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Gurukripa’s Guideline Answers for Nov 2015 CA Final Financial Reporting Exam

Gurukripa’s Guideline Answers to Nov 2015 Exam Questions

CA Final – Financial Reporting
Question No.1 is compulsory (4 × 5 = 20 Marks).
Answer any five questions from the remaining six questions (16 × 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]
Working Notes should form part of the answers.

Question 1 (a): AS – 20 Basic & Diluted EPS 5 Marks

From the following information, you are required to compute the Basic and Adjusted Earnings Per Share: (`)
Net Profit for 2013–2014 ` 11 Lakhs
Net Profit for 2014–2015 ` 15 Lakhs
No. of Shares issued before Rights Issue 5 Lakhs
Right Issue One for every 5 held
Right Issue Price ` 15 per Share
Last date of exercising right option 01–06–2014
Fair Value of Shares before Right Issue ` 21 per Share

Solution:
Similar to Page No. 20.12, Q.No.30 of Padhuka’s Students’ Referencer on Accounting Standards. [P (A/c)–M 11].

Right Issue = One Share for every 5 Shares held = 5,00,000 × 1/5 = 1,00,000 Shares
Stage Computation Result
1 Determination of Theoretical Ex–Rights Fair Value / Price:
(Base Shares Quantity × Fair Value per Share Before Rights) + (Rights Issue × Rights Issue Price)
Base Shares Quantity + Rights Shares Quantity
(5,00,000 × ` 21) + (1,00,000 × ` 15)
= ` 20
5,00,000 + 1,00,000

Fair Value before Rights Issue ` 21

2 Adjustment Factor (AF) = = 1.05
Theoretica l Ex - Rights Price (as per Stage 1) ` 20

5,87,500
3 Weighted Average Number of Shares (WANES) Outstanding during the period (Note)
Shares
Equity Earnings ` 15,00,000
4 Basic EPS for Current Year = = ` 2.55
WANES as per Stage 3 5,87,500 Shares

Pr evious Year ' s Equity Earnings ` 11,00,000

5 Basic EPS for Previous Year as originally reported = = ` 2.2
Previous Year' s WANES 5,00,000
Pr evious Year ' s Equity Earnings ` 11,00,000
6 Adjusted Basic EPS for Previous Year= = ` 2.10
Previous Year' s WANES × AF 5,00,000 Shares  1.05

Note: Computation of Weighted Average Number of Equity Shares Outstanding for the current year
Period Time Weighting Adjustment No. of Equity Weighted Average
Period
(in Mths) Factor Factor Shares Number of Shares
(1) (2) (3) (4) (5) (6) = (3) × (4) × (5)
1.4.2014 to 1.6.2014 2 2 / 12 1.05 Opg. Bal. = 5,00,000 87,500
2.6.2014 to 31.3.2015 10 10 / 12 NA incl. Rights = 6,00,000 5,00,000
Weighted Average Number of Shares outstanding during the period 5,87,500

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Question 1 (b): AS – 28 Impairment Loss on Revalued Asset 5 Marks

Fine Ltd acquired a machine on 1st April 2009, for ` 14 Crores that had an Estimated Useful Life of 7 years. The Machine is
depreciated on Straight Line basis and does not carry any Residual Value. On 1st April 2013, the Carrying Value of the Machine
was re–assessed at ` 10.20 Crores and the surplus arising out of the revaluation being credited to Re–valuation Reserves. For
the year ended 31st March 2015, conditions indicating an impairment of the machine existed and the amount recoverable
ascertained to be only ` 140 Lakhs.

Calculate the loss on impairment of the machine and show how this loss is to be treated in the books of Fine Ltd.

Fine Ltd had followed the policy of writing down the Revaluation surplus by the increased charge of depreciation resulting
from the Revaluation.

Solution:
Similar to Page No. 28.17, Q.No. 34 of Padhuka’s Students’ Referencer on Accounting Standards. [F (A/c)–N 11].

1. Computation of Depreciation per annum (before Revaluation)

(a) Value of Machine as on 01.04.2009 ` 14.00 Crores
(b) Depreciation Per Annum = (Cost 14.00 Crores less Estimated Salvage Value Nil) ÷ Life 7 Years) ` 2.00 Crore
(c) So, Depreciation for 4 Years (FY 2009–2010 to FY 2012–2013) ` 8 Crores
(d) So, WDV on 01.04.2013, i.e. Date of Revaluation (Original Cost ` 14 Crores Less Depn. ` 8 Crores) ` 6 Crores

2. Computation of Revaluation Gain and Revised Depreciation

Carrying Amount of Machine as on 01.04.2013 ` 6.00 Crores
Revalued Amount of the Machine as on 01.04.2013 ` 10.20 Crores
Gain on Revaluation Credited to Revaluation Reserve ` 4.20 Crores
Remaining Useful Life 3 Years
Revised Depreciation = Revalued Amount ` 10.20 Crores ÷ Remaining Useful Life 3 Years ` 3.40 Crores
Excess Depreciation (Revised Depreciation ` 3.40 Crores Less Original Depreciation ` 2 Crore) ` 1.40 Crores

3. Balance in Revaluation Reserve as on 31.03.2015

Revaluation Reserve created as on 01.04.2013 ` 4.20 Crores
Less: Excess Depreciation, adjusted (` 1.40 Crores × 2 Years) ` 2.80 Crores
Balance in Revaluation Reserve on the date of Impairment Loss testing ` 1.40 Crores

4. Computation of Impairment Loss and its Adjustment

Revalued Amount of the Machine as on 01.04.2013 ` 10.20 Crores
Less: Depreciation for FY 2013–2014 and FY 2014–2015 (` 3.40 Crores × 2 Years) ` 6.80 Crores
Carrying Amount on date of Impairment Loss testing ` 3.40 Crores
Less: Recoverable Amount (given) ` 1.40 Crores
Impairment Loss ` 2.00 Crores
Adjustment: First adjusted / debited to Revaluation Reserve A/c, to the extent Reserve available ` 1.40 Crores
Balance adjusted to / debited in Profit & Loss A/c ( ` 2.00 Crores – ` 1.40 Crores) ` 0.60 Crores

Question 1 (c): Valuation of Investments by NBFC 5 Marks

Sagar Future is a non–banking Finance Company. It makes available to you the costs and Market Price of various investments
held by it as on 31.3.2015 as under –
(Figures in ` Lakhs)
Scrips Cost Mkt. Price Scrips Cost Mkt. Price
Equity Shares A 60.00 61.20 Mutual Funds MF 1 39.00 24.00
B 31.50 24.00 MF 2 30.00 21.00
C 60.00 36.00 MF 3 6.00 9.00

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Scrips Cost Mkt. Price Scrips Cost Mkt. Price

D 60.00 120.00
E 90.00 105.00
F 75.00 90.00 Govt. Securities GV 1 60.00 66.00
G 30.00 6.00 GV 2 75.00 72.00
1. Can the Company adjust Depreciation of a particular item of Investment within a category?
2. What should be the value of Investments as on 31.03.2015?
3. Is it possible to off–set Depreciation in Investment in Mutual Funds against appreciation of the value Investment in Equity
Shares and Government Securities?

