Test Series: April, 2019

MOCK TEST PAPER – 2

INTERMEDIATE (NEW) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
Time Allowed: 3 Hours Maximum Marks: 100
1. (a) Ruby Ltd. sold goods through its agent. As per terms of sales, consideration is payable within one
month. In the event of delay in payment, interest is chargeable @ 10% p.a. from the agent. The
company has not realized interest from the agent in the past. For the year ended 31 st March, 2017
interest due from agent (because of delay in payment) amounts to Rs. 5 lakhs. The accountant of
Ruby Ltd. booked Rs. 5 lakhs as interest income in the year ended 31 st March, 2017.
Examine and discuss the contention of the accountant with reference to AS 9 “Revenue
Recognition”.
(b) EXOX Ltd. is in the process of finalising its accounts for the year ended 31 st March, 2017. The
company seeks your advice on the following:
(i) The Company’s sales tax assessment for assessment year 2014-15 has been completed on
14th February, 2017 with a demand of Rs. 2.76 crore. The company paid the entire due under
protest without prejudice to its right of appeal. The Company files its appeal before the
appellate authority wherein the grounds of appeal cover tax on additions made in the
assessment order for a sum of 2.10 crore.
(ii) The Company has entered into a wage agreement in May, 2017 whereby the labour union
has accepted a revision in wage from June, 2016. The agreement provided that the hike till
May, 2017 will not be paid to the employees but will be settled to them at the ti me of
retirement. The company agrees to deposit the arrears in Government Bonds by
September, 2017.
You required to examine and give suggestions in line with the relevant Accounting Standards.
(c) A Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of
Rs. 200 lakhs. Given below is the pattern of expected production and expected operating cash
inflow:
Year Production in bottles (in lakhs) Net operating cash flow (Rs. in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
1

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 8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory management and
handling method.
You are required to determine the amortization method in line with AS 26.
(d) ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being Rs. 10,00,000. The economic
life of the machine as well as the lease term is 4 years. At the end of each year, ABC Ltd. pays
Rs. 3,50,000. The lessee has guaranteed a residual value of Rs. 50,000 on expiry of the lease to
the lessor. However, XYZ Ltd. estimates that the residential value of the machinery will be
Rs. 35,000 only. The implicit rate of return is 16% and PV factors at 16% for year 1, year 2, year 3
and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively.
You are required to calculate the value of machinery to be considered by ABC Ltd. and the finance
charges for each year. (4 parts x 5 Marks = 20 Marks)
2. (a) Z Limited came up with an issue of 60,00,000 equity shares of Rs. 10 each at par. 15,00,000 shares
were issued to the promoters and the balance offered to the public was underwritten by three
underwriters D, E and F - equally with firm underwriting of 1,40,000 shares each, Subscriptions
totalled 38,91,000 shares including the marked forms which were:
D 12,75,000 shares
E 13,50,000 shares
F 10,50,000 shares
The underwriters had applied for the number of shares covered by firm underwriting. The amounts
payable on application and allotment were Rs. 2.50 and Rs. 2.00 respectively. The agreed
commission was 5%.
You are required to give journal entries for -
(a) The allotment of shares to the underwriters
(b) The commission due to each of them and
(c) The net cash paid and or received.
Note: Unmarked applications are to be credited to underwriters equally. Benefit of firm underwriting
is given to individual underwriter.
(b) SMM Ltd. has the following capital structure as on 31 st March, 2017: Rs. in crore
Particulars Situation Situation
(i) Equity share capital (shares of Rs. 10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory Reserve) 320 320
(iii) Loan Funds 3,200 6,000

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 The company has offered buy back price of Rs. 30 per equity share. You are required to calculate
maximum permissible number of equity shares that can be bought back in both situations and also
required to pass necessary Journal Entries. (10 + 10 = 20 Marks)
3. (a) The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31-3-20X1:
Liabilities P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Equity Share Capital (Fully paid shares of Rs. 10 each) 15,000 6,000
Securities Premium 3,000 –
Foreign Project Reserve – 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures – 1,000
Trade payables 1,200 463
Provisions 1,830 702
33,400 12,500

Assets P Ltd. V Ltd.

