Question 1

Hello Ltd. purchased goods at the cost of ₹ 20 lakhs in October. Till the end of the financial year, 75% of the stocks were sold. The Company wants to disclose closing stock at ₹ 5 lakhs. The expected sale value is ₹ 5.5 lakhs and a commission at 10% on sale is payable to the agent. You are required to ascertain the value of closing stock?

Accepted Answer

**Valuation of Closing Stock as per AS 2 – Valuation of Inventories**

As per **AS 2 (Valuation of Inventories)**, inventories must be valued at the **lower of cost or Net Realisable Value (NRV)**. NRV is the estimated selling price in the ordinary course of business **less** the estimated costs of completion and the estimated costs necessary to make the sale.

**Step 1 – Determine Cost of Closing Stock:**
Total goods purchased at cost = ₹20 lakhs. Since 75% of stocks were sold, the remaining closing stock represents 25% of total purchases.
Cost of closing stock = 25% × ₹20 lakhs = **₹5 lakhs**

**Step 2 – Determine Net Realisable Value (NRV):**
Expected sale value = ₹5.5 lakhs
Less: Commission payable to agent @ 10% on sale = 10% × ₹5.5 lakhs = ₹0.55 lakhs
**NRV = ₹5.5 – ₹0.55 = ₹4.95 lakhs**

**Step 3 – Apply Lower of Cost or NRV:**
| Basis | Amount |
|---|---|
| Cost | ₹5.00 lakhs |
| NRV | ₹4.95 lakhs |
| **Value of Closing Stock** | **₹4.95 lakhs** |

**Conclusion:** The closing stock should be valued at **₹4.95 lakhs** (being NRV, which is lower than cost). The Company's proposed disclosure of ₹5 lakhs is **not correct** and does not comply with AS 2. Valuing inventory above NRV would overstate assets and profit, which violates the **prudence concept** and AS 2 requirements.

Question 2

Viva Ltd. received a specific grant of ₹ 30 lakhs for acquiring the plant of ₹ 150 lakhs during 2018-19 having useful life of 10 years. The grant received was credited to deferred income in the balance sheet and was not deducted from the cost of plant. During 2021-22, due to non-compliance of conditions laid down for the grant, the company had to refund the whole grant to the Government. Balance in the deferred income on that date was ₹ 21 lakhs and written down value of plant was ₹ 105 lakhs. What should be the treatment of the refund of the grant and the effect on cost of the fixed asset and the amount of depreciation to be charged during the year 2021-22 in profit and loss account?

Accepted Answer

**Treatment of Refund of Government Grant under AS 12 (Accounting for Government Grants)**

Viva Ltd. adopted the **Deferred Income Approach** (as permitted under AS 12) — the grant of ₹30 lakhs was credited to Deferred Income and the plant was recorded at full cost of ₹150 lakhs.

**Relevant provision — AS 12, Para 31:** When a government grant related to a specific fixed asset (presented as deferred income) becomes refundable, the refund is recorded by **reducing the deferred income balance** by the amount refundable. Where the refund exceeds the unamortised deferred income balance, the excess is charged to the **Profit & Loss account** immediately.

**Treatment on Refund in 2021-22:**

On the date of refund, the Deferred Income balance stood at ₹21 lakhs (₹30 lakhs less ₹3 lakhs amortised per year × 3 years from 2018-19 to 2020-21). The full grant of ₹30 lakhs is refunded.

- **Step 1:** Deferred Income balance of ₹21 lakhs is applied against the refund → Deferred Income Account is debited and closed.
- **Step 2:** Excess of refund over deferred income = ₹30 lakhs − ₹21 lakhs = **₹9 lakhs** is charged to Profit & Loss account as an extraordinary item.

**Journal Entry:**
Deferred Income A/c Dr. ₹21 lakhs
Profit & Loss A/c Dr. ₹9 lakhs
&emsp;&emsp;To Bank A/c ₹30 lakhs

**Effect on Cost of Fixed Asset:**

Since Viva Ltd. used the Deferred Income approach (grant was **not** deducted from the cost of plant), the gross block of the plant **remains unchanged at ₹150 lakhs**. Th…

Question 3

Neon Enterprise operates a major chain of restaurants located in different cities. The company has acquired a new restaurant located at Chandigarh. The new-restaurant requires significant renovation expenditure. Management expects that the renovations will last for 3 months during which the restaurant will be closed. Management has prepared the following budget for this period – Salaries of the staff engaged in preparation of restaurant before its opening ₹ 7,50,000 and Construction and remodelling cost of restaurant ₹ 30,00,000. Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant and Equipment".

Accepted Answer

**Treatment of Renovation Expenditures as per AS 10 — Property, Plant and Equipment**

As per **AS 10 (Revised) — Property, Plant and Equipment**, the cost of an item of PPE comprises all costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The standard specifically includes **costs of employee benefits arising directly from the construction or acquisition of the item** as directly attributable costs (AS 10, para 17).

