Caap Practice Manual Executive Prog

EXECUTIVE PROGRAMME
MODULE 2, PAPER 5
Company Accounts
and
Auditing Practices
NOVEMBER 2015
Price : Rs. 300/-
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
No part of this Publication may be translated or copied in any form or by any means
without the prior written permission of The Institute of Company Secretaries of India.
The PRACTICE MANUAL has been prepared by competent persons and the
Institute hopes that it will facilitate the students in preparing for the
Institute's examinations. It is, however, to be noted that the answers are to be
treated as model answers and not as exhaustive and there can be alternative
solutions available for a questions provided in this practice manual. The
Institute is not in any way responsible for the correctness or otherwise of the
answers.
The Practice Manual contains the information based on the Laws/Rules
applicable at the time of preparation. Students are expected to be well versed
with the amendments in the Laws/Rules made upto six months prior to the
date of examination.
ISBN No.
: 978-98-82207-60-3
Printed at : Samrat Offset Works/500/November 2015
PREFACE
With the continuous developments in the external environment, the role of Company
Secretaries is being continuously redefined, which demand that our students - the
prospective Company Secretaries, are better prepared, developed and trained by providing
regular quality academic inputs, so that they are equipped to face the challenges of
dynamic environment with ease and efficiency. To become competitive, a student need not
only be aware of the basic theoretical provisions of subjects but also be conversant with the
practical aspects of it.
Developing competency in practical papers is a little more challenging as mastering these
subjects requires practicing more problems based on them. Although the study materials of
the Institute contains a lot of numerical and scenario based problem solving inputs but
nevertheless they can be supplemented further.
With the intent of developing our students in practical oriented subjects, the Institute has
brought out Practice Manual, a repository of solved questions, to build competency in
practical oriented subjects by providing the students with a pool of solved practical
problems. I am proudly presenting this practice manual prepared specifically for the
subject Company Accounts and Auditing Practices to the students of professional
programme.
Students learn best when they are shown how practical questions are framed and solved
on variety of topics, in a step by step method with proper explanation. With this
consistency, students would be able to see the underlying patterns clearly and will learn
better. The manual has adopted an easy-to-understand method of providing solutions so
that students can understand themselves without an aid of a teacher. It will prove to be a
significant preparation resource for the students and will also serve as a self assessment
tool in the preparation for examination.
I acknowledge with thanks all those experts authors and institutions whose material has
been consulted and referred in preparation of this Practice Manual.
I place on record my sincere appreciation to Ms. Khusbu Mohanty, Assistant Education
Officer in the Academic Team at the Institute headed by Ms. Sonia Baijal, Director for this
new initiative under the overall supervision of CS Sutanu Sinha, Chief Executive and
Officiating Secretary.
I will urge my students to take maximum benefit out of it by meticulously practicing the
questions given therein. Practicing more will develop better understanding of the concepts
and provide stronger grip on the subject, for which Practice Manual will certainly serve as a
means.
My best wishes to you all!
New Delhi
CS Atul H. Mehta
4th November, 2015
President, ICSI
(iii)
INDEX
Sl. No.
Subject
Page Nos.
1.
Share Capital
2.
Debentures
64
3.
Final Accounts of Companies
102
4.
Corporate Restructuring
151
5.
Consolidation of Accounts
243
6.
Valuation of Shares and Intangible Assets
324
7.
Liquidation of Company
347
8.
Corporate Financial Reporting
362
9.
Accounting Standards
382
10.
Auditing Concepts
417
11.
Types of Company Audit
430
12.
Internal Audit
447
13.
Internal Control
454
14.
Review of Internal Control
462
15.
Audit Engagement and Documentation
469
(v)
1
Share Capital
Question 1
On 1st April, 2014, A Ltd. issued 45,000 shares of Rs.100 each payable as follows:
Rs. 30 on application;
Rs. 20 on allotment;
Rs. 25 on 1st October, 2014; and
Rs. 25 on 1st February, 2015.
By 20th May, 2014 40,000 shares were applied for and all applications were accepted.
Allotment was made on 1st June. All sums due on allotment were received on 15th July;
those on 1st call were received on 20th October. Journalise the transactions when
accounts were closed on 31st March, 2015.
Answer
Case of under subscription
Shares issued by the company 45000
Shares applied by the public
40000
A Ltd. Journal
Date
Particular
May 20
Bank A/c (40000 x Rs. 30)
Amount
(Dr.)
Dr.
12,00,000
To Share Application A/c

(Application money received on 40,000
shares at Rs. 30 per share.)
June 1
Share Application A/c
12,00,000
Dr.
To Share Capital A/c

(Application money transferred to Share capital)
Note : Share Application A/c will be transferred
to share capital A/c on the date of Allotment.
Amount
(Cr.)
12,00,000
12,00,000
June 1
Share Allotment A/c (40000 x Rs. 20)
Dr.
800000
800000
(Amount due on allotment on 40000 shares

@ Rs. 20 per share)
July 15
Bank A/c
Dr.
800000
To Share Allotment A/c

(The amount due on allotment received)
Oct. 1
800000
Share First Call A/c (40000 x Rs. 25)
Dr. 10,00,000
10,00,000
Dr. 10,00,000
10,00,000

(Amount due on First call on 40000 shares
@ Rs. 25 per Share)
Oct. 20
Bank A/c
To Share First Call Account
(Amount received on First call)
Feb. 1
Share second and final Call A/c
Dr. 10,00,000
(40000 x Rs. 25)

(Amount due on Second and Final call on
40000 shares @Rs. 25 Per share)
Mar. 31
Bank A/c
10,00,000
Dr.
To Share Second & Final Call A/c

(Amount received on Second and Final
call)
10,00,000
10,00,000
Question 2
Pioneer Equipment Limited received on October 1, 2014 applications for 60,000 Equity
Shares of 100 each to be issued at a premium of 25 per cent payable at thus:
On Application Rs. 30
On Allotment Rs. 75 (including premium)
Balance Amount on Shares as and when required
The shares were allotted by the Company on October 20, 2014 and the allotment money
was duly received on October 31, 2014.
Record journal entries in the books of the company to record the transactions in
connection with the issue of shares.
2
Answer
Pioneer Equipment Limited
Journal
Date
Particulars
Oct. 1
Bank A/c (60000 x 30)
Amount Dr.
Dr.
Amount Cr.
18,00,000
To Equity Share Application A/c
_
Oct. 20
18,00,000
(Share Application money received

on 60000shares @ Rs. 30 per Share)
Equity Share Application A/c
Dr.
18,00,000
To Equity Share Capital A/c
18,00,000
(Share application money transferred

to share capital)
Oct. 20
Equity Share Allotment A/c (60000 x 75)
Dr.
45,00,000
To Equity Share Capital A/c (60000 x 50)
30,00,000
To Securities Premium A/c (60000 x 25)
15,00,000
(Amount due on allotment of 60,000 Shares @

Rs. 75 per share including premium of Rs. 25)
Oct. 31
Bank A/c
Dr.
45,00,000
To Equity Share Allotment A/c
45,00,000
(Amount received on allotment)

Question 3
X Ltd. invited applications for 10,000 shares of Rs. 100 each payable as follows :
On Application
Rs. 25
On Allotment (on 1st May, 2014)
Rs. 25
On First Call (on 1st Oct., 2014)
Rs. 25
On Final Call (on 1st Feb., 2015)
Rs. 25
All the shares were applied for and allotted. A shareholder holding 200 shares paid the
whole of the amount due along with allotment. Journalise the transactions, assuming all
sums due were received. Interest was paid to the shareholder concerned on 1st February,
2015.
Answer
Journal of X Ltd.
Date
Particulars
May 1
Bank A/c (10000 x 25)
Amount Dr.
Dr.
Amount Cr.
2,50,000
To Shares Application A/c
2,50,000
(Amount of share application received for

10,000 shares @ Rs. 25 per share.)
May 1
Dr.
2,50,000
2,50,000
(share application money transferred to share

capital)
May 1
Share allotment A/c
Dr.
2,50,000
To Share capital A/c
2,50,000
(Share allotment money due on 10,000 shares

@Rs. 25 per share)
May 1
Bank A/c
Dr.
2,60,000
To Shares Allotment A/c
2,50,000
To Calls in Advance A/c
10,000
[Receipt of money due on allotment, also the

two calls (Rs. 25 and Rs. 25) on 200 shares.]
Oct. 1
Share First Call A/c
Dr.
2,50,000
2,50,000
(The amount due on 10,000 shares @ Rs. 25

on first call.)
Oct.1
Bank A/c
Dr.
2,45,000
Calls in Advance A/c
Dr.
5,000
To Share First Call A/c
2,50,000
(Receipt of the first call on 9,800 shares, the

balance having been previously received and
now debited to call in advance account.)
2015
Feb. 1
Share Final Call A/c
Dr.
2,50,000
2,50,000
(The amount due on Final Call on 10,000

shares@ Rs. 25 per share.)
Feb. 1
Bank A/c
Dr.
2,45,000
Calls in Advance A/c
Dr.
5,000
To Share Final Call A/c
2,50,000
(Receipt of the moneys due on final call on

9,800 shares, the balance having been
previously received.)
Feb. 1
Interest A/c
Dr.
700
To Bank A/c
700
The interest on calls in advance paid @ 12% on :

Rs. 5,000 (first call) from 1st May to 1st Oct., 20145 months
250
Rs. 5,000 (final call) from 1st May, 2014 to 1st Feb., 20159 months 450
700
Question 4
X Ltd. Invited applications for 11,000 shares of Rs.10 each, issued at 20% premium payable
as :
Application
Rs. 3 (including Re.1 premium)
Allotment
Rs. 4 (including Re.1 premium)
Ist call
Rs. 3
IInd call
Rs. 2
Applications were received for 24,000 shares
Category I :- One fourth of the shares applied for allotted 2000 shares
Category II :- Two fourth of the shares applied for allotted 9000 share
Category III :- Remaining applications were rejected
Excess amount received is to be adjusted towards allotment and any amount beyond that
shall be refunded.
Mr. Remo, holding 300 shares out of category II failed to pay allotment and two calls and
his shares were forfeited and re-issued @ Rs.11 fully paid up.
Pass journal entries.
5
Answer
Journal of X Ltd.
Particulars
Amount Dr. Amount Cr.
Bank A/c
Dr.
72,000
72,000
(Application money received on 24,000 shares @ Rs.3)

Dr.
72,000
22,000
To Securities Premium A/c
11,000
17,000
To Bank A/c
22,000
(Amount transferred to share capital on 11,000

shares and excess amount adjusted & refunded)
Share Allotment A/c
Dr.
44,000
33,000
11,000
(Amount due on allotment on 11,000 shares @ Rs.4

including premium of Rs.1)
Bank A/c
Dr.
26,100
26,100
(Amount received on allotment)

Share First Call A/c
Dr.
33,000
33,000
(Amount due on Ist call on 11,000 shares @ Rs.3)

Bank A/c
Dr.
32,100
32,100
(Amount received on Ist call on 10,700 share @ Rs.3)

Share Second Call A/c
Dr.
22,000
22,000
(Amount due on IInd call on 11,000 shares @ Rs.2)
Bank A/c
Dr.
21,400
To Share Second Call A/c
21,400
(Amount received on IInd call on 10,700 shares @ Rs.2)

Share Capital Account A/c
Dr.
3000
Securities Premium A/c
Dr.
300
To Share Forfeiture A/c
900
900
900
To Share Second Call A/c
600
(300 Shares of Mr. Ram forfeited, who failed to pay his dues)
Bank A/c
Dr.
3300
3000
300
(Shares reissued @ Rs.11 fully paid up)

Share Forfeiture A/c
Dr.
900
To Capital Reserve A/c
900
(Amount transferred to Capital Reserve)

Working notes:
Calculation for adjustment and refund
Category
No. of
Shares
applied
for
No. of
Shares
allotte
d
Amount
received on
application
6,000
2,000
18,000
6,000
II
12,000
9,000
36,000
III
6,000
NIL
24,000
11,000
Total
Amount
required
on application
Amount
received
on allotment
Refund
Amount
due on
allotment
8,000
4,000
8,000
NIL
27,000
9,000
NIL
36,000
26,100
18,000
NIL
NIL
18,000
NIL
NIL
72,000
33,000
21,000
22,000
44,000
26,100
Amount
adjusted
on
allotment
Category I
Excess Money Received on (6000-2000)4000 X3= 12000
Allotment due 2000 x 4= 8000
Excess adjusted towards allotment = 8000
Refund = Excess money Received Excess Adjusted towards allotment
= 12000-8000=4000
Category II
Excess Money Received on (12000-9000) 3000 x 3=9000
Allotment due 9000 x 4= 36000
Excess adjusted towards allotment 9000
Category III
Refund 6000 x 3 = 18000
Mr. Remo
Allotted shares
300
Applied share
400
Excess shares
100
Excess Application money
Rs. 300/-
Allotment due
300 shares x Rs. 4
Rs.1,200/-
-excess amount
Rs. 300/-
Amount not received
Rs. 900/-
First call due

300 shares x Rs. 3
Rs. 900/-
Second call due

300 shares x Rs. 2
Rs. 600/-
Question 5
Runa Limited issued at par 10,000 Equity shares of Rs. 10 each payable Rs. 3.50 on
application; Rs. 4 on allotment; and balance on the final call. All the shares were fully
subscribed and paid except a shareholder having 100 shares could not pay the final call.
Give journal entries to record these transactions.
8
Answer
Book of Runa Limited
Particulars
Amount Dr.
Bank A/c (10,000x3.5)
Dr.
Amount Cr.
35,000
35,000
(Money received on applications for 10,000 shares

@ Rs. 3.50 per share)
Dr.
35,000
35,000
(Transfer of application money on 10,000 shares to

share capital)
Equity Share Allotment A/c (10,000 x4)
Dr.
40,000
40,000
(Amount due on the allotment of 10,000 shares @

Rs. 4 per share)
Bank A/c
Dr.
40,000
40,000
(Allotment money received)

Share Final Call A/c (10,000 x 2.5)
Dr.
25,000
25,000
(Final call money due)

Bank A/c (9900 x 2.5)
Dr.
24,750
Calls-in-Arrears A/c (100x2.5)
Dr.
250
To Share Final Call A/c (10,000x2.5)
25,000
(Final call money received and arrears on 100

shares)
Question 6
A limited Company, with an authorized capital of Rs. 2,00,000 divided into shares of Rs.
100 each, issued for subscription 1,500 shares payable at Rs.25 per share on application,
Rs. 40 per share on allotment, Rs. 25 per share on first call three months after allotment
and the balance as and when required.
The subscription list closed on January 31, 2015 when application money on 1,500 shares
was duly received and allotment was made on March 1, 2015.
The allotment amount was received in full but, when the first call was made, one
shareholder failed to pay the amount on 100 shares held by him and another shareholder
with 50 shares paid the entire amount on his shares.
Give journal entries in the books of the Company to record these share capital transactions
assuming that all amounts due were received within one month of the date they were
called.
Answer
Books of the Company
Journal
Date
Particulars
Jan. 31
Bank A/c
Amount Dr.
Dr.
Amount Cr.
37,500
37,500
(Money received on applications for 1,500

shares @ Rs. 25 per share)
March 1
Dr.
37,500
37,500
(Transfer of application money on 1,500

shares to share capital)
March 1
Equity Share Allotment A/c
Dr.
60,000
60,000
(Amount due on the allotment of 1,500

April 1
Bank A/c
Dr.

(Allotment money received)
10
60,000
60,000
June 1
Equity Share First Call A/c
Dr.
37,500
37,500
(First call money due on 1,500 shares@

Rs. 25 per share)
July 1
Bank A/c (37,500-2,500+500)
Dr.
35,500
Calls-in-Arrears A/c
Dr.
2,500
To Equity Share First Call A/c
37,500
To Calls-in-Advance A/c
500
(First call money received on 1400 shares

and calls-in-advance on 50 shares @ Rs. 10
per share)
Question 7
A Ltd forfeited 300 equity shares of Rs. 10 fully called-up, held by Mr. X for non-payment of
allotment @ Rs. 4 each and final call @ Rs. 4 each. However, he paid application money @
Rs. 2 per share. These shares were originally issued at par. Give Journal Entry for the
forfeiture.
Answer
In the books of A Ltd.
Journal
Particulars
Amount Dr.
Equity Share Capital A/c (300 x Rs. 10)
Dr.
To Equity Share Allotment A/c (300 x Rs. 4)

To Equity Share Final Call A/c (300 x Rs. 4)
Amount Cr.
3,000
1,200
1,200
600
To Forfeited Shares A/c (300 x Rs. 2)

(Being the forfeiture of 300 equity shares of Rs. 10
each fully called-up for non-payment of allotment @
Rs. 4 each and final call money@ Rs.4 each)
Question 8
X Ltd forfeited 200 equity shares of Rs. 10 each, Rs. 8 called-up for non-payment of
allotment @ Rs. 4 each and first call money @ Rs. 2 each. Application money @ Rs. 2 per
share have already been received by the company. Give Journal Entry for the forfeiture
(assume that all money due is transferred to Calls-in-Arrears Account).
11
Answer
Journal of X Ltd.
Particulars
Amount Dr.
Dr.
Amount Cr.
1,600
To
Calls-in-Arrears A/c (200 x Rs. 6)
1,200
To
Forfeited Shares A/c (200 x Rs. 2)
400
(Being the forfeiture of 200 equity shares of Rs. 10

each, Rs. 8 called-up for non-payment of allotment
@ Rs. 4 each and first call money @ Rs. 2 each )
Question 9
X Ltd. forfeited 1000 equity shares of Rs. 10 each fully called-up which were issued at a
premium of 20%. Amount payable on shares were:
on application Rs. 2; on allotment Rs. 4 (including premium) on First and Final call Rs.6.
Only application money was paid by the shareholders in respect of these shares. Pass
Journal Entries for the forfeiture.
Answer
Journal of X Ltd.
Particulars
Amount Dr.
Dr.
10,000
Securities Premium A/c (1000 x Rs. 2)
Dr.
2,000
Amount Cr.
4,000
To Equity Share First and Final Call A/c

(1000 x Rs. 6)
6,000
To Forfeited Shares A/c (1000 x Rs. 2)
2,000
(Being the forfeiture of 1000 equity shares of Rs.

10 each fully called-up, issued at a premium of
20%, for non-payment of allotment and call
money)
Note: Mr. X could not pay the amount due on
allotment and as such he could not pay the amount
of premium also. Hence the securities premium
reserve A/c will be debited in the entry of
forfeiture.
12
Question 10
Mr. Long who was the holder of 300 preference shares of Rs. 100 each, on which Rs. 75 per
share has been called up could not pay his dues on Allotment and First call each at Rs. 25
per share. The Directors forfeited the above shares and reissued 150 of such shares to Mr.
Short at Rs. 55 per share paid-up as Rs. 75 per share.
Give Journal Entries to record the above forfeiture and re-issue in the books of the
company.
Answer
Particulars
Amount Dr.
Preference Share Capital A/c (300 x Rs. 75)
Dr.
Amount Cr.
22,500
To Preference Share Allotment A/c (300 x 25)
7,500
To Preference Share First Call A/c (300 x 25)
7,500
To Forfeited Share A/c (300 x 25)
7,500
(Being the forfeiture of 300 preference shares Rs. 75

each being called up for non-payment of allotment and
first call money)
Bank A/c (Rs. 55 x 150)
Dr.
8,250
Forfeited Shares A/c (Rs. 20 x 150)
Dr.
3,000
To Preference Share Capital A/c (75 x 150)
11,250
(Being re-issue of 150 shares at Rs. 55 per share paid-up

as Rs. 75 )
Forfeited Shares A/c
Dr.
To Capital Reserve A/c (W. N. 1)
750
750
(Being profit on re-issue transferred to Capital Reserve)

Working Note:
(1) Calculation of amount to be transferred to Capital Reserve
Forfeited amount on 300 Shares=7500
Forfeited amount per share = Rs. 7,500/300 = Rs. 25
Forfeited amount on 150 shares = 150 x 25= 3,750
Transferred to capital Reserve =3750 - 3000=750
13
Question 11
Be Beautiful Ltd issued 4,000 equity shares of Rs. 10 each payable as Rs. 3 per share on
Application, Rs. 5 per share (including Rs. 2 as premium) on Allotment and Rs. 4 per share
on Call. All the shares were subscribed. Money due on all shares was fully received
excepting Remu, holding 150 shares, failed to pay the Allotment and Call money and Semu,
holding 50 shares, failed to pay the Call Money. All those 200 shares were forfeited. Of the
shares forfeited, 125 shares (including whole of Shemus shares) were subsequently reissued to Jadu as fully paid up at a discount of Rs. 2 per share.
Pass the necessary entries in the Journal of the company to record the forfeiture and reissue of the share. Also prepare the Balance Sheet of the company.
Answer
In the books of Be Beautiful Ltd.
Journal
Particulars
Amount Dr.
Dr.
2,000
Dr.
300
Amount Cr.
750
800
To Equity Share Call A/c (200 x Rs. 4)
750
To Forfeited Shares A/c

(Being forfeiture of 200 equity shares for nonpayment of
allotment and call money on 150 shares and for nonpayment of call money on 50 shares.)
Note : Mr. Remu could not pay the amount due on
allotment and as such he could not pay the amount of
premium also. Hence the securities premium reserve A/c
will be debited in the entry of forfeiture.
Bank A/c (125x8)
Dr.
Forfeited Shares A/c (125x2)
Dr.
1,000
250
1,250
To Equity Share Capital A/c (125x10)

(Being re-issue of 125 shares @ Rs. 8 each )
Dr.
275
275

(Being profit on re-issue transferred to Capital Reserve)
14
Particulars Notes No.

EQUITY AND LIABILITIES
Shareholders funds
Share capital
39,475
Reserves and Surplus
7975
Total
47450
ASSETS
Current assets
Cash and cash equivalents (bank)
47450
Total
47450
Notes to accounts
1. Share Capital
Equity share capital
Issued share capital
4,000 Equity shares of Rs. 10 each
40,000
Subscribed, called up and paid up share capital

3,925(4000-200+125) Equity shares of Rs. 10 each
39,250
Add : Forfeited shares
225
39,475
2. Reserves and Surplus

Securities Premium
7700 (8000-300)
Capital Reserve
275
7975
Cash and Cash equivalents = application 12000 + allotment 19250 + calls 15200 +
reissued 1000 = 47450
15
Working Note :
Calculation of Amount to be Transferred to Capital Reserve
a) Forfeited amount on 150 Shares of Mr. Remu=450
Forfeited amount per share = Rs. 450/150 = Rs. 3
Forfeited amount on 75 shares = 75 x 3 = 225
b) Forfeited amount on 50 shares of Mr. Shyam = 300
Forfeited amount per share = Rs. 300/50 = Rs. 6
Transferred to capital Reserve =525 (225+300)-250=275
Question 12
A holds 200 shares of Rs. 10 each on which he has paid Rs. 2 as application money. B holds
400 shares of Rs. 10 each on which he has paid Rs. 2 per share as application money and
Rs. 3 per share as allotment money. C holds 300 shares of Rs. 10 each and has paid Rs. 2 on
application, Rs. 3 on allotment and Rs. 3 for the first call. They all fail to pay their arrears
on the second and final call of Rs. 2 per share and the directors, therefore, forfeited their
shares. The shares are re-issued subsequently for Rs. 12 per share fully paid-up. Journalise
the transactions relating to the forfeiture and re-issue.
Answer
Journal
Particulars
Amount Dr.
Share Capital A/c (900 x Rs. 10)

Dr.
To Share Allotment A/c (200 x 3)
To Share First Call A/c (600 x 3)
To Share Final Call A/c (900 x 2)
To Forfeited Shares A/c (1800+2100+900)
(Being forfeiture of 900 shares of Rs. 10 each for nonpayment of allotment, first and final call )
9,000
Bank A/c (900 x Rs. 12)

Dr.
(Being the re-issue of 900 shares of Rs. 10 each@ Rs.
12)
10,800

Dr.
(Being profit on re-issue transferred to Capital
Reserve).
4,800
16
Amount Cr.
600
1,800
1,800
4,800
9,000
1,800
4,800
Working Note :
Amount received on forfeited shares
Application
Allotment
Amount not received on forfeited shares

First
Call
Allotment
First Call
Final Call
200
200
200
200
400
400
400
400
300
300
300
300
TOTAL
900
700
300
200
600
900
Rs. 2
Rs. 3
Rs. 3
Rs. 3
Rs. 3
Rs. 2
Rs. 1,800 Rs. 2,100
Rs. 900
Rs. 600 Rs. 1,800
Rs. 1,800
Money
Receivable
per share
Question 13
B Ltd. issued 20,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share payable
as follows: on application Rs. 5(including Re.1 premium), on allotment Rs. 5(including
Re.1 premium); on final call Rs. 2. Applications were received for 24,000 shares. Letters of
regret were issued to applicants for 4,000 shares and were allotted to all the other
applicants. Mr. A, who is the holder of 200 shares, failed to pay the allotment and call
money, the shares were forfeited. Show the Journal Entries and Cash Book in the books of
B Ltd.
Answer
In the Books of B Ltd.
Cash Book
1,20,000
99,000 By
Equity
Application A/c
To Equity Share Final Call A/c
39,600 By Balance c/d

2,58,600
17
Share
20,000
2,38,600
2,58,600
Particular
Amount Dr.
Equity Share Application A/c (20,000 x 5)
Dr.
Amount Cr.
1,00,000
To Equity Share Capital A/c (20,000 x 4)
80,000
To Securities Premium A/c (20.000 x 1)
20,000
(Being application money on 20,000 shares @ Rs. 5 each

transferred to Equity Share Capital Account )
Dr.
(20,000 x 5)
To Securities Premium A/c (20.000 x 1)
(Being allotment money due on 20,000 shares @ Rs. 5 each)
1,00,000
Equity share final call A/c

Dr.
To share capital A/c
(Being share final call money due on 20,000 shares @ Rs. 2
per share)
40,000
80,000
20,000
40,000
Dr.
2,000
Dr.
200
1,000
400
To Equity Share Final Call A/c
800
To Forfeited Shares A/c

(Being forfeiture of 200 shares for non payment of
allotment money and final call money )
Note: Mr. A could not pay the amount due on allotment and
as such he could not pay the amount of premium also.
Hence the securities premium reserve A/c will be debited in
the entry of forfeiture.
Question 14
X Co. Ltd. was incorporated with an authorized share capital of 1,00,000 equity shares of
Rs. 10 each. The directors decided to allot 10,000 shares credited as fully paid to the
promoters for their services.
18
The company also purchased land and buildings from Y Co. Ltd for Rs. 4,00,000 payable in
fully paid-up shares of the company. The balance of the shares were issued to the public,
which were fully subscribed and paid for.
You are required to pass Journal Entries and to prepare the Balance Sheet.
Answer
Journal
Particulars
Amount Dr.
Goodwill A/c
Dr.
Amount Cr.
1,00,000
1,00,000
(Being the issue of 10,000 shares of Rs. 10 each fully paid

to the promoters for their services )
Land and Buildings A/c
To
Dr.
4,00,000
Y Co. Ltd A/c
4,00,000
(Being the land and buildings purchased from Y Co. Ltd).
Y Co. Ltd A/c
Dr.
400000
To Share capital A/c (40000 x 10)
400000
(Being 40000 shares issued to the vendor @ Rs. 10 per

share)
Bank A/c
Dr.
5,00,000
To Equity Share Capital A/c (50000 x 10)
5,00,000
(Being the issue of 50,000 shares of Rs. 10 each)
Balance Sheet of X Company Limited

Particulars
Notes No.
Rs.

Shareholders funds
Share capital
Total
10,00,000
10,00,000
19
ASSETS
1. Non-current assets
a Fixed assets
i
Tangible assets
ii Intangible assets
4,00,000
1,00,000
5,00,000
2. Current assets
Cash and cash equivalents
Total
10,00,000
Notes to accounts
1. Share Capital
Authorised share capital
1,00,000 Equity shares of Rs. 10 each Issued share
capital
10,00,000
1,00,000 Equity shares of Rs. 10 each

(Out of the above 50,000 shares have been allotted
as fully paid up pursuant to contract(s) without
payment being received in cash)
2. Tangible Assets
Land and Building
4,00,000
3. Intangible Assets
Goodwill
1,00,000
4. Cash and cash equivalents

Balances with banks
5,00,000
Question 15
What is employee stock option plan? Explain the importance of such plans in the modern
time.
Answer
Employee Stock Option Plan is a plan under which the company grants employee stock
options. Employee stock option is a contract that gives the employees of the enterprise the
right, but not the obligation, for a specified period of time to purchase or subscribe the
20
shares of the company at a fixed or determinable price which is generally lower than the
prevailing market price of its shares.
The importance of these plans lies in the following advantages which accrue to both the
company and the employees:
1. Stock options provide an opportunity to employees to participate and contribute in
the growth of the company.
2. Stock option creates long term wealth in the hands of the employees.
3. They are important means to attract, retain and motivate the best available talent
for the company.
4. It creates a common sense of ownership between the company and its employees.
Question 16
X Co. Ltd. has its share capital divided into equity shares of Rs. 10 each. On 1.1.2014 it
granted 15,000 employees stock option at Rs. 50 per share, when the market price was
Rs. 120 per share. The options were to be exercised between 15th March, 2015 and 31st
March, 2015. The employees exercised their options for 10,000 shares only and the
remaining options lapsed. The company closes its books on 31st March every year. Show
Journal entries (with narration) as would appear in the books of the company up to 31st
March, 2015.
Answer
In the books of X Co. Ltd. Journal Entries
Date
Particulars
Amount Dr.
15.03.2015
Bank A/c (10,000 x 50)

Dr.
Employee compensation expense A/c
Dr.
(10,000 x 70)
To Equity share capital A/c (10,000 x 10)
5,00,000
7,00,000
1,00,000
11,00,000
To Securities premium A/c (10,000 x 110)

(Being shares issued to the employees against
the options vested to them in pursuance of
Employee Stock Option Plan)
31.03.2015
Statement of Profit and Loss A/ c
Dr.
To Employee compensation expenses A/c

(Being transfer of employee compensation
transfer to Profit and Loss Account)
21
Amount Cr.
7,00,000
7,00,000
Working Notes:
1. No entry is passed when Stock Options are granted to employees. Hence, no entry will
be passed on 1st April 2014;
2. Market Price = Rs. 120 per share whereas as stock option price = Rs. 50, Hence, the
difference Rs. 120 Rs. 50 = Rs. 70 per share is equivalent to employee cost or
employee compensation expense and will be charged to P/L Account as such for the
number of options exercised i.e. 10,000 shares.
Question 17
S Ltd. grants 1,000 options to its employees on 1.4.2014 at Rs. 70. The vesting period is two
and a half years. The maximum exercise period is one year. Market price on that date is
100. All the options were exercised on 31.7.2015. Journalize, if the face value of equity
share is Rs. 10 per share.
Answer
Books of S Ltd.
Journal Entries
Date
Particulars
Debit
31.3.14
Employees Compensation Expense Account
Dr.
Credit
12,000
12,000
To Employees Stock Option Out-standing

Account
(Being compensation expense recognized in
respect of 1,000 options granted to employees at
discount of Rs. 30 each, amortized on straight line
basis over 2 years)
Statement of Profit and Loss Account
Dr.
12,000
To Employees Compensation Expense Account
12,000
(Being employees compensation expense of the

year transferred to P&L A/c)
31.3.14

To Employees Stock Option Outstanding
Account
(Being compensation expense recognized in
respect of 1,000 options granted to employees at
discount of Rs. 30 each, amortized on straight line
basis over 2 years)
22
Dr.
12,000
12,000
31.3.15
31.7.15
Profit and Loss Account

Dr.
12,000

Dr.
To Employees Stock Option Outstanding
Account
(Being balance of compensation expense
amortized Rs. 30,000 less Rs. 24,000)
6,000
Statement of Profit and Loss Account

Dr.
6,000
Bank Account (Rs. 70 1,000)

To Equity Share Capital Account
Dr.
12,000
6,000
6,000
70,000
10,000
60,000
To Securities Premium Account

(Being exercise of 1,000 options at an exercise
price of Rs. 60)
31.7.15
Stock Option Outstanding A/c (Rs. 30 x 1,000)

Dr.
30,000
30,000
(Being the balance in the Employees Stock Option

Outstanding Account transferred to Securities
Premium A/c)
Working Notes:
1. Total employees compensation expense = 1,000 x (Rs. 100 Rs. 70) = Rs. 30,000
2. Employees compensation expense has been written off during 2 years on straight
line basis as under:
I year = Rs. 12,000 (for full year)
II year = Rs. 12,000 (for full year)
III year = Rs. 6,000 (for half year)
Question 18
What are the conditions to be fulfilled by a Joint Stock Company to buy-back its equity
shares as per Companies Act, 2013. Explain in brief.
23
Answer
Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a company to
buy-back its own equity shares. The key provisions in this regard are as under:
(a) A company may purchase its own shares or other specified securities out of:
(i)
Its free reserves;
(ii)
The securities premium account;
(iii)
The proceeds of the issue of any shares or other specified securities (not being
the proceeds of an earlier issue of the same kind of shares or other specified
securities).
(b) The buy-back is authorized by its articles.

(c)
A special resolution has been passed in general meeting of the company authorising
the buy-back (except where the buy back is of less than 10% of the paid up equity
capital and free reserves of the company and the buy back is authorized by the Board
by means of a resolution passed at a duly convened Board Meeting)
(d) The buy-back does not exceed 25% of the total paid up capital and free reserves of the
company. Provided that in case of buy back of equity shares in any financial year, the
25% of paid up capital shall be construed as 25% of the total paid up equity capital in
that financial year.
(e) The ratio of the secured and unsecured debt owed by the company after the buy back
is not more than twice the paid up capital and its free reserves.
(f)
All the shares and other securities for buy-back are fully paid up.
(g) The buy-back is completed within 12 months of the passing of the special resolution
or a resolution passed by the Board.
(h) The buy-back of the shares listed on any recognized stock exchange is in accordance
with the regulations made by the SEBI in this behalf.
(i)
(j)
Before making such buy-back, a listed company has to file with the Registrar and the
SEBI a declaration of solvency in the prescribed form.
(i)
the buy back may be from;
(i)
the existing shareholders or security holders on proportionate basis;
(ii)
the open market;
(iii)
the shares or securities issued to the employees of the company pursuant to a

scheme of Stock Option or Sweat Equity.
Where a company purchases its own shares out of its free reserves or securities
premium account it shall transfer an amount equal to the nominal value of such
shares to Capital Redemption Reserve Account and details of such transfers should be
given in the Balance Sheet.
24
Question 19
KG Limited furnishes the following summarized Balance Sheet as at 31st March, 2015,
Liabilities (Rs. in lakhs)
Assets (Rs. in lakhs)
1,200 Machinery
1,800
(fully paid up shares of Rs. 10 each)

Securities premium
175 Furniture
General reserve
265 Investment
Capital redemption reserve
200 Inventory
500
Profit & loss A/c
170 Trade receivables
160
12% Debentures
750 Cash at bank
740
Trade payables
645
Other current liabilities
226
74
95
3,500
3,500
On 1st April, 2015, the company announced the buy back of 25% of its equity shares @ Rs.
15 per share. For this purpose, it sold all of its investments for Rs. 72 lakhs.
On 5th April, 2015, the company achieved the target of buy back. On 30th April, 2015 the
company issued one fully paid up equity share of Rs. 10 by way of bonus for every four
equity shares held by the equity shareholders.
You are required to:
(1) Pass necessary journal entries for the above transactions.
(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares
Answer
In the books of KG Limited
Journal Entries
Date
Particulars
Dr.
(in lakhs)
April 1
Bank A/ c
Dr.
72
Loss on sale of Investment A/c
Dr.
To Investment A/c
Cr.
(in lakhs)
74
(Being investment sold on loss)
25
April 5
Equity share capital A/c

Premium payable on buy back A/c
Dr.
Dr.
300
150
To Equity shares holder A/c
450
(Being the amount due to equity shareholders on buy

back)
Equity shareholder A/c
Dr.
450
450
To Bank A/c
(Being the payment made on account of buy back of
30 Lakh Equity Shares)
April 5
General reserve A/ c
Dr.
265
Profit and Loss A/ c
Dr.
35
To Capital redemption reserve A/c
300
(Being amount equal to nominal value of buy back

shares from free reserves transferred to capital
redemption reserve account as per the law)
April 30
Capital redemption reserve A/c
Dr.
225
To Bonus shares A/c (W.N.1)

(Being the utilization of capital redemption reserve
to issue bonus shares)
Bonus shares A/ c
To
Dr.
225
225
225
(Being issue of one bonus equity share for every four

equity shares held)
Securities premium A/c
Dr.
To Premium payable on buy back A/c

(Being premium payable on buy back adjusted from
securities premium account)
26
150
150
Balance Sheet (After buy back and issue of bonus shares)

Particulars
I.
Equity and Liabilities
(1)
Shareholder's Funds
(2)
Note No
Amount
(in Lakhs)
(a) Share Capital
1,125
(b) Reserves and Surplus
433
Non-Current Liabilities
(a) Long-term borrowings
- 12% Debentures
(3)
750
Current Liabilities
(a) Trade payables
645
(b) Other current liabilities
95
Total
II.
Assets
(1)
Non-current assets
3,048
(a) Fixed assets

(i) Tangible assets
(2)
2,026
Current assets
(a) Current investments
(b) Inventory
500
(c) Trade receivables
160
(d) Cash and cash equivalents (W.N. 2)
362
Total
3,048
Notes to Accounts
1.
Share Capital
Equity share capital (Fully paid up shares of Rs.10 each)
2.

General Reserve
1125
265
Less : Transfer to CRR

Capital Redemption Reserve
(265)
200
Add: Transfer due to buy-back of shares from P/L
27
35
Transfer due to buy-back of shares from Gen. res.
265
Less: Utilisation for issue of bonus shares

Securities premium
(225)
275
175
Less: Adjustment for premium paid on buy back

Profit & Loss A/c
(150)
170
25
less : Loss on sale of investment
(2)
(35)
133
3.
433
Tangible assets
Machinery
1800
Furniture
226
2026
Working Notes:
1. Amount of bonus shares = 25% of (1,200 300) lakhs = Rs. 225 lakhs
2. Cash at bank after issue of bonus shares in lakhs
Cash balance as on 1st April, 2015
740
Add : Sale of investments
72
Less : Payment for buy back of shares
(450)
362
Note:
In the given solution, it is possible to adjust transfer to capital redemption reserve account
or capitalization of bonus shares from any other free reserves also.
Question 20.
Following is the Balance Sheet of M/s Competent Limited as on 31st March, 2015:
Liabilities
Rs.
Assets
Rs.
Equity Shares of Rs. 10 Each fully

paid
12,50,000 Fixed Assets
46,50,000
Revenue reserve
Securities Premium
15,00,000 Current Assets

2,50,000
30,00,000
Profit & Loss Account
1,25,000
Secured Loans:
12% Debentures
18,75,000
Unsecured Loans
Current maturities of long term
borrowings
10,00,000
16,50,000
76,50,000
28
76,50,000
The company wants to buy back 25,000 equity shares of Rs. 10 each, on 1st April, 2015 at
Rs. 20 per share. Buy back of shares is duly authorized by its articles and necessary
resolution passed by the company towards this. The payment for buy back of shares will be
made by the company out of sufficient bank balance available as part of Current Assets.
Comment with your calculations, whether buy back of shares by company is within the
provisions of the companies Act, 2015. If yes, pass necessary journal entries towards buy
back of shares and prepare the Balance Sheet after buy back of shares.
Answer
Determination of Buy back of maximum no. of shares as per the Companies Act, 2013
1.
2.
Shares Outstanding Test

Particulars
(Shares)
Number of shares outstanding
1,25,000
25% of the shares outstanding
31,250
Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free
Reserves
Particulars
Paid up capital (Rs.)
12,50,000
Free reserves (Rs.) (15,00,000 + 2,50,000 + 1,25,000)
18,75,000
Shareholders funds (Rs.)
1,25,000
25% of Shareholders fund (Rs.)
7,81,250
Buy back price per share Rs.
3.
20
Number of shares that can be bought back (shares)
39,062
Actual Number of shares for buy back
25,000
Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post
Buy Back
Particulars
Rs.
(a) Loan funds (Rs.) (18,75,000+10,00,000+16,50,000)
= 45,25,000
(b) Minimum equity to be maintained after buy back in

the ratio of 2:1 (a/2)
= 22,62,500
(c)
Present equity/shareholders fund
= 31,25,000
(d) Future equity/shareholders fund

(see W.N.) (31,25,000 2,87,500)
= 28,37,500
29
(e) Maximum permitted buy back of Equity [(d) (b)]

(f)
= 5,75,000
Maximum number of shares that can be bought back

@Rs. 20 per share 28,750 shares
(g) Actual Buy Back Proposed 25,000 Shares

Summary statement determining the maximum number of shares to be bought back
Particulars
Number of shares
Shares Outstanding Test
31,250
Resources Test
39,062
Debt Equity Ratio Test
28,750
Maximum number of shares that can be bought back [least of the above] 28,750 Company
qualifies all tests for buy-back of shares and came to the conclusion that it can buy
maximum 28,750 shares on 1st April, 2015.
However, company wants to buy-back only 25,000 equity shares @ Rs. 20. Therefore,
buyback of 25,000 shares, as desired by the company is within the provisions of the
Companies Act, 2013.
Journal Entries for buy-back of shares
Debit (Rs.)
(a) Equity shares buy-back account
Dr.
Credit (Rs.)
5,00,000
To Bank account
5,00,000
(Being buy back of 25,000 equity shares of

Rs. 10 each @ Rs. 20 per share)
(b) Equity share capital account
Securities premium account
Dr.
2,50,000
Dr.
2,50,000
To Equity shares buy-back account(Being

cancellation of shares bought back)
(c) Revenue reserve account
Dr.
To Capital redemption reserve account

(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of capital bought back through free
reserves)
30
5,00,000
2,50,000
2,50,000
As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the company
should not be more than twice the capital and its free reserves after such buy-back. Further
under Section 69 (1), on buy-back of shares out of free reserves a sum equal to the nominal
value of the share bought back shall be transferred to Capital Redemption Reserve (CRR).
As per section 69 (2) utilization of CRR is restricted to fully paying up unissued shares of
the Company which are to be issued as fully paid-up bonus shares only. It means CRR is not
available for distribution as dividend.
Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. shares
capital and free reserves, amount transferred to CRR on buy-back has to be excluded from
the present equity.
Balance Sheet of M/s. Competent Ltd. as on 31st March, 2015
Particulars
Note No
Amount

1
Shareholders' funds
(a) Share capital
10,00,000
16,25,000
28,75,000
Non-current liabilities
Current liabilities
16,50,000
Total
71,50,000
ASSETS
1
Non-current assets
(a) Fixed assets
46,50,000
Current assets (30,00,000-5,00,000)
25,00,000
Total
71,50,000
31
Notes to accounts
1. Share Capital
1,00,000 Equity shares of Rs. 10 each 10,00,000
Profit and Loss A/c
1,25,000
Revenue reserves
15,00,000
(2,50,000)
12,50,000
Securities premium
2,50,000
Less : Utilisation for share buy-back
(2,50,000)
Capital Redemption Reserves
2,50,000
16,25,000
3. Long-term borrowings - Secured

12% Debentures
18,75,000
Unsecured loans
10,00,000
28,75,000
Working Note
Amount transferred to CRR and maximum equity to be bought back will be calculated
by simultaneous equation method.
Suppose amount transferred to CRR account is x and maximum permitted buy-back of
equity is y.
Then (31,25,000 x) 22,62,500 = y
(1)
y
x 10 = x, or 2x = y
20
by solving the above equation we get
x = Rs. 2,87,500
y = Rs. 5,75,000
32
Question 21
X Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2015:
Equity & liabilities
Rs. in 000
Share Capital
Authorized Capital
Issued and subscribed share capital
2,00,000 Equity shares of 10 each fully paid up
20,000 9% Preference Shares of 100 each
(issued two months back for the purpose of buy back)
Rs. in 000
5000
2000
2000
4,000
Reserve and Surplus:

Capital reserve
10
Revenue reserve
5,000
Securities premium
500
Profit and Loss account
1,800
Non-current liabilities - 10% Debentures
7,310
400
Current liabilities and provisions
40
Total
11,750
Assets
Fixed Assets: Cost
3,000
Less: Provision for depreciation
250
2,750
Non-current investments at cost
4,000
Current assets, loans and advances (including cash and

bank balances)
5,000
Total
11,750
(1)
The company passed a resolution to buy back 20% of its equity capital @ 15 per
share. For this purpose, it sold its investments of 30 lakhs for 27 lakhs.
(2)
The company redeemed the preference shares at a premium of 10% on 1st April,
2015.
(3)
Included in its investments were 'Investments in own debentures' costing 3 lakhs

(face value 3.30 lakhs). These debentures were cancelled on 1st April, 2015.
You are required to pass necessary Journal entries and prepare the Balance Sheet on
01.04.2015.
33
Answer
Journal Entries in the books of X Ltd.
Sl. No.
Particulars
Dr.
(in 000)
Bank a/c
Dr.
2700
Profit and Loss A/c
Dr.
300
Dr.
2,000
To Investment Account
Cr.
(in 000)
3000
(Being investment sold for the purpose of

buy-back of Equity Shares)
2
Preference share capital A/c

Premium on redemption of
Preference Shares A/c
Dr.
200
To Preference shareholders A/c
2,200
(Being redemption of preference share

capital at premium of 10%)
3
Preference shareholders A/c
Dr.
2,200
To Bank A/c
2,200
(Being payment made to preference

shareholders)
4
Revenue Reserve A/c
Dr.
2,000
To Capital redemption reserve A/c

(Refer Note)
2,000
(Being creation of capital redemption

reserve to the extent of nominal value of
preference shares redeemed)
5
Dr.

(Premium payable on buy-back)
To Equity shareholder A/c
(Being the amount due on buy-back of
equity shares )
34
Dr.
400
200
600
Equity shareholder A/c

To
Dr.
600
Bank A/c
600
(Being payment made for buy-back of

equity shares)
7
10% Debentures A/c

To
Dr.
330
Own debentures A/c
300
To Capital reserve A/c
30
(Profit on cancellation)
(Being own debentures cancelled at
profit)
8

To
Dr.
Premium on redemption
preference shares A/c
200
of
200
(Being premium on redemption of

preference shares adjusted through
securities premium)
Balance Sheet of the X Ltd. as on 1st April, 2015
Notes No.
Rs. in 000

1
Shareholders funds
Share capital
1,600
6,640
70
Long term borrowings
Current liabilities
40
Total
8,350
Assets
1
Non-current assets
(a) Fixed assets
2,750
(b) Non-current investments
700
Current assets
4,900
Total
8,350
35
Notes to Accounts
1.
in 000
Rs. in 000
Share Capital
Authorized share capital:
5,000
Issued, subscribed and fully paid up share

capital:
1,60,000 Equity shares of 10 each, fully paid up
1,600
(40,000 equity shares had been bought back

and cancelled during the year)
2.

Capital Reserves
10
Add: Profit on cancellation of debentures
30
Securities Premium
40
500
Less: Premium on redemption of preference

shares
(200)
Premium on buy-back of equity shares -
(200)
Revenue Reserve
5,000
Less: Transfer to Capital Redemption Reserve
(2,000)
Capital Redemption reserve
100
3,000
2,000
Surplus (Profit & Loss Account)
1,800
Less: Loss on sale of investment 1,300 5,340
(300)
Total
1,500
6,640
3.
Long term borrowings 10% Debentures (400330)
4.
Non-current investments
Balance as on 31.03. 2013
Less: Investment sold
Own debentures cancelled
Total
36
70
4,000
(3,000)
(300)
700
5.
Current assets
Balance as on 31.03.2013
Add: Cash received on sale of investment
Less: Payment made to equity shareholders
Payment
made
to
preference
shareholders for buy back of shares
Total
5,000
2,700
(600)
(2,200)
4,900
Note : In the given solution, it is assumed that buy-back of shares has been done out of the
proceeds of issue of preference shares, therefore, no amount is transferred to capital
redemption reserve for buy-back. However, if it is assumed that buy-back is from sale of
investments and not from the proceeds of issue of preference shares, then, amount of
revenue reserves transferred to capital redemption reserve will be 2,600 instead of 2,000.
Question 22
Explain the term Firm underwriting.
Answer
Firm underwriting signifies a definite commitment to take up a specified number of shares
by an underwriter irrespective of the number of shares subscribed for by the public. In
such a case, unless it has been otherwise agreed, the underwriters liability is determined
without taking into account the number of shares taken up by him under the firm
commitment, i.e. the underwriter is obliged to take up :
1. the number of shares he has applied for firm; and
2. the number of shares he is obliged to take up on the basis of the underwriting agreement.
Question 23
A joint stock company resolved to issue 10 lakh equity shares of Rs. 10 each at a premium
of Re. 1 per share. Two lakh of these shares were taken up by the directors of the company,
their relatives, associates and friends, the entire amount being received forthwith. The
remaining shares were offered to the public, the entire amount being asked for with
applications.
The issue was underwritten by X, Y and Z for a commission @ 2.5% of the issue price, 65%
of the issue was underwritten by X, while Ys and Zs shares were 25% and 10%
respectively. Their firm underwriting was as follows :
X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The underwriters were to submit
unmarked applications for shares underwritten firm with full application money along
with members of the general public. Marked applications were as follows:
X 1,19,500 shares, Y 57,500 shares and Z 10,500 shares.
37
Unmarked applications totaled 6,00,000 shares. Accounts with the underwriters were
promptly settled.
(i) Prepare a statements calculating underwriters liability for shares other than shares
underwritten firm.
(ii) Pass journal entries for all the transactions including cash transactions.
Answer
Statement showing underwriters liability for shares other than shares underwritten
firm
X
Gross liability (Issued shares
purchased by promoters, directors
etc. (8,00,000 shares in the ratio of
65 : 25 : 10)
TOTAL
5,20,000
2,00,000
80,000
8,00,000
(1,19,500)
(57,500)
(10,500)
(1,87,500)
4,00,500
1,42,500
69,500
6,12,500
(3,90,000)
(1,50,000)
(60,000)
(6,00,000)
10,500
(7,500)
9,500
12,500
Surplus of Y allocated to X and Z in the

ratio 65 : 10
(6,500)
7,500
(1,000)
Additional shares to be purchased by

X&Z
4,000
8,500
12,500
Less : Marked applications
Less : Allocation of unmarked

applications
(including
firm
underwriting i.e. 7,00,000) in the
ratio 65 : 25 : 10
38
Additional Liability for additional

shares@ Rs. 11
44,000
93,500
Underwriting commission payable

on Gross Liability
(1,43,000)
(55,000)
(22,000)
(99,000)
(55,000)
71,500
(Shares underwritten as Gross

liability 11 2.5%)
Net Amount payable/receivables
(ii)
Journal Entries
Particulars
Dr.
Bank A/c
Dr.
Cr.
22,00,000
To Equity Shares Application A/c
22,00,000
(Being application money received on 2 lakh

equity shares purchased by directors etc. @
Rs. 11 per share)
Bank A/c
Dr.
86,62,500
86,62,500
(Application money received on 7,87,500

equity shares @ Rs. 11 per share from general
public
and
underwriters
for
shares
underwritten firm)
Dr.
1,08,62,500
X s A/c
Dr.
44,000
Z s A/c
Dr.
93,500
1,00,00,000
10,00,000
(Allotment of 10 lakh equity shares of 10 each

at a premium of Rs. 1 per share)
39
Underwriting commission A/c
Dr.
2,20,000
To Xs A/c
1,43,000
To Ys A/c
55,000
To Zs A/c
22,000
(Amount of underwriting commission payable

to X, Y and Z @ 2.5% on the amount of shares
underwritten)
Bank A/c
Dr.
71,500
To Zs A/c
71,500
(Amount received from Z in final settlement)

Xs A/c
Dr.
99,000
Ys A/c
Dr.
55,000
1,54,000
To Bank A/c
(Amount paid to X and Y in final settlement)
Question 24
Suprima Ltd. came out with an issue of 45,00,000 equity shares of 10 each at a premium
of Rs. 2 per share. The promoters took 20% of the issue and the balance was offered to the
public. The issue was equally underwritten by A & Co; B & Co. and C & Co. Each
underwriter took firm underwriting of 1,00,000 shares each. Subscriptions for 31,00,000
equity shares were received with marked forms for the underwriters as given below:
Shares
A & Co.
8,00,000
B & Co.
7,00,000
C & Co.
13,75,000
Total
28,75,000
The underwriters are eligible for a commission of 3.5% on face value of shares. The entire
amount towards shares subscription has to be paid alongwith application. You are
required to:
(a) Compute the underwriters liabilities (number of shares)
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Suprima Ltd. relating to underwriting.
40
Answer
(a)
Computation of liabilities of underwriters (No. of shares)

A & Co.
B & Co
Gross liability (Total Issue shares

purchased by promoters,
directors,
employees etc)
12,00,000
12,00,000
12,00,000
Less : Firm underwriting
(1,00,000)
(1,00,000)
(1,00,000)
11,00,000
11,00,000
11,00,000
(8,00,000)
(7,00,000) (13,75,000)

Unmarked applications
C & Co.
3,00,000
4,00,000
(2,75,000)
(1,12,500)
(1,12,500)
Nil
1,87,500
2,87,500
(2,75,000)
(1,05,000)
(1,05,000)
2,10,000
82,500
1,82,500
Nil
Add : Firm underwriting
1,00,000
1,00,000
1,00,000
Total liability (No. of shares)
1,82,500
2,82,500
1,00,000
Less : Unmarked applications distributed

to A & Co. and B & Co. in equal ratio
Total unmarked applications
Less : Surplus of C & Co. distributed to A &
Co. and B & Co. in equal ratio
Net
liability
underwriting)
(excluding
firm
Total Subscriptions received for 31,00,000 Shares out of which marked shares were Rs.
28,75,000, Hence unmarked shares received were 2,25,000 shares which will be
distributed between A & Co and B & Co only equally (agreed ratio underwriting). C & Co
has already exceeded the underwriting limit hence will not be required to absorb
unmarked shares.
No of shares purchased by Underwriters collectively will be 5 Lakh shares as under:
Total Shares Issued
45,00,000
Less: Purchased by Promoters etc
9,00,000
Shares offered to the Public
36,00,000
Total Subscription received
31,00,000
Shares purchased by Underwriters including firm commitment
41
5,00,000
(b) Computation of amounts payable by underwriters:

A & Co
B & Co
C & Co
Liability towards shares to be

subscribed@ 12 per share
21,90,000
33,90,000
12,00,000
Less : Commission (on Gross

Liability) (3.5% on FV Rs. 10 each
on 12 lakhs shares
(4,20,000)
(4,20,000)
(4,20,000)
Net amount
underwriters
17,70,000
29,70,000
7,80,000
to
(c)
be
paid
by
In the Books of Suprima Ltd. Journal Entries
Particulars
Dr.
Underwriting commission A/ c
Dr.
Cr.
12,60,000
To A & Co. A/c
4,20,000
To B & Co. A/c
4,20,000
To C & Co. A/c
4,20,000
(Being underwriting commission on the shares

underwritten)
A & Co. A/ c
Dr.
21,90,000
B & Co. A/ c
Dr.
26,10,000
C & Co. A/c
Dr.
12,00,000
To Equity share capital A/c
50,00,000
To Share premium A/c
10,00,000
(Being shares including firm underwritten shares

allotted to underwriters)
Bank A/ c
Dr.
55,20,000
To
A & Co. A/c
17,70,000
To
B & Co. A/c
29,70,000
To
C & Co. A/c
7,80,000
(Being the amount received towards shares allotted

to underwriters less underwriting commission due
to them)
42
Question 25
Jumba Ltd. came up with public issue of 30,00,000 Equity shares of Rs. 10 each at Rs. 15
per share. A, B and C took underwriting of the issue in 3 : 2 : 1 ratio. Applications were
received for 27,00,000 shares. The marked applications were received as under:
A
8,00,000 shares
7,00,000 shares
6,00,000 shares
Commission payable to underwriters is at 5% on the face value of shares.

(i)
Compute the liability of each underwriter as regards the number of shares to be

taken up.
(ii)
Pass journal entries in the books of Jumba Ltd. to record the transactions relating
to underwriters.
Answer
(i) Computation of liability of underwriters in respect of shares (In shares)
A
Gross liability (Total Issue Promoters

etc.) in agreed ration of 3 : 2 : 1
15,00,000
10,00,000
5,00,000
Less
:
Unmarked
applications
(Subscribed shares marked shares) in
3:2:1
(3,00,000)
(2,00,000)
(1,00,000)
Marked shares as per agreed ratio
12,00,000
8,00,000
4,00,000
Less : Marked applications actually

received
(8,00,000)
(7,00,000)
(6,00,000)
4,00,000
1,00,000
(2,00,000)
(1,20,000)
(80,000)
2,00,000
2,80,000
20,000
Nil
Shortfall / surplus in marked shares

Surplus of C distributed to A & B in 3:2
ratio
Net liability for underwriting shares
43
(ii)
Journal Entries in the books of Jumba Ltd.

Particular
Dr.
As Account
Dr.
42,00,000
Bs Account
Dr.
3,00,000
Cr.
To Share Capital Account
30,00,000
15,00,000
(Being the shares to be taken up by the

underwriters)
Underwriting Commission Account
Dr.
15,00,000
To
As Account
7,50,000
To
Bs Account
5,00,000
To
Cs Account
2,50,000
(Being the underwriting commission due to the

underwriters)
Bank Account
To
Dr.
34,50,000
As Account
34,50,000
(Being the amount received from underwriter

A for the shares taken up by him after adjustmentof
his commission)
Bs Account
Dr.
2,00,000
To Bank Account
2,00,000
(Being the amount paid to underwriter B after

adjustment of the shares taken by him against
underwriting commission due to him)
Cs Account
Dr.
To Bank Account
2,50,000
2,50,000
(Being the underwriting commission paid to C)

Note : C had sold in excess of the underwriting obligation and hence he will not be required
to purchase any shares but will get commission for underwriting.
44
Question 26
X Ltd., issued 1,00,000 equity shares of Rs. 10 each at par. The entire issue was
underwritten as follows:
A 60,000 shares (Firm underwriting 8,000 shares)
B 30,000 shares (Firm underwriting 10,000 shares)
C 10,000 shares (Firm underwriting 2,000 shares)
The total applications including firm underwriting were for 80,000 shares. The marked
applications were as follows:
A- 20,000 shares; B- 14,000 shares; C- 6,000 shares.
The underwriting contract provides that credit for unmarked applications be given to the
underwriters in proportion to the shares underwritten. Determine the liability of each
underwriter.
Answer
Statement showing liability of underwriters
A
Gross Liability (Total Issue
purchase by promoters etc)

Less : Unmarked applications (total
application less firm underwriting
less marked applications) in gross
liability
ratio
(Unmarked
Applications = (80,000 20,000
40,000)=20,000
Net Liability
Total Liability in Amount @ Rs.10/-
Total
60,000
30,000
10,000
1,00,000
(8,000)
(10,000)
(2,000)
(20,000)
52,000
20,000
8,000
80,000
(20,000)
(14,000)
(6,000)
(40,000)
32,000
6,000
2,000
40,000
(12,000)
(6,000)
(2,000)
(20,000)
20,000
20,000
8,000
10,000
2,000
20,000
28,000
10,000
2,000
40,000
2,80,000
1,00,000
2,00,000
4,00,000

Total liability of underwriters
The solution is given on the basis that the benefit of firm underwriting is given to
individual underwriters.
45
Question 27
Dolly Ltd. issued 25,00,000 equity shares of Rs.10 each at par. 10,00,000 shares were
issued to the promoters and the balance offered to the public was underwritten by three
underwriters P, Q & R in the ratio of 2 : 4 : 4 with firm underwriting of 50,000, 60,000 and
70,000 shares each respectively. Total subscription received 12,88,000 shares including
marked application and excluding firm underwriting. Marked applications were as
follows:
P 3,00,000
Q 3,50,000
R 4,50,000
Unmarked and surplus applications to be distributed in gross liability ratio. Ascertain the
liability of each underwriter.
Answer
Calculation of liability of underwriters (In shares)
P
Total

purchase by promoters etc.)
3,00,000
6,00,000
6,00,000
15,00,000
(50,000)
(60,000)
(70,000)
(180,000)
250,000
540,000
530,000
13,20,000
(3,00,000) (350,000) (450,000)
(11,00,000)
Less Marked applications
(50,000)
190,000
80,000
220,000
(94,000)
(94,000)
(188,000)
(50,000)
94,000
(14,000)
32,000
Excess of P and taken over by Q
50,000
62,000
14,000
Net liability (other than firm

underwriting)
32,000
32,000
50,000
60,000
70,000
1,80,000

including firm underwriting
50,000
92,000
70,000
2,12,000
5,00,000
9,20,000
7,00,000
41,20,000
Less : Unmarked applications

(In gross liability ratio 4:6:8)
Net Liability
Total Liability in Amount @ Rs.

10/-
46
Question 28
ABC Ltd. came up with public issue of 3,00,000 Equity Shares of Rs.10 each at Rs. 15 per
share. P, Q and R took underwriting of the issue in ratio of 3 : 2: 1 with the provisions of
firm underwriting of 20,000, 14,000 and 10,000 shares respectively.
Applications were received for 2,40,000 shares excluding firm underwriting. The marked
applications from public were received as under:
P - 60,000
Q - 50,000
R - 60,000
Compute the liability of each underwriter as regards the number of shares to be taken up
assuming that the benefit of firm underwriting is not given to individual underwriters.
Answer
Calculation of liability of each underwriter (in shares) assuming that the benefit of firm
underwriting is not given to individual underwriters
P
Total

150,000
1,00,000
50,000
3,00,000

(excluding firm underwriting)
(60,000)
(50,000)
(60,000)
(170,000)
Balance
90,000
50,000
(10,000)
1,30,000
Less : Surplus of R allocated to P

and Q in the ratio of 3:2
(6,000)
(4,000)
10,000
84,000
46,000
1,30,000
(57,000)
(38,000)
(19,000)
(1,14,000)
Net Liability
27,000
8,000
(19,000)
232,000
Less : Surplus of R allocated to P

and Q in the ratio of 3:2
11,400
(7,600)
19,000
Net liability (other than firm

underwriting)
15,600
400
16,000
20,000
14,000
10,000
44,000

35,600
1,4,400
10,000
60,000
Less : Unmarked applications

(Refer W.N.)
47
Working Note:
Applications received from public 2,40,000 shares
Add : Shares underwritten firm (20,000 + 14,000 + 10,000) 44,000 shares
Total applications 2,84,000 shares
Less : Marked applications (60,000 + 50,000 + 60,000) (1,70,000 shares)
Unmarked applications including firm underwriting 1,14,000 shares
Question 29
A company issued 1,50,000 shares of Rs. 10 each at a premium of Rs. 10. The entire issue
was underwritten as follows:
X 90000 shares (Firm underwriting 12000 shares)
Y 37500 shares (Firm underwriting 4500 shares)
Z 22500 shares (Firm underwriting 15000 shares)
Total subscriptions received by the company (excluding firm underwriting and marked
applications) were 22500 shares.
The marked applications (excluding firm underwriting) were as follows:
X 15000 shares
Y 30000 shares
Z 7500 shares
Commission payable to underwriters is at 5% of the issue price. The underwriting contract
provides that credit for unmarked applications be given to the underwriters in proportion
to the shares underwritten and benefit of firm underwriting is to be given to individual
underwriters.
(i) Determine the liability of each underwriter (number of shares);
(ii) Compute the amounts payable or due from underwriters; and
(iii) Pass Journal Entries in the books of the company relating to underwriting.
Answer
(i) Computation of total liability of underwriters in shares (In shares)
X
Total

90,000
37,500
22,500
1,50,000

(excluding firm underwriting)
(15,000)
(30,000)
(7,500)
(52,500)
48
75,000
7,500
15,000
97,500
(13,500)
(5,625)
(3,375)
(22,500)
61,500
1,875
11,625
75,000
(12,000)
(4,500)
(15,000)
(31,500)
Balance
49,500
(2,625)
(3,375)
43,500
Less : Surplus of Y and Z adjusted

in Xs balance (2,625+3,375)
(6,000)
2,625
3,375
Net liability
43,500
43,500
12,000
4,500
15,000
31,500
Total Liability
55,500
4,500
15,000
75,000
Less : Unmarked applications (In

gross liability ratio 12:5:3)
(ii) Calculation of amount payable to or due from underwriters

X
Total liability
Total
55,500
4,500
15,000
75,000
Amount receivable @ Rs. 20 from

underwriter (in Rs.)
11,10,000
90,000
3,00,000
15,00,000
Less : Underwriting Commission

payable @ 5% of Rs. 20 (in Rs.)
(90,000)
(37,500)
(22,500)
(1,50,000)
10,20,000
52,500
2,77,500
13,50,000
Net amount receivable (in Rs.)
(iii) Journal Entries in the books of the company (relating to underwriting)

Sl. no.
Particular
Dr.
Dr.
11,10,000
Dr.
90,000
Dr.
3,00,000
49
Cr.
7,50,000
7,50,000
(Being allotment of shares to underwriters)

2
Underwriting commission A/c

Dr.
To X
To Y
To Z
(Being amount of underwriting commission
payable)
Bank A/c
To X
To Y
To Z
(Being
net
amount
received
underwriters for shares allotted
underwriting commission)
Dr.
1,50,000
90,000
37,500
22,500
13,50,000
10,20,000
52,500
2,77,500
by
less
Question 30
The Balance Sheet of X Ltd. as on 31st March, 2015 is as follows:
Particulars
Rs.

1.
Shareholders funds
a Share capital
2,90,000
b Reserves and Surplus

2.
48,000
Current liabilities
Trade Payables
56,500
Total
3,94,500
ASSETS
1.
Fixed Assets
Tangible asset
3,45,000
18,500
50
2.
Current Assets
Cash and cash equivalents (bank)
31,000
Total
3,94,500
The share capital of the company consists of Rs. 50 each equity shares of Rs. 2,25,000 and
Rs. 100 each Preference shares of Rs. 65,000 (issued on 1.4.2013). Reserves and Surplus
comprises Profit and Loss Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the
Company decided:
(a) to sell all the investments for Rs. 14,000.
(b) to finance part of redemption from company funds, subject to, leaving a bank
balance of 14,000.
(c) to issue minimum equity share of Rs. 50 each at a premium of Rs. 10 per share to
raise the balance of funds required.
You are required to pass:
The necessary Journal Entries to record the above transactions and prepare the balance
sheet as on completion of the above transactions.9.69
Answer
Journal
Particulars
Dr.
Bank A/c
(For application money received on 675
shares@ Rs.60 per share)
Dr.
Cr.
40,500
40,500
Dr.
40,500
33,750
6,750
(For disposition of application money received)

Preference Share Capital A/c
Premium on Redemption of Preference
Shares A/c
To Preference Shareholders A/c
(For amount payable on redemption of
preference shares)
Dr.
Dr.
65,000
6,500
71,500
51

Profit and Loss A/c
To Premium on Redemption of
(For writing off premium on redemption
firstly out of securities premium and balance
out of profits)
Dr.
Dr.
6,250
250
Bank A/c
Dr.
14,000
Profit and Loss A/c (loss on sale) A/c
Dr.
4,500
6,500
To Investment A/c
(For sale of investments at a loss of Rs. 4,500)
Profit and Loss A/c
18,500
Dr.
31,250
To Capital Redemption Reserve A/c
31,250
(For transfer to CRR out of divisible profits an

amount equivalent to excess of nominal value over
proceeds i.e., Rs. 65,000 Rs. 33,750)
Preference Shareholders A/c
Dr.
71,500
To Bank A/c
71,500
(For payment of preference shareholders)

Balance Sheet (after redemption)
1.
2.
Notes No.
Rs.
Shareholders funds
a. Share capital
2,58,750
b. Reserves and Surplus
43,750
Current liabilities
Trade Payables
56,500
Total
3,59,000
52
ASSETS
1.
Fixed Assets
Tangible asset
2.
3,45,000
Current Assets
14,000
Total
3,59,000
Notes to accounts
1. Share Capital
5175 Equity share @ Rs. 50 each
2,58,750

a) Capital Redemption Reserve
31,250
b) Profit and Loss Account (48,000 250 4,500 31,250)
12,000
c) Securities Premium (6,750-6,250)
500
43,750

Balances with banks (31,000 + 40,500 +14,000 71,500)
14,000
Working Note
Calculation of Number of Shares:
Rs.
Amount payable on redemption
71,500
Less : Sale price of investment
(14,000)
57,500
Less : Available bank balance (31,000 - 14,000)

Funds from fresh issue
(17,000)
40,500
No. of shares = 40,500/60 = 675 shares

Question 31
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December,
2014.
53
Share capital : 40,000 Equity shares of Rs. 10 each fully paid Rs. 4,00,000; 1,000 10%
Redeemable preference shares of Rs. 100 each fully paid Rs.1,00,000. Reserve & Surplus:
Capital reserve Rs. 50,000; Securities premium Rs. 50,000; General reserve 75,000;
Profit and Loss Account Rs. 35,000
On 1st January 2015, the Board of Directors decided to redeem the preference shares at
par by utilisation of reserve.
You are required to pass necessary Journal Entries including cash transactions in the
books of the company.
Answer
In the books of ABC Limited Journal Entries
Date
Particulars
Dr. (Rs.)
Jan 1
10% Redeemable Preference Share
Dr.
Cr. (Rs)
1,00,000
Capital A/c
1,00,000
Dr.
1,00,000
To Bank A/c
1,00,000
(Being the amount paid on

redemption of preference shares)
General Reserve A/c
Dr.
75,000
Profit & Loss A/c
Dr.
25,000
1,00,000
(Being the amount transferred to Capital

Redemption Reserve Account as per the
requirement of the Act)
Note:
Securities premium cannot be utilised for transfer to Capital Redemption Reserve because
dividend cannot be paid out of Securities Premium Account.
54
Question 32
C Limited had 3,000, 12% Redeemable Preference Shares of Rs. 100 each, fully paid up.
The company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i)
20,000 Equity Shares of Rs. 10 each at par,
(ii) 1,000 14% Debentures of Rs. 100 each.

The issue was fully subscribed and all amounts were received in full .The payment was
duly made. The company had sufficient profits. Show Journal Entries in the books of the
company.
Answer
In the books of C Limited Journal Entries
Particulars
Dr.
Bank A/c
Dr.
Cr.
2,00,000
2,00,000
(Being the issue of 20,000 equity shares of Rs. 10 each

at par .)
Bank A/c
Dr.
1,00,000
To 14% Debenture A/c
1,00,000
(Being the issue of 1,000 Debentures of Rs. 100 each)

12% Redeemable Preference Share Capital A/c
Dr.

Shares A/c
Dr.
3,00,000
30,000
3,30,000
(Being the amount payable on redemption

transferred to Preference Shareholders Account)
Dr.
To Bank A/c
3,30,000
3,30,000
(Being the amount paid on redemption of preference

shares)
55
Profit & Loss A/c
Dr.
30,000
To Premium on Redemption of Preference
30,000
Shares A/c
(Being the adjustment of premium on redemption
against Profits & Loss Account)
Profit & Loss A/c
Dr.
1,00,000
To Capital Redemption Reserve A/c (W. N.1)
1,00,000
(Being the amount transferred to Capital Redemption

Reserve Account as per the requirement of the Act)
Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed
3,00,000
Less: Proceeds from new issue
(2,00,000)
Total Balance
1,00,000
Question 33
The capital structure of a company consists of 20,000 Equity Shares of Rs. 10 each fully
paid up and 1,000 8% Redeemable Preference Shares of Rs. 100 each fully paid up (issued
on 1.4.2015).
Undistributed reserve and surplus stood as: General Reserve Rs. 80,000; Profit and Loss
Account 10,000; Investment Allowance Reserve out of which Rs. 5,000, (not free for
distribution as dividend) 10,000; Securities Premium Rs. 12,000, Cash at bank amounted
to Rs.98,000. Preference shares are to be redeemed at a Premium of 10% and for the
purpose of redemption, the directors are empowered to make fresh issue of Equity Shares
at par after utilising the undistributed reserve and surplus, subject to the conditions that a
sum of Rs.20,000 shall be retained in general reserve and which should not be utilised.
Pass Journal Entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet of the company after the redemption
carried out.
56
Answer
Journal Entries
Particulars
Dr.
Bank A/c
Dr.
Cr.
25,000
25,000
(Being the issue of 2,500 Equity Shares of Rs. 10

each.)
8% Redeemable Preference Share Capital A/c Dr.
1,00,000

Shares A/c
Dr.
10,000
1,10,000
(Being the amount paid on redemption

transferred to Preference Shareholders Account)
Dr.
1,10,000
To Bank A/c
1,10,000
(Being the amount paid on redemption of

preference shares)
Dr.
10,000
To Premium on Redemption of
10,000

(Being the premium payable on redemption
provided out of Securities Premium Account)
General Reserve A/c
Dr.
60,000
Profit & Loss A/c
Dr.
10,000
Investment Allowance Reserve A/c
Dr.
5,000
75,000

Redemption Reserve Account as per the
requirement of the Act)
57
Balance Sheet as on [Extracts]

1.
Shareholders funds
a. Share capital
2,25,000
1,02,000
Total
ASSETS
2.
Current Assets
13,000
Total
Notes to accounts
1. Share Capital
22,500 Equity shares of Rs. 10 each fully paid up
2,25,000

General Reserve
20,000
Securities Premium (Rs. 12,000 Rs. 10,000)
2,000
Capital Redemption Reserve
75,000
Investment Allowance Reserve
5,000
1,02,000
Working Note :
(1) No of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed
Rs. 1,00,000
Less : Profit available for distribution as dividend:

General Reserve : Rs. (80,000-20,000)
Rs. 60,000
Profit and Loss
Rs. 10,000
Investment Allowance Reserve: (Rs. 10,000-5,000)
Rs. 5,000
(75,000)
25,000
Therefore, No. of shares to be issued = 25,000/Rs. 10 = 2,500 shares.

58
Question 34
The books of B Ltd. showed the following balance on 31st December, 2014:
30,000 Equity Shares of Rs. 10 each fully paid; 15,000 12% Redeemable Preference Shares
of Rs. 10 each fully paid; 4,000 10% Redeemable Preference Shares of Rs. 10 each, Rs. 8
paid up (all shares issued on 1st April, 2012).
Undistributed Reserve and Surplus stood as: Profit and Loss Account Rs. 80,000; General
Reserve Rs. 1,20,000; Securities Premium Account Rs. 15,000 and Capital Reserve Rs.
21,000.
Preference shares are redeemed on 1st January, 2014 at a premium of Rs. 2 per share. The
whereabouts of the holders of 100 shares of Rs. 10 each fully paid are not known.
For redemption, 3,000 equity shares of Rs. 10 each are issued at 10% premium. At the
same time, a bonus issue of equity share was made at par, two shares being issued for
every five held on that date out of the Capital Redemption Reserve Account.
Show the necessary Journal Entries to record the transactions.
Answer
In the books of B Limited Journal Entries
Date
Particulars
Dr.
Jan 1
12% Redeemable Preference Share Capital A/c Dr.