(Rs. in lakhs) (Rs. in lakhs)
Land and Buildings 6,000 –
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Inventory 7,862 4,041
Trade receivables 2,120 1,100
Cash at Bank 1,114 609
Cost of Issue of Debentures — 50
33,400 12,500
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.
On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was agreed
that in discharge of consideration for the business P Ltd. would allot three fully paid equity shares
of Rs. 10 each at par for every two shares held in V Ltd. It was also agreed that 12% debentures
in V Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination.
Details of trade receivables and trade payables as under:
Assets P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Trade payables
Bills Payable 120 -
Creditors 1,080 463
1,200 463

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 Trade receivables
Debtors 2,120 1,020
Bills Receivable — 80
2,120 1,100
Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.
You are required to:
(i) Prepare journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger considering that the cost of
issue of debentures shown in the balance sheet of the V Ltd. company is not transferred to
the P Ltd. company.
(b) XYZ Limited is being would up by the tribunal. All the assets of the company have been charged
to the company’s bankers to whom the company owes Rs. 5 crores. The company owes following
amounts to others:
Dues to workers – Rs. 1,25,00,000
Taxes Payable to Government – Rs. 30,00,000
Unsecured Creditors – Rs. 60,00,000
You are required to compute with the reference to the provision of the Companies Act, 2013 the
amount each kind of creditors is likely to get if the amount realized by the official liquidator from
the secured assets and available for distribution among creditors is only Rs. 4,00,00,000/-
(15 + 5 = 20 Marks)
4. (a) The following are the figures extracted from the books of TOP Bank Limited as on 31.3.2017.
Rs.
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank’s properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000

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 The following further information is given:
(i) A customer to whom a sum of Rs. 16 lakhs has been advanced has become insolvent and it
is expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs. 2,10,000 was found necessary by
the auditors.
(iii) Rebate on bills discounted on 31.3.2016 was Rs. 19,000 and on 31.3.2017 was Rs. 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide Rs. 9,00,000 for Income-tax.
(vi) Profit and Loss account opening balance was Nil as on 31.3.2016.
You are required to Prepare the Profit and Loss account of TOP Bank Limited for the year ended
31.3.2017.
(b) From the following particulars of M/s. Tsunami Marine Insurance Limited for the year ending
31st March, 2016, find out the
(i) Net Premium earned
(ii) Net Claims incurred
Direct Business Re- Insurance
(Rs.) lakhs (Rs.) lakhs
PREMIUM:
Received 4,400 376
Receivable -01.04.2015 220 18
Receivable -31.3.2016 189 16
Paid 305
Payable - 01.04.2015 14
Payable - 31.3.2016 9
CLAIMS:
Paid 3,450 277
Payable - 01.04.2015 45 8
Payable - 31.3.2016 48 6
Received 101
Receivable - 01.04.2015 20
Receivable - 31.3.2016 19
(16+ 4 = 20 Marks)
5. (a) Consider the following summarized balance sheets of subsidiary Neel Ltd.:
2015 2016 2015 2016
Rs. Rs. Rs. Rs.
Share-Capital Fixed Assets
Issued & subscribed Cost 1,60,000 1,60,000
2,500 equity shares Less: Accumulated
of Rs. 100 each 2,50,000 2,50,000 depreciation (24,000) (48,000)
Reserves & Surplus 1,36,000 1,12,000
5

