Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

CA INTER

ADVANCED ACCOUNTING

MASTER QUESTIONS FOR EXAM

Total Questions - 151

(Master Quest are Taken from all Topics except AS 4, 5, 18 & 29,
Students are advised to refer Maximum Questions of these Topics)

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

INDEX

Sr. No. Topic Name Page No. Question

of No.
1 AS 22 “ACCOUNTING FOR TAXES ON INCOME” 2 5
2 AS 19 - LEASES 6 5
3 AS 20 – “EARNINGS PER SHARE” 10 8
4 AS 16 – “BORROWING COSTS” 59 9
5 AS 10 “PROPERTY, PLANT AND EQUIPMENT 65 11
6 AS 15 “ EMPLOYEE BENEFITS” 74 7
7 AS 23 – “ACCOUNTING FOR INVESTMENTS IN 133 2
ASSOCIATES IN CONSLIDATED FINANCIAL
STATEMENTS”
8 AS 27 “FINANCIAL REPORTING OF INTERESTS IN 138 3
JOINT VENTURES”
9 AS 25 “INTERIM FINANCIAL REPORTING” 144 6
10 AS 28 “IMPAIRMENT OF ASSETS” 149 3
11 AS 13 “ACCOUNTING FOR INVESTMENTS” 154 5
12 AS 7 “CONSTRUCTION CONTRACTS” 162 4
13 PREPARATION OF FINANCIAL STATEMENTS 166 4
14 CASH FLOW STATEMENT 180 6
15 ACCOUNTING FOR RECONSTRUCTION OF 193 7
COMPANIES
16 ACCOUNTING FOR BRANCHES INCLUDING 212 12
FOREIGN INCLUDING FOREIGN BRANCHES
17 AS 1 - DISLOSURE OF ACCOUNTING POLICIES 231 2
18 AS 2 – VALUATION OF INVESTORIES 233 5
19 AS 11 – EFFECTS OF CHANGES IN FOREIGN 237 5
EXCHANGE RATES
20 AS 12 – ACCOUNTING FOR GOVERNMENT 242 4
GRANTS
21 AS 9 – REVENUE RECOGNTION 247 5
22 AS 26 - INTANGIBLE ASSETS 257 6
23 AS 24 - DISCONTINUING OPERATION 262 2
24 AS 17 - SEGMENT REPORTING 264 3
25 FRAMEWORK FOR PREPARATION AND 267 1
PRESENTATION OF FINANCIAL STATEMENTS
26 Amalgamation 15 7
27 CONSOLIDATED OF FINANCIAL STATEMENTS 79 6

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 22 “ACCOUNTING FOR TAXES ON INCOME”

Question 1)
Prepare Profit and Loss account of X td.
Sale 5,00,000
Sundry expenses 2,00,000
Cost of goods sold 1,00,000
Included in Sundry Expenses are:
Bonus not yet paid Rs. 40,000
Provision for bad debts Rs. 10,000
Donations Rs. 5,000
(Against which deduction under 80G is allowed Rs. 1,000.)
X Ltd. had purchased one machine for research purpose Rs. 30,000 on which deprecation have not been claimed.
Assume life is 3 years.
As per Income Tax 100% Depreciation is allowed in year of Purchase.
Rate of Tax is 30% + Surcharge 1%
Application of AS 22 is required.

SOLUTION:
WN 1 - Identify Timing Diff. & Tax Effect
Particulars Amt. Nature DTA/DTL Amt.
Bonus not yet paid 40000 DTA 12120
(Disallowed in cy)
Provision For B.D. 10000 DTA 3030
(Disallowed in CY)
Donations Paid - Permanent. -
(4000/- Permanently Disallowed) Diff.
Exp. As Research 20000 DTL 6060
(Excess deductions by I.T. in cy)
Net DTA = 9090

Statement of P&L
PARTICULARS AMOUNT
Revenue from Operation (Sales) 500000
(-) Cost of Goods Sold (100000)
(-) Sundry Exp. (200000)
(-) Depreciations (10000)
Profit before Tax (Accounting Incomes) 190000
(-) Tax Exp.: (58782)
Current Tax - 67872 (WN. – 2)
Deferred Tax – (9090) (WN. 1)
Net Profit After Tax 131218

WN 2 - Calculate of Taxable Income & Tax Thereon: -

Accounting Income 1,90,000
(+) Disallowed expenses
Provision 10,000
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Bonus 40,000
Donation 5,000
Depreciation Recognised 10,000
(-) Exp. Allowed
Depreciation Allowed (30,000)
Gross Incomes 2,25,000
(-) 80 G Deduction (1,000)
Taxable Income 2,24,000
Current Tax @30.3% 67,872

Question 2)
The following particulars are stated in the Balance Sheet of Deep Limited as on 31st March, 2020:
(Rs. In Lakhs)
Deferred Tax Liability (Cr.) 28.00
Deferred Tax Assets (Dr.) 14.00
The following transactions were reported during the year 2020 -2021:
i. Depreciation as per books was Rs. 70 Lakhs whereas Depreciation for Tax purposes was Rs. 42 Lakhs. There
were no additions to Fixed Assets during the year.
ii. Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were Rs. 14 Lakhs.
iii. Share issue expenses allowed under section 35(D) of the Income Tax Act, 1961 for the year 2020-21 (1/10th of
Rs. 70.00 lakhs incurred in 2019-20).
iv. Repairs to Plant and Machinery were made during the year for Rs. 140.00 Lakhs and was spread over the period
2020-21 and 2021-22 equally in the books. However, the entire expenditure was allowed for income-tax
purposes in the year 2020-21.
Tax Rate to be taken at 40%.
You are required to show the impact of above items on Deferred Tax Assets and Deferred Tax Liability as on 31st
March, 2021.

SOLUTION
Impact of various items in terms of deferred tax liability/deferred tax asset on 31.3.21
Transactions Analysis Nature of Effect Amount
difference (Rs.)
Difference in Generally, written down value method Responding Reversa 28 lakhs 40% =
depreciation of depreciation is adopted under IT Act timing l of DTL Rs. 11.20 lakhs
which leads to higher depreciation in difference
earlier years of useful life of the asset in
comparison to later years.
Disallowances, Tax payable for the earlier year was Responding Reversa 14 lakhs 40% =
as per IT Act, of higher on this account. timing l of DTA 5.6 lakhs
earlier years difference

Share issue Due to disallowance of full expenditure Responding Reversa 7 lakhs 40%
expenses under IT Act, tax payable in the earlier timing l of DTA = Rs. 2.8 lakhs
years was higher. difference
Repairs to plant Due to allowance of full expenditure Originating Increas 70 lakhs 40% =
and machinery under IT Act, tax payable of the current timing e in DTL 28 lakhs
year will be less. difference

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

Question 3)
From the following details of Aditya Limited for accounting year ended on 31st March, 2020:
Particular Rs.
Accounting profit 15,00,000
Book profit as per MAT 7,50,000
Profit as per Income tax Act 2,50,000
Tax Rate 20%
MAT Rate 7.5%

Calculate the deferred tax asset/liability as per AS 22 and amount of tax to be debited to the profit and loss account for
the year.

SOLUTION:
Tax as per accounting profit 15,00,000 x 20%= Rs. 3,00,000
Tax as per Income-tax Profit 2,50,000 x 20% =Rs. 50,000
Tax as per MAT 7,50,000 x 7.50%= Rs. 56,250
Tax expense= Current Tax +Deferred Tax
Rs. 3,00,000 = Rs. 50,000+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-2020
= Rs. 3,00,000 – Rs. 50,000 = Rs. 2,50,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2020
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= Rs. 50,000 + Rs. 2,50,000 + Rs. 6,250 (56,250 – 50,000) = Rs. 3,06,250

Question 4)
Beta Ltd. is a full tax-free enterprise for the first ten years of its existence and is in the second year of its
operation. Depreciation timing difference resulting in tax liability in year 1 and 2 is Rs. 1,000 lakhs and
Rs. 2,000 lakhs respectively. From the third year it is expected that the timing difference would reverse
each year by Rs. 50 lakhs. Assuming tax rate of 40%, you are required to compute to the deferred tax liability at the end
of the second year and any charge to the Profit and Loss account.

SOLUTION
As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”, deferred tax in respect of timing
differences which originate during the tax holiday period and reverse during the tax holiday period, should not be
recognized to the extent deduction from the total income of an enterprise is allowed during the tax holiday period as
per the provisions of sections 10A and 10B of the Income-tax Act. Deferred tax in respect of timing differences which
originate during the tax holiday period but reverse after the tax holiday period should be recognized in the year in which
the timing differences originate. However, recognition of deferred tax assets should be subject to the consideration of
prudence. For this purpose, the timing differences which originate first should be considered to reverse first.
Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50 lakhs x 8 years) will reverse in
the tax holiday period and therefore, should not be recognized. However, for Rs. 600 lakhs (Rs. 1,000 lakhs – Rs. 400
lakhs), deferred tax liability will be recognized for Rs. 240 lakhs (40% of Rs. 600 lakhs) in first year. In the second year,
the entire amount of timing difference of Rs. 2,000 lakhs will reverse only after-tax holiday period and hence will be
recognized in full. Deferred tax liability amounting Rs. 800 lakhs (40% of Rs. 2,000 lakhs) will be created by charging it
to profit and loss account and the total balance of deferred tax liability account at the end of second year will be Rs.
1,040 lakhs (240 lakhs + 800 lakhs).

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Question 5)
ABC Company limited had an investment in Venture Capital amounting ₹10Crores. Venture capital in
turn had invested in the below portfolio companies (New Start-ups) on behalf of ABC Limited:
Portfolio Amount of investment
Companies (₹ in Crores)
Oscar Limited 2
Zee Limited 3
Star Limited 4
Sony Limited 1
Total 10
During the FY 2019-2020, Venture Capital had sold their investment in Star Limited and realised an amount of ₹8
Crores on sale of shares of star Limited and entire proceeds of ₹8 Crores have been transferred by Venture Capital to
ABC Company Limited.
The accounts manager has received the following additional information from venture capital on 31.03.2020:
(1) 8 Crores has been deducted from the cost of investment and carrying amount of investment as at year end is 2
Crores.
(2) Company had to pay a capital gain tax @20% on the net sale consideration of ₹ 4 Crores.
(3) Due to COVID-19, the remaining start-ups (i.e. Oscar Limited, Zee Limited, and Sony Limited) are not performing
well and will soon wind up their operations. Venture capital is monitoring the situation and if required they will
provide an impairment loss in June 2020 Quarter.
You need to suggest the accounts manager what should be the correct accounting treatment as per AS 22 “Accounting
for Taxes on Income”.

SOLUTION
As company had to pay capital gain tax @20% on the net sale consideration as per income tax laws, the company has
to recognise a current tax liability of 0.8 Crores computed as under:
Particulars Amount (₹ in Crores)
Sales Consideration 8
Cost of Investment 4
Net gain on Sale 4
Tax@20% 0.8

As per AS 22, Timing differences are those differences between taxable income and accounting income for a period
that originate in one period and are capable of reversal in one or more subsequent periods.
Particulars Amount(₹ in Crores) Rationale
Taxable Income 4 As per income tax laws
Accounting Income Nil As the same is deducted from the
cost of investment
Timing Difference 4

As per AS 22, deferred tax assets should be recognised and carried forward only to the extent that there is a
reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can
be realised.
Since in current scenario, due to Covid 19 the portfolio companies are not performing well, thus the company may not
have sufficient future taxable income which will reverse deferred tax assets. Therefore, the company should not
recognise DTA of ₹ 0.8 Crores and company should recognise only current tax liability of ₹ 0.8 Crores.

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 19 - LEASES

Question 6)
Fair Value of Asset given = 15,00,000, Lease Rent p.a. = 5,50,000, Term = 3 years, GRV = 1,00,000, UGRV = 50,000, IRI
= 10%, Book Value of Inventory Which is Leased = 13,80,000. This is Finance Lease. Show Accounting as per AS 19.

Solution:
1) Net Investment in Lease:
Years Amounts PV @10%
1 5,50,000
2 5,50,000 14,80,465/-
3 5,50,000 + 1,50,000

2) PV of MLP: -
Years Amounts PV @10%
1 5,50,000
2 5,50,000 14,42,900/-
3 5,50,000 + 1,00,000

3) Lease Receivable to be recognised at NIL i.e., 14,80,465/-

4) Sales shall be recognised at Lower of
(a) FV or (b) PV of MLP i.e., Sales = 14,42,900
5) Journal Entry: -
Lease Receivable A/c Dr. 14,80,465
COGS A/c Dr. 13,42,435
To Sales A/c 14,42,900
To Investment A/c 13,80,000
Trading A/c Dr. 13,42,435
To COGS A/c 13,42,435
Sales A/c Dr. 14,42,900
To Trading A/c 14,42,900

Trading A/c
COGS 13,42,435 Sales 14,42,900
Profit on Outright Sale 1,00,465

Question 7)
Journalise in each of the following cases assuming transaction is of sale and operating lease back:
Cases Fair Value Book Value Sale Price
1 100000 100000 100000
2 100000 80000 100000
3 100000 120000 100000
4 100000 100000 120000
5 100000 80000 120000
6 100000 120000 120000
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7 100000 100000 90000

8 100000 90000 80000
9 100000 70000 80000
10 100000 110000 80000

Answer:
1) No Profit/Loss
2) Gain 20000 => P & L immediately
3) Loss 20000
General Rule – Immediately transfer to P&L
Exception – If loss is compensated with future lease payments then Deferred &Amortised.
4) Gain = 20000 D&A
5) Gain = 40000 20K P & L
20K D&A
6) Rule-3 => Imp. Loss = 20000 P & L
Rule-2 => Profit = 20000 D&A
7) Loss = 10000 Generally P & L
If compensated with rent then D&A
8) Loss = 10000 (same as 7)
9) Gain = 10000 P & l (Rule 2)
10) Rule – 3 => Imp. Loss 10000 P & L
Rule – 1 => Loss = 20000

Question 8)
Aksat International Limited has given a machinery on lease for 36 months, and its useful life is 60 months.
Cost & fair market value of the machinery is Rs. 5,00,000. The amount will be paid in 3 equal annual
installments and the lessee will return the machinery to lessor at termination of lease. The unguaranteed residual value
at the end of 3 years is Rs. 50,000. IRR of investment is 10% and present value of annuity factor of Rs 1 due at the end
of 3 years at 10% IRR is 2.4868 and present value of Rs. 1 due at the end of 3rd year at 10% IRR is 0.7513.
You are required to comment with reason whether the lease constitute finance lease or operating lease. If it is finance
lease, calculate unearned finance income.

SOLUTION
Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3rd year
= Rs. 50,000 x 0.7513
= Rs. 37,565
Present value of lease payments = Rs. 5,00,000 – Rs. 37,565
= Rs 4,62,435
The percentage of present value of lease payments to fair value of the equipment is
(Rs. 4,62,435/ Rs 5,00,000) x 100 = 92.487%.
Since, lease payments substantially covers the major portion of the fair value; the lease constitutes a finance lease.

Calculation of Unearned Finance Income

Annual lease payment = Rs. 4,62,435/ 2.4868 =Rs. 1,85,956 (approx.)
Gross investment in the lease = Total minimum lease payments + unguaranteed residual value
= (Rs. 1,85,956 × 3) + Rs. 50,000
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= Rs. 5,57,868 + Rs. 50,000 = Rs. 6,07,868

Unearned finance income = Gross investment - Present value of minimum lease payments and unguaranteed residual
value
= Rs. 6,07,868 – Rs. 5,00,000 = Rs. 1,07,868

Question 9)
S. Square Private Limited has taken machinery on finance lease from S.K. Ltd. The information is as
under:
Lease term = 4 years
Fair value at inception of lease = Rs.20,00,000
Lease rent = Rs.6,25,000 p.a. at the end of year
Guaranteed residual value = Rs.1,25,000
Expected residual value = Rs.3,75,000 (estimated by lessor)
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718 respectively.
Calculate the value of the lease liability as per AS-19.

SOLUTION
According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset and a liability at an amount
equal to the lower of the fair value of the leased asset at the inception of the finance lease & the present value of the
minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the
lease. Present value of minimum lease payments will be calculated as follows:
Year MLP Internal Rate of Return Present Value
1 6,25,000 0.8696 5,43,500
2 6,25,000 0.7561 4,72,563
3 6,25,000 0.6575 4,10,937
4 6,25,000 + 1,25,000 GRV 0.5718 4,28,850
Total 26,25,000 18,55,850

Present value of minimum lease payments Rs.18,55,850 is less than fair value at the inception of lease i.e.
Rs.20,00,000, therefore, the lease liability should be recognised at Rs.18,55,850 as per AS19.

Question 10)
A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease
rentals to yield 30% profit margin on cost Rs. 1,50,000. Economic life of the machine is 5 years and
output from the machine are estimated as 40,000 units, 50,000 units, 60,000 units, 80,000 units and
70,000 units consecutively for 5 years. Straight line depreciation in proportion of output is considered appropriate.
Compute the following:
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease.

SOLUTION:
(i) Annual lease rent
Total lease rent
𝑜𝑢𝑡𝑝𝑢𝑡 𝑑𝑢𝑟𝑖𝑛𝑔 𝑙𝑒𝑎𝑠𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
=130% of Rs. 1,50,000 × 𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
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=130% of Rs. 1,50,000 x (40,000+50,000+60,000) / (40,000+50,000+ 60,000+80,000+70,000)

=1,95,000 x 1,50,000 units / 3,00,000 units=Rs. 97,500
Annual lease rent = Rs. 97,500 / 3 = Rs. 32,500

(ii) Lease rent Income to be recognized in each operating year

Total lease rent should be recognised as income in proportion of output during lease period, i.e. in the proportion of
40:50:60.
Hence income recognised in years 1,2 and 3 will be as:
Year 1 Rs. 26,000,
Year 2 Rs. 32,500 and
Year 3 Rs. 39,000.

(iii) Depreciation for three years of lease

Since depreciation in proportion of output is considered appropriate, the depreciable amount Rs. 1,50,000 should be
allocated over useful life 5 years in proportion of output, i.e. in proportion of 40:50:60:80:70
Depreciation for year 1 is Rs. 20,000, year 2 = 25,000 and year 3 = 30,000.

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 20 – “EARNINGS PER SHARE”

Question 11)
EBIT = 49,80,000 (Current Year = 23-24)
Current Tax = 12,45,000
DTL = 2,15,000
85% Debenture issued on 1/7/23, ₹75 lacs
9% Non-Cumulative Preference Shares Capital are Outstanding ₹ 40 lacs From Beginning
10% Preference Shares Capital are issued on 1/3/24, ₹ 80 lacs
Preference Dividend not yet Declared
Calculate EAESH

SOLUTION:
Earnings Before Interest & Tax 49,80,000
(-) Interest (4,78,125)
Earning Before Tax 45,01,875
(-) Tax Expenses (14,60,000)
Earnings After Tax 30,41,875
(-) Preference Dividend on Cumulative Shares only (66,667)
(since dividend is not declared hence Dividend on Non-Cumulative Pref. Share is ignore)
Earnings Available for Equity Share Holder 29,75,208

Question 12)
As on 1/4/23 Opening Outstanding Equity Shares 50,000 of 10/- each, 6/- Paid-up.
On 1/9/23 Public Issue of 30,000 shares made at 10/- each, 7/- Paid up
On 1/10/23 Amount Called @4/- on Opening but Shareholders holding 48,000 Shares have paid.
On 1/12/23 Amount Called @3/- on public issue, all Share Holders have paid.

Note: Partly paid shares are also entitled for Dividend

Calculate Weighted Average Outstanding Equity Shares.

Solution:
Calculation of Weighted Average Outstanding Share Capital (in ₹)
Date Particulars Working Weighted Avg. Amount
1/4/23 Opening Balance 50,000 x 6 x 12/12 3,00,000
1/9/23 Public issue 30,000 x 7 x 6/12 1,22,500
1/10/23 Called @4/- 4,80,000 x 4 x 6/12 96,000
1/12/23 Called @3/- 30,000 x 3 x 4/12 30,000
Weighted Average Outstanding Share Capital 5,48,500
Weighted Avg Outstanding No. of Shares (5,48,500/10) 54,850 No.

Question 13)
EBIT = 9,00,000 (Current Year 23-24)
Tax Rate = 30%
1/4/23 = Outstanding 8% Convertible Debenture of ₹ 15,00,000, Face Value is ₹ 100

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(Convertible in next year into 50,000 no of equity shares)

1/4/23 = Outstanding equity shares 1,00,000 no.
Calculate BEPS & DEPS
SOLUTION
EBIT 9,00,000
(-) Interest 1,20,000
EBT 7,80,000
(-) Tax 30% 2,34,000
EAESH 5,46,000
Basic EPS = 5,46,000/1,00,000
= 5.46/-

DEPS = EAESH + (Saving in Interest net of Tax) / Weighted Avg no. of Equity + Weighted Avg Potential No. of Equity
[5,46,000 + (1,20,000 – 30%)] / [(1,00,000 x 12/12) + (50,000 x 12/12)] = 4.20/-

Question 14)
Same as Example 19 But instead of Debenture there are Convertible Preference Shares
SOLUTION
1) BEPS
EBIT 9,00,000
(-) Interest 0
EBT 9,00,000
(-) Tax @ 30% 2,70,000
EAT 6,30,000
(-) Preference Dividend (1,20,000)
EAESH 5,10,000
BEPS = 5,10,000/1,00,000 = 5.10/-

DEPS = 5,10,000 + Savings in Dividend / Weighted Avg No. of Equity + Weighted Avg No. of Potential Equity
5,10,000 + 1,20,000/1,50,000 = 4.20/-

Question 15)
On 1st April, 20X1 a company had 6,00,000 equity shares of Rs. 10 each (Rs. 5 paid up by all
shareholders). On 1st September, 20X1 the remaining Rs. 5 was called up and paid by all shareholders
except one shareholder having 60,000 equity shares. The net profit for the year ended 31 st March, 20X2 was Rs.
21,96,000 after considering dividend on preference shares of Rs. 3,40,000.
You are required to compute Basic EPS for the year ended 31 st March, 20X2 as per Accounting Standard 20 "Earnings
Per Share".
SOLUTION:
Basic earnings per share (EPS) =
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
21,96,000
= 4,57,500 𝑠ℎ𝑎𝑟𝑒𝑠 = Rs. 4.80 per share
Working note:
Calculation of weighted average number of equity shares
As per AS 20 ‘Earnings Per Share’, partly paid equity shares are treated as a fraction of equity share to the extent that
they were entitled to participate in dividend relative to a fully paid equity share during the reporting period. Assuming
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that the partly paid shares are entitled to participate in the dividend to the extent of amount paid, weighted average
number of shares will be calculated as follows:
Date No. of equity Amount paid per Weighted average no. of equity
shares share shares
Rs. Rs. Rs.
1.4.20X1 6,00,000 5 6,00,000 х 5/10 х 5/12 = 1,25,000
1.9.20X1 5,40,000 10 5,40,000 х 7/12 = 3,15,000
1.9.20X1 60,000 5 60,000 х 5/10 х 7/12 = 17,500
Total weighted average equity shares 4,57,500

Question 16)
X Ltd. supplied the following information. You are required to compute the basic earnings per share:
(Accounting year 1.1.20X1 – 31.12.20X1)
Net Profit : Year 20X1: Rs. 20,00,000
: Year 20X2: Rs. 30,00,000
No. of shares outstanding prior to right issue : 10,00,000 shares
Right issue: one new share for every four outstanding i.e., 2,50,000 shares
Right issue price – Rs. 20
Last date of exercise rights – 31.3.20X2
Fair rate of one Equity share immediately Prior to exercise of rights on 31.3.20X2: Rs. 25

SOLUTION:
Computation of Basic Earnings Per Share
(as per paragraphs 10 and 26 of AS 20 on Earnings Per Share)
Year 20X1 Rs. Year 20X2 Rs.
EPS for the year 20X1 as originally reported
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 2.00
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡 𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
= (Rs. 20,00,000 / 10,00,000 shares)
EPS for the year 20X1 restated for rights issue 1.92 (approx.)
= [Rs. 20,00,000 / (10,00,000 shares × 1.04)]

𝐸𝑃𝑆 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 20𝑋2 𝑖𝑛𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑒𝑓𝑓𝑒𝑐𝑡𝑠 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠 𝑖𝑠𝑠𝑢𝑒 𝑅𝑠. 30,00,000
(10,00,000𝑠ℎ𝑎𝑟𝑒𝑠 × 1.04 × 3/12) + (12,50,000 𝑠ℎ𝑎𝑟𝑒𝑠 × 9/12) 2.51 (approx.)
𝑅𝑠. 30,00,000
11,97,500 𝑠ℎ𝑎𝑟𝑒𝑠

Working note:
1. Computation of theoretical ex-rights fair value per share
𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑚𝑚𝑒𝑑𝑖𝑎𝑡𝑒𝑙𝑦 𝑝𝑟𝑖𝑜𝑟 𝑡𝑜 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠 +
𝑇𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑓𝑟𝑜𝑚 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑝𝑟𝑖𝑜𝑟 𝑡𝑜 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒
+ 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑒𝑥𝑐𝑒𝑟𝑐𝑖𝑠𝑒
(𝑅𝑠. 25 × 10,00,000 𝑠ℎ𝑎𝑟𝑒𝑠) + (𝑅𝑠. 20 × 2,50,000 𝑠ℎ𝑎𝑟𝑒)
10,00,000 𝑠ℎ𝑎𝑟𝑒𝑠 + 2,50,000 𝑠ℎ𝑎𝑟𝑒𝑠
𝑅𝑠.3,00,00,000
12,50,000 𝑠ℎ𝑎𝑟𝑒𝑠
= 𝑅𝑠. 24

2. Computation of adjustment factor

𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑜𝑟 𝑡𝑜 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 𝑜𝑓 𝑟𝑖𝑔ℎ𝑡𝑠
= 𝑡ℎ𝑒𝑜𝑟𝑎𝑡𝑖𝑐𝑎𝑙 𝑒𝑥−𝑟𝑖𝑔ℎ𝑡𝑠 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
= 𝑅𝑠. 25/𝑅𝑆. 24 = 𝑅𝑠. 1.04 (𝑎𝑝𝑝𝑟𝑜𝑥. )
Question 17)
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No. of equity shares outstanding = 30,00,000 Basic earnings per share ₹ 5.00
No. of 12% convertible debentures of ₹ 100 each; 50,000 Each debenture is convertible into 10 equity shares
Tax Rate 30%
Compute Diluted Earnings per Share.
Working notes should form part of the answer.

SOLUTION
Earnings for the year:
= No. of Shares x Basic EPS
= 30,00,000 shares x ₹ 5 per share = ₹ 1,50,00,000
Computation of Adjusted Net Profit:
= Earnings for the year + Interest on debentures net of tax
= 1,50,00,000 + (6,00,000 - 1,80,000) = ₹ 1,54,20,000
Computation of Adjusted Denominator:
No. of equity shares resulting from conversion of debentures:
= 50,000 x 10 shares = 5,00,000 shares
No. of equity shares for diluted EPS = 30,00,000 + 5,00,000
= 35,00,000 shares
Computation of Diluted EPS:
= ₹ 1,54,20,000/35,00,000 shares = ₹ 4.4 per share.

Question 18)
(a) Stock options have been granted by AB Limited to its employees and they vest equally over 5 years, i.e., 20 per
cent at the end of each year from the date of grant. The options will vest only if the employee is still employed with
the company at the end of the year. If the employee leaves the company during the vesting period, the options that
have vested can be exercised, while the others would lapse. Currently, AB Limited includes only the vested
options for calculating Diluted EPS. Should only completely vested options be included for computation of
Diluted EPS? Is this in accordance with the provisions of AS 20? Explain.
(b) X Limited, as at March 31, 2021, has income from continuing ordinary operations of Rs. 2,40,000, a loss from
discontinuing operations of Rs. 3,60,000 and accordingly a net loss of Rs. 1,20,000. The Company has 1,000
equity shares and 200 potential equity shares outstanding as at March 31, 2021. You are required to compute
Basic and Diluted EPS?

SOLUTION:
(a) The current method of calculating Diluted EPS adopted by AB limited is not in accordance with AS 20. The
calculation of Diluted EPS should include all potential equity shares, i.e., all the stock options granted at the
balance sheet date, which are dilutive in nature, irrespective of the vesting pattern. The options that have lapsed
during the year should be included for the portion of the period the same were outstanding, pursuant to the
requirement of the standard.
AS 20 states that “A potential equity share is a financial instrument or other contract that entitles, or may entitle,
its holder to equity shares”. Options including employee stock option plans under which employees of an
enterprise are entitled to receive equity shares as part of their remuneration and other similar plans are examples
of potential equity shares. Further, for the purpose of calculating diluted earnings per share, the net profit or loss
for the period attributable to equity shareholders and the weighted average number of shares outstanding during
the period should be adjusted for the effects of all dilutive potential equity shares.
(b) As per AS 20 “Potential equity shares should be treated as dilutive when, and only when, their conversion to
equity shares would decrease net profit per share from continuing ordinary operations”. As income from
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continuing ordinary operations, Rs. 2,40,000 would be considered and not Rs. (1,20,000), for ascertaining
whether 200 potential equity shares are dilutive or anti-dilutive. Accordingly, 200 potential equity shares would be
dilutive potential equity shares since their inclusion would decrease the net profit per share from continuing
ordinary operations from Rs. 240 to Rs. 200. Thus the basic E.P.S would be Rs. (120) and diluted E.P.S. would be
Rs. (100).

AS 16 – “BORROWING COSTS”
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Question 19)
Entity took a SBI Loan of 25,00,000 @12% p.a. on 1/4/22 for Building Construction:
1/5/22 = 15,00,000
1/Aug/22 = 10,00,000
Construction Completed on 28/Feb/23
Calculate Borrowing Cost to be Capitalised.

Solution:
Capitalisation Shall start from 1/May till 28/Feb
1/May = 15,00,000 x 12% x 10/12 = 1,50,000
1/Aug = 10,00,000 x 12% x10/12* = 1,00,000
Borrowing Capital to be Capitalised = 2,50,000
Borrowing Capital to be transfer to P&L A/c = 3,00,000 – 2,50,000 = 50,000
*Note: - As per AS 16, Under specific Borrowing, Capitalisation Shall Commence from the date of First Expenditure
incurred on Qualifying Asset for all Expenditure incurred further.

Question 20)
Entity Borrowed on 1/4/22 9%, 30 lakhs for Construction of two Qualifying assets. Construction Begins from 1/4/22.
The loan was availed on 1/4/22 & started utilizing in Qualifying Asset. Remaining funds were temporarily invested @7%
p.a.
QA 1 QA 2
Expenditure on 1/4/22 5,00,000 10,00,000
Expenditure on 1/10/22 5,00,000 10,00,000

Calculate Total Borrowing Cost & Capitalised Borrowing Cost.

Solution:
Particulars QA 1 QA 2
Borrowing Cost 10,00,000 x 9% = 90,000 20,00,000 x 9% = 1,80,000
(-) Investment Income 5,00,000 x 7% x6/12 = (17,500) 10,00,000 x 7% x 6/12 = (35,000)
Net Borrowing Cost to be Capitalised 72,500 1,45,000
Total Cost of QA 10,72,500 21,45,000
(After Capitalisation)

Question 21)
Rainbow Limited borrowed an amount of ₹ 150 crores on 1.4.20X1 for construction of boiler plant @ 11%
p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of capital is 13%
p.a., the accountant of Rainbow Ltd. capitalized ₹ 19.50 crores for the accounting period ending on
31.3.20X2. Due to surplus fund out of ₹ 150 crores, income of ₹ 3.50 crores were earned and credited to profit and
loss account. Comment on the above treatment of accountant with reference to relevant accounting standard.
Solution
Para 10 of AS 16 'Borrowing Costs' states "To the extent that funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset should be
determined as the actual borrowing costs incurred on that borrowing during the period less any income on the

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temporary investment of those borrowings."

The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the
enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of
obtaining a qualifying asset.
Thus, the treatment of accountant of Rainbow Ltd. is incorrect.
Amount of borrowing costs capitalized should be calculated as follows:
Particulars ₹ in crores
Actual interest for 20X1-20X2 (11% of ₹ 150 crores) 16.50
Less: Income on temporary investment from specific borrowings (3.50)
Borrowing costs to be capitalized during year 20X1-20X2 13.00

Question 22)
On 1st April, 2011, Amazing Construction Ltd. obtained a loan of ₹32 crores to be utilized as under:
(i) Construction of sealink across two cities : ₹25 crores
(Work was held up totally for a month during the year due to high water levels)
(ii) Purchase of equipments and machineries : ₹3 crores
(iii) Working capital : ₹2 crores
(iv) Purchase of vehicles : ₹50,00,000
(v) Advance for tools/cranes etc. : ₹50,00,000
(vi) Purchase of technical know-how : ₹1 crores
(vii) Total interest charged by the bank for the year : ₹80,00,000
ending 31st March, 2012
Show the treatment of interest by Amazing Construction Ltd.

SOLUTION
According to para 3 of AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period of
time to get ready for its intended use.
As per para 6 of the standard, 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. Other borrowing costs should be
recognised as an expense in the period in which they are incurred.
Assumption: Additional Assets is used for same restoration, Hence QA.
The treatment of interest by Amazing Construction Ltd. can be shown as:

Qualifying Interest to be Interest to be

Asset capitalized charged to
Profit & Loss
A/c
Construction of sea-link Yes 62,50,000 [80,00,000*(25/32)]
Purchase of equipments and No 7,50,000 [80,00,000*(3/32)]
machineries
Working capital No 5,00,000 [80,00,000*(2/32)]
Purchase of vehicles No 1,25,000 [80,00,000*(.5/32)]
Advance for tools, cranes etc. No. 1,25,000 [80,00,000*(.5/32)]
Purchase of technical know-how No 2,50,000 [80,00,000*(1/32)]
Total 62,50,000 17,50,000

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Question 23)
XYZ Ltd. has taken a loan of USD 10,000 on 1.04.2003 for a specific project at an interest rate of 5%
p.a., payable annually. On 1 April, 2003, the exchange rate between the currencies was Rs. 45 per $.
The exchange rate, as at March, 31st, 2004 is Rs. 48 per $. The Corresponding amount could have been
borrowed by XYZ Ltd. in local currency at an interest rate of 11% p.a. as on 1 April, 2003.

SOLUTION:
Step – 1 = Calculation of Actual Interest:
$10000 x 5% = $500 x Rs. 48 = Rs.24000
Step – 2 = Calculation of Interest if borrowing in Local Currency:
$10000 x 45 x 11% = Rs. 49500
Step – 3 = Calculation of Exchange Loss on FC Borrowings
$10000 x Rs3 = Rs. 30000

Note: Loss to the extent of saving in interest shall be treated as borrowing cost.
i.e., Actual Saving of Interest or Actual Exchange Loss whichever is lower
(49500 – 24000) or 30000 whichever is lower = 25500/- is Borrowing cost
Remaining exchange loss is to be transferred to P&L as other expense as per AS 11

Question 24)
The borrowings profile of Santra Pharmaceuticals Ltd. set up for the manufacture of antibiotics at Navi
Mumbai is as under:
Date Nature of borrowings Amount Purpose of Borrowings Incidental
borrowed Expenses
1/1/08 15% Demand Loan 60 Lakhs Acquisition of Fixed Assets 8.33%
1/7/08 14.5% Term Loan 40 Lakhs Acquisition of Plant & 5%
Machinery
1/10/08 14% Bonds 50 Lakhs Acquisition of Fixed Assets 8%
Fixed assets considered as Qualified as Under:
● Sterling Manufacturing Shed Rs. 10,00,000
● Plant & Machinery (Total) Rs. 90,00,000
● Other Fixed Assets Rs. 10,00,000
The project is completed on 1st January 2009 and is ready for commercial production. Show the capitalization of the
borrowing cost.

SOLUTION
Assuming Calendar Year
Working Note – 1: Calculation of Borrowing Cost as Specific Borrowings.
1/7/08
14.5% Term Loan = 40,00,000
Interest (40,00,000 × 14.5% × 6/12) = 2,90,000
+ Incidental Exp. = 2,00,000
Total Specific Borrowing Cost = 4,90,000
Conclusion: Entire 4,90,000 shall be capitalised to the cost of Plant & Machinery.

Working Note – 2: Weighted Average Borrowing Rate: (General)

(i) 1/1/08
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15% Demand Loan = 60,00,000 × 15% = 9,00,000

+ Incidental Charges @ 8.33% = 5,00,000
Total Borrowing Cost = 14,00,000
(ii) 1/10/08
14% Bond = 50,00,000 × 14% × 3/12 = 1,75,000
+ Incidental Charges @ 8% = 4,00,000
Total Borrowing Cost = 5,75,000

14,00,000+5,75,000
Weighted Average Capitalisation Rate = 12 3 × 100 = 27.24%
(60,00,000 × )+(50,00,000 × )
12 12

Capitalisation of Borrowing Cost to the following Qualifying Assets:

S.M.S = 10,00,000 × 27.24% = 2,72,400
P & M = 50,00,000 × 27.24% = 13,62,000
Other FA = 10,00,000 × 27.24% = 2,72,400
Total General Borrowing Cost Capitalized = 19,06,800

Borrowing Cost charged to P & L = 14,00,000 + 5,75,000 – 19,06,800 = 68,200

Question 25)
Harish Construction Company is constructing a huge building project consisting of four phases. It is
expected that the full building will be constructed over several years but Phase I and Phase II of the
building will be started as soon as they are completed.
Following is the detail of the work done on different phases of the building during the current year:
(₹ In lakhs)
Phase I Phase Phase Phase
II III IV
₹ ₹ ₹ ₹
Cash expenditure 10 30 25 30
Building purchased 24 34 30 38
Total expenditure 3 6 55 68
Total expenditure of all phases 4 4 221
Loan taken @ 15% at the 200
beginning of the year
During mid of the current year, Phase I and Phase II have become operational. Find out the total amount to be
capitalized and to be expensed during the year.

Solution
Computation of amount to be capitalized
No. Particulars ₹
1. Interest expense on loan ₹ 2,00,00,000 at 15% 30,00,000
2. Total cost of Phases I and II (₹ 34,00,000 +64,00,000) 98,00,000
3. Total cost of Phases III and IV (₹ 55,00,000 + ₹ 68,00,000) 1,23,00,000
4. Total cost of all 4 phases 2,21,00,000
5. Total loan 2,00,00,000
6. Interest on loan used for Phases I & II, based on proportionate 3,30,317
Loan amount = 30,00,000/2,21,00,000 x 98,00,000 (approx.)
7. Interest on loan used for Phases III & IV, based on proportionate Loan 16,69,683

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amount = 30,00,000/2,21,00,000 x 1,23,00,000 (approx.)

Accounting treatment For Phase I and Phase II

Since Phase I and Phase II have become operational at the mid of the year, half of the interest amount of ₹ 6,65,158.50
(i.e., ₹ 13,30,317/2) relating to Phase I and Phase II should be capitalized (in the ratio of asset costs 34:64) and added
to respective assets in Phase I and Phase II and remaining half of the interest amount of ₹ 6,65,158.50 (i.e., ₹
13,30,317/2) relating to Phase I and Phase II should be expensed during the year.

For Phase III and Phase IV

Interest of ₹ 16,69,683 relating to Phase III and Phase IV should be held in Capital Work-in-Progress till assets
construction work is completed, and thereafter capitalized in the ratio of cost of assets. No part of this interest amount
should be charged/expensed off during the year since the work on these phases has not been completed yet.

Question 26)
On 1stApril, 2022 Workhouse Limited took a loan from a Financial Institution for ₹ 25,00,000 for the construction of
Building. The rate of interest is 12%.
In addition to above loan, the company has taken multiple borrowings as follows:
(i) 8% Debentures ₹ 15,00,000
(ii) 15% Term Loan ₹ 30,00,000
(iii) 10% Other Loans ₹ 18,00,000
The company has utilised the above funds in construction / purchase of the following assets:
(i) Building ₹ 70,00,000
(ii) Furniture ₹ 22,00,000
(iii) Plant & Machinery ₹ 90,00,000
(iv) Factory Shed ₹ 43,00,000
The construction of Building, Plant & Machinery and Factory Shed was completed on 31st March 2023. Readymade
Furniture was purchased directly from the market. The factory was ready for production on 1stApril 2023.
You are required to calculate the borrowing cost for both qualifying and non-qualifying assets.
SOLUTION
Interest to be Capitalized (on qualifying asset)
Particulars Computation ₹
i. On specific Borrowings 25,00,000x12% 3,00,000
ii. On non-specific borrowings (W.N.1) 6,67,500
iii. Amount of interest to be Capitalised (i+ii) 9,67,500

Interest transferred to P&L (on non-qualifying asset)

Particulars Computation ₹
i. On non-specific Borrowings (W.N.1) 82,500

Working note:
1. Treatment of interest under AS 16 on non-specific borrowings
Particulars Qualifying # Computation Interest-Capitalized Interest-charged to
asset P&L A/c
i. Building Yes 45,00,000/2,00,00,000 1,68,750 -
x 63,00,000
x 11.9048%
ii. Furniture No 22,00,000/2,00,00,000 - 82,500

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x 63,00,000
x 11.9048%
iii. Plant & Yes 90,00,000/2,00,00,000 3,37,500 -
Machinery x 63,00,000
x 11.9048%
iv. Factory shed Yes 43,00,000/2,00,00,000 1,61,250 -
x 63,00,000
x 11.9048%
Total 6,67,500 82,500

NOTE: Alternative manner of presentation for Treatment of interest under AS 16 on non-specific borrowings:

Particulars Qualifying asset Expenses Share in borrowings ₹ Interest – Interest - charged

Incurred ₹ Capitalized ₹ to P&L A/c ₹
i. Building Yes 45,00,000 7,50,000 x 45/200 1,68,750 -
ii. Furniture No 22,00,000 7,50,000 x 22/200 - 82,500
iii. Plant & Yes 90,00,000 7,50,000 x 90 /200 3,37,500 -
Machinery
iv. Factory shed Yes 43,00,000 7,50,000 x 43 / 200 1,61,250 -
Total 2,00,00,000 6,67,500 82,500

2. Weighted Average interest rate for non-specific borrowings

Particulars Amount of loan (a) Rate of interest (b) Amount of interest (c) = (a) x
(b)
Debentures 15,00,000 8% 1,20,000
Term loan 30,00,000 15% 4,50,000
Other loans 18,00,000 10% 1,80,000
63,00,000 7,50,000
# Weighted Average Rate of Interest
= 7,50,000 / 63,00,000 x 100 = 11.9048%

Question 27)
ABC Limited has started construction of an asset on 1st December, 2020, which continues till 31st March, 2021 (and
is expected to go beyond a year). The entity has not taken any specific borrowings to finance the construction of the
asset but has incurred finance costs on its general borrowings during the construction period. The directly attributable
expenditure at the beginning of the month on this asset was Rs. 10 lakhs in December 2020 and Rs. 4 lakhs in each of
the months of January to March 2021. At the beginning of the year, the entity had taken Inter Corporate Deposits of Rs.
20 lakhs at 9% rate of interest and had an overdraft of Rs. 4 lakhs, which increased to Rs. 8 lakhs on 1st March, 2021.
Interest was paid on the overdraft at 10% until 1st January, 2021 and then the rate was increased to 12%. You are
required to calculate the annual capitalization rate for computation of borrowing cost in accordance with AS 16
'Borrowing Costs'.
SOLUTION
Calculation of capitalization rate on borrowings other than specific borrowings
Nature of Period of Amount of loan Rate of Weighted average amount of
general outstanding (Rs.) interest p.a. interest
borrowings balance (Rs.)
a b c d = [(b x c) xa/12)]
9% Debentures 12 months 20,00,000 9% 1,80,000
Bank overdraft 9 months 4,00,000 10% 30,000
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2 months 4,00,000 12% 8,000

1 month 8,00,000 12% 8,000
36,00,000 2,26,000
Weighted average cost of borrowings
= {20,00,000 x (12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12)} = 24,33,334
Capitalisation rate = [(Weighted average amount of interest / Weighted average of general borrowings) x 100] =
[(2,26,000 / 24,33,334) x 100] = 9.29% p.a.

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AS 10 “PROPERTY, PLANT AND EQUIPMENT

Question 28)
Fair value of Asset Purchased Rs. 1,00,000/-
Fair Value of Asset Given up Rs. 70000/-
Cash Paid Rs. 25000/-
Carrying Amount of Given up asset Rs. 55000/-
How to Record Asset Purchased, assume Commercial substance is present in the transaction.

Solution:
New Asset A/c Dr. 95000
To Old Asset A/c 55000
To Bank A/c 25000
To Gain (P&L) 15000 (B/f)

Question 29)
Fair value of Asset Purchased Rs. 3,00,000/-Fair Value of Asset given up is not known Carrying Amount of Given up
asset Rs. 5,50,000/-Cash Received - 200000
How to record as per IndAs 16, Assume Commercial substance is present in the transaction.

Solution:
New Asset A/c Dr. 3,00,000
Bank A/c Dr. 2,00,000
Loss on Ex. Dr. 50,000
To Old Asset A/c 5,50,000

Question 30)
Fair value of Asset Purchased Rs. 3,00,000/-
Fair Value of Asset given up 3,30,000/-
Carrying Amount of Given up asset Rs. 2,00,000/-
Cash Paid 50,000/-
Give Accounting Treatment as per IndAs 16,
Assuming No Commercial substance is present in the transaction.

Solution
New Asset A/c Dr. 2,50,000 (B/f)
To Old Asset A/c 2,00,000
To Cash A/c 50,000

Question 31)
PPE costs Rs. 50 Lacs acquired on 01.04.21 with estimated useful life of 20 years. Estimated Decommissioning
liability to be incurred after 20 years is 12 Lacs. Discounting Rate is 10%. At the end of the 6th Year, estimated outflow
of Decomm. Liab. Changed to Rs. 10 Lacs & discounting rate changed to 11%.
Apply IndAS 16 till 6th Year.

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Solution
1. Calculate total cost of PPE as on 1/4/21
Particular Amount
Purchase & Direct Cost 50,00,000
+ PV of Decommissioning liability 1,78,320
(12,00,000 x 0.148)
Cost of PPE 51,78,320

Journal Entry
PPE a/c Dr. 51,78,320
To Bank/Creditor 50,00,000
To Provision for Decommissioning cost 1,78,320

2. Calculate the amt of provision to be shown at the end of the year under b/s
1st year. Interest cost as 178320 @ 10% = 17,832
Interest cost (p&l) Dr. 17,832
To Provision a/c 17,832
Year Opening Balance Interest During the year Closing Balance
1st year 1,78,320 17,832 1,96,152
2nd year 1,96,152 19,615 2,15,767
3rd year 2,15,767 21,577 2,37,344
4th year 2,37,344 23,734 2,61,078
5th year 2,61,078 26,108 2,87,186
6th year 2,87,186 28,718 3,15,905

Carrying amount = Provision for decommissioning cost at the end of the 6th year = 3,15,905

3. Calculate the change in provision of Decommissioning cost as on 1/4/27: -

What should be the provision amt based as following received figures: -
Discount rate = 11%
Out flow = 10,00,000
Remaining period = 20 – 6 = 14 years
PVF @ 11% for 14th year = 0.232
Revised provision based as change (0.232 x 10,00,000) = 2,32,000 as on 1/4/27
Carrying amount (opening balance) of provision = 3,15,905 as on 1/4/27
Decrease in liabilities = 83,905

Case 1: Suppose PPE is under Cost model:

Provision a/c Dr. 83905
To PPE a/c 83905

Case 2: Suppose PPE is under Revaluation model:

Provision a/c Dr. 83905
To Rev. Surplus a/c 83905

However, Gain to the Extent of earlier Revaluation loss shall be changed to P&l a/c.

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Question 32)
Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in its Department
A in three months' time. Special foundations were required for the machinery which were to be prepared
within this supply lead time. The cost of the site preparation and laying foundations were Rs. 1,41,870.
These activities were supervised by a technician during the entire period, who is employed for this purpose of Rs.
45,000 per month. The technician's services were given by Department B to Department A, which billed the services
at Rs. 49,500 per month after adding 10% profit margin.
The machine was purchased at Rs. 1,58,34,000 inclusive of IGST @ 12% for which input credit is available to Shrishti
Ltd. Rs. 55,770 transportation charges were incurred to bring the machine to the factory site. An Architect was
appointed at a fee of Rs. 30,000 to supervise machinery installation at the factory site.
Ascertain the amount at which the Machinery should be capitalized under AS 10 considering that IGST credit is
availed by the Shristhi Limited. Internally booked profits should be eliminated in arriving at the cost of machine.

SOLUTION
Calculation of Cost of Fixed Asset (i.e., Machinery)
Particulars Rs.
Purchase Price Given (Rs. 158,34,000 x 100/112) 1,41,37,500
Add: Site Preparation Cost Given 1,41,870
Technician’s Salary Specific/Attributable overheads for 3 1,35,000
months (45,000 x3)
Initial Delivery Cost Transportation 55,770
Professional Fees for Architect’s Fees 30,000
Installation
Total Cost of Asset 1,45,00,140

Question 33)
On 1st April 20X1, an item of property is offered for sale at Rs. 10 million, with payment terms being
three equal installments of Rs.33,33,333 over a two years period (payments are made on 1st April
20X1, 31st March 20X2 and 31st March 20X3).
The property developer is offering a discount of 5 percent (i.e., Rs. 0.5 million) if payment is made in full at the time of
completion of sale. Implicit interest rate of 5.36 percent p.a.
Show how the property will be recorded in accordance of AS 10.
SOLUTION:
AS 10 requires that the cost of an item of PPE is the cash price equivalent at the recognition date. Hence, the purchaser
that takes up the deferred payment terms will recognise the acquisition of the asset as follows

On 1st April, 20X1 (Rs) (Rs)

Property, Plant and Equipment Dr. 95,00,000
To Cash 33,33,333
To Accounts Payable 61,66,667
(Initial recognition of property)
On 31st March 20X2
Interest Expense Dr. 3,30,533
Accounts payable Dr. 30,02,800
To Cash 33,33,333
(Recognition of interest expense and payment of second
installment)

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On 31st March 20X3

Interest Expense Dr. 1,69,467
Accounts payable Dr. 31,63,867
To Cash 33,33,334
(Recognition of interest expense and payment of final
installment)

Question 34)
An entity gave the following Note in its Financial Statements:
‘The company chooses not to charge depreciation on Property, Plant and Equipment on account of:
(a) Annual Maintenance Contracts being expensed thereby ensuring timely repairs of Plant and
Machinery.
(b) Depreciation being a non-cash expense has no impact on cash flows. Accordingly, it is not necessary to
depreciate an asset when repairs and maintenance charges are expensed in the Statement of Profit and Loss.
(c) The values of certain assets like Property increase with passage of time, and hence charging depreciation does
not make sense.
(d) At the end of the useful life, the asset is ultimately sold, and since the asset is at cost due to no depreciation,
exact profit or loss on sale of the asset is stated.’
You are required to state the appropriateness of the above accounting policy in line with the relevant Accounting
Standards.

Solution
Depreciation refers to writing off the value of the asset over its useful life. Such write-off is necessitated on account of
normal wear-and-tear, usage, or obsolescence. Since items of Property, Plant and Equipment are generally used in
generating revenue, the pro-rated write-off in value of such item should be recorded in the books against the income
earned by such an asset.
Providing depreciation is mandatory, in spite of the fact that repairs are expensed in the Statement of Profit and Loss,
or the value of the Property is appreciating. Depreciation is a systematic allocation of cost of the asset against the
income generated from the continued use of the asset. Further, the Companies Act, 2013 mandates depreciation to be
charged in order to determine the correct profits. Thus, not charging depreciation would result in non-compliance with
the Companies Act provisions as well.
The argument laid down by the company and the reasons for the same being invalid are discussed below.
(a) Annual Maintenance Contracts being expensed thereby ensuring timely repairs of Plant and Machinery:
The fact that the company enters into Annual Maintenance Contracts for timely repairs can be regarded as a
running cost. Such expense is incurred in order to ensure that the machine continues to run as intended. Thus, it
implies that because the machine is being utilized, it will need regular repairs. In other words, continuous use is
resulting in normal wear-and-tear which is the reason why depreciation should be charged by the company. By
stating that the company incurs Annual Maintenance Expenses, the company is recording only the ’maintenance
expenses’, but not the wear-and-tear requiring the maintenance in the first place. Hence, this argument put forth
by the company is not valid.
(b) Depreciation being a non-cash expense has no impact on cash flows. Accordingly, it is not necessary to
depreciate an asset when repairs and maintenance charges are expensed in the Statement of Profit and Loss.
When viewed from the prism of depreciation alone, it appears that the fact that depreciation is a non-cash item
is correct. However, it must be noted that at the time of procurement of the asset, the company would have paid
cash. Depreciation is after all writing off this amount over the life of the asset. Hence the argument that
depreciation is a non-cash item is not valid. Depreciation is writing off the cost of the asset (which was already
paid for) over the useful life of the asset, and hence is mandatory.

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(c) The values of certain assets like Property increase with passage of time, and hence charging depreciation does
not make sense.
Certain assets like immovable property do increase in value with the passage of time. However, such assets are
‘used for the purposes of business’ and are not ‘held for sale’ or held as investment property. Accordingly, since
the asset is being used for carrying on business, providing depreciation will give a true and fair view of the results
of the company, and hence the argument that the value of the property appreciates is not valid.
If the company wants to show the fair market value of the PPE, then it has the option to apply Revaluation
model. However, depreciation is mandatory to be charged in Revaluation model also.
(d) At the end of the useful life, the asset is ultimately sold, and since the asset is at cost due to no depreciation,
exact profit or loss on sale of the asset is stated.’
The value of any asset, after usage, will reduce. Accordingly, the argument that the ‘exact profit or loss on sale of
the asset’ will be obtained is incorrect. Due to usage of the asset, the value of the asset would be lower than the
cost. Charging depreciation would seek to bring the book value approximating to such reduced value. Thereafter,
on sale of the asset, the true profit or loss would be available. Accordingly, this argument is also invalid.
It may be pertinent to note that Accounting Standard 1, Disclosure of Accounting Policies states that Disclosure of
accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the
accounts. In other words, the company cannot be absolved of the fact that it has not complied with the relevant
accounting standards merely by giving a disclosure of incorrect policies or practices being followed.
Thus, the company’s stand of disclosing the incorrect policy as a remedy is not correct. The company is suggested to
charge depreciation on a systematic basis over the useful life of the asset thereby complying with the Accounting
Standards.

Question 35)
Skanda Ltd. acquired a machinery for ₹ 2,50,00,000 five years ago. Depreciation was charged at 10%
p.a. on SLM basis, useful life being 10 years. At the beginning of Year 3, the machinery was revalued to
₹ 3,00,00,000 with the surplus on revaluation being credited to Revaluation Reserve. Depreciation was
provided on the revalued amount over the balance useful life of 8 years. The machinery was sold in the current year for
₹ 1,12,50,000. Give the accounting treatment for the above in the Company’s accounts. What will be the treatment if
the machinery fetched only ₹ 42,50,000 now?
Solution
Particulars ₹
Original Cost of the Asset 2,50,00,000
Less: Depreciation for 2 years (₹ 2,50,00,000 x 10% x 2 years) 50,00,000
Book Value at the beginning of Year 3 2,00,00,000
Add: Revaluation Surplus (balancing figure) 1,00,00,000
Revalued Amount as given (= revised depreciable value) 3,00,00,000
Less: Depreciation for Years 3-5 (₹ 3,00,00,000 ÷ 8 yrs x 3 yrs) 1,12,50,000
Carrying Amount at the end of Year 5 1,87,50,000

The treatment of Gain / Loss on Disposal / Revaluation is as below:

Particulars Disposal Proceeds = Disposal Proceeds =
₹ 1,12,50,000 ₹ 42,50,000
Book Value Less Disposal
Proceeds = Loss recognized in ₹ 1,87,50,000 – ₹ 1,12,50,000 = ₹ ₹ 1,87,50,000 – ₹ 42,50,000 =
Profit or Loss 75,00,000 (Loss) ₹ 1,45,00,000 (Loss)
Revaluation Surplus directly
transferred to Retained ₹ 1,00,00,000 ₹ 1,00,00,000
Earnings
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Question 36)
Akshar Ltd. installed a new Plant (not a qualifying asset), at its production facility, and incurred the
following costs:
▪ Cost of the Plant (as per supplier’s invoice): ₹ 30,00,000
▪ Initial delivery and handling costs: ₹ 1,00,000
▪ Cost of site preparation: ₹ 2,00,000
▪ Consultant fee for advice on acquisition of Plant: ₹ 50,000
▪ Interest charges paid to supplier against deferred credit: ₹ 1,00,000
▪ Estimate of Dismantling and Site Restoration costs: ₹ 50,000 after 10 years (Present Value is ₹ 30,000)
▪ Operating losses before commercial production: ₹ 40,000
The company identified motors installed in the Plant as a separate component and a cost of ₹ 5,00,000 (Purchase
Price) and other costs were allocated to them proportionately. The company estimates the useful life of the Plant and
those of the Motors as 10 years and 6 years respectively and SLM method of Depreciation is used.
At the end of Year 4, the company replaces the Motors installed in the Plant at a cost of ₹ 6,00,000 and estimated the
useful life of new motors to be 5 years. Also, the company revalued its entire class of Fixed Assets at the end of Year 4.
The revalued amount of Plant as a whole is ₹ 25,00,000. At the end of Year 8, the company decides to retire the Plant
from active use and also disposed the Plant as a whole for ₹ 6,00,000.
There is no change in the Dismantling and Site Restoration liability during the period of use. You are required to explain
how the above transaction would be accounted in accordance with AS 10.

Solution
1. Cost at Initial Recognition:
Particulars ₹
Cost of the Plant (as per Invoice) 30,00,000
Initial Delivery and Handling Costs 1,00,000
Cost of Site Preparation 2,00,000
Consultants’ Fees 50,000
Estimated Dismantling and Site Restoration Costs 30,000
Total Cost of Plant including Motors 33,80,000
Less: Cost of Motors identified as a separate component (1/6)* 5,63,333
Cost of the Plant (excluding Motors – balance 5/6) 28,16,667
* Purchase price of Motors = ₹ 5,00,000 out of ₹ 30,00,000 i.e., 1/6 of value of Plant
Note: Since the asset is not a qualifying asset, payment of interest to the supplier is not capitalized. Further,
operating losses of ` 40,000 incurred before commercial production is not a directly attributable cost, and
hence excluded from cost of asset. These costs are expensed to the P/L as and when they are incurred.

2. Recognition of Motors Replacement

Particulars ₹
Cost of Motors determined above 5,63,333
Less: Depreciation for 4 years (as per SLM) 3,75,555
5,63,333 ÷ 6 years x 4 years
Carrying Amount of Motors at the end of Year 4 1,87,778

Accounting: The company should derecognize the existing Carrying Amount of Motors replaced of ₹ 1,87,778. Further,
the acquisition cost of new motors of ₹ 6,00,000 would be capitalized as a separate component. This amount will be
depreciated over the next 5 years at ₹ 6,00,000 ÷ 5 years = ₹ 1,20,000 p.a.

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3. Revaluation
Particulars ₹
Cost of the Plant at initial recognition [from (1) above] 28,16,667
Less: SLM Depreciation for 4 years: ₹ 28,16,667 ÷ 10 years x 4 years 11,26,667
Carrying Amount of Plant at the end of Year 4 16,90,000
Revalued Amount of Plant (Excluding Motors, since the same is treated 19,00,000
as a separate component: ₹ 25,00,000 –
₹ 6,00,000)
Therefore, Gain on Revaluation credited to Revaluation Reserve 2,10,000
Revised Depreciation Charge p.a.: 19,00,000 ÷ 6 years 3,16,667

4. Derecognition
Particulars Motors Plant (excluding
Motors)
Cost / Revalued Amount at end of Year 4 6,00,000 19,00,000
Less: Depreciation for Years 5-8 1,20,000 x 4 3,16,667 x 4
= 4,80,000 =12,66,668
Carrying Amount before Disposal / De- recognition 1,20,000 6,33,332
Less: Disposal Proceeds ₹ 6,00,000 allocated in ratio of carrying 95,575 5,04,425
amount
Loss to be written off to P/L 24,425 1,28,907

Notes:
(a) The Revaluation Surplus of ` 2,10,000 would be transferred directly to Retained Earnings.
(b) The allocation of disposal proceeds of ` 6,00,000 for the plant as whole is apportioned based on carrying amount
of motors and plant (excluding motors)
Alternatively, it may be apportioned as 1/6 towards motors and 5/6 plant (excluding motors) based on the reasoning that
the initially, motors amounted to 1/6 of the entire plant. This approach may not be preferable because there has been a
revaluation of the plant (excluding motors) and a disposal and subsequent acquisition of the Motor, which is not in the
initial proportion of 5/6 and 1/6 respectively.

Question 37)
Bharat Infrastructure Ltd. acquired a heavy machinery at a cost of ₹ 1,000 lakhs, the breakdown of its
components is not provided. The estimated useful life of the machinery is 10 years. At the end of Year 6,
the turbine, which is a major component of the machinery, needed replacement, as further usage and
maintenance was uneconomical. The remainder of the machine is in good condition and is expected to last for the
remaining 4 years. The cost of the new turbine is ₹ 450 lakhs. Give the accounting treatment for the new turbine,
assuming SLM Depreciation and a discount rate of 8%.
Solution
As per AS 10, Property, Plant and Equipment, the derecognition of the carrying amount of components of an item of
Property, Plant and Equipment occurs regardless of whether the cost of the previous part / inspection was identified in
the transaction in which the item was acquired or constructed. If it is not practicable for an enterprise to determine the
carrying amount of the replaced part/ inspection, it may use the cost of the replacement or the estimated cost of a
future similar inspection as an indication of what the cost of the replaced part/ existing inspection component was
when the item was acquired or constructed.
In the given case, the new turbine will produce economic benefits to Bharat Infrastructure Ltd. and the cost is
measurable. Since the recognition criteria is fulfilled, the same should be recognised as a separate item of Property,
Plant and Equipment. However, since the initial breakup of the components is not available, the cost of the

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replacement of ₹ 450 lakhs can be used as an indication based on the guidance given above, discounted at 8% for the
6-year period lapsed.
Thus, estimate of cost 6 years back = ₹ 450 lakhs ÷ 1.086 = ₹ 283.58 lakhs Current carrying amount of turbine (to be
de-recognised) = Estimated cost ₹ 283.58 lakhs (–) SLM depreciation at 10% (useful life 10 years) for 6 years ₹ 170.15
lakhs= ₹ 113.43 lakhs.
Hence revised carrying amount of the machinery will be as under:
Particulars ₹ in lakhs
Historical Cost [₹ 1,000 lakhs (–) SLM Depreciation at 10% (10 year life) 400.00
for 6 years]
Add: Cost of new turbine 450.00
Less: Derecognition of current carrying amount of old turbine (113.43)
New Carrying Amount of Machinery 736.57

Question 38)
(a) Entity A has a policy of not providing for depreciation on PPE capitalized in the year until the following year, but
provides for a full year's depreciation in the year of disposal of an asset. Is this acceptable?
(b) Entity A purchased an asset on 1st January 2016 for Rs. 1,00,000 and the asset had an estimated useful life of
10 years and a residual value of nil. On 1st January 2020, the directors review the estimated life and decide that
the asset will probably be useful for a further 4 years. Calculate the amount of depreciation for each year, if
company charges depreciation on Straight Line basis.
(c) The following items are given to you:
ITEMS
(1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any
items produced while bringing the asset to that location and condition (such as samples produced when
testing equipment);
(2) Costs of conducting business in a new location or with a new class of customer (including costs of staff
training);
(3) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management
(4) Costs of opening a new facility or business, such as, inauguration costs;
(5) Purchase price, including import duties and non–refundable purchase taxes, after deducting trade
discounts and rebates.
With reference to AS 10 “Property, Plant and Equipment”, classify the above 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.
SOLUTION
(a) The depreciable amount of a tangible fixed asset should be allocated on a systematic basis over its useful
life. The depreciation method should reflect the pattern in which the asset's future economic benefits are
expected to be consumed by the entity. Useful life means the period over which the asset is expected to be
available for use by the entity. Depreciation should commence as soon as the asset is acquired and is
available for use. Thus, the policy of Entity A is not acceptable.

