Question 1

Following items appear in the Trial Balance of Star Ltd. as on 31st March, 2019:

Particlulars:
- 80,000 Equity shares of ₹ 10 each, ₹ 8 paid-up: ₹ 6,40,000
- Capital Reserve (including ₹ 45,000 being profit on sale of Machinery): 1,10,000
- Revaluation Reserve: 80,000
- Capital Redemption Reserve: 75,000
- Securities Premium: 60,000
- General Reserve: 2,10,000
- Profit & Loss Account (Cr. Balance): 1,00,000

On 1st April, 2019, the Company has made final call on Equity shares @ ₹ 2 per share. The entire money was received in the month of April, 2019.

On 1st June, 2019, the Company decided to issue to Equity shareholders bonus shares at the rate of 2 shares for every 3 shares held and for this purpose, it decided that there should be minimum reduction in free reserves.

Pass necessary jou…

Accepted Answer

**Journal Entry 1: Final Call on Equity Shares (April 2019)**

Bank Account Dr. ₹1,60,000
  To Equity Share Capital ₹1,60,000
(Final call received on 80,000 shares @ ₹2 per share)

This entry records receipt of the final call. Equity Share Capital increases from ₹6,40,000 to ₹8,00,000 as all shares become fully paid-up at ₹10 per share.

**Journal Entry 2: Capitalization of Reserves for Bonus Shares (June 2019)**

Securities Premium Dr. ₹60,000
Capital Redemption Reserve Dr. ₹75,000
Revaluation Reserve Dr. ₹80,000
Capital Reserve Dr. ₹1,10,000
General Reserve Dr. ₹2,08,330
  To Equity Share Capital ₹5,33,330
(Capitalization of reserves and issuance of 53,333 bonus shares @ ₹10 per share in ratio 2:3)

**Accounting Treatment**: The bonus issue is effected through capitalization of reserves. To achieve minimum reduction in free reserves, the company first exhausts restricted reserves (Securities Premium, Capital Redemption Reserve, Revaluation Reserve, and Capital Reserve) totalling ₹3,25,000, then uses ₹2,08,330 from General Reserve. This minimizes the depletion of free reserves (General Reserve + P&L Account), leaving ₹1,670 in General Reserve and the entire P&L Account balance of ₹1,00,000 intact. The bonus shares are credited directly to Equity Share Capital at face value. Post-capitalization, Equity Share Capital becomes ₹13,33,330 (for 133,333 shares) while maintaining the ₹10 par value per share.

Question 2

Explain briefly the accounting treatment needed in the following cases as per AS 11 on 31.03.2020:

Accepted Answer

**AS 11: Effects of Changes in Foreign Exchange Rates** requires all monetary items to be restated at the closing exchange rate on the reporting date, with resulting exchange gains or losses recognized in the Profit & Loss Account.

**Part (i) - Debtor in Foreign Currency (Current Monetary Item)**

The debtor of ₹9,00,000 originally represents US$12,500 (₹9,00,000 ÷ ₹72.00). On 31st March 2020, this amount must be restated at the closing exchange rate of ₹73.50 per USD, resulting in a restated amount of ₹9,18,750. The exchange gain of ₹18,750 arising from the revaluation must be **recognized in the Profit & Loss Account** for the financial year 2019-20. In the Balance Sheet, the debtor should be shown at the restated amount of ₹9,18,750.

**Part (ii) - Long-term Loan from Foreign Company (Long-term Monetary Item)**

The loan requires treatment in two components:

**Exchange Gain on Mid-Year Repayment (31st December 2019):** The company repaid ₹5,00,000 on 31st December 2019, which at the transaction rate of ₹70.50 equals US$7,092.20. The original principal obligation recorded on 1st April 2019 (at ₹72.50) for this USD amount would have been US$7,092.20 × ₹72.50 = ₹5,14,184.50. The actual cash payment of ₹5,00,000 is ₹14,184.50 less than the recorded amount, resulting in an **exchange gain of ₹14,184.50** to be recognized in the P&L.

**Exchange Loss on Outstanding Balance (31st March 2020):** The original loan of ₹75,00,000 (equivalent to US$1,03,448.28 at ₹72.50) less the re…

Question 3

A Company acquired for its internal use a software on 01.03.2020 from U.K. for £ 1,20,000. The exchange rate on the date was at £ 100 per £. The seller allowed trade discount @ 2.5%. The other expenditures were: (i) Import Duty 10%, (ii) Additional Import Duty 5%, (iii) Entry Tax 2% (Recoverable later from tax department), (iv) Installation expenses £ 1,50,000, (v) Professional fees for clearance from customs £ 50,000. Compute the cost of software to be Capitalized as per relevant AS.

Accepted Answer

**Applicable Standard:** Software acquired for internal use is an **intangible asset** governed by **AS 26 – Intangible Assets** (ICAI). The cost capitalisation principles mirror those of AS 10 – Property, Plant and Equipment: include purchase price (net of trade discounts), non-refundable import duties/taxes, and directly attributable expenditure to bring the asset to its intended use.

**Treatment of each component:**

**Purchase Price:** The invoice price of £1,20,000 is converted at the ruling exchange rate of ₹100 per £ = ₹1,20,00,000. The **trade discount of 2.5%** is deducted as it reduces the purchase price — net cost = ₹1,17,00,000.

**Import Duty @ 10%:** This is a non-refundable duty directly incurred to acquire the asset — **included** in cost.

**Additional Import Duty @ 5%:** Also a non-refundable levy — **included** in cost.

**Entry Tax @ 2%:** Since this is **recoverable** from the tax department, it is NOT a cost to the enterprise. It is excluded from capitalisation (it is essentially a refundable deposit).

**Installation Expenses ₹1,50,000:** Directly attributable cost to bring the software to its working condition — **included**.

**Professional Fees for Customs Clearance ₹50,000:** Directly attributable cost incurred to acquire the asset — **included**.

**Cost of Software to be Capitalised = ₹1,36,55,000**

Question 4

State whether the following items are an example of change in Accounting Policy / Change in Accounting Estimates / Extraordinary items / Prior period items / Ordinary Activity: (i) Actual bad debts turning out to be more than provisions. (ii) Change from Cost Model to Revaluation model for measurement of carrying amount of PPE. (iii) Government grant receivable as compensation for expenses incurred in previous accounting period. (iv) Treating operating lease as finance lease. (v) Capitalisation of borrowing cost on working capital. (vi) Legislative changes having long term retrospective application. (vii) Change in the method of depreciation from straight line to WDV. (viii) Government grant becoming refundable. (ix) Applying 10% depreciation instead of 15% on furniture. (x) Change in usef…

Accepted Answer

The following classification is made under **AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies** (issued by ICAI):

**(i) Actual bad debts turning out to be more than provisions — Change in Accounting Estimate.** Provision for bad debts is an estimate. When actual bad debts exceed the provision, it is a revision of a prior estimate, not an error or change in policy.

**(ii) Change from Cost Model to Revaluation Model for PPE — Change in Accounting Policy.** The basis of measurement of Property, Plant & Equipment (cost vs. revaluation) is an **accounting policy** choice. Switching between the two constitutes a change in accounting policy.

**(iii) Government grant receivable as compensation for expenses incurred in previous accounting period — Prior Period Item.** The grant is linked to costs of a prior period. It represents income that properly belongs to an earlier period, making it a **prior period item** under AS 5.

**(iv) Treating operating lease as finance lease — Change in Accounting Policy.** The classification of a lease as operating or finance reflects the accounting treatment adopted. A reclassification constitutes a **change in accounting policy**.

