Question 1

State whether the following statements are 'True' or 'False' in line with the provisions of AS-1. Also give reason for your answer: (i) Certain fundamental accounting assumptions underline the preparation and presentation of financial statements. They are usually specifically stated because their acceptance and use are not assumed. (ii) If fundamental accounting assumptions are not followed in presentation and preparation of financial statements, a specific disclosure is not required. (iii) All significant accounting policies adopted in the preparation and presentation of financial statements should form part of the financial statements. (iv) Any change in an accounting policy, which has a material effect should be disclosed. Where the amount by which any item in the financial statements i…

Accepted Answer

**AS-1: Disclosure of Accounting Policies**

**(i) FALSE.** Fundamental accounting assumptions (Going Concern, Accrual, Consistency) do underlie the preparation and presentation of financial statements. However, they are NOT usually specifically stated precisely because their acceptance and use are **assumed**. They are so fundamental that they are taken as given. The statement incorrectly suggests they are stated because they are not assumed, which contradicts AS-1's position on fundamental assumptions.

**(ii) FALSE.** If fundamental accounting assumptions are NOT followed in the preparation and presentation of financial statements, **specific disclosure of the fact is required**. This is a mandatory disclosure requirement under AS-1. Non-compliance with fundamental assumptions is a material deviation that must be explicitly disclosed to users of financial statements.

**(iii) TRUE.** AS-1 explicitly requires that **all significant accounting policies adopted in the preparation and presentation of financial statements should form part of the financial statements**. These disclosures help users understand the basis on which financial statements have been prepared and the choices made by management among alternative accounting methods.

**(iv) FALSE.** Any change in an accounting policy which has a material effect should be disclosed along with the amount of adjustment. The statement is incorrect in suggesting that "the fact need not to be indicated" when the amount is not as…

Question 2

Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2021 with opening cash balance of ₹ 80,000, share capital issued of ₹ 5,00,000, collection from trade receivables of ₹ 3,50,000, sale of machinery of ₹ 70,000 on inflow side; and payments for account payables of ₹ 90,000, salaries and wages of ₹ 25,000, payment of overheads of ₹ 15,000, machinery acquired of ₹ 4,00,000, debentures redeemed of ₹ 50,000, bank loan repaid of ₹ 2,50,000, and tax paid of ₹ 1,55,000 on outflow side, with closing cash balance of ₹ 15,000. Prepare Cash Flow Statement for the year ended 31st March, 2021 in accordance with AS 3.

Accepted Answer

**Cash Flow Statement of Alpha Ltd. for the year ended 31st March, 2021**
**(As per AS 3 — Accounting Standard 3: Cash Flow Statements)**

**A. Cash Flow from Operating Activities**

Collection from trade receivables: ₹3,50,000
Less: Payments for account payables: ₹(90,000)
Less: Salaries and wages paid: ₹(25,000)
Less: Payment of overheads: ₹(15,000)
Less: Tax paid: ₹(1,55,000)

**Net Cash from Operating Activities (A): ₹65,000**

**B. Cash Flow from Investing Activities**

Proceeds from sale of machinery: ₹70,000
Less: Machinery acquired: ₹(4,00,000)

**Net Cash used in Investing Activities (B): ₹(3,30,000)**

**C. Cash Flow from Financing Activities**

Proceeds from issue of share capital: ₹5,00,000
Less: Debentures redeemed: ₹(50,000)
Less: Bank loan repaid: ₹(2,50,000)

**Net Cash from Financing Activities (C): ₹2,00,000**

**Net increase/(decrease) in Cash and Cash Equivalents (A+B+C): ₹(65,000)**

Add: **Opening Cash Balance: ₹80,000**

**Closing Cash Balance: ₹15,000** ✓ (Agrees with given closing balance)

Note: Tax paid of ₹1,55,000 is classified under **Operating Activities** as per AS 3, unless specifically identifiable with Financing or Investing activities. Sale and purchase of machinery are **Investing Activities**. Issue of share capital, redemption of debentures, and repayment of bank loan are **Financing Activities**.

Question 3

On 01.04.2018, XYZ Ltd. received Government grant of ₹ 100 Lakhs for acquisition of new machinery costing ₹ 500 lakhs. The grant was received and credited to the cost of the assets. The life span of the machinery is 5 years. The machinery is depreciated at 20% on WDV method. The company had to refund the entire grant on 2nd April, 2021 due to non-fulfilment of certain conditions imposed by the government. How do you deal with the refund of grant to the Government in the books of XYZ Ltd. as per AS 12?

Accepted Answer

**Applicable Standard: AS 12 – Accounting for Government Grants**

**Method Used:** Since the grant of ₹100 Lakhs was credited to the cost of the asset (capital approach – deduction from asset cost), the net cost of machinery recorded in books was ₹400 Lakhs (₹500 – ₹100 Lakhs). Depreciation was charged on this net cost at 20% WDV.

**WDV of Machinery (with grant) as on 01.04.2021:**

After 3 years of depreciation (FY 2018-19, 2019-20, 2020-21), the WDV stood at ₹204.80 Lakhs (see working notes).

