Test Series: August, 2018

MOCK TEST PAPER – 1

INTERMEDIATE (IPC) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: three hours) (Maximum Marks: 100)
1. (a) Sun Limited wishes to obtain a machine costingRs.30 lakhs by way of lease. The effective life of
the machine is 14 years, but the company requires it only for the first 5 years. It enters into an
agreement with Star Ltd., for a lease rental for Rs.3 lakhs p.a. payable in arrears and the implicit
rate of interest is 15%. The chief accountant of Sun Limited is not sure about the treatment of
these lease rentals and seeks your advise. (use annuity factor at @ 15% for 3 years as 3.36)
(b) The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18 th April, 2017,
considered and approved the Audited Financial results along with Auditors Report for the
Financial Year ended 31 st March, 2017 and recommended a dividend of Rs. 2 per equity share
(on 2 crore fully paid up equity shares of Rs. 10 each) for the year ended 31 st March, 2017 and if
approved by the members at the forthcoming Annual General Meeting of the company on 18 th
June, 2017, the same will be paid to all the eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the
annual accounts of the company for the year ended 31 st March, 2017 as per the applicable
Accounting Standard and other Statutory Requirements.
(c) Suhana Ltd. issued 12% secured debentures of Rs. 100 Lakhs on 01.05.2016, to be utilized as under:
Particulars Amount (Rs. in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2017, construction of the factory building was completed and machinery was installed
and ready for it's intended use. Total interest on debentures for the financial year ended
31.03.2017 was Rs. 11,00,000. During the year 2016-17, the company had invested idle fund out
of money raised from debentures in banks' fixed deposit and had earned an interest of
Rs. 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of assets.
(d) During 2016-17, an enterprise incurred costs to develop and produce a routine, low risk computer
software product, as follows:
Amount (Rs.)
Completion of detailed programme and design 25,000
Coding and Testing 20,000
Other coding costs 42,000
Testing costs 12,000
Product masters for training materials 13,000
Packing the product (1,000 units) 11,000

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 What amount should be capitalized as software costs in the books of the company, on Balance
Sheet date? (4 Parts x 5 Marks = 20 Marks)
2. A, B and C share profits and losses of a business as to 3:2:1 respectively. Their balance sheet as at
31st March, 2018 was as follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Goodwill 10,000
A 70,000 Land 20,000
B 80,000 Buildings 1,10,000
C 10,000 Machinery 50,000
General Reserve 18,000 Motor Car 28,000
Investment Fluctuation Fund 4,000 Furniture 12,000
C Loan 33,000 Investments 18,000
Mrs. A’s loan 15,000 Loose tools 7,000
Creditors 96,000 Stock 18,000
Bills Payable 14,000 Bills receivable 20,000
Bank overdraft 60,000 Debtor: 40,000
Less: Provision 2,000 38,000
Cash 1,000
C’s current A/c 56,000
Profit and Loss A/c 12,000
4,00,000 4,00,000
The partners decide to convert their firm into a Joint Stock Company. For this purpose ABC Ltd. was
formed with an authorized capital of Rs. 10,00,000 divided into Rs. 100 equity Shares. The business of
the firm was sold to the company as at the date of balance sheet given above on the following terms:
(i) Motor car, furniture, investments, loose tools, debtors and cash are not to be taken over by the
company.
(ii) Liabilities for bills payable and bank overdraft are to be taken over by the company.
(iii) The purchase price is settled at Rs. 1,95,500 payable as to Rs. 75,500 in cash and the balance
in company’s fully paid shares of Rs. 100 each.
(iv) The remaining assets and liabilities of the firm are directly disposed of by the firm as per details
given below:
Investments are taken over by A for Rs. 13,000; debtors realize in all Rs. 20,000; Motor Car,
furniture and loose tools fetch Rs. 24,000, Rs. 4,000, and Rs. 1,000 respectively. A agrees to pay
his wife’s loan. The creditors were paid Rs. 94,000 in final settlement of their claims. The
realization expenses amount to Rs. 500.
(v) The equity share received from the vendor company are to be divided among the partners in
profit-sharing ratio.
You are required to prepare the necessary ledger accounts. (16 Marks)
3. (a) Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at Salem. He
despatches 30 tins of Refined Oil @ Rs. 1,500 per tin and 20 tins of Ghee @ Rs. 5,000 per tin on
1st of every month. The Branch has incurred expenditure of Rs. 45,890 which is met out of its
collections; this is in addition to expenditure directly paid by Head Office.