**(v) Capitalisation of borrowing cost on working capital — Change in Accounting Policy.** The decision to capitalise or expense borrowing costs is an **accounting policy** matter. Changing such treatment amounts to a change in accounting policy.

**(vi) Legislative changes…

Question 5

The Senior Accountant of AMP Ltd. gives the following data regarding its five segments: Segment Assets (₹): P-80, Q-30, R-20, S-20, T-10, Total-160. Segment Results (₹): P-(190), Q-10, R-10, S-(10), T-30, Total-(150). Segment Revenue (₹): P-620, Q-80, R-60, S-80, T-60, Total-900.

Accepted Answer

**Identification of Reportable Segments under AS 17 — Segment Reporting**

As per **AS 17 (Accounting Standard 17)**, a segment is identified as a **reportable segment** if it meets any ONE of the following three quantitative thresholds (the 10% tests):

**Test 1 — Revenue Test:** Segment revenue ≥ 10% of total combined revenue of all segments.
Threshold = 10% × ₹900 = **₹90**
Segments qualifying: **P (₹620)** ✓ | Q (₹80) ✗ | R (₹60) ✗ | S (₹80) ✗ | T (₹60) ✗

**Test 2 — Result Test:** Absolute segment result ≥ 10% of the greater of (a) combined profit of all profit-making segments, or (b) combined loss of all loss-making segments (in absolute terms).
Profit segments: Q (₹10) + R (₹10) + T (₹30) = ₹50
Loss segments: P (₹190) + S (₹10) = ₹200
Greater of ₹50 and ₹200 = **₹200**; Threshold = 10% × ₹200 = **₹20**
Segments qualifying: **P (₹190)** ✓ | Q (₹10) ✗ | R (₹10) ✗ | S (₹10) ✗ | **T (₹30)** ✓

**Test 3 — Asset Test:** Segment assets ≥ 10% of total segment assets.
Threshold = 10% × ₹160 = **₹16**
Segments qualifying: **P (₹80)** ✓ | **Q (₹30)** ✓ | **R (₹20)** ✓ | **S (₹20)** ✓ | T (₹10) ✗

**Summary — Reportable Segments:**
| Segment | Revenue Test | Result Test | Asset Test | Reportable? |
|---------|-------------|------------|------------|-------------|
| P | ✓ | ✓ | ✓ | **Yes** |
| Q | ✗ | ✗ | ✓ | **Yes** |
| R | ✗ | ✗ | ✓ | **Yes** |
| S | ✗ | ✗ | ✓ | **Yes** |
| T | ✗ | ✓ | ✗ | **Yes** |

**All five segments — P, Q, R, S, and T — are reportable segments.**

**75% Reve…

Question 6

Galaxy Ltd. and Glory Ltd., are two companies engaged in the same business of designing software. Galaxy Ltd. was formed to which the assets and liabilities of the existing companies, with certain exceptions, are to be transferred. The summarised Balance Sheet of Galaxy Ltd. and Glory Ltd. as at 31st March, 2020 are provided with details of Equity & Liabilities (Share Capital, Reserves & Surplus, Non-current Liabilities, Current Liabilities) and Assets (Non-current assets, Current Assets) for both companies.

Accepted Answer

**Note: The question references Balance Sheet figures for Galaxy Ltd. and Glory Ltd. as at 31st March, 2020, but the actual numerical data (share capital amounts, reserves, asset values, liabilities) has not been provided in the question. The solution below presents the complete framework and methodology under AS 14 that would be applied once figures are available.**

**Applicable Standard: AS 14 – Accounting for Amalgamations** (issued by ICAI)

**Nature of Amalgamation:**
The facts indicate that a new company (Galaxy Ltd.) is formed to take over the assets and liabilities of two existing companies (Galaxy Ltd. and Glory Ltd.), with certain exceptions. This is a classic case of **Amalgamation in the Nature of Purchase** (unless all five conditions of AS 14 paragraph 3(e) are met, in which case it would be **Amalgamation in the Nature of Merger**).

Conditions for Amalgamation in the Nature of Merger (all five must be satisfied):
1. All assets and liabilities of the transferor companies become assets and liabilities of the transferee company.
2. Shareholders holding not less than 90% of the face value of equity shares of the transferor become equity shareholders of the transferee.
3. Consideration is discharged entirely by issue of equity shares in the transferee (except for fractional shares settled in cash).
4. The business of the transferor is intended to be carried on by the transferee.
5. No adjustment is made to the book values of the assets and liabilities of the trans…

Question 7

XYZ Garage consists of 3 departments - Spares, Service and Repairs, each department being managed by a departmental manager whose commission was respectively 5%, 10% and 10% of the respective departmental profit subject to a minimum of ₹ 5,000 in each case. Inter departmental transfers take place at a "loaded" price as follows: From Spares to Service 5% above cost, From Spares to Repairs 10% above cost, From Repairs to Service 10% above cost. In respect of the year ended March 31st 2019 the firm had already prepared and closed the departmental trading and profit and loss account. Subsequently it was discovered that the closing stocks of department had included inter-departmentally transferred goods at "loaded" price instead of the correct cost price. From the following information, you are…

Accepted Answer

**Re-computation of Departmental Profit/Loss — XYZ Garage (Year ended 31 March 2019)**

**Step 1 — Reverse Commission to Recover Profit Before Commission**

Since commission was charged at the time of closing, we first add it back to recover the base profit figure on which commission was computed.

For **Spares**: The department had a loss even before commission. The commission cannot be 5% of a negative figure, so the minimum of ₹5,000 was charged. Hence, Profit before commission = −₹38,000 + ₹5,000 = **Loss ₹33,000**.

For **Service**: Let profit before commission = P. Then P − 10%P = ₹50,400 → 0.9P = ₹50,400 → P = **₹56,000**. Commission = 10% × ₹56,000 = ₹5,600 (> minimum ₹5,000, so applicable).

For **Repairs**: Similarly, 0.9P = ₹72,000 → P = **₹80,000**. Commission = 10% × ₹80,000 = ₹8,000.

**Step 2 — Identify and Quantify Unrealized (Loading) Profits in Closing Stocks**

The closing stocks of receiving departments were valued at 'loaded' (transfer) prices instead of cost. The unrealized loading must be charged to the **sending (transferring) department**, as the profit arose there and is not yet realised externally.

Stock at loaded price in **Repairs department** (from Spares, at 10% above cost): ₹22,000
Loading = ₹22,000 × 10/110 = **₹2,000** → charged to Spares.

Stock at loaded price in **Service department**:
- From Spares (at 5% above cost): ₹21,000 → Loading = ₹21,000 × 5/105 = **₹1,000** → charged to Spares.
- From Repairs (at 10% above cost): ₹44,000 → Loadi…

Question 8

The Senior Accountant is of the opinion that segment 'P' alone should be reported. Is he justified in his view? Examine his opinion in the light of provision of AS-17 'Segment Reporting'.

Accepted Answer

**The Senior Accountant's opinion is only partially justified and requires examination against AS-17 criteria.**

AS-17 'Segment Reporting' provides specific rules for identifying reportable segments. A segment should be reported if it meets one or more of the following quantitative thresholds: (i) its revenue (including intersegment revenue) is 10% or more of the total enterprise revenue; (ii) its profit or loss is 10% or more of the total enterprise profit or loss; or (iii) its assets are 10% or more of the total enterprise assets.

**Justification for reporting only Segment P would be valid if:** (i) Segment P alone meets the 10% quantitative criteria on revenue, profit, or assets, AND (ii) all other segments identified fail to meet any of the three thresholds, AND (iii) reported segments together represent 75% or more of the total enterprise revenue (as per AS-17's materiality guideline).