The restaurant acquired at Chandigarh is undergoing renovation for 3 months before it can commence operations. During this period, the asset is NOT yet capable of operating in the manner intended by management. Therefore, expenditure incurred to bring the asset to that operable condition qualifies for capitalisation.

**Treatment of Construction and Remodelling Cost — ₹30,00,000:**

Construction and remodelling cost is a **directly attributable cost** as it is incurred specifically to bring the restaurant to the condition necessary for its intended use. As per AS 10, such costs form part of the cost of the PPE. Accordingly, ₹30,00,000 should be **capitalised** and added to the carrying amount of the restaurant (PPE).

**Treatment of Salaries of Staff — ₹7,50,000:**

The salaries pertain to staff who are specifically engaged in the **preparation of the restaurant before its opening**. As per AS 10 para 17(b), employee benefit costs arising **directly** fr…

Question 4

ABC Ltd. borrowed US $ 5,00,000 on 01/01/2021, which was repaid as on 31/07/2021. ABC Ltd. prepares financial statement ending on 31/03/2021. Rate of Exchange between reporting currency (INR) and foreign currency (USD) on different dates are: 01/01/2021 1 US$ = ₹ 68.50; 31/03/2021 1 US $ = ₹ 69.50; 31/07/2021 1 US $ = ₹ 70.00. You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11.

Accepted Answer

**As per AS 11 – The Effects of Changes in Foreign Exchange Rates**, monetary items denominated in foreign currency must be translated at the closing rate at each balance sheet date, and any resulting exchange difference must be recognised as income or expense in the period in which it arises.

**Facts:** ABC Ltd. borrowed US$ 5,00,000 on 01/01/2021 at ₹68.50/USD. The financial year ends on 31/03/2021 (rate: ₹69.50/USD). The loan is repaid on 31/07/2021 (rate: ₹70.00/USD). A foreign currency loan (borrowing) is a **monetary item**; hence it must be restated at each reporting date and at the date of settlement.

**Journal Entries in the Books of ABC Ltd.**

**01/01/2021 – On receipt of loan (US$ 5,00,000 × ₹68.50):**

Bank A/c — Dr. ₹3,42,50,000
  To Foreign Currency Loan A/c ₹3,42,50,000
*(Being US$ 5,00,000 borrowed and converted at ₹68.50 per USD)*

**31/03/2021 – Year-end restatement (Closing rate ₹69.50 vs. ₹68.50):**

The loan outstanding of US$ 5,00,000 must be restated at ₹69.50. Restated value = ₹3,47,50,000; Carrying value = ₹3,42,50,000; **Exchange Loss = ₹5,00,000** (INR weakened against USD — liability increases).

Foreign Exchange Loss A/c — Dr. ₹5,00,000
  To Foreign Currency Loan A/c ₹5,00,000
*(Being exchange loss on restatement of USD loan at closing rate as per AS 11; charged to Profit & Loss A/c)*

**31/07/2021 – On repayment of loan (US$ 5,00,000 × ₹70.00):**

At the date of repayment, the loan carrying value is ₹3,47,50,000 (post year-end restatement). Ac…

Question 5

The capital structure of Preet Ltd. consists of 20,000 Equity Shares of ₹10 each fully paid up and 1,000 8% Redeemable Preference Shares of ₹100 each fully paid up. Undistributed reserve and surplus stood as: General Reserve ₹ 90,000; Profit and Loss Account ₹ 20,000; Investment Allowance Reserve is ₹ 20,000 out of which ₹ 15,000 is not ascertained as free reserve; Cash at bank amounted to ₹ 98,000. Preference shares are to be redeemed at a premium of 10% and for the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed reserves and surplus, subject to the condition that a sum of ₹ 30,000 shall be retained in general reserve which should not be utilized. You are required to pass Journal Entries to give effect to the…

Accepted Answer

**Preference Share Redemption — Preet Ltd.**

**Key Calculations before Journal Entries:**

Total redemption amount = 1,000 × ₹100 × 110% = **₹1,10,000** (including 10% premium).

Premium on redemption = ₹10,000 — charged to **Profit & Loss Account** (no Securities Premium Account exists).

**Free reserves available for Capital Redemption Reserve (CRR):**
General Reserve (available) = ₹90,000 − ₹30,000 (retained minimum) = ₹60,000.
P&L Account (after premium) = ₹20,000 − ₹10,000 = ₹10,000.
Investment Allowance Reserve (free portion only) = ₹20,000 − ₹15,000 = ₹5,000.
Total free reserves = **₹75,000**.

As per **Section 55(2) of the Companies Act 2013**, when preference shares are redeemed out of profits, an amount equal to the nominal value of shares redeemed must be transferred to **Capital Redemption Reserve (CRR)**. The balance must be covered by fresh issue proceeds.

Fresh issue required = ₹1,00,000 (nominal) − ₹75,000 (free reserves) = **₹25,000** → 2,500 equity shares of ₹10 each at par.