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 Following are the other details:
Chennai H.O. Salem B.O.
Amount (Rs.) Amount (Rs.)
Purchases:
Refined Oil 27,50,000
Ghee 48,28,000
Direct Expenses 6,35,800
Expenses paid by H.O. 76,800
Sales:
Refined Oil 24,10,000 5,95,000
Ghee 38,40,500 14,50,000
Collection during the year 20,15,000
Remittance by Branch to Head Office 19,50,000

Chennai H.O.
Balance as on 01-04-2017 31-03-2018
Amount (Rs.) Amount (Rs.)
Stock:
Refined Oil 44,000 8,90,000
Ghee 10,65,000 15,70,000
Building 5,10,800 7,14,780
Furniture & Fixtures 88,600 79,740

Salem Brach Office

Balance as on 01-04-2017 31-03-2018
Amount (Rs.) Amount (Rs.)
Stock:
Refined Oil 22,500 19,500
Ghee 40,000 90,000
Sundry Debtors 1,80,000 ?
Cash in hand 25,690 ?
Furniture & Fixtures 23,800 21,420
Additional information:
(i) Addition to Building on 01-04-2017 Rs. 2,41,600 by H.O.
(ii) Rate of depreciation: Furniture & Fixtures @ 10% and Building @ 5% (already adjusted in
the above figure)
(iii) The Branch Manager is entitled to 10% commission on branch profits after charging such
commission.
(iv) The General Manager is entitled to a salary of Rs. 20,000 per month.
(v) General expenses incurred by Head Office is Rs. 1,86,000.

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 You are requested to prepare Branch Account in the Head Office books and also prepare Chena
Swami’s Trading and Profit & loss Account (excluding branch transactions) for the year ended
31st March, 2018.
(b) What are the conditions to be fulfilled by a company to buy-back its equity shares as per the
companies Act, 2013. Explain in brief. (12 + 4 = 16 Marks)
4. The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31 -3-20X1:
Liabilities P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Equity Share Capital (Fully paid shares of Rs. 10 each) 15,000 6,000
Securities Premium 3,000 –
Foreign Project Reserve – 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures – 1,000
Trade payables 1,200 463
Provisions 1,830 702
33,400 12,500
Assets P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Land and Buildings 6,000 –
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Inventory 7,862 4,041
Trade receivables 2,120 1,100
Cash at Bank 1,114 609
Cost of Issue of Debentures — 50
33,400 12,500
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.
On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was agreed
that in discharge of consideration for the business P Ltd. would allot three fully paid equity shares of
Rs. 10 each at par for every two shares held in V Ltd. It was also agreed that 12% debentures in V
Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination.
Details of trade receivables and trade payables as under:
Assets P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Trade payables
Bills Payable 120 -
Creditors 1,080 463
1,200 463
Trade receivables
Debtors 2,120 1,020
Bills Receivable — 80
2,120 1,100
4