Dr.
Cr.
1,50,000
30,000
Shares A/c
To
(Being the amount payable on redemption of 15000

12% Redeemable Preference Shares transferred to
Shareholders Account)
Dr.
To Bank A/c
1,80,000
1,78,800
1,78,800
(Being the amount paid on redemption of 14,900

preference shares)
59
Bank A/c
Dr.
33,000
To Equity Shares Capital A/c
30,000
3,000
(Being the issue of 3,000 Equity Shares of Rs. 10

each at a premium of 10% )
General Reserve A/c
Dr.
1,20,000
1,20,000

Redemption Reserve A/c as per the requirement of
the Act.)
Capital Redemption Reserve A/c
Dr.
1,20,000
To Bonus to Shareholders A/c
1,20,000
(Being the amount appropriated for issue of bonus

share in the ratio of 5:2)
Bonus to Shareholders A/c
Dr.
1,20,000
1,20,000
(Being the utilisation of bonus dividend for issue of

12,000 equity shares of Rs. 10 each fully paid)
Dr.
18,000
Profit & Loss A/c
Dr.
12,000
To Premium on Redemption of Preference

Shares A/c
30,000
(Being premium on redemption of preference

shares adjusted against Securities Premium Account
and the balance charged to Profit & Loss Account)
Working Note:
(1) Partly paid-up preference shares cannot be redeemed.
(2) Amount to be Transferred to Capital Redemption Reserve Account
Face value of share to be redeemed
1,50,000
60
Less : Proceeds from fresh issue (excluding premium)
(30,000)
1,20,000
Question 35
The Balance Sheet of XYZ as at 31st December, 2014 inter alia includes the following:
50,000, 8% Preference Shares of Rs. 100 each, Rs. 70 paid up 35,00,000
1,00,000 Equity Shares of Rs. 100 each fully paid up 1,00,00,000
Securities Premium 5,00,000
Capital Redemption Reserve 20,00,000
General Reserve 50,00,000
Under the terms of their issue, the preference shares are redeemable on 31st March, 2015
at 5% premium. In order to finance the redemption, the company makes a rights issue of
50,000 equity shares of Rs. 100 each at Rs. 110 per share, Rs. 20 being payable on
application, Rs. 35 (including premium) on allotment and the balance on 1st January,
2015. The issue was fully subscribed and allotment made on 1st March, 2015. The money
due on allotment were received by 31st March, 2015. The preference shares were
redeemed after fulfilling the necessary conditions of Section 55 of the Companies Act,
2013. The company decided to make minimum utilisation of general reserve.
You are asked to pass the necessary Journal Entries.
Answer
Journal Entries
Particulars
Dr.
8% Preference Share Final Call A/c
Dr.
Cr.
15,00,000
To 8% Preference Share Capital A/c
15,00,000
(For final call made on preference shares @ Rs. 30

each to make them fully paid up)
Bank A/c
Dr.
To 8% Preference Share Final Call A/c

(For receipt of final call money on preference shares)
61
15,00,000
15,00,000
Bank A/c
Dr.
10,00,000
10,00,000
(For receipt of application money on 50,000 equity

Dr.
10,00,000
10,00,000
(For application money transferred to share capital)

Dr.
17,50,000
12,50,000
5,00,000
(For allotment money due on 50,000 equity shares @

Rs. 35 per share including a premium of 10 per share)
Bank A/c
Dr.
17,50,000
17,50,000
(For receipt of allotment money on equity shares)

8% Preference Share Capital A/c
Dr.

Shares A/c
Dr.
50,00,000
2,50,000
52,50,000
(For amount payable to preference shareholders on

redemption at 5% premium)
Dr.
To Premium on Redemption A/c
2,50,000
2,50,000
(For writing off premium on redemption of preference

shares)
62
General Reserve A/c

Dr.
(For transfer of CRR the amount not covered by the
proceeds of fresh issue of equity shares i.e., 50,00,000 10,00,000 - 12,50,000)
27,50,000
52,50,000
Dr.
To Bank A/c
27,50,000
52,50,000
(For amount paid to preference shareholders)
***
63
2
Debentures
Question 1
Give the Journal entries in each of the following alternative cases assuming the face value
of a debenture being Rs. 100.
(a) A debenture issued at Rs. 100 repayable at Rs. 100
(b) A debenture issued at Rs. 95 repayable at Rs. 100
(c) A debenture issued at Rs. 105 repayable at Rs. 100
(d) A debenture issued at Rs. 100 repayable at Rs. 105
(e) A debenture issued at Rs. 95 repayable at Rs. 105
(f) A debenture issued at Rs. 90 repayable at Rs. 95
Answer
Journal
Particulars
(a)
Dr. (Rs.)
Bank A/c
Dr.
Cr. (Rs.)
100
To Debentures A/c
100
(Being the issue of debentures at par)

(b)
Bank A/c
Dr.
95
Discount on Issue of Debentures A/c
Dr.
To Debentures A/c
100
(Being the issue of debentures at 5%

discount)
64
(c)
Bank A/c
Dr.
105
To Debentures A/c
100
(Being the issue of debentures at 5%

premium)
(d)
Bank A/c
Dr.
100
Loss on Issue of Debentures A/c
Dr.
To Debentures A/c
100
To Premium on Redemption on
Debentures A/c
(Being the issue of debenture at par

but redeemable at 5% premium)
(e)
Bank A/c
Dr.
95
Loss on Issue of Debentures A/c
Dr.
10
To Debentures A/c
100
To Premium on redemption of
Debentures A/c
(Being the issue of debenture at 5%

discount which are redeemable at 5%
premium)
(f)
Bank A/c
Dr.
90
Discount on Issue of Debentures A/c
Dr.
10
To Debentures A/c
100
(Being the issue of debentures at

10% discount)
65
Question 2
Z Ltd. took over the assets of Rs. 6,00,000 and liabilities of Rs. 80,000 of C Ltd. for an
agreed purchase consideration of Rs. 5,40,000 to be satisfied by the issue of 10%
Debentures of Rs. 1,000 each.
Required : Show the necessary journal entries in the books of Z Ltd, assuming that
Case (a) Such Debentures are issued at par;
Case (b) Such Debentures are issued at 20% premium; and
Case (c) Such Debentures are issued at 10% discount.
Answer
In the Books of Z Ltd.
Particulars
Dr. (Rs.)
Sundry Assets A/c
Dr.
6,00,000
Goodwill A/c
Dr.
20,000
To Sundry Liabilities A/c
Cr. (Rs.)
80,000
To C Ltd.
5,40,000
(Being the purchase of assets and liabilities from

B Ltd.)
(a)
If Debentures are issued at par

C Ltd.
Dr.
5,40,000
To 10% Debentures A/c (540 x 1000)
5,40,000
(Being the issue of 540 debentures at par to C Ltd.)

(b)
If Debentures are issued at 20% premium

C Ltd.
Dr.
To 10% Debentures A/c (450x1000)

To Securities Premium A/c (450x200)
(Being the issue of 450 debentures at a premium
of 20% to C Ltd.)
66
5,40,000
4,50,000
90,000
(c)
If Debentures are issued at 10% discount

C Ltd.
Dr.
Discount on Issue of Debentures A/c (600x10)
Dr.
5,40,000
60,000
To 10% Debentures A/c (600x1000)
6,00,000
(Being the issue of 6,00 debentures at a discount of

10% to C Ltd.)
Working Notes :
(i) The amount by which the purchase consideration exceeds the value of the net assets
(i.e. the difference between the agreed value of the assets taken over and the agreed
amount of liabilities taken over) has been debited to Goodwill Account.
(ii) Calculation of No. of Debentures to be issued in each case.
At 20%
Premium
A. Issue Price per Debenture (Rs.)
B. Purchase Consideration (Rs.)
C. No. of Debentures to be issued
At 10%
Discount
At Par
1200
900
1000
5,40,000
5,40,000
5,40,000
450
600
540
(Purchase Consideration/ Issue

Price)
Question 3
Z Ltd. issued 2,500, 10% Debentures of Rs. 100 each, a premium of 10% payable as Rs. 20
on application, Rs. 50 on allotment (including premium) and the balance on first & final
call. The public applied for 3,500 debentures. Applications for 2,250 debentures were
accepted in full, application for 500 were allotted 250 debentures and remaining
applications were rejected. All moneys were duly received.
Required : Journalise these transactions.
67
Answer
Journal of Z Ltd.
Particulars
Dr. (Rs.)
Bank A/c (3500 x 20)
Dr.
70,000
To Debenture Application A/c

(Being application money received on 3,500
debentures)
Debentures Application A/c
70,000
Dr.
To
10% Debentures A/c (2500 x 20)
To
Debentures Allotment A/c (250 x 20)
To
Bank A/c (750x20)
Cr. (Rs.)
70,000
50,000
5,000
15,000
(Being the application money adjusted and the surplus

refunded)
Debenture Allotment A/c (2500 x 50)
Dr.
To
10% Debentures A/c (2500 x 40)
To
Securities Premium A/c (2500 x 10)
1,25,000
1,00,000
25,000
(Being the Amount due on allotment @ Rs. 50 on 2,500

debentures)
Bank A/c (125000-5000)
To
Dr.
1,20,000
Debentures Allotment A/c
1,20,000
(Being the Balance of the amount due on allotment

received)
Debentures Call A/c (2500 x 40)
Dr.
1,00,000
To 10% Debentures A/c
1,00,000
(Being the Amount due on Call @ Rs. 40 on 2,500

debentures)
1,00,000
Bank A/c
Dr.
To Debentures Call A/c
1,00,000
(Being the Amount due on call received)
68
Question 4
A company purchased its own 11% debentures in the open market for Rs. 50,00,000 (cuminterest). The interest amount included in the purchase price is Rs. 1,50,000. The face
value of the debentures purchased is Rs. 52,00,000. The company cancelled the debentures
so purchased.
Pass Journal Entries in the books of the company for purchase and immediate cancellation
of debentures.
Answer
Journal Entries
Particulars
Dr. (Rs.)
11% Own Debentures A/c
Dr.
48,50,000
Debenture interest A/c Dr.
Dr.
1,50,000
To Bank
Cr. (Rs.)
50,00,000
(Being purchase of own debentures from the

market)
11% Debentures A/c
Dr.
To 11% Own Debentures A/c
52,00,000
48,50,000
To Capital Reserve
3,50,000
(Being profit on cancellation of debentures

transferred to Capital Reserve A/c)
Question 5
On 1st April, X purchased 12% debentures in M Ltd. for Rs.6,50,000. The face value of
these debentures were Rs.6,00,000. Interest on debentures falls due on 30th June and 31st
December. Compute the cost of acquisition of debentures.
Answer
Computation of cost of acquisition of debentures:
Cum- interest purchase price of debentures
Less: Interest from the last date of payment of
interest to the date of purchase i.e. for 3 months
6,00,000 x 3 /12x12%
Rs.
6,50,000
18,000
6,32,000
Cost of debentures at the time of acquisition
69
Question 6
Arjun Ltd. issued 10,000 (Nos.) of 12% debentures of Rs.100 each in April, 2013. Interest is
payable on 30th September and 31st March every year. The company purchased 2,000
debentures at Rs.104 per debenture on cum-interest basis on 1.7.2014. The own
debentures were cancelled on 30.9.2015.
Show Journal entries that are required to be passed for purchase of own debentures,
interest on own debentures and for cancellation of those debentures.
Answer
Journal Entries
Date
Particulars
Dr. (Rs.)
1.7.2014
12% Own Debentures A/c
Dr.
2,02,000
Interest on own Debentures A/c
Dr.
6,000
To Bank A/c
Cr. (Rs.)
2,08,000
(Being purchase of 12% own debenture on

cum interest basis)
30.9.2014
12% Debenture Interest A/c
Dr.
60,000
To Bank A/c
48,000
To Interest on Own Debentures A/c
12,000
(Being interest on Debentures including own

debentures for 6 months i.e. upto 30.9.2014)
31.3.2015
Dr.
60,000
To Bank A/c
48,000
12,000

70
30.9.2015
Dr.
60,000
To Bank A/c
48,000
12,000

30.9.2015
12% Debentures A/c
Dr.
2,00,000
Loss on cancellation of 12%

Debentures A/c
Dr.
2,000
To 12% Own Debentures A/c

2,02,000
(Being cancellation of 2,000 own debentures)

30.9.2015
Profit and Loss A/c
Dr.
To Loss on cancellation of 12% Debentures
2,000
2,000
(Being loss on cancellation transferred)
Question 7
Piyush Ltd. issued Rs. 10,00,000, 6% Debenture Stock at par on 21.1.2009, Interest was
payable on 30th June and 31st December, in each year.
Under the terms of the Debentures Trust the owned stock is redeemable at par. The trust
deed obliges the Company to pay to the trustees on 31st December, 2013 and annually
thereafter the sum of Rs. 1,00,000 to be utilised for the redemption and cancellation of an
equivalent amount of stock, which is to be selected by drawing lots.
Alternatively, the Company is empowered as from 1st January, 2013 to purchase its own
debentures on the open market. These Debentures must be surrendered to the Trustees for
cancellation and any adjustments for accrued interest recorded in the books of account. If
in any year the nominal amount of the stock surrendered under this alternative does not
amount to Rs. 1,00,000 then the shortfall is to be paid by the Company to the Trustees in
cash on 31st December.
The following purchases of stock were made by the Company:
71
Nominal value of
stock purchased
Rs.
(1)
30th September, 2013
(2)
31st May, 2014
75,000
(3)
31st July, 2015
1,15,000
Purchase price per

Rs. 100 of stock
Rs.
1,20,000
98
95 (Ex-interest)
92
The Company fulfilled all its obligations under the trust deed.
Prepare the following Ledger Accounts :
(a)
Debenture Stock A/c
(b)
Debenture Redemption A/c
(c)
Debenture Interest A/c
Note : Ignore costs and taxation

Answer
In the Books of Piyush Ltd.
Debenture Stock Account
Year
Particulars
Rs.
To Debenture
2013
Sept. 30 Redemption A/c
1,20,000
Dec. 31
8,80,000
To Balance c/d
Year
Particulars
2013
By Balance
b/d
Jan. 1
10,00,000
Rs.
10,00,000
10,00,000
2014
2014
May 31
To Debenture
Redemption A/c
75,000
Dec.31
To Debenture
Redemption A/c
25,000
To Balance c/d
Jan. 1
By Balance
b/d
8,80,000
7,80,000
8,80,000
8,80,000
2015
2015
July 31
To Debenture
Redemption A/c
1,15,000
Dec.31
To Balance c/d
6,65,000
Jan. 1
7,80,000
By Balance
b/d
7,80,000
7,80,000
72
Debenture Redemption Account

Year
2013
Particulars
Rs.
To Bank A/c
1,15,800
(Rs. 1,20,0000.98
Sept. 30
Rs. 1,800)
Year
Particulars
2013
By
Debenture
Stock A/c
Sept.30
1,20,000
2014
Dec.31
2014
To Bank A/c
71,250
May 31
By
Debenture
Stock A/c
75,000

3,750
Dec. 31
By
Debenture
Stock A/c
25,000
To Bank A/c
(Shortfall=Rs.1,00,000
Rs. 75,000)
25,000
(Rs. 75,000 0.95)
1,00,000
1,00,000
2015
July 31
1,20,000
4,200
1,20,000
May 30
Rs.
2015
To
Bank
A/c
(Rs. 1,15,000 .92 Rs.
575)
1,05,225

9,775
July 31
By
Debenture
Stock A/c
1,15,000
1,15,000
1,15,000
Debenture Interest Account

2013
Rs.
June 30
To Bank A/c
30,000
Sept. 30
To Bank A/c
1,800
Dec. 31
To Bank A/c
26,400
2013
Dec. 31
58,200
Rs.
By Profit and Loss A/c
58,200
58,200
73
2014
Rs.
May 31
To Bank A/c
1,875
June 31
To Bank A/c
24,150
Dec. 31
To Bank A/c
24,150
2014
Dec. 31
Rs.
50,175
2015
Rs.
June 30
To Bank A/c
23,400
July 31
To Bank A/c
575
Dec. 31
To Bank A/c
19,950
50,175
50,175
2015
Dec. 31
Rs.
43,925
43,925
43,925
Working Notes :
Interest paid on Debentures @6% per annum:
Date
Amount of
Debentures
Period
Rs.
Interest
Rs.
2013
June 30
10,00,000
6 months
30,000
Sept. 30
1,20,000
3 months
1,800
Dec. 31
8,80,000
6 months
26,400
May 31
75,000
5 months
1,875
June 30
8,05,000
6 months
24,150
Dec. 31
8,05,000
6 months
24,150
June 30
7,80,000
6 months
23,400
July 31
1,15,000
1 month
Dec. 31
6,65,000
6 months
2014
2015
575
19,950
Notes : (1) It has been assumed that debentures are purchased for immediate
cancellation.
(2) The purchases of 30th September, 2013 and 31st July, 2015 have been taken
on cum-interest basis
74
Question 8
Pass journal entries in year 1 in case of the issue of debentures by ABC Co. Ltd.: Issued Rs.
1,00,000, 11% debentures at 95% redeemable at the end of 10 years. (i) at 102%, and (ii)
at 98%
Answer
ABC Co. Ltd. Journal Entries
Particulars
(i)
Dr. (Rs.)
Bank A/c
Dr.
95,000
Discount on issue of debentures A/c
Dr.
5,000
Loss on issue of debentures A/c
Dr.
2,000
Cr. (Rs.)
1,00,000
To Premium on Redemption of debentures A/c
2,000
(Issue of Rs. 1,00,000 11% debentures at a discount of

5% but redeemable at a premium of 2%)
(ii)
Bank A/c
Dr.
95,000
Dr.
5,000
1,00,000
(Issue of Rs. 1,00,000, 11% debentures at a discount

of 5% and redeemable at discount of 2%)
Question 9
On 1st April, 2014, in Tima Ltds ledger 9% debentures appeared with a opening
balance of Rs. 50,00,000 divided into 50,000 fully paid debentures of Rs. 100 each
issued at par.
Interest on debentures was paid half-yearly on 30 th of September and 31 st March every
year.
On 31.5.2014, the company purchased 8,000 debentures of its own @ Rs. 98 (exinterest) per debenture.
On 31.12.2014 it cancelled 5,000 debentures out of 8,000 debentures acquired on
31.5.2014.
On 31.1.2015 it resold 2,000 of its own debentures in the market @ Rs. 101 (exinterest) per debenture.
75
You are required to prepare:

(i) Own debentures account;
(ii) Interest on debentures account; and
(iii) Interest on own debentures account.
Answer
Tima Ltd.s Ledger
(i)
Own Debentures Account
Date
Particulars
31.5.14
To Bank
31.12.14
To
Capital
Reserve
Rs.
Date
Particulars
31.12.14
By
9%
Debentures
A/c
5,00,000
10,000
31.1.15
By
BankResale
of
2,000
debentures
2,02,000
6,000
31.3.15
By
c/d
7,84,000
(Profit
on
cancellation)
31.1.15
To Profit and
Loss A/c
Balance
Rs.
98,000
To (Profit on
resale)
8,00,000
(ii)
8,00,000
Interest on Debentures Account

Date
Particulars
31.5.14
To Bank (Interest
for 2 months on
8,000 debentures)
30.9.14
To Interest on own
debentures (Interest
for 4 months on
8,000 debentures)
30.9.14
To Bank (Interest
for 6 months on
42,000 debentures)
Rs.
12,000
24,000
1,89,000
76
Date
Particulars
31.3.15
By Profit and
Loss A/c
Rs.
4,38,750
31.12.14
31.3.15
31.3.15
To Interest on own
for 3 months on
5,000 debentures)
11,250
To Interest on own
for 6 months on
1,000 debentures)
4,500
To Bank (Interest
for 6 months on
44,000 debentures)
1,98,000
4,38,750
(iv)
4,38,750
Interest on Own Debentures Account

Date
Particulars
31.3.15
To Profit and
Loss A/c
Rs.
45,750
Date
Particulars
Rs.
30.9.14
By Interest on
Debentures A/c
24,000
31.12.14
By Interest on
Debentures A/c
11,250
31.01.15
By Bank (interest
for 4 months on
2,000 debentures)
6,000
31.03.15
By Interest
Debentures
4,500
on
45,750
45,750
Working Note
31.5.14
Acquired 8,000 Debentures @ Rs. 98

per debenture (ex-interest)
Purchase price of debenture 8,000 Rs.
98
77
Rs.
=
7,84,000
Interest for 2 months Rs. 8,00,000 9%

2 12
12,000
[Rs. 8,00,000 9% ] less Rs.12,000
24,000
Interest
on
other
Rs. 42,00,000 9%
1,89,000
Face value Rs.100 less acquired at Rs.98

= 2 5000
10,000
31.1.15
Resale of 2,000 Debentures sold for 101

(ex-interest) acquired for Rs. 98 (exinterest) 2,000 Rs.3 per Debenture
6,000
31.12.14
Interest on cancelled 5,000 debentures
11,250
4,500
30.9.14
31.12.14
Interest on own debentures
Cancellation of 5,000 own debentures
5,000 Rs.100 9%
31.3.15
debentures
1
4
Interest on 1,000 own debentures Rs.

1,00,000 9%
Question 10
Journalize the following transactions. Narration is not required:
Issue of 12%, 1,00,000 debentures of Rs. 100 each
1. at par and redeemable at par.
2. at 10% discount and redeemable at par.
3. at 10% premium and redeemable at par.
4. at 10% premium and redeemable at a premium of 5%.
5. at par and redeemable at a premium of 5%.
6. at 10% discount and redeemable at a premium of 5%.
Answer
Journal
This amount includes Rs. 1,000 discount on issue of debentures and Rs. 500 premium on
redemption.
Issue for Consideration other than Cash
In this case debentures are issued for consideration other than cash. Examples are
allotment of debentures for assets purchased or technical services received. There is no
78
receipt of cash in these transactions for the allotment of debentures. The following are the
accounting entries:
Particulars
1.
Rs.000
(Dr.)
Bank Account
Dr.
Rs.000
(Cr.)
10,000
To 12% Debentures Account
10,000
(Being 12% Debentures issued at par)

2.
Bank Account
Dr.
Discount on Issue of Debentures Account Dr.
9,000
1,000

(Being 12%debentures
discount)
3.
issued
10,000
at
Bank Account
10%
Dr.
11,000
10,000
1,000
(Being 12% debentures issued at 10%

premium)
4.
Bank Account
Dr.
11,000
Loss on issue of debenture
Dr.
500
10,000
1,000

To Premium on redemption of Debentures
500

premium and redeemed at 5% premium)
5.
Bank Account
Dr.
10,000
Loss on issue of Debentures Account
Dr.
500
10,000
79
500
(Being 12% debentures issued at par and

redeemed at 5% premium)
6.
Bank Account
Dr.
9,000
Loss on Issue of Debentures Account

(1000+500)
Dr.
1,500
10,000
500

discount and redeemed at 5% premium)
Question 11
Nima Limited recently made a public issue in respect of which the following information is
available:
(a)
No. of partly convertible debentures issued 2,00,000; face value and issue price
Rs.100 per debenture.
(b)
Convertible portion per debenture 60%, date of conversion on expiry of 6 months

from the date of closing of issue.
(c)
Date of closure of subscription lists 1.5.2014, date of allotment 1.6.2014, rate of

interest on debenture 15% payable from the date of allotment, value of equity
share for the purpose of conversion Rs. 60 (Face Value Rs. 10).
(d)
Underwriting Commission 2%.
(e)
No. of debentures applied for 1,50,000.
(f)
Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2015 (including cash and bank entries).
Answer
In the books of Nima Ltd.
Journal Entries
Date
Particulars
1.5.14
Bank A/c
(Dr.)
(Cr.)
1,50,00,000
Dr.

(Application money received on
1,50,000 debentures @ Rs. 100
each)
80
1,50,00,000
1.6.14
Debenture Application A/c
Dr.
1,50,00,000
Underwriters A/c
Dr.
50,00,000
2,00,00,000
(Allotment of 1,50,000 debentures

to
applicants
and
50,000
debentures to underwriters)
Underwriting Commission
Dr.
4,00,000
To Underwriters A/c
(Commission
underwriters
2,00,00,000)
4,00,000
payable
@ 2% on
Bank A/c
to
Rs.
Dr.
46,00,000
To Underwriters A/c
46,00,000
(Amount
received
from
underwriters in settlement of
account)
30.9.14
10,00,000
Dr.
To Bank A/c
10,00,000
(Interest paid on debentures for

4 months @ 15% on Rs.
2,00,00,000)
30.10.14
15% Debentures A/c
Dr.
1,20,00,0000
20,00,000
1,00,00,0000
(Conversion of 60% of debentures

into shares of Rs. 60 each with a
face value of Rs. 10)
31.3.15
Dr.
To Bank A/c
7,50,000
7,50,000
(Interest paid on debentures for

the half year)
81
Working Note :
Calculation of Debenture Interest for the half year ended 31st March, 2015
On Rs. 80,00,000 for 6 months @ 15%
= Rs. 6,00,000
On Rs. 1,20,00,000 for 1 months @ 15%
= Rs. 1,50,000
Rs. 7,50,000
Question 12
The Sonu Power Ltd. took over assets of Rs. 230 Lacs and liabilities of Rs. 30 Lacs of PQR
Company Ltd. for the purchase consideration of Rs. 220 Lacs. The Sonu Power Ltd. paid the
purchase consideration issuing debentures of Rs. 100 each at 10% premium. Give journal
entries in the books of the Sonu Power Ltd.
Answer
Journal of Sonu Power Ltd. (In lacs)
Particulars
Dr.
Cr.
Sundry Assets
Dr.
230
Goodwill
Dr.
20
To Liabilities
30
To PQR Ltd.
220
(Being purchase of assets and liabilities of PQR

Ltd.)
PQR Ltd.
Dr.
To Debentures
220
200
To Securities Premium
20
(Being issue of debentures at 10% premium)

Question 13
Write a short note on Debentures issued as Collateral Security.
Answer
Issue of debentures as a collateral security means issue of debentures as a subsidiary or
secondary security, that is, a security in addition to the prime security. Secondary security
82
is to be realized only when the prime security fails to pay the amount of loan. Debentures
issued as a collateral security can be dealt with in two ways in the books:
a. First Method
No entry is made in the books. On the liability side of the balance sheet below the
item of loan a note that it has been secured by the issue of debentures is to be given.
b. Second method
Sometimes issue of debentures as collateral security is recorded by making a journal
entry as follows:
Debenture suspense account Dr. (This appears on the assets side)
To Debenture account (This appears on the liabilities side)
Question 14
A Company issued 100,000 debentures of Rs. 100 each redeemable at the end of 10th year,
but reserves the right to redeem earlier from the end of 5th year. The company decides at
the end of 5th year to redeem 20,000 debentures out of profits it has made.
Pass necessary journal entries relating to redemption.
Answer
Following Journal entries will be passed in the end of 5th year
in thousand
Particulars
Dr.
Cr.
5th year end

Statement of Profit & loss A/c
Dr.
2,000
To Debenture redemption reserve A/c
2,000
(Being Transfer of profit)

Debentures A/c
Dr.
2,000
To Debenture holder A/c
2,000
(Being redemption due)

Debenture holder A/c
Dr.
To Bank account
2,000
2,000
(Being payment made to Debenture holders)

Question 15
On April 1, 2014 Autoparts Ltd. issued 25,00,000 12% fully convertible debentures of Rs.
100 each at par. The debenture holders were given the call option to convert the
debentures into two equity shares of Rs. 10 each at a premium of Rs. 40 per share on or
83
after July 1, 2014. On January 1, 2015, debenture holders holding 10,00,000 debentures
exercised their option. Pass the necessary Journal entries.
Answer
Journal entries
Date
Particulars
April 1, 2014
Bank A/c
In Lacs
Dr.
Dr.
Cr.
2,500
To 12% Convertible Debentures A/c
2,500
(Issue of 25,00,000 12% convertible

debentures of Rs. 100 each)
12% Convertible debentures A/c
Dr.
1,000
To Equity share capital A/c
200
To Security Premium A/c
800
(Conversion of 10,00,000 debenture of

Rs. 100 each, into two eq. shares of Rs 10
at a premium of Rs. 40 each)
Question 16
Bima Ltd. had issued 11% 5,00,000 debentures of Rs. 100 each redeemable on 31st March
2014 at a premium of 5%.
The company offered three options to debenture holders as under:
(i) 13% Preference shares of Rs. 10 each at Rs. 10.50
(ii) 14% debentures of Rs. 100 at par.
(iii) Redemption in cash.
The options were accepted as under.
Option (i) by holders of 1,00,000 debentures.
Option (ii) by holders of 1,00,000 debentures.
Option (iii) by holders of 3,00,000 debentures.
The company carried out the redemption. Pass the necessary journal entries.
84
Answer
Journal entries
(in lacs)
Particulars
Dr.
Cr.
11% Debentures A/c
Dr.
500
Premium on redemption of debentures A/c
Dr.
25
To Debenture Holder A/c
525
(Being redemption due at premium@5%)

Debenture holders account
Dr.
105
To 13% Preference share capital account
100
To Securities premium account
(Being debentures converted into preference shares)

Debenture holders A/c
Dr.
105
To 14% Debenture A/c
105
(being debentures converted into 14%debentures)

Dr.
315
To Bank A/c
(Being payment made to remaining debenture
holders)
315
Question 17
On 1st April, 2011 A Ltd. made an issue of 10,00,000 14% debentures of Rs. 100 each at Rs.
98 per debenture. According to the terms of issue, the company should redeem 10000
debentures either by purchasing them from the open market or by drawing lots at par at
the companys option. Profit, if any, on redemption is to be transferred to capital reserve.
The companys accounting year ends on 31st March. Interest is payable on 30th Sep and
31st March.
During 2011-12, the company wrote off 20% of debenture discount account.
During 2014-15, the company purchased and cancelled the debentures as given below:
(i)
Rs. 200,00,000 at Rs. 95 per debenture on 30th September, and
(ii) Rs. 300,00,000 at Rs. 97 per debenture on 31st March.

Give the journal entries in the books of A Ltd. for both the years
85
Answer
Journal Entries
Date
1.4.11
in lacs
Particulars
Cr.
Dr.
Bank A/c
Dr.
980
Dr.
20
1000
To 14 % Debentures A/c
(Being debentures issued at discount)
30.9.11
Debentures interest A/c
Dr.
70
To Bank A/c
70
(Being interest paid to debentureholders)

31.3.12
Dr.
70
To Bank A/c
70
(being interest paid to debentureholders)

31.3.12
Profit and loss A/c
Dr.
144
To Debenture interest A/c (70+70)
140
To Discount on issue of Debentures

A/c (20x20%)
(Being debenture interest and 20%

discount transferred to Profit and loss
account)
30.9.13
Dr.
70
To Bank A/c
70
(Being interest paid to debenture holders)

30.9.14
Own debentures A/c
Dr.
190
To Bank A/c
190
(Being own debentures purchased)

14 % Debentures A/c
Dr.
200
To Own debentures A/c
190
10
(Being own debentures cancelled and

profit transferred to capital reserve)
86
30.9.14
Dr.
56
To Bank A/c
56
(Being interest paid to debenture holders)

Own debentures A/c
Dr.
291
To Bank A/c
291
(Being own debentures purchased)

14 % Debentures A/c
Dr.
300
To Own debentures A/c
291
(Being own debentures cancelled and

profit tranfered to capital reserve)
31.3.15
Profit and loss A/c
Dr.
126
To Debenture interest A/c
126
(Being debenture interest transferred to

Profit and loss account)
Question 18
The Summary Balance Sheet of Boxco. LTD. on 31st March, 2015 read as under :
Liabilities
Rs.
Share Capital :
Assets
Rs.
Freehold property
1,15,000
1,35,000
Authorised:
30,000 Equity Shares of Rs.
10 each
3,00,000
Issued and Subscribed:
2,00,000
Stock
1,20,000
Debtors
75,000
12% Debentures
1,20,000
Cash
30,000
Creditors
1,15,000
Balance at Bank

10 each fully paid
Proposed Dividends
2,20,000
20,000
5,75,000
87
5,75,000
At the Annual General Meeting it was resolved :

(a) To pay the proposed dividend of 10 per cent in cash.
(b) To give existing shareholders the option to purchase one Rs. 10 share at Rs. 15 for
every four shares (held prior to the bonus distribution), this option being taken up
by all shareholders.
(c)
To issue one bonus share for every four shares held.
(d)
To repay the debentures at a premium of 3 per cent.
Give the necessary journal entries and the companys Balance Sheet after these
transactions are completed.
Answer
Journal of Boxco Ltd.
Particulars
Dr.
Proposed Dividend A/c
Dr.
Cr.
20,000
To Bank A/c
20,000
(Proposed Dividend paid to existing

shareholders)
Bank A/c
Dr.
75,000
To Equity Shareholders A/c
75,000
(Application money received on 5,000 shares @

Rs. 15 per share to be issued as rights shares in
the ratio of 1:4)
Equity Shareholders A/c
Dr.
75,000
50,000
25,000
(Share application money on 5,000 shares @

Rs.10 per share transferred to Share Capital
Account, and RS. 5 per share to Securities
Premium Account)
88
Dr.
25,000
Profit & Loss A/c
Dr.
25,000
50,000
To Bonus to Shareholders A/c

(Amount transferred for issue of bonus shares to
existing shareholders in the ratio of 1:4)
Bonus to Shareholders A/c
Dr.
50,000
To Equity Share Capital /c
50,000
(Issue of bonus shares in the ratio of 1 for 4)

12% Debentures A/c
Dr.
1,20,000
Premium Payable on Redemption A/c
Dr.
3,600
To Debenture holders A/c
1,23,600
(Amount payable to debentures holders)

Profit & Loss A/c
Dr.
3,600
To Premium Payable on Redemption A/c
3,600
(Premium payable on redemption charged to

Profit & Loss A/c)
Dr.
To Bank A/c
1,23,600
1,23,600
(Amount paid to debenture holders on

redemption)
89
Balance Sheet of Boxco Ltd. (after completion of transactions)

Particulars Note No.
I.
Equity and liabilities
(1)
Shareholder's Funds
(2)
Note
(a) Share Capital
3,00,000
91,400
Current Liabilities
(a) Trade payables
1,15,000
Total
5,06,400
II.
Assets
(1)
Non-current assets
(a) Fixed assets
(2)
Amount
1,15,000
Current assets
(a) Inventories
1,35,000
(b) Trade receivables
75,000
(c) Cash and cash equivalents
1,81,400
Total
5,06,400
Notes to Accounts
1. Share Capital
Rs.
30,000 shares of Rs.10 each fully paid=

(5,000 shares of Rs. 10 each, fully paid issued
as bonus shares out of securities premium
and P&L Account)
3,00,000
2. Reserve and Surplus

91,400
90
3. Fixed Assets
(i) Tangible assets
Property
1,15,000

Cash at Bank
1,51,400
Cash in Hand
30,000
1,81,400
Note : The number of bonus shares issued has been calculated on the basis of issued capital
before rights issued i.e., 20,000 shares (and not 25,000 shares after rights issue).
Question 19
The summarised Balance Sheet of Corpus Limited, as on 30th June, 2015, stood as follows:
Liabilities
Rs.
Share Capital :
5,00,000 equity shares of Rs.10 each fully paid
50,00,000
General Reserve
75,00,000
Debenture Redemption Reserve
50,00,000
13.5% Convertible Debentures, 1,00,000 Debentures of Rs. 100 each

Other loans
1,00,00,000
50,00,000
Current Liabilities and Provisions
1,25,00,000
4,50,00,000
Assets :
Rs.
Fixed Assets (at cost less depreciation)
1,60,00,000
Debenture Redemption Reserve Investments
40,00,000
Cash and bank Balances
50,00,000
Other Current Assets
2,00,00,000
4,50,00,000
The debentures are due for redemption on 1st July, 2015. The terms of issue of debentures
provided that they were redeemable at a premium 5% and also conferred option to the
91
debenture holders to convert 20% of their holding into equity shares at a predetermined
price of Rs. 15.75 per share and the payment in cash.
Assuming that :
(i)
except for 100 debenture holders holding totally 25,000 debentures, the rest of
them exercised the option for maximum conversion.
(ii) the investments realise Rs. 44 lakhs on sale; and

(iii) all the transactions are put through, without any lag, on 1st July, 2012.
Redraft the balance sheet of the company as on 1st July, 2012 after giving effect to the
redemption. Show your calculations in respect of the number of equity shares to be
allotted and the cash payment necessary.
Answer
Corpus Limited Balance Sheet as on July 1, 2015
Particulars
I.
(1)
Shareholder's Funds
(2)
Note No
(a) Share Capital
60,00,000
1,29,75,000
(a) Long-term borrowings - Unsecured Loans
(3)
Amount
50,00,000
Current Liabilities
(a) Short-term provisions
1,25,00,000
Total
3,64,75,000
II.
Assets
(1)
Non-current assets
(a) Fixed assets
(i) Tangible assets
(2)
1,60,00,000
Current assets
(a) Cash and cash equivalents
4,75,000
(b) Other current assets
2,00,00,000
Total
3,64,75,000
92
Notes to Accounts
1
Rs.
Share Capital
6,00,000 Equity Shares of Rs. 10 each
60,00,000
Reserve and Surplus

General Reserve
1,24,00,000
Securities Premium Account
5,75,000
1,29,75,000
Working Notes :
(i)
Calculation of number of shares to be allotted :

Total number of debentures
1,00,000
Less : Number of debentures not opting for conversion
25,000
75,000
20% of 75,000 =15,000

Redemption value of 15,000 debentures
Rs. 15,75,000
Number of Equity Shares to be allotted :
15,75,000
= 1,00,000 shares of Rs. 10 each.
15.75
(ii) Calculation of cash to be paid :
Rs.
Number of debentures
1,00,000
Less : number of debentures to be

converted into equity shares
15,000
Redemption value of 85,000 debentures (85,000 Rs. 105)
85,000
= 89,25,000
(iii) Cash and Bank Balance :

Balance before redemption
50,00,000
Add : Proceeds of investments sold
44,00,000
Less : Cash paid to debenture holders
89,25,000
4,75,000
(iv) Calculation of General Reserve :

Opening Balance
75,00,000
Add : Debenture Redemption Reserve transfer 50,00,000

Profit on sale of investments
4,00,000
Less : Premium on redemption of debentures
5,00,000
1,24,00,000
Note : The premium on redemption of debentures may also be adjusted against Securities
Premium Account.
93
Question 20
The following balances appeared in the books of a company as on December 31, 2014:
6% Mortgage 10,000 debentures of Rs. 100 each; Debenture Redemption Reserve (for
redemption of debentures) Rs. 10, 42,000;
Investment Rs. 5,28,000, 4% Government Loan purchased at par and 5,60,000,
3-1/2% Government paper purchased for Rs. 5,42,000.
The Interest on debentures had been paid up to December 31, 2010. On February 28, 2015,
the investments were sold at Rs. 90 and Rs. 87 respectively and the debentures were paid
off at 101, together with accrued interest.
Write up the ledger accounts concerned. The Debenture Redemption Reserve is non
cumulative.
Answer
6% Mortgage Debentures Account
Feb. 28
To
Debenture
holders A/c
10,00,000
Jan. 1
By Balance
b/d
10,00,000
10,00,000
10,00,000
Premium on Redemption of Debentures Account

To Debenture holders A/c
10,000
By
Debenture
Redemption
Reserve. A/c
10,000
10,000
10,000
Debentures Redemption Reserve Investment Account

To Balance b/d
10,70,000
By Bank Rs. 5,28,000

Govt. Loan @ Rs. 90
4,75,200
By Bank Rs. 5,60,000
4,87,200
Govt. Paper @ Rs. 87

By D.R.R. (Loss)
10,70,000
94
1,07,600
10,70,000
Debentures Interest Account

To cash A/c
10,000
By P& L
A/c
10,000
10,000
10,000
Debentures Redemption Reserve Account

To
Premium
Redemption
on
To DRR investment A/c
10,000
1,07,600
10,00,000
By Balance b/d
10,42,000
By Profit & Loss

Appropriation A/c
75,600
To General Reserve
11,17,600
11,17,600
Question 21
Seema Limited issued Rs. 1,50,000 ,5% Debentures on which interest is payable half
yearly on 31st March and 30th September. The company has power to purchase
debentures in the open market for cancellation thereof. The following purchases were
made during the year ended 31st December, 2015 and the cancellation were made on the
following 31st March :
1st March Rs. 25,000 nominal value purchased for Rs. 24,725 ex-interest.
1st September Rs. 20,000 nominal value purchased for Rs. 20,125 cum-interest.
You are required to draw up the following accounts up to the date of cancellation :
(i)
Debentures Account;
(ii) Own Debenture Investment Account; and

(iii) Debenture Interest Account.
Ignore taxation and make calculations to the nearest rupee.
Debentures Account
Particulars
To Balance c/d
Rs.
1,50,000
1,50,000
95
Date
Particulars
Jan. 1
By Balance
b/d
Rs.
1,50,000
1,50,000
To Own Debenture A/c
45,000
To Balance c/d
Jan. 1
By Balance
b/d
1,50,000
1,05,000
1,50,000
1,50,000
By Balance
b/d
1,05,000
Own Debentures Investment Account

Date
Particular
Face
Value
Mar. 1
To Bank
25,000
Sep. 1
To Bank
20,000
Dec.
31
To P & L
A/c
Interest
Cost
Date
Particular
521
24,725 Mar.
31
By
Debenture
Interest
625
417
19,708
Sep.
30
By
Debenture
Interest
1,125
Dec.
31
By
Debenture
Interest
563
1,375
By Balance
c/d
Jan . 1
Mar .31
To
Balance
b/d
45000
2313
45,000
563
To
Capital
44,433
44,433 Mar.
31
567
Reserve
To P&L
Face
Value
Interest
45,000
45000
Cost
44,433
2313
44,433
1,125
By
Debenture
Interest
By 5%
Debenture
a/c
45,000
45,000
562
45,000
1,125
45,000
96
45,000
1,125
45,000
Debentures Interest Account

Date
Particulars
Mar. 31
To Bank (on 1,25,000

for 6 months)
Mar. 31
To Interest on own
Debentures
Sep 30
To Bank (on Rs.

1,05,000 @ 5% for 3
months)
Dec. 31
Dec. 31
Rs.
3,125
625
Date
Particulars
Rs.
Jan.31
By Accrued Interest
(on 1,50,000 @ 5% for
3 months)
1,875
Dec. 31
By P & L A/c
7,500
2,625
To Interest on own
Debentures
To Interest accrued
(on Rs. 1,05,000 for 3
months)
1,125
To Interest on own
debentures (on
45,000 for 3 months)
563
1,312
9375
Mar. 31
To Bank (on Rs.

1,05,000
for 6 months)
Mar. 31
To Interest on own
Debentures (on Rs.
45,000 for 3 months)
2,625
563
9375
Jan. 1
By Interest Accrued
1,312
Mar. 31
By P & L A/c
1,876
3188
3188
Question 22
MM Ltd. had the following among their ledger opening balances on January 1, 2014 :
11% Debentures A/c (2000 issue)
50,00,000
Debenture Redemption Reserve A/c
45,00,000
13.5% Debentures in XX Ltd. A/c (Face Value Rs. 20,00,000)
19,50,000
Own Debentures A/c (Face value Rs. 20,00,000)
18,50,000
97
As 31st December, 2014 was the date for redemption of the 2000 debentures, the company
started buying own debentures and made the following purchases in the open market :
1-2-2014 2,000 debentures at Rs. 98 cum-interest.
1-6-2014 2,000 debentures at Rs. 99 ex-interest.
Half yearly interest is due on the debentures on the 30th June and 31st December in the
case of both the companies.
On 31st December, 2014, the debentures in XX Ltd. were sold for Rs. 95 each ex-interest. On
that date, the outstanding debentures of MM Ltd. were redeemed by payment and by
cancellation. Show the entries in the following ledger accounts of MM Ltd. during 2014 :
(a) Debenture Redemption Reserve A/c
(b) Own Debentures A/c
The face value of a debenture was Rs. 100 (Round off calculations to the nearest rupee.)
Answer
11% Mortgage Debentures Account
Date
Particulars
Rs.
Dec 31
To Own Debentures
A/c
24,00,000
To Bank
26,00,000
Date
Particulars
Rs.
Jan. 1
By Balance
b/d
50,00,000
50,00,000
50,00,000
Debentures Redemption Reserve Account

Particulars
Rs.
Particulars
To 13.5% Deb. In XX Ltd.
50,000
By Balance b/d
45,00,000
13.5% Deb. in
XX Ltd.
2,70,000
By Own Deb.
A/c (Int. on
own Deb.)
2,53,000
(Loss
on
investment)
sale
To General Reserve
(transfer)
of
49,73,000
50,23,000
Rs.
50,23,000
98
Own Debentures Account

Date
Particular
Face
Value
Interest
Cost
Date
Particular
Jan. 1
To Balance
b/d
20,00,000
18,50,000
June.
30
By
Debenture
Interest
1,32,000
Feb.
1
To Bank
2,00,000
1833
194,167
Dec.
31
By
Debenture
Interest
1,32,000
June.
1
To Bank
2,00,000
9167
198,000
By 11%
debenture
1,57,833
By Balance 24,00,000
c/d
To Capital
reserve
24,00,000
2,64,000
24,00,000
Face
Value
Interest
24,00,000 2,64,000
Cost
24,00,000
24,00,000
13% Debentures in XY Ltd. Account

Date
Particular
Face Value
Interest
Cost
Jan. 1
To Balance
b/d
20,00,000
19,50,000 June.
30
Debenture
Redemption
reserve
Date
270,000
20,00,000
270,000
Particular
Face
Value
Interest
Cost
By Bank
1,35,000
Dec. 31
By Bank
1,35,000
Dec. 31
By Bank
19,00,000
By
20,00,000
Debenture
Redemption
reserve
50,000
1950,000
99
20,00,000
270,000
1950,000
Question 23
A Ltd. issued 750, 12% Debentures of Rs. 1000 each at a discount of 10% payble Rs. 200 on
application, Rs. 400 on allotment and Rs. 300 on first and final call. The public applied for
1,050 debentures. Application for 675 debentures were accepted in full, applicants for 150
debentures were allotted 75 debentures and the remaining applications were rejected. All
moneys were duly received.
Required : Journalise these transactions.
Answer
Journal of A Ltd.
Particulars
Dr. (Rs.)
Bank A/c (1050 x 200)
Dr.
Cr. (Rs.)
2,10,000
2,10,000
(Being the Receipt of application money on 1,050

debentures)
Debentures Application A/c
Dr.
2,10,000
1,50,000
To Debentures Allotment A/c (75 x 200)
15,000
To Bank A/c (225x200)
45,000
(Being the application money adjusted and surplus

refunded)
Debentures Allotment A/c (750 x 400)
Dr.
Discount on issue of Debentures A/c (750x100) Dr.
3,00,000
75,000
3,75,000
(Being the amount due on allotment @ Rs. 500 on

750 debentures)
Bank A/c (300000 - 15000)
Dr.
To Debentures Allotment A/c
2,85,000
2,85,000
(Being the Balance of the amount due on allotment

received)
100
Debentures Call A/c (750 x 300)
Dr.
2,25,000
2,25,000
(Being the Amount due on debentures @ Rs. 300 on

750 debentures)
Bank A/c (750 x 300)
Dr.
To Debenture Call A/c
2,25,000
2,25,000
(Being the Amount due on call received)
***
101
3
Final Accounts of Companies
Question 1
The following information has been extracted from the books of account of Minati Ltd. as
at 31st March, 2015:
Particulars
Dr. (Rs. 000)
Administration Expenses
480
Cash at Bank
228
Cr. (Rs. 000)
Cash Received on Sale of Fittings
10
Long Term Loan
70
Investments
200
Depreciation on Fixtures, Fittings,

Tools and Equipment (1st April, 2014)
260
Distribution Costs
102
Factory Closure Costs
60
Fixtures, Fittings, Tools and Equipment at Cost
680
Profit & Loss Account (at 1st April, 2014)

Purchase of Equipment
80
120
Purchases of Goods for Resale
1710
Sales (net of Excise Duty)
2,400
Other income
600
Share Capital (50,000 shares of Rs. 20 each fully

paid)
Stock (at 1st April, 2014)
1,000
140
Trade Creditors
80
Trade Debtors
780
4,500
102
4,500
Additional Information:
(1)
The stock at 31st March, 2015 (valued at the lower of cost or net realizable value)
was estimated to be worth Rs.2,00,000.
(2)
Fixtures, fittings, tools and equipment all related to administration. Depreciation is

charged at a rate of 20% per annum on cost. A full years depreciation is charged in
the year of acquisition, but no depreciation is charged in the year of disposal.
During the year ended on 31st March, 2015, the Company purchased equipment of
Rs. 1,20,000. It also sold some fittings (which had originally cost Rs. 60,000) for Rs.
10,000 and for which depreciation of Rs.30,000 had been set aside.
The average Income tax for the Company is 50%. Factory closure cost is to be
presumed as an allowable expenditure for Income tax purpose.
The company proposes to pay a dividend of 20% per Equity Share. Prepare Prem
Ltd.s Profit and Loss Account for the year to 31st March, 2015 and balance Sheet as
at that date in accordance with the Companies Act, 2013
(3)
(4)
(5)
Answer
Profit and Loss Statement for the year ended: 31st March, 2015
(Rs. in000.)
Note No.
I
Revenue From Operation
11
2,400
Less: Excise duty

II
Other Income
III
Total Revenue(I+II)
IV
EXPENSES:
600
3000
Cost of material consumed

1,710
a) Purchase of products for sale
(60)
b) Changes in inventories of finished goods,

work in-progress and products for sale
(140-200) [Opening-Closing]
c) Depreciation and amortization expenses
d) Expenditure transfer to capital and other
account
Total Expenses
V
148
12
602
2,400
Profit Before Exceptional And Extraordinary

Items And Tax ( III-IV)
103
600
VI
Exceptional
Items
VII
Profit
Extraordinary Items And Tax (V-VI)
Before
600
VIII
IX
Extraordinary Items[Factory Closure]

Profit Before Tax From Continuing Operations
(VII-VIII)
Tax expenses:
(1) Current Tax 540*50/100
(2) Deferred tax
60
540
XI
Profit After Tax For The Year From Continuing

Operation(IX-X)
270
XII
Profit (Loss) From Discontinuing Operations
XIII
Tax Expenses From Discontinuing Operations
XIV
Profit (Loss) From Discontinuing Operations

(After Tax) (XII-XIII)
XV
Profit (Loss) For The Period (XI+XIV)
270
Balance brought forward from previous year

(as at 1st April, 2014)
Profit available for appropriation
80
350
270
Appropriation:
Proposed dividend 1000000 x 20%
200
Balance carried forward
150
Minati Ltd.
Balance Sheet as at : 31st March, 2015

(Rs. in 000)
S. No.
Particulars
Notes
Amount (Rs.)
(a) Share capital
1,000
(b) Reserves and surplus
150
I.
Equity And Liabilities
1.
Shareholders Fund
2.
Share application money pending allotment
104
NIL
3.
4.
70
(a) Other current liabilities
80
(b) Short-term provisions
470
Current Liabilities
Total (1+2+3+4)
II
Assets
Non-current assets
1,770
(a) Fixed assets

(i) Tangible assets
362
200
(a) Inventories
200
780
10
228

2.
Current assets

Total (1+2)
1,770
(Rs. in 000)
Note 1. Share Capital

Authorized, Issued, Subscribed and paid-up Share capital 50,000
Equity share of Rs. 10 each
Note 2. Reserve & Surplus
Profit and loss A/c
Note 3. Long term borrowings
Long term loan
Note 4. Trade Payables
Sundry Creditors
Note 5. Short- term provisions
Proposed dividend (20% on Rs. 10,00,000)
Provision for Taxation
Total
1,000
150
70
80
200
270
470
105
Note 6. Tangible Assets

Fixtures, Fittings, Tools and equipment at costOpening
680
Add : Additions
120
Less : Sale/ disposed
(60)
Less : Depreciation (260+148)
(408)
Total
362
Note 7.Non Current Investments

Investments (given)
200
Note 8. Inventories
Stock (given)
200
Note 9.Trade Receivables

Trade Debtors (more than six months considered good)
780
Note 10. Cash and cash equivalents

Cash at Bank
228
Note 11. Revenue from operation

2,400
Note 12. Other Expenses

Administrative Expenses
480
Distribution Expenses
102
Loss on sale of Fixed Assets
20
[60000-30000-10000]
Total
602
Notes:
(1) The rate of interest on long term loan is not given in the question. Reasonable
assumption may be made regarding the rate of interest and accordingly it may be
accounted for.
(2) In the absence of details regarding factory closure costs, there costs are treated as
extraordinary items in the above solution assuming that the factory is permanently
closed. However, the factory may close for a short span of time on account of strikes,
lockouts etc. and such type of factory closure costs should be treated as loss from
ordinary activities. In that case also, a separate disclosure regarding the factory
closure costs will be required as per para 12 of AS 5 (Revised) Net Profit or Loss for
the Period, Prior Period Items and Changes in Accounting Policies.
106
Working Notes:
Particulars
(Rs. in 000)
(1) Tangible Asset Furniture and Fixtures Gross Block As on 1.4.2014

Add : Additions during the year
680
120
Less : Deductions during the year
800
60
As on 31.3.2015
740
Depreciation As on 1.4.2014
260
For the year (20% on 740)
148
Less: Deduction during the year
30
As on 31.3.2015
378
Net block as on 31.3.2015
362
(2) Provision for taxation Profit as per profit and loss account
540
Add back : Loss on sale of asset (short term capital loss)

Depreciation
20
148
Less : Depreciation under Income-Tax Act

Taxable income
168
540
Provision for tax @ 50%
270
It has been assumed that depreciation calculated under Income-Tax Act amounts to Rs.
1,68,000.
Question 2
The following balances are extracted from the books of Ruby Ltd., a property company, on
31st March, 2015:
Particulars
Dr. (000)
Sales
Cr. (000)
13,800
Purchases of materials
6,090
Share capital fully paid
500
Land purchased in the year as stock
365
Leasehold premises
210
Creditors
2,315
Debtors
3,675
107
Directors salaries
195
Wages
555
Work in progress on 01.04.2014
1,050
Sub-contractors cost
4,470
Equipment, Fixtures and Fittings at cost on 01.04.2014
1,320
Stock on 01.04.2014
295
Profit and Loss Account, Credit Balance on 01.04.2014
640
Secured Loan
560
Bank Overdraft
525
Interest on Loan and Overdraft
110
Depreciation on Equipment on 01.04.2014

820
735
Office Salaries
90
19,160
19,160
You also obtain the following information:

(a) On 31st March, 2015, stock on hand including the land acquired during the year, is
valued at Rs. 7,10,000. Work in progress at that date is valued at Rs. 7,00,000.
(b) On 1st October, 2014 the company moved to new premises. The premises are on a
12 years lease and the lease premium paid amounted to Rs. 2,10,000. The company
used sub-contract labour of Rs. 2,00,000 and materials at cost of Rs.1,90,000 in the
refurishment of the premises. These are to be considered as part of the cost of
leasehold premises.
(c) A review of the debtors reveals specific doubtful debts of Rs. 1,75,000 and the
directors wish to provide for these together with a general provision based on 2% of
the balance.
108
(d) Depreciation on equipment, fixtures and fittings is provided at 15% on the written
down value.
(e) Ruby Ltd. sued Simple Ltd. for supplying defective materials which has been written
off as valueless. The Directors are confident that Shallow Ltd. will agree for a
settlement of Rs. 2,50,000.
(f) The directors propose a dividend of 25%.
(g) Rs. 1,00,000 is to be provided as audit fee.
(h) The company will provide 10% of the pre-tax profit as bonus to employees in the
accounts before charging the bonus.
(i) Income tax to be provided at 50% of the profits.
You are required: (i) to prepare the companys financial statements for the year ended
31st March, 2015 as near as possible to proper form of company final accounts; and
Notes: Workings should form part of your answer. Previous year figures can be ignored.
Figures are to be rounded off to nearest thousands.
Answer
Balance Sheet of Ruby Ltd. as at : 31st March, 2015 ( in 000)
S.No.
Particulars
Shareholders Fund
Note No.
(a) Share capital
500
945
Share application money pending

allotment
As at 31st
March, 2015
NIL
560
(a) Short-term borrowings
525
(b) Trade payables
2,315
Current Liabilities
109
(c) Other current liabilities
100
(d) Short-term provisions
895
Total (1+2+3+4)
II
ASSETS
Non-current assets
5840
(a) Fixed assets

(i) Tangible assets
2
1,000
(a) Inventories
1,410
3,430
Current assets
Total (1+2)
5840
Profit and Loss Statement for the year ended: 31st March, 2015
S. No.
Particulars
Note No.
REVENUE FROM OPERATION
11
As at 31st
March, 2015
13,800
Less : Excise duty

II
OTHER INCOME
III
TOTAL REVENUE(I+II)
IV
EXPENSES:
13,800
a) Cost of material consumed
12
11,025
13
405
b) Purchase of products for sale

c) changes in inventories of finished
goods, work-in-progress and products
for sale
d) Employees cost/ benefits expenses
110
e) Finance cost
f) Depreciation
expenses
110
and
amortization
g) Other expenses
100
14
TOTAL EXPENSES
1,080
12,720
PROFIT BEFORE TAX ( III-IV)
1,080
VI
EXCEPTIONAL ITEMS
VII
PROFIT BEFORE EXTRAORDINARY ITEMS

AND TAX (V-VI)
1,080
VIII
EXTRAORDINARY ITEMS
BEFORE
TAX
FRON
OPERATIONS (VII-VIII)
1,080
Tax expenses:
IX PROFIT
CONTINUING
(1) Current Tax
650
(2) deferred tax

XI
PROFIT AFTER TAX FOR THE YEAR FROM

CONTINUING OPERATION(IX-X)
430
PROFIT (LOSS) FOR THE PERIOD (XI+XIV)
430
Balance brought forward from previous

year
640

Appropriation: Proposed dividend
1,070
125
Transfer to General Reserve

45
900

Authorized, Issued, Subscribed and paid-up Share capital: 50,000
Equity share of Rs. 10 each 500
Total
500
111

General Reserve
45
Profit and loss A/c

Total
900
945
Note 3. Long term borrowings

Secured Loan
Total
560
560
Note 4. Short-term borrowings

Bank Overdraft
525

Sundry Creditors
2,315
Note 6. Other Current Liabilities

Audit fees
100
Proposed dividend [25*50000/100=125000]

125
650
Provision for bonus

Total
120
895
Note 8. Tangible Assets

Equipment, Fixtures & Fittings at costOpening
1,320
Less :Depriciation
Leasehold premises (210+200+190)
Less : Witten off
895
600
425
25
575
1,000
Total
Note 9. Inventories
Stock Finished stock
710
Work in progress
700
Total
Note 10.Trade Receivables-
1410
Trade Debtors (more than six months )
3,675
Less : Provision for doubtful debts
245
Total
3,430
13,800
112
Note 12. Cost of materials Consumed

Manufacturing expensesOpening Stock (FG)
Opening WIP
295
1,050
Purchase of materials (6,090-190)[Material Refurishment]
5,900
Purchase of land as stock

Wages
365
555
Sub-contract Cost (4,470-200) [Subcontract Used for Premises]

Less : Closing Stock- Finished goods
Less : Work in progress
4,270
710
700
11,025
Total
Note 13. Employees benefit expenses
Salary- office staff (90+195)[ DIRECTOR FEE]
Bonus
285
120
Total
405
Provision for doubtful debts {675-175=3500*2%=70+175=245}
735
245
Auditors remuneration
Total
100
1,080
Working notes
1) Bonus
Sales
13,800
Less : Manufacturing Expenses
11,025
Other Exp. (excluding bonus) [1080+285]
1,365
Depreciation
100
Interest
110
Pre-tax Profit
1,200
Bonus (10%)
120
2) Fixed Asset:
Tangible Asset
(a) Gross block Furniture and Fixture
1,320
Leasehold Premises (210 + 200 + 190)

(Lease+ Contractor+ Material )
113
600
1,920
(b) Depreciation Furniture and fixture (1.4.2014)
820
For the year [15% on (1,320 820)]
75
Cost of Leasehold Premises written off for 6 month

[(210 + 200 + 190) x 1/12 x 1/2]
25
920
Net
1000
3) Provision for Taxation

Profit as per Profit and Loss Account
1,080
Add back: Provision for doubtful debts
245
Cost of Leasehold premises written off
25
Depreciation on equipment, fixtures and fittings
75
Less : Depreciation under Income-tax Act
125
Taxable income
1,300
Provision for Tax (@ 50%)
650
(It has been assumed that depreciation calculated under Income - tax Act amounts to
Rs. 1,25,000)
Question 3
On 1st November, 2014 Squash Ltd. was incorporated with an authorized capital of Rs.
200 crores. It issued to its promoters equity capital of Rs. 10 crores which was paid for in
full. On that day it purchased the running business of Jam Ltd. for Rs. 40 crores and
allotted at par equity capital of Rs. 40 crores in discharge of the consideration. The net
assets taken over from Jam Ltd. were valued as follows: Fixed Assets Rs. 30 crores,
Inventory Rs. 2 crores, Customers dues Rs. 14 crores and Creditors Rs. 6 crores. Squash
Ltd. carried on business and the following information is furnished to you:
(a) Summary of cash/bank transactions (for year ended 31st October, 2015).
(Rs. in crores)
Equity capital raised:
Promoters (as shown above)
10
Others
50
Collections from customers
800
Sale proceeds of fixed assets (cost Rs. 18 crores)

Payments to suppliers
4
400
114
864
Payments to employees
140
Payment for expenses
100
Investments in Upkar Ltd.
-640
-20
Payments to suppliers of fixed assets:

Instalment due
120
Interest
10
-130
Tax payment
-54
Dividend
-10
Closing cash/bank balance
10
864
(b) On 31st October, 2015 Squash Ltd.s assets and liabilities were: (Rs. in Crores)
Inventory at cost
Customers dues
80
Prepaid expenses
Advances to suppliers
Amounts due to suppliers of goods
52
Amounts due to suppliers of fixed assets

Outstanding expenses
150
6
(c) Depreciation for the year under: (i) Companies Act, 2013 Rs. 36 crores (ii) Income tax
Act, 1961 Rs. 40 crores
(d) Provide for tax at 38.5% of total income.
There are no disallowed expenses for the purpose of income taxation. Provision for tax
is to be rounded off.
For Squash Ltd. prepare:
(i)
Revenue statement for the year ended 31st October, 2015 and
(ii)
Balance Sheet as on 31st October, 2015
115
Answer
Balance Sheet of Squash Ltd as at : 31st October, 2015 (Rs. inCrores)
S.No.
Particulars
Shareholders Fund
Note No.
As at 31st
March, 2015
(a) Share capital
100
77.4
Share application money pending allotment
NIL
NIL
Current Liabilities
(a) Trade payables
52
156
(c) Short-term provisions
52
Total (1+2+3+4)
II
ASSETS
Non-current assets
437.40
(a) Fixed assets
(i) Tangible assets
260.4
20
(c) Long-term loans and advances
54
(a) inventories
(b) trade receivables
10
80
11
10
(d) Short-term loans and advances
12
10
Current assets
Total (1+2)
437.40
116
Profit and Loss Statement for the year ended: 31st October, 2015 (Rs. in Crores)
S.No.
Particulars
Note No.
REVENUE FROM OPERATION Less: Excise duty
II
OTHER INCOME
III
TOTAL REVENUE(I+II)
IV
EXPENSES:
13
As at 31st
March, 2015
866
866
(a) Cost of material consumed
14
437
(b) Purchase of products for sale

(c) Changes in inventories of finished goods,
work-in-progress and products for sale
(d) Employees cost/ benefits expenses
140
(e) Finance cost
10
(f) Depreciation and amortization expenses
36
(g) Other expenses
15
104
TOTAL EXPENSES
727
PROFIT
BEFORE
EXCEPTIONAL
AND
EXTRAORDINARY ITEMS AND TAX ( III-IV)
139
VI
EXCEPTIONAL ITEMS
VII
PROFIT BEFORE EXTRAORDINARY ITEMS AND

TAX (V-VI)
VIII
EXTRAORDINARY ITEMS sale of fixed asset
IX
PROFIT BEFORE TAX FRON CONTINUING

OPERATIONS (VII-VIII)
Tax expenses:
(1) Current Tax 139.40-30+40=135.40*38.5%=
(2) deferred tax
117
139
0.4
139.40
52 rounded off
XI
PROFIT AFTER TAX FOR THE YEAR FROM

CONTINUING OPERATION(IX-X)
87.4
XII
Profit (loss) from discontinuing operations
XIII
Tax expenses from discontinuing operations
XIV
Profit(loss) from discontinuing

(after tax)(XII-XIII)
XV
PROFIT (LOSS) FOR THE PERIOD (XI+XIV)
87.4
Balance brought forward from previous year

87.4
operations
Appropriation:
Proposed dividend
10
77.40

Authorized Equity share capital of Rs. 10 each 200
Issued, Subscribed and paid-up Share capital:
10 Crores Equity share of Rs. 10 each
(of which 4 crores equity share have been issued for a
consideration other than cash, on take-over of business of Jam Ltd. )
100
Total
100

Profit and loss A/c
77.40

Sundry Creditors
52
Note 4. Other Current Liabilities

Amount due to supplier of fixed assets
150
Outstanding expenses
Total
156

52
118
Note 6.Tangible Assets

Fixed Assets taken over from Jam Ltd
30
Add : Purchase (120+150)Cash+Credit
270
Less : Sale proceeds
3.60
Less : Depreciation
300
36
Total
260.40
Note 7. Non-current Investments

Investments in Upkar Ltd
20
Note 8. Long term loans and advances

Advance Tax
54
Note 9. Inventories
Inventories at cost
Note 10. Trade receivables
Customers Due
Note 11.Cash and cash equivalents
Cash/bank balance
Note 12. Short-term loans and advances
Advance to suppliers
Prepaid expenses
Total
Note 14.Cost of materials Consumed
Stock taken over
Purchase
Less : Closing Stock
Total
Payment for expenses
Add : Outstanding expenses
Less : Prepaid expenses
80
10
8
2
10
866
2
438
3
437
100
6
(2)
Total
104
Working Notes: (Rs. in crores)

(1) Net assets of Jam Ltd. taken over:
Fixed Assets
30
119
Inventory
Customers dues
14
Less : Creditors
-6
40
Purchase consideration: 4 crores equity shares of Rs. 10 each.

(2) Customers Account
Particulars
To Business Purchase A/c
To Sales A/c (Balancing figure)
Dr.
Particulars
Cr.
14 By Bank A/c
800
866 By Balance c/d
80
880
880
(3) Suppliers (Goods) Account

To Bank A/c (400 8) Advance
392 By Business Purchase 6

A/c
To Balance c/d
52
By Purchases A/c 438

(Balancing figure)
444
444
Question 4
From the following particulars, calculate Commission to the managing Director:
Profit as per Profit and Loss A/c is Rs. 1,45,09,000, after deducting the depreciation of Rs.
1,24,24,000,
Salary and remuneration to the managing director of Rs. 72,000 a nd director fees of
Rs. 4,000.
The depreciation as per U/S 198 of the Companies Act, 2013 is of Rs. 1,04,24,000.
Answer
Computation of Commission to the Managing Director
Particulars
Rs. 000s
Profit as per Profit and Loss A/c
14,509
Add: Depreciation charged in the Profit and Loss A/c

Salary and remuneration to the managing director
12,424
72
Director fees
Less : Depreciation u/s 198 of the Companies Act 27,009
120
4
(10,424)
Rs. 000s
Profit u/s 198 for the purpose of Managerial Remuneration
16,585
Maximum remuneration (5%)

Less : Salaries and remuneration paid (directors fees is
excluded here)
829
(72)
Maximum commission payable to Managing Director
757
Commission to be provided for at 1% of Net Profits (1% of

Rs. 16,585)
166
Question 5
AnandaPvt Ltd. has furnished that the net profit before tax and managing directors
remuneration is 5,85,60,000, after adjusting the Depreciation as per books of Rs.
71,00,000 (Depreciation as per schedule II is Rs. 80,00,000), provision for doubtful debts of
Rs. 80,000. The managing directors remuneration is at 5% of Net Profit as per law subject
to maximum of Rs. 2,40,000 p.a. Compute the Managing Directors remuneration.
Answer
Computation of Managing Directors Remuneration
Particulars
000s
Net profit before tax and managing directors remuneration

Add : Depreciation as per books
58,560
7,100
Provision for doubtful debts
80
Less : Depreciation as per schedule II to Companies Act, 2013
(8,000)
Net profit for the purpose of Managerial remuneration
57,740
Maximum managerial remuneration at 5% of net profit
2,887
Restricted to actual payment under the agreement
240
Question 6
The following are the balances from the Ledger of Mount View Hotel Ltd., on 31st March
2015:
Share Capital - Credit Balance on 1st January, 2015
56,685
Freehold Premises
46,800
Furniture and Fittings
8,934
Glass and China
1,101
Linen
840
Cutlery and Plate
390
Rates, Taxes and Insurance
1,713
121
Salaries
2,400
Wages
4,305
Inventories on 31st March, 2014 :

Wines, Rs. 1,239 ; Spirits, Rs. 378 ; Beer, Rs. 165 ;
1,782
Minerals, Rs. 147 ; Cigars and Cigarettes, Rs. 114
261
Sundry Provisions and Stores, Rs. 183; Coal, Rs. 150
333
Purchases :
Meat, Rs. 3,627 ; Fish and Poultry Rs. 3,960
7,587
Sundry Provisions and Stores, Rs. 5,220
5,220
Wines Rs. 1,881; Spirits Rs. 2,190 ; Beer Rs. 1,152
5,223
Minerals, Rs. 1,050 : Cigars and Cigarettes, Rs. 240
1,290
Laundry
951
Coal and Gas
2,160
Electric Light
1,128
General Expenses
1,710
Sales
Wines, Rs. 3,870 ; Spirits, Rs. 4,335 ; Beer, Rs. 1,863
10,068
Minerals, Rs. 2,160 ; Cigars and Cigarettes, Rs. 390
2,550
Meals
23,829
Rooms
9,375
Fires in Bedrooms
582
Washing Charges
219
Repairs, Renewals, and Depreciation Premises, Rs. 348 ; Furniture and Fittings, Rs. 660
1,008
Glass and China, Rs. 609 ; Linen, Rs. 390
999
Cutlery and Plate
207
Cash Book - Debit Balances:

In Bank
7,500
On hand
2,367
Visitors Accounts unpaid
489
Trade payables
3,390
122
Inventories on 31st March, 2015 were valued as follows Wines, Rs. 1,197; Spirits, Rs. 333 ; Beer, Rs. 174 ;
Minerals, Rs. 357; Cigars and Cigarettes, Rs. 69;
Sundry Provisions and Stores, Rs. 141; Coal, Rs. 99
The Manager is entitled to a commission of 5% of the net profits after charging his
commission. The authorised share capital is 10,000 shares of Rs. 10 each of which 5,700
shares were issued, the whole of the amount being called up. The final call on 210 shares
@ Rs. 1.50 per share was unpaid; the directors forfeited these shares at their meeting held
on 15th March, 2015.
The tax liability is estimated at Rs. 4,300 and the directors propose to declare a dividend
at the rate of 6 per cent. Prepare the Balance Sheet and Statement of Profit and Loss with
notes to accounts for presentation to the shareholders.
Answer
Balance Sheet of Mount-View Hotel Ltd., as on 31st March, 2015
S.No.
Particulars
Note No
Rs.