Cash check: ₹98,000 + ₹25,000 − ₹1,10,000 = ₹13,000 cash remaining ✓

---

**Journal Entries in the books of Preet Ltd.**

| S.No. | Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| 1 | **Bank A/c** Dr. | 25,000 | |
| | &emsp;To **Equity Share Capital A/c** | | 25,000 |
| | *(Issue of 2,500 equity shares of ₹10 each at par for redemption purpose)* | | |
| 2 | **Profit & Loss A/c** Dr. | 10,000 | |
| | &emsp;To **Premium on Redemption of Preference Shares A/c** | | 10,000 |
| | *(…

Question 6

On 30th March, 2022 fire occurred in the premises of M/s Alok & Co. The concern had taken an insurance policy of ₹ 1,20,000 which was subject to the average clause. From the books of accounts the following particulars are available relating to the period 1st January to 30th March, 2022: (i) Stock as per Balance Sheet at 31st December, 2021 ₹ 1,91,200 (ii) Purchases (including purchase of machinery costing ₹ 60,000) ₹ 3,40,000 (iii) Wages (including wages ₹ 6,000 for installation of machinery) ₹ 1,00,000 (iv) Sales (including goods sold on approval basis amounting to ₹ 99,000) ₹ 5,50,000, no approval received for 2/3rd of goods sold on approval (v) Average rate of gross profit is 20% of sales (vi) Value of salvaged goods was ₹ 24,600. You are required to compute the amount of the claim to b…

Accepted Answer

**Insurance Claim Calculation for M/s Alok & Co. (Fire on 30th March, 2022)**

**Step 1 – Adjusted figures before preparing Memorandum Trading Account**

Purchases are adjusted to exclude machinery (capital item): ₹3,40,000 – ₹60,000 = **₹2,80,000**.

Wages are adjusted to exclude installation wages (capital): ₹1,00,000 – ₹6,000 = **₹94,000**.

For Sales: No approval was received for 2/3rd of goods sold on approval. Goods sold on approval where no approval has been received are not treated as sales — ownership remains with the seller. Unapproved goods at selling price = 2/3 × ₹99,000 = **₹66,000**. Adjusted Sales = ₹5,50,000 – ₹66,000 = **₹4,84,000**.

**Step 2 – Memorandum Trading Account (1st Jan to 30th March, 2022)**

The account is prepared to ascertain the estimated stock on the date of fire.

**Dr. Side:** Opening Stock ₹1,91,200 + Purchases (net) ₹2,80,000 + Wages (net) ₹94,000 = **₹5,65,200**.

**Cost of Goods Sold:** GP rate is 20% on sales, so cost ratio = 80%. Cost of Sales = 80% × ₹4,84,000 = **₹3,87,200**.

**Estimated Closing Stock (Total)** = ₹5,65,200 – ₹3,87,200 = **₹1,78,000**.

**Step 3 – Stock at Premises on Date of Fire**

The estimated closing stock of ₹1,78,000 includes goods sent on approval that are physically with customers (not at the fire-affected premises). These goods are safe and cannot be claimed.

Cost of unapproved goods sent on approval = 80% × ₹66,000 = **₹52,800**.

Stock at the insured premises = ₹1,78,000 – ₹52,800 = **₹1,25,200**.

**S…

Question 7

Moon Star has a branch at Virginia (USA). The Branch is a non-integral foreign operation of Moon Star with trial balance as at 31st March, 2022 provided. Further information includes: (1) Salaries outstanding $ 400. (2) Depreciate office equipment and furniture & fixtures @10% p.a. at written down value. (3) Head Office sent goods to Branch for ₹15,80,000. (4) Head Office shows amount of ₹ 20,50,000 due from Branch. (5) Stock on 31st March, 2022 - $21,500. (6) No transit items at start or end of year. (7) Exchange rates: 01.04.2020 ₹ 43 per $; 01.04.2021 ₹ 47 per $; 31.03.2022 ₹ 50 per $; average ₹ 45 per $. Prepare Trial balance incorporating adjustments converting dollars into rupees and Trading, Profit and Loss Account for the year ended 31st March, 2022 of the Branch as would appear in…

Accepted Answer

**Note:** The actual trial balance figures (in $) were referenced as 'provided' in the original question but are absent from the text supplied. The complete solution framework and all translations derivable from the given data are presented below. A student with the full trial balance can apply these rules directly.

**Applicable Standard: AS 11 – The Effects of Changes in Foreign Exchange Rates**

Since the Virginia branch is a **non-integral foreign operation**, the translation rules under AS 11 are:

**Translation Rules Applied:**
- All **assets and liabilities** → Closing rate: ₹50 per $
- All **income and expense items** (P&L) → Average rate: ₹45 per $
- **Opening net assets** → Rate on 01.04.2021: ₹47 per $
- **Exchange difference** (net) → Transferred to **Foreign Currency Translation Reserve (FCTR)** in equity (not P&L)

---

**Step 1 – Adjustments Before Translation**

**(i) Outstanding Salaries: $400**
Add $400 to Salaries in the trial balance.
Adjusted Salaries total = (Trial balance salaries + $400)
- P&L translation: (Salaries + $400) × ₹45
- Outstanding salary (current liability): $400 × ₹50 = **₹20,000**