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 Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.
You are required to:
(i) Pass journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger considering that the cost of issue of
debentures shown in the balance sheet of the V Ltd. company is not transferred to the P Ltd.
company. (16 Marks)
5. (a). X Fire Insurance Co. Ltd. commenced its business on 1.4.20X1. It submits you the following
information for the year ended 31.3.20X2:
Rs.
Premiums received 15,00,000
Re-insurance premiums paid 1,00,000
Claims paid 7,00,000
Expenses of Management 3,00,000
Commission paid 50,000
Claims outstanding on 31.3.20X2 1,00,000
Create reserve for unexpired risk @50%
Prepare Revenue account of X Fire Insurance company for the year ended 31.3.20X2.
(b) A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount
distributed to Preferential Creditors and 3% on the payment made to Unsecured Creditors. The
assets were realized for Rs. 45,00,000 against which payment was made as follows :
Liquidation expenses Rs. 50,000
Secured Creditors Rs. 15,00,000
Preferential Creditors Rs. 1,25,000
The amount due to Unsecured Creditors was Rs. 15,00,000. You are asked to calculate the total
remuneration payable to liquidator. Calculation shall be made to the nearest multiple of a rupee.
(c) Mohan started a business on 1 st April 2017 with Rs. 12,00,000 represented by 60,000 units of
Rs. 20 each. During the financial year ending on 31 st March, 2018, he sold the entire stock for
Rs. 30 each. In order to maintain the capital intact, calculate the maximum amount, which can
be withdrawn by Mohan in the year 2017-18 if Financial Capital is maintained at historical cost.
(8 +4 + 4 = 16 Marks)
6. The following are the figures extracted from the books of TOP Bank Limited as on 31.3.2017.
Rs.
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank’s properties 48,000
5

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 Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000
The following further information is given:
(i) A customer to whom a sum of Rs. 16 lakhs has been advanced has become insolvent and it is
expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs. 2,10,000 was found necessary by the
auditors.
(iii) Rebate on bills discounted on 31.3.2016 was Rs. 19,000 and on 31.3.2017 was Rs. 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide Rs. 9,00,000 for Income-tax.
(vi) Profit and Loss account opening balance was Nil as on 31.3.2016.
Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3.2017. (16 Marks)
7. Answer any four of the followings:
(a) An airline is required by law to overhaul its aircraft once in every five years. The pacific Airlines
which operate aircrafts does not provide any provision as required by law in its final accounts.
Discuss with reference to relevant Accounting Standard 29.
(b) A company had imported raw materials worth US Dollars 6,00,000 on 5 th January, 2017, when
the exchange rate was Rs. 43 per US Dollar. The company had recorded the transaction in the
books at the above mentioned rate. The payment for the import transaction was made on
5th April, 2017 when the exchange rate was Rs. 47 per US Dollar. However, on 31 st March, 2017,
the rate of exchange was Rs. 48 per US Dollar. The company passed an entry on 31 st March,
2017 adjusting the cost of raw materials consumed for the difference between Rs. 47 and Rs. 43
per US Dollar.
In the background of the relevant accounting standard, is the company’s accounting treatment
correct? Discuss.
(c) A company has its share capital divided into shares of Rs. 10 each. On 1-1-20X1, it granted
5,000 employees stock options at Rs. 50, when the market price was Rs. 140. The options were
to be exercised between 1-3-20X2 to 31-03-20X2. The employees exercised their options for
4,800 shares only; remaining options lapsed. Pass the necessary journal entries for the year
ended 31-3-20X2, with regard to employees’ stock options.
(d) Department X sells goods to Department Y at a profit of 50% on cost and to Department Z at
20% on cost. Department Y sells goods to Department X and Z at a profit of 25% and 15%
respectively on sales. Department Z charges 30% profit on cost to Department X and 40 profit on
sale to Y.
Stocks lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Rs. Rs. Rs.
Transfer from Department X 75,000 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000
Calculate the unrealized profit of each department and also total unrealized profit.
(e) Explain the Limitations of Liability of Limited Liability Partnership (LLP) and its partners.
(4 Parts x 4 Marks = 16 Marks)
6