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 Revenue reserves 1,43,000 3,57,000 Investments at cost
Current Liabilities & Current Assets: — 2,00,000
Provisions:
Trade Payables 2,45,000 2,47,000 Inventory 2,98,500 3,71,000
Bank overdraft — 85,000 Trade Receivables 2,97,000 4,45,500
Provision for taxation 1,55,000 2,15,000 Prepaid Expenses 36,000 24,000
Cash at Bank 25,500 1,500
7,93,000 11,54,000 7,93,000 11,54,000
Also consider the following information:
(i) Neel Ltd. is a subsidiary of Sky Ltd. Both the companies follow calendar year as the
accounting year.
(ii) Sky Ltd. values inventory on LIFO basis while Neel Ltd. used FIFO basis. To bring Neel Ltd.’s
values in line with those of Sky Ltd. its value of inventory is required to be reduced by Rs.
6,000 at the end of 2015 and Rs. 17,000 at the end of 2016.
(iii) Neel Ltd. deducts 1% from Trade Receivables as a general provision against doubtful debts.
(iv) Prepaid expenses in Neel Ltd. include advertising expenditure carried forward of
Rs. 30,000 in 2015 and Rs. 15,000 in 2016, being part of initial advertising expenditure of
Rs. 45,000 in 2015 which is being written off over three years. Similar amount of advertising
expenditure of Sky Ltd. has been fully written off in 2015.
You are required to restate the balance sheet of Neel Ltd. as on 31 st December, 2016 after
considering the above information, for the purpose of consolidation. Make the necessary
restatement which is necessary to make the accounting policies adopted by Sky Ltd. and Neel Ltd.
uniform.
(b) The summarized Balance Sheet of K Ltd. for the year ended on 31 st March, 2015, 2016 and 2017
are as follows:
(Rs. in thousands)
Liabilities 31.3.2015 31.3.2016 31.3.2017
1,60,000 equity shares of Rs. 10 each, fully paid 1,600 1,600 1,600
General reserve 1,200 1,400 1,600
Profit and Loss account 140 160 240
Trade Payables 600 800 1,000
3,540 3,960 4,440
Assets
Goodwill 1,000 800 600
Building and Machinery less, depreciation 1,400 1,600 1,600
Inventory 1,000 1,200 1,400
Trade Receivables 20 160 440
Bank balance 120 200 400
3,540 3,960 4,440

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 Additional information:
(a) Actual valuations were as under:
Building and machinery less, depreciation 1,800 2,000 2,200
Inventory 1,200 1,400 1,600
Net profit (including opening balance after
writing off depreciation, goodwill, tax
provision and transferred to general 420 620 820
reserve)
(b) Capital employed in the business at market value at the beginning of 2014-15 was
Rs. 36,60,000 which included the cost of goodwill. The normal annual return on average
capital employed in the line of business engaged by K Ltd. is 12½%.
(c) The balance in the general reserve on 1 st April, 2014 was Rs. 10 lakhs.
(d) The goodwill shown on 31.3.2015 was purchased on 1.4.2014 for Rs. 10 lakhs on which date
the balance in the Profit and Loss account was Rs. 1,20,000. Compute the average capital
employed in each year.
Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average method). Also find
out the total value of the business as on 31.3.2017. (12 Marks + 8 Marks = 20 Marks)
6. (a) A consumer goods producer has changed the product line as follows:
Dish washing Bar Clothes washing Bar
(Per month) (Per month)
January 2016 - September 2016 2,00,000 2,00,000
October 2016 - December 2016 1,00,000 3,00,000
January 2017 - March 2017 Nil 4,00,000
The company has enforced a gradual enforcement of change in product line on the basis of an
overall plan. The Board of Directors has passed a resolution in March 2016 to this effect. The
company follows calendar year as its accounting year. You are required to advise whether it should
it be treated as discontinuing operation as per AS 24?
(b) Explain, in brief, the investment valuation norms for traded securities in case of mutual funds as
per SEBI(Mutual fund) Regulations.
(c) Balance Sheets of X Ltd.
As on 31st March 2014 and 31st March 2015
(Rs. In lakhs)
Liabilities 31.3.14 31.3.15 Assets 31.3.14 31.3.15
Share Capital 18,00 18,00 Fixed assets 24,00 26,00
General Reserve 6,00 6,00 Investments 1,00 2,00
Profit &Loss A/c 6,80 9,40 Inventory 6,00 5,50
12% Debentures 2,00 2,00 Trade 3,00 3,50
receivables
18% Term Loan 3,00 3,20 Cash and Bank 4,00 3,40

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 Cash Credit 1,20 80
Trade payables 70 60
Tax Provision 30 40
38,00 40,40 38,00 40,40
Non-trade investments were 75% of the total investments. Find capital employed as on 31.3.14
and as on 31.3.15 and average capital employed.
(d) XYZ Ltd. purchased 80% shares of ABC Ltd. on 1 st January, 2016 for Rs. 2,80,000. The issued
capital of ABC Ltd., on 1 st January, 2016 was Rs. 2,00,000 and the balance in the Profit & Loss
Account was Rs. 1,20,000.
During the year ended 31 st December, 2016, ABC Ltd. earned a profit of Rs. 40,000 and at year
end, declared and paid a dividend of Rs. 60,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
What is the amount of minority interest as on 1 st January, 2016 and 31st December, 2016?
(4 Parts x 5 Marks = 20 Marks)