(b) The entity has charged depreciation using the straight-line method at Rs. 10,000 per annum i.e. (1,00,000/10
years). On 1st January 2020, the asset's net book value is [1,00,000 – (10,000 x 4)] = Rs. 60,000.
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The remaining useful life is 4 years. The company should amend the annual provision for depreciation to
charge the unamortized cost over the revised remaining life of four years. Consequently, it should charge
depreciation for the next 4 years at Rs. 15,000 per annum i.e. (60,000 / 4 years). Depreciation is recognized
even if the Fair value of the Asset exceeds its Carrying Amount. Repair and maintenance of an asset do not
negate the need to depreciate it.

(C)
(1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any
items produced while bringing the asset to that location and condition (such as samples produced when
testing equipment) will be classified as “Directly attributable cost of PPE”.
(2) Costs of conducting business in a new location or with a new class of customer (including costs of staff
training) will be classified under head (iii) as it will not be included in determining the carrying amount of
an item of PPE.
(3) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management will be included in determination of Purchase
Price of PPE
(4) Costs of opening a new facility or business, such as, inauguration costs will be classified under head (iii) as it
will not be included in determining the carrying amount of an item of PPE.
(5) Purchase price, including import duties and non–refundable purchase taxes, after deducting trade discounts
and rebates will be included in determination of Purchase Price of PPE.

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AS 15 “ EMPLOYEE BENEFITS”

Question 39)
A lump sum gratuity, equal to 1% of final salary for each year of service, is payable on termination of service. The salary
in year 1 is Rs. 10,000 and is assumed to increase at 7% (compound) each year resulting in Rs. 13,100 at the end of
year 5. The discount rate used is 10% per annum. Shows how the obligation builds up for an employee who is expected
to leave at the end of year 5, assuming that there are no changes in actuarial assumptions.
SOLUTION: (Amount in Rs.)
Computation of benefits attributed to the current and prior years:
Year 1 2 3 4 5
Benefit attributed to:
- Prior year 0 131 262 393 524
- Current year (1% of final salary) 131 131 131 131 131
- Current and prior years 131 262 393 524 655

Computation of obligation for an employee:

Year 1 2 3 4 5
Opening Obligation - 89 196 324 476
Interest at 10% - 9 20 33 48
Current service cost (see note 2) 89 98 108 119 131
Closing Obligation (see note 1) 89 196 324 476 655

Note 1
Closing obligation
Year 1 2 3 4 5
Gratuity attributable 131 262 393 524 655
Payable after (years) 4 3 2 1 0
Discounting factor .683 .751 .826 .909 1
PV 89 196 324 476 655

Note 2
Current Service Cost
Year 1 2 3 4 5
Gratuity of current year 131 131 131 131 131
Payable after (years) 4 3 2 1 0
Discounting factor .683 .751 .826 .909 1
PV 89 98 108 119 131

Question 40)
On 1.4.20X1, the fair value of plan assets is Rs.10,000. On 30.9.20X1 it paid benefits of Rs. 1,500 and received
contributions of Rs. 4,500. On 31.03.20X2, fair value of plan assets is Rs.15,000 and PV of obligation was Rs. 14,972.
Actuarial losses on obligation was Rs. 60 on 31.03.20X2.
Find the net actuarial gain/losses on 31.03.20X2 based on the following estimates:
Interest and dividend income 9.00%
Realised and unrealized gain on plan assets 1.50%
Administration costs (1.00%)
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SOLUTION
Calculation of Annual Ex. Return %
Interest and dividend income 9.00%
Realised and unrealized gain on plan assets 1.50%
Administration costs (1.00%)
Net Annual Ex. Return % 9.50%

Six monthly rate = [Square Root of (1+0.095)] -1 X 100 = 4.64%

Plan Assets
Date Particulars Amount Date Particulars Amount
01/04 To Balance 10,000 30/09 By Bank 1,500
30/09 To Bank 4,500
31/03 To Ex. Return
10,000X9.5% 950
3,000X4.64% 139
31/03 To Acturial Gain 911 31/03 By Balance 15,000

Question 41)
An enterprise operates a pension plan that provides a pension of 2% on final salary for each year of service. The benefit
will be vested after 5 years of service. On 1.1.2005, the enterprise improves the pension to 2.5% of the final salary for
each year of service starting from 1.1.2001 at the date of improvement the Present Value of additional benefits for
service from 1.1 .2001 to as follows:
● Employees with more than 5 years of service at 1.1.2005Rs. 2,00,000
● Employees with less than 5 years of service Rs. 1,20,000
(Average period until vesting = 3 years)
Suggest the accounting treatment.
SOLUTION
01) Amortised Past Service Cost means Additional Benefits payable to employees with more than 5 years of
service = 2,00,000
It is to be immediately recognised in P&L
02) Unamortised Past Service Cost means additional benefits payable to employees with less than 5 years i.e.
Unvested Benefits = Rs. 1,20,000
It is to be recognized in next 3 years.
01/01/05 Amortised PSC dr. 2
Unamortised PSC dr. 1.2
To DBO Payable 3.2
01/01/05 Profit and loss A/c dr. 2
To Amortised PSC 2

Question 42)
An employee Roshan has joined a company XYZ Ltd. in the year 20X1. The annual emoluments of
Roshan as decided is ₹14,90,210. The company also has a policy of giving a lump sum payment of
25% of the last drawn annual salary of the employee for each completed year of service if the
employee retires after completing minimum 5 years of service. The salary of the Roshan is expected to grow @ 10%
per annum.
The company has inducted Roshan in the beginning of the year and it is expected that he will complete the minimum
five year term before retiring. Thus he will get 5 yearly increment.

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What is the amount the company should charge in its Profit and Loss account every year as cost for the Defined Benefit
obligation? Also calculate the current service cost and the interest cost to be charged per year assuming a discount
rate of 8%.
(P.V factor for 8% - 0.735, 0.794, 0.857, 0.926, 1)
Solution
Calculation of Defined Benefit Obligation (DBO)
Expected last drawn salary ₹ 14,90,210 x 110% x 110% x 110% x 110% x 110% ₹24,00,000
Defined Benefit Obligation ₹ 24,00,000 x 25% x 5 ₹30,00,000
(DBO)

Amount of ₹ 6,00,000 will be charged to Profit and Loss Account of the company every year as cost for Defined Benefit
Obligation.

Calculation of Current Service Cost

Year Equal apportioned amount of DBO Discounting @ Current service cost
[i.e. ₹ 30,00,000/5 years] 8% PV factor (Present Value)
a b c d = b× c
1 6,00,000 0.735 (4 Years) 4,41,000
2 6,00,000 0.794 (3 Years) 4,76,400
3 6,00,000 0.857 (2 Years) 5,14,200
4 6,00,000 0.926 (1 Year) 5,55,600
5 6,00,000 1 (0 Year) 6,00,000

Calculation of Interest Cost to be charged per year

Opening balance Interest cost Current service Closing balance
cost
a b C =b×8% d e=b+c+d
1 0 0 4,41,000 4,41,000
2 4,41,000 35,280 4,76,400 9,52,680,
3 9,52,680 76,214 5,14,200 15,43,094
4 15,43,094 1,23,447 5,55,600 22,22141
5 22,22,141 1,77,859* 6,00,000 30,00,000
*Due to approximations used in calculation, this figure is adjusted accordingly

Question 43)
As on 1st April, 20X1 the fair value of plan assets was ₹1,00,000 in respect of a pension plan of
Zeleous Ltd. On 30th September, 20X1 the plan paid out benefits of ₹19,000 and received inward
contributions of ₹49,000. On 31st March, 20X2 the fair value of plan assets was ₹1,50,000 and present
value of the defined benefit obligation was ₹1,47,920. Actuarial losses on the obligations for the year 20X1- 20X2 were
₹600.
On 1st April, 20X1, the company made the following estimates, based on its market studies, understanding and
prevailing prices
%
Interest & dividend income, after tax payable by the fund 9.25
Realised and unrealised gains on plan assets (after tax) 2.00
Fund administrative costs (1.00)
Expected Rate of Return 10.25
You are required to find the expected and actual returns on plan assets.
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Solution
Computation of Expected and Actual Returns on Plan Assets
₹
Return on ₹ 1,00,000 held for 12 months at 10.25% 10,250
Return on ₹ 30,000 (49,000-19,000) held for six months at 5% (equivalent to 10.25%
annually, compounded every six months) 1,500

Expected return on plan assets for 20X1-20X2 11,750

Fair value of plan assets as on 31 March, 20X2 1,50,000
Less: Fair value of plan assets as on 1 April,20X1 1,00,000
Contributions received 49,000 (1,49,000)
1,000
Add: Benefits paid 19,000
Actual return on plan assets 20,000
Alternatively, the above question may be solved without giving compound effect to rate of return.

Question 44)
Rock Star Ltd. discontinues a business segment. Under the agreement with employee’s union, the
employees of the discontinued segment will earn no further benefit. This is a curtailment without
settlement, because employees will continue to receive benefits for services rendered before
discontinuance of the business segment. Curtailment reduces the gross obligation for various reasons
including change in actuarial assumptions made before curtailment. If the benefits are determined based on the last
pay drawn by employees, the gross obligation reduces after the curtailment because the last pay earlier assumed is no
longer valid.
Rock Star Ltd. estimates the share of unamortized service cost that relates to the part of the obligation at ₹ 18 (10% of
₹180). Calculate the gain from curtailment and liability after curtailment to be recognised in the balance sheet of Rock
Star Ltd. on the basis of given information:
(a) Immediately before the curtailment, gross obligation is estimated at ₹6,000 based on current actuarial
assumption.
(b) The fair value of plan assets on the date is estimated at ₹5,100.
(c) The unamortized past service cost is ₹180.
(d) Curtailment reduces the obligation by ₹600, which is 10% of the gross obligation.

Solution
Gain from curtailment is estimated as under:
₹
Reduction in gross obligation 600
Less: Proportion of un-amortised past service cost (18)
Gain from curtailment 582

The liability to be recognised after curtailment in the balance sheet is estimated as under:
₹
Reduced gross obligation (90% of ₹ 6,000) 5,400
Less: Fair value of plan assets (5,100)
Less: Un-amortised past service cost (90% of ₹180) 300
Liability to be recognised in the balance sheet (162)
Liability to be recognised in the balance sheet 138

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Question 45)
Mr. Rajan is working for Infotech Ltd. Consider the following particulars:
Annual salary of Mr. Rajan = ₹ 30,00,000
Total working days in 20X0-X1 = 300 days
Leaves allowed in 20X0-X1 as per company policy = 10 days
Leaves utilized by Mr. Rajan in 20X0-X1 = 8 days
The unutilized leaves are settled by way of payment and accordingly, carry forward of such leaves to the subsequent
period is not allowed.
Compute the total employee benefit expense for Infotech Ltd. in respect of 20X0-X1.

SOLUTION
Mr Rajan is entitled to a salary of ₹ 30,00,000 for 300 total working days.
Thus, per day salary works out to ₹ 30,00,000 ÷ 300 days = Rs. 10,000 per day
In the year 20X0-20X1, Mr. Rajan availed 8 out of 10 leaves allowed by the company.
Accordingly, leaves unutilized = 10 – 8 = 2 days
In line with the company policy, Infotech Ltd. will pay Mr. Rajan for the unutilized leave.
Thus, total expense for 20X0-20X1 = ₹ 30,00,000 + (2 days unutilized leaves x ₹ 10,000 per day) = ₹ 30,20,000.

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 23 – “ACCOUNTING FOR INVESTMENTS IN

ASSOCIATES IN CONSLIDATED FINANCIAL
STATEMENTS”

Question 46)
On 1/4/24 B Ltd. acquired 20% Equity interest in A Ltd. at a cost of 2,40,000/-
On 1/4/24 Equity Share Capital of A Ltd was 8,00,000 and Reserves & Surplus of A Ltd. was 3,00,000
On 31/3/25 Reserves & Surplus of A Ltd. was 5,00,000
During 24-25, Dividend Paid by A Ltd. to its Share Holders 15%
Apply AS 23 on DOA & Balance Sheet Date.

Solution:
Analysis of Profit of A Ltd.
Capital Profit Post – Acquisition Balance
Sheet
Reserves & Surplus 3,00,000 2,00,000 5,00,000
+ Dividend - 1,20,000
3,00,000 3,20,000

• 3,20,000 is the Total Earning of A Ltd. for the year

• Post-Acquisition share in Profit (20%) = 64,000

Equity Method
Investment Cost as on DOA (Including Goodwill 20,000) 2,40,000
(+) 20% share in Post – Acquisition Profit @ 20% 64,000
(-) Dividend Received (24,000)
Investment @ 20% as per Equity 2,80,000

1/4/24 - Investment Purchased

Investment A/c Dr. 2,40,000
To Bank A/c 2,40,000

31/3/25 - Consolidation
Investment A/c Dr. 64,000
To Consolidated P&L 64,000

During 24-25 - Dividend Received

Bank A/c Dr. 24,000
To Investment A/c 24,000
(This is not Income. This is Recovery)
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QUESTION 47)
A Ltd. acquired 40% share in B Ltd. on April 01, 20X1 for ₹ 10 lacs. On that date B Ltd. had 1,00,000
equity shares of ₹ 10 each fully paid and accumulated profits of ₹ 2,00,000. During the year 20X1-20X2, B
Ltd. suffered a loss of ₹ 10,00,000; during 20X2-20X3 loss of ₹ 12,50,000 and during 20X3-20X4 again a
loss of ₹ 5,00,000. Show the extract of consolidated balance sheet of A Ltd. on all the four dates
recording the above events.

Solution
Calculation of Goodwill/Capital Reserve under Equity Method
Particulars ₹
Equity Shares 10,00,000
Reserves & Surplus 2,00,000
Net Assets 12,00,000
40% share of Net Assets 4,80,000
Less: Cost of Investment (10,00,000)
Goodwill 5,20,000

Consolidated Balance Sheet (Extract) as on April 01, 20X1: ASSETS

Investment in Associate as per AS 23 ₹ ₹
Share of Net Assets on April 1 4,80,000
Add: Goodwill 5,20,000 10,00,000

Calculation of Carrying Amount of Investment as at 31 March 20X2:

Investment in Associate as per AS 23 ₹
Share of Net Assets on 1 April, 20X1 4,80,000
Add: Goodwill 5,20,000
Cost of Investment 10,00,000
Less: Loss for the year (10,00,000 x 40%) (4,00,000)
Carrying Amount of Investment 6,00,000

Consolidated Balance Sheet (Extract) as on March 31, 20X2: ASSETS

Investment in Associate as per AS 23 ₹ ₹
Share of Net Assets on 1 April, 20X1 4,80,000
Less: Share of Loss as above (4,00,000)
80,000
Add: Goodwill 5,20,000 6,00,000

Calculation of Carrying Amount of Investment as at 31 March 20X3:

Investment in Associate as per AS 23 ₹
Carrying Amount of Investment as on 31 March 20X2 6,00,000
Less: Loss for the year (12,50,000 x 40%) (5,00,000)
Carrying Amount of Investment 1,00,000

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Consolidated Balance Sheet (Extract) as on March 31, 20X3: ASSETS

Investment in Associate as per AS 23 ₹ ₹
Share of Net Assets on 1 April, 20X1 4,80,000
Less: Share of Loss as above (₹ 4,00,000 + ₹ 5,00,000) (4,20,000)
Add: Goodwill 1,00,000

Calculation of Carrying Amount of Investment as at 31 March 20X4:

Investment in Associate as per AS 23 ₹
Carrying Amount of Investment 1,00,000
Less: Loss for the year (5,00,000 x 40% = 2,00,000, restricted to
Carrying amount of Investment in B Ltd.) -refer note below
Carrying Amount of Investment

Consolidated Balance Sheet (Extract) as on March 31, 20X4: ASSETS

Investment in Associate as per AS 23 ₹
Investment in B Ltd. -

QUESTION 48)
Bright Ltd. acquired 30% of East India Ltd. shares for ₹ 2,00,000 on 01-06-20X1. By such an acquisition
Bright can exercise significant influence over East India Ltd. During the financial year ending on 31-03-
20X1 East India earned profits ₹ 80,000 and declared a dividend of ₹ 50,000 on 12-08-20X1. East India
reported earnings of ₹ 3,00,000 for the financial year ending on 31-03-20X2 (assume profits to accrue
evenly) and declareddividends of ₹ 60,000 on 12-06-20X2.
Calculate the carrying amount of investment in:
(i) Separate financial statements of Bright Ltd. as on 31-03-20X2;
(ii) Consolidated financial statements of Bright Ltd.; as on 31-03-20X2;
(iii) What will be the carrying amount as on 30-06-20X2 in consolidated financial statements?

SOLUTION
(i) Carrying amount of investment in Separate Financial Statement ofBright Ltd. as on 31.03.20X2
₹
Amount paid for investment in Associate (on 1.06.20X1) 2,00,000
Less: Pre-acquisition dividend (₹ 50,000 x 30%) (15,000)
Carrying amount as on 31.3.20X2 as per AS 13 1,85,000

(ii) Carrying amount of investment in Consolidated Financial Statements of Bright Ltd. as on

31.3.20X2 as per AS 23
₹
Carrying amount as per separate financial statements 1,85,000
Add: Proportionate share of 10-month profit of investee as per 75,000
equity method (30% of ₹ 3,00,000 x 10/12)
Carrying amount as on 31.3.20X2 2,60,000

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(iii) Carrying amount of investment in Consolidated Financial Statement of Bright Ltd. as on

30.6.20X2 as per AS 23
₹
Carrying amount as on 31.3.20X2 2,60,000
Less: Dividend received (₹ 60,000 x 30%) (18,000)
Carrying amount as on 30.6.20X2 2,42,000

Case 1: Conversion from a passive investor to an associate in the sameyear:

A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 during the
same year. Other information is as follow:
Cost of Investment for 10% ₹ 1,00,000 and for 15% ₹ 1,45,000
Net asset on April 01 ₹ 8,50,000 and on October 01 ₹ 10,00,000.
Calculations for April 01:
Cost of investment ₹1,00,000
10% share in net asset ₹85,000
Goodwill ₹ 15,000

Calculations for October 01:

15% share in net asset ₹ 1,50,000
Cost of investment ₹ 1,45,000
Capital Reserve ₹ 5,000
Total goodwill (15,000 – 5,000) ₹ 10,000

Case 2: Conversion from a passive investor to an associate in the sameyear:

A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on 1 s t October of the same
year. Other information is as follow:
Cost of Investment for 10% ₹ 1,00,000 and for 15% ₹ 1,55,000
Net asset on 1 s t April ₹ 8,50,000 and on 1 s t October ₹ 10,00,000.
Calculations for April 01:
Cost of investment ₹1,00,000
10% share in net asset ₹85,000
Goodwill ₹15,000

Calculations for October 01:

Cost of investment ₹1,55,000
15% share in net asset ₹1,50,000
Goodwill ₹5,000
Total goodwill (15,000 + 5,000) ₹20,000

Case 3: Further acquisition in an associate in the same year:

A Ltd. acquired 25% stake of B Ltd. on 1 s t April and further 5% on 1 s t October of the same
year. Other information is as follow:
Cost of Investment for 25% ₹ 1,50,000 and for 5% ₹ 20,000
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Net asset on 1st April ₹5,00,000.

Profit for the year ₹90,000 earned in the ratio 2:1 respectively.
Calculations for April 01:
Cost of investment ₹1,50,000
25% share in net asset ₹1,25,000
Goodwill ₹25,000

Calculations for October 01:

Profits for the first half (90,000/3) x 2 ₹60,000
Additional share of A Ltd. 5%
Pre-acquisition profits i.e. capital reserve (60,000 x 5%) ₹3,000
5% share in net asset ₹25,000
Cost of investment ₹20,000
Capital Reserve ₹5,000
Cost of Investment on April 01 ₹1,50,000
Less: Goodwill ₹25,000
Carrying Amount on April 01 ₹1,25,000
Add: Additional Share in Net Asset on October 01 ₹25,000
Add: Capital share of Profits for first half ₹3,000
Add: Revenue shares of Profits for first half (60,000 x 25%) ₹15,000
Add: Revenue shares of Profits for second half (30,000 x 30%) ₹9,000
Total Carrying Amount on March 31 ₹1,77,000

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 27 “FINANCIAL REPORTING OF INTERESTS IN JOINT

VENTURES”

QUESTION 49)
Mr. A, Mr. B and Mr. C entered into a joint venture to purchase a land, construct and sell flats. Mr. A
purchased a land for ₹ 60,00,000 on 01.01.20X1 and for the purpose he took loan from a bank for ₹
50,00,000 @ 8% interest p.a. He also paid registering fees ₹ 60,000 on the same day. Mr. B
supplied the materials for ₹ 4,50,000 from his godown and further he purchased the materials
for ₹ 5,00,000 for the joint venture. Mr. C met all other expenses of advertising, labour and other incidental
expenses which turnout to be ₹ 9,00,000. On 30.06.20X1 each of the venturer agreed to take away one
flat each to be valued at ₹ 10,00,000 each flat and rest were sold by them as follow: Mr. A for ₹
40,00,000; Mr. B for ₹ 20,00,000 and Mr. C for ₹ 10,00,000. Loan was repaid on the same day by Mr. A
along with the interest and net proceeds were shared by the partners equally.
You are required to prepare the draft Consolidated Profit & Loss Account and Joint Venture Account in the
books of each venturer.
Solution
Draft Consolidated Profit & Loss Account
Particulars ₹ ₹ Particulars ₹ ₹
To Purchase of Land: By Sale of Flats:
Mr. A 60,00,000 Mr. A 40,00,000
To Registration Fees: Mr. B 20,00,000
Mr. A 60,000 Mr. C 10,00,000 70,00,000
To Materials: By Flats takenby
Venturers:
Mr. B 9,50,000 Mr. A 10,00,000
To Other Expenses: Mr. B 10,00,000
Mr. C 9,00,000 Mr. C 10,00,000 30,00,000
To Bank Interest:
Mr. A 2,00,000
To Profits:
Mr. A 6,30,000
Mr. B 6,30,000
Mr. C 6,30,000 18,90,000
1,00,00,000 1,00,00,000

In the Books of Mr. A Joint Venture

Account
Particulars ₹ Particulars ₹
To Bank Loan (Purchase of Land) 50,00,000 By Bank (Sale of Flats) 40,00,000
To Bank:(Purchase of Land) 10,00,000 By Land & Building 10,00,000
To Bank (Registration Fees) 60,000 By Bank (Received from Mr. B) 14,20,000
To Bank (Bank Interest) 2,00,000 By Bank (Received from Mr. C) 4,70,000

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To Profit on JV 6,30,000
68,90,000 68,90,000

In the Books of Mr. B Joint Venture

Account
Particulars ₹ Particulars ₹
To Purchases (Material Supplied) 4,50,000 By Bank (Sale of Flats) 20,00,000
To Bank (Materials) 5,00,000 By Land & Building 10,00,000
To Profit on JV 6,30,000
To Bank (Paid to Mr. A) 14,20,000
30,00,000 30,00,000

In the Books of Mr. C Joint Venture

Account
Particulars ₹ Particulars ₹
To Bank (Misc. Expenses) 9,00,000 By Bank (Sale of Flats) 10,00,000
To Profit on JV 6,30,000 By Land & Building 10,00,000
To Bank (Paid to Mr. A) 4,70,000
20,00,000 20,00,000

QUESTION 50)
A Ltd. a UK based company entered into a joint venture with B Ltd. in India, wherein B Ltd. will import the
goods manufactured by A Ltd. on account of joint venture and sell them in India. A Ltd. and B Ltd. agreed to
share the expenses & revenues in the ratio of 5:4 respectively whereas profits are distributed equally. A
Ltd. invested 49% of total capital but has equal share in all the assets and is equally liable for all the liabilities
of the joint venture.
Following is the trial balance of the joint venture at the end of the first year:

Particulars Dr. (₹ ) Cr. (₹ )

Purchases 9,00,000
Other Expenses 3,06,000
Sales 13,05,000
Property, Plant and Equipment 6,00,000
Current Assets 2,00,000
Unsecured Loans 2,00,000
Current Liabilities 1,00,000
Capital 4,01,000
Closing inventory was valued at ₹ 1,00,000.
You are required to prepare the Consolidated Financial Statement.
Solution
Consolidated Profit & Loss Account
Particulars Note No. (₹ )
Revenue from operations 1 13,05,000
Total Revenue (A) 13,05,000
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Less: Expenses
Purchases 2 9,00,000
Other expenses 3 3,06,000
Changes in inventories of finished goods 4 (1,00,000)
Total Expenses (B) 11,06,000
Profit Before Tax (A-B) 1,99,000

Consolidated Balance Sheet

Note No. (₹)
I Equity and liabilities
1. Shareholders’ funds:
Share Capital 5 4,01,000
Reserves and Surplus 6 1,99,000
2. Non-current liabilities
Long term borrowings 7 2,00,000
3. Current Liabilities 8 1,00,000
9,00,000
II Assets
Non-current Assets
Property, Plant and Equipment 9 6,00,000
Current Assets
Inventories 10 1,00,000
Other current assets 11 2,00,000
9,00,000

Notes to Accounts
Particulars (₹)
1. Revenue from operations
Sales:
A Ltd. 7,25,000
B Ltd. 5,80,000 13,05,000
2. Purchases
A Ltd. 5,00,000
B Ltd. 4,00,000 9,00,000
3. Other expenses
A Ltd. 1,70,000
B Ltd. 1,36,000 3,06,000
4. Closing Inventory
A Ltd. 50,000
B Ltd. 50,000 1,00,000
5. Share Capital
A Ltd. 1,96,490
B Ltd. 2,04,510 4,01,000
6. Reserves and Surplus
Profit & Loss Account:

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A Ltd. 99,500
B Ltd. 99,500 1,99,000
7. Long Term Borrowings
Unsecured Loans:
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000
8. Current Liabilities
A Ltd. 50,000
B Ltd. 50,000 1,00,000
9. Property, Plant and Equipment
A Ltd. 3,00,000
B Ltd. 3,00,000 6,00,000
10. Inventories
A Ltd. 50,000
B Ltd. 50,000 1,00,000
11. Other Current Assets
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000

QUESTION 51)
A Ltd. entered into a joint venture with B Ltd. on 1:1 basis and a new company C Ltd. was formed for
the same purpose and following is the balance sheet of all thethree companies:
Particulars A Ltd. B Ltd. C Ltd.
Share Capital 10,00,000 7,50,000 5,00,000
Reserve & Surplus 18,00,000 16,00,000 12,00,000
Loans 3,00,000 4,00,000 2,00,000
Current Liabilities 4,00,000 2,50,000 1,00,000
Property, Plant and Equipment 30,50,000 26,25,000 19,50,000
Investment in JV 2,50,000 2,50,000 -
Current Assets 2,00,000 1,25,000 50,000
Prepare the balance sheet of A Ltd. and B Ltd. under proportionate consolidationmethod.

Solution
Balance Sheet of A Ltd.
Note No. (₹)
I Equity and liabilities
Shareholders’ funds:
Share Capital 10,00,000
Reserves and Surplus 1 24,00,000
Non-current liabilities 2 4,00,000
Current Liabilities 3 4,50,000
TOTAL 42,50,000
II Assets

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Non-current Assets
Property, Plant and Equipment: 4 40,25,000
Current Assets 5 2,25,000
42,50,000

Notes to Accounts
₹ ₹
1. Reserves and Surplus
A Ltd. 18,00,000
C Ltd. 6,00,000 24,00,000
2. Long Term Borrowings
Loans:
A Ltd. 3,00,000
C Ltd. 1,00,000 4,00,000
3. Current Liabilities:
A Ltd. 4,00,000
C Ltd. 50,000 4,50,000
4. Property, Plant and Equipment:
A Ltd. 30,50,000
C Ltd. 9,75,000 40,25,000
5. Current
Assets:
A Ltd. 2,00,000
C Ltd. 25,000 2,25,000

Balance Sheet of B Ltd.

Note No. (₹)
I Equity and liabilities
Shareholders’ funds:
Share Capital 1 7,50,000
Reserves and Surplus 2 22,00,000
Non-current liabilities 3 5,00,000
Current Liabilities 3,00,000
37,50,000
II Assets
Non-current Assets 4 36,00,000
Property, Plant and Equipment 5
Current Assets 1,50,000
37,50,000

Notes to Accounts
₹ ₹
1. Reserves and Surplus
A Ltd. 16,00,000
C Ltd. 6,00,000 22,00,000

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2. Long Term Borrowings

Loans:
A Ltd. 4,00,000
C Ltd. 1,00,000 5,00,000
3. Current Liabilities:
A Ltd. 2,50,000
C Ltd. 50,000 3,00,000
4. Property, Plant and Equipment:
A Ltd. 26,25,000
C Ltd. 9,75,000 36,00,000
5. Current
Assets:
A Ltd. 1,25,000
C Ltd. 25,000 1,50,000

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 25 “INTERIM FINANCIAL REPORTING”

QUESTION 52)
Sincere Corporation is dealing in seasonal product. Sales pattern of the product quarter-wise is as follows:
1st quarter 30th June 10%
2 quarter 30 September
nd th
10%
3 quarter 31 December
rd st
60%
4th quarter 31st March 20%
Information regarding the 1 quarter ended on 30th June, 20X1 is as follows:
st

Sales 80 crores
Salary and other expenses 60 croresAdvertisement expenses (routine)
4 crores Administrative and selling expenses
8 crores
While preparing interim financial report for first quarter Sincere Corporation wants to defer ₹ 10 crores
expenditure to third quarter on the argument that third quarter is having more sales, therefore, the third
quarter should be debited by more expenditure. Considering the seasonal nature of business and the
expenditures are uniform throughout all quarters, calculate the result of the first quarter as per AS 25. Also
give a comment on the company’s view.

Solution
Particulars (₹ In crores)
Result of first quarter ended 30th June, 20X1 80
Turnover Other Income Nil
Total (a) 80
Less: Changes in inventories Nil
Salaries and other cost 60
Administrative and selling Expenses (4+8) 12
Total (b) 72
Profit (a)-(b) 8
According to AS 25, the Income and Expense should be recognized when they are earned and incurred
respectively. Therefore, seasonal incomes will be recognized when they occur. Thus, the company’s view is
not as per AS 25.

QUESTION 53)
Accountants of Poornima Ltd. showed a net profit of ₹ 7,20,000 for the third quarter of 20X1 after
incorporating the following:
(i) Bad debts of ₹ 40,000 incurred during the quarter. 50% of the bad debts have been deferred to the
next quarter.
(ii) Extra ordinary loss of ₹ 35,000 incurred during the quarter has been fully recognized in this quarter.
(iii) Additional depreciation of ₹ 45,000 resulting from the change in the method of charge of depreciation

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

assuming that ₹ 45,000 is the charge for the 3rd quarter only.
Ascertain the correct quarterly income.

Solution
In the above case, the quarterly income has not been correctly stated. As per AS 25 “Interim Financial
Reporting”, the quarterly income should be adjusted and restated as follows:
Bad debts of ₹ 40,000 have been incurred during current quarter. Out of this, the company has deferred 50%
(i.e.) ₹ 20,000 to the next quarter. Therefore, ₹ 20,000 should be deducted from ₹ 7,20,000. The treatment of
extra-ordinary loss of ₹35,000 being recognized in the same quarter is correct.
Recognising additional depreciation of ₹ 45,000 in the same quarter is in tune with AS 25. Hence no
adjustments are required for these two items.
Poornima Ltd should report quarterly income as ₹ 7,00,000 (₹ 7,20,000 – ₹ 20,000).

QUESTION 54)
What are the periods for which Interim financial Statements are required to be presented? You are required to
answer your question in light of preparation of financial statements for the period ended and as at 31st
December, 20X1. The Financial Year is FY 20X1-X2.

SOLUTION
As per Accounting Standard 25, Interim reports should include interim financial statements (condensed
or complete) for periods as given below.
Statement Current period Comparative period
Balance sheet End of current interim End of immediately
period preceding financial year
Statement of profitand Current interim periodand Comparable interim period and
loss cumulatively for the year- year-to-date of immediately
to-date preceding financial year

Cash flow statement Cumulatively for the Comparable year-to-dateof

current financial year- to- immediately preceding
date financial year

In light of the above, following periods needs to be covered in interimfinancial statements for the period
ended and as at 31st December, 20X1:
Balance Sheet as of the end of the current interim period and a comparative balance
sheet as of the end of the immediately preceding financial year (As at
31 December 20X1 and 31 March 20X1).
Statements of for the current interim period and cumulatively for the current financial
Profit and Loss year to date, with comparative statements of profit and loss for the
comparable interim periods (current and year-to-date) of the
immediately preceding financial year. (for 3 months and 9 months i.e.,
year to date ended 31 December 20X1 and same for 31 December

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20X0 being comparative period).

Cash Flow cumulatively for the current financial year to date, with a comparative
Statement statement for the comparable year-to-date period of the immediately
preceding financial year. (year to date i.e., 1 April 20X1 to 31 December
20X1 and 1 April 20X0to 31 December 20X0).

QUESTION 55)
On 30th June, 20X1, Asmitha Ltd. incurred ₹ 2,00,000, net loss from disposal ofa business segment. Also,
on 31st July, 20X1, the company paid ₹ 60,000 for property taxes assessed for the calendar year 20X1. How
the above transactions should be included in determination of net income of Asmitha Ltd. for the six months
interim period ended on 30th September, 20X1.

Solution
According to Para 10 of AS 25 “Interim Financial Reporting”, if an enterprise prepares and presents a
complete set of financial statements in its interim financial report, the form and content of those statements
should conform to the requirements as applicable to annual complete set of financial statements. As at
30th September, 20X1, Asmitha Ltd would report the entire amount of ₹ 2,00,000 as loss on the disposal of
its business segment since the loss was incurred during interim period. A cost charged as an expense in an
annual period should be allocated to interim periods on accrual basis.
Since ₹ 60,000 Property tax payment relates to entire calendar year 20X1, ₹ 30,000 would be reported
as an expense for six months ended on 30th September, 20X1 while out of the remaining ₹ 30,000, ₹ 15,000
for January, 20X1 to March, 20X1 should be shown as payment of the outstanding amount of previous year
and another ₹ 15,000 related to quarter October, 20X1 to December, 20X1 would be reported as prepaid
expenses.

QUESTION 56)
An enterprise reports quarterly, estimates an annual income of ₹ 10 lakhs.Assume tax rates on 1st ₹ 5,00,000
at 30% and on the balance income at 40%. The estimated quarterly income are ₹ 75,000, ₹ 2,50,000, ₹
3,75,000 and ₹ 3,00,000.
Calculate the tax expense to be recognized in each quarter.

Solution
As per para 29 of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised in each interim
period based on the best estimate of the weighted average annual income tax rate expected for the full
financial year.
₹
Estimated Annual Income (A) 10,00,000
Tax expense:
30% on ₹ 5,00,000 1,50,000
40% on remaining ₹ 5,00,000 2,00,000
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(B) 3,50,000

Weighted average annual income tax rate = 3,50,000 / 10,00,000 = 35%

Tax expense to be recognized in each of the quarterly reports ₹
Quarter I - ₹ 75,000 x 35% 26,250
Quarter II - ₹ 2,50,000 x 35% 87,500
Quarter III - ₹ 3,75,000 x 35% 1,31,250
Quarter IV - ₹ 3,00,000 x 35% 1,05,000
₹ 10,00,000 3,50,000

QUESTION 57)
Antarbarti Limited reported a Profit Before Tax (PBT) of ₹ 4 lakhs for the third quarter ending 30-09-20X1. On
enquiry you observe the following. Give the treatment required under AS 25:
(i) Dividend income of ₹ 4 lakhs received during the quarter has been recognized to the extent of ₹
1 lakh only.
(ii) 80% of sales promotion expenses ₹ 15 lakhs incurred in the third quarter has been deferred to
the fourth quarter as the sales in the last quarter is high.
(iii) In the third quarter, the company changed depreciation method from WDV to SLM, which
resulted in excess depreciation of ₹ 12 lakhs. The entire amount has been debited in the third
quarter, though the share of the third quarter is only ₹ 3 lakhs.
(iv) ₹ 2 lakhs extra-ordinary gain received in third quarter was allocated equally to the third and
fourth quarter.
(v) Cumulative loss resulting from change in method of inventory valuation was recognized in the
third quarter of ₹ 3 lakhs. Out of this loss ₹ 1 lakh relates to previous quarters.
(vi) Sale of investment in the first quarter resulted in a gain of ₹ 20 lakhs. The company had
apportioned this equally to the four quarters.
Prepare the adjusted profit before tax for the third quarter.

Solution
As per para 36 of AS 25 “Interim Financial Reporting”, seasonal or occasional revenue and cost within a
financial year should not be deferred as of interim date until it is appropriate to defer at the end of the
enterprise’s financial year. Therefore, dividend income, extra-ordinary gain, and gain on sale of investment
received during 3rd quarter should be recognised in the 3rd quarter only. Similarly, sales promotion expenses
incurred in the 3rd quarter should also be charged in the 3rd quarter only.
Further, as per AS 10, Property, Plant and Equipment, if there is change in the depreciation method, such a
change should be accounted for as a change in accounting estimate in accordance with AS 5, Net Profit or
Loss for the Period, Prior Period Items and Changes in Accounting Policies, and applied prospectively.
Therefore, no adjustment would be required due to change in the method of depreciation.
Accordingly, the adjusted profit before tax for the 3rd quarter will be as follows:

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Statement showing Adjusted Profit Before Tax for the third quarter
(₹ in lakhs)
Profit before tax (as reported) 4
Add: Dividend income ₹ (4-1) lakhs 3
Excess depreciation charged in the 3rd quarter, due to change in
the method -
Extra ordinary gain ₹(2-1) lakhs 1
Cumulative loss due to change in the method of inventory
valuation should be applied retrospectively ₹ (3-2) lakhs
1
9
Less: Sales promotion expenses (80% of ₹ 15 lakhs) (12)
Gain on sale of investment (occasional gain should not be (5)
deferred)
(8)
Adjusted Profit before tax for the third quarter

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 28 “IMPAIRMENT OF ASSETS”

Question 58)
At the end of 20X0, enterprise M acquired 100% of enterprise Z for ₹ 3,000 lakhs. Z has 3 cash-generating
units A, B and C with net fair values of ₹ 1,200 lakhs, ₹ 800 lakhs and₹ 400 lakhs respectively. M recognises
goodwill of ₹ 600 lakhs (₹ 3,000 lakhs less ₹ 2,400 lakhs) that relates to Z. At the end of 20X4, A makes
significant losses. Its recoverable amount is estimated to be ₹ 1,350 lakhs. Carrying amounts are detailed
below (₹ In Lakh)

End of 20×4 A B C Goodwill Total

Net carrying amount 1300 1200 800 120 3420

Scenario A - Goodwill Can be Allocated on a Reasonable and Consistent Basis

On the date of acquisition of Z, the net fair values of A, B and C are considered a reasonable basis for a pro-
rata allocation of the goodwill to A, B and C.
Allocation of goodwill at the end of 20X4:
A B C Goodwill
End of 20×0
Net fair values 1200 800 400 2400
Pro-Rata 50% 33% 17% 100%
End of 20×4
Net carrying amount 1300 1200 800 3300
Allocation of goodwill 60 40 20 120
(Using pro rate above )
Net carrying amount (After goodwill) 1360 1240 820 3420

In accordance with the ‘bottom-up’ test in paragraph 78(a) of AS 28, M compares A’s recoverable amount to
its carrying amount after the allocation of the carrying amount of goodwill:
End of 20×4 A (Rs. In Lakh)
Carrying amount after allocation of goodwill 1360
Recoverable amount 1350
Impairment loss 10
M recognises an impairment loss of ₹ 10 lakhs for A. The impairment loss is fully allocated to the goodwill in
accordance with paragraph 87 of AS 28.

Scenario B - Goodwill Cannot be Allocated on a Reasonable and Consistent Basis

There is no reasonable way to allocate the goodwill that arose on the acquisition of Z to A, B and C. At the
end of 20X4, Z’s recoverable amount is estimated to be ₹3,400 lakhs.
At the end of 20X4, M first applies the ‘bottom-up’ test in accordance with paragraph 78(a) of this
Statement. It compares A’s recoverable amount to its carrying amount excluding the goodwill.
End of 20X4 A (Rs. In Lakh)
Carrying amount Recoverable 1300
amount 1350
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Impairment loss 0

Therefore, no impairment loss is recognised for A as a result of the ‘bottom-up’ test.

Since the goodwill could not be allocated on a reasonable and consistent basis to A, M also performs a ‘top-
down’ test in accordance with paragraph 78(b) of AS 28. It compares the carrying amount of Z as a whole to
its recoverable amount (Z as a whole is the smallest cash-generating unit that includes A and to which
goodwill can be allocated on a reasonable and consistent basis)

Application of the ‘top-down’ test (Amount in ₹ lakhs)

End of 20×4 A B C Goodwill Total
Carrying amount 1300 1200 800 120 3420
Impairment loss arising from the ‘bottom-up’ test 0 - - - 0
Carrying amount after the ‘bottom-up’ test 1300 1200 800 120 3420
Recoverable amount - - - - 3400
Impairment loss arising from ‘topdown’ test - - - - 20

Therefore, M recognises an impairment loss of ₹ 20 lakhs that it allocates fully to goodwill in accordance with
AS 28.

QUESTION 59)
Ergo Industries Ltd. gives the following estimates of cash flows relating to Property, Plant and Equipment on
31-12-20X1. The discount rate is 15%
Year Cash Flow (₹ in lakhs)
20×2 4000
20×3 6000
20×4 6000
20×5 8000
20×6 4000
Residual value at the end of 20X6 = ₹ 1000 lakhs
Property, Plant and Equipment purchased on 1-1-20XX = ₹ 40,000 lakh
Useful life = 8 years
Net selling price on 31-12-20X1 = ₹20,000 lakhs
Calculate on 31-12-20X1:
(a) Carrying amount at the end of 20X1
(b) Value in use on 31-12-20X1
(c) Recoverable amount on 31-12-20X1
(d) Impairment loss to be recognized for the year ended 31-12-20X1
(e) Revised carrying amount.
(f) Depreciation charge for 20X2.
Note: The year 20XX is the immediate preceding year before the year 20X0.

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Solution:
Calculation of Value in Use
Year Cash flow Discount as per 15% Discounted cash
flow
20×2 4,000 0.870 3,480
20×3 6,000 0.756 4,536
20×4 6,000 0.658 3,948
20×5 8,000 0.572 4,576
20×6 4,000 0.497 1,988
20×6 1,000 (Residual) 0.497 497
19,025

a) Calculation of carrying amount:

i. Original cost = ₹ 40,000 lakhs
ii. Depreciation for 3 years = [(40,000-1000)3/8] = ₹ 14,625 lakhs
iii. Carrying amount on 31-12-20X1 = [40,000-14,625] = ₹ 25,375 lakhs

b) Value in use = ₹ 19,025 lakhs

c) Recoverable amount = higher of value in use and net selling price i.e. ₹ 20,000 lakhs
d) Impairment Loss = ₹ (25,375-20,000) = ₹ 5,375 lakhs
e) Revised carrying amount = ₹ (25,375-5,375) = ₹ 20,000 lakhs
f) Depreciation charge for 20X2 = (20,000-1000)/5 = ₹ 3,800 lakhs

QUESTION 60)
From the following details of an asset
(i) Find out impairment loss
(ii) Treatment of impairment loss
(iii) Current year depreciation
Particulars of Asset:
Cost of asset ₹ 56 lakhs
Useful life period 10 years
Salvage value Nil
Current carrying value ₹27.30 lakhs
Useful life remaining 3 years
Recoverable amount ₹12 lakhs
Upward revaluation done in last year ₹14 lakhs

SOLUTION
According to AS 28 “Impairment of Assets”, an impairment loss on a revalued asset is recognised as an
expense in the statement of profit and loss. However, an impairment loss on a revalued asset is recognised
directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed
the amount held in the revaluation surplus for that same asset.

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Impairment Loss and its treatment

Current carrying amount (including revaluation amount of ₹ 14 lakhs) 27,30,000
Less: Current recoverable amount (12,00,000)
Impairment Loss 15,30,000

Impairment loss charged to revaluation Reserve 14,00,000

Impairment loss charged to profit and loss account 1,30,000

After the recognition of an impairment loss, the depreciation (amortization) charge for the asset should be
adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a
systematic basis over its remaining useful life.
In the given case, the carrying amount of the asset will be reduced to ₹ 12,00,000 after impairment. This
amount is required to be depreciated over remaining useful life of 3 years (including current year). Therefore,
the depreciation for the current year will be ₹ 4,00,000.

QUESTION 61)
Himalaya Ltd. which is in the business of manufacturing and exporting its product. Sometimes, back at the
end of 20X4, the Government put restrictions on export of goods exported by Himalaya Ltd. and due to that
restriction Himalaya Ltd. impaired its assets. Himalaya Ltd. acquired identifiable assets worth Rs 5,500 lakhs
for Rs 6,000 lakh at the end of the year 20X0. The difference is treated as goodwill. The useful life of
identifiable assets is 15 years and depreciated on a straight-line basis. When the Government put the
restriction at the end of 20X4, the company recognised the impairment loss by determining the recoverable
amount of assets for Rs 3,120 lakh. In 20X6 Government lifted the restriction imposed on the export and due
to this favourable change, Himalaya Ltd. re-estimate recoverable amount, which was estimated at Rs 3,420
lakh.
Required:
i. Calculation and allocation of impairment loss in 20X4.
ii. Reversal of impairment loss and its allocation as per AS 28 in 20X6.

Solution
(Assuming goodwill is amortised over 5 years as per AS 14)
(i) Calculation and allocation of impairment loss in 20X4
(Amount in Rs.lakhs)
Goodwill Identifiable assets Total
Historical cost 500 5,500 6,000
Accumulated depreciation/amortization (4 yrs.) 400 (1,467) (1,467)
Carrying amount before impairment 100 4,033 4,133
Impairment loss* (100) (913) (1013)
Carrying amount after impairment loss 0 3,120 3,120
*Notes:
1. As per AS 28, an impairment loss should be allocated to reduce the carrying amount of the assets of the
unit in the following order:
• first, to goodwill allocated to the cash-generating unit (if any); and

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• then, to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in
the unit.
Hence, first goodwill is impaired at full value and then identifiable assets are impaired to arrive at recoverable
value.

(ii) Carrying amount of the assets at the end of 20X6 (Amount in Rs. lakhs)
End of 20X6 Goodwill Identifiable assets Total
Carrying amount in 20X6 0 2,553 2,553
Add: Reversal of impairment loss (W.N.2) - 747 747
Carrying amount after reversal of impairment loss - 3,300 3,300

Working Note:
1. Calculation of depreciation after impairment till 20X6 and reversal of impairment loss in 20X6
(Amount in Rs lakhs)
Goodwill Identifiable assets Total
A. Carrying amount after impairment loss in 20X4 0 3,120 3,120
B. Additional depreciation (i.e. (3,120/11) x 2)refer Note – (567) (567)
C. Carrying amount 0 2,553 2,553
D. Recoverable amount 3,420
E. Excess of recoverable amount over carrying amount (D-C) 867
Note: It is assumed that the restriction by the Government has been lifted at the end of the year 20X6.
Therefore, depreciation for 2 years is calculated (2005, 2006).

2. Determination of the amount to be impaired by calculating depreciated historical cost of the

identifiable assets without impairment at the end of 20X6
(Amount in Rs lakhs)
End of 20X6 Identifiable assets
Historical cost 5,500
Accumulated depreciation (366.67 x 6 years) = (2,200)
Depreciated historical cost 3,300
Carrying amount (in W.N. 1) 2,553
Amount of reversal of impairment loss 747
Notes:
As per AS 28, in allocating a reversal of an impairment loss for a cash-generating unit, the carrying amount of
an asset should not be increased above the lower of:
a. its recoverable amount (if determinable); and
b. the carrying amount that would have been determined (net of amortization or depreciation) had no
impairment loss been recognised for the asset in prior accounting periods.
Hence impairment loss reversal is restricted to Rs 747 lakhs only.

Note:
Impairment Loss on Goodwill shall not be reversed except certain conditions.

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Master Questions by Jai Chawla Sir CA Inter Advanced Accounts

AS 13 “ACCOUNTING FOR INVESTMENTS”

QUESTUON 62)
Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance with AS 13 (Revised).
State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investments in Company A, costing Rs 8.5 lakhs are to be re-classified as current. The
company had reduced the value of these investments to Rs 6.5 lakhs to recognise ‘other than
temporary’ decline in value. The fair value on date of transfer is Rs 6.8 lakhs.
(ii) Long term investments in Company B, costing Rs 7 lakhs are to be re-classified as current. The fair
value on date of transfer is Rs 8 lakhs and book value is Rs 7 lakhs.
(iii) Current investment in Company C, costing Rs 10 lakhs are to be re-classified as long term as the
company wants to retain them. The market value on date of transfer is Rs 12 lakhs.

SOLUTION
As per AS 13 (Revised) ‘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 Rs 6.5 lakhs in the books.
(ii) The carrying / book value of the long-term investment is same as cost i.e., Rs 7 lakhs. Hence this long-
term investment will be reclassified as current investment at book value of Rs 7 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be made at Rs 10
lakhs as cost is less than its market value of Rs 12 lakhs.

QUESTION 63)
On 1st April, 20X1, Mr. Vijay had 30,000 Equity shares in X Ltd. at a book value of ₹ 4,50,000
(Face Value ₹ 10 per share). On 22nd June, 20X1, he purchased another 5000 shares of the
same company for ₹ 80,000.
The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for seven shares held
on 10th August, 20X1.
On 31st August, 20X1 the Company made a right issue in the ratio of three shares for every eight shares
held, on payment of ₹ 15 per share. Due date for the payment was 30th September, 20X1, Mr. Vijay
subscribed to 2/3rd of the right shares and sold the remaining of his entitlement to Viru for a consideration
of ₹ 2 per share.
On 31st October, 20X1, Vijay received dividends from X Ltd. @ 20% for the year ended 31st March,
20X1. Dividend for the shares acquired by him on 22nd June, 20X1 to be adjusted against the cost of
purchase.
On 15th November, 20X1 Vijay sold 20,000 Equity shares at a premium of ₹ 5 per share.

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You are required to prepare Investment Account in the books of Mr. Vijay forthe year ended 31st March,
20X2 assuming the shares are being valued at average cost.

Solution
Account in Books of Vijay(Scrip: Equity Shares in X Ltd.)
No. Amount No. Amount
₹ ₹
1.4.20X1 To Bal b/d 30,000 4,50,000 31.10.20X By Bank(dividend — 10,000
22.6.20X1 To Bank 5,000 80,000 1 on shares
acquired on
22.6.20X1)
10.8.20X1 To Bonus 5,000 _
30.9.20X1 To Bank(Rights 10,000 1,50,000
Shares)
15.11.20X To P&L A/c(Profit 32,000 15.11.20X By Bank (Sale of 20,000 3,00,000
1 on sale ofshares) 1 shares)
31.3.20X2 By Bal. c/d 30,000 4,02,000
50,000 7,12,000 50,000 7,12,000

Working Notes:
(1) Bonus Shares = (30,000 + 5,000) / 7 = 5,000 shares
(2) Right Shares = (30,000 + 5,000 + 5,000)/8 x 3 = 15,000 shares
(3) Rights shares sold = 15,000×1/3 = 5,000 shares
(4) Dividend received = 30,000×10×20% = ₹ 60,000 will be taken to P&Lstatement
(5) Dividend on shares purchased on 22.6.20X1
= 5,000×10×20%
= ₹ 10,000 is adjusted to Investment A/c
(6) Profit on sale of 20,000 shares = Sales proceeds – Average cost
Sales proceeds = ₹ 3,00,000
Average Cost = (4,50,000 + 80,000 + 1,50,000 – 10,000)/50,000 x 20,000 = ₹ 2,68,000
Profit = ₹ 3,00,000– ₹ 2,68,000= ₹ 32,000.
(7) Cost of shares on 31.3.20X2
(4,50,000 + 80,000 + 1,50,000 – 10,000)/50,000 x 30,000 = ₹ 4,02,000
(8) Sale of rights amounting ₹ 10,000 (₹ 2 x 5,000 shares) will not be shown in investment A/c but will
directly be taken to P & L statement.

QUESTION 64)
The following information is presented by Mr. Z (a stock broker), relating to hisholding in 9% Central
Government Bonds.
Opening balance (nominal value) ₹ 1,20,000, Cost ₹ 1,18,000 (Nominal value ofeach unit is ₹ 100).
1.3.20X1 Purchased 200 units, ex-interest at ₹ 98.
1.7.20X1 Sold 500 units, ex-interest out of original holding at ₹ 100.
1.10.20X1 Purchased 150 units at ₹ 98, cum interest.
1.11.20X1 Sold 300 units, ex-interest at ₹ 99 out of original holdings.
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Interest dates are 30th September and 31st March. Mr. Z closes his books every 31st December. Show the
investment account as it would appear in his books. Mr. Z follows FIFO method.

Solution
In the Books of Mr. Z
9% Central Government Bonds (Investment) Account
Particulars Nominal Interest Principal Particulars Nominal Interest Principal
Value Value
20X1 ₹ ₹ ₹ 20X1 ₹ ₹ ₹
Jan.1
To Balanceb/d Mar. By Bank A/c
(W.N.1) 1,20,000 2,700 1,18,000 31 (W.N.3) - 6,300 -
March To BankA/c July 1 By Bank A/c
1 (W.N.2) 20,000 750 19,600 (W.N.4) 50,000 1,125 50,000
July 1To P&L A/c(W.N.5) - - 833 Sept. By Bank A/c
30 (W.N.6) - 4,050 -
Oct.1 To BankA/c Nov. By Bank A/c
(150 x 98) 15,000 - 14,700 1 (W.N.7) 30,000 225 29,700
Nov.1 To P&L A/c - - 200 Dec. By Balancec/d
(W.N.8) 31 (W.N. 9 & 75,000 1,688 73,633
Dec. To P&L A/c(b.f.) W.N.10)
31 (Transfer) 9,938
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333

Working Note:
1. Interest element in opening balance of bonds = 1,20,000 x 9% x 3/12 = ₹2,700
2. Purchase of bonds on 1. 3.20X1
Interest element in purchase of bonds = 200 x 100 x 9% x 5/12 = ₹750
Investment element in purchase of bonds = 200 x 98 = ₹19,600
3. Interest for half-year ended 31 March = 1,400 x 100 x 9% x 6/12 = ₹6,300
4. Sale of bonds on 1.7.20X1
Interest element = 500 x 100 x 9% x 3/12 = ₹1,125 Investment element = 500 x 100 = ₹50,000
5. Profit on sale of bonds on 1.7.20X1
Cost of bonds = (1,18,000/ 1,200) x 500 = ₹49,167
Sale proceeds = ₹50,000
Profit element = ₹833
6. Interest for half-year ended 30 September
= 900 x 100 x 9% x 6/12 = ₹4,050
7. Sale of bonds on 1.11.20X1
Interest element = 300 x 100 x 9% x 1/12 = ₹225
Investment element = 300 x 99 = ₹29,700
8. Profit on sale of bonds on 1.11.20X1
Cost of bonds = (1,18,000/ 1,200) x 300 = ₹29,500
Sale proceeds = ₹29,700
Profit element = ₹200

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9. Closing value of investment

Calculation of closing Nominal ₹
balance: value
Bonds in hand remained in hand
at 31st December 20X1
From original holding (1,20,000 40,000 1,18,000/1,20,00 39,333
– 50,000 – 30,000) 0 x 40,000
Purchased on 1st March 20,000 19,600
Purchased on 1st October 15,000 14,700
75,000 73,633
10. Interest element in closing balance of bonds = 750 x 100 x 9% x 3/12 = ₹ 1,688

QUESTION 65)
A Ltd. purchased on 1st April, 2018 8% convertible debenture in C Ltd. of face value of Rs.
2,00,000 @ Rs. 108. On 1st July, 2018 A Ltd. purchased another Rs. 1,00,000 debentures @ Rs.
112 cum interest.
On 1st October, 2018 Rs. 80,000 debenture was sold @ Rs. 108. On 1st December, 2018, C Ltd. give option
for conversion of 8% convertible debentures into equity share of Rs. 10 each. A Ltd. receive 5,000 equity
share in C Ltd. in conversion of 25% debenture held on that date. The market price of debenture and equity
share in C Ltd. at the end of year 2018 is Rs. 110 and Rs. 15 respectively. Interest on debenture is payable
each year on 31st March, and 30th September. The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis.

SOLUTION
Investment Account for the year ending on 31st December, 2018
Scrip: 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]
Date Particulars Nominal Interest Cost (Rs) Date Particulars Nominal interest Cost (Rs)
value (Rs) (Rs) Value (Rs) (Rs)
1.4.18 To bank A/c 2,00,000 - 2,16,000 30.09.18 By Bank A/c 12,000
[Rs. 3,00,000 x
8% x (6/12])
1.7.18 To bank A/c 1,00,000 2,000 1,10,000 1.10.18 By Bank A/c 80,000 86,400
(W.N.1)
31.12.18 To P & L A/c 3,00,000 14,033 3,26,000 1.10.18 By P&L A/c 533
[Interest] (loss) (W.N.1)
1.12.18 By Bank A/c 733
(Accrued
interest)
(Rs. 55,000 x
0.08 x 2/12)
1.12.18 By Equity shares 55,000 59,767
in C Ltd.
(W.N. 3 and 4)
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1.12.18 By Balance c/d 1,65,000 3,300 1,79,300

(W.N.5)
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

SCRIP: Equity Shares in C LTD.

Date Particulars Cost (Rs) Date Particulars Cost (Rs)
1.12.18 To 8 % debentures 59,767 31.12.18 By balance c/d 59,767

Working Notes:
(i) Cost of Debenture purchased on 1st July = Rs. 1,12,000 – Rs. 2,000 (Interest) = Rs. 1,10,000
(ii) Cost of Debentures sold on 1st Oct. = (Rs. 2,16,000 + Rs. 1,10,000) x 80,000/3,00,000 = Rs. 86,933
(iii) Loss on sale of Debentures = Rs. 86,933– Rs. 86,400 = Rs. 533
Nominal value of debentures converted into equity shares = Rs. 55,000
[(Rs. 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures:
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733

(iv) Cost of Debentures converted = (Rs. 2,16,000 + Rs. 1,10,000) x 55,000/3,00,000

= Rs. 59,767

(v) Cost of closing balance of Debentures = (Rs. 2,16,000 + Rs. 1,10,000) x 1,65,000 / 3,00,000
= Rs. 1,79,300

(vii) Closing balance of Debentures has been valued at cost being lower than the market value i.e., Rs.
1,81,500 (Rs. 1,65,000 @ Rs. 110)

(viii) 5,000 equity Shares in C Ltd. will be valued at cost of Rs. 59,767 being lower than the market value Rs.
75,000 (Rs. 15 x5,000)

Note: It is assumed that interest on debentures, which are converted into cash, has been received at the
time of conversion.

QUESTION 66)
Smart Investments made the following investments in the year 20X1-X2:
12% State Government Bonds having nominal value Rs.100
Date Particulars
01.04.20X1 Opening Balance (1200 bonds) book value of Rs. 126,000
02.05.20X1 Purchased 2,000 bonds @ Rs. 100 cum interest
30.09.20X1 Sold 1,500 bonds at Rs. 105 ex interest

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th st
Interest on the bonds is received on 30 June and 31 Dec. each year.
15.04.20X1 Purchased 5,000 equity shares @ Rs. 200 on cum right basis
Brokerage of 1% was paid in addition (Nominal Value of shares Rs. 10)
03.06.20X1 The company announced a bonus issue of 2 shares for every 5 shares held
16.08.20X1 The company made a rights issue of 1 share for every 7 shares held at Rs. 250
per share.
The entire money was payable by 31.08.20X1.
22.8.20X1 Rights to the extent of 20% was sold @ Rs. 60. The remaining rights were
subscribed.
02.09.20X1 Dividend @ 15% for the year ended 31.03.20X1 was received on 16.09.20X1
15.12.20X1 Sold 3,000 shares @ Rs. 300. Brokerage of 1% was incurred extra.
15.01.20X2 Received interim dividend @ 10% for the year 20X1 –X2
31.03.20X2 The shares were quoted in the stock exchange @ Rs. 220

Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is
followed.

Solution
In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 20X2
Date Particulars Nos. Interest Amount Date Particulars Nos. Interest Amount
1.4.X1 To Opening 1,200 3,600 1,26,000 30.6.X1 By Bank A/c - 19,200 -
balance b/d (Interest)
(W.N.7) (3,200 x 100
x 12% x
6/12)
2.5.X1 To Bank A/c 2,000 8,000 1,92,000 30.9.X1 By Bank A/c 1,500 4,500 1,57,500
(W.N.8) (W.N.1 &
W.N.9)
30.9.X1 To P & L A/c 8,437.50 31.12.X1 By Bank A/c - 10,200 -
(Profit on Sale) (Interest)
(W.N.1) (1,700 x 100 x
12% x 6/12)
31.3.X2 To P & L A/c 27,400 31.3.X2 By Bal. c/d 1,700 5,100 1,68,937.50
(Interest) (W.N.2 &
W.N.10)
3,200 39,000 3,26,437.50 3,200 39,000 3,26,437.50

Investments in Equity shares of X Ltd. for year ended 31.3.20X2

Date Particulars Nos. Dividend Amount Date Particulars Nos. Dividend Amount
15.4.X1 To Ban A/c 5,000 10,10,000 16.9.X1 By Bank
(W.N.3) (Dividend)
(5,000 x 10 - - 7,500
x 15%)

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(refer note 1
and 2)

3.6.X1 To Bonus 2,000 - - By Bank 3,000 - 8,91,000

Issue (Sale)
(W.N.4)
31.8.X1 To Bank A/c 800 2,00,000 15.12.X1 By Bank 4,800
(W.N.11) (interim
dividend)
(W.N.12)
15.12.X1 To P & L A/c 4,28,500 15.1.X2 By 4,800 7,40,000
(W.N.5) Bal. c/d
(W.N.6)
31.3.X2 To P & L A/c 4,800 31.3.X2
7800 4,800 16,38,500 7800 4,800 16,38,500

Working Notes:
1. Profit on sale of bonds on 30.9.X1
= Sales proceeds – Average cost
Sales proceeds = Rs. 1,57,500 (i.e., 1,500 x 105)
Average cost = Rs. [(1,26,000+1,92,000) X 1,500/3,200] = 1,49,062.50
Profit = 1,57,500 – Rs. 1,49,062.50 = Rs. 8,437.50
2. Valuation of bonds on 31st March, 20X2
Cost = Rs. 3,18,000/3,200 x1,700 = 1,68,937.50
3. Cost of equity shares purchased on 15/4/20X1
= Cost + Brokerage
= (5,000 x Rs. 200) + 1% of (5,000 x Rs. 200) =Rs. 10,10,000
4. Sale proceeds of equity shares on 15/12/20X1
= Sale price – Brokerage
= (3,000 x Rs. 300) – 1% of (3,000 x Rs. 300) =Rs. 8,91,000.
5. Profit on sale of shares on 15/12/20X1
= Sales proceeds – Average cost
Sales proceeds = Rs. 8,91,000
Average cost = Rs. [(10,10,000+2,00,000-7,500) x 3,000/7,800]
= Rs.[12,02,500 x 3,000/7,800] = 4,62,500
Profit = Rs. 8,91,000 – Rs. 4,62,500=Rs.4,28,500.

