Advanced Accounting

Suggested Answer
CAP II, June 2013
Roll No.

Maximum Marks - 100

Total No. of Questions - 6

Total No. of Printed Pages - 4

Time Allowed - 3 Hours

Marks
Attempt all questions. Working notes should form part of the answer.
1. Radha, Kishan, Hari and Shyam were partners sharing Profit & Losses in the ratio of
3:3:2:2. Following was the Balance Sheet as on 31st Ashadh, 2069:
Liabilities
Trade Creditors

Rs.

Rs.
Assets
23,250 Trade Debtors
Less: Provision for
Kamals Loan
15,000 Bad Debts
Capital Accounts:
Inventories
Radha
30,000
Cash at Bank
Kishan
22,500
52,500 Furniture & Fixtures
Trade Marks
Capital Accounts:
Hari
Shyam
90,750
st
On 31 Ashadh, 2069, the partnership was dissolved.

Rs.
24,000
(750)

24,000
9,000

Rs.

23,250
15,000
3,000
6,000
10,500

33,000
90,750

The assets realized were as follows:

Trade Debtors Rs. 16,500; Inventories Rs. 12,000; Furniture & Fixtures Rs. 1500;
Trade Mark Rs. 6,000; Trade Creditors were settled at Rs. 23,000; also there was a
joint life insurance policy for Rs. 45,000; this was surrendered for Rs. 4,500.
Expenses of realisation amounted to Rs. 750. Hari was insolvent, but Rs. 5,500 was
recovered from his estate.
Show the following accounts in the books of the partnership firm:
a) Realisation Account
b) Cash Account
c) Partners Capital Account

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Answer:
a)
Particulars
To Sundry Assets:
Furniture & Fixtures
Trade Marks
Trade Debtors
Inventories
To Cash
(Payment to
Creditors)
To Cash
(Realization Expense)

Realisation Account As on Ashadh 2069

Amount Amount Particulars
By Provision for Doubtful
Debts
6000
By Trade Creditors
10500
By Cash:
24000
Furniture & Fixtures
15000
55500 Trade Marks
Trade Debtors
23000 Inventories
Surrender Value of Policy
750 By Partners Capital Account
(Loss on Realization)
Radha
Kishan
Hari
Shyam

Amount

Amount
750
23250

1500
6000
16500
12000
4500

40500

4425
4425
2950
2950

14750

79250

79250

b)
Particulars
To Balance B/d
To Realisation Account
(Assets Realized)
To Partners Capital
Radha
Kishan
Shyam
To Hari Capital
To Shyam Capital

Cash Account
Amount Particulars
3,000 By Realization Account
40,500 By Trade Creditors
Realisation Expenses
By Kamal's Loan
4,425
To Partners Capital:
4,425
Final Payment
2,950
11,800 Radha's Account

Amount

5,500 Kishan's Account

9,000

Amount

Amount

23,000
750

17,743
13,307

69,800

ZYA

23,750
15,000

31,050

69,800

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c)
Particulars
To balance
B/d
To
Realization
Account
(Loss)
To Hari
Capital
(Loss of
Capital
Written off)

To Cash A/C

Partners Capital Account

(3)
Radha Kishan Hari Shyam Particulars
Radha Kishan
By balance
- 24,000
9,000 B/d
30,000 22,500

Hari

Shyam
-

4,425

4,425

2,950

2,950

By Cash

4,425

4,425

2,950

12,257

9,193

By Cash

5,500

9,000

- 12,257

9,193

26,925 26,950

11,950

By Radha
Capital
By Kishan
Capital
17,743
34,425

13,307
26,925 26,950

11,950

34,425

Working Notes:
1. There was a debit balance of Rs 9,000 in the Shyams Capital and Shyam is a Solvent
Partner; hence, he must bring cash for balance capital
2. Hari is insolvent therefore he is not able to bring cash. The deficiency in his account is borne
by Radha & Kishan in the ratio 4:3 (Capital Ratio) as per Garner & Murray.
Deficiency in Hari Capital =Rs 24000+Rs. 2950-Rs. 5500=Rs. 21450
Borne By Radha=4/7*21450=12257
Borne by Kishan=3/7*21450=9193
Mr. Kamal Loan is paid off in Cash
2.
a) The following information is given to you:
Balance Sheet of Yan Ltd. as on 31st March, 2012
Liabilities