1
Shareholders' funds
a) Share capital
56,685
b) Reserves and Surplus
2052.18
3,390
b) Other current liabilities
510
c)
8153.82
Current liabilities
a)
Trade Payables
Short-term provisions
Total
70,791
Assets
1
Non-current assets
a)
Fixed assets
123
b) Tangible assets
2
55,734
4,701
Current assets
a)
Inventories
b) Trade receivables
c)
489
Total
9,867
70,791
Statement of Profit and Loss of Mount-View Hotel Ltd.

for the year ended 31st March, 2015
S.No.
Particulars
I.
Revenue from operations (A)
II
Expenses:
Notes
Rs.
46,623.0
Cost of materials consumed
10
7,587.0
Purchases of Inventory-in-Trade
11
11,733.0
Changes in inventories of finished goods workin-progress and Inventory-in-Trade
12
6.0
Employee benefits expense
13
7,215.0
Other operating expenses
14
6,453.0
Administrative and general expenses
15
3,423.0
Total expenses (B)
36,417.0
III
Profit before tax (VII- VIII) (A B)
10,206.0
IV
Provision for tax
(4,300.0)
Profit (Loss) for the period
5,906.0
124
Notes to accounts
1 Share Capital
Authorised
Rs.
10,000 Shares of Rs. 10 each
100,000
Issued & subscribed & called up

5,490 Equity Shares of Rs, 10 each
54,900
Forfeited Shares (210 x 8.5) 1,785
56,685
Total
56,685
2. Reserve & Surplus

Surplus (Profit & Loss A/c)
5906.0
Appropriations
Proposed Dividend
3,294.0
Dividend Distribution tax (3,294 0.16995)
559.82
Profit (Loss) carried forward to Balance Sheet
(3,853.82)
2052.18
3 Trade Payables
3,390
4 Other current liabilities

Manager's Commission Outstanding
510
5 Short-term provisions
Provision for taxation
4,300
Proposed Dividend
3,294
Dividend Distribution tax
559.82
Total
8153.82
6 Tangible assets
Freehold Premises
47,148
Less: Depreciation
(348)
Furniture & Fittings
9,594
Less: Depreciation
(660)
Total
46,800
8,934
55,734
125
7 Inventories
Raw Material
Wines, Spirits & Beer
1,704
Minerals, Cigars & Cigarettes
426
Sundry Provisions & Stores and Coal
240
2,370
Loose tools
Linen
1,230
Less: Depreciation
(390)
Cutlery & Plate
840
597
Less: Depreciation
(207)
Glass & China
1,710
Less: Depreciation
(609)
Total
390
1,101
4,701
8 Cash and cash equivalents
Cash at bank
7,500
Cash in hand
2,367
Total
9,867
Revenue from operations

Sale of products
Rs.
Wines, Spirits, Beer
Rs.
10,068
Minerals, Cigars and Cigarettes
2,550
12,618.0
Sale of services
Meals
23,829
Rooms
9,375
Fires in Bed Rooms
582
Washing Charges
219
Total
34,005.0
46,623.0
10 Cost of materials consumed

Meat, Fish and Poultry
7,587.0
126
11 Purchases of Inventory-in-Trade
Wines, Spirits, Beer
5,223.0
1,290.0
Sundry Provisions & Stores
5,220.0
Total
11,733.0
12 Changes in inventories of finished goods work-in-progress and Inventory-inTrade

Opening Inventory
Rs.
Rs.
Wines, Spirit & Beer
1,782
261
Sundry Provisions & Stores and Coal 0
333
2,376.
Less: Closing Inventory

Wines, Spirit & Beer
1,704
426
Sundry Provisions & Stores and Coal
240
Total
(2,370.0)
6.0
13 Employee benefits expense

Salaries
2,400.0
Wages
4,305.0
Manager's commission (on Rs. 10,206 @ 5%)

Total
510.0
7215.0
14 Other operating expenses

Coal and Gas
2,160.0
Laundry
951.0
Electricity Light
1,128.0
127
Repairs, Renewals and Depreciation

Premises
348
660
Glass and China
609
Linen
390
Cutlery & Plate
207
Total
6453.0
15 Administrative and general expenses

Rates, Taxes and Insurances
1,713.0
General Expenses
1,710.0
Total
3,423.0
Question 7
From the following particulars of Ajanta Ltd, you are required to calculate the managerial
remuneration in the following situation:
(i)
There is only one whole time director;
(ii)
There are two whole time directors;
(iii)
There are two whole time directors, a part time director and a manager;
Particulars Amount (`)

Net profit before provision for income tax and managerial
remuneration, but after depreciation and provision for repairs
8,70,410
Depreciation provided in the books
3,10,000
Provision for repairs of office premises during the year

Depreciation allowable under schedule II
Actual expenditure incurred on repairs during the year
128
25,000
2,60,000
15,000
Answer
Section 197 of the Companies Act,2013 prescribe the maximum percentage of profit that
can be paid as managerial remuneration. For this purpose, profit is to be calculated in the
manner a specified in section 198.
Calculation of net profit U/S 198 of the Companies Act, 2013
Particulars
Amount Rs.
Net profit before provision for income tax and managerial

remuneration, but after depreciation and for provision for repairs
8,70,410
Add back: Depreciation provided in the books
3,10,000
Provision for repairs of office premises
25,000
Less : Depreciation allowable under schedule II

Less : Actual expenditure incurred on repairs
Profit u/s 198
260000
15000
9,30,410
Calculation of Managerial Remuneration

(i)
There is only one whole time director : Managerial Remuneration = 5% of

Rs. 9,30,410 = Rs. 46,520.50
(ii)
There are two whole time directors : Managerial Remuneration = 10% of

Rs. 9,30,410 = Rs. 93,041
(iii)
There are two whole time directors, a part time director and a manager:
Managerial Remuneration = 11% of Rs. 9,30,410 = Rs. 1,02,345.10
Question 8
What are requirement of Companies Act, in respect of maitenence of books of accounts?
Answer
As per Section 128 of the Companies Act, 2013, Every company shall prepare and keep at
its registered office books of account and other relevant books and papers and financial
statement for every financial year which give a true and fair view of the state of the affairs
of the company, including that of its branch office or offices, if any, and explain the
transactions effected both at the registered office and its branches and such books shall be
kept on accrual basis and according to the double entry system of accounting:
Provided further that the company may keep such books of account or other relevant
papers in electronic mode in such manner as may be prescribed.
129
Maintenance at Place other than Registered Office

It is a duty of the company to inform the Registrar of Companies within seven days of the
decision in case the Board of Directors decides to maintain books at the place other than
the registered office.
Question 9
What are requirement of Companies Act, in respect of maintenance of books of accounts in
case of a company having branches throughout India or outside India?
Answer
Where a company has a branch office in India or outside India, it shall be deemed to have
complied with the provisions of the Act, if proper books of account relating to the
transactions effected at the branch office are kept at that office and proper summarised
returns periodically are sent by the branch office to the company at its registered office or
such other place.
Section 128 (3) further lays down that the books of account and other books and papers
maintained by the company within India shall be open for inspection at the registered
office of the company or at such other place in India by any director during business hours,
and in the case of financial information, if any, maintained outside the country, copies of
such financial information shall be maintained and produced for inspection by any director
subject to such conditions as may be prescribed.
Section 128(5) further states that the books of account of every company relating to a
period of not less than eight financial years immediately preceding a financial year, or
where the company had been in existence for a period less than eight years, in respect of all
the preceding years together with the vouchers relevant to any entry in such books of
account shall be kept in good order.
Question 10
What do you mean by small company?
Answer
Small company means a company, other than a public company, (i)
paid-up share capital of which does not exceed fifty lakh rupees or such higher
amount as may be prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore
rupees or such higher amount as may be prescribed which shall not be more than
twenty crore rupees:
Provided that nothing in this clause shall apply to
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
130
(C) a company or body corporate governed by any special Act;

Question 11
What do you mean by statutory Books?
Answer
As per Companies Act , 2013, certain books are to be maintained by every company. The
following statutory books are required to be maintained by a company under different
sections of the Companies Act, 2013:
Register of Investments of the company held in its own name (Section 187).
Register of Charges (Section 85).
Register of Members (Sections 88).
Register of Debenture-holders and other Security holders (Section 88).
Minute Books (Section 118).
Register of Contracts, or arrangements in which directors are interested (Section
189).
Register of directors and key managerial personnels and their shareholding (Section
170).
Register of Loans to Directors etc. (Section 185)
Register of Loans and Investments by Company (Section 186).
Question 12
What do you mean by statistical Books?
Answer
In addition, to statutory books a company usually maintains a number of other books called
statistical books to keep a record of its transactions which have resulted either in the
payment of money to it or constitute the basis on which certain payments have been made
by it. Some of the statistical books are as follows:
(i) Share Application and Allotment Book;
(ii) Share Call Book; and
(iii) Certificate Book.
(iv) Register of Members
(v) Share Transfer Book
(vi) Dividend Register
Question 13
Write a brief note on Annual return to be filed by a company.
131
Answer
(1) Section Applicable
Section 92 of the Companies Act, 2013.
(2) Number of Days
Within 60 days from the day on which each of the annual general meeting (AGM) is
held or where no AGM is held in any year, within 60 days from the date on which
AGM should have been held along with a statement showing the reasons why AGM
was not held.
(3) Documents to be filed
Prepare and file with the Registrar the annual return containing the particulars
specified under Section 92 of the Act.
(4) Form Applicable
The annual return shall be in the Form prescribed by the Companies Act, 2013.
Question 14
Briefly explain the term financial statements.
Answer
Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-alia include
(i)
a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for
profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in
subclause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company, small company
and dormant company, may not include the cash flow statement.
Question 15
In the financial statements of the financial year 2014-15, Gammon Ltd. has mentioned in
the notes to accounts that during financial year, 24,000 equity shares of Rs. 10 each were
issued as fully paid bonus shares. However, the source from which these bonus shares were
issued has not been disclosed. Is such non-disclosure a violation of the Schedule III to the
Companies Act? Comment.
Answer
Schedule III has come into force for the Balance Sheet and Profit and Loss Account
prepared for the financial year commencing on or after 1st April, 2014. As per Part I of the
Schedule III, a company shall, inter alia, disclose in notes to accounts for the period of 5
132
years immediately preceding the balance sheet date (31st March, 2015 in the instant case)
the aggregate number and class of shares allotted as fully paid-up bonus shares. Schedule
III does not require a company to disclose the source from which bonus shares have been
issued. Therefore, nondisclosure of source from which bonus shares have been issued does
not violate the Schedule III to the Companies Act.
Question 16
The management of Loyal Ltd. contends that the work in process is not valued since it is
difficult to ascertain the same in view of the multiple processes involved. They opine that
the value of opening and closing work in process would be more or less the same.
Accordingly, the management had not separately disclosed work in process in its financial
statements. Comment in line with Schedule III.
Answer
Schedule III to the companies Act does not require that the amounts for which WIP have
been completed at the beginning and at the end of the accounting period should be
disclosed in the statement of profit and loss. Therefore, the non-disclosure in the financial
statements by the company may not amount to violation of Schedule III if the differences
between opening and closing WIP are not material.
Question 17
Explain theprovisions in companies Act, 2013 regarding managerial Remuneration.
Answer
Section 197 prescribes the overall maximum managerial remuneration payable and also
managerial remuneration in case of absence or inadequacy of profits.
As per Section 197 of the Companies Act, 2013, total managerial remuneration payable by a
public company, to its directors, including managing director and whole-time director, and
its manager in respect of any financial year shall not exceed eleven per cent of the net
profits of that company for that financial year computed in the manner laid down in section
198 except that the remuneration of the directors shall not be deducted from the gross
profits: provided that the company in general meeting may, with the approval of the
Central Government, authorize the payment of remuneration exceeding eleven per cent. of
the net profits of the company, subject to the provisions of Schedule V.
Provided further that, except with the approval of the company in general meeting,
(i)
the remuneration payable to any one managing director; or whole-time director or

manager shall not exceed five per cent. of the net profits of the company and if there
is more than one such director remuneration shall not exceed ten per cent of the net
profits to all such directors and manager taken together;
(ii) the remuneration payable to directors who are neither managing directors nor
wholetime directors shall not exceed,
(A) one per cent of the net profits of the company, if there is a managing or wholetime director or manager;
133
(B) three per cent of the net profits in any other case.
Section 198 lays down how the net profit of the company will be ascertained for the
purpose of calculating managerial remuneration.
Question 18
The following is the Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 2006
Particulars
To Adm., Selling and
distribution expenses
Rs.
Particulars
Rs.
8,22,542 By Balance b/d
5,72,350
Donation to charitable
funds
25,500 Balance from Trading

A/c
Directors fees
66,750 Subsidies received from

Govt.
2,32,560
Interest on debentures
31,240 Interest on Investments
15,643
Compensation for
breach of contract
42,530 Transfer fees
722
Managerial
remuneration
2,85,350 Profit on sale of

Machinery:
Depreciation on fixed
assets
5,22,543 Amount realised 55,000

General Reserve
Investment Revaluation
Reserve
Balance c/d
40,25,365
25,000
Written down value
30,000
12,42,500
4,00,000
12,500
14,20,185
48,71,640
48,71,640
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was Rs.
5,75,345. You are required to calculate the maximum limits of the managerial
remuneration as per Companies Act, 2013.
Answer
Calculation of net profit u/s 198 of the Companies Act, 2013
Rs.
Balance from Trading A/c
40,25,365
134
Add : Subsidies received from Government
2,73,925
Less : Administrative, selling and distribution expenses
8,22,542
Directors fees
1,34,780
31,240
Depreciation on fixed assets as per Schedule II
5,75,345
Profit u/s 198
27,35,383
Maximum Managerial remuneration under Companies Act, 2013 = 11% of Rs. 27,35,383
= Rs.3,00,892
Question 19
The following extract of Balance Sheet of Yale Ltd. was obtained:
Balance Sheet (Extract) as on 31st March, 2015
The following extract of Balance sheet of Yale Ltd. was obtained:
Balance sheet (Extract) as on 31st march, 2006
Liabilities
Authorised capital:
20,000, 14% preference
shares of Rs. 100
2,00,000 Equity shares of Rs.
100 each
Issued and subscribed
capital:
15,000, 14% preference
shares of Rs. 100 each fully
paid
Rs.
20,00,000 Investment
in
shares, debentures,
etc.
2,00,00,000
2,20,00,000
Profit and Loss
account
15,00,000 Preliminary
expenses
not
written off
1,20,000 Equity shares of Rs.

100 each, Rs. 80 paid-up
96,00,000
Share suspense account
20,00,000
Reserves and surplus

Capital reserves (60% is
revaluation reserve)
Securities premium
2,50,000
50,000
Secured loans:
15% Debentures
Assets:
65,00,000
135
Rs.
75,00,000
15,25,000
55,000
Unsecured loans:
Public deposits
3,70,000
Cash credit loan from SBI
4,65,000
Current Liabilities:
Sundry creditors
3,45,000
Share suspense account represents application money received on shares, the allotment of
which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would
your answer differ if Yale Ltd. is an investment company?
Answer
Computation of effective capital
Paid-up share capital
Rs.
15,000, 14% Preference shares
15,00,000
1,20,000 Equity shares
96,00,000
Capital reserves
45,000
Securities premium
50,000
15% Debentures
65,00,000
Public Deposits
3,70,000
(A)
1,80,65,000
Investments
75,00,000
Profit and Loss account (Dr. balance)
15,25,000
(B)
Effective capital (AB) 1,65,40,000
90,25,000
90,40,000
If company happens to be an investment company then investment will not

be reduced. Hence effective capital will be increased by Rs. 75,00,000.
Effective capital (90,40,000+75,00,000)
Question 20
What are the sources of dividend?
136
1,65,40,000
Answer
Under Section 123 (1) of the Companies Act, 2013, no dividend shall be declared or paid by
a company for any financial year except(a) Out of the profits of the company for that financial year arrived at after providing for
depreciation in accordance with the provisions of section 123(2), or
(b) Out of the profits for any previous financial years arrived at after providing for
depreciation in accordance with the provisions of that sub section and remaining
undistributed; or
(c)
Out of both the above;
(d) Out of the moneys provided by the Central Government or any State Government for
the payment of dividend by the Company in pursuance of any guarantee given by
that government.
Provided that no dividend shall be declared or paid by a company from its reserves other
than free reserves.
Question 21
Can dividend be paid out of past profits?
Answer
For the purpose of second proviso to sub-section (1) of section 123, a company may
declare dividend out of the accumulated profits earned by it in previous years and
transferred by it to the reserves, in the event of inadequacy or absence of profits in any
year, subject to the fulfillment of the following conditions as per Companies (Declaration
and Payment of Dividend) Rules, 2014
(1)
The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by it in the three years immediately preceding that year:
provided that this sub-rule shall not apply to a company, which has not declared any
dividend in each of the three preceding financial year.
(2)
The total amount to be drawn from such accumulated profits shall not exceed onetenth of the sum of its paid-up share capital and free reserves as appearing in the
latest audited financial statement.
The amount so drawn shall first be utilised to set off the losses incurred in the
financial year in which dividend is declared before any dividend in respect of equity
shares is declared.
The balance of reserves after such withdrawal shall not fall below fifteen per cent of
its paid up share capital as appearing in the latest audited financial statement.
(3)
(4)
(5)
No company shall declare dividend unless carried over previous losses and
depreciation not provided in previous year are set off against profit of the company
137
of the current year the loss or depreciation, whichever is less, in previous years is
set off against the profit of the company for the year for which dividend is declared
or paid.
Question 22
What do you mean by capital profit? Give examples.
Answer
It is the reserve which does not include any amount regarded as free for distribution
through the Profit and Loss account. Only profits or a surplus of a capital nature can be
credited to such a reserve. The following are instances of profit or surpluses which can be
so credited:
1.
2.
Profit prior to incorporation.

Profit on sale of fixed assets
3.
The excess of the value of net assets over the price paid for the acquisition of a
business.
4.
5.
Profit on re-issue of forfeited shares.

The credit balance in the Capital Reduction Account, where there has been a
reduction of capital with the consent of the Court.
Question 23
Whether dividend can be paid out of capital profits arising on sale of fixed asstes?
Answer
Dividend is an appropriation of profit. As per Section 123 of the Companies Act, 2013,
Board of Directors of a company may declare dividend including interim dividend during
any financial year out of the surplus in the profit and loss account and out of profits of the
financial year in which such interim dividend is sought to be declared.
Dividend can be paid out of capital profits, but in the circumstances mentioned below,
these are not available for distribution as dividends:
(i) Where the profit on sale of a fixed asset has not been realised; or
(ii) Where the profit on sale of fixed assets though realised is likely to be wiped out by
the deficiency on revaluation of other assets; or
(iii) Where the Articles of Association do not permit distribution of such profit as a
dividend.
Question 24
Due to inadequacy of profits during the year ended 31st March, 2015, Marry Ltd. proposes
to declare 10% dividend out of general reserves. From the following particulars, ascertain
the amount that can be utilized from general reserves, according to the Companies
(Declaration of dividend out of Reserves) Rules, 2014:
Rs.
17,500 9% Preference shares of Rs.100 each, fully paid up
17,50,000
8,00,000 Equity shares of Rs. 10 each, fully paid up
80,00,000
138
General Reserves as on 1.4.2014
25,00,000
Capital Reserves as on 1.4.2014
3,00,000
Revaluation Reserves as on 1.4.2014
3,50,000
Net profit for the year ended 31st March, 2015
3,00,000
Average rate of dividend during the last five year has been 12%.
Answer
Amount that can be drawn from reserves for 10% dividend
Amount (Rs.)
10% dividend on Rs. 80,00,000
8,00,000
Profits available
Current year profit
3,00,000
Less : Preference dividend
(1,57,500)
(1,42,500)
Amount which can be utilized from reserves
6,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 2014:

Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should not
exceed 10% of paid up capital plus free reserves ie. Rs. 12,25,000 [10% of
(80,00,000+17,50,000+25,00,000)]
Condition III
The balance of reserves after drawl Rs. 18,42,500 (Rs. 25,00,000 Rs. 6,57,500) shall not
fall below 15 % of its paid up capital ie. Rs. 14,62,500 (15% of Rs. 97,50,000]
Since all the three conditions are satisfied, the company can withdraw Rs. 6,57,500 from
accumulated reserves.(as per Declaration and Payment of Dividend Rules, 2014.)
139
Question 25
The following is the Trial Balance of Pearl Ltd. as on 31.3.2015: (Figures in Rs. 000)
Debit
Credit
Land
220 Equity Capital (Shares of Rs.

10 each)
300
Plant & Machinery
770 10% Debentures
200
Trade Receivables
96 General Reserve
130
Inventories (31.3.15)
86 Profit & Loss A/c
72
Bank
20 Securities Premium
40
Adjusted Purchases
320 Sales
Factory Expenses
60 Trade Payables
30 Provision for Depreciation
Selling Expenses
30 Suspense Account
Debenture Interest
20
Interim Dividend Paid
18
1670
700
52
172
4
1670
*Note : Land and plant & machinery are given in the balance sheet at cost.
Additional Information:
(i)
The authorised share capital of the company is 40,000 shares of Rs. 10 each.
(ii)
The company on the advice of independent valuer wish to revalue the land at Rs.
3,60,000.
(iiii) Proposed final dividend @ 10%.

(iv)
Suspense account of Rs. 4,000 represents cash received for the sale of some of the
machinery on 1.4.14. The cost of the machinery was Rs. 10,000 and the accumulated
depreciation thereon being Rs. 8,000.
(v)
Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Pearl Ltd. Balance Sheet as on 31.3.2015 and Statement of
Profit and Loss with notes to accounts for the year ended 31.3.2015 as per Schedule III.
Ignore previous years figures & taxation.
140
Answer
Pearl Ltd.
Balance Sheet as at 31st March, 2015
Particulars
Note No.
(` in 000)

1.
2.
Shareholders' funds
a) Share capital
300
b) Reserves and Surplus
500
200
Non-Current liabilities
Long term borrowings
3.
Current liabilities
a) Trade Payables
52
b) Short-term provisions
Total
30
1082
Assets
1.
Non-current assets
a) Fixed assets
b) Tangible assets
2.
880
Current assets
a) Inventories
86
b) Trade receivables
96
c) Cash and cash equivalents
20
Total
1082
141
Pearl Ltd.
Statement of Profit and Loss for the year ended 31st March, 2015
S. No.
Particulars
Notes
I.
II.
Other Income
III.
Total Revenue
IV.
Expenses
700
6
2
702
Purchases
320
Finance costs
Depreciation (10% of 760)
20
76
Other expenses
V.
(`in 000)
120
Total Expenses
536
Profit (Loss) for the period (III IV)
166
Notes to accounts (in 000)

1. Share Capital
Authorized
40,000 shares of Rs. 10 each
400
Issued & subscribed & called up

300
Total
300

Securities Premium Account
40
Revaluation reserve
140
General reserve
130
Profit & loss Balance
142
Opening balance
72
Profit for the period
166
Less: Appropriations
Interim Dividend
(18)
Proposed Final Dividend
(30)
190
500
3. Long term borrowing
10% Debentures
200
4. Short term provision

Proposed Final Dividend
30
5. Tangible assets
Land Opening balance
220
Add : Revaluation adjustment
140
Closing balance
360
Plant and Machinery

Opening balance
770
Less: Disposed off
(10)
Less: Depreciation (172-8+76)
(240)
Closing balance
520
Total
880
6. Other Income
Profit on sale of machinery:
Sale value of machinery
Less: Book value of machinery (10-8)
(2)
7. Finance costs
Debenture interest
20
8. Other expenses:
Factory expenses
60
143
Selling expenses
30
Administrative expenses
30
Total
120
Question 27
You are required to prepare Balance sheet and statement of Profit and Loss from the
following trial balance of Shobit Ltd. for the year ended 31st March, 2015.
Shobit Ltd. Trial Balance as at 31st March, 2015
Particulars
Rs.
Particulars
Stock
6,80,000
Equity Shares
Furniture
2,00,000
Capital (Shares of Rs. 10

each)
Rs.
25,00,000
Discount
40,000
11% Debentures
5,00,000
Loan to Directors
80,000
Bank loans
6,45,000
Commission
20,000
Bills payable
1,25,000
Bad debts
35,000
Creditors
1,56,000
Advertisement
Purchases
Plant and Machinery
1,20,000
Sales
23,19,000
Rent received
46,000
8,60,000
Transfer fees
10,000
Rentals
25,000
Profit & Loss account
Current account
45,000
Depreciation provision :
Cash
Interest on bank loans
Preliminary expenses
8,000
1,16,000
10,000
Fixtures
3,00,000
Wages
9,00,000
Consumables
42,68,000
84,000
144
Machinery
1,39,000
1,46,000
Land & building
15,46,000
Tools &Equipments
2,45,000
Goodwill
2,65,000
Debtors
2,87,000
Bills receivable
1,53,000
Dealer aids
Fire
Premium
21,000
insurance
30,000
Trade expenses
72,000
Distribution freight
54,000
Debenture interest
20,000
85,35,000
85,35,000
Additional information : Closing Inventory on 31-3-2015: Rs.8,23,000.

Answer
Shobit Ltd.
Balance Sheet as at 31st March, 2015
S.No.
(1)
Shareholders funds :
(2)
Note
(a) Share Capital
25,00,000
7,40,000
11,45,000
Non Current Liabilities

(a) Long term borrowings
(3)
Rs.
Current Liabilities
(a) Trade payables
2,81,000
Total
46,66,000
Assets
145
(1)
Non current assets

Fixed Assets :
(a) Tangible assets
30,05,000
(b) Intangible assets(goodwill)

(2)
2,65,000
Current assets
(a) Inventories
8,23,000
4,40,000
53,000
(d) Short term loans and advances
6 80,000
Total
46,66,000
Shobit Ltd.
Statement of Profit and Loss for the year ended 31st March, 2015
Particulars
Note
Rs.
42,68,000
Other income (A)
56,000
43,24,000
Expenses
Change in inventory of finished goods
23,19,000
(1,43,000)
Employee benefit expenses
10
9,00,000
finance cost
11
1,36,000
Other expenses (B)
12
5,11,000
37,23,000
Profit before tax (A B)
6,01,000
Provision for tax
6,01,000
Notes to Accounts
1.
Share capital
Rs.
Authorised :
Equity share capital of Rs. 10 each
25,00,000
146
2.
3.
4.
Issued and Subscribed :

Equity share capital of Rs. 10 each
Balance as per last balance sheet
Balance in profit and loss account
25,00,000
1,39,000
6,01,000
7,40,000
Long term Borrowings

11% Debentures
Bank loans
5,00,000
6,45,000
11,45,000
Tangible Assets
Gross block
Land & Building
15,46,000
15,46,000
Furniture
2,00,000
2,00,000
Fixtures
3,00,000
3,00,000
Plant & Machinery
8,60,000
Tools & Equipment
2,45,000
Total
5.
Depreciation Net Block
31,51,000
1,46,000
7,14,000
2,45,000
1,46,000
30,05,000

Current account balance
45,000
Cash
8,000
53,000
6.
Short-term loans and Advances

Loan to directors
7.
80,000
Other Income
Rent received
46,000
Transfer fees
10,000
56,000
8.

Add: purchases
23,19,000
147
9.
Changes in inventory of finished goods, WIP & Stock in trade

Opening inventory
6,80,000
Closing inventory
8,23,000
(1,43,000)
10. Employee benefit expense

Wages
9,00,000
11. Finance cost

Interest on bank loans
1,16,000
Debenture interest
20,000
1,36,000
12. Other Expenses

Consumables
84,000
10,000
Bad debts
35,000
Discount
40,000
Rentals
25,000
Advertisement
1,20,000
Commission
20,000
Dealers aids
21,000
Insurance premium for fire insurance
30,000
Trade expenses
72,000
Distribution freight
54,000
5,11,000
Question 28
Holy Ltd. engaged in the business of manufacturing wine. The process of manufacturing
this wine takes around 15 months. Due to this reason Holy Ltd. has prepared its financial
148
statements considering its operating cycle as 15 months and accordingly classified the
raw material purchased and held in stock for less than 15 months as current asset.
Comment on the accuracy of the decision and the treatment of asset by Holy Ltd. as per
Companies Act, 2013.
Answer
As per Companies Act, 2013, one of the criteria for classification of an asset as a current
asset is that the asset is expected to be realised in the companys operating cycle or is
intended for sale or consumption in the companys normal operating cycle.
Further, operating cycle is the time between the acquisition of assets for processing and
their realization in cash or cash equivalents. However, when the normal operating cycle
cannot be identified, it is assumed to have a duration of 12 months.
As per the facts given in the question, the process of manufacturing of wine takes around
18 months; therefore, its realisation into cash and cash equivalents will be done only when
it is ready for sale i.e. after 15 months. This means that normal operating cycle of the
product is 15 months. Therefore, the contention of the company's management that the
operating cycle of the product wine is 15 months and not 12 months is correct. Holy Ltd.
will classify the raw material purchased & held in stock as current asset in its Balance
Sheet.
Question 29
Gale Ltd. has been in the business of sale of Gale Wines for the last 20 years and is an
extremely cash rich company. In FY 2011-12 the Board of the company decided to venture
into new areas of business and identified the activity of acquiring old Properties such as
old Bungalows, Heritage buildings and the like at prime locations and after carrying out
renovation and refurbishment of the same to let out these properties on lease to willing
parties. The new business was commenced as a separate division of the company in FY
2012-13 during which the company managed to identify 20 such properties of which 11
were acquired and 9 given on lease. Being the initial year of operations and also since
some of the lease arrangements were entered into at the fag end of the year the income
from leasing was only a paltry amount. After the acquisition of the properties as aforesaid
very attractive offers for sale of 7 of the properties were received. Vintage Ltd. after
negotiation accepted 5 of the offers and sold these 5 properties making large profits in the
bargain. The accountant of Gale Ltd. has accounted the acquisition and disposals of
properties as 'Purchases' and 'Sales' in the Profit & Loss account of the Property Division
and treated the lease incomes as part of the other income of the company. The contention
of the accountant of Gale Ltd., was that since a majority of the properties were disposed off
within a short span of time, the properties are to be considered as stock in trade only.
Further since the lease income was insignificant it does not become the main source of
income and hence considered as part of other income. You are required to examine the
correctness of the contentions of the accountant of Gale Ltd. considering the relevant
Accounting Standards and provisions of Revised Schedule III of Companies Act, 2013.
149
Answer
As per AS 2 Valuation of Inventories, inventories are assets that are (a) held for sale in the
ordinary course of business; (b) in the process of production for such sale; or (c) in the
form of materials or supplies to be consumed in the production process or in the rendering
of services.
The properties acquired by Gale Ltd. Should not be construed as stock in trade in spite of
the fact that they are being sold within a short span of time.
As per the definition of Fixed asset given in para 6 of AS 10, a fixed asset is one which is
held with the intention of being used for the purpose of producing goods or services and is
not held for sale in the normal course of business.
In the given question the acquisition of the old properties is done by the company with the
intention to provide the service of leasing of such properties. Hence the intention of the
company was to use such property for generating revenue for the company by leasing out
such properties. The sale of 5 properties cant be considered as part of normal business
operations of the company. Hence the treatment of the properties as Stock-in- Trade is
incorrect as the properties are to be considered only as Fixed Assets of the company. The
lease income from these properties will be considered as main business income and cannot
be considered as part of other income. Such income will be disclosed under the head
Revenue from operations.
Thus, the contentions regarding accounting the acquisition and sale of these properties as
sale and purchase, treating them as stock in trade, considering lease income as other
income are not in line with provisions of the relevant accounting standards.
Question 30
A Ltd. lodged a claim to insurance company for Rs. 8,00,000 in June, 2014. The claim was
settled in January, 2015 for Rs. 5,00,000. How will you record the short fall in claim
settlement in the books of the company.
Answer
Journal Entry
Profit and Loss A/c
Dr.
3,00,000
To Insurance Company A/c
3,00,000
[Being the shortfall in insurance claim is the loss, transferred to Profit and Loss A/c]
Question 31
The Managing Director of Arun Ltd. is entitled to 5% of the annual net profits, as his
remuneration, subject to a minimum of Rs.25,000 per month. The net profits, for this
purpose, are to be taken without charging income-tax and his remuneration itself. During
the year, Arun Ltd. made net profit of Rs.43,00,000 before charging MDs remuneration,
but after charging provision for taxation of Rs.17,20,000. Compute remuneration payable
to the Managing Director.
Answer
Calculation of remuneration of the Managing Director
Rs. in Lacs
Net profit as per books
43.00
150
Add: Provision for taxation
17.20
Annual profit for the purpose of managerial remuneration
60.20
Managing Directors Remuneration @ 5% of above
3.01
Minimum remuneration to be paid to the Managing Director

= Rs.25,000 per month x 12
3.00
Hence, in this case, remuneration to be paid to the Managing Director of A Ltd.

= Rs.3,01,000.
***
151
4
Corporate Restructuring
Question 1
Write short notes on comparison between Amalgamation and Absorption of companies.
Answer
In accounting parlance, amalgamation means merger of two or more companies into one
new or existing company. Absorption, on the other hand, refers to acquisition of business of
one company by another company. But, it may be noted that the Companies Act, 2013 does
not make any distinction between amalgamation and absorption.
The Income-tax Act, 1961, however, defines the term amalgamation to mean the merger of
one or more companies with another company or the merger of two or more companies to
form one company. Therefore, it seems that legally there is no difference between
amalgamation and absorption of companies. According to the Accounting Standard 14,
Accounting for Amalgamations, amalgamations fall into two broad categories. In the first
category are those amalgamations where there is a genuine pooling, not merely of the
assets and liabilities of the two companies but also of the shareholders interests and of the
businesses of these companies. Such amalgamations are known as amalgamation in the
nature of merger. The second type of amalgamations are those which are in effect a mode
by which one company acquires another company and as a consequence the shareholders
of the company, which is acquired normally do not continue to have a proportionate share
in the equity of the combined company or the business of the company which is acquired is
not intended to be continued. Such amalgamations are known as amalgamation in the
nature of purchase. Therefore, it can be said that amalgamations include absorption.
Question 2
Write short note on Pooling of interests method of amalgamation.
Answer
Pooling of interests method of accounting for amalgamation records amalgamation
transactions as if the separate businesses of the amalgamating companies were intended to
be continued by the transferee company. Accordingly, only the minimal changes are made
in aggregating the individual financial statements of the amalgamating companies.
Under the pooling of interests methods, the assets, liabilities and reserves of the transferor
company will be taken over by the transferee company at existing carrying amounts unless
any adjustment is required due to difference in accounting policies. As a result, the
difference between the amounts recorded as share capital issued (plus any additional
consideration in the form of cash or other assets) by the transferee company and the
151
amount of share capital of transferor company should be adjusted in reserves. At the time
of amalgamation, if the transferor and the transferee companies have conflicting
accounting policies, a uniform set of accounting policies is adopted following the
amalgamation.
Question 3
What are the conditions, which, according to AS 14 on Accounting for Amalgamations,
must be satisfied for an amalgamation in the nature of merger?
Answer
According to AS 14 on Accounting for Amalgamations; the following conditions must be
satisfied for an amalgamation in the nature of merger :
(i)
(ii)
(iii)
(iv)
(v)
(vi)
All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
Shareholders holding not less than 90% of the face value of the equity shares of
the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee by
virtue of the amalgamation.
The consideration for the amalgamation receivable by those equity shareholders
of the transferor company who agree to become equity shareholders of the
transferee company is discharged by the transferee company wholly by the issue
of equity shares in the transferee company, except that cash may be paid in
respect of any fractional shares.
The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.
All reserves & surplus of the transferor company shall be preserved by the
transferee company.
If any one of the condition is not satisfied in a process of amalgamation, it cannot be treated
as amalgamation in the nature of merger.
Question 4
The paid-up capital of Sapna Ltd. amounted to Rs. 2,50,000 consisting of Rs. 25,000 equity
shares of Rs. 10 each.
Due to losses incurred by the company continuously, the directors of the company
prepared a scheme for reconstruction which was duly approved by the court. The terms of
reconstruction were as under:
(i) In lieu of their present holdings, the shareholders are to receive:
(a) Fully paid equity shares equal to 2/5th of their holding.
152
(b) 5% preference shares fully paid-up to the extent of 20% of the above new
equity shares.
(c) 3,000, 6% second debentures of Rs. 10 each.
(ii) An issue of 2,500, 5% first debentures of Rs. 10 each was made and fully subscribed
in cash.
(iii) The assets were reduced as follows:
(a) Goodwill from Rs. 1,50,000 to Rs. 75,000.
(b) Machinery from Rs. 50,000 to Rs.37,500.
(c) Leasehold premises from Rs. 75,000 to Rs. 62,500.
Show the journal entries to give effect to the above scheme of reconstruction.
Answer
Journal Entries
Rs.
Share Capital A/c (old)
Dr.
Rs.
2,50,000
1,00,000
2
( of Rs. 2,50,000)
5
20,000
To 6% Second Debentures A/c
30,000
20
(
Rs. 1,00,000)
100
To Capital Reduction A/c
1,00,000
(Conversion of 25,000 Equity Shares and balance being

transferred to Capital Reduction A/c in accordance with
the Scheme of internal reconstruction as per Special
Resolution dated as confirmed by the Court Order
dated........)
Bank A/c
Dr.
To 5% First Debenture A/c
(Issue of Rs.25,000 5% First Debentures for cash as per
scheme of internal reconstruction)
Capital Reduction A/c
Dr.
To Goodwill A/c
To Plant & Machinery A/c
To Leasehold premises A/c
(Sundry Assets written down as per scheme of internal
reconstruction
153
25,000
25,000
1,00,000
75,000
12,500
12,500
Question 5
Balance Sheet of Asmi Ltd. as on 31.12.2014
Liabilities
Rs.in
000s
Assets
Share Capital:
Equity shares of Rs. 10 each
5050
Sundry
Assets
8% Preference shares
950
Rs.
in000s
Fixed
5000
Stock
2000
1000
12% Debentures
1500
Debtors
Sundry Creditors & Other

Liabilities
1000
Cash & Bank
500
8500
8500
Radhika Ltd. agreed to take over Asmi Ltd. by issuing requisite number of preference
shares of Rs. 10 each at 5% discount to the preference shareholders of Asmi Ltd. and
requisite number of equity shares of Rs. 10 each at par to the equity shareholders of Asmi
Ltd. Purchase consideration is settled as per book value of the assets and the debentures
will be taken over by Radhika Ltd. on the agreement that such will be paid off at 10%
premium after one year.
Debenture-holders of Asmi Ltd. will accept 12% debentures of Radhika Ltd.
Answer
Purchase Consideration
in Rs.000
Book Value of assets taken over
8500
Less : Debentures 1500@110%
-1650
Sundry Creditors & Other Liabilities
-1000
5850
Computation of number of shares to be issued:

1)
Preference shares to be issued:
950thousand
= Rs.100 thousand
Rs.9.5(i.e.Rs.10- 5%discount)
Balance of purchase consideration:Rs.58,50 thousand - Rs.950 thousand = Rs.49,00

thousand
2)
Equity shares to be issued forRs.4900 thousand = 490 thousand equity shares of Rs.
10 each
154
Question 7
Given below is the Balance Sheet of Sita Ltd. as on 31.03.2014 at which date the company
was taken over by Ram Ltd.
Liabilities
Rs. in
000s
Assets
Share Capital
Equity Shares of Rs.100
each
Preference shares
7000
12% Debentures
2500
Sundry Creditors
1500
Rs. in
000s
Sundry fixed assets
8000
Sundry
assets
4200
current
1200
12200
12200
It was decided that sundry fixed assets of Sita Ltd. will be taken over at a valuation of Rs.
102,00 thousand. 8% preference shareholders of Sita Ltd. are to be discharged by issuing
8% preference shares of the transferee company to the extent of 50% and the balance in
cash.
Claims of the equity shareholders to be discharged by issuing equity shares of the
transferee company to the extent of 60% and the balance in cash. The transferee company
will issue preference shares at par but equity shares of Rs. 10 each at a premium of 20%
Answer
Rs.in 000
Value of fixed assets takenover
Sundry current assets
102,00
42,00
Less: Sundry Creditors & Other Liabilities
-40,00
104,00
Discharge of Purchase Consideration

To be discharged by:
Rs.in 000
Preference shares
Issue
price Rs.
Number of
shares
6,00
10
60,000
Equity shares (104,00 12,00) x 60%
55,20
12
460,000
Cash
42,80
Total
104,00
155
Question 8
Given below are Balance Sheets of X Ltd. & Y Ltd. as on 31st Dec. 2014 at which date the
companies were amalgamated and a new company C Ltd. was formed.
Balance Sheets of X Ltd. &Y Ltd.
Liabilities
Share Capital
Rs. in 000s
X Ltd.
Assets
Rs. in 000s
Y Ltd.
X Ltd.
Y Ltd.
Equity Shares of Rs.

10 each
70,00
60,00
Sundry
assets
fixed
85,00
70,00
Reserve
2,000
4,000
Sundry
assets
current
20,00
30,00
Miscellaneous
expenditure
Sundry Creditors
1500
1000
105,00
110,00
1,000
105,00
110,00
Agreed that sundry fixed assets of X Ltd. would be valued at Rs. 100,00 thousand and that
of Y Ltd. at Rs. 95,00 thousand. Z Ltd. would issue requisite number of equity shares of Rs.
10 each at 10% premium to discharge claim of the equity shareholders of X Ltd. &Y Ltd.
How many shares of Z Ltd. should be issued to take over the businesses of X Ltd. &YLtd.
Answer
Calculation of No. of shares to be issued
X Ltd. Rs. in
000s
Sundry fixed assets
Sundry current assets
Less: Liabilities taken over:
Total
Y Ltd. Rs. in
000s
100,00
95,00
20,00
30,00
(15,00)
(10,00)
105,00
115,00
220,00
Issue Price
11
Number of equity shares to be issued by Z

Ltd.
156
20,00 thousand
Question 9
Giant Company Ltd. was incorporated on 1st April 2014 for the purpose of acquiring A Ltd.,
B Ltd., and C Ltd. The balance sheets of these companies as on 31st March 2015 are as
follows:
Assets
Tangible fixed assets at cost less
depreciation
A Ltd.
B Ltd.
C Ltd.
Rs.
Rs.
Rs.
5,00,000
Goodwill
4,00,000
3,00,000
60,000
Other assets
2,00,000
2,80,000
85,000
Total
7,00,000
7,40,000
3,85,000

Issued Equity share
shares of Rs. 10 each
capital
P & L A/c
A Ltd.
B Ltd.
C Ltd.
Rs.
Rs.
Rs.
4,00,000
5,00,000
2,50,000
1,50,000
1,10,000
60,000
10% Debentures
70,000
Sundry Creditors
80,000
1,30,000
35,000
7,00,000
7,40,000
3,85,000
Total
Rs.
40,000
Rs.
Rs.
Average annual profits before

Debentures interest (April 2014
to Mar 2015 inclusive)
90,000
1,20,000
50,000
Professional valuation of tangible

assets on 31st March 2015
6,20,000
4,80,000
3,60,000
1. The directors in their negotiations agreed that:

(a) The recorded goodwill of B Ltd. is valueless.
(b) The Other assets of A Ltd. are worth Rs. 30,000.
(c) The valuation of 31st March 2015 in respect of tangible fixed assets should be
accepted.
(d) These adjustments are to be made by the individual company before the
completion of the acquisition.
2. The acquisition agreement provides for the issue of 12 per cent unsecured Debentures
to the value of the net assets of companies A Ltd., B Ltd., and C Ltd., and for the
157
issuance of Rs.10 nominal value equity shares for the capitalized average profit of each
acquired company in excess of net assets contributed. The capitalisation rate is
established at 10 per cent.
You are required to calculate purchase consideration and show the purchase
consideration as discharged.
Answer
Calculation of Purchase Consideration
A Ltd.
Rs.
B Ltd.
Rs.
C Ltd.
Rs.
6,20,000
4,80,000
3,60,000
30,000
2,80,000
85,000
Less : Sundry Creditors
(80,000)
(1,30,000)
(35,000)
10% Debenture
(70,000)
(40,000)
Net assets
5,00,000
6,30,000
3,70,000
Capitalized average profits
8,30,000
12,00,000
4,60,000
3,30,000
5,70,000
90,000
Tangible Fixed assets

Other Assets
(Purchase Considerations)
Excess over net assets
Issue by Giant Ltd. (Discharge of Purchase Considerations)

Rs.
Rs.
Rs.
Equity shares
3,30,000
5,70,000
90,000
12% Debentures
5,00,000
6,30,000
3,70,000
WN.1.Capitalised value of profit

Rs.
Profit as given
Debenture Interest
Profit after Debenture interest
capitalized at the rate of 10%
Rs.
Rs.
90,000
1,20,000
50,000
7,000
Nil
4000
83,000
1,20,000
46,000
8,30,000
12,00,000
4,60,000
158
Question 10
The Balance Sheet of M/s. Hot Ltd. as on 31-03-2015 is given below:
Liabilities
1,00,000 Equity shares of Rs.10
each fully paid up
Rs.
Assets
10,00,000 Freehold property
Rs.
5,50,000
4,000, 8% Preference shares of

Rs.100 each fully paid
4,00,000 Plant and machinery
2,00,000
6% Debentures
4,00,000 Trade investment
2,00,000
(secured by freehold property)

Sundry debtors
Arrear interest
4,50,000
24,000 Stock-in trade
3,00,000
Sundry creditors
1,01,000 Deferred
advertisement
Expenses
50,000
Directors loan
3,00,000 Profit and loss

account
4,75,000
22,25,000
22,25,000
The Board of Directors of the company decided upon the following scheme of
reconstruction with the consent of respective stakeholders:
(i)
Preference shares are to be written down to Rs. 80 each and equity shares to
Rs.2 each.
(ii)
Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance
1/3rd, equity shares of Rs. 2 each to be allotted.
(iii)
Debentureholders agreed to take one freehold property at its book value of

3,00,000 in part payment of their holding. Balance debentures to remain as
liability of the company.
(iv)
Arrear debenture interest to be paid in cash.
(v)
Remaining freehold property to be valued at Rs.4,00,000.
(vi)
Investment sold out for Rs. 2,50,000.
(vii) 75% of Directors loan to be waived and for the balance, equity shares of Rs. 2
each to be allotted.
(viii) 40% of sundry debtors, 80% of stock and 100% of deferred advertisement
expenses to be written off.
159
(ix)
Companys contractual commitments amounting to Rs.6,00,000 have been

settled by paying 5% penalty of contract value.
Show the Journal Entries for giving effect to the internal re-construction and draw the
Balance Sheet of the company after effecting the scheme.
Answer
In the books of Hot Ltd.

Journal Entries
Rs.
8% Preference share capital A/c (Rs. 100 each)
Dr.
Rs.
4,00,000
To 8% Preference share capital A/c (Rs.80

each)
3,20,000
To Capital reduction A/c
80,000
(Being the preference shares of Rs. 100 each

fully paid reduced to Rs. 80 each fully paid as
per the approved scheme of reconstruction)
ii
Equity share capital A/c (Rs. 10 each)
Dr.
10,00,000
To Equity share capital A/c (Rs.2 each)

2,00,000
8,00,000
(Being the equity shares of Rs. 10 each fully

paid reduced to Rs. 2 each fully paid under the
scheme of reconstruction as approved)
iii
Capital reduction A/c
Dr.
32,000
32,000
(Being arrears of preference share dividend of

one year to be settled by issue of 16,000 equity
shares of Rs. 2 each fully paid as per the
approved scheme of reconstruction)
iv
6% Debentures A/c
Dr.
3,00,000
To Freehold property A/c
3,00,000
(Being claim settled in part by transfer of

freehold property under the approved scheme of
reconstruction)
v
Accrued debenture interest A/c
Dr.
To Bank A/c
24,000
24,000
(Being accrued debenture interest paid)

160
vi
Freehold property A/c
Dr.
1,50,000
1,50,000
(Being appreciation on revaluation of freehold property

under scheme of reconstruction)
vii
Bank A/c
Dr.
2,50,000
To Trade investment A/c
2,00,000
50,000
(Being trade investment sold on profit)

viii Directors loan A/c
Dr.
3,00,000
75,000
2,25,000
(Being directors loan waived by 75% and balance being

discharged by issue of 37,500 equity shares ofRs. 2 each
under scheme of reconstruction)
ix
Dr.
12,73,000
To Profit and loss A/c
4,75,000
To Sundry debtors A/c
1,80,000
To Stock-in-trade A/c
2,40,000
To Deferred advertisement expenses A/c
50,000
To Bank A/c
30,000
2,98,000
(Being various assets, penalty on cancellation of

contract, profit and loss account debit balance written
off, and balance transferred to capital reserve account
as per the scheme of reconstruction)
161
Balance Sheet of Hot Ltd. (As reduced)

Particulars
Notes
Rs.

1
Shareholders' funds
a. Share capital
6,27,000
2,98,000
1,00,000
Long-term borrowings
Current liabilities
a. Trade Payables
1,01,000
11,26,000
Assets
1
Non-current assets
a. Fixed assets
Tangible assets
6,00,000
Current assets
a. Inventories
60,000
b. Trade receivables
2,70,000
c. Cash and cash equivalents
1,96,000
11,26,000
Note to Accounts
1
Share Capital
Rs.

(out of which 53,500 shares have been issued for
consideration other than cash) 4,000, 8%
3,07,000
Preference shares of Rs. 80 each fully paid up
3,20,000
Total
6,27,000
162
2
3
4

Capital Reserves
6% Debentures
Tangible assets
Freehold property
Plant and machinery
Total
Cash at bank(2,50,000 24,000 30,000)
2,98,000
1,00,000
4,00,000
2,00,000
6,00,000
1,96,000
Question 11
Sun and Earth had been carrying on business independently. They agreed to amalgamate
and form a new company Mars Ltd. with an authorised share capital of Rs. 2,00,000
divided into 40,000 equity shares of Rs. 5 each.
On 31st March, 2015, the respective Balance Sheets of Sun and Earth were as follows :
Sun
Earth
Rs.
Rs.
Fixed Assets
3,17,500
1,82,500
Current Assets
1,63,500
4,81,000
83,875
2,66,375
Less: Current Liabilities
2,98,500
90,125
Representing Capital
1,82,500
4,81,000
1,76,250
2,66,375
Additional Information :
(a) Revalued figures of Fixed and Current Assets were as follows :
Sun
Earth
Rs.
Rs.
Fixed Assets
3,55,000
1,95,000
Current Assets
1,49,750
78,875
(b) The debtors and creditorsinclude Rs. 21,675 owed by Sun to Earth.
The purchase consideration is satisfied by issue of the following shares and
debentures :
(i)
30,000 equity shares of Mars Ltd., to Sun and Earth in the proportion to the
profitability of their respective business based on the average net profit during
the last three years which were as follows :
163
Sun
Rs.
2012-13 Profit
2013-14(Loss)/Profit
2014-15 Profit
Earth
Rs.
2,24,788
1,36,950
(1,250)
1,71,050
1,88,962
1,79,500
(ii) 15% debentures in Mars Ltd., at par to provide an income equivalent to 8%

return on capital employed in their respective business as on 31 st March, 2015
after revaluation of assets.
You are requested to :
(1) Compute the amount of debentures and shares to be issued to Sun and Earth.
(2) A Balance Sheet of Mars Ltd., showing the position immediately after
amalgamation.
Answer
(1) Computation of Amount of Debentures and Shares to be issued:
Sun
Earth
Rs.
Rs.
(i) Average Net Profit
2,24,788 1,250 1,88,962

3
1,37,500
1,36,950 1,71,050 1,79,500

3
(ii)
1,62,500
Equity Shares to be Issued:

(a) Ratio of distribution
1,375
(b) Number of Equity Shares

Sun
13,750
Earth :
16,250
30,000Shares
(c)
Amount
13,750 shares of Rs. 5 each = 68,750
16,250 shares of Rs. 5 each = 81,250
164
1,625
(iii) Capital Employed (after revaluation of assets)

Rs.
Rs.
Fixed Assets
3,55,000
1,95,000
Current Assets
1,49,750
78,875
Less: Current Liabilities
5,04,750
2,98,500
2,06,250
2,73,875
90,125
1,83,750
16,500
14,700
(iv) Debentures Issued

8% Return on capital employed
15% Debentures to be issued to provide
equivalent income :
100
=1,10,000
15
100
Earth : 14,700
=98,000
15
Sun : 16,500
(2)
Balance Sheet of Mars Ltd. As on 1st April 2015

Particulars
I.
Shareholders funds
2
3
II.
1
Note
Rs.
(a) Share capital
1,50,000

32,000
2,08,000
Current Liabilities
(a) Other current liabilities
Total (1+2+3+4)
Assets
7,56,950
Non-current assets
(a) Fixed assets
(i) Tangible assets
3,66,950
5,50,000
Current assets
(a) Other current assets
2,06,950
Total (1+2)
7,56,950
165
* Notes are not prepared

Working Notes :
Sun
Rs.
Earth
Rs.
Total
Rs.
68,750
81,250
1,50,000
1,10,000
1,78,750
98,000
1,79,250
2,08,000
3,58,000
Fixed Assets
3,55,000
1,95,000
5,50,000
Current Assets
1,49,750
5,04,750
57,200*
2,52,200
2,06,950
7,56,950
2,76,825**
90,125
3,66,950
Net Assests
2,27,925
1,62,075
3,90,000
(b) Purchase Consideration
1,78,750
1,79,250
3,58,000
(1) Purchase Consideration

Equity Shares Issued
15% Debentures Issued
(2) Capital Reserve
(a) Net Assets Taken Over
Less :Current Liabilities
(c) Capital Reserve [(a) - (b)]
49,175
(d) Goodwill [(b) - (a)]
(e) Capital Reserve [Final Figure(c) - (d)] -
17,175
-
32,000
*78, 875 - 21,675 = Rs. 57,200

**2,98,500 - 21,675 = Rs.2,76,825
Question 12
White Limited had decided to reconstruct the Balance Sheet since it has accumulated huge
losses. The following is the Balance Sheet of the Company on 31.3.2015 before
reconstruction:
Balance Sheet of White Limited as at 31.3.2015
Liabilities
Rs.
Assets
Rs.
Share Capital:
Fixed Assets:
Authorised:
Goodwill
20,00,000
Building
10,00,000
Plant
10,00,000
1,50,000 Equity Shares of

Rs. 50 each
75,00,000
Subscribed and Paid up
166
Capital:
50 each
25,00,000
Computers
1,00,000 Equity Shares of

Rs. 50 each, Rs. 40 per
share paid up
40,00,000
Investments
12% First Debentures

12% Second Debentures
Sundry Creditors
5,00,000
25,00,000
Nil
Profit and Loss A/c

Loss
20,00,000
10,00,000
5,00,000
85,00,000
85,00,000
The following is the interest of Mr. X and Mr. Y in White Limited:

Mr. X
Rs.
Mr. Y
Rs.
12% First Debentures
3,00,000
2,00,000
12% Second Debentures
7,00,000
3,00,000
Sundry Creditors
2,00,000
1,00,000
12,00,000
6,00,000
Fully paid up Rs. 50 shares
3,00,000
2,00,000
Partly paid up shares (Rs. 40 paid up)
5,00,000
5,00,000
The following Scheme of Reconstruction is approved by all parties interested and also by
the Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up
shares be converted into equity shares of Rs. 20 each.
(b) Mr. X is to cancel Rs. 7,00,000 of his total debt (other than share amount) and to pay
Rs. 2 lakhs to the company and to receive new 14% First Debentures for the balance
amount.
(c)
Mr. Y is to cancel Rs. 3,00,000 of his total debt (other than equity shares) and to
accept new 14% First Debentures for the balance.
(d) The amount thus rendered available by the scheme shall be utilised in writing off of
Goodwill, Profit and Loss A/c Loss and the balance to write off the value of
computers.
You are required to draw the Journal Entries to record the same and also show the
Balance Sheet of the reconstructed company.
167
Answer
White Limited
Journal Entries
Dr.
Rs.
Particulars
Equity share final call Account
Dr.
Cr.
Rs.
10,00,000
To Equity Share Capital Account
10,00,000
(Balance of Rs.10 per share on 1,00,000 equity

Shares called up as final call)
Bank Account
Dr.
10,00,000
To Equity Share Final call Account

(Equity share final call money received)
10,00,000
Equity Share Capital Account (Rs. 50)
Dr.
75,00,000
To Equity Share Capital Account (Rs. 20)
30,00,000
To Capital Reduction Account
45,00,000
(Reduction of equity shares of Rs. 50 each to

shares of Rs. 20 each as per reconstruction scheme)
12% First Debentures Account
Dr.
3,00,000
12% Second Debentures Account
Dr.
7,00,000
Sundry Creditors Account
Dr.
2,00,000
To X
(The total amount due to X, transferred to his account)
Bank Account
Dr.
To X
(The amount paid by X under the reconstruction scheme)
12% First Debentures Account
Dr.
12% Second Debentures Account
Dr.
Sundry Creditors Account
Dr.
To Y
(The total amount due to Y, transferred to his account)
X
Dr.
12,00,000
2,00,000
2,00,000
2,00,000
3,00,000
1,00,000
6,00,000
14,00,000
To 14% First Debentures Account
7,00,000
To Capital Reduction Account
7,00,000
(The cancellation of Rs.7,00,000 out of total debt of
168
Mr. X and issue of 14% first debentures for the

balance amount as per reconstruction scheme)
Y
Dr.
6,00,000
To 14% First Debentures Account
3,00,000
To Capital Reconstruction Account
3,00,000
(The cancellation of Rs.3,00,000 out of total debt of

Mr. Y and issue of 14% first debentures for the
balance amount)
Capital Reduction Account
Dr.
55,00,000
To Goodwill Account
20,00,000
To Profit and Loss Account
20,00,000
To Computers Account
15,00,000
(The balance amount of capital reduction account

utilised in writing off goodwill, profit and loss
account, and computersWorking Note)
Balance Sheet of White Limited (and reduced)
Particulars
Notes
Rs.
Shareholders' funds
Share capital
30,00,000
10,00,000
2,00,000
Current liabilities
Trade Payables
Total
42,00,000
Non-current assets
a.
Fixed assets
30,00,000
Tangible assets
Current assets
Cash and cash equivalents (10 Lakhs +
2 Lakhs)
12,00,000
Total
42,00,000
169
Notes to accounts
1.
Share Capital
Issued, subscribed and paid up
1,50,000 equity shares of Rs.20 each
Total
2.
30,00,000
Secured 14% First Debentures
Total
4.
30,00,000
10,00,000
10,00,000
Tangible assets
Building
10,00,000
Plant
10,00,000
Computers
10,00,000
Total
30,00,000
Working Note:
Rs.
Rs.
To Goodwill A/c
20,00,000 By Equity Share Capital A/c
To P & L A/c
20,00,000 By X
7,00,000
To Computers (Bal. Fig.)
15,00,000 By Y
3,00,000
55,00,000
45,00,000
55,00,000
170
Question 13
The following were the Balance Sheets of Pawan Ltd. and Varun Ltd. as at 31st March,
2015:
Liabilities
Pawan Ltd.
(Rs. in lakhs)
Equity Share Capital (Fully paid shares

ofRs. 10 each)
Varun Ltd.
(Rs. in lakhs)
15,000
6,000
3,000
310
General Reserve
9,500
3,200
Statement of Profit and Loss
2,870
825
1,000
Securities Premium
Foreign Project Reserve
12% Debentures
Bills Payable (Payable to Varun Ltd.
For Rs.80 Lakhs)
120
Sundry Creditors
1,080
463
Sundry Provisions
1,830
702
33,400
12,500
P Ltd.
V Ltd.
Assets
(Rs. in lakhs)
Land and Buildings
(Rs. in lakhs)
6,000
14,000
5,000
Furniture, Fixtures and Fittings
2,304
1,700
Stock
7,862
4,041
Debtors
2,120
1,020
Cash at Bank
1,114
609
Bills Receivable (Received from P Ltd.)
80
Cost of Issue of Debentures
50
33,400
12,500
Plant and Machinery
All the bills receivable held by Varun Ltd. were Pawan Ltd.s acceptances.
On 1st April 2015, Pawan Ltd. took over Varun Ltd in an amalgamation in the nature of
merger. It was agreed that in discharge of consideration for the business Pawan Ltd. would
allot three fully paid equity shares of Rs. 10 each at par for every two shares held in Varun
Ltd. It was also agreed that 12% debentures in Varun Ltd. would be converted into 13%
debentures in Pawan Ltd. of the same amount and denomination.
171
Expenses of amalgamation amounting to Rs. 1 lakh were borne by Pawan Ltd.

You are required to :
(i)Pass journal entries in the books of Pawan Ltd. and
(ii)Prepare Pawan Ltd.s Balance Sheet immediately after the merger.
Answer
Books of Pawan Ltd.
Journal Entries
Dr.
(Rs. in Lacs)
Business Purchase A/c
Dr.
Cr.
(Rs. in Lacs)
9,000
To Liquidator of Varun Ltd.
9,000
(Being business of Varun Ltd. taken over for

consideration settled as per agreement)
Plant and Machinery
Dr.
Dr.
Stock
Dr.
Debtors
Dr.
Cash at Bank
Dr.
Bills Receivable
Dr.
To Foreign Project Reserve
To General Reserve (3,200 - 3,000)
To Profit and Loss A/c (825 - 50)
To 12% Debentures
To Sundry Creditors
To Sundry Provisions
To Business Purchase
(Being assets & liabilities taken over from Varun Ltd.)
5,000
1,700
4,041
1,020
609
80
Liquidator of Varun Ltd. A/c

Dr.
(Purchase consideration discharged in the form
of equity shares)
9,000
Statement of Profit and loss
Dr.
To Bank A/c
310
200
775
1,000
463
702
9,000
9,000
1
1
(Liquidation expenses paid by Pawan Ltd.)
172
12% Debentures A/c
Dr.
1,000
1,000
(12% debentures discharged by

issue of 13% debentures)
Bills Payable A/c
Dr.
80
To Bills Receivable A/c
80
(Cancellation of mutual owing on account of bills)

Balance Sheet of Pawan Ltd. as at 1st April, 2015 (after merger)
Particulars
Notes
Rs.(in lakhs)

1
Shareholders' funds
a. Share capital
24,000
16,654
1,000
a. Long-term borrowings
Current liabilities
a. Trade Payables (1,543 + 40)
1,583
b. Short-term provisions
2,532
Total
45,769
Assets
1
Non-current assets
a. Fixed assets
Tangible assets
29,004
Current assets
a. Inventories
11,903
3,140
c. Cash and cash equivalents
1,722
Total
45,769
173
Notes to accounts
1.
2.
Rs.in Lakhs
Share Capital
Authorised, issued, subscribed and paid up
24 crores equity shares of Rs. 10 each (of
the above shares, 9 crores shares have been
issued for consideration other than cash)
24,000
Total
24,000

General Reserve (9500 + 200)
9,700
Securities Premium
3,000
Foreign Project Reserve
310
Statement of Profit and Loss (2870 +775-1)

Total
3
3,644
16,654
Secured
13% Debentures
1,000
Tangible assets
Land & Buildings
6,000
Plant & Machinery
19,000
4,004
Total
29,004
Working Notes :
1. Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of
Pawan Ltd. for every two equity shares held in Varun Ltd.
Purchase consideration = Rs. 6,000 lacs
3
= Rs. 9,000 lacs.
2
Note : The question is silent regarding the treatment of fictitious assets and therefore they
are not transferred to the amalgamated company. Thus the cost of issue of debentures
shown in the balance sheet of the Varun Ltd. company is not transferred to the P Ltd.
company.
174
Question 14
The following is the Balance Sheet of Rama Ltd. as at March 31, 2015:
Liabilities
Rs.in lacs
Fully paid equity shares of Rs. 10 each

Capital Reserve
500
6
12% Debentures
400
Debenture Interest Outstanding
48
Trade Creditors
165
Directors Remuneration Outstanding
10
Other Outstanding Expenses
11
Provisions
33
1,173
Assets
Rs.in lacs
Goodwill
15
Land and Building
184
Plant and Machinery
286
Furniture and Fixtures
41
Stock
142
Debtors
80
Cash at Bank
27
Discount on Issue of Debentures
Profits and Loss Account
390
1,173
The following scheme of internal reconstruction was framed, approved by the Court, all
the concerned parties and implemented:
(i) All the equity shares be converted into the same number of fully-paid equity shares
of Rs. 2.50 each.
(ii) Directors agree to forego their outstanding remuneration.
(iii) The debentureholders also agree to forego outstanding interest in return of their
12% debentures being converted into 13% debentures.
(iv) The existing shareholders agree to subscribe for cash, fully paid equity shares of Rs.
2.50 each for Rs. 125 lacs.
175
(v) Trade creditors are given the option of either to accept fully-paid equity shares of
Rs. 2.50 each for the amount due to them or to accept 80% of the amount due in
cash. Creditors for Rs. 65 lacs accept equity shares whereas those for Rs. 100 lacs
accept Rs. 80 lacs in cash in full settlement.
(vi) The Assets are revalued as under :
Rs. in lacs
Land and building
230
Plant and Machinery
220
Stock
120
Debtors
76
Pass Journal Entries for all the above mentioned transactions and draft the companys
Balance Sheet immediately after the reconstruction.
Answer
Journal Entries
Rs. in lacs
Dr.
Equity Share Capital (Rs. 10 each) A/c
Dr.
Cr.
500
To Equity Share Capital (Rs.2.50 each) A/c
125
To Reconstruction A/c
375
(Conversion of all the equity shares into the same number

of fully paid equity shares of Rs. 2.50 each as per scheme
of reconstruction)
Directors Remuneration Outstanding A/c
Dr.
10
10
(Outstanding remuneration foregone by the directors as

per scheme of reconstruction)
12% Debentures A/c
Dr.
400
Debenture Interest Outstanding A/c
Dr.
48
400
48
(Conversion of 12% debentures into 13% debentures,

Debentureholders forgoing outstanding debenture interest)
Bank
Dr.
125
125
(Application money received for equity shares)

176
Dr.
125
To Equity Share Capital (Rs. 2.50 each) A/c
125
(Application money transferred to share capital)

Trade Creditors
Dr.
165
To Equity Share Capital (Rs. 2.50 each) A/c
65
To Bank A/c
80
20
(Trade creditors for Rs.64 lakhs accepting shares for full

amount and those for Rs.100 lakhs accepting cash equal to
80% of claim in full settlement)
Capital Reserve
Dr.
(Capital Reserve being used for purpose of reconstruction)

Land and Building A/c
Dr.
46
46
(Appreciation made in the value of land and building as per

scheme of reconstruction)
Reconstruction A/c
Dr.
505
To Goodwill
15
To Plant and Machinery
66
To Stock
22
To Debtors
To Discount on issue of Debentures
To Profit and Loss Account
390
(Writing off losses and reduction in the values of assets as

per scheme of reconstructionW.N. 1)
177
Balance Sheet of Rama Ltd. (and Reduced) as on 31st March, 2015

Equity & Liabilities
Rs. in lacs
Share Capital
1,26,000 Fully paid equity shares of Rs. 2.50 each (W.N. 2)
315
(26,000 shares have been issued for consideration other than

cash)
Borrowings
13% Debentures
400
Current Liabilities
Outstanding Expenses
11
Short Term Provisions

Provisions
33
Total
759
Tangibles
Land and Building 184+46
230
Plant and Machinery 286-66
220

Inventory
491
41
120
Trade Receivable (80-4)
76
Cash & Cash Equivalent
72
759
Working Notes:
(Rs.inlacs)
1.
Reconstruction Account
Rs.
Rs.
To Goodwill
15
By Equity Share Capital A/c
To Plant and Machinery
66
By Directors Remuneration Outstanding A/c
10
To Stock
22
By Debenture Interest Outstanding A/c
48
By Trade Creditors
20
By Capital Reserve
To Debtors
To Discount on issue of
Debentures
To Profit and Loss A/c
By Land and Building
375
46
390
505
505
178
2.
Equity share capital as on 31st March, 2002 (after reconstruction)

Rs.
Equity Share Capital (Rs. 2.50 each)
125
Add: Fresh issue
125
Add: Equity shares issued to creditors
65
315
3.
Cash at bank as on 31st March, 2002 (after reconstruction)
27
Cash at bank (before reconstruction)
125
Add: Proceeds from issue of equity shares
152
Less: Payment made to creditors
80
72
Question 15
The financial position of two companies X Ltd. and Y Ltd. as on 31st March, 2015 was as
under:
Assets
X Ltd. (Rs.)
Y Ltd. (Rs.)
Goodwill
50,000
25,000
Building
3,00,000
1,00,000
Machinery
5,00,000
1,50,000
Stock
2,50,000
1,75,000
Debtors
2,00,000
1,00,000
Cash at Bank
50,000
20,000
Preliminary Expenses
30,000
10,000
13,80,000
5,80,000
179
Liabilities
Share Capital:
X Ltd. (Rs.)
Equity Shares of Rs. 10 each

9% Preference Shares of Rs. 100 each
10,00,000
3,00,000
1,00,000
1,00,000
1,00,000
80,000
50,000
20,000
1,30,000
80,000
13,80,000
5,80,000
10% Preference Shares of Rs. 100 each

General Reserve
Retirement Gratuity fund
Sundry Creditors
Y Ltd. (Rs.)
X Ltd. absorbs Y Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%
Preference Shares of X Ltd.
(b) Goodwill of Y Ltd. is valued at Rs. 50,000, Buildings are valued at Rs. 1,50,000 and
the Machinery at Rs. 1,60,000.
(c) Stock to be taken over at 10% less value and Reserve for Bad and Doubtful Debts
to be created @ 7.5%.
(d) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of Y Ltd.
Show the acquisition entries in the books of X Ltd.
Also draft the summarized Balance Sheet after absorption as at 31st March, 2015.
Answer
Particulars
To Sundry Assets (5,80,000
10,000)
In the Books of Y Ltd.

Realisation Account
Rs.
Particulars
5,70,000 ByGratuity Fund
To Preference Shareholders
(Premium on Redemption)
10,000 By Sundry Creditors
To Equity Shareholders
(Profit on Realisation)
50,000 By X Ltd.
(Purchase Consideration)
6,30,000
180
Rs.
20,000
80,000
5,30,000
6,30,000
Equity Shareholders Account

Rs.
To Preliminary Expenses
To Equity Shares of Hari Ltd.
Rs.
10,000 By Share Capital

4,20,000 By General Reserve
By Realisation Account
_______ (Profit on Realisation)
4,30,000
3,00,000
80,000
50,000
4,30,000
Preference Shareholders Account

Rs.
To 9% Preference Shares of
X Ltd.
Rs.
1,10,000 By Preference Share Capital
1,00,000
By Realisation Account
(Premium on Redemption
of Preference Shares)
10,000
1,10,000
1,10,000
X Ltd. Account
Rs.
To
Realisation Account
Rs.
5,30,000 By
9% Preference Shares
1,10,000
__________ By
Equity Shares
4,20,000
5,30,000
5,30,000
In the Books of X Ltd.

Journal Entries
Particulars
Dr.
Cr.
(Rs.)
(Rs.)
Goodwill Account
Dr.
50,000
Building Account
Dr.
1,50,000
Machinery Account
Dr.
1,60,000
Stock Account
Dr.
1,57,500
Debtors Account
Bank Account
Dr.
Dr.
1,00,000
20,000
181
To Gratuity Fund Account
20,000
To Sundry Creditors Account

To Provision for Doubtful Debts Account
80,000
7,500
To Liquidators of Vayu Ltd. Account

(Being Assets and Liabilities takenover as per
agreed valuation).
5,30,000
Liquidators of Vayu Ltd. A/c
Dr. 5,30,000

1,10,000
4,00,000
20,000
(Being Purchase Consideration satisfied as

above).
Summarized Balance sheet After Amalgamation
Particulars
Rs.
Share capital(10,00,000 + 400,000 +

100,000+110,000)
16,10,000
Reserve & surplus (100,000 + 20,000)
120,000
Current liabilities (50,000 + 130,000 +

20,000 +80,000)
2,80,000
20,10,000
Non Current Assets:

a. Tangible (300,000 + 150,000 +
500,000+ 160,000)
11,10,000
b. Intangible (50,000 + 50,000)
100,000
Current Assets:
a. Inventory (250,000 + 157,500)
4,07,500
b. Trade receivable (200,000 + 92,500)
2,92,500
c. Cash & Cash Equivalent (50,000 +

20,000)
70,000
d. Other current assets (Pre. Exp)
30,000
20,10,000
182
Working Notes:
Purchase Consideration:
Rs.
Goodwill
50,000
Building
1,50,000
Machinery
1,60,000
Stock
1,57,500
Debtors
92,500
Cash at Bank
20,000
6,30,000
Less: Liabilities
Gratuity
20,000
Sundry Creditors
80,000
Net Assets
5,30,000
To be satisfied as under:
10% Preference Shareholders of Y Ltd.
Add: 10% Premium
1,00,000
10,000
1,100 9% Preference Shares of X Ltd.
1,10,000
Equity Shareholders of Y Ltd. to be satisfied by issue of

40,000
Equity Shares of X Ltd. at 5% Premium
4,20,000
Total
5,30,000
183
Question 16
Amy Limited was wound up on 31.3.2015 and its Balance Sheet as on that date was
given below:
Balance Sheet of Exe Limited as on 31.3.2015
Liabilities
Rs.
Share capital:
1,20,000 Equity shares of
Rs. 10 each
Rs.
Fixed assets
Current assets:
12,00,000 Stock
Reserves and surplus:

Profit prior to
incorporation
Assets
9,64,000
7,75,000
Sundry debtors
1,60,000
Less: Provision for
42,000 bad and doubtful
debts 8,000
Contingency reserve
2,70,000 Bills receivable
Profit and loss A/c
2,52,000 Cash at bank
1,52,000
30,000
3,29,000
12,86,000
Current liabilities:
Bills payable
Sundry creditors
40,000
2,26,000
Provisions:
Provision for income tax
2,20,000
________
22,50,000
22,50,000
Samy Limited took over the following assets at values shown as under:
Fixed assets Rs. 12,80,000, Stock Rs. 7,70,000 and Bills Receivable Rs. 30,000.
Purchase consideration was settled by Wye Limited as under:
Rs. 5,10,000 of the consideration was satisfied by the allotment of fully paid 10%
Preference shares of Rs. 100 each. The balance was settled by issuing equity shares of
Rs. 10 each at Rs. 8 per share paid up.
Sundry debtors realisedRs. 1,50,000. Bills payable was settled for Rs. 38,000. Income
tax authorities fixed the taxation liability at Rs. 2,22,000.
Creditors were finally settled with the cash remaining after meeting liquidati on
expenses amounting to Rs. 8,000.
(i) Calculate the number of equity shares and preference shares to be allotted by
Samy Limited in discharge of purchase consideration.
(ii) Prepare the Realisation account, Cash/Bank account, Equity shareholders
account and Samy Limited account in the books of Amy Limited.
184
(iii) Pass journal entries in the books of Samy Limited.

Answer
(i) Purchase consideration
Rs.
Fixed assets
12,80,000
Stock
7,70,000
Bills receivable
30,000
Purchase consideration
20,80,000
Amount discharged by issue of preference shares = Rs. 5,10,000

No. of preference shares to be allotted = Rs.5,10,000 5,100 shares
100
Amount discharged by allotment of equity shares = Rs.20,80,000 Rs.5,10,000

= Rs. 15,70,000
Paid up value of equity share = Rs. 8
Hence, number of equity shares to be issued =
(ii)
Realisation Account In the books of Amy Ltd.
To
Fixed assets
Dr.
(Rs.)
9,64,000 By
To
To
To
To
Stock
Sundry debtors
Bills receivable
Bank account:
Liquidation expenses
7,75,000 By
1,60,000 By
30,000 By
By
8,000
Bills payable
To
Rs.15,70,000
= 1,96,250 shares
8
Tax liability
Sundry creditors
Equity shareholders
(profit transferred)
38,000 By
Provision for bad and

doubtful debts
Bills payable
Sundry creditors
Samy Ltd. Account
(Purchase
consideration)
Bank account: Sundry
debtors
Cr.
(Rs.)
8,000
40,000
2,26,000
2,20,000
20,80,000
1,50,000
2,22,000
2,11,000
3,16,000
27,24,000
27,24,000
185
Cash/Bank Account
Dr.
(Rs.)
To
Balance b/d
To
Realisation account:
Cr.
(Rs.)
3,29,000 By
Sundry debtors
Realisation account:
Liquidation expenses
1,50,000
Bills payable
_______
8,000
38,000
Tax liability
2,22,000
Sundry creditors
(Balancing figure)
2,11,000
4,79,000
4,79,000
Equity Shareholders Account

Dr.
(Rs.)
To
10% Preference
shares in Samy Ltd.
To
Equity shares in Samy

Ltd.
Cr.
(Rs.)
By
5,10,000 By

account
Profit prior to
incorporation
12,00,000
42,000
15,70,000 By
Contingency reserve
2,70,000
By
Profit and loss account
2,52,000
By
Realisation account
(Profit)
3,16,000
20,80,000
20,80,000
Samy Limited Account
Rs.
To
Realisation
account
Rs.
20,80,000 By
10% Preference shares in Wye

Ltd.
____________ By
Equity shares in Wye Ltd.
20,80,000
5,10,000
15,70,000
20,80,000
186
(iii)
In the books of Samy Ltd.
Journal Entries
Particulars
Dr Rs.
Business purchase account
Dr.
Cr. Rs.
20,80,000
To Liquidator of Exe Ltd. account
20,80,000
(Being the amount of purchase consideration

payable to liquidator of Exe Ltd. for assets taken over)
Fixed assets account
Dr.
12,80,000
Stock account
Dr.
7,70,000
Bills receivable account
Dr.
30,000
To Business purchase account
20,80,000
(Being assets taken over)

Liquidator of the Exe Ltd. account
Dr.
20,80,000
To 10% Preference share capital account
5,10,000
To Equity share capital account
15,70,000
(Being the allotment of 10% fully paid up

preference shares and equity shares of
Rs 10 each, ` 8 each paid up as per
agreement for discharge of purchase consideration)
Question 17
The following is the Balance sheet of Day Ltd. as on 31.3.2015:
Liabilities
Equity shares of Rs.100 each
12% cumulative
preferenceshares of Rs.100
each
Rs.
Assets
1,00,00,000 Fixed assets

50,00,000 Investments (Market
value Rs.9,50,000)
187
Rs.
1,25,00,000
10,00,000
10% debentures of Rs.100 each
40,00,000 Current assets
Sundry creditors
50,00,000 P & L A/c
1,00,00,000
4,00,000
1,00,000 Preliminary expenses

2,41,00,000
2,00,000
2,41,00,000
The following scheme of reorganization is sanctioned:

(i)
All the existing equity shares are reduced to Rs.40 each.
(ii)
All preference shares are reduced to Rs.60 each.
(iii)
The rate of interest on debentures is increased to 12%. The debentureholders

surrender their existing debentures of Rs.100 each and exchange the same for
fresh debentures of Rs.70 each for every debenture held by them.
(iv)
One of the creditors of the company to whom the company owes Rs.20,00,000
decides to forgo 40% of his claim. He is allotted 30,000 equity shares of Rs.40
each in full satisfaction of his claim.
(v)
Fixed assets are to be written down by 30%.
(vi)
Current assets are to be revalued at Rs.45,00,000.
(vii)
The taxation liability of the company is settled at Rs.1,50,000.
(viiii) Investments to be brought to their market value.