6. Valuation of equity shares on 31st March, 20X2

Cost= Rs.[12,02,500 x 4,800/7,800] = Rs. 7,40,000
Market Value= 4,800 shares × Rs. 220 = Rs.10,56,000
Closing stock of equity shares has been valued at Rs. 7,40,000 i.e., cost being lower than
the market value.
7. Interest accrued on opening balance of bonds
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= 1,200 x 100 x 12% x 3/12= Rs. 3,600

8. Interest element in bonds purchased on 02.05.20X1
= 2,000 x 100 x 12% x 4/12 = Rs. 8,000
Cost of investment (amount in investment column)
= (2,000 x 100) – 8,000 = Rs. 1,92,000
9. Interest element in bonds sold on 30.09.20X1
= 1,500 x 100 x 12% x 3/12 = Rs. 4,500
10. Interest accrued on closing balance of bonds
= 1,700 x 100 x 12% x 3/12 = Rs. 5,100
11. Right shares
No. of right shares issued= (5,000 + 2,000) x 1/7 = 1,000
shares No. of right shares sold= 1,000 x 20% = 200 shares
Proceeds from sale of right shares= 200 x 60 = Rs. 12,000 to be credited to statement of profit and loss
No. of right shares subscribed = 1,000 – 200 = 800 shares
12. Amount of interim dividend
= (5,000 + 2,000 + 800 – 3,000) x 10 x 10%= Rs. 4,800
Note:
1. It is presumed that no dividend is received on bonus shares as bonus shares are declared on 3.6.20X1
and dividend pertains to the year ended 31.03.20X1.
2. The amount of dividend for the period, for which shares were not held by the investor, has been treated
as capital receipt.

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AS 7 “CONSTRUCTION CONTRACTS”

QUESTION 67)
AB contactors enters into a contract on 1st January 20X1 with XY to construct a 5-storied building. Under the
contract, AB is required to complete the construction in 3 years (i.e., by 31 st December 20X3). The following
information is relevant:
Fixed price (agreed) ₹5crore
Material cost escalation (to the extent of 20% of increase in material cost) Labour cost escalation (up to 30%
of increase in minimum wages)
In case AB is able to complete the construction in less than 2 years and 10 months, it will be entitled for an
additional incentive of ₹ 50 lakh. However, in case the construction is delayed beyond 3 years and 2 months,
XY will charge a penalty of ₹ 20 lakh. At the start of the contract, AB has a reason to believe that construction
will be completed in 2 years and 8 months. Assume that the construction was actually completed in 2 years
9 months.
Labour cost was originally estimated to be ₹1.20 crore (based on initial minimum wages). However, the
costs have increased by 25% during the construction period.
Material costs have increased by 40% due to short-supply. The total increase in material cost due to the 40%
escalation is ₹ 80 lakh.
You are required to suggest what should be the contract revenue in above case?
Assume that in year 20X2, XY has requested AB to increase the scope of the contract. An additional floor is
required to be constructed and there is an increase in contract fee by ₹ 1 crore.
AB has incurred a cost of ₹ 20 lakh for getting the local authority approvals which it will be entitled to claim
from XY in addition to the increase in the fixed fee.
Also measure the total contract revenue in this case.

SOLUTION
Total Revenue after considering the escalation costs, claims and incentives:
Fixed Price: 5.00 crore
Incentive for early completion 0.50 crore
Material costs recovery (to the extent of 20%) 0.40 crore
Labour costs recovery (Actual increase is less than 30%) 0.30 crore [1.20 crore x 25%]
Total Contract Revenue 6.20 crore
Add: Variation to the contract 1.00 crore
Add: Claims recoverable from XY 0.20 crore
Total Contract Revenue 7.40 crore

QUESTION 68)
RT Enterprises has entered into a fixed price contract for construction of a tower with its customer. Initial
tender price agreed is ₹ 220 crore. At the start of the contract, it is estimated that total costs to be incurred
will be ₹ 200 crore. At the end of year 1, this estimate stands revised to ₹ 202 crore. Assume that the
construction is expected to be completed in 3 years.
During year 2, the customer has requested for a variation in the contract. As a result of that, the total contract
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value will increase by ₹ 5 crore and the costs will increase by ₹ 3 crore.
RT has decided to measure the stage of completion on the basis of the proportion of contract costs incurred
to the total estimated contract costs. Contract costs incurred at the end of each year is:
Year 1: ₹ 52.52 crore
Year 2: ₹ 154.20 crore (including unused material of 2.5 crore)
Year 3: ₹ 205 crore.
You are required to calculate:
(a) Stage of completion for each year.
(b) Profit to be recognised for each year.

SOLUTION
(a) Stage of completion = Costs incurred to date / Total estimated costs Year 1 : 52.52 crore / 202 crore =
26%
Year 2: (154.20 crore – 2.50 crore) / 205 crore = 74%
Year 3: 205 crore / 205 crore = 100%

(b) Profit for the year

Year 1 Year 2 Year 3
Contract 57.20 crore 109.30 crore 58.50 crore
Revenue (1) (220 crore x 26%) (225 crore x 74% - (225 crore x 100% - 109.30
57.20 crore) crore – 57.20 crore)
Contract Cost (2) 52.52 crore 99.18 crore 53.30 crore
(202 crore x 26%) (205 crore x 74% - (205 crore x 100% - 99.18
52.52 crore) crore – 52.52 crore)
Contract Profit 4.68 crore 10.12 crore 5.20 crore
(1)– (2)

QUESTION 69)
Sarita Construction Co. obtained a contract for construction of a dam. The following details are
available in records of company for the year ended 31st March, 2018:
Rs In Lakhs
Total Contract Price 12,000
Work Certified 6,250
Work not certified 1,250
Estimated further cost to completion 8,750
Progress payment received 5,500
Progress payment to be received 1,500
Applying the provisions of Accounting Standard 7 "Accounting for Construction Contracts" you are required
to compute:
(i) Profit/Loss for the year ended 31st March, 2018.
(ii) Contract work in progress as at end of financial year 2017-18.
(iii) Revenue to be recognized out of the total contract value.
(iv) Amount due from/to customers as at the year end.

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SOLUTION:
(i) (Loss for the year ended, 31st March, 2018 (Rs in lakhs)
i
Amount of foreseeable loss
)
Total cost of construction (6,250 + 1,250 + 8,750) 16,250
Less: Total contract price (12,000)
Total foreseeable loss to be recognised as expense 4,250
According to AS 7, when it is probable that total contract costs will exceed total contract revenue, the
expected loss should be recognised as an expense immediately.
Loss for the year ended, 31st March, 2018 amounting Rs 4,250 will be recognized.
(ii) Contract
( work-in-progress as on 31.3.18 (Rs in lakhs)
Contract
i work-in-progress i.e., cost incurred to date are Rs 7,500 6,250
lakhs:
i 1,250
Work
) certified 7,500
Work not certified

(iii) Proportion of total contract value recognised as revenue

Cost incurred till 31.3.18 is 46.15% (7,500/16,250×100) of total costs of construction.
Proportion of total contract value recognised as revenue:
46.15% of Rs 12,000 lakhs = Rs 5,538 lakhs
(iv) Amount due from/to customers at year end
(Contract costs + Recognised profits – Recognised Losses) – (Progress payments received +
Progress payments to be received)
= (7,500 + Nil – 4,250) – (5,500 + 1,500) Rs in lakhs
= [3,250 – 7,000] Rs in lakhs
Amount due to customers = Rs 3,750 lakhs

QUESTION 70)
a)Sky Limited belongs to Heavy Engineering Contractors specializing in construction of Flyovers. The
company just entered into a contract with a local municipal corporation for building a flyover. No activity
has started on this contract.
As per the terms of the contract, Sky Limited will receive an additional Rs. 50 lakhs if the construction of
the flyover were to be finished within a period of two years from the commencement of the contract. The
accountant of the entity wants to recognize this revenue since in the past the company has been able to
meet similar targets very easily. Give your opinion on this treatment.
(b) ABC Ltd., a construction contractor, undertakes the construction of commercial complex for XYZ Ltd.
ABC Ltd. submitted separate proposals for each of 3 units of commercial complex. A single agreement
is entered into between the two parties. The agreement lays down the value of each of the 3 units i.e. Rs.
50 lakh, Rs. 60 lakh and Rs. 75 lakh respectively. Agreement also lays down the completion time for
each unit.
Comment, with reference to AS 7, whether ABC Ltd., should treat it as a single contract or three separate
contracts.

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SOLUTION
(a) According to AS 7 ‘Construction Contracts’, incentive payments are additional amounts payable to the
contractor if specified performance standards are met or exceeded. For example, a contract may allow for
an incentive payment to the contractor for early completion of the contract. Incentive payments are included
in contract revenue when both the conditions are met:
(i) The contract is sufficiently advanced that it is probable that the specified performance standards will
be met or exceeded; and
(ii) The amount of the incentive payment can be measured reliably.
In the given problem, the contract has not even begun and hence the contractor (Sky Limited) should
not recognize any revenue of this contract. Therefore, the accountant’s contention for recognizing Rs.
50 lakhs as revenue is not correct.

(b) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the construction of
each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and customer have been
able to accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
ABC Ltd. has submitted separate proposals for each of the 3 units of commercial complex. Also, the revenue
and completion time has been laid down for each unit separately which implies separate negotiation for
them.
Therefore, ABC Ltd. is required to treat construction of each unit as a separate construction contract as the
above-mentioned conditions of AS 7 are fulfilled in the given case.

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PREPARATION OF FINANCIAL STATEMENTS

QUESTION 71)
You are required to prepare a Statement of Profit and Loss and Balance Sheet from the following Trial
Balance extracted from the books of the International Hotels Ltd., on 31st March, 20X2:
Dr. Cr.
Rs Rs
Authorised Capital-divided into 5,000 6% Preference Shares 15,00,000
of Rs 100 each and 10,000 equity Shares of Rs 100 each
Subscribed Capital -
5,000 6% Preference Shares of Rs 100 each 5,00,000
Equity Capital 8,05,000
Purchases - Wines, Cigarettes, Cigars, etc. 45,800
- Foodstuffs 36,200
Wages and Salaries 28,300
Rent, Rates and Taxes 8,900
Laundry 750
Sales - Wines, Cigarettes, Cigars, etc. 68,400
- Food 57,600
Coal and Firewood 3,290
Carriage and Cooliage 810
Sundry Expenses 5,840
Advertising 8,360
Repairs 4,250
Rent of Rooms 48,000
Billiard 5,700
Miscellaneous Receipts 2,800
Discount received 3,300
Transfer fees 700
Freehold Land and Building 8,50,000
Furniture and Fittings 86,300
Inventory on hand, 1st April, 20X1
Wines, Cigarettes. Cigars, etc. 12,800
Foodstuffs 5,260
Cash in hand 2,200
Cash with Bankers 76,380
Preliminary and formation expenses 8,000
2,000 Debentures of Rs 100 each (6%) 2,00,000
Profit and Loss Account 41,500
Trade payables 42,000
Trade receivables 19,260
Investments 2,72,300
Goodwill at cost 5,00,000
General Reserve 2,00,000
19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Inventory on 31st March, 20X2
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Wines, Cigarettes and Cigars, etc. 22,500

Foodstuffs 16,400

Depreciation: Furniture and Fittings @ 5% p.a.: Land and Building @ 2% p.a.

The Equity capital on 1st April, 20X1 stood at Rs 7,20,000, that is 6,000 shares fully paid and 2,000 shares Rs 60 paid.
The directors made a call of Rs 40 per share on 1st October 20X1. A shareholder could not pay the call on 100 shares
and his shares were then forfeited and reissued @ Rs 90 per share as fully paid. The Directors declare a dividend of 8%
on equity shares, transferring any amount that may be required from General Reserve. Ignore Taxation.

SOLUTION
Statement of Profit and Loss of International Hotels Ltd.
for the year ended 31st March, 20X2
Particulars Notes Amount
I. Revenue from operations 9 1,79,700
II. Other income 10 6,800
III. Total Revenue (I + II) 1,86,500
IV. Expenses:
Cost of materials consumed 11 25,060
Purchases of Inventory-in-Trade 12 45,800
Changes in inventories of finished goods work-in-progress and 13 (9,700)
Inventory-in-Trade
Employee benefits expense 14 29,580
Other operating expenses 15 18,000
Selling and administrative expenses 16 14,200
Finance costs 17 12,000
Depreciation and amortisation expense 18 21,315
Other expense (preliminary expenses written off) 8,000
Total expenses 1,64,255
V. Profit (Loss) for the period (III - IV) 22,245

Balance Sheet of International Hotels Ltd. as on 31st March, 20X2

Particulars Note No Rs
EQUITY AND LIABILITIES
1 Shareholders' funds
a Share capital 1 13,00,000
b Reserves and Surplus 2 2,68,745
2 Non-current liabilities
a Long-term borrowings 3 2,00,000
3 Current liabilities
a Trade Receivables 4 42,000
b Other current liabilities 5 13,280
Total 18,24,025
ASSETS
1 Non-current assets
a PPE
I Tangible assets 6 9,14,985
II Intangible assets (Goodwill) 5,00,000
B Non-current investments 2,72,300
2 Current assets
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A Inventories 7 38,900
B Trade receivables 19,260
C Cash and bank balances 8 78,580
Total 18,24,025

Notes to accounts
Rs
1 Share Capital
Equity share capital
Authorised
10,000 Equity shares of Rs 100 each 10,00,000
Issued & subscribed
8,000 Equity Shares of Rs 100 each 8,00,000
Preference share capital
Authorised
5,000 6% Preference shares of Rs 100 each 5,00,000
Issued & subscribed
5,000 6% Preference shares of Rs 100 each 5,00,000
Total 13,00,000
2 Reserves and Surplus
Capital reserve [100 x (90 – 40)] 5,000
General reserve 2,00,000
Less: Amount used to pay dividend (30,255) 1,69,745
Surplus (Profit & Loss A/c) 22,245
Add: Balance from previous year 41,500
63,745
Total 2,68,745
3 Long-term borrowings
Secured
6% Debentures 2,00,000
Total 2,00,000
4 Trade Receivables 42,000
5 Other current liabilities
Wages and Salaries Outstanding 1,280
Interest on debentures dividend Receivable 12,000 13,280
Total 13,280
6 Tangible assets
Freehold land & Buildings 8,50,000
Less: Depreciation (17,000) 8,33,000
Furniture and Fittings 86,300
Less: Depreciation (4,315) 81,985
Total 9,14,985
7 Inventories
Wines, Cigarettes & Cigars, etc. 22,500
Foodstuffs 16,400
Total 38,900
8 Cash and cash equivalents
Cash at bank 76,380
Cash in hand 2,200
Other bank balances Nil
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Total 78,580
9 Revenue from operations
Sale of products
Wines, Cigarettes, Cigars etc. 68,400
Food 57,600 1,26,000
Sale of services
Room Rent 48,000
Billiards 5,700 53,700
Total 1,79,700
10 Other income
Transfer fees 700
Miscellaneous Receipts 2,800
Discount received 3,300
Total 6,800
11 Cost of materials consumed
Opening Inventory 5,260
Add: Purchases during the year 36,200
Less: Closing Inventory (16,400) 25,060
Total 25,060
12 Purchases of Inventory-in-Trade
Wines, Cigarettes etc. 45,800
Total 45,800
13 Changes in inventories of finished goods work-in-progress
and Inventory-in-Trade
Wines, Cigarettes etc.
Opening Inventory 12,800
Less: Closing Inventory (22,500) (9,700)
Total (9,700)
14 Employee benefits expense
Wages and Salaries 28,300
Add: Wages and Salaries Outstanding 1,280 29,580
Total 29,580
15 Other operating expenses
Rent, Rates and Taxes 8,900
Coal and Firewood 3,290
Laundry 750
Carriage and Cooliage 810
Repairs 4,250
Total 18,000
16 Selling and administrative expenses
Advertising 8,360
Sundry Expenses 5,840
Total 14,200
17 Finance costs
Interest on Debentures (2,00,000 x 6%) 12,000
Total 12,000
18 Depreciation and amortisation expense
Land and Buildings (8,50,000 x 2%) 17,000
Furniture & Fittings (86,300 x 5%) 4,315
Total 21,315

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QUESTION 72)
On 31st March, 20X1, SR Ltd. provides the following ledger balances after preparing its Profit & Loss
Account for the year ended 31st March, 20X1.
Particulars Amount (Rs.)
Debit Credit
Equity Share Capital, fully paid shares of Rs. 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured by Hypothecation of 26,30,000
Land)
Other Long-Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000
Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000

The following additional information was also provided in respect of the above balances:
1) 50,000 fully paid equity shares were allotted as consideration for land.
2) The cost of assets were:
Building Rs. 32,00,000
Plant and Machinery Rs. 30,00,000
Furniture and Fixture Rs. 16,50,000
3) Trade Receivables for Rs. 4,86,000 due for more than 6 months.
4) Balances with banks include Rs. 56,000, the Naya bank, which is not a scheduled bank.
5) Loan from Public Finance Corporation repayable after 3 years.
6) The balance of Rs. 26,30,000 in the loan account with Public Finance Corporation is inclusive of Rs.1,34,000 for
interest accrued but not due. The loan is secured by hypothecation of land.
7) Other long-term loans (unsecured) includes:
Loan taken from Nixes Bank Rs. 13,80,000
(Amount repayable within one year) (Rs. 4,80,000)
Loan taken from Directors Rs. 8,50,000

8) Bills Receivable for Rs. 1,60,000 maturing on 15th June, 20X1 has been discounted.
9) Short term borrowings includes:
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Loan from Naya bank Rs. 1,16,000 (Secured)

Loan from directors Rs. 48,000
10) Transfer of Rs. 35,000 to general reserve has been proposed by the Board of directors out of the profits for the
year.
11) Inventory of finished goods includes loose tools costing Rs. 5 lakhs (which do not meet definition of property,
plant & equipment as per AS 10)
You are required to prepare the Balance Sheet of the Company as on March 31st 20X1 as required under Part - I of
Schedule III of the Companies Act, 2013.
You are not required to give previous year figures

SOLUTION
SR Ltd.
Balance Sheet as at 31st March, 20X1
Particulars Notes Figures at the end of
current reporting period (Rs.)
Equity and Liabilities
Shareholders' funds
Share capital 1 79,85,000
Reserves and Surplus 2 30,21,000
Non-current liabilities
Long-term borrowings 3 42,66,000
Current liabilities
Short-term borrowings 4 9,40,000
Trade Receivables 8,13,000
Other current liabilities 5 2,04,000
Short-term provisions 6 3,80,000
Total 1,76,09,000
Assets
Non-current assets
PPE 7 92,00,000
Current assets
Inventories 8 58,00,000
Trade receivables 9 17,50,000
Cash and cash equivalents 10 4,84,000
Short-term loans and advances 3,75,000
Total 1,76,09,000

Notes to accounts
1. Share Capital
Equity share capital
Issued, subscribed and called up
1,60,000 Equity Shares of Rs. 50 each (Out of the above 50,000 80,00,000
shares have been issued for consideration other than cash)
Less: Calls in arrears (15,000) 79,85,000
2. Reserves and Surplus
General Reserve 9,41,000
Add: Transferred from Profit and loss account 35,000 9,76,000
Securities premium 15,00,000
Surplus (Profit & Loss A/c) 5,80,000
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Less: Appropriation to General Reserve (proposed) (35,000) 5,45,000

30,21,000
3. Long-term borrowings
Secured: Term Loans
Loan from Public Finance Corporation [Receivable after 3 years (Rs. 24,96,000
26,30,000 - Rs. 1,34,000 for interest accrued but not due)] (secured
by hypothecation of land)
Unsecured
Bank Loan (Nixes bank) 9,00,000
(Rs. 13,80,000 - Rs. 4,80,000 Receivable within 1 year)
Loan from Directors 8,50,000
Others 20,000 17,70,000
Total 42,66,000
4. Short-term borrowings
Loan from Naya bank (Secured) 1,16,000
Loan from Directors 48,000
Loan from Nixes bank Receivable within one year 4,80,000
Others 2,96,000
9,40,000
5. Other current liabilities
Unpaid dividend 70,000
Interest accrued but not due on borrowings 1,34,000
6,84,000
6. Short-term provisions
Provision for taxation 3,80,000
7. PPE
Land 25,00,000
Buildings 32,00,000
Less: Depreciation (2,00,000) 30,00,000
Plant & Machinery 30,00,000
Less: Depreciation (6,00,000) 24,00,000
Furniture & Fittings 16,50,000
Less: Depreciation (3,50,000) 13,00,000
Total 92,00,000
8. Inventories
Raw Material 13,00,000
Finished goods 40,00,000
Loose tools 5,00,000 58,00,000
9. Trade receivables
Outstanding for a period exceeding six months 4,86,000
Others 12,64,000
Total 17,50,000
10. Cash and cash equivalents
Balances with banks
with Scheduled Banks 3,58,000
with others banks 56,000 4,14,000
Cash in hand 70,000
Total 4,84,000

Note: There is a contingent liability amounting to Rs. 1,60,000

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QUESTION 73)
Kapil Ltd. has authorized capital of Rs. 50 lakhs divided into 5,00,000 equity shares of Rs. 10 each. Their books show
the following balances as on 31st March, 2017:
Rs Rs
Inventory 1.4.2016 6,65,000 Bank Current Account 20,000
Discounts & Rebates allowed 30,000 Cash in hand 8,000
Carriage Inwards 57,500 Interest (bank overdraft) 1,11,000
Patterns (Tangible Asset) 3,75,000 Calls in Arrear @ Rs 2 per share 10,000
Rate, Taxes and Insurance 55,000 Equity shares capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of Rs. 10 each)
Purchases 12,32,500 Bank Overdraft 12,67,000
Wages 13,68,000 Trade Payables (for goods) 2,40,500
Freehold Land 16,25,000 Sales 36,17,000
Plant & Machinery 7,50,000 Rent (Cr.) 30,000
Engineering Tools 1,50,000 Transfer fees received 6,500
Trade Receivables 4,00,500 Profit & Loss A/c (Cr.) 67,000
Advertisement 15,000 Repairs to Building 56,500
Commission & Brokerage 67,500 Bad debts 25,500
Business Expenses 56,000
The inventory (valued at cost or market value, which is lower) as on 31st March, 2017 was Rs. 7,08,000. Outstanding
liabilities for wages Rs. 25,000 and business expenses Rs. 36,000. Dividend declared @ 12% on paid-up capital and it
was decided to transfer to reserve @ 2.5% of profits.
Charge depreciation on closing written down amount of Plant & Machinery @ 5%, Engineering Tools @ 20%; Patterns
@ 10%; and Furniture & Fixtures @ 10%. Provide 25,000 as doubtful debts after writing off Rs. 16,000 as bad debts.
Provide for income tax @ 30%.
You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2017 and Balance Sheet as on
that date.

SOLUTION
Kapil Ltd. Balance Sheet as at 31st March, 2017
Particulars Note No. (Rs)
I Equity and Liabilities
(1) Shareholders' Funds
(a) Share Capital 1 19,90,000
(b) Reserves and Surplus 2 3,47,000
(2) Current Liabilities
(a) Trade Payables 2,40,500
(b) Short Term Borrowings 3 12,67,000
(b) Other Current Liabilities 4 61,000
(c) Short-Term Provisions 5 1,20,000
Total 40,25,500
II ASSETS
(1) Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets 5 29,30,000
(2) Current Assets
(a) Inventories 7,08,000
(b) Trade Receivables 6 3,59,500

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(c) Cash and Cash Equivalents 7 28,000

Total 40,25,500

Kapil Ltd. Statement of Profit and Loss for the year ended 31st March, 2017
Particulars Note No. (Rs)
I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
IV Expenses:
Cost of purchases 12,32,500
Changes in Inventories [6,65,000-7,08,000] (43,000)
Employee Benefits Expenses 9 13,93,000
Finance Costs 10 1,11,000
Depreciation and Amortization Expenses 1,20,000
Other Expenses 11 4,40,000
Total Expenses 32,53,500
V Profit before Tax (III-IV) 4,00,000
VI Tax Expenses @ 30% (1,20,000)
VII Profit for the period 2,80,000

Notes to Accounts:
1. Share Capital
Authorized Capital
5,00,000 Equity Shares of Rs. 10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of Rs. 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of Rs. 10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of Rs. 10 each Rs. 8 paid 40,000
(Call unpaid Rs. 10,000) 19,90,000

2. Reserves and Surplus

General Reserve 7,000
Surplus i.e., Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 2,80,000
Less: Transfer to Reserve @ 2.5% (7,000) 3,40,000
3,47,000

3. Short Term Borrowings

Bank Overdraft 12,67,000
12,67,000

4. Other Current Liabilities

Outstanding Expenses [25,000+36,000] 61,000
61,000

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5. Short-term Provisions
Provision for Tax 1,20,000
1,20,000

6. Tangible Assets
Particulars Value given Depreciation rate Depreciation Written down value at
(Rs) Charged (Rs) the end (Rs)
Land 16,25,000 - 16,25,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Patterns 3,75,000 10% 37,500 3,37,500
Engineering Tools 1,50,000 20% 30,000 1,20,000
1,20,000 29,30,000
30,50,000

7. Trade Receivables
Trade receivables (4,00,500-16,000) 3,84,500
Less: Provision for doubtful debts (25,000)
3,59,500

8. Cash & Cash Equivalent

Cash Balance 8,000
Bank Balance in current A/c 20,000
28,000

9. Other Income
Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500

10. Employee benefits expenses

Wages 13,68,000
Add: Outstanding wages 25,000
13,93,000

11. Finance Cost

Interest on Bank overdraft 1,11,000

12. Other Expenses

Carriage Inward 57,500
Discount & Rebates 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,000] (Business Expenses) 92,000
Bad Debts [25,500+16,000] 41,500
Provision for Doubtful Debts 25,000
4,40,000

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QUESTION 74)
Om Ltd. has the Authorised Capital of Rs. 15,00,000 consisting of 6,000 6% Redeemable Preference
shares of Rs. 100 each and 90,000 equity Shares of Rs. 10 each. The following was the Trial Balance
of the Company as on 31st March, 2021:
Particulars Dr. Cr.
Investment in shares at cost (non-current investment) 1,50,000
Purchases 14,71,500
Selling expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and wages (included Rs. 30,000 being Director's 1,56,000
Remuneration)
Cash on hand 84,000
Bills receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on debentures up to 30th Sep (1st half year) 11,250
Trade receivables and trade payables 1,50,300 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of Rs. 45,000 1,05,000
6% Redeemable Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on freehold properties 4,50,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft (secured by hypothecation of stocks and
receivables) 4,50,000
Technical knowhow fees (cost paid during the year) 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850

Other Information:
1. Closing Stock was valued at Rs. 4,27,500.
2. Purchases include Rs. 15,000 worth of goods and articles distributed among valued customers.
3. Salaries and Wages include Rs. 6,000 being Wages incurred for installation of Electrical Fittings which were
recorded under "Furniture".
4. Bills Receivable includes Rs. 4,500 being dishonoured bills. 50% of which had been considered irrecoverable.
5. Bills Receivable of Rs. 6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value.
7. Interest on Debentures for the half year ending on 31st March was due on that date.
8. Technical Knowhow Fees is to be written off over a period of 10 years.
9. Trade receivables include Rs. 18,000 due for more than six months.
You are required to prepare the Balance Sheet as at 31st March, 2021 and Statement of Profit and Loss for the year
ended 31st March, 2021 as per Schedule III to the Companies Act, 2013 after taking into account the above
information. Ignore taxation.

SOLUTION
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Balance sheet of Om Ltd. as at 31st March, 2021

Note (Rs.)
I Equity and Liabilities
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 1,14,150
(2) Non-current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 11,250
Total 24,88,950
II ASSETS
(1) Non- Current Assets:
(a) Property, plant and equipment 6 11,49,900
(b) Intangible assets 7 4,05,000
(c) Non-current investments (Shares at cost) 1,50,000
(2) Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents – Cash on hand 84,000
Total 24,88,950
Note: There is a Contingent liability for Bills receivable discounted with Bank Rs. 6000.

Statement of Profit and Loss of Om Ltd. for the year ended 31st March, 2021
Particulars Note Rs.
I Revenue from Operations 20,11,050
II Other income (Dividend income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases of Inventory (14,71,500 – Advertisement 14,56,500
Expenses 15,000)
(b) Changes in Inventories of finished Goods / Work in 8,100
progress & inventory (4,35,600 – 4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses 11,100
[10% of (1,05,000 + 6,000)]
(f) Other Expenses 11 3,47,550
Total Expenses 19,95,150
V Profit before exceptional, extraordinary items and tax 28,650
VI Exceptional items -
VII Profit before extra-ordinary items and tax 28,650
VII Extraordinary items -
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I
IX Profit before tax 28,650

Notes to accounts
(Rs.)
1. Share Capital
Authorized capital:
90,000 Equity Shares of Rs. 10 each. 9,00,000
6,000 6% Preference shares of Rs. 100 each 6,00,000
Issued, subscribed & called up:
60,000, Equity Shares of Rs. 10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100 each 6,00,000 12,00,000
2. Reserves and Surplus
Balance as on 1st April, 2020 85,500
Add: Surplus for current year 28,650
Balance as on 31st March, 2021 1,14,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold 4,50,000
Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand 4,50,000
Overdraft from Banks (Secured by Hypothecation of
Stocks & Receivables)
5. Other Current liabilities
Interest due on Borrowings (5% Debentures) 11,250
6. Property, plant and equipment
Furniture
Furniture at Cost Less depreciation Rs. 45,000 (as
given in Trial Balance 1,05,000
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
included under the heading Salaries and Wages
6,000
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening
Balance-given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e.
(10% x 1,05,000) 10,500
On additional purchase during the year
at 10% i.e. (10% x 6,000) 600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
7. Intangible Assets

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Technical knowhow 4,50,000

Less: Written off 45,000 4,05,000
8. Trade Receivables
Sundry Debtors (a) Debt outstanding due more than 18,000
six months
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Salaries & Wages 1,56,000
Less: Wages incurred for installation of electrical 6,000
fittings to be capitalised
Less: Directors’ Remuneration shown separately 30,000
Balance amount 1,20,000
10 Finance Costs
.
Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900
11 Other Expenses
. Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000 3,47,550
Bad Debts (4,500 x 50%) 2,250

Working note
Calculation of Sundry Debtors-Other Debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% Rs. 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e., Debtors outstanding for less than 6 months 1,34,550

CASH FLOW STATEMENT

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QUESTION 75)
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.20X1 from the following information:
(1) Sales for the year amounted to Rs135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to Rs55 crores out of which credit purchase was 80%.
(3) Administrative and selling expenses amounted to Rs18 crores and salary paid amounted to Rs22 crores.
(4) The Company redeemed debentures of Rs20 crores at a premium of 10%. Debenture holders were issued
equity shares of Rs15 crores towards redemption and the balance was paid in cash. Debenture interest paid
during the year was Rs1.5 crores.
(5) Dividend paid during the year amounted to Rs11.7 crores (including Dividend distribution tax) was also paid.
(6) Investment costing Rs12 crores were sold at a profit of Rs2.4 crores.
(7) Rs8 crores was paid towards income tax during the year.
(8) A new plant costing Rs21 crores was purchased in part exchange of an old plant. The book value of the old
plant was Rs12 crores but the vendor took over the old plant at a value of Rs10 crores only. The balance was
paid in cash to the vendor.
(9) The following balances are also provided:
Rs in crores 1.4.20X0 Rs in crores 31.3.20X1
Debtors 45 50
Creditors 21 23
Bank 6

SOLUTION
Gamma Ltd.
Cash Flow Statement for the year ended
31st March, 20X1 (Using direct method)
Particulars Rs in crores Rs in crores
CASH FLOWS FROM OPERATING ACTIVITIES
Cash sales (60% of 135) 81
Cash receipts from Debtors 49
[45+ (135x40%) - 50]
Cash purchases (20% of 55) (11)
Cash payments to suppliers [21+(55x80%)23] (42)
Cash paid to employees (22)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 37
Income tax paid (8)
Net cash generated from operating activities 29
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments (12+ 2.40) 14.4
Payments for purchase of fixed assets (21 – 10) (11)
Net cash used in investing activities 3.4
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of debentures (22-15) (7)
Interest paid (1.5)
Dividend paid (11.7)
Net cash used in financing activities (20.2)
Net increase in cash 12.2
Cash at beginning of the period 6.0

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Cash at end of the period 18.2

QUESTION 76)
From the following Balance Sheet & information, prepare Cash Flow Statement of Ryan Ltd. by Indirect method for the
year ended 31st March, 20X1:
Balance Sheet
31stMarch, 20X1 31stMarch, 20X0
Liabilities
Equity Share Capital 6,00,000 5,00,000
10% Redeemable Preference Share Capital – 2,00,000
Capital Redemption Reserve 1,00,000 –
Capital Reserve 1,00,000 –
General Reserve 1,00,000 2,50,000
Profit and Loss Account 70,000 50,000
9% Debentures 2,00,000 –
Trade payables 1,15,000 1,10,000
Liabilities for Expenses 30,000 20,000
Provision for Taxation 95,000 60,000
Dividend payable 90,000 60,000
15,00,000 12,50,000
31st March,20X1 31st March,20X0
Assets
Land and Building 1,50,000 2,00,000
Plant and Machinery 7,65,000 5,00,000
Investments 50,000 80,000
Inventory 95,000 90,000
Trade receivables 2,50,000 2,25,000
Cash and Bank 65,000 90,000
Voluntary Separation Payments 1,25,000 65,000
15,00,000 12,50,000
Additional Information:
(i) A piece of land has been sold out for Rs 1,50,000 (Cost – Rs 1,20,000) and the balance land was revalued.
Capital Reserve consisted of profit on sale and profit on revaluation.
(ii) On 1st April, 20X0 a plant was sold for Rs 90,000 (Original Cost – Rs 70,000 and W.D.V. – Rs 50,000) and
Debentures worth Rs1 lakh was issued at par as part consideration for plant of Rs4.5 lakhs acquired.
(iii) Part of the investments (Cost – Rs 50,000) was sold for Rs 70,000.
(iv) Pre-acquisition dividend received Rs 5,000 was adjusted against cost of investment.
(v) Directors have declared 15% dividend for the current year.
(vi) Voluntary separation cost of Rs 50,000 was adjusted against General Reserve.
(vii) Income-tax liability for the current year was estimated at Rs 1,35,000.
Depreciation @ 15% has been written off from Plant account but no depreciation has been charged on Land and
Building.

SOLUTION
Cash Flow Statement of Ryan Limited
For the year ended 31st March, 20X1
Particulars Rs
CASH FLOW FROM OPERATING ACTIVITIES
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Net Profit before taxation (W.N.1) 2,45,000

Adjustment for
Depreciation (W.N.3) 1,35,000
Profit on sale of plant (W.N.3) (40,000)
Profit on sale of investments (W.N.3) (20,000)
Interest on debentures (W.N.4) 18,000
Operating profit before working capital changes 3,38,000
Increase in inventory (5,000)
Increase in trade receivables (25,000)
Increase in Trade payables 5,000
Increase in accrued liabilities 10,000
Extraordinary items (1,10,000)
Income taxes paid (W.N.8) (1,00,000)
Net cash generated from operating activities 1,13,000
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of land (W.N.2) 1,50,000
Proceeds from sale of plant (W.N.3) 90,000
Proceeds from sale of investments (W.N.4) 70,000
Purchase of plant (W.N.3) (3,50,000)
Purchase of investments (W.N.4) (25,000)
Pre-acquisition dividend received (W.N.4) 5,000
Net cash used in investing activities (60,000)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issue of equity shares 1,00,000
(6,00,000 – 5,00,000)
Proceeds from issue of debentures 1,00,000
(2,00,000 – 1,00,000)
Redemption of preference shares (2,00,000)
Dividends paid (60,000)
Interest paid on debentures (18,000)
Net cash used in financing activities (78,000)
Net decrease in cash and cash equivalents (25,000)
Cash and cash equivalents at the beginning of the year 90,000
Cash and Cash equivalents at the end of the year 65,000

Working Notes:
1. Net Profit before taxation
Particulars Rs
Net profit before taxation
Retained profit 1,00,000
Less: Balance as on 31.3.20X0 (50,000)
20,000
Provision for taxation 1,35,000
Dividend payable 90,000
Net Profit before taxation 2,75,000
2. Land and Building Account
Particulars Rs Particulars Rs
To Balance b/d 2,00,000 By Cash (Sale) 1,50,000
To Capital reserve (Profit on sale) 30,000 By Balance c/d 1,50,000
To Capital reserve (Revaluation profit) 70,000
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3,00,000 3,00,000
3. Plant and Machinery Account
Particulars Rs Particulars Rs
To Balance b/d 5,00,000 By Cash (Sale) 90,000
To Profit and loss account 40,000 By Depreciation 1,35,000
To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000
4. Investments Account
Particulars Rs Particulars Rs
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss account 20,000 By Dividend (Pre acquisition) 5,000
To Bank (Balancing figure) 25,000 To Balance C/d 50000
125000 125000
5. Capital Reserve Account
Particulars Rs Particulars Rs
To Balance c/d 70,000 By Profit on revaluation of land 70,000
70,000 700,000
6. General Reserve Account
Particulars Rs Particulars Rs
To Capital redemption reserve 1,00,000 By Balance b/d 2,50,000
To Balance c/d 1,50,000
2,50,000 2,50,000
7. Dividend payable Account
Particulars Rs Particulars Rs
To Bank (Balancing figure) 1,50,000 By Balance b/d 60,000
To Balance c/d - By Profit & loss account 90,000
1,50,000 1,50,000

8. Provision for Taxation Account

Particulars Rs Particulars Rs
To Bank 1,00,000 By balance b/d 60,000
(Balancing figure)
To Balance c/d 95,000 By Profit & loss account 1,35,000
1,95,000 1,95,000
9. Other Current Assets Account
Particulars Rs Particulars Rs
To Balance b/d 65,000 By Balance c/d 1,00,000
To Bank (Balancing figure) 35,000
1,00,000 1,00,000

QUESTION 77)
The Balance Sheet of New Light Ltd. for the years ended 31st March, 20X0 and 20X1 are as follows:

Notes 31st March, 31st March,

20X0 (Rs.) 20X1 (Rs.)
Equity and liabilities
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1 Shareholders’ funds
A Share capital 1 16,00,000 18,80,000
B Reserves and Surplus 2 8,40,000 11,00,000
2 Non-current liabilities
A Long term borrowings 3 4,00,000 2,80,000
3 Current liabilities
A Other current liabilities 4 6,00,000 5,20,000
B Short term provision (Provision for tax) 3,60,000 3,40,000
Total 38,00,000 41,20,000
Assets
1 non-current assets
A Property, plant and Equipment 5 22,80,000 26,40,000
B Non-Current investment 4,00,000 3,20,000
2 Current assets
A Cash and Cash equivalents 10,000 10,000
B Inventory 2,16,000 3,00,000
C Other current assets 8,94,000 8,50,000
Total 38,00,000 41,20,000

Notes to accounts
No. Particular 31st March, 20X0 31st March, 20X1
1 Share capital
Equity share capital 12,00,000 16,00,000
10% Preference share capital 4,00,000 2,80,000
Total 16,00,000 18,80,000
2 Reserves and Surplus
General reserve 6,00,000 7,60,000
Profit and Loss account 2,40,000 3,40,000
Total 8,40,000 11,00,000
3 Long term borrowings
9% Debentures 4,00,000 2,80,000
Total 4,00,000 2,80,000
4 Other current liabilities
Dividend payable 1,20,000 -
Current Liabilities 4,80,000 5,20,000
Total 6,00,000 5,20,000
5 Property, plant and equipment
Property, plant and equipment 32,00,000 38,00,000
Less: Depreciation (9,20,000) (11,60,000)
Net carrying value 22,80,000 26,40,000

Additional information:
(i) The company sold one fixed asset for Rs 1,00,000, the cost of which was Rs 2,00,000 and the depreciation
provided on it was Rs 80,000.
(ii) The company also decided to write off another fixed asset costing Rs 56,000 on which depreciation amounting
to Rs 40,000 has been provided.
(iii) Depreciation on fixed assets provided Rs 3,60,000.

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(iv) Company sold some investment at a profit of Rs 40,000.

(v) Debentures and preference share capital redeemed at 5% premium. Debentures were redeemed at the year
end.
(vi) Company decided to value inventory at cost, whereas previously the practice was to value inventory at cost less
10%. The inventory according to books on 31.3.20X0 was Rs 2,16,000. The inventory on 31.3.20X1 was
correctly valued at Rs 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.

SOLUTION
New Light Ltd.
Cash Flow Statement for the year ended 31st March, 20X1
A. Cash Flow from operating activities Rs.
Profit after appropriation
Increase in profit and loss A/c after inventory adjustment
[Rs. 3,40,000 – (Rs. 2,40,000 + Rs. 24,000)] 76,000
Transfer to general reserve 1,60,000
Dividend payable 1,60,000
Provision for tax 3,40,000
Net profit before taxation and extraordinary Item 5,76,000
Adjustments for:
Depreciation 3,60,000
Loss on sale of fixed assets 20,000
Decrease in value of fixed assets 16,000
Profit on sale of investment (40,000)
Premium on redemption of preference share capital 6,000
Interest on debentures 36,000
Premium on redemption of debentures 6,000
Operating profit before working capital changes 9,80,000
Increase in current liabilities (Rs. 5,20,000 – Rs. 4,80,000) 40,000
Increase in other current assets (16,000)
[Rs. 11,50,000 – (Rs. 11,10,000 + Rs. 24,000)]
Cash generated from operations 10,04,000
Income taxes paid (3,60,000)
Net Cash generated from operating activities 6,44,000
B. CASH FLOW FROM INVESTING ACTIVITIES
Purchase of fixed assets (W.N.3) (8,56,000)
Proceeds from sale of fixed assets (W.N.3) 1,00,000
Proceeds from sale of investments (W.N.2) 1,20,000
Net Cash from investing activities (6,36,000)
C. CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of share capital 4,00,000
Redemption of preference share capital (1,26,000)
(Rs. 1,20,000 + Rs. 6,000)
Redemption of debentures (Rs. 1,20,000 + Rs. 6,000) (1,26,000)
Dividend paid (1,20,000)
Interest on debentures (36,000)
Net Cash from financing activities (8,000)
Net increase/decrease in cash and cash equivalent during the year Nil
Cash and cash equivalent at the beginning of the year 10,000
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Cash and cash equivalent at the end of the year 10,000

Working Notes:
1. Revaluation of inventory will increase opening inventory by Rs. 24,000. 2,16,000/90 x 100 = Rs. 24,000
Therefore, opening balance of other current assets would be as follows:
Rs. 11,10,000 + Rs. 24,000 = Rs. 11,34,000
Due to under valuation of inventory, the opening balance of profit and loss account be increased by Rs. 24,000.
The opening balance of profit and loss account after revaluation of inventory will be Rs. 2,40,000 + Rs. 24,000 = Rs.
2,64,000

2. Investment Account
Particulars Rs Particulars Rs
To Balance b/d 4,00,000 By Bank A/c 1,20,000
To Capital reserve A/c (Profit (balancing figure being
on sale of investment) 40,000 investment sold)
By Balance c/d 3,20,000
4,40,000 4,40,000
3. Fixed Assets Account
Particulars Rs Particulars Rs
To Balance b/d 32,00,000 By Bank A/c (sale of assets) 1,00,000
To Bank A/c 8,56,000 By Accumulated 80,000
(Balancing figure being depreciation A/c
assets purchased)
By Profit and loss A/c (loss on
sale of assets) 20,000
By Accumulated depreciation A/c 40000
By Profit and loss A/c 16000
(assets written off)
By Balance c/d 38,00,000
40,56,000 40,56,000
4. Accumulated Depreciation Account
Particulars Rs Particulars Rs
To Fixed assets A/c 80,000 By Balance b/d 9,20,000
To Fixed assets A/c 40,000 By Profit and loss A/c 3,60,000
To Balance c/d 11,60,000 (depreciation for the period)
12,80,000 12,80,000
ICAI’s View on Preference Dividend: Preference Dividend is not declared on Balance Sheet date because it is not
shown as payable on Closing Balance sheet. Hence, if not declared from P&L then must not be paid and t be ignored.
Alternate View: If it is cumulative Preference Share Capital, dividend must have been declared & already paid on 31/3
(a) Added to CFOA since declared out of P&L.
(b) Deduct from Financing Activity since Paid in cash.

QUESTION 78)
ABC Ltd. gives you the following information. You are required to prepare Cash Flow Statement by using indirect
methods as per AS 3 for the year ended 31.03.20X1:
Notes 31st March, 31st March,
20X0 (Rs.) 20X1 (Rs.)
Equity and liabilities

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1 Shareholders’ funds
A Share capital 50,00,000 50,00,000
B Reserves and Surplus 26,50,000 36,90,000
2 Non-current liabilities
A Long term borrowings 1 - 9,00,000
3 Current liabilities
A Short term borrowings (Bank loan) 1,50,000 3,00,000
B Trade payable 8,80,000 8,20,000
C Other current liabilities 2 4,80,000 2,70,000
Total 91,60,000 1,09,80,000
Assets
1 non-current assets
A Property, plant and Equipment 3 21,20,000 32,80,000
2 Current assets
A Current investment 11,80,000 15,00,000
B Inventory 20,10,000 19,20,000
C Trade receivable 4 22,40,000 26,40,000
D Cash and Cash equivalents 15,20,000 15,20,000
E Other current assets (prepaid expenses) 90,000 1,20,000
Total 91,60,000 1,09,80,000

Notes to accounts
No. Particular 31st March, 20X0 31st March, 20X1
1 Long term borrowings
9% Debentures (issued at the end of year) - 9,00,000
Total - 9,00,000
2 Other current liabilities
Dividend payable 1,50,000 -
Liabilities for expenses 3,30,000 2,70,000
Total 4,80,000 2,70,000
3 Property, plant and equipment
Plant and equipment 27,30,000 40,70,000
Less: Depreciation (6,10,000) (7,90,000)
Net carrying value 21,20,000 32,80,000
4 Trade receivables
Gross amount 23,90,000 28,30,000
Less: provision for doubtful debts (1,50,000) (1,90,000)
Total 22,40,000 26,40,000

Additional Information:
(i) Net profit for the year ended 31st March, 20X1, after charging depreciation Rs 1,80,000 is Rs 10,40,000.
(ii) Trade receivables of Rs 2,30,000 were determined to be worthless and were written off against the
provisions for doubtful debts account during the year.

SOLUTION
Cash Flow Statement of ABC Ltd. for the year ended 31.3.20X1
CASH FLOWS FROM OPERATING ACTIVITIES Rs.
Net Profit 10,40,000

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Add: Adjustment for Depreciation (Rs. 7,90,000 – Rs. 6,10,000) 1,80,000

Increase in Provision for Doubtful Debts 2,70,000
(Rs. 4,20,000 – Rs. 1,50,000)
Operating Profit Before Working Capital Changes 14,90,000
Add: Decrease in Inventories (Rs. 20,10,000 – Rs. 19,20,000) 90,000
15,80,000
Less: Increase in Current Assets
Trade Receivables (Rs. 30,60,000 – Rs. 23,90,000) 6,70,000
Prepaid Expenses (Rs. 1,20,000 – Rs. 90,000) 30,000
Decrease in Current Liabilities:
Trade Payables (Rs. 8,80,000 – Rs. 8,20,000) 60,000
Expenses Outstanding (Rs. 3,30,000 – Rs. 2,70,000) 60,000 (8,20,000)
Net Cash from Operating Activities 7,60,000
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Current Investments (3,20,000)
Purchase of Plant & Equipment (Rs. 40,70,000 – Rs. 27,30,000) (13,40,000)
Net Cash Used in Investing Activities (16,60,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loan Raised (Rs. 3,00,000 – Rs. 1,50,000) 1,50,000
Issue of Debentures 9,00,000
Payment of Dividend (1,50,000)
Net Cash Used in Financing Activities 9,00,000
Net Increase in Cash During the Year -
Add: Cash and Cash Equivalents as on 1.4.20x0 15,20,000
(Rs. 15,20,000 + Rs. 11,80,000)
Cash and Cash Equivalents as on 31.3.20x1 15,20,000
(Rs. 18,20,000 + Rs. 15,00,000)
Note:
1. Bad debts amounting Rs 2,30,000 were written off against provision for doubtful debts account during the year.
In the above solution, Bad debts have been added back in the balances of provision for doubtful debts and trade
receivables as on 31.3.20X1. Alternatively, the adjustment of writing off bad debts may be ignored and the
solution can be given on the basis of figures of trade receivables and provision for doubtful debts as appearing in
the balance sheet on 31.3.20X1.
2. Current investments (i.e., Marketable securities) may not be readily convertible to a known amount of cash and
be subject to an insignificant risk of changes in value as per the requirements of AS 3 and hence those have
been considered as investing activities.

QUESTION 79)
The following information was extracted from the books of S Ltd. for the year ended 31.03.2020.
(1) Net profit before taking into account income tax and after taking into account the following items
was Rs. 30 Lakhs
(a) Depreciation on Property, Plant and Equipment Rs. 7,00,000
(b) Discount on issue of debentures written off Rs. 45,000
(c) Interest on debentures paid Rs. 4,35,000
(d) Investment of Book value Rs. 3,50,000 sold for 3,75,000
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(e) Interest received on investments Rs.70,000

(2) Income tax paid during the year Rs.12,80,000
(3) The company issued 60,000 equity shares of Rs. 10 each at a premium of 20% on 10.04.2019
(4) 20,000 9% Preference Shares of Rs. 100 were redeemed on 31st March 2020 at a premium of 5%
(5) Dividend paid during the year amounted to Rs. 11,00,000 (Including dividend distribution tax)
(6) A new plant costing 7 Lakhs was purchased in part exchange of an old plant on 1st January 2020. The book value of
the old plant was Rs. 8 Lakhs but the vendor took over the old plant at a value of Rs. 6 Lakhs only. The balance
amount was paid to vendor through cheque on 30th March 2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to value inventory at cost less
10%. The inventory according to books on 31.03.2020 was 14,76,000.
The Inventory on 31.03.2019 was correctly valued at Rs. 13,50,000
(8) Current assets and current liabilities in the beginning and at the end of the years 2019-2020 were as:
As on 01.04.2019 As on 31.03.2020
Rs. Rs.
Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash in Hand 2,40,700 3,70,500
Trade payables 2,84,700 2,87,300
Outstanding expenses 97,000 1,01,400
You are required to prepare a Cash Flow Statement for the year ended 31st March 2020 as per AS 3 (revised) using the
indirect method.

SOLUTION
S Ltd.
Cash Flow Statement for the year ended 31st March, 2020

Cash flows from operating activities

Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000
{14,76,000 less 16,40,000(14,76,000/90X100)}
Operating profit before working capital change 12,49,000
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000(14,76,000/90X100) less 13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Cash generated from operations 39,79,800
Less: Income taxes paid (12,80,000)
Net cash generated from operating activities 26,99,800
Cash flows from investing activities
Sale of investments 3,75,000
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Interest received 70,000

Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000
Issue of shares 7,20,000
Interest paid (4,35,000)
Dividend paid (11,00,000)
Net cash used in financing activities (29,15,000)
Net increase in cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period 3,70,500

*Net profit given in the question is after considering only the items listed as information point (1) of the question; hence
amount of loss on plant not added back

QUESTION 80)
Given below is the Statement of Profit and Loss of ABC Ltd. and relevant Balance Sheet information:
Extract of Balance sheet
Particular Notes 31.3.20X1 31.3.20X0
(Rs. In lakhs) (Rs. In lakhs)
Equity and Liabilities
1 Current liabilities
a Trade Payables 250 230
b Short term Provisions 1 200 180
c Other current liabilities 2 70 50
Assets
1 Current assets
a Inventories 200 180
b Trade Receivable 400 250
c Other current assets 3 195 180

Statement of Profit and Loss of ABC Ltd.

for the year ended 31st March, 20X1
Particulars Notes Rs. In lakhs
I Revenue from operations 4,150
II Other income 4 100
III Total income (I + II) 4250
Expenses:
Purchase on Stock-in-Trade 2,400
Change in inventories of finished goods (20)
Employee benefits expense 800
Depreciation expense 100
Finance cost 5 60
Other expenses 200
IV Total expenses 3,540
V Profit before tax (III -IV) 710
VI Tax expense:

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Current tax 200

VII Profit for the year from continuing operations 510

Appropriations
Balance of profit and loss account brought forward 50
Transfer to general reserve 200
Dividend paid 330

Notes to accounts:
20X1 (Rs. In lakhs) 20X0 (Rs. In lakhs)
1 Short term provision
Provision for tax 200 180
2 Other current liabilities
Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other current assets:
Advance tax 195 180
4 Other income:
Interest and dividend 100
5 Finance cost:
Interest 60
Compute cash flow from operating activities using both direct and indirect method.

SOLUTION
By direct method
Computation of Cash Flow from Operating Activities
Particulars Rs in lakhs Rs in lakhs
Cash Receipts:
Cash sales and collection from Trade receivables
Sales + Opening Trade receivables – Closing Trade receivables (A) 4,150+250-400 4,000
Cash payments:
Cash purchases & payment to Trade payables Purchases + Opening Trade 2,400+230-250 2,380
payables – Closing Trade payables
Wages and salaries paid 800+40-50 790
Cash expenses 200+10–20 190
Taxes paid – Advance tax 195
(B) 3,555
Cash flow from operating activities (A – B) 445

By Indirect Method
Computation of Cash Flow from Operating Activities

Rs in lakhs Rs in lakhs
By Indirect method
Profit before tax 710
Add: Non-cash items: Depreciation 100
Add: Interest: Financing cash outflow 60
Less: Interest and Dividend: Investment cash inflow (100)
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Less: Tax paid (195)

Working capital adjustments
Trade receivables 250-400 = (150)
Inventories 180-200 = (20)
Trade payables 250-230 =20
Outstanding wages 50-40=10
Outstanding expenses 20-10 =10 (130)
Cash flow from operating activities 445

ACCOUNTING FOR RECONSTRUCTION OF COMPANIES

QUESTION 81)
Recover Ltd decided to reorganize its capital structure owing to accumulated losses and adverse market condition.
The Balance Sheet of the company as on 31st March 2020 is as follows:
Particulars Notes Rs.
Equity and Liabilities

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1 Shareholders’ funds
A Share capital 1 3,50,000
B Reserves and surplus 2 (70,000)
2 Non-current liabilities
A Long-term borrowings 3 55,000
3 Current liabilities
A Trade Payables 80,000
B Short term Borrowings – Bank overdraft 90,000
5,05,000
Assets
1 Non-current assets
A Property, Plant Equipment 4 3,35,000
B Intangible assets 5 50,000
C Non-current investments 6 40,000
2 Current assets
A Inventories 30,000
B Trade receivables 50,000
5,05,000

Notes to accounts:
1 Share Capital Rs.
Equity share capital:
20,000 Equity Shares of Rs. 10 each 2,00,000
Preference share capital:
15,000 8% Cumulative Preference Shares of Rs. 10 each (preference
dividend has been in arrears for 4 years) 1,50,000
3,50,000
2 Reserves and surplus
Securities premium 10,000
Profit and loss account (debit balance) (80,000)
(70,000)
3 Long-term borrowings
Secured
9% Debentures (secured on the freehold property 50,000
Accrued interest on 9% debentures 5,000
55,000
4 Property, Plant and Equipment
Freehold property 1,20,000
Leasehold property 85,000
Plant and machinery 1,30,000
3,35,000
5 Intangible assets
Goodwill 50,000
50,000
6 Non-current investments
Non-Trade investments at cost 40,000
40,000
Subsequent to approval by court of a scheme for the reduction of capital, the following steps were taken:
i) The preference shares were reduced to Rs. 2.5 per share, and the equity shares to Rs. 1 per share.

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ii) One new equity share of Rs. 1 was issued for the arrears of preferred dividend for past 4 years.
iii) The balance on Securities Premium Account was utilized and was transferred to capital reduction account.
iv) The debenture holders took over the freehold property at an agreed figure of Rs. 75,000 and paid the balance to
the company after deducting the amount due to them.
v) Plant and Machinery was written down to Rs. 1,00,000.
vi) Non-trade Investments were sold for Rs. 32,000.
vii) Goodwill and obsolete stock (included in the value of inventories) of Rs. 10,000 were written off.
viii) A contingent liability of which no provision had been made was settled at Rs. 7,000 and of this amount, Rs. 6,300
was recovered from the insurance.
You are required (a) to show the Journal Entries, necessary to record the above transactions in the company’s books
and (b) to prepare the Balance Sheet, after completion of the scheme.

SOLUTION:
In the books of Recover Ltd
Journal entries
Particulars Dr. Cr.
Rs. Rs.
8% Cumulative Preference share capital (Rs. 10) A/c Dr. 1,50,000
To 8% Cumulative Preference share capital (Rs. 2.5) A/c 37,500
To Capital reduction (Rs. 7.5) A/c 1,12,500
(Preference shares being reduced to shares of Rs. 2.5 per share and remaining
transferred to capital reduction account as per capital reduction scheme)
Equity share capital A/c (Rs. 10) Dr. 2,00,000
To Equity Share capital A/c (Rs. 1) 20,000
To Capital reduction A/c (Rs. 9) 1,80,000
(Equity shares reduced to Rs. 1 per share with the remaining amount transferred to
capital reduction as a part of the internal reconstruction scheme.)
Capital reduction A/c Dr. 48,000
To Equity share capital A/c 48,000
(Equity shares of Rs. 1 issued in lieu of the arrears of preference dividend for 4 years as a
part of the internal reconstruction scheme)
Securities Premium A/c Dr. 10,000
To Capital reduction A/c 10,000
(Amount from the securities premium utilized towards the capital reduction a/c as a part
of the internal reconstruction scheme)
9% Debentures A/c Dr. 50,000
Accrued interest on debentures A/c Dr. 5,000
Bank A/c Dr. 20,000
Capital reduction A/c Dr. 45,000
To Freehold property A/c 1,20,000
(Debenture holders being paid by the sale of property, which is sold at a loss debited to
the capital reduction account. Amount received in excess being refunded to company by
debenture holders as a part of the internal reconstruction scheme.)
Capital reduction A/c Dr. 90,000
To Plant and Machinery Ac 30,000
To Goodwill A/c 50,000
To Inventory A/c 10,000
(The assets written off as a part of the internal reconstruction scheme)
Bank A/c Dr. 32,000
Capital reduction A/c Dr. 8,000
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To Investments A/c 40,000

(Investments sold at a loss debited to capital reduction account as a part of the internal
reconstruction scheme)
Contingent Liability A/c Dr. 7,000
To Bank A/c 7,000
(Contingent liability paid as a part of the internal reconstruction scheme)
Bank A/c Dr. 6,300
Capital reduction A/c Dr. 700
To Contingent Liability A/c 7,000
(The insurance company remitting part of the contingency payment amount)
Capital reduction A/c Dr. 80,000
To Profit and loss A/c 80,000
(Accumulated losses written off to capital reduction account as a part of the internal
reconstruction scheme).
Capital reduction A/c Dr. 30,800
To Capital reserve A/c 30,800
(The balance in capital reduction account transferred to capital reserve as a part of the
internal reconstruction scheme)

Balance sheet of Recover Ltd. as at 31st March 2020 (and reduced)

Particulars Notes Rs.
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,05,500
B Reserves and surplus 2 30,800
2 Non-current liabilities
A Long-term borrowings -
3 Current liabilities
A Trade Payables 80,000
B Short term Borrowings – Bank overdraft 90,000
3,06,300
Assets
1 Non-current assets
A Property, Plant Equipment 3 1,85,000
2 Current assets
A Inventories 20,000
B Trade receivables 50,000
C Cash and cash equivalents 4 51,300
3,06,300

Notes to Accounts
1 Share Capital Rs.
Equity share capital:
68,000 Equity Shares of Rs. 1 each 68,000
Preference share capital:
15,000 8% Cumulative Preference Shares of Rs. 2.5 each 3,75,00
1,05,500
2 Reserves and surplus
Capital Reserve 30,800
3 Property, Plant and Equipment

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Leasehold property 85,000

Plant and machinery 1,00,000
1,85,000
4 Cash and cash equivalents
Bank A/c (20,000+32,000-7000+6,300) 51,300

QUESTION 82)
The following is the Balance sheet of Purple Limited as at 31st March, 2022:
Balance Sheet of Purple Limited as at 31st March, 2022
Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 15,00,000
b Reserves & Surplus 2 (3,00,000)
2 Current liabilities
A Trade Payables 2,20,000
b Short Term Borrowings – Bank Overdraft 2,00,000
Total 16,20,000
Assets
1 Non-current assets
a Property, Plant and Equipment 3 10,20,000
b Intangible assets 4 1,20,600
2 Current assets
a Inventories 1,70,000
b Trade receivables 3,01,800
c Cash and cash equivalents 7,600
Total 16,20,000

Notes to accounts:
Rs
1 Share Capital
90,000 Equity Shares of Rs. 10 each fully paid 9,00,000
6% Preference Share Capital 6,00,000 15,00,000
2 Reserves & Surplus
Profit & Loss account (3,00,000)
3 Property, Plant and Equipment
Land and Building 5,40,000
Plant & Machinery 4,80,000 10,20,000
4 Intangible assets
Goodwill 84,600
Patents 36,000 1,20,600
Dividends on Preference shares are in arrears for 3 years.
On the above date, the company adopted the following scheme of reconstruction:
(i) The preference shares are converted from 6% to 8% but revalued in a manner in which the total return on them
remains unaffected.
(ii) The value of equity shares is brought down to Rs. 8 per share.
(iii) The arrears of dividend on preference shares are cancelled.
(iv) The debit balance of Goodwill account is written off entirely.
(v) Land & Building and Plant & Machinery are revalued at 85% and 80% of their respective book values.
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(vi) Book debts amounting to Rs. 14,400 are to be treated as bad and hence to be written off.
(vii) The company expects to earn a profit at the rate of Rs. 90,000 per annum from the current year which would be
utilized entirely for reducing the debit balance of Profit and loss accounts for 3 years. The Remaining balance of
Said account would be written off at the time of capital reduction process.
(viii) The balance of total capital reduction is to be utilized in writing down patents.
(ix) A secured loan of Rs. 4,80,000 bearing interest at 12% per annum is to be obtained by mortgaging tangible fixed
assets for repayment of bank overdraft and for providing additional funds for working capital.
You are required to give journal entries incorporating the above scheme of reconstruction, capital reduction account
and prepare the reconstructed Balance Sheet.