**However, the opinion may NOT be justified if:** (i) Other segments meet or approach the 10% threshold but are excluded; (ii) Multiple segments collectively represent a material portion but are individually excluded; (iii) The reported segments (only P) fail to represent at least 75% of total enterprise revenue, which would require reporting additional segments regardless of individual thresholds; or (iv) The enterprise has a primary and secondary segment classification, and only one has been considered.

**AS-17 requires that even if only one segment qualifies under the 10% rule, …

Question 9

Ananya Enterprises is a partnership firm in which A, B and C are three partners sharing profits and losses in the ratio of 5 : 3 : 2. The Balance Sheet of the firm as on 31st October, 2019 is as below:

Liabilities          ₹              Assets           ₹
Capital:
A                 95,00,000      Land & Buildings    45,00,000
B                 75,00,000      Plant & Machinery   65,00,000
C                 30,00,000      Furniture & Fixtures 18,00,000
Sundry Creditors  11,00,000      Stock              13,50,000
                                 Sundry Debtors      7,50,000
                                 Cash                7,00,000
                                 Loan A             25,00,000
                                 Loan B             30,00,000
                 2,11,00,000     …

Accepted Answer

**Dissolution of Ananya Enterprises — Piecemeal Distribution (Maximum Loss Method)**

**Preliminary Adjustments**

'Loan A' (₹25,00,000) and 'Loan B' (₹30,00,000) appear on the **Assets side** of the Balance Sheet, meaning these are loans advanced by the firm **to** partners A and B respectively. During dissolution, these are recovered from the respective partners (or set off against their capital accounts). For piecemeal distribution purposes, the loan balances are **netted against each partner's capital** to arrive at the true net capital at risk.

**Net Capital Positions (after netting partner loans):**
- Partner A: ₹95,00,000 − ₹25,00,000 = **₹70,00,000**
- Partner B: ₹75,00,000 − ₹30,00,000 = **₹45,00,000**
- Partner C: ₹30,00,000 − Nil = **₹30,00,000**
- **Total Net Capital: ₹1,45,00,000**

**Verification of Net Assets:**
Total Assets ₹2,11,00,000 − Sundry Creditors ₹11,00,000 = ₹2,00,00,000 payable to partners. Since partner loan recoveries of ₹55,00,000 are already included in assets and offset against capitals, net cash distributable to partners on their capital accounts = ₹2,00,00,000, which agrees with gross capitals (₹95L + ₹75L + ₹30L = ₹2,00,00,000). Net of loans, ₹1,45,00,000 is the base for distribution sequencing.

**Priority of Payment During Dissolution:**
1. **External creditors** must be paid first (Sundry Creditors ₹11,00,000). Initial cash of ₹7,00,000 is applied; balance of ₹4,00,000 is paid from first realisations.
2. There are no loans FROM partners …

Question 10

Prepare the Investment account of P Ltd. for the year ended 31st March, 2020 and determine the value of shares held on that date, assuming the investment as current investment. Consider average cost basis for ascertainment of cost for equity shares sold.

Accepted Answer

**Investment Account of P Ltd. for the year ended 31st March, 2020 (Equity Shares of K Ltd.)**

The investment is classified as a **current investment**; hence it is valued at the **lower of cost and fair value** as per **AS 13 – Accounting for Investments** (ICAI).

**Investment Account (Equity Shares of K Ltd.)**

| **Dr.** | | | | **Cr.** | | | |
|---|---|---|---|---|---|---|---|
| **Date** | **Particulars** | **Shares** | **₹** | **Date** | **Particulars** | **Shares** | **₹** |
| 1-Apr-19 | Balance b/d | 8,000 | 1,20,000 | 1-Dec-19 | Bank – Rights sold (2,000 × ₹8) | — | 16,000 |
| 1-Sep-19 | Bank – Purchase (2,000 × ₹12) | 2,000 | 24,000 | 20-Jan-20 | Bank – Pre-acquisition dividend (10,000 × ₹2) | — | 20,000 |
| 30-Sep-19 | Bonus Shares (10,000 × 2/5) | 4,000 | — | 1-Feb-20 | Bank – Sale of shares (8,000 × ₹14) | 8,000 | 1,12,000 |
| 1-Dec-19 | Bank – Right shares (2,000 × ₹12.50) | 2,000 | 25,000 | 31-Mar-20 | Balance c/d (at cost) | 8,000 | 66,500 |
| 1-Feb-20 | Profit & Loss – Profit on sale | — | 45,500 | | | | |
| | **Total** | **16,000** | **2,14,500** | | **Total** | **16,000** | **2,14,500** |

**Value of shares held on 31st March, 2020:**
- Cost of 8,000 shares = **₹66,500**
- Market value = 8,000 × ₹13 = ₹1,04,000
- **Lower of cost (₹66,500) and fair value (₹1,04,000) = ₹66,500**

The closing balance is carried at **₹66,500**, being the cost, since cost is lower than fair value.

**Key accounting treatments applied:**
(a) **Bonus shares** – No cost assigned; …

Question 11

From the particulars related to the fire in the premises of M/S MJ & Co. from April 2019 to 31st December 2019, ascertain the amount of claim to be filed with the insurance company for the loss of stock. The insurance policy is subject to average clause. The value of goods salvaged was estimated at ₹ 31,000.

Accepted Answer

**Step 1: Adjust Purchases and Calculate Goods Available for Sale**

Purchases as per books: ₹4,20,000
Less: Tools (to be capitalized, not part of purchases): ₹5,000
Adjusted Purchases: ₹4,15,000

Direct Wages: ₹90,000 less Machinery Installation Wages ₹6,000 = ₹84,000
(Machinery installation wages capitalized)

Goods Available for Sale:
Opening Stock: ₹1,20,000
Add: Adjusted Purchases: ₹4,15,000
Add: Direct Wages: ₹84,000
Total: ₹6,19,000

**Step 2: Calculate Cost of Goods Sold and Closing Stock**

Net Sales = Sales ₹6,10,000 less Sales Return ₹10,000 = ₹6,00,000

Assuming standard Gross Profit Rate of 25%:
Cost of Goods Sold = 75% × ₹6,00,000 = ₹4,50,000

Closing Stock:
Goods Available ₹6,19,000
Less: COGS ₹4,50,000
Less: Goods withdrawn for self use ₹10,000
Less: Goods distributed as charity ₹4,000
Closing Stock = ₹1,55,000

(This includes consignment goods ₹25,000 unsold with consignee on 31 Dec 2019)

**Step 3: Calculate Stock Lost in Fire**

Closing Stock: ₹1,55,000
Less: Consignment goods (not destroyed): ₹25,000
In-house Stock destroyed in fire: ₹1,30,000

**Step 4: Calculate Loss**

Stock destroyed: ₹1,30,000
Less: Salvaged value: ₹31,000
Gross Loss: ₹99,000

**Step 5: Apply Average Clause**

Average Stock = (Opening Stock + Closing In-house Stock) / 2
= (₹1,20,000 + ₹1,30,000) / 2
= ₹1,25,000

**Average Clause**: The claim is subject to adjustment if the closing stock is less than or more than the average stock maintained. Since closing stock (₹1,30,000) exceeds ave…

Question 12

The following particulars are stated in the Balance Sheet of HS Ltd. as on 31-3-2019: Deferred Tax Liability (Cr.) ₹60.00 lakhs; Deferred Tax Assets (Dr.) ₹30.00 lakhs. The following transactions were reported during the year 2019-20: Depreciation as per accounting records ₹160.00 lakhs; Depreciation as per income tax records ₹140.00 lakhs; Items disallowed for tax purposes in 2018-19 but allowed in 2019-20 ₹20.00 lakhs; Donation to Private Trust ₹20.00 lakhs; Tax rate 30%. There were no additions to fixed assets during the year. You are required to show the impact of various items on Deferred Tax Assets and Deferred Tax Liability as on 31-3-2020 as per AS-22.