**(ii) Depreciation on Office Equipment & Furniture @ 10% WDV**
Let WDV of Office Equipment (01.04.2021) = $OE and Furniture & Fixtures = $FF (from trial balance).
- Depreciation on OE = $OE × 10% → translate at ₹45
- Depreciation on FF = $FF × 10% → translate at ₹45
- Closing WDV of OE = $OE × 90% → translate at ₹50 (balance sheet)
- Closing WDV of FF = $FF ×…

Question 8

Alpha firm has two departments--X and Y. Product of Department Y is made with material supplied by Department X at its usual selling price. Prepare Departmental Trading and Profit and Loss Account for the year 2021 with following data: Department X Opening Stock ₹ 3,00,000, Sales ₹ 24,00,000, Purchases ₹ 20,00,000, Supply to Department Y ₹ 3,00,000, Selling expenses ₹ 20,000, Wages ₹ 60,000, Closing Stock ₹ 2,00,000. Department Y Opening Stock ₹ 50,000, Sales ₹ 4,00,000, Purchases ₹ 15,000, Selling expenses ₹ 6,000, Wages ₹ 20,000, Closing Stock ₹ 60,000. Stock in Department Y consists of 75% material and 25% other expenses. Department X earned Gross Profit at 15% on sales in 2020. General expenses ₹ 1,10,000. Firm adopts FIFO method.

Accepted Answer

**Departmental Trading Account for the year ended 31st March 2021**

**Department X — Trading Account:**

Dr side: Opening Stock ₹3,00,000 + Purchases ₹20,00,000 + Wages ₹60,000 + **Gross Profit (balancing figure) ₹5,40,000** = ₹29,00,000.

Cr side: Sales ₹24,00,000 + Transfer to Dept Y ₹3,00,000 + Closing Stock ₹2,00,000 = ₹29,00,000.

**GP% of Dept X (current year) = ₹5,40,000 / ₹27,00,000 × 100 = 20% on sales (including inter-departmental transfers).**

**Department Y — Trading Account:**

Dr side: Opening Stock ₹50,000 + Purchases from Dept X ₹3,00,000 + External Purchases ₹15,000 + Wages ₹20,000 + **Gross Profit ₹75,000** = ₹4,60,000.

Cr side: Sales ₹4,00,000 + Closing Stock ₹60,000 = ₹4,60,000.

**Unrealized Profit Calculation (Stock Reserve):**

Under **FIFO method**, closing stock is from latest purchases (i.e., from current year). Stock in Dept Y comprises 75% material (from Dept X) and 25% other costs.

**Opening Stock Reserve (from 2020):** Dept X's GP in 2020 = 15% on sales. Material in opening stock of Y = 75% × ₹50,000 = ₹37,500. Unrealized profit = 15% × ₹37,500 = **₹5,625** (to be written back — credit to P&L).

**Closing Stock Reserve (2021):** Dept X's GP in 2021 = 20% on sales. Material in closing stock of Y = 75% × ₹60,000 = ₹45,000. Unrealized profit = 20% × ₹45,000 = **₹9,000** (to be charged — debit to P&L).

**Departmental Profit and Loss Account:**

Cr side: GP from Dept X ₹5,40,000 + GP from Dept Y ₹75,000 + Opening Stock Reserve written back ₹5,625…

Question 9

Following is the incomplete information of Jyotishikha Traders with balances as on 31.03.2021 and 31.03.2022 for various assets and liabilities. Other information includes: Collections from Trade receivables ₹ 9,25,000, Payment to Trade payables ₹ 5,25,000, Payment of office expenses ₹ 42,000, Salary paid ₹ 32,000, Selling expenses ₹ 15,000, Cash sales ₹ 2,50,000, Credit sales (80% of total), Credit purchases ₹ 5,40,000, Cash purchases (40% of total), GP Margin at cost plus 25%, Discount Allowed ₹ 5,500, Discount Received ₹ 4,500, Bad debts (2% of closing receivables). Depreciation: Land and Building 5%, Plant and Machinery 10%, Office Equipment 15%. Other adjustments: (i) Machine sold 01.10.21 with Book Value ₹ 40,000 (31.03.2021) at loss of ₹ 15,000; new machine purchased 01.01.2022. (ii…

Accepted Answer

**Note:** The question references a table of opening/closing balances for assets and liabilities (as on 31.03.2021 and 31.03.2022) that was not included in the question text provided. Without those figures, the complete Balance Sheet cannot be fully prepared. Below is the **complete methodology and all derivable calculations** — every step a CA student needs once the missing table values are available.

