Roll No………

Total No. of Questions— 6] [Total No. of Printed Pages—5

Time Allowed : 3 Hours Maximum Marks : 100

Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a
candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.
Answer all Questions
Working notes should form part of the answer.
Wherever applicable, suitable assumptions should be made by the candidate.
Marks

1. The following is the extract from the Balance Sheets of Popular Ltd.: 16 (0)

Liabilities As at As at Assets As at As at
31.3.2004 31.3.2005 31.3.2004 31.3.2005
Rs. in Rs. in Rs. in Rs. in
lakhs lakhs lakhs lakhs
Share 500 500 Fixed assets 550 650
capital 400 425 10% 250 250
General investment 260 300
reserve 60 90 Stock
Profit and 180 165 170 110
Loss 35 45 Debtors 46 45
account 11 13 Cash at 10 8
18% term 100 125 bank
loan 1,286 1,363 Fictitious 1,286 1,363
Sundry assets
creditors
Provision
for tax
Proposed
dividend
Additional information:

Replacement values of Fixed assets were Rs.1,100 lakhs on 31.3.04 and

(i)
Rs.1,250 lakhs on 31.3.2005 respectively.
(ii) Rate of depreciation adopted on Fixed assets was 5% p.a.
(iii) 50% of the stock is to be valued at 120% of its book value
(iv) 50% of investments were trade investments.
(v) Debtors on 31st March, 2005 included foreign debtors of $35,000 recorded in the
books at Rs.35 per U.S. Dollar. The closing exchange rate was $ 1= Rs.39.
Creditors on 31st March, 2005 included foreign creditors of $60,000 recorded in
(vi)
the books at $ 1 = Rs.33. The closing exchange rate was $ 1 = Rs.39.
Profits for the year 2004–05 included Rs.60 lakhs of government subsidy which
(vii)
was not likely to recur.
(viii) Rs.125 lakhs of Research and Development expenditure was written off to the
Profit and Loss Account in the current year. This expenditure was not likely to
recur.
(ix) Future maintainable profits (pre–tax) are likely to be higher by 10%.
(x) Tax rate during 2004-05 was 50%, effective future tax rate will be 40%.
(xi) Normal rate of return expected is 15%.
One of the directors of the company Arvind, fears that the company does not enjoy a
goodwill in the prevalent market circumstances.
Critically examine this and establish whether Popular Co. has or has not any goodwill.
 If your answers were positive on the existence of goodwill, show the leverage effect it
has on the company’s result.
Industry average return was 12% on long-term funds and 15% on equity funds.
2. The summarized Balance sheets of X Ltd. and its subsidiary Y Ltd. as at 31.3.2005 were as follows: 16 (0)

Liabilities X Ltd. Rs. Y Ltd. Rs. Assets X Ltd. Rs. Y Ltd. Rs.
Share 50,00,000 10,00,000 Fixed 60,00,000 18,00,000
capital assets 6,00,000 —
(Share Investment
of Rs.10 in Y
each) 50,00,000 20,00,000 Ltd. 35,00,000 5,00,000
20,00,000 15,00,000 (60,000 30,00,000 25,00,000
General shares)
reserves 20,00,000 2,50,000 Sundry 39,00,000 2,00,000
Profit 30,00,000 2,50,000 debtors
and Loss 1,70,00,000 50,00,000 Inventories 1,70,00,000 50,00,000
account
Secured Cash and
loan bank
Current
liabilities
X Ltd. holds 60% of the paid-up capital of Y Ltd. and the balance is held by a foreign company.
A memorandum of understanding has been entered into with the foreign company by X Ltd. to the following effect:

(i) The shares held by the foreign company will be sold to X Ltd. at a price per share
to be calculated by capitalizing the yield at 15%. Yield, for this purpose, would
mean 50% of the average of pre-tax profits for the last 3 years, which were Rs.12
lakhs, 18 lakhs and 24 lakhs respectively. (Average tax rate was 40%).
(ii) The actual cost of shares to the foreign company was Rs.4,40,000 only. Gains
accruing to the foreign company are taxable at 20%. The tax payable will be
deducted from the sale proceeds and paid to government by X. 50% of the
consideration (after payment of tax) will be remitted to the foreign company by X
Ltd. and also any cash for fractional shares allotted.
For the balance of consideration, X Ltd. would issue its shares at their intrinsic
(iii)
value.
It was also decided that X Ltd. would absorb Y Ltd. Simultaneously by writing down
the Fixed assets of Y Ltd. by 10%. The Balance Sheet figures included a sum of
Rs.1,00,000 due by Y Ltd. to X Ltd. and stock of X Ltd. included stock of Rs.1,50,000
purchased from Y Ltd., who sold them at cost plus 20%.
The entire arrangement was approved and put through by all concern effective from
1.4.2005.
You are required to indicate how the above arrangements will be recorded in the books
of X Ltd. and also prepare a Balance Sheet after absorption of Y Ltd. Workings should
form part of your answer.
3. (a) A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2005, when the exchange rate was 4x4=16 (0)
Rs.43 per US Dollar. The company had recorded the transaction in the books at the above mentioned rate. The payment for
the import transaction was made on 5th April, 2005 when the exchange rate was Rs.47 per US Dollar. However, on 31st
March, 2005, the rate of exchange was Rs.48 per US Dollar. The company passed an entry on 31st March, 2005 adjusting
the cost of raw materials consumed for the difference between Rs.47 and Rs.43 per US Dollar.
In the background of the relevant accounting standard, is the company’s accounting treatment correct? Discuss.
(b) A private limited company manufacturing fancy terry towels had valued its closing stock of inventories of finished goods at (0)
the realisable value, inclusive of profit and the export cash incentives. Firm contracts had been received and goods were
packed for export, but the ownership in these goods had not been transferred to the foreign buyers.
Comment on the valuation of the stocks by the company.
(c) A company with a turnover of Rs.250 crores and an annual advertising budget of Rs.2 crore had taken up the marketing of (0)
a new product. It was estimated that the company would have a turnover of Rs. 25 crores from the new product. The
company had debited to its Profit and Loss account the total expenditure of Rs.2 crore incurred on extensive special initial
 advertisement campaign for the new product.
Is the procedure adopted by the company correct?
(d) A company deals in petroleum products. The sale price of petrol is fixed by the government. After the Balance Sheet date, (0)
but before the finalisation of the company’s accounts, the government unexpectedly increased the price retrospectively.
Can the company account for additional revenue at the close of the year? Discuss.
4. (a) P Limited is considering the acquisition of R Limited. The financial data at the time of acquisition being: 10 (0)

P R
Limited Limited
Net profit after tax (Rs. in
60 12
lakhs)
12 5
Number of shares (lakhs)
5 2.40
Earning per share (Rs.)
150 48
Market price per share (Rs.)
30 20
Price earning ratio
It is expected that the net profit after tax of the two companies would continue to be Rs.72 lakhs even after the
amalgamation.
Explain the effect on EPS of the merged company under each of the following situations:

(i) P Ltd. offers to pay Rs.60 per share to the shareholders of R Ltd.
(ii) P Ltd. offers to pay Rs.78 per share to the shareholders of R Ltd.
The amount in both cases is to be paid in the form of shares of P Ltd.
(b) A company has a capital base of Rs.1 crore and has earned profits to the tune of Rs.11 lakhs. The Return on Investment 6 (0)
(ROI) of the particular industry to which the company belongs is 12.5%. If the services of a particular executive are
acquired by the company, it is expected that the profits will increase by Rs.2.5 lakhs over and above the target profit.
Determine the amount of maximum bid price for that particular executive and the maximum salary that could be offered to
him.
(c) The following information is available of a concern; calculate E.V.A.: 4 (0)

Debt capital 12%

Rs. 2,000 crores
Equity capital
Rs. 500 crores
Reserve and surplus
Rs. 7,500 crores
Capital employed
employed Rs. 10,000
Risk-free rate
crores
Beta factor
9%
Market rate of return
1.05
Equity (market) risk
19%
premium
10%
Operating profit after
Rs.2,100 crores
tax
30%
Tax rate