Accepted Answer

**AS-22 (Accounting for Taxes on Income)** distinguishes between **timing differences** (which give rise to deferred tax) and **permanent differences** (which do not). Each transaction must be classified accordingly.

**Item 1 — Depreciation Difference (Timing Difference — Reversal):**
Book depreciation (₹160 lakhs) **exceeds** tax depreciation (₹140 lakhs) by ₹20 lakhs. Since there were no additions to fixed assets, this excess arises because, in prior years, tax depreciation was higher than book depreciation, creating the opening DTL. Now the timing difference is **reversing** — the entity is recognising more expense in books than is allowed for tax, meaning taxable income > book income. This reversal **reduces the existing DTL**. Impact: ₹20 × 30% = **₹6 lakhs reduction in DTL**.

**Item 2 — Items Disallowed in 2018-19 but Allowed in 2019-20 (Timing Difference — Reversal):**
In 2018-19, these items (₹20 lakhs) were disallowed for tax, meaning the entity paid higher tax in that year and recognised a **Deferred Tax Asset** (DTA). In 2019-20, allowance of these items reverses the timing difference — the DTA previously recognised is now utilised. Impact: ₹20 × 30% = **₹6 lakhs reduction in DTA**.

**Item 3 — Donation to Private Trust (Permanent Difference):**
Donation to a private trust is permanently disallowed under the Income Tax Act 1961 and will **never** be allowed in any future year. Under AS-22, deferred tax is not recognised on **permanent differences**. Impact: **NIL…

Question 13

On 31st March, 2020 the summarised Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows: [Balance Sheet data with Shareholders' Fund, Secured Loans, Current Liabilities, Non-Current Assets, and Current Assets]. The following information is also provided to you: (a) If H had purchased 19,200 shares of S Ltd. on 31st March, 2019, when the balances of Reserves & Surplus and Profit & Loss Account of S Ltd. stood at ₹60,000 and ₹36,000 respectively. (b) Machinery (Book value ₹2,40,000) and Furniture (Book value ₹48,000) of S Ltd. were revalued at ₹3,60,000 and ₹36,000 respectively on 1st April, 2019, for the purpose of issue of new shares. (Rates of depreciation computed on the basis of useful lives: Machinery 10%, Furniture 15%) (c) On 31st March, 2020, Bills payable of ₹12,000 …

Accepted Answer

**Note:** The actual balance sheet figures for H Ltd. and S Ltd. are not fully captured in the question. The solution below works through all derivable calculations using the information provided, with S Ltd.'s share capital assumed as ₹2,40,000 (24,000 shares of ₹10 each), which is consistent with the revaluation context. The methodology and all key workings are complete.

**Step 1 — Determination of H Ltd.'s Holding in S Ltd.**

H Ltd. purchased 19,200 shares out of 24,000 total equity shares of S Ltd. **H's holding = 19,200/24,000 = 80%.** Minority Interest (MI) = 20% (4,800 shares).

**(a) Pre-Acquisition Analysis and Cost of Control**

Date of acquisition = 31st March 2019. Net assets of S Ltd. at that date:

| Particulars | ₹ |
|---|---|
| Share Capital (24,000 × ₹10) | 2,40,000 |
| Reserves & Surplus | 60,000 |
| P&L Account | 36,000 |
| **Total Net Assets** | **3,36,000** |

H's share (80%) = ₹2,68,800. Cost of Investment is per H's Balance Sheet. **Goodwill (Cost of Control)** = Cost of Investment − H's share of net assets at acquisition. If investment cost exceeds ₹2,68,800 → **Goodwill**; if less → **Capital Reserve**.

**(b) Revaluation of Assets and Depreciation Adjustment**

S Ltd. revalued assets on 1st April 2019 for issue of new shares. The **revaluation surplus is treated as pre-acquisition** since it arose at the time of share issue coinciding with H's acquisition date.

| Asset | Book Value (₹) | Revalued Amount (₹) | Surplus/(Deficit) (₹) |
|---|---|---|-…

Question 14

During the year 2019-2020, A Limited (a listed company) made a public issue of Partly Convertible Debentures with the following information:
(i) No. of partly convertible debentures issued - 1,00,000; face value and issue price ₹ 100 per debenture. (Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture - 60%, date of conversion - on expiry of 6 months from the date of closing of issue.
(iii) Date of closure of subscription lists - 1st May, 2019, date of allotment - 1st June, 2019, rate of interest on debenture - 15% p.a. payable from the date of allotment, value of equity share for the purpose of conversion - ₹ 60 (face value ₹ 10)
(iv) Underwriting Commission - 2%
(v) No. of debentures applied for by public - 80,000
(vi) Payments made on debentures half yearly on …

Accepted Answer

**Journal Entries in the books of A Limited for the year ended 31st March, 2020**

**Preliminary Computations:**
Total debentures issued = 1,00,000; Public subscribed = 80,000; Shortfall devolved on underwriter (X Ltd.) = 20,000 debentures.
Conversion date = 6 months from 1st May, 2019 = **1st November, 2019**.
Convertible portion per debenture = 60% × ₹100 = ₹60; Non-convertible portion = ₹40.
Equity shares issued on conversion = ₹60,00,000 ÷ ₹60 = 1,00,000 shares (face value ₹10, premium ₹50).
Underwriting commission = 2% × 1,00,000 × ₹100 = ₹2,00,000.

---

**Entry 1 — Application money received from public (before 1st May, 2019)**
Bank A/c Dr. ₹80,00,000
  To 15% PCD Application A/c ₹80,00,000
*(80,000 debentures × ₹100)*

**Entry 2 — Allotment to public (1st June, 2019)**
15% PCD Application A/c Dr. ₹80,00,000
  To 15% Partly Convertible Debentures A/c ₹80,00,000

**Entry 3 — Allotment to underwriter X Ltd. (shortfall of 20,000 debentures)**
X Ltd. A/c Dr. ₹20,00,000
  To 15% Partly Convertible Debentures A/c ₹20,00,000

**Entry 4 — Underwriting commission payable**
Underwriting Commission A/c Dr. ₹2,00,000
  To X Ltd. A/c ₹2,00,000
*(2% × ₹1,00,00,000)*

**Entry 5 — Net receipt from underwriter (₹20,00,000 – ₹2,00,000)**
Bank A/c Dr. ₹18,00,000
  To X Ltd. A/c ₹18,00,000

**Entry 6 — Write off underwriting commission**
Statement of Profit & Loss A/c Dr. ₹2,00,000
  To Underwriting Commission A/c ₹2,00,000

**Entry 7 — Debenture interest paid on 30th September, 2019**
De…

Question 15

Assets and Liabilities are to be taken at book value, with the following exceptions:
(i) The Debentures of Glory Ltd. are to be discharged by the issue of 8% Debentures of Glorious Ltd. at a premium of 10%.
(ii) Plant and Machinery of Galaxy Ltd. are to be valued at ₹ 2,52,000.
(iii) Goodwill is to be valued at:
     Galaxy Ltd. ₹ 4,48,000
     Glory Ltd. ₹ 1,68,000
(iv) Liquidator of Glory Ltd., is appointed for collection from trade debtors and payment to trade creditors. He retained the cash balance and collected ₹ 1,10,000 from debtors and paid ₹ 1,80,000 to trade creditors. Liquidator is entitled to receive 5% commission for payments. The balance cash will be taken over by new company.