**Treatment of Refund as per AS 12 (Para 21):**

When a grant related to a specific fixed asset (recognised by reducing asset cost) becomes refundable, AS 12 requires:

1. **Increase the book value of the asset** by the amount refundable (i.e., add back ₹100 Lakhs to machinery account).
2. **Charge additional depreciation** immediately to Profit & Loss Account — representing the excess depreciation that would have been charged had the grant not originally been received.
3. Going forward, **depreciation is charged prospectively** on the revised (higher) book value over the remaining useful life.

**Journal Entries in the books of XYZ Ltd. on 02.04.2021:**

**(i)** Restoring grant to asset:
**Machinery A/c Dr. ₹100.00 Lakhs**
   To Government Grant Refund Payable A/c ₹100.00 Lakhs
*(Being grant refunded – book value of asset increased)*

**(ii)** Charging additional depreciation not provided earlier:
**Profit & Loss A/c Dr. ₹48.80 Lakhs** *(Extraordinary Item)*
   To Accumulated Depre…

Question 4

Shree Ltd. has authorized capital of ₹ 50 lakhs divided into 5,00,000 equity shares of ₹ 10 each. Its books show various balances including inventory of ₹ 6,65,000, discounts and rebates of ₹ 30,000, carriage inwards of ₹ 57,500, patterns of ₹ 3,75,000, purchases of ₹ 12,32,500, plant and machinery of ₹ 7,50,000, trade receivables of ₹ 4,00,500, bank overdraft of ₹ 12,67,000, trade payables of ₹ 2,40,500, equity share capital of ₹ 20,00,000, and sales of ₹ 36,17,000 among other items. You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2021 and Balance Sheet as on that date in line with Schedule III to the Companies Act, 2013 after considering the following adjustments: inventory as on 31st March, 2021 was ₹ 7,08,000; outstanding liabilities for wages ₹ 25…

Accepted Answer

**Note:** The question as presented provides only selected items from the trial balance. The items explicitly given are used below; items referenced in adjustments (Engineering Tools, Furniture & Fixtures, Wages, Business Expenses carrying amounts) are not stated in the question. The framework and all adjustments are shown completely; the examiner's complete trial balance would be needed to fill in those blanks.

**Statement of Profit & Loss of Shree Ltd. for the year ended 31st March, 2021**
(Prepared as per Schedule III to the Companies Act, 2013)

**I. Revenue from Operations:** Sales ₹36,17,000

**II. Other Income:** (as per complete trial balance)

**III. Total Revenue (I + II):** ₹36,17,000 (minimum)

**IV. Expenses:**

**(a) Cost of Materials Consumed / Changes in Inventories:**
Opening Inventory ₹6,65,000 + Purchases ₹12,32,500 + Carriage Inwards ₹57,500 − Closing Inventory ₹7,08,000 = **₹12,47,000**

**(b) Employee Benefits Expense:**
Wages (as per T.B.) + Outstanding Wages ₹25,000

**(c) Depreciation and Amortisation Expense:**
Plant & Machinery: ₹7,50,000 × 5% = **₹37,500**
Patterns: ₹3,75,000 × 10% = **₹37,500**
Engineering Tools: Closing WDV (from T.B.) × 20%
Furniture & Fixtures: Closing WDV (from T.B.) × 10%

**(d) Other Expenses:**
Business Expenses (per T.B.) + Outstanding ₹36,000
Discounts and Rebates: **₹30,000**
Bad Debts Written Off: **₹16,000**
Provision for Doubtful Debts: **₹25,000**

**V. Profit Before Tax (PBT):** Revenue − Total Expenses

**VI. Tax …

Question 5

State under which head these accounts should be classified in Balance Sheet, as per Schedule III of the Companies Act, 2013:

Accepted Answer

**Classification under Schedule III, Companies Act, 2013:**

**(i) Share option outstanding account** — This should be classified under **Reserves and Surplus** within the Equity section. This account represents the fair value of employee stock options granted under ESOPs that remain unexercised. It is part of the equity base and recognized as a reserve component in the Balance Sheet.

**(ii) Unpaid matured debenture and interest accrued thereon** — These should be classified under **Current Liabilities - Financial Liabilities - Borrowings** (for the principal debenture amount that matured but remains unpaid) and **Current Liabilities - Financial Liabilities - Other Financial Liabilities** (for the accrued interest portion). Since the maturity date has passed, these become current liabilities and are no longer non-current.

**(iii) Uncalled liability on shares and other partly paid investments** — This should be disclosed as a **Contingent Liability** in the notes section following the Balance Sheet (Schedule III also provides for disclosure of contingent liabilities and commitments). The uncalled amount represents a prospective liability that will materialize only if the shares are called. It is not a present obligation and therefore shown separately as a contingent liability rather than within the main liabilities section.

**(iv) Money received against share warrant** — This should be classified under **Current Liabilities - Other Financial Liabilities** or alternatively u…

Question 6

Mr. Vijay entered into the following transactions of equity shares of JP Power Ltd. (paid up value ₹ 10 per share): 01.01.2019: 600 shares @ ₹ 20 per share; 15.03.2019: 900 shares @ ₹ 25 per share; 20.05.2019: 1000 shares @ ₹ 23 per share; 25.07.2019: 2500 bonus shares received; 20.12.2019: 1500 shares sold @ ₹ 22 per share; 01.02.2020: 1000 shares sold @ ₹ 24 per share. Additional information: dividend of ₹ 3 per share received on 15.09.2019; right issue in ratio 1:5 on 12.11.2019 @ ₹ 20 per share with 60% subscription and renunciation of remaining at ₹ 3 per share; weighted average cost basis valuation. You are required to prepare Investment Account for the year ended 31.03.2019 and 31.03.2020.