---

**Step 1 – Derive Total Sales**

Cash sales = ₹2,50,000 = 20% of total sales (since credit sales = 80%).
Total Sales = ₹2,50,000 ÷ 20% = **₹12,50,000**
Credit Sales = 80% × ₹12,50,000 = **₹10,00,000**

**Step 2 – Derive Total Purchases**

Credit purchases = ₹5,40,000 = 60% of total (since cash purchases = 40%).
Total Purchases = ₹5,40,000 ÷ 60% = **₹9,00,000**
Cash Purchases = 40% × ₹9,00,000 = **₹3,60,000**

**Step 3 – Gross Profit Calculation**

GP Margin 'at cost + 25%' means GP is 25% of Cost, i.e., GP/Sales = 25/125 = **20%**.
Gross Profit = 20% × ₹12,50,000 = **₹2,50,000**
Cost of Goods Sold (COGS) = ₹12,50,000 − ₹2,50,000 = **₹10,00,000**

**Step 4 – Stock Reconciliation (for Trading A/c)**

Using: Opening Stock + Purchases − Closing Stock = COGS
Closing Stock = Opening Stock + ₹9,00,000 − ₹10,00,000 = Opening Stock − ₹1,00,000
(Opening Stock figure required from missing table)

**Step 5 – Trade Receivables Control Account**

Opening TR + Credit Sales − Collections − Discount Allowed − Bad Debts = Closing TR
Let Closing TR = X; Bad Debts = 2% × X
Opening TR + ₹10,0…

Question 10

On 1st April, 2021, Rajat has 50,000 equity shares of P Ltd. at book value of ₹ 15 per share (face value ₹ 10 each). Further information: (1) On 20th June, 2021 he purchased another 10,000 shares at ₹ 16 per share. (2) On 1st August, 2021, P Ltd. issued one equity bonus share for every six shares held. (3) On 31st October, 2021, directors announced right issue entitling holders to subscribe three shares for every seven shares at ₹ 15 per share. Shareholders can transfer rights fully or partially. Rajat sold 1/3rd of entitlement to Umang for ₹ 2 per share and subscribed the rest on 5th November, 2021. You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2022.

Accepted Answer

**Investment Account in the Books of Rajat**
**[Equity Shares of P Ltd. — Face Value ₹10 each]**
**For the Year Ended 31st March, 2022**

The investment account is maintained under **AS 13 — Accounting for Investments**. Each transaction is recorded as follows:

**1. Opening Balance (1st April, 2021):** 50,000 shares were held at a book value of ₹15 per share, totalling ₹7,50,000.

**2. Purchase (20th June, 2021):** 10,000 shares purchased at ₹16 per share = ₹1,60,000. Total holding becomes 60,000 shares at a cost of ₹9,10,000.

**3. Bonus Issue (1st August, 2021):** 1 bonus share for every 6 held → 60,000 ÷ 6 = **10,000 bonus shares** received at nil cost. Total shares = 70,000; cost remains ₹9,10,000. Revised average cost = ₹9,10,000 ÷ 70,000 = **₹13 per share**.

**4. Rights Issue (31st October, 2021):** Entitlement = 3 shares for every 7 held → (70,000 ÷ 7) × 3 = **30,000 rights**.
- Rajat **sold 1/3rd** of rights (= 10,000 rights) to Umang @ ₹2 each → **₹20,000 received**. This amount is credited to the Investment Account as a **reduction in cost** (capital receipt — return of cost).
- Rajat **subscribed 2/3rd** (= 20,000 shares) @ ₹15 per share on 5th November, 2021 → **₹3,00,000 paid**.

**Ledger Format:**

| Dr. Side | Shares | ₹ |
|---|---|---|
| 1.4.21 — Balance b/d | 50,000 | 7,50,000 |
| 20.6.21 — Bank (Purchase) | 10,000 | 1,60,000 |
| 1.8.21 — Bonus Shares | 10,000 | — |
| 5.11.21 — Bank (Rights subscribed) | 20,000 | 3,00,000 |
| **Total** | **90,000** | **12,1…

Question 11

From the following particulars furnished by Hello Ltd., prepare the Balance Sheet as on 31st March 2022 as required by Part I, Schedule III of the Companies Act, 2013 with trial balance items: Equity Share Capital (Face value ₹ 100 each) ₹ 50,00,000, Building ₹ 27,50,000, Plant & Machinery ₹ 26,25,000, Furniture ₹ 2,50,000, General Reserve ₹ 10,50,000, Loan from State Financial Corporation ₹ 7,50,000, Inventory (Raw Materials ₹ 2,55,000, Finished Goods ₹ 10,00,000) ₹ 12,55,000, Provision for Taxation ₹ 6,40,000, Trade receivables ₹ 10,00,000, Short term Advances ₹ 2,13,500, Profit & Loss Account ₹ 4,33,500, Cash in Hand ₹ 1,50,000, Cash at Bank ₹ 12,35,000, Unsecured Loan ₹ 6,05,000, Trade payables ₹ 10,00,000. Additional information: (i) 10,000 shares issued for non-cash consideration. (i…

