© The Institute of Chartered Accountants of India

PAPER – 5: ADVANCED ACCOUNTING
PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

For May, 2020 EXAMINATION
A. Applicable for May, 2020 Examination
I. Amendments in Schedule III (Division I) to the Companies Act, 2013
In exercise of the powers conferred by sub-section (1) of section 467 of the
Companies Act, 2013), the Central Government made the following amendments in
Division I of the Schedule III with effect from the date of publication of this notification
in the Official Gazette:
(A) under the heading “II Assets”, under sub-heading “Non-current assets”, for the
words “Fixed assets”, the words “Property, Plant and Equipment” shall be
substituted;
(B) in the “Notes”, under the heading “General Instructions for preparation of
Balance Sheet”, in paragraph 6,-
(I) under the heading “B. Reserves and Surplus”, in item (i), in sub- item (c), the
word “Reserve” shall be omitted;
(II) in clause W., for the words “fixed assets”, the words “Property, Plant and
Equipment” shall be substituted.
II. Amendment in AS 11 “The Effects of Changes in Foreign Exchange Rates”
In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of
the Companies Act, 1956, the Central Government, in consultation with National
Advisory Committee on Accounting Standards, hereby made the amendment in the
Companies (Accounting Standards) Rules, 2006, in the "ANNEXURE", under the
heading "ACCOUNTING STANDARDS" under "AS 11 on The Effects of Changes in
Foreign Exchange Rates", for the paragraph 32, the following paragraph shall be
substituted, namely :-
"32. An enterprise may dispose of its interest in a non-integral foreign operation
through sale, liquidation, repayment of share capital, or abandonment of all, or part
of, that operation. The payment of a dividend forms part of a disposal only when it
constitutes a return of the investment. Remittance from a non-integral foreign
operation by way of repatriation of accumulated profits does not form part of a
disposal unless it constitutes return of the investment. In the case of a partial disposal,
only the proportionate share of the related accumulated exchange differences is
included in the gain or loss. A write-down of the carrying amount of a non-integral
foreign operation does not constitute a partial disposal. Accordingly, no part of the
deferred foreign exchange gain or loss is recognised at the time of a write -down".
© The Institute of Chartered Accountants of India

2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2020
III. Amendments made by MCA in the Companies (Accounting Standards) Rules,

2006
Amendments made by MCA on 30.3.2016 in the Companies (Accounting Standards)
Rules, 2006 have been made applicable for May, 2020examination.
MCA has issued Companies (Accounting Standards) Amendment Rules, 2016 to
amend Companies (Accounting Standards) Rules, 2006 by incorporating the
references of the Companies Act, 2013, wherever applicable. Also, the Accounting
Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified in these
Rules will substitute the corresponding Accounting Standards with the same number
as specified in Companies (Accounting Standards) Rules, 2006.
Following table summarizes the changes made by the Companies (Accounting
Standards) Amendment Rules, 2016 vis a vis the Companies (Accounting Standards)
Rules, 2006 in the accounting standards relevant for Paper 5:
Name of Para no. As per the As per the Implication
the Companies Companies
standard (Accounting (Accounting
Standards) Rules, Standards)
2006 Amendment
Rules, 2016
AS 4 Footnote Pursuant to AS 29, All paragraphs of Footnote has
to AS 4 Provisions, this Standard that been modified.
Contingent Liabilities deal with
and Contingent contingencies are
Assets, becoming applicable only to
mandatory in respect the extent not
of accounting periods covered by other
commencing on or Accounting
after 1-4-2004, all Standards
paragraphs of this prescribed by the
Standard that deal Central
with contingencies Government. For
(viz. paragraphs 1(a), example, the
2, 3.1, 4 (4.1 to 4.4), 5 impairment of
(5.1 to 5.6), 6, 7 (7.1 to financial assets
7.3), 9.1 (relevant such as
portion), 9.2, 10, 11, impairment of
12 and 16) stand receivables
withdrawn except to (commonly known
the extent they deal as provision for
with impairment of bad and doubtful
assets not covered by

PAPER – 5 : ADVANCED ACCOUNTING 3
other Indian debts) is governed

Accounting by this Standard.
Standards. For
example, impairment
of receivables
(commonly referred to
as the provision for
bad and doubtful
debts), would
continue to be
covered by AS 4.
8.5 There are events There are events No liability for
which, although they which, although proposed
take place after the take place after the dividends
balance sheet date, balance sheet must be
are sometimes date, are created now.
reflected in the sometimes Such
financial statements reflected in the proposed
because of statutory financial dividends are
requirements or statements to be
because of their because of disclosed in
special nature. Such statutory the notes.
items include the requirements or
amount of dividend because of their
proposed or declared special nature. For
by the enterprise after example, if
the balance sheet dividends are
date in respect of the declared after the
period covered by the balance sheet date
financial statements. but before the
financial
statements are
approved for issue,
the dividends are
not recognized as
a liability at the
balance sheet date
because no
obligation exists at
that time unless a
statute requires
otherwise. Such
dividends are

disclosed in the
notes.
14 Dividends stated to be If an enterprise No liability for
in respect of the declares dividends proposed
period covered by the to shareholders dividends
financial statements, after the balance should be
which are proposed or sheet date, the created now.
declared by the enterprise should Such
enterprise after the not recognize proposed
balance sheet date those dividends as dividends are
but before approval of a liability at the to be
the financial balance sheet date disclosed in
statements, should be unless a statute the notes.
adjusted. requires otherwise.
Such dividends
should be
disclosed in notes.
AS 14 3(a) Amalgamation means Amalgamation Definition of
an amalgamation means an Amalgamation
pursuant to the amalgamation has been
provisions of the pursuant to the made broader
Companies Act, 1956 provisions of the by specifically
or any other statute Companies Act, including
which may be 2013 or any other ‘merger’.
applicable to statute which may
companies. be applicable to
companies and
includes ‘merger’.
18 and In such cases the In such cases the Correspondin
39 statutory reserves are statutory reserves g debit on
recorded in the are recorded in the account of
financial statements of financial statutory
the transferee statements of the reserve in
company by a transferee case of
corresponding debit to company by a amalgamation
a suitable account corresponding in the nature of
head (e.g., debit to a suitable purchase is
‘Amalgamation account head (e.g., termed as
Adjustment Account’) ‘Amalgamation ‘Amalgamatio
which is disclosed as Adjustment n Adjustment
a part of Reserve’) which is Reserve’ and
‘miscellaneous presented as a is now to be

expenditure’ or other separate line item. presented as a

similar category in the When the identity separate line
balance sheet. When of the statutory item since
the identity of the reserves is no there is not
statutory reserves is longer required to sub-heading
no longer required to be maintained, like
be maintained, both both the reserves ‘miscellaneou
the reserves and the and the aforesaid s expenditure’
aforesaid account are account are in Schedule III
reversed. reversed. to the
Companies
Act, 2013
AS 29 35 (An The amount of a The amount of a Now
extract) provision should not provision should discounting of
be discounted to its not be discounted provision for
present value. to its present value decommission
except in case of ing,
decommissioning, restoration
restoration and and similar
similar liabilities liabilities
that are recognized should be
as cost of Property, done as per
Plant and the pre-tax
Equipment. The discount rate
discount rate (or as mentioned
rates) should be a therein.
pre-tax rate (or
rates) that
reflect(s) current
market
assessments of
the time value of
money and the
risks specific to the
liability. The
discount rate(s)
should not reflect
risks for which
future cash flow
estimates have
been adjusted.
Periodic unwinding
of discount should

be recognized in
the statement of
profit and loss.
73 Transitional Discounting of
Provisions above existing
All the existing provisions and
provisions for similar
decommissioning, liabilities
restoration and should be
similar liabilities prospectively,
(see paragraph 35) with the
should be corresponding
discounted effect to the
prospectively, with related item of
the corresponding property, plant
effect to the related and
item of property, equipment.
plant and
equipment.
IV. Companies (Share Capital and Debentures) Amendment Rules, 2019 – reg.
Debenture Redemption Reserve
In exercise of the powers conferred by sub-sections (1) and (2) of section 469 of the
Companies Act, 2013 (18 of 2013), the Central Government made the Companies
(Share Capital and Debentures) Amendment Rules, 2019 dated 16 th August, 2019 to
amend the Companies (Share Capital and Debentures) Rules, 2014. As per the
Companies (Share Capital and Debentures) Amendment Rules, under principal rules,
in rule 18, for sub-rule (7), the following sub-rule shall be substituted, namely: -
“(7) The company shall comply with the requirements with regard to Debenture
Redemption Reserve (DRR) and investment or deposit of sum in respect of
debentures maturing during the year ending on the 31st day of March of next year, in
accordance with the conditions given below:-
(a) Debenture Redemption Reserve shall be created out of profits of the company
available for payment of dividend;
(b) the limits with respect to adequacy of Debenture Redemption Reserve and
investment or deposits, as the case may be, shall be as under;-
(i) Debenture Redemption Reserve is not required for debentures issued by
All India Financial Institutions regulated by Reserve Bank of India and
Banking Companies for both public as well as privately placed debentures;
(ii) For other Financial Institutions within the meaning of clause (72) of section

2 of the Companies Act, 2013, Debenture Redemption Reserve shall be as

applicable to Non –Banking Finance Companies registered with Reserve
Bank of India.
(iii) For listed companies (other than All India Financial Institutions and Banking
Companies as specified in sub-clause (i)), Debenture Redemption
Reserve is not required in the following cases - (A) in case of public issue
of debentures – A. for NBFCs registered with Reserve Bank of India under
section 45-IA of the RBI Act, 1934 and for Housing Finance Companies
registered with National Housing Bank; B. for other listed companies; (B)
in case of privately placed debentures, for companies specified in sub-
items A and B.
(iv) for unlisted companies, (other than All India Financial Institutions and
Banking Companies as specified in sub-clause (i)) -
(A) for NBFCs registered with RBI under section 45-IA of the Reserve
Bank of India Act, 1934 and for Housing Finance Companies
registered with National Housing Bank, Debenture Redemption
Reserve is not required in case of privately placed debentures.
(B) for other unlisted companies, the adequacy of Debenture Redemption
Reserve shall be ten percent. of the value of the outstanding
debentures;
(v) In case a company is covered in item (A) or item (B) of sub-clause (iii) of
clause (b) or item (B) of sub-clause (iv) of clause (b), it shall on or before
the 30th day of April in each year, in respect of debentures issued by a
company covered in item (A) or item (B) of sub clause (iii) of clause (b) or
item (B) of sub-clause (iv) of clause (b), invest or deposit, as the case may
be, a sum which shall not be less than fifteen per cent., of the amount of
its debentures maturing during the year, ending on the 31st day of March
of the next year in any one or more methods of investments or deposits as
provided in sub-clause (vi):
Provided that the amount remaining invested or deposited, as the case may
be, shall not at any time fall below fifteen percent. of the amount of the
debentures maturing during the year ending on 31st day of March of that
year.
(vi) for the purpose of sub-clause (v), the methods of deposits or investments,
as the case may be, are as follows:— (A) in deposits with any scheduled
bank, free from any charge or lien; (B) in unencumbered securities of the
Central Government or any State Government; (C) in unencumbered
securities mentioned in sub-clause (a) to (d) and (ee) of section 20 of the
Indian Trusts Act, 1882; (D) in unencumbered bonds issued by any other

company which is notified under sub-clause (f) of section 20 of the Indian

Trusts Act, 1882:
Provided that the amount invested or deposited as above shall not be used
for any purpose other than for redemption of debentures maturing during
the year referred above.
(c) in case of partly convertible debentures, Debenture Redemption Reserve shall
be created in respect of non-convertible portion of debenture issue in
accordance with this sub-rule.
(d) the amount credited to Debenture Redemption Reserve shall not be utilized by
the company except for the purpose of redemption of debentures.”
NOTE: Unit 3 of Chapter 4 on Redemption of Debentures of Intermediate Paper 5
Advanced Accounting Study Material has been revised. The revised unit has been
uploaded on the BoS Knowledge Portal of the Institute’s website. It is advised to ignore
the unit given in July, 2015 Edition (or prior Edition) of the Study Material and to refer the
updated unit uploaded on the BoS Knowledge Portal of the Institute’s website at the below
mentioned link: https://resource.cdn.icai.org/54231bos43539cp4-u3.pdf
V. Provisions of the Companies Act, 2013 related with Liquidation of Companies
As per Section 2 (94A) of the Companies Act, 2013, winding up means winding up
under this Act. As per section 270, the provision of Part I should apply to the winding
up of a company by the Tribunal under this Act.
Circumstances in which Company may be wound up by Tribunal [Section 271]
(a) The company has resolved that the company be wound up by the Tribunal.
(b) The company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order,
decency or morality
(c) The Registrar or any other person authorized by the Central Government by
notification under this Act can make an application to tribunal. The Tribunal is of
the opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful purpose or the
persons concerned in the formation or management of its affairs have been
guilty of fraud, misfeasance or misconduct in connection therewith and that it is
proper that the company be wound up.
(d) The company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding 5 consecutive financial
years.
(e) The Tribunal is of the opinion that it is just and equitable that the company should
be wound up.