SOLUTION:
Journal Entries In the books of Purple Ltd.
Particulars Debit Credit
(₹₹) (₹₹)
1. 6% Preference share capital A/c Dr. 6,00,000
To 8% Preference share capital A/c 4,50,000
To Capital reduction A/c 1,50,000
(Being 6% preference shares converted to 8% preference shares so that
return to pref. shareholders remains unaffected)
2. Equity share capital A/c (₹ 10) Dr. 9,00,000
To Equity share capital A/c (₹ 8) 7,20,000
To Capital reduction A/c 1,80,000
(Being equity capital reduced to nominal value of ₹ 8 each)
3. Capital Reduction A/c Dr. 3,30,000
To Goodwill A/c 84,600
To Land and Building A/c 81,000
To Plant and Machinery A/c 96,000
To Trade Receivables A/c (Book debts) 14,400
To Patents A/c (Bal. fig.) 24,000
To Profit and loss A/c 30,000
(Being losses and assets written off to the extent required)
4. Bank A/c Dr. 4,80,000
To Bank Loan A/c 4,80,000
(Being Loan taken)
5. Bank overdraft A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being Bank overdraft repaid)

Capital Reduction Account

Particulars ₹ Particulars ₹
To Goodwill A/c 84,600 By Equity Share Capital A/c 1,80,000
To Land & Building A/c 81,000 By 6% Preference Share Capital A/c 1,50,000
To Plant and Machinery A/c 96,000
To Plant and Machinery A/c 96,000
To Trade receivables (Book Debts) A/c 14,400

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To Profit & Loss A/c 30,000

To Patents A/c (Bal. fig.) 24,000
3,30,000 3,30,000

Balance Sheet of Purple Ltd. (and reduced) as at 31.3.2022

Particulars Notes ₹
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 11,70,000
b Reserves and surplus 2 (2,70,000)
2 Current liabilities
a Short term borrowings (Secured Bank Loan) 4,80,000
b Trade Payables 2,20,000
Total 16,00,000
Assets
1 Non-current assets
a Property, plant and equipment 3 8,43,000
b Intangible assets 4 12,000
2 Current Assets
a Inventory 1,70,000
b Trade receivables 5 2,87,400
c Cash and cash equivalents (7,600+4,80,000-2,00,000) 2,87,600
Total 16,00,000

Notes to Accounts:
₹
1. Share Capital
Authorized
Issued, subscribed and paid up:
90,000 equity shares of ₹ 8 each fully paid 7,20,000
8% Preference share capital* 4,50,000 11,70,000
2. Reserves and Surplus
Profit and Loss Account (Dr. balance) (2,70,000)
3. Property plant and equipment
Land and Building 4,59,000
Plant and Machinery 3,84,000 8,43,000
4. Intangible assets
Patent ₹ (36,000 - 24,000) 12,000
5. Trade Receivables
Sundry Debtors 3,01,800
Less: Bad debts (14,400) 2,87,400

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Note: *Face value of preference share is not given in the question (pre and post reconstruction) and hence any
suitable value of preference share may be assumed.
Working Notes:
1. Calculation of new Preference Shares
Rate of return 6% on Preference Shares
Dividend (6/100) x ₹6,00,000=₹36,000
Rate of return 8% on Preference Shares
Dividend (8/100) x X = ₹36,000
X = (36,000/8) x 100 = 4,50,000
New Preference Share Capital ₹ 4,50,000
Old Preference Share Capital ₹ 6,00,000
Amount taken to capital Reduction A/C. (6,00,000- ₹1,50,000 Amount taken to Capital
4,50,000) Reduction A/c.

2. Since the company expects to earn a profit of ₹ 90,000 p.a. consecutively for three years and it shall be used to
write-off debit balance of P & L account, hence ₹ 2,70,000 being loss shall be shown in the Balance Sheet under
Reserve & Surplus head and ₹ 30,000 shall be written-off from Capital Reduction A/c.

3. Calculation of Amount written off on Land & Building and Plant & Machinery
Land & Building = (85/100) x 5,40,000 = ₹ 4,59,000
Plant & Machinery = (80/100) x 4,80,000 = ₹ 3,84,000
Reduced by:
Land & Building = (5,40,000 - 4,59,000) = ₹ 81,000
Plant & Machinery = (4,80,000 - 3,84,000) = ₹ 96,000

QUESTION 83)
Repair Ltd. is in the hands of a receiver for debenture holders who holds a charge on all assets except
uncalled capital. The following statement shows the position as regards creditors as on 30th June,
20X1:
₹
Property, plant and equipment (Cost₹ 3,90,000) - estimated at 1,50,000
Cash in hand of the receiver 2,70,000
Charged under debentures 4,20,000
Uncalled capital 1,80,000
Deficiency 7,50,000
6,000 shares of ₹ 60 each, ₹ 30 paid up 1,80,000
First debentures 3,00,000
Second debentures 6,00,000
Unsecured trade payables 4,50,000

A holds the first debentures for Rs. 3,00,000 and second debentures for Rs. 3,00,000. He is also an unsecured creditor
for Rs. 90,000. B holds second debentures for Rs.3,00,000 and is an unsecured trade payables for Rs. 60,000. The
following scheme of reconstruction is proposed:
1. A is to cancel Rs. 2,10,000 of the total debt owing to him, to bring Rs. 30,000 in cash and to take first debentures
(in cancellation of those already issued to him) for Rs. 5,10,000 in satisfaction of all his claims.
2. B is to accept Rs. 90,000 in cash in satisfaction of all claims by him.
3. In full settlement of 75% of the claim, unsecured creditors (other than A and B) agreed to accept four shares of Rs.

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7.50 each, fully paid against their claim for each share of Rs. 60. The balance of 25% is to be postponed and to be
payable at the end of three years from the date of Court’s approval of the scheme. The nominal share capital is to
be increased accordingly.
4. Uncalled capital is to be called up in full and Rs. 52.50 per share cancelled, thus making the shares of Rs. 7.50
each.
Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary journal entries.

SOLUTION:
Journal Entries
Particulars Debit Credit
First debentures A/c Dr. 3,00,000
Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 90,000
To A’s A/c 6,90,000
(Being A’s total liability ascertained)
A’s A/c Dr. 2,10,000
To Capital reduction A/c 2,10,000
(Being cancellation of debt upto ₹ 2,10,000)
Bank A/c Dr. 30,000
To A’s A/c 30,000
(Being cash received in course of settlement)
A’s A/c Dr. 5,10,000
To First debentures A/c 5,10,000
(Being liability of A, discharged against first debentures)
Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 60,000
To B’s A/c 3,60,000
(Being B’s liability ascertained)
B’s A/c Dr. 3,60,000
To Bank A/c 90,000
To Capital reduction A/c 2,70,000
(Being B’s liability discharged)
Unsecured trade payables A/c Dr. 3,00,000
To Equity share capital A/c 1,12,500
To Loan (Unsecured) A/c 75,000
To Capital reduction A/c 1,12,500
(Being settlement of unsecured creditors)
Share call A/c Dr. 1,80,000
To Share capital A/c 1,80,000
(Being final call money due)
Bank A/c Dr. 1,80,000
To Share call A/c 1,80,000
(Being final call money received)

Share capital A/c (Face value ₹ 60) Dr. 3,60,000

To Share capital (Face value ₹ 7.50) 45,000
To Capital reduction A/c 3,15,000
(Being share capital reduced to ₹ 7.50 each)
Capital reduction A/c Dr. 9,07,500
To Profit and loss A/c 8,70,000

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To Capital Reserve 37,500

(Being reconstruction surplus used to write off losses and balance transfer
to capital reserve)

Working Notes:
1. Settlement of claim of remaining unsecured creditors ₹
75% of ₹ 3,00,000 2,25,000
Considering their claim for share of ₹ 60 each
2,25,000/60 =3,750 shares
Less: Number of shares to be issued
3,750 x 4= 15,000 shares of ₹ 7.5 each
Total value= 15,000 x 7.50 (1,12,500)
Transferred to Capital reduction A/c 1,12,500

2. Ascertainment of profit and loss account’s debit balance at the time of reconstruction.
₹ ₹
Asset
Fixed assets 3,90,000
Cash 2,70,000 6,60,000
Less: Capital & Liabilities:
Share capital 1,80,000
1st Debenture 3,00,000
2nd Debenture 6,00,000
Unsecured trade payables 4,50,000 (15,30,000)
Profit and loss A/c (Debit balance) (8,70,000)

QUESTION 84)
The summarized balance sheet of Z Limited as on 31st March, 2017 is as under:
Particulars Amount in Rs.
Share Capital:
5,00,000 Equity shares of Rs. 10 each fully paid up 50,00,000
9%, 20,000 Preference shares of Rs. 100 each fully paid up 20,00,000
Reserves and Surplus:
Profit and Loss Account (Dr. balance) 14,60,000
Non-Current Liabilities:
10% Secured Debentures 16,00,000
Current Liabilities:
Interest due on Debentures 1,60,000
Trade Payables 5,00,000
Loan from Directors 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000
Non-Current Assets:
Property, plant and Equipment:
Land & Buildings 30,00,000
Plant & Machinery 12,50,000
Furniture & Fixtures 2,50,000
Intangible Assets:
Goodwill 11,00,000

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Patents 5,00,000
Current Assets:
Trade Investments 5,00,000
Trade Receivables 5,00,000
Inventory 10,00,000
Note: Preference dividend is in arrears for last 2 years.
Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover Rs. 1,00,000 and Rs. 60,000 were also
payable to Mr. Y and Mr. Z respectively as trade payable.
The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of Rs. 5.00 each.
(ii) The Preference shares be reduced to Rs. 50 each and the preference shareholders agreed to forego their arrears
of preference dividends, in consideration of which 9% preference shares are to be converted into 10%
preference shares.
(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including interest on debentures. Mr. Y
and Mr. Z also agreed to pay Rs. 1,00,000 and Rs. 60,000 respectively in cash and to receive new 12%
debentures for the balance amount.
(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo their 50% claims.
(v) Directors also waived 60% of their loans and accepted equity shares for the balance.
(vi) Capital commitments of Rs. 3.00 lacs were cancelled on payment of Rs. 15,000 as penalty.
(vii) Directors refunded Rs. 1,00,000 of the fees previously received by them.
(viii) Reconstruction expenses paid Rs. 15,000.
(ix) The taxation liability of the company was settled for Rs. 75,000 and was paid immediately.
(x) The Assets were revalued as under:
Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to prepare necessary journal entries for all the above-mentioned transactions including amounts to be
written off of Goodwill, Patents, Loss in Profit and Loss account arid Discount on issue of debentures. And also,
prepare Bank Account and Reconstruction Account.

SOLUTION
Journal Entries in the Books of Z Ltd.
Rs. Rs.
(i) Equity Share Capital (Rs. 10 each) A/c Dr. 50,00,000
To Equity Share Capital (Rs. 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of Rs. 10 each fully
paid into same number of fully paid equity shares of Rs. 5 each
as per scheme of reconstruction.)
(ii) 9% Preference Share Capital (Rs. 100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (Rs. 50 each) A/c 10,00,000
To Reconstruction A/c 10,00,000
(Being conversion of 9% preference share of Rs. 100 each into
same number of 10% preference share of Rs. 50 each and

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claims of preference dividends settled as per scheme of

reconstruction.)
(iii) 10% Secured Debentures A/c Dr. 9,60,000
Trade payables A/c Dr. 1,00,000
Interest on Debentures payable A/c Dr. 96,000
Bank A/c Dr. 1,00,000
To 12% Debentures A/c 6,78,000
To Reconstruction A/c 5,78,000
(Being Rs. 11,56,000 due to Y (including trade payables)
cancelled and 12% debentures allotted for the amount after
waving 50% as per scheme of reconstruction.)
(iv) 10% Secured Debentures A/c Dr. 6,40,000
Trade Payables Dr. 60,000
Interest on debentures payable A/c Dr. 64,000
Bank A/c Dr. 60,000
To 12% debentures A/c 4,42,000
To Reconstruction A/c 3,82,000
(Being Rs. 7,64,000 due to Z (including trade payables)
cancelled and 12% debentures allotted for the amount after
waving 50% as per scheme of reconstruction.)
(v) Trade payables A/c Dr. 1,70,000
To Reconstruction A/c 1,70,000
(Being remaining trade payables sacrificed 50% of their claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (Rs. 5) A/c 40,000
To Reconstruction A/c 60,000
(Being Directors' loan claim settled by issuing 8,000 equity
shares of Rs. 5 each as per scheme of reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made towards penalty of 5% for cancellation of
capital commitments of Rs. 3 Lakhs.)
(viii) Bank A/c Dr. 1,00,000
To Reconstruction A/c 1,00,000
(Being refund of fees by directors credited to reconstruction
A/c.)
(ix) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 75,000
To Reconstruction A/c 25,000
(Being payment of tax liability in full settlement against provision
for tax)
(xi) Land and Building A/c Dr. 2,00,000
To Reconstruction A/c 2,00,000
(Being appreciation in value of Land & Building recorded)
(xii) Reconstruction A/c Dr. 49,85,000

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To Goodwill A/c 11,00,000

To Patent A/c 5,00,000
To Profit and Loss A/c 14,60,000
To Plant and Machinery A/c 6,50,000
To Furniture & Fixture A/c 1,00,000
To Trade Investment A/c 50,000
To Inventory A/c 2,50,000
To Trade Receivables A/c 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
(Being writing off of losses and reduction in the value of assets
as per scheme of reconstruction, balance of reconstruction A/c
transfer to Capital Reserve.)

Bank Account
Rs. Rs.
To Reconstruction (Y) 1,00,000 By Balance b/d (overdraft) 1,00,000
To Reconstruction(Z) 60,000 By Reconstruction A/c 15,000
To Reconstruction A/c 1,00,000 (Capital commitment penalty paid)
(Refund of earlier fees by directors)
By Reconstruction A/c (reconstruction 15,000
expenses paid)
By Provision for tax A/c (tax paid) 75,000
By Balance c/d 55,000
2,60,000 2,60,000

Reconstruction Account
Rs. Rs.
To Bank (penalty) 15,000 By Equity Share Capital A/c 25,00,000
To Bank (Reconstruction 15,000 By 9% Pref. Share Capital A/c 10,00,000
expenses)
To Goodwill 11,00,000 By Mr. Y (Settlement) 5,78,000
To Patent 5,00,000 By Mr. Z (Settlement) 3,82,000
To P & L A/c 14,60,000 By Trade Payables A/c 1,70,000
To P&M 6,50,000 By Director’s loan 60,000
To Furniture and Fixtures 1,00,000 By Bank 1,00,000
To Trade investment 50,000 By Provision for tax 25,000
To Inventory 2,50,000 By Land and Building 2,00,000
To Trade Receivables 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
50,15,000 50,15,000

QUESTION 85)
The summarised Balance Sheet of Preeti Limited as on 31st March 2019, was as follows:
(Rs.)
Authorized and subscribed capital:

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20,000 Equity shares of Rs. 100 each fully paid 20,00,000

Unsecured loans:
15% Debentures 6,00,000
Interest payable thereon 90,000
Current Liabilities:
Trade payables 1,04,000
Provision for income tax 72,000
Property, plant and equipment:
Machineries 7,00,000
Current Assets:
Inventory 5,06,000
Trade receivables 4,60,000
Bank 40,000
Profit & loss A/c (Dr.) 11,60,000
It was decided to reconstruct the company for which necessary resolution was passed and sanctions were obtained
from the appropriate authorities. Accordingly, it was decided that:
i) Each share be sub-divided into 10 fully paid up equity shares of Rs. 10 each.
ii) After sub-division, each shareholder shall surrender to the company 50% of his holding for the purpose of reissue
to debenture holders and trade payables as necessary.
iii) Out of shares surrendered 20,000 shares of Rs. 10 each shall be converted into 10% Preference shares of Rs. 10
each fully paid up.
iv) The claims of the debenture holders shall be reduced by 50%. In consideration of the reduction, the debenture
holder shall receive Preference Shares of Rs. 2,00,000 which are converted out of shares surrendered.
v) Trade payables claim shall be reduced by 25%. Remaining trade payables are to be settled by the issue of equity
shares of Rs. 10 each out of shares surrendered.
vi) Balance of Profit and Loss account to be written off.
vii) The shares surrendered and not re-issued shall be cancelled.
Pass Journal Entries giving effect to the above.

SOLUTION:
Sr. Particulars Dr. Cr.
No.
1 Equity Share Capital A/c (Rs.10) Dr. 20,00,000
To Share Surrender A/c 10,00,000
To Equity Share Capital (Rs. 10) A/c 10,00,000
(Sub-division of 20,000 equity shares of Rs. 100 each into 2,00,000 equity
shares of Rs. 10 each and surrender of 1,00,000 of such sub-divided shares as
per capital reduction scheme)
2 15% Debentures Account Dr. 3,00,000
Interest payable A/c (proportionate 50%) Dr. 45,000
To Reconstruction A/c 3,45,000
(Transferred 50% of the claims of the debenture holders to Reconstruction A/c
in consideration of which 10% Preference shares are being issued, out of share
surrender A/c as per capital reduction scheme)
3 Trade payables A/c Dr. 1,04,000
To Reconstruction A/c 1,04,000

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(Transferred claims of the trade payables to Reconstruction A/c, 25% of which

is reduction and equity shares are issued in consideration of the balance
amount)
4 Share Surrender A/c Dr. 10,00,000
To 10% Preference Share Capital A/c 2,00,000
To Equity Share Capital A/c 78,000
To Reconstruction A/c 7,22,000
(Issued preference and equity shares to discharge the claims of the debenture
holders and the trade payables respectively as per scheme and the balance in
5 share surrender account is transferred to reconstruction account)
Reconstruction A/c Dr. 11,71,000
To Profit & Loss A/c 11,60,000
To Capital Reserve A/c 11,000 11,000
(Adjusted debit balance of profit and loss account against reconstruction
account and the balance is transferred to Capital Reserve account)

Note: Alternative set of correct journal entries may be given for transfer of surrendered shares to trade payables and
debenture holders.

QUESTION 86)
Green Limited had decided to reconstruct the balance Sheet since it has accumulated huge losses. The following is the
summarized Balance Sheet of the Company on 31.03.20X1 before reconstruction:
Particulars Notes ₹
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 65,00,000
B Reserves and Surplus 2 (20,00,000)
2 Non-current liabilities
A Long-term borrowings 3 15,00,000
3 Current liabilities
A Trade Payables 5,00,000
Total 65,00,000
Assets
1 Non-current assets
A Property, plant and equipment 4 45,00,000
B Intangible assets 5 20,00,000
2 Current assets Nil
Total 65,00,000

Notes to accounts
₹
1 Share Capital
Equity share capital
Authorized share capital
1,50,000 Equity shares of ₹ 50 each 75,00,000
Issued, subscribed and paid up capital
50,000 Equity Shares of ₹ 50 each 25,00,000
1,00,000 Equity shares of ₹ 50 each, ₹ 40 paid up 40,00,000

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65,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (20,00,000)
(20,00,000)
3 Long-term borrowings
Secured: 12% First debentures 5,00,000
12% Second debentures 10,00,000
15,00,000
4 Property, Plant and Equipment
Building 10,00,000
Plant 10,00,000
Computers 25,00,000
45,00,000
5 Intangible assets
Goodwill 20,00,000
20,00,000

The following is the interest of Mr. X and Mr. Y in Green Limited:

Mr. X Mr. Y
₹ ₹
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
Trade payables 2,00,000 1,00,000
12,00,000 6,00,000
Fully paid up ₹ 50 shares 3,00,000 2,00,000
Partly paid up shares (₹ 40 paid up) 5,00,000 5,00,000

The following Scheme of Reconstruction is approved by all parties interested and also by the Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be converted into
equity shares of ₹ 20 each.
(b) Mr.X is to cancel ₹7,00,000 of his total debt (other than share amount) and to pay ₹2lakhs to the company and to
receive new 14% First Debentures for the balance amount.
(c) Mr. Y is to cancel ₹ 3,00,000 of his total debt (other than equity shares) and to accept new 14% First Debentures
for the balance.
(d) The amount thus rendered available by the scheme shall be utilised in writing off of Goodwill, Profit and Loss A/c
Loss and the balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the reconstructed
company.

SOLUTION
Green Limited Journal Entries
Dr. Cr.
Bank Account Dr. 10,00,000
To Equity Share Capital Account 10,00,000
(Balance of ₹10 per share on 1,00,000 equity shares called up as per reconstruction
scheme)
Equity Share capital Account (₹50) Dr. 75,00,000
To Equity Share Capital Account (₹20) 30,00,000

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To Capital Reduction Account 45,00,000

Reduction of equity shares of shares of ₹20 each as per reconstruction scheme)
12% First Debentures Account Dr. 3,00,000
12% Second Debentures Account Dr. 7,00,000
Trade payables Account Dr. 2,00,000
To X 12,00,000
(The total amount due to x, transferred to his account)
Bank Account Dr. 2,00,000
To X 2,00,000
(The amount paid by X under the reconstruction scheme)
12% First Debentures Account Dr. 2,00,000
12% Second Debentures Account Dr. 3,00,000
Trade payables Account Dr. 1,00,000
To Y 6,00,000
(The total amount due to Y, transferred to his account)
Y Dr. 6,00,000
To 14% First Debentures Account 3,00,000
To Capital Reduction Account 3,00,000
(The amount due to Y discharged by issue of 14% first debentures)
X Dr. 14,00,000
To 14% First Debentures Account 7,00,000
To Capital Reduction Account 7,00,000
(The cancellation of ₹7,00,000 out of total debt of Mr. X and issue of 14% first
debentures for the balance amount as per reconstruction scheme)
Capital Reduction Account Dr. 55,00,000
To Goodwill Account 20,00,000
To Profit and Loss Account 20,00,000
To Computers Account 15,00,000
(The balance amount of capital reduction account utilized in writing off goodwill,
profit and loss account, and computers- working Note)

Balance Sheet of Green Limited (and reduced) as on 31st March, 20X1

Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 30,00,000
2 Non-current liabilities
A Long-term borrowings 2 10,00,000
3 Current liabilities
A Trade Payables 2,00,000
Total 42,00,000
Assets
1 Non-current assets
A Property, Plant Equipment
Tangible assets 30,00,000
2 Current assets
A Cash and cash equivalents 12,00,000
Total 42,00,000

Notes to accounts

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₹
1. Share Capital
Equity share capital
Issued, subscribed and paid up
1,50,000 equity shares of ₹ 20 each 30,00,000
Total 30,00,000
2. Long-term borrowings
Secured
14% First Debentures 10,00,000
Total 10,00,000
3. Tangible assets
Building 10,00,000
Plant 10,00,000
Computers 10,00,000
Total 30,00,000

Working Note:
Capital Reduction Account
₹ ₹
To Goodwill A/c 20,00,000 By Equity Share Capital A/c 45,00,000
To P & L A/c 20,00,000 By X 7,00,000
To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000
55,00,000 55,00,000

QUESTION 87)
The following is the Balance Sheet of Star Ltd. as on 31st March, 2019:
Rs
A. EQUITY & LIABILITIES
1. Shareholders’ Fund:
(a) Share Capital:
9,000 7% Preference Shares of Rs 100 each fully paid 9,00,000
10,000 Equity Shares of Rs 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. PPE:
Bombay Works 9,50,000
Chennai Works 7,75,000
2. Investment:

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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
TOTAL 24,90,000
A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as follows:
1. Paid up value of 7% Preference Share to be reduced to Rs 80, but the rate of dividend being raised to 9%.
2. Paid up value of Equity Shares to be reduced to Rs 10.
3. The directors to refund Rs 50,000 of the fees previously received by them.
4. Debenture holders forego their interest of Rs 26,000 which is included among the trade payables.
5. The preference shareholders agreed to waive their claims for preference share dividend, which is in arrears for the
last three years.
6. “B” 6% Debenture holders agreed to take over the Chennai Works of Rs 4,25,000 and to accept an allotment of
1,500 equity shares of Rs 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 Rs 10 each fully paid at par to Star Ltd.
7. The Chennai Workmen’s compensation fund disclosed that there were actual liabilities of Rs 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.
8. Inventory was to be written off by Rs 1,90,000 and a provision for doubtful debts is to be made to the extent of Rs
20,000.
9. Chennai works completely written off.
10. 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.

SOLUTION
In the books of Star Ltd.
Journal Entries
Particulars Amount Rs. Amount Rs.
(i) 7% Preference share capital (Rs. 100) Dr. 9,00,000
To 9% Preference share capital (Rs. 80) 7,20,000
To Capital reduction A/c 1,80,000
(Being preference shares reduced to Rs. 80 and also rate of
dividend raised from 7% to 9%)
(ii) Equity share capital A/c (Rs. 100 each) Dr. 10,00,000
To Equity share capital A/c (Rs. 10 each) 1,00,000
To Capital reduction A/c 9,00,000
(Being reduction of nominal value of one share of Rs. 100 each to
Rs. 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
To Capital reduction A/c 26,000
(Being interest forgone by the debenture holders)
(v) No entry required
(vi) a ‘B’ 6% Debentures A/c Dr. 3,50,000

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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 Fund Dr. 4,000
To Capital reduction A/c 4,000
(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 Compensation Fund 14,000
To Capital reduction A/c 1,400
(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)

ACCOUNTING FOR BRANCHES INCLUDING

FOREIGN INCLUDING FOREIGN BRANCHES

QUESTION 88)
Beta, having head office at Mumbai has a branch at Nagpur. The head office does wholesale trade only at cost plus

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80%. The goods are sent to branch at the wholesale price viz., cost plus 80%. The branch at Nagpur is wholly engaged
in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 20X1:
Head Office (Rs.) Branch (Rs.)
Opening stock 2,25,000
Purchases 25,50,000
Goods sent to branch (Cost to H.0. plus 80%) 9,54,000
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and branch for the year ended 31st
March, 20X1.

SOLUTION
Working Note 1: -
Head Office
Opening Stock – 2,25,000
+ Purchases – 25,50,000
Total – 27,750000
Sale @180 GSTB @180 Closing Stock (b/f)
COGS = 27,81,000/180 x 100 COGS = 9,54,000/180 x 100 7,00,000
= 15,45,000 = 5,30,000

Working Note 2: -
Branch
Opening Stock – 0
+ Purchases – 0
+ Goods Received from HO – 5,30,000
Total – 5,30,000
COGS = 9,50,000/200 x 100 =4,75,000 Closing Stock (b/f)
55,000

Branch Trading (Cost Basis)

Goods Received from HO 5,30,000 Sales 9,50,000
Gross Profit 4,75,000 Closing Stock 55,000
10,05,000 10,05,000

QUESTION 89)
Beta, having head office at Mumbai has a branch at Nagpur. The head office does wholesale trade only at cost plus
80%. The goods are sent to branch at the wholesale price viz., cost plus 80%. The branch at Nagpur is wholly engaged
in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 20X1:
Head Office (Rs.) Branch (Rs.)
Opening stock 2,25,000

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Purchases 25,50,000
Goods sent to branch (Cost to H.0. plus 80%) 9,54,000
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and branch for the year ended 31st
March, 20X1.

SOLUTION
Trading and Profit and Loss A/c
For the year ended 31st March 20X1
Head office Branch Head office Branch
Rs. Rs. Rs. Rs.
To Opening stock 2,25,000 - By Sales 27,81,000 9,50,000
To Purchases 25,50,000 - By Goods sent to 9,54,000 _
branch
To Goods received from - 9,54,000 By Closing stock 7,00,000 99,000
head office (W.N.1 & 2)
To Gross profit c/d 16,60,000 95,000
44,35,000 10,49,000 44,35,000 10,49,000
To Office expenses 90,000 8,500 By Gross profit b/d 16,60,000 95,000
To Selling expenses 72,000 6,300
To Staff salaries 65,000 12,000
To Branch Stock Reserve 44,000 _
(W.N.3)
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000

Working Notes:
(1) Calculation of closing stock of head office: Rs.
Opening Stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
Less: Cost of goods sold [37,35,000 x 100/180] (20,75,000)
7,00,000
(2) Calculation of closing stock of branch: Rs.
Goods received from head office [At invoice value] 9,54,000
Less: Invoice value of goods sold [9,50,000 x 180/200] (8,55,000)
99,000
(3) Calculation of unrealized profit in branch stock:
Branch stock Rs. 99,000
Profit included 80% of cost
Hence, unrealized profit would be = Rs. 99,000 x 80/180 Rs. 44,000

QUESTION 90)

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Walkaway Footwears has its head office at Nagpur and Branch at Patna. It invoiced goods to its Branch at 20% less
than the list price which is cost plus 100%, with instruction that cash sales were to be made at invoice price and the
credit sales at Catalouge price (i.e. list price).
The following information was available at the branc for the year ended 31st March, 2022.
(Figures in Rs.)
Stock on 1st April, 2021 (invoice price) 12,000
Debtors on 1st April, 2021 10,000
Goods received from head office (invoice price) 1,32,000
Sales: Cash 46,000
Credit 1,00,000 1,46,000
Cash received from debtors 85,000
Expenses at branch 17,500
Debtors on 31st March, 2022 25,000
Stock on 31st March, 2022 (invoice price) 17,600
Remittances to head office 1,20,000
You are required to prepare Branch Stock Account, Branch Adjustment Account, Branch Profit & Loss Account and
Branch Debtors Account for the year ended 31st March, 2022.

SOLUTION
In the books of walkaway footwears
Patna Branch Stock Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
1.1.21 To Balance b/d 12,000 31.12.21 By Bank A/c (Cash sales) 46,000
31.12.21 To Goods sent to branch A/c 1,32,000
To Branch adjustment A/c 20,000 By Branch debtor’s A/c 1,00,000
(Surplus over invoice price) (credit sales)
31.12.21 By Shortage in stock A/c 400
By Balance c/d 17,600
1,64,000 1,64,000

Patna Branch Adjustment Account

Particulars Amount Particulars Amount
(Rs.) (Rs.)
31.12.21 To Stock reserve - Rs. 17,600 x 6,600 31.12.21 By Stock reserve – Rs. 12,000 x 4,500
60/160 (closing stock) 60/160 (Opening stock)
To Shortage (400x 60/160) 150 By Goods sent to branch A/c 49,500
To Branch profit & loss A/c 67,250 (Rs. 1,32,000 x 60/160)
(Gross profit)
By Branch stock A/c 20,000
74,000 74,000

Branch Profit & Loss Account

Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Branch expenses A/c 17,500 By Branch adjustment A/c 67,250
To Shortage in stock A/c 250 (Gross Profit)
To Net profit (transferred to Profit &
Loss A/c) 49,500

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67,250 67,250

Branch Debtors Account

Particulars Amount Particulars Amount
(Rs.) (Rs.)
1.1.21 To Balance b/d 10,000 31.12.21 By Bank A/c 85,000
31.12.21 To Branch stock A/c 1,00,000 By Balance c/d (bal. fig.) 25,000
1,10,000 1,10,000

QUESTION 91)
Vijay & Co. of Jaipur has a branch in Patna to which, goods are sent @ 20% above cost. The branch makes both cash
and credit sales. Branch expenses are paid direct from Head Office and the branch has to remit all cash received into
the bank account of Head Office. Branch does not maintain any books of accounts, but sends monthly returns to head
office.
Following further details are given for the year ended 31st March 2020:
Amount
Goods received from Head Office at invoice price 8,40,000
Goods returned to Head Office at invoice price 60,000
Cash sales for the year 2019-20 1,85,000
Credit sales for the year 2019-20 6,25,000
Stock at branch as on 01-04-2019 at invoice price 72,000
S. Debtors at Patna branch as on 01-04-2019 96,000
Cash received from debtors 4,38,000
Discount allowed to Debtors 7,500
Goods returned by customers at Patna Branch 14,000
Bad debts written off 5,500
Amount recovered from bad debts previously written off as bad 1,000
Rent, Rates & Taxes at branch 24,000
Salaries & Wages at branch 72,000
Office expenses (at branch) 9,200
Stock at branch as on 31-03-2020 at cost price 1,25,000
Prepare necessary ledger accounts in the books of Head office by following Stock & Debtors method and ascertain
branch profit.

SOLUTION
Branch Stock Account
Rs. Rs. Rs. Rs.
1.4.19 To Balance b/d (Opening 72,000 31.3.20 By Sales:
stock)
31.3.20 To Goods Sent to Branch 8,40,000 Cash 1,85,000
A/c
Credit 6,25,000
To Branch P&L 94,000 Less: Return (14,000) 6,11,000 7,96,000
Goods sent to Branch 60,000
- returns
By Balance c/d 1,50,000
(Closing stock)

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10,06,000 10,06,000
1.4.20 To Balance b/d 1,50,000

Branch Debtors Account

Rs. Rs.
1.4.19 To Balance b/d 96,000 31.3.20 By Cash 4,38,000
31.3.20 To Sales 6,25,000 By Returns 14,000
By Discounts 7,500
By Bad debts 5,500
By Balance c/d 2,56,000
7,21,000 7,21,000
1.4.20 To Balance b/d 2,56,000

Branch Expenses Account

Rs. Rs.
31.3.20 To Salaries & Wages 72,000 31.3.20 By Branch P&L A/c 1,18,200
To Rent, Rates &Taxes 24,000
To Office Expenses 9,200
To Discounts 7,500
To Bad Debts 5,500
1,18,200 1,18,200

Branch Profit & Loss Account for year ended 31.3.20

Rs. Rs.
31.3.20 To Branch Expenses A/c 1,18,200 31.3.20 By Branch stock 94,000
To Net Profit transferred to By Branch Stock Adjustment 1,17,000
account
General P & L A/c 93,800 By Bad debts recovered 1,000
2,12,000 2,12,000

Branch Stock Adjustment Account for year ended 31.3.20

Rs. Rs.
31.3.20 To Goods sent to 10,000 31.3.20 By Balance b/d 12,000
branch (72,000x1/6)
z60,000x1/6)-
Returns
To Branch P&L A/c 1,17,000 By Goods sent to branch 1,40,000
(8,40,000x1/6)

To Balance c/d 25,000

(1,50,000x1/6)
1,52,000 1,52,000

QUESTION 92)
1
Ayan Ltd. Invoices goods to its branch at cost plus 33 3% From the following Particulars prepare Branch
Stock Account, Branch Stock Adjustment Account and Branch Profit and Loss Account as they would

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appear in the books of head office.

Rs
Stock at commencement at Branch at invoice Price 3,60,000
Stock at close at Branch at Invoice Price 2,88,000
Goods sent to Branch during the year at invoice price (including goods invoiced at Rs. 24,00,000
48,000 to Branch on 31.03.2018 but not received by Branch before close of the year).
Return of goods to head office (invoice Price) 1,20,000
Credit Sales at Branch 1,20,000
Invoice value of goods pilfered 24,000
Normal loss at Branch due to wastage and deterioration of stock (at invoice price) 36,000
Cash Sales at Branch 21,60,000
st
Ayan closes its books on 31 March, 2018.

SOLUTION
In the books of Head Office Branch Stock Account
Particulars Rs Particulars Rs
To Balance b/d 3,60,000 By Bank A/c (cash Sales) 21,60,000
To Goods sent to Branch A/c 24,00,000 By Branch Debtors A/c 1,20,000
(Credit Sales)
To Branch Adjustment A/c – balancing 36,000 By Goods sent to Branch A/c (Returns 1,20,000
fig. (Surplus)*** to H.O.)
By Branch Adjustment A/c* 6,000
(Rs. 24,000 x25/100)
By Branch P&L A/c * 18,000
(Cost of Abnormal Loss)
By Branch Adjustment A/c** (Invoice 36,000
price of normal loss)
By Balance c/d:
In hand 2,88,000
in transit 48,000
27,96,000 27,96,000

Alternatively, combined posting for the amount of Rs. 24,000 may be passed through Goods pilfered account.
Alternatively, it may first be transferred to normal Loss account which may ultimately be closed by transfer to
Branch Adjustment account. The final amount of net profit will however remain same.
It has been considered that the surplus may be due to sale of goods by branch at price higher than invoice price.
Branch Stock Adjustment Account
Particulars (Rs) Particulars (Rs)
To Branch Stock A/c (Loading on 6,000 By Stock Reserve A/c 90,000
Abnormal Loss) (Rs. 3,60,000 x 25/100)
To Branch Stock A/c 36,000 By Goods Sent to Branch A/c (Rs. 5,70,000
(Normal Loss) 24,00,000 – Rs. 1,20,000) x 25/100

To Stock Reserve A/c (Rs. 84,000 By Branch Stock A/c (Surplus) 36,000
3,36,000x25/100)
To Gross Profit t/f to P & L A/c 5,70,000
6,96,000 6,96,000

Branch Profit and Loss Account

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Particulars Rs Particulars Rs
To Branch Stock A/c (Cost of 18,000 By Branch Adjustment A/c 5,70,000
Abnormal Loss) (Gross Profit)
To Net Profit 5,52,000
t/f to General P & LA/c
5,70,000 5,70,000

QUESTION 93)
Widespread invoices goods to its branch at cost plus 20%. The branch sells goods for cash as well as on
credit. The branch meets its expenses out of cash collected from its debtors and cash sales and remits
the balance of cash to head office after with-holding Rs. 10,000 necessary for meeting immediate requirements of
cash. On 31st March, 20X1 the assets at the branch were as follows:
Rs. (‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500

During the accounting year ended 31st March, 20X2 the invoice price of goods dispatched by the head office to the
branch amounted to Rs. 1 crore 32 lakhs. Out of the goods received by it, the branch sent back to head office
goods invoiced at Rs. 72,000. Other transactions at the branch during the year were as follows:
(Rs. ‘000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842

On 1st January, 20X2 the branch purchased new furniture for 1 lakh for which payment was made by head office
through a cheque.
On 31st March, 20X2 branch expenses amounting to Rs. 6,000 were outstanding and cash in hand was again Rs.
10,000. Furniture is subject to depreciation @ 16% per annum on diminishing balance method.
Prepare Branch Account in the books of head office for the year ended 31st March, 20X2.

SOLUTION
In the Head Office Books
Branch Account
for the year ended 31st March, 20X2
Rs.’000 Rs.’000
To Balance b/d By Balance b/d
Cash in hand 10 Stock reserve Rs. 1,080 × 1/6 180

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Trade debtors 384 By Goods sent to branch A/c (Returns to 72

H.O.)
Stock 1,080 By Goods sent to branch A/c (Loading on 2,188
net goods sent to branch – 13,128X1/6
Furniture and fittings 500
To Goods sent to branch A/c 13,200 Bank A/c (Remittance from branch to 11,700
H.O.) (W.N.5)
To Bank A/c (Payment for furniture) 100 By Balance c/d
To balance c/d stock reserve 1,470 x 1/6 245 Cash in hand 10
To Outstanding expenses 6 Trade debtors (W.N.3) 485
To Net profit transferred to General P/L 1,096 Stock (W.N.1) 1,470
account
Furniture & fittings (W.N.4) 516
16,621 16,621

Working Notes:
1. Invoice price and cost
Let cost be 100
So, invoice price 120
Loading 20
Loading: Invoice price = 20 : 120 = 1 :6

2. Invoice price of closing stock in branch

Branch Stock Account
Rs. ‘000 Rs. ‘000
To Balance b/d 1,080 By Goods sent to branch 72
To Goods sent to branch 13,200 By Branch Cash 9,700
To Branch debtors 102 By Branch debtors 3,140
By Balance c/d 1,470
14,382 14,382

3. Closing balance of branch debtors

Branch Debtors Account
Rs. ‘000 Rs. ‘000
To Balance b/d 384 By Branch cash 2,842
To Branch stock 3,140 By Branch expenses discount 58
By branch stock (Returns) 102
By Branch expenses (Bad debts) 37
By Balance b/d 485
3,524 3,524

4. Closing balance of furniture and fittings

Branch Furniture and Fittings Account
Rs. ‘000 Rs. ‘000
To Balance b/d 500 By depreciation [(500x16%) + 84
(100x16%x3/12)]
To Bank 100 By Balance c/d 516
600 600

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Note: Since the new furniture was purchased on 1st Jan 20X2 depreciation will be for 3 months.

5. Remittance by branch to head office

Branch Cash Account
Rs. ‘000 Rs. ‘000
To Balance b/d 10 By Branch expenses 842
To Branch stock 9,700 By Remittances to H.O. (b.f) 11,700
To Branch debtors 2,842 By Balance b/d 10
12,552 12,552

QUESTION 94)
Pass necessary Journal entries in the books of an independent Branch of M/s TPL Sons, wherever required, to rectify
or adjust the following transactions:
(i) Branch paid Rs. 5,000 as salary to a Head Office Manager, but the amount paid has been debited by the Branch
to Salaries Account.
(ii) A remittance of Rs. 1,50,000 sent by the Branch has not received by Head Office on the date of reconciliation of
Accounts.
(iii) Branch assets accounts retained at head office; depreciation charged for the year Rs. 15,000 not recorded by
Branch.
(iv) Head Office expenses Rs. 75,000 allocated to the Branch, but not yet been recorded by the Branch.
(v) Head Office collected Rs. 60,000 directly from a Branch Customer. The intimation of the fact has not been
received by the Branch.
(vi) Goods dispatched by the Head office amounting to Rs. 50,000, but not received by the Branch till date of
reconciliation.
(vii)Branch incurred advertisement expenses of Rs. 10,000 on behalf of other Branches, but not recorded in the
books of Branch.
Head office made payment of Rs. 16,000 for purchase of goods by branch, but not recorded in branch books.

SOLUTION
Books of Branch
Journal Entries
Amounts Rs
Dr. Cr.
(i) Head Office Account Dr. 5,000
To Salaries Account 5,000
(Being rectification of salary paid on behalf of Head Office)
(ii) No entry in Branch Books is required.
(iii) Depreciation A/c Dr. 15,000
To Head Office Account 15,000
(Being depreciation of assets accounted for)
(iv) Expenses Account Dr. 75,000
To Head Office Account 75,000
(Being allocated expenses of Head Office recorded)
(v) Head Office Account Dr. 60,000
To Debtors Account 60,000
(Being adjustment entry for collection from Branch Debtors directly by

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Head Office)
(vi) Goods in-transit Account Dr. 50,000
To Head Office Account 50,000
(Being goods sent by Head Office still in-transit)
(vii) Head Office Account Dr. 10,000
To expenses Account / To Cash 10,000
(Being expenditure incurred, wrongly recorded in books)
(vii) Purchases account A/c / Creditors Dr. 16,000
To Head Office Account 16,000
(Being purchases booked)

QUESTION 95)

Show adjustment journal entry in the books of head office at the end of April, 20X1 for incorporation of inter –
branch transactions assuming that only head office maintains different branch accounts in its books.
A. Delhi branch:
(1) Received goods from Mumbai – Rs. 35,000 and Rs. 15,000 from Kolkata.
(2) Sent goods to Chennai – Rs. 25,000, Kolkata – Rs. 20,000.
(3) Bill Receivable received – Rs. 20,000 from Chennai.
(4) Bill Acceptances sent to Mumbai – Rs. 25,000, Kolkata – Rs. 10,000.
B. Mumbai Branch (apart from the above):
(1) Received goods from Kolkata – Rs. 15,000, Delhi – Rs. 20,000.
(2) Cash sent to Delhi – Rs. 15,000, Kolkata – Rs. 7,000.
C. Chennai Branch (apart from the above):
(3) Received goods from Kolkata – Rs. 30,000.
(4) Acceptances and Cash sent to Kolkata – Rs. 20,000 and Rs.10,000 respectively.
D. Kolkata Branch (apart from the above):
(5) Sent goods to Chennai – Rs. 35,000.
(6) Paid cash to Chennai – Rs.15,000.
(7) Acceptances sent to Chennai – Rs.15,000.

SOLUTION
(a) Journal entry in the books of Head Office
Date Particulars Dr. Cr.
Rs. Rs.
30th April, Mumbai Branch Account Dr. 3,000
20X1 Chennai Branch Account Dr. 70,000
To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by head office in respect
of inter-branch transactions for the month of April,
20X1)

Working Note:
Delhi Mumbai Chennai Kolkata
Rs. Rs. Rs. Rs.
A. Delhi Branch

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1 Received goods 50,000(Dr.) 35,000(Cr.) 15,000(Cr.)

2 Sent goods 45,000(Cr.) 25,000(Dr.) 20,000(Dr.)
3 Received Bills receivable 20,000(Dr.) 20,000(Cr.)
4 Sent Acceptance 35,000(Cr.) 25,000 (Dr.) 10,000(Dr.)
B. Mumbai Branch
5 Received goods 20,000(Cr.) 35,000 (Dr.) 15,000(Cr.)
6 Sent cash 22,000 (Cr.)
C. Chennai Branch
7 Received goods 30,000 (Dr.) 30,000(Cr.)
8 Sent cash and acceptances 30,000(Cr.) 30,000 (Dr.)
D. Kolkata Branch
9 Sent goods 35,000(Dr.) 35,000(Cr.)
10 Sent cash 15,000(Dr.) 15,000(Cr.)
11 Sent acceptances 15,000(Dr.) 15,000(Cr.)
15,000 (Cr.) 3,000(Dr.) 70,000(Dr.) 58,000(Cr.)

QUESTION 96)
Ring Bell Ltd. Delhi has a branch at Bombay where a separate set of books is used. The following is the
Trail balance extracted on 31st Dec.,2010:
Particulars HO Branch
Dr. Cr. Dr. Cr.
Equity Share capital - 8,00,000 - -
Profit & Loss a/c (01/01/2010) - 25,310 - -
Profit for 2010 - 82,200 - 31,700
Interim dividend paid 30,000 - - -
General Reserve - 1,00,000 - -
Fixed Assets 5,30,000 - 95,000 -
Stock 2,22,470 - 50,460 -
Debtors and Creditors 50,500 21,900 19,100 10,400
Cash Balance 62,730 - 6,550 -
HO a/c in branch books - - - 1,29,010
Branch a/c in HO books 1,33,710 - - -
The difference between the balance of HO a/c and Branch a/c in both set of books is accounted for as follows:
(1) Cash remitted by the branch on 31st Dec 2010 but received by the HO on 1st Jan. 2011- 3,000/-
(2) Stock Stolen in transit from HO and charged to branch by the HO, but not credited to HO a/c in the branch books as
the branch manager declined to admit any liability (not covered by insurance)- 1,700/-.
Give the Branch a/c in the HO books after incorporating the branch Trail balance through journal entries. Also prepare
company’s Balance Sheet as on 31st Dec., 2010.

SOLUTION
The Branch Current Account in the Head Office Books and Head Office Current Account in the Branch Books do not
show the same balances. Therefore, in order to reconcile them, the following journal entries will be passed in the
Head Office books:

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Journal Entries
Dr. Cr.
20X1 Rs. Rs.
Dec., 31 Cash in Transit A/c Dr. 3,000
To Branch Current A/c 3,000
(Cash sent by the Branch on 31st Dec., 20X1 but received at H.O.
on 1st Jan.,20X2)
Loss by theft A/c Dr. 1,700
To Branch Current A/c 1,700
(Stock lost in transit from H.O. to Branch)

In order to incorporate, in the H.O. books, the given Branch trial balance which has been drawn up after preparing
the Branch Profit &Loss Account, the following journal entries will be necessary:
Journal Entries
20X1 Rs. Rs.
Dec. 31 Branch Current Account Dr. 31,700
To Profit & Loss Account 31,700
(Branch Profit for the year)
Branch Fixed Assets Dr. 95,000
Branch Stock Dr. 50,460
Branch Debtors Dr. 19,100
Branch Cash Dr. 6,550
To Branch Current Account 1,71,110
(Branch assets brought into H.O. Books)
Branch Current A/c Dr. 10,400 10,400
To Branch Creditors
(Branch creditors brought into H.O. Books)

Branch Current Account

Rs. Rs.
To Balance b/d 1,33,710 By Cash in transit 3,000
To Profit & Loss A/c 31,700 By Loss of theft 1,700
To Branch Creditors 10,400 By Sundry Branch Assets 1,71,110
1,75,810 1,75,810

Profit and Loss Account for 20X1

Rs. Rs.
To Loss by Theft 1,700 By Balance b/d 25,310
To Balance c/d 1,07,510 By Year’s Profit: H.O. 52,200
Branch 31,700
1,09,210 1,09,210

Question 97)
Manohar of Mohali has a branch at Noida to which the goods are supplied from Mohali but the cost thereof is not
recorded in the Head Office books. On 31st March, 2020 the Branch Balance Sheet was as follows:

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Liabilities Rs. Assets Rs.

Creditors Balance 62,000 Debtors Balance 2,24,000
Head Office 1,88,000 Building Extension A/c
Closed by transfer to H.O. A/c -
Cash at Bank 26,000
2,50,000 2,50,000
During the six months ending on 30-09-2020, the following transactions took place at Noida:
Rs. Rs.
Sales 2,78,000 Manager's salary 16,400
Purchases 64,500 Collections from debtors 2,57,000
Wages Paid 24,000 Discounts allowed 16,000
Salaries (inclusive of advance 15,600 Discount earned 4,600
of Rs. 5,000)
General Expenses 7,800 Cash paid to creditors 88,500
Fire Insurance (Paid for one 11,200 Building Account (further 14,000
year) payment)
Remittance to H.O. 52,900 Cash in Hand 5,600
Cash at Bank 47,000
Set out the Head Office Account in Noida Books and the Branch Balance Sheet as on 30.09.2020. Also give journal
entries in the Noida books.

SOLUTION
Journal Entries in the Books of Noida Branch
Particulars Debit Credit
(Rs.) (Rs.)
Salary Advance A/c Dr. 5,000
To Salaries A/c 5,000
(Being the amount paid as advance adjusted by debit to
Salary Advance A/c)
Prepaid Insurance A/c (11,200 X 6/12) Dr. 5,600
To Fire Insurance A/c 5,600
(Being the six months premium transferred to the Prepaid
Insurance A/c)
Head Office A/c Dr. 1,44,900
To Purchases A/c 64,500
To Wages A/c 24,000
To Salaries A/c (15,600 – 5,000) 10,600
To General Expenses A/c 7,800
To Fire Insurance A/c (11,200 X 6/12) 5,600
To Manager’s Salary A/c 16,400
To Discount Allowed A/c 16,000
(Being the transfer of various revenue accounts to the HO
A/c for closing the accounts)
Sales A/c Dr. 2,78,000
Discount Earned A/c Dr. 4,600
To Head Office A/c 2,82,600
(Being the transfer of various revenue accounts to HO)

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Head Office A/c Dr. 14,000

To Building A/c 14,000
(Being the transfer of amounts spent on building extension to
HO A/c)

Head Office Account

2020 Particulars Amount 2020 Particulars Amount
(Rs.) (Rs.)
Sept 30 To Cash Remittance 52,900 April 1 By Balance b/d 1,88,000
To Sundries* (Revenue) 1,44,900 By Sundries* (Revenue) 2,82,600
To Building A/c 14,000
To Balance c/d 2,58,800
Total 4,70,600 Total 4,70,600
* Instead of using Sundries (Revenue) A/c, the concerned revenue accounts can be posted in the ledger.
Balance Sheet of Noida Branch As at 30th Sept 2020
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Creditors 33,400 Debtors 2,29,000
Head Office A/c 2,58,800 Salary Advance 5,000
Prepaid Insurance 5,600
Building Extension A/c
transferred to HO
Cash in Hand 5,600
Cash at Bank 47,000
Total 2,92,200 Total 2,92,200

Working Notes
Cash and Bank Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Balance b/d 26,000 By Wages 24,000
To Collection from debtors 2,57,000 By Salaries 15,600
By Insurance 11,200
By General Expenses 7,800
By HO A/c 52,900
By Manager’s Salary 16,400
By Creditors 88,500
By Building A/c 14,000
By Balance c/d
- Cash in Hand 5,600
- Cash at bank 47,000
Total 2,83,000 Total 2,83,000

Debtors Account
Particulars Amount (Rs.) Particulars Amount (Rs.)

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To Balance b/d 2,24,000 By Cash Collection 2,57,000

To Sales A/c 2,78,000 By Discount (Allowed) 16,000
By Balance c/d 2,29,000
Total 5,02,000 Total 5,02,000

Creditors Account
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Cash A/c 88,500 By Balance b/d 62,000
To Discount (Earned) 4,600 By Purchases 64,500
To Balance c/d 33,400
Total 1,26,500 Total 1,26,500
Note:
Since the date of payment of fire insurance has not been mentioned in the question, it is assumed that it was paid on
01 April 2020.
Alternative answer considering otherwise also possible.

QUESTION 98)
KP manufactures a range of goods which it sells to wholesale customers only from its head office. In addition, the
H.O. transfers goods to a newly opened branch at factory cost plus 15%. The branch then sells these goods to the
general public on only cash basis.
The selling price to wholesale customers is designed to give a factory profit which amounts to 30% of the sales
value. The selling price to the general public is designed to give a gross margin (i.e., selling price less cost of goods
from H.O.) of 30% of the sales value.
KP operates from rented premises and leases all other types of fixed assets. The rent and hire charges for these are
included in the overhead costs shown in the trial balances.
From the information given below, you are required to prepare for the year ended 31 st Dec.,20X1 in columnar form.
(a) A Profit & Loss account for (i) H.O. (ii) the branch (iii) the entire business.
(b) Balance Sheet as on 31st Dec., 20X1 for the entire business.
H.O. Branch
Rs. Rs. Rs. Rs.
Raw materials purchased 35,000
Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-20X1
Raw materials 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000
Administrative Salaries 13,900 4,000
Salesmen Salaries 22,500 6,200
Other administrative &
selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000
Capital 50,000
Sundry Creditors 13,000
Provision for unrealized profit in stock 1,200
Sales 2,00,000 65,200
Goods sent to Branch 46,000
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Goods received from H.O. 44,500

3,10,200 3,10,200 67,200 67,200
Notes:
(8) On 28th Dec., 20X1 the branch remitted Rs. 1,500 to the H.O. and this has not yet been recorded in the H.O.
books. Also, on the same date, the H.O. dispatched goods to the branch invoiced at Rs. 1,500 and these too
have not yet been entered into the branch books. It is the company’s policy to adjust items in transit in the
books of the recipient.
(9) The stock of raw materials held at the H.O. on 31st Dec.,20X1 was valued at Rs. 2,300.
(10) You are advised that:
• There were no stock losses incurred at the H.O. or at the branch.
• It is KP’s practice to value finished goods stock at the H.O. at factory cost.
• There were no opening or closing stock of work-in-progress.
(11) Branch employees are entitled to a bonus of Rs. 156 under a bilateral agreement.

SOLUTION
In the books of KP
Trading and Profit & Loss Account for the year ended 31st Dec., 20X1
H.O. Branch Total H.O. Branch Total
Rs. Rs. Rs. Rs. Rs. Rs.
To Material consumed 34,500 - 34,500 By Sales 2,00,000 65,200 2,65,200
(W.N.1)
To Wages 1,08,500 - 1,08,500 By Goods Sent to Branch 46,000 - -
To Factory Overheads 39,000 - 39,000
To Opening stock of By Closing stock including 15,000 9,560 24,560
finished goods 13,000 9,200 22,200 transit (W.N.2)
To Goods from H.O. 46,000
To Gross Profit c/d 66,000 19,560 85,560
(W.N.3)
2,61,000 74,760 2,89,760 2,61,000 74,760 2,89,760
To Admn. Salaries 13,900 4,000 17,900 By Gross Profit b/d 66,000 19,560 85,560
To Salesmen Salaries 22,500 6,200 28,700
To Other Admn. & Selling 12,500 2,300 14,800
Overheads
To Stock Reserve (W.N.4) 47 - 47
To Bonus to Staff - 156 156
To Net Profit 17,053 6,904 23,957
66,000 19,560 85,560 66,000 19,560 85,560

Balance Sheet as on 31st Dec., 20X1

H.O. Branch Total H.O. Branch Total
Rs. Rs. Rs. Rs. Rs. Rs.
Capital 50,000 - 50,000 Fixed Assets - - -
Profit: H.O. 17,053 23,957 23,957 Current Assets:
Branch 6,904
Raw material 2,300 2,300
Trade Creditors 13,000 13,000 Finished Goods (Less 15,000 9,560 23,313*
Stock Res.)
Bonus Payable 156 156 Debtors 37,000 - 37,000
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H.O. Account* 10,404 Cash (including 23,500 1,000 24,500

transit item)
Stock Reserve (W.N.4) 1,247 Branch A/c 10,404*
88,204 10,560 87,113 88,204 10,560 87,113

*9,560 × 100/115 i.e., (8,313 + 15,000) = Rs.23,313

** (5,000 + 6,904) – 1500 = Rs. 10,404.
Working Notes:
(1) Material Consumed
Opening raw material + Raw Material Purchased – Closing raw material
= 1,800 + 35,000 - 2,300 = 34,500
(2) Closing stock at head office
(a) Calculation of total factor cost = Material consumed + Wages + Factory overhead
= 34,500 + 1,08,500 + 39,000 = 1,95,000
(b) Cost (factory cost) of goods sold = Sales – Gross profit
= 2,00,000 – 2,00,000 x 70% = 1,40,000
(c) Stock transferred to branch = 46,000 x 100/115 = 40,000
(d) Closing stock=1,95,000–1,40,000–40,000=15,000
(3) Gross profit of Branch = Sales x Gross profit ratio
= 65,200 x 30% =19,560
(4) Closing stock reserve = 9,560 x 15/115 = 1,246
Charge to profit and loss=1,247–1,200=47

QUESTION 99)
The Washington branch of XYZ Mumbai sent the following trial balance as on31st December,20X1:
$ $
Head office A/c _ 22,800
Sales _ 84,000
Debtors and creditors 4,800 3,400
Machinery 24,000 _
Cash at bank 1,200 _
Stock, 1 January, 20X1 11,200 _
Goods from H.O. 64,000 _
Expenses 5,000 _
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows:

Washington Branch A/c

Rs. Rs.
To Balance b/d 8,10,000 By Cash 28,76,000
To Goods sent to branch 29,26,000 By Balance c/d 8,60,000
37,36,000 37,36,000

Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price plus 25%. Machinery
was acquired on 31st January, 2007, when $ 1.00 = Rs.40.
Rates of exchange were:
1th January, 20X1 $ 1.00 = Rs. 46

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31st December, 20X1 $ 1.00 = Rs.48

Average $ 1.00 = Rs. 47

Machinery is depreciated @ 10% and the branch manager is entitled to a commission of 5% on the profits of the
branch.
You are required to:
(i) Prepare the Branch Trading &Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency and prepare Branch Trading & Profit and Loss A/c and
the Branch A/c in the books of head office.

SOLUTION
(i)
In the Books of Head Office
Branch Trading and Profit & Loss A/c (in Dollars)
for the year ended 31st December, 20X1

Opening stock 11200 By sales 84000

Goods from H.O. 64000 By closing stock 8000
Gross profit c/d 16800
92000 92000
To Expenses 5,000 By Gross Profit b/d 16,800
To deprecation (24000X 10%) 2400
To manager commission 470
To net profit C/d 8930
16800 16800

(i) (a)
Converted Branch Trial Balance (into Indian Currency)
Particulars Rate per $ Dr. (Rs.) Cr. (Rs.)
Machinery 40 9,60,000 _
Stock January 1, 20X1 46 5,15,200 _
Goods from head office Actual 29,26,000 _
Sales 47 _ 39,48,000
Expenses 47 2,35,000 _
Debtors & creditors 48 2,30,400 1,63,200
Cash at bank 48 57,600 _
Head office A/c Actual _ 8,60,000
Difference in exchange rate (b.f.) 47,000 _
49,71,200 49,71,200
Closing stock $ 8,000 (W.N. 2) 48 Rs. 3,84,000

(b) Branch Trading and Profit &Loss A/c for the year ended 31st December, 20X1

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Rs. Rs.
To Opening stock 5,15,200 By Sales 39,48,000
To Goods from head office 29,26,000 By Closing stock (W.N.2) 3,84,000
To Gross profit c/d 8,90,800
43,32,000 43,32,000
To Expenses 2,35,000 By Gross profit b/d 8,90,800
To Depreciation @ 10%on Rs. 96,000
9,60,000
To Exchange difference 47,000
To Manager’s commission 22,560
(W.N.1)
To Net Profit c/d 4,90,240
8,90,800 8,90,800
(c)
Branch Account
To Balance b/d 8,60,000 By Machinery 9,60,000
To Net profit 4,90,240 Less:
To Creditors 1,63,200 By Depreciation (96,000) 8,64,000
To Outstanding By Closing stock 3,84,000
To commission 22,560 By Debtors 2,30,400
By Cash at bank 57,600
15,36,000 15,36,000

Working Notes:
1. Calculation of manager’s commission @ 5% on profit
i.e., 5% of $[16,800 – (5,000 + 2,400)]
Or 5% × $9,400 = $ 470
Manager’s commission in Rupees = $ 470 x Rs. 48 = Rs. 22,560

2. Calculation of closing stock

$
Opening stock 11,200
Add: Goods from head office 64,000
75,200
Less: Cost of goods sold (at invoice price) (67,200)
84000X100/125
Closing stock 8,000
Closing stock in Rupees = $8,000 x Rs. 48 = Rs.3,84,000.
Note: Manager is entitled to commission on profits earned at the end of the year.

QUESTION 100)
M & S Co. of Lucknow has a Branch in Canberra, Australia (as an integral foreign operation of M & S
Co.). At the end of 31st March 2019, the following ledger balances have been extracted from the books
of the Lucknow office and the Canberra.
Lucknow office (Rs. In Canberra Branch (Aust. Dollars
thousands) in thousands)
Dr. Cr. Dr. Cr.
Capital 2,000

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Reserves & Surplus 1,000

Land 500
Buildings (Cost) 1,000
Buildings Dep. Reserves 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery Dep. 600 130
Reserves
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2018 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salary 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390
The following information is also available:
st
(i) Stock as at 31 March, 2019
Lucknow Rs. 1,50,000
Canberra A$ 3125 (all stock are out of purchases made at Abroad)
(ii) Head Office always sent goods to the Branch at cost plus 25%
(iii) Provision is to be made for doubtful debts at5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20% on written down value.
You are required to:
(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1 A $ = Rs. 50
Closing rate 1 A $ = Rs. 53
Average rate 1 A $ = Rs. 51.00
For Fixed Assets 1 A $ = Rs. 46.00
Prepare Trading and Profit and Loss Account for the year ended 31st March 2019 showing to the extent possible
H.O. results and Branch results separately.

