PAPER – 1 : ACCOUNTING

Question No. 1 is compulsory.

Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumptions may be made and indicated in answer by the
candidates.
Working Notes should form part of the answer.
Question 1
(a) From the following information of XYZ Limited, calculate cash and cash equivalent as on
31-03-2019 as per AS-3.
Particulars Amount (`)
Balance as per the Bank Statement 25,000
Cheque issued but not presented in the Bank 15,000
Short Term Investment in liquid equity shares of ABC Limited 50,000
Fixed Deposit created on 01-11-2018 and maturing on15-04-2019 75,000
Short Term Investment in highly liquid Sovereign Debt Mutual fund 1,00,000
on 01-03-2019
Bank Balance in a Foreign Currency Account in India $ 1,000
(Conversion Rate: On the day of deposit ` 69/USD As on 31-03-2019
` 70/USD)
(b) Given the following information of ABC Ltd.
(i) Goods of ` 80,000 were sold on 10-03-2019 but at the request of the buyer these
were delivered on 10-04-2019.
(ii) On 25-01-2019 goods of ` 2,00,000 were sent on consignment basis of which 20%
of the goods unsold are lying with the consignee as on 31-03-2019.
(iii) ` 2,40,000 worth of goods were sold on approval basis on 1-12-2018. The period of
approval was 3 months after which they were considered sold. Buyer sent approval
for 75% goods up to 31-1-2019 and no approval or disapproval received for the
remaining goods till 31-3-2019.
(iv) Apart from the above, the company has made cash sales of ` 9,60,000 (gross).
Trade discount of 5% was allowed on the cash sales.
You are required to advise the accountant of ABC Ltd., with valid reasons, the amount to
be recognized as revenue in above cases in the context of AS-9 for the year ending
31-1-2019.

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 2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

(c) Shyan Limited commenced a construction contract on 01-04-2018. The company

expended ` 500 crores in 2018-19 for 40% work. The total estimated cost of the project
is ` 1,250 crores. Compute (i) Revenue, (ii) Expense, (iii) Provision for loss and (iv) Profit
or loss to be recognized in the statement of Profit and Loss A/c as per
AS-7 for the year ending 31-03-2019 if:
(1) It is fixed price contract of ` 1,200 crores.
(2) It is cost plus contract of 20%.
(d) With reference to AS-10, classify the items under the following heads:
HEADS
(i) Purchase Price of PPE
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE.
ITEMS
(1) Import duties and non-refundable purchase taxes.
(2) Initial delivery and handling costs.
(3) Costs of testing whether the asset is functioning properly, after deducting the net
proceeds.
(4) Initial operating losses, such as those incurred while demand for the output of an
item builds up.
(5) Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
(6) Trade discounts and rebates.
(7) Costs of relocating or reorganizing part or all of the operations of an enterprise .
(8) Installation and assembly costs.
(9) Cost of site preparation.
(10) Administration and other general overhead costs. (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Computation of Cash and Cash Equivalents as on 31 st March, 2019
`
Cash balance with bank (` 25,000 less ` 15,000) 10,000
Short term investment in highly liquid sovereign debt mutual fund on 1,00,000
1.3.19*

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 PAPER – 1 : ACCOUNTING 3

Bank balance in foreign currency account ($1,000 x ` 70) 70,000

1,80,000
* Considered to be having maturity period of less than 3 months.
Note: Short term investment in liquid equity shares and fixed deposit will not be
considered as cash and cash equivalents.
(b) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are
fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price
or all significant risks and rewards of ownership have been transferred to the buyer
and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods.
Case (i)
The sale is complete (assuming risks and rewards transferred on 10.3.19) but delivery
has been postponed at buyer’s request. M/s ABC Ltd. should recognize the entire sale of
` 80,000 for the year ended 31 st March, 2019.
Case (ii)
20% goods lying unsold with consignee should be treated as closing inventory and sales
should be recognized for ` 1,60,000 (80% of ` 2,00,000). In case of consignment sales
revenue should not be recognized until the goods are sold to a third party.
Case (iii)
In case of goods sold on approval basis, revenue should not be recognized until the
goods have been formally accepted by the buyer or the buyer has done an act adopting
the transaction or the time period for rejection has elapsed or where no time has been
fixed, a reasonable time has elapsed. Therefore, revenue should be recognized for the
total sales amounting ` 2,40,000 as the time period for rejecting the goods had expired.
Case (iv)
Trade discounts given should be deducted in determining revenue. Thus ` 48,000 should
be deducted from the amount of turnover of ` 9,60,000 for the purpose of recognition of
revenue. Thus, revenue should be recognized for ` 9,12,000.
(c) 1. If it is a fixed price contract of ` 1,200 crores
Percentage of completion till date to total estimated cost of const ruction = 40%

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 4 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