A company may file petition for winding up under section 272 of the Companies Act,
2013. Petition for winding up to Tribunal cab neb made by the company, any
contributory or contributories, the registrar, any person autho rized by Central Govt.
in that behalf or Ii case affairs of the company have been conducted in a Fraudulent
manner, by the Central Government or a State Government.
Petition by Contributory
A contributory should be entitled to present a petition for the winding up of a company.
Shares in respect of which he is a contributory were either originally allotted to him
or have been held by him for at least 6 months during the 18 months immediately
before the commencement of the winding up and registered in his name or have
transferred to him through the death of a former holder.
Petition by Registrar
The Registrar should be entitled to present a petition for winding up under section
271, except on the grounds specified in section 271 (a) or (e). The Registrar should
obtain the previous sanction of the Central Government to the presentation of a
petition. The Central Government should not accord its sanction unless the company
has been given a reasonable opportunity of making representations.
Petition by Company
A petition presented by the company for winding up before the Tribunal should be
admitted only if accompanied by a statement of affairs in such form and in such
manner as may be prescribed.
A copy of the petition made under this section should also be fi led with the Registrar
and the Registrar should, without prejudice to any other provisions, submit his views
to the Tribunal within 60 days of receipt of such petition.
A company may be wound up voluntarily [Section 304 1],:
(a) if the company in general meeting passes a resolution requiring the company to
be wound up voluntarily as a result of the expiry of the period for its duration, if
any, fixed by its articles or on the occurrence of any event in respect of which
the articles provide that the company should be dissolved; or
(b) if the company passes a special resolution that the company be wound up.
Liquidators’ Statement of Account
In case of Compulsory wound-up, the Company Liquidator should keep proper books
in such manner, as may be prescribed, in which he should cause entries or minutes
1Applicableuntil 31 March 2017; with effect from 1 April 2017, Section 59 of the Insolvency and Bankruptcy Code,
2016 is applicable.

to be made of proceedings at meetings and of such other matters as may be

prescribed.
Any creditor or contributory may, subject to the control of the Tribunal, inspect any
such books, personally or through his agent.
While preparing the liquidator’s statement of account, receipts are shown in the
following order:
(a) Amount realized 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 can’t 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.
(f) 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) Liquidator’s expenses;
(c) 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);
(d) Creditors:
(i) Preferential (in actual practice, preferential creditors are paid before
debenture holders having a floating charge);
(ii) Unsecured creditors;
(e) Preferential shareholders (Arrears of dividends on cumulative preference shares
should be paid up to the date of commencement of winding up); and
(f) Equity shareholders.
Commencement of Winding Up by Tribunal [Section 357]
Where, before the presentation of a petition for the winding up of a company by the
Tribunal, a resolution has been passed by the company for voluntary winding up, the
winding up of the company should be deemed to have commenced at the time of the

passing of the resolution, and unless the Tribunal, on proof of fraud or mistake, thinks
fit to direct otherwise, all proceedings taken in the voluntary winding up should be
deemed to have been validly taken.
In any other case, the winding up of a company by the Tribunal should be deemed to
commence at the time of the presentation of the petition for the winding up.
Exclusion of Certain Time in Computing Period of Limitation [Section 358]
Notwithstanding anything in the Limitation Act, 1963, or in any other law for the time
being in force, in computing the period of limitation specified for any suit or application
in the name and on behalf of a company which is being wound up by the Tribunal, the
period from the date of commencement of the winding up of the company to a period
of one year immediately following the date of the winding up order should be
excluded.
Statement of Affairs
In case of winding up by Tribunal, Section 272(5) of the Companies Act, 2013
provides that a petition presented by the company for winding up before the Tribunal
shall be admitted only if accompanied by a statement of affairs in such form and in
such manner as may be prescribed.
In accordance with Section 274(1), where a petition for winding up is filed before the
Tribunal by any person other than the company, the Tribunal shall, if satisfied that a
prima facie case for winding up of the company is made out, by an order direct the
company to file its objections along with a statement of its affairs within thirty days of
the order in such form and in such manner as may be prescribed. The Tribunal may
allow a further period of thirty days in a situation of contingency or special
circumstances.
The broad lines on which the Statement of Affairs is prepared are the following —
(1) Include assets on which there is no fixed charge at the value they are expected
to realize. Students should note to include calls in arrear but not uncalled capital.
(2) Include assets on which there is a fixed charge. The amount expected to be
realized would be compared with the amount due to the creditor concerned. Any
surplus is to be extended to the other column. A deficit (the amount owed to
the creditor exceeding the amount realizable from the asset) is to be added to
unsecured creditors.
(3) The total of assets in point (1) and any surplus from assets mentioned in point
(2) is available for all the creditors (except secured creditors already covered by
specifically mortgaged assets).
(4) From the total assets available, the following should be deducted one by one: -
(i) Preferential creditors,

(ii) Debentures having a floating charge, and

(iii) Unsecured creditors.
If a minus balance emerges, there would be deficiency as regards creditors,
otherwise there would be a surplus.
(5) The amount of total paid-up capital (giving details of each class of shares)
should be added and the figure emerging will be deficiency (or surplus) as
regards members.
Note: Statement of affairs should accompany eight lists:
List A Full particulars of every description of property not specifically pledged and
included in any other list are to be set forth in this list.
List B Assets specifically pledged and creditors fully or partly secured.
List C Preferential creditors for rates, taxes, salaries, wages and otherwise.
List D List of debenture holders secured by a floating charge.
List E Unsecured creditors.
List F List of preference shareholders.
List G List of equity shareholders.
List H Deficiency or surplus account.
Deficiency Account
The official liquidator will specify a date for period (minimum three years) beginning
with the date on which information is supplied for preparation of an account to explain
the deficiency or surplus. On that date either assets would exceed capital plus
liabilities, that is, there would be a reserve or there would be a deficit or debit balance
in the Profit and Loss Account. The Deficiency account is divided into two parts:
1. The first part starts with the deficit (on the given date) and contains every item
that increases deficiency (or reduces surplus such as losses, dividends etc.).
2. The second part starts with the surplus on the given date and includes all profits.
If the total of the first exceeds that of the second, there would be a deficiency to the
extent of the difference, and if the total of the second part exceeds that of the first,
there would be a surplus.
Overriding Preferential Payments [Section 326]: In the winding up of a company
under this Act, the following debts should be paid in priority to all other debts:
a. workmen’s dues; and
b. where a secured creditor has realized a secured asset, so much of the debts
due to such secured creditor as could not be realized by him or the amount of

the workmen’s portion in his security (if payable under the law), whichever is
less, pari-passu with the workmen’s dues:
Explanation: For the purposes of this section, and section 327 -
a) Workmen, in relation to a company, means the employees of the company,
being workmen within the meaning of Section 2 (s) of the Industrial Disputes
Act, 1947;
b) Workmen’s dues, in relation to a company, means the aggregate of the
following sums due from the company to its workmen, namely:
(i) All wages or salary including wages payable;
(ii) all accrued holiday remuneration becoming payable to any workman
(iii) unless the company is being wound up voluntarily merely for the purposes
of reconstruction or amalgamation with another company or unless the
company has, at the commencement of the winding up, under such a
contract with insurers as is mentioned in section 14 of the Workmen's
Compensation Act, 1923 (19 of 1923), rights capable of being transferred
to and vested in the workmen, all amount due in respect of any
compensation or liability for compensation under the said Act in respect of
the death or disablement of any workman of the company;
(iv) all sums due to any workman from provident fund, pension fund, gratuity
fund or any other fund maintained by the company.
The following payment should be made in priority to secured creditors:
(i) All wages or salary including wages payable;
(ii) all accrued holiday remuneration becoming payable to any workman
(iii) If the above payments are payable for a period of 2 years preceding the
winding up order then the same shall be paid in priority to all other debts
(including debts due to secured creditors), within a period of 30 days of
sale of assets and shall be subject to such charge over the security of
secured creditors.
c) Workmen’s portion, in relation to the security of any secured creditor of a
company, means the amount which bears to the value of the security the same
proportion as the amount of the workmen’s dues bears to the aggregate of the
amount of workmen’s dues and the amount of the debts due to the secured
creditors.

Preferential Creditors
In a winding up there should be paid in priority to all other debts subject to the
provisions of section 326.
Preferential Creditors are as follows:
a. Government Taxes: All revenues, taxes, cess and rates due from the company
to the Central Government or a State Government or to a local authority at the
relevant date, and having become due and payable within the twelve months
immediately before that date;
b. Salary and Wages: All wages or salary including wages payable for time or
piece work and salary earned wholly or in part by way of commission of any
employee in respect of services rendered to the company and due for a period
not exceeding four months within the 12 months immediately before the relevant
date, subject to the condition that the amount payable under this clause to any
workman should not exceed such amount as may be notified;
c. Holiday Remuneration: All accrued holiday remuneration becoming payable to
any employee, or in the case of his death, to any other person claiming under
him, on the termination of his employment before, or by the winding up order,
or, as the case may be, the dissolution of the company;
d. Contribution under ESI Act: Unless the company is being wound up voluntarily
merely for the purposes of reconstruction or amalgamation with another
company, all amount due in respect of contributions payable during the period
of twelve months immediately before the relevant date by the company as the
employer of persons under the Employees’ State Insurance Act, 1948 or any
other law for the time being in force;
e. Compensation in respect of death of disablement: Unless the company has,
at the commencement of winding up, under such a contract with any insurer as
is mentioned in section 14 of the Workmen’s Compensation Act, 1923, rights
capable of being transferred to and vested in the workmen, all amount due in
respect of any compensation or liability for compensation under the said Act in
respect of the death or disablement of any employee of the company: Where
any compensation under the said Act is a weekly payment, the amount payable
under this clause should be taken to be the amount of the lump sum for which
such weekly payment could, if redeemable, be redeemed, if the employer has
made an application under that Act;
f. PF, Pension Fund or Gratuity Fund: All sums due to any employee from the
provident fund, the pension fund, the gratuity fund or any other fund for the
welfare of the employees, maintained by the company; and
g. Expenses of Investigation: The expenses of any investigation held in pursuance
of sections 213 and 216, in so far as they are payable by the company.

Where any advance payment has been made to any employee of a company on
account of wages or salary or accrued holiday remuneration himself by some
person for that purpose. The person by whom the money was advanced should
have a right of priority in respect of the money so advanced and paid-up to the
amount. The sum in respect of which the employee or other person in his right
would have been entitled to priority in the winding up has been reduced by
reason of the payment having been made.
The debts enumerated in this section should—
h. rank equally among themselves and be paid in full, unless the assets are
insufficient to meet them, in which case they should abate in equal proportions;
and
i. so far as the assets of the company available for payment to general creditors
are insufficient to meet them, have priority over the claims of holders of
debentures under any floating charge created by the company, and be paid
accordingly out of any property comprised in or subject to that charge.
The debts under this section should be discharged forthwith so far as the assets are
sufficient to meet them, subject to the retention of such sums as may be necessary
for the costs and expenses of the winding up.
In the event of a landlord or other person distraining or having distrained on any goods
or effects of the company within three months immediately before the date of a
winding up order, the debts to which priority is given under this section should be a
first charge on the goods or effects so distrained on or the proceeds of the sale
thereof: Provided that, in respect of any money paid under any such charge, the
landlord or other person should have the same rights of priority as the person to whom
the payment is made. Any remuneration in respect of a period of holiday or of absence
from work on medical grounds through sickness or other good cause should be
deemed to be wages in respect of services rendered to the company during that
period.
Explanations: For the purposes of this section,
• Accrued Holiday Remuneration includes, in relation to any person, all sums
which, by virtue either of his contract of employment or of any enactment
including any order made or direction given thereunder, are payable on acco unt
of the remuneration which would, in the ordinary course, have become payable
to him in respect of a period of holiday, had his employment with the company
continued until he became entitled to be allowed the holiday;
• Employee does not include a workman; and
• Relevant Date means in the case of a company being wound up by the Tribunal,
the date of appointment or first appointment of a provisional liquidator, or if no
such appointment was made, the date of the winding up order, unless, in either