Accepted Answer

**Note: The balance sheets of Glory Ltd. and Galaxy Ltd. are not provided in the question as stated. The solution below presents the complete methodology and framework with all the specific adjustments that can be computed from the given data. In the actual exam, the balance sheets would supply the missing figures.**

**Nature of Amalgamation:** This appears to be an amalgamation in the nature of **Purchase** (since assets are being revalued and goodwill is separately valued), governed by **AS 14 – Accounting for Amalgamations**.

---

**PART (1): Computation of Number of Shares to be Issued**

The number of shares issued by Glorious Ltd. is determined by the **Purchase Consideration** agreed for each transferor company, divided by the agreed value per share of Glorious Ltd. (₹10 nominal, but shares may be issued at a premium if agreed).

**Step 1 – Compute Net Assets Taken Over (Agreed Values) for each company:**

For **Galaxy Ltd.**:
- All assets at book value EXCEPT Plant & Machinery revalued to ₹2,52,000, and Goodwill recognised at ₹4,48,000.
- Net Assets = Revalued Assets − Liabilities taken over.

For **Glory Ltd.**:
- All assets at book value EXCEPT Goodwill recognised at ₹1,68,000.
- Debentures of Glory are NOT taken over at book value; they are discharged by issue of 8% Debentures of Glorious at 10% premium — so this is a **specific discharge**, not a cash payment and not equity shares.
- The Liquidator of Glory collects from debtors and pays creditors before transfe…

Question 16

A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I and Tier II capitals. Find out the risk-adjusted asset and risk weighted assets ratio: Equity Share Capital ₹29.00 lakhs, Perpetual Non-cumulative Preference Shares ₹8.00 lakhs, Perpetual Cumulative Preference Shares (fully paid up) ₹5.50 lakhs, Statutory Reserve ₹13.50 lakhs, Capital Reserve (of which ₹13.5 lakhs were due to revaluation of assets and the balance due to sale of assets) ₹45 lakhs, Securities Premium ₹7.00 lakhs

Accepted Answer

**Segregation of Capital Funds into Tier I and Tier II**

Under the **Basel Capital Adequacy Framework** as adopted by RBI, bank capital is classified into Tier I (Core Capital) and Tier II (Supplementary Capital). The following classification applies:

**Tier I Capital** comprises paid-up equity, perpetual non-cumulative preference shares, statutory reserves, securities premium, and capital reserves arising from actual sale of assets (not revaluation).

**Tier II Capital** comprises perpetual cumulative preference shares and revaluation reserves. As per RBI guidelines, **revaluation reserves are reckoned at a discount of 55%** (i.e., only 45% is eligible for Tier II).

**Tier I Capital:**
- Equity Share Capital: ₹29.00 lakhs
- Perpetual Non-cumulative Preference Shares (PNCPS): ₹8.00 lakhs
- Statutory Reserve: ₹13.50 lakhs
- Securities Premium: ₹7.00 lakhs
- Capital Reserve (sale of assets only): ₹45.00 – ₹13.50 = ₹31.50 lakhs

**Total Tier I Capital = ₹89.00 lakhs**

**Tier II Capital:**
- Perpetual Cumulative Preference Shares (PCPS): ₹5.50 lakhs
- Revaluation Reserve eligible (45% of ₹13.50): ₹6.075 lakhs

**Total Tier II Capital = ₹11.575 lakhs**

**Constraint Check:** Tier II capital must not exceed Tier I capital. Since ₹11.575 lakhs < ₹89.00 lakhs, the entire Tier II capital is eligible.

**Total Capital Funds (Tier I + Tier II) = ₹89.00 + ₹11.575 = ₹100.575 lakhs**

**Note on Risk-Weighted Assets Ratio:** The question states "capital funds and assets" but the asset d…

Question 17

Pass Journal entries to give effect to the above arrangements and also show how the debit items will appear in the Balance Sheet as on 31.03.2020 of BK Ltd., after the redemption carried out.

Accepted Answer

**Preference Share Redemption — BK Ltd. (31.03.2020)**

**Preliminary Computations:**

Before passing journal entries, the following calculations are essential:

**1. Amount Payable on Redemption:**
Face value of 2,000 × ₹100 = ₹2,00,000; Premium @ 10% = ₹20,000; **Total Redemption Outflow = ₹2,20,000**.

**2. Loss on Sale of Investments in G Ltd.:**
Sale proceeds: 4,500 × ₹9 = ₹40,500; Cost = ₹45,000; **Loss = ₹4,500** (charged to P&L A/c).

**3. Cash Available:**
Opening Bank = ₹1,95,000; Add: Sale proceeds = ₹40,500; Add: Fresh issue proceeds = ₹84,500 (computed below); Total = ₹3,20,000; Less: Redemption = ₹2,20,000; **Closing Bank = ₹1,00,000**.

**4. Determination of Fresh Equity Shares to be Issued (Section 55(2) of the Companies Act 2013):**
As per Section 55(2), when preference shares are redeemed out of profits (not out of fresh issue alone), an amount equal to the nominal value of shares redeemed must be transferred to a **Capital Redemption Reserve (CRR)**. The formula is: CRR + Fresh Issue Proceeds (nominal) = Nominal value of shares redeemed.

Directors must utilise all available distributable reserves before issuing fresh shares. Available reserves:
— P&L A/c after charging loss on sale (₹4,500) and premium on redemption (₹20,000): ₹60,000 − ₹4,500 − ₹20,000 = **₹35,500**
— General Reserve, net of ₹40,000 mandatory retention: ₹1,20,000 − ₹40,000 = **₹80,000**
— Investment Allowance Reserve: **Not distributable** (not available for CRR)
— Total distributable res…

Question 18

You are required to calculate the total interest and interest included in each instalment. Also prepare the Ledger Account of KM Ltd. in the books of Jai Ltd.

Accepted Answer

**Hire Purchase Accounting — Jai Ltd. (Purchaser) from KM Ltd. (Vendor)**

**Step 1: Total Interest Calculation**

Total amount payable = Down payment + (5 instalments × ₹23,100)
= ₹32,433 + ₹1,15,500 = **₹1,47,933**

Cash price = ₹1,20,000

**Total Interest = ₹1,47,933 − ₹1,20,000 = ₹27,933**

**Step 2: Interest Included in Each Instalment (Diminishing Balance Method)**

Balance due after down payment = ₹1,20,000 − ₹32,433 = **₹87,567**

Interest is calculated @10% p.a. on the opening balance for each year:

| Year | Opening Balance (₹) | Interest @10% (₹) | Principal (₹) | Closing Balance (₹) |
|------|---------------------|-------------------|---------------|---------------------|
| 2016 | 87,567 | **8,757** | 14,343 | 73,224 |
| 2017 | 73,224 | **7,322** | 15,778 | 57,446 |
| 2018 | 57,446 | **5,745** | 17,355 | 40,091 |
| 2019 | 40,091 | **4,009** | 19,091 | 21,000 |
| 2020 | 21,000 | **2,100** | 21,000 | Nil |
| **Total** | | **27,933** | **87,567** | |

**Step 3: KM Ltd. Account in the Books of Jai Ltd.**

**KM Ltd. Account** *(Creditor — Hire Vendor)*

| **Dr side** | | | | **Cr side** | | |
|-------------|---|----|---|-------------|---|---|
| **Date** | **Particulars** | **₹** | | **Date** | **Particulars** | **₹** |
| 1-1-2016 | Bank A/c (Down payment) | 32,433 | | 1-1-2016 | Machine A/c (Cash price) | 1,20,000 |
| 31-12-2016 | Bank A/c (1st Instalment) | 23,100 | | 31-12-2016 | Interest A/c | 8,757 |
| 31-12-2017 | Bank A/c (2nd Instalment) | 23,100 | | 31-12-2017 …

Question 19

You are required to prepare Trading and Profit & Loss account for the year ended 31st March 2020, and Balance Sheet as on that date.