Amount Assets
Amount
Rs.
Rs.
Share Capital:
Land & Building
100,000
2,000 14% preference shares of
Plant & Machinery
250,000
Rs. 100 each, fully paid up
200,000 Patents
40,000
1,000 Equity shares of Rs. 100
Stock at Cost
55,000
each, Rs. 75 paid up
75,000 Sundry Debtors
110,000
3,000 Equity shares of Rs. 100
Cash at Bank
75,500
each, Rs. 60 paid up
180,000 Profit & Loss Account
83,500
14% Debentures having floating
charge on all assets
100,000
Interest Outstanding
14,000
Creditors
145,000
Total
714,000 Total
714,000
The company went into liquidation on the above date.
Preference dividends were in arrear for two years. The arrears are payable
automatically on liquidation. Creditors include a loan of Rs. 50,000 on the
mortgage of Land & Building. The assets were realized as follows:
Rs.
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Land & Building
Plant & Machinery
Patents
Stock
Sundry Debtors

120,000
200,000
30,000
60,000
80,000

The expense of liquidation amounted to Rs. 10,900. The liquidator is entitled to a

commission of 3% on all assets realized except cash and a commission of 2% on
the amounts distributed among unsecured creditors. Preferential creditors amount
to Rs. 15,000. Assume the payment was made on September 30, 2012. Prepare the
Liquidator's Statement of Accounts.

10

b) Digital traders started business on 1st Shrawan 2068 selling one model of digital
cameras on hire purchase. During the year to 31st Ashadh 2069, it purchased
2,000 cameras at a uniform price of Rs. 9,000 and sold 1,900 cameras at a total
selling price under hire purchase agreements of Rs. 15,000 per camera, payable by
an initial deposit of Rs. 4,500 and 10 quarterly installments of Rs. 1,050.
The following trial balance is extracted from the firm's books as at 31st Ashadh
2069:
Particulars
Capital
Drawings
Fixed assets
Purchases
Cash collected from customers
Rent, rates and insurance
Salaries
General expenses
Balance at bank
Accounts payable

Rs.

Rs.
13,602,600

4,000,000
950,000
18,000,000
12,540,000
500,000
2,700,000
510,000
742,600
1,260,000
27,402,600

27,402,600

The personal accounts of customers are memorandum records (i.e. they are not
part of the double entry system).
The firm prepares its financial statements on the basis of taking credit for profit
(including interest) in proportion to cash collected from customers.
Ignore depreciation of fixed assets, and

(6+4=10)
st

i) Prepare hire purchase income statement for the year ending 31 Ashadh 2069.
ii) Prepare the balance sheet as at 31st Ashadh 2069.

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Answer:
a) Liquidator's Statement of Account as at 30th September 2012
Receipts
Assets realized:
Cash
Debtors
Stock
Plant & Machinery
Patents
Land & Building:
Surplus from securities :
(100000-50,000) =

Estimate
d Value

Value
Realized

75,500
110,000
55,000
250,000
40,000

75,500
80,000
60,000
200,000
30,000

50,000

(120000-50000)=

Payments

Amount
Paid

Liquidator's remuneration:
3% on NPR 490,000 = 14,700
2% on NPR 95,000=
1,900
Expenses of liquidation
Debentures having a floating
charge
100,000
Interest o/s
14,000
th
Interest up to 30
September 2012 (6month) 7,000
Creditors:
70,000 Preferential
15,000
Other
80,000
Preferential shareholders
Arrears of preference dividend
Equity shareholders:
NPR 15 on 1,000 shares 15,000
NPR 0.25 on 4,000 shares 1,000
515,500