case, the company had commenced to be wound up voluntarily before that date
under the Insolvency and Bankruptcy Code, 2016.
Effect of Floating Charge [Section 332]
Where a company is being wound up, a floating charge on the undertaking or property
of the company created within the 12 months immediately preceding the
commencement of the winding up, should be invalid unless it is proved that the
company immediately after the creation of the charge was solvent except for the
amount of any cash paid to the company at the time of and in consideration for or
subsequent to the creation of the charge together with interest on that amount at the
rate of 5 per cent per annum or such other rate as may be notified by the Central
Government in this behalf.
B List Contributories
(a) Persons: Shareholders who had 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 to pay off such Creditors as existed on the date of
transfer of shares. These Transferors are called as B List Contributories.
(b) Liability: Their liability is restricted to the amount not called up when the shares were
transferred. They cannot be called upon to pay more than the entire face value of the
share. For example, if Shares having Face Value ` 100 were paid up ` 60, the B List
Contributory can be called up to pay a maximum of ` 40 only.
(c) Conditions: Liability of B List Contributories will crystallize only (a) when the existing
assets available with the liquidator are not sufficient to cover the liabilities; (b) when
the existing shareholders fail to pay the amount due on the shares to the Liquidator.
VI Maintenance of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
In exercise of the powers conferred by sub-section (2A) of Section 24 read with
Section 51 and Section 56 of the Banking Regulation Act, 1949 (10 of 1949) and in
supersession of the notifications DBR.No.Ret.BC.14/12.02.001/2016-17 dated
October 13, 2016 BR.NDBR.No.Ret.BC.91/12.02.001/2017-18 dated October 04,
2017, the Reserve Bank hereby specifies that with effect from the dates given below,
every Scheduled Commercial Bank (including RRBs), Local Area Bank, Small
Finance Bank, Payments Bank, Primary (urban) co-operative bank and State and
central co-operative banks shall continue to maintain in India assets (referred to as
‘SLR assets’) the value of which shall not, at the close of business on any day, be
less than:
(i) 19.25 per cent from January 5, 2019
(ii) 19.00 per cent from April 13, 2019

(iii) 18.75 per cent from July 6, 2019

(iv) 18.50 per cent from October 12, 2019
(v) 18.25 per cent from January 4, 2020
(vi) 18.00 per cent from April 11, 2020
of their total net demand and time liabilities in India as on the last Friday of the second
preceding fortnight, valued in accordance with the method of valuation specified by
the Reserve Bank from time to time.
Cash Reserve Ratio (CRR)
The current Cash Reserve Ratio (CRR) is 4% of their Net Demand and Time Liabilities
(NDTL) with effect from the fortnight beginning February 09, 2013 vide circular
DBOD.No.Ret.BC.76 /12.01.001/2012-13 dated January 29, 2013. The Local Area
Banks shall also maintain CRR at 4.00 per cent of its net demand and time liabilities
from the fortnight beginning from February 09, 2013.
VII Sale of Securities held in Held to Maturity (HTM) Category
Accounting treatment
Investments by Primary (Urban) Co-operative Banks (UCBs) if securities acquired by
banks with the intention to hold them up to maturity will be classified under HTM
category. As per Circular no. RBI/2018-19/205 DCBR.BPD. (PCB)
Cir.No.10/16.20.000/2018-19 dated 10 th June, 2019, it is reiterated that UCBs are not
expected to resort to sale of securities held in HTM category. However, if due to
liquidity stress, UCBs are required to sell securities from HTM portfolio, they may do
so with the permission of their Board of Directors and rationale for such sale may be
clearly recorded. Profit on sale of investments from HTM category shall first be taken
to the Profit and Loss account and, thereafter, the amount of such profit shall be
appropriated to ‘Capital Reserve’ from the net profit for the year after statutory
appropriations. Loss on sale shall be recognized in the Profit and Loss account in the
year of sale.
Prudential Norms for Classification, Valuation and Operation of Investment Portfolio
by Banks
As per Circular no. RBI/2018-19/204 DBR.No.BP.BC.46/21.04.141/2018-19 dated
10th June, 2019 (referring to RBI circular DBR No BP.BC.6/21.04.141/2015 -16 dated
July 1, 2015 advising banks that if the value of sales and transfer of securities to /
from HTM category exceeds 5 per cent of the book value of investments held in HTM
category at the beginning of the year) banks should disclose the market value of the
investments held in the HTM category and indicate the excess of book value over
market value for which provision is not made. Apart from transactions that are already
exempted from inclusion in the 5 per cent cap, it has been decided that repurchase

of State Development Loans (SDLs) by the concerned state government shall also be
exempted.
VIII Relevant Provisions of the Insurance Act [updated as per the Insurance
(Amendment) Act, 2015]
The provisions of sections 10 and 11 have been modified vide the Insurance Laws
(Amendment) Act, 2015. These amendments have necessitated changes to the
IRDA (Preparation of Financial Statements and Auditors' Report of Insurance
Companies) Regulations 2002. The significant provisions are as follows:
(1) Forms for final accounts [Section 11(1)]. Every insurer, on or after the date of
the commencement of the Insurance Laws (Amendment) Act, 2015, in respect
of insurance business transacted by him and in respect of his shareholders'
funds, should, at the expiration of each financial year, prepare with reference to
that year, balance sheet, a profit and loss account, a separate account of
receipts and payments, a revenue account in accordance with the regulations
as may be specified.
(2) Audit [Section 12]: The balance sheet, profit and loss account, revenue account
and profit and loss appropriation account of every insurer, in respect of all
insurance business transacted by him, should, unless they are subject to audit
under the Companies Act, 2013, be audited annually by an auditor, and the
auditor should in the audit of all such accounts have the powers of, exercise the
functions vested in, and discharge the duties and be subject to the liabilities and
penalties imposed on, auditors of companies by Section 147 of the Companies
Act, 2013.
(3) Register of policies [Section 14(1)]: Every insurer, in respect of all business
transacted by him, should maintain— (a) a record of policies, in which should be
entered, in respect of every policy issued by the insurer, the name and address
of the policyholder, the date when the policy was effected and a record of any
transfer, assignment or nomination of which the insurer has notice; (b) a rec ord
of claims, every claim made together with the date of the claim, the name and
address of the claimant and the date on which the claim was discharged, or, in
the case of a claim which is rejected, the date of rejection and the grounds
thereof; and (c) a record of policies and claims in accordance with clauses (a)
and (b) may be maintained in any such form, including electronic mode, as may
be specified by the regulations made under this Act.
(4) Approved investments (Section 27B(1)): A company carrying on general
insurance business must invest its funds only in approved securities listed in this
section.

(5) Payment of commission to authorized agents (Section 40(1)): As per the

Insurance (Amendment) Act 2015, no person should, pay or contract to pay any
remuneration or reward, whether by way of commission or otherwise for
soliciting or procuring insurance business in India to any person except an
insurance agent or an intermediary or insurance intermediary in such manner as
may be specified by the regulations.
(6) Limit on expenditure (Sections 40B and 40C): As per the Insurance
(Amendment) Act 2015 No insurer should, in respect of insurance business
transacted by him in India, spend as expenses of management in any financial
year any amount exceeding the amount as may be specified by the regulations
made under this Act and every insurer transacting insurance business in India
should furnish to the Authority, the details of expenses of management in such
manner and form as may be specified by the regulations made under this Act."
(7) Sufficiency of assets [Section 64VA(1)]: Every insurer and re-insurer should at
all times maintain an excess of value of assets over the amount of liabilities of,
not less than fifty per cent. of the amount of minimum capital as stated under
section 6 and arrived at in the manner specified by the regulations.
(8) Segregation of Policyholders' and Shareholders' Funds by the insurers carrying
on General Insurance, Health Insurance and Reinsurance business: Section 11
(2) of the Insurance Laws (Amendment) Act, 2015 mandates that every insurer
shall keep separate funds of shareholders and policyholders.
(9) Unearned Premium Reserve (UPR): A Reserve for Unearned Premium shall be
created as the amount representing that part of the premium written which is
attributable to, and is to be allocated to the succeeding accounting periods.
Such Reserves shall be computed as under:
a) Marine Hull: 100 percent of Net Written Premium during the preceding
twelve months;
b) Other Segments: Insurers have an option to create UPR either at 50
percent of Net Written Premium of preceding twelve months or on the basis
of 1/365th method on the unexpired period of the respective policies.
The insurers can follow either percentage or 1/365th method for computation of
UPR of the other segments. However, Insurers shall follow the method of
provisioning of UPR in a consistent manner. Any change in the method of
provisioning can be done only with the prior written approval of the Authority.
10. Recoupment of the Deficit: Every Insurer shall ensure that the policyholders'
fund is fully supported by the policyholders' investments shown in Schedule-SA.
Therefore, any deficit/shortfall in policyholders' investments arising out of the
loss in the Revenue Account or otherwise shall be recouped by transfer of
securities from the shareholders' investments to the policyholders' investments

on a half yearly basis. The valuation of such securities shall be in accordance

with the valuation norms as specified in the IRDA (Preparation of Financial
Statements and Auditors' Report) Regulations, 2002.
11. Investment made out of the policyholders' funds: Investment made out of the
policyholders' funds shall be shown in a separate schedule i.e., 8 A. The format
of the same is given as below:
Annexure
SCHEDULE- 8A
INVESTMENTS-POLICYHOLDERS
Particulars Current Year Previous Year

('000) ('000)
LONG TERM INVESTMENTS
1. Government securities and Government
guaranteed bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares - i) Equity; ii) Preference
(b) Mutual Funds
(c) Debentures/ Bonds
(d) Investment Property-Real Estate
(e) Other Securities (to be specified)
4. Investments in Infrastructure and Housing
Sub-Total
SHORT TERM INVESTMENTS
1. Government securities and Government
guaranteed bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares- i) Equity ii) Preference
(b) Mutual Funds
(c) Debentures/ Bonds
(d) Other Securities (to be specified)
4. Investments in Infrastructure and Housing
Sub-Total
Total

NOTE: Chapters 2, 4, 5 and 6 of the Intermediate Paper 5 Advanced Accounting Study Material have
been revised in line with the Companies (Accounting Standards) Amendment Rules, Banking and
IRDA Regulations. These revised chapters have been uploaded on the BoS Knowledge Portal of the
Institute’s website. The students of Intermediate level (old course) who have either July, 2015 Edition
or prior Edition of the Study Material are required to ignore these chapters given in that material and
are advised to read the updated chapters uploaded on the BoS Knowledge Portal of the Institute’s
website at the below mentioned link: https://www.icai.org/post.html?post_id=12433
B. Not applicable for May, 2020examination
Non-Applicability of Ind AS for May, 2020 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies. These
Ind AS are not applicable for May, 2020 Examination.
PART – II : QUESTIONS AND ANSWERS
QUESTIONS
Dissolution of partnership firm

1. Ram, Wazir and Adil give you the following Balance Sheet as on 31st March, 2019:
Liabilities ` Assets `
Ram’s Loan 15,000 Plant and Machinery at cost 30,000
Capital Accounts: Fixtures and Fittings 2,000
Ram 30,000 Stock 10,400
Wazir 10,000 Debtors 18,400
Adil 2,000 42,000 Less: Provision (400) 18,000
Sundry Creditors 17,800 Joint Life Policy 15,000
Loan on Hypothecation of Patents and Trademarks 10,000
Stock 6,200 Cash at Bank 8,000
Joint Life Policy Reserve 12,400
93,400 93,400
The partners shared profits and losses in the ratio of Ram 4/9, Wazir 2/9 and Adil 1/3. Firm
was dissolved on 31 st March, 2019 and you are given the following information:
(a) Adil had taken a loan from insurers for ` 5,000 on the security of Joint Life Policy.
The policy was surrendered and Insurers paid a sum of ` 10,200 after deducting
` 5,000 for Adil’s loan and ` 300 as interest thereon.