(` in crores)
i Revenue (` 1,200 crores x 40%) 480
ii Expenses 500
iii Provision for loss (Refer Working note) 30
iv Loss 50
2. If it is a cost-plus contract of 20%
i Revenue (500 crores x120%) 600
ii Expenses 500
iii Provision for loss Nil
iv Profit 100
Working Note:
Calculation of provision for loss in case of fixed price contract
Amount of foreseeable loss (` in crores)
Total cost of construction 1,250
Less: Total contract price (1,200)
Amount of foreseeable loss 50
Loss for current year [500 – 480 (` 1,200 crores x 40%)] (20)
Expected loss to be recognized immediately 30
According to AS 7, when it is probable that total contract costs will exceed total contract
revenue, the expected loss should be recognized as an expense immediately.
(d) Heads
(i) Purchase price of PPE
(ii) Directly attributable cost of PPE
(iii) Cost not included in determining the carrying amount of an item of PPE
Items Classified
under Head
1 Import duties and non-refundable purchase taxes (i)
2 Initial delivery and handling costs (ii)
3 Costs of testing whether the asset is functioning properly, (ii)
after deducting the net proceeds*
4 Initial operating losses, such as those incurred while demand (iii)
for the output of an item builds up

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 PAPER – 1 : ACCOUNTING 5

5 Costs incurred while an item capable of operating in the (iii)

manner intended by management has yet to be brought into
use or is operated at less than full capacity.
6 Trade discounts and rebates (deducted for computing (i)
purchase price)
7 Costs of relocating or reorganizing part or all of the operations (iii)
of an enterprise.
8 Installation and assembly costs (ii)
9 Costs of site preparation (ii)
10 Administration and other general overhead costs (iii)

*Considered that this cost of testing is after deducting net proceeds from selling any items
produced while bringing the asset to that location and condition otherwise if the net
proceeds are after fixing the asset to its location and condition (asset ready for use), it
will be classified under category (iii) i.e. Cost not included in determining the carrying
amount of an item of PPE.
Question 2
A Limited and B Limited amalgamate to form a new company AB Limited. The financial
position of these companies as on the date of amalgamation was as under :
Particulars Amount Amount
A Ltd. B Ltd.
Equity and Liabilities
Shareholders' Fund:
(a) Equity share capital of ` 100 each 5,00,000 2,50,000
(b) 9% Preference Share Capital of ` 100 each 3,00,000 2,00,000
(c) General Reserve 1,50,000 1,40,000
(d) Profit & Loss Account 1,36,800 80,500
Non-Current Liabilities:
12% Debentures 2,00,000 -
Secured Loan. - 2,00,000
Current Liabilities:
Trade Payables 3,17,500 2,00,800
16,04,300 10,71,300
Assets
Non-Current Assets
Fixed Assets
Land and Building 2,50,000 1,90,000

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 6 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

Plant and Machinery 1,75,000 2,00,000

Furniture 75,000 50,000
Intangible Assets (Goodwill) 2,00,000
Non-Current Investments:
Current Assets:
Inventories 1,20,000 1,00,000
Trade Receivables 4,21,000 3,00,000
Bank Balance 3,40,000 1,80,000
Cash in hand 23,300 51,300
16,04,300 10,71,300
The terms of Amalgamation are as under :
(1) All assets and liabilities are to be taken at book value except inventory and trade
receivables for which provision of 5% and 7.5% respectively is required.
(2) Issue of 5 preference shares of ` 20 each in AB Limited @ ` 18 paid up at a premium of
` 4 per share for each preference share held in both the companies .
(3) Issue of 6 equity shares of ` 20 each in AB limited @ ` 18 paid up at a premium of ` 4
per share for each equity share held in both the companies.
(4) In addition cash should be paid to the equity shareholders of both the companies as is
required to adjust the rights of the shareholders in accordance with the intrinsic value of
shares of both the companies.
(5) Issue of such amount of fully paid 15% debentures in AB limited as is sufficient to
discharge the 12% debentures in A Limited.
(6) Trade receivable of A Limited include ` 25,000 due from B Ltd.
(i) Prepare necessary ledger accounts in the books of A limited to close their book.
(ii) Show necessary Journal entries in the books of AB Ltd. to give effect to the above
transactions. (16 Marks)
Answer
Books of A Ltd.
Realization Account
` `
To Goodwill 2,00,000 By 5% Debentures 2,00,000
To Land & Building 2,50,000 By Trade payables 3,17,500
To Plant & Machinery 1,75,000 By AB Ltd. 10,49,225
To Furniture 75,000 (Purchase consideration)
To Trade receivables 4,21,000 By Equity shareholders A/c 67,575

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 PAPER – 1 : ACCOUNTING 7

To Inventory 1,20,000 (loss)

To Bank balance 3,40,000
To Cash in hand 23,300
To Preference shareholders
(excess payment) 30,000
16,34,300 16,34,300
Equity Shareholders Account
` `
To Realisation A/c (loss) 67,575 By Share capital 5,00,000
To Equity Shares in AB Ltd. 6,60,000 By Profit & Loss A/c 1,36,800
To Cash 59,225 By Reserve 1,50,000
7,86,800 7,86,800
9% Preference Shareholders Account
` `
To Preference Shares in AB Ltd. 3,30,000 By Share capital 3,00,000
By Realisation A/c 30,000
3,30,000 3,30,000
AB Ltd. Account
` `
To Realisation A/c 10,49,225 By Equity Shares in AB Ltd.
For Equity 6,60,000
Pref. 3,30,000 9,90,000
By Cash 59,225
10,49,225 10,49,225
Working Notes:
(i) Purchase consideration
A Ltd. B Ltd.
` `
Payable to preference shareholders:
Preference shares at ` 22 (18*+4) per share 3,30,000 2,20,000
Equity Shares at ` 22(18*+4) per share 6,60,000 3,30,000
Cash [See W.N. (ii)] 59,225 93,000
10,49,225 6,43,000