SOLUTION
M & S Co. Ltd.
Canberra, Australia Branch Trial Balance As on 31st March 2019
($ ‘thousands) (Rs.’ thousands)
Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 Rs. 46 9,200
Plant & Machinery Dep. Reserve 130 Rs. 46 5,980
Trade receivable/payable 60 30 Rs. 53 3,180 1,590
Stock (1.4.2018) 20 Rs. 50 1,000
Cash & Bank Balances 10 Rs. 53 530
Purchase / Sales 20 123 Rs. 51 1,020 6,273

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Goods received from H.O. 5 Actual 100

Wages & Salaries 45 Rs. 51 2,295
Rent 12 Rs. 51 612
Office expenses 18 Rs. 51 918
Commission Receipts 100 Rs. 51 5,100
H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss (bal. fig.) 208
390 390 19,063 19,063
Closing stock 3.125 53 165.625

Trading and Profit & Loss Account for the year ended 31st March, 2019
(Rs.’000)
H.O. Branch Total H.O. Branch Total
To Opening Stock 100 1,000.000 1,100.000 By Sales 520 6,273.000 6,793.000
To Purchases 240 1,020.000 1,260.000 By Goods sent to 100 – 100.000
Branch
To Goods received from – 100.000 100.000 By Closing Stock 150 165.625 315.625
Head Office
To Wages & Salaries 75 2,295.000 2,370.000
To Gross profit c/d 355 2,023.625 2,378.625
770 6,438.625 7,208.625 770 6,438.625 7,208.625
To Rent – 612.000 612.000 By Gross profit b/d 355 2,023.625 2,378.625
To Office expenses 25 918.000 943.000 By Commission 256 5,100.000 5,356.000
receipts
To Provision for doubtful 14 159.000 173.000
debts @ 5%
To Depreciation (W. N.) 460 644.000 1,104.000
To Balance c/d 112 4,790.625 4,902.625
611 7,123.625 7,734.625 611 7,123.625 7,734.625
To Managing Partner’s 30.000 By Balance b/d 4,902.625
Salary
To Exchange Loss 208.000 By Branch stock 4.000
To Balance c/d 4,668.625 reserve
4,906.625 4,906.625

Working Note:
Calculation of Depreciation
H.O Rs. ‘000 Branch Rs. ‘000
Building – Cost 1,000
Less: Dep. Reserve (200)
800
Depreciation @ 10% (A) 80
Plant & Machinery Cost 2,500 9,200
Less: Dep. Reserve (600) (5,980)
1,900 3,220
Depreciation @ 20% (B) 380 644
Total Depreciation (A+B) 460 644
Note: As the closing stock of Branch does not consist any stock transferred from M&S Co., there is no need to
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create closing stock reserve. But the opening branch stock reserve has to be reversed in the P&LA/c.

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AS 1 - DISLOSURE OF ACCOUNTING POLICIES

QUESTION 101)
Jagannath Ltd. had made a rights issue of shares in 2012. In the offer document to its members, it had
projected a surplus of ₹40 crores during the accounting year to end on 31st March, 2014. The draft results
for the year, prepared on the hitherto followed accounting policies and presented for perusal of the board of
directors showed a deficit of ₹10 crores. The board in consultation with the managing director, decided on
the following:
(i) Value year-end inventory at works cost (₹50 crores) instead of the hitherto method of valuation of
inventory at prime cost (₹30 crores).
(ii) Provide depreciation for the year on straight line basis on account of substantial additions in gross block
during the year, instead of on the reducing balance method, which was hitherto adopted. As a
consequence, the charge for depreciation at ₹27 crores is lower than the amount of ₹45 crores which
would have been provided had the old method been followed, by ₹18 cores.
(iii) Not to provide for “after sales expenses” during the warranty period. Till the last year, provision at 2% of
sales used to be made under the concept of “matching of costs against revenue” and actual expenses
used to be charged against the provision. The board now decided to account for expenses as and when
actually incurred. Sales during the year total to ₹600 crores.
(iv) Provide for permanent fall in the value of investments - which fall had taken place over the past five
years - the provision being ₹10 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on accounts
for inclusion in the annual report for 2013-2014.

Answer
As per AS 1, any change in the accounting policies which has a material effect in the current period or which
is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change
in accounting policies which has a material effect in the current period, the amount by which any item in the
financial statements is affected by such change should also be disclosed to the extent ascertainable. Where
such amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on
accounts should properly disclose the change and its effect.
Notes on Accounts:
(i) During the year inventory has been valued at factory cost, against the practice of valuing it at prime cost
as was the practice till last year. This has been done to take cognizance of the more capital-intensive
method of production on account of heavy capital expenditure during the year. As a result of this
change, the year-end inventory has been valued at ₹50 crores and the profit for the year is increased by
₹20 crores.
(ii) In view of the heavy capital-intensive method of production introduced during the year, the company
has decided to change the method of providing depreciation from reducing balance method to straight
line method. As a result of this change, depreciation has been provided at ₹27 crores which is lower
than the charge which would have been made had the old method and the old rates been applied, by

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₹18 crores. To that extent, the profit for the year is increased.
(iii) So far, the company has been providing 2% of sales for meeting “after sales expenses during the
warranty period. With the improved method of production, the probability of defects occurring in the
products has reduced considerably. Hence, the company has decided not to make provision for such
expenses but to account for the same as and when expenses are incurred. Due to this change, the profit
for the year is increased by ₹12 crores than would have been the case if the old policy were to continue.
The company has decided to provide ₹10 crores for the permanent fall in the value of investments which has
taken place over the period of past five years. The provision so made has reduced the profit disclosed in the
accounts by ₹10 crores.

QUESTION 102)
You are required to comment on the following cases as per the provisions of Accounting Standard-1
‘Disclosure of Accounting Policies’:
(1) Bee Limited has not complied with AS-2 "Valuation of inventories" and the same is disclosed in the Notes
on Accounts. Management is of the view that the financial statements give a true and fair view as non-
compliance with AS-2 is disclosed.
(2) Cee Limited sold its Office Building for ` 10,00,000 on 1st March, 2023. The buyer has paid the full
amount and taken possession of the building. The book value of the Office Building is ` 4,00,000. On 31st
2023, documentation and legal formalities are pending. The company has not recorded the disposal and the
amount received is shown as an advance.
(3) Dee Limited has prepared its accounts on cash basis and the same is not disclosed.
(4) Jee Limited disclosed significant accounting policies adopted in the preparation of financial statements,
in the Directors' Report.

Solution
(1) As per AS-I disclosure of accounting policies is not a remedy for wrong or inappropriate treatment in
accounting. In the given case the financial statement does not give a true and fair view as they are not in
compliance with AS-2.
(2) Considering the substance over form as per AS-I, documentation and legal formalities represent the form
of the transaction, although the legal title has not been transferred, the economic reality and substance are
that the rights and beneficial interest in the Office Building have been transferred. Therefore, recording of
acquisition/ disposal (by the transferee and transferor respectively) would in substance represent the
transaction entered into.
(3) Accrual is a fundamental accounting assumption. If it is not followed by the company, the facts should be
disclosed under AS-I. Hence the company should disclose the fact that the cash basis of accounting has
been followed in the notes on accounts.
(4) The practice followed by the company is not correct. It should be disclosed as part of financial
statements (The director’s report is not part of financial statements).

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AS 2 – VALUATION OF INVESTORIES

QUESTION 103)
Alpha Ltd. sells flavored milk to customers; some of the customers consume the milk in the shop run by
Alpha Limited. While leaving the shop, the consumers leave the empty bottles in the shop and the company
takes possession of these empty bottles. The company has laid down a detailed internal record procedure
for accounting for these empty bottles which are sold by the company by calling for tenders.
Keeping this in view:
Decide whether the inventory of empty bottles is an asset of the company;
If so, whether the inventory of empty bottles existing as on the date of Balance Sheet is to be considered as
inventories of the company and valued as per AS 2 or to be treated as scrap and shown at realizable value
with corresponding credit to ‘Other Income’?

SOLUTION
As per the ‘Framework on Presentation and Preparation of Financial Statements’:
Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are called
assets.
Alpha Ltd. sells these empty bottles by calling tenders. It means further benefits are accrued on its sale.
Therefore, empty bottles are assets for the company.
As per AS 2, inventories are assets held for sale in the ordinary course of business.
Inventory of empty bottles existing on the Balance Sheet date is the inventory and Alpha Ltd. has detailed
controlled recording and accounting procedure which duly signify its materiality.
Thus, inventory of empty bottles cannot be considered as scrap and should be valued as inventory in
accordance with AS 2.

QUESTION 104)
The closing inventory at cost of a company amounted to Rs. 2,84,700. The following items were included
at cost in the total:
(a) 400 coats, which had cost Rs. 80 each and normally sold for Rs. 150 each. Owing to a defect in
manufacture, they were all sold after the balance sheet date at 50% of their normal price. Selling
expenses amounted to 5% of the proceeds.
(b) 800 skirts, which had cost Rs. 20 each. These too were found to be defective. Remedial work in
April cost Rs. 5 per skirt, and selling expenses for the batch totaled Rs. 800. They were sold for Rs.
28 each.
What should the inventory value be according to AS 2 after considering the above items?

Answer:
Valuation of Closing Stock
Particulars Rs. Rs.
Closing Stock at cost 2,84,700
Less: adjustment required for 400 defected coats 3,500

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Cost of 400 coats (400 x 80) 32,000

Net Realisable Value [400 x (75 – 5% of Rs. 75)] 28,500

(400 coats should be measured at NRV which is lower i.e.

28,500 therefore adjustment of 3500 is required)
Value of Closing Stock 2,81,200
Note: There is no adjustment for skirts because for skirts were sold at above cost.

QUESTION 105)
In a manufacturing process of Mars ltd, one by-product BP emerges besides two main products
MP1 and MP2 apart from scrap. Details of cost of production process are here under:
Item Unit Amount Output Closing Stock 31-3-20X1
Raw material 14,500 1,50,000 MP I-5,000 units 250
Wages - 90,000 MP II - 4,000 units 100
Fixed overhead - 65,000 BP- 2,000 units -
Variable overhead - 50,000 - -
Average market price of MP1 and MP2 is Rs. 60 per unit and Rs. 50 per unit respectively, by- product is sold
@ Rs. 20 per unit. There is a profit of Rs. 5,000 on sale of by-product after incurring separate processing
charges of Rs. 8,000 and packing charges of Rs. 2,000, Rs. 5,000 was realised from sale of scrap.
Required:
Calculate the value of closing stock of MP1 and MP2 as on 31-03-20X1.

Solution
As per Ind 2 ‘Inventories’, most by-products as well as scrap or waste materials, by their nature, are
immaterial. They are often measured at net realizable value and this value is deducted from the cost of the
main product.
1) Calculation of NRV of By-product BP
Selling price of by-product 2,000 units x 20 per unit 40,000
Less: Separate processing charges of by- product BP (8,000)
Packing charges (2,000)
Net realizable value of by-product BP 30,000

2) Calculation of cost of conversion for allocation between joint products MP1 and MP2
Raw material 1,50,000
Wages 90,000
Fixed overhead 65,000
Variable overhead 50,000
Less: NRV of by-product BP (See Calculation 1) 30,000
Sale value of scrap 5,000 (35,000)
Joint cost to be allocated between MP1 and MP2 3,20,000

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3) Determination of “basis for allocation” and allocation of joint cost to MP1 and MP2
MP I MP 2
Output in units (a) 5,000 4,000
Sales price per unit (b) 60 50
Sales value (a x b) 3,00,000 2,00,000
Ratio of allocation 3 2
Joint cost of Rs. 3,20,000 allocated in the ratio of 3:2 1,92,000 1,28,000
(c)
Cost per unit [C/A] 38.4 32

4) Determination of Value of Closing stock of MP 1 & MP 2

Particulars MP 1 MP 2
Closing stock in units 250 units 100 units
Cost per unit 38.4 32
Value of closing stock 9,600 3,200

QUESTION 106)
A private limited company manufacturing fancy terry towels had valued its closing inventory of inventories of
finished goods at the realizable value, inclusive of profit and the export cash incentives. Firm contracts had
been received and goods were packed for export, but the ownership in these goods had not been transferred
to the foreign buyers. You are required to advise the company on the valuation of the inventories in line with
the provisions of AS 2.

SOLUTION
Accounting Standard 2 “Valuation of Inventories” states that inventories should be valued at lower of
historical cost and net realizable value. The standard states, “at certain stages in specific industries, such as
when agricultural crops have been harvested or mineral ores have been extracted, performance may be
substantially complete prior to the execution of the transaction generating revenue. In such cases, when sale
is assured under forward contract or a government guarantee or when market exists and there is a negligible
risk of failure to sell, the goods are often valued at net realizable value at certain stages of production.”
Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into account
the facts stated, the closing inventory of finished goods (Fancy terry towel) should have been valued at lower
of cost and net realizable value and not at net realizable value. Further, export incentives are recorded only in
the year the export sale takes place. Therefore, the policy adopted by the company for valuing its closing
inventory of inventories of finished goods is not correct.

QUESTION 107 )
Particulars Kg. Rs
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000

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Sales 10,000 2,80,000

Closing Inventory: Raw Materials 900
Finished Goods 1200
The expected production for the year was 15,000 kg of the finished product. Due to fall in market demand the
sales price for the finished goods was Rs. 20 per kg and the replacement cost for the raw material was Rs.
9.50 per kg on the closing day. You are required to calculate the closing inventory as on that date.

SOLUTION
Calculation of cost for closing inventory
Particulars Rs
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labour 76,500
Fixed Overhead 75,000X10,200/15,000 51,000
Cost of Production 2,29,500
Cost of closing inventory per unit (2,29,500/10,200) Rs 22.50
Net Realisable Value per unit Rs 20.00
Since net realisable value is less than cost, closing inventory will be valued at Rs. 20.
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement cost
i.e. Rs. 9.50.
Therefore, value of closing inventory: Finished Goods (1,200 x 20) Rs. 24,000
Raw Materials (900 x 9.50) =Rs. 8,550
Total =Rs. 32,550

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AS 11 – EFFECTS OF CHANGES IN FOREIGN EXCHANGE

RATES

QUESTION 108)
A Ltd. has borrowed USD 10,000 in foreign currency on April 1, 20X1 at 5% p.a. annual interest and
acquired a depreciable asset. The exchange rates are as under:
01/04/20X1 1 US$ = ₹ 48.00
31/03/20X2 1 US$ = ₹ 51.00
You are required to pass the journal entries in the following cases:
(i) Option under Para 46A is not availed.
(ii) Option under Para 46A is availed.
(iii) The loan was taken to finance the operations of the entity (and not to procurea depreciable asset).
In all cases, assume interest accrued on 31 March 20X2 is paid on the same date.

Solution
Journal Entries in the Books of A Ltd.
(i) Option under Para 46A is not availed
Date Particulars ₹ (Dr.) ₹ (Cr.)
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
To Foreign Loan Account 4,80,000
Mar 31 Finance Cost (USD 10,000 x 5% x ₹ 51) Dr. 25,500
To Bank Account 25,500
Mar 31 Foreign Exchange Difference Account (P/L) Dr. 30,000
To Foreign Loan Account [10,000 x (51-48)] 30,000
In this case, since the option under Para 46A is NOT availed, the Exchange Loss of ₹ 30,000 is recognised as an
expense in the Statement of Profit and Loss for theyear ending 31 March 20X2.

(ii) Option under Para 46A is availed

Date Particulars ₹ (Dr.) ₹ (Cr.)
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
To Foreign Loan Account 4,80,000
Mar 31 Finance Cost (USD 10,000 x 5% x ₹ 51) Dr. 25,500
To Bank Account 25,500
Mar 31 Foreign Exchange Difference Account (P/L) Dr. 30,000
To Foreign Loan Account [10,000 x (51-48)] 30,000
Mar 31 Property Plant & Equipment A/c Dr. 30,000
To Foreign Exchange Difference A/c 30,000
In this case, since the option under Para 46A is availed, the Exchange Loss of ₹ 30,000 is capitalized in
the cost of Property, Plant and Equipment, which will indirectly get recognized in the Profit & Loss A/c by
way of increased depreciation over the remaining useful life of the asset.
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(iii) Option under Para 46A is availed

Date Particulars ₹ (Dr.) ₹ (Cr.)
20X1
Apr. 01 Bank Account (10,000 x 48) Dr. 4,80,000
To Foreign Loan Account 4,80,000
Mar 31 Finance Cost (USD 10,000 x 5% x ₹ 51) Dr. 25,500
To Bank Account 25,500
Mar 31 Foreign Exchange Difference Account (P/L) Dr. 30,000
To Foreign Loan Account [10,000 x (51-48)] 30,000
Mar 31 Foreign Currency Monetary Item TranslationDifference A/c 30,000
(FCMITDA) Dr.
To Foreign Exchange Difference A/c 30,000
In this case, since the option under Para 46A is availed, the Exchange Loss of ₹ 30,000 is
accumulated in the FCMITD A/c, which will be subsequently spread over and debited to P&L A/c over the
tenure of the loan.

QUESTION 109)
(i) ABC Ltd. an Indian Company obtained long term loan from WWW private Ltd., a U.S. company amounting to Rs.
30,00,000. It was recorded at US $1 = Rs. 60.00, taking exchange rate prevailing at the date of transaction. The
exchange rate on balance sheet date (31.03.2018) was US $1 = Rs. 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd., Rs. 10,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $1 = Rs. 59.00. The exchange rate on balance
sheet date (31.03.2018) was US $1 = Rs. 62.00.
You are required to calculate the amount of exchange difference and also explain the accounting treatment needed in
the above two cases as per AS 11 in the books of ABC Ltd.

SOLUTION
Amount of Exchange difference and its Accounting Treatment
Long term Loan Foreign Currency Rs
Rate
(i) Initial recognition US $ 50,000 Rs. (30,00,000/60) 1 US $ = Rs. 60 30,00,000
Rate on Balance sheet date 1 US $ = Rs. 62
Exchange Difference Loss US $ 50,000 x Rs. (62 – 60) 1,00,000
Treatment: Credit Loan A/c
and Debit FCMITD A/c or Profit and Loss A/c by Rs. 1,00,000
Trade receivables
(ii) Initial recognition US $ 16,949.152* (Rs. 10,00,000/59) 1 US $ = Rs. 59 10,00,000
Rate on Balance sheet date 1 US $ = Rs. 62
Exchange Difference Gain US $ 16,949.152* x Rs. (62-59) 50,847.456*
Treatment: Credit Profit and Loss A/c by Rs. 50,847.456*
And Debit Trade Receivables

Thus, Exchange Difference on Long term loan amounting Rs. 1,00,000 may either be charged to Profit and
Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on
trade receivables amounting Rs. 50,847.456 is required to be transferred to Profit and Loss A/c.
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QUESTION 110)
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.03.2020.
(i) Debtors include amount due from Mr. SRs. 9,00,000 recorded at the prevailing exchange rate on the
date of sales, transaction recorded at US $ 1 = Rs. 72.00
US $ 1 = Rs. 73.50 on 31st March 2020
US $ 1 = Rs. 72.50 on 1st April 2019
(ii) Long term loan taken on 1st April 2019 from a US Company amounting to Rs. 75,00,000. Rs. 5,00,000
was repaid on 31st December 2019 recorded at US $ 1 = Rs. 70.50. Interest has been paid as and when
debited by the US Company.
US $ 1 = Rs. 73.50 on 31st March 2020
US $ 1 = Rs. 72.50 on 1st April 2019

SOLUTION
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising on the
settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at
which they were initially recorded during the period, or reported in previous financial statements, should be
recognized as income or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long term foreign currency
monetary items at rates different from those at which they were initially recorded during the period, or
reported in previous financial statements, in so far as they relate to the acquisition of a non-depreciable
capital asset can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in
the enterprise’s financial statements and amortized over the balance period of such long-term asset/
liability, by recognition as income or expense in each of such periods.

Foreign Currency Rs.

Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = Rs. 72 9,00,000
Rate on Balance sheet date 1 US $ = Rs. 73.50
Exchange Difference Gain US $ 12,500 X (73.5072) 18,750
Treatment: Credit Profit and Loss A/c by Rs. 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 (75,00,000/72.50) 1 US $ = Rs. 73.50 75,00,000
Rate on Balance sheet date 1 US $ = Rs. 73.50
Exchange Difference Loss after adjustment of exchange gain on
repayment of Rs. 5,00,000
Rs. 67,987.48 [82,171.88 (US $ 96,356.08 X Rs. 73.5 less Rs.
70,00,000) less profit 14,184.40 [US $ 7,092.2 (5,00,000/70.5)
X Rs. 2)] NET LOSS 67,987.48*
Treatment: Credit Loan A/c and
Debit FCMITD A/C or Profit and Loss A/c by Rs. 67,987.48

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Thus, Exchange Difference on Long term loan amounting Rs. 67,987.48 may either be charged to Profit and
Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on
debtors amounting Rs. 18,750 is required to be transferred to Profit and Loss A/c.
NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment of Rs. 5,00,000) has
been calculated in the above solution. Alternative considering otherwise also possible.
NOTE 2: Date of sales transaction of Rs. 9 lakhs has not been given in the question and hence it has been
assumed that the transaction took place during the year ended 31 March 2020.

QUESTION 111)
Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2016 payable after 6 months. The
company entered into a forward contract for 6 months @Rs. 64.25 per Dollar. On 31st October, 2016, the
exchange rate was Rs. 61.50 per Dollar.
You are required to calculate the amount of the profit or loss on forward contract to be recognized in the
books of the company for the year ended 31st March, 2017.

SOLUTION
Calculation of profit or loss to be recognized in the books of Power Track Limited

Forward contract rate 64.25

Less: Spot rate (61.50)
Loss on forward contract 2.75
Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 × Rs. 2.75) Rs. 1,37,500
Contract period 6 months
Loss for the period 1st November, 2016 to 31st March, 2017 i.e., 5 5 months
months falling in the year 2016-2017
Hence, Loss for 5 months will be Rs. 1,37,500 = 65 Rs. 1,14,583

Thus, the loss amounting to Rs. 1,14,583 for the period is to be recognized in the year ended 31st March,
2017.

QUESTION 112 )
Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st December at 1 US$ = Rs 47.10
when exchange rate was US$ 1 = Rs 47.02. On 31st December when he closed his books exchange rate was
US$ 1 = Rs 47.15. On 31st January, he decided to sell the contract at Rs 47.18 per dollar. Show how the
profits from contract will be recognised in the books.

SOLUTION
Since the forward contract was for speculation purpose the premium on contract i.e. the difference between
the spot rate and contract rate will not be recorded in the books. Only when the contract is sold the
difference between the contract rate and sale rate will be recorded in the Profit & Loss Account.

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Sale Rate Rs 47.18

Less: Contract Rate (Rs 47.10)
Premium on Contract Rs 0.08
Contract Amount US$ 1,00,000
Total Profit (1,00,000 x 0.08) Rs 8,000

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AS 12 – ACCOUNTING FOR GOVERNMENT GRANTS

QUESTION 113)
How would you treat the following in the accounts in accordance with AS 12 'Government Grants'?
(i) Rs. 35 Lakhs received from the Local Authority for providing medical facilities to the employees.
(ii) Rs. 100 Lakhs received as Subsidy from the Central Government for setting up a unit in a notified
backward area.
(iii) Rs. 10 Lakhs Grant received from the Central Government on installation of anti-pollution equipment.

SOLUTION
(i) Rs. 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, Rs.
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 Rs
100 lakhs should be credited to capital reserve.
(iii) Rs 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, Rs 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.

QUESTION 114)
A Ltd. purchased a machinery for Rs 40 lakhs. (Useful life 4 years and residual value Rs 8 lakhs) Government
grant received is Rs 16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant in the third year and the value of the fixed
assets, if:
(1) the grant is credited to Fixed Assets A/c.
(2) the grant is credited to Deferred Grant A/c.

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SOLUTION
IN THE BOOKS OF A LTD.
Journal Entries (at the time of refund of grant)
(1) If the grant is credited to Fixed Assets Account:
Rs Rs
I. Fixed Assets A/c Dr. 16 lakhs
To Bank A/c 16 lakhs
(Being grant refunded) The amount of refund should be Rs
16 Lakhs

The balance of fixed assets after two years depreciation will be Rs 16 lakhs (W.N.1) and after refund of grant
it will become (Rs 16 lakhs + Rs 16 lakhs) = Rs 32 lakhs on which depreciation will be charged for remaining
two years. Depreciation = (32-8)/2 = Rs 12 lakhs p.a. will be charged for next two years.

(2) If the grant is credited to Deferred Grant Account:

As per para 14 of AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is
allocated to Profit and Loss account usually over the periods and in the proportions in which
depreciation on related assets is charged. Accordingly, in the first two years (Rs 16 lakhs /4 years) =
Rs 4 lakhs p.a. x 2 years = Rs 8 lakhs were credited to Profit and Loss Account and Rs 8 lakhs was the
balance of Deferred Grant Account after two years.
Therefore, on refund in the 3rd year, following entry will be passed:
Rs Rs
I. Deferred Grant A/c Dr. 8 lakhs
Profit & Loss A/c Dr. 8 lakhs
To Bank A/c 16 lakhs
(Being Government grant refunded)

Deferred grant account will become Nil. The fixed assets will continue to be shown in the books at Rs 24
lakhs (W.N.2) and depreciation will continue to be charged at Rs 8 lakhs per annum for the remaining two
years.

Working Notes:
i. Balance of Fixed Assets after two years but before refund (under first alternative)
Fixed assets initially recorded in the books = Rs 40 lakhs – Rs 16 lakhs = Rs 24 lakhs
Depreciation p.a. = (Rs 24 lakhs – Rs 8 lakhs)/4 years = Rs 4 lakhs per year
Value of fixed assets after two years but before refund of grant = Rs 24 lakhs – (Rs 4 lakhs x 2 years) = Rs
16 lakhs

ii. Balance of Fixed Assets after two years but before refund (under second alternative)
Fixed assets initially recorded in the books = Rs 40 lakhs
Depreciation p.a. = (Rs 40 lakhs – Rs 8 lakhs)/4 years = Rs 8 lakhs per year
Book value of fixed assets after two years = Rs 40 lakhs – (Rs 8 lakhs x 2 years)
= Rs 24 lakhs
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Note: It is assumed that the question requires the value of fixed assets is to be given after refund of
government grant.

QUESTION 115)
On 1stApril 2021, Eleanor Limited purchased a manufacturing Plant for ` 60 lakhs, which has an estimated
useful life of 10 years with a salvage value of ` 10 lakhs. On purchase of the Plant, a grant of ` 20 lakhs was
received from the government.
You are required to calculate the amount of depreciation as per AS-12 for the financial year 2022-23 in the
following cases:
(i) If the grant amount is deducted from the value of Plant.
(ii) If the grant is treated as deferred income.
(ii) If the grant amount is deducted from the value of Plant, but at the end of the year 2022-2023 grant
isrefunded to the extent of ` 4 lakhs, due to non-compliance of certain conditions.
(iv) If the grant is treated as the promoter's contribution.
(Assume depreciation on the basis of Straight-Line Method.)

SOLUTION
Calculation of depreciation as per AS 12 for the financial year 2022-23:
(i) If the grant amount is deducted from the value of Plant, then the amount of deprecation will be ` 3,00,000
p.a. (` 60,00,000 - ` 10,00,000 - ` 20,00,000) / 10 year.
(ii) If the grant is treated as deferred income, then amount of depreciation will be ` 5,00,000 p.a. (`
60,00,000 - ` 10,00,000) / 10 year.
(iii) If the grant amount is deducted from the value of plant, but at the end of the year 2022-23 grant is
refunded to the extent of ` 4 lakh then the amount of depreciation will be ` 3,00,000 p.a. (` 60,00,000 - `
10,00,000 - ` 20,00,000) /10 year for year 2021-22 and for the year 2022-23 Depreciation will be `
3,00,000 calculated as follows, (`60,00,000 - ` 10,00,000 - ` 20,00,000– ` 3,00,000) / 10 years.
Note: It is assumed that the depreciation for the year has been charged on the book value on the plant before
making adjustment for grant. Alternatively, if it is considered otherwise then the depreciation will be charged
after making adjustment for grant. In that case depreciation for the year 2022-23 will be as ` 3,44,444
calculated as follows, (` 60,00,000 - `10,00,000 - ` 20,00,000 + 4,00,000 – ` 3,00,000 / 9 years
(iv) If the grant is treated as promoter’s contribution, then the amount of depreciation will be ` 5,00,000 p.a. (`
60,00,000 -10,00,000) /10 year.

Note:
It is assumed that the depreciation for the year has been charged on the book value on the plant before
making adjustment for grant. Alternatively, if it is considered otherwise then the depreciation will be charged
after making adjustment for grant. In that case depreciation for the year 2022-23 will be as:

Cost of Plant 60,00,000

Less: Salvage Value 10,00,000
Less: Grant 20,00,000
Add: Grant Refundable 4,00,000
34,00,000

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Less: Depreciation for 2021-22 3,00,000

31,00,000
Useful Life (years) 9
Depreciation for 2022-23 3,44,4444

QUESTION 116)
Hygiene Ltd. had received a grant of Rs. 50 lakhs in 2012 from a State Government towards installation of
pollution control machinery on fulfilment of certain conditions. The company, however, failed to comply with
the said conditions and consequently was required to refund the said amount in 2020. The company debited
the said amount to its machinery account in 2020 on payment of the same. It also reworked the depreciation
for the said machinery from the date of its purchase and passed necessary adjusting entries in the year 2020
to incorporate the retrospective impact of the same. State whether the treatment done by the company is
correct or not.
ABC Ltd. received two acres of land received for set up of plant. It also received Rs.2 lakhs received for
purchase of machinery of Rs. 10 lakhs. Useful life of machinery is 5 years. Depreciation on this machinery is
to be charged on straight-line basis. How should ABC Ltd. recognize these government grants in its books of
accounts?

SOLUTION
As per the facts of the case, Hygiene Ltd. had received a grant of Rs. 50 lakh in 2012 from a State
Government towards installation of pollution control machinery on fulfilment of certain conditions.
However, the amount of grant has to be refunded since it failed to comply with the prescribed conditions. In
such circumstances, AS 12, “Accounting for Government Grants”, requires that the amount refundable in
respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the
asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount
refundable. The Standard further makes it clear that in the first alternative, i.e., where the book value of the
asset is increased, depreciation on the revised book value should be provided prospectively over the
residual useful life of the asset. Accordingly, the accounting treatment given by Hygiene Ltd. of increasing the
value of the plant and machinery is quite proper. However, the accounting treatment in respect of
depreciation given by the company of adjustment of depreciation with retrospective effect is improper and
constitutes violation of AS 12.
ABC Ltd. should recognize the grants in the following manner:
• As per AS 12, government grants may take the form of non-monetary assets, such as land or other
resources, given at concessional rates. In these circumstances, it is usual to account for such assets
at their acquisition cost. Non-monetary assets given free of cost are recorded at a nominal value.
Accordingly, land should be recognised at nominal value in the balance sheet.
• The standard provides option to treat the grant either as a deduction from the gross value of the asset
or to treat it as deferred income as per provisions of the standard. 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. Accordingly, the grant of Rs. 2 lakhs is deducted from the cost
of the machinery. Machinery will be recognised in the books at Rs. 10 lakhs – Rs. 2 lakhs = Rs. 8 lakhs
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and depreciation will be charged on it as follows:

Rs. 8 lakhs/ 5 years = Rs. 1.60 lakhs per year.
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. Such allocation to income is usually made over the periods and in the proportions in which
depreciation on related assets is charged. Rs. 2 lakhs should be recognised as deferred income and
will be transferred to profit and loss over the useful life of the asset. In this case, Rs. 40,000 [Rs. 2
lakhs / 5 years] should be credited to profit and loss each year over the period of 5 years.

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AS 9 – REVENUE RECOGNTION

QUESTION 117)
Indicate in each case whether revenue can be recognized and when it will be recognized as per AS-9.
(1) Trade discount and volume rebate received.
(2) Where goods are sold to distributors or others for resale.
(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-03-2019 cloths worth Rs 50,000 were sold to X mart, but due to refurbishing of their showroom
being underway, on their request, clothes were delivered on 12-04-2019.

SOLUTION
(1) Trade discounts and volume rebates received are not encompassed within the definition of revenue,
since they represent a reduction of cost. Trade discounts and volume rebates given should be deducted
in determining revenue.
(2) When goods are sold to distributor or others, revenue from such sales can generally be recognized if
significant risks of ownership have passed; however, in some situations the buyer may in substance be
an agent and in such cases the sale should be treated as a consignment sale.
(3) For transactions, where seller concurrently agrees to repurchase the same goods at a later date that
are in substance a financing agreement, the resulting cash inflow is not revenue as defined and should
not be recognized as revenue.
(4) Insurance agency commissions should be recognized on the effective commencement or renewal
dates of the related policies.
(5) On 11.03.2019, if X mart takes title and accepts billing for the goods then it is implied that the sale is
complete and all risk and reward on ownership has been transferred to the buyers.
Revenue should be recognized for year ended 31st March, 2019 notwithstanding that physical delivery has
not been completed so long as there is every expectation that delivery will be made and items were ready for
delivery to the buyer at the time.

QUESTION 118)
For the year ended 31st March 20X1, KY Enterprises has entered into the following transactions.
On 31 March 20X1, KY supplied two machines to its customer ST. Both machines were accepted by ST on 31
March 20X1. Machine 1 was a machine that was routinely supplied by KY to many customers and the
installation process was very simple.
Machine 1 was installed on 2 April 20X1 by ST’s employees.
Machine 2 being more specialised in nature requires an installation process which is more complicated,
requiring significant assistance from KY. Machine 2 was installed between 2 and 5 April 20X1. Details of
costs and sales prices are as follows:

Sale Price 3,20,000 3,00,000

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Cost of production 1,60,000 1,50,000

Installation fee Nil 10,000
How should above transactions be recognized by KY Enterprises for the year ended 31st March 20X1?

SOLUTION
Machine 1: As the installation process is simple, revenue from Machine 1 will be recognized on 31 March
20X1.
Revenue (Machine 1) ₹ 3,20,000
Cost of Goods Sold ₹ 1,60,000
Profit during the period ₹ 1,60,000
Since the question specifies that the machine is already accepted by ST on 31 March 20X1, the revenue
arising from sale of the machine needs to be recognized for the year ending 31 March 20X1. This is because
acceptance of the machine indicates that the risks and rewards pursuant to the ownership are transferred to
ST.

Machine 2: Installation process for Machine 2 is more complicated, requiring significant assistance from KY
Ltd. However, question specifies that the machine is already accepted by ST on 31 March 20X1. Assuming
that there is no further approval/acceptance required from the buyer for the Machine sold, revenue from sale
of Machine 2 can be recognized for the year ending 31 March 20X1.
Revenue (Machine 2) ₹ 3,00,000
Cost of Goods Sold ₹ 1,50,000
Profit during the period ₹ 1,50,000
However, installation fee which is for rendering installation services cannot be recognized until the
installation is complete. Since the machine is pending installation, the revenue in respect of installation
charges ₹ 10,000 needs to be recognized on 5 April 20X1 once the installation process gets completed.

QUESTION 119)
Zigato runs a food-delivery business. As per the arrangement, Zigato allows customers to order food from
local restaurants and is responsible the delivery of the food within stipulated time. During a particular year, it
collects the money on orders made online as under:
Total price for the food item - ₹ 200 lakhs
Delivery charges - ₹ 60 lakhs
GST - ₹ 40 lakhs
Total - ₹ 300 lakhs
Zigato has received ₹ 300 lakhs for the above orders from customers and the orders were delivered to the
customer in stipulated time.
How much revenue should be recognised by restaurants and how much revenue should be recognised by
Zigato for the year?

Solution
The risks and rewards associated with the food item are not with Zigato. When a customer has ordered a
food item, whether the item will be prepared or not is the responsibility of the restaurant and not Zigato.
Similarly, the responsibility to deliver the food item is with Zigato and the restaurant does not undertake
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responsibility for the same.

Therefore, the restaurant undertakes the principal’s responsibility to prepare the food and ensure its quality.
Zigato, on the other hand, is only responsible to deliver the food. Thus, Zigato is acting as an agent. Hence, it
can only recognize revenue relating to that activity (which it does in the ordinary course of business). The
revenue for Zigato, therefore, is ₹ 60 lakhs, whereas, the revenue for restaurants will be ₹ 200 lakhs.
It may be noted that the GST of ₹ 40 lakhs is a liability payable to the Government (third party), hence it does
not form part of revenue.

QUESTION 120)
Sarita Publications publishes a monthly magazine on the 15th of every month. It sells advertising
space in the magazine to advertisers on the terms of 80% sale value payable in advance and the
balance within 30 days of the release of the publication. The sale of space for the March 2014
issue was made in February 2014. The magazine was published on its scheduled date. It received ₹ 2,40,000
on 10.3.2014 and ₹ 60,000 on 10.4.2014 for the March 2014 issue. Discuss in the context of AS 9 the
amount of revenue to be recognized and the treatment of the amount received from advertisers for the year
ending 31.3.2014. What will be the treatment if the publication is delayed till 2.4.2014?

SOLUTION:
As per para 12 of AS 9 “Revenue Recognition”, In a transaction involving the rendering of services,
performance should be measured either under the completed service contract method or under the
proportionate completion method, whichever relates the revenue to the work accomplished.
In the given case, income accrues when the related advertisement appears before public. The advertisement
service would be considered as performed on the day the advertisement is seen by public and hence revenue
is recognized on that date. In this case, it is 15.03.2014, the date of publication of the magazine.
Hence, ₹ 3,00,000 (₹ 2,40,000 + ₹ 60,000) is recognized as income in March, 2014. The terms of payment
are not relevant for considering the date on which revenue is to be recognized. ₹ 60,000 is treated as amount
due from advertisers as on 31.03.2014 and ₹ 2,40,000 will be treated as payment received against the sale.
However, if the publication is delayed till 02.04.2014 revenue recognition will also be delayed till the
advertisements get published in the magazine. In that case revenue of ₹ 3,00,000 will be recognized for the
year ended 31.03.2015 after the magazine is published on 02.04.2014. The amount received from sale of
advertising space on 10.03.2014 of ₹ 2,40,000 will be considered as an advance from advertisers for the year
ended 31st March, 2014.

QUESTION 121)
During the year ended 31st March 20X1, ZX Enterprises has recognized ₹ 100 lakhs on accrual basis income
from dividend on units of mutual funds held by it. The dividends on mutual funds were declared on 15th June,
20X1. The dividend was proposed on 10th April, 20X1.
Whether the above treatment is as per the relevant Accounting Standard?

Solution
Dividends from investments in shares are not recognized in the statement of profit and loss until a right to
receive payment is established. In the given situation, the dividend is proposed on 10th April, 20X1, while it

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is declared on 15th June, 20X1. Thus, the right to receive the payment of dividend gets established on 15th
June, 20X1.
The recognition of ₹ 100 lakhs on accrual basis in the financial year 20X0-20X1 is not correct as per AS 9
'Revenue Recognition'.

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AS 26 “INTANGIBLE ASSETS”

QUESTION 122)
During 20X1-X2, an enterprise incurred costs to develop and produce a routine low risk
computer software product, as follows:
Particular Rs.
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Other coding costs (Phase 3&4) 63,000
Testing costs (Phase 3&4) 18,000
Product masters for training materials (Phase 5) 19,500
Packing the products (1,500 units) (Phase 6) 16,500
After completion of phase 2, it was established that the product is technically feasible for the market.
You are required to state how the above referred cost to be recognized in the books of accounts.

SOLUTION:
As per AS 26, costs incurred in creating a computer software product should be charged to research and
development expense when incurred until technological feasibility / asset recognition criteria has been
established for the product. Technological feasibility / asset recognition criteria have been established upon
completion of detailed program design, coding and testing. In this case, Rs. 90,000 would be recorded as an
expense (Rs. 50,000 for completion of detailed program design and Rs. 40,000 for coding and testing to
establish technological feasibility/asset recognition criteria). Cost incurred from the point of technological
feasibility/asset recognition criteria until the time when products costs are incurred are capitalized as
software cost (63,000+18,000+19,500)=Rs.1,00,500. Packing cost Rs.16,500 should be recognized as
expenses and charged to P&LA/c.

QUESTION 123)
A company acquired a patent at a cost of Rs 160 lakhs for a period of 5 years and the product life cycle is
also 5 years. The company capitalized the cost and started amortising the asset at Rs. 16 lakhs per year
based on the economic benefits derived from the product manufactured under the patent. After 2 years it
was found that the product life cycle may continue for another 5 years from then (the patent is renewable
and the company can get it renewed after 5 years). The net cash flows from the product during these 5 years
were expected to be Rs. 50 lakhs, Rs. 30 lakhs, Rs. 60 lakhs, Rs. 70 lakhs and Rs. 40 lakhs. Find out the
amortization cost of the patent for each of the years.

SOLUTION:
Company amortized Rs 16,00,000 per annum for the first two years. Hence, Amortization for the first two
years (Rs 16,00,000 X 2) = Rs 32,00,000.
Remaining carrying cost after two years =Rs 1,60,00,000 – Rs 32,00,000
= Rs 1,28,00,000

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Since after two years it was found that the product life cycle may continue for another 5 years, hence the
remaining carrying cost Rs128 lakhs will be amortized during next 5 years in the ratio of net cash arising from
the sale of the products of Fast Limited.
The amortization cost of the patents may be computed as follows:
Year Net cash flows Rs Amortization Ratio Amortization Amount Rs
I - 0.1 16,00,000
II - 0.1 16,00,000
III 50,00,000 0.2 25,60,000
IV 30,00,000 0.12 15,36,000
V 60,00,000 0.24 30,72,000
VI 70,00,000 0.28 35,84,000
VII 40,00,000 0.16 20,48,000
Total 250,00,000 1.000 160,00,000

QUESTION 124)
Vishnu Ltd. is engaged in research on a new process design for its product- It had incurred an
expenditure of Rs. 265.37 lakhs on research upto 31stMarch, 2003. The development of the
process began on 1st April, 2003 and the Development Phase Expenditure was Rs. 180 lakhs upto
31stMarch, 2004. From 1stApril, 2004 the Company will implement the new process design which will result
in a after-tax cost saving of Rs. 40 lakhs per annum for the next five years. The Company's Cost of Capital is
10%. At what cost should the asset be recorded and what is its amortisation amount?

SOLUTION
Research Expenditure: As per Para 41 of AS-26, the expenditure on research Rs. 265.37 lakhs should be
expensed in the year in which it is incurred. It is presumed that the entire expenditure of Rs. 265.37 lakhs is
incurred in financial year 2002-2003. Hence, it should be written off as an expense in that year itself.
Development Expenditure: As per para 44 of AS-26, the expenditure on development can be treated as an
asset only if all the conditions listed in that paragraph are satisfied. It is presumed that the company has duly
complied with this requirement.
Cost of internally generated intangible asset: Para 53 specifies the items which can be included in the cost
of an internally generated intangible asset, while Para 54 specifies the exclusions there from. It is presumed
that the expenditure of Rs.180 lakhs is determined in accordance with Para 53 and 54 of AS-26.
Discounting Future Cash Flows: As per Para 30 of AS-26, fair value of an intangible asset can be estimated
by discounting estimated future net cash flows. Even if this paragraph is primarily related to estimation of fair
value of an intangible asset acquired in the course of amalgamation in the nature of purchase, the concept
can be extended for internally generated intangible asset also.
Cost savings from the new process design for five = Rs. 40 lakhs per year
Company's Cost of Capital = 10%
Annuity Factor at 10% for five years = 3.7908
(from the annuity tables)
Present value of future cash flows =Rs. 40 x 3.7908= Rs. 151.63 lakhs

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Carrying Amount of the Asset: Since the Present Value of Future Cash Flows is only Rs. 151.63 lakhs,
(which is lower than the cost of Rs.180 lakhs), it is prudent to recognise an impairment loss of Rs. 180.00
lakhs - Rs. 151.63 lakhs = Rs. 28.37 lakhs in the financial year 2003-2004.

Amortisation Period and Amount: The Company can amortise Rs. 151.63 lakhs over a five-year period by
charging Rs. 30.33 lakhs per annum from the financial year 2004-2005 onwards.

QUESTION 125)
Honey Ltd. is in the process of developing a new production method. During the financial year ended 31st
March, 2021, total expenditure incurred on development of this production method was Rs. 98,00,000. On
1st Jan, 2021, the production method met the criteria as an intangible asset and expenditure incurred till this
date was Rs. 68,00,000. Further expenditure incurred on the new method was Rs. 72,00,000 for the year
ended 31st March, 2022 and recoverable amount of the know how embodied in the new method for this
financial year is Rs. 52,00,000.
You are required to calculate:
(1) The carrying amount of the Intangible asset on 31stMarch, 2021.
(2) The expenditure to be shown in Statement of Profit and Loss for the year ended 31st March, 2022.
(3) The carrying amount of the Intangible asset on 31st March, 2022.

SOLUTION
As per AS 26 ‘Intangible Assets’
(i) Carrying value of intangible asset as on 31.03.2021
At the end of financial year, on 31st March 2021, the production process will be recognized (i.e.,
carrying amount) as an intangible asset at a cost of Rs. 30 (98-68) lacs (expenditure incurred since the
date the recognition criteria were met, i.e., from 1stJanuary, 2021).
(ii) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2022
(Rs. in lacs)
Carrying Amount as on 31.03.2021 30
Expenditure during 2021–2022 72
Book Value 102
Recoverable Amount (52)
Impairment loss 50
Rs. 50 lakhs to be charged to Profit and loss account for the year ending 31.03.2022.

(iii) Carrying value of intangible asset as on 31.03.2022

(Rs. in lacs)
Book Value 102
Less: Impairment loss (50)
Carrying amount as on 31.03.2022 52

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QUESTION 126)
Naresh Ltd. had the following transactions during the financial year 2019 -2020:
(i) Naresh Ltd. acquired running business of Sunil Ltd. for Rs. 10,80,000 on 15th May, 2019. The
fair value of Sunil Ltd.'s net assets was Rs. 5,16,000. Naresh Ltd. is of the view that due to
popularity of Sunil Ltd.’s product in the market, its goodwill exists.
(ii) Naresh Ltd. had taken a franchise on July 2019 to operate a restaurant from Sankalp Ltd. for Rs.
1,80,000 and at an annual fee of 10% of net revenues (after deducting expenditure). The franchise
expires after 6 years. Net revenues were Rs. 60,000 during the financial year 2019-2020.
(iii) On 20th August, 2019, Naresh Ltd, incurred costs of Rs. 2,40,000 to register the patent for its product.
Naresh Ltd. expects the patent’s economic life to be 8 years.
Naresh Ltd. follows an accounting policy to amortize all intangibles on straight line basis over the maximum
period permitted by accounting standards taking a full year amortization in the year of acquisition. Goodwill
on acquisition of business to be amortized over 5 years (SLM) as per AS 14.
Prepare a schedule showing the intangible assets section in Naresh Ltd. Balance Sheet at 31st March, 2020.

SOLUTION:
Naresh Ltd.
Balance Sheet (Extract relating to intangible asset) as on 31st March 2020
Note No. Rs.
Assets
(1) Non-current assets
Intangible assets 1 8,11,200

Notes to Accounts (Extract)

Rs. Rs.
1 Intangible assets
. Goodwill (Refer to note 1) 4,51,200
Franchise (Refer to Note 2) 1,50,000
Patents (Refer to Note 3) 2,10,000 8,11,200

Working Notes:
Rs.
(1) Goodwill on acquisition of business
Cash paid for acquiring the business (purchase 10,80,000
consideration)
Less: Fair value of net assets acquired (5,16,000)
Goodwill 5,64,000
Less: Amortisation as per AS 14 ie. over 5 years (as per (1,12,800)
SLM)
Balance to be shown in the balance sheet 4,51,200
(2) Franchise 1,80,000
Less: Amortisation (over 6 years) (30,000)
Balance to be shown in the balance sheet 1,50,000
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(3) Patent 2,40,000

Less: Amortisation (over 8 years as per SLM) (30,000)
Balance to be shown in the balance sheet 2,10,000

QUESTION 127)
As per provisions of AS-26, how would you deal to the following situations:
(1) Rs 23,00,000 paid by a manufacturing company to the legal advisor for defending the
patent of a product is treated as a capital expenditure.
(2) During the year 2018-19, a company spent Rs 7,00,000 for publicity and research expenses on one of its
new consumer product which was marketed in the same accounting year but proved to be a failure.
(3) A company spent Rs 25,00,000 in the past three years to develop a product, these expenses were
charged to profit and loss account since they did not meet AS-26 criteria for capitalization. In the current
year approval of the concerned authority has been received. The company wishes to capitalize Rs
25,00,000 by disclosing it as a prior period item.
(4) A company with a turnover of Rs 200 crores and an annual advertising budget of
Rs 50,00,000 had taken up for the marketing of a new product by a company. It was estimated that the
company would have a turnover of Rs 20 crore from the new product.
The company had debited to its Profit & Loss Account the total expenditure of Rs 50,00,000 incurred on
extensive special initial advertisement campaign for the new product.

ANSWER:
As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its purchase or its
completion should be recognized as an expense when it is incurred unless (a) it is probable that the
expenditure will enable the asset to generate future economic benefits in excess of its originally assessed
standard of performance; and (b) expenditure can be measured and attributed to the asset reliably. If these
conditions are met, the subsequent expenditure should be added to the cost of the intangible asset.
(i) In the given case, the legal expenses to defend the patent of a product amounting Rs 23,00,000 should
not be capitalized and be charged to Profit and Loss Statement.
(ii) The company is required to expense the entire amount of Rs 7,00,000 in the Profit and Loss account for
the year ended 31stMarch, 2019 because no benefit will arise in the future.
(iii) As per AS 26, expenditure on an intangible item that was initially recognized as an expense by a
reporting enterprise in previous annual financial statements should not be recognized as part of the cost
of an intangible asset at a later date. Thus, the company cannot capitalize the amount of Rs 25,00,000
and it should be recognized as expense
(iv) Expenditure of Rs 50,00,000 on advertising and promotional activities should always be charged to
Profit and Loss Statement. Hence, the company has done the correct treatment by debiting the sum of
50 lakhs to Profit and Loss Account.

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AS 24 “DISCONTINUING OPERATION”

QUESTION 128)
A consumer goods producer has changed the product line as follows:
Dish washing Bar Clothes washing Bar
(Per month) (Per month)
January 2016 - September 2016 2,00,000 2,00,000
October 2016 - December 2016 1,00,000 3,00,000
January 2017 - March 2017 Nil 4,00,000

The company has enforced a gradual enforcement of change in product line on the basis of an overall plan.
The Board of Directors has passed a resolution in March 20X6 to this effect. The company follows calendar
year as its accounting year.
You required advising the company whether it should be treated as discontinuing operation or not as per AS
24?

ANSWER:
As per AS 24 ‘Discontinuing Operations’, a discontinuing operation is a component of an enterprise:
(i) that the enterprise, pursuant to a single plan, is:
(1) disposing of substantially in its entirety,
(2) disposing of piecemeal, or
(3) terminating through abandonment; and
(ii) that represents a separate major line of business or geographical area of operations; and
(iii) that can be distinguished operationally and for financial reporting purposes.
As per provisions of the standard, business enterprises frequently close facilities, abandon products or even
product lines, and change the size of their work force in response to market forces. While those kinds of
terminations generally are not, in themselves, discontinuing operations, they can occur in connection with a
discontinuing operation. Examples of activities that do not necessarily satisfy criterion of discontinuing
operation are gradual or evolutionary phasing out of a product line or class of service, discontinuing, even if
relatively abruptly, several products within an ongoing line of business;
In the given case, the company has enforced a gradual enforcement of change in product line and does not
represent a separate major line of business and hence is not a discontinued operation. If it were a
discontinuing operation, the initial disclosure event is the occurrence of one of the following, whichever
occurs earlier:
(i) the enterprise has entered into a binding sale agreement for substantially all of the assets
attributable to the discontinuing operation; or
(ii) The enterprises board of directors or similar governing body has both approved a detailed, formal
plan for discontinuance and made an announcement of the plan.

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QUESTION 129)
Arzoo Ltd. is in the business of manufacture of passenger cars and commercial vehicles. The company is
working on a strategic plan to shift from the passenger car segment to the commercial vehicles segment over
the coming 5 years. However, no specific plans have been drawn up for sale of neither the division nor its
assets. As part of its plan, it has planned that it will reduce the production of passenger cars by 20%
annually. It also plans to commence another new factory for the manufacture of commercial vehicles plus
transfer of employees in a phased manner. These plans have not approved from the Board of Directors and
the new factory for manufacture of commercial vehicles has not yet started. You are required to comment if
mere gradual phasing out in itself can be considered as a ‘Discontinuing Operation' within the meaning of AS
24.

ANSWER:
Mere gradual phasing out is not considered as discontinuing operation as defined under AS 24, ‘Discontinuing
Operations’.
Examples of activities that do not necessarily satisfy criterion of the definition, but that might do so in
combination with other circumstances, include:
(1) Gradual or evolutionary phasing out of a product line or class of service;
(2) Discontinuing, even if relatively abruptly, several products within an ongoing line of business;
(3) Shifting of some production or marketing activities for a particular line of business from one location to
another; and
(4) Closing of a facility to achieve productivity improvements or other cost savings.
In view of the above, mere gradual phasing out in itself cannot be considered as discontinuing operation. The
companies’ strategic plan also has no final approval from the board through a resolution and there is no
specific time bound activities like shifting of assets and employees. Moreover, the new segment i.e.,
commercial vehicle production line in a new factory has not started.
and made an announcement of the plan.

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AS 17 “SEGMENT REPORTING”

QUESTION 130)
An enterprise operates through segments, namely, A. B, C, D, E, F. G and H. The relevant information about
these segments is given in the following table:
(Amount in Rs. ‘000)
A B C D E F G H Total Total
(Seg.) (Entp.)
Seg. Revn
(a) Ext 255 15 10 15 50 20 35 400
(b) Inter-Seg 100 60 30 5 - - 5 - 200
(c) Total 100 315 45 15 15 50 25 35 600 400
Seg. Result 5 -90 15 -5 8 -5 5 7
Seg. Assets 15 47 5 11 3 5 5 9 100

Identify Reportable Segments

SOLVE HERE:
(1) Total Revenue of Enterprise = 600; Minimum 10% limit = 60, Segment A & B both have Revenue more
than 60

(2) Total Assets of Enterprise = 100; Minimum 10% limit = 10; Segment A, B & D are fulfilling the
minimum limit Condition.

(3) Total Results: -

Profitable segment = 40
Loss making segment = 100
Higher = 100 (in absolute terms)
Minimum 10% limit = 10; Segment B & C are Fulfilling the minimum criteria.
As per the above analysis, Segment A, B, C & D are Reportable Segments as per Para 27.

(4) However Total external revenue of reportable segments should be at least 75% of Total External
Revenue of Enterprise. That means it should be 280 (400 x 75%).

(5) Therefore, we have to include one more segment in the list of reportable segments so that minimum 280
of revenue should be reported.

(6) Segment F with 50 Revenue can be included in the list of Reportable Segments even though it doesn’t
fulfill Para 27 criteria.

(7) Conclusion – Segment A, B, C, D & F are Reportable.

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QUESTION 131)
M/s Nathan Limited has three segments namely P, Q and R. The assets of the company are Rs 15 crores.
Segment P has 4 crores, Segment Q has 6 crores and Segment R has 5 crores. Deferred tax assets included
in the assets of each segment are P - Rs 1 crore, Q - Rs 0.90 crores and R - Rs 0.80 crores. The accountant
contends all these three segments are reportable segments. Comment.

SOLUTION:
According to AS 17 “Segment Reporting”, segment Assets do not include income tax assets.
Therefore, the revised total assets are 12.3 crores [Rs 15 – (Rs 1 + 0.9 + 0.8).
Details of Segment wise assets
Segment P holds total assets of Rs 3 crores (Rs 4 crores – Rs 1 crores);
Segment Q holds Rs 5.1 crores (Rs 6 crores – 0.9 crores);
Segment R holds Rs 4.2 crores (Rs 5 crores – Rs 0.8 crores).
Thus, all the three segments hold more than 10% of the total assets, all segments are reportable segments.
Hence, the contention of the Accountant that all three segments are reportable segments is correct.

QUESTION 132)
Prepare a segmental report for publication in Diversifiers Ltd. from the following details of the company’s
three divisions and the head office:
Rs. (‘000)
Forging Shop Division
Sales to Bright Bar Division 4,575
Other Domestic Sales 90
Export Sales 6,135
10,800
Bright Bar Division
Sales to Fitting Division 45
Export Sales to Rwanda 300
345
Fitting Division
Export Sales to Maldives 270

Particulars HeadOffice Forging Shop Bright Bar Fitting

Rs.(‘000) Division Division Division
Rs. (‘000) Rs. (‘000) Rs. (‘000)
Pre-tax operating result 240 30 (12)
Head office cost reallocated 72 36 36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180

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SOLUTION:
Diversifiers Ltd. Segmental Report
(Rs. ’000)
Divisions InterSegment Consolidated
Particulars Forging Bright Fitting Eliminations Total
shop Bar
Segment Revenue
Sales:
Domestic 90 - - - 90
Export 6,135 300 270 - 6,705
External Sales 6,225 300 270 - 6,795
Inter-Segment Sales 4,575 45 - 4,620 -
Total Revenue 10,800 345 270 4,620 6,795
Segment Result (Given) 240 30 (12) 258
Head Office Expenses (144)
Operating Profit 114
Interest Expense (16)
Profit Before Tax 98
Information in Relation
to Assets and Liabilities:
Fixed Assets 300 60 180 - 540
Net Current Assets 180 60 135 - 375
Segment assets 480 120 315 - 915
Unallocated Corporate
Assets (75 + 72) - - - - 147
Total assets 1,062
Segment liabilities 30 15 180 - 225
Unallocated corporate 57
liabilities
Total liabilities 282

Sales Revenue by Geographical Market

Home Export Sales(by Export to Export to (Rs. ’000)
Sales forging shop Rwanda Maldives Consolidated
division) Total
Externalsales 90 6,135 300 270 6,795

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FRAMEWORK FOR PREPARATION AND PRESENTATION

OF FINANCIAL STATEMENTS

QUESTION 133)
Balance sheet of a trader on 31st March, 20X1 is given below:
Particulars Rs
Assets
Non-current assets
Property, Plant and Equipment 65,000
Current assets
Inventories 30,000
Financial assets
Trade receivables 20,000
Other Assets 10,000
Bank Balance 5,000
Total 1,30,000
Equity and Liabilities
Equity
Share capital 60,000
Other Equity - Profit and Loss Account 25,000
Non-current liabilities
10% Loan 35,000
Current liabilities
Financial liabilities
Trade payables 10,000
Total 1,30,000

Additional information:
(a) The remaining life of Property, Plant and Equipment is 5 years. The pattern of use of the asset is even. The
net realisable value of Property, Plant and Equipment on 31.03.20X2 was Rs. 60,000.
(b) The trader’s purchases and sales in 20X1-20X2 amounted to Rs. 4 lakh and Rs. 4.5 lakh respectively.
(c) The cost and net realisable value of inventories on 31.03.20X2 were Rs. 32,000 and Rs. 40,000
respectively.
(d) Employee benefit expenses for the year amounted to Rs. 14,900 (including interest of Rs. 3,500 on 10%
Loan for the year).
(e) Other Assets is written off equally over 4 years.
(f) Trade receivables on 31.03.20X2 is Rs. 25,000, of which Rs. 2,000 is doubtful. Collection of another Rs.
4,000 depends on successful re-installation of certain product supplied to the customer.
(g) Closing Trade Payable is Rs. 12,000 which is likely to be settled at 5% discount.
(h) Bank balance on 31.03.20X2 is Rs. 37,100.
(i) There is an early repayment penalty for the loan Rs. 2,500.
The Profit and Loss Accounts and Balance Sheets of the trader are shown below in two cases
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(j) Assuming going concern (ii) not assuming going concern.

SOLUTION:
Profit and Loss Account for the year ended 31stMarch, 20X2
Case (i) Rs Case (ii) Rs
Revenue from operations – Sales 4,50,000 4,50,000
Other Incomes - 600
TOTAL INCOMES (A) 4,50,000 4,50,600
Expenses :
Purchases 4,00,000 4,00,000
Changes in inventories (2,000) (10,000)
Employee benefit expenses 11,400 11,400
Finance cost (including penalty) 3,500 6,000
Depreciation and amortisation expenses (including w/off) 15,500 15,000
Other expenses - Provision for doubtful debts 2,000 6,000
Total Expenses (B) 4,30,400 4,28,400
Profit for the period (A-B) 19,600 22,200
Opening Reserves & Surplus 25,000 25,000
Closing Reserves and Suplus 44,600 47,200

Balance Sheet as at 31stMarch, 20X2

Case (i) Rs Case (ii) Rs
ASSETS
Non-current assets
Property, Plant and Equipment 52,000 60,000
Current Asset
Inventories 32,000 40,000
Financial assets
Trade receivables (less provision) 23,000 19,000
Other Assets 7,500 Nil
Cash and cash equivalents (after interest paid on loan) 37,100 37,100
Total 1,56,100 1,56,100
EQUITY AND LIABILITIES
Shareholders Fund
Share Capital 60,000 60,000
Reserves and Surplus 44,600 47,200
Non-current liabilities
10% Loan 35,000 37,500
Current liabilities
Trade payables 12,000 11,400
Total 1,56,100 1,56,100

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QUESTION 134)
Historical Cost Capital Maintenance
A trader commenced business on 01/01/20X1 with Rs. 12,000 represented by 6,000 units of a certain
product at Rs. 2 per unit. During the year 20X1 he sold these units at Rs. 3 per unit and had withdrawn Rs.
6,000. Thus:
Opening Equity = Rs. 12,000 represented by 6,000 units at Rs. 2 per unit.
Closing Equity = Rs. 12,000 (Rs. 18,000 – Rs. 6,000) represented entirely by cash.
Retained Profit = Rs. 12,000 – Rs. 12,000 = Nil
The trader can start year 20X3 by purchasing 6,000 units at Rs. 2 per unit once again for selling them at Rs. 3
per unit. The whole process can repeat endlessly if there is no change in purchase price of the product.

QUESTION 135)
Financial Capital Maintenance
In the previous example 8, suppose that the average price indices at the beginning and at the end of year are
100 and 120 respectively.
Opening Equity = Rs. 12,000 represented by 6,000 units at Rs. 2 per unit.
Opening equity at closing price = (Rs. 12,000 / 100) x 120 = Rs. 14,400 (6,000 x Rs. 2.40)
Closing Equity at closing price = Rs. 12,000 (Rs. 18,000 – Rs. 6,000) represented entirely by cash.
Retained Profit = Rs. 12,000 – Rs. 14,400 = (-) Rs. 2,400
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund Rs.
12,000 is not sufficient to buy 6,000 units again at increased price Rs. 2.40 per unit. In fact, he should have
restricted his drawings to Rs. 3,600 (Rs. 6,000 – Rs. 2,400).
Had the trader withdrawn Rs. 3,600 instead of Rs. 6,000, he would have left with Rs. 14,400, the fund
required to buy 6,000 units at Rs. 2.40 per unit.

QUESTION 136)
Physical Capital Maintenance
In the previous example 8, suppose that the price of the product at the end of year is 2.50 per unit. In other
words, the specific price index applicable to the product is 125.
Current cost of opening stock = (Rs. 12,000 / 100) x 125 = 6,000 x Rs. 2.50 = Rs. 15,000
Current cost of closing cash = Rs. 12,000 (Rs. 18,000 – Rs. 6,000)
Opening equity at closing current costs = Rs. 15,000
Closing equity at closing current costs = Rs. 12,000
Retained Profit = Rs. 12,000 – Rs. 15,000 = (Rs. 3,000)
The negative retained profit indicates that the trader has failed to maintain his capital. The available
fund Rs. 12,000 is not sufficient to buy 6,000 units again at increased price Rs. 2.50 per unit. The drawings
should have been restricted to Rs. 3,000 (Rs. 6,000 – Rs. 3,000).
Had the trader withdrawn Rs. 3,000 instead of Rs. 6,000, he would have left with Rs. 15,000, the fund
required to buy 6,000 units at Rs. 2.50 per unit.