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 Test Series: April, 2019
MOCK TEST PAPER - 2
INTERMEDIATE (NEW): GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) As per AS 9 “Revenue Recognition”, “where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is
postponed to the extent of uncertainty involved. In such cases, the revenue is recognized only
when it is reasonably certain that the ultimate collection will be made”. In this case, the company
never realized interest for the delayed payments made by the agent. Hence, based on the past
experience, the realization of interest for the delayed payments by the agent is very much
uncertain. The interest should be recognized only if the ultimate collection is certain. Therefore,
the interest income of Rs. 5 lakhs should not be recognized in the books for the year ended 31 st
March, 2017. Thus the contention of accountant is incorrect. However, if the agents have agreed
to pay the amount of interest and there is an element of certainty associated with these receipts,
the accountant is correct regarding booking of Rs. 5 lakhs as interest amount.
(b) (i) Since the company is not appealing against the addition of Rs. 0.66 crore the same should
be provided for in its accounts for the year ended on 31st March, 2017. The amount paid
under protest can be kept under the heading ‘Loans & Advances’ and disclosed along with
the contingent liability of Rs. 2.10 crore.
(ii) The arrears for the period from June, 2016 to March, 2017 are required to be provided for in
the accounts of the company for the year ended on 31st March, 2017.
(c) As per AS 26 ‘Intangibles Assets’, the amortization method used should reflect the pattern in which
economic benefits are consumed by the enterprise. If pattern cannot be determined reliably, then
straight-line method should be used.
In the instant case, the pattern of economic benefit in the form of net operating cash flow vis-à-vis
production is determined reliably. A Ltd. should amortize the license fee of Rs. 200 lakhs as under:
Year Net operating Cash in Ratio Amortize amount (Rs. in lakhs)
flow (Rs.)
1 900 0.03 6
2 1,800 0.06 12
3 2,300 0.08 16
4 3,200 0.12 24
5 3,200 0.12 24
6 3,200 0.12 24
7 3,200 0.12 24
8 3,200 0.12 24
9 3,200 0.12 24
10 3,200 0.11 (bal.) 22
27,400 1.00 200

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 (d) As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability at the
inception of a finance lease. Such recognition should be at an amount equal to the fair value of the
leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the
present value of minimum lease payment from the standpoint of the lessee, the amount recorded
as an asset and liability should be the present value of minimum lease payments from the
standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is Rs. 10, 00,000 and the net present value of
minimum lease payments is Rs. 10, 07,020 (Refer working Note). As the present value of the
machine is more than the fair value of the machine, the machine and the corresponding liability will
be recorded at value of Rs.10,00,000.
Calculation of finance charges for each year
Year Finance Payment Reduction in Outstanding
charge outstanding liability liability
(Rs.) (Rs.) (Rs.) (Rs.)
1 year beginning
st - - - 10,00,000
End of 1st year 1,60,000 3,50,000 1,90,000 8,10,000
End of 2nd year 1,29,600 3,50,000 2,20,400 5,89,600
End of 3rd year 94,336 3,50,000 2,55,664 3,33,936
End of 4th year 53,430 3,50,000 2,96,570 37,366
Working Note:
Present value of minimum lease payments
Annual lease rental x PV factor
Rs. 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) Rs. 9,79 ,405
Present value of guaranteed residual value
Rs. 50,000 x (0.5523) Rs. 27,615
Rs. 10,07,020
2. (a) Z Ltd.
Journal Entries
Dr. Cr.
Rs. Rs.
Bank A/c Dr. 10,50,000
To Share Application A/c 10,50,000
(Application money received on firm applications for 140,000 shares
each @ Rs. 2.50 per share from D, E & F)
D Dr. 2,80,000
E Dr. 2,80,000
F Dr. 11,30,500
Share Application A/c Dr. 10,50,000

 The difference between this figure and guaranteed residual value (Rs. 50,000) is due to rounding off.
2