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 8 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

(ii) Value of Net Assets

A Ltd. B Ltd.
` `
Goodwill 2,00,000
Land & Building 2,50,000 1,90,000
Plant & Machinery 1,75,000 2,00,000
Furniture 75,000 50,000
Trade receivables less 7.5% 3,89,425 2,77,500
Inventory less 5% 1,14,000 95,000
Bank balance 3,40,000 1,80,000
Cash in hand 23,300 51,300
15,66,725 10,43,800
Less: Debentures 2,00,000 –
Trade payables 3,17,500 2,00,800
Secured Loans – (5,17,500) 2,00,000 (4,00,800)
10,49,225 6,43,000
Payable in shares 9,90,000 5,50,000
Payable in cash 59,225 93,000
*considered that the paid-up value of ` 18 consists of only face value.
Journal Entries in the Books of AB Ltd.
1 Goodwill Dr. 2,00,000
Land & Building Dr. 2,50,000
Plant & Machinery Dr. 1,75,000
Furniture Dr. 75,000
Trade receivables less 7.5% Dr. 3,89,425
Inventory less 5% Dr. 1,14,000
Bank balance Dr. 3,40,000
Cash in hand Dr. 23,300
To Debentures 2,00,000
To Trade payables 3,17,500
To Business Purchase Account 10,49,225
(Incorporation of various assets and liabilities taken
over from A Ltd.’s at agreed value)
Land & Building Dr. 1,90,000
Plant & Machinery Dr. 2,00,000
Furniture Dr. 50,000

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 PAPER – 1 : ACCOUNTING 9

Trade receivables less 7.5% Dr. 2,77,500

Inventory less 5% Dr. 95,000
Bank balance Dr. 1,80,000
Cash in hand Dr. 51,300
To Secured Loans 2,00,000
To Trade payables 2,00,800
To Business Purchase Account 6,43,000
(Incorporation of various assets and liabilities taken
over from B Ltd.’s at agreed value)
2 Business Purchase A/c Dr. 10,49,225
To Liquidator of A Ltd 10,49,225
(Amount payable to A Ltd. as per agreement dated)
Business Purchase A/c Dr. 6,43,000
To Liquidator of B Ltd 6,43,000
(Amount payable to B Ltd. as per agreement dated)
3 Liquidator of A Ltd. Dr. 10,49,225
To Equity Share Capital 5,40,000
To 9% Preference Share Capital 2,70,000
To Securities premium 1,80,000
To Bank A/c 59,225
(Discharge of consideration for A Ltd.’s business)
Liquidator of B Ltd. Dr. 6,43,000
To Equity Share Capital 2,70,000
To 9% Preference Share Capital 1,80,000
To Securities premium 1,00,000
To Bank A/c 93,000
(Discharge of consideration for B Ltd.’s business)
4 12% Debentures A/c Dr. 2,00,000
To 15% Debentures A/c 2,00,000
(Allotment of 15% Debentures to debenture holders of
A Ltd.)
5 Trade payable of B Ltd. Dr. 25,000
To Trade receivables of A Ltd. 25,000
(Cancellation of mutual owing)
Note: Alternative set of entries (combined entries for both A Ltd. and B Ltd.) may also be
given for entries numbered 1,2,3.

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 10 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

Question 3
(a) Prepare cash flow for ABC Ltd., using Direct Method for the year 10 ending 31-03-2019
from the following information:
(1) Sales for the year amounted to ` 270 Lakh out of which 50% was cash sales.
(2) Purchases for the year amounted to ` 60 lakh out of which credit purchases were
80%.
(3) Administrative expenses amounted to ` 18 lakh. Salary of ` 16 lakh was charged
to profit and loss account for the year. Salary of ` 4 lakh was outstanding as on
31-03-2019. (Salary does not form part of Administrative expenses)
(4) The company has 15% debentures of ` 10 lakh, which it redeemed during the year
at a premium of 10% by issue of equity shares of ` 9 lakh towards redemption and
the balance was paid in cash. Debenture Interest was also paid during the year.
(5) Dividend paid during the year amounted to ` 12 lakh (including dividend distribution
tax).
(6) Investment costing ` 10 lakh were sold at a profit of ` 2.50 lakh.
(7) Income tax payable for the year was ` 80,000.
(8) Depreciation of 25% is charged by the company on opening balance of Plant and
Machinery. At the year end one old plant costing ` 5,00,000 (WDV ` 2,00,000) was
sold for ` 3,50,000. The purchases were also made at year end.
(9) The following balances are also provided :
` in Lakh ` in Lakh
31-03-2018 31-03-2019
Debtors 40 45
Creditors 20 23
Bank 5 -
Plant & Machinery 50 70
Provision for tax 1 0.7
(b) From the following details, find out the average due date of the bills issued by A to B :
Date of Bill Amount (`) Usance of the Bill
29th January, 2018 10,000 1 month
20th March 2018 8,000 2 months
12th July, 2018 14,000 1 month
10th August, 2018 12,000 2 months

