PAPER 5: ADVANCED ACCOUNTING Question No.1 is compulsory. Candidates are also required to answer any four questions from the remaining five questions. Working notes should form part of the respective answers. Wherever necessary, candidates are permitted to make suitable assumptions which should be disclosed by way ofa note Question 1 (a) TQ Cycles Ltd. isin the manufacturing of bicycles, a labour intensive manufacturing sector. |In April 2022, the Government enhanced the minimum wages payable to workers with retrospective effect from the 1 January, 2022. Due to ths legislative change, the adaitional wages for the period from January 2022 to March 2022 amounted to © 30 lakhs. The ‘management asked the Finance manager to charge € 30 lakhs as prior period item while finalizing financial statements for the year 2022-23. Further, the Finance manager is of the view that this amount being abnormal should be disclosed as extra-ordinary item in the Profit and loss account for the financial year 2021-22. Discuss with reference to applicable Accounting Standards. (6) NAT, allisted entity, as on 1 April 2021 had the folowing capital structure: z 10,00,000 Equity Shares having face value of @ 1 each 10,00,000 10,00,000 8% Preference Shares having face value of #10 each 1,00,00,000 During the year 2021-2022, the company had profit affer tax of € 90,00,000 On 1 January,2022, NAT made a bonus issue of one equity share for every 2 equity shares outstanding as at 31% December, 2021. On 1 January,2022, NAT issued 2,00,000 equity shares of ® 1 each at their full market price of 7.60 per share. NAT's shares were trading at € 8.05 per share on 31% March, 2022 Further it has been provided that the basic eamings per share for the year ended 31* March,2021 was previously reported at 62.30. You are required to: () Calculate the basic earnings per share to be reported in the financial statements of NAT for the year ended 31% March,2022 including the comparative figure, in accordance with AS-20 Earnings Per Share. (il) Explain why the bonus issue of shares and the shares issue at full market price are treated differently in the calculation of the basic eamings per share? © The Institute of Chartered Accountants of India2 INTERMEDIATE EXAMINATION: MAY, 2022 (c) Alloy Fabrication Limited is engaged in manufacturing of iron and stee! rods. The company is in the process of finalisation of the accounts for the year ended 31%* March,2022 and needs your advice on the following issues inline with the provisions of AS-29: (On t%April2019, the company installed a huge furnace in their plant. The furnace has a lining that needs to be replaced every five years for technical reasons. At the Balance Sheet date 31' March, 2022, the company does not provide any provision for replacement of lining of the furnace. (i) A case has been fled against the company in the consumer court and a notice for levy of a penalty of #50 Lakhs has been received. The company has appointed a lawyer to defend the case for a fee of ® 5 Lakhs. 60% of the fees have been pai in advance and rest 40% wil be paid after finalization of the case. There are 70% chances that the penalty may not be levied. (@) Grace Lid, a firm of contractors provided the following information in respect of a contract for the year ended on 31% March, 2022: Particulars (in 000) Fixed Price Contract with an escalation clause 38,000 Work Certified 17,500 Work not Certified (includes * 26,25,000 for materials issued, out of | 3,815 which material lying unused at the end of the period is # 1,40,000) Estimated further cost to completion Progress Payment Received 17,325 Payment to be Received 14,000 Escalation in cost is by 8% and accordingly the contract price is} 4.900 increased by 8% From the above information, you are required to: () Compute the contract revenue to be recognized. (il) Calculate Profit /Loss for the year ended 31% March,2022 and additional provision for, loss to be made, if any, for the year ended 31* March, 2022. (4 Parts X 5 Marks = 20 Marks) Answer (2) As per AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in ‘Accounting Policies” prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of ‘one or more prior periods. The term does not include other adjustments necessitated by circumstances which though related to prior periods, are determined in the current period, © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING 3 Itis given that revision of wages took place in April, 2022 with retrospective effect from 48 January, 2022, Therefore, wages payable for the period from 1.01.2022 to 31.3,2022 cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item. The full amount of wages payable to workers will be treated as an expense of current year and it will be charged to profit & loss account forthe year 2022-23 as normal expenses, It may be mentioned that additional wages is an expense arising from the ordinary activities, of the company. Such an expense does not qualify as an extraordinary item. Therefore, finance manager is incorrect in treating increase as extraordinary item. However, as per AS 5, when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Therefore, additional wages liability of & 30 lakhs should be disclosed separately in the financial statements of TO Cycles Ltd. forthe year ended 31° March, 2023. (6) (i) Calculation of Basic Earnings per share forthe year ended 31 March, 2022 including the comparative