(b) One of the creditors took some of the patents whose book value was ` 6,000 at a
valuation of ` 4,500. The balance to that creditor was paid in cash.
(c) The firm had previously purchased some shares in a joint stock company and had
written them off on finding them useless. The shares were now found to be worth
` 3,000 and the loan creditor agreed to accept the shares at this value.
(d) The remaining assets realized the following amount: `
Plant and Machinery 17,000
Fixtures and Fittings 1,000
Stock 9,000
Debtors 16,500
Patents 50% of their book value
(e) The liabilities were paid and a total discount of ` 500 was allowed by the creditors.
(f) The expenses of realization amounted to ` 2,300.
You are required to prepare the Realization Account, Bank Account and Partners’ Capital
Accounts in columnar form. Also provide necessary working notes in your answer.
Conversion of Partnership firms into a company
2. The following is the Balance Sheet of M/s. Pratham and Kaushal as on 31 st March, 2019:
Liabilities ` Assets `
Capital Accounts: Machinery 54,000
Pratham 50,000 Furniture 5,000
Kaushal 30,000 Investment (Non-trading) 50,000
Reserves 20,000 Stock 20,000
Loan Account of Kaushal 15,000 Debtors 21,000
Creditors 40,000 Cash 5,000
1,55,000 1,55,000
It was agreed that Mr. Rohan is to be admitted for a fourth share in the future profits from
1st April, 2019. He is required to contribute cash towards goodwill and ` 15,000 towards
capital.
The following further information is furnished:
(a) Pratham & Kaushal share the profits in the ratio 3 : 2.
(b) Pratham was receiving salary of ` 750 p.m. from the very inception of the firm in 2012
in addition to share of profit.

(c) The future profit ratio between Pratham, Kaushal & Rohan will be 2:1:1. Pratham will
not get any salary after the admission of Rohan.
(d) It was agreed that the value of goodwill of the firm shall be determined on the basis
of 3 years’ purchase of the average profits from business of the last 5 years. The
particulars of the profits are as under:
Year ended Profit/(Loss)
31st March, 2015 25,000
31st March, 2016 12,500
31st March, 2017 (2,500)
31st March, 2018 35,000
31st March, 2019 30,000
The above Profits and Losses are after charging the Salary of Pratham. The Profit of
the year ended 31st March, 2015 included an extraneous profit of ` 40,000 and the
loss for the year ended 31st March, 2017 was on account of loss by strike to the
extent of ` 20,000.
(e) The cash trading profit for the year ended 31st March, 2020 was ` 50,000 before
depreciation.
(f) The partners had drawn each ` 1,000 p.m. as drawings.
(g) The value of other assets and liabilities as on 31st March, 2020 were as under:
`
Machinery (before depreciation) 60,000
Furniture (before depreciation) 10,000
Investment 50,000
Stock 15,000
Debtors 30,000
Creditors 20,000
(h) Provide depreciation @ 10% on Machinery and @ 5% on Furniture on the Closing
Balance and interest is accumulated @ 6% on Kaushal’s loan. The loan alongwith
interest would be repaid within next 12 months.
(i) Investments (non-trading) are held from inception of the firm and interest is received
@ 10% p.a.
(j) The partners applied for conversion of the firm into Karma Ltd., a Private Limited
Company. Certificate was received on 1 st April, 2020. They decided to convert
Capital accounts of the partners into share capital in the ratio of 2:1:1 on the basis of

a total Capital as on 31 st March, 2020. If necessary, partners have to subscribe to

fresh capital or withdraw.
Prepare the Profit and Loss Account of the firm for the year ended 31 st March, 2020 and
the Balance Sheet of the Company on 1 st April, 2020.
Sale of Partnership firm to a Company
3. Mohit, Neel and Om were Partners sharing Profits and Losses in the ratio of 5:3:2
respectively. The Trial Balance of the Firm on 31st March, 2019 was the following:
Particulars ` `
Machinery at Cost 2,00,000
Inventory 1,37,400
Trade receivables 1,24,000
Trade payables 1,69,400
Capital A/cs:
Mohit 1,36,000
Neel 90,000
Om 46,000
Drawing A/cs:
Mohit 50,000
Neel 46,000
Om 34,000
Depreciation on Machinery 80,000
Profit for the year ended 31st March 2,48,600
Cash at Bank 1,78,600
7,70,000 7,70,000
Interest on Capital Accounts at 10% p.a. on the amount standing to the credit of Partners'
Capital Account at the beginning of the year, was not provided before preparing the above
Trial Balance. On the above date, they formed a MNO Private Limited Company with an
Authorized Share Capital of 2,00,000 shares of ` 10 each to be divided in different classes
to take over the business of Partnership firm.
You are provided the following information:
1. Machinery is to be transferred at ` 1,40,000.
2. Shares in the Company are to be issued to the partners, at par, in such numbers, and
in such classes as will give the partners, by reason of their shareholdings alone, the

same rights as regards interest on capital and the sharing of profit and losses as they
had in the partnership.
3. Before transferring the business, the partners wish to draw from the partnership
profits to such an extent that the bank balance is reduced to ` 1,00,000. For this
purpose, sufficient profits of the year are to be retained in profit -sharing ratio.
4. Assets and liabilities except Machinery and Bank, are to be transferred at their book
value as on the above date.
You are required to prepare:
(a) Statement showing the workings of the Number of Shares of each class to be issued
by the company, to each partner.
(b) Capital Accounts showing all adjustments required to dissolve the Partnership.
(c) Balance Sheet of the Company immediately after acquiring the business of the
Partnership and Issuing of Shares.
Limited Liability Partnerships
4. Differentiate on ordinary partnership firm with an LLP (Limited Liability Partnership) in
respect of the following:
(1) Applicable Law
(2) Number of Partners
(3) Ownership of Assets
(4) Liability of Partners/Members
Accounting for ESOPs
5. On 1st April, 2019, a company offered 100 shares to each of its 400 employees at ` 25 per
share. The employees are given a month to accept the shares. The shares issued under
the plan shall be subject to lock-in to transfer for three years from the grant date i.e. 30th
April 2019. The market price of shares of the company on the grant date is ` 30 per share.
Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan
is estimated at ` 28 per share.
Up to 30th April, 2019, 50% of employees accepted the offer and paid ` 25 per share
purchased. Nominal value of each share is ` 10. You are required to record the issue of
shares in the books of the company under the aforesaid plan.
Buy Back of Securities
6. The following was the Balance Sheet of C Ltd. as on 31 st March ,2019:
Equity & Liabilities ` Lakhs Assets ` Lakhs
Share Capital: Fixed Assets 14,000

Equity shares of ` 10 each Fully 8,000 Investments 2,350

Paid Up
10% Redeemable Pref. Shares 2,500 Cash at Bank 2,300
of ` 10 each Fully Paid Up
Reserves & Surplus Other Current Assets 8,250
Capital Redemption Reserve 1,000
Securities Premium 800
General Reserve 6,000
Profit & Loss Account 300
Secured Loans:
9% Debentures 5,000
Current Liabilities:
Trade payables 2,300
Sundry Provisions 1,000
26,900 26,900
On 1st April, 2019 the Company redeemed all its Preference Shares at a Premium of 10%
and bought back 10% of its Equity Shares at ` 20 per Share. In order to make cash
available, the Company sold all the Investments for ` 2,500 lakhs.
You are required to pass journal entries for the above and prepare the Company’s Balance
sheet immediately after buyback of equity shares and redemption of preference shares .
Redemption of Debentures
7. The following balances appeared in the books of Lakshya Ltd. as on 1 -4-20X1:
(i) 10 % Debentures ` 37,50,000
(ii) Balance of DRR ` 1,25,000
(iii) DRR Investment 5,62,500 represented by 10% ` 5,625 Secured Bonds of the
Government of India of ` 100 each.
Annual contribution to the DRR was made on 31 st March every year. On 31-3-20X2,
balance at bank was ` 37,50,000 before receipt of interest. Interest on Debentures had
already been paid. The investment were realised at par for redemption of debentures at a
premium of 10% on the above date.
Lakshya Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC).
You are required to prepare Debenture Redemption Reserve Account, Debenture
Redemption Reserve Investment Account and Bank Account in the books of Lakshya Ltd.
for the year ended 31st March, 20X2.

Underwriting of Shares
8. X Ltd. issued 1,20,000 Equity Shares which were underwritten as follows:
A & Co 72,000 Equity Shares
B & Co. 30,000 Equity Shares
C& Co. 18,000 Equity Shares
The above mentioned underwriters made applications for ‘firm’ underwritings as follows:
B & Co 12,000 Equity Shares
The total applications excluding ‘firm’ underwriting, but including marked applications were
for 60,000 Equity Shares.
The marked Applications were as under:
B & Co. 15,000 Equity Shares
The underwriting contracts provide that underwriters be given credit for ‘firm’ applications
and that credit for unmarked applications be given in proportion to the shares underwritten.
You are required to show the allocation of liability. Workings will be considered as a part
of your answer.
Amalgamation of Companies
9. P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The
summarized balance sheets of both the companies on the date of amalgamation stood as
below:
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
` ` ` `
Equity Shares 8,20,000 3,20,000 Land & Building 4,50,000 3,40,000
(` 100 each)
9% Pref. Shares 3,80,000 2,80,000 Furniture & Fittings 1,00,000 50,000
(` 100 each)
8% Debentures 2,00,000 1,00,000 Plant & Machinery 6,20,000 4,50,000
General Reserve 1,50,000 50,000 Trade receivables 3,25,000 1,50,000
Profit & Loss a/c 3,52,000 2,05,000 Inventory 2,33,000 1,05,000
Unsecured Loan - 1,75,000 Cash at bank 2,08,000 1,75,000

Trade payables 88,000 1,60,000 Cash in hand 54,000 20,000

19,90,000 12,90,000 19,90,000 12,90,000
PQ Ltd. took over the assets and liabilities of both the companies at book value after
creating provision @ 5% on inventory and trade receivables respectively and depreciating
Furniture & Fittings by @ 10%, Plant and Machinery by @ 10%. The trade receivables of
P Ltd. include ` 25,000 due from Q Ltd.
PQ Ltd. will issue:
(i) 5 Preference shares of ` 20 each @ ` 18 paid up at a premium of ` 4 per share for
each pref. share held in both the companies.
(ii) 6 Equity shares of ` 20 each @ ` 18 paid up a premium of ` 4 per share for each
equity share held in both the companies.
(iii) 6% Debentures to discharge the 8% debentures of both the companies.
(iv) 20,000 new equity shares of ` 20 each for cash @ ` 18 paid up at a premium of ` 4
per share.
PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their
rights as per the intrinsic value of the shares of both the companies.
You are required to prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their
books.
Internal Reconstruction of a Company
10. The following is the Balance Sheet of Star Ltd. as on 31 st March, 2019:
`
A. Equity & Liabilities
1. Shareholders’ Fund:
(a) Share Capital:
9,000 7% Preference Shares of ` 100 each fully paid 9,00,000
10,000 Equity Shares of ` 100 each fully paid 10,00,000
(b) Reserve & Surplus:
Profit & Loss Account (2,00,000)
2. Non-current liabilities:
“A” 6% Debentures (Secured on Bombay Works) 3,00,000
“B” 6% Debentures (Secured on Chennai Works) 3,50,000
3. Current Liabilities and Provisions:
(a) Workmen’s Compensation Fund:

Bombay Works 10,000

Chennai Works 5,000
(b) Trade Payables 1,25,000
Total 24,90,000
B. Assets:
Non- current Assets:
1. Property, Plant & Equipment:
Bombay Works 9,50,000
Chennai Works 7,75,000
2. Investment:
Investments for Workman’s Compensation Fund 15,000
3. Current Assets:
(a) Inventories 4,50,000
(b) Trade Receivables 2,50,000
(c) Cash at Bank 50,000
24,90,000
A reconstruction scheme was prepared and duly approved. The salient features of the
scheme were as follows:
(i) Paid up value of 7% Preference Share to be reduced to ` 80, but the rate of dividend
being raised to 9%.
(ii) Paid up value of Equity Shares to be reduced to ` 10.
(iii) The directors to refund ` 50,000 of the fees previously received by them.
(iv) Debenture holders forego their interest of ` 26,000 which is included among the trade
payables.
(v) The preference shareholders agreed to waive their claims for preference share
dividend, which is in arrears for the last three years.
(vi) “B” 6% Debenture holders agreed to take over the Chennai Works at ` 4,25,000 and
to accept an allotment of 1,500 equity shares of ` 10 each at par, and upon their
forming a company called Zia Ltd. (to take over the Chennai Works) they allotted
9,000 equity shares of ` 10 each fully paid at par to Star Ltd.
(vii) The Chennai Worksmen’s compensation fund disclosed that there were actual
liabilities of ` 1,000 only. As a consequence, the investments of the fund were
realized to the extent of the balance. Entire investments were sold at a profit of 10%
on book value and the proceeds were utilized for part payment of the creditors.