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 To Share Capital A/c 27,40,500
(Allotment of shares to underwriters - 1,40,000 to D; 1,40,000 to E
and 3,29,000 to F; application and allotment money credited to
share capital)
Underwriting Commission A/c Dr. 22,50,000
To D 7,50,000
To E 7,50,000
To F 7,50,000
(Amount of underwriting commission payable to D, E and F @ 5%
on the amount of shares underwritten.)
Bank A/c Dr. 3,80,500
To F 3,80,500
(Amount received from F on shares allotted less underwriting
commission)
D Dr. 4,70,000
E Dr. 4,70,000
To Bank A/c 9,40,000
(Amount paid to D & E in final settlement of underwriting commission
due less amount payable on shares allotted payable by them.)
Working Notes:
(1) Calculation of Liability of Underwriters
D E F
Gross Liability (No. of shares) 15,00,000 15,00,000 15,00,000
Less: Marked Applications (excluding
firm underwriting) (12,75,000) (13,50,000) (10,50,000)
2,25,000 1,50,000 4,50,000
Less: Unmarked Applications (equally) (72,000) (72,000) (72,000)
1,53,000 78,000 3,78,000
Less: Firm Underwriting (1,40,000) (1,40,000) (1,40,000)
13,000 (62,000) 2,38,000
Surplus of E distributed between D & F
equally (31,000) 62,000 (31,000)
(18,000) - 2,07,000
Surplus of D allocated to F totally 18,000 — (18,000)
Net Liability, excluding Firm Underwriting - - 1,89,000
Add: Firm underwriting 1,40,000 1,40,000 1,40,000
Total liability of underwriters 1,40,000 1,40,000 3,29,000
(2) Calculation of Amounts Payable by Underwriters
D E F
Liability (No. of shares) 1,40,000 1,40,000 3,29,000
Amount payable @ Rs. 4.50 per share 6,30,000 6,30,000 14,80,500
3

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 Less: Amount paid on Firm Applications of
1,40,000 each @ Rs. 2.50* (3,50,000) (3,50,000) (3,50,000)
Balance payable 2,80,000 2,80,000 11,30,500
Underwriting Commission Receivable 7,50,000 7,50,000 7,50,000
Amount Paid 4,70,000 4,70,000 —
Amount received by the Co. — — 3,80,500
* Underwriters had already paid the application money on these shares.
(b) Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
Particulars When loan fund is
Rs. 3,200 crores Rs. 6,000
crores
Shares Outstanding Test (W.N.1) 30 30
Resources Test (W.N.2) 24 24
Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be 24 Nil
bought back [least of the above]
Journal Entries for the Buy Back
(applicable only when loan fund is Rs.3,200 crores)
Rs. in crores
Debit Credit
(a) Equity share buyback account Dr. 720
To Bank account 720
(Being payment for buy back of 24 crores equity shares
of Rs. 10 each @ Rs. 30 per share)
(b) Equity share capital account Dr. 240
Premium Payable on buyback account Dr. 480
To Equity share buyback account 720
(Being cancellation of shares bought back)
Securities Premium account Dr. 400
General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buyback account 480
(Being Premium Payable on buyback account charged to
securities premium and general reserve/Profit & Loss
A/c)
(c) General Reserve / Profit & Loss A/c Dr. 240
To Capital redemption reserve account 240
(Being transfer of free reserves to capital redemption
reserve to the extent of nominal value of share capital
bought back out of redeemed through free reserves)
4

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 Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 120
25% of the shares outstanding 30
2. Resources Test
Particulars
Paid up capital (Rs. in crores) 1,200
Free reserves (Rs. in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (Rs. in crores) 2,880
25% of Shareholders fund (Rs. in crores) Rs. 720 crores
Buy back price per share Rs. 30
Number of shares that can be bought back 24 crores shares
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy
Back
Particulars When loan fund is
Rs. 3,200 crores Rs. 6,000 crores
(a) Loan funds (Rs.) 3,200 6,000
(b) Minimum equity to be maintained after buy 1,600 3,000
back in the ratio of 2:1 (Rs.) (a/2)
(c) Present equity shareholders fund (Rs.) 2,880 2,880
(d) Future equity shareholders fund (Rs.) (see 2,560 (2,880-320) N.A.
W.N.4)
(e) Maximum permitted buy back of Equity (Rs.) 960 Nil
[(d) – (b)]
(f) Maximum number of shares that can be 32 crore shares
bought back @ Rs. 30 per share Nil
As per the provisions of the Companies Act,
2013, company Qualifies Does not Qualify
3. (a) Books of P Ltd.
Journal Entries
Dr. Cr.
(Rs. in Lacs) (Rs. in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for consideration
settled as per agreement)
Plant and Machinery Dr. 5,000