Solution:
Same Illustration in Page No. 6.25, Q.No. 1 of Padhuka’s Students’ Guide on Financial Reporting. [RTP, N 08].

1. Quoted Current Investments are to be valued at Cost of Market Value, whichever is lower. Such amount can be
aggregated for all scrips in that category and the net depreciation should be computed. Hence, Depreciation of a
particular item can be adjusted within the same category of investments.

2. Value of Investments will be as under –

Type of Investment Valuation Principle Value of Investments
Equity Shares (aggregate) Lower of Cost or Market Value ` 406.50 Lakhs
Mutual Funds NAV (Market Value assumed) ` 54.00 Lakhs
Government Securities Cost ` 135.00 Lakhs
Total ` 595.50 Lakhs

3. Inter–Category Adjustments of appreciation and depreciation in values of investments cannot be done. Hence, it is not
possible to offset depreciation in investment in Mutual Funds against appreciation of value of investments in Equity
Shares and Government Securities.

Question 1 (d): AS – 15 Actuarial Gains Losses 5 Marks

At 1st April 2014, the Fair Value of Plan Assets was ` 1,00,000 in respect of Pension Plan of Zeleous Ltd. On 30th September
2014, the Plan paid out benefits of ` 19,000 and received inward contributions of ` 49,000. At 31st March 2015, the Fair Value of
Plan Assets was ` 1,50,000 and the Present Value of the Defined Benefit Obligation was ` 1,47,920. Actuarial Losses on the
obligations for the year 2014–2015 were ` 600.
At 1st April 2014, the Company made the following estimates, based on market studies, understanding and prevailing prices:
Particulars %
Interest and Dividend Income, after tax payable by the Fund 9.25
Add: Realised and Unrealised Gains on Plan Assets (after tax) 2.00
Less: Fund Administrative Costs (1.00)
Expected Rate of Return 10.25
You are required to find the Expected and Actual Returns on Plan Assets
Solution:
Same Illustration in Page No. 15.23, Q.No. 57 of Padhuka’s Students’ Referencer on Accounting Standards.
[F (A/c) – N 09, M 13 (Mod)].

Particulars `
Return on ` 1,00,000 held for 12 months at 10.25% 10,250
Add: Return on ` 30,000 held for 6 months at 5% (equivalent to 10.25% annually, compounded every 6 1,500
months) [` 30,000 = Inflow ` 49,000 Less Payments ` 19,000]
Expected Return on Plan Assets for 2014–15 11,750
st
Fair Value of Plan Assets at 31 March 2015 1,50,000
Less: Fair Value of Plan Assets at 1st April 2014 (1,00,000)

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Particulars `
Less: Contributions Received (49,000)
Add: Benefits paid during the year 19,000
Actual Return on Plan Assets 20,000
Difference Between Expected Return & Actual Return on Plan Assets (20,000 – 11,750) Gain 8,250
Actuarial Loss on the obligation for 2014–2015 (given) Loss 600
Net Actuarial Gain to be recognised in the Statement of Profit and Loss. Gain 7,650

Note: The Expected Return on Plan Assets for 2015–2016 (Next year) will be based on market expectations at
01.04.2015 for returns over the entire life of the obligation.
The Actual Return on Plan Assets can also be computed in T–Form, by preparing Plan Assets A/c as under –
Particulars ` Particulars `
To balance b/d (given) By Benefits paid out of Plan Assets
(Fair Value of Plan Assets at year beginning) 1,00,000 (Outflow out of Plan Assets) 19,000
To Employer’s Contribution for the period By balance c/d (given)
(Inflow to create more Plan Assets) 49,000 (Fair Value of Plan Assets at year end) 1,50,000
To Surplus (balancing figure)
20,000
(being Actual Return on Plan Assets)
Total 1,69,000 Total 1,69,000

Question 2: Sale of Division – Demerger 16 Marks

White Ltd has 2 divisions, E and N, and their respective Shares of various Assets and Liabilities in the Company’s Balance
Sheet as on 31st March 2015, are given below: (` Lakhs)
Particulars E Division N Division Total
Fixed Assets:
Cost 975 510
Less: Depreciation 340 240
Written – Down Value 635 270 905
Investments 175
Current Assets 525 645
Less: Current Liabilities 275 305
Net Current Assets 250 340 590
Total 1,670
Financed By
1. Loan Funds – 20 530
2. Own Funds
(a) Equity Share Capital (Shares of ` 10 Each) 420
(b) Reserves & Surplus 720
Total 1,670
Loan Funds included, inter–alia, Bank Loans of ` 20 Lakhs specifically taken for N Division, and Debentures of the Paid–up
Value of ` 200 Lakhs redeemable at any time between 1st December 2014, and 30th September 2015.
Division N has been invariably suffering Losses. The Company sold this division N along with its Assets & Liabilities to a newly
formed Bright Ltd, which was incorporated with an Authorized Capital of ` 1,200 Lakhs, divided into Shares of ` 10 each.
Bright Ltd allotted to White Ltd’s Shareholders, its two fully paid Equity Shares of ` 10 each at par, for every fully paid Equity
Shares of ` 10 each held in White Ltd, as discharge of consideration for the Division taken–over.
Bright Ltd recorded in its books the Fixed Assets at ` 400 Lakhs, Current Assets at ` 450 Lakhs and Liabilities at the same
value at which they appeared in the books of White Ltd.
On 1st April 2015, White Ltd sold all its Investments for ` 200 Lakhs and redeemed Debentures liability at 10% discount, which
was included in Loan Funds. The Cash Transaction being recorded in the Bank Account pertaining to E Division.