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 Test Series: August, 2018
MOCK TEST PAPER – 1
INTERMEDIATE (IPC) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) As per AS 19 ‘leases’, a lease will be classified as finance lease if at the inception of the lease,
the present value of minimum lease payment amounts to at least substantially all of the fair value
of leased asset. In the given case, the implicit rate of interest is given at 15%. The present value
of minimum lease payments at 15% using PV- Annuity Factor can be computed as:
Annuity Factor (Year 1 to Year 5) 3.36 (approx.)
Present Value of minimum lease payments Rs.10.08 lakhs (approx.)
(Rs.3 lakhs each year)

Thus present value of minimum lease payments is Rs.10.08 lakhs and the fair value of the
machine is Rs. 30 lakhs. In a finance lease, lease term should be for the major part of the
economic life of the asset even if title is not transferred. However, in the given case, the effective
useful life of the machine is 14 years while the lease is only for five years . Therefore, lease
agreement is an operating lease. Lease payments under an operating lease should be
recognized as an expense in the statement of profit and loss on a straight line basis over the
lease term unless another systematic basis is more representative of the time pattern of the
user’s benefit.
(b) As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet
Date” vide Companies (Accounting Standards) Amendments Rules, 2016 dated 30 th March, 2016,
the events which take place after the balance sheet date, are sometimes reflected in the financial
statements because of statutory requirements or because of their special nature.
However, dividends declared after the balance sheet date but before approval of financial statements
are not recognized as a liability at the balance sheet date because no statutory obligation exists at
that time. Hence such dividends are disclosed in the notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends are to
be disclosed in the notes to financial statements. Accordingly, the dividend of Rs. 4 crores
recommended by New Graphics Ltd. in its Board meeting on 18 th April, 2017 shall not be
accounted for in the books for the year 2016-17 irrespective of the fact that it pertains to the year
2016-17 and will be paid after approval in the Annual General Meeting of the members /
shareholders.
(c) As per AS 16 “Borrowing Costs”, borrowing costs that are directly attributable to the acquisi tion,
construction or production of a qualifying asset should be capitalised as part of the cost of that
asset. The amount of borrowing costs eligible for capitalisation should be determined in
accordance with this Standard. Other borrowing costs should be recognised as an expense in the
period in which they are incurred.
Also AS 16 “Borrowing Costs” states that to the extent that funds are borrowed specifically for the
purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capi talisation
on that asset should be determined as the actual borrowing costs incurred on that borrowing
during the period less any income on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= Rs. 11,00,000 – Rs. 2,00,000
= Rs. 9,00,000
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 Sr. Particulars Nature of assets Interest to be Interest to be
No. Capitalized (Rs.) charged to Profit
& Loss Account
(Rs.)
i Construction of factory Qualifying Asset* 9,00,000x40/100 NIL
building = Rs. 3,60,000
ii Purchase of Machinery Not a Qualifying Asset NIL 9,00,000x35/100
= Rs. 3,15,000
iii Working Capital Not a Qualifying Asset NIL 9,00,000x25/100
= Rs. 2,25,000
Total Rs. 3,60,000 Rs. 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale.
(d) 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 recogn ition
criteria has been established for the product. Technological feasibility/asset recognition criteria
have been established upon completion of detailed programme design or working model. In this
case, Rs. 45,000 would be recorded as an expense (Rs. 25,000 for completion of detailed
program design and Rs. 20,000 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
(Rs. 42,000 + Rs. 12,000 + Rs. 13,000) Rs. 67,000.
2. Realisation Account
Particulars Rs. Rs. Particulars Rs. Rs.
To Goodwill 10,000 By Provision to doubtful Debts 2,000
To Land 20,000 By Trade creditors 96,000
To Buildings 1,10,000 By Bills Payable 14,000
To Machinery 50,000 By Bank overdraft 60,000
To Motor Car 28,000 By Mrs. A’s loan 15,000
To Furniture 12,000 By ABC Ltd. (Purchase price) 1,95,500
To Investments 18,000 By A’s Capital A/c (Investments) 13,000
To Loose tools 7,000 By Cash A/c:
To Stock 18,000 Debtors 20,000
To Bill receivable 20,000 Motor Car 24,000
To Debtors 40,000 Furniture 4,000
To A’s Capital A/c 15,000 Loose tools 1,000 49,000
(Mrs. A’s Loan)
To Cash A/c:
Creditors 94,000
Realisation expenses 500 94,500
To Profit on Realisation
t/f to:
A’s Capital A/c 1,000
B’s Capital A/c 667
C’s Capital A/c 333 2,000
4,44,500 4,44,500