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Capital maintenance can be computed under all three bases as shown below:
Financial Capital Maintenance at historical costs
Rs Rs
Closing capital (At historical cost) 12,000
Less: Capital to be maintained
Opening capital (At historical cost) 12,000
Introduction (At historical cost) Nil (12,000)
Retained profit Nil

Financial Capital Maintenance at current purchasing power

Rs Rs
Closing capital (At closing price) 12,000
Less: Capital to be maintained
Opening capital (At closing price) 14,400
Introduction (At closing price) Nil (14,400)
Retained profit (2,400)

Physical Capital Maintenance

Rs Rs
Closing capital (At current cost) 12,000
Less: Capital to be maintained
Opening capital (At current cost) 15,000
Introduction (At current cost) Nil (15,000)
Retained profit (3,000)

QUESTION 137)
Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs. 8
lakhs, Rs. 3 lakh and Rs. 5 lakhs respectively. During accounting period, Mr. A has the following
transactions:
1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
3) Rent of the premises is outstanding Rs. 10,000
4) Mr. A withdrew Rs. 9,000 for his personal use.
You are required to show the effect of above transactions on Balance Sheet in the form of Assets - Liabilities =
Equity after each transaction.

Solution
Effects of each transaction on Balance sheet of the trader is shown below:
Transactions Assets Rs. Lakhs Liabilities Rs. Equity Rs. lakhs
(a) Lakhs (b) (c) + (a – b)
Opening 8.00 3.00 5.00
1) Dividend earned 8.20 3.00 5.20
2) Settlement of Creditors 7.70 2.30 5.40
3) Rent Outstanding 7.70 2.40 5.30
4) Drawings 7.61 2.40 5.21

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AMALGAMATION

Question 138)
(Accounting for Transferee Books – Purchase Method)
Balance Sheet as on 31/3/24
Particulars Transferee Transferor
Equity Share Capital (10/-) 12,00,000 8,00,000
9% Preference Share Capital (10/-) 8,00,000 -
8% Preference Share Capital (10/-) - 6,00,000
General Reserve 5,00,000 3,00,000
Profit & Loss A/c 3,50,000 2,50,000
Export Profit Reserve - 50,000
7% Debenture (100/-) 7,50,000 -
6% Debenture (100/-) - 6,00,000
Creditors 4,00,000 4,00,000
40,00,000 30,00,000
PPE 13,00,000 9,00,000
Investments 9,00,000 7,00,000
Inventory 10,00,000 7,00,000
Trade Receivables 5,00,000 6,00,000
Cash & Bank Balance 3,00,000 2,00,000
40,00,000 30,00,000
(1) 8% Preference Shareholders shall be given New 9% Preference Shares at 20% Increase in value (Shares to
be issued at Par)
(2) Purchased Consideration to Equity Share Holder shall be discharged as under:
Cash = 3,00,000
Equity Shares of Transferee in 5:4
(3) Market Value per share of Transferee is 28/-
(4) Market Value of PPE & Investments of Transferor are 11,50,000 & 6,20,000
(5) Trade Receivable shall be subject to a Provision on Doubtful Debts @2%
(6) 6% Debenture Holder will get new 7% Debenture at an adequate amount. So that Interest Amount would be
same
(7) EPR to be maintained for 2 Years more years.
(8) There is unrecorded Liabilities of Transferor towards creditor for goods of ₹ 30,000 which is also assumed by
Transferee.
Required:
(a) Calculate Preference Share.
(b) Pass Journal entries in the Books of Transferee.
(c) Prepare Balance Sheet after takeover of Transferee.
Assume Amalgamation in the nature of Purchase.

SOLUTION:
Working Note: – 1 Calculation of Purchase Consideration
Payment to Payment in Working Amount
Equity Shareholders Cash - 3,00,000
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Equity Shareholders Equity shares of Transferee 80,000 X 5/4 28,00,000

Preference Shareholder 9% Preference Shares 6,00,000 + 20% 7,20,000
Total 38,20,000

Working Note-2 Settlement of 6% Debentures

● 6% Debenture of Transferor = 6,00,000
● Interest Amount @ 6% = 36,000/-
● New Debenture Interest Rate 7%
● Therefore, New Debenture Value = 36,000 ÷ 7%
● 7% Debenture = 5,14,286/- (Payable Value)

Important Facts (Not a Part of Solution in Exam)

a) All Assets and Liabilities to be Recorded.
b) Assets to be recorded at Market Value if given.
c) Provision for doubtful debts to be credited separately.
d) Export Profit Reserve (EPR) is not a liability therefore will not come under 2nd Entry of Assets/Liabilities taken over.
Journal entries (Books of Transferee)
Business Purchase A/c Dr. 38,20,000
To Liability of Transferor A/c 38,20,000
(Being Business taken over)
PPE A/c Dr. 11,50,000
Invest A/c Dr. 6,20,000
Inventory A/c Dr. 6,00,000
Trade Receivable Dr. 6,00,000
Cash & Bank Dr. 2,00,000
Goodwill A/c Dr. (BF) 16,06,286
To Provision for DD A/c 12,000
To Creditors A/c 4,30,000
To Debenture Holder of Transferor A/c 5,14,286
To Business Purchase A/c 38,20,000
(Being Assets & Liabilities are recognised & Goodwill recorded
Liquidator of Transferor A/c Dr. 38,20,000
To 9% Preference Share Capital 7,20,000
To Cash A/c 3,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium A/c 18,00,000
(Being Purchase Consideration Discharged)
Debenture Holder of Transferor A/c Dr. 5,14,286
To 7% Debenture A/c 5,14,286
(Being Outstanding Debenture are issued New with 7% Interest)
Amalgamation Adjustable Reserve Dr. 50,000
To Expenses Profit Reserve 50,000
(Being EPR maintained)

Balance Sheet (after Amalgamation)

Shareholders Fund
(I) Share Capital 1 37,20,000
(II) Reserve & Surplus 2 26,50,000
Non-Current Liabilities

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(I) Long Term Borrowings 3 12,64,286

Current Liability
(i) Trade Payable 4 8,30,000
84,64,286
Assets
Non-current Assets:
(a) PPE Tangible & Intangible 5 40,56,286
(b) Investment 6 15,20,000
Current Assets:
(a) Inventory 7 16,00,000
(b) Trade Receivable 8 10,88,000
(c) Cash & Cash equity 9 2,00,000
Total 84,64.286

Notes to Accounts:
Share Capital
(a) Equity Share Capital of 10/- each 12,00,000
+ Issue of Purchase consideration 10,00,000 22,00,000
(b) 9% Purchased Share Capital of 10/- each + Issue of Purchase 8,00,000
Consideration 72,00,000 15,20,000
37,20,000
Reserve & surplus 26,50,000
General Reserve 5,00,000
Profit & Loss 3,50,000
Securities Premium 18,00,000
EPR 50,000
(-) AAR (50,000)
Long TERM Borrowings 12,64,286
(a) 7 % Debenture 7,50,000
+ New Issue of 7% Debentures 5,14,286
Trade Payable 8,30,000
Creditor of Transferee 4,00,000
Creditors Recorded Transferor 4,30,000
PPE
(a) Tangible 13,00,000 24,00,000
Transferee 11,00,000
Transferor
(b) Intangible
Goodwill 16,06,286
40,56,286
Investments
Transferee 9,00,000
Transferor 6,20,000 15,20,000
Inventory
Transferee 10,00,000
Transferor 6,00,000 16,00,000
Trade Receivable
Transferee 5,00,000
Transferor 6,00,000
(-) Provision (12,000) 10,88,000
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Cash & Bank 2,00,000

Transferee 3,00,000
Transferor 2,00,000
(-) Purchase Consideration (3,00,000)

Question 139)
The balance sheets of Truth Limited and Myth Limited as at 31.03.2021 is given below. Myth Limited is
to be amalgamated with Truth Limited from 1.04.2021. The amalgamation is to be carried out in the
nature of purchase.
Particulars Note No. Truth Ltd. Myth Ltd.
(Rs.) (Rs.)
(1) Equity and Liabilities
1. Shareholders’ Funds
(a) Share Capital 1 10,00,000 4,00,000
(b) Reserves and Surplus 2 11,35,000 4,13,000
2. Non -Current Liabilities 3 - 1,50,000
3. Current Liabilities 4 1,40,000 1,82,000
Total 22,75,000 11,45,000
(2) Assets
1. Non -Current Assets
(a) Property, Plant 15,75,000 6,80,000
& Equipment
(b) Investments 1,87,500 1,00,000
2. Current Assets 5 5,12,500 3,65,000
Total 22,75,000 11,45,000

Notes to Accounts:
Note No. Particulars Truth Limited Myth Limited
(Rs.) (Rs.)
1 Share Capital
Equity shares of Rs. 10 each 10,00,000 4,00,000
2 Reserves & Surplus
General Reserve 5,05,000 2,30,000
Profit & Loss A/c 4,45,000 1,58,000
Export Profit Reserve 1,85,000 25,000
11,35,000 4,13,000
3 Non- Current Liabilities
14% Debentures --- 1,50,000
4 Current Liabilities
Trade Payables 90,000 1,42,000
Other Current Liabilities 50,000 40,000
1,40,000 1,82,000
5 Current Assets
Inventory 2,15,000 85,000
Trade Receivables 2,02,500 1,75,000
Cash and Cash equivalents 95,000 1,05,000
5,12,500 3,65,000

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Truth Limited would issue 12% debentures to discharge the claim of the debenture holders of Myth Limited so as to
maintain their present annual interest income. Non-trade investment, which constitute 80% of their respective total
investments yielded income of 20% to Truth Limited and 15% to Myth Limited. This income is to be deducted from
profits while computing average profit for the purpose of calculating goodwill. Profit before tax of both the companies
during the last 3 years were as follows:
Truth Limited (Rs.) Myth Limited (Rs.)
2018-2019 8,20,000 2,55,000
2019-2020 7,45,000 2,15,000
2020-2021 6,04,000 2,14,000
Goodwill is to be calculated on the basis of simple average of three years profit by using Capitalization method taking
18% as normal rate of return. Ignore taxation. Purchase consideration is to be discharged by Truth Limited on the basis
of intrinsic value per share. Prepare Balance Sheet of Truth Limited after the amalgamation.

SOLUTION
Balance Sheet of Truth Ltd. (after amalgamation with Myth Ltd.) as at 1.4.2021
Particulars Note No. (Rs.)
I. Equity and liabilities
(1) Shareholder's funds
(a) Share capital 1 13,13,750
(b) Reserves and surplus 2 20,76,250
(2) Non-current liabilities
12% Debentures 3 1,75,000
(3) Current liabilities
(a) Trade payables 4 2,32,000
(b) Other current liabilities 5 90,000
Total 38,87,000
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 6 22,55,000
(b) Intangible assets (Goodwill) [WN 1] 4,67,000
(c) Non-current investments 7 2,87,500
(2) Current assets
(a) Inventories (2,15,000 + 85,000) 3,00,000
(b) Trade receivables (2,02,500 + 1,75,000) 3,77,500
(c) Cash & cash equivalents (95,000 + 1,05,000) 2,00,000
Total 38,87,000

Notes to Accounts
(Rs.) (Rs.)
1. Share Capital
1,31,375 Equity Shares of Rs. 10 each [1,00,000 + 31,375] 13,13,750
(of the above shares, 31,375 shares were issued to the vendors
otherwise than for cash)
2. Reserves and surplus
General Reserve 5,05,000
Profit and Loss A/c 4,45,000
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Securities Premium [31,375 x 30] 9,41,250

Export profit reserve 1,85,000
Add: Balance of Myth Ltd. 25,000 2,10,000
Amalgamation Adjustment Reserve (25,000) 20,76,250
3. Long Term Borrowings
12% Debentures issued to Myth Ltd. 1,75,000
4. Trade payables
Trade payables 90,000
Add: Taken over 1,42,000 2,32,000
5 Other Current Liabilities
Truth Ltd. 50,000
Myth Ltd. 40,000 90,000
6. Property, Plant & Equipment
Truth Ltd. 15,75,000
Myth Ltd. 6,80,000 22,55,000
7. Investment
Truth Ltd. 1,87,500
Myth Ltd. 1,00,000 2,87,500

Working Notes:
(1) Valuation of Goodwill
(i) Capital Employed
Truth Ltd. Myth Ltd.
Rs. Rs. Rs. Rs.
Assets as per Balance Sheet 22,75,000 11,45,000
Less: Non-trade Investment (1,50,000) (80,000)
Less: Liabilities: 21,25,000 10,65,000
14% Debentures - 1,50,000
Trade payables 90,000 1,42,000
Other current liabilities 50,000 (1,40,000) 40,000 (3,32,000)
Capital Employed 19,85,000 7,33,000

(ii) Average Profit before Tax

Truth Ltd. Myth Ltd.
2018-2019 8,20,000 2,55,000
2019-2020 7,45,000 2,15,000
2020- 2021 6,04,000 2,14,000
Total profit of 3 years (a) 21,69,000 6,84,000
Simple Average [(a)/3] 7,23,000 2,28,000
Less: Non-trading income* (30,000) (12,000)
6,93,000 2,16,000
(iii) Goodwill
[(6,93,000 / [(2,16,000 /
Capitalised value of average profit 38,50,000 12,00,000
18) x 100] 18) x 100]

Less: Capital Employed [From (i) above]

(19,85,000) (7,33,000)
Goodwill 18,65,000 4,67,000

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* For Truth Ltd. = 1,87,500 x 80% x 20% = 30,000; and

Myth Ltd. = 1,00,000 x 80% x 15% = 12,000

(2) Intrinsic Value per Share

Truth Ltd. Myth Ltd.
Rs. Rs.
Goodwill [W.N. 1] 18,65,000 4,67,000
Other Assets 22,75,000 41,40,000 11,45,000 16,12,000
Less: Liabilities
12% Debentures - 1,75,000**
Trade payables 90,000 1,42,000
Provision for Tax 50,000 (1,40,000) 40,000 (3,57,000)
Net Assets 40,00,000 12,55,000
Intrinsic value per share [Net 40,00,000 / 12,55,000 /
Assets / No. of Shares] 1,00,000 40,000
= Rs. 40 = Rs. 31.375

** 1,50,000 x 14%/12% = 1,75,000

(3) Purchase Consideration & manner of its discharge

Intrinsic Value of Myth Ltd. [a] Rs. 31.375 per share
No. of shares [b] 40,000 shares
Purchase Consideration c= [a x b] Rs. 12,55,000
Intrinsic Value of Truth Ltd. [d] Rs. 40 per share
No. of shares to be issued [c / d] 31,375 shares

Question 140)
The following are the Balance Sheets of Aakash Limited and Ganga Limited as at March 31, 2021:
Particulars Note Aakash Limited Ganga Limited
No. (Rs.) (Rs.)
I. Equity and Liabilities:
(1) Shareholder's Funds:
(a) Share Capital 1 80,00,000 20,00,000
(b) Reserves and Surplus 2 (3,24,00,000) 56,00,000
(2) Non-Current Liabilities:
(a) Secured Loans 3 3,20,00,000 1,60,00,000
(b) Unsecured Loans 4 1,72,00,000 -
(3) Current Liabilities:
(a) Trade Payables 56,00,000 36,00,000
(b) Other Current Liabilities 5 2,04,00,000 56,00,000
Total 5,08,00,000 3,28,00,000
II. Assets:
(1) Non-Current Assets:
68,00,000 1,36,00,000
Property, Plant & Equipment

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(2) Current Assets:

(a) Inventories 3,68,00,000 -
(b) Other Current Assets 72,00,000 1,92,00,000
Total 5,08,00,000 3,28,00,000

Notes to Accounts:
Aakash Limited Ganga Limited
(Rs.) (Rs.)
1. Share Capital
Authorized, Issued, Subscribed & Paid up:
6,00,000 Equity Shares of Rs.10 each 60,00,000 -
20,000 Preference Shares of Rs. 100 each 20,00,000 -
2,00,000 Equity Shares of Rs. 10 each - 20,00,000
80,00,000 20,00,000
2. Reserves and Surplus
General Reserve 8,00,000 56,00,000
Surplus (3,32,00,000) -
(3,24,00,000) 56,00,000
3. Secured Loans
(Secured Loans of Aakash Limited are secured against 3,20,00,000 1,60,00,000
pledge of Inventories)
4. Unsecured Loans 1,72,00,000 -
5. Other Current Liabilities
Statutory Liabilities 1,44,00,000 20,00,000
Liability to Employees 60,00,000 36,00,000
2,04,00,000 56,00,000
Both the companies go into liquidation and a new company ‘Aakash Ganga Limited’ is formed to take over their
business. The following information is given:
(i) All Current Assets of two companies, except pledged inventory are taken over by Aakash Ganga Limited.
The realizable value of all the Current Assets (including pledged inventory) is 80% of book value in case of
Aakash Limited and 70% for Ganga Limited.
(ii) Property, Plant and Equipment of both the companies are taken over at book value by AakashGanga
Limited.
(iii) Secured Loans include Rs. 32,00,000 accured interest in case of Ganga Limited.
(iv) 4,00,000 Equity Shares of Rs. 10 each are allotted by AakashGanga Limited at par against cash payment of
entire face value to the shareholders of Aakash Limited and Ganga Limited in the ratio of shares held by
them in Aakash Limited and Ganga Limited.
Preference Shareholders in Aakash Limited are issued Equity Shares in AakashGanga Ltd. worth Rs.
(v) 4,00,000 in lieu of their present holdings.
(vi) Secured Loan agree to continue the balance amount of their loans to AakashGanga Limited after adjusting
realizable value of pledged asset in case of Aakash Limited and after waiving 50% of interest due in the case
of Ganga Limited.
(vii) Unsecured Loans are taken over by AakashGanga Limited at 25% of loan amounts.
(viii) Employees are issued fully paid Equity Shares in AakashGanga Limited in full settlement of their dues.
(ix) Statutory Liabilities are taken over by AakashGanga Limited at full value and Trade Payables are taken over

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at 80% of the book value.

You are required to prepare the opening Balance Sheet of AakashGanga Limited as at 1.4.2021.

SOLUTION
Balance sheet of AakashGanga Ltd. as at 1st April, 2021
Particulars Note No. (Rs.)
I. Equity and Liabilities
(1) Shareholders' Funds
(a) Share Capital 1 1,40,00,000
(2) Non-Current Liabilities
(a) Long term borrowings 2 2,12,60,000
(3) Current Liabilities
(a) Trade Payables 3 73,60,000
(b) Other current liabilities 4 1,64,00,000
Total 5,90,20,000
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment 5 2,04,00,000
(b) Intangible assets 6 1,54,20,000
(2) Current assets
(a) Cash and cash equivalents 40,00,000
(b) Other current assets 7 1,92,00,000
Total 5,90,20,000

Notes to Accounts
(Rs.)
1. Share Capital
Issued, subscribed & paid up:
14,00,000 equity shares of Rs. 10 each, fully paid up 1,40,00,000
(W.N.4)
(Of the above 10,00,000 shares have been issued for
consideration other than cash)
2. Long Term borrowings
Secured Loans
Aakash Limited 25,60,000
Ganga Limited 1,44,00,000 1,69,60,000
Unsecured Loans 43,00,000 2,12,60,000
3. Trade Payables (W.N.1)
Aakash Limited 44,80,000
Ganga Limited 28,80,000 73,60,000
4. Other current liabilities
Statutory Liabilities
Aakash Limited 1,44,00,000
Ganga Limited 20,00,000 1,64,00,000
5. Property, Plant & Equipment
Aakash Limited 68,00,000
Ganga Limited 1,36,00,000 2,04,00,000
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6. Intangible assets
Goodwill (W.N.3) 1,54,20,000
7. Other Current Assets
Aakash Limited 57,60,000
Ganga Limited 1,34,40,000 1,92,00,000

Working Notes:
1. Value of total liabilities taken over by Aakash Ganga Ltd. (Rs.)
Aakash Limited Ganga Limited
Current liabilities
Statutory liabilities 1,44,00,000 20,00,000
Liability to employees 60,00,000 36,00,000
Trade payables @ 80% 44,80,000 2,48,80,000 28,80,000 84,80,000
Secured loans
Given in Balance Sheet 3,20,00,000 1,60,00,000
Interest waived - 16,00,000 1,44,00,000
Value of Inventory 2,94,40,000 25,60,000
(80% of Rs. 3,68,00,000)
Unsecured Loans 43,00,000 -
(25% of Rs.1,72,00,000)
3,17,40,000 2,28,80,000

2. Assets taken over by Aakash Ganga Ltd. (Rs.)

Aakash Limited Ganga Limited
Rs. Rs.
Property, Plant & Equipment 68,00,000 1,36,00,000
Current Assets
(80% and 70% respectively of book value) 57,60,000 1,34,40,000
1,25,60,000 2,70,40,000

3. Goodwill / Capital Reserve on amalgamation (Rs.)

Liabilities taken over (W.N. 1) 3,17,40,000 2,28,80,000
Equity shares to be issued to Preference Shareholders 4,00,000 -
A 3,21,40,000 2,28,80,000
Less: Total assets taken over (W.N. 2) B (1,25,60,000) (2,70,40,000)
A-B 1,95,80,000 (41,60,000)
Goodwill Capital Reserve
Net Goodwill (1,95,80,000- 41,60,000) 1,54,20,000

4. Equity shares issued by Aakash Ganga Ltd.

(i) For Cash 40,00,000
For consideration other than cash
(ii) In Discharge of Liabilities to Employees 96,00,000
(iii) To Preference shareholders 4,00,000 1,00,00,000
1,40,00,000

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No. of shares @ Rs. 10 14,00,000

Question 141)
A Limited and B Limited are carrying on business of same nature. On 31 st March, 2021 the information given by both
these companies is as follows:
A Ltd. (Rs.) B Ltd. (Rs.)
Share Capital
- Equity Shares 10 each (Fully Paid) 12,00,000 7,20,000
- 10% Preference Shares of Rs. 100 each 6,00,000 -
- 8% Preference Shares of Rs. 100 each - 5,00,000
General Reserve 3,00,000 2,50,000
Investment Allowance Reserve - 60,000
Security Premium 2,40,000 -
Export Profit Reserve 1,80,000 1,20,000
Profit & Loss Account 2,16,000 1,92,000
9% Debentures (Rs. 10 each) 3,00,000 2,00,000
Secured Loan - 3,60,000
Sundry Creditors 3,12,000 2,04,000
Bills Payable 75,000 1,00,000
Other Current Liabilities 50,000 75,000
Land and Building 10,80,000 8,40,000
Plant and Machinery 6,00,000 5,60,000
Office Equipment 3,45,000 2,10,000
Investments 96,000 3,00,000
Stock in Trade 6,30,000 4,20,000
Sundry Debtors 4,90,000 3,20,000
Bills Receivables 60,000 70,000
Cash at Bank 1,72,000 61,000
A Limited take over B Limited on the above date, both companies agreeing on a scheme of Amalgamation on the
following terms:
(a) A Limited will issue 80,000 Equity Shares of Rs. 10 each at par to the Equity Shareholders of B Limited.
(b) A Limited will issue 10% Preference Shares of Rs. 100 each to discharge the Preference Shareholders of B
Limited at 15% premium in such a way that the existing dividend quantum of the preference shareholders of B
Limited will not get affected. Accordingly, Rs. 5,00,000 pref. shares are discharged at Rs. 5,75,000 (5,00,000X
115%) by issue of 4,000 preference shares of Rs. 100 each at premium of Rs. 43.75 each.
(c) The Debentures of B Limited will be converted into equivalent number of Debentures of A Limited.
(d) All the Bills Receivable of A Limited were accepted by B Limited.
(e) A contingent liability of B Limited amounting to Rs. 72,000 to be treated as actual liability in trade payables.
(f) Expenses of Amalgamation amounted to Rs. 12,000 were borne by A Limited.
You are required to pass opening Journal Entries in the books of A Limited and prepare the opening Balance Sheet of A
Limited as on 1st April, 2021 after amalgamation, assuming that the amalgamation is in the nature of Merger.
SOLUTION
Journal Entries in the books of A Ltd.
Particulars Debit Credit
Rs. Rs.
Business purchase A/c (W.N.1) Dr. 13,75,000

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To Liquidator of B Ltd. 13,75,000

(Being business of B Ltd. taken over)
Land & Building A/c Dr. 8,40,000
Plant and machinery A/c Dr. 5,60,000
Office equipment A/c Dr. 2,10,000
Investments A/c Dr. 3,00,000
Inventory A/c Dr. 4,20,000
Debtors A/c Dr. 3,20,000
Bills receivables A/c Dr. 70,000
Bank A/c Dr. 61,000
To General reserve A/c (W.N.2) 95,000
(2,50,000-1,55,000)
To Export profit reserve A/c 1,20,000
To Investment allowance reserve A/c 60,000
To Profit and loss A/c 1,20,000
To Liability for 9% Debentures A/c (Rs. 100 each) 2,00,000
To Secured Loan 3,60,000
To Trade creditors A/c 2,76,000
To Bills payables A/c 1,00,000
To Other current liabilities A/c 75,000
To Business purchase A/c 13,75,000
(Being assets and liabilities taken over)
Liquidator of B Ltd. Dr. 13,75,000
To Equity share capital A/c 8,00,000
To 10% Preference share capital A/c 4,00,000
To Securities premium A/c 1,75,000
(Being purchase consideration discharged)
General Reserve* A/c Dr. 12,000
To Cash at bank 12,000
(Being expenses of amalgamation paid)
Liability for 9% Debentures in B Ltd. A/c Dr. 2,00,000
To 9% Debentures A/c 2,00,000
(Being debentures in B ltd. discharged by issuing own 9% debentures)
Bills payables A/c Dr. 60,000
To Bill receivables A/c 60,000
(Cancellation of mutual owing on account of bills of exchange)
*Alternatively, profit & loss A/c may be debited in place of general reserve A/c.

Opening Balance Sheet of A Ltd. (after absorption) as at 1st April, 2021

Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 14,94,000
2 Non-current liabilities

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a Long-term borrowings 3 8,60,000

3 Current liabilities
a Trade Payables 4 7,03,000
b Other current liabilities 5 1,25,000
Total 61,82,000
Assets
1 Non-current assets
a PPE 6 36,35,000
b Investments 7 3,96,000
2 Current assets
a Inventories 8 10,50,000
b Trade receivables 9 8,80,000
c Cash and cash equivalents 10 2,21,000
Total 61,82,000

Notes to accounts
Rs.
1 Share Capital
Equity share capital
2,00,000 Equity shares of Rs. 10 each
(Out of above, 80,000 shares were issued for consideration other than 20,00,000
cash)
Preference share capital
10,000 10% Preference shares of Rs. 100 each
(Out of above, 4,000 shares were issued for consideration other than 10,00,000
cash)
Total 30,00,000
2 Reserves and Surplus
General Reserve
Opening balance 3,00,000
Add: Adjustment under scheme of amalgamation 95,000
Less: Amalgamation expense paid (12,000) 3,83,000
Securities premium (2,40,000+1,75,000) 4,15,000
Export profit reserve
Opening balance 1,80,000
Add: Adjustment under scheme of amalgamation 1,20,000 3,00,000
Investment allowance reserve 60,000
Profit and loss account
Opening balance 2,16,000
Add: Adjustment under scheme of amalgamation 1,20,000 3,36,000
Total 14,94,000
3 Long-term borrowings
Secured
9% Debentures 3,00,000
Add: Adjustment under scheme of amalgamation 2,00,000
Secured loan 3,60,000 8,60,000
4 Trade payables

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Creditors: Opening balance 3,12,000

Add: Adjustment under scheme of amalgamation 2,76,000 5,88,000
Bills Payables: Opening balance 75,000
Add: Adjustment under scheme of amalgamation 1,00,000
Less: Cancellation of mutual owning upon amalgamation (60,000) 1,15,000
7,03,000
5 Other current liabilities
Opening balance 50,000
Add: Adjustment under scheme of amalgamation 75,000 1,25,000
6 PPE
Land & Building- Opening balance 10,80,000
Add: Adjustment under scheme of amalgamation 8,40,000 19,20,000
Plant and machinery- Opening balance 6,00,000
Add: Adjustment under scheme of amalgamation 5,60,000 11,60,000
Office equipment- Opening balance 3,45,000
Add: Adjustment under scheme of amalgamation 2,10,000 5,55,000
Total 36,35,000
7 Investments
Opening balance 96,000
Add: Adjustment under scheme of amalgamation 3,00,000 3,96,000
8 Inventories
Opening balance 6,30,000
Add: Adjustment under scheme of amalgamation 4,20,000 10,50,000
9 Trade receivables
Debtors: Opening balance 4,90,000
Add: Adjustment under scheme of amalgamation 3,20,000 8,10,000
Bills Payables: Opening balance 60,000
Add: Adjustment under scheme of amalgamation 70,000
Less: Cancellation of mutual owning upon amalgamation (60,000) 70,000
Total 8,80,000
10 Cash and cash equivalents
Opening balance 1,72,000
Add: Adjustment under scheme of amalgamation 61,000
Less: Amalgamation expense paid (12,000) 2,21,000

Working Notes:
1. Calculation of purchase consideration
Rs.
Equity shareholders of B Ltd. (80,000 x Rs. 10) 8,00,000
Preference shareholders of B Ltd. (5,00,000 x 115%) 5,75,000
Purchase consideration would be 13,75,000
2. Amount to be adjusted from general reserve
The difference between the amount recorded as share capital issued and the amount of share capital of transferor
company should be adjusted in General Reserve.
Thus, General reserve will be adjusted as follows:
Rs.
Purchase consideration 13,75,000

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Less: Share capital issued (Rs. 7,20,000 + Rs. 5,00,000) (12,20,000)

Amount to be adjusted from general reserve 1,55,000

3. Calculation of balances of Profit & Loss and Sundry Creditors of B Limited to be taken over by A Limited
P&L (Rs.) Creditors (Rs.)
Balance as per Balance Sheet of B Limited 1,92,000 2,04,000
Less / Add: Contingent Trade Payable treated as Actual Liability (72,000) 72,000
Taken by A Limited 1,20,000 2,76,000

Question 142)
P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to
the combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and
undertakings of the two companies in exchange for share in PQ Ltd.
The Summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date of amalgamation) are given
below:
Summarized balance sheets as at 31-03-2017
Liabilities P Ltd. Rs Q Ltd. Rs Assets P Ltd. Rs Q Ltd. Rs
Equity & liabilities: Assets:
Shareholders Fund Non-current Assets:
a. Share Capital 6,00,000 8,40,000 Fixed Assets (excluding 7,20,000 10,80,000
Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current Liabilities a. Inventories 3,60,000 6,60,000
Bank Overdraft - 5,40,000 b. Trade receivables 4,80,000 7,80,000
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000

The consideration was to be based on the net assets of the companies as shown in the above Balance Sheets, but
subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted average of net profits for the
three years ended 31st March, 2017. The weights for this purpose for the years 2014-15, 2015-16 and 2016-17 were
agreed as 1, 2 and 3 respectively.
The profit had been:
2014-15 Rs 3,00,000; 2015-16 Rs 5,25,000 and 2016-17 Rs 6,30,000.
The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed net assets
value of these companies.
In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of Rs 10 each at the same rate of premium
as issued for discharging purchase consideration to P Ltd. and Q Ltd.
You are required to:
(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare required journal entries in the books of PQ Ltd.; and
Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary journal entries

SOLUTION
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:
Amount of Share Capital as per balance sheet Rs
P Ltd. 6,00,000
Q Ltd. 8,40,000
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14,40,000
Share of P Ltd. = Rs 14,40,000 x [21,60,000/ (21,60,000 + 14,40,000)]
= Rs 8,64,000 or 86,400 shares
Securities premium = Rs 21,60,000 – Rs 8,64,000 = Rs 12,96,000
Premium per share = Rs 12,96,000 / Rs 86,400 = Rs 15
Issued 86,400 shares @ Rs 10 each at a premium of Rs 15 per share

Share of Q Ltd. = Rs 14,40,000 x [14,40,000/ (21,60,000 + 14,40,000)]

= Rs 5,76,000 or 57,600 shares
Securities premium = Rs 14,40,000 – Rs 5,76,000 = Rs 8,64,000
Premium per share = Rs 8,64,000 / Rs 57,600 = Rs 15
Issued 57,600 shares @ Rs 10 each at a premium of Rs 15 per share

(ii) Journal Entries in the books of PQ Ltd.

Dr. Cr.
Particulars Amount (Rs) Amount (Rs)
Business purchase account Dr. 36,00,000
To Liquidator of P Ltd. account 21,60,000
To Liquidator of Q Ltd. account 14,40,000
(Being the amount of purchase consideration payable to liquidator
of P Ltd. and Q Ltd. for assets taken over)
Goodwill Dr. 5,40,000
Fixed assets account Dr. 7,20,000
Inventory account Dr. 3,60,000
Trade receivables account Dr. 4,80,000
Cash at bank Dr. 3,00,000
To Trade payables account 2,40,000
To Business purchase account 21,60,000
(Being assets and liabilities of P Ltd. taken over)
Fixed assets account Dr. 10,80,000
Inventory account Dr. 6,60,000
Trade receivables account Dr. 7,80,000
To bank overdraft account 5,40,000
To Trade payables account 5,40,000
To Business purchase account 14,40,000
(Being assets and liabilities of Q Ltd. taken over)
Liquidator of P Ltd. Account Dr. 21,60,000
To Equity share capital account (86,400 x Rs 10) 8,64,000
To Securities premium (86,400 x Rs 15) 12,96,000
(Being the allotment of shares as per agreement for discharge of
purchase consideration)
Liquidator of Q Ltd. account Dr. 14,40,000
To Equity share capital account (57,600 x Rs 10) 5,76,000
To Securities premium (57,600 x Rs 15) 8,64,000
(Being the allotment of shares as per agreement for discharge of
purchase consideration)
Bank A/c 18,00,000
To Equity share capital account 7,20,000
To Securities premium 10,80,000

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(Equity share capital issued to raise working capital)

(iii) Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 21,60,000
b Reserves and Surplus 2 32,40,000
2 Current liabilities
a Trade payables (2,40,000 + 5,40,000) 7,80,000
Total 61,80,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets (7,20,000 + 10,80,000) 18,00,000
Intangible assets (goodwill) 4 5,40,000
2 Current assets
a Inventories (3,60,000 + 6,60,000) 10,20,000
b Trade receivables (4,80,000 +7,80,000) 12,60,000
c Cash and cash equivalents 3 15,60,000
Total 61,80,000

Notes to accounts
Rs
1 Share Capital
Issued, subscribed and paid-up share capital 2,16,000 Equity shares of Rs10 each 21,60,000
(Out of the above 1,44,000 shares issued for non-cash consideration under scheme
of amalgamation)
2 Reserves and Surplus
Securities premium (@Rs 15 for 2,16,000 shares) 32,40,000
3 Cash and cash equivalents
Cash at Bank 15,60,000
4 Intangible Assets
Goodwill 5,40,000

Working Notes:
1. Calculation of goodwill of P Ltd.
Particulars Amount Rs Weight Weighted amount Rs
2014-15 3,00,000 1 3,00,000
2015-16 5,25,000 2 10,50,000
2016-17 6,30,000 3 18,90,000
Total (a+b+c) 14,55,000 6 32,40,000
weighted Average = [Total weighted amount/Total of weight] [Rs
32,40,000/6]
Goodwill 5,40,000

2. Calculation of Net assets

P Ltd. Rs Q Ltd. Rs
Assets

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Goodwill 5,40,000
Fixed assets 7,20,000 10,80,000
Inventory 3,60,000 6,60,000
Trade receivable 4,80,000 7,80,000
Cash at bank 3,00,000
Less: Liabilities
Bank overdraft 5,40,000
Trade payables 2,40,000 5,40,000
Net assets or Purchase consideration 21,60,000 14,40,000

3. New authorized capital

= Rs 14,40,000 + Rs 12,00 000 = Rs 26,40,000
4. Cash and Cash equivalents
Rs
P Ltd. Balance 3,00,000
Cash received from Fresh issue (72,000 X Rs 25) 18,00,000
21,00,000
Less: Bank Overdraft 5,40,000
15,60,000
*The balance of cash and cash equivalents has been shown after setting off overdraft amount.

Question 143)
The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:

X Ltd. (Rs) Y Ltd. (Rs)

Equity and Liabilities
Equity Shares of Rs 10 each 30,00,000 9,00,000
9% Preference Shares of Rs 100 each 3,00,000 -
10% Preference Shares of Rs 100 each - 3,00,000
General Reserve 2,10,000 2,10,000
Retirement Gratuity Fund (long term) 1,50,000 60,000
Trade Payables 3,90,000 2,40,000
Total 40,50,000 17,10,000
Assets
Goodwill 1,50,000 75,000
Land & Buildings 9,00,000 3,00,000
Plant & Machinery 15,00,000 4,50,000
Inventories 7,50,000 5,25,000
Trade Receivables 6,00,000 3,00,000
Cash and Bank 1,50,000 60,000
Total 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of preceding three
financial years (2016-17: Rs 90,000; 2015-16: Rs 78,000 and 2014-15: Rs 72,000). The profits of 2014 -15
included credit of an insurance claim of Rs 25,000 (fire occurred in 2013-14 and loss by fire Rs 30,000 was
booked in Profit and Loss Account of that year). In the year 2015 -16, there was an embezzlement of cash by an
employee amounting to Rs 10,000.
(iii) Land & Buildings are valued at Rs 5,00,000 and the Plant & Machinery at Rs 4,00,000.
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(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts is to be created @ 2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to Rs 15,000 and such
asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included Rs 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to
(i) Prepare Realisation A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.

SOLUTION
In the Books of Y Ltd. Realisation Account
Rs Rs
To Sundry Assets: By Retirement Gratuity Fund 60,000
Goodwill 75,000
Land & Building 3,00,000 By Trade payables 2,40,000
Plant & Machinery 4,50,000 By X Ltd. (Purchase 15,90,000
Inventory 5,25,000 Consideration)
Trade receivables 3,00,000
Bank 60,000 17,10,000
To Preference Shareholders 30,000
(Premium on Redemption)
To Equity Shareholders
(Profit on Realisation) 1,50,000 _______
18,90,000 18,90,000

In the Books of X Ltd. Journal Entries

Dr. Rs Cr. Rs
Business Purchase A/c Dr. 15,90,000
To Liquidators of Y Ltd. Account 15,90,000
(Being business of Y Ltd. taken over)
Goodwill Account Dr. 1,50,000
Land & Building Account Dr. 5,00,000
Plant & Machinery Account Dr. 4,00,000
Inventory Account Dr. 4,72,500
Trade receivables Account Dr. 3,00,000
Bank Account Dr. 60,000
Unrecorded assets Account Dr. 15,000
To Retirement Gratuity Fund Account 60,000
To Trade payables Account 2,40,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 15,90,000
(Being Assets and Liabilities taken over as per agreed valuation).
Liquidators of Y Ltd. A/c Dr. 15,90,000
To 9% Preference Share Capital A/c 3,30,000
To Equity Share Capital A/c 12,00,000
To Securities Premium A/c 60,000
(Being Purchase Consideration satisfied as above).

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Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 48,30,000
B Reserves and Surplus 2 2,70,000
2 Non-current liabilities
A Long-term provisions 3 2,10,000
3 Current liabilities
A Trade Payables 4 6,10,000
B Short term provision 5 7,500
Total 59,27,500
Assets
1 Non-current assets
A Fixed assets
Tangible assets 6 33,00,000
Intangible assets 7 3,00,000
2 Current assets
A Inventories 8 12,22,500
B Trade receivables 9 8,80,000
C Other current Assets 10 15,000
D Cash and cash equivalents 11 2,10,000
Total 59,27,500

Notes to accounts
Rs
1 Share Capital
Equity share capital
4,20,000 Equity Shares of Rs. 10 each fully paid (Out of above 1,20,000 Equity Shares 42,00,000
were issued in consideration other than for cash)
Preference share capital
6,300 9% Preference Shares of Rs. 100 each (Out of above 3,300 Preference Shares 6,30,000
were issued in consideration other than for cash)
Total 48,30,000
2 Reserves and Surplus
Securities Premium 60,000
General Reserve 2,10,000
Total 2,70,000
3 Long-term provisions
Retirement Gratuity fund 2,10,000
4 Trade payables (3,90,000 + 2,40,000 - 20,000*) 6,10,000
* Mutual Owings eliminated.
5 Short term Provisions
Provision for Doubtful Debts 7,500
6 Tangible assets
Land & Buildings 14,00,000
Plant & Machinery 19,00,000
Total 33,00,000
7 Intangible assets
Goodwill (1,50,000 +1,50,000) 3,00,000
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8 Inventories (7,50,000 + 4,72,500) 12,22,500

9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000
10 Other current Assets 15,000
11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000

Working Notes:
1. Computation of goodwill Rs
Profit of 2016-17 90,000
Profit of 2015-16 adjusted Rs 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (Rs 72,000 – 25,000) 47,000
2,25,000
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs 75,000 x 2 = RS 1,50,000
2.
Purchase Consideration: Rs
Goodwill 1,50,000
Land & Building 5,00,000
Plant & Machinery 4,00,000
Inventory 4,72,500
Trade receivables 3,00,000
Unrecorded assets 15,000
Cash at Bank 60,000
18,97,500
Less: Liabilities:
Retirement Gratuity 60,000
Trade payables 2,40,000 (3,07,500)
Provision for doubtful debts 7,500
Net Assets/ Purchase Consideration 15,90,000
To be satisfied as under:
10% Preference Shareholders of Y Ltd. 3,00,000
Add: 10% Premium 30,000
9% Preference Shares of X Ltd. 3,30,000
Equity Shareholders of Y Ltd. to be satisfied by issue of 1,20,000
equity Shares of X Ltd. at 5% Premium 12,60,000
Total 15,90,000

Question 144)
Mohan Ltd. gives you the following information as on 31st March, 2020:
Rs.
Share capital:
Equity shares of Rs. 10 each 3,00,000
6,000, 9% cumulative preference shares of Rs. 10 each 60,000
Profit and Loss Account (Dr. balance) 1,70,000
10% Debentures of Rs. 100 each 2,00,000
Interest payable on Debentures 20,000
Trade Payables 1,50,000
Property, Plant and Equipment 3,40,000
Goodwill 10,000
Inventory 80,000

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Trade Receivables 1,10,000

Bank Balance 20,000
A new company Ravi Ltd. is formed with authorised share capital of Rs. 4,00,000 divided into 40,000 Equity Shares of
Rs. 10 each. The new company will acquire the assets and liabilities of Mohan Ltd. on the following terms:
i)
a) Mohan Ltd.'s debentures are paid by similar debentures in new company and for outstanding accrued interest
on debentures, equity shares of equal amount are issued at par.
b) The trade payables are paid by issue of 12,000 equity shares at par in full and final settlement of their claims.
c) Preference shareholders are to get equal number of equity shares issued at par. Dividend on preference shares
is in arrears for three years. Preference shareholders to forgo dividend for two years. For balance dividend,
equity shares of equal amount are issued at par.
d) Equity shareholders are issued one share at par for every three shares held in Mohan Ltd.
ii) Current Assets are to be taken at book value (except inventory, which is to be reduced by 10%). Goodwill is to be
eliminated. The Property, plant and equipment is taken over at Rs. 3,08,400.
iii) Remaining equity shares of the new company are issued to public at par fully paid up.
iv) Expenses of Rs. 5,000 to be met from bank balance of Mohan Ltd. This is to be adjusted from the bank balance of
Mohan Ltd. before acquisition by Ravi Ltd.
You are required to prepare:
(a) Realisation account and Equity Shareholders' account in the books of Mohan Ltd.
(b) Bank Account and Balance Sheet with notes to accounts in the books of Ravi Ltd.

SOLUTION
In the books of Mohan Ltd.
i) Realisation Account
Rs. Rs.
To Goodwill 10,000 By 10% Debentures 2,00,000
To Property, plant and Equipment 3,40,000 By Interest accrued on 20,000
To Inventory 80,000 By Trade payables 1,50,000
To Trade receivables 1,10,000 By Ravi Ltd. (Purchase 1,65,400
consideration) (W.N. 1)
To Bank (20,000 - 5,000) 15,000 By Equity shareholders A/c (loss on 25,000
realization) (Bal. fig.)
To Preference shareholders A/c (W.N.2) 5,400
5,60,400 5,60,400

ii) Equity shareholders’ Account

Rs. Rs.
To Profit & loss A/c 1,70,000 By Equity Share capital 3,00,000
To Expenses* 5,000
To Equity shares in Ravi Ltd. 1,00,000
To Realization A/c 25,000
3,00,000 3,00,000
*Alternatively, expenses may be routed through Realization account.

In the books of Ravi Ltd.

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i) Bank Account
Rs. Rs.
To Business Purchase 15,000 By Balance c/d (Bal. fig.) 1,09,600
To Equity shares application & 94,600
allotment A/c (W.N. 3)
1,09,600 1,09,600

ii) Balance Sheet as at 31st March, 2020

Particulars Note No. Rs.
I. Equity and Liabilities
(1) Shareholder's Funds
Share Capital 1 4,00,000
(2) Non-Current Liabilities
Long-term borrowings 2 2,00,000
Total 6,00,000
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 3,08,400
(2) Current assets
(a) Inventories 72,000
(b) Trade receivables 1,10,000
(c) Cash and cash equivalents 1,09,600
Total 6,00,000

Notes to Accounts
Rs.
1 Share Capital
Authorised share capital
40,000 equity shares of Rs. 10 each 4,00,000
Issued and Subscribed
40,000 shares of Rs. 10 each fully paid up 4,00,000
(Out of the above, 30,540 (W.N.3) shares have been allotted as fully paid-up pursuant
to contract without payment being received in cash)
2 Long Term Borrowings
10% Debentures 2,00,000

Working Notes:
1. Calculation of Purchase consideration
Rs.
Payment to preference shareholders
6,000 equity shares @ Rs. 10 60,000
For arrears of dividend: (6,000 x Rs. 10) x 9% 5,400
Payment to equity shareholders
(30,000 shares x 1/3) @ Rs. 10 1,00,000
Total purchase consideration 1,65,400

2. Preference shareholders’ Account in books of Mohan Ltd.

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Rs. Rs.
To Equity Shares in Ravi Ltd. 65,400 By Preference Share capital 60,000
By Realization A/c (Bal. fig.) 5,400
65,400 65,400

3. Calculation of number of Equity shares issued to public

Number of shares
Authorized equity shares 40,000
Less: Equity shares issued for
Interest accrued on debentures 2,000
Trade payables of Mohan Ltd. 12,000
Preference shareholders of Mohan Ltd. 6,000
Arrears of preference dividend 540
Equity shareholders of Mohan Ltd. 10,000 (30,540)
Number of equity shares issued to public at par for cash 9,460

CONSOLIDATED
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QUESTION 145)
On 31st March, 2015, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs. 12,00,000. The position of Q Ltd.
on that date was as under:
Rs.
Property, plant and equipment 10,50,000
Current Assets 6,45,000
1,50,000 equity shares of Rs. 10 each fully paid 15,00,000
Pre-incorporation profits 30,000
Profit and Loss Account 60,000
Trade payables 1,05,000

P Ltd. and Q Ltd. give the following information on 31st March, 2021:

P Ltd. Q Ltd.
Rs. Rs.
Equity shares of Rs. 10 each fully paid (before bonus issue) 45,00,000 15,00,000
Securities Premium 9,00,000 –
Pre-incorporation profits – 30,000
General Reserve 60,00,000 19,05,000
Profit and Loss Account 15,75,000 4,20,000
Trade payables 5,55,000 2,10,000
Property, plant and equipment 79,20,000 23,10,000
Investment: 1,05,000 Equity shares in Q Ltd. at cost 12,00,000 –
Current Assets 44,10,000 17,55,000
Directors of Q Ltd. made bonus issue on 31.3.2021 in the ratio of one equity share of Rs. 10 each fully paid for
every two equity shares held on that date. Bonus shares were issued out of post-acquisition profits by using
General Reserve.
Calculate as on 31st March, 2021
(i) Cost of Control/Capital Reserve;
(ii) Minority Interest;
(iii) Consolidated Profit and Loss Account in each of the following cases:
. Before issue of bonus shares.
Immediately after issue of bonus shares.
SOLUTION
Shareholding pattern
Particulars Number of % of
Shares holding
. P Ltd.
(i) Purchased on 31.03.2015 1,05,000
(ii) Bonus Issue (1,05,000/2) 52,500

Total 1,57,500 70%

a. Minority Interest 67,500 30%

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Calculations of (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss
Account as on 31st March, 2021:
. Before issue of bonus shares
(i) Cost of control/capital reserve Rs. Rs.
Investment in Q Ltd. 12,00,000
Less: Face value of investments 10,50,000
Capital profits (W.N.) 63,000 (11,13,000)
Cost of control 87,000
(ii) Minority Interest Rs.
Share Capital 4,50,000
Capital profits (W.N.) 27,000
Revenue profits (W.N.) 6,79,500
11,56,500
(iii) Consolidated profit and loss account – P Ltd. Rs.
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. (W.N.) 15,85,500
31,60,500
(i) Cost of control/capital reserve Rs. Rs.
Investment in Q Ltd. 12,00,000
Less: Face value of investments 10,50,000
Capital profits (W.N.) 63,000 (11,13,000)
Cost of control 87,000
(ii) Minority Interest Rs.
Share Capital 4,50,000
Capital profits (W.N.) 27,000
Revenue profits (W.N.) 6,79,500
11,56,500
(iii) Consolidated profit and loss account – P Ltd. Rs.
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. (W.N.) 15,85,500
31,60,500

b. Immediately after issue of bonus shares

(i) Cost of control/capital reserve Rs. Rs.
Face value of investments (Rs. 10,50,000 + Rs. 5,25,000) 15,75,000
Capital Profits (W.N.) 63,000 16,38,000
Less: Investment in Q Ltd. (12,00,000)
Capital reserve 4,38,000
(ii) Minority Interest Rs.
Share Capital (Rs. 4,50,000 + Rs. 2,25,000) 6,75,000
Capital Profits (W.N.) 27,000
Revenue Profits (W.N.) 4,54,500
11,56,500
(iii) Consolidated Profit and Loss Account – P Ltd. Rs.
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. (W.N.) 10,60,500
26,35,500

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Working Note:
Analysis of Profits of Q Ltd.
Capital Profits Revenue Profits
(Before and after issue of Before Bonus After Bonus
bonus shares) Issue Issue
Rs. Rs. Rs.
Pre-incorporation profits 30,000
Profit and loss account on 60,000
31.3.2015
General reserve* 90,000 19,05,000 19,05,000
Less: Bonus shares (7,50,000)
11,55,000

Profit for period of 1st April, 2015 to 31st

March, 2021 (Rs. 4,20,000 – Rs. 60,000) 3,60,000 3,60,000
22,65,000 15,15,000
P Ltd.’s share (70%) 63,000 15,85,500 10,60,500
Minority’s share (30%) 27,000 6,79,500 4,54,500
*Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss Account.

QUESTION 146)
A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.2010 at cost of ₹10,00,000 when B Ltd. had an
equity share capital of ₹10,00,000 & reserves & surplus of ₹80,000. In the four consecutive years, B Ltd.
fared badly& suffered losses of ₹2,50,000, ₹4,00,000, ₹ 5,00,000 & ₹1,20,000 respectively. Thereafter
in 2014- 15, B Ltd. experienced turnaround &registered an annual profit of ₹ 50,000. In the next two years i.e., 2015-16
& 2016-17, B Ltd. recorded annual profits of ₹1,00,000 & ₹1,50,000 respectively. Show the minority interests& cost of
control at the end of each year for the purpose of consolidation.
SOLUTION
The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the equity of the
subsidiary. The excess, and any further losses applicable to the minority, are adjusted against the majority interest
except to the extent that the minority has a binding obligation to, and is able to, make good the losses. If the subsidiary
subsequently reports profits, all such profits are allocated to the majority interest until the minority's share of losses
previously absorbed by the majority has been recovered. Accordingly, the minority interests will be computed as
follows:
Year Profit/(Loss) Minority Additional Minority's Share of losses Cost of
Interest Consolidated P borne by A Ltd. Control
(30%) & L (Dr.) Cr.
₹ Balance
At the time of -
acquisition in 3,24,000
2010 (W.N.)
2010-11 (2,50,000) (75,000) 1,75,000 2,44,000
Balance 2,49,000 (W.N.)
2011-12 (4,00,000) (1,20,000) 2,80,000 2,44,000
Balance 1,29,00
2012-13 (5,00,000) (1,50,000) (3,50,000) 2,44,000
(21,000)

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Loss of minority borne 21,0000 (21,000) 21,000 21,000

by Holding Co
Balance Nil (3,71,000)
2013-14 (1,20,000) (36,000) (84,000) 2,44,000
Loss of 36,000 (36,000) 36,000 57,000
minority borne by
Holding Co.
Balance Nil (1,20,000)
2014-15 50,000 15,000 35,000 2,44,000
Profit share of minority (15,000) 15,000 (15,000) 42,000
adjusted against
losses of minority
absorbed
by Holding Co.
Balance Nil 50,000
2015-16 1,00,000 30,000 70,000
Profit share of minority (30,000) 30,000 (30,000) 12,000 2,44,000
adjusted
against losses of
minority absorbed by
Holding Co.
Balance Nil 1,00,000
2016-17 1,50,000 45,000 1,05,000 (12,000) Nil 2,44,000
(12,000) (12,000)
33,000 1,17,000

Calculation of Minority interest and Cost of control on 1.4.2010

Working Note: Share of Holding Co. Minority interest

100% 70% 30%

(₹) ( ₹) (₹)
Share Capital 10,00,000 7,00,000 3,00,000
Reserve 80,000 56,000 24,000
7,56,000 3,24,000
Less: Cost of investment (10,00,000)
Goodwill 2,44,000

QUESTION 147)
H Limited acquired 64000 Equity Shares of Rs. 10 each in S Ltd. as on 1st October, 2019. The Balance
Sheets of the two companies as on 31st March, 2020 were as under:
Particulars H Ltd. (Rs.) S Ltd. (Rs.)
Equities and Liabilities:
Equity Share Capital: Shares of Rs. 10 each 20,00,000 8,00,000
General Reserve (1st April, 2019) 9,60,000 4,20,000
Profit & Loss Account 2,28,800 3,28,000
Preliminary Expenses (1st April, 2019) - (20,000)
Bank Overdraft 3,00,000 -
Bills Payable - 52,000
Trade Payables 1,66,400 80,000
Total 36,55,200 16,60,000
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Assets:
Land and Building 7,20,000 7,60,000
Plant & Machinery 9,60,000 5,40,000
Investment in Equity Shares of S Ltd. 12,27,200 -
Inventories 4,56,000 1,68,000
Trade Receivables 1,76,000 1,60,000
Bills Receivable 59,200 -
Cash in Hand 56,800 32,000
Total 36,55,200 16,60,000
Additional Information:
1) The Profit & Loss Account of S Ltd. showed credit balance of Rs. 1,20,000 on 1st April, 2019. S Ltd. paid a dividend
of 10% out of the same on 1st November, 2019 for the year 2018-19. The dividend was correctly accounted for by
H Ltd.
2) The Plant & Machinery of S Ltd. which stood at Rs. 6,00,000 on 1st April, 2019 was considered worth Rs. 5,20,000
on the date of acquisition by H Ltd. S Ltd. charges depreciation @ 10% per annum on Plant & Machinery.
Prepare consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March, 2020 as per Schedule III of
the Companies Act, 2013.
SOLUTION
Consolidated Balance Sheet of H Ltd. and its subsidiary, S Ltd.
as at 31st March, 2020
Particulars Note No. (Rs.)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 20,00,000
(b) Reserves and Surplus 2 13,07,200
(2) Minority Interest (W.N 4) 2,96,400
(3) Current Liabilities
(a) Trade Payables 3 2,96,400
(b) Short term borrowings 3,00,000
Total 42,02,000
II. Assets
(1) Non-current assets
(i) Property, Plant and Equipment 4 29,34,000
(ii) Intangible assets (W.N.5) 1,60,000
(2) Current assets
(a) Inventories 5 6,24,000
(b) Trade receivables 6 3,95,200
(c) Cash & Cash equivalents (Cash) 7 88,800
Total 42,02,000

Notes to Accounts
Rs. Rs.
1. Share Capital
2,00,000 Equity shares of Rs. 10 each 20,00,000
2. Reserves and Surplus
Reserves 9,60,000
Profit & Loss
H Ltd. 2,28,800
S Ltd. (As per W.N. 3) 1,18,400 3,47,200 13,07,200

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3. Trade Payables
H Ltd. 1,66,400
S Ltd. (80,000+52,000) 1,32,000 2,98,400
4. Property, Plant and Equipment
Land and building
H Ltd. 7,20,000
S Ltd. 7,60,000 14,80,000
Plant & Machinery
H Ltd. 9,60,000
S Ltd. (As per W.N. 7) 4,94,000 14,54,000 29,34,000
5. Inventories
H Ltd. 4,56,000
S Ltd. 1,68,000 6,24,000
6. Trade Receivables
H Ltd. 1,76,000
S Ltd. 1,60,000 3,36,000
Bills receivable: H Ltd. 59,200 3,95,200
7. Cash & Cash equivalents
Cash
H Ltd. 56,800
S Ltd. 32,000 88,800
Working Notes:
1. Share holding pattern
Total Shares of S Ltd 80,000 shares
Shares held by H Ltd 64,000 shares i.e., 80 %;
Minority Shareholding 16,000 shares i.e., 20 %

2. Capital profits of S Ltd.

Rs. Rs.
Reserve on 1st October, 2019 (Assumed there is no movement in reserves 4,20,000
during the year and hence balance as on 1st October, 2019 is same as of
31st March 2020)
Profit & Loss Account Balance on 1st April, 2019 1,20,000
Less: Dividend paid (80,000) 40,000
Profit for year:
Total Rs. 3,28,000
Less: Rs. 40,000 (opening balance)
Rs. 2,88,000
Proportionate up to 1st October, 2019 on time basis 1,44,000
(Rs. 2,88,000/2)
Reduction in value of Plant & Machinery (WN 6) (50,000)
5,54,000
Less: Preliminary expenses written off (20,000)
Total Capital Profit 5,34,000
Holding company’s share (5,34,000 X 80%) 4,27,200
Minority Interest (5,34,000 X 20%) 1,06,800

Note: Preliminary expenses as on 1st April, 2019 amounting Rs. 20,000 have been written off.

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a. Revenue profits of S Ltd.

Profit after 1st October, 2019 (3,28,000 - 40,000)/2 1,44,000
Less 10% depreciation on Rs.5,20,000 for 6 months (26,000)
Add: Depreciation already charged for 2nd half year on 30,000
6,00,000 4,000
1,48,000
Holding company’s share (1,48,000 X 80%) 1,18,400
Minority Interest (1,48,000 X 20%) 29,600

b. Minority interest
Par value of 16,000 shares (8,00,000 X 20%) 1,60,000
Add: 1/5 Capital Profits [WN 2] 1,06,800
1/5 Revenue Profits [WN 3] 29,600
2,96,400
c. Cost of Control
Amount paid for 64,000 shares 12,27,200
Less:
Par value of shares (8,00,000 X 80%) 6,40,000
Capital Profits – share of H Ltd. [WN 2] 4,27,200 (10,67,200)
Cost of Control or Goodwill 1,60,000

d. Calculation of revaluation loss on Plant and Machinery of S Ltd. on 1st October, 2019
Rs.
Value of plant and machinery as on 1 April,2019
st
6,00,000
Less: Depreciation for the six months (30,000)
Value of plant and machinery as on 1st October, 2019 5,70,000
Less: Plant and machinery valued by H Ltd. on 1st October,2019 (5,20,000)
Revaluation Loss 50,000

e. Value of plant & Machinery of S Ltd. On 31st March,2020

Value of machinery on 1st October, 2019 5,20,000
Less: depreciation for next six month (26,000)
4,94,000

QUESTION 148)
On 31st March, 2022, H Ltd. and S Ltd. give the following information:
H Ltd. S Ltd.
(Rs. in 000’s) (Rs. in 000’s)
Equity Share Capital – Authorised 5,000 3,000
Issued and subscribed in Equity Shares of Rs. 4,000 2,400
10 each fully paid
General Reserve 928 690
Profit and Loss Account (Cr. Balance) 1,305 810
Trade payables 611 507
Provision for Taxation 220 180
Other Provisions 65 17

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Plant and Machinery 2,541 2,450

Furniture and Fittings 615 298
Investment in the Equity Shares of S Ltd. 1,500 -
Inventory 983 786
Trade receivables 820 778
Cash and Bank Balances 410 102
Sundry Advances (Dr. balances) 260 190
Following Additional Information is available:
(a) H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2021. On that date the following balances
stood in the books of S Ltd.:
General Reserve Rs. 1,500 thousand; Profit and Loss Account Rs. 633 thousand.
(b) On 14th July, 2021 S Ltd. declared a dividend of 20% out of pre-acquisition profits. H Ltd. credited the
dividend received to its Profit and Loss Account.
(c) On 1st November, 2021, S Ltd. issued 3 fully paid Equity Shares of Rs. 10 each, for every 5 shares held as
bonus shares out of pre-acquisition General Reserve.
(d) On 31st March, 2021, the Inventory of S Ltd. included goods purchased for Rs. 50 thousand from H Ltd., which
had made a profit of 25% on cost.
(e) Details of Trade payables and Trade receivables:
H Ltd. S Ltd.
(Rs. in 000’s) (Rs. in 000’s)
Trade payables
Bills Payable 124 80
Sundry creditors 487 427
611 507
Trade receivables
Debtors 700 683
Bills Receivables 120 95
820 778
Prepare a consolidated Balance Sheet as at 31st March, 2022
Solution
Consolidated Balance Sheet of H Ltd. with its subsidiary S Ltd. as at 31st March, 2022
Particulars Note No. (Rs. in 000’s)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 4,000
(b) Reserves and Surplus 2 3,063
(2) Minority Interest (W.N.6) 1,560
(3) Current Liabilities
Trade payables 3 1,118
Short term provisions 4 482
Total 10,223
II. Assets
(1) Non-current assets
PPE 5 5,904
(2) Current assets
(a) Inventories 6 1,759

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(b) Trade receivables 7 1,598

(c) Cash and cash equivalents 8 512
(d) Short term loans and advances 9 450
Total 10,223

Notes to Accounts
(Rs. in 000’s) (Rs. in 000’s)
1. Share Capital
Authorised share capital
5 lakhs equity shares of Rs. 10 each 5,000
Issued, Subscribed and Paid up
4 lakhs equity shares of Rs. 10 each fully paid 4,000
2. Reserves and surplus
Capital Reserve (Note 5) 679.8
General Reserve 928
Profit and Loss Account:
H Ltd. Rs. 1,305
Add: Share in S Ltd Rs. 340.20
Rs.
1,645.20
Less: Dividend wrongly credited Rs. (180)
Rs.
1,465.20
Less: Unrealised profit (50 X 1/5) Rs. (10) 1,455.20 3,063
3. Trade payables
H Ltd. 611
S Ltd. 507 1,118
4. Short –term provisions
Provision for Taxation H Ltd. Rs. 220
S Ltd. Rs. 180 400
Other Provisions H Ltd Rs. 65
S Ltd. Rs. 17 82 482
5. PPE
Plant and Machinery
H Ltd. Rs. 2,541
S Ltd. Rs. 2,450 4,991
Furniture and fittings
H Ltd. Rs. 615
S Ltd. Rs. 298 913 5,904
6. Inventories
Inventory H Ltd. Rs. 983
S Ltd. Rs. 786 1,769
Less: Unrealised profit (Rs. 50 x 1/5) (10) 1,759
7. Trade receivables
H Ltd. 820
S Ltd. 778 1,598
8. Cash and cash equivalents

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Cash and Bank Balances H Ltd 410

S Ltd. 102 512
9. Short term loans and advances
Sundry Advances H Ltd. 260
S Ltd. 190 450

Working Notes:
Share holding pattern
Particulars Number of % of holding
Shares
a. S Ltd.
(i) Purchased on 01.04.2021 90,000
(ii) Bonus Issue (90,000/5 x 3) 54,000
Total 1,44,000 60%
(1,44,000 /2,40,000*x 100)
b. Minority Interest 96,000 40%

*2,40,000 is after issue of bonus shares as per balance sheet as at 31.3.2022

1. S Ltd. General Reserve

(Rs. in 000) (Rs. in 000)
To Bonus to equity shareholders 900 By Balance b/d 1,500
(2,400/8 x 3)
To Balance c/d 690 By Profit and Loss A/c 90
(Balancing figure)
1,590 1,590
2. S Ltd.’s Profit and Loss Account
(Rs. in (Rs. in 000)
000)
To General Reserve 90 By Balance b/d 633
To Dividend paid on 14.7.2021 300 By Net Profit for the
(1,500/100 x 20) year (Bal. fig.) 567*
To Balance c/d 810
1,200 1,200
* Out of Rs. 5,67,000 profit for the year, Rs. 90,000 has been transferred to reserves by S Ltd.
3. Distribution of Revenue Profits
Rs. in ’000
Revenue Profit as above 567.00
Share of H Ltd. (60%) 340.20
Share of Minority shareholders (567– 340.20) 226.80
4. Computation of Capital Profits
Rs. in 000 Rs. in 000
General Reserve on the date of acquisition 1,500
Less: Bonus issue of shares (900)
600
Profit and Loss Account balance on the date of acquisition 633
Less: Dividends paid (300) 333
933

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Share of H Ltd. (60%) 559.80

Share of Minority shareholders 373.20
5. Computation of Capital Reserve
Rs. in ’000
60% of share capital of S Ltd. 1,440
Add: Share of H Ltd. in the capital profits as in W.N. (4) 559.80
1,999.80
Less: Investments in S Ltd. 1,500
Less: Dividends received out of pre- acquisition profits Rs. 300/100 x 60 (180) (1,320)
679.80
6. Calculation of Minority Interest
Rs. in ’000
40% of share capital of S Ltd. 960.00
Add: Share of Revenue Profits (Note 3) 226.80
Share of Capital Profits (Note 4) 373.20
1,560.00

QUESTION 149)
The Summarised Balance Sheet of X Ltd. and its subsidiary Y Ltd.
as on 31st March, 2017 are as follows:
Particulars Amounts as at 31st March, 2017
X Ltd. Y Ltd.
(Rs in lakhs) (Rs in lakhs)
LIABILITIES
Share Capital:
Authorised 20,000 8,000
Issues and subscribed:
Equity share of Rs. 10 each, fully paid up 15,000 6,000
15% preference shares of Rs. 10 each, fully paid up 4,000 1,000
General Reserves 2,500 1,450
Profit & Loss Account 2,750 1,250
Trade payables 1,646 1,027
25,896 10,727
ASSESTS
Land & Building 3,550 1,510
Plant & Machinery 5,275 3,600
Furniture & Fittings 1,945 655
Investment in Y Ltd.: 450 Lakh Equity share in Y Ltd. purchased on 6,800
1st April, 2016
Inventory 4,142 2,520
Trade Receivables 3,010 1,882
Cash and Bank Balance 1,174 560
25,896 10,727
The following information is also given to you:
(a) 10% dividend on Equity shares was declared by Y Ltd. on 31st March, 2016 for the year ended 31st March,
2016. X Ltd. credited the dividend received to its Profit & Loss Account.
(b) Credit Balance of Profit & Loss account of Y Ltd. as on 1st April, 2016 was Rs 650 Lakhs.