16,600
10,900

121,000

95,000
200,000
56,000

16,000
515,500

b)
Digital Traders
Income Statement for the year ended 31st Ashadh 2069
Particulars
Rs.
Sales (1900 x Rs.15,000)
Less: Cost of sales
Purchases (2000 x Rs.9,000)
18,000,000
Less closing stock (100 x Rs.9,000)
(900,000)
Provision for unrealized profit & interest (WN 1)
Gross Profit
Less: Other expenses
Rent, rates and insurance
500,000
Salaries
2,700,000
General expenses
510,000
Net profit
Digital Traders
Balance Sheet as at 31st Ashadh 2069
Capital & Liabilities
Rs.
Capital
Add: Net profit for the year
Less: Drawing
Total
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Rs.
28,500,000

(17,100,000)
(6,384,000)
5,016,000

Rs.
13,602,600
1,306,000
(4,000,000)

(3,710,000)
1,306,000

Rs.

10,908,600
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Assets
Fixed Assets
Current Assets:
Closing stock
HP accounts receivable
Less: Provision for unrealized profit & interest
Balance at bank

950,000
900,000
15,960,000
(6,384,000)

Less: Current Liabilities

Accounts payable

9,576,000
742,600
11,218,600
(1,260,000)
9,958,600
10,908,600

Total
WN 1) Calculation of amount of unrealized profit

b)

Rs.
Sales amount
28,500,000
Less: Cash collected from customers
12,540,000
Cash yet to be collected
15,960,000
Profit & interest per unit of camera = Rs. 15,000 Rs. 9,000 = Rs.6,000

c)

Unrealized Profit and interest

a)

= (15,960,000/28,500,000) x Rs. 6,000 x 1900

= Rs. 6,384,000

3.
a) Following are the extracts of financial statements of a commercial bank:
Particulars
Total risk weighted exposure
Paid up equity share capital
Share Premium
Proposed bonus equity shares
Statutory general reserves
Retained earning
Debenture redemption reserve
Investment in equity of institutions with financial interests
Subordinated term debt
General loan loss provision
Exchange equalization reserve
Investment adjustment reserve

Rs. '000
62,704,174
3,012,924
11,849
753,231
1,532,353
19,635
630,364
101,500
1,050,000
414,741
50,633
38,920

Required:
(2+1+1+4+2=10)
i) Amount of core capital (Tier I)
ii) Amount of supplementary capital (Tier II)
iii) Amount of total capital fund
iv) Capital adequacy ratios with regard to:
(a) Core capital
(b) Total capital fund
v) Explain whether the bank meets standard capital adequacy ratios requirement.

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b) The following information is extracted from the annual report of a limited
company for a year end:
Issued and paid up equity shares of Rs. 100 each
Net working capital
Current ratio
Liquidity ratio
Net fixed assets to shareholders' equity
Gross profit margin
Net profit to share capital
Inventory turnover
Average age of outstanding debtors

Rs. 12,000,000
Rs. 6,060,000
1.75 : 1
1.25 : 1
60%
20%
16%
6.575 times
2 months

Make appropriate assumptions and prepare an Income Statement and Balance

Sheet for the company.
Answer:
a) Solution:

10

i) Calculation of amount of Core Capital (Tier I)

Particulars
Paid up Equity Share Capital
Share Premium
Proposed Bonus Equity Shares
Statutory General Reserves
Retained Earning
Debenture Redemption Reserve
less: Investment in equity of institutions with financial interests
Total Core Capital

Rs.'000
3,012,924
11,849
753,231
1,532,353
19,635
630,364
(101,500)
5,858,856

ii) Calculation of amount of Supplementary Capital (Tier II)

Particulars
Subordinated Term Debt
General loan loss provision
Exchange Equalization Reserve
Investment Adjustment Reserve
Total Supplementary Capital

Rs.'000
1,050,000
414,741
50,633
38,920
1,554,294

iii) Amount of total capital fund (Rs.'000)

= Core Capital + Supplementary Capital

= 5,858,856 + 1,554,294
= 7,413,150

iv) Capital Adequacy Ratios

Core Capital to Total Risk weighted exposure

= Core Capital/ Total RWE

= 5,858,856/ 62,704,174
= 0.0934
= 9.34%

Total capital fund to Total Risk weighted exposure = Total capital fund/ Total RWE
= 7,413,150/ 62,704,174
= 0.1182
= 11.82%

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v) As per NRB requirement, the core capital to total RWE should be at least 6% and total
capital fund to total RWE should be at least 10%. From the above calculation, it is
evident that the capital adequacy ratios of the bank meet the standard requirement.
b)
Income Statement
Particulars
Sales (WN 4)
Less: Cost of goods sold (WN 4)
Gross profit
Other expenses (balancing figure)
Net profit (WN 7)

Rs.