Accepted Answer

**Trading and Profit & Loss Account for the year ended 31st March 2020**

**Trading Account**

| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| To Opening Stock | 38,600 | By Sales (Total) | 8,54,000 |
| To Purchases (Total) | 6,13,750 | By Closing Stock | 55,700 |
| To **Gross Profit c/d** | **2,57,350** | | |
| | **9,09,700** | | **9,09,700** |

**Profit & Loss Account**

| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| To Salaries | 57,000 | By Gross Profit b/d | 2,57,350 |
| To General Expenses | 22,500 | By Interest on Investment (12% × ₹85,000) | 10,200 |
| To Rent and Taxes | 11,800 | | |
| To Bad Debts | 7,200 | | |
| To Reserve for Doubtful Debts (2% on ₹3,50,000) | 7,000 | | |
| To Depreciation – Machinery | 8,500 | | |
| To Depreciation – Furniture | 2,450 | | |
| To **Net Profit (transferred to Capital)** | **1,51,100** | | |
| | **2,67,550** | | **2,67,550** |

**Balance Sheet as on 31st March 2020**

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| **Capital Account** | | **Machinery** (85,000 – 8,500) | 76,500 |
| Opening Balance | 3,32,150 | **Furniture** (24,500 – 2,450) | 22,050 |
| Add: Capital introduced | 50,000 | **12% Investments** | 85,000 |
| Add: Net Profit | 1,51,100 | **Stock** | 55,700 |
| Less: Drawings | (96,000) | **Trade Debtors** | 3,50,000 |
| | **4,37,250** | Less: Reserve for Doubtful Debts | (7,000) |
| **Trade Creditors** | 1,88,200 | **Net Trade Debtors** | **3,43,000** |
| **Outstanding Salaries** | 14,000 | **Accrued Interest on Investment** | …

Question 20

Explain how financial capital is maintained at historical cost?

Kishore started a business on 1st April, 2019 with ₹15,00,000. The business issues units of ₹20 each. During the period ending 31st March, 2020, he sold the entire stock for ₹30 each. In order to maintain the capital intact, calculate the maximum amount which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is maintained at historical cost.

Accepted Answer

**Financial Capital Maintenance at Historical Cost** is a concept under which capital is measured in **nominal money terms (historical cost)**. Under this concept, a profit is earned only if the **closing net assets in nominal money terms exceed the opening net assets in nominal money terms**, after excluding distributions to and contributions from owners. In other words, the business must recover its original money invested (opening capital) before any amount can be treated as profit and distributed.

The key feature is that **no adjustment is made for changes in price levels**; capital is simply the amount originally invested in money terms. Only the surplus over and above the original historical cost investment is considered profit available for distribution.

**Calculation of Maximum Withdrawal:**

Step 1 — Determine number of units purchased:
Kishore invested ₹15,00,000 at a cost of ₹20 per unit.
Number of units = ₹15,00,000 ÷ ₹20 = **75,000 units**

Step 2 — Determine total sales proceeds:
All 75,000 units were sold at ₹30 each.
Total Sales = 75,000 × ₹30 = **₹22,50,000**

Step 3 — Determine capital to be maintained:
Under Financial Capital Maintenance at Historical Cost, the capital to be kept intact = **Opening Capital = ₹15,00,000** (in nominal money terms).

Step 4 — Determine maximum withdrawal (Profit):
Maximum Amount Withdrawable = Total Sales − Capital to be Maintained
= ₹22,50,000 − ₹15,00,000 = **₹7,50,000**

Therefore, Kishore can withdraw a **maximum of ₹7,5…

Question 21

Give Journal Entries in the books of Branch to rectify or adjust the following:

Accepted Answer

**Journal Entries in the Books of Branch (Rectification Entries)**

**Principle**: Branch adjustments reconcile differences between branch and H.O. records. Entries flow through Due to H.O (branch owes H.O) or Due from H.O (H.O owes branch) accounts.

**(i) Salary paid to H.O Supervisor**
Dr. Due to H.O Account                 ₹5,000
    To Salary Account                           ₹5,000
(Being correction of salary paid to H.O supervisor, previously wrongly debited to branch salary)

Salary for H.O staff is not an expense of the branch; it is remitted to H.O, hence must be shown as due to H.O.

**(ii) Asset Purchased by Branch but Recorded in H.O Books**
Dr. Fixed Asset Account                ₹25,000
    To Due to H.O Account                      ₹25,000
(Being asset purchased for and retained in branch, now brought into branch books)

Assets physically held by the branch must appear in branch books. The purchase increases branch's liability to H.O.

**(iii) Remittance of ₹8,000 Sent by Branch, Not Received by H.O**
Dr. Cash-in-Transit Account            ₹8,000
    To Due to H.O Account                      ₹8,000
(Being remittance in transit—sent by branch but not yet received by H.O)

Until H.O confirms receipt, the amount represents cash-in-transit and remains a liability of the branch to H.O. This adjusts the prematurely cleared remittance.

**(iv) H.O Collected ₹25,000 from Branch's Customer Without Intimation**
Dr. Due from H.O Account               ₹25,000
    To Sundr…

Question 22

List the Criteria for classification of non-corporate entities as level 1 Entities for the purpose of application of Accounting Standards as per The Institute of Chartered Accountants of India.

Accepted Answer

A non-corporate entity is classified as a **Level 1 Entity** if it satisfies any one or more of the following criteria in the financial year or immediately preceding financial year:

**1. Turnover Criterion**: The entity has a turnover exceeding **₹50 crore** in the financial year or immediately preceding financial year.

**2. Borrowings Criterion**: The entity has borrowings exceeding **₹50 crore** at any point during the financial year or immediately preceding financial year.

**3. Deposits Criterion**: Where an entity accepts deposits, such entity has deposits exceeding **₹50 crore** at any point during the financial year or immediately preceding financial year.

**Additional Categories Automatically Classified as Level 1**:

(a) Entities listed on any stock exchange or seeking to be listed

(b) Banks, financial institutions, insurance companies, and entities regulated by RBI, SEBI, or IRDA

(c) Entities required to prepare consolidated financial statements

(d) Large business entities as defined under any statute

**Applicability**: Level 1 entities are required to prepare their financial statements in accordance with the full **Accounting Standards (AS)** as prescribed by ICAI, or **Indian Accounting Standards (Ind AS)** where applicable as per regulatory requirements. These standards provide more detailed and comprehensive accounting treatments compared to standards applicable to smaller entities (Level 2 and Level 3 entities).

Question 23

X Ltd. sold machinery having WDV of ₹ 300 lakhs to Y Ltd. for ₹ 400 lakhs and the same machinery was leased back by Y Ltd to X Ltd. The lease back arrangement is operating lease. Give your comments in the following situations:

Accepted Answer

This question involves a **sale and leaseback transaction** where the leaseback is an **operating lease**. The relevant standard is **AS 19 – Leases** (issued by ICAI). The key principles under AS 19 (para 52) for an operating leaseback are:

1. If sale price **equals** fair value → profit or loss is **recognised immediately**.
2. If sale price is **below** fair value → profit or loss is **recognised immediately**, UNLESS the loss is compensated by future lease payments below market price, in which case the loss is **deferred and amortised** over the lease term.
3. If sale price is **above** fair value → the excess of sale price over fair value is **deferred and amortised** over the lease term; any profit or loss up to fair value is recognised immediately.