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(c) General Reserve of Y Ltd. stood at same Rs 1,450 Lakhs as on 1st April, 2016.
(d) Y Ltd.’s Plant & machinery showed a balance of Rs 4,000 Lakh on 1st April 2016. At the time of purchase of
shares in Y Ltd., X Ltd. revalued Y’s Ltd. Plant & Machinery upward by Rs 1,000 Lakh.
(e) Included in Trade Payables of Y Ltd. are Rs 50 Lakh for goods supplied by X Ltd.
(f) On 31st March, 2017, Y’s ltd. inventory included goods for Rs 150 lakhs which it had purchased from X Ltd. X
Ltd. sold goods to Y Ltd. at cost plus 25%.
You are required to prepare a Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2017
giving working notes.
SOLUTION
Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd.as on 31st March, 2017
Particulars Note No. Rs in lakhs
I Equity and Liabilities
1. Shareholders’ Funds
(a) Share Capital 1 19,000
(b) Reserves and Surplus 2 5,620
2. Minority interest 3 3,400
3. Current Liabilities
(a) Trade payables 4 2,623
Total 30,643
II Assets
1 Non-Current Assets
Fixed Assets
(i) Tangible Assets 5 17,435
2 Current Assets
(a) Inventories 6 6,632
(b) Trade Receivables 7 4,842
(c) Cash and Cash equivalents 8 1,734
Total 30,643

Notes to Accounts
Rs in lakhs
1. Share Capital
Issued, Subscribed and Paid up (1,500 lakh Equity Shares of Rs 10 each fully paid 15,000
up)
400 lakh Preference Shares of Rs 10 each fully paid up 4,000
19,000
2. Reserves and Surplus
Credit Balance of Profit & Loss Account 2,750
Less: Capital Receipt wrongly credited (Dividend @ 10% on Rs 4500 Lakh Equity 450
Shares)
2,300
Add: Share in Y Ltd. Revenue Profit (Working Note i) 825
3,125
Less: Unrealised Profit (Working Note iv) 30 3,095
Capital Reserve (Working Note iii) 25
General Reserve 2,500 2,525
5,620
3. Minority interest
100 Lakh Preference Shares of Rs 10 fully paid up 1,000

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150 Lakh Equity Shares of Rs10 each fully paid up 1,500 2,500
Share in Revenue Profits (Working Note i) 275
Share in Capital Profit (working Note ii) 625 900
3,400
4. Trade payables
X Ltd. 1,646
Y Ltd. 1,027
2,673
Less: Mutual owing 50 2,623
5. Tangible Assets
Land & Building
X Ltd. 3,550
Y Ltd 1,510 5,060
Plant & Machinery
X Ltd. 5,275
Y Ltd (Working note v) 4,500 9,775
Furniture & Fixtures
X Ltd. 1,945
Y Ltd 655 2,600
17,435
6. Inventories
X Ltd. 4,142
Y Ltd 2,520
6,662
Less: Unrealized Profit (30) 6,632
7. Trade Receivables
X Ltd. 3,010
Y Ltd 1,882
4,892
Less: Mutual Owing 50 4,842
8. Cash & cash Equivalents
X Ltd. 1,174
Y Ltd 560 1,734

Working Notes
(i) Calculation of Revenue Profits
Y’s Ltd Profit & Loss Account
Rs in lakh Rs in lakh
To Equity Dividend By Balance b/d 650
10 % of 6,000 lakh 600 By Net profit for the year (Bal Fig.) 1,200
To balance c/d 1,250
1,850 1,850

Depreciation provided on Plant & Machinery

Balance as on 1st April, 2016 4,000
Less Balance as 31st March 2017 3,600
400
Hence rate of Depreciation = 400/4000 x 100 10%
Net Profit for the year ended 31st March 2017 1,200

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Less: Additional Depreciation 100

Revenue Profit 1,100
X Ltd.’s share- 1100 x 450/600 825
Y Ltd.’s share = 1100 x150/600 275

(ii) Calculation of Capital Profits

Profit & Loss Balance as on 1st April, 2016 650
Less: Dividend Paid 600
50
Add: General Reserve as on 1st April, 2016 1,450
Add: Profit on Revaluation of Plant & machinery 1,000
Capital Profit 2,500
X Ltd.’s Share in Capital Profit = 2,500 x 450/600 1,875
Y Ltd.’s Share in Capital Profit = 2,500 x 150/600 625

(iii) Calculation of Capital Reserve

Paid up value of 450 Lakh equity shares 4,500
Add: Share in Capital Profits 1,875
6,375
Amount Paid to acquire the 450 Lakh Equity Shares 6,800
Less: Dividend received out of Pre acquisition profits 450
6,350
Capital Reserve = 6,375-6,350 25

(iv) Unrealised Profit

Rs 150 Lakh x 25/125* = 30 lakh

(v) Plant & Machinery of Y Ltd.

Balance as on 31st March, 2017 3,600
Add: Addition due to revaluation 1,000
Less: Depreciation on additional Value of Plant & Machinery @ 10 % 100 900
4,500

* Rs 150 lakh considered as cost to Y ltd.

QUESTION 150)
Variety Ltd. holds 46% of the paid-up share capital of VR Ltd. The shares were acquired at a market
price of ₹ 17 per share. The balance of shares of VR Ltd. are held by a foreign collaborating company. A
memorandum of understanding has been entered into with the foreign company providing for the
following:
(a) The shares held by the foreign company will be sold to Variety Ltd. The price per share will be calculated by
capitalising the yield at 15%. Yield, for this purpose, would mean 40% of the average of pre-tax profits for the
last 3 years, which were ₹ 30 lakhs, ₹ 40 lakhs and ₹ 65 lakhs.
(b) The actual cost of the shares to the foreign company was ₹ 5,40,000 only. The profit that would accrue to them
would be taxable at an average rate of 30%. The tax payable will be deducted from the proceeds and Variety Ltd.
will pay it to the Government.
(c) Out of the net consideration, 50% would be remitted to the foreign company immediately and the balance will

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be an unsecured loan repayable after two years.

The above agreement was approved by all concerned for being given effect to on 1.4.20X1. The total assets of VR Ltd.
as on 31st March, 20X1 was ₹ 1,00,00,000. It was decided to write down Property, Plant and Equipment by ₹
1,75,000. Current liabilities of VR Ltd. as on the same date were ₹ 20,00,000. The paid-up share capital of VR Ltd. was
₹ 20,00,000 divided into 2,00,000 equity shares of ₹ 10 each.
Find out goodwill/capital reserve to Variety Ltd. on acquiring wholly the shares of VR Ltd.
SOLUTION
1. Computation of Purchase Consideration
(a) Yield of VR Ltd. {(40/100 x [(30+40+65)/3)]} ₹ 18 lakhs
(b) Price per share of VR Ltd.
Capitalized Yield: (18 lakhs/0.15) ₹ 120 lakhs
No. of Shares 2 lakhs
Therefore, Price per share ₹ 60
(C) Purchase Consideration for 54% shares in VR Ltd. 2 ₹ 64.80 lakhs
lakh shares x 54% x ₹ 60 per shares
(d) Discharge of Purchase Consideration:
Tax at source (₹ 64.80 lakhs - ₹ 5.40 lakhs) x 30/100 ₹ 17.82 lakhs
50% of Purchase Consideration (net of tax) in cash (₹ ₹ 23.49 lakhs
(64.80-17.82) x 50%)
Balance – Unsecured Loan ₹ 23.49 lakhs

2. Goodwill / Capital Reserve to Variety Ltd.

₹ in lakhs
Total Assets 100.00
Less: Reduction in Value of Property, Plant and Equipment (1.75)
98.25
Less: Current Liabilities (20.00)
Net Assets of VR Ltd. on Date of Acquisition 78.25
Purchase Consideration: 54% purchased from Foreign Co. 64.80
Investment: 46% existing stake 15.64 (80.44)
Goodwill on Date of Acquisition 2.19

QUESTION 151)
The Trial Balances of X Limited and Y Limited as on 31 March, 2021 were as under:
st

X Limited (Rs. In Y Limited (Rs. In

000) 000)
Dr. Cr. Dr. Cr.
Equity Share capital (Share of Rs. 100 2,000 400
each)
7% Preference share capital - 400
Reserves 600 200
6% Debentures 400 400
Trade Receivables/Trade Payables 160 180 100 120
Profit & Loss A/c balance 40 30
Purchases /Sales 1,000 1,800 1,200 1,900
Wages and Salaries 200 300
Debenture Interest 24 24

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General Expenses 160 7 120

Preference share dividend up to 14
30.09.2020
Inventory (as on 31.03.2021) 200 100
Cash at Bank 27 12
Investment in Y Limited 1,056 -
Fixed Assets 2,200 1,580
Total 5,027 5,027 3,450 3,450
● Investment in Y Limited was acquired on 1 July, 2020 and consisted of 80% of Equity Share Capital and 50% of
st

Preference Share Capital.

● After acquiring control over Y Limited, X Limited supplied to Y Limited goods at cost plus 25%, the total invoice value of such
goods being Rs. 1,20,000, one fourth of such goods were still lying-in inventory at the end of the year.
● Depreciation to be charged @ 10% in X Limited and @ 15% in Y Limited on Fixed Assets.
You are required to prepare the Consolidated Statement of Profit and Loss for the year ended on 31st March, 2021
SOLUTION
Consolidated Statement of Profit & Loss Account of X Ltd. and Y Ltd.
for the year ended 31st March, 2021
Particulars Note No. Rs.
I. Revenue from operations 1 35,80,000
II. Total revenue 35,80,000
III. Expenses
Cost of Material purchased/Consumed 2 20,80,000
Changes of Inventories of finished goods -
Employee benefit expense 3 5,00,000
Finance cost 4 48,000
Depreciation and amortization expense 5 4,57,000
Other expenses 6 2,80,000
Total expenses 33,65,000
IV. Profit before Tax (II-III) 2,15,000
Profit transferred to Consolidated Balance Sheet
Profit After Tax 2,15,000
Preference dividend 7,000
Preference dividend payable 7,000 (14,000)
2,01,000
Share in pre-acquisition loss (WN 3) 1,800
Share of Minority interest in losses (WN 1) 1,800
Less: Investment Account- dividend for 3 months (prior to acquisition) (3,500)
Inventory reserve (WN 2) (6,000)
Profit to be transferred to consolidated balance sheet 1,95,100

Notes to Accounts
Rs. Rs.
1 Revenue from Operations
X Ltd. 18,00,000
Y Ltd. 19,00,000
Total 37,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 35,80,000

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2 Cost of Materials
Purchased/Consumed
X Ltd. 10,00,000
Y Ltd. 12,00,000
Total 22,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 20,80,000
3 Employee benefit and expenses
Wages and salaries
H Ltd. 2,00,000
S Ltd. 3,00,000 5,00,000
4 Finance cost
Interest
H Ltd. 24,000
S Ltd. 24,000 48,000
5 Depreciation
H Ltd. 2,20,000
S Ltd. 2,37,000 4,57,000
6 Other expenses
H Ltd. 1,60,000
S Ltd. 1,20,000 2,80,000

Working Notes:
1. Profit of Subsidiary Rs.
Revenue from Operations 19,00,000
Less: Expenses
Cost of Material purchased/Consumed 12,00,000
Changes of Inventories of finished -
goods
Employee benefit expense 3,00,000
Finance cost 24,000
Depreciation and amortization expense 2,37,000
Other expenses 1,20,000
Total expenses (18,81,000)
Profit Before Tax 19,000
Less: Preference Dividend 14,000
Less: Preference Dividend Payable 14,000 (28,000)
Profit available for shareholders (9,000)
Minority Share (20% of loss Rs. 9,000) (1,800)

0. Inventory reserve = 120,0004 x 25125=Rs. 6,000

1. Pre-acquisition loss = 80% of 3 month’s profit up to 30th June,2020 i.e. 80 % of ¼ of loss Rs. 9,000. Hence,
pre-acquisition loss = Rs. 1,800
2. Investment account includes Preference dividend for 3 months prior to acquisition i.e. Rs. 4,00,000 x 50% x
7% x 1/4 = Rs. 3,500

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AMALGAMATION

1. BASICS
(1) What’s the Difference between Absorption & Merger?
(a) Absorption (also called Take Over or Acquisition) can be of two types:
(i) Business Takeover/Acquisition: A Ltd. absorbs B Ltd. i.e. taken over the Business of B
Ltd., Here B Ltd. is getting liquidated.
(ii) Takeover through Shares (Voting Rights): A Ltd. acquired Control over the Business of B
Ltd. by Purchasing more than 50% Equity Shares of B Ltd. A Ltd. is called Holding co. & B
Ltd. is called Subsidiary co. (No company is getting liquidated)
(b) Merger takes place when two companies Merge their businesses and New Company is
creating which is controlled by the Management of both the Companies. For Example, A Ltd.
and B Ltd. Merged and form a New Company AB Ltd. in which Directors of both the Companies
have common decision making.

(2) The entity who acquires or takes over the Business is called Transferee (Buyer) Company.

(3) The entity whose Business is getting Taken over is called Transferor (Seller) Company.

(4) Transferee company gets Net Assets (Assets and Liabilities) of Transferor company as a result of
Acquisition/Absorption.

(5) Transferee company pay the Consideration against business taken over.
Here A Ltd. shall pay consideration (PC) against acquiring of Net Asset of B Ltd. to the shareholders of
B Ltd. in the form of:
● Cash
● Equity Shares
● Preference shares.
● Debenture etc.

2. DIFFERENCE BETWEEN AMALGAMATION, ABSORPTION AND EXTERNAL

RECONSTRUCTION
Basis Amalgamation Absorption External Reconstruction
Meaning Two or more companies are In this case an existing In this case, a newly formed
wound up and a new company takes over the company takes over the
company is formed to take business of one or more business of an existing
over their business. existing companies. company.
Minimum number At least three companies are At least two Companies are Only two Companies are
of Companies involved. involved. involved.
involved

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Number of new Only one resultant company No new resultant company is Only one resultant company
resultant is formed. Two companies formed. is formed. Under this case a
companies are wound up to form a single newly formed company
resultant company. takes over the business of an
existing company.
Objective Amalgamation is done to cut Absorption is done to cut External reconstruction is
competition & reap the competition & reap the done to reorganize the
economies in large scale. economies in large scale. financial structure of the
company.
Example Jai Ltd. and Ravi Ltd. Jai Ltd. takes over the Jai Ltd. is formed to take over
amalgamate to form Vishal business of another existing the business of an existing
Ltd. company Ravi Ltd. company Ravi Ltd.

3. TYPES OF AMALGAMATION (AS 14)

1) For the Purpose of Accounting, Amalgamation is classified into Two Types: (for Transferee Company)
(a) Amalgamation in the nature of Purchase: Here one Entity has absorbed the business of other
Entity i.e., One Entity is able to control Another Entity (A Ltd. + B Ltd. = A Ltd.)
(b) Amalgamation in the nature of Merger: It is an amalgamation where there is a genuine pooling
not merely of assets and liabilities of the transferor and transferee companies but also of the
shareholders’ interests and of the businesses of the companies. All Entities are agreed to work
together in the name of new entity. No one is dominating to each other.
Note: The accounting treatment of such amalgamations in the nature of Merger should ensure that the
resultant figures of assets, liabilities, capital and reserves more or less represent the sum of the
respective figures of the transferor and transferee companies.

2) According to AS 14, on satisfaction of all the following conditions, then only Amalgamation will be
treated as Nature of Merger:
(a) All the assets and liabilities of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
(Sab ki Sab A/L, Matlab kuch bhi nai chodne ka)
(b) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company become equity shareholders of the transferee company by virtue of the
amalgamation.
(Above 90% should not include the shares already held by transferee company)
(c) The consideration to Equity Shareholders of Transferor Company is discharged by the issue of
equity shares in the transferee company, except that cash may be paid in respect of any
fractional shares.
(Owner banao sabko)
(d) The business of the transferor company is intended to be carried on, after the amalgamation,
by the transferee company.
(Purana Business continue karna jaruri hai)
(e) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
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(Arry bhai same book values pe hi record karne ka hai A/L ko)
If any one or more of the above conditions are not satisfied in an amalgamation, such amalgamation is called
amalgamation in the nature of purchase.

EXAMPLE 1:
A Ltd. and B Ltd. decided to amalgamate and form a New Company AB Ltd.
Balance Sheet (Extract)
A B
Fixed Assets 50 Lacs 40 Lacs
Current Assets 30 Lacs 25 Lacs
Liabilities 27 Lacs 18 Lacs

● Market Value of PPE 66 Lacs (A Ltd.) & 47 Lacs (B Ltd)

● Market Value of Current Asset are same as Book Value
● Fair value of Liabilities are same as Book Value.
● Purchased consideration (Market Value) = 69 Lacs (for A Ltd.) and 54 Lacs for B Ltd.
● It was decided to record Net Assets at Fair Value
PPE a/c Dr. 113
Current Asset a/c Dr. 55
To Liability A/c 45
To Purchase Consideration A/c* 123
Conclusion – This is not Merger.
Note: Purchase consideration is always based on Market Values.

EXAMPLE 2:
A Ltd. has 1,00,000 no. Outstanding, B Ltd is taking over A Ltd.
B Ltd. is also holding 15,000 shares in A Ltd. Other Share Holders holding 75,000 no. are giving their consent in favor of
Amalgamation.
Total no of Outstanding Shares = 1,00,000 No.
(a) Shares already Held by B Ltd. = 15,000 No.
(b) Others Shareholders holding = 85,000 No.
Out of which, shareholders holding 75,000 No. of shares gave their Consent, which means 88.24% (75000/85,000 x
100). Hence, it’s not a Merger.

4. PURCHASE CONSIDERATION
PC includes PC does not include
Payment in any form such as- Any payment made by transferee company to
● Shares or Other Securities the Debenture holders or Creditors of Transferor
● Cash company.
● Other Assets etc.
To the Shareholders of Transferor company to acquire the
Business.

PC shall always be measured at Fair Value of Shares/Other

Securities issued/Assets Given.

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But if Fair Value (Market Values) are not given then we can
take Book Values of Assets.

PC also includes any additional payment which is probable

in future and can be estimated reasonably.

CALCULATION OF PURCHASE CONSIDERATION

Purchase Consideration can be calculated in different ways. However, the most methods are as under:
(a) Exchange Ratio Method
(b) Net Assets Method
Exchange Ratio Method: Purchase consideration based on Net Asset value:
Here we need Exchange Ratio (Swap Ratio) for ● If Some Asset/Liabilities are not taken over then we
calculation of PC. Exchange ratio is a ratio for exchange shall not consider such Asset or Liabilities while
of No. of Shares. It can be given in the question. calculating Purchase consideration
If it is missing in question, then we shall use Deemed (Refer Example 6)
Exchange Ratio as under: ● If there are any unrecorded Asset/Liabilities they may
Fair Value of Share of Transferor ÷ Fair Value of Share also be taken over & to be considered in calculation of
of Transferee Purchase Consideration.
(Refer Example 6)
The above Fair values can be Intrinsic Values, Market If Goodwill value is given in the Question then Goodwill
Values or any other values given in the question. shall also be taken for the purpose of calculation of
In absence of any Information, we will use Intrinsic Purchase Consideration.
Values. (Refer Example 8)
● Sometimes Question asks to calculate Purchase
consideration based on Intrinsic Values, If so then we
shall assume that all Asset & all liabilities are being
taken over.
● How to Calculate Intrinsic Value: (Refer Q.204)
Market Value of All Assets
(+) Goodwill if Any
(-) All Liabilities
(-) PC to PSH
= Net Assets for Equity Shareholders ÷ No of Equity
Shares

EXAMPLE 3: - (Purchase Consideration based as Exchange Ratio)

A Ltd. (Transferee) acquired business of B Ltd. (Transferor)
B Ltd. has total Outstanding equity shares of 2,00,000 no.
A Ltd. offered 3 shares of its own Company in exchange of every 2 shares of B Ltd. @ Market Price of 25/- per share

SOLUTION:
Calculation of Purchased Share
Payment to Payment in Working Amount
Equity Share Holder of B Equity Shares of A Ltd. 2,00,000/2 x 3 75,00,000/-
Ltd. 3,00,000 x 25/-
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EXAMPLE 4: (Purchased Consideration as Exchange of Shares)

B Ltd.
Equity Shares 1,50,000 no.
Preference Shares 80,000 no.
A ltd. is taking over Business of B Ltd Exchange Ratio is 5:4 for equity & 3:4 for Preference shares. Market Price per
share of A: - Equity Share - 60/-, Preference Share - 20/-
SOLUTION:
Payment to Payment in Working Amount
Equity Share Holders of B Ltd. Equity Shares of A Ltd. (1,50,000/4X5) x 60/- 1,12,50,000
Preference Share Holders of B Ltd. Preference Share A Ltd. (80,000/4X3) x 20/- 12,00,000
Total Purchase Consideration 1,24,50,000

EXAMPLE 5:
B Ltd. is Transferor having Outstanding equity shares are 3,00,000 No.
A Ltd. taking over Business of B Ltd. by issuing 4 shares for every 7 shares of B. Market Price Per share of A is 30/-
SOLUTION:
Payment to Payment in Working Amount
Equity Shareholders of B Ltd. Equity Shares of A Ltd. 3,00,000 x 4/7 x 30 51,42,840/-
Equity Shareholders of B Ltd. Cash 0.571 x 30/- 17/-
51,42,857/-

EXAMPLE 6: (PC based on Assets/Liabilities Value)

Balance Sheet of Q Ltd.
Equity Share Capital (10/-) 10,00,000
Reserves & Surplus 12,00,000
Loan 17,50,000
Current Liabilities 20,50,000
60,00,000
Building 30,00,000
Plant and Machinery 16,00,000
Inventory 4,00,000
Debtors 6,50,000
Cash and Bank 3,50,000
60,00,000
P Ltd. is taking over the Business of Q Ltd. P Ltd. will taken over all Assets and Liabilities except Cash/Bank subject to
following measurements:
a. Building at 25% higher than book value
b. P&M at 70% of book value
c. Debtors at Same value subject to 5% Provision for doubtful debts
d. There is an unrecorded tax liability of Q Ltd. of 85000/-, it is accepted by P Ltd.
Calculate Purchase Consideration
SOLUTION
Calculation of PC
Particulars Amount
Building (at Agreed Value) 37,50,000
Plant and Machinery (at agreed value) 11,20,000

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Inventory 4,00,000
Debtors 6,50,000
Less:
Provision for Doubtful debts 32,500
Loans 17,50,000
Current Liability 20,50,000
Tax Liability 85,000
Total Purchase 20,02,500

EXAMPLE 7:
In above Example 6, Purchase Consideration to be discharge in form of Equity Shares of P Ltd. having MP per share
25/- each, Calculate No. of Equity Shares and Pass Journal Entries for Acquisition.
SOLUTION:
No. of shares to be Issued as Purchase Consideration = 20,02,500 ÷ 25 = 80,100 No.
Business Purchase Dr. 20,02,500
To Liquidator of Q Ltd. 20,02,500
Building A/c Dr. 37,50,000
Plant & Machinery A/c Dr. 11,20,000
Inventory A/c Dr. 4,00,000
Debtors A/c Dr. 6,50,000
To Provision for doubtful debts A/c 32,500
To Loan A/c 17,50,000
To Current Liabilities A/c 20,50,000
To Tax Liability A/c 85,000
To Business Purchase A/c 20,02,500
Liquidator of Q A/c Dr. 20,02,500
To Equity Share Capital A/c 8,01,000
To Security Premium A/c 12,01,500

EXAMPLE 8: (PC based on Intrinsic Value or Market Value per share)

Balance Sheet of Transferor as on 31/3/2024
Equity Share Capital (10/-) 12,00,000
Reserves & Surplus 7,00,000
Liabilities 21,00,000
40,00,000
Non-Current Asset (Tangible) 25,00,000
Current Asset 15,00,000
40,00,000
● Goodwill is valued at 6,00,000
● Market Value of NCA = 28,50,000
● Current Assets & Liabilities are at their Proper Value.
● Purchase Consideration shall be discharged based as Intrinsic Value of Transferor & Transferee.
● Intrinsic Value per Share of Transferee is 30/-
SOLUTION:
Intrinsic Value Calculation
Market Value of NCA 28,50,000
Value of Current Asset 15,00,000
Value of Goodwill 6,00,000
(-) Liabilities (21,00,000)
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Net Assets for Equity share Holders 28,50,000

(÷) No of Equity Shares 1,20,000 no.
Intrinsic Value Per share (Transferor) 23.75/-
Intrinsic Value per Share (Transferee) 30/-(given)

Payment to Payment in Working Amount

Equity Shareholders of Equity Share in Transferee 1,20,000 X 23.75 / 30 28,50,000
Transferor 95,000 No. x 30/-

EXAMPLE 9: (PC based on Intrinsic Value)

Balance Sheet of Transferor as on 31/3/24
Equity Share Capital (10/-) 12,00,000
Reserves & Surplus 7,00,000
Liabilities 21,00,000
Preference Share Capital (100/-) 10,00,000
50,00,000
Non-Current Asset (Tangible) 30,00,000
Current Asset 20,00,000
50,00,000
(1) Goodwill is values at 8,50,000
(2) Intrinsic values of Transferee = 50/- Per Share
(3) Preference Share Holders of Transferor will get new shares of Transferee in the ratio of 3:2 of 100 each.
Calculate Total Purchase Consideration
SOLUTION:
Working Note: Calculation of Intrinsic value of Transferor
Market Value Non-Current Asset 30,00,000
Value of Current Asset 20,00,000
Goodwill 8,50,000
(-) Liabilities (21,00,000)
(-) Purchase Consideration to Preference Share Holder (15,00,000)
Net Asset available for Equity Share Holder 22,50,000
Intrinsic value = 22,50,000/1,20,000 = 18.75

Working Note 2:
Payment to Payment in Working Amount
Preference Share Holder In Preference share of 10,000/2 x 3 = 15,000 15,00,000
of Transferor Transferee x 100/-
Equity Share of Transferor Equity Shares of Transferee 1,20,000 x 18.75/50 22,50,000
= 45,000 x 50/-
37,50,000

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5. PAYMENT TO DEBENTURE HOLDERS

Purchase Consideration is payable to Equity Shareholders & Preference Shareholders only. Anything payable to
Debenture holders or any other party is not Purchase Consideration.

EXAMPLE 10: (Discharge of Purchased Consideration)

B/S (extract) of Transferor
Equity Share Capital (10/-) 2,00,000 no. 20,00,000
9% Preference Share Capital (100/-) 2,500 no. 2,50,000
11% Debenture (100/-) 15,00,000
Transferee shall discharge following:
(1) Cash ₹ 3,00,000 to Equity Share Holders
(2) 3 Equity Share against every 10 equity share of Transferor. Market Value Per share of Transferee = 18/-
(3) New 12% Debenture to given to Equity shareholders of Transferor of 5,00,000/-
(4) Preference share of Transferor will get equal no of preference share in Transferee to be issued at 10% premium
(Face Value 100/-)
(5) 11% Debenture of Transferor will get new 12% Debenture of Transferee at a value at which same Interest
Amount should be received.
Calculate Purchased Consideration
SOLUTION:
Calculation Purchased Consideration
Payment to Payment In Working Amount
(a) Equity Shareholders (i) Cash - 3,00,000
(ii) Equity Shares 2,00,000/10 x 3 10,80,0000
(iii) 12:1 Debenture -
(b) Preference Shareholders Preference Share 2,500 x 110 2,75,000
Total 21,55,000
Payment to Debenture holders: (Not a part of PC)
Issue of new 12% Debenture = Old Interest amount/New Rate = 1,65,000÷12% = 13,75,000

EXAMPLE 11:
Transferor has an outstanding 7% Debenture of Rs. 12,00,000. Transferee will settle these Debenture at 20% Premium
by Issue of New 8% Debenture at 25% premium.
SOLUTION:
Settlement Value to Debenture holders of Trasferor = 12,00,000 + 20% = 14,40,000 (Payable Value)
No. of New 8% Debenture to be issue against settlement = 14,40,000/125 = 11,520 no.
2nd Entry
Asset A/c Dr.
To Debenture Holders 14,40,000
(Payable value always)
4th Entry (Settlement)
Debenture Holders Dr. 14,40,000
To 8% Debenture 11,52,000
To Securities Premium 2,88,000

EXAMPLE 12:
9% Debenture of 10,00,000 to be settled at 20% premium, by issue of new 10% Debenture to be issued at 25%
Discount.

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SOLUTION:
Payable value = 10,00,000 + 20% = 12,00,000
New 10% Debenture no. against settlement = 12,00,000 ÷ 75 = 16,000 no.
Debenture holders A/c Dr. 12,00,000
Discount A/c Dr. 4,00,000
To 10% Debentures 16,00,000

EXAMPLE 13:
6% Debenture of ₹ 7,20,000 to be discharged at 10% Discount by issue of equity share @ 12/- per share. Face Value =
10/-
SOLUTION:
Payable Value to Debenture holders = 72,00,00 – 10% = 6,48,000
New Equity No. to be settled = 6,48,000/12 = 54,000

Debenture Holder Dr. 6,48,000

To Equity Share Capital 5,40,000
To Securities Premium 1,08,000

6. DIFFERENCE BETWEEN AMALGAMATION IN THE NATURE OF MERGER AND

AMALGAMATION IN THE NATURE OF PURCHASE.

Best of Distinction Amalgamation in the Nature of Merger Amalgamation in the Nature of

Purchase
a) Transfer of Assets There is transfer of all assets & liabilities. There need not be transfer for all assets
and Liabilities & liabilities.
b) Shareholders of Equity shareholders holding 90% equity shares Equity shareholders need not become
transferor company in transferor company become shareholders shareholders of transferee company.
of transferee company.
c) Purchase Purchase consideration is discharged wholly Purchase consideration need not be
Consideration by issue of equity shares of transferee discharged wholly by issue of equity
company (except cash only for fractional shares.
shares)
d) Same Business The same business of the transferor The business of the transferor company
company is intended to be carried on by the need not be intended to be carried on by
transferee company. the transferee company.
e) Recording of The assets & liabilities taken over are The assets & liabilities taken over are
Assets & Liabilities recorded at their existing carrying amounts recorded at their existing carrying
except where adjustment is required to amounts or the basis of their fair
ensure uniformity of accounting policies. values.
f) Method of Journal entries for recording the merger are Journal entries for recording the
Accounting passed by pooling of interest method. purchase of business are passed by
purchase method.

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All Reserves & Surplus of Transferor are also No R&S are required to be maintained
taken up by Transferee. except Statutory Reserves EG.
Ex. GR, CR, P&L A/C, IAR , EPR, CRR, DRR, IAR/EPR
etc.

ACCOUNTING ENTRIES
In the Nature of Purchase In the Nature of Merger
(Purchase Method) (Pooling of Interest Method)
Business Purchase A/c (PC) Dr. Business Merger A/c (PC) Dr.
To Liq. of Transferor Co. A/c (PC) To Liq. of Transferor Co. A/c (PC)

Sundry Assets A/c (Agreed value) Dr. All Sundry Assets A/c (Book value) Dr.
Goodwill A/c (Bal. Fig) Dr. Gen. Res or P&L A/c (Bal. Fig) Dr.
To Liabilities A/c (Payable Value) To All Liabilities A/c (Payable Value)
To Business Purchases A/c To Business Merger A/c (PC)
To CR (Bal. Fig) To Reserves and Surplus (Book value)

Payment of PC: Payment of PC:

Liquidator A/c Dr. Liquidator A/c Dr.
To Cash A/c To Cash A/c
To Equity Share Capital A/c To Equity Share Capital A/c
To Pref. Share Capital A/c To Pref. Share Capital A/c
To Security Premium A/c To Security Premium A/c

Cancellation of Receivables and Payables Cancellation of Receivables and Payables

Payables A/c Dr. Payables A/c Dr.
To Receivables A/c To
Receivables A/c
For Payment of Liability:
Liability A/c (e.g., Debenture holder’s A/c) Dr. For Payment of Liability:
To Cash A/c Liability A/c (e.g., Debenture holder’s A/c) Dr.
To New Liability A/c To Cash A/c
(Debentures are taken over at agreed value and settled To New Liability A/c
by issue of new debentures in above entry) (Debentures are taken over at agreed value and settled by
issue of new debentures in above entry)
For Payment of Expenses/Unrecorded Liability:
CR / Goodwill A/c Dr. For Payment of Expenses/Unrecorded Liability:
To Cash A/c Gen. Res. or P&L A/c Dr.
(In balance sheet goodwill and CR should set off to To Cash A/c
show net figure)

For creation of Statutory Reserves:

Amalgamation Adjustment Reserve Dr. No Statutory reserve to be created separately, Since
To Statutory Reserves A/c they are already recorded in 2nd Entry above.
(Following are statutory reserves:
1. Invst. Allowance Res.
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2. Export Profit Res.

3. Foreign Project Res.
4. Tea Development Res.
5. Shipping Res.
6. Site Restoration Fund
*Amalg. Adjust. Reserve should be shown as a
separate line item under the head R & S

For Unrealised Profit:

Upstream Transaction:
Goodwill A/c Dr. For Unrealised Profit:
To Stock A/c Upstream and Downstream Transaction:
Downstream Transaction: General Reserve A/c Dr.
General Reserve A/c Dr. To Stock A/c
To Stock A/c
It is important to note that in case of Amalgamation in the nature of merger question may specify revalued
figures or Market values of Assets, such values would be used for the purpose of calculation of PC.

EXAMPLE 14: (Accounting for Transferee Books – Purchase Method) (Master Problem)
Balance Sheet as on 31/3/24
Particulars Transferee Transferor
Equity Share Capital (10/-) 12,00,000 8,00,000
9% Preference Share Capital (10/-) 8,00,000 -
8% Preference Share Capital (10/-) - 6,00,000
General Reserve 5,00,000 3,00,000
Profit & Loss A/c 3,50,000 2,50,000
Export Profit Reserve - 50,000
7% Debenture (100/-) 7,50,000 -
6% Debenture (100/-) - 6,00,000
Creditors 4,00,000 4,00,000
40,00,000 30,00,000
PPE 13,00,000 9,00,000
Investments 9,00,000 7,00,000
Inventory 10,00,000 7,00,000
Trade Receivables 5,00,000 6,00,000
Cash & Bank Balance 3,00,000 2,00,000
40,00,000 30,00,000
(1) 8% Preference Shareholders shall be given New 9% Preference Shares at 20% Increase in value (Shares to
be issued at Par)
(2) Purchased Consideration to Equity Share Holder shall be discharged as under:
Cash = 3,00,000
Equity Shares of Transferee in 5:4
(3) Market Value per share of Transferee is 28/-
(4) Market Value of PPE & Investments of Transferor are 11,50,000 & 6,20,000
(5) Trade Receivable shall be subject to a Provision on Doubtful Debts @2%
(6) 6% Debenture Holder will get new 7% Debenture at an adequate amount. So that Interest Amount would be
same
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(7) EPR to be maintained for 2 Years more years.

(8) There is unrecorded Liabilities of Transferor towards creditor for goods of ₹ 30,000 which is also assumed by
Transferee.
Required:
(a) Calculate Purchase Consideration.
(b) Pass Journal entries in the Books of Transferee.
(c) Prepare Balance Sheet after takeover of Transferee.
Assume Amalgamation in the nature of Purchase.
SOLUTION:
Working Note: – 1 Calculation of Purchase Consideration
Payment to Payment in Working Amount
Equity Shareholders Cash - 3,00,000
Equity Shareholders Equity shares of Transferee 80,000 X 5/4 28,00,000
Preference Shareholder 9% Preference Shares 6,00,000 + 20% 7,20,000
Total 38,20,000

Working Note-2 Settlement of 6% Debentures

● 6% Debenture of Transferor = 6,00,000
● Interest Amount @ 6% = 36,000/-
● New Debenture Interest Rate 7%
● Therefore, New Debenture Value = 36,000 ÷ 7%
● 7% Debenture = 5,14,286/- (Payable Value)

Important Facts (Not a Part of Solution in Exam)

a) All Assets and Liabilities to be Recorded.
b) Assets to be recorded at Market Value if given.
c) Provision for doubtful debts to be credited separately.
d) Export Profit Reserve (EPR) is not a liability therefore will not come under 2nd Entry of Assets/Liabilities taken over.

Journal entries (Books of Transferee)

Business Purchase A/c Dr. 38,20,000
To Liability of Transferor A/c 38,20,000
(Being Business taken over)
PPE A/c Dr. 11,50,000
Investment A/c Dr. 6,20,000
Inventory A/c Dr. 7,00,000
Trade Receivable Dr. 6,00,000
Cash & Bank Dr. 2,00,000
Goodwill A/c Dr. (BF) 15,06,286
To Provision for DD A/c 12,000
To Creditors A/c 4,30,000
To Debenture Holder of Transferor A/c 5,14,286
To Business Purchase A/c 38,20,000
(Being Assets & Liabilities are recognised & Goodwill
recorded
Liquidator of Transferor A/c Dr. 38,20,000
To 9% Preference Share Capital 7,20,000
To Cash A/c 3,00,000
To Equity Share Capital A/c 10,00,000
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To Securities Premium A/c 18,00,000

(Being Purchase Consideration Discharged)
Debenture Holder of Transferor A/c Dr. 5,14,286
To 7% Debenture A/c 5,14,286
(Being Outstanding Debenture are issued New with 7%
Interest)
Amalgamation Adjustable Reserve Dr. 50,000
To Expenses Profit Reserve 50,000
(Being EPR maintained)

Balance Sheet (after Amalgamation)

Shareholders Fund
(I) Share Capital 1 37,20,000
(II) Reserve & Surplus 2 26,50,000
Non-Current Liabilities
(I) Long Term Borrowings 3 12,64,286
Current Liability
(i) Trade Payable 4 8,30,000
84,64,286
Assets
Non-current Assets:
(a) PPE Tangible & Intangible 5 40,56,286
(b) Investment 6 15,20,000
Current Assets:
(a) Inventory 7 16,00,000
(b) Trade Receivable 8 10,88,000
(c) Cash & Cash equity 9 2,00,000
Total 84,64.286

Notes to Accounts:
Share Capital
(a) Equity Share Capital of 10/- each 12,00,000
+ Issue of Purchase consideration 10,00,000 22,00,000
(b) 9% Purchased Share Capital of 10/- each + Issue of 8,00,000
Purchase Consideration 72,00,000 15,20,000
37,20,000
Reserve & surplus 26,50,000
General Reserve 5,00,000
Profit & Loss 3,50,000
Securities Premium 18,00,000
EPR 50,000
(-) AAR (50,000)
Long TERM Borrowings 12,64,286
(a) 7 % Debenture 7,50,000
+ New Issue of 7% Debentures 5,14,286
Trade Payable 8,30,000
Creditor of Transferee 4,00,000
Creditors Recorded Transferor 4,30,000
PPE
(a) Tangible 13,00,000 24,00,000
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Transferee 11,00,000
Transferor
(b) Intangible
Goodwill 16,06,286
40,56,286
Investments
Transferee 9,00,000
Transferor 6,20,000 15,20,000
Inventory
Transferee 10,00,000
Transferor 6,00,000 16,00,000
Trade Receivable
Transferee 5,00,000
Transferor 6,00,000
(-) Provision (12,000) 10,88,000
Cash & Bank 2,00,000
Transferee 3,00,000
Transferor 2,00,000
(-) Purchase Consideration (3,00,000)

EXAMPLE 15: (Amalgamation in the nature of Merger)

Balance Sheet
X ltd. Y ltd.
Equity Share Capital (10/-) 15,00,000 12,00,000
General Reserve 3,00,000 2,00,000
Securities Premium 1,00,000 50,000
Revaluation Reserve 50,000 20,000
Liabilities 2,50,000 1,30,000
22,00,000 16,00,000
Property Plant & Equipment 9,00,000 7,00,000
Investments 4,00,000 2,00,000
Current Assets 9,00,000 7,00,000
22,00,000 16,00,000

(1) X Ltd. & Y Ltd. decided to merge their Business & form a New Company XY Ltd.
(2) XY Ltd. shall issue new equity share to Shareholders of X Ltd. & Y Ltd. at 10/- each (at Par)
(3) Exchange Ratio for issue of New shares is 4:5
Required:
(a) Calculate Purchase Consideration
(b) Journal entries in the books of XY Ltd.
SOLUTION:
WN 1 - Calculation of PC
(i) For Shareholders of X Ltd.
Equity Shares in XY Ltd. = 1,50,000/5X4 = 1,20,000 no.
PC Value = 1,20,000 X 10 = 12,00,000
(ii) For Share Holder of Y Ltd.
Equity Shares in XY Ltd. = 1,20,000/5X4
PC Value = 9,60,000

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Journal Entries in the Books of XY Ltd. (Transferee)

Business Purchase A/c Dr. 21,60,000
To Liquidator of X Ltd. A/c 12,00,000
To Liquidator of Y Ltd A/c 9,60,000
PPE A/c Dr. 16,00,000
Investment A/c Dr. 6,00,000
Current Asset A/c Dr. 16,00,000
To Liabilities 3,80,000
To Business Purchase 21,60,000
To Revaluation Reserve 70,000
To Securities Premium 1,50,000
To General Reserve (Bal. Fig.) 10,40,000
Liquidator of X Ltd. Dr. 12,00,000
Liquidator of Y Ltd. Dr. 9,60,000
To Equity Share Capital 21,60,000

Balance of XY Ltd.
Equity Share Capital 10/- each 21,60,000
General Reserve 10,40,000
Securities Premium 1,50,000
Revenue Reserve 70,000
Liabilities 3,80,000
38,00,000
PPE 16,00,000
Investment 6,00,000
Current Asset 16,00,000
38,00,000

EXAMPLE 16:
Same as Example 15 But Exchange Ratio is 9:8 for calculation of PC
Calculate Purchase Consideration & Pass Journal entries in the Books of XY Ltd. (Pooling of Interest Method)
SOLUTION:
WN 1 - Calculation of PC
For Shareholders of X Ltd.
Equity Shares in XY Ltd. = 1,50,000 x 9/8 = 1,68,750 no.
PC Value = 1,68,750 X 10 = 16,87,500
For Share Holder of Y Ltd.
Equity Shares in XY Ltd. = 1,20,000 x 9/8 = 1,35,000
PC Value = 1,35,000 X 10 = 13,50,000
PPE A/c Dr. 16,00,000
Investment A/c Dr. 6,00,000
Current Asset A/c Dr. 16,00,000
General Reserve (Bal. Fig.) Dr. 3,37,500
To Liabilities 3,80,000
To B/P 30,37,500
To Revaluation Reserve 70,000
To Securities Premium Reserve 1,50,000
To General Reserve 5,00,000

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7. Books of Transferor Company

1. Transfer all the Assets and Liabilities to Realisation A/c

2. EQ Share Capital, Reserves, Losses, Dividend Payable, Fict. Assets shall be transferred to ESH A/c
3. PSC is to be transferred to PSH A/c
4. Cash and Bank – If taken over then transfer it to Realisation A/c otherwise Make it separately
5. Raise PC in Credit side of Realisation A/c
6. Before closing Realisation A/c, close Pref. Share Holder A/c after discharging PC to them so that if there
remains any difference in PSH A/c it will be transferred to Realisation A/c
7. Close Realisation A/c, Balance of this account will be transferred to ESH A/c
8. Discharge PC (In the form of Cash and Shares) to ESH.

EXAMPLE 17:
In Above Example No. 15, Close the books of X Ltd.
SOLUTION:
Closing the Books of X Ltd.
Target = To Close All Assets Ledger Balance and all Liabilities Ledger Balance through Realization A/c
To Close Equity Share Capital and R&S Ledger through Equity Shareholders A/c

Realization A/c
Particular Amount Particular Amount
To PPE 9,00,000 By Liabilities 2,50,000
To Investment 4,00,000 By XY Ltd. (PC) 12,00,000
To Current Asset 9,00,000 By Equity Shareholders A/c (b/f Loss) 7,50,000

Equity Shareholders A/c

Particular Amount Particular Amount
To Realisation A/c (Loss) 7,50,000 By Equity Share Capital 15,00,000
To Equity Share of XY Ltd. 12,00,000 By General Reserve 3,00,000
(final settlement)
By Securities Premium Reserve 1,00,000
By Revaluation Reserve 50,000

For Purchase Consideration due (Receivable from XY Ltd.)

XY Ltd. A/c Dr. 12,00,000
To Realization 12,00,000
For receiving Purchase Consideration
Equity Share of XY Ltd A/c Dr. 12,00,000
To XY Ltd 12,00,000
For Distributing Purchase consideration to Equity share Holder
Equity share Holders A/c Dr. 12,00,000
To equity shares of XY Ltd. 12,00,000

EXAMPLE 18: (Takeover of selected Asset & Liabilities)

Balance Sheet
A Ltd. B Ltd.
Equity Share Capital (10/- each) 10,00,000 7,00,000

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GR 3,00,000 4,00,000
Bank Loan 9,00,000 8,00,000
Creditors 4,00,000 3,00,000
26,00,000 22,00,000
Land & Building 8,00,000 6,00,000
Plant & Machinery 5,00,000 4,00,000
Investments 3,00,000 5,00,000
Goodwill 1,00,000 1,00,000
Debtors 6,00,000 5,00,000
Cash & Bank 3,00,000 1,00,000
26,00,000 22,00,000
(1) A Ltd acquired The Business of B except Creditors, Investment & Cash at Bank.
(2) Investments will be realised by B @ 10% above Book Value.
(3) Creditors to be paid Rs. 2,80,000 by B in full settlement.
(4) Liquidation expenses to be borne by B ₹ 1,00,000.
(5) Goodwill value of B is useless.
(6) Market Value of Land & Building of B = 9,00,000
Required:
(a) Calculate Purchased consideration (Purchased Consideration shall be discharged in form of Equity Shares @
30/- each)
(b) Close Books of B Ltd.
(c) Prepare B/s of A Ltd after Amalgamation.

SOLUTION:
Purchase Consideration Calculation
Land Building 9,00,000
Plant & Machinery 4,00,000
Debtors 5,00,000
(-) Bank Loan (8,00,000)
Purchase Consideration 10,00,000

Purchase consideration to be discharged in Equity Shares @ 30/-

Therefor No. Equity shares to be Issued = 10,00,000/30 = 33,333no X 30/-
Remaining to be paid in cash = 0.33 X 30/- = 10/-
Realization A/c Dr. 5,00,000
To Investment A/c 5,00,000
Bank A/c Dr. 5,50,000
To Realization 5,00,000
Creditors A/c Dr. 3,00,000
To Realization 3,00,000
Realization A/c Dr. 2,80,000
To Bank 2,80,000

Realization A/c
Particular Amount Particular Amount
To Land & Building 6,00,000 By Bank Loan 8,00,000
To Plant & Machinery 4,00,000 By Creditors 3,00,000
To Investment 5,00,000 By A Ltd. (PC) 10,00,000

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To Debenture 5,00,000 By Bank 5,50,000

To Goodwill 1,00,000
To Bank 2,80,000
To Bank 1,00,000
To Equity Shareholders 1,7,0000

Cash at Bank A/c

To Balance B/d 1,00,000 By Realization 2,80,000
To Realization 5,50,000 By Realization 1,00,000
To A Ltd 10 By Equity Shares 2,70,010
6,50,010 6,50,010

Equity Shareholders A/c

Particular Amount Particular Amount
To Equity Shares (PC) 9,99,990 By Equity Share Capital 7,00,000
To Cash (b/f) 2,70,010 By General Reserve 4,00,000
By Realization 1,70,000
12,70,000 12,70,000

8. ELIMINATION OF UNREALISED PROFIT/LOSS ON UNSOLD STOCK IN INTER CO.

TRANSACTION
Transaction between Transferee co. and Transferor co. for sale purchase of goods/assets may be made at more than
actual cost (i.e. at Profit margin). In that case, unrealized profit on unsold stock shall be eliminated while Preparing
Final Balance Sheet of Transferee Co. Such Inter company transactions can be of two types:
1. Downstream Transaction – Sale of Goods/Assets by Transferee Co. to Transferor co.
2. Upstream Transaction – Sale of Goods/Assets by Transferor co. to Transferee co.
Downstream Transaction Upstream Transaction
Profit is earned by Transferee co. and unsold stock is Profit is earned by Transferor co. and unsold stock is
laying with Transferor co. laying with Transferee Co.

Such profit is to be eliminated from Profit and Loss A/c of Such profit is to be eliminated from Profit & Loss A/c of
Transferee co. as under: Transferor co. (in case of Merger) or Capital
Profit and Loss A/c Dr. Reserve/Goodwill A/c (in case of Purchase) as under:
To Stock A/c (Merger) Profit and Loss A/c Dr.
To Stock A/c

(Purchase) Goodwill/CR A/c Dr.

To Stock A/c
Note: Above entries are based on Profit Elimination. In case of Loss elimination Profit and Loss A/c or Goodwill/CR
A/c shall be credited and Stock shall be debited.

EXAMPLE 19:
A Ltd. sold goods costing 1,20,000 to B Ltd. @ 1,50,000. After some time, A Ltd. acquired Business of B Ltd. Inventory
of B Ltd. includes 30,000/- goods purchased from A & not yet sold. Calculate unrealized profit and pass Journal Entry
for elimination of unrealized Profit.

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SOLUTION:
Profit Margin included in the above transaction = 30,000/1,50,000 X 100 = 20% as sale
Profit element in Unsold Inventory with B = 30,000 X 20% = 6000
Journal Entry (Books of A Ltd. Transferor)
GR/ Profit & Loss A/c Dr. 6,000
To Stock 6,000

Example 20:
Case 1: Downstream Transaction
Transferee sold goods to Transferor Costing ₹ 5,00,000 at ₹ 7,50,000
In Balance sheet of Transferor Total inventory is appearing at 12,00,000. Which includes goods from transferee ₹
3,00,000
Inventory is taken over at Book Value
Calculate Unrealised Profit to be eliminated
Cost Sale Profit
Total 5,00,000 7,50,000 2,50,000
Unsold ? 3,00,000 1,00,000
Unrealised Profit to be Eliminated = 1,00,000/-

Case 2:
Same as Case 1 but Inventory is taken over at 15% less than Book Value
Total Unrealised Profit to be eliminated 5,00,000
(-) already eliminated @15% of 3,00,000 (45,000)
Unrealised Profit shall be eliminated Separately 55,000

9. OTHER IMPORTANT ADJUSTMENTS

1. DIVIDEND DECLARED & Dividend declared: It is declared out of Profit & Loss A/c Dr.
PAID free reserve i.e. General Reserve or Profit & General Reserve A/c Dr.
(Refer Q203 & 208) Loss a/c. To Dividend Payable A/c
Dividend in form of %: Such % is always
applied as paid up share capital. Dividend Payable A/c Dr.
To Bank A/c
2. REVALUATION OF PPE If question asks for revaluation of PPE of PPE A/c Dr.
(FIXED ASSETS) Transferor and Transferee: To Revaluation Reserve
(Refer Q203 & 208)
Profit & Loss A/c Dr.
To PPE a/c
3. SETTLEMENT OF ● Sometimes it is not clear whether New
PREFERENCE SHARES Preference shares to be issued by Refer Example 21
OF TRANSFEROR AT Transferee will be at Par OR @
PREMIUM Premium.
● In that case, check premium % given in
the question is attached with
preference shares of Transferor or with
preference shares of Transferee.

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If premium % is attached with New

●
Issue of Transferee, then only New
Issue Price will be at premium
otherwise at par.
4. PURCHASE ● Transferee Company is issuing partly
CONSIDERATION ISSUED paid-up shares to discharge Purchase Refer Example 22
IN FORM OF PARTY PAID Consideration.
UP SHARES ● When partly paid-up shares are being
(Refer Q402) issued, transferee Company may
announce premium separately.
● In such case, the issue price of share
would be Partly Paid-up Value +
Premium Amount.
5. GOODWILL Sometimes question require us to calculate Goodwill by following methods:
CALCULATION 1. Avg. Profit Method
2. Super Profit Method
(Refer Q204) 3. Capitalisation Method
One common observation in all above methods is we should always exclude
following items while calculating Goodwill:
a) Non-Trade Investments from Capital Employed working
b) Non-Trade Incomes, Non-recurring Incomes/Expenses and Abnormal
Items from Past Profits.

EXAMPLE 21:
CASE 1: 12% preference share of Transferor will be paid by issue of new 14% preference shares at 20% premium. B/S
of Transferor shows PSC O/s = 1,50,000
Therefore, Settlement of Rs 1,50,000 @ 120/- per (No of new issue = 1,50,000/20 = 1,250 no.)
Case 2: 2,50,000/- 10% preference share capital will be discharged @ 20% premium by issue of new 9% preference
shares of Transferee
Therefore, Settlement value = 2,50,000+20% = 3,00,000
By issue of New 9% preference share @ 100/- (No. of new issue = 3,000 no.)
Case 3: Rs. 1,00,000, 9% preference shareholders will be paid @ 10% premium by issue of new preference share at
10% premium.
Settlement value = 1,10,000
By issue of new share @110 (No. = 1,10,000/110 = 1000 no.)

EXAMPLE 22:
Transferor has 1,20,000 no. of shares outstanding. Transferee shall issue Rs. 100 share at 80% paid up with 30/-
premium in the ratio of 3:4
SOLUTION:
New No. to be issued = 1,20,000 X ¾ = 90,000 no.
Purchase Consideration = 90,000 No. X 110/- = 99,00,000/-
Conclusion: Purchase Consideration is discharged in form of shares at Issued price always.
Issued price = Paid up Price (+) Premium OR (-) Discount

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CONSOLIDATED OF FINANCIAL STATEMENTS

CONCEPTS AND IMPORTANT ADJUSTMENTS TO SOLVE THE QUESTIONS

(1) Two Types of Financial Statements

(a) Standalone Financial Statements
(b) Consolidated Financial Statements

(2) Standalone Financial Statements: - Financial Statements of Individual Entity.

(3) Consolidated Financial Statements: - Financial Statements of Group Companies. (Holding

Company + all Subsidiary Companies)
Example: A Ltd (Holding of B); B Ltd Subsidiary of A Ltd. and Holding of C Ltd & C Ltd Subsidiary of B.
Here, A Ltd. will be the ultimate Parent Entity.

(4) Holding Company: Sec 2 (46) of Companies Act, 2013

‘Holding Company in relation to one or more other companies, means a company of which such
companies are subsidiary companies’.

(5) Subsidiary Company: Sec 2 (87) of Companies Act, 2013

Subsidiary Company means a company in which the holding company –
a) Controls the composition of the Board of Directors; or
b) Controls/Holds more the 50% of the total share capital either at its own or together with one or
more of its subsidiary companies.

(6) Consolidated F/S Consist of -

(a) Consolidated Balance Sheet.
(b) Consolidated Statement of Profit & Loss.
(c) Consolidated Cash Flow Statement. (Not in Syllabus)
(d) Consolidated Note to Accounts.

(7) What is the relation between Holding Company & Subsidiary Company?
● Holding Company holds Controlling Power over the Subsidiary Company.
● Controlling powers means “To Direct the Operating & Financial decisions (activities) of the
Subsidiary Company”

(8) Direct Subsidiary & Indirect Subsidiary:

Direct Subsidiary: - Indirect Subsidiary: -
H invested in 80% equity shares of S H Invested in S1 @ 80% Equity
Ltd. S1 Invested in S2 @ 75% Equity
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Now S2 also become Subsidiary of H Indirectly

H Holds 80% in S1
S1 Holds 75% in S2
H Holds 80% in S1 & 20% in S2 & S1 Holds 50% in S2 (This is
called Chain Holding)

(9) Wholly owned Subsidiary & Partially owned Subsidiary: -

Wholly owned Subsidiary = Holding Company acquired 100% Equity Capital of Subsidiary
Partially owned Subsidiary = Acquired less than 100% of total Equity Capital of Subsidiary

(10) Minority Interest: -

Those shares which are not Directly or Indirectly held by Holding Company.
Example: If H Ltd. acquired 80% shares of S Ltd. then 20% shareholders of S Ltd will be known as
Minority Internet.
Minority Interest doesn’t have Control over the Subsidiary Company (i.e., they don’t have decision
making rights). But MI must have a proportionate share in profits and Net Assets of Subsidiary
Company. If H has acquired 90% shares of Subsidiary co. then Minority Interest is 10%. Now H has
100% control over the subsidiary with 90% share in Subsidiary and Minority Interest has 0% control
over the Subsidiary with 10% share in Subsidiary.

EXAMPLE 1: -
Standalone Balance Sheet as on 31/3/24
H Ltd. S Ltd.
Equity Share Capital (10/- each) 10,00,00 7,00,000
Liabilities 15,00,000 8,00,000
25,00,000 15,00,000
NCA (PPE) 14,00,000 9,00,000
Cash & Bank Balance. 11,00,000 6,00,000
25,00,000 15,00,000
On 1st April 2024, H has acquired 100% shares of S Ltd from Market at a cost of 7,50,000
SOLUTION
Journal entry in the Books of H
Investment A/c Dr. 7,50,000
To Bank A/c 7,50,000

Standalone Balance Sheet as on 1/4/24

H S
Equity Share Capital (10/-) 10,00,000 7,00,000
Liabilities 15,00,000 8,00,000
25,00,000 15,00,000
NCA (PPE) 14,00,000 9,00,000
NCA (Investment 100%) 7,50,000 0
Cash & Bank 3,50,000 6,00,000
25,00,000 15,00,000
This Investment represents control & share of Holding (100%) on all Assets & Liabilities of Subsidiary.
Hence, if we replace this Investment with Net Assets of Subsidiary then it is called Consolidation.

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For simplicity, we can understand the same concept with the help of following Journal entry in the Books of Holding
Company: -
PPE A/c Dr. 9,00,000
Cash Bank Dr. 6,00,000
Goodwill (b/f) Dr. 50,000
To Liabilities 8,00,000
To Investment 7,50,000

Consolidated B/S of H & Group

Equity Share Capital 10,00,000
Liabilities 23,00,000
33,00,000
PPE 23,00,000
Goodwill 50,000
Cash & Bank
H 3,50,000
S 6,00,000 9,50,000
33,00,000
Note: Goodwill represents that value of Investments made by Holding co. is more than the Share of Holding co. in Net
Assets of Subsidiary co.

EXAMPLE 2: -
H Ltd. acquired 90% of shares of S Ltd @ Rs. 7,50,000
Date of Acquisition = 1/4/24
Total Assets of Subsidiary (1/4/24) PPE 9,00,000
Cash 6,00,000
Total Liabilities of Subsidiary (1/4/24) 8,00,000
Pass Journal Entry for: -
(i) Standalone Financial Statements &
(ii) Consolidated Financial Statements
SOLUTION:
(1) Standalone Financial Statement
*Investment Dr. 7,50,000
To Bank A/c 7,50,000
*This Investment represents 100% control & 90% share of Holding on Net Assets of Subsidiary co.

(2) Consolidated F/S

We should consider control based (100%) Consolidation always:
PPE A/c Dr. 9,00,000
Cash & Bank A/c Dr. 6,00,000
*Goodwill Dr. 1,20,000 (B/F)
To Liabilities 8,00,000
To Investment (90%) 7,50,000
To Minority Inter (10%) 70,000

How to Calculate Goodwill (also known as Cost of Control):

*Investment (90%) 7,50,000
(-) 90% Share In Net Asset 7,00,000 X 90% 6,30,000

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1,20,000
Note: Minority Interest in simple terms, shall be treated as Liability. But to be shown separately in Consolidated
Balance Sheet after Shareholders funds but before Non-Current Liabilities.
MI should be equal to Proportionate Share of Net Assets of Subsidiary.