5. (a) Mohur Ltd. has equity capital of Rs.40,00,000 consisting of fully paid equity shares of Rs.10 each. The net profit for the 8 (0)
year 2004–05 was Rs.60,00,000. It has also issued 36,000, 10% convertible debentures of Rs.50 each. Each debenture is
convertible into five equity shares. The tax rate applicable is 30%. Compute the diluted earnings.
(b) Find out the average capital employed of ND Ltd. from its Balance sheet as at 31st March, 2006: 8 (0)

(Rs. in (Rs. in
Liabilities Assets
lakhs) lakhs)
Share Capital: Land and 25.00
Equity shares of Rs.10 50.00 buildings 80.25
each 10.00 Plant and 5.50
9% Pref. shares fully machinery 5.00
paid up 12.00 Furniture and 10.00
Reserve and Surplus: 20.00 fixture
General reserve Vehicles 6.75
 Profit and Loss 5.00 Investments 4.90
Secured loans: 18.00 Current Assets: 10.40
16% debentures 13.30 Stock 10.40
16% Term loan Sundry Debtors
Cash credit 2.70 Cash and bank
Current Liabilities and 6.40 Preliminary
Provisions: expenses
Sundry creditors 10.00
Provision for taxation 0.90
Proposed dividend on: 148.30 148.30
Equity shares
Preference shares
Non–trade investments were 20% of the total investments.
Balances as on 1.4.2005 to the following accounts were:
Profit and Loss account Rs.8.70 lakhs, General reserve Rs.6.50 lakhs.
6. The Balance Sheet of Golden and Silver Limited as on 31.3.2006 are given below:

Liabilities Golden Silver Assets Golden Silver

Ltd. (Rs.) Ltd.(Rs.) Ltd. (Rs.) Ltd.(Rs.)
Equity 2,40,000 2,40,000 Fixed 88,000 1,68,000
share assets
capital 40,000 32,000 1,80,000 10,000
General 24,000 39,000 Investment 12,000 30,000
reserve Sundry
Profit 4,000 10,000 debtors 8,000 32,000
and Loss 8,000 15,000 20,000 80,000
account Bills 8,000 16,000
Bills 3,16,000 3,36,000 receivable 3,16,000 3,36,000
payable Stock in
Sundry trade
creditors Cash at
bank
Note: Contingent liability of Golden Ltd.: Bills discounted not yet matured at Rs.5,000.
Additional information:
On 1.10.2003, Golden Ltd. acquired 16,000 shares of Rs.10 each at the rate of
(i)
Rs.11 per share.
Balances to General reserve and Profit and Loss account of Silver Ltd. stood on
(ii)
1.4.2003 at Rs.60,000 and Rs.32,000 respectively.
(iii) Dividends have been paid @ 10% for each of the years 2003-04 and 2004-05.
Dividend for the year 2003-04 was paid out of the pre-acquisition profits. No
dividend has been proposed for the year 2005-06 as yet and no provision need
to be made in consolidated Balance Sheet. Golden Ltd. has credited all dividends
received to profit and Loss account.
(iv) On 1.3.2006, bonus shares were issued by Silver Ltd. at the rate of one fully
paid share for every five held and effect has been given to that in the above
accounts. The bonus was declared from general reserves from out of profits
earned prior to 1.4.2003.
On 1.10.2003, Fixed assets was revalued at Rs.2,16,000, but no adjustment had
(v)
been made in the books.
(vi) Depreciation had been charged @ 10% p.a. on the book value as on 1.4.2003
(on straight line method), there being no addition or sale since then.
Out of Current profits Rs.4,000 have been transferred to General reserve every
(vii)
year.
(viii) Bills receivable of Golden Ltd. include Rs.4,000 bills accepted by Silver Ltd. Bills
discounted by Golden Ltd., but not yet matured include Rs.3,000 accepted by
Silver Ltd.
(ix) Sundry creditors of Golden Ltd. include Rs.4,000 due to Silver Ltd. Sundry
debtors of Silver Ltd. include Rs.8,000 due from Golden Ltd.
It is found that Golden Ltd. has remitted a cheque of Rs.4,000, which has not yet
(x)
been received by Silver Ltd.
Prepare consolidated Balance Sheet as at 31.3.2006 of Golden Ltd. and its Subsidiary.