**WDV of machinery = ₹300 lakhs** (in all sub-parts)

**(i) Sale Price = ₹400 lakhs = Fair Value = ₹400 lakhs**

Since the transaction is at fair value, the **profit of ₹100 lakhs** (₹400 – ₹300) is **recognised immediately** in the Statement of Profit and Loss of X Ltd. There is no deferral required.

**(ii) Sale Price = ₹400 lakhs; Fair Value = ₹450 lakhs**

Here sale price (₹400) is **below fair value** (₹450). There is still an accounting profit of ₹100 lakhs over WDV. Since the sale is below FV (not above), there is no excess to defer. The **profit of ₹100 lakhs is recognised immediately**. The shortfall of ₹50 lakhs (FV – SP) indicates X Ltd. may be receiving below-market lease rentals in return, but AS 19 does not r…

Question 24

List the conditions to be fulfilled as per AS-14 (Revised) for an arrangement to be in the nature of merger.

Accepted Answer

**AS-14: Conditions for Amalgamation in the Nature of Merger**

As per **AS-14 (Accounting for Amalgamations)** issued by the Institute of Chartered Accountants of India, an amalgamation is classified as an **amalgamation in the nature of merger** (accounted under the **Pooling of Interests Method**) only if ALL of the following five conditions are satisfied simultaneously:

**Condition 1 — Transfer of All Assets and Liabilities:** All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

**Condition 2 — Shareholders Holding Not Less Than 90% of Face Value of Shares Become Shareholders of Transferee Company:** Shareholders holding not less than **90% of the face value of the equity shares** of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

**Condition 3 — Consideration Paid Only in Equity Shares:** The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged **wholly in equity shares** of the transferee company, except that cash may be paid in respect of any fractional shares.

**Condition 4 — Same Business to be Continued:** The business of the transferor compan…

Question 25

Raja Ltd. has its share capital divided into equity shares of ₹ 10 each. On 01-08-2019, it granted 2,500 employees stock options at ₹ 50 per share, when the market price was ₹ 140 per share. The options were to be exercised between 1-10-2019 to 31-03-2020. The employees exercised their options for 2,400 share only and the remaining options lapsed. Raja Ltd. closes its books of accounts on 31st March, every year. You are required to pass the necessary Journal Entries (including narration) for the year ended 31-03-2020, with regard to employees' stock options and give working notes also.

Accepted Answer

**Employee Stock Options (ESOPs) — Journal Entries for Year Ended 31-03-2020**

As per the **ICAI Guidance Note on Accounting for Employee Share-based Payments**, the fair value (intrinsic value method) of the option is the difference between the market price and the exercise price on the grant date.

**Fair value per option** = ₹140 − ₹50 = **₹90**

Since the entire grant, vesting, and exercise fall within FY 2019-20, all entries are passed in this single year.

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

**(1) On 01-08-2019 — Recognition of Employee Compensation Expense (vesting of 2,500 options):**

Employee Compensation Expense A/c &emsp; Dr. &emsp; ₹2,25,000
&emsp; To Employee Stock Options Outstanding A/c &emsp; ₹2,25,000
*(Being employee compensation expense recognised for 2,500 options at fair value of ₹90 per option on grant date)*

**(2) On exercise of 2,400 options (between 01-10-2019 to 31-03-2020):**

Bank A/c &emsp; Dr. &emsp; ₹1,20,000
Employee Stock Options Outstanding A/c &emsp; Dr. &emsp; ₹2,16,000
&emsp; To Share Capital A/c &emsp; ₹24,000
&emsp; To Securities Premium A/c &emsp; ₹3,12,000
*(Being 2,400 equity shares of ₹10 each issued at exercise price of ₹50; securities premium credited with excess of exercise price plus fair value component over face value)*

**(3) On lapse of remaining 100 options (31-03-2020):**

Employee Stock Options Outstanding A/c &emsp; Dr. &emsp; ₹9,000
&emsp; To General Reserve A/c &emsp; ₹9,000
*(Being Employee Stock Options …

Question 26

Equity Capital is held by Anu, Adi and Arun in the proportion of 30: 40: 30 and Preference Share Capital is held by Sonu, Shri and Sanaya in the proportion of 40: 10: 50. If the paid up Equity Share Capital of the company is ₹ 60 lakhs and Preference Share Capital is ₹ 30 lakhs, find the proportion and percentage of their voting right in case of resolution of winding up of the company.

Accepted Answer

**Relevant Provision:** As per **Section 47(2) of the Companies Act, 2013**, preference shareholders have the right to vote on any resolution for **winding up** of the company. Therefore, for a resolution of winding up, both equity shareholders and preference shareholders exercise voting rights in proportion to their **paid-up capital**.

**Step 1: Calculate individual paid-up capital**

*Equity Shareholders (Total Equity Capital = ₹60 lakhs, ratio 30:40:30):*
- Anu: 30/100 × ₹60 lakhs = **₹18 lakhs**
- Adi: 40/100 × ₹60 lakhs = **₹24 lakhs**
- Arun: 30/100 × ₹60 lakhs = **₹18 lakhs**

*Preference Shareholders (Total Preference Capital = ₹30 lakhs, ratio 40:10:50):*
- Sonu: 40/100 × ₹30 lakhs = **₹12 lakhs**
- Shri: 10/100 × ₹30 lakhs = **₹3 lakhs**
- Sanaya: 50/100 × ₹30 lakhs = **₹15 lakhs**

**Total Paid-up Capital = ₹60 + ₹30 = ₹90 lakhs**

**Step 2: Voting Rights Proportion**

Dividing each holding by 3 to simplify: 18:24:18:12:3:15 → **6:8:6:4:1:5** (Total = 30 parts)

**Step 3: Voting Rights Percentage**

| Shareholder | Capital (₹ lakhs) | Proportion | Percentage |
|---|---|---|---|
| Anu | 18 | 6 | 20.00% |
| Adi | 24 | 8 | 26.67% |
| Arun | 18 | 6 | 20.00% |
| Sonu | 12 | 4 | 13.33% |
| Shri | 3 | 1 | 3.33% |
| Sanaya | 15 | 5 | 16.67% |
| **Total** | **90** | **30** | **100%** |

**Conclusion:** In the resolution for winding up, all six members (equity and preference shareholders) vote. The voting proportion is **6:8:6:4:1:5** and the respective percentages are as …

Question 27

The Directors of Umang Ltd. passed a resolution to buyback 5,00,000 numbers of its fully paid equity shares of ₹ 10 each at ₹ 15 per share. This buyback is in compliance with the provisions of the Companies Act, 2013. For this purpose, the company: (i) Sold its investments of ₹ 10,00,000 for ₹ 25,00,000. (ii) Issued 20,000, 12% preference shares of ₹ 100 each at par, the entire amount being payable with application.