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 Furniture & Fittings Dr. 1,700
Inventory Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 – 50*) 775
To Liability for 12% Debentures 1,000
To Creditors 463
To Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the form of equity
shares)
Profit & loss A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
Liability for 12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 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 P Ltd. as at 1st April, 20X1 (after merger)

Particulars Notes Rs. (in lakhs)
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 24,000
B Reserves and Surplus 2 16,654

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 2 Non-current liabilities
A Long-term borrowings 3 1,000
3 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 4 29,004
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,769
Notes to accounts
Rs.
1. Share Capital
Equity 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
2. Reserves and Surplus
General Reserve 9,700
Securities Premium 3,000
Foreign Project Reserve 310
Profit and Loss Account 3,644
Total 16,654
3. Long-term borrowings
Secured
13% Debentures 1,000
4. Tangible assets
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,004
Total 29,004

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 Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for every
two equity shares held in V Ltd.

Purchase consideration = Rs. 6,000 lacs × 3 = Rs. 9,000 lacs.

2
* Cost of issue of debenture adjusted against P & L Account of V Ltd.
(b) Section 326 of the Companies Act, 2013 talks about the overriding preferential payments to be
made from the amount realized from the assets to be distributed to various kind of creditors.
According to the proviso given in the section 326 the security of every secured creditor should be
deemed to be subject to a paripassu change in favor of the workman to the extent of their portion.
Amount Realied X Workman′ s Dues
Workman′ s Share to Secured Asset =
Workman′ s Dues + Secured Loan
Workman′ s Share to Secured Asset
4,00,00,000 X 1,25,00,000
=
1,25,00,000 + 5,00,00,000

1
4,00,00,000 X
5

Workman′ s Share to Secured Assets = 80,00,000

Amount available to secured creditor is Rs. 400 Lakhs – 80 Lakhs = 320 Lakhs
Hence, no amount is available for payment of government dues and unsecured creditors.
4. (a) TOP Bank Limited
Profit and Loss Account for the year ended 31 st March, 2017
Schedule Year ended
31.03.2017
(Rs. in ‘000s)
I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6,651.18
II. Expenditure
Interest expended 15 3259.92
Operating expenses 16 768.46
Provisions and contingencies (960+210+900) 2,070.00
Total 6,098.38
IIII. Profits/Losses
Net profit for the year 552.80
Profit brought forward nil
552.80

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 IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Balance carried over to balance sheet 414.60
552.80

Year ended
31.3. 2017
(Rs. in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5923.18
5923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304
II. Profit on sale of investments 320
III. Rent received 104
728
Schedule 15 – Interest Expended
I. Interests paid on deposits 3259.92

Schedule 16 – Operating Expenses

I. Payment to and provisions for employees 320
II. Rent and taxes 144
III. Depreciation on bank’s properties 48
IV. Director’s fee, allowances and expenses 48
V. Auditors’ fee 28
VI. Law (statutory) charges 44
VII. Postage and telegrams 96.46
VIII. Preliminary expenses 40
768.46
Working Note:
(Rs. in
‘000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2016 19.00
Less: Rebate on bills discounted on 31.3. 2017 ( 25.00)
5,923.18

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 (b) (i) Net Premium earned
Rs. In lakhs
Premium from direct business received 4,400
Add: Receivable as 31.03.16 189
Less: Receivable as on 01.04.2015 (220) 4,369
Add: Premium on re-insurance accepted 376
Add: Receivable as on 31.03.16 16
Less: Receivable as on 01.04.2015 (18) 374
4,743
Less: Premium on re-insurance ceded 305
Add: Payable as on 31.03.16 9
Less: Payable as on 01.04.15 (14) (300)
Net Premium earned 4,443
(ii) Net Claims incurred
Rs. In lakhs
Claims paid on direct business 3,450
Add: Reinsurance 277
Add: Reinsurance outstanding as 31.03.16 6
Less: Reinsurance outstanding as on 01.04.2015 (8) 275
Less: Claims Received from re-insurance 101
Add: Receivable as on 31.03.16 19
Less: Receivable as on 01.04.2015 (20) 100
3,625
Add: Outstanding direct claims at the end of the year 48
3,673
Less: Outstanding Claims at the beginning of the year (45)
Net Claims Incurred 3,628
5. (a) Adjusted revenue reserves of Neel Ltd.
Rs. Rs.
Revenue reserves as given 3,57,000
Add: Provision for doubtful debts [4,45,500 / 99 X 1] 4,500
3,61,500
Less: Reduction in value of Inventory 17,000
Advertising expenditure to be written off 15,000 (32,000)
Adjusted revenue reserve 3,29,500