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 PAPER – 1 : ACCOUNTING 11

Base date to be taken shall be the earliest due date. (10 + 6 = 16 Marks)
Answer
(a) ABC Ltd.
Cash Flow Statement for the year ended 31 st March, 2019
(Using direct method)
Particulars ` In lakhs ` In lakhs
Cash flows from operating activities
Cash sales (50% of 270) 135
Cash receipts from Debtors 130
[40 + 135 - 45]
Cash purchases (20% of 60) (12)
Cash payments to suppliers (45)
[20 + 60 x 80% – 23]
Cash paid to employees (12)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 178
Income tax paid (1.1)
Net cash generated from operating activities 176.9
Cash flows from investing activities
Sale of investments (10+ 2.5) 12.5
Payments for purchase of fixed assets (34.5)
Sale of Machinery 3.5
Net cash used in investing activities (18.5)
Cash flows from financing activities
Redemption of debentures (11-9) (2)
Interest paid (1.5)
Dividend paid (12)
Net cash used in financing activities (15.5)
Net increase in cash 142.90
Cash at beginning of the period 5.00
Cash at end of the period 147.90

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 12 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

Working Notes
1. Calculation of Income Tax paid during the year
Provision for taxation A/c
` `
To Cash (Amount paid 1,10,000 By Balance b/d 1,00,000
during the year
balancing figure)
To Balance c/d 70,000 By P & L A/c (Provision 80,000
for the year)
1,80,000 1,80,000
2. Calculation of Purchase of Fixed Assets
Plant & Machinery A/c
` `
To Balance b/d 50,00,000 By Depreciation (25% 12,50,000
of ` 50 Lacs)
To P & L A/c (Profit on 1,50,000 By Cash (Sale) 3,50,000
Sale)
To Cash
(Purchases)(bal. fig.) 34,50,000 By Balance c/d 70,00,000
86,00,000 86,00,000
(b) Calculation of Average Due Date
(Taking 3rd March, 2018 as base date)
Date of bill 2018 Term Due date Amount No. of days Product
2018 from the base
date i.e. 3rd
March,2018
(`) (`) (`)
29th January 1 month 3rd March 10,000 0 0
20th March 2 months 23rd May 8,000 81 6,48,000
12th July 1month 14th Aug. 14,000 164 22,96,000
10th August 2 months 13th Oct. 12,000 224 26,88,000
44,000 56,32,000
Sum of Products
Average due date = Base date + Days equal to
Sum of Amounts

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 PAPER – 1 : ACCOUNTING 13

56,32,000
= 3rd March, 2018 +
44,000
= 3rd March, 2018 + 128 days = 9 th July, 2018
Note:
Bill dated 12 th July, 2018 has the maturity period of one month, due date (after adding 3
days of grace) falls on 15 th August, 2018. 15 th August being public holiday, due date
would be preceding date i.e. 14th August, 2018.
Question 4
Prepare the Income & Expenditure Account of the Entertainment Club for the year ending
31st March, 2019 and Balance Sheet on that date from the following information:
Receipts and Payment Account of Entertainment Club
For the year ending on 31 st March, 2019
Receipts ` Payments `
To Balance b/d (cash) 25,000 By Rent and Rates 89,250
To Subscriptions: By Furniture purchased 80,000
(1-4-2018)
2017-18 13,350 By Creditors for Sports 71,000
Materials
2018-19 4,20,000 By Purchases for Sports 20,000
2019-20 12,000 4,45,350 Materials
By Cost of prizes awarded 23,450
To Sales of Sports Materials 34,000 By Match expenses 38,200
To Entrance Fees 50,000 By Miscellaneous expenses 1,28,300
To General Donation 25,750 By Balance c/d 1,49,300
To Donation for prize fund 15,500
To Interest on prize fund 2,000
Investments
To Miscellaneous receipts 1,900
5,99,500 5,99,500
Additional Information :
Particulars 31st March, 2018 31st March, 2019
Sports materials 25,000 28,000

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 14 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

Furniture 2,50,000 ?
5% Prize fund investments 80,000 ?
Creditors for sports materials 7,500 15,250
Subscription in arrears (17-18) 23,750 ?
Prize fund 80,000 ?
Rent paid in advance - 4,750
Outstanding rent 3,750 -
• Book value of sports materials sold was ` 30,000.
• Depreciation on furniture is to be provided @ 10%.
• Half of the entrance fee is to be capitalized.
• There are 1520 members, each paying an annual subscription@ ` 300.
• Subscription received in advance on 31-3-2018 were ` 9,000 (For 2018-19). (16 Marks)
Answer
Books of Entertainment Club
Income & Expenditure Account
For the year ending 31 st March, 2019
Particulars ` Particular `
To Rent & Rates (W.N.4) 80,750 By Subscription 4,56,000
(` 1,520 × ` 300)
To Match expenses 38,200 By Profit on sale of sports 4,000
material
To Misc. expense 1,28,300 (` 34,000 - ` 30,000)
To Depreciation 33,000 By Entrance fee 25,000
(10% of ` 3,30,000) on By Misc. Receipts 1,900
furniture
To Sports material consumed 65,750 By General donation 25,750
To Surplus 1,66,650
5,12,650 5,12,650

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Balance Sheet of Entertainment Club as on 31 st March, 2019

Particular ` Particular `
Capital Fund Outstanding
subscription
Opening balance 3,03,500 (2018-19) 27,000
Add: Surplus 1,66,650 (2017-18) 10,400 37,400
Entrance fee 25,000 4,95,150 Furniture 2,97,000
Price fund (W.N.5) 76,050 Sports material 28,000
Subscription 12,000 5% Prize fund 80,000
received in advance investments
Creditors for sports 15,250 Accrued interest* 2,000
material on Prize Fund
investments
Cash balance 1,49,300
Rent paid in 4,750
advance
5,98,450 5,98,450
* Interest on prize fund investment amounts to ` 4,000 but only ` 2,000 was received, hence
` 2,000 is accrued.
Working Notes:
1. Balance Sheet as on 31.3.2018
Particulars ` Particular `
Capital fund 3,03,500 Furniture 2,50,000
(bal figure)
Subscription received in advance 9,000 Investment (Prize Fund) 80,000
Prize Fund 80,000 Stock of sports material 25,000
Outstanding rent 3,750 Cash Balance 25,000
Creditors (Sports material) 7,500 Outstanding subscription 23,750
4,03,750 4,03,750
2. Furniture Account
Particulars ` Particular `
To Opening balance 2,50,000 By Depreciation (10% of 3,30,000) 33,000
To Bank A/c 80,000 By bal. c/d 2,97,000
3,30,000 3,30,000

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 16 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

3. (i) Sports material purchased during the year (on credit)

Creditors
Particulars ` Particular `
To Bank A/c 71,000 By Balance b/d 7,500
To Bal. c/d 15,250 By Purchases (Bal figure) 78,750
86,250 86,250
(ii) Sports material consumed during year
Particulars `
Opening balance 25,000
Add: Credit purchase 78,750
Cash purchase 20,000 98,750
Less Sale (30,000)
Total 93,750
Less: Closing Stock (28,000)
Sports material consumed 65,750
4. Rent & Rates to be shown in Income & Expenditure A/c
Particulars `
Payment 89,250
Less: Rent paid in advance on 31.3.19 (4,750)
Outstanding rent on 31.3.18 (3,750)
80,750
5. Prize fund
Particulars `
Opening balance 80,000
Add: Donation 15,500
Interest 4,000
99,500
Less: Prize distributed (23,450)
76,050
Note: The answer has been given on the assumption that the club is not registered under the
Companies Act, 2013. Therefore, Income & Expenditure A/c and Balance Sheet of the club
are not prepared as per Schedule III of the Companies Act, 2013.

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Question 5
(a) ABC Ltd. has insured itself under a loss of profit policy for ` 3,30,000 with indemnity
period of 8 months under average clause. A fire occurred in the factory on 01-01-2019
and normal business was affected up to 30-04-2019.
From the following information, prepare a Statement of Claim under the policy:
Actual Turnover over the period of dislocation 50,000
(01-01-2019 to 30-4-2019)
Turnover for 12 months immediately preceding the date of fire 10,00,000
(01-01-2018 to 31-12-2018)
Turnover for corresponding period in 12 months immediately 4,50,000
preceding the date of fire (01-01-2018 to 30-04-2018)
Turnover for last financial year 12,00,000
Net Profit for last financial year 3,00,000
Uninsured Standing charges 18,000
Insured Standing charges for the last financial year 60,000
Following increases are approved in the policy:
(i) Increase in G.P. rate by 2%
(ii) Increase in turnover by 10%
There was an additional cost of working of ` 20,000 during dislocation period. Due to this
additional cost there was a saving of ` 5,000 in insured standing charges during the
indemnity period and but for this additional cost the turnover during the period of
dislocation would have been only ` 35,000.
(b) XYZ Limited held on 1st April, 2018, 1000 9% Government Securities at ` 90,000 (Face
Value of Security ` 100 each). Three month's interest had accrued on the above date.
On 1st May, the company purchased the same Government Securities of the face value
of ` 80,000 at ` 95 cum-interest. On 1 st June, ` 60,000 face value of the security was
sold at ` 94 cum-interest. Interest on the security was paid each year on 30 th June and
31st December and was credited by the bank on the same date. On 30th September,
` 40,000 face value of the Govt. securities were sold at ` 97 cum-interest. On
1st December, the company purchased the same security ` 10,000 at par ex-interest. On
1st March, the company sold ` 10,000 face value of the government securities at ` 95 ex-
interest.
You are required to draw up the 9% Government Security Account in the books of XYZ
Limited. FIFO method shall be followed.
Calculation shall be made to the nearest rupee or multiple thereof. (8 + 8 = 16 Marks)

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 18 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

Answer
(a) Computation of loss of profit Insurance claim
`
(1) Rate of gross profit:
Net profit for the last financial year 3,00,000
Add: Insured standing charges 60,000
3,60,000
Turnover for the last financial year 12,00,000
 ` 3,60,000 
Rate of gross profit =  100 = 30%
 ` 12,00,000 
Gross profit after adding 2% = 30%+2%= 32%
(2) Short sales:
Standard Turnover 4,50,000
Add: 10% increasing trend 45,000
4,95,000
Less: Turnover during the dislocation period (50,000)
4,45,000
(3) Annual (Adjusted) Turnover:
Annual Turnover (1-1-2018 to 31-12-2018) 10,00,000
Add: 10% increasing trend 1,00,000
11,00,000
Note: Assumed that trend adjustment is required on total amount of annual turnover.
However, part of the annual turnover represents trend adjusted figure. Alternatively, trend
may be ignored and annual turnover can be taken simply.
(4) Additional Expenses: `
(i) Actual Expenses 20,000
(ii) Gross profit on sales generated by additional expenses
32/100× (` 50,000 – ` 35,000) = 4,800
Gross Profit on Annual (Adjusted) Turnover
(iii) × Additional Expenses
Gross Profit shown in the numerator + Uninsured standing charges
(32% on ` 11,00,000)/ [(32% on ` 11,00,000)+18,000)] x ` 20,000
[` 3,52,000/(` 3,52,000+ ` 18,000)] x ` 20,000 = `19,027

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 PAPER – 1 : ACCOUNTING 19

Least of the above three figures, i.e. ` 4,800 allowable.

(5) Computation of Claim: `
Loss of profit on short sales (32% on ` 4,45,000) 1,42,400
Add: Allowable additional expenses 4,800
1,47,200
Less: Savings in insured standing charges (5,000)
1,42,200
Application of average clause
(3,30,000/3,52,000) x 1,42,200 = ` 1,33,312.50
(b) In the Books of XYZ Ltd.
9% Government Securities (Investment) Account
Particulars Face Interest Principal Particulars Face Interest Principal
Value Value
2018 ` ` ` 2018 ` ` `
April To Balance June 1 By Bank
1 b/d 1,00,000 2,250 90,000 A/c 60,000 2,250 54,150
May To Bank June 30 By Bank
1 A/c 80,000 2,400 73,600 A/c - 5,400 -
June To P&L A/c - - 150 Sept. By Bank
1 30 A/c 40,000 900 37,900
Sept. To P & L A/c - - 1,900 Dec. 31 By Bank - 4,050 -
30 A/c
Dec. To Bank Mar.1 By Bank
1 A/c 10,000 375 10,000 2019 A/c 10,000 150 9,500
Mar. To P&L A/c - - 300 Mar. 31 By Balance
1 c/d 80,000 1,800 74,400
Mar. To P&L A/c
31 (Transfer) - 9,525 -

1,90,000 14,550 1,75,950 1,90,000 14,550 1,75,950

Working Notes:
1. Interest accrued on 1 st April 2018 = `1,00,000 x 9% x 3/12 = ` 2,250
2. Accrued Interest on 800 units as on 01.05.2018 = ` 80,000 x 9/100 x 4/12 = ` 2,400

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 20 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

3. Cost of Investment for purchase on 01.05.2018 = ` 76,000 - ` 2,400 = ` 73,600

4. Accrued Interest on 600 units as on 01.06.2018 = ` 60,000 x 9/100 x 5/12 = ` 2,250
5. Profit on Securities sold on 1 st June = ` 54,150 (56,400 – 2,250)- ` 54,000 (60,000
x 90,000/1,00,000) = ` 150
6. Interest received on 30.06.2018 = `1,20,000 x 9/100 x 6/12 = ` 5,400
7. Accrued Interest on 400 units as on 30.09.2018 = ` 40,000 x 9/100 x 3/12 = ` 900
8. Cost of 400 Govt. Securities sold on 30.09.2018 = 40,000 x 90,000/1,00,000 =
` 36,000
9. Profit on securities sold on 30 th September = `37,900 (38,800-900) - ` 36,000 =
` 1,900
10. Accrued Interest on 1.12.2018 = ` 10,000 x 9/100 x 5/12 = ` 375
11. Interest received on 31.12.2018 = ` 90,000 x 9/100 x 6/12 = ` 4,050
12. Accrued Interest on 100 units as on 01.03.2019 = ` 10,000 x 9/100 x 2/12 = ` 150
13. Cost of 100 Govt. Securities sold on 01.03.2019 = ` 10,000 x 73,600/80,000 =
` 9,200
14. Profit on securities sold on 01.03.2019 = ` 9,500 - ` 9,200 = ` 300
15.
Calculation of closing balance: Units `
Securities in hand remained in hand at 31/3/2019
From original holding (1,00,000 – 60,000 – 40,000) -
Purchased on 1st May (80,000 – 10,000) 70,000 64,400
Purchased on 1 st December 10,000 10,000
80,000 74,400
Question 6
X, Y, and Z are partners of the firm XYZ & Co., sharing profits and losses in the ratio of 5:3:2.
Following is the Balance Sheet of the firm as at 31-3-2019:
Liabilities Amount Assets Amount
(` ) (` )
Partners’ Capital Accounts Goodwill 2,00,000
X 5,00,000 Building 9,50,000
Y 2,50,000 Machinery 7,00,000
Z 2,00,000 Furniture 2,50,000
Investment fluctuation 2,00,000 Investments (market value 1,00,000

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 PAPER – 1 : ACCOUNTING 21

reserve ` 1,25,000)
General Reserve 95,000 Stock 5,50,000
Long-term loan 10,45,000 Sundry debtors 5,00,000
Bank overdraft 3,60,000 Profit and Loss A/c 50,000
Sundry Creditors 6,50,000
33,00,000 33,00,000
It was decided that Y would retire from the partnership on 1-4-2019 and M would be admitted
as a partner on the same date. Following adjustments are agreed amongst the partners for the
retirement/admission:
(i) Goodwill is to be valued at ` 6,00,000, but the same will not appear as an asset in the
books of the firm.
(ii) Building and machinery are to be revalued at ` 10,00,000 and ` 6,40,000 respectively.
(iii) Investments are to be taken over by Y at the market value.
(iv) Provision for doubtful debts is to be maintained at 15% on Sundry debtors.
(v) The capital of the reconstituted firm will be ` 15,00,000 to be contributed by the partners
X, Y1 and M in their new profit sharing ratio of 2:2:1.
(vi) Surplus funds, if any will be used to pay the bank overdraft.
(vii) Amount due to retiring partner Y will be transferred to his loan account.
Prepare:
(1) Revaluation Account
(2) Capital Accounts of the partners; and
(3) Balance Sheet of the firm after reconstitution. (16 Marks)
Answer
Revaluation Account
` `
To Provision for doubtful debts 75,000 By Building 50,000
(15% on 5,00,000)
To Machinery 60,000 By Investments 25,000
By Parents’ Capital A/cs:
X 30,000
Y 18,000

1 PS: Partner Y to be read as partner Z.

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 22 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

______ Z 12,000 60,000

1,35,000 1,35,000
Partners’ Capital Accounts
Particulars X Y Z M Particulars X Y Z M

` ` ` ` ` ` ` `
To Revaluation 30,000 18,000 12,000
To Goodwill 1,00,000 60,000 40,000 By Balance b/d 5,00,000 2,50,000 2,00,000 -
To Investment 1,25,000 - - By Investment 1,00,000 60,000 40,000 -
Fluctuation
Reserve
To P & L A/c 25,000 15,000 10,000 By General -
Reserve 47,500 28,500 19,000
To X - 30,000 30,000 By Z 30,000 90,000 - -
To Y - - 90,000 90,000 By M 30,000 90,000 - -
To Y’s Loan - 3,00,500 - -
To Balance c/d 6,00,000 - 6,00,000 3,00,000 By Bank 47,500 - 5,23,000 4,20,000
7,55,000 5,18,500 7,82,000 4,20,000 7,55,000 5,18,500 7,82,000 4,20,000

Balance sheet of firm as on 31.03.2019 (after reconstitution)

` `
Capital Buildings 10,00,000
X 6,00,000 Machinery 6,40,000
Z 6,00,000 Furniture 2,50,000
M 3,00,000 15,00,000 Stock 5,50,000
Y’s loan A/c 3,00,500 Debtors less provision 4,25,000
Long-term loan 10,45,000 Bank 6,30,500
Sundry Creditors 6,50,000
34,95,500 34,95,500
Working Notes:
1. Profit sharing ratio – gain for the other partners including new partner
Gain/loss
Old Ratio New Ratio X Z M
X Y Z X Z M (5/10 less 2/5) (2/5 less 1/5
5 3 2 2 2 1 = loss 1/10 2/10) =1/5
5/10 3/10 2/10 2/5 2/5 1/5

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 PAPER – 1 : ACCOUNTING 23

Z and M gain in 1:1 but X loses by 1/10.

Adjustment of goodwill has been made accordingly in the partner’s capital accounts by
crediting X by 1/10 th and Y by 3/10 th value of goodwill and debiting Z and M in their equal
gaining ratio correspondingly.
Goodwill, already shown in the Balance Sheet of ` 2,00,000, is firstly written off and then
an adjusting entry is passed for revalued goodwill of `6,00,000 in sacrificing and gaining
ratio of partners.
2. Bank Account
` `
To X’ s capital 47,500 By Balance b/d (overdraft) 3,60,000
To Z’ s capital 5,23,000 By Balance c/d 6,30,500
To M’ s capital 4,20,000
9,90,500 9,90,500
3. Capitals of X, Z and M as per new ratio
X’s share 15,00,000 x2/5 6,00,000
Z’s share 15,00,000 x2/5 6,00,000
M’s share 15,00,000 x1/5 3,00,000
Total capital 15,00,000
Question 7
Answer any 4 out of below 5 questions.
(a) What is an Enterprise Resource Planning (ERP) Software? What are the factors which
you will take into consideration while choosing an ERP software?
(b) PQR Investments Ltd., wants to re-classify its investments in accordance with AS 13.
State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investments in Company A, costing ` 10 lakhs are to be re-classified as
current. The company had reduced the value of these investments to ` 8 lakhs to
recognize a permanent decline in value. The fair value on date of transfer is ` 8.50
lakhs.
(ii) Long term investments in Company B, costing ` 5 lakhs are to be re-classified as
current. The fair value on date of transfer is ` 6 lakhs and book value is ` 5 lakhs.
(iii) Current investment in Company C costing ` 8 lakhs are to be re-classified as long
term as the company wants to retain them. The market value on date of transfer is
` 9 lakhs.