Accepted Answer

**Investment Account — JP Power Ltd. (Equity Shares, FV ₹10 each)**

The account is prepared under **AS 13 — Accounting for Investments** using the **Weighted Average Cost (WAC)** method. Key principles applied: (a) Bonus shares are received free of cost — no cost is allocated; (b) Rights shares subscribed increase cost; (c) Proceeds from renunciation of rights reduce the cost of investment (credited to Investment A/c); (d) Post-acquisition dividend is income — not deducted from cost.

---

**INVESTMENT ACCOUNT FOR THE YEAR ENDED 31st MARCH 2019**

| **Dr.** | | | | **Cr.** | | | |
|---|---|---|---|---|---|---|---|
| **Date** | **Particulars** | **Shares** | **₹** | **Date** | **Particulars** | **Shares** | **₹** |
| 01.01.2019 | Bank (Purchase @ ₹20) | 600 | 12,000 | 31.03.2019 | Balance c/d | 1,500 | 34,500 |
| 15.03.2019 | Bank (Purchase @ ₹25) | 900 | 22,500 | | | | |
| | **Total** | **1,500** | **34,500** | | **Total** | **1,500** | **34,500** |

**WAC as at 31.03.2019 = ₹34,500 ÷ 1,500 = ₹23 per share**

---

**INVESTMENT ACCOUNT FOR THE YEAR ENDED 31st MARCH 2020**

| **Dr.** | | | | | **Cr.** | | | | |
|---|---|---|---|---|---|---|---|---|---|
| **Date** | **Particulars** | **Shares** | **Cost (₹)** | **P&L (₹)** | **Date** | **Particulars** | **Shares** | **Cost (₹)** | **P&L (₹)** |
| 01.04.2019 | Balance b/d | 1,500 | 34,500 | — | 12.11.2019 | Bank – Rights renounced (40% × 1,000) | — | 1,200 | — |
| 20.05.2019 | Bank (Purchase @ ₹23) | 1,000 | 23,000 | — | 20.12.2…

Question 7

Whether the accounting treatment 'at cost' under the head 'Long Term Investments' without providing for any diminution in value is correct and in accordance with the provisions of AS 13? If not, what should have been the accounting treatment? What methodology should be adopted for ascertaining the provision for diminution in the value of investment, if any? Explain in brief.

Accepted Answer

**No, the accounting treatment of valuing long-term investments 'at cost' without providing for any diminution in value is NOT correct** and is in violation of AS 13.

**AS 13 - Position on Long-Term Investments:**

AS 13 (Accounting for Investments) requires that long-term investments be valued at cost. However, this principle is subject to an important caveat: **if there is evidence of permanent fall in value, appropriate provision should be made.** The investment must therefore be shown at the lower of cost and fair value when permanent diminution has occurred. The fact that an investment is classified as 'long-term' does not override this fundamental principle.

**Correct Accounting Treatment:**

When permanent diminution is identified:

1. The investment should be recorded at **lower of cost and fair value**
2. A **provision for diminution in value** should be created through the profit and loss account
3. The balance sheet should show the investment as: Cost less Provision for Diminution
4. Adequate **disclosure** regarding the valuation basis and provision amount must be made

**Methodology for Ascertaining Provision for Diminution:**

**Step 1 - Comparison of Values:** Compare the **cost of investment** with its **fair value** (market value, net realizable value, or value determined through appropriate valuation techniques) as at the balance sheet date.

**Step 2 - Assessment of Permanence:** Before creating a provision, ascertain whether the fall in value is **perman…

Question 8

A fire engulfed the premises of M/s Preet on 1st July 2021. Building, equipment and stock were destroyed with salvage value of Building ₹ 4,000, Equipment ₹ 2,500, and Stock ₹ 20,000. From records saved for 1st January to 30th June 2021: Sales ₹ 11,50,000, Sales Returns ₹ 40,000, Purchases ₹ 9,50,000, Purchases Returns ₹ 12,500, Cartage inward ₹ 17,500, Wages ₹ 7,500, Stock on 31.12.2020 ₹ 1,50,000, Building value on 31.12.2020 ₹ 3,75,000 with depreciation till date ₹ 1,25,000, Equipment value on 31.12.2020 ₹ 75,000 with depreciation till date ₹ 22,500; depreciation rates: Building 5% p.a. and Equipment 15% p.a. by straight line method; normal profit margin is 25% on net sales. You are required to prepare the statement of claim for submission to the Insurance Company.

Accepted Answer

**Statement of Claim for Submission to Insurance Company — M/s Preet (Fire on 1st July 2021)**

**I. Loss of Stock**

To ascertain the stock on the date of fire, a Memorandum Trading Account is prepared for the period 1st January 2021 to 30th June 2021 (6 months). The gross profit ratio is given as 25% on net sales, so Cost of Goods Sold = 75% of Net Sales.