Accepted Answer

**HELLO LTD.**
**Balance Sheet as at 31st March, 2022**
*(As required by Part I, Schedule III of the Companies Act, 2013)*

| Particulars | Note No. | Amount (₹) |
|---|:---:|---:|
| **EQUITY AND LIABILITIES** | | |
| **Shareholders' Funds** | | |
| (a) Share Capital | 1 | 50,00,000 |
| (b) Reserves and Surplus | 2 | 14,83,500 |
| **Non-Current Liabilities** | | |
| (a) Long-term Borrowings | 3 | 13,55,000 |
| **Current Liabilities** | | |
| (a) Trade Payables | | 10,00,000 |
| (b) Short-term Provisions | 4 | 6,40,000 |
| **TOTAL** | | **94,78,500** |
| | | |
| **ASSETS** | | |
| **Non-Current Assets** | | |
| (a) Property, Plant and Equipment (Tangible) | 5 | 56,25,000 |
| **Current Assets** | | |
| (a) Inventories | 6 | 12,55,000 |
| (b) Trade Receivables | 7 | 10,00,000 |
| (c) Cash and Cash Equivalents | 8 | 13,85,000 |
| (d) Short-term Loans and Advances | | 2,13,500 |
| **TOTAL** | | **94,78,500** |

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**Notes to Accounts:**

**Note 1 — Share Capital**
Subscribed and Fully Paid-up: 50,000 Equity Shares of ₹100 each = **₹50,00,000**
*(Of the above, 10,000 shares of ₹100 each were issued for consideration other than cash)*

**Note 2 — Reserves and Surplus**

| | ₹ |
|---|---:|
| General Reserve (Opening) | 10,50,000 |
| Add: Transfer from Surplus | 20,000 |
| **General Reserve (Closing)** | **10,70,000** |
| Surplus — Balance in Statement of P&L (Opening) | 4,33,500 |
| Less: Transfer to General Reserve | (20,000) |
| **Surplus (Closing)** | **4,13,500** |
| **Total Re…

Question 12

Aman Ltd. has issued 2,000, 12% convertible debentures of ₹ 100 each redeemable after five years at premium of 5%. Debenture holders had option at redemption to convert 20% of holdings into equity shares of ₹ 10 each at price of ₹ 20 per share and balance in cash. Debenture holders amounting ₹ 40,000 opted for conversion into equity shares. You are required to calculate the number of shares issued and cash paid for redemption of ₹ 40,000 debenture holders and also pass journal entry for conversion and redemption of debentures.

Accepted Answer

**Calculation of Number of Shares Issued and Cash Paid (for ₹40,000 debenture holders)**

**Step 1 – Redemption Value of ₹40,000 debenture holders:**
Face value of debentures opted for conversion = ₹40,000
Redemption value (at 5% premium) = ₹40,000 × 105/100 = **₹42,000**

**Step 2 – Portion converted into equity shares (20% of redemption value):**
Amount to be converted = 20% × ₹42,000 = **₹8,400**

**Step 3 – Number of equity shares issued:**
Issue price per share = ₹20
Number of shares = ₹8,400 ÷ ₹20 = **420 shares**
(Face value component = 420 × ₹10 = ₹4,200; Securities Premium = 420 × ₹10 = ₹4,200)

**Step 4 – Cash paid (balance 80% of redemption value):**
Cash paid = 80% × ₹42,000 = **₹33,600**

---

**Journal Entries in the books of Aman Ltd.**

**(i) On transferring debentures to Debenture Holders A/c at redemption value:**

12% Debentures A/c — Dr. — ₹40,000
Premium on Redemption of Debentures A/c — Dr. — ₹2,000
    To Debenture Holders A/c — ₹42,000
*(Being debentures due for redemption transferred at 5% premium)*

**(ii) On conversion of 20% into equity shares (420 shares at ₹20):**

Debenture Holders A/c — Dr. — ₹8,400
    To Equity Share Capital A/c (420 × ₹10) — ₹4,200
    To Securities Premium A/c (420 × ₹10) — ₹4,200
*(Being 420 equity shares of ₹10 each issued at ₹20 per share on conversion)*

**(iii) On payment of balance in cash:**

Debenture Holders A/c — Dr. — ₹33,600
    To Bank A/c — ₹33,600
*(Being 80% of redemption value paid in cash to converting deb…

Question 13

Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2021-22 for its residential project at 4%. Interest is payable at end of Financial Year. At availment, exchange rate was ₹ 56 per US $ and as on 31st March, 2022 was ₹ 62 per US $. If loan had been borrowed in India in Indian Rupee equivalent, pricing would have been 10.50%. You are required to compute Borrowing Cost and exchange difference for the year ending 31st March, 2022 as per applicable Accounting Standards.

Accepted Answer

**Applicable Standards:** AS 16 — Borrowing Costs and AS 11 — Effects of Changes in Foreign Exchange Rates.

As per **AS 16 (paragraph 4(e))**, borrowing costs include exchange differences arising from foreign currency borrowings **to the extent they are regarded as an adjustment to interest costs**. The adjustment is capped at the difference between the notional interest cost on an equivalent Indian Rupee borrowing and the actual interest paid/payable on the foreign currency loan.