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 Note: Since Neel Ltd. follows FIFO basis, it is assumed that opening inventory has been sold out
during the year 2015. Therefore, reduction in inventory would have been taken care of by sale
value. Hence no adjustment has been made for the same.
Restated Balance Sheet of Neel Ltd.
as at 31st December, 2016
Particulars Note No. (Rs.)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 2,50,000
(b) Reserves and Surplus 1 3,29,500
(2) Current Liabilities
(a) Short term borrowings 2 85,000
(b) Trade Payables 2,47,000
(c) Short-term provision 3 2,15,000
Total 11,26,500
II. Assets
(1) Non-current assets
(a) Fixed assets
Tangible assets 4 1,12,000
(b) Non-current Investment 2,00,000
(2) Current assets
(a) Inventories 3,54,000
(b) Trade Receivables 4,50,000
(c) Cash & Cash Equivalents 1,500
(d) Other current assets 5 9,000
Total 11,26,500

Notes to Accounts
Rs.
1. Reserves and Surplus
Revenue Reserve (refer computation of adjusted revenue 3,29,500
reserves of Neel Ltd)
2. Short term borrowings
Bank overdraft 85,000
3. Short-term provision
Provision for taxation 2,15,000
4. Tangible Assets
Cost 1,60,000
Less: Depreciation to date (48,000) 1,12,000

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 5. Other current assets
Prepaid expenses (After adjusting advertising expenditure to be 9,000
written off each year)
(b)
Total value of business Rs.
Total net Asset as on 31.3.2017 42,40,000
Less: Goodwill as per Balance Sheet (6,00,000)
Add: Goodwill as calculated in Working Note 2 20,56,250
Value of Business 56,96,250
Working Notes:
1. Capital Employed at the end of each year
31.3.2015 31.3.2016 31.3.2017
Rs. Rs. Rs.
Goodwill 10,00,000 8,00,000 6,00,000
Building and Machinery (Revaluation) 18,00,000 20,00,000 22,00,000
Inventory (Revalued) 12,00,000 14,00,000 16,00,000
Trade Receivables 20,000 1,60,000 4,40,000
Bank Balance 1,20,000 2,00,000 4,00,000
Total Assets 41,40,000 45,60,000 52,40,000
Less: Trade Payables (6,00,000) (8,00,000) (10,00,000)
Closing Capital 35,40,000 37,60,000 42,40,000
Add: Opening Capital 36,60,000 35,40,000 37,60,000
Total 72,00,000 73,00,000 80,00,000
Average Capital 36,00,000 36,50,000 40,00,000
Since the goodwill has been purchased, it is taken as a part of Capital employed.
2. Valuation of Goodwill
(i) Future Maintainable Profit 31.3.2015 31.3.2016 31.3.2017
Net Profit as given 4,20,000 6,20,000 8,20,000
Less: Opening Balance (1,20,000) (1,40,000) (1,60,000)
Adjustment for Valuation of Opening - (2,00,000) (2,00,000)
Inventory
Add: Adjustment for Valuation of closing 2,00,000 2,00,000 2,00,000
inventory
Goodwill written off - 2,00,000 2,00,000
Transferred to General Reserve 2,00,000 2,00,000 2,00,000
Future Maintainable Profit 7,00,000 8,80,000 10,60,000
Less: 12.50% Normal Return (4,50,000) (4,56,250) (5,00,000)
(ii) Super Profit 2,50,000 4,23,750 5,60,000
(iii) Average Super Profit = Rs. (2,50,000+4,23,750+5,60,000) ÷3 = Rs. 4,11,250
(iv) Value of Goodwill at five years’ purchase= Rs. 4,11250 × 5 = Rs. 20,56,250.