Net Sales = ₹11,50,000 − ₹40,000 (Sales Returns) = **₹11,10,000**
Cost of Goods Sold (75% of ₹11,10,000) = **₹8,32,500**

Goods available for sale:
Opening Stock (31.12.2020) + Net Purchases + Cartage Inward + Wages
= ₹1,50,000 + ₹9,37,500 + ₹17,500 + ₹7,500 = **₹11,12,500**

Estimated Closing Stock (on 1st July 2021) = ₹11,12,500 − ₹8,32,500 = **₹2,80,000**
Less: Salvage Value of Stock = ₹20,000
**Loss of Stock = ₹2,60,000**

**II. Loss of Building**

Building: Gross Value = ₹3,75,000; Accumulated Depreciation till 31.12.2020 = ₹1,25,000
WDV on 31.12.2020 = ₹3,75,000 − ₹1,25,000 = ₹2,50,000
Depreciation for 6 months (Jan–Jun 2021) @ 5% p.a. on SLM basis = ₹3,75,000 × 5% × 6/12 = ₹9,375
WDV on 1st July 2021 = ₹2,50,000 − ₹9,375 = **₹2,40,625**
Less: Salvage Value = ₹4,000
**Loss of Building = ₹2,36,625**

**III. Loss of Equipment**

Equipment: Gross Value = ₹75,000; Accumulated Depreciation till 31.12.2020 = ₹22,500
WDV on 31.12.2020 = ₹75,000 − ₹22,500 = ₹52,500
Depreciation for 6 months @ 15% p.a. on SLM basis = ₹75,000 × 15% × 6/12 = ₹5,625
WDV on 1st July 2021 = ₹52,500 − ₹5,625 = **₹46,875**
Less: Salvage Value = ₹2,…

Question 9

The Balance Sheet of Chirag as on 31st March, 2020 shows Capital Account ₹ 48,000, Loan ₹ 15,000, Creditor ₹ 31,000, Building ₹ 32,500, Furniture ₹ 5,000, Motor car ₹ 9,000, Stock ₹ 20,000, Debtors ₹ 17,000, Cash in hand ₹ 2,000, and Cash at bank ₹ 8,500. A riot on 31st March, 2021 destroyed all books and records and the cashier absconded. Information provided: sales for year ended 31.03.2021 were 20% higher than previous year with goods sold at cost plus 25%; 20% of total sales were for cash with no cash purchases; stock level was raised to ₹ 30,000 on 1.4.2020 and maintained throughout; collection from debtors ₹ 1,40,000 (₹ 35,000 in cash), business expenses ₹ 20,000 (₹ 5,000 outstanding, ₹ 6,000 by cheques); bank pass book shows payments to creditors ₹ 1,37,500, personal drawings ₹ 7,50…

Accepted Answer

**Step 1 – Establish Last Year's Sales and Current Year's Sales**

Gross Profit for previous year = ₹30,000. Since goods sold at Cost + 25%, GP ratio = 25/125 = **20%**.
Previous year Sales = ₹30,000 ÷ 20% = ₹1,50,000.
Current year Sales = ₹1,50,000 × 120% = **₹1,80,000**.
Cash Sales (20%) = ₹36,000; Credit Sales (80%) = ₹1,44,000.

**Step 2 – Determine Purchases**

Opening Stock (as per Balance Sheet 31.3.2020) = ₹20,000. Stock raised to ₹30,000 on 1.4.2020, so Closing Stock = ₹30,000.
Cost of Goods Sold = Sales × 80% = ₹1,80,000 × 80% = ₹1,44,000.
Purchases = COGS + Closing Stock − Opening Stock = ₹1,44,000 + ₹30,000 − ₹20,000 = **₹1,54,000** (all on credit, no cash purchases).

**Step 3 – Reconstruct Debtors Account**

Opening Debtors ₹17,000 + Credit Sales ₹1,44,000 = ₹1,61,000. Collections ₹1,40,000. **Closing Debtors = ₹21,000**.

**Step 4 – Reconstruct Bank Account**

Opening ₹8,500 + Cheque receipts from debtors ₹1,05,000 + Cash deposited ₹71,500 = ₹1,85,000.
Payments: Creditors ₹1,37,500 + Drawings ₹7,500 + Cash withdrawn ₹12,000 + Expenses by cheque ₹6,000 = ₹1,63,000.
**Closing Bank Balance = ₹22,000**.