Accepted Answer

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

**Preliminary Calculations:**
Total buyback consideration = 5,00,000 × ₹15 = **₹75,00,000**
Nominal value of shares bought back = 5,00,000 × ₹10 = **₹50,00,000**
Premium on buyback = 5,00,000 × ₹5 = **₹25,00,000**
Proceeds from fresh issue of preference shares = 20,000 × ₹100 = **₹20,00,000**

**Capital Redemption Reserve (CRR) Calculation** [Section 68(7) of the Companies Act, 2013]:
CRR = Nominal value of shares bought back − Proceeds from fresh issue of shares
CRR = ₹50,00,000 − ₹20,00,000 = **₹30,00,000**

**Journal Entries:**

**(1) On sale of investments:**
Bank A/c Dr. ₹25,00,000
    To Investments A/c ₹10,00,000
    To Profit on Sale of Investments A/c ₹15,00,000
*(Being investments sold at a profit)*

**(2) Transfer of profit to General Reserve:**
Profit on Sale of Investments A/c Dr. ₹15,00,000
    To General Reserve A/c ₹15,00,000
*(Being profit on sale of investments transferred to General Reserve)*

**(3) On issue of 12% Preference Shares:**
Bank A/c Dr. ₹20,00,000
    To 12% Preference Share Capital A/c ₹20,00,000
*(Being 20,000, 12% preference shares of ₹100 each issued at par)*

**(4) On buyback of equity shares:**
Equity Share Capital A/c Dr. ₹50,00,000
Premium on Buyback A/c Dr. ₹25,00,000
    To Equity Shareholders A/c ₹75,00,000
*(Being 5,00,000 equity shares of ₹10 each bought back at ₹15 per share)*

**(5) Premium on buyback charged to free reserves:**
General Reserve A/c Dr. ₹25,00,000
    To Premium on Bu…

Question 28

A summary of liquidation transactions for SPL is as follows:

November, 2019:
• ₹ 3,00,000 – collected from debtors, balance is uncollectable
• ₹ 11,00,000 – received from the sale of entire furniture
• ₹ 2,00,000 – liquidation expenses paid
• ₹ 6,60,000 – Cash retained in the business at the end of month

December, 2019:
• ₹ 2,20,000 – Liquidation expenses paid
• As part payment of his capital, C accepted a machinery for ₹ 9,00,000 (Book value ₹ 6,00,000)
• ₹ 3,00,000 – Cash retained in the business at the end of month.

January, 2020:
• ₹ 28,00,000 – Received on the sale of remaining plant & machinery
• ₹ 9,00,000 – Received from the sale of entire stock
• ₹ 1,50,000 – Liquidation expenses paid
• ₹ 63,00,000 – Received on sale of Land & Buildings
• No cash is retained in the business.

Y…

Accepted Answer

**Answer: Schedule of Cash Payments - Highest Relative Capital Method (31 January 2020)**

The question requires preparation of a cash distribution schedule using the Highest Relative Capital Method, which distributes final cash based on the proportion of each partner's final capital balance after allocation of realization gains/losses.

**Critical Issue:** The opening balance sheet showing initial capital balances of partners A, B, and C, and their profit-sharing ratio, has not been provided in this question. Without these figures, the numerical schedule cannot be completed. The question appears incomplete.

**However, the methodology is as follows:**

**Step 1: Calculate Total Cash Available for Distribution**

November 2019:
- Collections from debtors: ₹ 3,00,000
- Sale of furniture: ₹ 11,00,000
- Liquidation expenses paid: ₹ (2,00,000)
- Opening balance: Nil
- Cash retained in business: ₹ 6,60,000
- Cash distributed: ₹ 5,40,000

December 2019:
- Opening cash: ₹ 6,60,000
- Liquidation expenses: ₹ (2,20,000)
- Cash retained: ₹ 3,00,000
- Cash distributed: ₹ 1,40,000
- Machinery transfer to C: ₹ 9,00,000 (non-cash, capital credit)

January 2020:
- Sale of plant & machinery: ₹ 28,00,000
- Sale of stock: ₹ 9,00,000
- Sale of land & buildings: ₹ 63,00,000
- Total receipts: ₹ 1,00,00,000
- Liquidation expenses: ₹ (1,50,000)
- Cash distributed: ₹ 99,51,000

**Total Cash for Distribution: ₹ 1,06,31,000** (5,40,000 + 1,40,000 + 99,51,000)

**Step 2: Calculate Realization Gains/Loss…

Question 29

You are required to prepare a Cash Flow Statement for the year ended 31st March, 2020 as per AS 3 (revised) using the indirect method

Accepted Answer

**Cash Flow Statement for the year ended 31st March, 2020** (as per **AS 3 Revised** — Indirect Method)

**Note on Available Data:** The question provides only Current Assets and Current Liabilities data. A complete Cash Flow Statement under the Indirect Method also requires Net Profit Before Tax, non-cash adjustments (depreciation, amortisation, provisions, etc.), investing activity details (purchase/sale of fixed assets, investments), and financing activity details (loans, dividends, share capital). Since only working capital items are provided, the **Changes in Working Capital** section and the **Net Change in Cash & Cash Equivalents** can be conclusively computed.

**CASH FLOW STATEMENT for the year ended 31st March, 2020**

**A. Cash Flow from Operating Activities**

Net Profit Before Tax and Extraordinary Items — *[Not provided]*

**Adjustments for non-cash/non-operating items:**
Depreciation, Amortisation, Provisions — *[Not provided]*

**Operating Profit Before Working Capital Changes** — *[Not provided]*

**Adjustments for Changes in Working Capital:**
- Decrease in Trade Receivables (₹3,27,000 → ₹3,13,200): **+₹13,800**
- Increase in Inventory (₹13,50,000 → ₹14,60,000): **(₹1,10,000)**
- Increase in Trade Payables (₹2,84,700 → ₹2,87,300): **+₹2,600**
- Increase in Outstanding Expenses (₹97,000 → ₹1,07,400): **+₹10,400**

**Net Working Capital Adjustment: (₹83,200)**

Cash Generated from Operations — *[Depends on profit figure not provided]*
Less: Income Tax Paid — *…

Question 30

In the winding up of a company, certain Creditors could not receive payments out of the realisation of Assets and out of contribution from 'A' in contribution. Liquidation started on 1st April, 2020. The following persons have transferred their holdings before winding up:

| Name | Date of Transfer | No. of shares transferred | Amount due to creditors on the date of transfer (₹) |
|---|---|---|---|
| O | 4th April, 2019 | 1,000 | 42,000 |
| P | 2nd Feb, 2019 | 300 | 25,000 |
| Q | 8th Sep, 2019 | 200 | 57,000 |
| R | 11th Nov, 2019 | 1,400 | 85,000 |
| S | 2nd Feb, 2020 | 800 | 66,000 |
| T | 1st March, 2020 | 1,400 | 95,000 |

The shares were of ₹ 100 each, ₹ 70 being called up and paid up on the date of transfers. 'X' was the transfer of shares held by 'S'. 'X' paid ₹ 30 per share as cal…

Accepted Answer

**Applicable Law:** Under **Section 285 of the Companies Act, 2013**, both present members (List A contributories) and past members (List B contributories) are liable to contribute in winding up. A **past member** is liable only if: (i) the present member (transferee) is unable to satisfy contribution, (ii) the debt existed at the date of transfer of shares, and (iii) the transfer took place within **one year before the commencement of winding up**.

Winding up commenced on **1st April, 2020**. Therefore, the relevant one-year window is **1st April, 2019 to 1st April, 2020**.

**Step 1 – Eligibility of Past Members (List B):**
- **P** transferred on 2nd February, 2019 — this is **more than one year** before winding up. P is **NOT liable** as a contributory.
- **O** (4th April, 2019), **Q** (8th September, 2019), **R** (11th November, 2019), **S** (2nd February, 2020), and **T** (1st March, 2020) — all transferred **within one year**. All are **eligible** as List B contributories.

**Step 2 – Maximum Liability per Contributory:**
Each share is ₹100, with ₹70 called up. Therefore, **uncalled amount = ₹30 per share**. The maximum liability of a past member is the lower of: (a) uncalled amount on shares transferred, or (b) amount of creditors' debt at the date of transfer.

**Step 3 – Special Case of S and X:**
'X' is the **transferee** of S's 800 shares (present member, List A). X paid ₹30 per share as **calls in advance immediately** on becoming a member, thereby fully paying u…

CA Inter Adv Accounting

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