figure: (2) Eamings for the year ended 31% March, 2021 = EPS x Number of shares ‘outstanding during 2020-2021 62.30 x 10,00,000 equity shares 6,23,00,000 (0) Adjusted Earnings per share after taking into consideration bonus issue Adjusted Basic EPS = Earnings for the year 2020-2021 | Total outstanding shares +Borus issue = & 6,23,00,000 / (10,00,000+ 5,00,000) = & 6,23,00,000 / 15,00,000 = £41.53 per share (c) Basic EPS for the year 2021-2022 Basic EPS = Total Eamings ~ Preference Shares Dividend) / (Total shares ‘outstanding at the beginning + Bonus issue + weighted average of the shares issued in January, 2022) = (8 90,00,000 ~ % (1,00,00,000 x 8%) / (10,00,000 + 5,00,000 + (2,00,000 x 3/12) = © 82,00,000 / 15,50,000 shares = 5.29 per share © The Institute of Chartered Accountants of India4 INTERMEDIATE EXAMINATION: MAY, 2022 (ii) In case of a bonus issue, equity shares are issued to existing shareholders for no additional consideration. Therefore, the number of equity shares outstanding is increased without an increase in resources. Since the bonus issue is an issue without consideration, the issue is treated as if it had occurred prior to the beginning of the year 2021, the earliest period reported However, the share issued at full market price does not carry any bonus element and Usually results in a proportionate change in the resources availabe to the enterprise. Therefore, itis taken into consideration from the time it has been issued i.e. the time- weighting factor is considered based on the specific shares outstanding as a proportion ofthe total number of days in the period (c) (i) 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 replacement of lining of furnace is not recognized as a provision because itis a future obligation. Even a legal requirement does not require the company to make a provision for the cost of replacement because there is no present obligation. Even the intention to incur the expenditure depends on the company deciding to continue operating the furnace orto replace the lining (i) As per AS 29, an obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered probable, i.e., more likely than not. Liability is @ present obligation of the enterprise arising from past events, the settlement of which is expected to resultin an outlow from the enterprise of resources embodying economic benefits In the given case, there are 70% chances that the penalty may not be levied. Accordingly, Alloy Fabrication Ltd. should not make the provision for penalty. The matter is disclosed as a contingent liability unless the probability of any outfiow is regarded as remote. However, a provision should be made for remaining 40% fees of the lawyer amounting % 2,00,000 in the financial statements of financial year 2021-2022. (d) Calculation of total estimated cost of construction in thousand Cost of Contract incurred till date Work certified 17,500 Work not certified (3,815 thousand - 140 thousand) | _3,675 24,475 Add: Estimated future cost 17,325 Total estimated cost of construction 38,500 Contract Price (35,000 thousand x 1.08) 37,800 © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING 5 Stage of completion Percentage of completion till date to total estimated cost of construction = [Cost of work completed til date / total estimated cost of the contract] x 100 = [8 21,175 thousand / & 38,500 thousand] x 100= 55% Revenue to be recognized for the year ended 31%March, 2022 Proportion of total contract value recognized as revenue = Contract price x percentage of ‘completion = & 37,800 thousand x 55% = & 20,790 thousand Loss to be recognized for the year ended 31*March, 2022 Loss for the year ended 31*March, 2022 = Cost incurred till date ~ Revenue to be recognized for the year ended 31* March, 2022 = € 21,175 thousand ~ % 20,790 thousand = & 385 thousand Provision for loss to be made at the end of 31*March, 2022 in thousand Total estimated loss on the contract Total estimated cost of the contract 38,500 Less: Total revised contract price 37,800 700 Less: Loss recognized for the year ended 31% March, (385) 2022 Provision for loss to be made at the end of 31°March, 315 2022 Question 2 The summarized Balance Sheet of A Ltd. and B Ltd. as at 31* March, 2022 are as under: Ald. (in | BLid. (in & Equity shares of #10 each, fully paid up 30,00,000 | 24,00,000 ‘Securities Premium Account 4,00,000 General Reserve 6,20,000| — 5,00,000 Profit and Loss Account 3,60,000| 320,000 Retirement Gratuity Fund Account 1,00,000 10% Debentures 20,00,000 Unsecured Loan (including loan from A Ltd.) 6,00,000| 8,20,000 Trade Payables 1,00,000 | 3,40,000 71,80,000 | 43.80,000 Land and Buildings 28,00,000 | 27,00,000 Plant and Machinery 20,00,000 | _7,60,000 © The Institute of Chartered Accountants of India6 INTERMEDIATE EXAMINATION: MAY, 2022 Long term advance to B Lid. 2,20,000 Inventories 10,40,000 | 7,00,000 Trade Receivables 820,000} §,20,000 Cash and Bank 3.00000) 300,000 71,80,000 | _43,80,000 B Lid. isto declare and pay * 1 per equity share as dividend, before the following amalgamation takes place with Z Ltd. Z Lid. was incorporated to take over the business of both A Ltd. and B Ltd. (2) The authorized share capital of Z Ltd. is ® 60 lakhs divided into %6 lakhs equity shares of 710 each. (b) As per Registered Valuer the value of equity shares of A Ltd. is @ 18 per share and of B Lid. is % 12 per share respectively and agreed by respective shareholders of the ‘companies. (0) 10% Debentures of A Ltd. to be issued 12% Debentures of Z Ltd. at par in consideration of their holdings. (A) A contingent liability of A Ltd. of %2,00,000 is to be treated as actual labilty (2) Liquidation expenses including Registered Valuer fees of A Ltd. ® 50,000 and B Ltd. 30,000 respectively to be borne by Z Ltd. (9 The shareholders of A Ltd. and B Lid. is to be paid by issuing sufficient number of fully paid up equity shares of € 10 each at a premium of ® 10 per share. ‘Assuming amalgamation in the nature of purchase, you are required to pass the necessary Journal entries (narrations not required) in the books of Z Ltd. and Prepare Balance Sheet of Z Ltd. immediately after amalgamation of both the companies. (20 Marks) Answer Journal Entries in the books of Z Ltd. z z Business Purchase Alc Dr. 54,00,000 To Liquidator of A Ltd. Alc 54,00,000 Land & Building Alc Dr. 28,00,000 Plant & Machinery Alc Dr. 20,00,000 Long term advance to B Ltd. Alc Dr.) 2,20,000 Inventories Ale Dr. 10,40,000 Trade Receivables Alc Dr.| 8,20,000 © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING Cash and Bank Alc Dr. 3,00,000 Goodwill Ac Dr.} 12,20,000 To Retirement Gratuity Fund Alc 1,00,000 To 10% Debentures Alc 20,00,000 To Unsecured Loan Alc 6,00,000 To Trade Payables Alc 100,000 To Other liabilities Alc 2,00,000 To Business Purchase Nic 54,00,000 10% Debentures Alc Dr. | 20,00,000 To 12% Debentures Alc 20,00,000 Liquidator of A Ltd. Alc Dr. | 54,00,000 To Equity Share Capital Alc 27,00,000 To Securities Premium Alc 27,00,000 Business Purchase Alc r. | 28,80,000 To Liquidator of B Ltd. Alo 28,80,000 Land and Building Alc Dr.} 21,00,000 Plant & Machinery Alc Dr. 7,60,000 Inventories Ale Dr. 7,00,000 Trade Receivables Ale Dr. §,20,000 Cash and Bank (less dividend) Alc Dr. 60,000 To Unsecured Loan Alc 8,20,000 To Trade Payables Alc 3,40,000 To Business Purchase Alc 28,80,000 To Capital Reserve A/c 1,00,000 Liquidators of B Ltd. Alc Dr. | 28,80,000 To Equity Share Capital Alo 14,40,000 To Securities Premium Alc 14,40,000 Unsecured Loans Alo Dr. 2,20,000 To.Long term Advance to B Lid. Alc 2,20,000 *Capital Reserve Alc Dr. 1,00,000 To Cash and Bank Alc (Liquidation expenses) 80,000 To Goodwill Alc 20,0008 INTERMEDIATE EXAMINATION: MAY, 2022 Note: 1, The journal entries for A Ltd. and B Ltd. have been given separately inthe above solution. Alternatively, the entries may be given as combined for both companies. 2. *Altematively, following set of entries may be given in place of the last entry given in the above solution Goodwill Ale or. | 50,000 To Cash & Bank Alc (Liquidation expenses of A Ltd.) 50,000 Capital Reserve Alc Dr. | 30,000 To Cash and Bank Alc (Liquidation expenses of B Ltd.) 30,000 Capital Reserve Alc Dr. | 70,000 To Goodwill Ale 70,000 Balance Sheet of Z Ltd. as at 31** March, 2022 Particulars Note No. ® 1. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital 1 41,40,000 (b) Reserves and Surplus 2 41,40,000 (2). Non-Current Liabilities (@) Long-term borrowings 20,00,000 (0) Long term provisions 41,00,000 (3) Current Ss (2) Short-term borrowings! 12,00,000 (0) Trade payables 4,40,000 (@) Other tabitty 2,00,000 Total 1,22,20,000 Il. Assets (1) Non-current assets (2) i. Property, plant and equipment 7 76,60,000 + Unsecured loans have been considered as short-term borrowings. Alternatively, it may be considered ‘as long-term borrowings and presented accordingly. © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING ii, Intangible assets 12,00,000 (Goodwill 12,20,000-20,000) (2) Current assets (2) Inventories 8 17,40,000 (0) Trade receivables 9 13,40,000 (c) Cash and cash equivalents 10 2,80,000 1,22,20,000 Notes to Accounts ®) ®& 1. | Share Capital Authorized Share Capital 6,00,000 Equity shares of & 10 each 60,00,000 Issued: 4,14,000 Equity shares of € 10 each 41,40,000 (all these shares were Issued for consideration other than cash) 2. | Reserves and surplus ‘Securities Premium Account (4,14,000 shares » & 10) 41,40,000 3. | Long-term borrowings 12% Debentures 20,00,000 4 | Long term Provisions Retirement gratuity fund 1,00,000 5. | Short-term borrowings Unsecured loans Ald 600,000 Bid 8,20,000 14,20,000 Less: Mutual 2.20,000) | 12,00,000 6. | Trade payables Ald. 4,00,000, Bid 3,40,000 | 4,40,00010 INTERMEDIATE EXAMINATION: MAY, 2022 T. | Property, plant & equipment Land and Building Altd 28,00,000 B Ltd 21,00,000 | 49,00,000 Plant and Machinery ALtd 20,00,000 B Ltd 160.000 | 27.60,000 76.60,000 8. | Inventories Alta. 10,40,000 Bltd 7.00,000 | 17,40,000 9 | Trade receivables Altd 8,20,000 B Ltd 5,20,000 | 13,40,000 10 | Cash & cash equivalents ALtd 3,00,000 B Ltd. [3,00,000-2,40,000(dividend)] 60,000 3,60,000 Less: Liquidation Expenses (80,000) | 2,80,000 Working Note: Calculation of amount of Purchase Consideration Autd. | BLtd. Existing shares 3,00,000 | 2,40,000 ‘Agreed value per share 18 12 Purchase consideration 54,00,000 | 28,80,000 No. of shares to be issued of € 20 each (including € 10 premium) | 2,70,000) 1,44,000 Face value of shares at € 10 27,00,000 | 14,40,000 Premium of shares at @ 10 27,00,000 | 14,40,000PAPER - 5 : ADVANCED ACCOUNTING 1" Question 3 (a) White Ltd. acquired 2,250 shares of Black Ltd. on 1% October, 2020. The summarized balance sheets of both the companies as on 31% March, 2021 are given below: White Lid, (2 | Black Lta. (3) () Equity and Liabilities (1) Shareholder's fund Share capital (Equity shares of € 100 each fully paid up) 6,50,000 3,00,000 Reserves and Surplus General Reserve 60,000 30,000 Profit and loss account 4,50,000 90,000 (2) Current Liabilities Trade payables 4,95,000 75,000 Due to White Lie : 30,000 Total 9,75,000 5,25,000, (i) Assets: Non-current assets Property, Plant and Equipment 5,80,000 3,51,000 Investments Shares in Black Ltd. (2,250 shares) 2,70,000 Current assets Inventories 50,000 1,20,000 Due from Black Ltd 36,000 Cash and Cash equivalents 39,000 54,000 Total| _9,75000| 526,000 Other information. () During the year, Black Limited fabricated a machine, which is sold to White Ltd. for % 39,000, the transaction being completed on 30% March,2021. (i) Cash in transit from Black Ltd. to White Ltd. was €6,000 on 31% March, 2021. (il) Profits during the year 2020-2024 were earned evenly.2 INTERMEDIATE EXAMINATION: MAY, 2022 (iv) The balances of Reserve and Profit and Loss account as on 1* April,2020 were as follows: Reserves Profit and Loss A/c e e White Ltd. 30,000 15,000 Profit Black Ltd. 30,000 10,000 Loss You are required to prepare consolidated Balance Sheet of the group as on 31 March,2021 as per the requirement of Schedule Ill of the Companies Act, 2013, () (i) Write a short note on Non-performing assets of a banking company. (il) Dee Bank provides you the following information relating to their two cash credit accounts: Account| Account B finLakhs | €in Lakhs Sanctioned limit 4,500 3,200 Drawing power 4,200 2,500 Amount outstanding continuously from 01.01.2021 3,600 2,000 to 31.03.2021 Total Interest debited for the above period 288 315 Total credits for the above period 120 380 State with reason whether the above cash credit accounts are NPA or not? (15+ 5 = 20 Marks) ‘Answer (2) Consolidated Balance Sheet of White Ltd. and its Subsidiary Black Ltd. as at 31st March, 2024 Partic Note No. ® 1. Equity and Liabilities (1) Shareholder's Funds (2) Share Capital 1 6,50,000 (b) Reserves and Surplus 2 2,55,000 (2) Minority Interest 3 1,05,000 (3) Current Liabilities (2) Trade Payables 4 1,90,000 Total 12,00,000 © The Institute of Chartered Accountants of IndiaPAPER ~ 5: ADVANCED ACCOUNTING 13 I Assets (1) Non-current assets (2) Property, Plant and Equipment 5 9,31,000 (2) Current assets (i) lnventory 6 4,70,000 (i) Cash & cash equivalent 7 99,000 Total 12,00,000 Notes to Accounts z 1. | Share capital 6,500 equity shares of & 100 each, fully paid up 6,50,000 Total 6.50,000 2. | Reserves and Surplus General Reserves 60,000 Profit and Loss Account 1,50,000 ‘Add: 75% share of Black Ltd's post-acquisition profits (W.N.1) 37.500 | 1,87,500 Capital reserve (W.N. 5) 7.500 Total 2,55,000 3. | Minority interest in Black Ltd. (WN 4) 1,05,000 4, | Trade payables White Ltd 41,18,000 Black Lid. 75,000 | 1,90,000 5. | Property, plant and equipment White Ltd 5,80,000 Black Ltd 3.51,000) 9,31,000 6 | Inventory White Ltd 50,000 Black Lid. 41,20,000 | 1,70,000 7 | Cash & cash equivalent White Ltd 39,000 Black Ltd 54,000 Cash in transit 6.000| 99,0004 INTERMEDIATE EXAMINATION: MAY, 2022 Working Notes: 1. Post-acquisition profits of Black Ltd. z profits eamed during the year = & 90,000 + 210,000 1,00,000, Pre-acqusition profits (1.4.20 to 30.9.20) 50,000 Post-acquistion profits (1.10.20 to 31.3.21) 50,000 White Ltd's share 75% of 50,000 37,500 Minority Interest 25% of 50,000 12,500 2. Pre-acquisition profits and reserves of Black Ltd. Reserves as on 1.4.2020 30,000 Profit and Loss Account 40,000 {10,000 ((oss as on 1.4.20) +50,000 (6 month Adjusted pre-acquisition profits] 70,000 White Ltd.’s = (75%) * 70,000 52,500 Minority interest= (25%) x 70,000 17,500 3. Post-acquisition reserves of Black Ltd. Post-acquisition reserves (Total reserves less pre-acquisition il reserves = & 30,000 - 30,000) 4, Minority Interest Paid-up value of (3,000 - 2,260) = 750 shares held by outsiders Le. 750 x & 100 75,000 ‘Add: 25% share of pre-acquisition reserves & Profit 17,500 25% share of post-acquisition profit 42,500 41,05,000 5. Capital Reserve Price paid by White Ltd. fr 2,260 shares (A) 2,70,000 Intrinsic value of the shares- Paid-up value of 2,250 shares held by White Ltd. 2,25,000 ie. 2,250 x & 100 Add 75% share of pre-acquisition reserves & profit (70,000 x 75%) 52,500 (B) | 277,500 Capital reserve (A - B) 7,500PAPER - 5 : ADVANCED ACCOUNTING 15 (b) (i) Performing assets are also called as Standard Assets. A non-performing asset is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days. The assets other than performing assets are called Non-Performing Assets (NPA). NPAS are classified into three groups: (|) sub-standard Assets (i) doubtful assets & (i) Loss Assets. (i) Sub-standard Assets ~A Sub-standard asset is one which has been classified as an NPA for a period not exceeding 12 months. (i) Doubtful Assets - An asset would be classified as doubtful fit has remained in the substandard category for a period of at least12 months. (ii) Loss Assets - A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors but the amount has not been written off, wholly or partly. In other words, such an asset is considered Uncollectible or if collected of such litle value that its continuance as @ bank asset is not warranted although there may be some salvage or recovery value. Income from non-performing assets can only be accounted for as and when itis actually received. ii) ‘Account A | Account B Zin lakhs | in lakhs Sanetioned limit 4,500 3,200 Drawing power 4,200 2,500 Amount outstanding continuously from 1.01.2024 3,600 2,000 0 31.03.2021 Total interest debited 288 315 Total credits 120 380 |s credit in the account is sufficient to cover the No Yes interest debited during the period? or |s amount ‘overdue’ for a continuous period of 90 Yes No days? NPA | _NotNPA Question 4 (a) Ajay, Vijay and Sanjay have been in partnership for a number of years, sharing profits and losses in the ratio 7:7: 4 as a wholesale stationers running business under the name "AVS Traders’. On 31% March,2021, it was found that some frauds were committed by Sanjay during the year 2020-2021. So, it was decided to dissolve the partnership business on 31* March,2021 when their Balance sheet stood as under: © The Institute of Chartered Accountants of India16 INTERMEDIATE EXAMINATION: MAY, 2022 Balance Sheet as at 31% March,2021 Liabilities ‘Amount (2) | Assets Amount (3) Capital accounts: Building 1,90,000 Ajay 1,80,000 Inventory 1,30,000 Viay — 1,80,000 | 3,60,000 | Investments 50,000 General Reserve | 36,000 | Trade Debtors 70,000 Trade Creditors 80,000 | Cash & Bank 26,000 Bills payables 30,000 | Sanjay’s Capital (overdrawn) 40,000 ,06,000 §,06,000 ‘Additional Information: ()) Following frauds were committed by Sanjay: (1) Investments costing ¥ 8,000 were sold by Sanjay at € 11,000 and the funds were transferred to his personal account. This sale was omitted from firm's books. (2) A cheque for #7,000 received from trade debtors was not recorded in the books ‘and was misappropriated by Sanjay. (il) A trade creditor agreed to take over investments of the book value of % 9,000 at % 13,000. The rest of the trade creditors were paid off at a discount of 10%. (il) Other assets were realized as follows: Inventory #1,20,000 Building 110% of book value Investments _ | The rest of the investments were sold at a profit of € 7,000 Trade Debtors | The rest of the trade debtors were realised at a discount of 10% (iv) The Bills payables were settled at a discount of, % 500. (v)_ The expenses of dissolution amounted to € 8,060. (vi). It was found out, that realisation from Sanjay's private assets would be & 7,000. You are required to prepare (1) Realisation Account 2) Cash & Bank Account (3) Partners’ Capital Accounts. (All workings should form part of your answer) © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING 7 (6) Explain the nature of a Limited Liability Partnership. Who can be a designated partner in a Limited Liability Partnership and what are their labilties? (15+ 5 = 20 Marks) ‘Answer @ Realization Account Particulars = [Particulars z To Building 1,90,000 By Trade creditors 80,000 To Inventory 1,30,000 By Bills payable 30,000 To Investment 50,000 By Cash To Trade Debtors 70,000] Building 2,09,000 To Cash - Trade creditors) 60,300] Inventory 4,20,000 paid (W.N.1) To Cash-expenses 8,060] Investments (W.N.2) 40,000 To Cash-bills payable 29,500} Trade Debtors 56,700] 4,25,700 (30,000-500) (W.N. 3) To Partners’ Capital Alcs By Sanjay’s Capital Ac 7,000 (Trade Debtors- unrecorded) Ajay 6,160 By Sanjay's Capital Alc 11,000 (lnvestments- unrecorded) Viay 6,160 Sanjay 3,520 15,840 553,700 5,53.700 Cash and Bank Account Particulars ‘Amount|Particulars ‘Amount| q z To Balance bid 26,000|By Realization Alc- Trade | 60,300 creditors paid To Realization Alc— By Realization Alc-bills 29,500 (Assets realized) payable Building 2,09,000 By Realization Alc- 8,060 expenses Inventory 1,20,000 By Capital accounts: Investments (W.N.2)| 40,000 Ajay 1,80,4208 INTERMEDIATE EXAMINATION: MAY, 2022 Trade Debtors 56,700| 4,25,700| Vijay 1,80,420 (W.N. 3) To Sanjay’s capital Alo 7,000} 458,700] 458.700) Partners’ Capital Accounts Particulars Ajay Sanjay|Particulars Ajay| Vijay) Sanjay’ z z q 8 "To Balance bid 40,000|By Balance b/d| 1,80,000] 1,80,000) - {To Trade Debtors- 7,000/By General 14,000] 14,000] 8,000 misappropriation reserve ‘To Investment- 11,000/By Realization} 6,160] 6,160] 3,520 misappropriation profit ‘To Sanjay's 19,740) 19,740 By Cash Alc 7,000] capital Ate (WN. 4) [To Cash Ne | 1,80,420| 1,80,420] By Ajay's 19,740 capital Alc By Vijay's —] capital Alc ——_} 19.240] 2,00.160) 2,00.160) 58.000] 2,00.160| 2,00.160) 58.000] Working Notes: 4. Amount paid to Trade creditors @ Book value 80,000 Less: Creditors taking over investments 13,000) 67,000 Less: Discount @ 10% (6,700) 80,300 2. Amount received from sale of investments z Book value 50,000 © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING 19 Less: Misappropriated by Sanjay £8,000) 42,000 Less: Taken over by a trade creditor (9,000) 33,000 ‘Add: Profit on sale of investments 7000 40,000 3. Amount received from Trade debtors = Book value 70,000 Less: Unrecorded receipt (7,000) 63,000 Less: Discount @ 10% (6,300) 56,700 4. Deficiency of Sanjay z Balance of capital as on 31% March, 2021 40,000 Debtors-mmisappropriation 7,000 Investment misappropriation 14,000 58,000 Less: Realization Profit (3.520) General reserve (8,000) Contribution from private assets {7.000} Net deficiency of capital 39,480 This deficiency of % 39,480 in Sanjay’s capital account will be shared by other partners Ajay and Vijay in their capital ratio of 1:1 Accordingly, Ajay's share of deficiency = [39,480/2] = & 19,740 Vijay's share of deficiency = (39,480/2] = & 19,740 (b) Nature of Limited Liability Partnership: A limited liability partnership is a body corporate formed and incorporated under the LLP Act, 2008 and is a legal entity separate from that of its partners. A limited liability partnership shall have perpetual succession and any © The Institute of Chartered Accountants of India20 INTERMEDIATE EXAMINATION: MAY, 2022 change in the partners of a limited lability partnership shall not affect the existence, rights, or liabilities ofthe limited liability partnership. Designated partners: Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. In case ofa limited lability partnership in which all the partners are bodies corporate or in which ‘one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners. Liabilities of Designated partners: As per the LLP Act, unless expressly provided otherwise in this Act, a designated partner should be- (2) responsible for the doing of al acts, matters, and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, retum, statement, and the like report pursuant to the provisions ofthis Act and as may be specified in the limited liability partnership agreement; and. (b) Liable to all penalties imposed on the limited liability partnership for any contravention of those provisions. Question 5 (@) Quick Ltd. has the following capital structure as on 31% March, 2021: Zin Crores (1) | Share Capital: 462 (Equity Shares of #10 each, fully paid) (2) | Reserves and Surplus: General Reserve 336 Securities Premium Account 126 Profit and Loss Account 126 Statutory Reserve 180 Capital Redemption Reserve a7 Plant Revaluation Reserve 33) 888 (3) | Loan Funds: Secured 2,200 Unsecured —320| 2,520 On the recommendations of the Board of Directors, on 16" September, 2021, the shareholders of the company have approved a proposal to buy-back of equity shares. The prevailing market value of the company's share is @ 20 per share and in order to induce the existing shareholders to offer their shares for buy-back, it was decided to offer a price © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING a of 50% over market value. The company had sufficient balance in its bank account for the buy-back of shares. You are required to compute the maximum number of shares that can be bought back in the light of the above information and also under a situation where the loan funds of the company were either ® 1,680 Crores or 2,100 Crores. Assuming that the entire buy-back is completed by 31% December,2021, Pass the necessary accounting entries (narrations not required) in the books of the company in each situation (6) Deluxe Commercial Bank has the following capital funds and assets: @ In Crores Capital Funds and Assets Capital Funds: aid up Equity Share Capital 2,400 Statutory Reserves 480 Secunties Premium 480 Capital Reserve (of Which 7 128 Crores were due to revaluation of assets and balance due to sale of assets) 288 Profit and Loss Account (Dr. Balance) 48 Assets: () Cash balance with Reserve Bank of India 192 (il) Claims on Banks 544 (iil) Other Investments 7,360 Loans and Advances. (i) Guaranteed by Goverment of India and State Governments 1,260 (il) Bank Staff Advances - fully covered by superannuation benefit 160 Other loans and advances 544 Other Assets: (i) Premises, Furniture & Fixtures 12,560 (ii) Intangible Assets 48 Off-Balance Sheet Items: Acceptance, Endorsements and Letters of Credit 4,800 Guarantee and other obligations 160 You are required to: (i) Segregate the capital funds into Tier ! and Tier I capitals, and © The Institute of Chartered Accountants of India22 INTERMEDIATE EXAMINATION: MAY, 2022 (il) Find out the risk-adjusted asset and risk weighted assets ratio. (10 +10 = 20 Marks) Answer (a) Statement determining the maximum number of shares to be bought back ‘Number of shares Particulars When loan fund is 2,520 crores | _% 1,680 crores | % 2,100 crores. Shares Outstanding Test (W.N.1) 11.55 11.55 11.55 Resources Test (W.N.2) 8.75 8.75 8.75 Debt Equity Ratio Test (W.N.3) Nil 5.25 Nil Maximum number of shares that can be bought back [least of the Nil 5.25 Nil above] Journal Entries for the Buy-Back (applicable only when loan fund is & 1,680 crores) Zin crores Particulars Debit | Credit (a) | Equity share buy-back account Or.) 1575 To Bank account 1575 (b) | Equity share capital aocount (5.25 x & 10) Or. 525 Securities premium account (5.25 x & 20) Or. 105 To Equity share buy-back account 1875 (¢)_ | General reserve account Or. 525 To Capital redemption reserve account 525 Working Notes: 1. Shares Outstanding Test Particulars (Shares in crores) Number of shares outstanding 46.2 25% of the shares outstanding 11.55 2, Resources Test Particulars Paid up capital (8 in crores) 462 © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING 2B Free reserves (@ in crores) (336+126+126) 588 Shareholders’ funds (& in crores) 1,050 25% of Shareholders fund (Zin crores) % 262.5 crores Buy-back price per share 230 Number of shares that can be bought back (shares in | 8.75 crores shares crores) 3. Debt Equity R Particulars When loan fund is 2,520 crores | & 1,680 crores | & 2,100 crores (@) [loan funds (in 2,520 1,680 2,100 crores) (6) | Minimum equity to be maintained after buy- 4,260 840 41,050 back in the ratio of 2:1 (in crores) (©) | Present equity 1,050 1,050 1,050 shareholders fund (in crores) (@) | Future equity NA. 997.5 NA. shareholder fund (1,050-82.5) (in. crores) (See Note 2) () | Maximum permitted Nil 18755 (by Nil buy-back of Equity simultaneous (in crores) [(d) - (0)] equation) (See Note 2) (| Maximum number of 5.25 (by shares that can be simultaneous bought back @ Nil| equation) Nil % 30 per share (shares in crores) (See Note 2) 1. Under Situations 1 & 3 the company does not qualify for buy-back of shares as per the provisions of the Companies Act, 2013 2. As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company should not be more than twice the capital and its free reserve after such buy-back © The Institute of Chartered Accountants of India24 INTERMEDIATE EXAMINATION: MAY, 2022 Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method. ‘Suppose amount equivalent to nominal value of bought back shares transferred to RR account is ‘x’ and maximum permitted buy-back of equity is ‘y’ Then Equation 1: (Present equity — Nominal value of buy-back transfer to CRR) — Minimum equity to be maintained= Maximum permissible buy-back of equity (1,050 -x)-840 = y Since 210-x=y Equation 2: (senna uation 2° \ Ofer price for buy-back = Nominal value of the shares bought ~back to be transferred to CRR. = (Xx10 (5 ) Or oxsy, (2) by solving the above two equations we get X Nominal rr) x= 752.5 crores y= 157.5 crores 3. Statutory reserves, capital redemption reserve and plant revaluation reserves are not free reserves. 4, For calculation of debt -equity ratio both secured and unsecured loans have been considered. (b) (Zin crores) (i) Capital Funds - Tier i: Paid up Equity Share Capital 2,400.00 Securities premium 480.00 Statutory Reserve 480.00 Capital Reserve (arising out of sale of assets) 160.00 3,520.00 Less: Intangible assets 48.00 Profit and Loss Account (Or. balance) 48.00 96.00) Total 3,424.00 © The Institute of Chartered Accountants of IndiaPAPER ~ 5: ADVANCED ACCOUNTING 5 Capital Funds - Tier I: Capital Reserve (arising out of revaluation of assets) 128.00 Less: Discount tothe extent of 55% 70.40 57.60 Total Capital Funds 3,481.60 (ii) Calculation of Risk Adjusted Assets Zin crore | Weightin% | _ Amount (in crore) Funded Risk Assets Cash Balance with RBI 192 0 0 Claims on banks 544 20 108.80 Other Investments 7,360 100 7,360 Loans and Advances: (i) Guaranteed by government 1,280 0 0 i) Staff advances fully covered by superannuation benefits 160 20 32 (ii) Other Loans 544 100 544 Premises, furniture and fixtures 42,560 100 42,560 20,604.80 Off-Balance Sheet Items in crores | Credit Conversion | @in crore Factor Acceptances, Endorsements and 4,800 100] 4,800 Letters of credit Guarantees and other obligations 160 100 160 4,960 Risk Weighted Assets Ratio: Capital Funds (Tier 18 Tier I) Risk Adjusted Assets+off Balance sheet tems x Capital Adequacy Ratio = 3424 + 57.60/ 20,604.80 + 4,960 (3481.60/25,564.80) x 100 = 13.62% (rounded off) © The Institute of Chartered Accountants of India26 INTERMEDIATE EXAMINATION: MAY, 2022 Question 6 ‘Answer any four ofthe following: (a) XYZ Lid. has 5 business segments. Profit / Loss of each of the segments for the year ended 31% March, 2022 has been provided below. You are required to identify from the following whether reportable segments or not reportable segments, on the basis of “profitability test" as per AS-17. ‘Segment Profit (Loss) @in lakhs A 225 8 25 c (175) o (20) E (105) (6) Ina limited company, Equity Share Capital is held by X, Y and Z in the proportion of 30:30:40. Also A, B and C hold preference share capital in the proportion of 50:30:20. The company has not paid the dividend to holders of preference share capital for more than 3 years. Given that the paid-up equity share capital ofthe company is @ 1 Crore and that of preference share capital is 7 50 Lakh. () Find out the relative weight in the voting right of equity shareholders and preference shareholders. (il) Also the company proposing to issue equity shares with differential voting rights (OVR) to the extent of 7 50 lakhs. Assuming the company fulfils other conditions pertaining to the issue of shares with DVR. Can the company issue the shares with DVR? (c) What are the disclosures requirements for operating leases by the lessee as per AS-19? (a) The position of Bad Luck Limited on its liquidation on 31% March, 2022 is as under: Issued and paid up capital: 90,000, 10% Preference Shares of * 100 each, fully paid 90,000 Equity Shares of # 100 each, fully paid up 30,000 Equity Shares of ® 50 each, 40 paid up 10,000 Equity Shares of 10 each, 4 paid up Calls in arrears are € 3,00,000 and calls received in advance % 2,55,000. Preference dividends are in arrears for two years. Amount left with the liquidator after discharging of all liabilities is ® 1,25,15,000. Articles of Association of the company provide for payment of preference dividend arrears in priority to return of equity capital. © The Institute of Chartered Accountants of IndiaPAPER - 5 : ADVANCED ACCOUNTING re You are required to prepare the Liquidator's Final Statement of Account. (¢) On 1* Apri,2021, a company offered 100 shares to each of its 5,000 employees at 50 per share. The employees are given a year to accept the offer. The shares issued under the plan shall be subject to lock-in on transfer for three years from the grant date. The ‘market price of shares of the company on the grant date is # 60 per share. Due to post vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at 756 per share and fair value per option worked out to be %6. On 31% March,2022, 4,000 employees accepted the offer and paid % 50 per share purchased. Nominal value of each share is # 10. You are required to pass journal entries (with narration) as would appear in the books of the company up to 31* March, 2022. (4 Parts x 5 Marks = 20 Marks) ‘Answer (a) As per AS 17 ‘Segment Reporting, @ business segment or geographical segment should be identified as a reportable segment it Its segment results whether profit or loss is 10% or more of: ‘¢ The combined result ofall segments in profit; i.e. € 250 Lakhs or ‘¢ The combined result ofall segments in loss; ie. € 300 Lakhs Whichever is greater in absolute amount i.e. & 300 Lakhs, Operating | Absolute amount of Pr Reportable Segment Segment or Loss (° In lakhs) Yes or No A 225 Yes B 25 No: c 115 Yes D 2 No E 105 Yes (On the basis of the profitability test (result criteria), segments A, C and E are reportable segments (since their results in absolute amount is 10% or more of & 300 lakhs ic. 30 lakhs), (b) (i) The respective voting right of various shareholders will be X = 23X30/100 = 3/15 OR 20% Y = 213x30/100 315 OR 20% Z = 213x40/100 4N5 OR 26.67% A = 113X50/100 116 OR 16.67% © The Institute of Chartered Accountants of India28 INTERMEDIATE EXAMINATION: MAY, 2022 o 413x30/100 1/10 OR 10% c 113X20/100 = 2/30 OR 6.67% Hence their relative weights are 3/15: 3/16: 4/16: 1/6: 1/10:2/30 or 6:6:8:5:3:2. (ii) The voting power in respect of shares with differential rights shall not exceed seventy four percent of the total voting power including voting power in respect of equity shares with differential rights (DVR) issued at any point of time as per Companies (Share Capital and Debentures) Rules. z Existing Equity Share Capital paid up 1,00,00,000.00 Proposed DVR 50,00,000.00 Post DVR Equity Share Capital paid up 1,50,00,000.00 4% of shares with DVR to total paid up Equity Share Capital 33.33% (including Equity Shares with DVR) ( 50,00,000 1 & 150,00,000 X 100) Inthe given case 33.33% of shares with DVR to total post issue paid up Equity Capital (including Equity Shares with DVR) is not exceeding 74%. Hence, the company can issue such equity shares. (c) As per AS 19, lessees are required to make following disclosures for operating leases: (2) the total of future minimum lease payments under non-cancelable operating leases for each of the following periods: (i) not later than one year, (i) later than one year and not later than five years; (ii) later than five years; (b)_ the total of future minimum sublease payments expected to be received under non- cancelable subleases at the balance sheet date; (c) lease payments recognised in the statement of profit and loss for the period, with separate amounts for minimum lease payments and contingent rents; (@)_sub-lease payments received (or receivable) recognised in the statement of profit and loss for the period; (e) a general description of the lessee’s significant leasing arrangements including, but ‘ot limited to, the following (i) _ the basis on which contingent rent payments are determined; (i) the existence and terms of renewal or purchase options and escalation clauses; and © The Institute of Chartered Accountants of India(a) PAPER - 5 : ADVANCED ACCOUNTING 29 (ii) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing, Note: The Level I! and Level Ill non-corporate entities (and SMCs) need not make disclosures required by (a), (b) and (e) above. Liquidator’s Final Statement of Account Receipts [Payments z Cash with liquidator 125,18,000 | Return to contributors: Realization from: Arrears of Preference dividend | 18,00,000 Calls in arrears 3,00,000 | Preference shareholders 90,00,000 Final all of € 4 per equity Cals in advance 2,85,000 share on 10,000 shares Equity shareholders (& 4 x 10,000) See WN 40,000 | (90,000 x & 20) 48,00,000 128,58,000 128,56,000 Working Notes: (i) Calculation of amount available with liquidator after paying pref. shareholders z Cash account balance 125,15,000 Less: Payment for dividend 18,00,000 Preference shareholders 90,00,000 Calls in advance 2,55,000 110,55,000 14,60,000 ‘Add: Calls in arrears 3,00,000 417,60,000 (i) Paid up Share capital = 90,00,000 + 12,00,000 + 40,000 = & 1,02,40,000 (ii) Deficiency for equity shareholders: % 1,02,40,000 - & 17,60,000 = = 84,80,000 (iv) Nominal Value of Share Capital = € 90,00,000 + 15,00,000+4,00,000 = 1,06,00,000 (v)_% of deficiency to be bome by each equity shareholder += (€ 84,80,000 / & 1,06,00,000) x 100 = 80%30 (e) INTERMEDIATE EXAMINATION: MAY, 2022 (vi) Amount refunded/recovered from equity shareholders: 90,000 shares | 30,000 shares ] 10,000 shares of % 100 each | of 50 each | of & 10 each Paid up per share 100 240 4 Deficiency to bear per 80 240 x8 share (80% of nominal value) To refund NIL] Torrecover % 20 per share 4 per share Note: Alternative presentation of the above working notes may be provided in the answer. 56-2 50=26 Number of shares issued = 4,000 employees x 100 shares = 4,00,000 shares Fair value of ESOP = 4,00,000 shares x & 6 = & 24,00,000 Vesting period = 1 year Expenses recognized in 2021 - 22 = € 24,00,000 Date Particulars z z 31.03.2022 | Bank (4,00,000 shares x % 50) Dr. | 200,00,000 Employees stock compensation expense Dr.| 24,00,000 Alc Fair value of an optior To Share Capital (4,00,000 shares x 40,00,000 210) To Securities Premium 4184,00,000 (4,00,000 shares x & 46) (Being option accepted by 4,000 employees & payment made @ % 56 share) Profit & Loss Alc Dr. 24,00,000 To Employees stock compensation 24,00,000 expense Alc (Being Employees stock compensation expense transferred to Profit & Loss Alc)