**Step 5 – Reconstruct Cash Account and Determine Defalcation**

Cash available: Opening ₹2,000 + Cash sales ₹36,000 + Cash from debtors ₹35,000 + Withdrawn from bank ₹12,000 = ₹85,000.
Cash accounted for: Expenses (cash) ₹9,000 + Deposited to bank ₹71,500 = ₹80,500.
Cash that should remain = ₹85,000 − ₹80,500 = ₹4,500. Since cashier absconded, **Amount defalcated …

Question 10

The following balances were extracted from the books of Beta for the year ended 31st March, 2021: Department A - Opening Stock ₹ 3,00,000, Purchases ₹ 39,00,000, Sales ₹ 60,00,000; Department B - Opening Stock ₹ 2,40,000, Purchases ₹ 54,60,000, Sales ₹ 90,00,000. General expenses incurred for both departments were ₹ 7,50,000. Additional information: Closing stock of Department A ₹ 6,00,000 including goods from Department B ₹ 1,20,000 at cost to A; Closing stock of Department B ₹ 12,00,000 including goods from Department A ₹ 1,80,000 at cost to B; Opening stock of A includes ₹ 60,000 from B and opening stock of B includes ₹ 90,000 from A at cost to transferee; gross profit is uniform year to year. You are required to prepare Departmental Trading Account and general Profit & Loss Account for…

Accepted Answer

**Departmental Trading and Profit & Loss Account for the year ended 31st March 2021**

**Step 1 — Determine GP% for each department (before stock adjustments)**

Since gross profit ratio is uniform year to year, the GP% computed from current-year figures is used to eliminate unrealized profit from both opening and closing stocks.

**Dept A (apparent):** Sales ₹60,00,000 + Closing Stock ₹6,00,000 − Opening Stock ₹3,00,000 − Purchases ₹39,00,000 = GP ₹24,00,000. **GP% = 40% on sales.**

**Dept B (apparent):** Sales ₹90,00,000 + Closing Stock ₹12,00,000 − Opening Stock ₹2,40,000 − Purchases ₹54,60,000 = GP ₹45,00,000. **GP% = 50% on sales.**

**Step 2 — Unrealized Profit (UP) in stocks**

UP is the profit of the *supplying* department embedded in the receiving department's stock.

| Stock | Supplier | Amount at cost to receiver | UP |  
|---|---|---|---|  
| A's closing stock (from B) | B | ₹1,20,000 | 50% × 1,20,000 = **₹60,000** |  
| B's closing stock (from A) | A | ₹1,80,000 | 40% × 1,80,000 = **₹72,000** |  
| A's opening stock (from B) | B | ₹60,000 | 50% × 60,000 = **₹30,000** |  
| B's opening stock (from A) | A | ₹90,000 | 40% × 90,000 = **₹36,000** |

**Step 3 — Adjusted Stock Values**

- A's adjusted opening stock = ₹3,00,000 − ₹30,000 = **₹2,70,000**
- A's adjusted closing stock = ₹6,00,000 − ₹60,000 = **₹5,40,000**
- B's adjusted opening stock = ₹2,40,000 − ₹36,000 = **₹2,04,000**
- B's adjusted closing stock = ₹12,00,000 − ₹72,000 = **₹11,28,000**

**Departmental…

Question 11

The partners of Ojasvi Enterprises decided to convert the partnership firm into Private Limited Company Tejasvi (P) Ltd. with effect from 1st January, 2019, but incorporation occurred only on 1st June, 2019. Business continued on behalf of the company with consideration of ₹ 6,00,000 settled on incorporation date plus interest @ 12% p.a. Company availed loan of ₹ 9,00,000 @ 10% p.a. on 1st June, 2019 to pay consideration and for working capital. Company closed accounts for first time on 31st March, 2020 with: Sales ₹ 19,80,000, Cost of goods sold ₹ 11,88,000, Discount to dealers ₹ 46,200, Directors' remuneration ₹ 60,000, Salaries ₹ 90,000, Rent ₹ 1,35,000, Interest ₹ 1,05,000, Depreciation ₹ 30,000, Office expenses ₹ 1,05,000, Preliminary expenses ₹ 15,000 (written off in first year). Sal…

Accepted Answer

**Statement of Apportionment of Profit between Pre-incorporation and Post-incorporation Periods**

**Period Identification:**
Business commenced (deemed): 1st January 2019 | Incorporation: 1st June 2019 | Accounts closed: 31st March 2020
- **Pre-incorporation period:** 1st Jan 2019 – 31st May 2019 = **5 months**
- **Post-incorporation period:** 1st June 2019 – 31st March 2020 = **10 months**
- Total period = 15 months

**Basis of Apportionment:**

**Sales Ratio (for turnover-linked items):** Let normal monthly sales = x. June–Dec 2019 (7 months) = 2.5x each; Jan–Mar 2020 (3 months) = 3.5x each; Jan–May 2019 (5 months) = x each (normal). Total = 5x + 17.5x + 10.5x = 33x = ₹19,80,000 → x = ₹60,000. Pre-inc sales = 5x = ₹3,00,000; Post-inc sales = 28x = ₹16,80,000. **Sales ratio = 5 : 28.**

**Time Ratio** (for fixed-period items): 5 : 10 = 1 : 2.

**Statement of Apportionment (₹)**

| Particulars | Basis | Total (₹) | Pre-inc (₹) | Post-inc (₹) |
|---|---|---|---|---|
| **Sales** | Sales ratio 5:28 | 19,80,000 | 3,00,000 | 16,80,000 |
| Less: Cost of Goods Sold | Sales ratio 5:28 | 11,88,000 | 1,80,000 | 10,08,000 |
| **Gross Profit** | | **7,92,000** | **1,20,000** | **6,72,000** |
| Less: Expenses: | | | | |
| Discount to Dealers | Sales ratio 5:28 | 46,200 | 7,000 | 39,200 |
| Directors' Remuneration | Post-inc only | 60,000 | — | 60,000 |
| Salaries | Special basis | 90,000 | 18,750 | 71,250 |
| Rent | Special basis | 1,35,000 | 15,000 | 1,20,000 |
| Interest | Special basi…