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 24 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

(iv) Current investment in Company D, costing ` 12 lakhs are to be re-classified as long

term. The market value on date of transfer is ` 11 Lakhs.
You are required to advise PQR Investments Ltd., the correct treatment in light of
relevant accounting standard.
(c) On 1st January 2016 M/s KMR acquired a machine on hire purchase from M/s PQR on
the following terms:
(1) Cash price of the machine was ` 2,40,000.
(2) The down payment at the time of signing the contract was ` 96,000.
(3) The balance amount is to be paid in 3 equal annual instalments plus interest.
(4) Interest is chargeable @ 8% p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR in
the books of the purchaser.
(d) (1) Under what circumstances does the necessity for valuation of Goodwill in a
partnership firm arise.
(2) List four methods of valuation of Goodwill.
(e) XYZ Ltd. proposes to declare 10% dividend out of General Reserves due to inadequacy
of profits in the year ending 31-03-2019.
From the following particulars ascertain the amount that can be utilized from general
reserves, according to the Companies Rules, 2014:
8,00,000 Equity Shares of ` 10 each fully paid up 80,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%. (4 Parts x 4 Marks= 16 Marks)
Answer
(a) An Enterprise Resource Planning (ERP) is an integrated software package that manages
the business process across the entire enterprise by integrating information created by
different functional groups of the organisation.
Choice of ERP software depends upon the following factors:
1. Functional requirement of the organisation: The ERP that matches most of the
requirements of an organisation is preferred over the others.
2. Reports available in the ERP: The organisation visualises the reporting
requirements and chooses a vendor which fulfils its reporting requirements.

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 PAPER – 1 : ACCOUNTING 25

3. Background of the vendors: The service and deliverable record of a vendor is

extremely important in choosing the vendor.
4. Cost comparisons: The budget constraints and fund position of an enterprise often
becomes the deciding factor for choosing a particular package.
(b) As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified
as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer. And where investments are reclassified from current to long term,
transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 8 lakhs in
the books.
(ii) The carrying / book value of the long term investment is same as cost i.e. ` 5 lakhs.
Hence this long term investment will be reclassified as current investment at book
value of ` 5 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be
made at ` 8 lakhs as cost is less than its market value (considered as fair value) of
` 9 lakhs.
(iv) In this case, market value is ` 11 lakhs which is lower than the cost of ` 12 lakhs.
The reclassification of current investment as long-term investments will be made at
` 11 lakhs.
(c) In the books of M/s KMR (purchaser)
H.P. Interest Suspense Account
Date Particulars ` Date Particulars `
1.1.2016 To M/s PQR A/c 23,040 31.12.2016 By Interest A/c 11,520
(W.N.)
31.12.2016 By Balance c/d 11,520
23,040 23,040
1.1.2017 To Balance b/d 11,520 31.12.2017 By Interest A/c 7,680
31.12.2017 By Balance c/d 3,840
11,520 11,520
1.1.2018 To Balance b/d 3,840 31.12.2018 By Interest A/c 3,840
M/s PQR Account
Date Particulars ` Date Particulars `
1.1.2016 To Bank/Cash A/c 96,000 1.1.2016 By Machine/Van 2,40,000
A/c

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 26 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019

31.12.2016 To Bank/Cash A/c 59,520 1.1.2016 By H.P. Interest 23,040

Suspense A/c
31.12.2016 To Balance c/d 1,07,520
2,63,040 2,63,040
31.12.2017 To Bank/Cash A/c 55,680 1.1.2017 By Balance b/d 1,07,520
31.12.2017 To Balance c/d 51,840
1,07,520 1,07,520
31.12.2018 To Bank/Cash A/c 51,840 1.1.2018 By Balance b/d 51,840
Working Note:
Cash Price 2,40,000
Down Payment 96,000
1,44,000
` 1,44,000 to be paid in 3 instalments ie. ` 48,000 plus interest
Total interest = ` 11,520 + ` 7,680 + ` 3,840 = ` 23,040
(d) Goodwill is the value of reputation of a firm in respect of profits expected in future over
and above the normal rate of profits. The necessity for valuation of goodwill in a firm
arises in the following cases:
(a) When the profit sharing ratio amongst the partners is changed;
(b) When a new partner is admitted;
(c) When a partner retires or dies, and
(d) When the business is dissolved or sold.
There are four methods for valuation of goodwill, viz:
• Average profit basis
• Super profit basis
• Annuity basis
• Capitalization basis
(e) Amount that can be drawn from reserves for (10% dividend on ` 80,00,000 i.e.
` 8,00,000)
Profits available
Current year profit ` 1,42,500

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 PAPER – 1 : ACCOUNTING 27

Amount which can be utilized from reserves (` 8,00,000 – 1,42,500) ` 6,57,500

Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:
Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be
declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should
not exceed 10% of paid up capital plus free reserves ie. ` 10,50,000 [10% of (80,00,000
+ 25,00,000)]
Condition III
The balance of reserves after drawl ` 18,42,500 (` 25,00,000 - ` 6,57,500) should not
fall below 15 % of its paid up capital ie. ` 12,00,000 (15% of ` 80,00,000]
Since all the three conditions are satisfied, the company can withdraw ` 6,57,500 from
accumulated reserve (as per Declaration and Payment of Dividend Rules, 2014).

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