(viii) Inventory was to be written off by ` 1,90,000 and a provision for doubtful debts is to
be made to the extent of ` 20,000.
(ix) Chennai works completely written off.
(x) Any balance of the Capital Reduction Account is to be applied as two-third to write off
the value of Bombay Works and one-third to Capital Reserve.
Pass necessary Journal Entries in the books of Star Ltd. after the scheme has been carried
into effect.
Liquidation of Company
11. Alpha Ltd. is under the process of liquidation. Liquidator is entitled to receive remuneration
at 2% on the assets realized, 3% on the amount distributed to Preferential Creditors and
3% on the payment made to Unsecured Creditors. The assets were realized for `
37,50,000 against which payment was made as follows:
Liquidation Expenses ` 37,500
Secured Creditors ` 15,00,000
Preferential Creditors ` 1,12,500
The amount due to Unsecured Creditors was ` 22,50,000. You are asked to calculate the
total Remuneration payable to Liquidator.
Calculation shall be made to the nearest multiple of a rupee.
Financial Statements of Insurance Companies
12. Prepare Revenue Account of M/s Jagan Insurance Co. engaged in marine insurance
business for the year ended 31st March, 2019:
Particulars Direct Business Re-insurance
(`) (`)
I. Premium
Received 3,60,000 38,000
Receivable - 1st April, 2018 10,000 1,600
- 31st March, 2019 16,000 1,800
Premium Paid - 24,000
Premium Payable - 1st April, 2018 - 1,000
- 31st March, 2019 - 2,200
II. Claims
Paid 1,54,000 14,000
Payable - 1st April, 2018 78,000 1,500

- 31st March, 2019 16,000 4,200

Received - 17,000
Receivable - 1st April, 2018 - 1,400
- 31st March, 2019 - 1,900
III. Commission
On insurance accepted 96,000 5,600
On insurance ceded - 8,000
Details of Other Expenses & Income is as below:
`
Establishment Expenses 30,000
Rent, rate & taxes 14,000
Printing & Stationery 1,800
Income from Dividend 18,000
Legal Expenses (Inclusive of ` 1,200 in connection with settlement of 2,000
claims)
Balance of fund as on 1 st April, 2018 was ` 3,00,000. Fund required to be maintained at
` 3,50,000 on 31.3.2019.
Financial Statements of Banking Companies
13. Anmol Bank Ltd. has a balance of ` 40 crores in “Rebate on bills discounted” account as
on 31st March, 2018. The Bank provides you the following information:
(i) During the financial year ending 31 st March, 2019 Anmol Bank Ltd. discounted bills of
exchange of ` 5,000 crores charging interest @ 14% and the average period of
discount being 146 days.
(ii) Bills of exchange of ` 500 crores were due for realization from the
acceptors/customers after 31 st March, 2019. The average period of outstanding after
31st March, 2019 being 73 days. These bills of exchange of ` 500 crores were
discounted charging interest @ 14% p.a.
You are requested to pass necessary Journal Entries in the books of Anmol Bank Ltd. for
the above transactions.
Departmental Accounts
14. (a) How will you allocate the following expenses among different departments:
(i) Rent, rates and taxes, repairs and maintenance, insurance of building;
(ii) Maintenance of capital assets

(iii) PF/ESI contributions

(iv) Carriage inward/ Discount received
(v) Lighting and Heating expenses
(b) There is transfer/sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to
Department Z at 20% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y
respectively.
Department Managers are entitled to 10% commission on net profit subjec t to
urealised profit on departmental sales being eliminated.
Departmental profits after charging Managers' commission, but before adjustment of
unrealised profit are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers' commission.
Branch Accounting
15. On 31st March, 2019 Chennai Branch submits the following Trial Balance to its Head Office
at Lucknow:
Debit Balances ` in lacs
Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6

Telephone, Postage and Stationery 3

Sundry Office Expenses 1
Stock on 1st April, 2018 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Additional Information:
Stock on 31st March, 2019 was valued at ` 62 lacs. On 29th March, 2019 the Head Office
dispatched goods costing ` 10 lacs to its branch. Branch did not receive these goods
before 1st April, 2019. Hence, the figure of goods received from Head Office does not
include these goods. Also the head office has charged the branch ` 1 lac for centralized
services for which the branch has not passed the entry.
You are required to : (i) pass Journal Entries in the books of the Branch to make the necessary
adjustments and (ii) prepare Final Accounts of the Branch including Balance Sheet.
Framework for Preparation and Presentation of Financial Statements
16. A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom -made
machine ` 1,00,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to
change its method of production. The new method will not require the machine ordered
and it will be scrapped after delivery. The expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in
the year 20X1-X2.
Problems based on Accounting Standards
AS 4 Contingencies and Events occurring after the Balance Sheet Date
17. (a) With reference to AS 4 "Contingencies and events occurring after the balance sheet
date", state whether the following events will be treated as contingencies, adjusting
events or non-adjusting events occurring after balance sheet date in case of a
company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the

year end. However, the assets are fully insured and the books have not been
approved by the Directors.
(ii) A suit against the company's advertisement was filed by a party on 10th April,
10 days after the year end claiming damages of ` 20 lakhs.
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies
(b) Explain whether the following will constitute a change in accounting policy or not as
per AS 5.
(i) Introduction of a formal retirement gratuity scheme by an employer in place of
ad hoc ex-gratia payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organistaion. Such employees will get
pension of ` 20,000 per month. Earlier there was no such scheme of pension
in the organization.
AS 11 The Effects of Changes in Foreign Exchange Rates
18. (a) (i) AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from
an American company M/s M&M Limited. The amount was payable after 6
months. The company entered into a forward contract on 1st January 2018 for
five months @ ` 62.50 per dollar. The exchange rate per dollar was as follows :
On 1st January, 2018 ` 60.75 per dollar
On 31st March, 2018 ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be
recognized in the books of AXE Limited for the year ending 2017-18, as per the
provisions of AS 11.
(ii) Assets and liabilities and income and expenditure items in respect of integral
foreign operations are translated into Indian rupees at the prevailing rate of
exchange at the end of the year. The resultant exchange differences in the case
of profit, is carried to other Liabilities Account and the Loss, if any, is charged to
revenue. You are required to comment in line with AS 11.
AS 12 Accounting for Government Grants
(b) How would you treat the following in the accounts in accordance with AS 12
'Government Grants'?
(i) ` 35 Lakhs received from the Local Authority for providing Medical facilities to
the employees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a

unit in a notified backward area.

(iii) ` 10 Lakhs Grant received from the Central Government on installation of anti -
pollution equipment.
AS 16 Borrowing Costs
19. (a) Govind Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.04.2018, to be
utilized as under:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery was
installed and ready for its intended use. Total interest on debentures for the financial
year ended 31.03.2019 was ` 12,00,000. During the year 2018-19, the company had
invested idle fund out of money raised from debentures in banks' fixed deposit and
had earned an interest of ` 3,00,000.
You are required to show the treatment of interest under Accounting Standard 16 and
also explain nature of assets.
AS 19 Leases
(b) ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being ` 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 ` 3,50,000. The lessee has guaranteed a residual value of
` 50,000 on expiry of the lease to the lessor. However, XYZ Ltd. estimates that the
residential value of the machinery will be ` 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.
AS 20 Earnings per Share
(c) From the following information, you are required to compute Basic and Diluted
Earnings Per Share (EPS) of M/s. XYZ Limited for the year ended 31 st March, 2019 :
Net Profit for the year after tax: ` 75,00,000
Number of Equity Shares of ` 10 each outstanding: ` 10,00,000
1,00,000, 8% Convertible Debentures of ` 100 each were issued by the Company at
the beginning of the year. 1,10,000 Equity Shares were supposed to be issued on
conversion. Consider rate of Income Tax as 30%.

AS 26 Intangible Assets
20. (a) A company acquired patent right for ` 1200 lakhs. The product life cycle has been
estimated to be 5 years and the amortization was decided in the ratio of estimated
future cash flows which are as under:
Year 1 2 3 4 5
Estimated future cash flows
(` in lakhs) 600 600 600 300 300
After 3 rd year, it was ascertained that the patent would have an estimated balance
future life of 3 years and the estimated cash flow after 5 th year is expected to be
` 150 lakhs. You are required to determine the amortization pattern under Accounting
Standard 26.
AS 29 Provisions, Contingent Liabilities and Contingent Assets
(b) With reference to AS 29, how would you deal with the following in the annual accounts
of the company at the Balance Sheet dates:
(i) An organization operates an offshore oilfield where its licensing agreement
requires it to remove the oil rig at the end of production and restore the seabed.
Ninety percent of the eventual costs relate to the removal of the oil rig and
restoration of damage caused by building it, and ten percent arise through the
extraction of oil. At the balance sheet date, the rig has been constructed but no
oil has been extracted.
(ii) During 2018-19 Ace Ltd. gives a guarantee of certain borrowings of Brew Ltd.,
whose financial condition at that time is sound. During 2019-20, the financial
condition of Brew Ltd. deteriorates and at 31 st Dec. 2019 it goes into Liquidation.
(Balance Sheet date 31-3-19)
SUGGESTED ANSWERS/HINTS
1. Realisation Account
` `
To Plant and machinery 30,000 By Provision for doubtful debts 400
To Fixtures and fittings 2,000 By Loan on hypothecation of stock 3,000
(W.N.3)
To Stock 10,400 By Creditors (W.N.2) 500
To Debtors 18,400 By Joint Life Policy A/c (W.N.4) 12,900

To Patents and 5,500 By Bank

Trademarks (W.N.5) Plant and machinery 17,000
To Bank 2,300 Fixtures and fittings 1,000
Stock 9,000
Debtors 16,500
Patents and Trademarks 2,000 45,500
By Partners’ Capital Accounts
Ram 2,800
Wazir 1,400
Adil 2,100 6,300
68,600 68,600
Bank Account
` `
To Balance b/d 8,000 By Adil’s Capital A/c- drawings 5,300
To Joint Life Policy 15,500 By Loan on hypothecation of stock 3,200
To Realisation A/c 45,500
To Adil’s Capital A/c 5,400 By Creditors 12,800
By Realisation A/c (expenses) 2,300
By Ram’s Loan A/c 15,000
By Ram’s Capital A/c 27,200
By Wazir’s Capital A/c 8,600
74,400 74,400
Partners’ Capital Accounts
Ram Wazir Adil Ram Wazir Adil
` ` ` ` ` `
To Bank 5,300 By Balance b/d 30,000 10,000
To Realisation
A/c 2,800 1,400 2,100 2,000
To Bank (Bal. By Bank A/c 5,400
Fig.) 27,200 8,600 (bal.fig.)
30,000 10,000 7,400 30,000 10,000 7,400

Working Notes:
1. Ram’s Loan Account
` `
To Bank A/c 15,000 By Balance b/d 15,000
15,000 15,000
2. Sundry Creditors Account
` `
To Patents and Trademarks 4,500 By Balance b/d 17,800
A/c
To Realisation A/c 500
To Bank A/c 12,800
17,800 17,800
3. Loan on Hypothecation of Stock Account
` `
To Realisation A/c 3,000 By Balance b/d 6,200
To Bank A/c 3,200
6,200 6,200
4. Joint Life Policy Account

` `
To Balance b/d 15,000 By Joint Life Policy Reserve 12,400
A/c
To Realisation A/c 12,900 By Bank A/c (10,200 + 5,300) 15,500
27,900 27,900
5. Patents and Trademarks Account
` `
To Balance b/d 10,000 By Creditors A/c 4,500
By Realisation A/c 1,500
By Realisation A/c (bal.fig.) 4,000*
10,000 10,000

2. M/s Pratham, Kaushal and Rohan

Profit and Loss Account for the year ending on 31 st March, 2020
` `
To Depreciation on Machinery 6,000 By Trading Profit 50,000
To Depreciation on furniture 500 By Interest on Investment 5,000
To Interest on Kaushal’s loan 900
To Net Profit to :
Pratham’s Capital A/c 23,800
Kaushal’s Capital A/c 11,900
Rohan’s Capital A/c 11,900 47,600
55,000 55,000
Balance Sheet of the Karma Pvt. Ltd. as on 1 st April, 2020
Notes No. `
I Equity and Liabilities
Shareholders’ funds
Share capital 1,41,600
Current liabilities
Short term borrowings 1 15,900
Trade payables 20,000
Total 1,77,500
II Assets
Non-current assets
Property, plant & Equipment 2 63,500
Non-current investments 50,000
Current assets
Inventories 15,000
Trade receivables 30,000
Cash and cash equivalents 19,000
Total 1,77,500

Notes to Accounts
`
1. Short term borrowings
Loan from Kaushal 15,900
2. PPE
Machinery 54,000
Furniture 9,500 63,500
Working Notes:
1. Calculation of goodwill
2014-15 2015-16 2016-17 2017-18 2018-19
` ` ` ` `
Profits/(Loss) 25,000 12,500 (2,500) 35,000 30,000
Adjustment for
extraneous profit
of 2014-15 and abnormal
loss of 2016-17 (40,000) - 20,000 — —
(15,000) 12,500 17,500 35,000 30,000
Add: Salary of Pratham 9,000 9,000 9,000 9,000 9,000
(750 x12)
(6,000) 21,500 26,500 44,000 39,000
Less: Interest on non-
trading investment (5,000) (5,000) (5,000) (5,000) (5,000)
(11,000) 16,500 21,500 39,000 34,000
Total Profit from 2015-16 1,11,000
to 2018-19
Less: Loss for 2014-15 (11,000)
1,00,000
Average Profit 20,000
Goodwill equal to 3 60,000
years’ purchase
Contribution from Rohan 15,000
for ¼ share

2. Calculation of sacrificing ratio of Partners Pratham and Kaushal on admission

of Rohan
Old share New share Sacrificing share Gaining share
Pratham 3/5 1/2 3 1 65 1
 = =
5 2 10 10
Kaushal 2/5 1/4 2 1 85 3
 = =
5 4 20 20
Rohan 1/4 1/4
3. Goodwill adjustment entry through Partners’ capital accounts (in their

sacrificing ratio of 2:3)
` `
Rohan’ s capital A/c Dr. 15,000
To Pratham’s capital A/c 6,000
To Kaushal’ s capital A/c 9,000
(Rohan’s share in goodwill adjusted through
Pratham and Kaushal)
4. Partners’ Capital Accounts
Pratham Kaushal Rohan Pratham Kaushal Rohan
` ` ` ` ` `
To Drawings 12,000 12,000 12,000 By Balance b/d 50,000 30,000 —
(1,000 x 12)
To Pratham 6,000 By General 12,000 8,000 —
Reserve
To Kaushal 9,000 By Rohan 6,000 9,000 —
To Balance 79,800 46,900 14,900 By Bank — — 30,000
c/d (15,000 +
15,000)
By Profit & 23,800 11,900 11,900
Loss A/c
91,800 58,900 41,900 91,800 58,900 41,900
5. Balance Sheet of the firm as on 31 st March, 2020

Liabilities ` ` Assets ` `
Pratham’s Capital 79,800 Machinery 60,000

Kaushal’s Capital 46,900 Less: Depreciation (6,000) 54,000

Rohan’s Capital 14,900 1,41,600 Furniture 10,000
Less: Depreciation (500) 9,500
Kaushal’s Loan 15,000 Investments 50,000
Add: Interest due 900 15,900 Stock-in-trade 15,000
Creditors 20,000 Debtors 30,000
Cash (W.N.6) 19,000
1,77,500 1,77,500
6. Cash balance as on 31.3.2020
` `
Cash trading profit 50,000
Add: Investment Interest 5,000
Add: Decrease in Stock Balance 5,000
60,000
Less: Increase in Debtors 9,000
Less: Decrease in Creditors 20,000 (29,000)
31,000
Add: Opening cash balance 5,000
Add: Cash brought in by Rohan 30,000 35,000
66,000
Less: Drawings (12,000 +12,000 +12,000) 36,000
Less: Additions to Machine (60,000 - 54,000) 6,000
Furniture (10,000 - 5,000) 5,000 (47,000)
Closing cash balance 19,000
7. Distribution of shares – Conversion into Company
`
Capital : Pratham 79,800
Kaushal 46,900
Rohan 14,900
Share Capital 1,41,600
Distribution of shares: Pratham (1/2) 70,800
Kaushal (1/4) 35,400
Rohan (1/4) 35,400

Pratham and Kaushal should withdraw capital of ` 9,000 (` 79,800 – ` 70,800) and
` 11,500 (` 46,900 – ` 35,400) respectively and Rohan should subscribe shares of
` 20,500 (` 35,400 – ` 14,900).
3. (a) Number of Shares to be issued to Partners
`
Assets: Machinery ` 1,40,000 + Inventory ` 1,37,400 +Trade 5,01,400
Receivable `1,24,000 + Bank ` 1,00,000
Less: Liabilities taken over (1,69,400)
Net Assets taken over (Purchase Consideration) 3,32,000
Classes of Shares to be issued : Mohit Neel Om Total

10% Preference Shares of ` 10 each 1,36,000 90,000 46,000 2,72,000
(to retain rights as to Interest on
Capital)
Balance in Equity Shares of ` 10 each 30,000 18,000 12,000 60,000
(3,32,000 -2,72,000) (issued in profit
sharing ratio)
1,66,000 1,08,000 58,000 3,32,000
(b) Partners’ Capital Accounts
Particulars Mohit Neel Om Particulars Mohit Neel Om
To Drawings 50,000 46,000 34,000 By balance b/d 1,36,000 90,000 46,000

To 10% Preference 1,36,000 90,000 46,000 By Interest on 13,600 9,000 4,600
share capital Capital
To Equity Shares 30,000 18,000 12,000 By profit for the 1,10,700 66,420 44,280
year 5:3:2
(W.N. 1)
To Bank – 54,300 17,420 6,880 By Machinery* 10,000 6,000 4,000
Additional A/c
drawings (W.N. 2)
Total 2,70,300 1,71,420 98,880 2,70,300 1,71,420 98,880
* Gain on Transfer of Machinery = ` 1,40,000 – (` 2,00,000-` 80,000) = ` 20,000 in

5:3:2 ratio.

(c) Balance sheet of MNO Ltd. as on 31 st March, 2019 (after Takeover of Firm)
Note no. `
I Equity and Liabilities:
(1) Shareholders Funds
Share Capital 1 3,32,000
(2) Current Liabilities
Trade Payables 1,69,400
Total 5,01,400
II Assets
(1) Non-Current Assets
Property, plant & equipment 1,40,000
(2) Current Assets:
(a) Inventories 1,37,400
(b) Trade Receivables 1,24,000
(c) Cash and Cash Equivalents 1,00,000
Total 5,01,400
Notes to Accounts
Particulars `
1. Shares capital
Authorised shares capital 20,00,000
Issued, Subscribed & paid up
6,000 Equity Shares of ` 10 each 60,000
27,200 10% Preference Shares capital of ` 10 each 2,72,000
(All above shares issued for consideration other than 3,32,000
cash, in takeover of partnership firm)
Working Note:
1. Profit & Loss Appropriation Account for the year ended 31 st March, 2019
Particulars ` ` Particulars `
To Interest on Capital: By Net Profit 2,48,600
Mohit [` 1,36,000 x 10%] 13,600 (given)
Neel [` 90,000 x 10%] 9,000
Om [` 46,000 x 10%] 4,600 27,200

To Profits transferred to
Capital in profit
sharing ratio 5:3:2
Mohit 1,10,700
Neel 66,420
Om 44,280 2,21,400
Total 2,48,600 2,48,600
2. Statement showing Additional Drawings in Cash
(a) Funds available for Drawings
Total Drawing of Partners (given) 1,30,000
Add: Further Funds available for Drawings (1,78,600-1,00,000) 78,600
2,08,600
Less: Interest on Capital (27,200)
Amount available for Additional Drawings 1,81,400
(b) Ascertainment of Additional Drawings
Particulars Mohit Neel Om
As per above statement ` 1,81,400 (in 90,700 54,420 36,280
profit sharing ratio)
Add: Interest 13,600 9,000 4,600
1,04,300 63,420 40,880
Less: Already drawn (50,000) (46,000) (34,000)
Additional Drawings 54,300 17,420 6,880
4. Distinction between an ordinary partnership firm and an LLP
Key Elements Partnerships LLPs
Applicable Law Indian Partnership Act 1932 The Limited Liability
Partnerships Act, 2008
Number of Minimum 2 and Maximum 20 Minimum 2 but no maximum limit
Partners (subject to 10 for banks)
Ownership of Firm cannot own any assets. The LLP as an independent
Assets The partners own the assets entity can own assets
of the firm.
Liability of Unlimited: Partners are Limited to the extent of their
Partners/ severally and jointly liable for contribution towards LLP except
Members actions of other partners and in case of intentional fraud or
the firm and their liability wrongful act of omission or
extends to personal assets. commission by a partner.

5. Fair value of an option = ` 28

Difference between Fair value and Issue Price =` 28 – ` 25 = 3.
Number of employees accepting the offer = 400 employees x 50% = 200 employees
Number of shares issued = 200 employees x 100 shares/employee = 20,000 shares
Employee Compensation Expenses recognized in 2019-20 =20,000 shares x ` 3 =
` 60,000
Securities Premium A/c = ` 28 – 10 = ` 18 per share = 20,000 x 18 = ` 3,60,000
Journal Entry
Date Particulars ` `
30.04.2019 Bank (20,000 shares x ` 25) Dr. 5,00,000
Employees compensation expense A/c Dr. 60,000
To Share Capital 2,00,000
To Securities Premium 3,60,000
(Being stock purchase option accepted by 200
employees for 100 shares each at ` 25 per
share on a Fair Value of ` 28 per share)
Note: Employees compensation expenses amounting ` 60,000 will ultimately be charged
to profit & loss account.
6. (i) Journal Entries in the books of C Ltd. (` in lakhs)
Particulars ` `
1 Bank A/c Dr. 2,500
To Investments A/c 2,350
To Profit and Loss A/c
(Being investment sold on profit for the purpose of buy- 150
back)
2 10% Redeemable Preference Share Capital A/c Dr. 2,500
Premium on Redemption of Preference Shares A/c Dr. 250
To Preference Shareholders A/c 2,750
(Being redemption of preference share capital at
premium of 10%)
3 Securities Premium A/c Dr. 250
To Premium on Redemption of Preference Shares 250
A/c
(Being premium on redemption of preference shares
adjusted through securities premium)

4 Equity Share Capital A/c Dr. 800

Premium on buyback Dr. 800
To Equity buy-back A/c 1,600
(Being Equity Share bought back, Share Capital
cancelled, and Premium on Buyback accounted for)
5 Securities Premium A/c (800-250) Dr. 550
General Reserve A/c 250
To Premium on Buyback A/c 800
(Being premium on buyback provided first out of
securities premium and the balance out of general
reserves.)
6 Preference Shareholders A/c 2,750
Equity buy-back A/c 1,600
To Bank A/c 4,350
(Being payment made to preference shareholders and
equity shareholders)
7 General Reserve Account 3,300
To Capital Redemption Reserve Account 3,300
(Being amount transferred to capital redemption
reserve account towards face value of preference
shares redeemed and equity shares bought back)
(ii) Balance Sheet of C Ltd. (after Redemption and Buyback) (` Lakhs)
Particulars Note No Amount
EQUITY AND LIABILITIES `
(I) Shareholders’ Funds:
(a) Share Capital 1 7,200
(b) Reserves and Surplus 2 7,200
(2) Non-Current Liabilities:
(a) Long Term Borrowings 3 5,000
(3) Current Liabilities:
(a) Trade payables 2,300
(b) Short Term Provisions 1,000
Total 22,700
(II) ASSETS
(1) Non-Current Assets

Property, Plant & Equipment 14,000

Current Assets:
(a) Cash and Cash equivalents (W N) 450
(b) Other Current Assets 8,250
22,700
Notes to Accounts
` in Lakhs
1. Share Capital
720 lakh Equity Shares of ` 10 each Fully Paid up
(80 lakh Equity Shares bought back) 7,200
2. Reserves and Surplus
General Reserve 6,000
Less: Adjustment for premium paid on buy (250)
back
Less: Transfer to CRR (3,300) 2,450
Capital Redemption Reserve 1,000
Add: Transfer due to buy-back of shares from 3,300
Gen. res. 4,300
Securities premium 800
Less: Adjustment for premium paid on redemption (250)
of preference shares
Less: Adjustment for premium paid on buy (550)
back -
Profit & Loss A/c 300
Add: Profit on sale of investment 150 450 7,200
3. Long-term borrowings
Secured
9 % Debentures 5,000
Working Note
Bank Account
Receipts Amount Payments Amount
(` Lakhs) (` Lakhs)
To balance b/d 2,300 By Preference 2,750
Shareholders A/c
To Investment A/c (sale 2,500 By Equity Shareholders 1,600
Proceeds) A/c

By Balance c/d
(Balancing figure) 450
4,800 4,800
7. Debenture Redemption Reserve Account
Date Particulars ` Date Particulars `
1st April, By Balance b/d 1,25,000
20X1
31st March, To General reserve 1st April, By Profit and loss
20X2 A/c note 1 (Refer 20X1 A/c (Refer Note 1)
Note 1) 3,75,000 2,50,000
3,75,000 3,75,000
10% Secured Bonds of Govt. (DRR Investment) A/c

` `
1st April, 20X1 To Balance b/d 5,62,500 31st March, 20X2 By Bank A/c 5,62,500
5,62,500 5,62,500
Bank Account
` `
31st
March, To Balance b/d 37,50,000 31st
March, By Debenture 41,25,000
20X2 To Interest on DRR 56,250 20X2 Holders A/c
Investment (110% of 37,50,000)
(5,62,500X 10%)
To DRR Investment By Balance c/d 2,43,750
A/c 5,62,500
43,68,750 43,68,750
Working note –
Calculation of DRR before redemption = 10% of ` 37,50,000 = 3,75,000
Available balance = ` 1,25,000
DRR required =3,75,000 – 1,25,000 = ` 2,50,000.
8. Computation of liabilities of underwriters (No. of shares):
A & Co. B & Co. C & Co. Total
Gross liability 72,000 30,000 18,000 1,20,000
Less: Marked applications (excluding firm (12,000) (15,000) (6,000) (33,000)
underwriting)
60,000 15,000 12,000 87,000

Less: Unmarked Applications* (Ratio (16,200) (6,750) (4,050) (27,000)

72:30:18)
43,800 8,250 7,950 60,000
Less: Firm underwriting (9,600) (12,000) (3,600) (25,200)
34,200 (3,750) 4,350 34,800
Credit for excess of B & Co. (ratio 72:18) (3,000) 3,750 (750)
Net liability (excluding firm underwriting) 31,200 - 3,600
Add: Firm underwriting 9,600 12,000 3,600
Total liability (No. of shares) 40,800 12,000 7,200
Working Note:
*Total Applications 60,000 Shares
Less: Marked Applications 33,000 Shares
Unmarked applications 27,000 Shares
9. In the Books of P Ltd.
Realization Account
` `
To Land & Building 4,50,000 By 8% Debentures 2,00,000
To Plant & Machinery 6,20,000 By Trade Payables 88,000
To Furniture & Fitting 1,00,000 By PQ Ltd. 16,02,100
To Trade receivables 3,25,000 (Purchase
consideration)
To Inventory/Stock 2,33,000 By Equity Shareholders A/c 1,37,900
To Cash at Bank 2,08,000 (loss)
To Cash in Hand 54,000
To Preference shareholders 38,000
(excess payment) _______ ____
20,28,000 20,28,000
Equity Shareholders Account
` `
To Realization A/c (loss) 1,37,900 By Share capital 8,20,000
To Equity Shares in PQ Ltd. 10,82,400 By Profit & Loss A/c 3,52,000
To Cash 1,01,700 By General Reserve 1,50,000
13,22,000 13,22,000

9% Preference Shareholders Account

To Preference Shares in 4,18,000 By Pref. Share capital 3,80,000
PQ Ltd. ______ By Realization A/c 38,000
4,18,000 4,18,000
PQ Ltd. Account
To Realization A/c 16,02,100 By Shares in PQ Ltd.
For Equity 10,82,400
For Pref. 4,18,000 15,00,400
By Cash 1,01,700
16,02,100 16,02,100
8% Debentures holders Account
` `
To 6% Debentures 2,00,000 By 8% Debentures 2,00,000
Books of Q Ltd.
Realization Account
` `
To Land & Building 3,40,000 By 8% Debentures 1,00,000
To Plant & Machinery 4,50,000 By Trade payables 1,60,000
To Furniture & Fittings 50,000 By Unsecured loan 1,75,000
To Trade receivables 1,50,000 By PQ Ltd. (Purchase
To Inventory 1,05,000 consideration) 7,92,250
To Cash at bank 1,75,000 By Equity Shareholders A/c 90,750
To Cash in hand 20,000 Loss
To Pref. shareholders 28,000
13,18,000 13,18,000
Equity Shareholders Account
` `
To Equity shares in PQ Ltd. 4,22,400 By Share Capital 3,20,000
To Realization 90,750 By Profit & Loss A/c 2,05,000
To Cash 61,850 By General Reserve 50,000
5,75,000 5,75,000

9% Preference Shareholders Account

` `
To Preference Shares in PQ Ltd.3,08,000 By Share capital 2,80,000
By Realization A/c 28,000
3,08,000 3,08,000
PQ Ltd. Account
` `
To Realization A/c 7,92,250 By Equity shares in PQ Ltd.
For Equity 4,22,400
Preference 3,08,000 7,30,400
By Cash 61,850
7,92,250 7,92,250
8% Debentures holders Account
` `
To 6% Debentures 1,00,000 By 8% Debentures 1,00,000
Working Notes:
(i) Purchase consideration
P Ltd. Q Ltd.
` `
Payable to preference shareholders:
Preference shares at ` 22 per share 4,18,000 3,08,000
Equity Shares at ` 22 per share 10,82,400 4,22,400
Cash [See W.N. (ii)] 1,01,700 61,850
16,02,100 7,92,250
(ii) Value of Net Assets
P Ltd. Q Ltd.
` `
Land & Building 4,50,000 3,40,000
Plant & Machinery less 10% Depreciation 5,58,000 4,05,000
Furniture & Fittings less 10% Depreciation 90,000 45,000
Trade receivables less 5% 3,08,750 1,42,500

Inventory less 5% 2,21,350 99,750

Cash at Bank 2,08,000 1,75,000
Cash in hand 54,000 20,000
18,90,100 12,27,250
Less: Debentures 2,00,000 1,00,000
Trade payables 88,000 1,60,000
Secured Loans – (2,88,000) 1,75,000 (4,35,000)
16,02,100 7,92,250
Payable in shares 15,00,400 7,30,400
Payable in cash* 1,01,700 (61,850)
(iii) P Q
Plant &Machinery 6,20,000 4,50,000
Less: Depreciation 10% 62,000 45,000
5,58,000 4,05,000
Furniture & Fixtures 1,00,000 50,000
Less: Depreciation 10% 10,000 5,000
90,000 45,000
*This cash is paid to equity shareholders of both the companies for adjustment of their rights
as per intrinsic value of both companies.
10. In the books of Star Ltd.
Journal Entries
Amount Amount
Particulars
` `
(i) 7% Preference share capital (` 100) Dr. 9,00,000
To 9% Preference share capital (` 80) 7,20,000
To Capital reduction A/c 1,80,000
(Being preference shares reduced to
` 80 and also rate of dividend raised from 7%
to 9%)

(ii) Equity share capital A/c (` 100 each) Dr. 10,00,000

To Equity share capital A/c (` 10 each) 1,00,000
To Capital reduction A/c 9,00,000
(Being reduction of nominal value of one
share of ` 100 each to ` 10 each)
(iii) Bank A/c Dr. 50,000
To Capital reduction A/c 50,000
(Being directors refunded the fee amount)
(iv) Trade payables A/c (Interest on debentures) Dr. 26,000
(Being interest forgone by the debenture
holders)
(v) No entry required
(vi) a ‘B’ 6% Debentures A/c Dr. 3,50,000
To Debentures holders A/c 3,50,000
(Being amount due to Debentures holders)
b Debentures holders A/c Dr. 4,40,000
To Chennai Works A/c 4,25,000
To Equity share capital A/c 15,000
(Being Chennai works taken over and equity
shares issued to ‘B’ 6% Debenture holders)
c Equity share of Zia Ltd. A/c Dr. 90,000
To Debentures holders A/c 90,000
(Being 9,000 equity shares of Zia Ltd. issued
by Debentures holders)
(vii) a Chennai Works – Workmen Compensation Dr. 4,000
Fund
(Being difference due to reduced amount of
actual liability transferred to capital reduction
account)
b Bank A/c Dr. 15,400
To Investment for Workmen 14,000
Compensation Fund


(Being investment for Workmen
Compensation Fund sold @ 10% profit)
c Trade Payables A/c Dr. 15,400
To Bank A/c 15,400
(Being part payment made to trade payables)
(viii) Capital reduction A/c Dr. 2,10,000
To Provision for Doubtful Debts A/c 20,000
To Inventory A/c 1,90,000
(Being assets revalued)
(ix) Capital reduction A/c Dr. 5,50,000
To Profit & Loss A/c 2,00,000
To PPE – Chennai Works 3,50,000 
(Being assets revalued and losses written off)
(x) Capital reduction A/c Dr. 4,01,400
To PPE – Bombay Works 2,67,600
To Capital reserve A/c 1,33,800
(Being assets revalued and remaining amount
transferred to capital reserve account)
11. Calculation of Total Remuneration payable to Liquidator
Amount in
`
2% on Assets realised 37,50,000 x 2% 75,000
3% on payment made to Preferential creditors 1,12,500 x 3% 3,375
3% on payment made to Unsecured creditors
(Refer W.N) 58,882
Total Remuneration payable to Liquidator 1,37,257

` 7,75,000 less ` 4,25,000

Working Note:
Liquidator’s remuneration on payment to unsecured creditors
Cash available for unsecured creditors after all payments including liquidation expenses,
payment to secured creditors, preferential creditors & liquidator’s remuneration
= ` 37,50,000 – ` 37,500 – ` 15,00,000 – ` 1,12,500 – ` 75,000 – ` 3,375
= ` 20,21,625.
Liquidator’s remuneration
= 3/103 x ` 20,21,625= ` 58,882
12. (a) Form B – RA
Name of Insurer: M/s Jagan Co.
Revenue Account for the year ended 31 st March, 2019
Schedule Current Year
`
1. Premium earned (net) 1 3,29,000
2. Interest, Dividends and Rent – Assumed Gross 18,000
Total (A) 3,47,000
1. Claims incurred (net) 2 92,400
2. Commission 3 93,600
3. Operating expenses related to Insurance business 4 46,600
Total (B) 2,32,600
Operating Profit from Marine Insurance business 1,14,400
(A-B)
Schedules forming part of Revenue Account
Current Year
`
Schedule –1
Premium earned (net)
Total Premium earned 4,04,200
Less: Premium on reinsurance ceded (25,200)
Total Premium earned (net) 3,79,000
Adjustment for change in reserve for unexpired risk (3,50,000-
3,00,000) 50,000
Net Premium earned 3,29,000

Schedule – 2
Claims incurred (net) (1,52,000+18,300-78,100) 92,400
Schedule – 3
Commission paid
Direct 96,000
Add: Re-insurance accepted 5,600
Less: Re-insurance ceded (8,000)
Net Commission 93,600
Schedule – 4
Operating expenses related to insurance business
Establishment expenses 30,000
Rent, rates and taxes 14,000
Printing and stationery 1,800
Legal and professional charges ` (2,000-1,200) 800
46,600
Working Notes:
Direct Re-insurance
` `
1. Total Premium Income
Received 3,60,000 38,000
Add: Receivable on 31 st March, 2019 16,000 1,800
3,76,000 39,800
Less: Receivable on 1st April, 2018 (10,000) (1,600)
3,66,000 38,200
Total premium income ` 3,66,000 + ` 38,200 = ` 4,04,200
2. Premium Expense on reinsurance `
Premium Paid during the year 24,000
Add: Payable on 31 st March, 2019 2,200
26,200
Less: Payable on 1st April, 2018 (1,000)
25,200
3. Claims Paid
Direct Business 1,54,000
Re-insurance 14,000

Legal Expenses 1,200

1,69,200
Less: Re-insurance claims received (17,000)
1,52,200
4. Claims outstanding as on 31 st March, 2019
Direct 16,000
Re-insurance 4,200
20,200
Less: Recoverable from Re-insurers on 31 st March, 2019 (1,900)
18,300
5. Claims outstanding as on 1 st April, 2018
Direct 78,000
Re-insurance 1,500
79,500
Less: Recoverable from Re-insurers on 1st April, 2018 (1,400)
78,100
6. Claims incurred during the year
Net Claims Paid + Claims outstanding on 31.3.2019 – Claims
outstanding on 1.4.2018 = ` 1,52,200 + ` 18,300 – ` 78,100 92,400
13. In the books of Anmol bank Ltd.
Journal Entries ` in crores
Particulars Debit Credit
Rebate on bills discounted A/c Dr. 40
To Discount on bills A/c 40
(Being the transfer of opening balance in ‘Rebate on bills
discounted A/c’ to ‘Discount on bills A/c’)
Bills purchased and discounted A/c Dr. 5,000
To Discount on bills A/c 280
To Clients A/c 4,720
(Being the discounting of bills of exchange during the year)
Discount on bills A/c Dr. 14
To Rebate on bills discounted A/c 14
(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)