Question 12

L Ltd. has head office at Mumbai and branches at Pune and Goa. Branches purchase goods independently with Pune branch making profit of one-third on cost and Goa branch making profit of 20% on sales. Goods supplied between branches at respective sales prices. Particulars for year: Pune opening stock ₹ 40,000, purchases ₹ 2,00,000, sales ₹ 2,80,000, chargeable expenses ₹ 15,000, closing stock ₹ 30,000, office and administration expenses ₹ 13,250, selling and distribution expenses ₹ 15,000; Goa opening stock ₹ 30,000, purchases ₹ 2,50,000, sales ₹ 2,95,625, chargeable expenses ₹ 27,500, closing stock ₹ 43,500, office and administration expenses ₹ 7,000, selling and distribution expenses ₹ 10,000. Information: Opening stock at Pune includes goods ₹ 10,000 (invoice price) from Goa; Opening stoc…

Accepted Answer

**Pune Branch — Trading Account** for the year ended

The Trading Account is prepared using the figures directly from Pune's books. Opening stock (₹40,000) includes ₹10,000 from Goa at invoice price; closing stock (₹30,000) includes ₹5,000 from Goa at invoice price. Sales (₹2,80,000) include ₹20,000 transferred to Goa at Pune's selling price.

| Dr |  | ₹ | Cr |  | ₹ |
|---|---|---|---|---|---|
| To Opening Stock |  | 40,000 | By Sales |  | 2,80,000 |
| To Purchases |  | 2,00,000 | By Closing Stock |  | 30,000 |
| To Chargeable Expenses |  | 15,000 |  |  |  |
| To **Gross Profit c/d** |  | **55,000** |  |  |  |
|  |  | **3,10,000** |  |  | **3,10,000** |

**Pune Branch — Profit & Loss Account**

| Dr |  | ₹ | Cr |  | ₹ |
|---|---|---|---|---|---|
| To Office & Administration Expenses |  | 13,250 | By Gross Profit b/d |  | 55,000 |
| To Selling & Distribution Expenses |  | 15,000 |  |  |  |
| To **Net Profit** |  | **26,750** |  |  |  |
|  |  | **55,000** |  |  | **55,000** |

**Calculation of Adjusted Profit after Reserve for Unrealised Profit**

Goods transferred **from Pune to Goa** carry Pune's profit at 25% on sales (1/3 on cost = 1/4 on sales). The unrealised profit sitting in Goa's closing stock is Pune's profit and must be reserved against Pune. The opening reserve (on Goa's opening stock from Pune) is reversed as those goods are assumed sold.

| Particulars | ₹ |
|---|---|
| Net Profit as per Pune P&L | 26,750 |
| **Add:** Opening Reserve for UP — Pune's profit in Goa…

Question 13

Ganesh Ltd. has head office at Delhi and integral foreign operation branch at New York. New York branch trial balance as on 31st March, 2020: Stock on 1.4.2019 $300, Purchases and Sales $800 and $1,500, Sundry Debtors and Creditors $400 and $300, Bills of exchange $120 and $240, Sundry expenses $1,080, Bank balance $420, Delhi office A/c debit $1,080, with totals $3,120 each side. Exchange rates: 1.4.2019 @ ₹ 40 per US $, 31.3.2020 @ ₹ 42 per US $, average for year @ ₹ 41 per US $. New York branch account showed debit balance of ₹ 44,380 on 31.3.2020 in Delhi books with no pending reconciliation items. You are asked to prepare trial balance of New York in ₹ in the books of Ganesh Ltd.

Accepted Answer

**New York Branch Trial Balance in ₹ (Integral Foreign Operation) as on 31st March, 2020**

For an **integral foreign operation** under **AS 11 – The Effects of Changes in Foreign Exchange Rates**, the translation rules are:
- **Monetary items** (Debtors, Creditors, Bills, Bank) → **Closing rate** (₹42)
- **Non-monetary items at cost** (Opening Stock) → **Historical rate** on date of acquisition (₹40 on 1.4.2019)
- **Income & Expense items** (Purchases, Sales, Expenses) → **Rate on date of transaction / average rate** (₹41)
- **Delhi Office A/c** → Translated at the ₹ figure appearing in HO books (₹44,380), since there are no reconciliation items pending.

**Exchange Difference** arising on translation of an integral foreign operation is recognised in the **Profit & Loss Account** in the period it arises (AS 11, para 11).