**Step 1 — Loan Principal in INR at inception:**
US$ 10,00,000 × ₹56 = **₹5,60,00,000**

**Step 2 — Actual interest in INR (at closing rate):**
US$ 10,00,000 × 4% = US$ 40,000
US$ 40,000 × ₹62 = **₹24,80,000**

**Step 3 — Exchange difference on principal:**
US$ 10,00,000 × (₹62 − ₹56) = US$ 10,00,000 × ₹6 = **₹60,00,000** (loss)

**Step 4 — Notional interest at Indian Rupee rate:**
₹5,60,00,000 × 10.50% = **₹58,80,000**

**Step 5 — Exchange difference eligible as Borrowing Cost (ceiling):**
Notional INR interest − Actual interest = ₹58,80,000 − ₹24,80,000 = **₹34,00,000**

Since actual exchange difference (₹60,00,000) **exceeds** the ceiling (₹34,00,000), only ₹34,00,000 qualifies as borrowing cost.

**Step 6 — Summary:**

| Component | Amount (₹) | Treatment |
|---|---|---|
| Actual Interest (foreign currency) | 24,80,000 | Borrowing Cost — Capitalise |
| Exchange difference (eligible portion) | 34,00,000 | Borrowing Cost — Capitalise |
| **Total Borrowing Cost** | **58,80,000** | **Capitalised t…

Question 14

The following extract of Balance Sheet of Ram Ltd. (a non-investment company) as on 31st March, 2022 is provided: Issued and subscribed capital: 20,000 14% Preference shares of ₹ 100 each ₹ 20,00,000; 1,20,000 Equity shares of ₹ 100 each ₹ 80 paid-up ₹ 96,00,000; Capital reserves (₹ 1,50,000 is revaluation reserve) ₹ 1,95,000; Securities premium ₹ 50,000; 15% Debentures ₹ 65,00,000; Unsecured loans: Public deposits payable after one year ₹ 3,70,000; Investment in shares, debentures, etc. ₹ 75,00,000; Profit and Loss account (debit balance) ₹ 15,00,000. You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act, 2013.

Accepted Answer

**Computation of Effective Capital of Ram Ltd. as per Schedule V to the Companies Act, 2013**

As per **Schedule V, Part II, Section II** of the **Companies Act, 2013**, **Effective Capital** means the aggregate of paid-up share capital, share premium account, reserves and surplus (excluding revaluation reserve), and long-term loans/deposits repayable after one year — **reduced by** investments (for non-investment companies) and accumulated losses not written off.

**Particulars** | **₹**

**Add (Inclusions):**

14% Preference Share Capital (20,000 × ₹100) → ₹20,00,000

Equity Share Capital — paid-up (1,20,000 × ₹80) → ₹96,00,000

Securities Premium → ₹50,000

Capital Reserves *excluding* Revaluation Reserve (₹1,95,000 − ₹1,50,000) → ₹45,000

15% Debentures (long-term loans) → ₹65,00,000

Public Deposits payable after one year → ₹3,70,000

**Total (A)** → ₹1,85,65,000

**Less (Deductions):**

Investments in shares, debentures, etc. (Ram Ltd. is a non-investment company) → ₹75,00,000

Profit & Loss Account — debit balance (accumulated loss) → ₹15,00,000

**Total (B)** → ₹90,00,000

**Effective Capital (A − B) = ₹95,65,000**

**Key notes:** (1) Revaluation reserve is **excluded** from reserves per Schedule V definition. (2) Investments are deducted since Ram Ltd. is a **non-investment company**. (3) Debit balance of P&L represents accumulated losses and is **deducted**. (4) Public deposits repayable after one year qualify as long-term deposits and are **included**. (5) Only pai…

Question 15

Following items appear in the Trial Balance of Mehta Ltd. as on 31st March, 2022: 9,000 Equity Shares of ₹100 each ₹ 9,00,000, Securities Premium (realized in cash) ₹ 80,000, Capital Redemption Reserve ₹ 1,40,000, General Reserve ₹ 2,10,000, Profit and Loss Account (Cr. Balance) ₹ 90,000. Company decided to issue bonus shares to equity shareholders at rate of 1 share for every 3 shares held with minimum reduction in free reserves. You are required to give the necessary Journal Entries in the books of Mehta Ltd.

Accepted Answer

**Bonus Shares Calculation:**
Bonus shares to be issued = 9,000 ÷ 3 = **3,000 Equity Shares of ₹100 each**
Total amount to be capitalised = 3,000 × ₹100 = **₹3,00,000**

**Source of Funds — Minimum Reduction in Free Reserves:**
As per **Section 63 of the Companies Act, 2013**, bonus shares can be issued from (i) free reserves, (ii) Securities Premium Account, and (iii) Capital Redemption Reserve. To **minimise reduction in free reserves**, non-free reserve sources (Securities Premium and Capital Redemption Reserve) must be utilised first:

**Securities Premium** (not a free reserve) = ₹80,000 — used fully
**Capital Redemption Reserve** (not a free reserve) = ₹1,40,000 — used fully
Total from non-free reserves = ₹2,20,000

Balance required from **free reserves** = ₹3,00,000 − ₹2,20,000 = **₹80,000**
This ₹80,000 is drawn from **General Reserve** (free reserve), leaving P&L Account untouched.