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6. (a) As per AS 24 ‘Discontinuing Operations’, a discontinuing operation is a component of an enterprise:
(i) that the enterprise, pursuant to a single plan, is:
(1) disposing of substantially in its entirety,
(2) disposing of piecemeal, or
(3) terminating through abandonment; and
(ii) that represents a separate major line of business or geographical area of operations; and
(iii) that can be distinguished operationally and for financial reporting purposes.
As per provisions of the standard, business enterprises frequently close facilities, abandon
products or even product lines, and change the size of their work force in response to market
forces. While those kinds of terminations generally are not, in themselves, discontinuing
operations, they can occur in connection with a discontinuing operation. Examples of activities that
do not necessarily satisfy criterion of discontinuing operation are gradual or evolutionary phasing
out of a product line or class of service, discontinuing, even if relatively abruptly, several products
within an ongoing line of business;
In the given case, the company has enforced a gradual enforcement of change in product line and
does not represent a separate major line of business and hence is not a discontinued operation.
If it were a discontinuing operation, the initial disclosure event is the occurrence of one of the
following, whichever occurs earlier:
(i) the enterprise has entered into a binding sale agreem ent for substantially all of the assets
attributable to the discontinuing operation; or
(ii) the enterprises board of directors or similar governing body has both approved a detailed, formal
plan for discontinuance and made an announcement of the plan.
(b) Eight Schedule of the SEBI (Mutual Fund) Regulations, 1996 states the Investment Valuation
Norms. NAV of a scheme is determined by dividing the net assets of the scheme by the number
of outstanding units on the valuation date.
Traded Securities:-
(i) The securities shall be valued at the last quoted closing price on the recognized stock
exchange.
(ii) When the securities are traded on more than one recognised stock exchange, the securities
shall be valued at the last quoted closing price on the stoc k exchange where the security is
principally traded. It would be left to the asset management company to select the appropriate
stock exchange, but the reasons for the selection should be recorded in writing. There should
however be no objection for all scrips being valued at the prices quoted on the stock exchange
where a majority in value of the investments is principally traded.
(iii) Once a stock exchange has been selected for valuation of a particular security, reasons for
change of the exchange shall be recorded in writing by the asset management company.
(iv) When on a particular valuation day, a security has not been traded on the selected stock
exchange, the value at which it is traded on another stock exchange may be used.
(v) When a security is not traded on any stock exchange on a particular valuation day, the value
at which it was traded on the selected stock exchange or any other stock exchange, as the
case may be, on the earliest previous day may be used provided such date is not more than
sixty days prior to the valuation date.

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 (c) Computation of capital employed
(Rs. in lakhs)
31.3.14 31.3.15
Total Assets as per
Balance Sheet 38,00 40,40

Less: Non-trade Investments (75) (1,50)

37,25 38,90
Less: Outside Liabilities:
12% Debentures 2,00 2,00
18% Term Loan 3,00 3,20
Cash Credit 1,20 80
Trade payables 70 60
Tax Provision 30 7,20 40 7,00
Capital employed 30,05 31,90
30,05 lakhs+31,90 lakhs
Average capital employed = = Rs. 3,097.5 lakhs.
2
(d) Total dividend paid = Rs. 60,000
Out of post-acquisition profit = Rs. 40,000
Out of pre-acquisition profit = Rs. 20,000
Hence, 2/3rd of dividend received by XYZ will be credited to P & L and 1/3rd will be credited to
Investment.
XYZ Ltd.’s share of dividend = Rs. 60,000 X 80% = Rs. 48,000
In the books of XYZ Ltd.
Rs. Rs.
Bank A/c Dr. 48,000
To Profit & Loss A/c 32,000
To Investments in ABC Ltd. 16,000
(Dividend received from ABC Ltd. 1/3 credited to investment A/c
being out of capital profits – as explained above)
Goodwill on Consolidation: Rs.
Cost of shares less dividend out of capital profits 2,64,000
Less: Face value of capital i.e. 80% of capital 1,60,000
Add: Share of capital profits [1,20,000-20,000 (dividend portion 80,000 2,40,000
out of pre-acquisition profits)] X 80 %
Goodwill 24,000
Minority interest on: 64,000
1st January, 2016: 20% of Rs. 3,20,000 [2,00,000 + 1,20,000]
31st December, 2016: 20% of Rs. 3,00,000 [2,00,000 + 1,20,000 60,000
+ 40,000 – 60,000]

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