(ix)
It is decided to write off the fictitious assets.
Pass Journal entries and show the Balance sheet of the company after giving effect to the
above.
Answer
Journal Entries in the books of Day Ltd.
Particulars
(i)
Dr. (Rs.)
Equity share capital (Rs.100) A/c
Dr.
Cr. (Rs.)
1,00,00,000
To Equity Share Capital (Rs.40) A/c
40,00,000
60,00,000
(Being conversion of equity share capital of

Rs.100 each into Rs.40 each as per reconstruction
scheme)
188
(ii)
12% Cumulative Preference Share capital

(Rs.100) A/c
Dr.
50,00,000
To 12% Cumulative Pref. Share Capital (Rs.60) A/c
30,00,000
20,00,000
(Being conversion of 12% cumulative preference

share capital of Rs.100 each into Rs.60 each as per
reconstruction scheme)
(iii)
10% Debentures A/c
Dr.
40,00,000
28,00,000
12,00,000
(Being 12% debentures issued to 10% debentureholders for 70% of their claims. The balance
transferred to capital reduction account as per
reconstruction scheme)
(iv)
Sundry Creditors A/c
Dr.
20,00,000
12,00,000
8,00,000
(Being a creditor of 20,00,000 agreed to surrender

his claim by 40% and was allotted 30,000 equity
shares of Rs.40 each in full settlement of his dues as
per reconstruction scheme)
(v)
Provision for Taxation A/c
Dr.
1,00,000
Dr.
50,000
To Liability for Taxation A/c
1,50,000
(Being conversion of the provision for taxation into

liability for taxation for settlement of the amount
due)
(vi)
Dr.
99,50,000
To P & L A/c
4,00,000
To Preliminary Expenses A/c
2,00,000
To Fixed Assets A/c
37,50,000
189
To Current Assets A/c
55,00,000
To Investments A/c
50,000
50,000
(Being amount of Capital Reduction utilized in

writing off P & L A/c (Dr.) Balance, Expenses, Fixed
Assets, Current Assets, Investments and the
Balance transferred to Capital Reserve)
Dr.
(vii) Liability for Taxation A/c
1,50,000
To Current Assets (Bank A/c)
1,50,000
(Being the payment of tax liability)

Balance Sheet of Day Ltd. (and reduced) as on 31.3.2015
Particulars
Notes
Rs.

1 Shareholders' funds
a Share capital
82,00,000
b Reserves and Surplus
50,000
28,00,000
2 Non-current liabilities
a Long-term borrowings
3 Current liabilities
a Trade Payables
30,00,000
Total
1,40,50,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets
87,50,000
b Investments
9,50,000
2 Current assets
43,50,000
Total
1,40,50,000
190
Notes to accounts
Rs.
Rs.
1. Share Capital
1,30,000 equity shares of Rs. 40 each
Preference share capital
50,000 12% Cumulative Preference shares
of Rs.60 each
Total
Capital Reserve
3. Long-term borrowings
Secured
12% Debentures
4. Tangible assets
Fixed Assets
Adjustment under scheme of reconstruction
5. Investments
6. Current assets
52,00,000
30,00,000
82,00,000
50,000
28,00,000
1,25,00,000
(37,50,000)
10,00,000
(50,000)
45,00,000
(1,50,000)
87,50,000
9,50,000
43,50,000
Working Note:
Particulars
To Liability for taxation A/c
To P & L A/c
To Preliminary expenses
To Fixed assets
To Current assets
To Investment
To Capital Reserve
(balancing figure)
Rs.
Particulars
50,000 By Equity share capital

4,00,000 By 12% Cumulative
preference
share
capital
2,00,000 By 10% Debentures
37,50,000 By Sundry creditors
55,00,000
50,000
50,000
1,00,00,000
191
Rs.
60,00,000
20,00,000
12,00,000
8,00,000
1,00,00,000
Question 18
The following is the Balance Sheet of A Ltd. as on 31.3.2015:
Liabilities
Rs.
14,000 Equity shares of

Rs.100 each fully paid
14,00,000
General reserve
Assets
Rs.
Sundry assets
18,00,000
10,000 Discount on issue of

Debentures
10,000
10% Debentures
2,00,000 Preliminary expenses
30,000
Sundry creditors
2,00,000 P & L A/c
60,000
Bank overdraft
50,000
Bills payable
40,000
19,00,000
19,00,000
Y Ltd. agreed to take over the business of X Ltd. Calculate purchase consideration
under Net Assets method on the basis of the following:
The market value of 75% of the sundry assets is estimated to be 12% more than the
book value and that of the remaining 25% at 8% less than the book value. The
liabilities are taken over at book values. There is an unrecorded liability of Rs.25,000.
Answer
Calculation of Purchase Consideration under Net Assets Method
Sundry assets
Rs.
75 112
100 100
25 92
18,00,000
100 100
18,00,000
Rs.
15,12,000
4,14,000
19,26,000
Less:Liabilities:
10% Debentures
2,00,000
Sundry creditors
2,00,000
Bank overdraft
50,000
Bills payable
40,000
Unrecorded liability
25,000
5,15,000
14,11,000
192
Question 19
Why is corporate structuring exercise carried out?
Answer
The various needs for undertaking a Corporate Restructuring exercise are as follows:
(i)
to focus on core strengths, operational synergy and efficient allocation of managerial

capabilities and infrastructure.
(ii) consolidation and economies of scale by expansion and diversion to exploit

extended domestic and global markets.
(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with
profits of a healthy company.
(iv) acquiring constant supply of raw materials and access to scientific research and
technological developments.
(v) capital restructuring by appropriate mix of loan and equity funds to reduce the cost
of servicing and improve return on capital employed.
(vi) improve corporate performance to bring it at par with competitors by adopting the
radical changes brought out by information technology.
Question 20
What are the different types of corporate structuring?
Answer
Restructuring may be of the following kinds:
Financial restructuring which deals with the restructuring of capital base and raising
finance for new projects. This involves decisions relating to acquisitions, mergers, joint
ventures and strategic alliances.
Technological restructuring which involves, inter alia, alliances with other companies
to exploit technological expertise.
Market restructuring which involves decisions with respect to the product market
segments, where the company plans to operate based on its core competencies.
Organizational restructuring which involves establishing internal structures and
procedures for improving the capability of the personnel in the organization to respond
to changes. This kind of restructuring is required in order to facilitate and implement
the above three kinds of restructuring. These changes need to have the cooperation of
all levels of employees to ensure that the restructuring is successful.
The most commonly applied tools of corporate restructuring are amalgamation, merger,
demerger, slump sale, acquisition, joint venture, disinvestment, strategic alliances and
franchises.
193
Question 21
What are the methods of calculation of purchase consideration?
Answer
(i)
Lump Sum Method: The amount to be paid by the transferee company as

consideration may be stated in the problem as a lump sum. In such a case, no
calculation is required.
(ii) Net Assets Method: The amount of consideration or the amount of net assets is
ascertained under thismethod in the following manner:
Assets taken over (at their revalued figures, if any, otherwise at their book figures).
Less: Liabilities taken over (at their agreed values, if any, otherwise at their book
figures).
(iii) Net Payment Method: The amount of consideration under this method is
ascertained by adding up the total value of shares and other securities issued and
the payments made in the form of cash and other assets by the transferee company
to the transferor company in discharge of consideration. So the consideration
constitutes the total payment in whatever form either in shares, debentures, or in
cash to the liquidator of the transferor company for payment to the shareholders of
the transferor company.
1.
The value of assets and liabilities taken over by the transferee company are
not to be considered in calculating the consideration.
2.
The payments made by the transferee company for shareholders, whether in

cash or in shares or in debentures must to be taken into account.
3.
Where the liabilities are taken over by the transferee company and
subsequently discharged such amount should not be added to consideration.
4.
When liabilities are taken over by the transferee company they are neither
deducted nor added to the amount arrived at as consideration.
5.
Any payments made by the transferee company to some other party on

behalf of the transferor company are to be ignored.
6.
If the liquidation expenses of the transferor company are paid by the

transferee company, the same should not be taken as a part of the
consideration.
(iv) Shares Exchange Method: In this method, the consideration is ascertained on the
basis of the ratio in which the shares of the transferee company are to be exchanged
for the shares of the transferor company.
This exchange ratio is generally determined on the basis of the value of each
companys shares.
194
Question 22
The Balance Sheet of M/s. Square Limited as on 31-03-2015 is given below:
Balance Sheet of Ice Ltd. (As reduced)
Particulars
Notes
Rs. in lacs

1 Shareholders' funds
a. Share capital
700

2 Non-current liabilities
(261)
350
a. Trade Payables
51
Other liabilities
12
3 Current liabilities
852
Assets
1 Non-current assets
a. Fixed assets
Tangible assets
375
a. Current investments
100
b. Inventories
150
c. Trade receivables
225
d. Cash and cash equivalents
10
2 Current assets
Total
852
Notes to Accounts:
Rs.in Lacs
(1) Share Capital

Authorised :
100 lakh shares of Rs.10 each
1,000
4 lakh, 8% Preference Shares of Rs. 100 each

Issued, Subscribed and paid up:
195
400
1,400
50 lakh Equity Shares of Rs.10 each, full paid up
500
2 lakh 8% Preference Shares of Rs. 100 each, fully paid up
200
Total
700
(2) Reserves and Surplus

Debit balance of Profit & Loss A/c
(261)
(3) Long Term Borrowings

6% Debentures (Secured by Freehold Property)
200
Directors Loan
150
350
(4) Trade Payables

Sundry Creditors for Goods
51
(5) Other Current Liabilities

Interest Accrued and Due on 6% Debentures
12
(6) Tangible Assets

Freehold Property
275
Plant & Machinery
100
375
(7) Current Investment

Investment in Equity Instruments
100
(8) Inventories
Finished Goods
150
(9) Trade Receivables

Sundry Debtors for Goods
225
(10) Cash and Cash Equivalents

Balance with Bank
2
The Board of Directors of the company decided upon the following scheme of
reconstruction with the consent of respective shareholders:
(1) Preference Shares are to be written down to Rs. 80 each and Equity Shares to Rs.2
each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for
balance 1/3 rd, Equity Shares of Rs.2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of Rs. 150
lakh in part payment of their holding. Balance Debentures to remain as liability of
the company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at Rs.200 lakh.
196
(6) All investments sold out for Rs. 125 lakh.

(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of Rs.2 each
to be allowed.
(8) 40% of Sundry Debtors and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to Rs.300 lakh have been settled by
paying 5% penalty of contract value.
You are required to :
(a)
Pass Journal Entries for all the transactions related to internal reconstruction;
(b)
Prepare Reconstruction Account; and
(c)
Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately
after the implementation of scheme of internal reconstruction.
Answer
In the books of Square Ltd.
Journal Entries
Particulars
i.
Dr. (Rs.)
8% Preference share capital A/c (Rs.100 each)
Dr.
Cr. (Rs.)
200
To 8% Preference share capital A/c (Rs. 80 each)
160
40
(Being the preference shares of Rs. 100 each

fully paid reduced to Rs.80 each fully paid as per
the approved scheme of reconstruction)
ii. Equity share capital A/c (Rs.10 each)
Dr.
500
100
400
(Being the equity shares of Rs.10 each fully paid

reduced to Rs.2 each fully paid under the
scheme of reconstruction as approved)
iii. Capital reduction A/c
Dr.
To Equity share capital A/c (Rs. 2 each)

(Being 1/3rd arrears of preference share
dividend of 3 years settled by issue of 8 lakhs
equity shares of Rs. 2 each fully paid)
197
16
16
iv. 6% Debentures A/c
Dr.
150
To Freehold property A/c
150
(Being claim settled in part by transfer of

freehold property under the approved scheme
of reconstruction)
v. Accrued debenture interest A/c
Dr.
12
To Bank A/c
12
(Being accrued debenture interest paid)

vi. Freehold property A/c
Dr.
75
75
(Being appreciation on revaluation of freehold

property under scheme of reconstruction)
vii. Bank A/c
Dr.
125
To Trade investment A/c
100
25
(Being trade investment sold on profit)

viii. Directors loan A/c
Dr.
150

45
105
(Being directors loan waived by 70% and

balance discharged by issue of 22.5 lakhs
equity shares ofRs.2 each fully paid)
ix. Capital Reduction A/c
Dr.
629
To Profit and loss A/c
261
To Sundry debtors A/c
90
To Stock-in-trade A/c
120
To Bank A/c
15
143
(Being various assets, penalty on cancellation

of contract, profit and loss account debit
balance writtenoff, and balance transferred to
capital reserve account as per the scheme of
reconstruction)
198
Reconstruction Account
Particulars
Dr.
(Rs. in lacs)
Particulars
Cr.
(Rs. in lacs)
To Equity Share Capital
16
By Preference Share
Capital
By Equity Share
Capital
To Sundry Debtors
90
To Finished Goods
120
By Freehold Property
To Profit & Loss A/c

To Bank A/c
261
15
By Bank
By Directors Loan
To Capital Reserve
143
645
40
400
75
25
105
645
(c) Notes to Balance Sheet (Rs.in lacs)

1.
2.
Share Capital Authorised:

100 lakhs Equity shares of Rs. 2 each
4 lakhs 8% Preference shares of Rs. 80 each
Issued:
80.5 lakhs equity shares of Rs. 2 each
2 lakhs Preference Shares of Rs. 80 each
Tangible Assets
Freehold Property
Less: Utilized to pay Debenture holders
Add: Appreciation
Plant and Machinery
200
320
520
161
160
321
275
(150)
75
125
200
100
_____
300
Question 23
Following are the Balance Sheet of companies as at 31.12.2015:
Liabilities
P Ltd. Rs.
Q Ltd. Rs.
Assets
P Ltd. Rs.
Q Ltd. Rs.
Equity
share
capital (Rs.100)
8,00,000
Goodwill
6,00,000
5,00,000
8,00,000
General Reserve
4,00,000
3,00,000 Investments
2,00,000
4,00,000
199
Current
Assets
Investment
AllowanceReserve
Sundry Creditors
4,00,000
3,00,000
4,00,000
5,00,000
2,00,000
________
________
17,00,000
15,00,000
17,00,000
15,00,000
P Ltd. took over Q Ltd. on the basis of the respective shares value, adjusting wherever
necessary, the book values of assets and liabilities on the basis of the following
information:
(i)
Investment Allowance Reserve was in respect of addition made to fixed assets

by Q Ltd. in the year 2012-2015 on which income tax relief has been obtained.
In terms of the Income Tax Act, 1961, the company has to carry forward till
2018 reserve of Rs. 2,00,000 for utilization.
(ii)
Investments of Q Ltd. included 1,000 shares in P Ltd. acquired at cost of Rs. 150
per share. The other investments of Q Ltd. have a market value of Rs. 1,92,500.
(iii)
The market value of investments of P Ltd. are to be taken at Rs. 1,00,000.
(iv)
Goodwill of P Ltd. and Q Ltd. are to be taken at Rs. 5,00,000 and Rs. 1,00,000
respectively.
(v)
Fixed assets of P Ltd. and Q Ltd. are valued at Rs. 6,00,000 and Rs. 8,50,000
respectively.
(vi)
Current assets of P Ltd. included Rs. 80,000 of stock in trade received from Q
Ltd. at cost plus 25%.
The above scheme has been duly adopted. Pass necessary Journal Entries in the books
of P Ltd. and prepare Balance Sheet of P Ltd. after taking over the business of Q Ltd.
Fractional share to be settled in cash, rest in shares of P Ltd. Calculation shall be
made to the nearest of a rupee.
Answer
Journal Entries in the Books of P Ltd.
Particulars
Dr. (Amount) Cr. (Amount)
Business Purchase Account
Dr.
To Liquidator of Q Ltd.
12,42,500
12,42,500
(For purchase consideration due)
200
Investments Account
Dr.
1,92,500
Goodwill Account (Balancing figure)
Dr.
1,00,000
Fixed Assets Account
Dr.
8,50,000
Current Assets Account
Dr.
3,00,000
To Sundry Creditors Account
2,00,000
To Business Purchase Account
12,42,500
(For assets and liabilities taken over at agreed

value)
Liquidator of Q Ltd.
Dr.
12,42,500
To Equity Share Capital Account (Rs. 100)
9,03,600
To Securities Premium Account (Rs.37.50)
3,38,850
To Cash Account
50
(For purchase consideration discharged)

Goodwill Account
Dr.
16,000
To Current Assets (Stock) Account
16,000
(For elimination of unrealized profit on unsold

stock)
Amalgamation Adjustment Account
Dr.
2,00,000
To Investment Allowance Reserve Account
2,00,000
(For incorporation of statutory reserve)

Balance Sheet of P Ltd. as on 31st December, 2015
Particulars
Notes
Rs. (Amount)

1.
2.
Shareholders' funds
a. Share capital
17,03,600
9,38,850
7,00,000
Current liabilities
a. Trade Payables
Total
33,42,450
Assets
1.
Non-current assets
a. Fixed assets
Tangible assets (5,00,000 + 8,50,000)
201
13,50,000
Intangible assets
2.
7,16,000
b. Investments (2,00,000 + 1,92,500)
3,92,500
c. Amalgamation Adjustment Account
2,00,000
Current assets (7,00,000 50 16,000)
6,83,950
Total
33,42,450
Notes to accounts
1
Share Capital
3
4
17,036 shares of Rs. 100 each (out of which

9036 shares are issued in favour of vendor
forconsideration other than cash)
Total
General Reserve
Securities Premium
Investment allowance reserve
Trade payables
Creditors
Intangible assets
Goodwill (6,00,000 + 1,00,000 + 16,000)
17,03,600
17,03,600
4,00,000
3,38,850
2,00,000
9,38,850
7,00,000
7,16,000
Working Notes:
1. Calculation of net asset value of shares
Particulars
P Ltd.
Q Ltd.
Goodwill
5,00,000
1,00,000
Fixed Assets
6,00,000
8,50,000
Investments
1,00,000
3,30,000*
Current Assets
4,00,000
3,00,000
Less: Sundry Creditors
5,00,000
2,00,000
11,00,000
13,80,000
Net assets
202
Number of shares
Value per equity share
8,000
6,000
137.50
230
*Investments of Q Ltd. are calculated as follows:

Shares in P Ltd. (1,000 x 137.50)
1,37,500
Market value of remaining investments (given)
1,92,500
3,30,000
2. Calculation of Purchase Consideration

Value of Assets of Q Ltd
Rs.
15,00,000
Less: Value erosion on investments (Rs. 2,50,000 Rs. 1,92,500)

57,500
2,00,000
12,42,500
Or
Total Purchase Consideration (Net Assets)
13,80,000
Less :Intrinsic Value of shares of P Ltd.

(1000X137.50)
137500
Purchase Consideration for Accounting Purpose
Settlement of Purchase Consideration

Net assets of Q Ltd.
12,42,500
Rs.
13,80,000
Value of Shares of P Ltd.
137.50
Number of shares to be issued in P Ltd. to Q Ltd.

(13,80,000 / 137.50)
10,036.36
Less: Shares already held by Q Ltd.
1,000
Additional shares to be issued
9,036.36
Total value of shares to be issued (9036 x 137.50)

Cash payment for fractional share (.36 x 137.50)
12,42,450
50
12,42,500
203
Question 24
The following are the Balance Sheets of A Ltd. and B Ltd. as at 31st March, 2015:
(Rs. in lacs)
Liabilities
A Ltd.
Fully paid equity shares of Rs.10 each
3,600
900
10% preference shares of Rs.10 each, fully paid

up
1,200
Capital Reserve
600
General Reserve
2,100
780
300
2,421
369
870
93
11,571
1,662
Plant and Machinery
4,215
468
2,400
183
51
Stock
2,370
444
Sundry Debtors
1,044
237
Cash at Bank
1,542
240
33
11,571
1,662

8% Redeemable debentures of Rs.1,000 each
Trade Creditors
Provisions
B Ltd.
Assets
Motor Vehicles
A new Company AB Ltd. was incorporated with an authorised capital of Rs. 15,000 lakhs
divided into shares of Rs.10 each. For the purpose of amalgamation in the nature of
merger, A Ltd. and B Ltd. were merged into AB Ltd. on the following terms:
(i)
Purchase consideration for A Ltd.s business is to be discharged by issue of 120

lakhs fully paid 11% preference shares and 720 lakhs fully paid equity shares of AB
204
Ltd. to the preference and equity shareholders of M Ltd. in full satisfaction of their
claims.
(ii)
To discharge purchase consideration for B Ltd.s business, AB Ltd. to allot 90 lakhs

fully paid up equity shares to shareholders of B Ltd. in full satisfaction of their
claims.
(iii)
Expenses on the liquidation of A Ltd. and B Ltd. amounting to Rs.6 lakhs are to be
borne by AB Ltd.
(iv)
8% redeemable debentures of B Ltd. to be converted into 8.5% redeemable

debentures of AB Ltd.
(v)
Expenses on incorporation of AB Ltd. were Rs.15 lakhs.
You are requested to:

(a)
Pass necessary Journal Entries in the books of MN Ltd. to record above

transactions, and
(b)
Prepare Balance Sheet of MN Ltd. after merger.
Answer
In the books of AB Ltd. Journal Entries
Particulars
(Rs. in lacs)
Dr.
Business Purchase Account
Dr.
Cr.
9,300
To Liquidator of A Ltd.
8,400
To Liquidator of B Ltd.
900
(Being consideration payable to liquidators of the two

companies taken over)
Plant and Machinery Account (4,215+468)
Dr.
4,683
Furniture and Fixtures Account (2,400+183)
Dr.
2,583
Motor Vehicles Account
Dr.
51
Stock Account (2,370+444)
Dr.
2,814
Sundry Debtors Account (1,044+237)
Dr.
1,281
Cash at Bank Account (1,542+240)
Dr.
1,782
Preliminary Expenses Account
Dr.
33
Discount on issue of Debentures Account
Dr.
205
Profit and Loss Account (Refer W.N.)
Dr.
120
To 8% Redeemable Debentures of B Ltd. Account
300
To Trade Creditors Account (2,421+369)
2,790
To Provisions Account (870+93)
963
To Business Purchase Account
9,300
(Being incorporation of all the assets and liabilities and the

excess of consideration over the share capital being
adjusted against reserves and surplus)
Liquidator of A Ltd. Account
Dr.
8,400
Liquidator of B Ltd. Account
Dr.
900
To Equity Share Capital Account (7,200+900)
8,100
To 11% Preference Share Capital Account
1,200
Dr.
To Bank Account
(Being payment of liquidation expenses of A Ltd. and B

Ltd.)
Preliminary Expenses Account
Dr.
15
To Bank Account
15
(Being expenses on incorporation of AB Ltd.)

8% Redeemable Debentures of A Ltd. Account
Dr.
300
To 8.5% Redeemable Debentures Account
300
(Being conversion of 8% Debentures of A Ltd. into 8.5%

Debentures)
Dr.
To Preliminary Expenses Account (33+15)

(Being Preliminary Expenses are charged to Profit & Loss
A/c in the year it is incurred)
206
48
48
Balance Sheet of AB Ltd.

Particulars
Notes
Rs. in lacs
EQUITY & LIABILITY

1.
Shareholders Funds
a Share capital
b Reserve & Surplus
1
2
9,300
(174)
2.
Non-Current-Liabilities
3
300
3.
a Long- term borrowings

Current-Liabilities
Trade Payables
2,790
Short term provisions
963
Total
ASSETS
1.
13,179
Non-current assets
a Fixed assets
Tangible assets
2.
b Other Non-current asset

Current assets
7,317
a Inventories
b Trade receivables
2,814
1,281
c Cash and cash equivalents
Total
1,761
13,179
Note to Accounts
Rs. in lacs
1 Share Capital
Authorised share capital
15 crore shares of Rs. 10 each
15,000
810 lakhs Equity shares of Rs.10 each, fully paid Reserves and Surplus
8,100
120 lakhs 11% Preference shares of Rs. 10 each, fully paid
1,200
(All the above mentioned shares have been issued for consideration
other than cash)
Total
9,300
2 Reserves and Surplus

Profit and Loss Account (120+6+48)
(174)
207
3 Long-term borrowings
Secured
8.5% Redeemable Debentures
4 Short-term provisions
300
Others
963
5 Tangible assets
Plant and Machinery
4,683
2,583
Plant and machinery
51
Total
7,317
6 Other non-current assets
6
7 Cash and cash equivalents
Cash at Bank (1,782615)
1,761
Working Note:
(Rs.in lacs)
Total consideration = Rs. (8,400 + 900) lacs
9,300
Less: Share Capital of Companies taken over [Rs. (3,600+1,200+900) lacs]
5,700
3,600
Amount to be adjusted:
Capital Reserve
600
General Reserve
2,100
Profit & Loss A/c
780
3,480
Debit balance of Profit & Loss Account
120
Question 25
The summarized Balance Sheet of Om Ltd. as on 31st March, 2015 was as follows:
Liabilities
Amount
Equity Shares of Rs. 10 fully

paid
Export Profit Reserves
General Reserves
Profit and loss Account
9% Debentures
Trade Creditors
30,00,000 Goodwill
8,50,000
50,000
5,50,000
5,00,000
1,00,000
50,50,000
208
Assets
Tangible Fixed Assets

Stock
Debtors
Cash & Bank
Amount
5,00,000
30,00,000
10,40,000
1,80,000
2,80,000
50,000
50,50,000
Shiv Ltd. agreed to absorb the business of Om Ltd. with effect from 1st April, 2015.
(a) The purchase consideration settled by Shiv Ltd. as agreed:
(i) 4,50,000 equity Shares of Rs. 10 each issued by Shiv Ltd. by valuing its share @ 15
per share.
(ii) Cash payment equivalent to Rs. 2.50 for every share in Om Ltd.
(b) The issue of such an amount of fully paid 8% Debentures in Shiv Ltd. at 96% as is
sufficient to discharge 9% Debentures in O Ltd. at a premium of 20%.
(c) Shiv Ltd. will take over the Tangible Fixed Assets at 100% more than the book value,
Stock at Rs. 7,10,000 and Debtors at their face value subject to a provision of 5% for
doubtful Debts.
(d) The actual cost of liquidation of Om Ltd. was Rs. 75,000. Liquidation cost of Om Ltd. is
to be reimbursed by Shiv Ltd. to the extent of Rs. 50,000.
(e) Statutory Reserves are to be maintained for 1 more year.
(i) Close the books of Om Ltd. by preparing Realisation Account, Shiv Ltd. Account,
Shareholders Account and Debenture Account, and
(ii) Pass Journal Entries in the books of Shiv Ltd. regarding acquisition of business.
Answer
(i)
Purchase consideration computation
Rs.
Cash payment for (3,00,000 x 2.5)
7,50,000
Equity Shares (4,50,000 x Rs. 15)
67,50,000
75,00,000
In the books of Om Ltd.

Realisation Account
Particulars
To Goodwill
Amount
Particulars
5,00,000 By 9% Debentures
To Tangible Fixed Assets
30,00,000
To Stock
10,40,000 By Creditors
To Debtors
1,80,000 By ByAnu Ltd.
To Cash & Bank A/c

(2,80,000- 25,000)
2,55,000 (Purchase
consideration)
To Cash & Bank A/c
25,000
(Realization expenses)
209
Amount
5,00,000
1,00,000
75,00,000
To Profit on realization transfer

to shareholders
31,00,000
81,00,000
81,00,000
Equity Shareholders A/c

To Preliminary expenses
To Equity Shares in Anu Ltd.
To Cash & Bank A/c
50,000 By Equity Share Capital
30,00,000
67,50,000 By Export Profit

Reserves
8,50,000
7,50,000 By General Reserves
50,000
By P & L A/c
5,50,000
By Realization A/c
75,50,000
31,00,000
75,50,000
Shiv Ltd.
To Realization A/c
75,00,000 By Share Capital
67,50,000
By Bank A/c
7,50,000
75,00,000
(ii)
75,00,000
Journal Entries in the books of Shiv Ltd.

Particulars
1
Dr.
Dr.
Cr.
75,00,000
To Liquidator of Om Ltd
75,00,000
(Being business of Om Ltd. taken over)

2
Tangible Fixed Assets
Dr.
60,00,000
Stock
Dr.
7,10,000
Debtors
Dr.
1,80,000
Cash & Bank A/c
Dr.
2,55,000
Goodwill A/c (Bal. fig.)
Dr.
10,64,000
To Provision for doubtful debts
9,000
To Liability for 9 % Debentures
6,00,000
210
To Creditors
1,00,000
To Business Purchase account
75,00,000
(Being assets and liabilities taken over)

3
Amalgamation Adjustment A/c
Dr.
8,50,000
To Export Profit Reserves
8,50,000
(Being statutory Reserves taken over)

4
Goodwill
Dr.
50,000
To Bank A/c
50,000
(Liquidation expenses reimbursed))

5
Liquidator of Om Ltd.
Dr.
75,00,000
To Equity Share Capital
45,00,000
To Securities Premium
22,50,000
To Bank A/c
7,50,000
(Being purchase consideration discharged)

6
Liability for 9% Debentures (5,00,000 x

120/100)
Dr.
6,00,000
Discount on issue of debentures
Dr.
25,000
To 8% Debentures (6,00,000 x 100/96)
6,25,000
(Being liability of debenture holders

discharged)
Question 26
The following is the Balance Sheet of A Ltd. as at 31 st March, 2015:
Liabilities
Rs. Assets
Rs.
8,000 equity shares of Rs.100 each
8,00,000 Building
3,40,000
10% debentures
4,00,000 Machinery
6,40,000
Loan from A
1,60,000 Stock
2,20,000
211
Creditors
General Reserve
3,20,000 Debtors
2,60,000
80,000 Bank
1,36,000
Goodwill
1,30,000
Misc.
Expenses
34,000
17,60,000
17,60,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:

(1) B Ltd. would take over all Assets, except bank balance at their book values less
10%. Goodwill is to be valued at 4 years purchase of super profits, assuming that
the normal rate of return be 8% on the combined amount of share capital and
general reserve.
(2) B Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and
the balance in fully paid equity shares of Rs. 100 each at Rs. 125 per share.
The average profit is Rs. 1,24,400. The liquidation expenses amounted to Rs.
16,000. B Ltd. sold prior to 31 st March, 2015 goods costing Rs.1,20,000 to A Ltd.
for Rs. 1,60,000. Rs.1,00,000 worth of goods are still in stock of A Ltd. on 31 st
March, 2015. Creditors of A Ltd. include Rs.40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and Prepare balance
sheet of B Ltd. as on 1-04-15.
Answer
Books of A Limited
Realisation Account
Rs.
Rs.
To Building
3,40,000 By Creditors
To Machinery
6,40,000 By B Ltd.
To Stock
2,20,000 By Equity Shareholders

(Loss)
To Debtors
2,60,000 By Loan from A
1,60,000
To Goodwill
1,30,000 By 10% debentures
4,00,000
To Bank (loan)
160,000
To Bank (10% debenture)
4,00,000
To Bank (exp)
3,20,000
12,10,000
76,000
16,000
21,66,000
212
21,66,000
Equity Share Holders Account

Rs.
Rs.
To Realisation
76,000
By Equity share capital
To Misc. Expenses
34,000
By General reserve
To Equity shares in B Ltd.
6,10,000
To Bank
1,60,000
8,80,000
8,00,000
80,000
8,80,000
Bank Account
To Balance b/d
136,000 By realization
576,000
To B ltd
6,00,000 By Equity share holders (bf)
160,000
7,36,000
736,000
B Ltd
Balance Sheet as on 1st April, 2015 (An extract)

Particulars
Notes
Rs.

1
Shareholders' funds
a. Share capital
4,88,000
1,07,000
2,80,000
Current liabilities
a. Trade Payables
b. Bank overdraft
6,00,000
Total
14,75,000
Assets
1
Non-current assets
a. Fixed assets
Tangible assets
8,82,000
Intangible assets
2,16,000
213
Current assets
a. Inventories
1,83,000
1,94,000
14,75,000
Notes to accounts
1 Share Capital
4,880 Equity shares of Rs. 100 each
(Shares have been issued for consideration other than cash)
4,88,000
Total
4,88,000
2 Reserves and Surplus (an extract)

Securities Premium
1,22,000

Less: Unrealised profit
(15,000)
Total
1,07,000
3 Trade payables
Opening balance
3,20,000
Less: Inter-company transaction cancelled upon
(40,000)
amalgamation
2,80,000
4 Tangible assets
Buildings
3,06,000
Machinery
5,76,000
Total
8,82,000
5 Intangible assets
Goodwill
2,16,000
6 Inventories
Opening balance
1,98,000
Less: Cancellation of profit upon amalgamation
(15,000)
1,83,000
214
7 Trade receivables
Opening balance
2,60,000
Less: Intercompany transaction cancelled upon amalgamation
(40,000)
Less: Provision for doubtful debts
(26,000)
1,94,000
Working Notes:
1. Valuation of Goodwill
Rs.
Average profit
1,24,400
Less: 8% of 8,80,000
(70,400)
Super profit
54,000
Value of Goodwill = 54,000 x 4
2,16,000
2. Net Assets for purchase consideration

Goodwill as valued in W.N.1
2,16,000
Building
3,06,000
Machinery
5,76,000
Stock
1,98,000
Debtors
2,34,000
Total Assets
15,30,000
Less: Creditors
3,20,000
Net Assets
12,10,000
Out of this Rs. 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 6,00,000)
=6,10,000 in shares of Rs. 125. Thus, the number of shares to be allotted 6,10,000/125
= 4,880 shares.
3. Unrealised Profit on Stock
The stock of A Ltd. includes goods worth Rs. 1,00,000 which was sold by B Ltd. on
profit. Unrealized profit on this stock will be :
1,00,000x 40,000
= 25,000
1,60,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book value, 10% need to
be adjusted from the stock i.e., 10% of ` 1,00,000. (10,000) Amount of unrealized profit
15,000.
215
Question 27
Semi Ltd. and Demi Ltd. were amalgamated on and from 1st April, 2015. A new company
Telly Ltd. was formed to take over the businesses of the existing companies. The balance
sheets of Semi Ltd. and Demi Ltd. as on 31st March, 2015 are given below:
Liabilities
Rs. in Lacs
Assets
Semi Ltd. Demi Ltd.
Rs. in Lacs
Semi Ltd. Demi Ltd.
Share Capital
Long
Short
Equity Shares of
Rs. 100 each
850
725
Land & Building
460
275
14%
Preference
Shares of Rs. 100
each
320
175
Plant & Machinery
325
210
75
52
75
50
Revaluation
reserve
125
80
Investment
Allowance
50
30
Debtors
305
270
240
160
13% Debentures
(Rs. 100 each)
50
28
Cash & Bank
385
251
Bills payable
Sundry Creditors
20
145
75
Stock
Bills receivable
325
25
269
19,00
13,25
19,00
13,25
P & L Account
Reserve
Reserve
General
Investments
Other information
(i)
13% Debenture holders of Semi Ltd. and Demi Ltd. are discharged by Telly Ltd. by
issuing such number of its 15% Debentures of Rs.100 each so as to maintain the
same amount of interest.
(ii) Preference Shareholders of the two companies are issued equivalent number of
15% preference shares of Telly Ltd. at a price of Rs. 125 per share (face value Rs.
100).
(iii) Telly Ltd. will issue 4 equity shares for each equity share of Semi Ltd. and 3 equity
shares for each equity share of Demi Ltd. The shares are to be issued @ Rs. 35 each,
having a face value of Rs.10 per share.
(iv) Investment allowance reserve is to be maintained for two more years.
Prepare the balance sheet of Telly Ltd. as on 1st April, 2015 after the amalgamation has
been carried out in the nature of purchase.
216
Answer
Working Notes:
1. Computation of Purchase consideration
(Rs. in lacs)
Semi Ltd.
Preference Shareholders:
3,20,000 shares @ Rs. 125 each
1,75,000 shares @ Rs. 125 each
(ii) Equity Shareholders:
(4 8,50,000) = 34,00,000 equity shares @ Rs. 35 each
(3 7,25,000) = 21,75,000 equity shares @ Rs. 35 each
Demi Ltd.
(i)
400
218.75
1190
761.25
15,90
Total Purchase Consideration Rs. 25,70,00,000

2. Calculation of Capital Reserve:
Value of Assets taken over-
(Rs. In lacs)
Assets of Semi Ltd.
1900
Assets of Demi Ltd.
1325
3225
Less: Liabilities taken over

Debentures= 50+ 28 = 78 X 13%/ 15 % = 67.60
Public Deposit
25.00
Bills Payable
20.00
Sundry Creditors (145+ 75)
220.00
Net Assets
332.60
2892.40
Less: Purchase Consideration
2570.00
Capital Reserve
322.40
3. Securities Premium:
On preference shares :4,95,000 shares @ Rs. 25 per shares 123.75
On Equity Shares: 5,57,5000 shares @25 per share
1393.75
1517.50
217
9,80.00
a) Amalgamation in the nature of Purchase

Balance Sheet of Telly Ltd. as on 1st April, 2015
Particulars
I.
(1)
Shareholder's Funds
(2)
Note No.
(a) Share Capital
1052.50
1,919.90
92.60
(3)
(Rs. in lacs)
Current Liabilities
Trade payables
240.00
Total
II.
Assets
(1)
Non-current assets
3305.00
(a) Fixed assets

Tangible assets
(b) Non-current Investments ( 75+50)
125.00
(c) Other Non-current assets (Amalgamation

Adjustment Account)
(2)
1270.00
80
Current assets
(a) Stock (325 + 269)
594.00
(b) Trade Receivables
(c) Cash & Cash equivalents (385 + 251)

Total
600.00
636.00
3305.00
218
Notes to Accounts
(Rs. in lacs)
1.
2.
Share Capital
55,75,000 Equity Shares of Rs. 10 each
5,57.5
4,95,000 15% Preference shares of 100 each
4,95.0
80.0
Securities Premium
1517.50
Capital Reserve
4.
322.40
15% Debentures (50+28= 78X 13 %/15 %)
67.6
Public Deposit
25.0
92.6
Trade payables
220.0
Bills Payable
6.
1919.90
Long Term Borrowings
Creditors
5.
1,052.5

Investment Allowance Reserve
3.
(Rs.in lacs)
20.0
240
Tangible assets
Land & Building
735.0
Plant & Machinery
535.0
1270
Trade Receivables
Debtors (305 + 270)
575.0
Bills receivables
25.0
219
600
Question 28
Given below Balance Sheets of AB Ltd. and XY Ltd. as on 31.03.2015. XY Ltd. was merged
with AB Ltd. with effect from 1.4.2015 and the merger was in the nature of purchase.
Balance Sheets as on 31.03.2015
Liabilities
Rs.
AB
Assets
Rs.
XY
AB
XY
Share Capital
Equity Shares of Rs.
100 each
7,00,000
2,50,000 Sundry
Assets
General Reserve
3,50,000
1,20,000
P & L Account
2,10,000
Export
Reserve
Profit
70,000
Fixed
Investments
(Non-trade)
65,000 Debtors
40,000 Stock
12% Debentures
(Rs. 100 each)
1,00,000
1,00,000 Cash & Bank

Advance Tax
Prov. for Taxation
1,00,000
60,000 Preliminary
Exp.
Sundry Creditors
Proposed Dividend
40,000
45,000
1,40,000
50,000
17,10,000
7,30,000
9,50,000
4,00,000
2,00,000
50,000
75,000
80,000
1,20,000
50,000
2,75,000
80,000
1,30,000
20,000
10,000
17,10,000
7,30,000
AB Ltd. would issue 12% Debentures to discharge the claims of the debenture holders of
XY Ltd. at par. Non-trade investments of AB Ltd. fetched @25% while those of XY Ltd.
fetched @18% Profit (pretax) by AB Ltd. and XY Ltd. during the year ended on 31st
March 2013, 2014 and 2015 and were as follows:
AB Ltd.
XY Ltd.
Rs.
Rs.
2013
5,00,000
1,50,000
2014
6,50,000
2,10,000
2015
5,75,000
1,80,000
Goodwill may be calculated on the basis of capitalisation method taking 20% as the pretax normal rate of return. Purchase consideration is discharged by AB Ltd. on the basis of
intrinsic value per share. The company decided to cancel the proposed dividend. Prepare
Balance Sheet of ABLtd. after merger.
220
Answer
(1) Valuation of Goodwill
AB Ltd.
XY Ltd.
17,10,000
7,30,000
(i) Capital Employed

Sundry-Assets as per Balance
Sheet
Less: Preliminary Expenses
10,000
Non-trade Investment
2,00,000
2,10,000
Less: 12% Debentures
1,00,000
1,00,000
40,000
45,000
1,00,000
2,40,000
12,60,000
4,75,000
Sundry Creditors
(ii) Average Pre-Tax Profit

AB Ltd.
XY Ltd.
2013
5,00,000
1,50,000
2014
6,50,000
2,10,000
2015
5,75,000
1,80,000
17,25,000
5,40,000
5,75,000
1,80,000
50,000
9,000
5,25,000
1,71,000
525000/20% =
2625000
171000/20%=
855000
1260000
475000
1365000
380000
Simple Average
Less: Non-trading income
Actual Average Profits
Goodwill:
Capitalisation Value of Average Profits=
Less : Capital Employed:
Goodwill
221
(2) Intrinsic Value per Share
AB Ltd.
XY Ltd.
Goodwill
13,65,000
3,80,000
Sundry Assets less pre. Expenses
17,00,000
7,30,000
1,00,000
1,00,000
Sundry Creditors
40,000
45,000
Provision for Tax
1,00,000
60,000
28,25,000
9,05,000
70,000
25,000
40.40
36.20
Less: 12% Debentures
No. of Shares
Intrinsic value per share
(3) Purchase Consideration
Equity shares (25,000 x 36.20/40.40)=22,400 @

Rs. 40.40
9,04,960
Cash for fraction .99 x 40.40
40
9,05,000
Balance Sheet of AB Ltd. (after merger with XY Ltd.)

Particulars
I.
(1)
Shareholder's Funds
(2)
Note
Rs.
(a) Share Capital
9,24,000
14,80,960
2,00,000
222
(3)
Current Liabilities
(a) Trade payables
85,000
(b) Other Current Liabilities
1,60,000
Total
II.
Assets
(1)
Non-current assets
28,49,960
(a) Fixed assets

Tangible assets
Intangible assets (Goodwill)
(2)
13,50,000
3,80,000
(b) Non-current Investments

(2,00,000+,50,000)
2,50,000
(c) Other non-current assets
40,000
Current assets
(a) Stock (1,20,000 + 50,000)
1,70,000
(b) Debtors (75,000 + 80,000)
1,55,000
(c) Cash & Cash equivalents (2,75,000 +

1,30,000 40)
4,04,960
(d) Other current assets
Total
1,00,000
28,49,960
Notes to Accounts
1.
Share Capital
(Rs.)
92,400 Equity Shares of Rs. 10 each
9,24,000
(Of the above shares, 22,400 shares were

issued otherwise than cash)
2.

General Reserve
3,50,000
P&L A/c
2,10,000
Add : Proposed dividend written off
1,40,000
223
(Rs.)
Less: Preliminary expenses
(10,000)
Securities Premium
3,40,000
6,80,960
Export profit reserve
70,000
1,10000
Add : Balance of XY Ltd.
40,000
1,10000
14,80,960
3.
4.
12% Debentures
1,00,000
Add : 12% debentures issued at par other

than cash
1,00,000
2,00,000
Trade payables
5.
Creditors
40,000
Add : Taken over
45,000
85,000
Other Current Liabilities

1,00,000
Add: Provision for Taxation of TX ltd.

6.
60,000
1,60,000
Tangible assets
Fixed Assets
9,50,000
Add : Taken over
4,00,000
13,50,000
40,000
40,000
Other non-current assets

Amalgamation Adjustment A/c
7.
Other current assets

Advance Tax (80,000 + 20,000)
1,00,000
Question 29
Mahua Ltd. agreed to absorb Hezal Ltd. on 31st March 2015, whose balance sheet stood as
follows:
Liabilities
80,000 shares of
fully paid
General Reserve
Rs.
Rs. 10 each
Assets
Rs.
7,00,000
1,00,000 Stock in trade
1,00,000
224
Sundry Creditors
1,00,000 Sundry Debtors

10,00,000
2,00,000
10,00,000
The consideration was agreed to be paid as follows:

(a) A payment in cash of Rs. 5 per share in Hezal Ltd. and
(b) The issue of shares of Rs. 10 each in Mahua Ltd., on the basis of 2 Equity Shares
(valued at Rs. 15) and one 10% cum. preference share (valued at Rs. 10) for every
five shares held in Hezal Ltd. The whole of the share capital consists of shareholdings
in exact multiple of five except the following holding.
A
116
76
72
28
Other individuals
(eight members holding one share each)
300
It was agreed that Mahua Ltd. will pay in cash for fractional shares equivalent at agreed
value of shares in Hezal Ltd. i.e. Rs. 65 for five shares of Rs. 50 paid.
Prepare a statement showing the purchase consideration receivable in shares and cash.
Answer
Schedule of Fraction Holding of Shares
Shareholders
Exchangeable in
multiple of Five
Non
Exchangeable
116
115
76
75
72
70
28
25
300
285
15
Others
Shares Exchangeable: Equity shares in Mahua Ltd.

(i) 80,000-300 = 79,700; 2/5 shares of = 31880
(ii) 300-15
285; 2/5 Shares of =

79,985
114
31,994
225
Share Exchangeable: Preference shares in Mahua Ltd.

Share held in (i) 79700; 1/5 share of = 15940
Share held in (ii) 285; 1/5 shares of =
57
79,985
15,997
(79985 x 2
) = 31,994 Equity Shares @ Rs. 15 each
5
(79985 x 1)
= 15,997 Preference shares @ Rs. 10 each
5
Cash on 80,000 @ Rs. 5 each
4,79,910
1,59,970
4,00,000
Add: Cash for fraction in lieu of equity 15 x 2/5 shares @15
90
Cash for fraction in lieu of preference 15 x 1/5 shares @10
30
10,40,000
Question 30
Alpha Limited and Beta Limited were amalgamated on and from 1st April, 2015. A new
Company Gamma Limited was formed to take over the business of the existing companies.
The Balance Sheets of Alpha Limited and Beta Limited as on 31st March, 2015 are given
below:
Liabilities
Rs. in Lacs
Assets
Alpha Ltd. Beta Ltd.
Rs. in Lacs
Alpha Ltd.
Beta Ltd.
Share Capital
Equity Shares of
Rs. 100 each
1000
800
Fixed
Assets
14% Preference
Shares of Rs. 100
each
400
300
Current
Assets,
Loans
&
Advances
80
60
Revaluation
reserve
100
80
General Reserve
200
150
96
80
P & L Account
12% Debentures
(Rs. 100 each)
226
1200
1000
880
565
Current
Liabilities &
Provisions
204
95
2,080
1565
2,080
1565
Other information:
(1)
12% Debenture holders of Alpha Limited and Beta Limited are discharged by
Gamma Limited by issuing adequate number of 16% Debentures of Rs. 100 each to
ensure that they continue to receive the same amount of interest.
Preference shareholders of Alpha Limited and Beta Limited have received same
number of 15% Preference shares of Rs. 100 each of Gamma Limited.
(2)
(3)
Gamma Limited has issued 1.5 equity shares for each equity share of Alpha Limited
and 1 equity share for each equity share of Beta Limited. The face value of shares
issued by Gamma Limited is Rs. 100 each.
Required:
(i) Calculate Purchase consideration
(ii) Pass Journal entries in the books of Gamma Limited.
(iii) Also Prepare notes to the Balance Sheet of Gamma Limited as on 1st April, 2015
after the amalgamation has been carried out using the 'pooling of interest
method'.
Answer
Working Note 1 : Calculation of purchase consideration
i.
ii.
Alpha Ltd. (Rs.)
Beta Ltd. (Rs.)
No. of equity shares
10,00,000
8,00,000
Exchange Ratio
1:1.5
1:1
No. of equity shares to be issued
15,00,000
8,00,000
Equity Shares capital
1,500 Lakhs
800 Lakhs
No. of preference shares
4,00,000
3,00,000
Exchange Ratio
1:1
1:1
No. of preference share to be

issued
4,00,000
3,00,000
Preference Share Capital
400 Lakhs
300 Lakhs
Total Purchase Consideration
900
1100
227
Journal Entries in the books of Gamma Ltd.

Notes
a.
Particulars
Dr.
For Business Merger

Dr.
3,000
To Liquidator of Selling Co. A/c

b.
3,000
Incorporation of Assets and

Liabilities taken over:
Fixed Assets A/c
Dr.
2,200
Current Assets A/c
Dr.
1,445
General reserve Dr. (b.f.)
456
To Current Liabilities A/c
299
132
To Revaluation Reserve A/c
180
To General Reserve A/c
350
To Profit and Loss A/c
140
To Business Purchase A/c

c.
3,000
Discharge of Purchase Consideration

Liquidator of Selling Co. A/c
Dr.
3,000
2300
To Preference Share Capital A/c

d.
Cr.
700
Discharge of Debentures:
12% Debentures A/c
Dr.
132
132
Amount of debentures
Particulars
(i)
Value of 12% Debentures
(ii)
Interest Payable
(iii)
16% Debentures to be issued
Alpha Ltd.
Beta Ltd.
96
80
11.52
9.6
72
60
132
228
Notes
1.
Share Capital
2300
Preference share capital
700
Total
2.
3,000

P&L
3.
4.
5.
6.
34
Revaluation Reserve
180
Total
214
16% Debentures(Rs.100 each)(72+60)
132
Total
132

Current Liabilities and Provisions (204+95)
299
Total
299
Tangible Assets
Fixed assets (1,200+1,000)
2,200
Total
2,200
Short-term Loans and Advances

Current assets, Loans and Advances (880+565)
1,445
Total
1,445
Question 31.
T. Ltd. and V. Ltd. propose to amalgamate. Their balance sheets as at 31st March, 2015
were as follows:
Liabilities
Equity
shares of
Rs.10 each
General
reserve
T. Ltd Rs.
V. Ltd
Rs.
Assets
T. Ltd Rs.
15,00,000
6,00,000
Fixed assets
Less:
Depreciation
12,00,000
6,00,000
60,000
Investments
(face value of
Rs. 3 lacs, 6%
tax free G.P.
notes)
229
3,00,000
V. Ltd
Rs.
3,00,000
Profit
Loss A/c
&
Creditors
3,00,000
90,000
3,00,000
1,50,000
Stock
6,00,000
3,90,000
Debtors
5,10,000
1,80,000
90,000
30,000
27,00,000
9,00,000
Cash and bank

27,00,000
9,00,000
Their net profits (after taxation) were as follows:

Year
T. Ltd.(Rs.)
V. Ltd.(Rs.)
2012-13
3,90,000
1,35,000
2013-14
3,75,000
1,20,000
2014-15
4,50,000
1,68,000
Normal trading profit may be considered as 15% on closing capital invested. Goodwill
may be taken as 4 years purchase of average super profits. The stock of T. Ltd. and V. Ltd.
are to be taken at Rs.6,12,000 and Rs.4,26,000 respectively for the purpose of
amalgamation. W. Ltd. is formed for the purpose of amalgamation of two companies.
Corporate tax rate is 40%.
(a) Suggest a scheme of capitalization of W. Ltd. and ratio of exchange of shares; and
(b) Draft the opening balance sheet of W. Ltd.
Answer
(a) Scheme of capitalization of W. Ltd. and ratio of exchange of shares
Computation of Net Assets of amalgamating companies
T. Ltd.(Rs.)
Goodwill (W.N.2)
3,19,200
6% investments (Non-trade)
3,00,000
V. Ltd.(Rs.)
1,21,200
Net Assets
21,12,000
7,86,000
Net Assets
27,31,200
9,07,200
1,50,000
60,000
18.208
15.12
2,73,120
shares
90,720
shares
No. of Equity shares

Intrinsic value of a share Rs.
No of shares to be issued by W
T. Ltd 1,50,000 x 18.208/10
V. Ltd 60,000 x 15.12/10
230
In total 2,73,120 + 90,720 i.e. 3,63,840 shares will be issued by W. Ltd.

Ratio of exchange of shares will be as follows:
1.
Holders of 1,50,000 equity shares of T Ltd. will get 2,73,120 shares in W. Ltd.
2.
Similarly, holders of 60,000 equity shares of V Ltd. will get 90,720 shares in
W. Ltd.
(b) Opening Balance Sheet of W. Ltd.

Particulars
I.
(1)
Shareholder's Funds
Note
Share Capital
(2)
Rs.
36,38,400
Current Liabilities
Trade payables
4,50,000
Total
II.
Assets
(1)
Non-current assets
(a)
Fixed assets
40,88,400
i. Tangible assets
15,00,000
ii. Intangible assets
4,40,400
(b)
3,00,000
(2)
Current assets
(a) Inventories
10,38,000
6,90,000
1,20,000
Total
40,88,400
231
Notes to Accounts
1.
Share Capital
2.
36,38,400
Tangible Assets
Other Fixed Assets (Rs. 12,00,000+Rs. 3,00,000)
15,00,000
3.
Intangible assets
4,40,400
4.
Goodwill (W.N.2) (Rs. 3,19,200 +Rs. 1,21,200)

Investments in 6% Tax free G.P. Notes
3,00,000
Working Notes:
1. Calculation of closing trading capital employed on the basis of net assets
T. Ltd.
Fixed Assets
V. Ltd.
12,00,000
3,00,000
Stock
6,12,000
4,26,000
Debtors
5,10,000
1,80,000
90,000
30,000
Less: Creditors
(3,00,000)
(1,50,000)
Net Assets
21,12,000
7,86,000
Cash and Bank Balances
2. Calculation of value of goodwill

(i)
Average Trading Profit

2012-13
3,90,000
1,35,000
2013-14
3,75,000
1,20,000
2014-15
4,50,000
1,68,000
Profit after tax
12,15,000
4,23,000
Profit before tax (40%)
20,25,000
7,05,000
12,000
36,000
20,37,000
7,41,000
Add : Under valuation of

closing stock
Total
232
(ii)
Average of 3 years profit

before tax
6,79,000
Less: non-trade income

(3,00,000 x6%)
(18,000)
Average profit before tax
6,61,000
2,47,000
(2,64,400)
(98,800)
3,96,600
1,48,200
(3,16,800)
(1,17,900)
79,800
30,300
3,19,200
1,21,200
Less: 40% tax

Average profit after tax
Less: Normal Profit -15%
Value of goodwill at 4 years

purchase
2,47,000
Question 32
The Balance Sheets of Sama Ltd. and Wahida Ltd. as on 31.03.2015 is as below:
Balance Sheet as on 31.03.2015
Liabilities
Sama Ltd Wahida

(Rs.)
Ltd (Rs).
Share
capital
(Share of Rs.100
each)
50,00,000
Assets
Sama Ltd
(Rs.)
30,00,000 Fixed assets

otherthan
Goodwill
Wahida
Ltd (Rs.)
30,00,000
20,00,000
8,00,000
6,00,000
General reserves
4,00,000
2,00,000 Stock
Profit and Loss

account
6,00,000
4,00,000 Sundry
debtors
14,00,000
9,00,000
Current liabilities
5,00,000
3,00,000 Inventories
30,00,000
25,00,000
12,00,000
3,50,000
1,00,000
50,000
65,00,000
39,00,000
Cash
bank
and
Preliminary
Expenses
65,00,000
39,00,000
233
Sama Ltd. takes over Wahida Ltd. on 01.07.15 No Balance Sheet of Wahida Ltd. is
available as on that date. It is however estimated that Wahida Ltd. earns estimated profit
of Rs.2,00,000 after charging proportionate depreciation @ 10% p.a. on fixed assets,
during April-June, 2015.
Estimated profit of Sama Ltd. during these 3 months is Rs. 4,00,000 after charging
proportionate depreciation @ 10% p.a. on fixed assets.
Both the companies have declared and paid 10% dividend within this 3 months period.
Goodwill of Wahida Ltd. is valued at Rs.2,00,000 and Fixed Assets are valued at
Rs.1,00,000 above the estimated book value. Purchase consideration is to be satisfied by
Sama Ltd. by shares at par. Ignore Income-tax.
You are required to calculate the following:
(i) No. of shares to be issued by Sama Ltd. to Wahida Ltd. against purchase
consideration;
(ii) Net Current Assets of Sama Ltd. and Wahida Ltd. as on 01.07.2015;
(iii) P/L A/c balance of the Sama Ltd. as on 01.07.2015;
(iv) Fixed Assets as on 01.07.2015;
(v) Balance Sheet of Sama Ltd. as on 01.07.2015 after take over of Wahida Ltd.
Answer
(i) Number of shares to be issued by Sama Ltd. to Wahida Ltd. against purchase
consideration
Wahida Ltd.
(Rs.)
Goodwill
(Rs.)
2,00,000
Fixed Assets
20,00,000
Less: Depreciation
(50,000)
19,50,000
Add: Appreciation
1,00,000
20,50,000
Stock
6,00,000
Debtors
9,00,000
Cash and Bank balances
3,50,000
Add: Profit after Depreciation 2,00,000

Add: Depreciation(non-cash)
50,000
Less: Dividend
(300000)
3,00,000
Less: Creditors
(3,00,000)
37,50,000
234
(ii) Calculation of Net Current Assets as on 01.07.2015

Sama Ltd.
Stock
Wahida Ltd.
8,00,000
6,00,000
Debtors
14,00,000
9,00,000
Cash and Bank
12,00,000
3,50,000
Less: Dividend
5,00,000
3,00,000
Add: Profit before

depreciation
4,75,000
2,50,000
1175000
3,00,000
(5,00,000)
(3,00,000)
28,75,000
15,00,000
Less: Creditors
(iii) Profit and Loss Account balance of Sama Ltd. as on 1.07.2015

P & L A/c balance as on 31.03.2015
Less: Dividend paid
6,00,000
(5,00,000)
Add: Estimated profit for 3 months after

depreciation
Less: Preliminary expenses
4,00,000
(1,00,000)
4,00,000
(iv) Fixed Assets as on 01.07.2015

(Rs.)
Fixed Assets of Sama Ltd. as on 31.03.2015
(Rs.)
30,00,000
Less: Depreciation for 3 months
(75,000)
Fixed assets taken over of Weak Ltd. as on

31.03.2015
20,00,000
Less: Proportionate depreciation for 3 months on

fixed assets
(50,000)
Add: Appreciation above the estimated book value
1,00,000
20,50,000
49,75,000
235
(v) Balance Sheet of Sama Ltd. as on 01.07.2015 (after Take Over)

I.
(1)
Shareholder's Funds
(2)
(a) Share Capital
87,50,000
8,00,000
8,00,000
Current Liabilities
Trade payables
Total
II.
Assets
(1)
Non-current assets
1,03,50,000
(a) Fixed assets
(2)
i. Tangible assets
49,75,000
2,00,000
Current assets
(a) Inventories
14,00,000
23,00,000
14,75,000
Total
1,03,50,000
Notes to Accounts:
1.
Share Capital
87,500 (50,000+ 37,500) Equity shares of
Rs. 100 each
2.
87,50,000

Reserves
4,00,000
Profit and Loss Account [as computed in

(iii)]
4,00,000
236
8,00,000
3.
Trade payables
Creditors (Rs. 5,00,000 + Rs. 3,00,000)
4.
8,00,000
Tangible Assets
Fixed assets [as computed in (iv)]
5.
49,75,000
Intangible assets
Goodwill
2,00,000
W.N.1. Calculation of Cash

Sama Ltd.
Cash and Bank
Profit in 3 months
Depreciation in 3 months
Dividend paid
Wahida Ltd.
12,00,000
3,50,000
4,00,000
2,00,000
75,000
50,000
-5,00,000
-3,00,000
11,75,000
3,00,000
Question 33
The abridged Balance Sheet (draft) of V Ltd. as on 31-03-2015 is as under:
Liabilities
Rs.
Assets
24,000 Equity shares of Rs.

10 each
2,40,000
5,000
8%
Preference
shares of Rs.10 each
50,000
8% debentures
Interest
accrued
debentures
Sundry creditors
Fixed assets
1,00,000
on
Goodwill
8,000
1,00,000
4,98,000
237
Rs.
5,000
2,57,000
Stock
50,000
Debtors
60,000
Bank
Profit and Loss A/c
1,000
15,000
1,10,000
4,98,000
The following scheme is passed and sanctioned by the court:

(i)
A new company P Ltd. is formed with Rs. 3,00,000, divided into 30,000 Equity
shares of Rs. 10 each.
(ii)
The new company will acquire the assets and liabilities of V Ltd. on the following
terms:
(a)
Old company's debentures are paid by similar debentures in new company
and for outstanding accrued interest, shares of equal amount are issued at
par.
(b)
The creditors are paid for every Rs. 100, Rs. 16 in cash and 10 shares issued
at par.
(c)
Preference shareholders are to get equal number of equity shares at par.
For arrears of dividend amounting to Rs. 12,000, 5 shares are issued at par
for each Rs. 100 in full satisfaction.
(d)
Equity shareholders are issued one share at par for every three shares held.
(e)
Expenses of Rs. 8,000 are to be borne by the new company.
Current Assets are to be taken at book value (except stock, which is to be reduced
by Rs. 3,000). Goodwill is to be eliminated, balance of purchase consideration being
attributed to fixed assets.
Remaining shares of the new company are issued to public at par and are fully
paid.
You are required to show:
(a) In the old company's books:
(i) Realisation Account
(ii) Equity Shareholder's Account
(b) In the new company's books:
(i) Bank Account
(ii) Summarised Balance Sheet as per the requirements of Revised
Schedule III of the Companies Act, 2013.
(iii)
(iii)
Answer
(a) (i) In the books of V Ltd. i.e Old companys
Realisation Account
Rs.
Goodwill
Fixed assets
Stock
Rs.
5,000 8% Debentures
2,57,000 Interest accrued on deb.
50,000 Creditors
238
1,00,000
8,000
1,00,000
Debtors
60,000 P Ltd. (P.C)
Bank
1,000 Equity shareholders a/c

(b.f.)
Preference share holders

A/c (W.N.3)
6,000
3,79,000
1,36,000
35,000
3,79,000
(ii) (a) Equity shareholders Account

Rs.
Profit & loss A/c
Rs.
15,000 Equity Share capital
2,40,000
1,10,000
Equity shares in P Ltd.
80,000
Realisation and
Reconstruction A/c
35,000
2,40,000
2,40,000
(b) In the Books of P Ltd.

Bank Account
Rs.
To V ltd. (balance shown
on B/S)
To
Equity
application A/c
Share
Rs.
1,000 By V Ltd. (For creditors)

56,000 By Goodwill
By Balance
57,000
239
16,000
8,000
33,000
57,000
(ii)
Balance Sheet as on 31st March, 2015

Particulars
I.
(1)
Shareholder's Funds
Note No.
Rs.
3,00,000
1,00,000
Share Capital
(2)
Total
II.
Assets
(1)
Non-current assets
4,00,000
Fixed assets
(a) Tangible assets (W.N.2)
(b) Intangible assets
(2)
(a) Inventories
47,000
60,000
33,000
4,00,000
Notes to Accounts
2.
Rs.
Share Capital
Authorised share capital 30,000 equity
shares of R`s10 each
3,00,000
Issued and Subscribed30,000 shares of

Rs. 10 each fully paid up
(out of 24,400 (W.N.4) issued for
consideration other than cash)
3,00,000

Secured 8% Debentures
3.
8,000
Current assets
Total
1.
2,52,000
1,00,000
Intangible assets
Goodwill
8,000
240
Working Notes:
1.
Rs.
Calculation of Purchase consideration

Payment to preference shareholders
50,000
5,000 equity shares @ Rs. 10

For arrears of dividend: (Rs. 12,000 x 5 shares /s
Rs.100) @ Rs. 10
Payment to equity shareholders
6,000
80,000
(24,000 shares x 1/3) @ Rs. 10

Total purchase consideration
2.
1,36,000
Calculation of fair value at which fixed assets have

been acquired by P Ltd.
Since, the question states that balance of purchase
consideration is being attributed to fixed assets, it is
implied that the amount of purchase consideration is
equal to the fair value at which the net assets have
been acquired. Therefore, the difference of fair value
of net assets (excluding fixed assets) and the
purchase consideration is the fair value at which the
fixed assets have been acquired.
Purchase consideration / Net assets
1,36,000
Add: Liabilities:
8% Debentures
1,08,000
Creditors 1,00,000 x 16/100 +1,00,000 x 10x10/100
1,16,000
3,60,000
Less: Stock Rs. (50,000- 3,000)= 47,000

Debtors
60,000
Bank
1,000
Fair value at which fixed assets has been acquired
241
(1,08,000)
2,52,000
3.
Preference shareholders Account

To Equity Shares in P Ltd.
56,000 By Preference Share capital

By Realisation and
Reconstruction A/c (B.f.)
56,000
Rs.
50,000
6,000
56,000
4. Calculation of number of Equity shares issued to public

Number of shares
Authorised equity shares
30,000
Less: Equity shares issued for

Interest accrued on debentures
800
Creditors of V Ltd.1,00,000x10
shares/100
10,000
Preference shareholders of V Ltd.

Arrears of preference dividend
12,000x5/100
5,000
600
Equity shareholders of V Ltd. 24,000/3
8,000
Number of equity shares issued to public

at par for cash
***
242
(24,400)
5,600
5
Consolidation of Accounts
Question 1
H Ltd. acquires 3/4 of the share capital of S Ltd. On 31-03-2015 whose Balance Sheets are
as follows:
H
(Rs.)
S
(Rs.)
H
(Rs.)
S
(Rs.)
Share Capital @
Rs. 10 each
20,000
10,000 Fixed assets

(Tangible)
20,000
10,000
General Reserves
5,000
3,000 Current assets
13,000
12,000
P/L Account
3,000
2,000 7,500 Shares in S

Ltd. (3/4)
10,000
10% Debentures
10,000
5,000
Sundry creditors
5,000
2,000
43,000
22,000
43,000
Required to compile consolidated Balance Sheet on 31-12-2015.

Answer
1.
Cost of Control
(Rs.)
Cost of acquisition of shares
10,000
Less : Paid up value in S Ltd. (3/4 of Rs. 10000)
7,500
Share of General Reserve (3/4 of Rs. 3000)
2,250
Share of P/L Account (3/4 of Rs. 2000)
1,500
Capital Reserve
1,250
Minority Interest
Paid up value
2,500
General Reserve (1/4)
750
P/L Account (1/4)
500
Minority Interest
3,750
243
22,000
Consolidated Balance Sheet as at 31st March, 2015

Particulars
A
Shareholders funds
Note No.
(a) Share capital
20,000.00

2
Minority Interest
9,250.00
3,750.00
(a) Long-term borrowings (10% debentures)

4
Rs.
15,000.00
7,000.00
Current liabilities
(a) Trade payables
TOTAL (1+2+3+4+5)
ASSETS
Non-current assets
55,000.00
(a) Fixed assets

(i) Tangible assets
2
30,000.00
25,000.00
Current assets
TOTAL (1+2) -
Note 1.
Reserve & Surplus Note

General Reserve
P/L A/c
Capital Reserve
2.
55,000.00
Rs.
5,000.00
3,000.00
1,250.00
9,250.00
10% Debenture
H
10,000.00
5,000.00
15,000.00
244
Note 3.
Trade Payable
H
5,000.00
2,000.00
7,000.00
Note 4.
Tangible Assets
H
20,000.00
10,000.00
30,000.00
Note 5.
Other Current Assets

H
13,000.00
12,000.00
25,000.00
Question.2
H Ltd. Holds share capital of S Ltd. On 31-12-2015 whose Balance Sheets are as follows:
H
(Rs.)
Share Capital @ Rs.
10 each
20,000
General Reserves
10,000
P/L Account (1.4.14)
5,000
S
(Rs.)
10,000 Fixed assets
(Tangible)
H
(Rs.)
S
(Rs.)
30,000
15,000
5,000 Current assets
35,000
25,000
4,000 8,000 Shares in S

Ltd.
10,000
10% Debentures
20,000
10,000
Sundry creditors
10,000
5,000
P/L Account for the

year
10,000
6,000
75,000
40,000
75,000
40,000
H Limited acquired shares in S Limited on 01-10-2014. S limited has a balance of Rs. 4000
in General Reserve on 01-04-2014. On the account fire goods costing Rs. 2000 of S Limited
were destroyed in June, 2014. The loss has been charged to the Profit and Loss Account for
the year.
Required to prepare a consolidated Balance Sheet. Required to compile consolidated
Balance Sheet on 31-12-2015.
245
Answer
Analysis of Profit (of S)
Particulars
Capital Profit
(Rs.)
General Reserve of 01.04.14
4000.00
Profit & Loss of 01.04. 14
4000.00
Profit for the year prior to Transfer +

General Reserve
(6000+1000+2000)/2
4500.00
Less: Loss on fire in March
2000.00
Revenue Profit
(Rs.)
4500.00
10500.00
4500.00
Holding Companys share (80%)
8400.00
3600.00
Minority Companys share (20%)
2100.00
900.00
Cost of Control
(Rs.)
Cost acquiring share
10000.00
Less: Nominal Value of shares (800*10)
8000.00
Share of Capital profits
8400.00
Capital Reserve
6400.00
Minority Interest
(Rs.)
Nominal Value of share Capital (200*10)
2000.00
Share of Capital Profit
2100.00
Share of Revenue Profit
900.00
5000.00
246
Consolidated Balance Sheet as at 31st December, 2015

Particulars
A
Shareholders funds
Note No.
(a) Share capital
20,000.00

2
Minority Interest
35000.00
5,000

4
(Rs.)
30,000.00
15,000.00
Current liabilities
(a) Trade payables
TOTAL (1+2+3+4+5)
ASSETS
Non-current assets
105,000.00
(a) Fixed assets

(i) Tangible assets
2
45,000.00
60,000.00
Current assets
TOTAL (1+2) -
105,000.00
Note
1. Resesrve & Surplus Note
General Reserve
10,000.00
P/L A/c
H
15,000.00
3600
Capital Reserve
6400.00
35000.00
2. Long Term Borrowings

12% Debenture
H
S
20,000.00
10,000.00
30,000.00
247
3. Trade Payable
H
S
10,000.00
5,000.00
15,000.00
4. Tangible Assets
H
S
30,000.00
15,000.00
45,000.00
5. Other Current Assets

H
S
35,000.00
25,000.00
60,000.00
Question 3
From the Extract Balance Sheets and information given below, prepare Consolidated
Balance Sheet of H Ltd. and S Ltd. as at 31st March, 2015:
H
Share Capital @
Rs. 10 each
30,000
General Reserves
5,000
10% Debentures
10,000
Sundry creditors
5,000
20,000 Fixed assets

(Tangible)
20,000
15,000
16,000
5,000 Stock
8,000
10,000
5,000 Debtors
4,000
7,000
2,000
3,000
50,000
35,000
5,000 1,600 Shares in

S Ltd.
Cash
50,000
35,000
H Ltd. holds 80% of Equity Shares in S since its incorporation. Prepare Consolidated
Balance Sheet.
Answer
Analysis of Profit (of S)
Particulars
Capital Profit
(Rs.)
Revenue Profit
(Rs.)
General Reserve
5000
Holding Companys share (80%)
4,000.00
Minority Companys share (20%)
1,000.00
248
Cost of Control
(Rs.)
Cost acquiring share
16000.00
Less: Nominal Value of shares (1600*10)
16000.00
Share of Capital profits
Capital Reserve
0.00
Minority Interest
(Rs.)
Nominal Value of share Capital (400*10)
4000.00
Share of Revenue Profit
1000.00
5000.00
Consolidated Balance Sheet as at 31st December, 2015

Particulars
A
Shareholders funds
Note No.
(a) Share capital
30,000.00

2
Minority Interest
9000.00
5,000

4
(Rs.)
15,000.00
10,000.00
Current liabilities
(a) Trade payables
TOTAL (1+2+3+4+5)
ASSETS
Non-current assets
69,000.00
(a) Fixed assets

(i) Tangible assets
249
35,000.00
Current assets
(a) Inventories
18,000.00
(b) Trade receivable
11,000
(c) Cash & Cash equivalent
5,000
TOTAL
69,000.00
Note
1.
2.
Resesrve & Surplus Note

General Reserve
8% Debenture
H
S
9,000.00
10,000.00
5,000.00
15,000.00
3.
Trade Payable
H
S
5,000.00
5,000.00
10,000.00
4.
Tangible Assets
H
S
20,000.00
15,000.00
35,000.00
5.
Inventories
H
S
8,000.00
10,000.00
18,000.00
6.
Trade receivable
H
S
4,000.00
7,000.00
11,000.00
7.
Cash & Cash equivalent

H
S
2,000.00
3,000.00
5,000.00
250
Question 4
From the following balance sheets of H Ltd. and its subsidiary S Ltd. drawn up at 31st
March, 2015, prepare a consolidated balance sheet as at that date, having regard to the
following :
(i)
Reserves and Profit and Loss Account of S Ltd. stood at Rs. 25,000 and Rs. 15,000
respectively on the date of acquisition of its 80% shares by H Ltd. on 1st April, 2014.
(ii) Machinery (Book-value Rs.1,00,000) and Furniture (Book value Rs.20,000) of S Ltd.
were revalued at Rs.1,50,000 and Rs.15,000 respectively on 1.4.2014 for the purpose
of fixing the price of its shares. [Rates of depreciation: Machinery 10%, Furniture
15%.]
Balance Sheet of H Ltd. as on 31st March, 2015
Liabilities
H Ltd.
(Rs.)
Share
Capital
Shares of Rs. 100
each
6,00,000
1,00,000
Reserves
2,00,000
Profit and
Account
Creditors
Loss
S Ltd.
(Rs.)
Assets
H Ltd.
(Rs.)
S Ltd.
(Rs.)
Machinery
3,00,000
90,000
75,000
Furniture
1,50,000
17,000
1,00,000
25,000
800 shares
in S Ltd.: Rs.
200 each
1,60,000
1,50,000
57,000
Other assets
4,40,000
1,50,000
10,50,000
2,57,000
10,50,000
2,57,000
Answer
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2015
Particulars
I.
(1)
(2)
(3)
Note No.

Shareholder's Funds
(a) Share Capital
1
1
(Rs.)
6,00,000
3,44,600
Minority Interest
Current Liabilities
48,150
(a) Trade Payables
2,07,000
Total
251
11,99,750
II
Assets
(1)
Non-current assets
(a) Fixed assets
(i) Tangible assets
5,97,750
(ii) Intangible assets
12,000
(b) Other assets (Asssumed

non- current)
5,90,000
Total
11,99,750
Working
(1)
Consolidated assets balances

Machinery
3,00,000
1,50,000
4,40,000
S Ltd.
90,000
17,000
1,50,000
+50,000
-5,000
-5,000
+750
4,35,000
162,750
Depreciation
Adjustment
5,90,000
Consolidated Equity & Liabilities balances

Capital
H Ltd.
6,00,000
S Ltd.
(3)
Other assets
H Ltd.
Revaluation
(2)
F&F
Reserve
P&L
Creditors
2,00,000 1,00,000
1,50,000
40,000
4600
57,000
240,000
104,600
207000
Minority Interest
Face value of shares
20,000
Capital Profit
17,000
Revenue profit
11,150
48,150
252
(4)
Cost of control
Rs.
Cost of investments
1,60,000
Less: Face value of shares
80,000
Capital profits
68,000
G/W
(5)
12,000
AOP-S Ltd.
Capital Profits
Profit & Loss A/c
General Reserve
25,000
Profit on
revaluation
50,000
Less : Loss on
Furniture
Revenue Profits
G/R
P&L
15,000
10,000
50,000
25,000
75,000
5,000
(5,000)
+750
Total
85,000
5,750
M.I.-20%
17,000
1150
H Ltd. 80%
68000
10,000
Total
4600
40,000
Question 5
A Ltd. acquired 1,600 ordinary shares of Rs. 100 each of B Ltd. on 1st July 2014. On
December 31, 2014 the Balance Sheets of the two companies were as given below:
Liabilities
A Ltd.
(Rs.)
B Ltd.
(Rs.)
Assets
Share
Capital
Shares
of
Rs. 100 each
5,00,000
2,00,000
Land &
Buildings
1,50,000
1,80,000
Reserves
2,40,000
1,00,000
Plant &
Machinery
2,40,000
1,35,000
253
A Ltd.
(Rs.)
B Ltd.
(Rs.)
Profit
Loss
Account
&
57,200
82,000
Creditors
47,100
9,000
Bank
Overdraft
80,000
8,400
Bills
Payable
9,24,300
Investments
in B Ltd.
3,40,000
Stock
1,20,000
36,400
Sundry
Debtors
44,000
40,000
Bills
Receivable
15,800
Cash
14,500
8,000
9,24,300
39,940
3,99,400
The Profit & Loss Account of B Ltd. showed a credit balance of Rs. 30,000 on 1st January,
2014 out of which a dividend of 10% was paid on 1st August, 2014. A Ltd. has credited the
dividend received to its Profit & Loss Account. The Plant & Machinery which stood at Rs.
1,50,000 on 1st January, 2014 was considered as worth Rs. 1,80,000 on 1st July, 2014; this
figure is to be considered while consolidating the Balance Sheets.
Prepare consolidated Balance Sheet as on December 31, 2014.
Answer
Consolidated Balance Sheet of A Ltd. and its Subsidiary B Ltd.
Particulars
I.
(1)
Shareholder's Funds
Note No.
(Rs.)
(a) Share Capital
5,00,000
3,08,500
(2)
Minority Interest
(3)
Current Liabilities
83,525
(a) Trade Payables
64,500
(b) Short term borrowings
80,000
Total
254
10,36,525
II
Assets
(1)
Non-current assets
(a) Fixed assets
(i) Tangible assets
(2)

Current assets
(a) Inventories
7,40,625
4
5
17,200
1,56,400

(c) Cash & Cash equivalents
99,800
22,400
10,36,525
Working
(1)

Land and
building
(Rs.)
Plant &
Machinery
(Rs.)
Sundry
debtors
(Rs.)
Bills
receivables
(Rs.)
Cash
(Rs.)
A Ltd.
1,50,000
2,40,000
1,20,000
44,000
B Ltd.
1,80,000
1,35,000
36,400
40,000
15,800
8,000
1,56,400
84,000
15,800
22,500
Revaluation
14,500
+37,500
Depreciation
Adjustment
-1875
3,30,000
(2)
Inventories
(Rs.)
4,10,625
Consolidated Equity & liabilities balances

Capital
(Rs.)
Reserve
(Rs.)
P&L
(Rs.)
Creditors
(Rs.)
Bills
Payable
(Rs.)
H Ltd.
5,00,000
2,40,000
57,200
47,100
27,300
9,000
8,400
5,00,000 2,24,000 84,500
56,100
8,400
S Ltd.
Dividend
rectification
Short term
borrowings
(Rs.)
80,000
-16,000
255
80,000
(3)
Minority Interest
Rs.
40,000
Capital Profit
36,700
Revenue profit
6,825
83,525
(4)
Cost of control
Rs.
Cost of investments
3,40,000
Less : Face value of shares
160,000
Capital profits
1,46,800
Rectification of dividend
-16,000
G/w
(5)
17,200
AOP-B Ltd.
Capital
Profits (Rs.)
Revenue Profits
G/R (Rs.)
Profit & Loss A/c
30,000
General Reserve
100,000
+ Dividend paid
+36,000
Dividend as per source
-20,000
M.I.-20%
A Ltd. 80%
52,000
82,000
100,000
-36,000
37,500
Additional depreciation
Total
P&L (Rs.)
+20,000
Time adjustments
Revaluation profit
Total
(Rs.)
(1,875)
1,83,500
34,125
36,700
6,825
1,46,800
27,300
256
Question 6
On 31st March, 2015, the Balance Sheets of H Ltd. and S Ltd. stood as follows:
(Rs. in 000s)
Liabilities
H Ltd.
S Ltd.
Equity Share (Capital Authorised)
5,000
3,000
Issued and subscribed in Equity Shares of Rs. 10 each

full paid
4,000
2,400
928
690
1,305
810
Bills Payable
124
80
Sundry Creditors
487
427
220
180
65
17
7,129
4,604
2,541
2,450
615
298
1,500
Stock
983
786
Debtors
700
683
Bills Receivables
120
95
410
102
Sundry Advances
260
190
7,129
4,604
General Reserve
Other Provisions
Assets:
Plant and Machinery
Investment in the Equity Shares of S Ltd.
Following Additional Information is available:

(a) H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2014 at which
date the following balances stood in the books of S Ltd. General Reserve Rs. 1,500
thousand; Profit and Loss Account Rs. 633 thousand.
(b) On 14th July, 2014 S Ltd. declared a dividend of 20% out of pre-acquisition profits
and paid corporate dividend tax (including surcharge) at 11%. H Ltd. credited
the dividend received to its Profit and Loss Account.
257
(c) On 1st November, 2014 S Ltd. issued a 3 fully paid Equity Shares of Rs. 10 each, for
every 5 shares held as bonus shares out of pre-acquisition General Reserve.
(d) On 31st March, 2015, the Stock of S Ltd. included goods purchased for Rs. 50
thousand from H Ltd., which had made a profit of 25% on Cost.
Prepare a consolidated Balance Sheet as on 31st March, 2015.
Answer
Consolidated Balance Sheet (CBS) of H Ltd. with its subsidiary S Ltd.
as on 31st March, 2015
I.
(1)
Shareholder's Funds
(Rs. in 000)
(a) Share Capital
4,000
3,063
(2)
Minority Interest (W.N.6)
(3)
Current Liabilities
1,560
Trade payables
1,118
482
Total
II.
Assets
(1)
Non-current assets
10,223
Fixed assets
Tangible assets
(2)
5,904
(a) Inventories
1,759
1,598
512
450
Current assets
Total
258
10,223
Working
(1)

P&M
(Rs.)
F&F
(Rs.)
Debtors
(Rs.)
B/R
(Rs.)
Cash
(Rs.)
S.T Adv.
(Rs.)
2,541
615
983
700
120
410
260
S Ltd.
2,450
298
786
683
95
102
190
1,383
215
512
450
(10)
4,991
913
1,759

Capital
H Ltd.
4,000
S Ltd.
Less
URP
Reserve
P&L
(Rs. in 000)
B/P
Creditors
S.T.Prov.
Other
Prov.
928
1,305
124
487
220
65
54
306
80
427
180
17
204
914
400
82
(10)
Less:
dividend
(180)
982
(3)
Stock
(Rs.)
H Ltd.
Less : URP (50

x 1/5)
(2)
(Rs. in 000)
1,421
Minority Interest
(Rs. in 000)
960
Capital Profit
360
Revenue profit
240
1560
Note : Because Holding Ratio is 60%, thus minority ratio would be 40% i.e. (2400 x 40%) =
960.
259
(4)
Cost of Control
(Rs. in 000)
(5)
Cost of investments
1500
Less : Face value of shares
1440
Capital profits
540
180
Capital Reserve
660
AOP-S Ltd.
Capital
(Rs.)
Revenue
G/R
Profit & Loss A/c
633
General Reserve
1500
Add : Bonus and

dividend
Total
Time adjustment
Less
Paid
Bonus
source
6.
177 (B/F)
-810
2133
90
510
as
-900
Total
900
90
510
M.I.-40%
360
36
204
H Ltd. 60%
540
54
306
Holding Ratio
For every 5 shares 3 Bonus Shares
90,000 shares =
3
x 90,000 = 54,000 share (Bonus)
5
Existing holding shares by H Ltd. = 90,000

Total Holding = 90,000 + 54,000 = 1,44,000 shares
260
810
690
+333
-333
Total
(Rs.)
P&L
+900
dividend
per
(Rs.)
Total number of shares issued by S Ltd.
24,00,000
= 2,40,000 shares
10
1,44,000
% of Holding =
x 100%
2,40,000
=
= 60%
7.
For every 5 shares the shareholder gets 3 shares Bonus

Thus total shares = 5 + 3 = 8 shares
Accordingly No. of shares before bonus issue is
2,40,000
x5
8
= 1,50,000 shares
8.
20% Dividend declared on 1,50,000 shares by S Ltd. is Rs. 3,00,000 (20% of

1,50,000 x 10)
Corporate dividend Tax @ 11% of 3,00,000 = 33,000
Total Amount = 3,33,000
9.
Calculation of Reserve and Surplus :

General Reserve of H Ltd.
928
Profit & Loan A/c of H Ltd.
1305
Capital Reserve of S Ltd.
660
Revenues Profit (54 + 306)
360
Less : Unrealised Profit on Stock of S Ltd. :
(10)
Less : Rectification of Dividend
(180)
3063
Question 7
On 31st March, 2015 the Balance Sheets of H Ltd. & its subsidiary S Ltd. stood as follows:
Liabilities
Rs. in lakhs
Share Capital:
H Ltd.
Authorised
S Ltd.
15,000
6,000
12,000
4,800
2,784
1,380
Issued and Subscribed:

Equity Shares of Rs. 10 each, fully paid up
General Reserve
261

Bills Payable
Sundry Creditors
Proposed Dividend
2,715
1,620
372
160
1,461
854
855
394
1,200
21,387
9,208
Land and Buildings
2,718
Plant and Machinery
4,905
4,900
1,845
586
Investments in shares in S Ltd.
3,000
Stock
3,949
1,956
Debtors
2,600
1,363
1,490
204
Bills Receivable
360
199
Sundry Advances
520
21,387
9,208
Assets
The following information is also provided to you:

(a) H Ltd. purchased 180 lakh shares in S Ltd. on 1st April, 2014 when the balances to
General Reserve and Profit and Loss Account of S Ltd. stood at Rs. 3,000 lakh and
1,200 lakh respectively.
(b) On 4th July, 2014 S Ltd. declared a dividend @ 20% for the year ended 31st
March, 2014. H Ltd. credited the dividend received by it to its Profit and Loss
Account.
(c) On 1st January, 2015 S Ltd. issued 3 fully paid-up shares for every 5 shares held as
bonus shares out of balances to its general reserve as on 31st March, 2020.
(d) On 31st March, 2015 all the bills payable in S Ltd.s balance sheet were
acceptances in favour of H Ltd. But on that date, H Ltd. held only Rs. 45 lakh of
these acceptances in hand, the rest having been endorsed in favour of its
creditors.
(e) On 31st March, 2015 S Ltd.s stock included goods which it had purchased for Rs.
100 lakh from H Ltd. which made a profit @ 25% on cost.
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st
March, 2015 bearing in mind the requirements of AS 21.
262
Answer
CBS of H Ltd. with its subsidiary S Ltd. as on 31st March, 2015
(Rs. in lacs)
I.
(1) Shareholder's Funds

(a) Share Capital
(2) Minority Interest (W.N.6)
Trade payables
1
1
1
1
1
Total
II. Assets
(1) Non-current assets
Fixed assets
Tangible assets
(2) Current assets
(a) Inventories
12,000
7,159
3,120
2,082
1,249
1,200
27,530
14,954
2
2
2
2
5,885
4,477
1,694
520
Total
27,530
Working
(1)
(Rs. in lacs)
L&B
(Rs.)
P&M
(Rs.)
F&F
(Rs.)
Stock
(Rs.)
H Ltd.
2,718
4,905
1,845
S Ltd.
4,900
586
Less: URP
(100 x
1/5)
Debtors
(Rs.)
B/R
(RS.)
Cash
(Rs.)
3,949
2600
360
1,490
1,956
1,363
199
204
S.T
Adv.
(Rs.)
520
(20)
Less:
Contra
-45
2,718
9,805
2,431
263
5,885
3,963
514
1,694
520
(2)
H Ltd.
Capital
(Rs.)
Reserve
(Rs.)
12,000
2784
108
S Ltd.
Less
URP
P&L
(Rs.)
B/P
(Rs.)
Creditors
(Rs.)
S. T.Prov.
(Rs.)
2,705
372
1461
855
612
160
854
394
2315
1249
1200
(360)
Less:
Contra
-45
12,000
2892
2,937
487
Minority Interest
(Rs. in lacs)
1920
Capital Profit
Revenue profit
480
Proposed dividend
720
3120
(4)
Pro. Div
(Rs.)
(20)
Less:
dividend
(3)
(Rs. in lacs)
Cost of control
(Rs. in lacs)
Cost of investments
3000
Less: Face value of shares
2880
Capital profits
1,080
360
C/R
264
1320
1200
(5)
AOP - S Ltd.
(Rs. in lacs)
Capital
Revenue
G/R
Profit & Loss A/c
1200
General Reserve
3000
Time adjustment
Less: dividend Paid
-1620
1620
1380
+1800
+600
2400
4200
180
1020
5400
-600
Bonus as per source
-1800
Total
-1800
180
1020
720
72
408
1080
108
612
M.I.-40%
H Ltd. 60%
6.
P&L
420 (B/F)
Add: dividend and

Bonus
Total
Total
Holding ratio
% of Holding =
Question 8
1800 (3/5x 1800)x 100

=60%, Bonus Amount =4800 x 3/8=1800
2400
On 31st March, 2013, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs. 12,00,000. The
Balance Sheet of Q Ltd. on that date was as under:
Liabilities
1,50,000 equity shares of Rs. 10
each fully paid
Rs.
15,00,000
Pre-incorporation profits
30,000
60,000
Creditors
Assets
Fixed Assets
Current Assets
Rs.
10,50,000
6,45,000
1,05,000
_______
16,95,000
16,95,000
265
On 31st March, 2015 the Balance Sheets of two companies were as follows:
Liabilities
Equity shares
of Rs. 10 each
fully
paid
(before bonus
issue)
Securities
Premium
Preincorporation
profits
P Ltd.
(Rs.)
Q Ltd.
(Rs.)
45,00,000
Assets
15,00,000 Fixed
Assets
Q Ltd.
(Rs.)
79,20,000
23,10,000
Investments
9,00,000
1,05,000
equity
shares in
30,000 Q Ltd. at
cost
General
Reserve
60,00,000
Profit & Loss

Account
15,75,000
4,20,000
5,55,000
2,10,000
1,35,30,000
40,65,000
Creditors
P Ltd.
(Rs.)
19,05,000 Current
Assets
12,00,000
44,10,000
17,55,000
1,35,30,000
40,65,000
Directors of Q Ltd. made bonus issue on 31.3.2013 in the ratio of one equity share of Rs.
10 each fully paid for every two equity shares held on that date.
Calculate as on 31st March, 2015 (i)Cost of Control/Capital Reserve; (ii) Minority
Interest; (iii) Consolidated Profit and Loss Account in each of the following cases:
(i) Before issue of bonus shares.
(ii) Immediately after issue of bonus shares.
It may be assumed that bonus shares were issued out of post-acquisition profits by
using General Reserve.
Prepare a Consolidated Balance Sheet after the bonus issue.
266
Answer
(i) Before issue of bonus shares
(i)
Cost of control/capital reserve
Rs.
Investment in Q Ltd.
Less: Face value of investments
12,00,000
10,50,000
Capital profits (W.N.)

Cost of control
(ii)
63,000
87,000
Rs.
Minority Interest
Share Capital
Capital profits (W.N.)
4,50,000
27,000
Revenue profits (W.N.)
6,79,500
(iii) Consolidated profit and loss account P

Ltd.
11,56,500
Rs.
Balance
15,75,000
Add: Share in revenue profits of Q Ltd.

(W.N.)
15,85,500
31,60,500
(ii) Immediately after issue of bonus shares

(i)
Cost of control/capital reserve
Rs.
Face value of investments (Rs. 10,50,000 +

5,25,000)
Capital Profits (W.N.)
63,000
Less: Investment in Q Ltd.

Capital reserve
(ii)
15,75,000
12,00,000
4,38,000
Rs.
Minority Interest
Share Capital (Rs. 4,50,000 + 2,25,000)
Capital Profits (W.N.)
6,75,000
27,000
Revenue Profits (W.N.)
4,54,500
11,56,500
(iii) Consolidated Profit and Loss Account P td.

Balance
Add: Share in revenue profits of Q Ltd. (W.N.)
Rs.
15,75,000
10,60,500
26,35,500
267
Consolidated Balance Sheet of P Ltd. and its subsidiary Q Ltd.

Liabilities
Rs.
Share Capital
45,00,000
Reserve & surplus
99,73,500
Creditors
Minority Interest
7,65,000
11,56,500
1,63,95,000
Tangible Assets
Current Assets
1,02,30,000
61,65,000
1,63,95,000
Working Note:
(Before and after issue of bonus shares)
1. Analysis of Profits of Q Ltd.
Capital
Profits
(Rs.)
Pre-incorporation profits
30,000
Profit and loss account on 31.3.2013
60,000
Revenue
Profits
Before bonus
(Rs.)
After Bonus
(Rs.)
90,000
General reserve*
19,05,000
Less: Bonus shares
19,05,000
7,50,000
11,55,000
Profit from 1.4.13 to 31.03.2015
3,60,000
3,60,000
90,000
22,65,000
15,15,000
P Ltd.s share (70%)
63,000
15,85,500
10,60,500
Minoritys share (30%)
27,000
6,79,500
4,54,500
(4,20,000 60,000)
Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss
Account.
268
2.
Reserve & surplus
(Rs.)
Securities Premium
9,00,000
Capital Reserve
4,38,000
General Reserve
60,00,000
26,35,500
99,73,500
Question 9
Write a short note on Minority Interest.
Answer
The claim of outside shareholders in the subsidiary company has to be assessed and shown
as a liability in the consolidate balance sheet.
While calculating the amount of minority interest, all these items have to be taken into
account and proportionate share of all such profits and reserves should be added to the
amount of minority interest while proportionate share of all such losses should be
deducted from the minority interest, thus,
Minority Interest = paid-up value of shares held by minority shareholders + proportionate
share of the companys profits and reserves + proportionate shares of profits on
revaluation of assets of the company - proportionate share of companys losses
proportionate share of loss on revaluation of assets of the company.
But, if there are some preference shares of the subsidiary company held by outsiders, the
minority interest in respect of the preference share will consist only of the face value of
such shares and the dividend due on such shares if there are profits.
of bonus shares by the subsidiary company will increase Question 10
What is the treatment of Bonus issue by subsidiary company.
Answer
The issue the number of shares held by the holding company as well as the minority
shareholders. Issue of bonus shares may or may not affect the cost of control depending
upon whether such shares are issued out of capital profits or revenue profits.
(a) Issue of bonus shares out of capital profit (Pre-acquisition profits): In this case there
will be no effect on accounting treatment because while calculating the cost of
control the share of the holding company in pre-acquisition profit is reduced
because of capitalisation of profit and the paid-up value of shares held in subsidiary
company is increased. Hence there is no effect on cost of control when bonus shares
are issued from pre-acquisition profit.
269
(b) Issue of bonus shares out of post acquisition profit: In this case, a part of the revenue
profits will get capitalised resulting in decrease of cost of control or increase in
capital reserve.
Question 11
What is the treatment of dividend paid by subsidiary company.
Answer
Dividends may be received out of capital or revenue profits of the subsidiary company.
Dividend received by the holding company from the capital profits of the subsidiary
company are credited to investment in shares of the subsidiary account thereby reducing
the cost of control or increasing capital reserve.
On the other hand, dividend received out of the revenue profits (i.e., post-acquisition
profits) are treated as income and credited to profit & loss Account by the holding
company. If dividend declared partly out of capital profits (i.e., pre-acquisition profits) and
partly out of revenue profits (i.e., post- acquisition profits), the dividend received is divided
into two parts in proportion to its declaration out of capital profits and revenue profits. The
dividend pertaining to the first part (i.e., capital profits) is credited to Investment Account
reducing the cost of control or increasing the capital reserve and dividend pertaining to the
second part (i.e., revenue profits) is credited to profit and loss Account or surplus account.
Question 12
Able Ltd. made an offer to acquire all the shares of Baker Ltd. at a price of Rs. 25 per
share, to be satisfied by the allotment of five shares in Able Ltd. for every four shares in
Baker Ltd. By the date of expiration of the offer, which was on 1st January, 2015, shareholders owning 75% of the shares in Baker Ltd. accepted the offer and the acquisition was
effective from that date.
The accounting date of Baker Ltd. was on 31st March in each year, but to conform with
Able Ltd. accounts were prepared to 30th June, 2015, covering the fifteen months to the
date. The draft summarised accounts of the companies on 30th June, 2015 which do not
include any entries regarding the acquisition of shares in Baker Ltd., were as follows:
Balance Sheet as on 30th June, 2015
Liabilities
Able Ltd.
Share Capital -Equity shares of Rs. 10

each
Baker Ltd.
Rs.
Rs.
Authorised :
3,00,000
75,000
Issued & fully paid:
1,50,000
60,000
55,000
General Reserve
270
62,000
20,000
Current liabilities
27,000
7,000
33,000
6,000
3,27,000
93,000
Freehold property, at cost
2,00,000
38,000
Plant & Machinery at cost
50,000
12,000
Less: Depreciation
18,000
3,000
32,000
9,000
7,000
Stock at Cost
32,000
21,000
Debtors
41,000
17,000
Balance at Bank
15,000
8,000
3,27,000
93,000
Assets
Quoted Investment at Cost
Profit & Loss Account for the period ended on 30th June, 2015
Able Ltd.
Baker Ltd.
One Year Rs.
15 months Rs.
Balance brought forward
14,000
12,000
80,000
18,000
Total
94,000
30,000
Taxation for the period
32,000
6,000
4,000
62,000
20,000
94,000
30,000
Interim Dividend paid, 30th Nov., 2014

271
The Directors of Able Ltd. recommended a final dividend of 20% to the shareholders on
register as on 30th June, 2015. The Directors of Baker Ltd., proposed a final dividend of
12% payable on 30th September, 2015.
You are required to prepare the consolidated Balance Sheet of Able Ltd. and Baker Ltd. On
30th June, 2015.
Answer
CBS of Able Ltd. and its subsidiary Baker Ltd. as on 30th June, 2015
Particulars
1
(1)
Shareholder's Funds
Note
Rs.
(a) Share Capital
2,06,250
1,35,600
(2)
Minority Interest(W.N 3)
(3)
Current Liabilities
18,125
(a) Trade Payables
34,000
(b) Short term provisions
39,000
43,125
Total
II.
Assets
(1)
Non-current assets
4,76,100
(a) Fixed assets

Tangible assets
2,79,000
Intangible assets
56,100
(b) Non-current investment

(2)
7,000
Current assets
(a) Inventories
53,000
(c) Trade receivable
58,000
(c) Cash & Cash equivalents Rs.
23,000
Total
272
4,76,100
Working
(1)
(2)

P&M
F&F
Investments
Stock
Debtors
Cash
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
H
Ltd.
32,000
2,00,000
7,000
32,000
41,000
15,000
S
Ltd.
9,000
38,000
21,000
17,000
8,000
41,000
2,38,000
7,000
53,000
58,000
23,000

Capital
(Rs.)
Reserve
(Rs.)
P&L
(Rs.)
Securities
Premium
(Rs.)
Current
Liabilities
(Rs.)
Tax
Prov.
(Rs.)
Pro. Div
(Rs.)
H Ltd.
2,06,250
55,000
62,000
56,250
27,000
33,000
41,250
S Ltd.
3,600
7,000
6,000
1,875
56,250
34,000
39,000
43,125
Less: P. Div.
(20% on
2,06,250)
41,250
2,06,250
(3)
55,000
24,350
Minority Interest
Rs.
15,000
Capital Profit
3,800
Revenue profit
1,200
Proposed dividend
-1,875
18,125
273
(4)
Cost of control
Rs.
Cost of investments
1,12,500
Less : Face value of

shares
-45,000
Capital profits
-11,400
G/w
(5)
56,100
AOP- Baker Ltd.

Capital
(Rs.)
Revenue
Total
(Rs.)
P&L
(Rs.)
Profit & Loss A/c
12,000
Add: Dividend
+4,000
Total
12,000
12,000
Time adjustment
12,000x 9/15
+7,200
-7,200
Less : Dividend Paid as

per source
-4,000
Total
M.I.-25%
H Ltd. 75%
(6)
8,000
15,200
4,800
3,800
1,200
11,400
3,600
Value of investments
Value of 6,000x 75% Shares @ Rs. 25 =1,12,500
No. of shares of Able Ltd. 4,500 5/4= 5,625
Face value of 5,625 Shares @ 10 =56,250
Securities Premium = 56,250
274
20,000
Question 13
From the following Summarised Balance Sheets of A Ltd. and its subsidiary B Ltd., prepare
a consolidated Balance Sheet as on 31st December, 2014.
Liabilities
Equity Shares
of Rs. 10 each
A Ltd.
(Rs.)
B Ltd.
(Rs.)
1,00,000
20,000
Profit on sale of
Shares
3,000
Profit and Loss

A/c
Brought
forward
6,000
7,200
For the year
2,000
4,800
1,11,000
32,000
Assets
A Ltd.
(Rs.)
B Ltd.
(Rs.)
Sundry Assets
93,000
Shares in B Ltd.
1,200 shares at
Rs. 15 each
18,000
1,11,000
32,000
32,000
A Ltd. bought in earlier year 1,600 equity shares in B Ltd.@ 15 when the Profit and Loss
Account balance in B Ltd. was Rs. 4,400. A Ltd. sold 400 shares @ Rs. 22.50, credited the
difference between the sale proceeds and cost to Profit on sale of investment account on
30 June, 2014 and crediting the balance to the investment account. Profit during the year
accrued uniformly.
Answer
Consolidated Balance Sheet of A Ltd., and its subsidiary B Ltd. as at 31st December, 2014
Note
I.
(1)
(2)

Shareholder's Funds
(a) Share Capital
1,00,000
15,560
Minority Interest
12,800
Total
II.
Rs.
1,28,360
Assets
Non-current assets
(i) Tangible assets
1,25,000
3,360
Total
275
1,28,360
(1)
Consolidated Balances
Share Capital
(Rs.)
Profit & Loss

(Rs.)
A Ltd.
1,00,000
8,000
93,000
B Ltd.
4,560
32,000
Profit on
sale
3,000
1,00,000
(2)
15,560
125,000
Analysis of Profits of B Ltd.

Capital
(Rs.)
(3)
Fixed Assets
(Rs.)
Revenue
(Rs.)
Profit
4400
7600
A Ltd.s share (60%)
2640
4560
1760
3040
Total
(Rs.)
12000
(7200+4800)
Cost of Control
Rs.
Cost of Investments
18,000
Less: Face value shares
12,000
Capital profits
2,640
Goodwill
(4)
3,360
Minority Interest
Rs.
Share capital
8,000
Capital profit
1,760
Revenue profits
3,040
12,800
276
Question 14
The draft balance sheet of X Ltd. and its subsidiary Y Ltd. in U.S.A as at 31st March 2015
are as follows:
Assets
X Ltd. (Rs.)
Y Ltd. $
Fixed assets
18,00,000
20,000
Investments
16,00,000
Stock
12,00,000
30,000
Debtors
24,00,000
60,000
8,00,000
10,000
78,00,000
1,20,000
30,00,000
30,000
Profit & Loss account
20,00,000
40,000
Loans
12,00,000
20,000
6,00,000
10,000
10,00,000
20,000
78,00,000
1,20,000
Cash
Total
Trade creditors
Taxation
X Ltd. acquired 80% shares in Y Ltd. on 1.4.2014 when profit & loss account balance was
$23,000. Y Ltd. paid a dividend of $3,000 out of the balance of profit as on 1.4.2014 on
30.09.2014 for the year 2013-14. When amount was remitted by Y Ltd. the exchangre rate
was 1$= Rs. 40. The rate of exchange prevailing on 1.4.2014 was Rs. 30 and on 31.03.2015
was Rs. 42.
There was no change in the fixed assets or share capital. Prepare balance sheet as on
31.03.2015.
277
Answer
(Foreign Subsidiary) consolidated Balance Sheet of X Ltd. with Y Ltd.
I.
(1)
Shareholder's Funds
(2)
(a) Share Capital
30,00,000

(24,80,000 + 27,2000)
27,52,000
Minority Interest
588,000
Borrowings
(3)
20,40,000
Current Liabilities
(a) Trade Payables
10,20,000
(c) Short term Provisions
18,40,000

Total
II.
Assets
(1)
Non-current assets
112,40,000
(a) Fixed assets

(i) Tangible assets
26,40,000

(2)
Current assets
(a) Inventories
24,60,000
(b) Trade Receivables
49,20,000
(c) Cash & Cash equivalents
12,20,000
Total
278
11,240,000
Working
1.
Analysis of Profits in foreign currency

Capital $
Revenue $
Total $
23,000
17,000
40,000
P & L Accounts
+ dividend paid
3,000
23,000
20,000
Time adjustments
Less: dividend as per source
-3,000
Total
20,000
20,000
30
(30 +42)/2 =
36
Total amount in Indian

rupees
600000
720000
X Ltd.s share : 80%
480000
576000
Minority Share : 20%
120000
144000
Applicable Exchange Rate
2.
Balance sheet in Indian currency

Assets
Y Ltd. $
Rate (Rs.)
(Rs.)
Fixed assets
20,000
42
8,40,000
Stock
30,000
42
12,60,000
Debtors
60,000
42
25,20,000
Cash
10,000
42
4,20,000
1,20,000
50,40,000
30,000
30
9,00,000
Profit & Loss account-Capital
20,000
30
6,00,000
Profit & Loss account-Revenue
20,000
36
(30+42)/2
7,20,000
Loans
20,000
42
8,40,000
Trade creditors
10,000
42
4,20,000
279
Taxation
20,000
F.C.T.R (b.f.)
3.
X Ltd.
720,000
1,20,000
50,40,000
Stock
(Rs.)
Debtors
(Rs.)
Cash
(Rs.)
1,800,000
1,200,000
2,400,000
800,000
840,000
1,260,000
2,520,000
420,000
2,640,000 2,460,000
4,920,000
1,220,000
Star Ltd.
Liabilities
Capital
(Rs.)
P& L
(Rs.)
Loans
(Rs.)
3,000,000
2,000,000
1,200,000
600,000
Star
576,000
840,000
420,000
Dividend
rectification
(96,000)
X Ltd
3,000,000
5.
8,40,000
Assets consolidated
Fixed assets
(Rs.)
4.
42
2,480,000
Creditors
(Rs.)
2,040,000
Share in share capital
1,600,000
80%
720,000
Capital Profits
480,000
3000*40*80%
Share in FCTR
96,000
80%
576,000
Capital
Reserve
272,000
280
1,000,000
840,000
1,020,000 1,840,000
Cost of control
Cost of investments
Taxation
(Rs.)
6.
Minority interest
Share capital
20%
180,000
Capital Profits
120,000
Revenue Profits
144,000
FCTR
20%
144,000
588,000
Question 15
The summarised Balance Sheets of A Ltd. and B Limited are as follows:
Balance Sheets as at 31st December, 2014
A Ltd.
B Ltd.
Rs.
Rs.
2,00,000
50,000
Reserves
20,000
5,000
Profit and Loss Account as on 1st January, 2014
30,000
10,000
Profit for the year
8,000
8,000
Add: Dividends from B Ltd.
4,000
(5,000)
30,000
20,000
2,92,000
88,000
2,00,000
80,000
Current Assets
32,000
8,000
Shares in B Ltd. at cost 3,000 shares
60,000
2,92,000
88,000
Sources of Funds:
Share Capital in equity shares of Rs. 10 each
Less: Dividends paid

Creditors
Application of Funds:
Fixed Assets
A Limited had acquired 4,000 shares in B Ltd. at Rs. 20 each on 1st January, 2014 and
sold 1,000 of them at the same price on 1st October, 2014. The sale is ex dividend. An
interim dividend of 10% was paid by B Limited on 1st July, 2014.
Draft the consolidated Balance Sheet as at 31st December, 2014.
281
Answer
CBS of A Limited and its subsidiary B Limited as at 31st December, 2014
Particulars
Note No.
I.
(1)
Shareholder's Funds
Rs.
(a) Share Capital
2,00,000
63,800
(2)
Minority Interest
27,200
(3)
Trade payables
50,000
Total
II.
3,41,000
Assets
Fixed assets
(i) Tangible assets
2,80,000
(ii) Intangibles
21,00
(iii) Current assets
40,000
Total
(1)
3,41,000
Consolidated Balances
Share
Capital
(Rs.)
Reserve
(Rs.)
Profit &
Loss
(Rs.)
Creditors
(Rs.)
Fixed Assets
(Rs.)
A Ltd.
2,00,000
20,000
42,000
30,000
2,00,000
32,000
B Ltd.
1,800
20,000
80,000
8,000
2,00,000
20,000
43,800
50,000
2,80,000
40,000
(2)
Current
Assets
(Rs.)
Analysis of Profits of B Ltd.

Capital Profits
(Rs.)
Reserves
Revenue
Profits (Rs.)
5,000
Profit and loss account on

1.1.2000
Total
5,000
10,000
3,000
______
8,000
15,000
5,000
Interim Dividend paid
282
Total
(Rs.)
13,000
Dividend as per source
5,000
15,000
3,000
A Ltd.s share (60%)
9,000
1,800
6,000
1,200
Total
(3)
Cost of Control
Rs.
Cost of Investments
60,000
Less : Face value shares
30,000
Capital profits
Cost of control (Goodwill)
(4)
9,000
21,000
Minority Interest
Rs.
Share capital
20,000
Capital profit
6,000
Revenue profits
1,200
27,200
Question 16
Prepare the Consolidated Balance Sheet as on December 31, 2015 of group of companies A
Ltd., B Ltd. and C Ltd. Their balance sheets on that date are given below:
Liabilities
Share Capital (share of Rs. 100 each)
A Ltd.
Rs.
B Ltd.
Rs.
C Ltd.
Rs.
1,25,000
1,00,000
60,000
Reserves
18,000
10,000
7,200
Profit & Loss A/c
16,000
4,000
5,000
Sundry Creditors
7,000
10,000
3,000
1,66,000
1,24,000
75,200
Assets
283
Fixed Assets
28,000
55,000
37,200
85,000
53,000
Stocks
30,000
6,000
23,000
Debtors
23,000
10,000
15,000
1,66,000
1,24,000
75,200
Investments in shares
750 shares in B Ltd.
400 shares C Ltd.
Other information:
(i)
All the shares were acquired on 30th June, 2015.
(ii) On lst January, 2015 the following balances stood in the books of B Ltd. and C Ltd.
B Ltd.
C Ltd.
Rs.
Rs.
Reserves
8,000
6,000
P & L Account
1,000
1,000
Answer
CBS of A Ltd. and its subsidiaries B Ltd. and C Ltd. as on 31st December, 2015
Particulars
I.
(1)
Note

Shareholder's Funds
(a) Share Capital
1,25,000
37,175
(2)
Minority Interest
(3)
Current Liabilities
(a) Trade payables
53,000
Total
II.
(1)
(Rs.)
Assets
Non-current assets
Fixed assets
i. Tangible assets
2,35,175
1
1
284
20,000
1,20,200
7,975
(2)
Current assets
(a) Inventories
59,000
48,000
Total
2,35,175
Working
(1)
(2)

F.A. (Rs.)
Stock(Rs.)
Debtors(Rs.)
A Ltd.
28,000
30,000
23,000
B Ltd.
55,000
6,000
10,000
C Ltd.
37,200
23,000
15,000
120,200
59,000
48,000

Capital
(Rs.)
Reserve
(Rs.)
Creditors
(Rs.)
A Ltd.
125,000
18,000
16,000
7,000
B Ltd.
1,050
2,125
10,000
C Ltd.
3,000
19,050 18,125
20,000
1,25,000
(3)
P&L
(Rs.)
Analysis of Profit-B Ltd.

Capital
(Rs.)
Revenue
(Rs.)
G/R
General Reserve
8,000
Profit & Loss A/c
1,000
Time adjustment
+2,500
Total
(Rs.)
P&L
2,000
10,000
3,000
-1,000
-1,500
400
1,333
Add: Transfer form C
285
4,000
Total
(4)
11,500
1400
2,833
M.I.-25%
2,875
350
708
A. Ltd. 75%
8,625
1050
2125
Analysis of profit-C Ltd.

Capital
Revenue
G/R
P&L
Profit & Loss A/c
1,000
4,000
5,000
General Reserve
6,000
1,200
7,200
+2,600
-600
-2,000
Total
9,600
600
2,000
B Ltd 2/3
6,400
400
1,333
M.I. 1/3
3,200
200
667
Time adjustments
(5)
Total
Minority Interest
Rs.
Shares held by outsiders B
25,000
Shares held by outsiders C
20,000
Profits from B
3,933
Profits from C
4,067
53,000
(6)
Cost of Control
Rs.
Amount paid by both companies
1,38,000
Less: Face value of shares in B Ltd.
-75,000
Face value of shares in C Ltd.
-40,000
Capital profits C
-6,400
Capital profits B
-8,625
G/w
7,975
286
Question 17
A Limited is a holding company and B Limited and C Limited are subsidiaries of A
Limited. Their Balance Sheets as on 31.12.2014 are given below:
Liabilities
A Ltd.
B Ltd.
C Ltd.
Assets
A Ltd.
B Ltd.
C Ltd.
Rs.
Rs.
Rs.
1,00,000
1,00,000
60,000
Reserves
48,000
10,000
9,000
Investme
nts
Profit & Loss
16,000
12,000
9,000
Shares
in B Ltd.
95,000
C
Ltd.
Balance
3,000
Shares
in C Ltd.
13,000
Creditors
7,000
5,000
Stock in
Trade
12,000
7,000
B
Ltd.
Balance
8,000
Sundry
Debtors
26,000
21,000
32,000
_______
_______
3,000
1,74,000
1,34,000
78,000
Share
Capital
A
Ltd.
Balance
_______
_______
1,74,000
1,34,000
Fixed
Assets
_____ A
Ltd.
Balance
78,000
Rs.
Rs.
Rs.
20,000
60,000
43,000
53,000
The following particulars are given:

(i)
The Share Capital of all companies is divided into shares of Rs. 10 each.
(ii)
A Ltd. held 8,000 shares of B Ltd. and 1,000 shares of C Ltd.
(iii)
B Ltd. held 4,000 shares of C Ltd.
(iv)
All these investments were made on 30.6.2014.
(v)
On 31.12.2013, the position was as shown below:
287
B Ltd.
C Ltd.
Rs.
Rs.
Reserve
8,000
7,500
4,000
3,000
Sundry Creditors
5,000
1,000
60,000
43,000
Stock in Trade
4,000
35,500
Sundry Debtors
48,000
33,000
Fixed Assets
(vi)
10% dividend is proposed by each company.
(vii)
The whole of stock in trade of B Ltd. as on 30.6.2014 (Rs. 4,000) was later sold
to A Ltd. for Rs. 4,400 and remained unsold by A Ltd. as on 31.12.2014.
(viii) Cash-in-transit from B Ltd. to A Ltd. was Rs. 1,000 as at the close of business.
You are required to prepare the Consolidated Balance Sheet of the group as on
31.12.2014.
Answer
Particulars
Note
(Rs.)
I.
(1)
Shareholder's Funds
(a) Share Capital
1,00,000
(b) Reserves and Surplus (49325 + 20980)
70305
(2)
Minority Interest
37820
(3)
Current Liabilities
(a) Trade payables
2
Total
288
12,000
2,08,188
II.
Assets
(1)
Non-current assets
Fixed assets
i. Tangible assets
1,23,000
5,525
(a) Inventories
11,600
79,000
1,000
Current assets
Total
2,20,125
Working
(1)

F.A.
(Rs.)
Debtors
(Rs.)
Cash in
transit (Rs.)
Inter Co.
(Rs.)
A Ltd.
20,000
12,000
26,000
8,000
B Ltd.
60,000
21,000
C Ltd.
43,000
32,000
3,000
URP/ Cash
in transit
-400
1,23,000
(2)
Stock
(Rs.)
11,600
79,000
+1,000
-11,000
1,000
Nil

Capital
(Rs.)
A Ltd.
1,00,000
C Ltd.
Reserve
(Rs.)
P&L
(Rs.)
1,00,000
Inter Co.
(Rs.)
Prop.
Dividend
(Rs.)
48,000
16,000
7,000
3,000
10,000
125
500
5,000
7,000
2,000
1,000
B Ltd.
-Contra
Creditors
(Rs.)
1,200
4,480
49,325
20,980
289
-10,000
12,000
Nil
13,000
(3)
Analysis of profit-B Ltd.

Capital (Rs.)
Revenue (Rs.)
G/R
General Reserve
8,000
Profit & Loss A/c
4,000
Time Adjustments
+5,000
P&L
2,000
10,000
8,000
-1,000
-400
Total
17,000
1,000
3,600
+Transfer From B
500
2,000
Total
17,000
1,500
5,600
20 % M.I.
3,400
300
1,120
A. Ltd. 80%
13,600
1,200
4,480

Capital
Revenue
G/R
Total
P&L
Profit & Loss A/c
3,000
General Reserve
7,500
1,500
+3,750
-750
-3,000
14,250
750
3,000
B Ltd. 4 /6
9,500
500
2,000
A Ltd 1/6
2,375
125
500
M.I. 1/6
2,375
125
500
Time adjustments
(5)
12,000
-4,000
Less URP
(4)
Total (Rs.)
6,000
9,000
Minority Interest
Share Capital in B Ltd.
20000
Share Capital in C Ltd.
10000
Profits in B Ltd. (3400 + 300 +

1120)
4820
Profits in C Ltd. (2375 + 125 + 528)
3000
37820
290
9,000
(6)
Cost of control
Rs.
161,000
-80,000
-50,000
Capital profits C 9500+2375
-11,875
Capital profits B
-13,600
G/w
5,525
Question 18
The following are the Balance Sheets of A Ltd. and Subsidiaries B Ltd. and C Ltd. as on 31st
December, 2014.
Share Capital (in shares of Rs. 100

each)
A Ltd.
B Ltd.
C Ltd.
Rs.
Rs.
Rs.
12,50,000
10,00,000
6,00,000
1,60,000
20,000
51,000
Reserves
1,80,000
1,00,000
72,000
Sundry Creditors
Total
1,03,000
16,93,000
1,20,000
12,40,000
7,23,000
Fixed Assets
Investment at cost
2,80,000
10,30,000
5,50,000
5,30,000
3,75,000
Sundry Debtors
Stock-in- trade
2,63,000
1,20,000
1,60,000
3,48,000
16,93,000
12,40,000
7,23,000
(a)
The break-up of investments, which were all made on 30th June, 2014 is as
under:
(i)
A Ltd. held 7,500 shares in B Ltd. at a cost of Rs. 8,50,000 and 1,500 shares in
C Ltd. at a cost of Rs. 1,80,000
(ii)
B Ltd. held 4,000 shares in C Ltd. at cost of Rs. 5,30,000.
(b) (i)
Sundry Creditors of A Ltd. include Rs. 33,000 due to C Ltd. which amount is
duly reflected in the books of C Ltd.
(ii)
Sundry Creditors of B Ltd. include Rs. 72,000 due to A Ltd. whereas Sundry
Debtors of A Ltd include Rs. 86,000 due from B Ltd. The difference of
291
Rs.14,000 being cash in transit from B Ltd. to A Ltd. as on 31st December,

2014.
(c) (i)
The subsidiaries position as on the date acquisition of shares (ie, on 30 th

June. 2014) was as follows :
B Ltd.
Rs.
C Ltd.
Rs.
Reserves
90,000
60,000
10,000
8,400
Sundry Creditors
40,000
Fixed Assets
5,50,000
Stock-in-trade
3,68,400
40,000
Sundry Debtors
5,50,000
30,000
(ii)
The whole of the stock-in-trade of B Ltd. as on 30th June, 2014 was

subsequently sold to A Ltd. at a profit of 20% on selling price.
(d)
The stock-in-trade of A Ltd. as on 31st December, 2014 includes Rs. 25,000

being cost to A Ltd. of the above stock purchased from B Ltd. and remaining
unsold as on that date.
Prepare a Consolidated Balance Sheet as on 31st December, 2014.

Answer
Particulars
Note
(Rs.)
I.
(1)
Shareholder's Funds
(a) Share Capital
2
2
2
(2)
(b) Reserves and Surplus (1994507+192750)

Minority Interest
(3)
Current Liabilities
(a) Trade payables
1,18,000
21,08,300
1
1
12,05,000
1,22,300
Total
II.
(1)
12,50,000
3,92,200
348,100
Assets
Non-current assets
Fixed assets
i. Tangible assets
292
(2)
Current assets
(a) Inventories
1,15,000
6,52,000
14,000
Total
21,08,300
Working
(1)

F.A. (Rs.)
Stock
(Rs.)
Debtors
(Rs.)
A Ltd.
2,80,000
1,20,000
2,63,000
B Ltd.
5,50,000
160,000
C Ltd.
3,75,000
348,000
Cash in transit
12,05,000 1,20,000
(2)
-19,000
14,000
6,52,000
14,000

Capital
(Rs.)
(3)
Cash in transit
(Rs.)
P&L
(Rs.)
Reserve
(Rs.)
Creditors
(Rs.)
A Ltd.
12,50,000
160,000
180,000
1,03,000
B Ltd.
28,800
9,750
120,000
C Ltd.
10,650
3,000
-Contra
105,000
12,50,000
1,99,450
192,200
1,18,000
Analysis of profit-B Ltd.

Capital
(Rs.)
Revenue
(Rs.)
G/R
General Reserve
90,000
Profit & Loss A/c
10,000
P&L
10,000
1,00,000
10,000
293
Total
(Rs.)
20,000
Add: Transfer from C
URP (20% of 25000)
(4)
8,000
-5,000
Total
100,000
13,000
38,400
M.I.-25%
25,000
3250
9,600
A. Ltd. 75%
75,000
9,750
28,800

Capital
(Rs.)
Revenue
(Rs.)
G/R
Total
(Rs.)
P&L
Profit & Loss A/c
60,000
12,000
72,000
General Reserve
8,400
42,600
51,000
68,400
12,000
42,600
A 15/60
17,100
3,000
10,650
B Ltd 40/60
45,600
8,000
28,400
5,700
1,000
3,550
Total
M.I. 5/60
(5)
28,400
Minority Interest
Rs.
Shares held by outsiders B
250,000
Shares held by outsiders C
50,000
Profits from C (5700 + 1000 +

3550)
10,250
Profits from B (25000 + 3250 +

9600)
37,850
3,48,100
294
(6)
Cost of control
Rs.
15,60,000
-7,50,000
-5,50,000
Capital profits C (17100 + 45600)
-62,700
Capital profits B
-75,000
G/w
122,300
Question 19
X Ltd. purchases its raw materials from Y Ltd. and sells goods to Z Ltd. In order to
ensure regular supply of raw materials and patronage for finished goods, X Ltd.
through its wholly owned subsidiary, X Investments Ltd. acquires on 31st December,
2014, 51% of equity capital of Y Ltd. for Rs. 15 crores and 76% of equity capital of Z
Ltd. for Rs.30 crores. X Investments Ltd. was floated by X Ltd. in 2008 from which date
it was wholly owned by X Ltd.
The following are the Balance Sheets of the four companies as on 31st December, 2014:
Rs. in crore
X Ltd.
(Rs.)
X Invest
Ltd. (Rs.)
Y Ltd.
(Rs.)
Z Ltd.
(Rs.)
Equity (Fully paid) Rs. 10 each
25
10
15
75
20
15
20
Loan Funds: Secured
15
20
Unsecured
10
50
10
15
Current Liabilities
10
64
143
135
75
104
213
15
30
Fixed Assets: Cost

Less: Depreciation
Net Fixed Assets
60
-
35
25
Investments Equity Shares of:

X Investments Ltd.
295
7
8
17
13
Y Ltd.
15
Z Ltd.
30
Other
Companies
Value Rs. 116)
29
(Market
Current Assets
105
96
200
135
75
104
213
There are no intercompany transactions outstanding between the companies. You are
asked to prepare consolidated balance sheet as at 31st December, 2014.
Answer
Consolidated Balance Sheet of X Ltd. and its subsidiaries as on 31.12.2014
Rs. in crore
I.
(1)
Shareholder's Funds
(a) Share Capital
25
(b) Reserves and Surplus (75 + 20)
95
(2)
Minority Interest
20.65
(3)
Non Current Liabilities
125
(4)
Current Liabilities
217
Total
II
Assets
(1)
Non-current assets
Tangible assets
482.65
46
Intangible assets
5.65
Non current investments
29
Current assets
402
Total
296
482.65
Working
(1)
(Rs. in crores)
Fixed
assets
(Rs.)
X Ltd.
105
29
Y Ltd.
15
96
Z Ltd.
30
200
-59
46
29
402
Less depreciation

Capital
(Rs.)
X Ltd.
3.
Current
assets
(Rs.)
60
X Investments Ltd.
(2)
Investments
(Rs.)
R& S
(Rs.)
(Rs. in crores)
Uns.
Loan
(Rs.)
Sec. loan
(Rs.)
Current liabilities
(Rs.)
25
75
10
15
10
X Investments
Ltd.
20
50
Y Ltd.
10
64
Z Ltd.
15
20
143
25
95
85
40
217
Analysis of Profits of X Investments Ltd.
(Rs. in crores)
Capital
Profit
(Rs.)
Revenue
(Rs.)
Total
(Rs.)
20
Reserves & surplus
20
Transfer from Y & Z
X Ltd.-100%
20
297
4.
Analysis of Profits of Y Ltd.
(Rs. in crores)
Capital
Profit
(Rs.)
Reserves & surplus
5.
15
Less: Minority Interest (49%)
7.35
X Investments Ltd.-51%
7.65
Analysis of Profits of Z Ltd.
Total
(Rs.)
15
(Rs. in crores)
Capital
Profit (Rs.)
Revenue
(Rs.)
Total
(Rs.)
Reserves & surplus
20
20
Less: Minority Interest (24%)
4.8
X Investments Ltd. 76%

6.
Revenue
(Rs.)
15.2
Cost of Control
(Rs. in crores)
Investment in X Investments Ltd.
Investment in Y Ltd.
15
Investment in Z Ltd.
30
Less: Share capital X Investments
-5
Less: Share capital Y Ltd.
-5.1
Less : Share capital Z Ltd.
-11.4
Capital Profits x Investments Y & Z Ltd.

(0+15.2+7.65)
Goodwill
298
-22.85
5.65
7.
Minority Interest
(Rs. in crores)
Share capital X Investments
Share capital Y Ltd.
4.9
Share capital Z Ltd.
3.6
Capital profit Y Ltd.
7.35
Capital Profit Z Ltd.
4.8
20.65
Question 20
Following are the Balance Sheets of Mumbai Limited, Delhi Limited, Amritsar Limited and
Kanpur Limited as at 31st December, 2014:
Liabilities
Mumbai
(Rs.)
Delhi
(Rs.)
Amritsar
(Rs.)
Kanpur
(Rs.)
Share Capital (Rs. 100

face value)
50,00,000
40,00,000
20,00,000
60,00,000
General Reserve
20,00,000
4,00,000
2,50,000
10,00,000
10,00,000
4,00,000
2,50,000
3,20,000
3,00,000
1,00,000
50,000
80,000
83,00,000
49,00,000
25,50,000
74,00,000
Sundry Creditors
Assets
Investments: 30,000
shares in Delhi Ltd.
35,00,000
10,000 shares
Amritsar Ltd
in
11,00,000
5,000
shares
Amritsar Ltd.
in
Shares in Kanpur Ltd.

@ Rs. 120
5,00,000
36,00,000
18,00,000
6,00,000
20,00,000
15,00,000
70,00,000
1,00,000
6,00,000
4,50,000
4,00,000
83,00,000
49,00,000
25,50,000
74,00,000
Fixed Assets
Current Assets
299
Balance in General Reserve Account and Profit & Loss Account, when shares were
purchased in different companies were:
General Reserve Account

Mumbai
Delhi
Amritsar
Kanpur
Ltd.
Ltd.
Ltd.
Ltd.
10,00,000
2,00,000
1,00,000
6,00,000
6,00,000
2,00,000
50,000
60,000
Required: Prepare the consolidated Balance Sheet of the group as at 31st December,
2000 (Calculations may be rounded off to the nearest rupee).
Answer
CBS of Mumbai With its subsidiaries
(1)
Shareholder's Funds
(a) Share Capital
50,00,000.00
40,32,187.50
(2)
Minority Interest(W.N.)
31,25,312.50
(3)
Current Liabilities
Trade payables
5,30,000.00
Total
1,26,87,500.00
Fixed assets
i. Tangible assets
105,00,000.00

(2)
6,37,500.00
Current assets
15,50,000.00
Total
(1)
1,26,87,500.00
Consolidated Assets & Liabilities
Mumbai
Share
Capital
(Rs.)
G/R
(Rs.)
50,00,000
20,00,000
10,00,000.00
1,00,000
259,375
2,40,312.50
20,00,000
6,00,000
91,666.67
1,10,833.33
15,00,000
450,000
2,00,000
1,30,000.
70,00,000
400,000
25,51,041.67
14,81,145.83
105,00,000
15,50,000
Delhi
Amritsar
Kanpur
50,00,000
P&L
(Rs.)
300
F.A
(Rs.)
C.A.
(Rs.)
(2)
Analysis of profit-Kanpur Ltd.

Capital
(Rs.)
Revenue
(Rs.)
G/R
(3)
General Reserve
6,00,000
Profit & Loss A/c
60,000
Total
(Rs.)
P&L
4,00,000
10,00,000
260,000
Total
6,60,000
4,00,000
260,000
Minority Interest
1,10,000
66,666.67
43,333.33
Mumbai -1/2
3,30,000
2,00,000
1,30,000
Delhi-1/4
165,000
1,00,000
65,000
Amritsar 1/12
55,000
33,333.33
21,666.67
320,000
Analysis of profit-Amritsar Ltd.

Capital
(Rs.)
Revenue
(Rs.)
G/R
General Reserve
1,00,000
Profit & Loss A/c
50,000
Kanpur
P&L
1,50,000
2,50,000
200,000
33,333.33
Total
Total
(Rs.)
21,666.67
1,50,000 1,83,333.33 2,21,666.67
Minority Interest - 37,500.00
45,833.33
55,416.67
55,416.67
Delhi-1/4
37,500
45,833.33
Mumbai 1/2
75,000
91,666.67 1,10,833.33
301
250,000
(4)
Analysis of profit-Delhi Ltd.

Capital (Rs.)
5.
Revenue (Rs.)
Total (Rs.)
G/R
General Reserve
2,00,000
2,00,000
4,00,000
Profit & Loss A/c
2,00,000
2,00,000
4,00,000
Kanpur Ltd.
1,00,000
65,000
Amritsar Ltd.
45833.33
55416.67
Total
4,00,000
345833.33
320416.67
Mumbai
3,00,000
259375.00
240312.50
Minority Interest
100,000.00
86458.33
80104.17
Cost of Control
(Rs.)
(Rs.)
Investments in Delhi Ltd.
35,00,000
Amritsar Ltd. (1100000 + 500000)
16,00,000
Kanpur Ltd. (3600000 + 1800000 + 600000)
60,00,000 1,11,00,000
Paid up value of Delhi Ltd.
30,00,000
Amritsar Ltd.
15,00,000
Kanpur Ltd.
50,00,000 (95,00,000)
Capital profits in Delhi Ltd.
3,00,000
Amritsar Ltd. (75000 + 37500)
1,12,500
Kanpur Ltd. (330000 + 165000 +55000)
5,50,000
Goodwill
(9,62,500)
6,37,500
302
6.
Minority Interest
Share Capital in Delhi
10,00,000
In Amritsar
5,00,000
In Kanpur
10,00,000
Profits in Delhi
2,66,562.50
In Amritsar
1,38,750.00
In Kanpur
2,20,000.00
25,00,000
6,25,312.5
31,25,312.5
Question 21
Given below are the Profit & Loss Account of H Ltd. and its subsidiary Ltd. for the year
ended 31st March, 2015.
Incomes:
H Ltd.
S Ltd.
(Rs. in lacs)
(Rs. in lacs)
Sales and other income
5,000
1,000
Increase in stock
1,000
200
6,000
1,200
Raw material consumed
800
200
Wages and Salaries
800
150
Production expenses
200
100
200
100
Selling and Distribution Expenses
200
50
Interest
100
50
Depreciation
100
50
2,400
700
Expenses:
303
Profit before tax
3,600
500
Provision for tax
1,200
200
Profit after tax
2,400
300
Proposed dividend
1,200
150
Balance of Profit
1,200
150
Other Information:
H Ltd. sold goods to S Ltd. of Rs. 120 lacs at cost plus 20%. Stock of S Ltd. includes such
goods valuing Rs. 24 lacs. Administrative Expenses of S Ltd. includes Rs. 5 lacs paid to H
Ltd. as consultancy fees. Selling and Distribution expenses of H Ltd. include Rs.10 lacs paid
to S Ltd. as commission.
H Ltd. holds 80% of equity share capital of Rs. 1,000 lacs in S Ltd. on 31.03.2004.
Prepare consolidated Profit & Loss Account of H Ltd. and its subsidiary Ltd. for the year
ended 31st March, 2015.
Answer
CPL of H Ltd. and its subsidiary S Ltd. for the year ended on 31st March, 2015
Particulars
I
II
Total revenue
III
Expenses
Note
No.
Rs. in Lacs
Rs. in
Lacs
5,865
5,865
Cost of Material purchased/Consumed
1,180
Changes of Inventories of finished goods
(1,196)
Employee benefit expense
950
Finance cost
150
Depreciation and amortization expense
150
Other expenses
535
Total expenses
1,769
IV
Profit before Tax (II-III)
4,096
Tax Expenses
304
1,400
VI
Profit After Tax
2,696
Profit transferred to Consolidated Balance

Sheet
Profit After Tax
2,696
Proposed dividend
H Ltd.
1,200
S Ltd.
150
Less: Share of H Ltd. in proposed dividend

80% x150
(120)
Profit to be transferred to consolidated

balance sheet
1,466
Notes to Accounts
1.
Revenue form Operations

Sales and other income
2.
H Ltd.
5,000
S Ltd.
1,000
Less: Inter-company Sales
(120)
Consultancy fees received by H Ltd. from S

Ltd.
(5)
Commission received by S Ltd. from H Ltd.
(10)
5,865
Increase in Stock
H Ltd.
1,000
S Ltd.
200
Less: Unrealised profits Rs. 24 lacs 20/120
305
1,230
(4)
1,196
Cost of Material purchased/consumed

H Ltd.
800
S Ltd.
200
Less: Purchases by S Ltd. from H Ltd.
(120)
880
Direct Expenses
4.
H Ltd.
200
S Ltd.
100
300
Employee benefits and expenses

Wages and Salaries:
5.
H Ltd.
800
S Ltd.
150
950
Other Expenses
H Ltd.
200
S Ltd.
100
Less: Consultancy fees received by H Ltd. from

S Ltd.
(5)
295
Selling and Distribution Expenses :

H Ltd.
200
S Ltd.
50
Less : Commission received from S Ltd. from H

Ltd.
6.
(10)
240
535
Finance Cost
Interest:
H Ltd.
100
S Ltd.
50
306
150
7.
Depreciation and Amortisation

Depreciation:
8.
H Ltd.
100
S Ltd.
50
150
Provision for tax

H Ltd.
1,200
S. Ltd.
200
1,400
It is assumed that H Ltd. acquired shares in S Ltd. before 2010-2011.

Question 22
Write a short note on Minority Interest.
Answer
In actual practice, it rarely happens that the cost of acquisition of shares in the subsidiary
company agrees exactly with intrinsic value of the shares (i.e. the net assets of the
subsidiary company) on the date of acquisition.
If the price paid by the holding company for the shares acquired in the subsidiary company
is more than the intrinsic value of the shares acquired, the difference should be treated as
Cost of Control or Goodwill. If on the other hand, the price paid by the holding company for
the shares acquired in the subsidiary company is less than the intrinsic value of the shares
acquired, the difference should be treated as capital profits and credited to Capital Reserve.
It should be noted that while computing the intrinsic value of the shares as on the date of
acquisition of control, all profits and losses upto that date, have to be taken into account.
While preparing the consolidated balance sheet, such Goodwill or Capital Reserve,
whatever may be the case, must be shown in the Balance Sheet.
Question 23
Write a short note on treatment of contingent liabilities..
Answer
Contingent Liabilities: A contingent liability appears as a footnote. This is on account of a
liability which may or may not arise in the future. While preparing a consolidated Balance
Sheet they may be categorized as external current liabilities or internal current liabilities.
External liabilities between the holding and subsidiary firm and the outsiders. Internal
current liabilities is on account of transactions between the firms belonging to the same
group. The external liabilities continue unchanged for the same group while internal
liabilities no longer appears as a footnote as it is generally incorporated on the liability
side.
307
Question 24
Write a short note on inter company transaction between holding and subsidiary.
Answer
Inter Company Transactions: The holding and subsidiary firm may have centered into
the following transaction and these common transactions will be eliminated while
compiling the consolidated Balance Sheet.
(a) The holding or the subsidiary firm may have granted loans (short term) to each
other.
(b) They may have sold goods on credit in which case the inter company transactions
will be included in debtors and creditors.
(c) The subsidiary or holding company may have drawn Bills of Exchange on each
other in which case the common transaction will be included in Bills Payable/ Bills
Receivable.
In all the above cases where the companies were treated as separate entities, these
transactions would appear on the liabilities side on the Balance Sheet of one and on the
assets side of the others Balance Sheet. However, when the entire group is being treated as
a single entity it is undesirable to include common transaction and therefore they will be
eliminated in the consolidated Balance Sheet from the liabilities as well as assets side.
Question 25
Write a short not Revaluation of assets and Liabilities of subsidiary company.
Answer
The Holding company may revalue the Assets and Liabilities of the subsidiary firm at the
time of acquisition of shares in terms of market prices. In such a case the rate of revaluation
is, assumed to be the same date as acquisition of shares. The profit or loss on revaluation is
capital in nature and accordingly will be adjusted for in the analysis of profit under capital
profits. The date of acquisition of shares as considered earlier also may not coincide with
date of Balance Sheet in which case as stated earlier the current years profit has to be
segregated between capital and revenue. Since the date of revaluation of assets is the date
of acquisition of shares, a change in depreciation may be required on the revalued assets
from the date of acquisition till the closing of Balance Sheet. For, presumably the Balance
Sheet of the subsidiary company has been made or complied in terms of its original values.
Information with respect to revaluation has to be explicitly stated by an agreement
between the firms at the time of acquisition of majority share by the holding company.
Question 26
Write a short not preference share in subsidiary company.
308
Answer
With respect to the Subsidiary firm if preference share capital has been issued there are 2
possibilities.
All preference shares are held by the outsiders i .e. other than holding company i.e
which case the paid up value of the preference shares of the Subsidiary company is
added to the minority interest.
It is possible that part whole of the preference. shares of the Subsidiary company is
held by the Holding Company. In such a case the cost of acquiring of the preference
shares (shown in the investment account in the assets side in the Balance Sheet of
the holding company) is compared with the paid up value (shown in Balance Sheet
of Subsidiary firm) and the difference if any, adjusted in the cost of control. (if
preference shares are issued after date of acquisition the adjustments remain the
same)
Arrears of preference dividends may be payable or outstanding at the time of consolidation

of Balance Sheet and usually preference dividends are cumulative in nature. If the
subsidiary company, has adequate profits, it is reasonable to assume that these dividends
will be paid. The minorities shares will be added to Minority Interest while with respect to
the holding company the treatment will differ in terms of the divided being paid out of pre
acquisition or post acquisition profits or both.
In case the dividends are paid out of pre-acquisition profits (capital profit), the dividend
due to the holding company will be adjusted for in the cost of control. In case post
acquisitions revenue profits are employed, the dividend due to the holding company will be
credited (added on) to the Profit and Loss Account of the holding company in the
consolidated Balance Sheet. It is possible that a combination of both pre and post
acquisition profit is employed for the purpose of making dividend payment in which case
the dividend paid out of the capital profit will be adjusted for in the cost of control and the
portion out of revenue profit will be adjusted for in the P/L Account of Holding company.
Question 27
On 31st March, 2015 the balance sheets of H. Ltd. and S. Ltd. appeared as follows :
H. Ltd.
(Rs.)
I
(1)
Shareholders' funds (a) Share capital (in Rs. 50,00,000

100 shares)
S. Ltd.
(Rs.)
20,00,000

Securities premium
4,00,000
309
(2)
II
General reserve (as on 1.4.2014)
20,00,000
4,00,000
Surplus
15,40,000
3,10,000
Current liabilities Trade payables
5,60,000
1,30,000
TOTAL
95,00,000
28,40,000
(a) Fixed assets Land and building
28,00,000
10,00,000
Plant and machinery
14,00,000
5,16,000
(b) 75% Shares in S. Ltd.
20,25,000
(a) Inventories
16,80,000
6,42,000
15,00,000
5,80,000
(c) Cash
95,000
1,02,000
TOTAL
95,00,000
28,40,000
ASSETS
(2)
Current assets
Additional information :
(i)
H. Ltd. acquired the shares of S. Ltd. on 1st August, 2014.
(ii) Surplus of H. Ltd. includes interim dividend @15% received from S. Ltd. on 1st
January, 2015.
(iii) On 1st April, 2014, S. Ltd.'s surplus showed credit balance of Rs. 1,90,000.
You are required to prepare a consolidated balance sheet of H. Ltd. and S. Ltd. on 31st
March, 2015.
Answer
I
(1)
Shareholder's Funds
(a) Share Capital
Rs.
1
310
50,00,000

(4,00,000+20,00,000+15,25,000+22,500)
(2)
(3)
Current Liabilities
6,77,500
Trade payables
1
Total
II
Assets
(1)
Non-current assets
39,47,500
6,90,000
1,03,15,000
Fixed assets
Tangible assets (38,00,000+19,16,000)
(2)
57,16,000
(a) Inventories
23,22,000
20,80,000
1,97,000
Current assets
Total
1,03,15,000
Working
(1)

Particulars
L& B
Rs.
P&M
Rs.
Stock
Rs.
Debtors
Rs.
28,00,000 14,00,000 16,80,000 15,00,000
10,00,000
5,16,000
6,42,000
Cash
Rs.
95,000
5,80,000 1,02,000
38,00,000 19,16,000 23,22,000 20,80,000 1,97,000
311
(2)

Capital
Rs.
Premium
Rs.
H Ltd
50,00,000
S Ltd.
General
Reserve
Rs.
Surplus
Rs.
4,00,000 20,00,000
-
-Dividend
Rectification
(133,333 x
75%)
15,40,000
5,60,000
85,000
1,30,000
-1,00,000
50,00,000
(3)
4,00,000 20,00,000
15,25,000
Minority Interest
Rs.
Share Capital
5,00,000
Capital Profit
1,49,167
Revenue profit
28,333
6,77,500
(4)
Trade
Payable
Rs.
Cost of control
Rs.
75% Shares in S. Ltd.
20,25,000
Share Capital
-15,00,000
-Dividend Rectification (133,333 x 75%)
-1,00,000
Capital Profit
-4,47,500
Capital reserve
22,500
312
6,90,000
(5)
AOP- S Ltd.
Capital
Rs.
Revenue
Rs.
G/R
General Reserve
4,00,000
Surplus
1,90,000
Interim Dividend Paid @

15% on Rs. 20 lacs share
capital
Total
Total
Rs.
P&L
-
4,00,000
1,20,000
3,10,000
3,00,000
5,90,000
4,20,000
Time adjustment
(4,20,000 x 4/12)
+140,000
-140,000
-interim Dividend in the

ratio of 4:5
-133,333
-166,667
5,96,667
1,13,333
H-75%
4,47,500
85,000
MI-25%
1,49,167
28,333
Total
Dividend has been paid in January, hence it is assumed that profit for 9 months has been
distributed. 4 Months profit will be capital & 5 Months profit will be revenue.
Question 28
The following are the balance sheets of H Ltd. and S Ltd. as at 31st March, 2015 :
I
(1)
Shareholders Funds
(a) Share capital (Rs.100 each)
H. Ltd.
S. Ltd.
Rs.
Rs.
5,00,000
2,00,000
1,00,000
60,000

General reserve (1.4.2014)
313
Surplus (Profit & Loss a/c)

(2)
1,40,000
90,000
80,000
90,000
8,20,000
4,40,000
3,60,000
2,20,000
40,000
30,000
2,40,000
1,00,000
90,000
20,000
75,000
(c) Cash
60,000
25,000
8,20,000
4,40,000
Current Liabilities Trade payables

TOTAL
II
ASSETS
(1)
Non-current assets
(a) Fixed assets
(i) Tangible assets
(ii) Goodwill
(b) Investments (1,500 shares in S. Ltd.)
(2)
Current assets
(a) Inventories
TOTAL
The profit and loss account of S Ltd. showed a balance of Rs. 53,000 on 1st April, 2014. A
dividend of 15% was paid on 15th October, 2014 for the year 2013-14. Corporate Dividend
tax @15% was also paid on the dividend. The dividend was credited by H Ltd. in its profit
and loss account. H Ltd. acquired the shares on 1st October, 2014. The trade payables of S.
Ltd. include Rs.20,000 for goods supplied by H. Ltd. The stock of S Ltd. includes goods to
the value of Rs.8,000 which were supplied by H Ltd. at a profit of 33 % on cost. Prepare a
consolidated balance sheet.
Answer
Rs.
I.
(1)
Shareholder's Funds
(a) Share Capital
5,00,000
(b) Reserves and Surplus (1,00,000+141,750+18,750)
2,60,500
(2)
(3)
Current Liabilities
87,500
Trade payables
2
Total
314
170,000
10,18,000
II.
Assets
(1)
Non-current assets
Fixed assets
580,000
Tangible assets
Intangible goodwill
(2)
70,000
Current assets
Inventories
188,000
Trade receivables
95,000
Cash
85,000
Total
10,18,000
Working
(1)

Particulars
F. A (Rs.)
Intangible Inventories
(Rs.)
(Rs.)
3,60,000
40,000
1,00,000
20,000
60,000
2,20,000
30,000
90,000
75,000
25,000
Cash
(Rs.)
95,000
85,000
-2,000
Unrealised Profit
(8,000 x25%)
5,80,000
(2)
Trade
Receivables
(Rs.)
70,000
188,000

Capital
(Rs.)
General
reserve
(Rs.)
Surplus
account
(Rs.)
H Ltd.
5,00,000
1,00,000
1,40,000
80,000
S Ltd.
26,250
90,000
-22,500
Dividend rectification
(30,000x75%)
Unrealised
25%)
Profit
(8,000
Trade
Payable
(Rs.)
-2,000
x
5,00,00
315
1,00,000
141,750
170,000
(3)
Minority Interest
Rs.
Share capital
50,000
Revenue Profit
8,750
Capital Profit
28,750
87,500
(4)
Cost of control
Rs.
Investment in S
2,40,000
Share capital
-150,000
Capital Profit
-86,250
Dividend rectification (30,000x75%)
-22,500
Capital Reserve
(5)
18,750
AOP- S Ltd.
Capital
Revenue
G/R
General Reserve
60,000
Surplus
53,000
Dividend 30,000 + CDT

3,000
Total
P&L
60,000
37,000
33,000
113,000
70,000
Time adjustment
+35,000
-35,000
-Dividend as per source
-33,000
Total
1,15,000
35,000
H-75%
86,250
26,250
MI-25%
28,750
8,750
316
Total
90,000
Question 29
A Ltd. acquired 2,000 equity shares of Rs. 100 each in B Ltd. on 31st December, 2014. A
summarised balance sheet of the two companies, A Ltd. and B Ltd., as on 31st December,
2015 was as follows :
A Ltd.
(Rs.)
B Ltd.
(Rs.)
8,00,000
2,50,000
General reserve
3,00,000
50,000
Surplus
1,00,000
1,00,000
2,00,000
50,000
14,00,000
4,50,000
(a) Fixed assets
7,00,000
2,50,000
(b) 2,000 shares in B Ltd. (at cost)
3,00,000
Current assets
4,00,000
2,00,000
14,00,000
4,50,000
(1)
Shareholders' funds
(a) Shares of Rs. 100 each
(2)
Current Liabilities
Trade payables
TOTAL
II
ASSETS
(1)
Non-current assets
(2)
TOTAL
317
When A Ltd. acquired shares, B Ltd. had a credit balance of Rs. 50,000 in the general
reserve and Rs. 20,000 as surplus in the statement of profit and loss.
B Ltd. issued bonus shares in the ratio one for every five shares held out of the profit
earned during the year 2014. This is not shown in the above balance sheet of B Ltd. You
are required to prepare consolidated balance sheet for H Ltd. as on 31st December, 2015
from the above information.
Answer
CBS of A Ltd. with its subsidiary B Ltd. as on 31st December, 2015
I.
Rs.

(a) Share Capital
8,00,000
(b) Reserves and Surplus (3,00,000+100,000+64,000)
4,64,000
80,000
(3) Current Liabilities

Trade payables
2
Total
II.
250,000
15,94,000
Assets

Fixed assets
950,000
Tangible assets
Intangible goodwill (W.N.4)
44,000
(2) Current assets
1
Total
Working
(1)

Particulars
F. A.
(Rs.)
Current assets
(Rs.)
7,00,000
4,00,000
2,50,000
2,00,000
9,50,000
6,00,000
318
6,00,000
15,94,000
(2)
(3)

Capital
(Rs.)
General
reserve
(Rs.)
Surplus
account
(Rs.)
Trade
Payable
(Rs.)
A Ltd.
8,00,000
3,00,000
1,00,000
2,00,000
B Ltd.
64,000
50,000
8,00,000
3,00,000
1,64,000
2,50,000
Minority Interest
Rs.
Share capital
50,000
Revenue Profit
16,000
Capital Profit
4,000
Bonus shares
10,000
80,000
(4)
Cost of control
Rs.
Investment in A
3,00,000
Share capital
-2,00,000
Capital Profit
-16,000
Bonus shares (50,000 x

80%)
-40,000
Goodwill
44,000
319
(5)
AOP - B Ltd.
Capital
Revenue
G/R
General Reserve
50,000
Surplus
20,000
Bonus
-50,000
Total
Total
P&L
-
50,000
80,000
1,00,000
20,000
80,000
A-80%
16,000
64,000
MI-20%
4,000
16,000
Question 30
H Ltd. acquired 4,000 shares on 30th June, 2014 in S Ltd. H Ltd. received 10% dividend for
the year 2013 and it is credited in profit and loss account of H Ltd. Following are the
balance sheets of H Ltd. and S Ltd. as on 31st December, 2014 :
H Ltd.
Rs.
S Ltd.
Rs.
60,000
50,000
General reserve (1.1.2014)
12,000
10,000
Profit/loss (as on 1.1.2014)
4,000
8,000
30,000
20,000
10,000
8,000
1,16,000
96,000

Share capital Equity share capital of
Rs.10 each
Profit for the year ended 31.12.2014

Current liabilities
Trade payables
Total
320
II Assets Non-current assets

Fixed assets
44,000
60,000
Investment Investment in S Ltd.
52,000
Current assets
20,000
36,000
1,16,000
96,000
Total
You are required to prepare consolidated balance sheet for H Ltd. as on 31st December,
2014 from the above information.
Answer
CBS of H Ltd. with its subsidiary S Ltd. as on 31st December, 2014
I
Rs.

(a) Share Capital
60,000

(40,000+12,000+12,400)
64,400
17,600
(3) Current Liabilities

Trade payables
2
Total
II
18,000
1,60,000
Assets

Fixed assets
Tangible assets
(2) Current assets
Total
Working
(1)

Particulars
F. A
(Rs.)
Current assets
(Rs.)
44,000
20,000
60,000
36,000
1,04,000
56,000
321
104,000
56,000
1,60,000
(2)

Capital
General
reserve
P&L account
Trade
Payable
H Ltd.
60,000
12,000
34,000
10,000
S Ltd.
10,000
8,000
Dividend
Rectification
-4,000
60,000
12,000
40,000
18,000
(3) Minority Interest

Rs.
Share capital
10,000
Capital Profit
5,100
2,500
17,600
(4)
Cost of Control
Rs.
Investment in S
(5)
52,000
Share capital
-40,000
Capital Profit
-20,400
Dividend Rectification (5,000x80%)
-4,000
Capital Reserve
12,400
AOP- S Ltd.
Capital
(Rs.)
Revenue
(Rs.)
G/R
General Reserve
Profit & Loss
10,000
P&L
-
8,000
322
Total
(Rs.)
-
10,000
20,000
28,000
Dividend Paid @ 10%

Total
Time adjustment
(25,000 x 6/12)
- Dividend capital
Total
5,000
18,000
25,000
+12,500
-12,500
-5,000
25,500
12,500
H-80%
20,400
10,000
MI-20%
5,100
2,500
***
323
6
Valuation of
Shares & Intangible Assets
Question 1
Briefly discuss methods of valuation of intangible assets.
Answer
Valuation of intangible assets is a complex exercise, as the non-physical form of
intangible assets pose the difficulty of identifying the future economic benefits that the
enterprise can expect to derive from them. There are three main approaches for
valuing intangible assets:
(1)
Cost approach : In cost approach, historical expenditure incurred in

developing the asset is aggregated. Cost is measured by purchase price,
where the asset has been acquired recently.
(2)
Market value approach : In comparable market value approach, intangible

assets are valued with reference to transactions involving similar assets that
have cropped up recently in similar markets. This approach is possible when
there is an active market in which arms length transactions have occurred
recently involving comparable intangible assets and adequate information of
terms of transactions is available.
(3)
Economic value approach : This approach is based on the cash flows or

earnings attributable to those assets and the capitalization thereof, at an
appropriate discount rate or multiple. Some of the key parameters used in
this approach are projected revenues, projected earnings, discount rate, rate
of return etc. The information required can be derived from either internal
sources, external sources or both. Under this approach, the valuer has to
identify cash flows or earnings directly associated with the intangible assets
like the cash flows arising from the exploitation of a patent or copyright,
licensing of an intangible asset etc. This approach can be put to practice only
if cash flows arising from the intangible assets are identifiable from the
management accounts and budgets, forecasts or plans of the company. In
most situations of valuation of intangible assets, the economic based
approach is used, because of the uniqueness of intangible assets and the lack
of comparable market data for the use of market value approach.
324
Question 2
Find out the average capital employed of India Ltd. from its Balance sheet as at 31 st
March, 2006:
Liabilities
(Rs. in
lakhs)
Share Capital:
Assets
(Rs. in
lakhs)
Fixed Assets:
100.00
9% Pref. shares fully paid up
20.00
Reserve and Surplus:
Land and buildings
50.00
Plant and machinery
160.5
Furniture and fixture
11.00
General reserve
24.00
Vehicles
10.00
Profit and Loss
40.00
Investments
20.00
Secured loans:
Current Assets:
16% debentures
10.00
Stock
13.5
16% Term loan
36.00
Sundry Debtors
9.80
Cash credit
26.60
Cash and bank
20.80
Current Liabilities and Provisions:
Sundry creditors
1.00
5.40
12.80
Proposed dividend on:

Equity shares
20.00
Preference shares
1.80
296.60
Non-trade investments were 20% of the total investments.

Balances as on 1.4.2005 to the following accounts were:
Profit and Loss account Rs. 16.40 lakhs, General reserve Rs. 13.0 lakhs.
325
296.60
Answer
Computation of Average Capital employed
(Rs. in Lakhs)
Total Assets as per Balance Sheet
296.6
Less: Preliminary Expenses
1.00
Non-trade investments (20% of Rs. 10 lakhs)
4.00
5.00
291.60
Less:Outside Liabilities:
16% Debentures
10.00
16% Term Loan
36.00
Cash Credit
26.60
Sundry Creditors
5.40
12.80
Capital Employed as on 31.03.2006
90.80
200.80
Less: of profit earned:

Increase in reserve balance
11.00
Increase in Profit & Loss A/c
22.60
Proposed Dividend
21.80
55.40 X 50 %
Average capital employed
27.70
173.10
Question 3
On the basis of the following information, calculate the value of goodwill of Ganesh
Ltd. at three years purchase of super profits, if any, earned by the company in the
previous four completed accounting years.
326
Balance Sheet of Ganesh Ltd. as at 31st March, 2015

Liabilities
Rs. in lakhs
Share Capital:
Assets
Goodwill
Authorised
10,000
Issued and Subscribed

5 crore equity shares of Rs. 10
each, fully paid up
7,000
Rs. in lakhs
210
Land and Buildings
1950
Machinery
4,760
15
Patents and Trade Marks
32
Capital Reserve
260
9% Non-trading
Investments
600
General Reserve
543
Stock
873
Surplus i.e. credit balance of Profit

and Loss (appropriation) A/c
Debtors
1,114
477
Cash in hand and at Bank
46
Trade Creditors
468
20
Provision for Taxation (net)
122
Proposed Dividend for 2002-2003
750
_____
9,620
9,620
The profits before tax of the four years have been as follows:
Year ended 31st March
Profit before tax in lakhs of

Rupees
2011
2012
2013
2014
3,190
2,500
3,108
2,900
The rate of income tax for the accounting year 2010-2011 was 40%. Thereafter it has
been 38% for all the years so far. But for the accounting year 2014-2015 it will be
35%.
In the accounting year 2010-2011, the company earned an extraordinary income of Rs.
1 crore due to a special foreign contract. In August, 2011 there was an earthquake due
to which the company lost property worth Rs. 50 lakhs and the insurance policy did n ot
cover the loss due to earthquake or riots.
327
9% Non-trading investments appearing in the above mentioned Balance Sheet were

purchased at par by the company on 1st April, 2012.
The normal rate of return for the industry in which the company is engaged is 20%.
Also note that the companys shareholders, in their general meeting have passed a
resolution sanctioning the directors an additional remuneration of Rs. 50 lakhs every
year beginning from the accounting year 2015-2016.
Answer
(1) Capital employed as on 31st March, 2015
(Refer to Note)
Rs. in lakhs
Land and Buildings
1,950
Machinery
4,760
15
Patents and Trade Marks
32
Stock
873
Debtors
1,114
Cash in hand and at Bank
46
8,690
Less:
Trade creditors
468
Provision for taxation (net)
122
590
8,100
(2) Future maintainable profit

(Amounts in lakhs of rupees)
2010-2011
Rs.
Profit before tax
Rs.
3,190
Less: Extra-ordinary income

due to foreign contract
non-
2012-2013
Rs.
2,500
2013-2014
Rs.
3,108
2,900
100
Add: Loss due to earthquake

Less: Income from
trading Investments
2011-2012
50
54
54
3,090
2,550
________
3,054
________
2,846
328
As there is no trend, simple average profits will be considered for calculation of

goodwill.
Total adjusted trading profits for the last four years = Rs. (3,090 + 2,550 + 3,054 +
2,846) = Rs. 11,540 lakhs
Rs. in
lakhs
Average trading profit before tax =
2,885
Rs. 11,540lakhs
Less: Additional remuneration to directors
50
Less: Income tax @ 35%(approx.)
992 (Approx)
1,843
(3) Valuation of goodwill on super profits basis

Future maintainable profits
1,843
Less: Normal profits (20% of Rs. 8,100 lakhs)
1,620
Super Profits
223
Goodwill at 3 years purchase of super profits = 3 x Rs. 223 lakhs = Rs. 669 lakhs
Note:
In the above solution, goodwill has been calculated on the basis of closing capital employed
(i.e. on 31st March, 2015).
Question 4
Write short Note on capital market information-P/E ratio, yield ratio and market
value/book value of shares.
Answer
Capital market information-P/E ratio, yield ratio and market value/book value of
shares : Frequently share prices data are punched with the accounting data to generate
new set of information. These are (i) Price-Earning Ratio, (ii) Yield Ratio, (iii) Market
Value/Book Value per share.
Price- EarningsRatio(P/ERatio)
AverageShare Price
EPS
(Sometimes it is also calculated with reference to closing share price)

P/ERatio
Closing Share Price

EPS
329
It indicates the pay back period to the investors or prospective investors. The P/E ratio can
be interpreted on a comparison with the industry P/E. A low P/E in comparison to the
Industry can indicate that there are prospects for growth in share price and hence could be
an indicator to buy/hold the shares. A high P/E ratio in comparison to the Industry can be
an indicator to sell the shares.
Yield
or
Dividend
100
AverageShare Price
Dividend
100
Closing Share Price
This ratio indicates return on investment; this may be on average investment or closing
investment. Dividend (%) indicates return on paid up value of shares. But yield (%) is
the indicator of true return in which share capital is taken at its market value.
Market Value per share
Book Value per share
or
Average Share Price

Net Worth/No.of EquityShares
Closing Share Price

Net Worth/No.of Equity Shares
This ratio indicates market response of the shareholders' investment. Undoubtedly, higher
the ratio, better is the shareholders' position in terms of return and capital gains.
Question 5
The Balance Sheet of RNR Limited as on 31.12.2010 is as follows :
Liabilities
(Rupees
in Lakhs)
1,00,000 equity shares of

Rs. 10 each fully paid
Assets
(Rupees
in Lakhs)
Goodwill
10
1,00,000 equity shares of
Fixed assets
5
3
Intangible assets (market value)
Miscellaneous expenditure to
10
30
15
Other tangible assets
Rs. 6 each, fully paid up
Liabilities
the extent not written off
2
30
Fixed assets are worth Rs. 24 lakhs. Other Tangible assets are revalued at Rs. 3 lakhs. The
company is expected to settle the disputed bonus claim of Rs. 1 lakh not provided for in the
accounts. Goodwill appearing in the Balance Sheet is purchased goodwill. It is considered
reasonable to increase the value of goodwill by an amount equal to average of the book
value and a valuation made at 3 years purchase of average super-profit for the last 4
years.
330
After tax, profits and dividend rates were as follows :

Year
PAT
(Rs. in Lakhs)
Dividend %
2007
3.0
11%
2008
3.5
12%
2009
4.0
13%
2010
4.1
14%
Normal expectation in the industry to which the company belongs is 10%.

Akbar holds 20,000 equity shares of Rs. 10 each fully paid and 10,000 equity shares of
Rs. 6 each, fully paid up. He wants to sell away his holdings.
(i)
(ii)
Determine the break-up value and market value of both kinds of shares.
What should be the fair value of shares, if controlling interest is being sold ?
Answer
(i)
Break up value of Re. 1 of share capital =
Rs. 28.98 lakhs

Rs. 16.00 lakhs
= Rs. 1.81
Break up value of Rs. 10 paid up share= 1.81 10 = Rs. 18.10
Break up value of Rs. 6 paid up share = 1.81 6 = Rs. 10.86
Market value of shares :
11% 12% 13% 14%
Average dividend =
= 12.5%
Market value of Rs. 10 paid up share =

Market value of Rs. 6 paid up share =
12.5%
10 = Rs. 12.50
10%
12.5%
6
10%
= Rs. 7.50
(ii) Break up value of share will remain as before even if the controlling interest is being
sold. But the market value of shares will be different as the controlling interest would
enable the declaration of dividend upto the limit of disposable profit.
Rs. 3.4 lakhs
AverageProfit*
100 =
100 = 21.25%
Rs. 16 lakhs
Paidup valueof shares
Market value of shares :

For Rs. 10 paid up share =
For Rs. 6 paid up share =
21.25%
10 = Rs. 21.25
10%
21.25%
6 = Rs. 12.75
10%
331
Fair value of shares =
Breakup value Market value

2
Fair value of Rs. 10 paid up share =

Fair value of Rs. 6 paid up share
18.10 21.25
= Rs. 19.68
2
10.86 12.75
= Rs. 11.81
2
* (Transfer to reserves has been ignored)

Working Notes:
(Rs. in lakhs)
(a)
Calculation of average capital employed

Fixed assets
24.00
Other tangible assets

Intangible assets
30.00
Less : Liabilities
Bonus
3.00
3.00
10
1
Less : of profits [ (4.1 Bonus 1.0)]

Average capital employed
(b)
Calculation of super profit

Average profit
Less : Normal profit
= ( 3 + 3.5 + 4 + 4.1 Bonus 1.0 )

= 13.6
3.400
= 10 % of Rs. 17.45 lakhs
1.745
Super profit
(c)
11.00
19.00
1.55
17.45
1.655
Calculation of goodwill
3 Years purchase of average super-profit = 3 1.655 = Rs. 4.965 lakhs
Increase in value of goodwill
= (book value + 3 years super profit)

= (5 + 4.965)
= Rs. 4.9825 lakhs
Net assets as revalued including book value of goodwill

Add : Increase in goodwill (rounded-off)
Net assets available for shareholders
24.00
4.98
28.98
332
Question 6
Following are the information of two companies for the year ended 31st March, 2002 :
Particulars
Company A
Company B
Equity Shares of Rs. 10 each
8,00,000
10,00,000
10% Pref. Shares of Rs. 10 each
6,00,000
4,00,000
Profit after tax
3,00,000
3,00,000
Assume the Market expectation is 18% 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 shares.
(ii)
If you plan to invest only in preference shares which companys preference

shares would you prefer ?
(iii)
Would your rates be different for buying small lot, if the company A retains
30% and company B 10% of the profits?
Answer
(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 small (non-controlling)
position of the equity of the companies, dividend capitalisation method is
most appropriate. Under this method, value of equity share is given by:
Dividendper share
100
Market capitalisation rate
Company A : Rs.
2.4
100= Rs. 13.33
18
Company B : Rs.
208
100 = Rs. 11.56
18
(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(EPS)
100
Market capitalisation rate
Company A : Rs.
3
100 = Rs. 16.67
18
Company B : Rs.
2.6
100 = Rs. 14.44
18
333
(ii) Preference Dividend coverage ratios of both companies are to be compared to

make such decision.
Preference dividend coverage ratio is given by:
Profitafter tax
100
PreferenceDividend
Company A : Rs. 3,00,000 5 times

Rs.60,000
Company B : Rs. 3,00,000 7.5 times

Rs. 40,000
If we are planning to invest only in preference shares, we would prefer shares of B

Company as there is more coverage for preference dividend.
(iii) Yes, the rates will be different for buying a small lot of equity shares, if the
company A retains 30% and company B 10% of profits.
The new rates will be calculated as follows:
Company A : Rs.
2.1
100 = Rs. 11.67
18
Company B : Rs.
2.34
100 = Rs. 13.00
18
Working Notes:
1. Computation of earning per share and dividend per share (companies distribute 80%
of profits)
Company A
Profit before tax
Less: Preference dividend
Earnings available to equity shareholders (A)
Number of Equity Shares (B)
Earning per share (A/B)
Retained earnings 20%
Dividend declared 80% (C)
Dividend per share (C/B)
334
Company B
3,00,000
3,00,000
60,000
40,000
2,40,000
2,60,000
80,000
1,00,000
3.0
2.60
48,000
52,000
1,92,000
2,08,000
2.40
2.08
2.
Computation of dividend per share (Company A retains 30% and Company B 10% of
profits)
Earnings available for Equity Shareholders
2,40,000
2,60,000
Number of Equity Shares
80,000
1,00,000
Retained Earnings
72,000
26,000
1,68,000
2,34,000
2.10
2.34
Dividend Distribution
Dividend per share
Question 7
The following abridged Balance Sheet as at 31st March, 2005 pertains to Glorious Ltd.
Liabilities
Rs. in lakhs Assets
Share Capital:
Goodwill, at cost
180 lakh Equity shares of Rs.

10 each, fully paid up
Other Fixed Assets

10 each, Rs. 8 paid up

5 each, fully paid-up
1,800 Current Assets
720 Loans and Advances

Miscellaneous
Expenditure
Rs. in lakhs
220
11,366
1,910
1,933
171
750
5,628
Secured Loans
4,000
Current Liabilities
1,242
Provisions
1,460
______
15,600
15,600
You are required to calculate the following for each one of the three categories of
equity shares appearing in the above mentioned Balance Sheet:
(i)
Intrinsic value on the basis of book values of Assets and Liabilities including
goodwill;
(ii) Value per share on the basis of dividend yield.

335
Normal rate of dividend in the concerned industry is 15%, whereas Glorious

Ltd. has been paying 20% dividend for the last four years and is expected to
maintain it in the next few years; and
(iii) Value per share on the basis of EPS.
For the year ended 31st March, 2005 the company has earned Rs. 1,371 lakh as profit
after tax, which can be considered to be normal for the company. Average EPS for a
fully paid share of Rs. 10 of a Company in the same industry is Rs. 2.
Answer
(i)
Intrinsic value on the basis of book values
Rs. in lakhs Rs. in lakhs
Goodwill
220
Other Fixed Assets
11,366
Current Assets
1,910
Loans and Advances
1,933
15,429
Less: Secured loans
4,000
Current liabilities
1,242
Provisions
1,460
6,702
8,727
Add: Notional call on 90 lakhs equity shares @ Rs. 2

per share
180
8,907
Equivalent number of equity shares of Rs. 10 each.

Rs. in lakhs
Fully paid shares of Rs. 10 each
180
Partly-paid shares after notional call
90
Rs. 150 lakhs

Rs. 5
Fully paid shares of Rs. 5 each,
Rs. 10
75
345
336
Value per equivalent share of Rs. 10 each = Rs.
8,907lakhs
Rs. 25.82
345 lakhs
Hence, intrinsic values of each equity share are as follows:

Value of fully paid share of Rs. 10 = Rs. 25.82 per equity share.
Value of share of Rs. 10, Rs. 8 paid-up = Rs. 25.82 Rs. 2 = Rs. 23.82 per equity
share.
Value of fully paid share of Rs. 5 =
Rs. 25.82
Rs. 12.91 per equity share.
2
(ii) Valuation on dividend yield basis:

20
Rs. 10 Rs. 13.33
15
Value of share of Rs. 10, Rs. 8 paid-up =

20
Rs. 8 Rs. 10.67
15
20
5 Rs. 6.67
15
(iii) Valuation on the basis of EPS:

Profit after tax = Rs. 1,371 lakhs
Total share capital = Rs. (1,800 + 720 + 750) lakhs = Rs. 3,270 lakhs
Earning per rupee of share capital = Rs. 1,371 lakhs Re. 0.419
3,270lakhs
Earning per fully paid share of Rs. 10 = Re. 0.419 10 = Rs. 4.19
Earning per share of Rs. 10 each, Rs. 8 paid-up = Re. 0.419 8 = Rs. 3.35
Earning per share of Rs. 5, fully paid-up = Re. 0.419 5 = Rs. 2.10
Value of fully paid share of Rs. 10 = Rs.
4.19
10 Rs. 20.95
2
Value of share of Rs. 10, Rs. 8 paid-up = Rs.

Value of fully paid share of Rs. 5 = Rs.
3.35
10 Rs. 16.75
2
2.10
10 Rs. 10.50
2
337
Question 8
Balance Sheet of KNR Ltd. as on 31.12.2006 is given below:
Balance Sheet (Figures in 000)
Liabilities
Rs.
Assets
Rs.
Share Capital -
1,500 Sundry Fixed Assets
3,200
1,50,000 Equity Shares of Rs.10 each

2,00,000 Equity Shares of Rs. 10
1,200 Investments
350
each Rs. 6 paid up

9% Cum Pref. Shares
600 Stock
850
18% Term Loan
1,000 Debtors
400
Sundry Creditors
1,200 Cash & Bank
400
P & L A/c
5,500
300
5,500
Other Information:
(1) Current Cost of Sundry Fixed Assets Rs. 38,00 thousand and stock Rs.9,00 thousand,
(2) Investments could fetch only Rs. 100 thousand,
(3) 50% debtors are doubtful,
(4) Preference dividend was in arrear for the last five years.
Find out the intrinsic value per share of John Engg. Ltd.
Answer 8
Statement showing Valuation of Equity Shares
Sundry fixed assets
Investments
Stock
Debtors
Cash & Bank
18% Term Loan
9% Cumulative Pref. Shares
Arrear Pref. Dividend
Net Assets
Amount in 000
38,00
1,00
9,00
2,00
4,00
12,00
1,000
6,00
2,70
23,30
338
Add : Notional call on 2,00,000 partly paid up equity

shares @ Rs. 4 each
8,00
31,30
Number of equity shares

Value per fully paid up equity share = Rs. 31,30 / 3,50 = 8.94
Value per partly paid up equity share = Rs. 8.94 4 =4.94
350
Question 9
From the following figures calculate the value of the share of Rs.10 on (i) yield on capital
employed basis, and (ii) dividend basis, the market expectation being 12%.
Year
Capital employed
Profit (Rs.)
Dividend %
(Rs.)
2011
5500,000
880,000
12
2012
8000,000
1600,000
15
2013
1,00,00,000
2200,000
18
2014
150,00,000
3750,000
20
Answer 9
Since the dividend has been rising it would be better to take the weighted average which
comes to 17.6%:
Year
2011
2012
2013
2014
Rate
12
15
18
20
Weight
Product
1
2
3
4
12
30
54
80
176
The value of the share on the basis of dividend should be 17.6/12 10 =14.67
The yield on capital employed for each year and its weighted average is as follows:
Year
2011
2012
2013
2014
Yield on capital employed

(%)
16
20
22
25
Weight
1
2
3
4
Product
12
30
54
80
222
Weighted average is 22.2%: on this basis the value should be 22.2/12 x Rs. 100 = Rs. 185.
339
Question 10
From the following data, compute the Intrinsic value of each category of equity shares of
Ankit Ltd.:
Shareholders funds
100,000 A Equity shares of Rs.10 each, fully paid
100,000 B Equity shares of Rs.10 each, Rs. 8 paid
100,000 C Equity shares of Rs.10 each, Rs. 5 paid
Retained Earnings Rs.9,00,000
Answer 10
(i) Computation of Net assets
Worth of net assets is equal to shareholders fund, i.e.
Paid up value of A equity shares 100,000 x Rs. 10
= 10,00,000
Paid up value of B equity shares 100,000 x Rs. 8
= 8,00,000
Paid up value of C equity shares 100,000 x Rs. 5
= 5,00,000
Retained earnings
= 9,00,000
Net assets
= 32,00,000
Add: Notional calls (100,000 x 2 + 100,000 x Rs. 5)
= 7,00,000
= 39,00,000
Intrinsic Value of each equity share of Rs. 100 fully paid up =39,00,000 / 300,000= Rs.
13
(ii) Intrinsic values of each category of equity shares
A equity shares of Rs. 10 fully paid up 13
B equity shares of Rs. 10 each, out of which Rs. 8 paid up(13-2)=11
Value of C Equity shares of Rs. 10 each, out of which Rs. 5 paid up (13-5)= 8
Question 11
From the following particulars of three companies, ascertain the value of goodwill.
Terms and conditions are as follows:
(i)
Assets are to be revalued.
(ii) Goodwill is to be valued at four years purchase of average super profits for three
years. Such average is to be calculated after adjustment of depreciation at ten
per cent on the amount of increase/decrease on revaluation of fixed assets.
Income tax is to be ignored.
(iii) Normal profit on capital employed is to be taken at 10 percent, capital employed
being considered on the basis of net revalued amounts of tangible assets
340
The summarized Balance Sheets and relevant information are given below:
(Rs. in Lakhs)
Liabilities
P Ltd.
Q Ltd.
R Ltd.
24.0
28.0
12.0
Reserves
4.00
2.00
4.00
10 percent debentures
8.00
4.00
Expenses and creditors
8.00
6.00
4.00
44.00
36.00
24.00
2.0
Net tangible block
32.00
24.00
20.00
Current assets
12.00
10.00
4.00
44.00
36.00
24.00
Assets
Goodwill
P Ltd.
Rs.
Q Ltd.
Rs.
R Ltd.
Rs.
Revaluation of tangible block
40,00,000 20,00,000
Revaluation of current assets
14,00,000
5,60,000
3,20,000
7,20,000
576,000
272,000
Average annual profit for three

years before charging debenture
interest
341
24,00,000
Answer 11
Valuation of Goodwill
P Ltd.
Q Ltd.
R Ltd.
Average profit after charging debenture

interest
640,000
576,000
272,000
Less/Add : Depreciation on revaluation
(80,000)
40,000
(40,000)
560,000
6.16,000
232,000
(380,000)
(196,000)
(192,000)
Super Profit
180,000
420,000
40,000
Goodwill at 4 years purchase of super

profits
720,000
16,80,000
160,000
Q Ltd.
R Ltd.
Less : Normal profit at 10% (WN1)
W.N.1.Calculation of Capital Employed

P Ltd.
Tangible fixed assets
40,00,000
20,00,000
24,00,000
Current assets
14,00,000
560,000
320,000
(16,00,000)
(6,00,000)
(8,00,000)
38,00,000
19,60,000
19,20,000
Less : Debentures and Creditors
Question 12
The following are the summarized Balance Sheets of two Companies, A Ltd and B Ltd as
on 31.03.2010
Liabilities
Equity Shares of
Rs. 10 each
A Ltd
B Ltd
Assets
A Ltd
B Ltd
15,00,000
10,00,000 Goodwill
2,00,000
1,00,000
Reserves
3,00,000
2,00,000 Tangible
Block
17,00,000
14,00,000
10% Debentures
6,00,000
4,00,000 Current
Assets
8,00,000
6,00,000
Creditors
3,00,000
5,00,000
27,00,000
21,00,000
27,00,000
21,00,000
342
Additional Information
1.
Assets are to be revalued as follows

A Ltd
B Ltd
Revaluation of Tangible Block
21,00,000
12,00,000
Revaluation of Current Assets
10,00,000
4,00,000
2.
Average Annual Profits for three years before charging Debenture Interest, A Ltd
Rs.4,50,000; B Ltd Rs. 3,10,000.
3.
Goodwill is to be valued at four years purchase of Average Super Profits for three
years. Such average is to be calculated after adjustment of depreciation at 10% on
the amount of increase/decrease on revaluation of fixed assets. In the case of B Ltd,
a claim of Rs. 10,000 which was omitted, is to be adjusted against its average profit.
Income tax is to be ignored.
4.
Normal profit on Capital Employed is to be taken at 15%, capital employed being

considered on the basis of net revalued amount of tangible assets.
Ascertain the value of Goodwill of A Ltd and B Ltd.
Answer
Calculation of Goodwill
(Rs.)
A Ltd.
B Ltd.
Average annual profit
4,50,000
3,10,000
Less : Debenture Interest
(60,000)
(40,000)
Less : Depreciation on revaluation (W.N.2)
(40,000)
Add : Depreciation on revaluation (W.N.2)
20,000
Less : Omission of claim
(10,000)
3,50,000
2,80,000
(3,30,000)
(1,03,500)
Super profit
20,000
1,76,500
Goodwill at four years purchase
80,000
7,06,000
Average profit
Less : Normal profit @ 15% on CCE (W.N.1)
343
W.N.1. Calculation of Closing Capital Employed

A Ltd.
B Ltd.
Tangible Fixed Assets (Revalued)
21,00,000
12,00,000
Current Assets (Revalued)
10,00,000
4,00,000
Less : Debentures
(6,00,000)
(4,00,000)
Creditors
(3,00,000)
(5,00,000)
Claim
Closing Capital Employed
22,00,000
2. Excess / short depreciation
A Ltd.
(10,000)
6,90,000
B Ltd.
Revalued Assets
21,00,000
10,00,000
Tangible Assets as per the Balance Sheet
17,00,000
12,00,000
Upward/(Downward) revaluation
4,00,000
(2,00,000)
(Increase)/decrease in depreciation @ 10%
(40,000)
20,000
Question 13
U.K. International Ltd. is developing a new production process. During the financial year
ending 31st March, 2007, the total expenditure incurred was Rs.50 lakhs. This process met
the criteria for recognition as an intangible asset on 1st December, 2006.
Expenditure incurred till this date was Rs. 22 lakhs. Further expenditure incurred on the
process for the financial year ending 31st March, 2008 was Rs.80 lakhs. As at 31 st March,
2008, the recoverable amount of know-how embodied in the process is estimated to be Rs.
72 lakhs. This includes estimates of future cash outflows as well as inflows.
You are required to calculate:
(i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2007
and carrying value of intangible as on that date.
(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on
31st March, 2008. Ignore depreciation.
Answer 13
(a) As per AS 26 Intangible Assets
(i) For the year ending 31.03.2007
(1) Carrying value of intangiblet as on 31.03.2007:
At the end of financial year 31st March 2007, the production process will be
recognized (i.e. carrying amount) as an intangible asset at a cost of Rs. 28 lakhs
344
(expenditure incurred since the date the recognition criteria were met, i.e., on
1st December 2006).
(2) Expenditure to be charged to Profit and Loss account:
The Rs. 22 lakhs is recognized as an expense because the recognition criteria
were not met until 1st December 2007. This expenditure will not form part of
the cost of the production process recognized in the balance sheet.
(ii) For the year ending 31.03.2008
(1)
Expenditure to be charged to Profit and Loss account:
(Rs. in lakhs)
Carrying Amount as on 31.03.2007
28
Expenditure during 20072008
80
Total book cost
108
Recoverable Amount
72
Impairment loss
36
Rs. 36 lakhs to be charged to Profit and loss account

for the year ending 31.03.2008.
(2)
Carrying value of intangible as on 31.03.2008:

Total Book Cost
Less : Impairment loss
Carrying amount as on 31.03.2008
(Rs. in lakhs)
108
36
72
Question 14
Dell International Ltd. is developing a new production process. During the financial Year
31st March, 2006, the total expenditure incurred on this process was Rs. 40 lakhs. The
production process met the criteria for recognition as an intangible asset on 1 st December
2005. Expenditure incurred till this date was Rs. 16 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March
2007, was Rs.70 lakhs. As at 31-3-2007, the recoverable amount of know-how embodied in
the process is estimated to be Rs. 62 lakhs. This includes estimates of future cash outflows
as well as inflows. You are required to work out:
(a) What is the expenditure to be charged to the profit and loss account for the
financial year ended 31st March 2006? (Ignore depreciation for this purpose)
(b) What is the carrying amount of the intangible asset as at 31st March 2006?
(c)
What is the expenditure to be charged to the profit and loss account for the
financial year ended 31st March 2007? (Ignore depreciation for this purpose)
(d) What is the carrying amount of the intangible asset as at 31st March 2007?
Answer
(a) Rs. 16 lakhs
345
(b) Carrying amount as on 31-3-2006 will be expenditure incurred after 1-12-2005

= Rs. 24 lakhs
(c) Book cost of intangible asset as on 31-3-2007 is as follows
Total Book cost = Rs.(70 + 24) lakhs = Rs. 94 lakhs
Recoverable amount as estimated = Rs. 62 lakhs
Difference to be charged to Profit and Loss account = Rs. 32 lakhs
(d) Rs. 62 lakhs
Question 15
A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2006
on a research project to develop a drug to treat AIDS. Experts are of the view that it may
take four years to establish whether the drug will be effective or not and even if found
effective it may take two to three more years to produce the medicine, which can be
marketed. The company wants to treat the expenditure as deferred revenue expenditure.
Comment.
Answer
As per para 41 of AS 26 Intangible Assets, no intangible asset arising from research (or
from the research phase of an internal project) should be recognized. Expenditure on
research (or on the research phase of an internal project) should be recognized as an
expense when it is incurred.
Thus the company cannot treat the expenditure as deferred revenue expenditure. The
entire amount of Rs. 33 lakhs spent on research project should be charged as an expense in
the year ended 31st March, 2006.
***
346
WORK
Liquidation of
Company
Question 1
What are the contents of Liquidators statement of account? How frequently does a
liquidator has to submit such statement?
Answer
The statement prepared by the liquidator showing receipts and payments of cash in case of
voluntary winding up is called Liquidators statement of account. There is no double
entry involved in the preparation of liquidators statement of account. It is only a statement
though presented in the form of an account.
While preparing the liquidators statement of account, receipts are shown in the following
order:
(a) Amount realised from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from
it, if any, is entered as surplus from securities.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay
necessary amount (not exceeding the amount of uncalled capital) if creditors
claims/claims of preference shareholders cant be satisfied with the available
amount. Preference shareholders would be called upon to contribute (not
exceeding the amount as yet uncalled on the shares) for paying of creditors.
(d) Amounts received from calls to contributories made at the time of winding up are
shown on the Receipts side.
(e) Receipts per Trading Account are also included on the Receipts side.
Payments made to redeem securities and cost of execution and payments per Trading
Account are deducted from total receipts.
Payments are made and shown in the following order :
(a) Legal charges;
(b) Liquidators expenses;
(c) Preferential (i) Overriding Preferential Creditors (ii) Remaining Preferential
Creditors;
(d) Secured loan including, Debenture holders (including interest up to the date of
winding up if the company is insolvent and to the date of payment if it is solvent);
(e) Unsecured Loan, Creditors:
(i) Unsecured creditors (Excluding Preferential Creditors);
347
(f)
Preferential shareholders (Arrears of dividends on cumulative preference shares

should be paid up to the date of commencement of winding up); and
(g) Equity shareholders.
Liquidators statement of account of the winding up is prepared for the period starting
from the commencement of winding up to the close of winding up by the Liquidators.
Question 2
Briefly explain the liability of contributories included in the list B of Contributories.
Answer
The shareholders who transferred partly paid shares (otherwise than by operation of law
or by death) within one year, prior to the date of winding up may be called upon to pay an
amount (not exceeding the amount not called up when the shares were transferred) to pay
off such creditors as existed on the date of transfer of shares.
Their liability will crystallize only (i) when the existing assets available with the liquidator
are not sufficient to cover the liabilties; (ii) when the existing shareholders (A
Contributors) fail to pay the amount due on the shares to the liquidator.
Question 3
The following is the Balance Sheet of Chilli Limited as at 31st March, 2014:
Liabilities
Rs.
10%, 1,900 preference shares of

Rs. 100 each fully paid up
1,900 equity shares of Rs. 100
each, Rs. 75 per share paid up
5700 equity shares of Rs. 100 each,
Rs. 60 per share paid up
Secured Loans
10% debentures(Having a floating
charge on all assets)
Interest accrued on above
Sundry creditors
Assets

Land &Buildings
1,42,500 Plant and Machinery
Current Assets
3,42,000 Stock at cost
Sundry debtors
Cash at bank
1,90,000 Miscellaneous expenses
Profit and Loss A/c
9500
4,65,500
13,39,500
Rs.
3,80,000
3,61,000
1,04500
2,09,000
57,000
2,28,000
13,39,500
On that date, the company went into Voluntary Liquidation. The dividends on preference
shares were in arrear for the last two years. Sundry Creditors include a loan of Rs. 85,500
on mortgage of Land and Buildings. The assets realised were as under :Land and Buildings
Plant & Machineries
Stock
Sundry Debtors
348
Rs.
3,23,000
3,42,000
1,14,000
1,52,000
Interest accrued on loan on mortgage of buildings upto the date of payment amounted
to Rs. 9500. The expenses of Liquidation amounted to Rs. 4,370. The Liquidator is
entitled to a remuneration of 3% on all the assets realised (except cash at bank) and
2% on the amounts distributed among equity shareholders. Preferential creditors
included in sundry creditors amount to Rs. 28,500. All payments were made on 30th
June, 2014. Prepare the liquidators final statement of account.
Answer
Chilli Ltd. Liquidators Final Statement of Account
Receipts
Rs. Payments
Assets Realised: Cash at Bank

Sundry Debtors
Stock
Plant and Machinery
Surplus from Land & building
Amount realised
Creditors
57,000 Liquidators
Remuneration (W.N. 1)
152,000
1,14,000 Liquidation Expenses
3,42,000 Debenture holders:
14% Debentures
3,23,000
95000
Rs.
2,28,000
28,880
4,370
190,000
Interest Accrued (W.N.

2)
Creditors :
Preferential
Unsecured (See W. N. 4)
Preference Shareholders
:
Preference
Capital
Rs.
14250
2,04,250
28,500
3,51,500
3,80,000
Share
Arrears of Dividend
1,90,000
Equity
Shareholders
(W.N. 3) :
38,000
228,000
Rs. 17.50 per share on

1,900 shares
Rs. 2.50 per share
5,700 shares
893000
on
33,250
14,250
47500
893000
349
Working Notes :
(1) Liquidators remuneration
Rs.
3% on Assets realised (3% of Rs. 9,31,000)
27930
2% of the amounts distributed among Equity Shareholders

(2/102 Rs. 48450)
950
28880
(2) Interest accrued on 10% debentures

Interest accrued as on 31.3.2014
9,500
Interest accrued upto the date of payment

(upto 30th June, 2014)
4750
14250
(3) Amount payable to Equity Shareholders

Equity Share Capital
4,84,500
Less: Surplus available for Equity Shareholders

Loss to be borne by them
47500
4,37,000
Loss per Equity share (Rs. 4,37,000/7600)
57.50
Calculation of % of Total Deficiency to each share holder

=[Total face Value 7600*Rs. 100- {Uncalled money (1900*25)+(5700*40)}-surplus
available Rs. 47,500]*100/ Total face Value
=(7,60,000-2,75,500-47,500)*100/7,60,000= 57.5%
Amount payable to Equity shareholders :
Each Equity share of Rs. 75 paid up (75-57.50)
17.50
Each Equity share of Rs. 60 paid up (60-57.50)
2.50
(4) Calculation of amount paid to Unsecured creditor other than Preferential creditors
(Amount in Rs.)
Total Sundry Creditors (given)
4,65,500
Less: Amount related to Secured Loan
85,500
Less preferential Creditors
28,500
Amount paid to Unsecured Sundry Creditors
350
3,51,000
Question 4
The following was the Balance Sheet of X Limited as on 31.3.2015 :
Balance Sheet of X Limited as at 31.3.2015
Liabilities
14%, 38,000 preference shares of Rs.
100 each fully paid up
Rs.
3,80,000
7,600 equity shares of Rs. 100 each,

Rs. 60 per share paid up
4,56,000
Secured Loans
2,18,500
Assets
Fixed Assets
Land
Buildings
Plant and
Machinery
Rs.
38,000
1,52,000
5,13,000
14% debentures
Patents
38,000
(Having a floating charge on all

assets)
Current Assets
95000
Interest accrued on above
30,590
Loan on mortgage of land and

building
1,42,500
Sundry creditors
1,11,910
13,39,500
Stock at cost
Sundry debtors
2,18,500
57,000
Cash at bank
Miscellaneous
expenses Profit
and Loss A/c
2,28,000
13,39,500
On 31.3.2015 the company went into voluntary liquidation. The dividend on 14%
preference shares was in arrears for one year. Sundry creditors include preferential
creditors amounting to Rs. 28,500.
The assets realised the following sums
Land Rs. 76,000; Buildings Rs. 1,90,000; Plant and machinery Rs. 475,000; Patent Rs.
47,500; Stock Rs. 1,52,000; Sundry debtors Rs. 1,90,000.
The expenses of liquidation amounted to Rs. 27,962. The liquidator is entitled to a
commission of 2% on all assets realised (except cash at bank) and 2% on amounts among
unsecured creditors other than preferential creditors. All payments the on 30th June,
2015. Interest on mortgage loan shall be ignored at the time of payment.
Prepare the liquidators final statement of account.
351
Answer
X Ltd. Liquidators Final Statement of Account
Receipts
Rs. Payments
Assets Realised : Cash

at Bank
Liquidators
57,000 (W.N. 1)
Rs.
Remuneration
Sundry Debtors
1,90,000 Liquidation Expenses
Stock
1,52,000 Debenture holders:
Plant and Machinery
4,75,000 14% Debentures
Patents
Surplus from
Securities
47,500 Interest Accrued (W.N. 2)
24278
27,962
2,18,500
256738
38,238
1,23,500 Creditors :
(W.N. 3)
Rs.
1,11,910
Preferential
28,500
Unsecured
83,410
Preference Shareholders :
Preference Share Capital
Arrears of Dividend
3,80000
53200
Equity Shareholders (W.N.4)
4,33,200
1,90,912
Rs. 25.12 per share on 8,000

shares
10,45,000
10,45,000
Working Notes :
1.
Rs.
Liquidators remuneration :
2% on assets realised (2% of Rs. 11,30,500)
2% on payments to unsecured creditors (2% on Rs. 83410)
22,610
1668
24278
2.
Interest accrued on 14% Debentures :

Interest accrued as on 31.3.2015
30,590
Interest accrued upto the date of payment i.e. 30.6.2015

[2,18500*14/100*3/12= 7,648]
3.
7,648
38238
Surplus from Securities :

Amount realised from Land and Buildings (Rs. 76,000 + Rs. 1,90,000)
2,66,000
Less : Mortgage Loan
142,500
1,23,500
352
4.
Amount payable to Equity Shareholders :

Equity share capital (paid up)
4,56,000
Less : Amount available for equity shareholders
1,90,912
Loss to be born by equity shareholders
2,65,088
Loss per equity share (Rs. 2,65,088/7,600)
34.88
Amount payable to equity shareholders for each equity share (60-34.88)
25.12
Notes:
(1) Commission due to the liquidator has been calculated on the total realisation on the
supposition that the securities (land and buildings) are realised by the liquidator on
behalf of the lender.
(2) Preference shares have been taken as cumulative.
Question 5
Pine Ltd. has gone into liquidation on 10th May, 2013. The details of members, who have
ceased to be members, within the year ended 31st March, 2013 are given below. The debts
that could not be paid out of realisation of assets and contribution from present membrs
(A contributories) are also given with their date-wise break up. Shares are of Rs. 10 each,
Rs. 6 per share paid up.
You are to determine the amount realisable from each person.
Shareholders
No. of shares
transferred
Date of transfer
Proportionate
unpaid debts
950
20.04.2012
2850
1,140
15.05.2012
4,750
1,425
18.09.2012
8,740
760
24.12.2012
9,975
475
12.03.2013
10,450
Answer
Statement of liabilities of B List Contributories
Creditors
outstanding on
the date of
transfer
No. of
shares
1,140
353
1,425
760
475
Amount
to paid to
creditors
Date
Rs.
15.5.2012
4750
18.9.2012
8740
Rs.
1425
Rs.
Rs.
Rs.
1781
950
594
4750
2138
1,140
713
3,990
760
475
1235
475
119
10,094
4750 =3990
24.12.2012 9975
-8,740=1,235
12.3.2013
10450
-9975=475
10,450
1,425
3,919
2,850
2,256
Maximum liability on shares

held (b)
4560
5,700
3,040
1,900
Amount paid (a) and (b)

whichever is lower
1,425
3,919
2,850
1,900
Working Note :
P Will not be liable since he transferred his shares prior to one year preceding the
date of winding up.
The amount of Rs. 4,750 outstanding on 15th May, 1999 will have to contributed by
Q, R, S and T in the ratio of number of shares held by them, i.e. in the ratio of
12:15:8:5; thus Q will have to contribute Rs. 1,425; R Rs. 1,781; S Rs. 950; T Rs. 594.
Similarly, the further debts incurred between 15th May, 1999 to 18th September,
1999, viz. Rs.3990 for which Q is not liable will be contributed by R, S and T in the
ratio of 15:8:5. R will have to contribute Rs. 2,138. S and T will contribute Rs. 1,140
and Rs. 713 respectively.
The further increase from Rs. 8,740 to Rs. 9,975 viz. Rs. 1,235 occurring between
18th September and 24th December will be shared by S and T who will be liable for
Rs. 760 and Rs. 475 respectively. The increase between 24th December and 12th
March, is solely the responsibility of T.
Question 6
Liquidation of Tempoo Ltd. commenced on 2nd April, 2014. Certain creditors could not
receive payments out of the realisation of assets and out of the contributions from A list
contributories. The following are the details of certain transfers which took place in 2013
and 2014:
354
Shareholders
No. of Shares Date of Ceasing Creditors

remaining
transferred
to be a member unpaid and outstanding on
the date of such transfer
Abhay
1,900
1st March, 2013
Rs. 4,750
Parul
1,425
1st May, 2013
Rs. 3,135
Mahesh
950
1st
2013
October,
Rs. 4,085
Ram
475
1st November,
2013
Rs. 4,370
Sanjay
285
1st
February,
2014
Rs. 5,700
All the shares were of Rs. 10 each, Rs. 8 per share paid up. Show the amount to be realised
from the various persons listed above ignoring expenses and remuneration to liquidator
etc.
Answer
Statement of liabilities of B list contributories
Shareholders
No. of
Maximum
Division of Liability as on
shares
liability (upto
transferred Rs.
2
per 1.5.2013 1.10.2013 1.11.2013
share)
Rs.
Rs.
Rs.
Rs.
1.2.2014
Total
Rs.
Rs.
1425
2,850
1,425
1,425
Mahesh
950
1,900
950
527
1,477
Ram
475
950
475
264
179
918
Sanjay
285
570
285
159
106
20
570
3,135
6,270
3135
950
285
20 4,390
Parul
355
Working Note:
Date
Cumulative liability
Increase in liability
Ratio of no. of shares

held by the members
1.5.2013
3,135
30 : 20 : 10 : 6
1.10.2013
4,085
950
20 : 10 : 6
1.11.2013
4,370
285
10 : 6
1.2.2014
5,700
1330
Only S
Liability of Sanjay has been restricted to the maximum allowable limit of Rs. 570,
therefore amount payable by Sanjay is restricted to Rs. 20 only, on 1.2.2014.
Notes:
1.
Abhay will not be liable to pay to the outstanding creditors since he transferred his
shares prior to one year preceding the date of winding up.
2.
Parul will not be responsible for further debts incurred after 1st May, 2013 (from
the date when he ceases to be member). Similarly, Mahesh and Ram will not be
responsible for the debts incurred after the date of their transfer of shares.
Question 7
The position of Lisa Ltd. on its liquidation is as under:
Issued and paid up Capital:
2,850 11% preference shares of Rs. 100 each fully paid.
2,850 Equity shares of Rs. 100 each fully paid.
950
Equity shares of Rs. 50 each Rs. 30 per share paid.
Calls in Arrears are Rs. 9,500 and Calls received in Advance Rs. 4,750. Preference
Dividends are in arrears for one year. Amount left with the liquidator after
discharging all liabilities is Rs. 3,92,350. Articles of Association of the company
provide for payment of preference dividend arrears in priority to return of equity
capital. You are required to prepare the Liquidators final statement of account.
Answer
Liquidators Final Statement of Account
Receipts
Cash
Realisation from:
Calls in arrears
Rs.
Payments
Rs.
3,92,350 Return to contributors:

Preference dividend
9,500 Preference shareholders
356
31,350
2,85,000
Final call of Rs. 5 per
Calls in advance
4,750
equity share of Rs. 50

each (Rs. 5 950)
Equity shareholders of
4750 Rs. 100 each (2,850 Rs. 30)
85,500
406,600
406,600
Working Note:
Rs.
Cash account balance
3,92,350
Less : Payment for dividend
31,350
Preference shareholders
2,85,000
Calls in advance
4,750
3,21,100
71,250
Add: Calls in arrears
9,500
80,750
Add: Amount to be received from equity shareholders of Rs.

50 each (950 20)
19,000
Amount disposable
99,750
Number of equivalent equity shares:

= 5,700 shares of Rs. 50 each
950 shares of Rs. 50 each
= 950 shares of Rs. 50 each

= 6,650 shares of Rs. 50 each
Final payment to equity shareholders =
Amount left for distribution

Total number of equivalent equity shares
= Rs. 99,750 / 6,650 shares = Rs. 15 per share to equity shareholders of Rs. 50 each.
Therefore for equity shareholders of Rs. 100 each Rs. 15
100
50
= Rs. 30 per share to equity shareholders of Rs. 100 each.

Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equity
shareholders of Rs. 50 each have to pay Rs. 20 and receive Rs. 15 each.
As a result, they are required to pay net [20-15] Rs. 5 per share i.e. 1000*5=5000.
357
Question 8
The following particulars relate to a Limited Company which has gone into voluntary
liquidation. You are required to prepare the Liquidators Statement of Account
allowing for his remuneration @ 2% on all assets realized excluding call money
received and 2% on the amount paid to unsecured creditors including preferential
creditors.
Share capital issued:
9,500 Preference shares of Rs.100 each fully paid up.
47,500 Equity shares of Rs.10 each fully paid up.
28,500 Equity shares of Rs.10 each, Rs.8 paid up.
Assets realized Rs.19,00,000 excluding the amount realized by sale of securities held by
partly secured creditors.
Rs.
Preferential creditors
47,500
Unsecured creditors
17,10,000
Partly secured creditors (Assets realized Rs. 3,04,000)
3,32,500
Debenture holders having floating charge on all assets of the

company
5,70,000
Expenses of liquidation
9,500
A call of Rs.2 per share on the partly paid equity shares was duly received except in
case of one shareholder owning 950 shares.
Also calculate the percentage of amount paid to the unsecured creditors to the total
unsecured creditors.
Answer
(i)
Liquidators Final Statement of Account

Rs.
To
Assets Realised
To
Receipt of call money

on 27,550 equity shares
@ 2 per share
19,00,000 By
Rs.
Liquidators
remuneration
2.5% on 22,04,000
(W. N.4)
55,100
2% on 47,500
2% on
(W.N.3)
358
12,47,108
55,100
950
24942
80992
By
Liquidation
Expenses
By
Debenture
having a
9,500
holders
5,70,000
floating charge on all

assets
By
Preferential
creditors
________ By
47,500
Unsecured creditors
12,47,108
19,55,100
19,55,100
(ii) Percentage of amount paid to unsecured creditors to total unsecured

creditors
=
1247108
100 71.73%
17,38,500
Working Notes:
1.
Unsecured portion in partly secured creditors =
Rs.3,32,500-Rs.3,04,000
=
Rs.28,500
2.
Total unsecured creditors = 17,10000 + 28,500 (W.N.1)
= Rs. 1738,500
3.
Liquidators remuneration on payment to unsecured creditors
Cash available for unsecured creditors after all payments including payment to
preferential creditors & liquidators remuneration on it = Rs.12,72,050
[ 19,00,000+55,100]-[55,100+950+9,500+5,70,000+47,500]= 12,72,050
Liquidators remuneration on unsecured creditors =
4.
2
1272050 Rs.24,942
102
or on Rs. 12,47,116 x 2/100 = Rs. 24,942

Total assets realised = Rs. 19,00,000 + Rs. 3,04,000 = Rs. 22,04,000
Question 9
A Ltd is to be liquidated. Their summarised Balance Sheet as at 30th September, 201 4
appears as under:
Liabilities:
Rs.
4,75,000 equity shares of Rs. 10 each
47,50,000
Secured debentures (on Land and Buildings)
19,00,000
Unsecured loans
38,00,000
359
Trade creditors
66,50,000
1,71,00,000
Assets:
Land and buildings
Other fixed assets
9,50,000
38,00,000
Current assets
85,50,000
38,00,000
1,71,00,000
Contingent liabilities are:

For bills discounted 1, 90,000
For excise duty demands 2,85,000
On investigation, it is found that the contingent liabilities are certain to devolve and
that the assets are likely to be realised as follows:
Land and Building
20,90,000
Other fixed assets
34,20,000
Current assets
66,50,000
Taking the above into account, prepare the statement of affairs.

Answer
Statement of Affairs of A Ltd. (in Liquidation) as at 30th September, 2014
Estimated
Realisable
Value
Assets not specifically pledged (as per List A):
Other Fixed Assets
34,20,000
Current Assets
66,50,000
Assets specifically pledged (as per List B):
Land &
Building
Estimated
Realizable
Value
Due to
secured
creditors
Deficiency
ranking
as
unsecured
20,90,000
19,00,000
Estimated total assets available for preferential

creditors, debenture holders secured by a floating
charge and unsecured creditors
360
1,00,70,000
Surplus carried
to
the
last
column
1,90,000
1,02,60,000
1,90,000
Summary of Gross Assets:

Gross realizable value of assets specifically pledged
20,90,000
Other Assets
1,00,70,000
Total Assets
1,21,60,000
Gross
Liabilities
Liabilities
19,00,000
Secured creditors (as per List B) to the extent to which claims are estimated
to be covered by assets specifically pledged
2,85,000
Preferential creditors (as per List C) for demand of excise duty

Balance of assets available for debenture holders secured by floating charge
and unsecured creditors
2,85,000
99,75,000
Unsecured creditors (as per List E):

38,00,000
Unsecured Loans
38,00,000
66,50,000
Trade creditors
66,50,000
1,90,000
Liability for bills discounted (Contingent)
1,90,000
1,28,25,000
Estimated deficiency as regards creditors (difference between gross assets

and gross liabilities)
6,65,000
Issued and called up capital:

4,75,000 Equity shares of Rs. 10 each (as per List G)
47,50,000
Estimated deficiency as regards members/ contributories
54,15,000
***
361
8
Corporate Financial Reporting
Question 1
On the basis of the profit and loss statement available for the year ended on 31 st March,
2015, prepare Gross Value Added Statement.
Profit and Loss Account for the year ended 31st March, 2015
Income Notes
(Rs. in
crores)
Sales
(Rs. in crores)
210.20
Other Income
06.42
216.62
Expenditure
Production and Operational Expenses
166.57
8.42
Interest and Other Charges
5.70
Depreciation
5.69
186.38
Profit before Taxes
30.24
Provision for taxes
3.00
27.24
Investment Allowance Reserve Written Back
0.46
Balance as per Last Balance Sheet
1.35
29.05
Transferred to:
General Reserve
24.30
Proposed Dividend
3.00
Surplus Carried to Balance Sheet
27.30
1.75
29.05
362
Notes:
(1)
(Rs. In crores)
Increase in Stock
30.50
Consumption of Raw Materials
80.57
Consumption of Stores
5.30
Salaries, Wages, Bonus and Other Benefits
12.80
Cess and Local Taxes
3.20
Other Manufacturing Expenses
34.20
166.57
(2)
Administration expenses include inter-alia

Audit fees of Rs. 1 crore, Salaries and
commission to directors Rs. 2.20 crores and
Provision for doubtful debts Rs. 2.50 crores.
(3)
Interest and Other Charges:

On Fixed Loans from HDFC Bank
3.90
Debentures
1.80
5.70
Answer
Value added statement for the year ended 31st March, 2015
Particulars
Rs. in
crores
Sales
Rs. in
crores
210.20
Less: Cost of bought in material and services:

Production and operational expenses
Administration expenses
150.57
6.22
156.79
Value Added by manufacturing and trading

activities
53.41
Add: Other income
06.42
Total Value Added
59.83
363
Application of Value Added:

To Pay Employees:
Salaries, Wages, Bonus and other
benefits
12.80
21.39
2.20
3.68
6.20
10.36
8.70
14.54
29.93
50.03
59.83
100.00
To Pay Directors:
Salaries and Commission
To Pay Government:
3.20
Income Tax
3.00
To Pay Providers of Capital:

Interest on Debentures
1.80
Interest on Fixed Loan from HDFC

Bank
3.90
Dividend
To Provide
for
maintenance
Expansion of the company:
3.00
and
Depreciation
General Reserve (24.30 0.46)
Retained profit (1.75 1.35)
5.69
23.84
0.40
Question 2
From the given Profit & Loss Account of Shyama Co. Ltd., for the year ended 31.03.2015
prepare:
(a) Gross value added statement
(b) Reconciliation statement between gross value added and profit before taxation.
Profit and Loss Account for the year ended 31.03.2015
Notes
(Rs. in lakhs) (Rs. in lakhs)
Income :
Sales
6,255
Other Income
40
6,295
Expenditure:
364
4,320
Administration expenses
180
Interest & Other charges
624
Depreciation
16
5,140
Profit before tax
1,155
Provision for tax
55
1,100
Balance as per last Balance Sheet
60
1,160
Transferred to fixed assets replacement reserve
400
Dividend paid
160
560
Surplus carried to Balance Sheet
600
Notes:
1. Production & Operation expenses :
Consumption of raw materials
3,210
Consumption of stores
40
Local tax
Salaries to administrative staff
620
Other manufacturing expenses
442
4,320
2. Administration expenses include salaries and commission to directors
3. Interest & other charges include :

(a) Interest on temporary bank overdraft
109
(b) Fixed loan from banks
51
(c) Working capital loan from banks
20
(d) Excise duties
180
(e) Remaining are miscellaneous charges

Consider the miscellaneous charges for arriving at Value Added.
365
Answer
Value Added Statement For the year ended 31st March, 2015
Rs.
in lakhs
Sales
Rs.
in lakhs
6,255
Less: Cost of bought in material and services:

(4,320 - 8 - 620)
Administration expenses (180 - 5)
3,692
175
Interest on bank overdraft

Interest on working capital loan
109
20
Excise duties
180
Miscellaneous charges (Refer to working note)

Value added by manufacturing and trading activities
264
4,440
1,815
Add: Other income
40
Total Value Added
1,855

To pay Employees :
Salaries to Administrative staff
620
33.42
0.27
55
63
3.40
51
160
211
11.37
16
400
540
956
51.54
1,855
100.00
To pay Directors:
To Pay Government :
Local Tax
Income Tax
To Pay Providers of Capital :
Interest on Fixed Loan
Dividend
To provide For Maintenance and Expansion of
the Company :
Depreciation
Fixed Assets Replacement Reserve
Retained Profit (600 - 60)
366
Reconciliation Between Total Value Added and Profit Before Taxation:

Particulars
Rs.
in lakhs
Rs.
in lakhs
Profit before Tax
1,155
Add back:
Depreciation
16
Salaries to Administrative Staff
620
Director's Remuneration
Interest on Fixed Loan
51
Local Tax
700
Total Value Added
1,855
Working Note :
Calculation of Other Miscellaneous Charges
Rs. In lakhs
Interest and other charges
Less :
624
109
Interest on loan from banks
51
Interest on loan from banks
20
Excise duties
180
360
Other/miscellaneous charges
264
Question 3
Prepare Gross Value Added Statement from the given profit and loss account for the year
ended on 31.03.2015
Income
(Rs. in 000)
Sales
(Rs. in 000)
850
Other Income
Nil
850
Expenditure
600
30
Interest and Other Charges
30
367
Depreciation
20
680
Profit before taxes
170
Provision for taxes
30
140
10
150
Transferred to:
General Reserve
80
Proposed Dividend
20
50
150
Production and Operational Expenses:

Consumption of Raw Materials
200
Salaries, Wages and Bonus
60
20
320
600
Administrative Expenses:
Audit Fee
Salaries and Commission to Directors
Provision for Doubtful Debts
Other Expenses
10
30
Interest and other Charges:

On Working Capital Loans from HDFC
Bank
10
On Term Loans from banks
15
On Debentures
5
30
368
Answer
Gross Value Added Statement for the year ended 31st March, 2015
Particulars
Rs. in 000
Rs. in 000
Sales
850
Less: Cost of bought in material or services:

Production and Operational Expenses (320 + 200)
520
Administrative Expenses (6 + 6 +10)
22
Interest on working capital loans
10
552
298
Valued added by manufacturing and trading

activities
Add: Other Income
Nil
Total Value Added
298

To
Pay Employees:
Salaries, Wages and Bonus

To
To
To
20.14
2.68
Pay Directors:
To
60
Pay Government:
Cess and Local taxes
20
Income Tax
30
50
16.78
40
13.42
140
46.98
Pay Providers of Capital:

Interest on Fixed Loans
15
Dividend
20
Provide for Maintenance and

Expansion of the Company:
Depreciation
20
80
General Reserve
40
Retained Profit (50 10)
298
369
100.00
Question 4
On the basis of the given extract of the income statement of Square Ltd., prepare Gross
Value Added Statement.
Profit and Loss Account of Square Ltd. for the year ended on 31st March, 2015
Particulars
Rs. in lakhs
Rs. in lakhs
Income
Net Sales Revenue
15,27,956
Interest received
174
Other Revenue
430
(A)
15,28,560
Expenditure
Production and operational expenses:
7,66,875
Power and lighting
32,565
Wages, salaries and bonus
3,81,240
Staff welfare expenses
26,760
Excise duty
14,540
1,20,030
13,42,010
Administrative expenses:
Directors' remuneration
7,810
Other administrative expenses
32,640
40,450
Interest on:
Term loan from ICICI Bank
24,400
Bank overdraft
100
Depreciation on fixed assets
24,500
50,600
370
(B)
14,57,560
Profit before Taxation, (A) (B)
71,000
Provision for Income-tax @ 35.875%
25,470
Profit after Taxation
45,530
Balance of account as per last Balance

Sheet
6,300
51,830
Transferred to:
General reserve 40% of Rs. 45,530
18,212
Proposed dividend @ 22%
22,000
Tax on distributed profits @ 12.81%
2,818
43,030
Surplus transferred to Balance Sheet
8,800
Answer
Square Ltd.
Value Added Statement for the year ended 31 st March, 2015
Particulars
Rs. in lakhs
Rs. in lakhs
Net sales revenue
15,27,956
Less:
9,19,470
Cost of production (working note)
32,640
100

Value added by manufacturing and trading
activities
9,52,210
5,75,746
Add: Interest received
174
Other Revenue
430
Total value added
5,76,350
371
Application of valued added

Particulars
Rs. in lakhs
Rs. in lakhs
To pay Employees:
3,81,240
Staff welfare expenses
26,760
4,08,000
70.79
7,810
1.36
42,828
7.43
46,400
8.05
71,312
12.37
5,76,350
100.00
To pay Directors:
Directors' remuneration
To pay Government:
Excise duty
14,540
Income tax
25,470
Tax on distributed profits
2,818
To pay providers of capital:

Term loan from ICICI Bank
24,400
Dividend to shareholders
22,000
To provide for maintenance

expansion of the company:
and
Depreciation on Fixed assets
50,600
Transfer to General reserve
18,212
Retained profit, Rs. (8,800-6,300) (in

000s)
2,500
Working Note:
Calculation of cost of production
Particulars
Rs. in lakhs
7,66,875
Power and lighting
32,565
1,20,030
9,19,470
372
Question 5
From the given details, prepare a Gross Value Added Statement for Alpha Ltd. and
show also the reconciliation between Gross Value Added and Profit before taxation.
Profit and Loss Account for the year ended 31.03.2015
Particulars
Notes
Amount (Rs. in 000)
Total income
945
Expenditure:
Production
expenses
and
operational
641
33
29
Depreciation
17
720
Profit before taxes
225
30
195
10
Administration expenses (Factory)

Interest
Provision for taxes
Profit after tax

205
Transferred to General Reserve
Dividend paid
45
95
140
65
205
Notes:
1
Production and Operational expenses

Rs. in 000
352
Salaries, Wages, Gratuities etc. (Admn.)
82
Cess and Local taxes
98
109
641
373
Administration expenses include salaries, commission to Directors

Rs.9.00 lakhs Provision for doubtful debts Rs. 6.30 lakhs.
Rs. in 000
Interest on loan from ICICI Bank for working capital

Interest on loan from ICICI Bank for fixed loan
9
16
4
29
The charges for taxation include a transfer of Rs. 3.00 lakhs to the
credit of Deferred Tax Account.
Excise Duty is Rs. 55,000
Answer
Alpha Ltd.
Gross Value Added Statement for the year ended 31st March, 2015
Particulars
Rs. in 000
Rs. in 000
Sales
945
Less: Cost of bought in materials and services:

Production and Operational expenses (352+
109)
461
Administration expenses (33 9)
24
Interest on working capital loan
Excise duty
55

activities
549
396
Add: Other income
Nil
Total value added
396
374
Application of Value Added

Particulars
Rs. in 000
To Employees
Salaries, wages, gratuities etc.
To Directors
Salaries and commission
To Government
Cess and local taxes (98 55)
%
82
20.71%
2.27%
70
17.68%
115
29.04%
120
30.30%
396
100%
43
Income tax
27
To Providers of capital
Interest on fixed loan
16
Dividends
95
To Provide for maintenance and expansion

of the company
Depreciation
General reserve
17
45
Deferred tax
Retained profits (65 10)
55
Statement showing reconciliation of Gross Value Added with Profits before taxation
Rs. in 000
Profits before taxes
225
Add:
Depreciation
17
Directors remuneration
Salaries, wages & gratuities etc.
82
Cess and local taxes
43
Interest on fixed loan
16
Total value added
171
396
375
Question 6
Prepare Gross Value Added Statement on the basis of the following information
provided. Also prepare statement showing reconciliation of Gross Value Added with
Profit before Taxation.
Profit and Loss Account of OTEX Limited for the year ended 31st March, 2015.
Amount
(Rs. in 000)
Amount
(Rs. in 000)
Income
Sales
5,010
Other Income
130
5,140
Expenditure
Production and Operational
Expenses
3,550
185
Interest
235
Depreciation
370
4,340
Profit before Taxation
800
280
Profit after Taxation
520
Credit Balance as per last Balance Sheet
40
560
Appropriations
Transfer to General Reserve
100
Preference Dividend (Interim) paid
50
Proposed Preference Dividend (Final)
350
Balance carried to Balance Sheet
60
560
Supplementary Information
Production and Operational Expenses:
Raw Materials
1,920
376
Wages, Salaries and Bonus
610
Local Taxes including Cess
220
800
3,550
Administrative Expenses consist of:

Salaries and Commission to
Directors
Debts
60
Provision for Bad and Doubtful
44
Other Administrative Expenses
81
185
Interest is on:
Loan from Bank for Working
Capital
35
Debentures
200
235
Answer
Gross Value Added Statement of OTEX Ltd.
for the year ended 31st March, 2015
Particulars
Rs. in 000
Sales
Less:
5,010
(1920+800)
2,720
125
Interest on loan from bank for working

capital
activities
Add:
Rs. in 000
Other income
35
2,880
2,130
130
Total value added
2,260
377
Application of Value Added

Particulars
To
Rs.in 000
610 26.99
pay directors
Salaries and commission to Directors
To
To
To
pay employees
To
Rs. in 000
60
2.66
pay Government
Local taxes including cess
220
Income tax
280
500 22.12
pay providers of capital

200
Dividend
400
600 26.55
provide for the maintenance and

expansion of the company:
Depreciation
370
Transfer to general reserve
100
Retained profit Rs.(60 40) lakhs
20
490 21.68
2,260
Statement showing Reconciliation between

Gross Value Added with Profit before Taxation
Particulars
Rs. in 000
Profit before taxation
Rs. in 000
800
Add back:
610
Salaries and commission to Directors
60
Local taxes including cess
220
200
Depreciation
370
Gross Value Added
1,460
2,260
378
100
Question 7
Explain the concept of Corporate Financial Reporting.
Answer
Financial reporting may be defined as communication of published financial statement and
related information from a business enterprise to stakeholders. It is the reporting of
accounting information of an entity and contains booth qualitative and quantitative
information. The Financial report made to the management is generally known as internal
reporting, while financial reporting made to the shareholder investors/management is
known as external reporting. The internal reporting is a part of management information
system and the uses MIS reporting for the purpose of analysis and as an aid in decision
making process.
Corporate Reporting is a very hot topic now days. Various statues have prescribed certain
statements to be disclosed periodically by a corporate entity. The purpose of such mandate
is to convey a true and fair view of the operating results and financial position to the users
of financial reports. Within a corporate context, financial reporting generally covers
accounting data sets in the form of balance sheet, a statement of profit and loss, a statement
of cash flows.
Question 8
What is value added statement? Discuss.
Answer
Value Added Statement is a simplified financial statement that shows how much wealth has
been created by a company. A value added statement calculates total output by adding
sales, changes in stock, and other incomes, then subtracting depreciation, interest, taxation,
dividends, and the amounts paid to suppliers and employees. Such value added can be
taken to represent in monetary terms the net output of an enterprise. This is the difference
between the total value of its output and the value of the inputs of materials and services
obtained from other enterprises. The value added is seen to be due to the combined efforts
of capital, management and employees, and the statement shows how the value added has
been distributed to each of these factors.
The conventional Value added statement is divided into two parts:
1. The first part shows value added
2. The second part shows application of the value added
Question 9
What is Economic Value Added and how is it calculated?

Answer
Economic Value Added (EVA) is a residual income particularly considered as a
benchmark to measure earning efficiency. It is simply the operating profit after tax less
a charge for the capital employed, equity as well as debt, used in the business.
379
Mathematically EVA= OPBT - Tax - (TCE COC)

Where:
OPBT = Opening Profit Before Tax
TCE = Total Capital Employed
COC = Cost of Control
Since, EVA includes both profit and loss as well as balance sheet efficiency as well as the
opportunity cost of investor capital - it is better linked to changes in shareholders
wealth and is superior to traditional financial measures such as Profit After Tax.
EVA, additionally, is a tool for management to focus on the impact of their decisions in
increasing shareholders wealth. These include both strategic decisions such as what
investments to make, which business to exit, what financing structure is optimal; as
well as operational decisions involving trade-offs between profit and asset efficiency
such as whether to make inhouse or outsource, repair or replace an equipment,
whether to make short or long production runs etc.
Question 9
What is Shareholder Value Added and how is it calculated? Discuss.
Answer
Shareholder Value Added (SVA) represents the economic profits generated by a
business above and beyond the minimum return required by all providers of capital.
Value is added when the overall net economic cash flow of the business exceeds the
economic cost of all the capital employed to produce the operating profit.
Therefore, SVA integrates financial statements of the business (profit and loss, balance
sheet and cash flow) into one meaningful measure.
The SVA approach is a methodology which recognises that equity holders as well as
debt financiers need to be compensated for the bearing of investment risk. The SVA
methodology is a highly flexible approach to assist management in the decision making
process. Its applications include performance monitoring, capital budgeting, output
pricing and market valuation of the entity.
Question 10
What are the drawbacks of adopting Shareholder Value Added (SVA) discuss.
Answer
Some of the drawbacks of Shareholder Value added as a measure are:
1.
It is by nature an aggregate measure, in order to analyse the underlying cause of any

change in calculated value between years, it is necessary to fully comprehend the
value drivers and activities specific to a given firm.
2.
There may be certain enterprises which are subject to any degree of price regulation
then it may not be possible for management to adjust output prices to achieve a
380
commercial return in response to upward movements in input prices. Such a

situation may result in SVA being reduced even though there may have been no
decrease in overall efficiency.
3.
Combined with the use of traditional accounting measures, a thorough knowledge of

the value drivers of the business will assist in determining the underlying causes of
fluctuations in the value added measure.
4.
The use of SVA is not a substitute for detailed analysis of business drivers, rather it
is an additional measurement tool with an economic foundation
Question 11
What is benefit of adopting Shareholder Value Added discuss? Discuss.
Answer
To create value, management must have an understanding of the variables that drive the
value of the business. An organisation cannot act directly on value. It has to act on factors it
can influence, such as client satisfaction, cost, capital expenditures, the debt / equity mix
and so forth. Through an understanding of these drivers of value, management is able to
establish a consistent dialogue, both internally and with the Shareholder, regarding what
needs to be accomplished to create value. The benefits of moving towards SVA include: 1.
Overall, value-based performance measures will result in greater accountability for the
investment of new capital, as well as for the use of existing investments. 2. Organisation
will have the opportunity to apply a meaningful private sector benchmark to evaluate
performance. 3. Managers will be provided with an improved focus on maximizing
shareholder value.
***
381
9
Accounting Standards
Accounting Standard 1
Disclosure of Accounting Policies
Question 1
X Ltd. has sold its building for Rs. 50 lakhs to Y Ltd. and has also given the possession to Y
Ltd. The book value of the building is Rs. 30 Lakhs. As on 31st March, 2015, the
documentation and legal formalities are pending. The company has not recorded the sale
and has shown the amount received as advance. Do you agree with this treatment?
Answer
The economic reality and substance of the transaction is that the rights and beneficial
interest in the property has been transferred although legal title has not been transferred.
X Ltd. should record the sale and recognize the profit of Rs. 20 lakhs in its profit and loss
account. The building should be eliminated from the balance sheet.
Question 2
XYZ Ltd. was making provision for non-moving stocks based on no issues for the last 12
months up to 31.3.2014. The company wants to provide during the year ending 31.3.2015
based on technical evaluation:
Total value of stock Rs. 100 lakhs
Provision required based on 12 months issue Rs. 3.5 lakhs
Provision required based on technical evaluation Rs. 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of
provision?
Answer
The decision of making provision for non-moving stocks on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a company
may require that provision for non-moving stocks should be made. The method of
estimating the amount of provision may be changed in case a more prudent estimate can be
made.
In the given case, considering the total value of stock, the change in the amount of required
provision of non-moving stock from Rs.3.5 lakhs to Rs.2.5 lakhs is also not material. The
disclosure can be made for such change in the following lines by way of notes to the
accounts in the annual accounts of XYZ Ltd. for the year 2014-15:
382
The company has provided for non-moving stocks on the basis of technical evaluation
unlike preceding years. Had the same method been followed as in the previous year, the
profit for the year and the corresponding effect on the year end net assets would have been
higher by Rs.1 lakh.
Accounting Standards-2
Valuation of Inventories
Question 1
Anand Ltd. purchased 1,00,000 MT for Rs. 100 each MT of raw material and introduced in
the production process to get 85,000 MT as output. Normal wastage is 5%. In the process,
company incurred the following expenses:
Direct Labour
Rs.10,00,000
Direct Variable Overheads
Rs. 1,00,000
Direct Fixed Overheads
Rs. 1,00,000
(Including interest Rs. 40,625)

Of the above 80,000 MT was sold during the year and remaining 5,000 MT remained in
closing stock. Due to fall in demand in market the selling price for the finished goods on
the closing day was estimated to be Rs. 105 per MT. Calculate the value of closing stock.
Answer
Calculation of cost for closing stock
Rs.
Cost of Purchase (1,00,000 x 100)
1,00,00,000
Direct Labour
10,00,000
Variable Overhead
1,00,000
Fixed Overhead
(1,00,000 40,625) 85,000
(1,00,000-5,000) or 95000
53,125
Cost of Production
1,11,53,125
Cost of closing stock per unit (1,11,53,125/85,000) = Rs. 131 (approx)

Net Realisable Value per unit Rs. 105
As per AS 2, Since net realisable value is less than cost, closing stock will be valued at
Rs. 105. Therefore closing stock is Rs. 5,25,000 (5,000 x 105).
383
Question 2
From the following details you are required to calculate the closing stock as on that date.
Particulars
Kg.
Rs.
Opening Stock: Finished Goods
1,000
25,000
Raw Materials
1,100
11,000
10,000
1,00,000
Labour
76,500
Overheads (Fixed)
75,000
10,000
2,80,000
Purchase of Raw Materials
Sales
Closing Stock: Raw Materials
900
Finished Goods
1200
The expected production for the year was 15,000 kg of the finished product. Due to fall in
market demand the sales price for the finished goods was Rs. 20 per kg and the
replacement cost for the raw material was Rs. 9.50 per kg on the closing day.
Answer
Calculation of cost for closing stock
Rs.
Cost of materials (10,200 x 10)
1,02,000
Direct Labour
76,500
Fixed Overhead 75,000 x 10,200/15,000
51,000
Cost of Production
2,29,500
Cost per unit (2,29,500/10,200)
22.50
Net Realisable Value per unit
20.00
Since net realisable value is less than cost, closing stock will be valued at Rs. 20. As NRV of
the finished goods is less than its cost, relevant raw materials will be valued at replacement
cost i.e. Rs. 9.50. Therefore, value of closing stock: Finished Goods (1,200 x 20) Rs. 24,000,
and Raw Materials (900 x 9.50) Rs. 8,550.
384
Question 3
The company deals in three products, P, Q and R, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2014-15. The Historical
Cost and Net Realizable Value of the items of closing stock are determined as follows:
Items
Historical Cost
(Rs. in lakhs)
Net Realisable Value

(Rs. in lakhs)
40
28
32
32
16
24
What will be the value of Closing Stock in accordance with AS-2?

Answer
Value of inventory
Items
Historical Cost
(Rs. in lakhs)
NRV
(Rs. in lakhs)
Value
40
28
28
32
32
32
16
24
16
Total
76
Contingencies and Events occurring after Balance Sheet Date
Question 1
Asmi Ltd., whose accounting year ends on 31/03/2015, agreed in principle to sell a plot of
land on 18/03/2015 at a price to be determined by an independent valuer. Pending the
agreement for sale and due to non-receipt of valuers report, the sale of the land could not
be completed up to 31/03/15. The company received the report on April 7, 2015 and the
agreement was signed on April 10, 2015. The financial statements for 2014-15 were
approved by the board on May 12, 2015.
Answer
The sale of land, is an event occurring after the balance sheet date. Also, the condition,
which led to the sell, existed on the balance sheet date. The signing of the agreement
385
provides further evidence as to the condition that existed on the balance sheet date. The
sale of land after the balance sheet date is therefore an adjusting event, which means the
sale transaction should be recorded in books of A Ltd. for the purpose of its financial
statements for 2014-15.
Question2
A company follows April-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 A/c and crediting the Debtors
A/c. The Cheques in hand is shown in 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.
Answer
Even if the cheques bear the date 31st March or before, the cheques received after 31st
March do not represent any condition or situation existing on 31st March. Thus the
collection of cheques after balance sheet date is not an adjusting event. Recognition of
cheques in hand is therefore not consistent with requirements of AS 4. Also the collection
of cheques after balance sheet date does not amounts to any material change or
commitments affecting financial position of the enterprise, and so no disclosure of such
collections in the Directors Report is necessary.
Hence cheques in hand do not qualify to be recognized as asset on 31st March.
Question 3
An earthquake destroyed a major warehouse of Anu Ltd. on 20.5.2015. The accounting
year of the company ended on 31.3.2015. The accounts were approved on 30.6.2015. The
loss from earthquake is estimated at Rs.30 lakhs. State with reasons, whether the loss due
to earthquake is an adjusting or non-adjusting event and how the fact of loss is to be
disclosed by the company?
Answer 3
AS 4 states that adjustments to assets and liabilities are not appropriate for events
occurring after the balance sheet date, if such events do not relate to conditions existing at
the balance sheet date. The destruction of warehouse due to earthquake did not exist on
the balance sheet date i.e. 31.3.2015. Therefore, loss occurred due to earthquake is not to
be recognised in the financial year 2014-2015.
However, unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements.
As per the information given in the question, the earthquake has caused major destruction;
therefore fundamental accounting assumption of going concern is called upon. Hence, the
fact of earthquake together with an estimated loss of Rs. 30 lakhs should be disclosed in the
Report of the Directors for the financial year 2014-2015.
386
Question 1
The company has to pay delayed cotton clearing charges over and above the negotiated
price for taking delayed delivery of cotton from the Suppliers' Godown. Upto 2013-14, the
company has regularly included such charges in the valuation of closing stock. This being
in the nature of interest the company has decided to exclude it from closing stock
valuation for the year 2014-15. This would result into decrease in profit by Rs. 7.60 lakhs
Answer
AS 5 states that a change in an accounting policy should be made only if the adoption of a
different accounting policy is required by statute or for compliance with an accounting
standard or if it is considered that the change would result in a more appropriate
presentation of the financial statements of an enterprise. Therefore the change in the
method of stock valuation is justified in view of the fact that the change is in line with the
recommendations of AS 2 and result in more appropriate preparation of the financial
statements. As per AS 2, this accounting policy adopted for valuation of inventories
including the cost formulae used should be disclosed in the financial statements.
Also, appropriate disclosure of the change and the amount by which any item in the
financial statements is affected by such change is necessary as per AS 1, AS 2 and AS 5.
Therefore, the under mentioned note should be given in the annual accounts.
"In compliance with the Accounting Standards issued by the ICAl, delayed cotton clearing
charges which are in the nature of interest have been excluded from the valuation of
closing stock unlike preceding years. Had the company continued the accounting practice
followed earlier, the value of closing stock as well as profit before tax for the year would
have been higher by Rs. 7.60 lakhs."
Question 2
Mr. Raju an employee of CCO Ltd. went on leave with a pay for 9 months on 1.1.2015 up to
30.9.2015. His monthly pay was Rs.25,000. While preparing the financial statement on
30.6.2015 for the year ended 31.3.15, the expense of salary of Mr. Raju for 3 months
(1.1.15 to 31.3.15) was not provided due to omission. When Mr. Raju joined on 1.10.15, the
whole salary for 9 months was duly paid to him. Give the accounting treatment as per AS5, if Mr. Raju was terminated from services on 01.01.15 and was reinstated in service by
court on 30.9.15 with full pay protection, then what would be the accounting treatment?
Answer
In this case, three month salary of Rs.75,000 is prior period expense and following entry
should be passed:
Salary A/c
Dr.
1,50,000
Prior period expense (Salary) A/c
Dr.
75,000
To Bank A/c
2,25,000
387
If Mr. Raju was terminated from service on 1.1.15 and was re-instated in service by the
Court on 30.9.15 with full pay protection(i.e. total salary was rewarded to him). As the
employee was reinstated in service as per the Courts Order as on 30.9.2015, the following
entry should be made:
Salary A/c
Dr.
2,25,000
To Bank A/c
2,25,000
In such a case, there shall arise no error or omission while preparing the financial
statements for the earlier year.
Accounting Standard-6
Question 1
Mr. Ram set up a new factory in the backward area and purchased plant for Rs. 500 lakhs
for the purpose. Purchases were entitled for the CENVAT credit of Rs. 10 lakhs and also
Government agreed to extend the 25% subsidy for backward area development.
Determine the depreciable value for the asset.
Answer
Depreciable amount
Rs.
Cost of assets
500
Less: Cenvat credit
10
Balance
490
Less: Subsidy 25% of 500
125
Depreciable value of the asset
365
Question 2
Mr. Atul purchased a machine on 01.04.2010 for Rs. 1,00,000. On 01.07.2011 he purchased
another machine for Rs.1,50,000. On 01.10.2012, he purchased the third machine for Rs.
2,00,000 and on 31.12.2013 he sold the second machine for Rs. 1,25,000. On 31.03.2015 he
decided to change the method of charging depreciation from Straight Line Method @ 10%
p.a. to Written Down Value Method @ 15 % p.a. You are required to calculate the amount
of additional depreciation chargeable.
Answer
1. Depreciation charged under old method:
Purchase of first machine on 1.4.2010
Depreciation for 4 years (1,00,000 x 10% x 5)
388
Rs.
Rs.
100,000
50,000
Purchase of second machine on 1.7.11 and sold

on 31.12.13
1,50,000
Purchase of third machine on 1.10.12
200,000
Depreciation for 2.5 years
37,500
(1,50,000 x 10% x 2.5)

Depreciation for 2.5 years (2,00,000 x 10% x 2.5)
50,000
Total Depreciation charged
1,37,500
2. Depreciation to be charged under new method:

Year
Opening WDV Purchases/sales Depreciation
Closing WDV
2010-11
1,00,000
100,000
On 1.4.2010
15,000
85,000
2011-12
85,000
1,50,000
12,750 (i)
72,250 (i)
(on 1.7.2011
16,875 (ii)
133,125 (ii)
72,250 (i)
200,000 (iii)
10,838 (i)
61,412 (i)
133125 (ii)
(on 1.10.12)
19,969 (ii)
1,13,156 (ii)
15,000 (iii)
1,85,000 (iii)
9,212 (i)
52200 (i)
12,730 (ii)
157250 (iii)
2012-13
2013-14
61,412 (i)
1,13,156 (ii)
2014-15
Sold (ii) on
31.12.2013
1,85,000 (iii)
27,750 (iii)
209450
31,418
1,78,032
Total Depreciation = 1,71,542

Additional Depreciation chargeable = 1,71,542 1,37,500 = Rs. 34,042
Question 1
Mohan undertook a contract for Rs. 15,00,000 on an arrangement that 80% of the value of
work done as certified by the architect of the contractee, should be paid immediately and
that the remaining 20% be retained until the contract was completed.
In 2013, the amounts expended were Rs. 3,60,000; the work was certified for Rs. 3,00,000
and 80% of this was paid as agreed. It was estimated that future expenditure to complete
the contract would be Rs. 10,00,000. In 2014, the amounts expended were Rs. 4,75,000.
389
Three-fourths of the contract was certified as done by December 31st and 80% of this was
received accordingly. It was estimated that future expenditure to complete the contract
would be Rs. 4,00,000. In 2015, the amounts expended were Rs. 3,10,000 and on June 30th
the whole contract was completed.
Show how the contract revenue would be recognised in the profit & loss account for each
year.
Answer
2013
Contract work in progress
3,60,000x 100
= 26.47%
3,60,000 10,00,000
Revenue (15,00,000x26.47%)
3,97,050
Less: Contract cost
3,60,000
Profit
37050
Contract work in progress
3,60,000 4,75,000 x 100 = 67.61%
Revenue (15,00,000x67.61%)
10,14,150
Less: Contract cost
8,35,000
Profit
1,79,150
37,050
142,100
15,00,000
Contract Cost (8,35,000+3,10,000) =
11,45,000
Total Profit
3,55,000
Less: profit already recognized
1,79,150
1,75,850
2014
Less : Profit already recognized

Profit
8,35,000 4,00,000
2015
Contract Revenue
Profit
Question 2
A firm of contractors obtained a contract for construction of bridges across river Shipra.
The following details are available in the records kept for the year ended 31st March,
2015.
(Rs. in lakhs)
Total Contract Price
1,000
Work Certified
500
390
Work not Certified
105
Estimated further Cost to Completion
495
Progress Payment Received
400
To be Received
140
The firm seeks your advice and assistance in the presentation of accounts keeping in view
the requirements of AS 7 (Revised).
Answer
(a) Amount of foreseeable loss (Rs. in lakhs)
Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price (1,000)
Total foreseeable loss to be recognized as expense 100
According to AS 7, when it is probable that total contract costs will exceed total
contract revenue, the expected loss should be recognized as an expense immediately.
(b) Contract work-in-progress i.e. cost incurred to date are Rs. 605 lakhs
(Rs.in lakhs)
Work certified
500
Work not certified
105
605
This is 55% (605/1,100 100) of total costs of construction.
(c) Proportion of total contract value recognised as revenue as per para 21 of AS 7
(Revised).
55% of Rs. 1,000 lakhs = Rs. 550 lakhs
(d) Amount due from/to customers = Contract costs + Recognised profits Recognised
losses (Progress payments received + Progress payments to be received)= [605 + Nil
100 (400 + 140)] Rs. in lakhs, = [605 100 540] Rs. in lakhs = Rs. 35 lakh.
Amount due to customers = Rs. 35 lakhs, The amount of Rs. 35 lakhs will be shown in
the balance sheet as liability.
(e) The relevant disclosures under AS 7 (Revised) are given below:
Rs.
Contract revenue
550
Contract expenses
605
Recognized profits less recognized losses
(100)
Progress billings(400 + 140)
540
Retentions (billed but not received from contractee)
140
Gross amount due to customers
35
391
Question 1
The Board of Directors decided on 31.3.2015 to increase the sale price of certain items
retrospectively from 1st January, 2015. In view of this price revision with effect from 1st
January 2015, the company has to receive Rs. 15 lakhs from its customers in respect of
sales made from 1st January, 2015 to 31st March, 2015 and the Accountant cannot make
up his mind whether to include Rs. 15 lakhs in the sales for 2014-2015
Answer
Price revision was effected during the current accounting period 2014-2015. As a result,
the company stands to receive Rs. 15 lakhs from its customers in respect of sales made
from 1st January, 2015 to 31st March, 2015. If the company is able to assess the ultimate
collection with reasonable certainty, then additional revenue arising out of the said price
revision may be recognised in 2015- 2016 vide Para 10 of AS 9.
Question 2
B Co. Ltd., used certain resources of A Co. Ltd. In return A Co. Ltd. received Rs. 10 lakhs and
Rs. 15 lakhs as interest and royalties respective from B Co. Ltd. during the year 2014-15.
You are required to state whether and on what basis these revenues can be recognised by
A Co. Ltd.
Answer
As per para 13 of AS 9 on Revenue Recognition, revenue arising from the use by others of
enterprise resources yielding interest and royalties should only be recognised when no
significant uncertainty as to measurability or collectability exists. These revenues are
recognised on the following bases:
(i)
Interest: on a time proportion basis taking into account the amount outstanding and
the rate applicable.
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant
agreement.
Question 3
A Limited has recognized Rs. 10 lakhs on accrual basis income from dividend on units of
mutual funds of the face value of Rs. 50 lakhs held by it as at the end of the financial year
31st March, 2015. The dividends on mutual funds were declared at the rate of 20% on 15 th
June, 2015. The dividend was proposed on 10th April, 2015 by the declaring company.
Whether the treatment is as per the relevant Accounting Standard? You are asked to
answer with reference to provisions of Accounting Standard.
392
Answer
Accounting Standard 9 on Revenue Recognition states that dividends from investments in
shares are not recognised in the statement of profit and loss until a right to receive
payment is established.
In the given case, the dividend is proposed on 10th April, 2015, while it is declared on 15th
June, 2015. Hence, the right to receive payment is established on 15th June, 2015. As per
the above mentioned paragraphs, income from dividend on units of mutual funds should be
recognised by A Ltd. in the financial year ended 31st March, 2015.
The recognition of Rs. 10 lakhs on accrual basis in the financial year 2014-2015 is not as
per AS 9 'Revenue Recognition'.
Question 1
Rama Ltd. is constructing a fixed asset. Following are the expenses incurred on the
construction:
Materials
Rs. 10,00,000
Direct Expenses
Rs. 2,50,000
Total Direct Labour
Rs. 5,00,000
(1/10th of the total labour time was chargeable to the construction)

Total office & administrative expenses
Rs. 8,00,000
(5% is chargeable to the construction)

Depreciation on the assets used for the construction of this assets
Rs. 10,000
Calculate the cost of fixed assets.

Answer
Material
10,00,000
Direct expenses
Direct labour (1/10 of 5,00,000)
2,50,000
50,000
Administrative expenses (5% of 8,00,000)

Depreciation on assets used
40,000
10,000
13,50,000
Question 2
On March 01, 2015, Sonu Ltd. purchased Rs. 5 lakhs worth of land for a factory site.
Company demolished an old building on the property and sold the material for Rs. 10,000.
Company incurred additional cost and realized salvaged proceeds during the March 2015
as follows:
393
Legal fees for purchase contract and recording ownership Rs. 25,000, Title guarantee
insurance Rs. 10,000 Cost for demolition of building Rs. 50,000
Compute the balance to be shown in the land account on March 31, 2015 balance sheet.
Answer
Rs.
Purchase price
Recovery on sale
Legal fee
Cost of demolition
Title guarantee fee
Land to be shown at
5,00,000
-10,000
25,000
50,000
10,000
5,75,000
Question 3
What are the various disclosures to be made as per AS-10.
Answer
As per AS 10, the following information should be disclosed in the financial statements:
(i) gross and net book values of fixed assets at the beginning and end of an accounting
period showing additions, disposals, acquisitions and other movements ;
(ii) expenditure incurred on account of fixed assets in the course of construction or
acquisition;
(iii) revalued amount substituted for historical costs of fixed assets, the method
adopted to compute the revalued amounts, the nature of indices used, the year of
any appraisal made, and whether an external valuer was involved, in case where
fixed assets are stated at revalued amounts.
Question 1
Kamal Ltd. borrowed US$ 4,50,000 on 01/01/2015, which will be repaid as on
31/07/2015. Kamal Ltd. prepares financial statement ending on 31/03/2015. Rate of
exchange between reporting currency (INR) and foreign currency (USD) on different dates
are as under:
01/01/2015 1 US$ = Rs.48.00
31/03/2015 1 US$ = Rs.49.00
31/07/2015 1 US$ = Rs.49.50
Pass the necessary journal entries as per AS-11, to record the above.
394
Answer
Journals in the Books of Kamal Ltd.
Date
Jan. 01, 2015
Particulars
(Dr.)
Bank Account (4,50,000 x 48)
Dr.
21,60,000
To Foreign Loan Account
21,60,000
Mar. 31, 2015 Foreign Exchange Difference Account
Dr.
4,50,000
To Foreign Loan Account [4,50,000 x(49-48)]

Jul. 01, 2015
(Cr.)
4,50,000
Foreign Exchange Difference Account
Dr.
2,25,000
Foreign Loan Account
Dr.
26,10,000
To Bank Account
28,35,000
Question 2
Rohan Ltd. purchased a plant for US$ 1,00,000 on 01st February 2015, payable after three
months. Company entered into a forward contract for three months @ Rs. 49.15 per
dollar. Exchange rate per dollar on 01st Feb. was Rs. 48.85. How will you recognize the
profit or loss on forward contract in the books of Rohan Ltd.
Answer
Forward Rate
Rs.49.15
Less : Spot Rate
Rs.48.85
Premium on Contract
Rs.0.30
Contract Amount
US$ 1,00,000
Total Loss (1,00,000 x 0.30) = Rs. 30,000

Contract period 3 months Two falling the year 2014-15; therefore loss to be recognized
(30,000/3) x 2 = Rs. 20,000. Rest Rs. 10,000 will be recognized in the following year.
Question 1
Zoya Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5
year swith the salvage value of Rs. 5,00,000. On purchase of the assets government
granted it a grant for Rs. 10 lakhs. Pass the necessary journal entries in the books of the
company for first two years.
395
Answer
Journal in the books of Zoya Ltd.
Particulars
Rs. (Dr.)
1st Fixed Assets Account

To Bank Account
(Being Fixed Assets purchased)
Dr.
Bank Account
To Fixed Assets Account
(Being grant received from the government)
Dr.
Depreciation Account
(Being Depreciation charged on SLM)
Dr.

To Depreciation Account
(Being Depreciation transferred to P/L Account)
Dr.
2nd Depreciation Account

Dr. 7,00,000

(Being Depreciation transferred to P/L Account)
Dr.
Rs. (Cr.)
50,00,000
50,00,000
10,00,000
10,00,000
7,00,000
7,00,000
7,00,000
7,00,000
7,00,000
Method II
1st Fixed Assets Account
To Bank Account
(Being Fixed Assets purchased)
7,00,000
7,00,000
Dr.
5,00,0000
5,00,0000
Bank Account
To Deferred Govt. Grant Account
(Being grant received from the government)
Dr.
Depreciation Account
Dr.

(Being depreciation transferred to P/L Account)
Dr.
1,00,0000
1,00,0000
9,00,000
9,00,000
396
9,00,000
9,00,000
Deferred Govt. Grants Account

Dr.
To Profit & Loss Account
(Being proportionate government grant taken to P/L Account)
2,00,000
2nd Depreciation Account

Dr.
9,00,000

(Being depreciation transferred to P/L Account)
Dr.
2,00,000
9,00,000
9,00,000
9,00,000
Deferred Govt. Grant Account

Dr.
To Profit & Loss Account
(Being proportionate government grant taken to P/L Account)
2,00,000
2,00,000
Question 2
Sanvi Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5
years with the salvage value of Rs. 5,00,000. On purchase of the assets government
granted it a grant for 10 lakhs. Grant was considered as refundable in the end of 2nd year
to the extent of Rs. 7,00,000. Pass the journal entry for refund of the grant.
Answer
Fixed Assets Account
Dr.
7,00,000
To Bank Account
(Being government grant on asset refunded)
7,00,000
OR
Deferred Govt. Grant Account
Dr.
6,00,000
Dr.
1,00,000
To Bank Account
(Being government grant on asset refunded)
7,00,000
Question 3
How Government grant relating to specific fixed asset is treated in the books as per AS-12?
Answer
In accordance with AS 12, government grants related to specific fixed assets should be
presented in the balance sheet by showing the grant as a deduction from the gross value of
the assets concerned in arriving at their book value. Where the grant related to a specific
fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should
be shown in the balance sheet at a nominal value. Alternatively, government grants related
to depreciable fixed assets may be treated as deferred income which should be recognized
in the profit and loss statement on a systematic and rational basis over the useful life of the
397
asset, i.e., such grants should be allocated to income over the periods and in the
proportions in which depreciation on those assets is charged. Grants related to nondepreciable assets are credited to capital reserve under this method, as there is usually no
charge to income in respect of such assets. However, if a grant related to a non-depreciable
asset requires the fulfillment of certain obligations, the grant is credited to income over the
same period over which the cost of meeting such obligations is charged to income. The
deferred income is suitably disclosed in the balance sheet pending its apportionment to
profit and loss account
Question 4
How would you record a non-monetary grant received from the Government as per AS 12?
Answer
According to para 7.1 of AS 12 Accounting for Government Grants, Government grants
may take the form of non-monetary assets such as land or other resources, given at
concessional rates. In these circumstances, it is usual to account for such assets at their
acquisition cost. Non-monetary grants given free of cost are recorded at a nominal value.
Question 1
An unquoted long term investment is carried in the books at a cost of Rs. 2 lakhs. The
published accounts of the unlisted company received in May, 2015 showed that the
company was incurring cash losses with declining market share and the long term
investment may not fetch more than Rs. 20,000. How will you deal with this in preparing
the financial statements of X Ltd. for the year ended 31st March, 2015?
Answer
As it is stated in the question that financial statements for the year ended 31st March, 2015
are under preparation, the views have been given on the basis that the financial statements
are yet to be completed and approved by the Board of Directors. Investments classified as
long term investments should be carried in the financial statements at cost. However,
provision for diminution shall be made to recognise a decline, other than temporary, in the
value of the investments, such reduction being determined and made for each investment
individually. Para 17 of AS 13 Accounting for Investments states that indicators of the
value of an investment are obtained by reference to its market value, the investee's assets
and results and the expected cash flows from the investment. On these bases, the facts of
the given case clearly suggest that the provision for diminution should be made to reduce
the carrying amount of long term investment to Rs. 20,000 in the financial statements for
Question 2
Ashu Ltd. acquired 2,000 debentures in Vikas Ltd. by issue of 10,000 equity shares having a
face of Rs.100 each, whose market value is Rs.150 per share. The debentures of Vikas Ltd
were listed at Rs.800 but the face value is Rs.500 only. What should be the cost of the
investments? Ignore pre-acquisition interest.
398
Answer
As per AS-13, if investments has been purchased in exchange of assets then fair value of
assets given up or fair value of assets acquired whichever is clearly evident can be taken as
consideration.
Hence cost of investment 10,000 equity shares @150=15,00,000.
Question 3
On 1st April, Kalpana Ltd. purchased 12% Debentures in Soni Ltd. for Rs.7,50,000. The face
value of these debentures were Rs.5,00,000. Interest on debentures falls due for payment
on 30th June, and 31st December. Compute the cost of acquisition of debentures.
Answer
Amount Paid for debentures
7,50,000
Pre acquisition interest 5,00,000 x 12% x 3/12

Cost
15,000
7,35,000
Question 4
What are the disclosure requirements of AS-13.
Answer
The disclosure requirements as per para 35 of AS 13 are as follows:
(i)
Accounting policies followed for valuation of investments.
(ii) Classification of investment into current and long term in addition to

classification as per Schedule VI of Companies Act in case of company.
(iii) The amount included in profit and loss statements for
(a) Interest, dividends and rentals for long term and current investments,
disclosing therein gross income and tax deducted at source thereon;
(b) Profits and losses on disposal of current investment and changes in
carrying amount of such investments;
(c)
Profits and losses and disposal of long term investments and changes in
carrying amount of investments.
(iv) Aggregate amount of quoted and unquoted investments, giving the aggregate
market value of quoted investments;
(v) Any significant restrictions on investments like minimum holding period for
sale/disposal, utilisation of sale proceeds or non-remittance of sale proceeds of
investment held outside India.
(vi) Other disclosures required by the relevant statute governing the enterprises.
399
Accounting Standard -14

Question 1
List the conditions to be fulfilled as per Accounting Standard 14 for an amalgamation to
be in the nature of merger, in the case of companies.
Answer
An amalgamation should be considered to be an amalgamation in the nature of merger if
the following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of
the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders
of the transferor company who agree to become equity shareholders of the
transferee company is discharged by the transferee company wholly by the issue
of equity shares in the transferee company, except that cash may be paid in
respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.
Question 2
What are the methods of Accounting for Amalgamations.
Answer
As per AS 14 on Accounting for Amalgamations, there are two main methods of
accountingfor amalgamations:
(i)
The Pooling of Interest Method
Under this method, the assets, liabilities and reserves of the transferor company
are recorded by the transferee company at their existing carrying amounts (after
making the necessary adjustments).
If at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted
following the amalgamation. The effects on the financial statements of any
changes in accounting policies are reported in accordance with AS 5 on Net
400
Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies.
(ii) The Purchase Method
Under the purchase method, the transferee company accounts for the
amalgamation either by incorporating the assets and liabilities at their existing
carrying amounts or by allocating the consideration to individual identifiable
assets and liabilities of the transferor company on the basis of their fair values at
the date of amalgamation. The identifiable assets and liabilities may include assets
and liabilities not recorded in the financial statements of the transferor company.
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee
company.
Question 3
Briefly describe the disclosure requirements for amalgamation including additional
disclosure, if any, for different methods of amalgamation as per AS 14.
Answer
The disclosure requirements for amalgamations have been prescribed in paragraphs 43 to
46 of AS 14 on Accounting for Amalgamation.
For all amalgamations, the following disclosures should be made in the first financial
statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) the effective date of amalgamation for accounting purpose;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
For amalgamations accounted under the pooling of interests method, the following
additional disclosures should be made in the first financial statements following the
amalgamation:
(a) description and number of shares issued, together with the percentage of each
companys equity shares exchanged to effect the amalgamation; and
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof.
For amalgamations, accounted under the purchase method, the following additional
disclosures should be made in the first financial statements following the amalgamation;
(a) consideration for the amalgamation and a description of the consideration paid or
contingently payable; and
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
401
Question 1
Alpha Limited belongs to the engineering industry. The company received an actuarial
valuation for the first time for its pension scheme which revealed a surplus of Rs. 6 lakhs. It
wants to spread the same over the next 2 years by reducing the annual contribution to Rs.
2 lakhs instead of Rs. 5 lakhs. The average remaining life of the employees is estimated to
be 6 years. You are required to advise the company on the following items from the
viewpoint of finalisation of accounts, taking note of the mandatory accounting standards.
Answer
According to AS 15, actuarial gains and losses should be recognized immediately in the
statement of profit and loss as income or expense. Therefore, surplus amount of Rs. 6 lakhs
is required to be credited to the profit and loss statement of the current year.
Question 2
As on 1st April, 2014 the fair value of plan assets was Rs.1,00,000 in respect of a pension
plan of Zebra Ltd. On 30th September, 2014 the plan paid out benefits of Rs.19,000 and
received inward contributions of Rs.49,000. On 31st March, 2015 the fair value of plan
assets was Rs.1,50,000. On 1st April, 2014 the company made the following estimates,
based on its market studies, understanding and prevailing prices.
%
Interest & dividend income, after tax payable by the fund
9.25
Realised and unrealised gains on plan assets (after tax)
2.00
Fund administrative costs
(1.00)
Expected Rate of Return
10.25
You are required to find the expected and actual returns on plan assets.
Answer
Computation of Expected and Actual Returns on Plan Assets
Rs.
Return on Rs. 1,00,000 held for 12 months at 10.25%
Return on Rs. 30,000 (49,000-19,000) held for six months at 5%
(Equivalent to 10.25% annually, compounded every six months)
Expected return on plan assets for 2014-15
Fair value of plan assets as on 31 March, 2015
Less: Fair value of plan assets as on 1 April, 2014
Contributions received
49,000
10,250
1,500
11,750
1,50,000
1,00,000
1,49,000
1,000
Add: Benefits paid
19,000
Actual return on plan assets
20,000
402
Question 3
Hero Bank has followed the policies for retirement benefits as under:
(a) Contribution to pension fund is made based on actuarial valuation at the year end. In
respect of employees who have opted for pension scheme.
(b) Contribution to the gratuity fund is made based on actuarial valuation at the year
end.
(c) Leave encashment is accounted for on PAY-AS-YOU-GO method.
Comment whether the policy is in accordance with AS-15.
Answer
(a) As the contribution to Pension Fund is made on actuarial basis every year, there fore
the policy is as per AS-15, which is based on actuarial basis of a counting.
(b) As the contribution is being made on annual basis to gratuity fund on actuarial basis,
the policy is in accordance with AS-15.
(c)
As regard leave encashment, which is accounted for on PAY-AS-YOU-GO basis, it is

not in accordance with AS-15. It should be accounted for on accrual basis.
Question 1
A company borrowed Rs. 40,00,000 for purchase of machinery on 1.6.2014. Interest on
loan is 9% per annum. The machinery was put to use from 1.1.2015. Pass journal entry for
the year ended 31.3.2015 to record the borrowing cost of loan as per AS 16.
Answer
Rs.
Interest upto 31.3.2015 (40,00,000 9% 10 /12)

Less: Interest relating to pre-operative period
3,00,000 x 7
10
Amount to be charged to P&L A/c

Pre-operative interest to be capitalized
Journal Entry
Machinery A/c
Dr.
To Loan A/c
(Being interest on loan for pre-operative period capitalized)
Interest on loan A/c
Dr.
To Loan A/c
(Being the interest on loan for the post-operative period)
Profit and Loss A/c
Dr.
To Interest on loan A/c
(Being interest on loan transferred to P&L A/c)
403
3,00,000
2,10,000
=
=
90,000
2,10,000
Rs.
Rs.
2,10,000
2,10,000
90,000
90,000
90,000
90,000
Question 2
Naman Ltd. obtained a loan from a bank for Rs. 120 lakhs on 30-04-2014. It was utilized
as follows:
Particulars
Amount (Rs.in lakhs)
Construction of a shed
50
Purchase of a machinery
40
Working Capital
20
Advance for purchase of truck
10
Construction of shed was completed in March 2015. The machinery was installed on the
same date. Delivery truck was not received. Total interest charged by the bank for the year
ending 31-03- 2015 was Rs.18 lakhs. Show the treatment of interest.
Answer
Qualifying Asset as per AS-16 = Rs. 50 lakhs (construction of a shed)
Borrowing cost to be capitalized = 18X 50/120 =Rs. 7.5 lakhs
Interest to be debited to Profit or Loss account = Rs. (18 7.5) lakhs = Rs. 10.5 lakhs
Question 3
A company has obtained Institutional Term Loan of Rs. 580 lakhs for modernisation and
renovation of its Plant & Machinery. Plant & Machinery acquired under the modernization
scheme and installation completed on 31st March, 2015 amounted to Rs. 406 lakhs, Rs. 58
lakhs has been advanced to suppliers for additional assets and the balance loan of Rs. 116
lakhs has been utilized for working capital purpose. The Accountant is on a dilemma as to
how to account for the total interest of Rs. 52.20 lakhs incurred during 2014-2015 on the
entire Institutional Term Loan of Rs.580 lakhs.
Answer
As per para 6 of AS 16 Borrowing Costs, borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset should be capitalized as
part of the cost of that asset. Other borrowing costs should be recognized as an expense in
the period in which they are incurred. Borrowing costs should be expensed except where
they are directly attributable to acquisition, construction or production of qualifying asset.
A qualifying asset is an asset that necessary takes a substantial period of time to get ready
for its intended use or sale.
Question 4
Briefly indicate the items which are included in the expressions Borrowing Cost as per AS
16.
404
Answer 4
Borrowing cost may include:
(a) Interest and commitment charges on bank borrowings and other short term and
long term borrowings.
(b) Amortisation of discounts or premiums relating to borrowings.
(c)
Amortisation of ancillary costs incurred in connection with the arrangement of

borrowings.
(d) Finance charges in respect of assets required under finance leases or under other
similar arrangements; and
(e) Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.
Question 1
Identify the related parties in the following cases as per AS-18
A Ltd. holds 51% of B Ltd.
B Ltd holds 51% of O Ltd.
Z Ltd holds 49% of O Ltd
Answer
A Ltd., B Ltd. & O Ltd. are related to each other. Z Ltd. & O Ltd. are related to each other by
virtue of Associate relationship. However, neither A Ltd. nor B Ltd. is related to Z Ltd. and
vice versa.
Control: (a) ownership, directly or indirectly, of more than one half of the voting power of
anenterprise, or (b) control of the composition of the board of directors in the case of a
company or of the composition of the corresponding governing body in case of any other
enterprise, or (c) a substantial interest in voting power and the power to direct, by statute
or agreement, the financial and/or operating policies of the enterprise.
Question 2
Kaveri Ltd. sold goods for Rs.90 lakhs to Yamuna Ltd. during financial year ended 31-32015. The Managing Director of Kaveri Ltd. own 100% of Yamuna Ltd. The sales were
made to Yamuna Ltd. at normal selling prices followed by Kaveri Ltd. The Chief
accountant of Kaveri Ltd. contends that these sales need not require a different treatment
from the other sales made by the company and hence no disclosure is necessary as per the
accounting standard. Is the Chief Accountant correct?
Answer
As per AS 18 Related Party Disclosures, Enterprises over which a key management
personnel is able to exercise significant influence are related parties. This includes
405
enterprises owned by directors or major shareholders of the reporting enterprise that

have a member of key management in common with the reporting enterprise
transaction between them is required irrespective of whether the transaction was done
at normal selling price.
Hence the contention of Chief Accountant of Kaveri Ltd is wrong.
Question 3
Mr. Kapil a relative of key Management personnel received remuneration of Rs. 2,50,000
for his services in the company for the period from 1.4.2014 to 30.6.2014. On 1.7.2014 he
left the service. Should the relative be identified as at the closing date i.e. on 31.3.2015 for
the purposes of AS 18?
Answer
According to para 10 of AS 18 on Related Party Disclosures, parties are considered to be
related if at any time during the reporting period one party has the ability to control the
other party or exercise significant influence over the other party in making financial and/or
operating decisions.
Hence, Mr. Kapil, a relative of key management personnel should be identified as relative as
at the closing date i.e. on 31.3.2015.
Question 4
A Ltd. sold goods to its associate Company for the 1st quarter ending 30.6.2014. After that,
the related party relationship ceased to exist. However, goods were supplied as was
supplied to any other ordinary customer. Decide whether transactions of the entire year
has to be disclosed as related party transaction.
Answer
As per para 23 of AS 18, transactions of A Ltd. with its associate company for the first
quarter ending 30.06.2014 only are required to be disclosed as related party transactions.
The transactions for the period in which related party relationship did not exist need not
be reported.
Question 1
Tim Ltd. wishes to obtain a machine tool costing Rs. 20 lakhs by way of lease. The
effective life of the machine tool is 12 years but the Company requires it only for the
first five years. It enters into an agreement with Sim Ltd. for a lease rental of Rs. 2
lakhs p.a.
The company is not sure about the treatment of these lease rentals and hence requests
your assistance in proper disclosure of the same. For calculation purposes, take the
implicit rate of interest at 15%. PV factors are : 0.87, 0.76, 0.66, 0.57, and 0.50.
406
Answer
AS 19 Leases, a lease will be classified as finance lease if at the inception of the lease, the
present value of minimum lease payment amounts to at least substantially all of the fair
value of leased asset. In the given case, the implicit rate of interest is given at 15%. The
present value of minimum lease payments at 15% using PV- Annuity Factor can be
computed as follows:
Annuity Factor (Year 1 to Year 5) 3.36 (approx.)
Present value of minimum lease payments (for Rs.2 lakhs each year) Rs.6.72 lakhs
(approx.)
Thus, present value of minimum lease payments is Rs.10.08 lakhs and the fair value of the
machine is Rs.20 lakhs. In a finance lease, lease term should be for the major part of the
economic life of the asset even if title is not transferred. However, in the given case, the
effective useful life of the machine is 12 years while the lease is only for five years.
Therefore, lease agreement is an operating lease. Lease payments under an operating lease
should be recognized as an expense in the statement of profit and loss on a straight line
basis over the lease term unless another systematic basis is more representative of the
time pattern of the users benefit.
Question 1
Calculate Weighted Number of Shares.
Date
Particulars
Purchased
1st January
Balance at beginning of year
31st May
Issue of shares for cash
1st November
Buy Back of shares
Sold
Balance
1,800
1,800
600
2,400
300
2,100
Answer
Computation of Weighted Average: (1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) =
2,100 shares.
Question 2
Net profit for the year 2013
No. of equity shares outstanding until 30th September 2006
Rs. 18,00,000
Rs. 60,00,000
20,00,000
Bonus issue 1st October 2014 was 2 equity shares for each equity share outstanding at
30th September, 2014
Calculate Basic Earnings Per Share.
407
Answer
No. of Bonus Issue 20,00,000 x 2 = 40,00,000 shares
2014
2013
Profit to equity (Rs.)
60,00,000
18,00,000
No. of shares including bonus
60,00,000
60,00,000
Earnings per share / Adjusted Earning per share
Rs. 1
Rs. 0.3
Since the bonus issue is an issue without consideration, the issue is treated as if it had
occurred prior to the beginning of the year 2013, the earliest period reported.
Question 3
Rs. 11,00,000
Rs. 15,00,000
No. of shares outstanding prior to rights issue
5,00,000 shares
Rights issue price
Rs. 15.00
Last date to exercise rights
1st March 2015
Rights issue is one new share for each five outstanding (i.e. 1,00,000 new shares)
Fair value of one equity share immediately prior to exercise of rights on 1st March 2015
was Rs. 21.00. Compute Basic Earnings Per Share.
Answer
Number of shares outstanding prior to exercise Number of shares issued in the exercise,
Fair value of shares =
5 sharesx 21 15 x 1
= Rs. 20.00
6
Paid part in Right issue =
1,00,000x 15
=75,000
20
Bonus shares in Right issue=1,00,000-75,000=25,000

Computation of earnings per share:
EPS for the year 2014 as originally reported: 11,00,000/5,00,000 shares = Rs. 2.20
EPS for the year 2014 restated for rights issue: 11,00,000/ (5,00,000 shares +25,000) = Rs.
2.10
EPS for the year 2015 including effects of rights issue:
(5,00,000 x 12/12) + (75,000 x 10/12) +25,000x12/12= 5,87,500 shares, EPS =
15,00,000/5,87,500= Rs. 2.55
408
Question 4
Net profit for the current year
Rs. 1,00,00,000
No. of equity shares outstanding
50,00,000
Basic earnings per share
Rs. 2.00
No. of 12% convertible debentures of Rs. 100 each
1,00,000
Each debenture is convertible into 10 equity shares

Interest expense for the current year
Rs. 12,00,000
Tax relating to interest expense (30%)

Compute Diluted Earnings Per Share.
Rs. 3,60,000
Answer
2015 (Rs.)
Adjusted net profit for the current year (1,00,00,000 +
12,00,000 3,60,000)
No. of equity shares resulting from conversion of debentures:
1,08,40,000
10,00,000 Shares
No. of equity shares used to compute diluted EPS: (50,00,000 +

10,00,000)
60,00,000
Diluted earnings per share: (1,08,40,000/60,00,000)
1.81
Question 1
Exo Ltd. has provided the following information.
Depreciation as per accounting records
Rs. 2,00,000
Depreciation as per tax records
Rs. 5,00,000
Unamotised preliminary expenses as per tax record
Rs. 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax
asset/liability should be recognized as transition adjustment.
Tax rate 30%.
409
Answer
Calculation of difference between taxable income and accounting income
Rs.
Excess depreciation as per tax Rs, (5,00,000 2,00,000)
3,00,000
Less: Expenses provided in taxable income
(30,000)
Timing difference
2,70,000
Tax expense is more than the current tax due to timing difference.
Therefore deferred tax liability = 30%*2,70,000
81,000
Accounting Standard - 24
Question 1
A healthcare goods producer has changed the product line as follows:
Washing soap
Bathing soap
January 2014 September, 2014 per month
2,00,000
2,00,000
October 2014 December, 2014 per month
1,00,000
3,00,000
4,00,000
January 2015 March, 2015 per month
The company has enforced a gradual enforcement of change in product line on the
basis of an overall plan. The Board of Directors of the Company has passed a
resolution in March, 2015 to this effect. The company follows calendar year as its
accounting year. Should it be treated as discontinuing operation?
Answer
Business enterprises frequently close facilities, abandon products, or even product lines,
and reduce the size of their workforce in response to market forces. These kinds of
terminations, generally, are not in themselves discontinuing operations unless they satisfy
the definition criteria. By gradually reducing the size of operations in the product line of
Washing Soap, the company has increased its scale of operations in Bathing Soap. Such a
change is a gradual or evolutionary, phasing out of a product line or class of services does
not meet definition criteria in AS 24 namely, disposing of substantially in its entirety, a
component of the enterprise. Hence, changeover is not a discontinuing operation.
410
Question 1
Holy Corporation is dealing in seasonal product sales pattern of the product, quarter wise
is as follows:
1st quarter
30th June
10%
2nd quarter
3rd quarter
30th September
31st December
10%
60%
4th quarter
31st March
20%
Information regarding the 1st quarter ending on 30th June, 2015 is as follows:
Sales
80 crores
Salary and other expenses
60 crores
Advertisement expenses (routine)
4 crores
Administrative and selling expenses

8 crores
While preparing interim financial report for first quarter Holy Corporation wants to defer
Rs. 10 crores expenditure to third quarter on the argument that third quarter is having
more sales therefore third quarter should be debited by more expenditure. Considering the
seasonal nature of business and the expenditures are uniform throughout all quarters,
calculate the result of the first quarter as per AS-25. Also give a comment on the
companys view.
Answer
Particulars
(Rs. in crores)
Result of first quarter ending 30th June, 2015

Turnover
80
Other Income
Nil
Total (a)
80
Less: Changes in inventories
Nil
Salaries and other cost
60
Administrative and selling Expenses (4+8)
12
Total (b)
72
Profit (a)-(b)
According to AS-25 the Income and Expense should be recognized when they are earned
and incurred respectively. Therefore seasonal incomes will be recognized when they occur.
Thus the companys view is not as per AS-25.
411
Question 1
MN International Ltd. is developing a new production process. During the financial year
ending 31st March, 2014, the total expenditure incurred was Rs.50 lakhs. This process met
the criteria for recognition as an intangible assets on 1st December, 2013.
Expenditure incurred till this date was Rs.22 lakhs. Further expenditure incurred on the
process for the financial year ending 31st March, 2015 was Rs.80 lakhs. As at 31 st March,
2015, the recoverable amount of know-how embodied in the process is estimated to be
Rs.72 lakhs. This includes estimates of future cash outflows as well as inflows.
You are required to calculate:
(i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2014
and carrying value of intangible assets as on that date.
(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on
31st March, 2015. Ignore depreciation.
Answer
(a) As per AS 26 Intangible Assets
(i) For the year ending 31.03.2014
(1) Carrying value of intangible asset as on 31.03.2014:
At the end of financial year 31st March 2014, the production process will be
recognized (i.e. carrying amount) as an intangible asset at a cost of Rs. 28 lakhs
(expenditure incurred since the date the recognition criteria were met, i.e., on 1st
December 2013).
The Rs. 22 lakhs is recognized as an expense because the recognition criteria were
not met until 1st December 2014. This expenditure will not form part of the cost of
the production process recognized in the balance sheet.
(ii) For the year ending 31.03.2015
(Rs. in lakhs)
Carrying Amount as on 31.03.2014
28
Expenditure during 20142015
80
Total book cost
108
Recoverable Amount
72
Impairment loss
36
Rs. 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2015.
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(2) Carrying value of intangible as on 31.03.2015:

(Rs. in lakhs)
Total Book Cost
108
Less: Impairment loss
36
Carrying amount as on 31.03.2015
72
Question 2
Roma International Ltd. is developing a new production process. During the financial Year
31st March, 2014, the total expenditure incurred on this process was Rs. 40 lakhs. The
production process met the criteria for recognition as an intangible asset on 1 st December
2013. Expenditure incurred till this date was Rs. 16 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March
2015, was Rs.70 lakhs. As at 31-3-2015, the recoverable amount of know-how embodied in
the process is estimated to be Rs. 62 lakhs. This includes estimates of future cash outflows
as well as inflows. You are required to work out:
(a) What is the expenditure to be charged to the profit and loss account for the financial
year ended 31st March 2014? (Ignore depreciation for this purpose)
(b) What is the carrying amount of the intangible asset as at 31st March 2014?
(c)
What is the expenditure to be charged to the profit and loss account for the financial
year ended 31st March 2015? (Ignore depreciation for this purpose)
(d) What is the carrying amount of the intangible asset as at 31st March 2015?
Answer
(a) Rs. 16 lakhs
(b) Carrying amount as on 31-3-2014 will be expenditure incurred after 1-12-2013= Rs.
24 lakhs
(c)
Book cost of intangible asset as on 31-3-2015 is as follows

Total Book cost = Rs.(70 + 24) lakhs = Rs. 94 lakhs
Recoverable amount as estimated = Rs. 62 lakhs
Difference to be charged to Profit and Loss account = Rs. 32 lakhs
(d) Rs. 62 lakhs

Question 3
A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2015
on a research project to develop a drug to treat AIDS. Experts are of the view that it may
take four years to establish whether the drug will be effective or not and even if found
effective it may take two to three more years to produce the medicine, which can be
marketed. The company wants to treat the expenditure as deferred revenue expenditure.
Comment.
413
Answer
As per para 41 of AS 26 Intangible Assets, no intangible asset arising from research (or
from the research phase of an internal project) should be recognized. Expenditure on
research (or on the research phase of an internal project) should be recognized as an
expense when it is incurred.
Thus the company cannot treat the expenditure as deferred revenue expenditure. The
entire amount of Rs. 33 lakhs spent on research project should be charged as an expense in
Question 1
Excellent Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April,
2014 for Rs.60 lakhs. The machine was expected to have a productive life of 6 years. At the
end of financial year 2014-15 the carrying amount was Rs.41 lakhs. A short circuit
occurred in this financial year but luckily the machine did not get badly damaged and was
still in working order at the close of the financial year. The machine was expected to fetch
Rs.36 lakhs, if sold in the market. The machine by itself is not capable of generating cash
flows. However, the smallest group of assets comprising of this machine also, is capable of
generating cash flows of Rs.54 crore per annum and has a carrying amount of Rs.3.46
crore. All such machines put together could fetch a sum of Rs.4.44 crore if disposed.
Discuss the applicability of Impairment loss.
Answer1
As perAS 28 impairment loss is not to be recognized for a given asset if the related cash
generating unit (CGU) is not impaired. In the given question, the related cash generating
unit, which is group of asset to which the damaged machine belongs, is not impaired; as the
recoverable amount is more than the carrying amount of group of assets. Hence there is no
need to provide for impairment loss on the damaged sachet filling machine.
Question 2
Mars Ltd. has an asset, which is carried in the Balance Sheet on 31.3.2015 at Rs. 500 lakhs.
As at that date the value in use is Rs. 400 lakhs and the net selling price is Rs. 375 lakhs.
From the above data:
(i)
Calculate impairment loss.
(ii)
Prepare journal entries for adjustment of impairment loss.
(iii)
Show, how impairment loss will be shown in the Balance Sheet.
Answer
(i) Recoverable amount is higher of value in use Rs. 400 lakhs and net selling price 375
lakhs, Recoverable amount = Rs. 400 lakhs
Impairment loss = Carried Amount Recoverable amount= Rs. 500 lakhs Rs. 400
lakhs = Rs. 100 lakhs.
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(ii) Journal Entries
Rs.
Dr.
Rs.
100
To Provision for Impairment loss

100
(Being the entry to transfer impairment loss to profit and loss account)
(iii) Balance Sheet of Mars Ltd. as on 31.3.2015 (Rs. in lakhs)
Fixed Asset Asset less depreciation
Less: Impairment loss
500
(100)
400
Question 1
At the end of the financial year ending on 31st December, 2014, a company finds that
there are twenty law suits outstanding which have not been settled till the date of
approval of accounts by the Board of Directors. The possible outcome as estimated by the
Board is as follows:
Probability
In respect of five cases (Win)
Loss (Rs.)
100%
Next ten cases (Win)
60%
Lose (Low damages)
30%
1,20,000
Lose (High damages)
10%
2,00,000
Remaining five cases Win
50%
Lose (Low damages)
30%
1,00,000
Lose (High damages)
20%
2,10,000
Outcome of each case is to be taken as a separate entity. Ascertain the amount of

contingent loss and the accounting treatment in respect thereof.
Answer
According to AS 29 Provisions, Contingent Liabilities and Contingent Assets,
contingent liability should be disclosed in the financial statements if following
conditions are satisfied:
(i)
There is a present obligation arising out of past events but not recognized as
provision.
(ii)
It is not probable that an outflow of resources embodying economic benefits

will be required to settle the obligation.
415
(iii)
The possibility of an outflow of resources embodying economic benefits is also

remote.
(iv)
The amount of the obligation cannot be measured with sufficient reliability to

be recognized as provision.
In this case, the probability of winning of first five cases is 100% and hence, question of
providing for contingent loss does not arise. The probability of winning of next ten
cases is 60% and for remaining five cases is 50%. As per AS 29, we make a provision if
the loss is probable. As the loss does not appear to be probable and the possibility of an
outflow of resources embodying economic benefits is not remote rather there is
reasonable possibility of loss, therefore disclosure by way of note should be made. For
the purpose of the disclosure of contingent liability by way of note, amount may be
calculated as under:
Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000
= Rs. 36,000 + Rs. 20,000 = Rs. 56,000
Expected loss in remaining five cases = 30% of Rs. 1,00,000 + 20% of Rs. 2,10,000
= Rs. 30,000 + Rs. 42,000 = Rs. 72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic.
Therefore, the better approach will be to disclose the overall expected loss of Rs.
9,20,000 (Rs. 56,000 x 10 +Rs. 72,000 x 5) as contingent liability.
Question 2
A Company has entered into a sale contract of Rs.10,00,000 with B Company during
financial year 2014-15. The profit on this transaction is Rs.2,00,000. The delivery of the
goods to be taken place during the first month of the financial year 2015-2016. In case of
failure of A Company to deliver within the schedule, a compensation of Rs.3,00,000 is to be
paid to B Company. A Company planned to manufacturer the goods during the last month
of the financial year 2014-2015. As on the Balance Sheet date (i.e., 31-3-2015), goods were
not manufactured and it was unlikely that A Company would be in a position to meet the
contractual obligation.
(a) Should A Company provide for the contingency?
(b) Should A company measure provision as the excess of compensation to be paid over
the profit?
Answer
(a) Yes, A company should provide for the contingency because it is unlikely that A
Company should be in a position to meet contractual obligation.
(b) No, A Company cant measure provision as the excess of compensation to be paid
over profit. It has to provide for the total compensation amount.
***
416
10
Auditing Concepts
Question 1
Discuss the procedure for issuing auditing standards.
Answer
Procedure of issuing auditing standards
The Auditing and Assurance Standards Board (AASB) identifies the areas where
auditing standards need to be formulated and the priority in regard to their
selection.
In the preparation of the auditing standards, the Board is normally, assisted by

study groups comprising of a cross section of members of the Institute of
Chartered Accountants of India.
On the basis of the work of the study groups, an Exposure Draft of the proposed
auditing standard is prepared by the Board and issued for comments of the
members.
After taking into the comments received, the draft of the proposed auditing
standard is finalized by the Board and submitted to the Council of the Institute.
The Council considers the final draft of the proposed auditing standard and, if
necessary, modifies the same in consultation with the Board. The auditing
standard is then issued under the authority of the Council.
While formulating the auditing standards, the Board also takes into consideration
the applicable laws, customs, usages and business environment in the country.
Question 2
What are the important matters which an auditor should ensure to ascertain and
establish true and fair view ?
Answer
In order to show a true and fair view the auditor should ensure that:
The final accounts (Trading and Profit and loss Account and Balance Sheet) agree
with the books of accounts.
The closing stock is physically verified and valued properly.
Intangible assets like goodwill, patents, preliminary expenses or other deferred

revenue expenses are valued and written off properly.
417
Expenses/income of capital nature is not treated as revenue and vice versa.
Contingent liabilities are not treated as actual liabilities and vice versa
Provision is made for all known losses and liabilities
Transactions are recorded on accrual basis, i.e. outstanding expenses, prepaid

expenses, income accrued and advance income is recorded properly
The exceptional or non-recurring transactions are disclosed separately in the

accounts.
Question 3
Distinguish between audit and investigation.
Answer
The following are the difference between audit and investigation
Legal binding : Audit of annual financial statements of a company is compulsory

under the Companies Act, 2013. However, investigation is voluntary depending
upon necessity.
Objective : Audit is conducted to ascertain whether the financial statements show a

true and fair view. Investigation is conducted with a particular object in view, viz
to know financial position, earning capacity, prove fraud, invest capital, etc.
Period covered : Audit is conducted on annual basis. Investigation may be

conducted as and when required for several years or several months together.
Parties for whom conducted : Audit is conducted on behalf of shareholders (or

proprietor, or partners). Investigation is usually conducted on behalf of outsiders
like prospective buyers, investors, lenders, etc.
Documents : Audit is not carried out of audited financial statements. Investigation

may be conducted even though the accounts have been audited.
Extent of work : Audit is normally conducted on test verification basis.

Investigation is a thorough examination of books of accounts.
Report : Audit report of a company is addressed to shareholders (or proprietors or

partners). Investigation report is addressed to the party on whose instruction
investigation was conducted.
Person performing work : Audit is to be conducted by a person having prescribed

qualification i.e. Chartered accountant, Cost accountant. No statutory qualification
is prescribed for Investigation. It may be undertaken by any one.
Question 4
What does Standards on Auditing (SA) 230 {Revised) say about utility, ownership, custody
and retention of working papers?
418
Answer
SA 230(Revised) on Audit Documentation deals with the auditors responsibility to prepare
audit documentation; documentation of the audit procedures performed and audit
evidence obtained and assembly of the final audit file. It outlines about utility, ownership,
custody and retention of working papers.
Utility: The Working papers aid in the planning and performance of the audit; aid
in the supervision and review of the audit work; and provide evidence of the
audit work performed to support the auditors opinion.
Ownership: Working papers are the property of the auditor. The auditor may, at
his discretion, make portions of or extracts from his working papers available to
his client.
Custody: The auditor should adopt reasonable procedures for custody and
confidentiality of his working papers.
Retention of working papers: The auditor should retain them for a period of time
sufficient to meet the needs of his practice and satisfy any pertinent legal or
professional requirements of record retention.
Question 5
Explain the basic principles governing an audit.
Answer
SA 200 Basic Principals Governing an Audit, describes the basic principles which govern
the auditors professional responsibilities and which should be complied with wherever an
audit is carried. They are described below:
(i)
Integrity objectivity and independence: An auditor should be honest, sincere,

impartial and free from bias. He should be a man of high integrity and objectivity.
(ii)
Confidentiality: The auditor should respect confidentiality of information acquired

during the course of his work and should not disclose the information without the
prior permission of the client, unless there is a legal duty to disclose.
(iii)
Skill and competence: The auditor must acquire adequate training and experience.
He should be competent, skillful and keep himself abreast of the latest
developments including pronouncements of ICAI on accounting and auditing
matters.
(iv)
Work performed by others: If the auditor delegates some work to others and uses
work performed by others including that of an expert, he continues to be
responsible for forming and expressing his opinion on the financial information.
(v)
Documentation: The auditor should document matters which are important in

providing evidence to ensure that the audit was carried out in accordance with the
basic principles.
419
(vi)
Planning: The auditor should plan his work to enable him to conduct the audit in
an effective, efficient and timely manner. He should acquire knowledge of clients
accounting system, the extent of reliance that could be placed on internal control
and coordinate the work to be performed.
(vii)
Audit evidence: The auditor should obtain sufficient appropriate evidences

through the performance of compliance and other substantive procedures to
enable him to draw reasonable conclusions to form an opinion on the financial
information.
(viii) Accounting System and Internal Control: The management is responsible for
maintaining an adequate accounting system incorporating various internal
controls appropriate to the size and nature of business.
The auditor should assure himself that the accounting system is adequate and all
the information which should be recorded has been recorded. Internal control
system contributes to such assurance.
(ix)
Audit conclusions and reporting: On the basis of the audit evidence, he should
review and assess the audit conclusions. He should ascertain:
1.
As whether accounting policies have been consistently applied;
2.
Whether financial information complies with regulations and statutory

requirements; and
3.
There is adequate disclosure of material matters relevant to the presentation

of financial information subject to statutory requirements.
The auditors report should contain a clear written opinion on the financial information. A
clean audit report indicates the auditors satisfaction in all respects and when a qualified,
adverse or a disclaimer of opinion is to be given or reservation of opinion on any matter is
to be made, the audit report should state the reasons thereof.
Question 6
Explain the scope of SA 210 agreeing the terms of audit engagement.
Answer
SA 210 deals with the auditors responsibilities in agreeing the terms of the audit
engagement with management and those charged with governance.
It includes establishing that certain pre-conditions for an audit, responsibility for which
rests with management and those charged with governance, are present.
Question 7
What do you understand by audit documentation?
Answer
According to SA 230, Audit Documentation refers to the record of audit procedures
performed, relevant audit evidence obtained, and conclusions the auditor reached.
Preparing sufficient and appropriate audit documentation on a timely basis helps to
420
enhance the quality of audit and facilitates effective review and evaluation of audit
evidence obtained and conclusions reached before finalizing auditors report. According to
this standard, retention period for audit engagements ordinarily is no shorter than ten
years from the date of auditors report, or, if later, the date of group auditors report.
Question 8
What would be the form, content and extent of Audit Documentation?
Answer
The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand:
The nature, timing, and extent of the audit procedures performed to comply with
the Standards on Auditing (SA) and applicable legal and regulatory requirements;
The results of the audit procedures performed, and the audit evidence obtained; and
Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
Question 9
What are the examples of the audit documentation?
Answer
Examples of audit documentation include the following:
Engagement letter
Audit programmes defined, with details of work carried out and results filled,
including planning memorandum
Analyses of various account balances through comparatives and corroborative.
Issues memoranda
Summaries of significant matters
Letters of confirmation and representation.
Checklists
Correspondence (including e-mail) concerning significant matters
Abstracts or copies of the entitys records (for example, significant and specific
contracts and agreements)
Audit documentation, however, is not a substitute for the entitys accounting

records.
Question 10
Explain briefly duties and responsibilities of an auditor in case of material misstatement
resulting from Management Fraud.
421
Answer
Misstatement in the financial statements can arise from fraud or error. The term fraud
refers to an Intentional Act by one or more individuals among management, those charged
with governance, employees, or third parties, involving the use of deception to obtain an
unjust or illegal advantage.
As per SA 240 The Auditors Responsibilities Relating to Fraud in an Audit of Financial
Statements, the primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management. The auditor,
conducting an audit, is responsible for obtaining reasonable assurance that the financial
statements taken as a whole are free from material misstatement, whether caused by fraud
or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that
some material misstatements of the financial statements may not be detected, even though
the audit is properly planned and performed in accordance with the SAs.
Question 11
In the books of accounts of M/s ABC Ltd. huge differences are noticed between the control
accounts and subsidiary records. The Chief Accounts Officer informs that this is common
due to huge volume of business done by the company during the year. As a company
auditor, how would you deal with the situation?
Answer
The huge differences found between control accounts and subsidiary records in the books
of M/s ABC Ltd. indicate that there may be material misstatements requiring detailed
examination by the auditor to ascertain the cause. The contention of Chief Accounts Officer
cannot be accepted simply because the company has done huge volume of business. Such a
phenomenon indicates that recording of transactions is not being done properly or the
accounting system in the company which might have several branches spread over the
country fails to capture all transactions in time. It would also be interesting to see whether
it is a recurring phenomenon or such reconciliation could not be done at a subsequent date.
Having regard to all these circumstances, it appears from the facts of the case that these
differences indicate the possibility of some kind of material misstatements.
As per SA 240, The Auditors Responsibility to Consider Fraud and Error in an Audit of
Financial Statements when the auditor encounters circumstances that there is material
misstatement, the auditor should perform procedures to determine whether the financial
statements are materially misstated. If as a result of such examination the auditor comes
across any material information involving fraud or gross irregularity the same shall be
reported by him appropriately.
Question 12
Write short notes on preliminary engagement activities under SA 300.
422
Answer
The auditor shall undertake the following activities at the beginning of the current audit
engagement(a) performing procedures on Quality control for audit work (as per SA 220) regarding
the continuance of the client relationship and the specific audit engagement;
(b) evaluating compliance with ethical requirements, including independence as per SA
220; and
(c)
establishing an understanding of the terms of the engagement, as required by SA

210.
Question 13
As an auditor of Limca Ltd., Mr. Xian applied the concept of materiality for the financial
statements as a whole. On the basis of obtaining additional information of significant
contractual arrangements that draw attention to a particular aspect of a company's
business, he wants to re-evaluate the materiality concept. Please advise.
Answer
In the instant case, Mr. Xian, as an auditor of Limca Ltd., has applied the concept of
materiality for the financial statements as a whole. But he wants to re-evaluate the
materiality concept, on the basis of additional information of significant contractual
arrangements which draws attention to a particular aspect of the companys business.
As per SA 320 Materiality in Planning and Performing an Audit, while establishing the
overall audit strategy, the auditor shall determine materiality for the financial statement as
a whole. He should set the benchmark on the basis of which he performs his audit
procedure. If, in the specific circumstances of the entity, there is one or more particular
classes of transactions, account balances or disclosures for which misstatements of lesser
amounts than the materiality for the financial statements as a whole could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial
statements, the auditor shall also determine the materiality level or levels to be applied to
those particular classes of transactions, account balances or disclosures.
Question 14
An assistant of Y & Co. Chartered Accountant detected an error of Rs. 10 per interest
payment, which recurred a number of times. The General Manager (Finance) of X Ltd.
advised him not to request for passing any adjustment entry as individually the errors
were of very small amounts. The company had 2000 deposit accounts and interest was
paid quarterly. Share your view in this issue, with reasons.
Answer
Principle : Mis-statements, including omissions, are considered to be material if they,

individually or in the aggregate, could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements.
423
Analysis : In the instant case, an error of Rs. 10 in the interest computation, even if
small individually, will have a material effect due to the large number of
transactions.
Conclusion : Hence Y & Co., need not pay any attention to the advise given by the General Manger
(Finance) of X Ltd. The necessary adjustment should be carried out in the accounts of the company.
Question 15
State, how the reliability of audit evidence gets affected by the types of Audit evidences.
(SA 500)
Answer
The audit evidences provide credence to the assertions that a transaction seeks to reveal
out. Depending upon the sources, forms or nature of audit evidences, the credence or
reliability value of the evidences may vary. Generally
1. The external evidence is usually more reliable than internal evidence. (Source)
2. Internal evidence is more reliable when related internal control is satisfactory.
(Nature)
3. Evidence in the form of document or written representation is usually more reliable
than oral representation. (Form)
4. Evidence obtained by the auditor himself is more reliable than the evidence
obtained through the entity. (Nature)
Question 16
While planning the audit of X Ltd, you want to apply sampling techniques. What are the
risk factors you should keep in mind?
Answer
SA 530 Audit Sampling deals with auditor use of sampling in performing audit
procedures. However, due to application of sampling in audit procedures, there arises risk
of sampling.
Sampling Risk may be defined as the risk that the auditors conclusion based on a sample
may be different from the conclusion if the entire population were subjected to the same
audit procedure.
Sampling risk can lead to two types of erroneous conclusions:
(i) In the case of a test of controls, that controls are more effective than they actually are,
or in the case of a test of details, that a material misstatement does not exist when in
fact it does. The auditor is primarily concerned with this type of erroneous conclusion
because it affects audit effectiveness and is more likely to lead to an inappropriate
audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they actually are,
or in the case of a test of details, that a material misstatement exists when in fact it
424
does not. This type of erroneous conclusion affects audit efficiency as it would usually
lead to additional work to establish that initial conclusions were incorrect.
Question 17
Cipsa Ltd. holds the ownership of 10% of voting power and control over the composition of
Board of Directors of Lipsa Ltd. While planning the statutory audit of Cipsa Ltd., what
factors would be considered by you for audit of financial statements?
Answer
In this case, Cipsa Ltd. holds only 10 percent of the voting power and control over the
composition of the Board of Directors of Lipsa Ltd. In such a case, Cipsa Ltd. would be
considered as a parent of Lipsa Ltd. and, therefore, it would consolidate Lipsa Ltd., in the
consolidated financial statements as subsidiary.
The auditor should verify whether the parent controls the composition of the Board of
Directors or corresponding governing body of any entity. There would be various means by
which such kind of control can be obtained.
In this regard, the auditor may verify the Boards minutes, shareholder agreements entered
into by the parent, agreements with the entities to which the parent might have provided
any technology or know how, enforcement of statute, as the case may be, etc.
The auditor should verify that the adjustments warranted by the relevant accounting
standards have been made wherever required and have been properly authorised by the
management of the parent. The preparation of consolidated financial statements gives rise
to permanent consolidation adjustments and current period consolidation adjustments.
The auditor should make plans, among other things, for the understanding of accounting
policies of the parent, subsidiaries, associates and joint ventures and determining and
programming the nature, timing, and extent of the audit procedures to be performed etc.
Further, the duties of an auditor with regard to reporting of transactions with related
parties as required by Accounting Standard 18 are given in SA 550 on Related Parties.
As per SA 550 on, Related Parties, the auditor should review information provided by the
management of the entity identifying the names of all known related parties. A person or
other entity that has control or significant influence, directly or indirectly through one or
more intermediaries, over the reporting entity are considered as Related Party.
In forming an opinion on the financial statements the auditor shall evaluate whether the
identified related party relationships and transactions have been appropriately accounted
for and disclosed in accordance with the applicable financial reporting framework and
whether the effects of the related party relationships and transactions prevent the financial
statements from achieving true and fair presentation (for fair presentation frameworks);
or cause the financial statements to be misleading (for compliance frameworks).
Question 18
Can the statutory auditor rely upon the work of an internal auditor?
425
Answer
SA 610 Using the work of Internal auditors deals with the external auditors
responsibilities regarding the work of internal auditors when the external auditor has
determined, in accordance with SA 315 that the internal audit function is likely to be
relevant to the audit. With respect to relationship between statutory auditor and internal
auditor, SA 610 provides the following:
(a) The role and objectives of the internal audit function are determined by
management and, where applicable, those charged with governance. While the
objectives of the internal audit function and the external auditor are different, some
of the ways in which the internal audit function and the external auditor achieve
their respective objectives may be similar.
(b) Irrespective of the degree of autonomy and objectivity of the internal audit function,
such function is not independent of the entity as is required of the external auditor
when expressing an opinion on financial statements.
(c)
Therefore, the external auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the external auditors use of the
work of the internal auditors.
Question 19
State in brief about SA- 620, using the work of an auditors expert.
Answer
SA 620 Using the work of an Auditors Expert deals with the auditors responsibilities
regarding the use of an individual or organisations work in a field of expertise other than
accounting or auditing, when that work is used to assist the auditor in obtaining sufficient
appropriate audit evidence.
With respect to reference of Expert in Auditors Report, SA 620 provides the following:
The auditor shall not refer to the work of an auditors expert in an auditors report
containing an unmodified opinion unless required by law or regulation to do so.
If such reference is required by law or regulation, the auditor shall indicate in the
auditors report that the reference does not reduce the auditors responsibility for
the audit opinion.
If the auditor makes reference to the work of an auditors expert in the auditors
report because such reference is relevant to an understanding of a modification to
the auditors opinion, the auditor shall indicate in the auditors report that such
reference does not reduce the auditors responsibility for that opinion.
Question 20
While reading the other information, auditor finds certain misstatement which requires
revision of audited financial statements, but management refuses. Comment on the
statement.
426
Answer
SA 720 The auditors Responsibility in relation to other information in Documents

containing audited financial statements. deals with the auditors responsibility in
relation to other information in documents containing audited financial statements
and the auditors report thereon.
When material inconsistencies identified in Other Information which requires

revision of audited financial statements, the auditors procedures depends upon the
timing of availability of other information.
If other information was obtained prior to the date of the Auditors Report and
misstatements identified by the auditor which requires revision of audited financial
statements, but management refuses to make the revision, the auditor shall modify
the opinion in accordance with SA 705.
If other Information was obtained Subsequent to the Date of the Auditors Report
and misstatements identified by the auditor which requires revision of the audited
financial statements, the auditor shall follow the relevant requirements in SA 560.
Question 21
Write a short note on harmonization of Indian auditing standards with international
auditing standards?
Answer 21
The Institute of Chartered Accountants of India (ICAI) is a founder member of the
International Federation of Accountants. (IFAC). It is one of the membership obligations of
the Institute to actively propagate the pronouncements of the International Auditing and
Assurance Standards Boards (IAASB) of the IFAC to contribute towards global
harmonization and acceptance of the standards issued by IAASB. Accordingly, while
formulating engagement and quality control standards the AASB takes into consideration
the corresponding standards if any, issued by the IAASB.
With effect from 1st April, 2008 the AASB re-categorised and renumbered the existing
Auditing and Assurance Standards on the lines as followed by the IAASB with this change,
all auditing and assurance standards (AAS) were renamed as standards on Auditing (SAs).
Question 22
Explain the term Auditing, its objective and scope?
Answer 22
Institute of Chartered Accountants of India (ICAI) defines auditing as a systematic and
independent examination of data, statements, records, operations and performance of an
enterprise for a stated purpose. In any auditing situation, the auditor perceives and
recognizes the propositions before him for examination, collect evidence, evaluates the
same and on this basis formulates his judgement which is communicated through his audit
report.
427
The primary objective of the auditor is to report to the owners whether the balance sheet
gives a true and fair view of the companys state of affairs and the profit & loss account
gives a correct figure for the financial year.
The incidental objective of auditing is detection and prevention of frauds and detection and
prevention of errors.
Audit scope determines the time involved in audit exercise, depth of auditing, aspects to be
covered etc.
Audit scope depends on nature of audit, objectives of audit & terms of engagement,
requirement of applicable legislations and auditing standard.
Question 23
Explain the concept of materiality in auditing?
Answer 23
Materiality is a concept or convention within auditing and accounting relating to the
significance of an amount, transaction or discrepancy.
Materiality can be defined as the magnitude of an omission or misstatement of accounting
information that in the light of surrounding circumstances makes it probable that the
judgment of a reasonable person relying on the information would have been changed or
influenced by the omission or misstatement.
Question 24
Is it true to say that modifications can be done in the opinion of the Independent Auditor
or opinion in the Independent Auditors report? Justify?
Answer 24
It is true to say that modifications to the opinion in the Independent Auditors report could
be done and even considered necessary in few situations.
SA 705 deals with the auditors responsibility to issue an appropriate report in
circumstances when, in forming an opinion in accordance with SA 700 (revised) the
auditor concludes that a modification to the auditors opinion on the financial statement is
necessary. The objective of the auditor is to express clearly an appropriately modified
opinion on the financial statements that are necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material misstatement
Question 25
How the audit work is distributed among Joint Auditors? Who remains responsible and
accountable among them for the work done?
428
Answer 25
SA 299, lays down that the joint auditors should normally by mutual discussion, divides the
audit work among themselves. The division of work among joint auditors as also the areas
of work to be covered by all of them should be adequately documented and preferably
communicated to the entity. The SA also states that each joint auditor is responsible only
for the work allotted to him. It also deals with the reporting responsibilities of the joint
auditors. This standard very specifically states that the majority opinion would not be
binding upon the other joint auditor(s)
***
429
11
Types of Company Audit
Question 1
Enumerate the various types of audit prescribed under Companies Act, 2013?
Answer
The Companies Act, 2013 is focused on transparency and disclosure. In the new Act,
attempt has been made to cover each aspect of corporate functioning under audit by
prescribing various types of audits like internal audit and secretarial audit. The various
types of audits prescribed under the Companies Act, 2013 are:
Statutory Audit
Internal Audit
Secretarial Audit
Cost Audit.
Question 2
Briefly discuss the various provisions prescribed under Companies Act, 2013 for selection
and appointment of auditors.
Answer
A company shall follow the procedure prescribed under Rule 3 of the Companies (Audit
and Auditors) Rules, 2014 for the selection and appointment of auditors under section
139(1) which is as follows:
A company that is required to constitute an Audit Committee under section 177,
such committee and where such committee is not required, the Board, shall take
into consideration the qualifications and experience of the individual or the firm
proposed to be considered for appointment as auditor and whether such
qualifications and experience are commensurate with the size and requirements of
the company.
While considering the appointment, the Audit Committee or the Board, as the case
may be, shall have regard to any order or pending proceeding relating to
professional matters of conduct against the proposed auditor before the Institute of
Chartered Accountants of India or any competent authority or any Court.
The Audit Committee or the Board, as the case may be, may call for such other
information from the proposed auditor as it may deem fit.
430
Where a company is required to constitute the Audit Committee, the committee

shall recommend the name of an individual or a firm as auditor to the Board for
consideration and in other cases; the Board shall consider and recommend an
individual or a firm as auditor to the members in the annual general meeting for
appointment.
If the Board agrees with the recommendation of the Audit Committee, it shall
further recommend the appointment of an individual or a firm as auditor to the
members in the annual general meeting.
If the Board disagrees with the recommendation of the Audit Committee, it shall
refer back the recommendation to the committee for reconsideration citing reasons
for such disagreement.
If the Audit Committee, after considering the reasons given by the Board, decides
not to reconsider its original recommendation, the Board shall record reasons for its
disagreement with the committee and send its own recommendation for
consideration of the members in the annual general meeting; and if the Board
agrees with the recommendations of the Audit Committee, it shall place the matter
for consideration by members in the annual general meeting.
The auditor so appointment shall be subject to ratification in every annual general
meeting till the sixth such meeting by way of passing of an ordinary resolution. If the
appointment is not ratified by the members of the company, the Board of Directors
shall appoint another individual or firm as its auditor or auditors after following the
procedure laid down in this behalf under the Act.
The auditor appointed in the annual general meeting shall hold office from the
conclusion of that meeting till the conclusion of the sixth annual general meeting,
with the meeting wherein such appointment has been made being counted as the
first meeting:
Question 3
The first auditor did not give notice to the ROC for accepting the audit.
Answer
The requirement of giving notice to the ROC has been prescribed only in respect of
appointment in an AGM under section 139 (1) read along with rule 4 of Companies (Audit
and Auditors) Rules, 2014 and therefore is not applicable to appointment of first auditor
being appointed by the Board of directors or shareholders in the general meeting.
Question 4
Whether the following persons can be appointed as the auditor of a company?
1.
Mr. X who is a Chartered Accountant of the Canadian Institute of Chartered

Accountants but is not a member of the Institute of Chartered Accountants of India.
431
2.
Mrs. P is a member of the Institute of Chartered Accountants of India. The directors

of a limited company say that she being a lady can not be appointed as an auditor of
the company.
3.
4.
Mr. A owes Rs. 1,000 to ABC Ltd. of which he is an auditor.

Mr. A, a member of the ICAI, does not hold a certificate of practice.
5.
ABC Consultants Ltd is a registered company with A, K and V as its Directors. All the
three Directors are Chartered Accountants. Can the Co. be appointed as auditor of
another Company?
A, a partner in the firm of M/s Rama & Co., Chartered Accountants, is the Secretary of
C Ltd. Can A or Rama & Co., be appointed as the Company Auditor?
6.
7.
B, Chartered Accountant, is the partner of N, who is a Director in P Ltd. Can B be

appointed as Statutory Auditor?
8.
A, a Chartered Accountant, is a director of A Ltd., which is a subsidiary of B Ltd. The

Board of Directors of B Ltd. proposes to appoint Mr. A as the auditor of B Ltd.
Discuss.
Answer
1. Mr. X cannot be appointed an auditor of a limited company in India. He must be a
chartered accountant within the meaning of the Chartered Accountants Act, 1949.
2. Mrs. P can be appointed as an auditor of the company. There is no bar on a lady.
3. Mr. A is not disqualified. He will be disqualified only if he owes an amount in excess of
1,000.
4. A does not hold a COP and hence cannot be appointed as an auditor of a company.
5. A Body Corporate cannot be appointed as Statutory Auditor of a Company. In the above
case, the Company cannot be appointed as Statutory Auditor of another Company.
6. A, being an Officer of the Company is disqualified. Also, M/s Rama & Co., is not qualified
to be appointed as auditor as one of its partners is an employee of the Company.
7. B is not qualified to be appointed as auditor, as u/s 141 (3) (d), a person who is a
partner of an officer of a Company cannot be appointed as its auditor.
8. A is not qualified to be appointed as auditor of B Ltd., because a person who is not
qualified to be the auditor of a company would also not be qualified to be auditor of
such companys subsidiary, or holding company.
Question 5
Can a director of the company be appointed as an auditor?
Answer
There is no express prohibition that a director cannot be appointed as an auditor. But the
below given two provisions of the Companies Act, 2013 prohibits a director to be
appointed as an auditor:
(a)
Sec.141 (3) (b) enumerates that an officer of the company cannot be appointed as
an auditor.
432
(b)
Section 2(59), which defines the officer to include the director.
Question 6
Mr Abhishek is appointed as an auditor in X Ltd. Further, Mr Abhishek is a relative of a
director of X Ltd. Comment.
Answer
Section 141 of the Companies Act, 2013 deals with the eligibility criteria, qualifications and
disqualifications of an Auditor. Sub-section (3) (f) of the Section 141 of the Act, explicitly
disqualifies a person from being appointed as an auditor of a company whose relative is a
director or is in the employment of the company as a director or key managerial personnel.
In the instant case, Mr. Abhishek is the relative of a Director of the company, therefore he
should not accept the appointment as an auditor of that company.
Question 7
X, Y and Z together are forming a new company. They wish to include the following clause
in the Articles of Association of the company. The first auditors of the company will be
M/s RS & Co, Chartered Accountants who will hold office for five years. They seek your
advice in the matter.
Answer
The above clause will not be valid. As per section139 (6) of the Companies Act, 2013 the
first auditors can be appointed only by a resolution of the board of directors within thirty
days from the date of registration of the company, or by the shareholders who shall within
ninety days at an extra ordinary general Meeting appoint the first auditors if the board fails
to do so. Moreover, the first auditors can hold office only until the conclusion of the first
annual general meeting (provided they are not removed by the shareholders earlier at a
general meeting by passing special resolution).
Question 8
Discuss the provision relating to rotation of auditors under the Companies Act, 2013.
Answer
Under Section 139(2), the system of rotation of auditors has been introduced for the
auditors of listed companies and other class of companies. The provisions for rotation of
auditors under sub sections 2, 3 and 4 of section 139 are given below:
If the auditor is an individual, he cannot be auditor of such a company for more than
5 consecutive years.
If an audit firm/LLP is auditor of the company, it cannot be auditor of such a

company for more than two terms of 5 consecutive years (i.e. 10 years)
If an individual auditor who has completed his one term of 5 years, shall not be
eligible for reappointment as auditor in the same company for 5 years from the
completion of his term.
433
In an audit firm/LLP which has completed its one term of 10 years, shall not be
eligible for reappointment as auditor in the same company for 5 years from the
completion of its term.
It may be noted that any firm/LLP which has one or more partners who are also
partners in the outgoing audit firm/LLP cannot be appointed as auditors during this
5 year period.
There is a transition period of three years, from date of enactment of the 2013 Act,
to comply with this requirement. All listed companies or specified companies will
have to comply with the above provisions relating to rotation of auditors within 3
years from the date of commencement of this Act i.e. within 31st March 2017.
However there will be no effect on the right of the company to remove an auditor or
the right of the auditor to resign from such office of the company because of the
provisions mentioned above.
The members of a company may also provide for the rotation of auditing partner
and his team at specified intervals in the audit firm appointed by the company.
The members of a company may also provide that the audit shall be conducted by
more than one auditor.
Illustration explaining rotation in case of individual auditor
Illustration 1:Number of consecutive years for

which an individual auditor has
been functioning as auditor in
the same company [in the first
AGM
held
after
the
commencement of provisions of
section 139(2)]
Maximum number of
consecutive years for
which he may be
appointed in the same
company
(including
transitional period)
Aggregate period which

the auditor would complete
in the same company in
view of column I and II
II
III
5 years (or more than 5 year)
3 years
8 years or more
4 years
3 years
7 years
3 years
3 years
6 years
2 years
3 years
5 years
1 years
4 years
5 years
Note:
1.
Individual auditor shall include other individuals or firms whose name or trade mark
or brand is used by such individual, if any.
434
2.
Consecutive years shall mean all the preceding financial years for which the individual
auditor has been the auditor until there has been a break by five years or more.
Illustration explaining rotation in case of audit firm
Illustration 2:Number of consecutive years for

which an audit firm has been
functioning as auditor in the
same company [in the first AGM
held after the commencement of
provisions of section 139(2)]
Maximum
number
of
consecutive
years
for
which the firm may be
appointed in the same
company
(including
transitional period)
Aggregate period which

the firm would complete
in the same company in
view of column I and II
II
III
10 years (or more than 10 year)
3 years
13 years or more
9 years
3 years
12 years
8 years
3 years
11 years
7 years
3 years
10 years
6 years
4 years
10 years
5 years
5 years
10 years
4 years
6 years
10 years
3 years
7 years
10 years
2 years
8 years
10 years
1 years
9 years
10 years
Note:
1. Audit Firm shall include other firms whose name or trade mark or brand is used by the
firm or any of its partners.
2. Consecutive years shall mean all the preceding financial years for which the firm has
been the auditor until there has been a break by five years or more.
Question 9
Mr. Raja, a practicing chartered accountant, holds 35 company audits including 15 public
companies, 7 other companies out of which 5 are private companies having paid capital
exceeding One hundred crores rupees and 2 are small companies and the rest are audit
435
of branches of companies. Has Mr. Raj violated any provisions of the companies Act, 2013
or is he guilty of professional misconduct?
Answer
Audits which are taken for counting as per Section 141 (3) (g) read along with Section 143
(8) of the Companies Act, 2013:
Public companies
15
Private Companies (> one hundred crore rupees,

excluding small companies)
The audits are within the ceiling limit (i.e. 20 excluding small companies, branches etc.)
prescribed by the Act. Therefore there is no violation of the act.
Question 10
Mr. X, who was appointed as the first auditors, of the company, was removed without the
prior approval of the Central Government before the expiry of their term, by calling an
EGM.
Answer
As per section 140 (1) which says that, the auditor appointed may be removed before the
expiry of his term only by a special resolution of the company, after obtaining the prior
approval of the Central Government in that behalf in the prescribed manner.
So in the instant case, the company has to obtain Central Government approval for removal
of X before the expiry of his term.
Question 11
How is an auditors' remuneration fixed under the Companies Act, 2013?
Answer
According to section 142 of the Companies Act, 2013 the remuneration of the auditor of a
company shall be fixed in its general meeting or in the manner as determined in the general
meeting.
The remuneration of the first auditor appointed by the board may be fixed by the
Board.
The remuneration shall be in addition to the fee payable to an auditor, include the
expenses, if any, incurred by the auditor in connection with the audit of the
company and any facility extended to him but does not include any remuneration
paid to him for any other service rendered by him at the request of the company.
Question 12
Can the Board of Directors fill the casual vacancy arising as a result of the resignation of
an auditor?
436
Answer
No, the Board of Director cannot fill the casual vacancy arising as a result of the resignation
of an auditor under the provisions of section 139(8) (i) of the Companies Act, 2013.
Question 13
Due to the resignation of the existing auditor(s) the board of directors of X Ltd appointed
Mr. Om as the auditor. Is it valid?
Answer
The resignation of the existing auditor(s) would give rise to a casual vacancy. As per section
139 (8) (i), casual vacancy can be filled by the Board of Directors, provided such vacancy
has not been caused by the resignation of the auditor.
The appointment shall be approved by the company at a general meeting convened within
three months of the recommendation of the Board and he/she shall hold the office till the
conclusion of the next annual general meeting.
So in the given case the above procedure has to be followed by X Ltd.
Question 14
At the AGM of ABC Ltd. Mr. X was appointed as the statutory auditor. He, however,
resigned after 3 months since he wants to shift from practice to job. State how the new
auditor will be appointed by ABC Ltd.
Answer
As per Section 139 (8) (i), casual vacancy can be filled in the following way:
a. If it was due to resignation - only by shareholders.
b. If it was due to other reasons - By board of directors.
Thus, in this case ABC Ltd will have to call an extra-ordinary general meeting (EGM) and
appoint another auditor. The new auditor so appointed shall hold office only till the
conclusion of the next annual general meeting.
Question 15
The auditor of Y Ltd. resigned after valid and accepted appointment whereupon the Board
of Directors appointed another auditor treating it as a casual vacancy.
Answer
Section 139 (8) (i) states that the Board may fill any casual vacancy, provided such vacancy
has not been caused by the resignation of the auditor. In the instant case, a casual vacancy
has arisen on account of resignation since the auditor of Y Ltd resigned after accepting the
appointment. Under these circumstances, the shareholders can only fill the vacancy in the
general meeting.
Question 16
AB Ltd. does not send to its auditors the notice of an extraordinary general meeting on the
plea that accounts are not being discussed at the aforesaid meeting.
437
Answer
This is not correct since the requirements of section 146 of Companies Act, 2013 provides
that all notices of, and other communications relating to, any general meeting shall be
forwarded to the auditors of the company, and the auditor shall, unless otherwise
exempted by the company, attend either by himself or through his authorised
representative, who shall also be qualified to be an auditor, any general meeting and shall
have right to be heard at such meeting on any part of the business which concerns him as
the auditor.
So this section applies to all general meetings held during the period when the auditor
holds his office.
Question 17
A company has a branch office which recorded a turnover of Rs. 1, 20,000 in the financial
year 2014-15. No audit of the branch has been carried out. The statutory auditor of the
company has made no reference of the above branch in his report. The total turnover of
the company is Rs. 10 crores for the year 2014-15. Comment on the issue.
Answer
As per section 143(8) of the Companies Act, 2013 if a company has a branch office, the
accounts of that office shall be audited either by the auditor appointed for the company
(herein referred to as the company's auditor) under this Act or by any other person
qualified for appointment as an auditor of the company under this Act and appointed as
such under section 139, or where the branch office is situated in a country outside India,
the accounts of the branch office shall be audited either by the company's auditor or by an
accountant or by any other person duly qualified to act as an auditor of the accounts of the
branch office in accordance with the laws of that country.
Therefore, the company has to get its branch audited. In case no branch audit has been
carried out, companys auditor is required to mention this fact in the audit report and deal
appropriately.
Question 18
XYZ & Company Limited by passing a resolution by the entire body of shareholders wants
to limit the powers of the statutory auditors.
Answer
Section 143 (1) of the Companies Act, 2013 specifies the rights of a company auditor
which include right of access to the books of accounts, etc. These rights have been
granted to the auditor to carry out his duties and responsibilities prescribed under
the Act.
The rights of the auditor cannot be restricted in any manner.
Any resolution passed by the entire body of shareholders limiting the powers of the
auditor or any such provisions in the Articles of Association is void.
438
Question 19
Amit is appointed as the auditor of ABC Ltd. on 25th July, 2015. He informs the company
that he will visit its head office on August 16, 2015 (a holiday for the company, being a
Sunday) and examine the cash book. The accountant argues that Amit should come after
March 31, 2016 when the accounts are closed. Moreover, he should not come on a Sunday
as the office is closed on that day. Is the position taken by the accountant correct?
Answer
The auditor has access to books etc. at all times. This implies that he can examine them at
any time after assuming his office as the auditor and he need out wait for the closing of the
accounts, i.e., March 31, 2016. However, the expression at all times refers to only the
normal business hours on any working day. Thus, Amit can only examine the books during
normal business hours on any working day of the company.
Question 20
Explain the penal provisions which are applicable to auditors under the Companies Act,
2013.
Answer
The penal provisions applicable to auditors under the Companies Act 2013 are as under
If an auditor of a company contravenes any of the provisions of section 139, section

143, section 144 or section 145, the auditor shall be punishable with fine which
shall not be less than twenty-five thousand rupees but which may extend to five lakh
rupees.
If an auditor has contravened such provisions knowingly or willfully with the

intention to deceive the company or its shareholders or creditors or tax authorities,
he shall be punishable with imprisonment for a term which may extend to one year
and with fine which shall not be less than one lakh rupees but which may extend to
twenty-five lakh rupees.
Where an auditor has been convicted he shall be liable to

I.
refund the remuneration received by him to the company; and
II.
pay for damages to the company, statutory bodies or authorities or to any
other persons for loss arising out of incorrect or misleading statements of
particulars made in his audit report.
Question 21
Differentiate between Secretarial Audit and Internal Audit.
Answer
Basis
Definition
Secretarial Audit
Internal Audit
Secretarial Audit is an audit to check Internal audit is an independent

compliance of various legislations management
function,
which
including the Companies Act and involves a continuous and critical
439
other corporate and economic laws appraisal of the functioning of an

applicable to the company.
entity with a view to suggest
improvements thereto and add
value to and strengthen the overall
governance mechanism of the
entity, including the entity's
strategic risk management and
internal control system.
Applicability
It is applicable to every listed It is applicable tocompany and every public company (i) every listed company;
having a paid-up share capital of
fifty crore rupees or more; or every (ii) every unlisted public company
havingpublic company having a turnover
of two hundred fifty crore rupees or
paid up share capital 50
more.
crores rupees during the
preceding financial year; or
turnover 200 crore rupees

or more during the preceding
financial year; or
outstanding
loans
or
borrowings from banks or
public financial institutions >
100 crore rupees or more at
any point of time during the
outstanding
deposits
twenty five crore at any point

of time during the preceding
financial year; and
(iii) every
having-
440
private
company
turnover 200 crore crore

rupees or more during the
outstanding
loans
or
borrowings from banks or
public financial institutions >
100 crore rupees or more at
any point of time during the
preceding financial year.
Qualification
s for auditor
A Secretarial Audit has to be

conducted by a Practising Company
Secretary in respect of the
secretarial and other records of the
company.
The internal auditor shall either be

a chartered accountant whether
engaged in practice or not or a cost
accountant,
or
such
other
professional as may be decided by
the Board to conduct internal audit
of the functions and activities of the
company.
Report of the
audit
A secretarial audit report shall be The report of internal audit shall be

annexed with the Boards report of submitted to the Board of the
the company.
company.
Question 22
What are the services which cannot be rendered by a statutory auditor of a company
under section 144 of the Companies Act, 2013?
Answer
An Auditor cannot render to a company the following services under section 144 of the
Companies Act, 2013:- Accounting & Book-keeping
- Internal Audit
- Financial Information System
- Actuarial Services
- Investment Advisory Services
- Investment Banking Services
- Outsourced Financial Services
- Management Services and
- Any other kind of services as may be prescribed.
Question 23
Alma Limited, a company having a sum of Rs. 70 crores each, outstanding towards a Bank
and a public financial institution, has appointed its employee Mr. Siva, a CS, as its internal
auditor with effect from 15 October, 2014, for the financial year 2014-2015. Comment on
this statement.
Answer
As per Section 138 of the Companies Act, 2013 read along with Rule 13 of Companies
(Accounts) Rules, 2014, every unlisted public company having outstanding loans or
borrowings from banks or public financial institutions, for atleast Rs. 100 crore at any point
of time during the preceding financial year, shall be required to appoint an internal auditor.
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Such internal auditor shall be a chartered accountant or cost accountant or such other
professional as may be decided by the Board who shall conduct internal audit of the
functions and activities of the company.
Section 138 which came into force w.e.f. 1st April 2014, further states that an existing
company covered under the above criteria shall comply with the requirements of section
138 within six months of commencement of such section.
In the given question, Alma Limited has outstanding loans/ borrowings towards Bank and
public financial institution amounting to Rs. 140 crores (i.e. more than Rs. 100 crores), it is
required mandatorily to appoint internal auditor within 6 months, i.e. by 30th September
2014. Thus, the company has defaulted in compliance with the requirements of section
138.
Question 24
Lamba Pvt Ltd. is having only 2 members Manish & Satish. During the audit for the year
ended on 31.3.2015, the auditor of the company found that:
(i) Manish, who is in charge of purchases has introduced fictitious purchase bills of Rs. 60
lakhs;
(ii) Satish, who is in charge of sales, has sold goods worth Rs. 90 lakhs without bringing
the same in the books of account.
The auditor raises the matter with Manish & Satish in their capacity as directors. They
contest that as this is a position known to them and within their own fold, the auditor
should not report the same under the Companies Act, 2013. Discuss whether these
arguments are acceptable under the Companies Act, 2013 for non-reporting. If not, state
the reasons and the manner of reporting.
Answer
The arguments made by Manish & Satish, directors of Lamba Pvt. Ltd., for non-reporting of
fictitious purchases of Rs. 60 lakhs and omission of recording of sales of Rs. 90 lakhs under
the Companies Act, 2013 are not acceptable in view of the following reasons:
(i)
The scope of audit of a company is determined by provisions of the Companies Act,

2013. Even the terms of the engagement cannot restrict the scope of audit in
relation to matters which are prescribed by legislation [SA 200R read with Newton
v. Birmingham Small Arms Co.]
(ii) Section 143 requires the auditor to state whether in his opinion and to the best of
his information and according to the explanations given to him, the accounts give a
true and fair view in the case of the balance sheet, of the state of the companys
affairs as at the end of its financial year and in the case of the profit and loss account,
of the profit or loss for its financial year. Thus, the primary duty of the auditor is to
determine whether the balance sheet shows a true and fair view of the state of the
companys affairs as at the end of the financial year and whether the profit and loss
account shows a true and fair view of the working results of the company for the
year.
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(iii) The fact that there are only two members and they are fully aware of such
transactions would not have any impact as far as scope of audit is concerned.
Therefore, it would, therefore, be obligatory on the part of auditor to report these aspects
in the audit report.
The following paragraph in the audit report under section 143 of the Companies Act, 2013
should be included:
On the basis of information and explanation given to us, together with our audit
examination, subject to the purchases of Rs. as reflected in the profit and loss account
being overstated by Rs.60 lakhs and sales of Rsas reflected in the Profit and Loss
Account being understated by Rs.90 lakhs and thus resulting in understating the profits of
the company by Rs.1.50 crores, we report that the financial statements are reflecting true
and fair view.
Question 25
Explain the role of CAG in the functioning of financial committees of Parliament.
Answer
The Comptroller & Auditor General of India plays a key role in the functioning of the
financial committees of Parliament and the State Legislatures. He has been recognised as a
friend, philosopher and guide of the Committee. His Reports generally form the basis of
the Committees working, although they are not precluded from examining issues not
brought out in his Reports. He scrutinizes the notes which the Ministries submit to the
Committees and helps the Committees to check the correctness of facts and figures in their
draft reports.
The Financial Committees present their Report to the Parliament/ State Legislature with
their observations and recommendations. The various Ministries / Department of the
Government are required to inform the Committees of the action taken by them on the
recommendations of the Committees (which are generally accepted) and the Committees
present Action Taken Reports to Parliament / Legislature. In respect of those cases in Audit
Reports, which could not be discussed in detail by the Committees, written answers are
obtained from the Department / Ministry concerned and are sometimes incorporated in
the Reports presented to the Parliament / State Legislature. This ensures that the Audit
Reports are not taken lightly by the Government, even if the entire report is not deliberated
upon by the Committee.
Question 26
CAG audit is audit of public enterprises done by Comptroller and Auditor General of India?
Explain
Answer 26
CAG audit is known as audit of public enterprises done by comptroller and Auditor General
of India.
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In India, government audit is performed by an independent constitutional authority is

comptroller and Audit General of India (CAG), The constitution of India gives a special
status to the C&AG and contains to safeguard his independence.
The organisations should to the audit of the Comptroller and Auditor General of India are:1
2
3
4
All the Union and State Government departments and offices including the Indian
Railways and Post and Telecommunications.
About 15000 public commercial enterprises controlled by the Union and State
Governments, is government companies and corporations.
Around 400 non-commercial autonomous bodies and authorities owned or
controlled by the Union or the states
Over 4400 authorities and bodies substantially financed from Union or State
revenues.
Question 27
Explain the provision regarding the appointment of C&AG and its term of office?
Answer 27
Article 148 of the constitution provides that the C&AG shall be appointed by the President
and can be removed from the office only in a like manner and on the like grounds as a judge
of the Supreme Court. Article 151 of the Constitution requires that the audit reports of the
C&AG relating to the accounts of the Central/State Government should be submitted to the
President/Governor of the State who shall cause them to be laid before Parliament/State
legislative.
The Comptroller and audit Generals Act 1971, prescribes that the C&AG shall hold office for
a term of six years or upto the age of 65 years, whichever is earlier. He can resign at any
time through a resignation letter addressed to the President.
Question 28
State the requirement of Cost audit in brief.
Answer 28
Section 148 of the Companies Act provides that the Central government may by order in
respect of such class of Companies engaged in the production of such goods or providing
such services as may be prescribed, direct that particulars relating to the utilisation of
material or labour or to other items of cost as may be prescribed shall also be included in
the books of account kept by that class of Companies.
If the Central Government is of the opinion, that it is necessary to do so, it may by order,
direct that the audit of cost records of class of companies which are covered under subsection (1) of Section 148 and which have a net worth of such amount as may be prescribed
or a turnover of such amount as may be prescribed.
The audit shall be conducted by a Cost Accountant in practice who shall be appointed by
the Board on such remuneration as may be determined by the members in such manner as
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may be prescribed provided that no person appointed under section 139 as an auditor of
the company shall be appointed for conducting the audit of cost records.
Question 29
Differentiate between the Regularity Audit and Performance audit done by C&AG.
Answer 29
The audit done by C&AG is classified into Regularity Audit and Performance Audit
Regularity Audit (Compliance)
-
Audit against provision of funds to ascertain whether the moneys shown as

expenditure in the Accounts were authorised for the purpose for which they were
spent.
Audit against rules and regulation to see that the expenditure incurred was in
conformity with the laws, rules and regulations framed to regulate the procedure
for expending public money.
Audit of sanctions to expenditure to see that every item of expenditure was done
with the approval of the competent authority in the government for expending the
public money.
Regularity Audit (Financial)

Under this, auditors analyze the financial statements to establish whether acceptable
accounting standards for financial reporting and disclosure are complied with. Analysis of
financial statements is performed to such a degree that a rational basis is obtained to
express an opinion on financial statements.
Performance Audit
Performance Audit is done to see that government programmes have achieved the desired
objectives at lowest cost and given the intended benefits.
Question 30
Write a short note on PAC (Public Accounts Committee)?
Answer 30
The Committee on Public Accounts is constituted by Parliament each year for examination
of accounts showing the appropriation of sums granted by Parliament for expenditure of
government of India, the annual Finance Accounts of Government of India and such other
Accounts laid before Parliament as the Committee may deem fit such as accounts of
autonomous and semi-autonomous bodies.
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 the like manner. The Chairman is appointed by the speaker
from amongst it s members of Lok Sabha.
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The PAC satisfies itself:

(a) that the money shown in the accounts as having been disbursed were legally
available for and applicable to the service or purpose to which they have been
applied or charged.
(b) that the expenditure conforms to the authority which governs it.
(c)
that every re-appropriation has been made has been made in accordance with the
provisions made in this behalf under rules framed by the competent authority.
It is also the duty of the PAC to examine the statement of account of autonomous and semiautonomous bodies, the audit of which is conducted by the comptroller & Auditor General
either under the directions of the President or by a statute of Parliament.
***
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12
Internal Audit
Question 1
Define the term Internal Audit.
Answer
As per the institute of internal auditors (IIA) - Internal auditing is an independent,
objective assurance and consulting activity designed to add value and improve an
organisations operations. It helps an organization to accomplish its objectives by bringing
a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control and governance processes.
Internal audit is performed by professionals with an in depth understanding of the
business culture, systems and processes, the internal audit activity provides assurance that
internal controls in place are adequate to mitigate the risk, the governance processes are
effective and efficient, and organizational goals and objectives are met.
Question 2
Differentiate between internal audit and statutory audit.
Answer
The difference between internal audit and statutory audit is as under:
(i)
The management of the organization makes the appointment of an internal auditor.

The statutory auditor is appointed by different authorities according to different
circumstances.
(ii)
Qualifications of the statutory auditor are prescribed in the Companies Act, 2013.
There is no fixed qualification for the position of an internal auditor.
(iii)
The main objective of the statutory audit is to form an opinion on the financial
statement of the organization. Auditor has to state whether the financial
statements are showing the true and fair view of the affairs of the organization or
not. The main objective of the internal audit is to detect and prevent the errors and
frauds.
(iv)
The scope of the statutory audit is fixed by the Companies Act, 2013. It cannot be
changed by mutual consent between the auditor and the management of the
audited business unit. The scope of the internal audit is fixed by the mutual consent
of the auditor and the management of the unit under audit.
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(v)
Remuneration of the statutory auditor is fixed by the appointing authority, i.e. in

case of first auditors, the directors fix the remuneration and in case of the
subsequent auditors, the company in its general meeting fixes the remuneration. In
case of internal auditor, the management who appoints him fixes his remuneration.
(vi)
The procedure for removal of the statutory auditor is very complex. Only the
company in its general meeting can remove the auditor. It is required to take
permission of the central government. The management of the entity can remove
internal auditor.
Question 3
Discuss the scope of Efficiency-cum-performance Audit.
Answer
Following are the scope of Efficiency-cum-performance Audit:
i.
Economy Audit : It ensures that entity has acquired the financial, human and
physical resources economically. It implies that resources have been procured in
appropriate quantity, quality and at minimum cost.
ii.
Efficiency Audit : It ensures the economical execution of various schemes and

policies. It refers to the relationship between inputs and output i.e. the goods and
services produced and resources used to produce them, yielding the expected
results.
iii.
Effectiveness : It is an appraisal of the performance of schemes and projects with

reference to the overall targeted objectives as well as efficiency of the ways and
methods adopted for the attainment of objectives.
Question 4
What do you understand by Compliance Audit?
Answer
Compliance audit is a comprehensive review of an organizations adherence to regulatory
guidelines.
It is common to us that the business undertakings require some certified statement on
various matters and the auditors certify such statements after carrying out audit which
might be necessary under the particular cases. All such audits are called Compliance Audit.
Suppose when a company applies to a bank for some loan, a certified statement showing
the turnover of the company for the past two or three years along with the current year
might be necessary, and for this purpose the certified statements are to be attached with
the application, otherwise the application will be rejected. So these certified statements
showing the turnover of the company fall under the category of compliance audit. Internal
audit for compliance could be the broader base to include compliance with documented
procedures/policies, compliance with statutory requirements in the relevant areas etc.
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Question 5
What process should be followed for doing compliance audit?
Answer
Doing a Compliance Audit, a stepwise approach is required:
First the compliance auditor needs to have a clear knowledge of audits objective
and scope. Accordingly he decides the time to be devoted in the compliance audit.
Before beginning a particular compliance audit, the auditor must gain thorough
understanding of applicable rules, guidelines and procedures to be evaluated.
He should decide how to recognize when a deviation has occurred, and how to
evaluate evidence obtained through audit tests.
The auditor must figure out, for each event to be tested, just what evidence signifies
compliance and what evidence signifies non-compliance. The auditor may also
prepare a detailed questionnaire about key compliance issues.
Assessing compliance may be simple, requiring a brief inspection to find out

whether rules were followed or not however in some cases making a judgment may
require extensive research of regulatory requirements, interpretations, and
technical materials.
If the auditor is not sufficiently experienced in very specialized compliance topics

then the opinions of an expert should be sought.
Compliance audit reports must be made in the format that is relevant to the auditee
or sponsoring entity i.e. government.
Reports usually describe the objectives of the compliance audit, the number of
conditions examined during the time period considered, the frequency of events
conforming to conditions, and the number of exceptions.
When a statistical sample of events has been tested and required assumptions are
appropriate, results from the sample may be used to predict the level of compliance
for all events or transactions within the scope of the audit.
Compliance audit reports often indicate reasons for deviations from standards,
describe implications of those deviations, and recommend actions that strengthen
control procedures for assuring compliance.
Question 6
Differentiate between efficiency audit and propriety audit.
Answer
Difference between efficiency audit and propriety audit are as under :
Efficiency audit
1.
Efficiency audit is related to that whether corporate plans are effectively executed.
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2.
In this, auditor investigates the reasons of variances in actual performance and

planned performance.
3.
It also investigates that capital resources of company are properly utilized or not.
Propriety audit
1.
It is related to that whether executive plans and action are perfectly executed or not.
2.
In this auditor investigates that the planned expenditure are designed to give
optimum results or not.
3.
It also investigates, whether the return from expenditure on capital as well as

current operation could be better by some other alternative plan of action.
Question 7
Discuss about propriety audit.
Answer
The Propriety Audit means the verification of following main aspects to find out whether:
(i)
Proper recording has been done in appropriate books of accounts.
(ii) The assets have not been misused and have been properly safeguarded.
(iii) The business funds have been utilized properly.
(iv) The concern is yielding the expected results.
The system of Propriety Audit is applied in respect to Government companies, Government
Department because public money and public interest are involved therein. It is an
essential function of audit to bring to light not only cases of clear irregularity but also every
matter which in its judgement appears to involve improper expenditure or waste of public
money or stores, even though the accounts themselves may be insufficient to see that
sundry rules or orders of competent authority have been observed.
Question 8
Internal Audit has become an important management tool Explain.
What is the scope of internal audit?
Or
Answer
Internal Audit has become an important management tool for the following reasons:
1.
Internal Auditing is a specialized service to look into the standards of efficiency of

business operation.
2.
Internal Auditing can evaluate various problems independently in terms of overall

management control and suggest improvement.
3.
Internal Audits independent appraisal and review can ensure the reliability and
promptness of MIS and the management reporting on the basis of which the top
management can take firm decisions.
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4.
Internal Audit system makes sure the internal control system including accounting
control system in an organization is effective.
5.
Internal Audit ensures the adequacy, reliability and accuracy of financial and
operational data by conducting appraisal and review from an independent angle.
6.
Internal Audit is an integral part of Management by System.
7.
Internal Audit can break through the power ego and personality factors and possible
conflicts of interest within the organization.
8.
It ensures compliance of accounting procedures and accounting policies.
9.
Internal Auditor can be of valuable assistance to management in acquiring new

business, in promoting new products and in launching new projects for expansion
or diversification of business.
Question 9
Explain the role of internal audit in corporate governance.
Answer
Internal auditing activity as it relates to corporate governance is generally informal,
accomplished primarily through participation in meetings and discussions with members
of the Board of Directors. Corporate governance is a combination of processes and
organizational structures implemented by the Board of Directors to inform, direct, manage,
and monitor the organization's resources, strategies and policies towards the achievement
of the organizations objectives. The internal auditor is often considered one of the "four
pillars" of corporate governance, the other pillars being the Board of Directors,
management, and the external auditor.
A primary focus area of internal auditing as it relates to corporate governance is helping
the Audit Committee of the Board of Directors (or equivalent) perform its responsibilities
effectively. This may include reporting critical internal control problems, informing the
Committee privately on the capabilities of key managers, suggesting questions or topics for
the Audit Committee's meeting agendas, and coordinating carefully with the external
auditor and management to ensure the Committee receives effective information.
Question 10
Briefly discuss the advantages of efficiency audit.
Answer
Auditing efficiency enables the management/owner to know whether the departments and
agencies manage resources with due regard to efficiency. It can also directly or indirectly
help departments and agencies to identify opportunities to provide more or better services
at the same or lower cost. More specifically, such audits can:
help managers and staff to be more sensitive to their obligation of due regard to
efficiency;
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underline the importance of measuring efficiency and of using that information for
managing operations and providing accountability;
identify means for improving efficiency, even in operations where efficiency is

difficult to measure;
demonstrate the scope for lowering the cost of delivering programs without
reducing the quantity or quality of outputs or the level of service;
increase the quantity or improve the quality of outputs and level of service without
increasing spending; and
identify needed improvements in existing controls, operational systems, and work

processes for better use of resources.
Question 11
What is the process of Internal Audit?
Answer
Audit Planning
Conducting Audits
Improvement Actions
Feedback
1.
The Scope and objectives for the audit is required to be established and then
communicated to the management.
2.
Review of documents is done. Flow charts and narratives can be created for this.
3.
Identify the key risks facing the business activities.
4.
Identify the control procedures to control the above risks.
5.
Report problems or any deviations identified.
6.
Follow-up on reported findings at appropriate interval of time.
Question 12
What are the roles/responsibilities of an internal auditor?
Answer 12
Internal auditing is an independent, objective assurance and consulting activity designed to
add value and improve an organisations operations. This is done by an internal auditor in
the organisation.
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Major roles and responsibilities of internal auditor are

1)
To plan organise and carry out the internal audit function. For this purpose,
preparation of an audit plan is done which includes scheduling and assigning of
work and estimating the need of resources.
2)
To provide support to company anti-fraud programmes.
3)
To evaluate the key risks facing the business activities and the information security.
4)
To review and report the internal control deficiencies and risk management issues
to the audit committee.
5)
To review and report on the accuracy, timeliness and relevance of the financial and
other information.
***
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13
Internal Control
Question 1
What do you understand by Internal Control ?
Answer
Internal control means different things to different people. This causes confusion among
businessman, legislators, regulators and others.
Internal control is broadly defined as a process, effected by an entitys board of directors,
management and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
1. Effectiveness and efficiency of operations.
2. Reliability of financial reporting.
3. Compliance with applicable laws and regulations.
De Paula [1989] defined internal controls as a system of controls, financial and otherwise
established by management in order to carry on the business of the company in an orderly
and efficient manner to ensure the adherence to management policies, safeguard the
assets, and secure as much as possible the completeness of an internal control system.
Gibbins [1990] argues that the safeguarding of assess , prevention and detection of frauds
and errors , the accuracy and completeness of accounting records and timely preparation of
reliable information, he argues that internal controls may be incorporated with in
computerized accounting system, which extends beyond those matters which are related
directly to the accounting system.
Lucy argues that internal controls comprise the control environment and control
procedures. It includes all the policies and procedures adopted by the directors and
management of an entity to assist in achieving their objective of ensuring are efficient and
orderly conduct of its business and adherence to internal policies.
Thomas Evans, in his book International Accounting and reporting defines internal
controls as policies and procedures that an organization develops to safe guard its
resources and provide for the reliability of financial records.
The international standards of auditors define internal controls as a system comprising
of controls environment and procedures. It includes polices and ways adapted by
management of an enterprise to assist it in achieving its objectives.
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Question 2
In a medium size trading organisation, the accountant was given additional responsibility
of making recoveries from receivables. On one occasion, an insurance claim of Rs.75,000
was received. He credited the same to the account of a debtor and misappropriated the
cash which he had recovered from the said receivable. Pinpoint the weaknesses in the
internal control which led to this situation.
Answer
Following two essential features of internal control are relevant here:
(i)
Breaking the chain of the work in a manner so that no single person can handle a
transaction from the beginning to the end and
(ii) Segregation of accounting and custodial functions.

Weakness in internal control system in the instant case:
(i)
The accountant is receiving cash and also passing the entries in the books. The
accountant should not have been allowed to effect recoveries.
(ii) It also appears that system for issuing receipts for amount received - whether cash
or cheque is also lacking.
(iii) In a small and to some extent medium size organization, the supervision of the
owner offsets the deficiencies in internal control system. But in this case, it appears,
that supervision and personal control is also lacking.
Thus, in the given case, the main weakness of the system is that it is ignoring the basic
requirements of a good internal control system.
Question 3
What are the techniques of internal control system? Discuss with examples.
Answer
There are two types of techniques used in internal control system : Preventive internal
control techniques and Detective internal control techniques.
(I)
Preventive Controls techniques are designed to discourage errors or irregularities

from occurring. They are proactive in nature that helps to ensure departmental
objectives are being met. Examples of preventive controls techniques are:
Segregation of Duties:
Approvals, Authorizations, and Verifications
Security of Assets (Preventive and Detective)
(II) Detective Controls techniques are designed to find errors or irregularities after they
have occurred. Examples of detective controls techniques are:
Reviews of Performance
Reconciliations
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Physical Inventories
Internal Audits
Question 4
What is internal check? Distinguish between internal check and internal audit?
Answer
Internal check is best regarded as indicating checks on the day-to-day transactions which
operate continuously as a part of the routine systems whereby work of one person is
proved independently or is complementary to the work of another, the object being the
prevention of or early detection of errors and frauds. Internal check is a continuous process
and is part of the day-to-day routine. Internal check is a part of internal control system. It
ensures that all financial transactions are properly recorded and efficiency of the
accounting system followed by the organization and enables easy preparation of financial
statements.
Difference between internal check and internal audit
Way of checking : In internal check system work is automatically checked

whereas in internal audit system work is checked specially.
Cost involvement : Cost of internal check is the part of the system cost whereas
cost of internal audit is additional cost to the system.
Thrust of system : Thrust of internal check system is to prevent the errors and
whereas the thrust of internal audit system is to detect the errors and frauds.
Time of checking : In internal check system checking is done when the work is
being done whereas in internal audit system work is checked after it is done.
Mistakes can be checked at an early stage in internal check system.
Question 5
What are the limitations of Internal Control?
Answer
No matter how well the internal controls are designed, they can only provide a reasonable
assurance that objectives will be achieved. Some limitations are inherent in all internal
control systems. These limitations include:
Judgment - the effectiveness of controls will be limited by decisions made with human
judgment under pressures to conduct business based on the information available at
hand.
Breakdowns - even well designed internal controls can break down. Employees
sometimes misunderstand instructions or simply make mistakes. Errors may also result
from new technology and the complexity of computerized information systems.
Management Override - high level personnel may be able to override prescribed
policies or procedures for personal gains or advantages. This should not be confused
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with management intervention, which represents management actions to depart from

prescribed policies and procedures for legitimate purposes.
Collusion - control system can be circumvented by employee collusion. Individuals
acting collectively can alter financial data or other management information in a
manner that cannot be identified by control systems.
A well designed process with appropriate internal controls should meet most if not all of
these control objectives.
Question 6
What are the tools available to the auditor for review of internal control?
Answer
An auditor can use the following tools to collect information required for the proper review
and evaluation of internal controls:(1) Narrative record : It is a complete and exhaustive description of the system as
found in operation by the auditor. Actual testing and observation are necessary
before such a system is in operation and would be more suited to small business.
(2) Check list : A check list is a series of instruction and/or answer. When he completes
instruction, he initials the space against the instruction. Answers to the check list
instruction are usually Yes, No or Not applicable. This is again an on the job
requirement and instructions are framed having regard to the desirable element of
control. The complete check list is studied by the principle/manager/senior to
ascertain existence of internal control and evaluate its implementation and
efficiency.
(3) Questionnaire : It is a comprehensive series of questions concerning internal
control. This is the most widely used from for collecting information about the
existence, operation and efficiency of internal control in an organization. The
questionnaire form also provides an orderly means of disclosing control defects. It is
the general practice to review the internal control system annually and record the
review the detail. In the questionnaire, generally questions are so framed that a Yes
answer denotes satisfactory position and a No answer suggests weakness.
Provision is made for an explanation or further details of No answers. In respect of
questions not relevant to the business, Not applicable reply is given.
The questionnaire is annually issued to the client and the client is requested to get it
filled by the concerned executives and employees. If on a perusal of the answers,
inconsistencies or apparent incongruities are noticed, the matter is further
discussed by auditors staff with the client employees for a clear picture. The
concerned auditor then prepares a report of deficiencies and recommendation for
improvement.
(4) Flow chart : Flow chart is a graphical presentation of each part of the companys
system of internal control. A flow chart is considered to be the most concise way of
recording the auditors review of the system. It minimizes the amount of narrative
explanation and thereby achieves and consideration or presentation not possible in
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any other form. It gives birds eye view of the system and the flow of transactions
and integration and in documentation, can be easily spotted and improvements can
be suggested.
Question 7
Write a short note on audit in depth.
Answer
Audit in depth as the name implies means checking a transaction extensively from origin to
end. It is an audit technique which is used to evaluate the effectiveness of internal control
system in an organisation. It is used in investigation exercises whereby the objective is to
thorough examination of transactions or records. In this technique all aspects relating to
the transaction are checked such as sanctity of transaction, validity of transaction,
adherences of prescribed procedures, arithmetical accuracy of transaction, accounting
treatment of transaction etc. It is also called vertical vouching as against horizontal
vouching.
Question 8
Explain the objectives of internal control system in an organisation.
Answer
Internal audit evaluates the organisations system of internal control by accessing the
ability of individual process controls to achieve seven pre-defined control objectives.
The objectives of internal control system in an organisation include:
Authorization - the objective is to ensure that all transactions are approved by

responsible personnel in accordance with their specific or general authority before
the transaction is recorded.
Completeness - the objective is to ensure that no valid transactions have been

omitted from the accounting records.
Accuracy - the objective is to ensure that all valid transactions are accurate,
consistent with the originating transaction data, and information is recorded in a
timely manner.
Validity - the objective is to ensure that all recorded transactions fairly represent the
economic events that actually occurred, are lawful in nature, and have been
executed in accordance with managements general authorization.
Physical Safeguards and Security - the objective is to ensure that access to physical
assets and information systems are controlled and properly restricted to authorized
personnel.
Error Handling - the objective is to ensure that errors detected at any stage of
processing receive prompts corrective action and are reported to the appropriate
level of management.
458
Segregation of Duties - the objective is to ensure that duties are assigned to

individuals in a manner that ensures that no one individual can control both the
recording function and the procedures relative to processing a transaction.
Question 9
What do you mean by inter firm comparison?
Answer
Inter firm comparison is the technique of evaluating the performance efficiency, costs and
profits of firm in an industry. It consists of voluntary exchanges of information/data
concerning costs, prices, profits, productivity and overall efficiency among firms engaged in
similar type of operations for the purpose of bringing improvement in efficiency and
indicating the weakness. Such a comparison will be possible where uniform costing is in
operation.
An inter-firm comparison indicates the efficiency of production and selling, adequacy of
profits, weak spots in the organisation, etc. and thus demands from the firms management
an immediate suitable action. Inter-firm comparison may enable the management to
challenge the standards which it has set for itself and to improve upon them in the light of
the current information gathered from more efficient units. Such a comparison may be
carried out in electrical industry, printing firms, cotton spinning firms, pharmaceuticals,
cycle manufacturing, etc.
Question 10
What do you mean by intra firm comparison?
Answer
The term intra firm comparison means comparison of two or more departments or
divisions belonging to the same firm with the objective of making meaningful analysis for
the purpose of increasing the effectiveness or efficiency of the departments or divisions
involved.
This may also mean comparison of results achieved by an organization over two different
financial periods or periods consideration. The idea is to compare the firms performance
with its own performance in some other department other point in time.
Question 11
What are the elements of internal control?
Answer
Information
&
Communication
Management Objectives
Monitoring
Control Activities
Risk Assessment
Control Environment
Elements of Internal Control
459
Internal Control consists of five inter-related components. These all are integrated with
the management process. The components are
1. Control Environment: - It sets the tone of on organization, influencing the control
conscious of its people. It is the foundation for all other components of internal
control, providing discipline and structure.
2. Risk Assessment:- Risk assessment is the identification and analysis of relevant
risks to the achievement of the objectives, forming a basis for determining how the
risk should be managed
3. Control Activities:- These are the policies and procedures that help ensure
management diver mining are carried out . They help ensure that necessary actions
are token to address risks to achievement of the entity objective.
4. Information and communication: - Pertinent information must be identified,
captured and communicated is a form and timeframe that enable people to carry out
their responsibilities. Information Systems Produce reports, containing operational,
financial and compliance related information that make it possible to run and
control the business.
Effective communication must occur in a broader sense, flowing down, across and
up the organisation.
5. Monitoring
Internal control systems need to be monitored a process that assesses the quality of
the systems performance over time.
Internal control deficiencies should be reported upstream, with serious matters
reported to top management and the board.
Question 12
What is sampling in Audit testing? What are the approaches to statistical Sampling?
Answer
Sampling is a process of selection a subset of a population of items for the purpose of
making inferences to the whole population.
Sampling is used is both compliance and substantive testing and is described in numerous
textbooks in auditing.
Approaches to statistical sampling
Samples during an audit are normally selected through one of the probability sampling
methods as discussed below :
-
Simple Random sampling

This method uses sampling without replacement in once an item has been selected
for testing it is removed from the population & is not subject to re selection.
460
Systematic (Interval) Sampling

This method provides for the selection of sample items in such a way that there is a
uniform interval between each sample item. Under this method, every Nth item is
selected with a random start.
Stratified (Cluster) sampling

This method provides for the selection of sample items by breaking the population
down into stratas or clusters.
An example of cluster sampling is the inclusion in the sample of all remittances or
cash disbursements for a particular month.
***
461
14
Review of Internal Control
Question 1
What is Internal Control Review (ICR) and how different it is to Internal Audit?
Answer
Internal Control Review is an overall assessment of the internal control system and its
adequacy of each business area in an organization to address the relevant risks. Through
control review, an organization's resources are directed, monitored, and measured in an
effective manner. It plays an important role in protecting the organization's tangible and
intangible resources.
Whereas, Internal audit as defined by the Institute of Internal Auditors is "an activity that
provides independent, objective assurance and consulting activity designed to add value
and improve an organizations operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes".
Question 2
Explain the term segregation of duties in context of purchase control review.
Answer
To ensure proper separation of duties, assign related buying functions to different people.
Ensure proper segregation, no single person has complete control over all buying activities.
It is always preferable to have different people who
I.
Approve purchases
II.
Receive ordered materials
III.
Approve invoices for payment
IV.
Review and reconcile financial records
V.
Perform inventory counts
If segregation of duties does not exist in purchases operations, this may result into
unauthorized or unnecessary purchases, improper charges to department budgets,
purchase of goods at excessive costs, use of goods for personal purposes.
Question 3
What are the objectives of review of management information system of an organisation?
462
Answer
The following are the objectives of review of management information system of an
organisation:
1.
To determine whether review procedures are necessary to achieve stated

objectives.
2.
To determine whether MIS policies or practices, processes, objectives, and internal

controls are adequate.
3.
To evaluate whether MIS applications provide users with timely, accurate,

consistent, complete, and relevant information.
4.
To assess the types and level of risk associated with MIS and the quality of controls
over those risks.
5.
To determine whether MIS applications and enhancements to existing systems

adequately support corporate goals.
6.
To determine whether MIS is being developed in compliance with an approved

corporate MIS policy or practice statement.
7.
To determine whether management is committed to providing the resources

needed to develop the required MIS.
8.
To determine if officers are operating according to established guidelines.
9.
To evaluate the scope and adequacy of audit activities.
10. To initiate corrective action when policies or practices, processes, objectives, or

internal controls are deficient.
11. To determine if any additional work is needed to fulfill the examination strategy of
the institution.
Question 4
Explain the internal control review points for reviewing the marketing function of an
organisation?
Answer
The following are the review points for reviewing the marketing function of an
organisation:
1.
Are standard price lists maintained? Is a special sanction from a senior manager
required in the case of sales at prices lower than the standard price?
2.
Does the system of allowing rebates and discount provide for adequate controls? In
particular is there a clear cut policy for allowing such rebates and discounts? Are the
authorities for various managers in this regard clearly laid down and are they
reasonable?
3.
Are special sanctions required in case of sales to those companies/ other

enterprises in which the managerial personnel or senior employees are interested?
463
4.
Is there a well defined policy for making sales to employees at concessional prices?
Does it laid down any limits in this regard?
5.
Is there a timely preparation of a written sale order on receipt of an order from a

customer?
6.
Are sale orders pre numbered? Is a lack of continuity in sale order number duly
enquired into?
7.
Is there a proper authorization of credit, price, quantity and other important terms
of the sale order?
8.
Is there a system of fixing credit limit for regular customer? Are these limits
approved by a senior manager as per the sales policy determined by the top
management? Are these limits reviewed periodically in the light of the experienced
in dealing with the customer?
9.
Is credit limit of the customer concerned checked before sanctioning the credit on
the sale order? Is up to date information on the extent of the credit already extended
to the customer readily available for this purpose?
10. Is a copy of each sale order sent to the dispatch department and the accounts
department?
11. Is a dispatch document, e.g. a good outward challan, prepared at the time the goods
are dispatch to the customer? Is it matched with the bill of lading or railway
receipt/transporter receipt?
12. Are dispatch documents pre numbered and missing document numbered duly
enquired into?
13. Is there a system of checking each consignment of good leaving the premises with
the related dispatch document?
14. Is a copy of dispatch document, i.e. goods outward challan /gate pass sent to the
customer and to the accounts department?
15. Is an acknowledgement of receipt of goods obtained from the customer or from his
agent on the copy of the dispatch document?
Question 5
What are the points to be considered while reviewing the quality management system of a
manufacturing organisation?
Answer
The following points are to be considered while reviewing the quality management system
of a manufacturing organisation:
1. Whether formal documented instructions / procedures are available on:
I.
Quality tests to be performed at each stage of the production process.
II.
Steps to be taken in the case of negative results.
464
III. Documentation required to evidence completion and results of quality checks.

2. Whether sufficient quantities of each production run are tested to enable
compliance with quality control standards.
3. Whether Quality assurance procedures are integrated into the production process.
4. Whether defect rates, customer returns and complaints due to poor quality are
monitored.
5. Whether measuring equipment and devices are calibrated on a periodic basis i.e.
quarterly, half yearly.
Question 6
What are the points to be considered while carrying out the internal control review of
recruitment function?
Answer
Organizations recruitment and selection process shapes part of companys reputation.
Reviewing human resources employment function involves a review of the way applicants
are received. A review should reveal how knowledgeable the engaged employment
specialists are concerning organizational structure, positions within each department, and
fair employment practices in recruiting and hiring candidates.
Question 7
Explain the main points to be considered in reviewing the decision making process of
management.
Answer
Decision-making is an essential aspect of modern management. It is a primary function of
management. A manager takes hundreds of decisions consciously and subconsciously. A
decision may be defined as a course of action which is consciously chosen from among a
set of alternatives to achieve a desired result. It represents a well-balanced judgment and
a commitment to action. Decision-making pervades all managerial actions and a continuous
process. Decision-making is an indispensable component of the management process itself.
Management decision-making process steps:
1. Define the problem.
2. Identify limiting factors.
3. Develop potential alternatives.
4. Analyze the alternatives.
5. Select the best alternative.
6. Implement the decision.
7. Establish a control and evaluation system.
465
Question 8
What are the internal control aspects in relation to Bank Reconciliation Statement?
Answer
The following are the internal control aspects in relation to Bank Reconciliation Statement :
1. Receipt of Bank Statement : Decision regarding handling over/receipt of bank
Statements.
2. Frequency of Reconciliation : How frequently reconciliation should be performed.
3. Authorisation : By whom and the detailed procedure to be followed for reconciliation.
The person responsible for carrying out the bank reconciliation should not normally
be concerned with handling cash and cheques received or with arrangements for
disbursements.
4. Attention points : Special attention to be given for long standing unpresented cheques,
stop payment notices, examination of the sequence of cheque numbers and
compilation of cheque details with details recorded in the cash book.
Question 9
Explain the points to be considered while carrying out the internal control review of an
organisation over the selection of transporter.
Answer
The following points are to be considered while carrying out the internal control review of
an organisation over the selection of transporter:
1. Check the system of sending enquiry and receiving quotations.
2. Check the control over sending enquiry and receiving, how followed up, record
keeping, etc.
3. Check whether basis of taking decision is documented properly or not.
4. Check whether date of approval, name of approving authority is mentioned on the
approval document or not.
5. Check whether the contract is entered into with thee selected transporter. Check the
terms and conditions of transporter agreement and report lapses if any.
Question 10
Prepare a small questionnaire enlisting the important things to be reviewed in case of
hiring by the HR department of an organisation.
466
Answer
The following important things to be reviewed in case of hiring by the HR department of an
organisation:
Question
Yes
1.
Do job descriptions exist?
2.
Are job descriptions up to date?
3.
Are forms and acceptable

reviewed annually?
4.
Are job openings offered to current employees?
5.
Are applicant references checked?
6.
Are turnover rates monitored?
7.
Are selection processes used with reference to

the Uniform Guidelines?
8.
Are all applicants required to fill out and sign an

application form?
9.
Are applicants asked to voluntarily identify their

affirmative action information?
No
N/A Comments
documentation
10. If applicable, do application forms identify that

the employment relationship at the organization
at-will?
11. Do employment applications refrain
requesting protected information?
12. Are
independent
identified?
contractors
from
accurately
13. If the organization has a qualifying federal

contract, is there an affirmative action plan?
14. Is medical information kept separately from
personnel files?
Question 11
What is management information system (MIS)? List down the points to be considered
while evaluating the MIS.
Answer
MIS is an information system which provides information to the management so that
management may take timely decisions. MIS is concerned with processing data into
467
information which is then communicated to the various departments in an organisation for

appropriate decision making.
Points to be considered while evaluating MIS are:
1. Has management developed and maintained a current MIS policy or practice?
2. Is the policy or practice reviewed and updated regularly?
3. Is the policy or practice distributed to appropriate employees?
4. Is the user manual for MIS system (s) meaningful, easy to understand and current?
5. Does the organisation use a consistent and standardized approach or a structured
methodology for developing MIS projects?
6. Does the policy or practice in corporate or require :-
User approval for each phase?
Installation of MIS enhancements is a controlled change environment?
Employees to be sufficiently trained for new systems and subsequent

enhancements.
Employees to follow policy or practice and processes as data are acquired,

merged, manipulated and uploaded to other systems?
***
468
15
Audit Engagement and
Documentation
Question 1
What is the meaning of audit plan? State the reasons why audit plan is prepared?
Answer
An audit plan is a step-by-step, methodical approach that enables auditors to focus on
important areas under review. Audit Planning steps run the gamut, from engagement
preparation and staff appointment to testing financial accounts and internal processes.
In order to ensure a high standard of performance, it is important that the auditor should
prepare adequately for his work. Planning ahead for an audit work will not only guarantee
a valid audit opinion but will also help the auditor to ensure that:
The audit objective is established and achieved;
The audit is properly controlled and adequately directed at all stages;
High risk and critical areas of the engagement are not omitted but that adequate
attention is focused on these areas; and
The work is completed economically and expeditiously, hence, savings on audit

resources.
Audit plan relates to preparations made by the auditor for one specific audit engagement of
one client for one year.
Question 2
Explain the term Audit programme and distinguish it from Audit plan.
Answer
Audit programme is nothing but a list of examination and verification steps to be applied
set out in such a way that the inter-relationship of one step to another is clearly shown and
designed, keeping in view the assertions discernible in the statements of account produced
for audit or on the basis of an appraisal of the accounting records of the client.
In other words, an audit programme is a detailed plan of applying the audit procedures in
the given circumstances with instructions for the appropriate techniques to be adopted for
accomplishing the audit objectives. Businesses vary in nature, size and composition work
which is suitable to one business may not be suitable to others; efficiency and operation of
internal controls and the exact nature of the service to be rendered by the auditor are the
469
other factors that vary from assignment to assignment. Because of such variations, evolving
one audit programme applicable to all business under all circumstances is not practicable.
However it becomes a necessity to specify in detail in the audit programme the nature of
work to be done so that no time will be wasted on matters not pertinent to the engagement
and any special matter or any specific situation can be taken care of.
Audit programme contains step by step instructions to be carried out by team members i.e.
it is simply a list of audit procedures to be executed by team members.
Audit programmes are prepared on the basis of audit plan usually by the auditor who in the
audit team is either partner or manager. But sometimes, audit firms have a basic audit
programme and the same is used by the auditor after making some modifications to it to
make it according the audit engagement in hand.
An audit plan is a step-by-step, methodical approach that enables auditors to focus on
important areas under review. Audit Planning steps run the gamut, from engagement
preparation and staff appointment to testing financial accounts and internal processes.
In order to ensure a high standard of performance, it is important that the auditor should
prepare adequately for his work. Planning for an audit, just like every human endeavour, is
essential for the smooth performance of the audit work and its successful completion.
Planning ahead for an audit work will not only guarantee a valid audit opinion but will also
help the auditor to ensure that:
(a) The audit objective is established and achieved;
(b) The audit is properly controlled and adequately directed at all stages;
(c)
High risk and critical areas of the engagement are not omitted but that
adequateattention is focused on these areas; and
(d) The work is completed economically and expeditiously, hence, saving on audit
resources.
Question 3
What do you mean by the term Vouching? Explain the importance of vouching in Auditing.
Answer
Vouching means the examination of documentary evidence in support of entries passed in
order to establish their arithmetic accuracy. When the auditor checks the entries with some
documents it is called vouching. Vouching is the acid test of audit. It tests the truth of the
transaction recorded in the books of accounts. It is an act of examining documentary
evidence in order to ascertain the accuracy and authenticity of the entries in the books of
accounts.
According to Dicksee, Vouching consists of comparing entries in the books of accounts
with documentary evidence in support thereof. Thus, vouching means testing the truth of
entries appearing in the primary books of accounts. In short, vouching means to examine
the evidence in support of any transaction or entry recorded in the books of accounts.
Vouching does not merely see that the entries and transactions are supported by proper
470
documentary evidence. The auditor should be satisfied that they are properly maintained,
they are supported by all evidence and they are correctly recorded in the books of
accounts.
Following points enumerate the importance of vouching in auditing:
Ensures genuineness of the transactions
Enables to know transactions
Helps to know relevance of the transaction
Facilitates proper allocation of capital & revenue, expenditure
Detects frauds and errors
Decides authenticity of transactions
Ensures proper accounting
Compliance with law
Ensures proper disclosure
Question 4
Write the distinction between verification and Vouching.
Answer
Difference between Verification and Vouching
Basis
Verification
Vouching
Meaning
Verification is the act of checking Vouching is the act of checking the

title, possession and valuation of records with the help of evidential
assets.
documents.
Nature
Verification is specially related to Vouching is related to

the assets and liabilities.
accounting documents.
Person
Auditor himself performs

work of verification.
Time
Verification is made at the end of Vouching is made at the beginning of

auditing or at the time of checking auditing.
balance sheets.
the Generally, assistant staff or auditor

performs the work of vouching.
Question 5
Explain the different approaches used in statistical sampling during an audit.
471
all the
Answer
In statistical sampling, samples during an audit are normally selected through probability
sampling methods. Probability sampling provides an objective method of determining
sample size and selecting the items to be examined. It also provides a means of
quantitatively assessing precision and reliability.
(a) Simple Random Sampling : A simple random sampling is a method in which each
item in the sample has equal chance of selection. In auditing, sampling without
replacement method is used; that is, once an item has been selected for testing it is
removed from the population and is not subject to re-selection. An auditor can
implement simple random sampling in following ways: computer programs or
random number tables.
(b) Systematic (Interval) Sampling : This method provides for the selection of sample
items in such a way that there is a uniform interval between each sample item.
Under this method of sampling, every Nth item is selected with a random start.
(c) Stratified (Cluster) Sampling : This method provides for the selection of sample items
by breaking the population down into stratas, or clusters. Each strata is then treated
separately. For this plan to be effective, dispersion within clusters should be greater
than dispersion among clusters. An example of cluster sampling is the inclusion in
the sample of all remittances or cash disbursements for a particular month. If blocks
of homogeneous samples are selected, the sample will be biased.
Question 6
Prepare a sample audit programme for auditing the receipt of fees from the students of a
government college.
Answer
A sample audit programme for auditing of the receipt of fees from the students of a
government college is given below:
Check names entered in the Students Fee Register for each month or term, with the
respective class registers, showing names of students on rolls and test amount of
fees charged; and verify that there operates a system of internal check which
ensures that demands against the students are properly raised.
Check fees received by comparing counterfoils of receipts granted with entries in
the cash book and tracing the collections in the Fee Register to confirm that the
revenue from this source has been duly accounted for.
Total up the various columns of the Fees Register for each month or term to
ascertain that fees paid in advance have been carried forward and the arrears that
are irrecoverable have been written off under the sanction of an appropriate
authority.
Check admission fees with admission slips signed by the head of the institution and
confirm that the amount had been credited to a Capital Fund, unless the Managing
Committee has taken a decision to the contrary.
472
See that free studentship and concessions have been granted by a person authorised
to do so, having regard to the prescribed Rules.
Confirm that fines for late payment or absence, etc., have either been collected or
remitted under proper authority.
Confirm that hostel dues were recovered before students accounts were closed and
their deposits of caution money refunded.
Confirm that caution money and other deposits paid by students on admission have
been shown as liability in the balance sheet and not transferred to revenue.
If admission process is going through online, than check the all application received.
To check Bank Reconciliation statement with receipts.
Check the Bank receipts, Credit card receipt and reconciliation plan to be made.
Check the all email correspondence regarding the receipts of fee.
Check the reminder system SMS alert, e-mails, call log book, to proper collection of
fee.
Check fee policy for different category of Students
Check the authentication of system and software used by the concern in this regard.
Question 7
The scope of verification is much wider than that of vouching.
Answer
The statement is true. Vouching enables the auditor to know whether the transactions are
Genuine and valid to enable the auditor to report on the financial statements with
reference to relevant documentary evidence.
Vouching is the substantive testing/examination of transaction at their point of
origin.
On other hand, verification process encompasses the inquiry into the ownership/
title, existence, valuation, completeness and presentation of assets and liabilities in
the balance sheet.
Verification usually deals with the final balance in the Final Accounts viz the balance
sheet and profit and loss account.
Question 8
Define documentation and explain the form and contents of documentation.
Answer
Documentation refers to the working papers prepared or obtained by the auditor and
retained by him, in connection with the performance of the audit.
The form and content of audit documentation should be designed to meet the
circumstances of the particular audit. The information contained in audit documentation
473
constitutes the principal record of the work that the auditors have performed in
accordance with standards and the conclusions that the auditors have reached. The
quantity, type, and content of audit documentation are a matter of the auditors
professional judgment. The Audit documentation therefore is not restricted to being only
on papers, but can also be on electronic media.
Generally the factors that determine the form and content of documentation for a
particular engagement are:
(a) The nature of the engagement.
(b) The nature of the business activity of the client.
(c)
The status of the client.
(d) Reporting format.

(e) Relevant legislations applicable to the client.
(f)
Records maintained by the client.
(g) Internal controls in operation.

(h) Quality of audit assistants engaged in the particular assignment and the need to
direct and supervise their work.
Question 9
What is test checking in audit? What are the advantages of test checking?
Answer
Test checking is an accepted auditing procedure wherein only a part of its transactions is
checked to form an opinion instead of checking the transactions. The advantages of test
checking include:
1.
Audit objective : The auditor is required to form an opinion on the financial

statements. Even after 100 % checking, he may not derive absolute satisfaction.
Hence, proper and careful test checking serves the audit objective in obtaining
reasonable audit assurance.
2.
Expertise : Application of test check principles involves the application of mind and
intelligent judgement. It enables the auditors to use his expertise effectively.
3.
Exception Principle : Test checking adopts the principle of exception in control. If

certain aspects of internal control do not create suspicion, there is no need to verify
all these transactions exhaustively.
4.
Scientific assessment of risk : The auditor assesses the risk of material misstatements in the Financial Statements in a scientific manner by drawing suitable
samples and studying the same in detail.
5.
Saving in time : As fewer transactions are verified, time is saved to a great extent.
This, in turn, enables completion of all the audits/verification procedures in time.
474
6.
Reduction in Work : Volume of work is reduced by test checking methods. Audit

processes are not carried out mechanically on all transactions.
Answer 10
What is tolerable terror?
Answer
Tolerable error is the maximum error in the population that the auditor would be willing to
accept and still concludes that the result from the sample has achieved the audit objective.
Tolerable error is considered during the planning stage and, for substantive procedures, is
related to the auditors judgement about materiality. The smaller the tolerable error, the
greater the sample size will need to be. In tests of control, the tolerable error is the
maximum rate of deviation from a prescribed control procedure that the auditor would be
willing to accept, based on the preliminary assessment of control risk. In substantive
procedures, the tolerable error is the maximum monetary error in an account balance or
class of transactions that the auditor would be willing to accept so that when the results of
all audit procedures are considered, the auditor is able to conclude, with reasonable
assurance, that the financial statements are not materially misstated.
Question 11
What is the guideline for preparation of good working papers?
Answer
Working papers are the property of the auditor. The auditor may, at his discretion, make
portions of or extracts from his working papers available to his client.
General guidelines for the preparation of working papers are :
1.
Clarity and Understanding As a preparer of audit documentation, step back and

read your work objectively. Would it be clear to another auditor? Working papers
should be clear and understandable without supplementary oral explanations. With
the information the working papers reveal, a reviewer should be able to readily
determine their purpose, the nature and scope of the work done and the preparers
conclusions.
2.
Completeness and Accuracy As a reviewer of documentation, if you have to ask

the audit staff basic questions about the audit, the documentation probably does not
really serve the purpose. Work papers should be complete, accurate, and support
observations, testing, conclusions, and recommendations. They should also show
the nature and scope of the work performed.
3.
Pertinence Limit the information in working papers to matters that are important
and necessary to support the objectives and scope established for the assignment.
4.
Logical Arrangement File the working papers in a logical order.
5.
Legibility and Neatness Be neat in your work. Working papers should be legible
and as neat as practical. Sloppy work papers may lose their worth as evidence.
475
Crowding and writing between lines should be avoided by anticipating space needs
and arranging the work papers before writing.
6.
Safety Keep your work papers safe and retrievable.
7.
Initial and Date Put your initials and date on every working paper.
8.
Summary of conclusions Summarize the results of work performed and identify

the overall significance of any weaknesses or exceptions found.
Question 11
What is the need for working papers ?
Answer 11
The need for working papers are :
(1) They aid in the planning and performance of the audit.
(2) They provide evidence of the audit work performed to support the auditors opinion
(3) The working papers should evidence compliance with technical standards.
(4) They retain a record of matters of continuing significance to future audits of the
entity.
Question 12
What are the different types of audit files which are classified under working paper files?
Or
Differentiate between permanent audit files and current audit file?
Answer 12
In case of recurring audits, some working paper files may be classified as permanent audit
files, which are updated currently with information of continuing importance to succeeding
audits. In contrast, audit files contain information relating primarily to the audit of a single
period.
The permanent audit file includes
-
Copy of initial appointment letter if the engagement is of recurring nature.
NOC from previous auditor
Details of Bankers, Registrars, Lawyers etc.
Details of sister concerns
Organisational structure of the client.
476
The current audit file includes

-
Letters of representation or confirmation received from the client
Analysis of transactions and balances
Audit review points and highlight
Major weakness in internal control
Evidence of the planning process of the audit and audit programme.
***
***
477

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EXECUTIVE PROGRAMME

Price : Rs. 300/-

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

Printed at : Samrat Offset Works/500/November 2015

4th November, 2015

Final Accounts of Companies

Valuation of Shares and Intangible Assets

Corporate Financial Reporting

Types of Company Audit

Review of Internal Control

Audit Engagement and Documentation

Bank A/c (40000 x Rs. 30)

To Share Application A/c

Share Application A/c

To Share Capital A/c

Share Allotment A/c (40000 x Rs. 20)

To Share Capital A/c

(Amount due on allotment on 40000 shares

To Share Allotment A/c

Share First Call A/c (40000 x Rs. 25)

To Share Capital A/c

Share second and final Call A/c

(40000 x Rs. 25)

To Share Second & Final Call A/c

Bank A/c (60000 x 30)

To Equity Share Application A/c

(Share Application money received

To Equity Share Capital A/c

(Share application money transferred

Equity Share Allotment A/c (60000 x 75)

To Equity Share Capital A/c (60000 x 50)

To Securities Premium A/c (60000 x 25)

(Amount due on allotment of 60,000 Shares @

To Equity Share Allotment A/c

(Amount received on allotment)

On Allotment (on 1st May, 2014)

On First Call (on 1st Oct., 2014)

On Final Call (on 1st Feb., 2015)

Bank A/c (10000 x 25)

To Shares Application A/c

(Amount of share application received for

Share Application A/c

To Share Capital A/c

(share application money transferred to share

Share allotment A/c

To Share capital A/c

(Share allotment money due on 10,000 shares

To Shares Allotment A/c

To Calls in Advance A/c

[Receipt of money due on allotment, also the

Share First Call A/c

To Share Capital A/c

(The amount due on 10,000 shares @ Rs. 25

Calls in Advance A/c

To Share First Call A/c

(Receipt of the first call on 9,800 shares, the

Share Final Call A/c

To Share Capital A/c

(The amount due on Final Call on 10,000

Calls in Advance A/c

To Share Final Call A/c

(Receipt of the moneys due on final call on

The interest on calls in advance paid @ 12% on :

Amount Dr. Amount Cr.