**Journal Entries in the Books of Mehta Ltd.:**

*Entry 1 — Utilising reserves for bonus issue:*
Securities Premium A/c Dr. ₹80,000
Capital Redemption Reserve A/c Dr. ₹1,40,000
General Reserve A/c Dr. ₹80,000
    To Bonus to Equity Shareholders A/c ₹3,00,000
*(Being various reserves utilised for issue of 3,000 bonus shares of ₹100 each as per Section 63 of the Companies Act, 2013)*

*Entry 2 — Issue of fully paid-up bonus shares:*
Bonus to Equity Shareholders A/c Dr. ₹3,00,000
    To Equity Share Capital A/c ₹3,00,000
*(Being 3,000 fully paid-up equ…

Question 16

Classify the following activities as (i) Operating Activities, (ii) Investing activities, (iii) Financial activities and (iv) Cash Equivalents: (1) Cash receipts from Trade Receivables (2) Highly liquid Marketable Securities without risk of change in value (3) Purchase of investment (4) Proceeds from long term borrowings (5) Wages and Salaries paid (6) Bank overdraft (7) Purchase of Goodwill (8) Interim dividend paid on equity shares (9) Short term Deposits (10) Underwriting commission paid

Accepted Answer

As per **AS 3 – Cash Flow Statements** (issued by ICAI), cash flows are classified into Operating, Investing, and Financing Activities. Additionally, certain items qualify as **Cash and Cash Equivalents** and are not treated as cash flows per se but as components of the opening/closing cash balance.

**Classification of the given items:**

**(i) Operating Activities** – Cash flows from the principal revenue-producing activities of an enterprise:
- **(1) Cash receipts from Trade Receivables** – Collections from customers are the primary source of operating cash inflows.
- **(5) Wages and Salaries paid** – Payments to employees are a core operating outflow.

**(ii) Investing Activities** – Cash flows from acquisition and disposal of long-term assets and other investments not included in cash equivalents:
- **(3) Purchase of Investment** – Outflow for acquiring investments is an investing activity.
- **(7) Purchase of Goodwill** – Acquisition of an intangible asset represents an investing outflow.

**(iii) Financing Activities** – Cash flows that result in changes in the size and composition of owners' capital and borrowings:
- **(4) Proceeds from long-term borrowings** – Raising long-term debt is a financing inflow.
- **(8) Interim dividend paid on equity shares** – Dividends paid are classified as financing activities per AS 3 (they represent returns to equity providers).
- **(10) Underwriting commission paid** – This is a cost incurred in connection with raising finance (issu…

Question 17

Hari Enterprises purchased a generator on hire purchase from Sanctum Ltd. on 1st April, 2022. Hire purchase price was ₹ 48,000. Down payment was ₹ 12,000 and balance is payable in 3 annual instalments of ₹ 12,000 each payable at end of each financial year. Interest is payable @ 8% p.a. and is included in annual payment of ₹12,000. Depreciation at 10% p.a. is to be written off using straight line method. You are required to calculate the cash price of the generator and the interest paid on each instalment.

Accepted Answer

**Cash Price of the Generator**

Under hire purchase accounting, the cash price is determined by discounting the future instalments at the given rate of interest (8% p.a.) back to the date of purchase, and adding the down payment.

Working backwards from the last instalment to find the outstanding principal before each payment:

**Before 3rd instalment:** ₹12,000 ÷ 1.08 = **₹11,111**

**Before 2nd instalment:** (₹11,111 + ₹12,000) ÷ 1.08 = ₹23,111 ÷ 1.08 = **₹21,399**

**Before 1st instalment** (= Cash Price − Down Payment): (₹21,399 + ₹12,000) ÷ 1.08 = ₹33,399 ÷ 1.08 = **₹30,925**

**Cash Price = ₹30,925 + ₹12,000 (down payment) = ₹42,925**

**Total Interest Charged = HP Price − Cash Price = ₹48,000 − ₹42,925 = ₹5,075**

**Interest Included in Each Instalment:**

| Year | Opening Balance (₹) | Interest @ 8% (₹) | Principal (₹) | Closing Balance (₹) |
|------|--------------------|--------------------|----------------|---------------------|
| 1    | 30,925             | 2,474              | 9,526          | 21,399              |
| 2    | 21,399             | 1,712              | 10,288         | 11,111              |
| 3    | 11,111             | 889                | 11,111         | —                   |
| **Total** |               | **5,075**          | **30,925**     |                     |

**Summary:** Cash price of the generator is **₹42,925** and the interest paid is ₹2,474 (Year 1), ₹1,712 (Year 2), and ₹889 (Year 3), totalling **₹5,075**.

CA Inter Adv Accounting

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Basis	Amount
Cost	₹5.00 lakhs
NRV	₹4.95 lakhs
Value of Closing Stock	₹4.95 lakhs