Rs.
26,563,000
(21,250,400)
5,312,600
(3,392,600)
1,920,000

Rs.

Rs.
12,000,000

Balance Sheet
Share capital:
120,000 equity shares of Rs.100 each fully paid up
Reserve and Surplus:
Retained earnings (WN 9)

3,150,000
Total

Net fixed assets (WN 8)

Current assets:
Inventory (WN 3)
Debtors (WN 5)
Cash and bank balance (WN 6)

15,150,000
9,090,000
4,040,000
4,427,167
5,672,833
14,140,000
(8,080,000)

Less: Current liabilities (WN 1)

Total

6,060,000
15,150,000

Working Notes:
1) Calculation of current assets and current liabilities
Net working capital = Current assets Current liabilities
or, CA CL = Rs.6,060,000.. (i)
Besides,
Current ratio = 1.75 : 1
or, CA/ CL = 1.75/1
or, CA = 1.75CL
or, CA 1.75CL = 0 (ii)
Subtracting eq. (ii) from eq. (i)
0.75CL = Rs.6,060,000
or, CL = Rs.6,060,000/ 0.75
or, CL = Rs.8,080,000
and,
CA = 1.75 x Rs.8,080,000
= Rs.14,140,000
2) Calculation of liquid assets
Liquid assets/ CL = 1.25/ 1
or, Liquid assets/ Rs.8,080,000 = 1.25/ 1
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or, Liquid assets = 1.25 x Rs.8,080,000
or, Liquid assets = Rs.10,100,000
3) Calculation of inventory
Since liquid assets exclude inventory from total current assets,
Inventory = Current assets Liquid assets
= Rs.14,140,000 - Rs.10,100,000
= Rs.4,040,000
4) Calculation of cost of goods sold, gross profit and sales
Inventory turnover = 6.575 times
or, Sales/ Inventory = 6.575
or, Sales = 6.575 x Rs.4,040,000
Sales = Rs,26,563,000
Gross profit = 20% x Rs,26,563,000 = Rs.5,312,600
Cost of goods sold = Rs,26,563,000 - Rs.5,312,600 = Rs.21,250,400
5) Calculation of Debtors
Assumed that all sales were on credit.
Debtors = Sales x Average collection period/ Month in a year
= Rs,26,563,000 x 2/ 12
= Rs.4,427,167
6) Calculation of cash and bank balance
Assumed that liquid assets consisted of debtors and cash and bank balance only.
Cash and bank balance = Liquid assets Debtors
= Rs.10,100,000 - Rs.4,427,167
= Rs.5,672,833
7) Calculation of Net profit
Net profit

= 16% of Share capital

= 0.16 x Rs.12,000,000
= Rs.1,920,000

8) Calculation of Net fixed assets and shareholders' equity

Shareholders equity = Net fixed assets + Net working capital
If Net fixed assets are 60% (given) of shareholders' equity, Net working capital is 40% of
the same.
Therefore,
Net fixed assets
= Net working capital x 60/40
= Rs.6,060,000 x 60/40
= Rs.9,090,000
Shareholders' equity = Net fixed assets/ 0.60
= Rs.9,090,000/ 0.60
= Rs.15,150,000
9) Calculation of Reserve and surplus
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Shareholders' equity = Share capital + Reserve and surplus
Reserve and surplus = Rs.15,150,000 Rs.12,000,000
= Rs.3,150,000
4.
a) A fire broke out in the godown of a business house on Shrawan 08, 2068. Goods
costing Rs. 203,000 in a small sub-godown remain unaffected by fire. The goods
retrieved in a damaged condition from the main godown were valued at
Rs. 197,000. The following particulars were available from the books of account:
Stock on the last balance sheet date at 30.03.2068 was
Purchases for the period from Shrawan 01 to Shrawan 07 were
Sales during the same period amounted to
The average gross profit margin was 30% on sales.