Discount on bills A/c Dr. 306

To Profit and Loss A/c 306
(Being the amount of income for the year from discounting
of bills of exchange transferred to Profit and loss A/c)
Working Notes:
1. Discount received on the bills discounted during the year
` 5,000 crores x 14/100 x 146/365 = ` 280 crores
2. Calculation of rebate on bill discounted
` 500 crores x 14/100 x 73/365 = `14 crores
3. Income from bills discounted transferred to Profit and Loss A/c would be calculated
by preparing Discount on bills A/c.
Discount on bills A/c ` in crores
Date Particulars Amount Date Particulars Amount
31.3.2019 To Rebate on bills 14 1.4.2018 By Rebate on 40
discounted bills discounted
b/d
” To Profit and Loss 2018-19 By Bills purchased
A/c (Bal. Fig.) 306 and discounted 280
320 320
14. (a) (i) Floor area occupied by each department (if given) otherwise on time basis;
(ii) Value of assets of each department otherwise on time basis;
(iii) Wages and salaries of each department;
(iv) Purchases of each department;
(v) Consumption of energy by each department.
(b) Calculation of Correct Profit
Department Department Department
X Y Z
` ` `
Profit after charging managers’ 1,80,000 1,35,000 90,000
commission
Add back: Managers’ commission (1/9) 20,000 15,000 10,000
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000)

Profit before Manager’s commission 1,75,500 1,27,500 90,000

Less: Commission for Department
Manager @ 10% (17,550) (12,750) (9,000)
Departmental Profits after manager’s
commission 1,57,950 1,14,750 81,000
Working Note:
Stock lying with
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized Profit of:
Department X 1/5 × 75,000 20/120 × 57,000 24,500
= 15,000 = 9,500
Department Y 0.15 × 70,000 0.20 × 60,000 22,500
= 10,500 = 12,000
Department Z 20/120 × 30,000 25/125 × 25,000 10,000
= 5,000 = 5,000
15. (i) Books of Branch

Journal Entries
(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
(Goods dispatched by head office but not received by
branch before 1st April, 2019)
Expenses A/c Dr. 1
To Head Office A/c 1
(Amount charged by head office for centralised
services)
(ii) Trading and Profit & Loss Account of the Branch
for the year ended 31 st March, 2019
` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
Head Office 288

Less: Returns (5) 283

To Carriage Inwards 7
To Gross Profit c/d 72
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & 3
Stationery
To Sundry Office Expenses 1
To Head Office Expenses 1
To Net Profit Transferred to
Head Office A/c 24
72 72
Balance Sheet as on 31 st March, 2019
Liabilities ` in lacs Assets ` in lacs
Head Office 80 Furniture & Equipment 20
Add: Goods in transit 10 Less: Depreciation (2) 18
Head Office Expenses 1 Stock in hand 62
Net Profit 24 Goods in Transit 10
115 Debtors 20
Outstanding Expenses 3 Cash at bank and in hand 8
118 118
16. A liability is recognised when outflow of economic resources in settlement of a present
obligation can be anticipated and the value of outflow can be reliably measured. In the
given case, A Ltd. should recognise a liability of ` 1,00,000 to Gamma Ltd.
When flow of economic benefit to the enterprise beyond the current accounting period is
considered improbable, the expenditure incurred is recognised as an expense rather than
as an asset. In the present case, flow of future economic benefit from the machine to the
enterprise is improbable. The entire amount of purchase price of the machine should be
recognised as an expense.

Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
(loss transferred to profit and loss account)
17. (a) According to AS 4 on ‘Contingencies and Events Occurring after the Balance Sheet
Date’, adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the balance sheet date.
However, 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. “Contingencies” used in the Standard is restricted to conditions
or situations at the balance sheet date, the financial effect of which is to be
determined by future events which may or may not occur.
(i) Fire has occurred after the balance sheet date and also the loss is totally
insured. Therefore, the event becomes immaterial and the event is non-
adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date.
However, in the given case, suit was filed against the company’s advertisement
by a party on 10 th April for amount of ` 20 lakhs. Therefore, it does not fit into
the definition of a contingency and hence is a non-adjusting event.
(b) As per para 31 of AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies’, the adoption of an accounting policy for events or
transactions that differ in substance from previously occurring events or transactions,
will not be considered as a change in accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer
in place of ad hoc ex-gratia payments to employees on retirement is not a
change in an accounting policy.
(ii) Similarly, the adoption of a new accounting policy for events or transactions
which did not occur previously or that were immaterial will not be treated as a
change in an accounting policy
18. (a) (i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an
enterprise may enter into a forward exchange contract to establish the amount
of the reporting currency required, the premium or discount arising at the
inception of such a forward exchange contract should be amortized as expenses
or income over the life of the contract.

Forward Rate ` 62.50

Less: Spot Rate (` 60.75)
Premium on Contract ` 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 5 months
3 months falling in the year 2017-18, therefore loss to be recognized in 2017-18
(8,75,000/5) x 3 = ` 5,25,000. Rest ` 3,50,000 will be recognized in the following
year 2018-19.
(ii) Financial statements of an integral foreign operation (for example, dependent foreign
branches) should be translated using the principles and procedures described in
paragraphs 8 to 16 of AS 11 (Revised 2003). The individual items in the financial
statements of a foreign operation are translated as if all its transactions had been
entered into by the reporting enterprise itself. Individual items in the financial
statements of the foreign operation are translated at the actual rate on the date of
transaction. The foreign currency monetary items (for example cash, receivables,
payables) should be reported using the closing rate at each balance sheet date. Non-
monetary items (for example, fixed assets, inventories, investments in equity shares)
which are carried in terms of historical cost denominated in a foreign currency should
be reported using the exchange date at the date of transaction. Thus the cost and
depreciation of the tangible fixed assets is translated using the exchange rate at the
date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at
fair value, translation should be done using the rate existed on the date of the
valuation. The cost of inventories is translated at the exchange rates that existed
when the cost of inventory was incurred and realizable value is translated applying
exchange rate when realizable value is determined which is generally closing rate.
Exchange difference arising on the translation of the financial statements of integral
foreign operation should be charged to profit and loss account.
Thus, the treatment by the management of translating all assets and liabilities; income
and expenditure items in respect of foreign branches at the prevailing rate at the year
end and also the treatment of resultant exchange difference is not in consonance with
AS 11 (Revised 2003).
(b) (i) ` 35 lakhs received from the local authority for providing medical facilities to the
employees is a grant received in the nature of revenue grant. Such grants are
generally presented as a credit in the profit and loss statement, either separately
or under a general heading such as ‘Other Income’. Alternatively, ` 35 lakhs
may be deducted in reporting the related expense i.e. employee benefit
expenses.

(ii) As per AS 12 ‘Accounting for Government Grants’, where the government grants
are in the nature of promoters’ contribution, i.e. they are given with reference to
the total investment in an undertaking or by way of contribution towards its total
capital outlay and no repayment is ordinarily expected in respect thereof, the
grants are treated as capital reserve which can be neither distributed as dividend
nor considered as deferred income.
In the given case, the subsidy received from the Central Government for setting
up a unit in notified backward area is neither in relation to specific fixed asset
nor in relation to revenue. Thus, amount of ` 100 lakhs should be credited to
capital reserve.
(iii) ` 10 lakhs grant received for installation anti-pollution equipment is a grant
related to specific fixed asset. Two methods of presentation in financial
statements of grants related to specific fixed assets are regarded as acceptable
alternatives. Under first method, the grant is shown as a deduction from the
gross value of the asset concerned in arriving at its book value. The grant is
thus recognised in the profit and loss statement over the useful life of a
depreciable asset by way of a reduced depreciation charge. Under the second
method, grants related to depreciable assets are treated as deferred income
which is recognised in the profit and loss statement on a systematic and rational
basis over the useful life of the asset.
Thus, ` 10 lakhs may either be deducted from the cost of equipment or treated
as deferred income to be recognized on a systematic basis in profit & Loss A/c
over the useful life of equipment.
19. (a) According to AS 16 “Borrowing Costs”, borrowing costs that are directly attributable
to the acquisition, construction or production of a qualifying asset should be
capitalised as part of the cost of that asset. The amount of borrowing costs eligible
for capitalisation should be determined in accordance with this Standard. Other
borrowing costs should be recognised as an expense in the period in which they are
incurred.
It also states that to the extent that funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation
on that asset should be determined as the actual borrowing costs incurred on that
borrowing during the period less any income on the temporary investment of those
borrowings.
Thus, eligible borrowing cost
= ` 12,00,000 – ` 3,00,000
= ` 9,00,000

Sr. Particulars Nature of assets Interest to be Interest to be

No. capitalized (`) charged to Profit
& Loss Account
( `)
i Construction of Qualifying Asset 9,00,000x40/10 NIL
factory building 0
= ` 3,60,000
ii Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = ` 3,15,000
iii Working Capital Not a Qualifying NIL 9,00,000x25/100
Asset = ` 2,25,000
Total ` 3,60,000 ` 5,40,000
(b) 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 ` 10, 00,000 and the net present
value of minimum lease payments is ` 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 `10,00,000.
Calculation of finance charges for each year
Year Finance Payment Reduction in Outstanding
charge outstanding liability liability
(`) (`) (`) (`)
1st year beginning - - - 10,00,000
End of 1 st year 1,60,000 3,50,000 1,90,000 8,10,000
End of 2 nd year 1,29,600 3,50,000 2,20,400 5,89,600
End of 3 rd year 94,336 3,50,000 2,55,664 3,33,936
End of 4 th 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
` 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) ` 9,79 ,405
Present value of guaranteed residual value
` 50,000 x (0.5523) ` 27,615
` 10,07,020
(c) Computation of basic earnings per share
Net profit for the current year / Weighted average number of equity shares
outstanding during the year
` 75,00,000 / 10,00,000 = ` 7.50 per share
Adjusted net profit for the current year
Computation of diluted earnings per share
Weighted average number of equity shares
Adjusted net profit for the current year

`
Net profit for the current year 75,00,000
Add: Interest expense for the current year 8,00,000
Less: Tax relating to interest expense (30% of ` 8,00,000) (2,40,000)
Adjusted net profit for the current year 80,60,000
Number of equity shares resulting from conversion of debentures
= 1,10,000 Equity shares (given in the question)
Weighted average number of equity shares used to compute diluted earnings
per share
= 11,10,000 shares (10,00,000 + 1,10,000)
Diluted earnings per share
= ` 80,60,000/ 11,10,000
= ` 7.26 per share
Note:
Conversion of convertible debentures into Equity Share will be dilutive potential equity
shares. Hence, to compute the adjusted profit the interest paid on such debentures
will be added back as the same would not be payable in case these are converted
into equity shares.

20. (a) Amortization of cost of patent as per AS 26

Year Estimated future cash Amortization Ratio Amortized Amount
flow (` in lakhs) (` in lakhs)
1 600 .25 300
2 600 .25 300
3 600 .25 300
4 300 .40 (Revised) 120
5 300 .40 (Revised) 120
6 150 .20 (Revised) 60
1,200
In the first three years, the patent cost will be amortized in the ratio of estimated future
cash flows i.e. (600: 600: 600: 300: 300).
The unamortized amount of the patent after third year will be ` 300 lakh (1,200-900)
which will be amortized in the ratio of revised estimated future cash flows
(300:300:150) in the fourth, fifth and sixth year.
(b) (i) The construction of the oil rig creates an obligation under the terms of the license
to remove the rig and restore the seabed and is thus an obligating event. At the
balance sheet date, however, there is no obligation to rectify the damage that
will be caused by extraction of the oil. An outflow of resources embodying
economic benefits in settlement is probable. Thus, a provision is recognized for
the best estimate of ninety per cent of the eventual costs that relate to the
removal of the oil rig and restoration of damage caused by building it. These
costs are included as part of the cost of the oil rig. However, there is no
obligation to rectify the damage that will be caused by extraction of oil, as no oil
has been extracted at the balance sheet date. So, no provision is required for
the cost of extraction of oil at balance sheet date.
Ten per cent of costs that arise through the extraction of oil are recognized as
a liability when the oil is extracted.
(ii) As per AS 29, for a liability to qualify for recognition there must be not only a
present obligation but also the probability of an outflow of resources embodying
economic benefits to settle that obligation.

The obligating event is the giving of the guarantee by Ace Ltd. for certain
borrowings of Brew Ltd., which gives rise to an obligation. No outflow of benefits
is probable at 31 March 2019.Thus no provision is recognized. The guarantee is
disclosed as a contingent liability unless the probability of any outflow is
regarded as remote.
During 2019-20, the financial condition of Brew Ltd. deteriorates and finally goes
into liquidation. The obligating event is the giving of the guarantee, which gives
rise to a legal obligation. At 31 March 2020, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation.
Thus, provision is recognized for the best estimate of the obligation.

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PAPER – 5: ADVANCED ACCOUNTING

PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY