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CA-INTERMEDIATE - ADVANCED ACCOUNTING - TEST-2 QUESTION PAPER

Syllabus: Amalgamation, Internal Reconstruction & AS-13
Total Marks: 45 Marks
Duration: 90 Minutes
“Working Notes forms part of your answer”.

Q1. 10 Marks
The Balance Sheet of Lion Limited as on 31-03-2018 is given below:
NOTE AMOUNT
PARTICULARS
REF. (Rs. In Lakhs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 1 1,400
(B) Reserves & Suplus 2 (522)
2. Non Current Liabilities
Long Term Borrowings 3 700
3. Current Liabilities
Trade Payables 4 102
Other Liabilities 5 24
TOTAL 1,704
II. ASSETS
1. Non-Current Assets
Property, Plant & Equipments 6 750
2. Current Assets
(A) Current Investments 7 200
(B) Inventories 8 300
(C) Trade Receivables 9 450
(D) Cash and Cash Equivalents 10 4
TOTAL 1,704

Notes to Accounts
AMOUNT
PARTICULARS
(Rs. In Lakhs)
1. Shareholder’s Funds
Authorized Share Capital
200 lakhs Equity Shares of Rs. 10 each 2,000
8 lakhs 8% Pref Shares of Rs. 100 each 800
TOTAL 2,800
Issued, Subscribed & Paid Up Capital
100 lakhs Equity Shares of Rs. 10 each 1,000
4 lakhs 8% Pref shares of Rs. 100 each, fully paid up 400
TOTAL 1,400
2. Reserves & Surplus
Debit Balance of Profit & Loss Account (522)
TOTAL (522)
3. Long Term Borrowings
6% Debentures (Secured by Freehold Property) 400
Director’s Loan 300
TOTAL 700
4. Trade Payables
Trade Payables for Goods 102
TOTAL 102
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 5. Other Current Liabilities
Interest Accured and Due on 6% Debentures 24
TOTAL 24
6. Property, Plant & Equipments
Freehold Property 550
Plant and Machinery 200
TOTAL 750
7. Current Investments
Investments in Equity Instruments 200
TOTAL 200

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8. Inventories
Finished Goods 300
TOTAL 300
9. Trade Receivables
Trade Receivables for Goods 450
TOTAL 450

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10. Cash and Cash Equivalents
Balance with Bank 4
TOTAL 4
The Board of Directors of the company decided upon the following scheme of reconstruction with the
consent of respective shareholders:
(1) Preference Shares are to be written down to Rs. 80 each and Equity Shares to Rs. 2 each.
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(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3rd,
Equity Shares of Rs. 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of Rs.300 lakh in part
payment of their holding. Balance Debentures to remain as liability of the company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at Rs.400 lakh.
(6) All investments sold out for Rs.250 lakh.
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(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of Rs. 2 each to be allowed.
(8) 40% of Trade receivables and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to Rs.600 lakh have been settled by paying 5%
penalty of contract value.
You are required to: Pass Journal Entries & prepare Reconstruction Account
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Q2. 15 Marks
P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to the
combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and undertakings of
the two companies in exchange for share in PQ Ltd.
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The Summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date of amalgamation)
are given below:
P LTD. Q LTD.
PARTICULARS
(Rs) (Rs)
I. EQUITY & LIABILITIES
1. Shareholder’s Funds
(A) Share Capital 6,00,000 8,40,000
(B) Reserves & Surplus 10,20,000 6,00,000
2. Current Liabilities
(A)Bank overdraft -- 5,40,000
(B)Trade Payables 2,40,000 5,40,000

TOTAL 18,60,000 25,20,000

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II. ASSETS
1. Non-Current Assets
(A)Fixed assets (excluding goodwill) 7,20,000 10,80,000
2. Current Assets
(A) Inventories 3,60,000 6,60,000
(B) Trade Receivables 4,80,000 7,80,000
(C) Cash at bank 3,00,000 --
TOTAL 18,60,000 25,20,000
The consideration was to be based on the net assets of the companies as shown in the above Balance Sheets,
but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted average of
net profits for the three years ended 31st March, 2017. The weights for this purpose for the years 2014-
15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.
The profit had been:
2014-15 Rs. 3,00,000; 2015-16 Rs. 5,25,000 and 2016-17 Rs. 6,30,000.

The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed
net assets value of these companies.

In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of Rs. 10 each at the same rate
of premium as issued for discharging purchase consideration to P Ltd. And Q Ltd.
You are required to:
(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare required journal entries in the books of PQ Ltd.; and
(iii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary journal entries.

Q3. 10 Marks
On 1st April 2018, Luckywell Ltd. held Rs. 2,00,000 of 9% Government Bonds at Rs. 1,90,000 (FV of Rs. 100
each). Three month’s interest had accrued on the above date. On 31st May 2018 the company made an
additional investment in said Government Bonds of face value of Rs. 80,000 at Rs. 95 (net) cum-interest.
On 1st June 2013, Rs. 60,000 face value of investments were sold at Rs. 94 (net) ex-interest. Interest on
Bonds was paid each year 30th June and 31st December. On 30th November 2018, Rs. 40,000 face value of
investments were sold at Rs. 97 (net) cum-interest. On 1st December 2018, the company purchased the
said investments of face value of Rs. 10,000 at par (ex-interest). The market price of bonds on 31st March
2019 was Rs. 93.
Draw up 9% Government Bonds account, considering FIFO method and that the investments are current
investments. All calculations are to be made to the nearest rupee.

Q4. 5 Marks
Bharat Ltd. wants to re-classify its investments in accordance with AS-13. Decide on the amount of transfer,
based on the following information:
1. A portion of Current Investments purchased for Rs. 20 lakhs, to be reclassified as Long Term
Investments, as the Company has decided to retain them. The market value as on the date of Balance
Sheet was Rs. 25 lakhs.
2. Another portion of current investments purchased for Rs. 15 1akhs, to be reclassified as long term
investments. The market value of these investments as on the date of balance sheet was Rs. 6.5 lakhs.
3. Certain long term investments no longer considered for holding purposes, to be re-classified as
current investments. The original cost of these was Rs. 18 lakhs but had been written down to Rs.
12 lakhs to recognise permanent decline, as per AS 13.

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 Q5. Select the most appropriate alternative 1 Marks Each
(1) Which of the following statement is correct:
(a) In case of merger – ESH can be issued only equity shares as a part of Purchase consideration
(b) In case of purchase – ESH can be issued Preference shares also as a part of Purchase consideration
(c) Both (a) and (b) are correct
(d) Both (a) and (b) are incorrect
(2) State which statement is correct:
(a) In case of merger – assets and liabilities can only be taken over at book values
(b) In case of purchase – assets and liabilities can be taken over at book values or agreed values

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(c) Both (a) and (b) are correct
(d) Both (a) and (b) are incorrect
(3) State which statement is correct:
(a) In case of merger – All Reserves and surplus of vendor company are taken over by Purchasing Co.
(b) In case of Purchase – None of the Reserves and surplus of vendor company are taken over by

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Purchasing Co.
(c) Both (a) and (b) are correct
(d) Only (a) is correct
(4) State which statement is correct:
(a) In case of merger – We use pooling of interest method for accounting
(b) In case of Purchase We use purchase method or pooling of interest method depending upon
whether it is take over at agreed values or book values
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(c) Both (a) and (b) are correct
(d) Only (a) is correct
(5) State which statement is incorrect:
(a) In case of merger – We can issue either preference shares or equity shares to PSH
(b) In case of Purchase – We can issue either preference shares or equity shares to PSH
(c) In case of merger – We can issue only preference shares to PSH
(d) none of the above
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MY OBSERVATIONS AFTER THIS TEST AND MY ACTION PLAN ------>>>

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CA-INTERMEDIATE - ADVANCED ACCOUNTING - TEST-2 SUGGESTED ANSWER

Q1. Solution 10 Marks
In the Books of Lion Limited – Journal Entries
Rs. In Lakhs
DATE PARTICULARS L/F DR. AMT. CR. AMT.
(i) 8% Pref. Share Capital A/c (4L x Rs. 100)---Dr. 400
To 8% Pref. Share Capital A/c (4L x Rs. 80) 320
To Reconstruction A/c 80
(Being Preference Share Capital reduced).
(ii) Equity Share Capital A/c (100L x Rs. 10)---Dr. 1,000
To Equity Share Capital A/c (100L x Rs. 2) 200
To Reconstruction A/c 800
(Being Preference Share Capital reduced).
(iii) Capital Reduction A/c --------------------------Dr. 32
To Equity Share Capital A/c 32
(Being arrears of Pref. Dividend settled).
A student may alternatively first provide for total
Pref. Div. payable and then write off 2/3rd
amount.
(iv) 6% Debentures A/c ----------------------------Dr. 300
To Freehold Property A/c 300
(Being partial settlement done).
(v) Interest Accrued on Debenture A/c ---------Dr. 24
To Bank A/c 24
(Being interest outsanding on debentures paid).
(vi) Freehold Property A/c ------------------------Dr. 150
To Reconstruction A/c 150
(Being asset revalued). [400 – (550 – 300)]
(vii) Bank A/c------------------------------------------Dr. 250
To Investments A/c 200
To Reconstruction A/c 50
(Being investments sold).
(viii) Director’s Loan A/c ----------------------------Dr. 300
To Equity Share Capital A/c (45L x Rs. 2) 90
To Reconstruction A/c 210
(Being liability settled).
(ix) Reconstruction A/c ----------------------------Dr. 972
To Profit & Loss A/c 522
To Trade Receivables A/c (450L x 40%) 180
To Inventories A/c (300L x 80%) 240
To Bank A/c (600L x 5%) 30
(Being accounting done).
(x) Reconstruction A/c ----------------------------Dr. 286
To Capital Reserve A/c 286
(Being surplus transferred).
Reconstruction Account
PARTICULARS AMOUNT PARTICULARS AMOUNT
To Equity Share Capital 32 By Preference Share Capital A/c 80
To Trade Receivables 180 By Equity Share Capital A/c 800
To Inventories 240 By Freehold Property A/c 150
To Profit & Loss A/c 522 By Bank A/c 50
To Bank A/c 30 By Director’s Loan A/c 210
To Capital Reserve A/c 286
TOTAL 1,290 TOTAL 1,290
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 Q2. Solution 15 Marks
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:
Amount of Share Capital as per balance sheet = P Ltd. 6,00,000 + Q Ltd. 8,40,000 = Rs. 14,40,000
Share of P Ltd. = Rs. 14,40,000 x [21,60,000/ (21,60,000 + 14,40,000)] = Rs. 8,64,000 or 86,400 shares
Securities premium = Rs. 21,60,000 – Rs. 8,64,000 = Rs. 12,96,000
Premium per share = Rs. 12,96,000 / Rs. 86,400 = Rs. 15
Issued 86,400 shares @ Rs. 10 each at a premium of Rs. 15 per share

Share of Q Ltd. = Rs. 14,40,000 x [14,40,000/ (21,60,000 + 14,40,000)] = Rs. 5,76,000 or 57,600 shares

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

(ii)

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In the Books of PQ Ltd. (Transferee Co.) – Journal Entries
DATE PARTICULARS L/F DR. AMT. CR. AMT.
(i) Business Purchase A/c ------------------------Dr. 36,00,000
To Liquidator of P Ltd. 21,60,000
To Liquidator of Q Ltd. 14,40,000
(Being Purchase Consideration becomes due).
(ii) Goodwill A/c ------------------------------------Dr. 5,40,000
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Fixed Assets A/c --------------------------------Dr. 7,20,000
Inventory A/c -----------------------------------Dr. 3,60,000
Trade Receivables A/c ------------------------Dr. 4,80,000
Cash at Bank A/c -------------------------------Dr. 3,00,000
To Trade Receivables A/c 2,40,000
To Business Purchase A/c 21,60,000
(Being assets and liabilities of P Ltd. taken over).
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(iii) Fixed Assets A/c --------------------------------Dr. 10,80,000
Inventory A/c -----------------------------------Dr. 6,60,000
Trade Receivables A/c ------------------------Dr. 7,80,000
To Bank Overdraft A/c 5,40,000
To Trade Receivables A/c 5,40,000
To Business Purchase A/c 14,40,000
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(Being assets and liabilities of Q Ltd. taken over).

(iv) Liquidator of P Ltd. A/c ------------------------Dr. 21,60,000
To Equity Share Capital A/c (86,400 ES x Rs.10) 8,64,000
To Securities Premium A/c (86,400 ES x Rs.15) 12,96,000
(Being Purchase consideration discharged).
(v) Liquidator of Q Ltd. A/c ------------------------Dr. 14,40,000
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To Equity Share Capital A/c (86,400 ES x Rs.10) 5,76,000

To Securities Premium A/c (86,400 ES x Rs.15) 8,64,000
(Being Purchase consideration discharged).
(vi) Bank A/c ------------------------------------------Dr. 18,00,000
To Equity Share Capital A/c (72,000 ES x Rs.10) 7,20,000
To Securities Premium A/c (72,000 ES x Rs.15) 10,80,000
(Being shares issued for working capital).

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Balance Sheet of PQ Ltd. As on 31st March 2017 After Amalgamation

NOTE CURRENT PREVIOUS
PARTICULARS
REF. YEAR YEAR
A] EQUITY AND LIABILITIES
(1) Shareholder’s Funds
(A) Share Capital 1 21,60,000
(B) Reserves and Surplus 2 32,40,000
(2) Share Application Money pending Allotment
(3) Non Current Liabilities
(4) Current Liabilities
Trade Payables 7,80,000
TOTAL 61,80,000
B] ASSETS
(1) Non Current Assets
Property, Plant & Equipments 18,00,000
Intangible Assets - Goodwill 5,40,000
(2) Current Assets
Inventories 10,20,000
Trade Receivables 12,60,000
Cash & Cash Equivalents 15,60,000
TOTAL 61,80,000

Note-1: Share Capital

Issued, subscribed and paid up share capital
2,16,000 Equity shares of Rs.10 each Rs. 21,60,000
(Out of the above 1,44,000 shares issued for non-cash
consideration under scheme of amalgamation)

Note-2: Reserves & Surplus

Securities Premium Rs. 32,40,000

Q4. Solution

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Q4. Reclassification of Investment
(1) Rs. 20 Lakhs (2) Rs. 6.5 Lakhs (3) Rs. 12 Lakhs
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Q5. Answers to MCQ
(1) B (2) C (3) D (4) D (5) C
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