Rs. 1,572,000
Rs. 3,710,000
Rs. 5,260,000

The business house has a fire insurance policy for Rs. 1,000,000 in respect of its
entire stock. Assist the accountant of the business house in computing the amount
of claim of loss by fire.

b) Goverdhan Ltd. has equity capital of Rs. 2,000,000 consisting of fully paid equity
shares of Rs. 10 each. The net profit for the year ended 31.03.2069 was
Rs. 3,000,000. It has also issued 18,000, 10% convertible debentures of Rs. 50
each. Each debenture is convertible into 5 equity shares. The tax rate applicable is
30%.
Compute the diluted earnings.

c) A Ltd. Purchased fixed assets costing Rs. 850 Lakhs on 1.1.2069. This was
financed by foreign currency loan (U.S. Dollars) payable in three equal
instalments. Exchange rates were $1=Rs. 85 and Rs. 88 as on 1.1.2069 and
31.3.2069. First instalment was paid on 31.3.2069. You are required to state, how
these financial transactions would be accounted for?

Answer:
a)
Calculation of Amount of Claim
Value of Stock on 8th Shrawan
(Refer W.N.)
Less:
Value of Stock remaining unaffected by fire.
Agreed value of damaged goods
Loss of Stock

Amount

2,03,000
1,97,000

Amount
16,00,000

4,00,000
12,00,000

Applying Average Clause:

Amount of Claim=Amount of Policy x Loss of Stock
Stock on the date of Fire
=Rs 10,00,000x12,00,000
Rs16,00,000
=Rs 750,000

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Working Note:
Memorandum Trading Account for the Period from 1St Shrawan 2068 to 8Th Shrawan2068
Particulars
Amount Particulars
Amount
To Opening Stock
15,72,000 By Sales
52,60,000
To Purchases
37,10,000 By Closing Stock (Bal. Fig) 16,00,000
To Gross Profit (30% of Sales)

15,78,000
68,60,000

68,60,000

b) Solution:
Particulars
Interest on Debentures @10% for the year
(18,000 debentures x Rs50x10%)
Less Tax on Interest @ 30%
Add: Net Profit for the year ended 31.3.2069
Diluted Earning

Amount
90,000
-27,000
63,000
30,00,000
30,63,000

c) As per NAS-11: The Effects to Changes in Foreign Exchange Rates, exchange differences
arising on the settlement of monetary items or on reporting an enterprise monetary items at
rates different from those at which they were initially recorded during the period, or reported
in previous financial Statements, should be recognised as income or expense in the period
they arise. Thus exchange differences arising on repayment of liabilities incurred for the
purpose of acquiring fixed assets are recognised as income or expense.
Calculation of Exchange Difference:
Foreign Exchange Loan = Rs 850 Lacs / Rs 85 = $10 Lacs
Exchange Difference = $ 10 Lacs X (88-85) = Rs 30 Lacs
Loss due to exchange difference amounting to Rs 30 Lacs should be charged to Profit & Loss
Account for the year ended 31.03.2069.
5.
a) On 25th Poush 2068, ABC Advertising P. Ltd. obtained advertising rights for
ACC-Football Cup to be held in Baishakh and Jestha 2069 for Rs. 520 Lakhs.
They furnish the following information:
i) The company obtained the advertisements for 70% available time for Rs. 700
Lakhs by 25th Falgun 2068.
ii) For the balance time they got bookings in 20th Chaitra 2068 for Rs. 240 Lakhs.
iii) All the advertisers paid the full amount at the time of booking the
advertisements.
iv) 40% of the advertisements appeared before the public in Baishakh and balance
60% appeared in the month of Jestha.
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Calculate the amount of profit/loss to be recognised for the month Baishakh and
Jestha, 2069 as per NAS-7.

b) Discuss accounting treatment of repayment of Government Grants as per NAS 10.

c) In preparing financial statements of Lotus Limited for the year ended 31.3.2069,
you come across the following information. State with reason, how you deal with
them in the financial statements?
The company invested Rs. 50 Lakhs in 28.04.2069 in the acquisition of another
company doing similar business, the negotiation for which started.