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 ABC Ltd. Account
Particulars Rs. Particulars Rs.
To Realisation A/c 1,95,500 By Cash A/c 75,500
By Shares in ABC Ltd. 1,20,000
1,95,500 1,95,500
Partners’ Capital Accounts
Particulars A B C Particulars A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Profit and 6,000 4,000 2,000 By Balance b/d 70,000 80,000 10,000
Loss A/c
To Realisation A/c 13,000 - - By C’s Loan A/c - - 33,000
To C’s Current A/c - - 56,000 By General reserve 9,000 6,000 3,000
To shares in 60,000 40,000 20,000 By Investment Fluctuation
ABC Ltd. Fund 2,000 1,333 667
To Cash A/c 18,000 44,000 - By Realization A/c 1,000 667 333
By Realisation A/c (Mrs. A’s 15,000 - -
loan A/c)
By Cash A/c - 31,000
97,000 88,000 78,000 97,000 88,000 78,000

C’s Current Account

Particulars Rs. Particulars Rs.
To Balance b/d 56,000 By C’s Capital A/c-transfer 56,000
56,000 56,000
Shares in ABC Ltd. Account
Particulars Rs. Particulars Rs.
To ABC Ltd. Account 1,20,000 By A’s Capital A/c 60,000
By B’s Capital A/c 40,000
By C’s Capital A/c 20,000
1,20,000 1,20,000
Cash Account
Particulars Rs. Particulars Rs.
To Balance b/d 1,000 By Realisation A/c (Liabilities and expenses) 94,500
To ABC Ltd. 75,500 By A’s Capital A/c 18,000
To Realisation A/c (sale of assets) 49,000 By B’s Capital A/c 44,000
To C’s Capital A/c 31,000 -
1,56,500 1,56,500
Note : Investment Fluctuation Fund Account may be transferred to Realisation Account.
3. (a) In the books of Mr. Chena Swami
Salem Branch Account
Rs. Rs.
To Balance b/d By Bank (Remittance to H.O.) 19,50,000

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 Opening stock:
Ghee 40,000 By Balance c/d
Refined Oil 22,500 Closing stock:
Debtors 1,80,000 Refined oil 19,500
Cash on hand 25,690 Ghee 90,000
Furniture & fittings 23,800 Debtors (W.N. 1) 2,10,000
To Goods sent to Branch A/c Cash on hand (W.N. 2) 44,800
Refined Oil (30x1500x12) 5,40,000 Furniture & fittings 21,420
Ghee (20x5000x12) 12,00,000
To Bank (Expenses paid by H.O.) 76,800
To Branch manager’s commission 20,630
(2,26,930 x 10/110)
To Net Profit transferred
to General P & L A/c 2,06,300
23,35,720 23,35,720
Mr. Chena Swami
Trading and Profit and Loss account for the year ended 31st March, 2018
(Excluding branch transactions)
Rs. Rs.
To Opening Stock: By Sales:
Refined Oil 44,000 Refined Oil 24,10,000
Ghee 10,65,000 Ghee 38,40,500
To Purchases: By Closing Stock:
Refined Oil 27,50,000 Refined Oil 8,90,000
Less: Goods sent Ghee 15,70,000
to Branch (5,40,000) 22,10,000
Ghee 48,28,000
Less: Goods sent
to Branch (12,00,000) 36,28,000
To Direct Expenses 6,35,800
To Gross Profit 11,27,700
87,10,500 87,10,500
To Manager’s Salary 2,40,000 By Gross Profit 11,27,700
To General Expenses 1,86,000 By Branch Profit 2,26,930
transferred
To Depreciation
Furniture (88,600-79,740) 8,860
Building
(5,10,800+2,41,600- 7,14,780) 37,620
To Net profit 8,82,150
13,54,630 13,54,630

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 Working Notes:
(1) Debtors Account
Rs. Rs.
To Balance b/d 1,80,000 By Cash Collections 20,15,000
To Sales made during By Balance c/d 2,10,000
the year: (Bal. Figure)
Refined oil 5,95,000
Ghee 14,50,000
22,25,000 22,25,000
(2) Branch Cash Account
Rs. Rs.
To Balance b/d 25,690 By Remittance 19,50,000
To Collections 20,15,000 By Exp. 45,890
By Balance c/d (Bal. Figure) 44,800
20,40,690 20,40,690
(b) As per the provisions of the Companies Act, 2013:
No company shall purchase its own shares or other specified securities unless —
(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed in general meeting of the company authorising the
buy-back; however, if the buy back is upto 10% of paid up equity + free reserves, the same
may be done with the authorization of the Board Resolution without the necessity of its
being authorized by the articles of association of the company and by a special resolution of
its members passed at a general meeting of the company.
(c) the buy-back must be equal or less than twenty-five per cent of the total paid-up capital and
free reserves of the company: (Resource Test)
(d) Further, the buy-back of shares in any financial year must not exceed 25% of its total paid-
up capital and free reserves: (Share Outstanding Test)
(d) the ratio of the debt owed by the company (both secured and unsecured) after such buy -
back is not more than twice the total of its paid up capital and its free reserves: (Debt-Equity
Ratio Test)
Note: Central Government may prescribe a higher ratio of the debt than that specified under
this clause for a class or classes of companies.
(e) all the shares or other specified securities for buy-back are fully paid-up;
(f) the buy-back of the shares or other specified securities listed on any recognised stock
exchange is in accordance with the regulations made by the Securities and Exchange Board
of India in this behalf;
No offer of buy back under this sub section shall be made within a period of one year reckoned
from the date of closure of a previous offer of buy back if any. Section 69 (1) of the Companies
Act also states that where a company purchases its own shares out of the free reserves or
securities premium account, a sum equal to the nominal value of shares so purchased shall be
transferred to the Capital Redemption Reserve Account and details of such account shall be
disclosed in the Balance Sheet.
The shares or other specified securities which are proposed to be bought-back must be fully
paid-up.
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4. Books of P Ltd.
Journal Entries
Dr. Cr.
(Rs. in Lacs) (Rs. in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for consideration
settled as per agreement)
Plant and Machinery Dr. 5,000
Furniture & Fittings Dr. 1,700
Inventory Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 – 50*) 775
To Liability for 12% Debentures 1,000
To Creditors 463
To Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the form of equity
shares)
Profit & loss A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
Liability for 12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)
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 Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)
Particulars Notes Rs. (in lakhs)
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 24,000
B Reserves and Surplus 2 16,654
2 Non-current liabilities
A Long-term borrowings 3 1,000
3 Current liabilities
A Trade Payables (1,543 + 40) 1,583
B Short-term provisions 2,532
Total 45,769
Assets
1 Non-current assets
A Fixed assets
Tangible assets 4 29,004
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,769
Notes to accounts
Rs.
1. Share Capital
Equity share capital
Authorised, issued, subscribed and paid up
24 crores equity shares of Rs. 10 each (Of the above shares, 9 crores shares
have been issued for consideration other than cash) 24,000
Total 24,000
2. Reserves and Surplus
General Reserve 9,700
Securities Premium 3,000
Foreign Project Reserve 310
Profit and Loss Account 3,644
Total 16,654
3. Long-term borrowings
Secured
13% Debentures 1,000
4. Tangible assets
Land & Buildings 6,000