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You are required to,

(i) Show the Journal Entries in the books of White Ltd.
(ii) Prepare White Ltd’s Balance Sheet immediately after the demerger, and the initial Balance Sheet of Bright Ltd.
(iii) Calculate the Intrinsic Value of the Share of White Ltd immediately before the Demerger and after the Demerger, and
(iv) Comment on the impact of Demerger on “Shareholders’ Wealth”.

Solution:
Similar to Page No. 2.159, Q.No. 61 of Padhuka’s Students’ Guide on Financial Reporting. [M 04, N 10 (Mod)].

1. Journal Entries in the books of White Ltd (` Lakhs)

Particulars Dr. Cr.
1. Bank Account (Current Assets) Dr. 200
To Investments 175
To Profit and Loss Account (Reserves and Surplus) 25
(Being the sale of investments at a Profit of ` 25 Lakhs)
2. Debentures (Loan Funds) Dr. 200
To Bank Account (Current Assets) 180
To Profit and Loss A/c (Reserves & Surplus) 20
(Being the redemption of Debentures at a Discount of 10% )
3. Current Liabilities Dr. 305
Bank Loan (Loan Funds) Dr. 20
Provision for Depreciation Dr. 240
Reserves and Surplus (Loss on Demerger) Dr. 590
To Fixed Assets 510
To Current Assets 645
(Being the Assets and Liabilities pertaining to N Division taken out of the books, on transfer of the
division to White Ltd)
(Note: Any other alternative entries, with same net effect on various accounts, may be given)

2. Balance Sheet of White Ltd (After Demerger) (` Lakhs)

st
Particulars as at 31 March Note This Year Prev. Yr
I EQUITY AND LIABILITIES
(1) Shareholders’ Funds:
(a) Share Capital 1 420
(b) Reserves & Surplus – (720 + 25 – 590 + 20) 175
(2) Non–Current Liabilities
Long Term Borrowings – Loan Funds (530 – 200 – 20) 310
(3) Current Liabilities 275
Total 1180
II ASSETS
(1) Non–Current Assets
Fixed Assets: – Tangible Assets (975 – Deprn. 340) 635
(2) Current Assets – (525 + 200 – 180) 545
Total 1180

Notes to the Balance Sheet (` Lakhs) Note 1: Share Capital

Particulars This Year Prev. Year
Authorised: ……… Equity Shares of ` 10 each
Issued, Subscribed & Paid up: 42 Lakhs Equity Shares of ` 10 each 420
Total 420

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3. Balance Sheet of Bright Ltd (` Lakhs)

Particulars as at 31st March Note This Year Prev. Yr
I EQUITY AND LIABILITIES
(1) Shareholders’ Funds: Share Capital 1 840
(2) Non–Current Liabilities: Long Term Borrowings 20
(3) Current Liabilities 305
Total 1165
II ASSETS
(1) Non–Current Assets: 2 715
(2) Current Assets (At Revised Value) 450
Total 1165

Notes to the Balance Sheet (` Lakhs) Note 1: Share Capital

Particulars This Year Prev. Year
Authorised: 120 Lakhs Equity Shares of ` 10 each 1200
Issued, Subscribed & Paid up: 84 Lakhs Equity Shares of ` 10 each (issued fully for 840
Business Acquisition for Non–Cash Consideration, 2 Shares for every Share)
Total 840

Note 2: Fixed Assets

Particulars This Year Prev. Year
Tangible Assets (At Revised Value) 400
Intangible Assets Goodwill [400 + 450 – 20 – 305 – 840] 315
Total 715
4. Computation of Intrinsic Value per Share
Particulars Before Demerger After Demerger
Fixed Assets (at WDV) 905 635
Net Current Assets (590 + 200 – 180) and (250 + 200 – 180) 610 270
Total Capital Employed 1,515 905
Less: Loan Funds (530 – 200) and (530 – 200 – 20) 330 310
Net Worth of Shareholders 1,185 595
Number of Shares 42 Lakhs 42 Lakhs
Intrinsic Value per share ` 28.21 per share ` 14.17 per share

5. Gain per Share to Shareholders: After Demerger, for every Share in White Ltd (old Company), the Shareholder holds
2 Shares in Bright Ltd (new Company) also. The gain is calculated as under:
Particulars `
Value of one Share in White Ltd (Old Company) 14.16
Value of two Shares in Bright Ltd (` 10 × 2) 20.00
Total Value per Share held by Shareholder 34.16
Less: Value of one Share before Demerger 28.21
Gain per Share 5.95
The Gain per Share ` 5.95 is due to appreciation in the value of Fixed Assets by Bright Ltd.

Question 3: Consolidation of Financial Statements 16 Marks

X Ltd acquired 100% (2,00,000) Shares in Y Ltd for ` 200 Lakhs on 1st April 2011, when Y Ltd was formed with Share Capital of `
200 Lakhs. X Ltd acquired 80% (1,60,000) Shares in Z Ltd for ` 400 Lakhs on 1st April 2011, when Z Ltd had Share Capital of `
200 Lakhs and Reserves and Surplus of ` 200 Lakhs.
The Company amortizes goodwill on consolidation on a SLM basis over a period of 5 years. A full year’s amortization is
provided if the Goodwill exists for more than 6 months.
On 1st April 2014, X Ltd sold 80,000 Shares of Z Ltd for cash consideration of ` 300 Lakhs.

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The Net Assets of Z Ltd on 31st March 2014, was ` 600 Lakhs. The amount of Reserves and Surplus on 31st March 2014 was `
800 Lakhs, ` 600 Lakhs and ` 400 Lakhs respectively in X Ltd, Y Ltd, and Z Ltd, on 31st March 2014. The Balance Sheet of the
Companies as on 31st March 2015 were as follows: (` in Lakhs)
Particulars X Ltd Y Ltd Z Ltd
Share Capital ( ` 100 per Share) 800 200 200
Reserves and Surplus 1,100 840 560
Current Liabilities 500 560 640
Total 2,400 1,600 1,400
Investments at Cost
2,00,000 Shares in Y Ltd 200 – –
80,000 Shares in Z Ltd 200 – –
Current Assets 2,000 1,600 1,400
Total 2,400 1,600 1,400
Prepare for X Ltd, the Group Balance–Sheet as on 31st March 2015, along with notes. Give workings wherever necessary.
Solution: Similar to Page No. 3.161, Q.No 67 of Padhuka’s Students’ Guide on Financial Reporting. [M 12]

A. Basic Information (on 31.03.2015)

Company Y Ltd Z Ltd
Nature Wholly Owned Subsidiary Associate
Nature of Consolidation Total Consolidation Equity Method
Group Interest 100% 40%
Minority Interest NIL Not Applicable

B. Analysis of Reserves
1. For Y Ltd: A Ltd acquired the entire Shares at the time of incorporation of B Ltd. Therefore, entire profits earned by B
Ltd is in the nature of Post Acquisition Reserves, i.e. ` 840 Lakhs is Post Acquisition Group Interest.

2. For Z Ltd as at 31.03.2014: (Note 1: Z Ltd is a Subsidiary (80% Group Interest on 31.03.2014).
Reserves on Date of Consolidation : ` 400 Lakhs

Date of Acquisition, i.e. 01.04.2011 From Date of Acquisition to Date of

` 200 Lakhs Consolidation ` 200 Lakhs
Group Interest @ 80% ` 160 Lakhs Group Interest @ 80% ` 160 Lakhs
Minority Interest @ 20% ` 40 Lakhs Minority Interest @ 20% ` 40 Lakhs

3. For Z Ltd as at 31.03.2015: (Note 2: Z Ltd is an Associate on this date)

Reserves on Date of Consolidation ` 560 Lakhs

Date of Acquisition i.e. 01.04.2011 From Date of Acquisition to Date of

` 200 Lakhs Consolidation ` 360 Lakhs
Group Interest @ 40% ` 80 Lakhs Group Interest @ 40% ` 144 Lakhs

C. Consolidation of Balances relating to Z Ltd at 31.03.2014

Total Minority Group Int Reserves &
Particulars
Interest Pre–Acqn. Surplus
Subsidiary: Z Ltd (Group 80%, Minority 20%)
Equity Share Capital 200 40 160 –
Reserves & Surplus 400 80 160 160
Sub Total 120 320 160
Less: Investments – – (400) –
Add: Reserves & Surplus of X Ltd – – – 800
Add: Reserves & Surplus of Y Ltd – – – 600
Gross Total 120 (80) 1,560
Goodwill

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Total Minority Group Int Reserves &

Particulars
Interest Pre–Acqn. Surplus
Less: Goodwill on Acquisition of Z Ltd amortized 48 (48)
3 Years
(01.04.2011 to 31.03.2014) (` 80 Lakhs × )
5 Years
For Consolidated Balance Sheet 120 (32) 1,512
Minority Int. Goodwill Reserves
D. Consolidation of Balances as at 31.03.2015:
Total Minority Group Int Reserves &
Particulars
Interest Pre–Acqn. Surplus
Equity Share Capital of Y Ltd 200 – 200 –
Reserves & Surplus of Y Ltd 840 – – 840
Investments (2,00,000 Shares of Y Ltd) – – (200) –
Reserves & Surplus of X Ltd – – – 1,100
Total NIL NIL 1,940
Add: Share in Post Acquisition Reserve of Associate — — — 144
Less: Goodwill on Acquisition of Associate Amortized (32)
For Consolidated Balance Sheet — — 2,052

E. Ascertainment of Carrying Value of Investment in Z Ltd, disposed off and retained:

Particulars ` Lakhs
Net Assets of Z Ltd on the Date of Disposal
Equity Share Capital 200
Reserves & Surplus 400
Total 600
Share of X Ltd (80%) 480
Add: Carrying Value of Goodwill as at 31.03.2014 32
Total Value of Investment 512
80,000 256
Less: Carrying Value of Investment disposed off ( ` 512 × )
1,60,000
Carrying Value of Investment retained 256
Less: Share in Value of Z Ltd as on date when it transformed to an Associate ( ` 600 × 40%) 240
Goodwill arising on such Investment under Equity Method as per AS–23 16
F. Consolidated Balance Sheet of X Ltd and its Subsidiaries / Associates as at 31.03.2015 (` Lakhs)
Particulars as at 31st March Note This Year Prev. Yr
I EQUITY AND LIABILITIES
(1) Shareholders’ Funds:
(a) Share Capital (8 Lakhs Equity Shares of ` 100 each) 800
(b) Reserves & Surplus 2,052
(2) Current Liabilities = 500 + 560 1,060
Total 3,912
II ASSETS
(1) Non–Current Assets: Non–Current Investments (Note) 312
(2) Current Assets = 2,000 + 1,600 3,600
Total 3,912
Note: (AS–23)
1. Non–Current Investments
Carrying Amount of Investment in Associate Z Ltd (including Goodwill 16 Lakhs) 256
Add: Increase in Reserves and Surplus of Associate during the Year [(560 – 400) × 40%] 64
Less: Goodwill written off during the year (16 ÷ 2 Years) (8) 312

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Question 4 (a): Accounting for Stock Appreciation Rights (SAR) 8 Marks

A company announced a Stock Appreciation Right (SAR) on 01.04.2011 for each of its 600 Employees. The scheme gives the
Employees the right to claim Cash Payment equivalent to the excess on Market Price of Company’s Shares on the Exercise
Date, over the Exercise Price ` 130 per Share in respect of ` 100 Shares, subject to the condition of continuous Employment of
3 years. The SAR is exercisable after 31.03.2014 but before 30.06.2014.
Particulars 2011–2012 2012–2013 2013–2014
Fair Value of SAR ` 25 ` 28 ` 32
Actual No. of Employees left 25 15 10
Company Estimation for left Employee 3% 5% –
On 30.06.2014 when SAR was exercised, the Intrinsic Value per Share was ` 35 per Share.
Show Provision for SAR Account by Fair Value Method.
Solution: 1. Computation of Expense to be recognized under Stock Appreciation Rights (SAR)
Details FY 2011–2012 FY 2012–2013 FY 2013–2014
(a) Number of Employees at year end 600 – 25 = 575 575 – 15 = 560 560 – 10 = 550
(b) Annual Forfeiture Expected 3% 5% –
54,100 53,200
(c) Total Number of Options Expected to Vest on 55,000
Exercise Date [(a) × 100 Shares × [(a) × 100 Shares
[(a) × 100 Shares]
97% × 97%)] × 95%)]
(d) Total Value of Options Expected to Vest at the 54,100 × ` 25 53,200 × ` 28 55,000 × ` 32
end of Vesting Period = [(c) × Fair Value] = ` 13,52,500 = ` 14,89,600 = ` 17,60,000
[(d) × 1/3] = [(d) × 2/3] [(d) × 3/3]
(e) Total Cumulative Cost of Options
` 4,50,833 = ` 9,93,067 = ` 17,60,000
(f) Less: Already recognized in Previous Years 0 (` 4,50,833) (` 9,93,067)
(g) Amount to be Expensed this Year ` 4,50,833 ` 5,42,234 ` 7,66,933
Note: In the above computations, the Expense to be recognized is determined from a year–end estimation perspective. An
alternative approach is to estimate Expected Options from a year–beginning perspective, as under –
 For FY 2011–2012: 600 Employees × 100 Shares × 97% × 97%× 97% (for 3 years) = 54,760 Shares.
 For FY 2012–2013: (600–25) = 575 Employees × 100 Shares × 95% × 95% (for 2 years) = 51,894 Shares.
Year 2014 – 2015
Cash Payment of SAR’s (55,000 Shares × Intrinsic Value of SAR per Share ` 35) 19,25,000
Less: Value of SAR recognized as Expense in Books as above 17,60,000
Value of SAR recognized as Expense in 2014–2015 1,65,000

2. Provision for Stock Appreciation Right A/c

Year Particulars ` Particulars `
2011–2012 To Balance c/d 4,50,833 By Employees’ Compensation Expense A/c 4,50,833
Total 4,50,833 Total 4,50,833
2012–2013 To Balance c/d 9,93,067 By Balance b/d 4,50,833
By Employees’ Compensation Expense A/c 5,42,234
Total 9,93,067 Total 9,93,067
2013–2014 To Balance c/d 17,60,000 By Balance b/d 9,93,067
By Employees’ Compensation Expense A/c 7,66,933
Total 17,60,000 Total 17,60,000
2014–2015 To Bank (55,000 x 35) 19,25,000 By Balance b/d 17,60,000
By Employees’ Compensation Expense A/c 1,65,000
Total 19,25,000 Total 19,25,000

Question 4 (b): AS 31 Convertible Investment – Equity / Liability Recognition 8 Marks

You are required to –
(i) Identify Equity and Liability Components,

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(ii) Compute Bond Liability at the end of each year, and

(iii) Pass necessary Journal Entries from the following information:
Number of Convertible Bonds 5,000 Bonds issued at the beginning of Year 1
Value of Bonds ` 500 per Bond
Period of Bonds 3 Years Validity
Interest Rate on the Bond 9% p.a Payable Annually
Proceeds Received ` 25 Lakhs
Conversion At the Bond Holders’ discretion, conversion into 125 Ordinary Shares for each
Bond of ` 500
Prevailing Market Rate 11% p.a. for Bonds issued without conversion option
Present Value Factor for 11% 0.900, 0.812, 0.731 (for One year, two years and three years, respectively)

Solution: 1. Computation of Fair Value of Liability Component

This is measured using the Interest Rate of 11% for Non–Convertible Debt as the Benchmark Discount Rate, as under –
Nature Year Outflow Discount Factor at 11% PV of Outflow
Annual Interest [` 25 Lakhs × 9%] 1 to 3 2,25,000 (0.900 + 0.812 + 0.731) 2.443 5,49,675
Principal repayment at Maturity 3 25,00,000 0.731 18,27,500
Fair Value of Liability 23,77,175

2. Initial Recognition of Compound Financial Instrument (9% Convertible Debentures)

Fair Value of the Compound Instrument as a whole = Nominal Value = 5,000 × ` 500 ` 25,00,000
Less: Fair Value of Liability Component as computed above ` 23,77,175
Equity Component ` 1,22,825
3. Bond Liability at the end of each Year
Particulars Year 1 Year 2 Year 3
Beginning 23,77,175 24,13,664 24,54,167
Add: Notional Interest @ 11% 2,61,489 2,65,503 2,70,833
26,38,664 26,79,167 27,25,000
Less: Interest @ 9% 2,25,000 2,25,000 2,25,000
24,13,664 24,54,167 25,00,000
Note: Rounding off adjustments made to 11% interest in year 3.

4. Journal Entries
Year Particulars Dr (`) Cr (`)
1 Cash / Bank A/c Dr. [Total Proceeds] 25,00,000
To Convertible Bond Liability A/c [Liability Component] 23,77,175
To Equity A/c [Equity Component] 1,22,825
(Being recognition of Equity and Liability Component)
1 Finance Charges A/c Dr. 2,61,489
To Bonds A/c [Bal. Fig.] 36,489
To Cash / Bank A/c 2,25,000
(Being Interest paid and balance adjusted in Bonds A/c)
2 Finance Charges A/c Dr. 2,65,503
To Bonds A/c [Bal. Fig.] 40,503
To Cash / Bank A/c 2,25,000
(Being Interest paid and balance adjusted in Bonds A/c)
3 Finance Charges A/c Dr. 2,70,833
To Bonds A/c [Bal. Fig.] 45,833
To Cash / Bank A/c 2,25,000
(Being Interest paid and balance adjusted in Bonds A/c)

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Question 5 (a): Valuation of Business – Maximum Price that can be quoted 10 Marks
Railway Products Private Ltd (RPPL) is engaged in the Business of Design and Manufacture of Railways Products that are
supplied to Railway Department. The core component of such product is outsourced by RPPL from Allied Component Ltd
(ACL), the Sole Manufacturer of such components.
RPPL wants to gain leadership in this industry and seeks to take over ACL. RPPL estimates that its goodwill will increase on
the Acquisition. Minimum increased value of Goodwill will be ` 200 Lakhs.
RPPL has made the following calculation of the economic benefits presently available and that are foreseen as a result of the
acquisition:
(i) Projected Cash Flows for the next 5 Years: Cash Flow Forecasts (` in Lakhs)
Year 1 2 3 4 5
RPPL 2,000 2,500 3,000 3,500 4,000
ACL 600 600 800 800 1,000

(ii) The Net Worth of ACL is as follows:(` in Lakhs)

Fixed Assets: Tangible Assets 3,000
Investments (Non–Trade) 1,500
Current Assets: Inventories 1,000
Receivables 500 1,500
Total 6,000
Less: Current Liabilities: Trade Payables 800
Bank Loan 700 1,500
Net Worth (represented by 300 Lakh Shares of ` 10 each and Reserves and Surplus ` 1,500 Lakhs) 4,500

(iii) Others Information:

(a) 20% of the Fixed Assets of ACL will not be required on acquisition, and the same has ready buyers for ` 300 Lakhs.
(b) Investments have a ready market for ` 2,000 Lakhs.
(c) Currents Assets include surplus Inventory of ` 50 Lakhs that can realize ` 80 Lakhs.
(d) The Current Liabilities are to be paid off immediately. A sum of ` 820 Lakhs are payable on account of a
compensation claim awarded against ACL, which has been treated as a Contingent Liability in the accounts, on which
20% was provided for.
(iv) RPPL has estimated the combined Cash Flows post–merger as follows:
Year 1 2 3 4 5
Cash Flow (` in Lakhs) 2,800 3,200 3,700 4,300 5,000
You are required to advice RPPL the Maximum Value it can pay for take–over of ACL, and also show the current valuation
of ACL as a “Stand Alone” Equity. The Discount Rate of 5% is advised appropriate.
P.V. of Discounting Factor of 15% are as follows:
Year 1 2 3 4 5
Discounting Factor (15%) 0.870 0.756 0.658 0.572 0.497

Solution: Similar to Page No. 4.111, Q.No 9 of Padhuka’s Students’ Guide on Financial Reporting [M 12 (Mod)]

1. Computation of Operational Synergy expected to arise out of merger (` Lakhs):

Year 1 2 3 4 5
Cash Flow after merger 2,800 3,200 3,700 4,300 5,000
Cash Flow without merger 2,000 2,500 3,000 3,500 4,000
Synergy Effect 800 700 700 800 1,000

2. Valuation of ACL (` Lakhs):

Discount Without considering merger Considering Merger
Year
Factor Cash Flows Discounted Cash Flow Cash Flows Discounted Cash Flow
1 0.870 600.00 522.00 800.00 696.00
2 0.756 600.00 453.60 700.00 529.20

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Year Discount Without considering merger Considering Merger

3 Factor
0.658 800.00 526.40 700.00 460.60
4 0.572 800.00 457.60 800.00 457.60
5 0.497 1,000.00 497.00 1,000.00 497.00
2,456.60 2,640.40
Difference in Valuation had there been no merger = 2,640.40 – 2,456.60 = ` 183.80 Lakhs

3. Computation of Maximum Value to be quoted

Particulars ` Lakhs
Value as per Discounted Cash Flow from Operations 2,640.40
Add: Cash to be collected immediately by disposal of assets:
Sundry Fixed Assets 300.00
Investments 2,000.00
Stocks 80.00 2,380.00
Total of above 5,020.40
Less: Trade Payables 800.00
Bank Loan 700.00
Compensation Claim to be provided (` 820 × 80%) 656.00 (2,156.00)
Maximum Amount to be quoted 2,864.40

Question 5 (b): Leverage effect of Goodwill 6 Marks

Find out Leverage effect on Goodwill from the following information:
(i) Average Capital Employed (Equity Approach) ` 11,50,000
(ii) Future Maintainable Profit on Equity Fund (After Tax) ` 1,80,000
(iii) 10% Long Term Loan ` 4,50,000
(iv) Tax Rate 40%
(v) Normal Rate of Return:
On Equity Capital Employed 15%
On Long Term Capital Employed 12%

Solution: Similar to Page No. 4.33, Q.No.14 of Padhuka’s Students’ Guide on Financial Reporting [N 12 (Mod)]

1. Computation of Future Maintainable Profit (` Lakhs)

Particulars Owners Funds Total Funds
Profit Before Interest 3.45 3.45
Less: Interest on Long Term Loans = 10% of 4.50 0.45 NA
Future Maintainable Profits before Tax (Note) 3.00 3.45
Less: Tax Expense at 40% 1.20 1.38
Future Maintainable Profits after Tax (given) 1.80 2.07
1.80
Note: Tax = 40%, So PAT = 60% = 1.80. Hence, PBT = = 3.00
60%

2. Computation of Goodwill (` Lakhs)

Particulars Owners Funds Total Funds
(a) Future Maintainable Profits after Tax 1.80 2.07
(b) Normal Rate of Return 15% 12%
(c) Normal Capital Employed = (a ÷ b) 12.00 17.25
(d) Actual Capital Employed (given) (given) 11.50 11.50 + 4.50 = 16.00
(e) Goodwill = (c – d) 0.50 1.25
Hence, Leverage Effect on Goodwill = ` 1.25 – ` 0.50 = ` 0.75 Lakhs.

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Question 6 (a): EVA with WACC, EVA vs MVA 8 Marks

Vijay Ltd furnishes the following information from which you are required to calculate the Economic Value Added (EVA) of the
Company and also explain the reason for the difference, if any, between the EVA as calculated by you and the MVA (Market
Value Added) of Vijay Ltd amounting to ` 7,010 Crores.
Common Shares of ` 10 Face Value 79,10,000 Shares
10% Debentures of ` 100 Face Value 2,50,000 Debentures
Tax Rate 30%
Financial Leverage 1.1 Times
Capital Reserves (` in Lakhs) 54
Free Reserves ( ` in Lakhs) 75
Securities Premium (` in Lakhs) 80
It is common practice for Companies in the industry to which Vijay Ltd belongs, to pay atleast a dividend of 12% to its Common
Shareholders.
Solution: Similar to Page No. 7.26, Q.No 5 of Padhuka’s Students’ Guide on Financial Reporting [N 11]

1. Computation of EBIT & NOPAT

(a) Interest on Debt = 2,50,000 × ` 100 × 10% = ` 25 Lakhs
EBIT EBIT x
(b) Assuming EBIT = x, Financial Leverage = = = = 1.1 times
EBT EBIT Less Interest x - 25
So, x = 1.1 (x – 25). x = 1.1x – 27.5
0.1X = ` 27.50 Lakhs, So, X = ` 275 Lakhs = Operating Profit (EBIT)
Therefore, Operating Profit After Taxes = ` 275 Lakhs x (1 – Tax Rate of 30%) = ` 192.50 Lakhs
2. Computation of Weighted Average Cost of Capital
Sources of Finance Capital Amount (` Lakhs) Individual Cost Product
Equity Share Capital 791 12% 94.92
Reserves and Surplus (Note) 209 12% 25.08
10% Debentures 250 [10% – 30% thereon] = 7% 17.50
Total 1,250 137.50
Note: Reserves and Surplus = Free Reserves + Capital Reserve + Securities Premium = 75 + 54 + 80 = ` 209 Lakhs

137.50 Lakhs
Therefore, Weighted Average Cost of Capital = = 11%
1,250 Lakhs

3. Computation of EVA
Economic Value Added = Operating Profit After Taxes Less [Capital Employed x WACC]
= ` 192.50 Lakhs Less [` 1,250 Lakhs × 11%] = ` 55 Lakhs

4. EVA vs. MVA

(a) EVA represents excess of earnings over the cost of financing, whereas Market Value Added represents excess of Market
Value over the Book Value of Shares. (Similar to Super Profits)
(b) In a way, Market Value Added is comparable to the capitalized value of Economic Value Added of an Entity. The
capitalized value of EVA using 12% (Cost of Equity) as appropriate discount rate ` 800 Lakhs, or ` 8 Crores (EVA ` 55
Lakhs ÷ 12%), whereas the actual Market Value Added is given as ` 7,010 Crores.
(c) The difference can be due to factors which influence the market movements of prices, but not influencing the earning
capacity of the Entity.

Question 6 (b): As – 26 & B/s Extract under Schedule III 8 Marks

During the Financial Year 2014–2015, Power Ltd had the following transactions;
(i) On 01.04.2014, Power Ltd Purchased a new Asset of Dark Ltd for ` 11,40,000. The Fair Value of Dark Ltd’s identifiable Net Assets
was ` 8,50,000. Power Ltd is of the view that due to popularity of Dark Ltd’s product, the life of Goodwill is 10 Years.

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(ii) On 01.05.2014, Power Ltd purchased a franchise to operate Transport Service from the Government for ` 12,00,000 and at a
Annual Fees of 4% of Transport Revenues. The Franchise expires after 5 years. Transport Revenue were ` 1,20,000 for Financial
Year 2014–2015. Power Ltd projects future Revenue of ` 2,40,000 in 2015–2016 and ` 3,50,000 p.a for 3 Years thereafter.
(iii) On 05.07.2014, Power Ltd was granted a Patent that had been applied for by Dark Ltd. During 2014–2015, Power Ltd
incurred Legal Cost of ` 1,10,000 to register the Patent and an additional ` 3,00,000 to successfully prosecute a Patent
infringement suit against a Competitor. Power Ltd expects the Patent’s economic life to be 10 years. Power Ltd follows an
Accounting policy to amortize all Intangibles on SLM basis over a maximum period permitted by Accounting Standard,
taking a full year amortization in the year of acquisition.
Prepare:
(a) A Schedule showing the intangible section in Power Ltd Balance Sheet at 31st March 2015.
(b) A Schedule showing the related expenses that would appear in the Statement of Profit and Loss of Power Ltd for 2014–2015.

Solution: Refer Principles in Pg.No.26.14, Q.No.36, Pg.No.26.5, Q.No.15, Pg.No.26.18, Q.No.51 of Padhuka’s
Students’ Referencer on Accounting Standards.

1. Treatment under AS – 26
Point Principle and Treatment. (amounts in ` 000s)
(i)  The excess of consideration paid over the Fair Value of identifiable Net Assets is recognized as Goodwill.
Hence, Goodwill = 1140 – 850 = 290.
 AS–26 assumes that the useful life does not exceed 10 years. So, the amortization over 10 years is proper.
290
Amortisation p.a. = = 29
10
(ii)  Lumpsum franchise fee 1200 would be recognized as Intangibel Asset.
 The Depreciation Amount should be allocated over the assets useful life, on a systematic basis. [e.g. SLM,
or Ratio of Revenues to be earned, etc.]
 In this case Total Revenues to be earned in 5 years are –
Year 1 2 3 4 5 Total
Revenue 120 240 350 350 350 1410
Amortisation Apportioned 102 204 298 298 298 1200
 Alternatively, Amortisation p.a. under SLM = 1200 ÷ 5 = 240
 Revenue in each year and 4% Annual Fees should be recognized as Income / Expenses in P & L of each year.
Note: Impairment Testing nor considered in this cases.
(iii)  Cost of Patent = Registration + Directly attributable Cost = 110 + 300 = 410
 Amortisation p.a. = 410 ÷ 10 years = 41
 Note: Assumed that 410 represents cost relating to right to use, and hence capitalized under AS–26.

2. Balance Sheet of Power Ltd (extract) (` 000)

Particulars as at 31st March 2015 Note This Year Prev. Yr
II ASSETS
(1) Non–Current Assets: Intangible Assets 1 1,728
Total XXXX

Note for WN 2: Intangible Assets: (` 000s)

Gross Block (Cost) Accumulated Amortisation Net Block
Particulars Closing Closing Opg. Closing
Opg. Bal Addns Opg. Bal Addns
Balance Balance Bal Balance
(a) Goodwill – 290 290 – 29 29 – 261
(b) Transport Franchise – 1200 1200 – 102 102 – 1098
(c) Patent – 410 410 – 41 41 – 369
Total 1900 1900 172 172 1728
3. Profit and Loss Statement (extract) (` 000)
Particulars as at 31st March 2015 Note This Year Prev. Yr
Depreciation and Amortisation Expense 1 172
Total XXXX

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Note:
1 Depreciation and Amortisation Expense
(a) Goodwill 29
(b) Transport Service Franchise 102
(c) Patent 41 172

Question 7 (a): AS–1 Recognition of Expense using Accrual 4 Marks

XYZ Ltd is engaged in the business of financial services and is undergoing tight liquidity position, since most of the assets of
the Company are blocked in various claims / petitions in a Special Court. XYZ Ltd has accepted Inter–Corporate Deposits
(ICDs) and is making its best efforts to settle the dues. There were claims at varied rates of interest from Lenders from the due
date of ICD’s to the date of repayment. The Company has provided interest, as per the terms of the contract till the due date,
and a Note for non–provision of interest from the due date to date of repayment was effected in the Financial Statements.
On account of uncertainties existing regarding the determination of the amount and in the absence of any Specific Legal
obligation at present as per the terms of contracts, the Company considers that these claims are in the nature of “Claims against
the Company not acknowledged as Debt”, and the same has been disclosed by way of a Note in the Accounts instead of making a
provision in the Statement of Profit and Loss. State whether the treatment done by the Company is correct or not. [F(A/c) RTP]
Solution: Same Illustration in Page No. 1.5, Q.No 14 of Padhuka’s Students’ Referencer on AS [F (A/c) – (RTP)]

1. Nature of Interest Expense: Irrespective of the terms of the contract, as long as the principal amount of a loan is
not repaid, the lender cannot be placed in a disadvantageous position for non–payment of interest in respect of claim
for interest from the due date to date of repayment of loan.

2. Principles as per AS–1: On a combined reading of “Prudence” concept and “Accrual” assumption, it is apparent that
the Company should provide for the Interest Expense / Liability (since it is not waived by the Lenders) at an amount
estimated or on reasonable basis, based on facts and circumstances of each case.

3. Effect of Company A/cing: Non–Provision of Interest from the due date to the date of repayment of Loan amounts
to violation of accrual basis of accounting and also not in time with AS–29 requirements conditions as to present
obligation Quantification of Amount, etc. require Recognistion of Expense. Proper Accountancy / Disclosure under AS–1
& AS–29 is necessary. The Accounting treatment given by the Company is not proper.

Question 7 (b): AS–30, 31, 32 – Put Option 4 Marks

Company owns an office building. Company enters into a Put Option with an Investor that permits the Company to put the
Building to the Investor for ` 150 Million. The Current Value of the Building is ` 175 Million. The option expires in 5 years. The
option, if exercised, may be settled through physical delivery or net cash, at the Company’s option. How do the Company and
the Investor account for the option?

Refer Page No. 32.17, Q.No.24 of Padhuka’s Students’ Referencer on Accounting Standards [N 11, N 10]

1. Principle: As per AS – 31, Financial Instrument is any contract that gives rise to a Financial Asset of one Entity and a
Financial Liability or Equity Instrument of another Entity. In the given case, for the purpose of the definition of Financial
Instrument, “Building” do not qualify the definition of Financial Asset as per the Standard.
2. Analysis: To assess whether the Put Option is a Financial Instrument or not, it is necessary to evaluate the past
practice of the Company. If the Company has the practice of settling net, then it becomes a Financial Instrument.
3. Conclusion: If the Company intends to sell the Building and settle by delivery and there is no past practice of settling
net, then the contract should not be accounted for as Financial Instrument under AS – 30 and AS – 31.

Question 7 (c): AS–22 4 Marks

Aakash Limited is the owner of CGU (Cash Generating Unit) Block of Assets whose Current carrying Cost is ` 1,000 Lakhs.
Current Carrying Cost of the CGU Block of Assets as per Accounting and Tax Records are after charging Depreciation of the
Current Year. The Company, after a detailed study by its Technical Team, has assessed the Present Value recoverable amount
of this CGU Block of Assets at ` 550 Lakhs. The value of the Block of Assets as per the Income Tax Records is ` 800 Lakhs.
The Approving Authority of the Company have issued a signed statement confirming that the impairment in the value of CGU is
only a temporary phenomenon which is reversible in subsequent periods, and also assuring virtual certainty of Taxable
Incomes in the foreseeable future. You are required to show Deferred Tax workings as per Accounting Standards in force,
given the Tax Rate of 30% plus 10% Surcharge. The Depreciation Rate for tax purposes is 15% and that as per Books is 13.91%.

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Solution: Same Illustration in Page No. 22.8, Q.No 15 of Padhuka’s Students’ Referencer on AS [F (A/c) – M 12)]

Particulars ` Lakhs
1,000
1. Depreciation as per Accounting Books for the current year × 13.91 % 161.58
(100% - 13.91%)

800
2. Depreciation as per Income Tax Records for the current year × 15 % 141.18
(100% - 15%)

3. Timing Difference due to Depreciation (1 – 2) 20.40

4. Tax effect of the above timing difference at 33% (Deferred Tax Asset) (A) 6.73
5. Impairment Loss recognized in the Profit and Loss Account (1,000 – 550) 450
6. Impairment Loss allowed for tax purposes Nil
7. Timing Difference due to Impairment Loss (5 – 6) 450
8. Tax effect of the above timing difference at 33% (Deferred Tax Asset) (B) 148.50
9. Total Deferred Tax Asset to be considered in current year (A + B) 155.23

Question 7 (d): Derivatives 4 Marks

A Company enters into a fixed price forward contract to purchase one million kilograms of copper in accordance with its
expected usage requirements. The contract permits the company to take physical delivery of the copper at the end of 12
months or to pay or receive a net settlement in cash, based on the change in fair value of copper. Is the contract accounted for
as a Derivative? Explain.

Solution: Refer Principles in Page No. 30.5, Q.No 7 of Padhuka’s Students’ Referencer on Accounting Standards

1. Principle and Analysis: To account for a Contract as a Derivative, the Contract should be within the scope of AS–30,
with all three of the following characteristics –
Features (Principles) Analysis
(a) Derives its value from Underlying Asset Yes. Metal Prices are the underlying Asset
(b) Requires negligible Investment Yes. Only a Contract is entered.
(c) Can be settled on Net basis Yes. (Given)
(d) Volatility in underlying asset Metal Prices are subject to fluctuation

2. Conclusion: It is a Derivative Instrument (Forward Contract) as per AS – 31.

Question 7 (e): CSR Reporting 4 Marks

Due to immense loss to Nepal in the recent earthquake, one FMCG Company undertakes various commercial activities with
considerable discounts and concessions at the related affected areas of Nepal for a continuous period of 3 months after
earthquake. In the Financial Statement for the year 2014–2015, the Management has shown the Expenditure incurred on such
activity as Expenditure incurred to discharge Corporate Social Responsibility. State whether the intention of Management is
correct. Explain with reasons.

Solution:
(i) Principle: Activities undertaken outside India are excluded from CSR Activities u/s 135.
(ii) Conclusion: Since the CSR activity is undertaken outside India, the expenditure incurred on the same cannot be
shown as CSR Expenditure in the Financial Statements. Hence the intention of the management is not correct in this
case.

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