Answer:
a) As per NAS-7, Revenue Recognition, in a transaction involving the rendering of services,
performance should be measured either under the completed service contract method or
under the proportionate completion method, which ever relates the revenue to the work
accomplished. Further as per NAS, it states that revenue from advertising should be
recognised when the service is completed. The Service as regards advertisement is deemed to
be completed when the related advertisement appears before the public.
In the given problem 40% advertisements appeared in the month of Baisakh 2069 and
Balance in the month of Jestha 2069.
Total Profit Computed as follows:
Particulars
Advertisement for 70% of Available time obtained by
Falgun,2068
Advertisement for 30% of available time obtained in by
Chaitra2068
Total
Less:
Cost of Advertisement Rights
Profit

In Lacs
700
240
940
-520
420

The Profit amounting to Rs 420 Lacs should be apportioned in the ratio of 40:60 for the
months of Baisakh & Jestha 2069.
Hence the company should recognise Rs 168 Lacs (Rs 420*40%) & rest Rs 252 Lacs in the
month of Baisakh & Jestha 2069respectively.
b) As per para 32 NAS 10, government grant that becomes repayable shall be accounted for as a
revision to an accounting estimate. Repayment of a grant related to income shall be applied
first against any unamortized deferred credit set up in respect of the grant. To the extent that
the repayment exceeds any such deferred credit, or where no deferred credit exists, the
repayment shall be recognized immediately as an expense. Repayment of a grant related to
an asset shall be recorded by increasing the carrying amount of the asset or reducing the
deferred income balance by the amount repayable. The cumulative additional depreciation
that would have been recognized to date as an expense in the absence of the grant shall be
recognized immediately as an expense.

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c) The Investments of Rs 50 Lacs in Ashadh 2069 for acquisition of another company is under
negotiation stage and is not finalized yet. On the other hand, it is also not affecting the
figures stated in the Financial Statements of 2068/69. Hence the details regarding such
negotiation and investment planning of Rs 50 Lacs are indicative of conditions that arose
after the balance sheet date (non-adjusting events after the balance sheet date). Therefore as
per para 10 of NAS 5 lotus limited shall not adjust the amount recognized in its financial
statement.
Since, such event constitute material, lotus limited shall disclose in the financial statement:
i) The nature of event ; and
ii) An estimate of its financial effect
6. Write short notes on:
a) Accounting treatments leading to formation of secret reserve

b) Need for revaluation of partnership assets

c) Mark-up and margin

d) Contingent asset

Answer:
a) Following accounting treatment may result in formation of secret reserves within an
organization:
i) Writing off excessive depreciation;
ii) Charging capital expenditures to profit & loss account;
iii) Undervaluation of closing stocks;
iv) Suppression of sales;
v) Showing a contingent liability as an actual liability;
vi) Showing an assets as contingent assets;
vii) Crediting revenue receipt to an assets account
b) The partnership assets need to be revalued mainly in the following situation:

Admission of a new partner

Retirement or death of a partner
Change in profit or loss sharing ratio
Sale or dissolution of partnership

c) When gross profit is shown as a fraction or percentage of the cost price, it is termed as markup. Besides, when gross profit is shown as a fraction or percentage of the selling price, it is
termed as margin. Both the terms refer to the same gross profit, but expressed as percentage
of different figures.
d) NAS 12 on " Provisions, contingent liabilities and contingent assets" defines a contingent
asset as a possible asset that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the entity; e.g. a claim that the entity is pursuing through legal
processes, where the outcome is uncertain.

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Contingent asset is not recognized in financial statements since this may result in the
recognition of income that may never be realized. It is disclosed where an inflow of
economic benefit is probable.

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