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 Plant & Machinery 19,000
Furniture & Fittings 4,004
Total 29,004
Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for every two
equity shares held in V Ltd.
3
Purchase consideration = Rs. 6,000 lacs × = Rs. 9,000 lacs.
2
* Cost of issue of debenture adjusted against P & L Account of V Ltd.
5. (a). Form B – RA (Prescribed by IRDA)
Name of the Insurer: X Fire Insurance Co. Ltd.
Registration No. and Date of registration with the IRDA: …………………..
Revenue Account for the year ended 31st March, 20X2
Particulars Schedule Current year ended
on 31st March, 20X2
Rs.
1. Premium earned (Net) 1 7,00,000
Total (A) 7,00,000
1. Claims incurred (Net) 2 8,00,000
2. Commission 3 50,000
3. Operating Expenses related to insurance business 4 3,00,000
Total (B) 11,50,000
Operating Profit/(Loss) from Fire Insurance Business
[C = (A – B)] (4,50,000)
Schedule 1
Premium earned (Net)
Rs.
Premium received from direct business written 15,00,000
Less: Premium on re-insurance ceded (1,00,000)
14,00,000
Adjustment for change in reserve for unexpired risk 7,00,000
Net Premium Earned 7,00,000
Schedule 2
Claims incurred (Net)
Rs.
Claims paid – Direct 7,00,000
Add: Claims outstanding on 31.3.20X2 1,00,000
Total claims incurred 8,00,000
Schedule 3
Commission
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 Commission paid 50,000
Net commission 50,000
Schedule 4
Operating expenses related to insurance business
Rs.
Expenses of Management 3,00,000
(b) Calculation of Total Remuneration payable to Liquidator
Amount in Rs.
2% on Assets realised (45,00,000 x 2%) 90,000
3% on payment made to Preferential creditors (1,25,000 x 3%) 3,750
3% on payment made to Unsecured creditors (Refer W.N) 45,000
Total Remuneration payable to Liquidator 1,38,750
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses,
payment to secured creditors, preferential creditors & liquidator’s remuneration
= Rs. 45,00,000 – Rs. 50,000 – Rs. 15,00,000 – Rs. 1,25,000 – Rs. 90,000 – Rs. 3,750
= Rs. 27,31,250
Sufficient amount is available for unsecured creditors therefore Liquidator’s remuneration on
payment to unsecured creditors = 3% x Rs. 15,00,000 = Rs. 45,000
(c)
Particulars Financial Capital Maintenance at Historical Cost
(Rs.)
Closing equity
18,00,000 represented by cash
(Rs. 30 x 60,000 units)
Opening equity 60,000 units x Rs. 20 = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (18,00,000 – 12,00,000)
Thus, in order to maintain the capital intact, Mohan can withdraw Rs. 6,00,000 as the maximum
amount.
6. TOP Bank Limited
Profit and Loss Account for the year ended 31st March, 2017
Schedule Year ended 31.03.2017
(Rs. in ‘000s)
I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6,651.18
II. Expenditure
Interest expended 15 3259.92

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 Operating expenses 16 768.46
Provisions and contingencies (960+210+900) 2,070.00
Total 6,098.38
IIII. Profits/Losses
Net profit for the year 552.80
Profit brought forward nil
552.80
IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Balance carried over to balance sheet 414.60
552.80

Year ended 31.3. 2017

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

Schedule 16 – Operating Expenses

I. Payment to and provisions for employees 320
II. Rent and taxes 144
III. Depreciation on bank’s properties 48
IV. Director’s fee, allowances and expenses 48
V. Auditors’ fee 28
VI. Law (statutory) charges 44
VII. Postage and telegrams 96.46
VIII. Preliminary expenses 40
768.46
Working Note:
(Rs. in ‘000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2016 19.00
Less: Rebate on bills discounted on 31.3. 2017 ( 25.00)
5,923.18
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7. (a) A provision should be recognized only when an enterprise has a present obligation arising from a
past event or obligation. In the given case, there is no present obligation but a future one,
therefore no provision is recognized as per AS 29.
The cost of overhauling aircraft is not recognized as a provision because it is a future obligation
and the incurring of the expenditure depends on the company’s decision to continue operating
the aircrafts. Even a legal requirement to overhaul does not require the company to make a
provision for the cost of overhaul because there is no present obligation to overhaul the aircrafts.
Further, the enterprise can avoid the future expenditure by its future action, for example by
selling the aircraft. However, an obligation might arise to pay fines or penalties under the
legislation after completion of five years. Assessment of probability of incurring fi nes and
penalties depends upon the provisions of the legislation and the stringency of the enforcement
regime. A provision should be recognized for the best estimate of any fines and penalties if
airline continues to operate aircrafts for more than five years.
(b) As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’, monetary
items denominated in a foreign currency should be reported using the closing rate at each
balance sheet date. The effect of exchange difference should be ta ken into profit and loss
account. Trade payables is a monetary item, hence should be valued at the closing rate i.e.,
Rs. 48 at 31 st March, 2017 irrespective of the payment for the same subsequently at lower rate in
the next financial year. The difference of Rs. 5 (Rs. 48 less Rs. 43) per US dollar should be
shown as an exchange loss in the profit and loss account for the year ended 31 st March, 2017
and is not to be adjusted against the cost of raw materials. In the subsequent year, the company
would record an exchange gain of Rs.1 per US dollar, i.e., the difference between
Rs. 48 and Rs. 47 per US dollar. Hence, the accounting treatment adopted by the company is
incorrect.
(c) In the books of Company
Journal Entries
Date Particulars Dr. Rs. Cr. Rs.
1-3-X2 to Bank A/c Dr. 2,40,000
31-3-X2 Employees compensation expenses A/c Dr. 4,32,000
To Equity Share Capital A/c 48,000
To Securities Premium A/c 6,24,000
(Being allotment to employees 4,800 shares of
Rs. 10 each at a premium of Rs. 130 at an exercise
price of Rs. 50 each)
31-3-X2 Profit and Loss account Dr. 4,32,000
To Employees compensation expenses A/c 4,32,000
(Being transfer of employees compensation expenses)
Working Note:
1. Employee Compensation Expenses = Discount between Market Price and option price =
Rs. 140 – Rs. 50 = Rs. 90 per share = Rs. 90 x 4,800 = Rs. 4,32,000 in total.
2. The Employees Compensation Expense is transferred to Securities Premium Account.
3. Securities Premium Account = Rs. 50 – Rs. 10 = Rs. 40 per share + Rs. 90 per share on
account of discount of option price over market price = Rs. 130 per share = Rs. 130 x 4,800
= Rs. 6, 24,000 in total.
(d) Calculation of unrealized profit of each department and total unrealized profit
Dept. X Dept. Y Dept. Z Total

11

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 Rs. Rs. Rs. Rs.
Unrealized Profit of:
Department X 75,000 x 50/150 48,000 x 20/120 =
= 25,000 8,000 33,000
Department Y 50,000 x .25 = 82,000 x .15 =
12,500 12,300 24,800
Department Z 52,000 x 30/130 = 56,000 x 40/100
12,000 = 22,400 34,400
92,200

(e) Under section 27 (3) of the LLP Act, 2008 an obligation of an LLP arising out of a contract or
otherwise, shall be solely the obligation of the LLP;
 The Liabilities of an LLP shall be met out of the properties of the LLP;
 Under section 28 (1) a partner is not personally liable, directly or indirectly, for an obligation
referred to in Section 27 (3) above, solely by reason of being a partner in the LLP;
 Section 27 (1) states that an LLP is not bound by anything done by a partner in dealing with
a person, if:
• The partner does not have the authority to act on behalf of the LLP in doing a particular
act; and
• The other person knows that the partner has no authority or does not know or believe
him to be a partner in the LLP
 Under section 30 (1) the liability of the LLP and the partners perpetrating fraudulent dealings
shall be unlimited for all or any of the debts or other liabilities of the LLP.

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