(11) What are Net Assets of Subsidiary

Alternate 1 All Assets – All Liabilities = XXX
Alternate 2 Equity Share Capital of Subsidiary + Reserves & Surplus of Subsidiary = XXX

(12) On Date of Acquisition (DOA), we need following elements: -

(1) Investment Cost (Also known as Purchase Consideration for Acquisition of Control)
(2) Market value of Net Assets of Subsidiary
(Equity Share Capital on Date of Acquisition + Pre-Acquisition Profit of Subsidiary)
(3) Goodwill/CR (Cost of Control working)
[Investment Cost (-) Proportionate Net Asset on Date of Acquisition = Goodwill/CR]
(4) Minority Interest (MI)
Equity Share Capital X Proportionate share of Minority Interest
Pre-acquisition X Proportionate share of Minority Interest
EXAMPLE 3:
Standalone Balance Sheet as on 1/4/24
H S
Equity Share Capital (Rs.10) 10,00,000 8,00,000
Liability 20,00,000 10,00,000
30,00,000 18,0,000
PPE 12,00,000 9,00,000
Investment (100% in S) 9,00,000 -
Current Asset 9,00,000 9,00,000
30,00,000 18,00,000
(1) Investment in S (100%) acquired on 1/4/24
(2) Prepare consolidated B/S of H on 1/4/24
SOLUTION
(1) DOA = 1/4/24
DOA is very important to consider, because on this date only, we need the value of Net Asset of subsidiary to
compare it with the Investment cost so that we can calculate Goodwill/CR on same Date.
(Once Goodwill/CR is figured out it will not be changed in further period unless there is a change in % of Holding)
In our Example, Investment cost of 9,00,000 can be compared with Net Assets of Subsidiary of 8,00,000 (as on
1/4/24)

(2) Cost of Control as on DOA: (To Calculate Goodwill or CR as on DOA)

Cost of Control Means comparing Investment value with Net Asset value as on DOA.
Particulars Amount
Investments (100%) 9,00,000
(-) Equity share Capital (8,00,000)
(-) R&S of Subsidiary 0
Goodwill 1,00,000

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(3) Consolidated Balance Sheet of H

Equity Share (10%) 10,00,000
Liabilities 30,00,000
H 20,00,000
S 10,00,000
40,00,000
PPE 21,00,000
H 12,00,000
S 9,00,000
Goodwill 1,00,000
Current Asset 18,00,000
H 9,00,000
S 9,00,000
40,00,000

EXAMPLE 4: -
In continuation of Example 3:
Following Transaction took place in First Year 24-25
Particular H S
Sales 12,00,000 7,00,000
Cost of Good Sales 7,00,000 4,00,000
Above transaction took place in cash. Prepare consolidated Balance Sheet of H as on 31/3/25
SOLUTION:
Working Note 1: Standalone Balance Sheet as on 31/03/25
Equity Share Capital 10,00,000 8,00,000
R&S 5,00,000 3,00,000
Liabilities 20,00,000 10,00,000
35,00,000 21,00,000
PPE 12,00,000 9,00,000
Investments 9,00,000 -
Current Asset 14,00,000 12,00,000
35,00,000 21,00,000
Working Note 2: Cost of control as on 1/4/24
Investment (100%) 9,00,000
(-) 100% Net-Asset 8,00,000
Equity Share Capital 8,00,000
Reserves & Surplus 0
Goodwill 1,00,000

Working Note 3: Consolidate R&S of Group

Balance as per standalone F/S of H 5,00,000
+ 100% share from NP of subsidiary 3,00,000
(100% share of Post-Acquisition Profit)
Consolidated R&S 8,00,000

Consolidated Balance Sheet

Equity share capital 10,00,000
Consolidated Reserves & Surplus 8,00,000
Liabilities 30,00,000
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48,00,000
PPE 21,00,000
Goodwill 1,00,000
Current Asset 26,00,000
48,00,000

EXAMPLE 5:
Standalone Balance Sheet as on 1/4/24
Equity share (10/-) 15,00,000 1,20,000
Reserve & Surplus 7,00,000 5,00,000
Liabilities 8,00,000 6,00,000
30,00,000 23,00,000
PPE 11,00,000 13,00,000
Investment (80% in Subsidiary) 13,00,000 -
Current Asset 6,00,000 10,00,000
30,00,000 23,00,000
(1) Investments were acquired on 1/4/24
(2) Following Transaction took place in 24-25
H S
Sales 15,00,000 10,00,000
Cost of Goods Sold 9,00,000 6,00,000
All transactions are in Cash.
(3) Calculate Cost of Control & Prepare Consolidated Balance sheet as on 1/4/24 & as on 31/3/25.
SOLUTION:
(1) Date of Acquisition = 1/4/24
Cost of Control
Investment (80%) 13,00,000
(-) 80% Net Asset (13,60,000)
Equity Share Capital 12,00,000 x 80%
Reserves & Surplus 5,00,000 x 80%
CR as on 1/4/24 60,000

(2) Consolidated Balance sheet as on 1/4/24

Equity Share Cost 15,00,000
Reserves & Surplus 7,00,0000
Minority Interest (20%) 3,40,000
Liability 14,00,000
40,00,000
PPE 24,00,000
Current Asset 16,00,000
40,00,000

(3) Standalone Balance Sheet as on 31/3/25

H S
Equity Share Capital 15,00,000 12,00,000
Reserves & Surplus 13,00,000 9,00,000
Liabilities 8,00,000 6,00,000
36,00,000 27,00,000

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PPE 11,00,000 13,00,000

Investment 13,00,000 -
Current Asset 12,00,000 14,00,000
36,00,000 27,00,000

(4) Consolidate Reserves & Surplus of Group

H’s Balance of Reserves & Surplus 13,00,000
80% share in Post Acquisition profit 3,20,000
16,20,000
Capital Reserve (WN 1) 60,000
16,80,000

(5) Minority Interest

Minority Interest as on 1/4/24 3,40,000
+ 20% of Post Acquisition Profit 80,000
4,20,000

(6) Consolidated Balance Sheet as on 31/3/25

Equity Share Capital 15,00,000
Consolidated Reserves & Surplus 16,80,000
Minority Interest 4,20,000
Liabilities 14,00,000
50,00,000
PPE 24,00,000
Current Asset 26,00,000
50,00,000

EXAMPLE 6:
Standalone Balance Sheet of S Ltd. as on 31/3/23
Equity share capital 15,00,000
General Reserve 7,00,000
Profit & Loss A/c 4,00,000
Liability 14,00,000
40,00,000
Non-Current Asset 25,00,000
Current Asset 15,00,000
40,00,000
On 31/3/23 H ltd. acquired 90% equity Investment in S Ltd at cost of Rs. 24,00,000
SOLUTION:
Date of Acquisition 31/3/23
(1) Investment cost 24,00,000 (90%)
(2) Net Assets value of Subsidiary
Equity Share Capital 15,00,000
*General Reserve as on DOA 7,00,000
*Profit & Loss balance as on DOA 4,00,000
26,00,000

*Pre-Acquisition Profit

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(3) Cost of Control (Calculation of Goodwill and CR):

Investments (90%) 21,00,000
Less: 90% of Net Assets
Equity Share Capital 1500000 x 90% 13,50,000
Pre-Acquisition Profit 11,00,000 x 90% 9,90,000
Goodwill 60,000

(4) Minority Interest

Equity Share 15,00,000 X 10% 1,50,000
Pre-Acquisition 11,00,000 X 10% 1,10,000
2,60,000

(5) Journal Entry consolidation

Goodwill A/c Dr. 60,000
NCA A/c Dr. 25,00,000
Current Asset A/c Dr. 15,00,000
To Liabilities A/c 14,00,000
To Minority Interest A/c 2,60,000
To Investment A/c 24,00,000

Consolidated Balance Sheet (Extract) as on 31/3/23

Equity of H XXX
Pre-Acquisition Part of General Reserve and Profit & XXX
Loss of Subsidiary Already taken in COC Working
Minority Interest (WN - 4) 2,60,000
Liabilities 14,00,000

NCA H – XXX 25,00,000

S – 25,00,000
Goodwill (WN - 3) 60,000
Current Asset 15,00,000
H XXX
S 15,00,000

EXAMPLE 7:
In Continuation of Example 6, refer the following Balance Sheet of Subsidiary as on 31/03/2024:
Equity Share Capital 15,00,000
General Reserve 12,00,000
Profit & Loss 6,00,000
Liabilities 16,50,000
49,50,000
NCA 30,00,000
Current Asset 19,50,000
49,50,000
Prepare Consolidated Balance Sheet as on 31/03/2024 (Extract)

SOLUTION:
Consolidated Balance Sheet of H Ltd. (Extract)
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Equity Share Capital XXX

GR (Post Acquisition share of H) 4,50,000
Profit & Loss (Post Acquisition Share of H) 1,80,000
Minority Interest 3,30,000
Opining 2,60,000
+ General Reserve 50,000
+ Profit & Loss 20,000
Liability 16,50,000
H XXX
S 16,50,000
NCA 30,00,000
H XXX
S 30,00,000
Goodwill 60,000
CA 19,50,000
H XXX
S 19,50,000

EXAMPLE 8:
Standalone Balance Sheet as on 30/3/25
H S
Equity Share Capital 15,00,000 12,00,000
Reserves & Surplus 13,00,000 9,00,000
Liabilities 8,00,000 6,00,000
Total 36,00,000 27,00,000
PPE 11,00,000 13,00,000
Investment 80% 13,00,000 -
Current Asset 12,00,000 14,00,000
Total 36,00,000 27,00,000
● Investment acquired on 31/3/24
● Balance of Reserves & Surplus of Subsidiary on 31/3/24 - 5,00,000
Prepare Consolidated Balance Sheet.
SOLUTION:
Consolidated Balance Sheet of H Ltd. (Extract)
Equity Share Capital 15,00,000
Consolidated Reserves & Surplus 16,80,000
Minority Interest 4,20,000
Liability 14,00,000
50,00,000
PPE 24,00,000
Current Asset 26,00,000
50,00,000
COC: -
Investment 13,00,000
(-) Proportionate Net Assets 13,60,000
ESC 9,60,000
CP 4,00,000
CR 60,000
Minority Interest: -

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Equity Share Capital 2,40,000

Share of Capital Profit 1,00,000
As on Date of Acquisition 3,40,000
Shaer of Revenue Profit 80,000
As on Balance Sheet 4,20,000

(13) Time Adjustment in AOP: -

I. For Cost of Control, we need Net Assets (ESC + R&S Balance) as on DOA
II. On DOA, Equity Share Capital must be given, But Balance of Reserves & Surplus on DOA may be
missing.
III. The difference between balances of R&S as on Beginning of year and End of Year is the Profit for
the Year and it will be shown under Revenue Column of AOP (i.e. Post Acquisition Column).
IV. Time Adjustment for Revenue Profit Column is required so that Reserves & Surplus Balance as on
DOA must be determined.
V. For making Time Adjustment we will always assume that profit of each month is same.
Following points should also be taken care of while doing time adjustment of Revenue Profit:
✔ Take Normal profit always for Time Adjustment (Normal profit means Profit After Tax
excluding the effect of Abnormal Gains/Losses)
✔ Normal Profit should be after Tax.
✔ But Before Dividend
✔ Before Revaluation Gain/Loss
✔ Before Un-realised Gain/Loss
✔ Before Bonus Issue

(14)Treatment of Abnormal Items

a) While preparing AOP, effect of Abnormal Items should be eliminated from Revenue Profit column
(Ab. Loss will be added and Ab. Profit will be deducted)
b) Apply time adjustment of Revenue Profit after above elimination.
c) Re-instate the effect of Abnormal Items (Ab. Loss deducted and Ab. Profit added) form Capital
Profit Column or Revenue Profit Column depending on the date of occurrence of abnormal items.
(Jis period me A.Item occur hua hai vahi pe adjust karenge)
Note: Ab. Loss will be calculated net of claims

EXAMPLE 9:
Financial Year 23-24, Date of Acquisition 1/8/23
Date Particulars Amount
1/4/23 Balance of Reserve & Surplus 15,00,000
3/3/24 Balance of Reserve & Surplus 21,00,000
During the year: - Abnormal loss in the month of September (Dr. in Profit & Loss already) = 60,000
Abnormal gain in the month of May 2023 = 1,45,000. Prepare Analysis of Profit of Subsidiary.

SOLUTION:
Analysis of Profit of Subsidiary: -
Particular CP (1st Aug) Revenue Profit B/S

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(Aug to March) 31/03

Balance of Reserve & Surplus 15,00,000 6,00,000 21,00,000
(as on 01/04) (12 Months)
(+) Abnormal loss (September) - 60,000
(-) Abnormal gain (May) - (1,45,000)
Balance 15,00,000 5,15,000
(+/-) Time Adjustment for 4 months 1,71,667 (5,15,000/12 X 4)
16,71,667 3,43,333
(+/-) Restatement of Abnormal Items 1,45,000 (60,000)
18,16,667 2,83,333 21,00,000

EXAMPLE 10:
1) FY 23-24, DOA = 1/12/23
2) Investment Cost @90% = 12,00,000
3) ESC of Subsidiary = 7,50,000
4) R&S of Subsidiary – 1/4/23 = 6,00,000; 31/3/24 – 9,30,000
5) Abnormal loss in July 23 = 18,000
Calculate AOP, COC & MI
SOLUTION
Working Note 1:
AOP
Particular CP RP B/S
Reserves & Surplus 6,00,000 3,30,000 9,30,000
+ Abnormal loss - 18,000
6,00,000 3,48,000
+/- Time Adjustment for 8 Months 2,32,000 (3,48,000 x 8/12)
8,32,000 1,16,000
(-) Abnormal Loss (18,000) -
8,14,000 1,16,000
H 90% 7,32,600 1,04,400
MI 10% 81,400 11,600

Working Note 2:
COC
Investment 12,00,000
(-) 90% ESC 6,75,000
(-) CP x 90% 7,32,600
Capital Reserve 2,07,600

Working Note 3:
Minority Interest
Equity Share Capital 75,000
Capital Profit 81,400
Revenue Profit 11,600
1,68,000

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15) Treatment of Bonus issue of Shares by Subsidiary

a) Normally the Bonus Equity Shares are Issued out of Reserves & Surplus of the Entity as under:
Reserves & Suplus (Earnings) A/c Dr.
To Equity Share Capital A/c
b) We shall always assume that bonus is distributed out of Past Profits/Reserves of the Subsidiary co. i.e., out of
Capital Profits if such profits are sufficient. (Purane kamaye hue profits me se bonus issue hoga, Na ki
current year k profits me se)
c) There can be either of the two possible cases for Bonus issue:

Case 1: Bonus Entry has been passed in subsidiary’s books: Follow the below steps
⮚ Add back in Revenue Profit Column of AOP
⮚ Less Back in Capital Profit Column of AOP

Case 2: Bonus Entry has not been passed in Subsidiary’s Books: Directly deduct the Bonus issue
amount out of Capital Profit column of AOP.
d) Holding Company shall not pass any entry for receipt of Bonus Shares from subsidiary Co. since it is free of
cost. (Bonus shares receive karne wala koi bhi entry nai karega, kyunki usko shares free me mile hai.)
e) Bonus issue of shares may effect the calculation of Percentage of Holding. Hence, we should be very careful
while calculating such Percentage.
% of Holding = No. of Shares Held by Holding Co. (including Bonus) / Total O/s Shares of Subsidiary (including
Bonus)

EXAMPLE 11: (on Bonus Issue of Shares)

Balance Sheet of Subsidiary (31/3/24)
Equity Share capital (10/-) 5,00,000
Reserves & Surplus 4,00,000
Liabilities 9,00,000
18,00,000
Asset 18,00,000
18,00,000

H Acquired 90% shares of S on 31/3/24 at cost of 7,50,000

Calculate Cost of Control, Minority Interest & Prepare Consolidated Balance Sheet (Extract)
SOLUTION:
Cost of Control
Investment 7,50,000
(-) Net Asset 90%
Equity share capital 5,00,000 x 90% 4,50,000
Reserves & Surplus 4,00,000 x 90% 3,60,000
Capital Reserve 60,000

Minority Interest
Equity Share Capital @ 10% 50,000
Reserves & Surplus @ 10% 40,000
90,000

Consolidated Balance Sheet (Extract)

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Equity Share Capital XXX

Reserves & Surplus (CR) 60,000
Minority Interest 90,000
Liabilities 90,000
H xxxx
S 9,00,000
Asset 18,00,000
H xxxx
S 18,00,000

In continuation of above example: -

On 1st April 2024, Subsidiary company announced Bonus issue in the ratio of 1:2 out of its Reserves & Surplus
Journal entry by Subsidiary
Reserves & Surplus A/c Dr. 2,50,000
To Equity share capital A/c 2,50,000

No other transaction took place as 1st April Now

Standalone Balance Sheet of Subsidiary as on 1/4/24
Equity share capital 7,50,000
Reserves & Surplus 1,50,000
Liabilities 9,00,000
18,00,000
Assets 18,00,000
18,00,000
Analysis of Profit: -
Particular Capital Profit Revenue Profit Balance
up to 31/3 1 day Sheet Date
R&S 4,00,000 (2,50,000) 1,50,000
(+/-) Bonus Adjustment (2,50,000) 2,50,000
1,50,000 0
H 90% 1,35,000
Minority Interest 10% 15,000

Cost of Control:
Investments 7,50,000
(-) 90% Net Asset:
Equity Share capital 7,50,000 x 90% 6,75,000
Share in Capital Profit 13,5000
Capital Reserve 60,000
Minority Interest:
Equity Share Capital 75,000
R&S 15,000
90,000
Conclusion:
(1) Bonus will not affect the Goodwill/ CR/ Minority Interest
(2) Revenue Profit shown as negative (2,50,000) is not Really a loss. There is no profit/loss, it needs to be rectified
by adding back the Bonus Effect & deduction from Capital Profit.

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EXAMPLE 12: (Bonus adjustment – Entry already passed)

Standalone Balance Sheet as on 31/3/24
H S
Equity sharer capital 8,00,000 5,00,000
Reserves & Surplus 6,00,000 4,00,000
Liabilities 5,00,000 3,00,000
19,00,000 12,00,000
Investment 80% 7,00,000 -
Other Asset 12,00,000 12,00,000
19,00,000 12,00,000
● Date of Acquisition - 1/7/23
● On 1st March, 2024 - Bonus issue of shares by subsidiary in the ratio of 1:4 (I.e., 1,00,000/-). Whose entry is
already passed by subsidiary.
● Opening Reserves & Surplus as on 1/4/23 = 2,50,000

SOLUTION:
How much Net Profit earned by subsidiary company? Lets understand this with the help of below ledger account of
R&S
Reserves & Surplus (FY 23-24)
Particular Amount Particular Amount
To Equity share Capital 1,00,000 By Opening Balance 2,50,000
(Bonus Entry Passed)
Closing Balance 4,00,000 By Net Profit (B/f) 2,50,000

Note: As we can understand from above R&S account that NP during the year is 2,50,000 for which Time Adjustment is
required by assuming that it is earned equally every month.

Working Note 1: Analysis of Profit

Capital Profit Revenue Profit B/S
As on 01/07 1/7-31/3 31/3
Reserves & Surplus 2,50,000 1,50,000 4,00,000
Bonus Adjustment (-)1,00,000 +1,00,000
Revised Balances 1,50,000 2,50,000
(+/-) Time Adjustment for 3 62,500 (2,50,000 X 3/12)
Months
Revised Balances 2,12,500 1,87,500
H 80% 1,70,000 1,50,000
Minority Interest 20% 42,500 37,500

Cost of Control: -
Investment (80%) 7,00,000
(-) 80% of Net Asset
Equity shares capital (with Bonus always) 4,00,000
CP 1,70,000
Goodwill 1,30,000
Minority Interest:
Proportionate share in Equity shares capital 1,00,000
(with bonus always)
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Capital Profit Share 42,500

M/I as on DOA 1,42,500
Revenue Profit Share of MI 37,500
Total MI as on BS Date 1,80,000

Consolidated Reserves & Surplus: -

H’s Balance R&S 6,00,000
(+) H’s share of Profit from Subsidiary 1,50,000
7,50,000

Consolidated Balance Sheet

Equity share capital 8,00,000
Consolidated Reserves & Surplus 7,50,000
Minority Interest 1,80,000
Liabilities 8,00,000
25,30,000
Goodwill 1,30,000
Other Asset 24,00,000
25,30,000

EXAMPLE 13: (Bonus Issue but Entry not yet Passed)

Solve Example 11 by assuming that bonus entry is not yet passed by Subsidiary & Equity share capital which is given in
Balance Sheet i.e. 5,00,000 is without Bonus issue.
SOLUTION:
Amount of Bonus issue of Shares = 5,00,000 X1/4 = 1,25,000
Reserves & Surplus
Particular Amount Particular Amount
- - Opening Balance 2,50,000
Closing Balance 4,00,000 Net Profit 1,50,000

Working Note 1 - Analysis of Profit of Subsidiary

CP RP B/S Date
Up to 1/7 July to March 31/3
Reserves & Surplus 2,50,000 1,50,000 4,00,000
(-) Bonus share (1,25,000) 1,50,000 4,00,000
1,25,000 1,50,000 2,75,000
(+/-) Time adjustment for 3 months 37,500 (1,50,000 X 3/12)
1,62,500 1,12,500 2,75,000
H’s Share 80% 1,30,000 90,000
Minority Interest Share 20% 32,500 22,500

Solve the rest part of this example here:

COC: -
Investments 7,00,000

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(-) Proportionate Net Asset:

Equity Share capital 6,25,000 x 80% (5,00,000)
Share of Capital Profit (1,30,000)
Goodwill 70,000

Minority Interest: -
Equity Share Capital 6,25,000 x 20% 1,25,000
Share of Capital Profit 32,500
Share of Revenue Profit 22,500
1,80,000

EXAMPLE 14:
Date of Acquisition is 1/11/2024
Investment Cost is Rs. 5,00,000 (65%)
Equity Share Capital at beginning & ending of year is 3,00,000
Reserves & Surplus at beginning is 1,20,000 & at end is 3,40,000
During the year Bonus shares issued by Subsidiary in the ratio of 1:3 (Abnormal Loss of ₹ 18,000 on 1 st July)
Calculate Goodwill & Minority Interest.
SOLUTION:
1) Since Equity Share Capital is 3,00,000 at beginning and ending of the year. Therefore Bonus entry not yet passed.
Working Note 1: - Analysis of Profit
CP RP B/S Date
Reserves & Surplus 1,20,000 2,20,000 3,40,000
(-) Bonus Issue (1,00,000) -
(+) Abnormal Loss - 18,000
20,000 2,38,000
(+/-) Time adjustment for 7 1,38,833 (1,38,833)
Months
1,58,833 99,167
(-) Abnormal Loss (18,000) -
1,40,833 99,167
H 65% 91,541 64,459
MI 35% 49,292 34,708

Working Note 2: Goodwill

Investment 5,00,000
(-) Equity Share Capital (65%) (2,60,000)
(-) CP (91,541)
Goodwill 1,48,459

Working Note 3: Minority Interest

Equity Share Capital (35%) 1,40,000
CP 49,292
RP 34,708
2,24,000

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16) Dividend Declared and Paid By Subsidiary

Declared in CY on B/S Date Declared after BS Date Dividend Received by Holding
Case 1: Entry not yet passed It means Dividend paid in CY and
Pre-Acquisition Dividend
(Not shown on Liabilities side of BS) belongs to Last FY. Since it is paid in
Should be Deducted from Investment
What to do in AOP? CY, it is declared in CY only before
Cost under COC working.
Directly Deduct after Time paid. (a) If already deducted from
Adjustment from Pre/Post Column. Investment. Do Nothing, your
What to do in AOP? Investment is already shown
Case 2: Entry passed ● Add back in Post-Acquisition after deduction of Dividend.
(Shown on Liability Side of BS) ● Time adjustment (b) If Wrongly Cr. to P&L A/c
What to do in AOP? ● Deduct from Pre-Column or Post ● Deduct from Investment
● Add back in Post Acquisition Column depends on Period of under COC
● Time Adjustment Dividend ● Deduct from Consolidated
● Deduct from Pre-Column or P&L of H
Post Column depends on
Period of Dividend (Also see Note 3 below)
Important Notes:
1) There can be two types of Dividend:
⮚ Final Dividend
⮚ Interim dividend.
Treatment of both are almost same.

2) Dividend is calculated on paid up share capital outstanding:

⮚ At the end of the relevant year in case of Final Dividend.
⮚ On the date of Distribution for Interim Dividend.

3) We always assume that:

⮚ Dividend paid is Final if question is silent.
⮚ Pre-acquisition dividend received by parent is wrongly credited to its P&L A/c.
(Agar pre acquisition dividend galti se p&l me daal diya parent ne to vaha se hatana padega to minus
karenge and COC me dalna padega to vaha pe bhi minus karenge)

EXAMPLE 15: (Dividend Declared and Paid by Subsidiary)

● Financial Year 23-24.
● Date of Acquisition 1/4/23
● Dividend (15%) declared on 31/3/24 for Financial Year 23-24 but Dividend entry not yet passed.
● Equity shares of subsidiary = 10,00,000/-
● Reserve & Surplus of 1/4/23 = 4,50,000/-
● Reserve & Surplus of 31/3/24 = 9,90,000/-
SOLUTION
Reserves & Surplus A/c
Particular Amount Particular Amount
Opening A/c 4,50,000
Closing A/c 9,90,000 Net Profit 5,40,000

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Analysis of Profit:
CP RP B/S date
R&S 4,50,000 5,40,000 9,90,000
(-) Dividend - (1,50,000)
4,50,000 3,90,000

EXAMPLE 16: (Dividend)

Same as Example 15, Date of Acquisition is 1/10/23
SOLUTION
Analysis of Profit: -
CP RP B/S Date
Reserve & Surplus 4,50,000 5,40,000 9,90,000
(+/-) Time Adjustment 2,70,000 (2,70,000)
7,20,000 2,70,000
(-) Dividend (7,5000) (75,000)

EXAMPLE 17: (Dividend)

Same as Example 15, Date of Acquisition is 31/3/24
SOLUTION
Analysis of Profit: -
CP RP B/S Date
Reserve & Surplus 9,90,000 - 9,90,000
(-) Dividend (1,50,000)
8,40,000
Note: Since Entire 12 Months belongs to Pre Acquisition period i.e., before DOA. Hence, entire dividend belongs to CP

EXAMPLE 18: (Dividend)

Same As Example 15, But Dividend entry is already passed.

SOLUTION
Reserves and Surplus
Particular Amount Particular Amount
Dividend Payable A/c 1,50,000 Opening A/c 4,50,000
Closing A/c 9,90,000 Net Profit 6,90,000

Note: Since Dividend entry is passed during the year hence NP (before dividend is paid) for the year should be
6,90,000/-

Analysis of Profit:
CP RP B/s Date
R&S 4,50,000 5,40,000 9,90,000
Dividend Add Back +1,50,000
Profits before Dividend 4,50,000 6,90,000
+/- Total Adjustment Not required
(-) Dividend - (1,50,000)
4,50,000 5,40,000

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EXAMPLE 19: (Dividend)

Financial Year 23-24, Date of Acquisition 1/10/23
Date Particular Amount
1/4/23 Equity Shae Capital 4,00,000
1/4/23 Reserves & Surplus Opening A/c 2,70,000
31/3/24 Reserves & Surplus closing A/c 3,90,000
Dividend Declared & Entry passed on 31/3/24 = 12%, Dividend is for FY 23-24
SOLUTION:
CP RP B/s Date
R&S 2,70,000 1,20,000 3,90,000
(+) Dividend - 48,000
2,70,000 1,68,000
(+/-) Total Adjustment 84,000 (84,000)
3,54,000 84,000
(-) Dividend (24,000) (24,000)
3,30,000 60,000

EXAMPLE 20: (Dividend)

Particular Amount
Equity Shae Capital of Subsidiary 7,50,000
Reserves & Surplus as on 1/4/23 6,00,000
Reserves & Surplus as on 31/3/24 9,00,000
DOA = 1/9/23. Dividend declared & Paid on 15/9/23 in an AGM.
SOLUTION:
Dividend belong to 22-23
Reserves & Surplus
Particular Amount Particular Amount
Dividend 75,000 Opening A/c 6,00,000
Closing A/c 9,00,000 Net Profit 3,75,000
Analysis of Profit:
CP RP B/s Date
Reserves & Surplus 6,00,000 3,00,000 9,00,000
+ Dividend - 75,000
6,00,000 3,75,000
+/- Total Adjustment 1,56,250 (1,56,250)
(3,75,000)
(-) Dividend (75,000) -
6,81,250 2,18,750

EXAMPLE 21: (Dividend)

Standalone Balance Sheet as on 31/3/24
H S
Equity shares capital (10%) 5,00,000 4,00,000
Reserves & Surplus 6,00,000 5,00,000
Liabilities 7,00,000 6,00,000
Dividend Payable - 80,000
18,00,000 15,80,000
Investments in S (80%) 7,40,000 -

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Other Assets 10,60,000 15,80,000

18,00,000 15,80,000
● Date of Acquisition = 1/7/23
● Dividend is Declared as 31/3/24 for First Year 23-24
● Opening A/c Reserves & Surplus as on 1/4/23 = 2,60,000
Requirement: Prepare AOP, COC, Minority Interest & Consolidated Balance Sheet.
SOLUTION:
Analysis of Profit
CP RP B/s Date
Reserves & Surplus 2,60,000 2,40,000 5,00,000
+ Dividend - 80,000
2,60,000 3,20,000
+/- Total Adjustment 80,000 (3,20,000 X 3/12)
3,40,000 2,40,000
(-) Dividend (3 months Pre 9 (20,000) (60,000)
months Post)
3,20,000 1,80,000
H 80% 2,56,000 1,44.000
Minority Interest 20% 64,000 36,000

Working Note 1:
In above example, How H Ltd. has to treat the portion of Dividend Receivable from S Ltd.
● Dividend Receivable 64,000/-
● H has to treated 3 months Dividend as per Acquisition - 16,000 & 9 Months Dividend as post-Acquisition - 48,000

Journal Entry:
Dividend receivable A/c Dr. 64,000
To Investment A/c 16,000
To Profit & Loss A/c 48,000

Working Note 2: - Cost of Control

Investments (80%) 7,40,000
(-) Pre-Acquisition Dividend 16,000
Investments (Net) 7,24,000
(-) 80% Net Assets
Equity share 80% (3,20,000)
CP’s Share (2,56,000)
Goodwill 1,48,000

Working Note 3: - Minority Interest

Equity Share Capital (20%) 80,000
Share in
CP 64,000
RP 36,000
1,80,000

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Consolidated Balance Sheet

Equity share capital 5,00,000
Consolidated Reserves & Surplus 79,2000
H 6,00,000
+ share in RP 1,44,000
+ Dividend income 48,000
Minority Interest 1,80,000
Liabilities
H 7,00,00
S 6,00,00 13,00,000
Dividend payable 80,000
(-) Inter Co. Debt 64,000 16,000
2,78,8000
Goodwill 1,48,000
Other Asset
H 10,60,000
s 1,58,000 26,40,000
Dividend Receivable 64,000
(-) Inter co debt 64,000 0
27,80,000

EXAMPLE 22:
As on 1/4 Reserves & Surplus is 6,00,000
On 1/6 Date of Acquisition (90%)
On 1/10 Paid Interim Dividend (CY) is 75,000
On 1/1 Abnormal Loss 12,000
On 31/3 Reserves & Surplus is 9,50,000
Investment Cost = 10,00,000
ESC = 4,00,000
Prepare AOP, COC, MI & Extract of Consolidated R&S.
SOLUTION:
(a) Analysis of Profit
Particular CP RP B/s Date
Balance of Profit & Loss 6,00,000 3,50,000 9,50,000
+ Abnormal Loss - 12,000
+ Dividend - 75,000
6,00,000 4,37,000
+/- Time Adjustment for 2 72,833 (72,833)
months
(-) Abnormal Loss - (12,000)
(-) Interim Dividend (2M Pre & (25,000) (50,000)
4M Post)
6,47,833 3,02,167
H’s share 90% 5,83,050 2,71,950
Minority Interest 10% 64,783 30,217

(b) Cost of Control

Investment 10,00,000

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(-) Proportionate of Net Asset (22,500)

Net Investment 9,77,500
(-) 90% ESC (3,60,000)
(-) Share in Capital Profit (5,83,050)
Goodwill 34,450
(c) Minority Interest
Equity Share Capital 40,000
Share in Capital Profit 64,783
Share in Revenue Profit 30,217
1,35,000

(d) Consolidated Reserves & Surplus

H’s Balance xxx
+ Share in Revenue Profit 2,71,950
(-) Pre Acquisition Dividend (22,500)

17) Preference Share Capital of Subsidiary & Investment by Holding in the Same
● If Holding company has made Investment in Subsidiary’s Preference Share Capital also, then proportionate
Preference Share Capital will be shown in Cost of Control & Minority Interest working.
● Holding company may also be eligible for preference dividend which may be Pre or Post depending on DOA.

EXAMPLE 23: (Pref. Share Capital of Subsidiary)

First Year 23-24
Date Particular Amount
1/4/23 9% Preference share capital 6,00,000/-
1/4/23 Equity share capital 9,00,000/-
1/4/23 Profit & Loss Balance 4,50,000
31/3/24 Profit & Loss Balance 7,50,000
On 1/6 Investment in 80% equity of S = 9,50,000 and Investment in 40% Preference Share = 2,50,000
On 31/3/24, Equity Dividend @ 12% & Preference dividend declared.
Entry also passed by S But entry for Dividend Receivable not yet passed by H.
1/4/23
● Profit & Loss = 4,50,000
● Date of Acquisition - 1/6/23
31/3/24
● Profit & Loss = 7,50,000
● Preference Dividend = 54,000
● Equity Dividend = 1,08,000
SOLUTION:
Note: Both Dividend belongs to Current Year & DOA of 1/6 is also Current year. Therefore, 2 months pre & 10 Months
post
Working Note 1: Analysis of Profit
Particular CP RP B/s Date
Balance of Profit & Loss 4,50,000 3,00,000 7,50,000
+ Dividend - 1,62,000
4,50,000 4,62,000
+/- Total Adjustment for 2 77,000 (4,62,000X2/12)
months
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5,27,000 3,85,000
(-) Preference Dividend (9,000) (45,000)
(-) Equity Dividend (18,000) (90,000)
5,00,000 2,50,000
H’s share 80% 4,00,000 2,00,000
Minority Interest 20% 1,00,000 50,000

Working Note 2: - Cost of Control

Investment in Equity 9,50,000
(+) Investment in Preference 2,50,000
Gross Investment 12,00,000
(-) Pre-Acquired Dividend
Preference (40%) 3,600
Equity (80%) 14,400
Investment (Net) 11,82,000
(-) 80% Equity share capital (7,20,000)
(-) 40% Preference Share Capital (2,40,000)
(-) Pre Acquisition Profit Share (4,00,000)
Capital Reserve 1,78,000

Working Note 3: - Minority Interest

Equity shares capital (20%) 1,80,000
Preference share capital (60%) 3,60,000
Capital Profit share 1,00,000
Revenue Profit share 50,000
6,90,000

Working Note 4: - Consolidated Reserves & Surplus

Profit & Loss CR
Balance with H - -
+ Share in Revenue Profit of Subsidiary 2,00,000 -
+ Equity Dividend 72,000 -
+ Preference Dividend 18,000 -
+ Capital Reserve (from Cost of control) - 17,8000
2,90,000 1,78,000

EXAMPLE 24: (Preference Share Capital of Subsidiary)

Same Example 23 but Holding Company has not made Investment in preference share capital.

SOLUTION:
(1) No change in Analysis of Profit
(2) Cost of Control
Investment 9,50,000
(-) Pre-Acquisition Dividend (14,400)
(-) 80% Equity share capital (7,20,000)
(-) Pre-acquisition profit Share (4,00,000)
Capital Reserve 1,84,400

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(3) Minority Interest

Equity shares capital (20%) 1,80,000
Preference shares capital (100%) 6,00,000
Capital Profit 1,00,000
Revenue Profit 50,000
9,30,000

(4) Consolidated Profit & Loss

H’s Balance 0
Revenue Profit 2,00,000
Dividend Equity 72,000

EXAMPLE 25: (Preference Shares of Subsidiary)

Show How much amount of Dividend shall be shown in the Balance Sheet of Example 23

SOLUTION:
(1)
Equity Dividend Declared By S 1,08,000
(-) Equity Dividend receivable by H 86,400
Payable to Minority Interest 21,600

(2)
Preference Dividend Declared by S 54,000
(-) Preference Dividend receivable By H (40%) 21,600
Payable to Minority Interest 32,400

18) Treatment of Revaluation of Assets

● Revaluation of Assets of Parent co. is not relevant.
● Revaluation of Assets of Subsidiary co. is relevant to find out the fair value of Net Assets of Subsidiary co. for
the calculation of Cost of Control. (Net assets ki real aukaat pata karne k liye market value of assets
dekhenge, book value nai)
● Revaluation of Assets will be checked on the acquisition date of investments.
● Revaluation Profit or Loss is calculated as follows:
Book Value of Asset on the date of Acquisition xxx
Less: Market Value of Assets on the date of Acquisition xxx
● Revaluation Profit/Loss is treated as pre-acquisition profit/loss. (profit ko plus aur loss ko minus karenge)
● Additional Depreciation will be calculated in case of Revaluation profit and adjusted in post-acquisition profit.
(minus karenge)
● Saving in depreciation will be calculated in case of Revaluation loss and adjusted in post-acquisition profit.
(plus karenge)

Calculate Additional or Saving in Depreciation:

Depreciation that should be charged on Market Value of Asset from DOA to BS Date XXX
Depreciation which is actually charged by Subsidiary from DOA to BS Date XXX

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Net Effect of Depreciation to be adjusted in Revenue Profit Column of AOP XXX

Additional Dep shall be deducted and Saving in Dep shall be added.

● Revaluation adjustment will be done after applying Time Adjustment.

EXAMPLE 26: (Fair Value of Net Assets of Subsidiary)

Balance Sheet of Subsidiary as on 31/3/24
Equity share capital (10/-) 15,00,000
Reserves & Surplus 7,50,000
Liabilities 24,50,000
47,00,000
PPE 30,00,000
Current Asset 17,00,000
47,00,000
Date of Acquisition by H is 31/03/24 on this date Market Value of PPE of S was 38,00,000. Calculate Market Value of
Net Asset on Date of Acquisition.

SOLUTION:
Alternate 1
PPE 38,00,000
Current Asset 17,00,000
(-) Liabilities 24,50,000
Market Value of Net Asset 30,50,000
Alternate 2
Equity share capital 15,00,000
Reserves & Surplus 7,50,000
+ Fair Value Gain 8,00,000
30,50,000

Alternate 3
Analysis of Profit
CP RP BS
Reserves & Surplus 7,50,000 - 7,50,000
(+) Fair Value Gain 8,00,000
15,50,000
H (100%) 15,50,000

Example 27: (Fair Value of Net Assets of Subsidiary)

Balance Sheet of Subsidiary
Opening Closing
Balances Balances
Equity share capital 15,00,000 15,00,000
Reserves & Surplus 10,50,000 16,40,000
Liabilities 14,50,000 19,60,000
40,00,000 51,00,000
PPE 30,00,000 27,00,000

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Current Asset 10,00,000 24,00,000

40,00,000 51,00,000

(1) Date of Acquisition is 1/23 (100% Acquisition)

(2) Market Value of PPE as on 1/1/23 = 38,00,000
Show AOP & Cost of Control (Extract)

SOLUTION:
Analysis of Profit:
CP RP B/S
Reserves & Surplus 10,50,000 5,90,000 16,40,000
(+) Face value gain 8,00,000
18,50,000 5,90,000
H 100% 18,50,000 5,90,000

Cost Of Control
Investment XXX
(-) Equity share of capital 100% 15,00,000
(-) CP 18,50,000

Example 28: (Fair Value of Net Assets of Subsidiary)

Same Balance Sheet from Example 26 but Date of Acquisition is 1/10/23
Market Value of PPE
as on 1/4 = 38,00,000
as on 1/10 = 37,00,000
as on 31/3 = 36,00,000
Value of Investment (100%) = 25,00,000
Calculate Analysis of Profit & Cost of Control

SOLUTION:
a) Market Value of PPE as on 1/10 37,00,000
b) Full year Depreciation 3,00,000
c) Depreciation for 1st half 1,50,000
d) Book Value as on ¼ 30,00,000
e) Book Value on as 1/10 (d-c) 28,50,000
f) Fair Value Gain (a-e) 8,50,000

Analysis of Profit (AOP):

CP RP Balance Sheet
Reserves & Surplus 10,50,000 5,90,000 16,40,000
(+/-) Total adjustment 2,95,000 (2,95,000)
13,45,000 2,95,000
(+) Fair Value Gain 8,50,000 (35,000)
H’s 100% Share 21,95,000 2,60,000

Addition Depreciation due to Revaluation:

Depreciation @ 10% on Market Value for post period 1,85,000

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(37,00,000 X 10% X 6/12)

Depreciation which is actually charged by S for post period 1,50,000
(Book Value as on 1/10 – Book Value as on 31/3 = 35,000)
Additional Depreciation 35,000
Cost of Control: -
Investment 25,00,000
(-) Pre-Acquisition Dividend 0
(-) 100% Net Asset
Equity Share Capital 15,00,000
CP 21,95,000
CR 11,95,000

EXAMPLE 29: (Fair Value of Net Assets of Subsidiary)

First year 23-24, DOA = 1/923
Date Particular Amount
31/3/24 Book Value of PPE of Subsidiary 18,00,000
Depreciation Rate 10% P.a.
1/4/23 Profit & Loss A/c of subsidiary 11,00,000
31/3/24 Profit & Loss A/c of subsidiary 19,50,000
1/9/23 MV of PPE 22,30,000

On Date of Acquisition value of Inventory & creditors of subsidiary should be increased by 50,000 & 21,000
respectively. Abnormal Loss on 01/12/23 = 32,000
Prepare Analysis of Profit (AOP)
SOLUTION:
Book Value as on 1/4 20,00,000
(-) Depreciation for 5 Months 83,333
Book Value as on 1/9 19,16,667
Market Value as on 1/9 22,30,000
FV Gain 3,13,333

Additional Depreciation: -
1) Depreciation that should be charged on MV for Post Period (22,30,000 x 10% x 7/12) 1,30,083
2) Depreciation actually Charged by S on Book Value for Post Period (BV as on DOA – BV as on B/s) 1,16,667
13,416

3) Inventory on DOA is increased by 50,000

Inventory A/c Dr. 50,000
To CP 50,000
4) Creditors increased by 21,000
CP A/c Dr. 21,000
To Creditor A/c 21,000

CP RP B/S Date
Profit & Loss 11,00,0000 8,50,000 19,50,000
+ Abnormal Loss - 32,000
11,00,000 8,82,000
+/- Trading Adjustment for 5 3,67,500 (3,67,500)

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Months
(-) Abnormal Loss - (32,000)
(+/-) FV Adjustment 3,13,333 (13,416)
50,000 -
(21,000) -
18,09,833 4,69,084

EXAMPLE 30: (Fair Value of Net Assets of Subsidiary)

Date of Acquisition = 1/12/23
Date Particular Amount
Furniture & Fixture
31/3/24 Book Value 4,00,000
01/4/23 Book Value 5,00,000
01/12/23 Market Value 3,50,000
Calculate Fair Value gain/Loss & Depreciation Effect
Solve Here:
1) Depreciation % (1,00,000/5,00,000 x 100) 20%
2) Depreciation Amount (5,00,000 x 20% x 8/12) 66,667
3) Book Value as on 1/12 4,33,333
4) Market Value as on 1/12 3,50,000
5) Fair Value Loss 83,333
Depreciation:
Depreciation that should be charged (3,50,000 x 20% x 4/12 23,333
Depreciation actually Charged (4,33,333 – 4,00,000) 33,333
10,000

EXAMPLE 31:
Standalone Balance Sheet as on 31/3/24
Particular H S
Equity Share Capital 15,00,000 12,00,000
General Reserve 5,00,000 2,80,000
Profit & Loss A/c 3,00,000 4,20,000
Loans 9,00,000 7,50,000
Trades Payable 5,50,000 2,50,000
37,50,000 29,00,000
Land & Building 8,00,000 10,00,000
Machines 7,00,000 9,00,000
Investment @75% 14,00,000 -
Current Asset 8,50,000 10,00,000
37,50,000 29,00,000
1) DOA = 1/July/23
2) MV of Land & Building – 12,00,000, Plant & Machinery – 7,00,000 as on DOA
3) Rate of Depreciation = Land and Building 20%, Plant & Machinery 10%
4) Abnormal Gain on 1/June = 21,000; Abnormal loss on 2/July = 18,000
5) On 1/Jan/24 Bonus, issue by Subsidiary
6) Opening Balance of General Reserve 1,80,000 and Profit & Loss 3,00,000
7) Bonus entry already Passed
8) Debtors of 15,000 of H are receivable from S

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SOLUTION
Working Note 1: Calculation of FV Gain/Loss due to Revaluation
Land & Building Plant & Machinery
(a) Book Value as on 31/3 10,00,000 9,00,000
(b) Depreciation Rate 20% 10%
(c) Book Value as on 1/4 (a/100%-b) 12,50,000 10,00,000
(d) Book Value as on 1/7 (after 3M dep) 11,87,500 9,75,000
(e) Market Value as on 1/7 12,00,000 7,00,000
(f) Gain/Loss (e-d) 12,500 (2,75,000)

Working Note 2: Depreciation effect

Land & Building Plant & Machinery
(a) Depreciation from July to March already Charged by S 1,87,500 75,000
(b) Depreciation from July to March that should be charged 1,80,000 52,500
by H on Market Value
Saving 7,500 22,500

Working Note 3: Analysis of Profit of Subsidiary

Particular CP Revenue Profit Balance Sheet
(up to 1/7) 31/3/24
GR P&L
(9M) (9M)
Balances
General Reserve 1,80,000 1,00,000 - 2,80,000
Profit & Loss 3,00,000 - 1,20,000 4,20,000
(+/-) Bonus (2,00,000) 2,00,000 -
(+/-) Eliminated Abnormal Items (21,000)
18,000
2,80,000 3,00,000 1,17,000
(+/-) Time Adjustment (3 Months) 75,000 (3,00,000 x (1,17,000 x
29,250 3/12) 3/12)
Balances 3,84,250 2,25,000 87,750
(+/-) Abnormal Item 21,000 - (18,000)
(+/-) Fair Value
Land & Building (Gain) 12,500
Plant & Machinery (Loss) (2,75,000)
(+) Saving in Depreciation
Land & Building - - 7,500
Plant & Machinery - - 22,500
Final Balances 1,42,750 2,25,000 99,750
H 75% 1,07,063 1,68,750 74,813
MI 25% 35,687 56,250 24,937

Working Note 4: Cost of Control

Investment 14,00,000
(-) Proportion of Net Asset
ESC @75% 9,00,000
Share in Capital Profit 1,07,063
Goodwill 3,92,937

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Working Note 5: Minority Interest

Equity Share Capital @25% 3,00,000
Share in Capital Profit 35,687
Share in Revenue Profit 81,187
4,16,874

Working Note 6: Consolidated Reserves & Surplus

Particular Amount
(a) General Reserve
Balance with H 5,00,000
+ Share in RP 1,68,750
6,68,750
(b) Profit & Loss
Balance with H 3,00,000
+ Share in RP 74,813
3,74,813
Gross Total (a+b) 10,43,563

Consolidated Balance Sheet as on 31/3/2024

Particular Amount
Equity Share Capital 15,00,000
Consolidated Reserves & Surplus (W.N – 6) 10,43,563
Minority Interest (W.N – 5) 4,16,874
Loans 16,50,000
H 9,00,000
S 7,50,000
Trade Payables 7,85,000
H 5,50,000
S 2,50,000
(-) Common Debts (15,000)
53,95,437
Land & Building 18,20,000
H 8,00,000
S 10,00,000
+ FV Gain 12,500
+ Saving Depreciation 7,500
Profit & Machinery 13,47,500
H 7,00,000
S 9,00,000
(-) FV Loss (2,75,000)
(+) Dep 22,500
Goodwill (WN – 4) 3,92,937
Current Asset 18,35,000
H 8,50,000
S 10,00,000
(-) Common Debts (15,000)
53,95,437

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EXAMPLE 32
As on 1/4 Equity Share Capital = 7,00,000
Reserves & Surplus = 5,20,000
On 1/9 (DOA) 80% Investment of 10 lakhs
PPE (MV) = 11,00,000
On 1/1 Abnormal Gain = 18,000
On 31/3 Reserves & Surplus = 9,00,000
On 31/3
(a) Bonus Declared at 1:4 ratio, but entry is not passed
(b) Dividend Declared 15%, but entry is not passed
(c) Book Value of PPE is 8,50,000, Depreciation = 12%

SOLUTION:
*Revenue Profit is already Before Dividend. Since, Dividend entry not yet passed
Working Note 1: Revaluation of PPE and depreciation thereon
(a) Book Value as on 31/3 8,50,000
(b) Book value as on 1/4 (8,50,000/88%) 9,65,910
(c) Book value as on 1/9 (after 5M Dep) 9,17,615
(d) Market value as on 1/9 11,00,000
(e) FV Gain (d-c) 1,82,385
(f) Depreciation for Post Acquisition Period actually Charged by S (c-a) 67,615
(g) Depreciation that should be Charged on Market Value 77,000
(h) Additional Depreciation (g-f) 9,385

Working Note 2: AOP of Subsidiary

Particular CP (up to 1/9) GR (Sep to Nov) Balance Sheet
31/3
Balance of Reserves & Surplus 5,20,000 3,80,000 9,00,000
(-) Abnormal Gain - (18,000)
(-) Bonus issue (7,00,000 x 1/4) (1,75,000) -
3,45,000 3,62,000
(+/-) Time Adjustment for 5 months 1,50,833 (1,50,833)
Balances 4,95,833 2,11,167
(+) Abnormal Gain - 18,000
(-) Dividend (5M Pre : 7M Post) (43,750) (61,250)
+/- Revaluation effect (WN.1) 1,82,385 (9,385)
Final Balances 6,34,468 1,58,532
H’s 80%- 5,07,574 1,26,826
MI 20% 1,26,894 31,706

Working Note 3: Cost of Control

Investment Cost (Before Pre-Dividend Deduction) 10,00,000
(-) Pre-Acquisition Dividend Receivable (35,000)
Net Investment Cost 9,65,000
(-) Proportionate Net Asset
80% Equity Share Holder (with Bonus) (7,00,000)
80% share in Capital Profit (WN.2) (5,07,574)
Capital Reserve 2,42,574
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Working Note 4: Minority Interest

20% of Equity Share Capital 1,75,000
20% of Share in Capital Profit (WN.2) 1,26,894
20% of Share in Revenue Profit (WN.3) 31,706
3,33,600

Note: Dividend payable to Minority Interest shall be shown Separately in the Balance Sheet as Current Liability.

Working Note 5: Consolidated Reserves & Surplus of Holding

Balance of H xxx
(+) Share in Revenue Profit 1,26,826
(+) Dividend Income (7M) 49,000

19) Elimation of Unrealised Profit/Loss on unsold stock in Inter Co. Transaction

Transaction between Holding Co. and Subsidiary Co. for sale purchase of goods/assets may be made at more than
actual cost (i.e., at Profit margin). In that case, unrealized profit on unsold stock shall be eliminated while Preparing
Consolidated Balance Sheet of Group.
Such Inter company transactions can be of two types:
1. Downstream Transaction – Sale of Goods/Assets by Holding Co. to Subsidiary Co.
2. Upstream Transaction – Sale of Goods/Assets by Subsidiary Co. to Holding Co.

Downstream Transaction Upstream Transaction

Profit is earned by Holding Co. and unsold stock is laying Profit is earned by Subsidiary Co. and unsold stock is
with Subsidiary Co. laying with Holding Co.

Such profit is to be eliminated from Profit and Loss A/c of Such profit is to be eliminated from Profit & Loss A/c of
Holding Co. as under: Subsidiary Co. under the Revenue Profit Column of AOP.
Profit and Loss A/c (of Holding) Dr. Revenue Profit (AOP) Dr.
To Stock A/c To Stock A/c

Note: Minority Interest will not be affected due to such Such Elimination will affect Holding Co.’s and MI’s Share
elimination. of Profit.
Note: Above entries are based on Profit Elimination. In case of Loss elimination, Profit and Loss A/c shall be credited
and Stock shall be debited.

(16) How to prepare consolidated Profit & Loss of group?

(a) Make line by line consolidation of every income & expenses of H & S
(Line by line mean item wise)
(b) In the year of Acquisition we shall take proportionate amount of Income other than Beginning

EXAMPLE 33: (Consolidated Profit and Loss A/c)

Statement of profit & Loss year ending 31/3/24
Particular H Ltd. S Ltd.
Revenue form Operation 50,00,000 30,00,000
Other income 4,50,000 2,00,000
54,50,000 32,00,000
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Cost of Material consume 18,00,000 9,00,000

Changes in Inventories (3,00,000) (1,80,000)
Employee Benefit Expenses 6,00,000 5,00,000
Finance cost 5,50,000 3,80,000
Other expenses 11,00,000 8,00,000
37,50,000 24,00,000
Profits before Taxes 17,00,000 8,00,000
(-) Tax expenses (5,00,000) (2,00,000)
Profit After Taxes 12,00,000 6,00,000
Less: Dividend paid (2,50,000) (1,00,000)
Retained Earnings 9,50,000 5,00,000
(1) Date of Acquisition is 1/7/23
(2) Acquired 75% of equity
(3) During the year: -
(a) Goods Sold by H to S for Rs.4,00,000
(b) Interest paid by S to H Rs. 50,000
(4) Opening inventory on 1/7 of S is 5,00,000 & Closing Inventory as on 31/3 of S is 6,20,000
SOLUTION:
Consolidated statement of Profit & Loss of group for the year ended 31/3/24
Particular H S Contra Total
Revenue from Operation 5,00,000 22,50,000 (4,00,000) 68,50,000
Other Income 4,50,000 1,50,000 (50,000) 5,50,000
Total (A) 54,50,000 24,00,000 (4,50,000) 74,00,000
Cost of material consume 18,00,000 6,75,000 (4,00,000) 20,75,000
Changes in Inventory (3,00,000) (1,20,000) - (4,20,000)
Employment Benefit Expenses 6,00,000 3,75,000 - 9,75,000
Finance cost 5,50,000 28,5000 (50,000) 78,5000
Other Expenses 11,00,000 6,00,000 - 17,00,000
Total (B) 37,50,000 18,15,000 (4,50,000) 51,15,000
Profit Before tax (A.B) 17,00,000 5,85,000 22,85,000
(-) Tax expenses 5,00,000 1,50,000 - (6,50,000)
Profit after Tax 12,00,000 4,35,000 - 16,35,000
(-) Dividend declared (2,50,000) (1,00,000) 75,000 (2,75,000)
Retained earnings 9,50,000 3,35,000 75,000 13,60,000
Retained earnings attributable to owners of Parent (B/F) 12,76,250
R/E attributable to M/I (3,35,000 X 25%) 83,750

EXAMPLE 34: (Contingent Liabilities for Bills Discounted)

H
Bills Payable 65,000 Bills receivable 50,000
Contingent Liabilities: Bills Discovered 15,000
Bills Payable 30,000 Bills receivable 40,000
Contingent Liabilities: Bills discovered 8,000
Bills Payable of H Includes 20,000 payable to S, Out of this 5,000/- of bills already discounted by S
Consolidated B/s (Extract)
Bills Receivable 75,000
H 50,000
S 40,000

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(-) Contra (15,000)

Bills Payable 80,000
H 65,000
S 30,000
(-) Contra (15,000)
Contingent Liabilities 18,000
H 15,000
S 8,000
(-) 5,000
As Per AS 21
Negative minority cannot be shown in consolidated Balance Sheet
Negative minority shall be written off from consolidated Profit & Loss of group (Holding Company) excess
I.e., share of loss of M/I beyond 0 balance of M/I shall be borne by holding company for the time being
When subsidiary earns profit in future the M/I share of profit to the extract of earlier loss shall be transfer to
holding.

EXAMPLE 35: (Negative Minority Interest)

Minority Interest =30%
Date Particular Amount
1/4/24 Equity share capital 10,00,000
1/4/24 Reserves & Surplus 5,00,000
31/3/25 Reserves & Surplus 2,00,000
31/3/26 Reserves & Surplus (3,00,000)
Calculate Minority Interest on as Date of Acquisition at every Balance Sheet Date
SOLUTION:
(1) As on 1/4/24 Date of Acquisition
Equity Share Capital 10,00,000
Reserves & Surplus 5,00,000
Minority Interest (15,00,000 x 30%) 4,50,000

(2) Minority Interest as on 31/3/25

Equity Share Capital 10,00,000
Reserves & Surplus 2,00,000
12,00,000 x 3 3,60,000
OR
Minority Interest as on DOA 4,50,000
(-) Share in RP (90,000)
3,60,000

(3) Minority Interest on as 31/3/26

Equity Share Capital 10,00,000
Reserves & Surplus (3,00,000)
Net Asset 7,00,000 x 30%
Minority Interest 21,00,000
OR
Minority Interest as on 31/3/25 3,60,000
(-) Share of Loss for first year 25-26 (5,00,000 x 30%) (1,50,000)

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Minority Interest 2,10,000

EXAMPLE 36:
In continuation of Example 35, Balance Reserves & Surplus as on 31/3/27 = (12,00,000)
SOLUTION
Minority Interest (as on 31/3/27)
Equity share capital 10,00,000
Reserves & Surplus (12,00,000)
Net Asset (2,00,000)
Minority Interest @ 30% *(60,000)
OR
Minority Interest as on 31/3/26 3,60,000
(-) Share of Loss for first year 26-27 (9,00,000 x 30%) (2,70,000)
Minority Interest *(60,000)
*Borne By Holding
Therefore, Minority Interest = NIL

20) Other Important Adjustments:

Balances of For Balance of Profit &Loss A/c: Assume Zero Balance as on 1st Day of the year.
Reserves and
Surplus – For Balance of Other Reserves: Assume the Same amount as at the end of the year.
Missing

Dividend on 1. Add back in AOP, if entry is already passed (ignore if entry not passed)
Preference 2. Apply Time Adjustment
Shares 3. Deduct in AOP from Pre and/or Post according to the date of Investment.
4. If this dividend is receivable by Parent then share of parent will be transfer to COC (Pre)
or CPL (Post)
5. MI’s Share in dividend will be shown as Short Term Provisions separately.
Rectification If question specifies any error then such errors should be rectified before time adjustment.
of Errors
Contra Items Whenever Payable and Receivable are within group (i.e. H and S), then such payable/receivable
should be eliminated.
Payable A/c Dr.
To Receivable A/c
Note:
1. If payable is less than receivable then difference is called cheque in transit
2. If payable is more than some Error will be given in the question. Such error will be
rectified and then contra adjustment will be made.
Contingent The Portion which is discounted and shown as Contingent liability will not to be shown in
Liabilities Consolidated BS

Contra Adjustment will be made only for that portion which is not yet discounted and shown
under Bills receivable and Bills payable

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EXAMPLE 37
As on 1/4/23 Reserves & Surplus is 5,20,000
On 1/6 Abnormal Gain is 9,000
On 1/8 (DOA) Market Value of Fixed Asset – 25,00,000;
Depreciation rate = 12%
On 1/10 Upstream Transaction at 25% on Cost;
Unsold Goods = 1,25,000
On 1/3 Bonus @ 1:4
31/3/24 Reserves & Surplus is 9,30,000; Dividend declared is 12%

Standalone Balance Sheet as on 31/3/24

Particular H Ltd. S Ltd.
Equity Share Capital 12,00,000 10,00,000
Reserves & Surplus 10,00,000 9,30,000
Liabilities 19,00,000 11,70,000
41,00,000 31,00,000
Fixed Asset 12,00,000 18,00,000
Investment @75% 15,00,000 -
Current Asset 14,00,000 13,00,000
41,00,000 31,00,000
Note: Bonus entry is already Passed
SOLUTION:
Working Note 1: Revaluation & its Depreciation
(i) Book Value as on 31/3/23 18,00,000
(j) Book value as on 1/4/23 18,00,000/88% 20,45,454
(k) Book value as on 1/8/23 19,63,636
(l) Market value as on 1/8/23 25,00,000
(m) FV Gain (d-c) 5,36,364
(n) Depreciation for Post Acquisition Period actually Charged by S (c-a) 1,63,636
(o) Depreciation that should be Charged on Market Value 2,00,000
(p) Additional Depreciation (g-f) 36,364

Working Note 2: Calculation of Unrealised Profit on Unsold Goods with H

Unsold goods with H (i.e., Sale by S) = 1,25,000
Subsidiary Margin (25% on Cost) = 1/5 on Sales
Profit = 1,25,000/5 = 25,000

Working Note 3: Analysis of Profit of S:

CP RP Balance Sheet
Balance of Reserves & Surplus 5,20,000 4,10,000 9,30,000
(-) Abnormal Gain - (9,000)
(+/-) Bonus (2,00,000) 2,00,000
Balance 3,20,000 6,01,000
(+/-) Time adjustment for 4M 2,00,333 (6,01,000 x 4/12)
5,20,333 4,00,667
(+) Abnormal Gain 9,000 -
(-) Dividend (4M Pre & 8M Post) (40,000) (80,000)
(+/-) Revaluation effect 5,36,364 (36,364)

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(-) Unrealised Profit (WN.2) - (25,000)

10,25,697 2,59,303
H 75% 7,69,273 1,94,477
MI 25% 2,56,424 64,826
* Dividend shall be calculated on ESC including Bonus is already declared before CY Dividend. 10,00,000 x 12% =
1,20,000
*Dividend entry not yet passed

Working Note 4: Cost of Control

Investment 15,00,000
(-) Pre-Acquisition Dividend 30,000
(-) 75% ESC (7,50,000)
(-) Capital Profit Share (7,69,273)
Capital Reserve 49,273

Working Note 5: Minority Interest

Equity Share Capital 2,50,000
Share in Capital Profit 2,56,424
Share in Revenue Profit 64,826
5,71,250

Working Note 6: Consolidated Reserves & Surplus

(a) Consolidated Free Reserves 12,54,477
Balance with H 10,00,000
(+) Revenue Profit Share of H 1,94,477
(+) Post Acquisition Share of Dividend 60,000
(+) (b) Capital Reserve 49,273
Consolidated Reserves & Surplus 13,03,750

Consolidated Balance Sheet

Equity Share Capital 12,00,000
Consolidated Reserves & Surplus 13,03,750
Minority Interest 5,71,250
Liability 31,00,000
H 19,00,000
S 11,70,000
+ Dividend Payable to MI 30,000
61,75,000
Fixed Asset 35,00,000
H 12,00,000
S 18,00,000
+ FV 5,36,364
(-) Depreciation (36,364)
Current Assets 26,75,000
H 14,00,000
S 13,00,000
(-) Unrealised Profit (25,000)
61,75,000

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