**Trial Balance of New York Branch in ₹ (in the books of Ganesh Ltd.)**

| Particulars | Rate Used | Dr (₹) | Cr (₹) |
|---|---|---|---|
| Stock on 1.4.2019 | Historical (₹40) | 12,000 | — |
| Purchases | Average (₹41) | 32,800 | — |
| Sales | Average (₹41) | — | 61,500 |
| Sundry Debtors | Closing (₹42) | 16,800 | — |
| Sundry Creditors | Closing (₹42) | — | 12,600 |
| Bills of Exchange (Dr) | Closing (₹42) | 5,040 | — |
| Bills of Exchange (Cr) | Closing (₹42) | — | 10,080 |
| Sundry Expenses | Average (₹41) | 44,280 | — |
| Bank Balance | Closing (₹42) | 17,640 | — |
| Delhi Office A/c | HO Books figure | 44,380 | — |
| **Exchange Difference (P&L)** | Ba…

Question 14

The Balance Sheet of ABC Ltd. as on 31st March, 2021 shows: Share capital: 40,000 Equity shares of ₹ 10 each fully paid ₹ 4,00,000; 1,000 10% Redeemable preference shares of ₹ 100 each fully paid ₹ 1,00,000. Reserve & Surplus: Capital reserve ₹ 50,000, Securities premium ₹ 50,000, General reserve ₹ 75,000, Profit and Loss Account ₹ 35,000. On 1st April 2020, Board of Directors decided to redeem the preference shares at par by utilisation of reserve. You are required to pass necessary Journal Entries including cash transactions in the books of the company.

Accepted Answer

**Preference Share Redemption — Journal Entries in the books of ABC Ltd.**

As per **Section 55 of the Companies Act, 2013**, when redeemable preference shares are redeemed out of distributable profits (free reserves), an amount equal to the **nominal value of shares redeemed** must be transferred to the **Capital Redemption Reserve (CRR)**. This maintains the company's permanent capital base.

**Key Determination — Source of Funds for CRR:**

Nominal value of preference shares redeemed = 1,000 × ₹100 = **₹1,00,000** (to be transferred to CRR).

Free reserves available for CRR:
- General Reserve: ₹75,000
- Profit & Loss Account: ₹35,000
- **Total: ₹1,10,000**

**Note:** Capital Reserve and Securities Premium are **not free reserves** and cannot be used to create CRR under Section 55. Securities Premium can only be utilised for specific purposes listed in Section 52 of the Companies Act, 2013 (e.g., premium on redemption, bonus shares, writing off preliminary expenses).

Since ₹1,10,000 of free reserves is available against the requirement of ₹1,00,000, no fresh issue of shares is needed.

**Journal Entries in the Books of ABC Ltd. (1st April 2021):**

| Date | Particulars | Dr (₹) | Cr (₹) |
|------|------------|---------|--------|
| 1 Apr 2021 | General Reserve A/c Dr | 75,000 | |
| | Profit & Loss A/c Dr | 25,000 | |
| |     To Capital Redemption Reserve A/c | | 1,00,000 |
| | *(Being amount equal to nominal value of preference shares redeemed, transferr…

Question 15

X Ltd. (a non-investment company) as on 31st March, 2021 provides: Issued and subscribed capital: 15,000 14% Preference shares of ₹ 100 each fully paid ₹ 15,00,000; 1,20,000 Equity shares of ₹ 100 each, ₹ 80 paid-up ₹ 96,00,000. Capital reserves ₹ 1,95,000 (with ₹ 1,50,000 revaluation reserve), Securities premium ₹ 50,000, 15% Debentures ₹ 65,00,000, Investment in shares, debentures, etc. ₹ 75,00,000, Profit and Loss account (debit balance) ₹ 15,25,000. You are required to compute Effective Capital as per the provisions of Schedule V to the Companies Act, 2013.

Accepted Answer

**Effective Capital as per Schedule V to the Companies Act, 2013**

As per **Part II, Section II of Schedule V** to the Companies Act, 2013, **Effective Capital** is computed as: Paid-up share capital **+** Share premium **+** Reserves and surplus (excluding revaluation reserve) **+** Long-term loans and deposits **–** Investments (for non-investment companies) **–** Accumulated losses **–** Preliminary expenses not written off.

Applying the above to X Ltd. (a non-investment company) as on 31st March, 2021:

**Particulars and amounts included:**
- 14% Preference Share Capital (15,000 × ₹100 fully paid): ₹15,00,000
- Equity Share Capital (1,20,000 × ₹80 paid-up): ₹96,00,000
- Securities Premium: ₹50,000
- Capital Reserves excluding Revaluation Reserve (₹1,95,000 – ₹1,50,000): ₹45,000
- 15% Debentures (long-term loan): ₹65,00,000

**Deductions:**
- Investments in shares, debentures, etc.: ₹75,00,000
- Profit and Loss Account (debit balance — accumulated loss): ₹15,25,000

Note: **Revaluation Reserve of ₹1,50,000 is excluded** from reserves while computing effective capital, as specifically required by Schedule V.

**Effective Capital of X Ltd. = ₹86,70,000**

Question 16

Mr. Aman is running a business of readymade garments without maintaining double entry books. Income Tax Officer feels he has not disclosed full income for financial year 2020-21. Information provided: As on 31st March, 2020 - Sundry Assets ₹ 16,65,000, Liabilities ₹ 4,13,000; As on 31st March, 2021 - Sundry Assets ₹ 28,40,000, Liabilities ₹ 5,80,000; Drawings ₹ 32,000 per month; Income declared to ITOs ₹ 9,12,000; Life insurance policy matured with amount received ₹ 50,000 retained in business. State whether the Income Tax Officer's contention is correct. Explain by giving your working.

Accepted Answer

**Net Worth Method — Assessment of Income under Section 144 of the Income Tax Act, 1961**

When an assessee does not maintain proper books of account, the Assessing Officer is empowered under **Section 144** (Best Judgment Assessment) to estimate income using indirect methods. The **Net Worth Method** is one such recognized method, where income is computed by comparing the net worth (assets minus liabilities) at the beginning and end of the year, adjusted for drawings and non-taxable receipts.

**Step 1 — Compute Net Worth at both dates:**

Net Worth as on **31st March 2020** = ₹16,65,000 − ₹4,13,000 = **₹12,52,000**

Net Worth as on **31st March 2021** = ₹28,40,000 − ₹5,80,000 = **₹22,60,000**

**Step 2 — Increase in Net Worth:**

₹22,60,000 − ₹12,52,000 = **₹10,08,000**

**Step 3 — Add back Drawings (personal withdrawals reduce net worth but are part of income applied):**

Drawings = ₹32,000 × 12 months = **₹3,84,000**

**Step 4 — Estimated Total Income before adjustments:**

₹10,08,000 + ₹3,84,000 = **₹13,92,000**

**Step 5 — Deduct Non-taxable Receipts (LIC Maturity amount):**

Maturity proceeds of a life insurance policy are **exempt under Section 10(10D)** of the Income Tax Act, 1961 (subject to conditions). Since this amount of ₹50,000 was retained in the business and has already increased the net worth, it must be deducted to avoid overstating taxable income.

Estimated Business Income = ₹13,92,000 − ₹50,000 = **₹13,42,000**

**Conclusion:**

The income estimated by t…

Question 17

A acquired on 1st January, 2021 a machine under a Hire-Purchase agreement providing for 5 half-yearly instalments of ₹ 6,000 each, the first instalment being due on 1st July, 2021. Assuming that the applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working should form part of the answer.

Accepted Answer

**Cash Value of Machine under Hire-Purchase Agreement**

The cash value of a machine acquired under a Hire-Purchase agreement is the **present value of all future instalments** discounted at the applicable rate of interest.

**Given Information:**
- Date of acquisition: 1st January, 2021
- Number of instalments: 5 half-yearly instalments
- Amount of each instalment: ₹6,000
- First instalment due: 1st July, 2021
- Interest rate: 10% per annum → **5% per half-year**

Since each instalment is paid at the end of each half-year period, we discount each at 5% per half-year.

**Present Value Table:**

| Instalment No. | Due Date | Amount (₹) | Discount Factor @ 5% | Present Value (₹) |
|---|---|---|---|---|
| 1 | 1 July 2021 | 6,000 | 1/(1.05)¹ = 0.9524 | 5,714.29 |
| 2 | 1 Jan 2022 | 6,000 | 1/(1.05)² = 0.9070 | 5,442.18 |
| 3 | 1 July 2022 | 6,000 | 1/(1.05)³ = 0.8638 | 5,183.03 |
| 4 | 1 Jan 2023 | 6,000 | 1/(1.05)⁴ = 0.8227 | 4,936.22 |
| 5 | 1 July 2023 | 6,000 | 1/(1.05)⁵ = 0.7835 | 4,701.16 |
| **Total** | | | | **₹25,976.88** |

**Cash Value of the Machine = ₹25,977 (approx.)**

Alternatively, using the **Present Value Annuity Factor** for 5 periods @ 5%:
Cash Value = ₹6,000 × 4.3295 = **₹25,977**

Question 18

ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting to ₹ 4,00,000. As on 31st March, 2021 before delivery of the machine, ABC Ltd. had to change its method of production. The new method will not require the machine ordered and so it shall be scrapped after delivery. The expected scrap value is 'NIL'. Show the treatment of machine in the books of ABC Ltd.

Accepted Answer

**Applicable Standard: AS 29 — Provisions, Contingent Liabilities and Contingent Assets**

The binding (non-cancellable) agreement between ABC Ltd. and XYZ Ltd. for the custom-made machine constitutes an **onerous contract** as defined under AS 29 (Provisions, Contingent Liabilities and Contingent Assets).

**What is an Onerous Contract?**
An onerous contract is one in which the **unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it**. The present obligation under such a contract must be recognised and measured as a provision.

**Analysis of the Situation:**
- Cost to fulfil the contract (purchase price of machine): ₹4,00,000
- Economic benefit expected (scrap value): NIL
- **Net unavoidable loss (onerous obligation): ₹4,00,000**

Since the contract is **binding and non-cancellable**, ABC Ltd. has a present obligation it cannot avoid. The fact that the machine has become redundant due to the change in production method does not extinguish the liability. The entire contract cost of ₹4,00,000 represents the onerous obligation.

**Treatment in the Books of ABC Ltd.:**

**Step 1 — As on 31st March 2021 (before delivery):**
Recognise a provision for the onerous contract, since the obligation exists at the balance sheet date:

Loss on Onerous Contract A/c Dr. ₹4,00,000
  To Provision for Onerous Contract A/c ₹4,00,000
*(Being provision created for the onerous contract as the unavoidable cost exceeds expected e…

CA Inter Adv Accounting

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap