CA Inter Adv Accounting — Question Paper — January 2025

Answer: (D)

Under Ind AS 20 – Government Grants, when a government grant is received for acquisition of an asset, the net method treats the grant by reducing the cost of the asset. On 1st April 2019, the machine cost was ₹50,00,000 and the grant of ₹15,00,000 was credited to (deducted from) the cost, resulting in a net capitalized cost of ₹35,00,000.

Depreciation is calculated on this net cost using the straight-line method: (₹35,00,000 − ₹5,00,000 residual value) ÷ 10 years = ₹3,00,000 per annum.

For the two years ended 31st March 2021:
- Year 2019–20: Depreciation of ₹3,00,000
- Year 2020–21: Depreciation of ₹3,00,000
- Total accumulated depreciation: ₹6,00,000

Carrying amount as on 31st March 2021 = ₹35,00,000 − ₹6,00,000 = ₹29,00,000

Note: The grant refund, impairment, and machine exchange are subsequent events occurring after 31st March 2021 and do not affect this calculation.

Calculation of Basic and Diluted Earnings Per Share as on 31st March, 2024

As per AS 20 – Earnings Per Share, EPS must be calculated adjusting for bonus issues retrospectively and dilutive potential equity shares.

Basic EPS

Bonus shares are treated as if they were outstanding from the beginning of the year (retrospective treatment). Fresh issue shares are weighted from the date of issue.

Shares before bonus (working back from 31-3-2024): Shares after fresh issue = 8,00,000 – 2,00,000 = 6,00,000. If x = shares before bonus, then x + x/5 = 6,00,000 → x = 5,00,000. Bonus shares = 1,00,000.

Weighted Average Shares (for Basic EPS):
- 1-4-2023 to 31-12-2023: (5,00,000 + 1,00,000 bonus) × 9/12 = 4,50,000
- 1-1-2024 to 31-3-2024: 8,00,000 × 3/12 = 2,00,000
- Weighted Average = 6,50,000 shares

Basic EPS = ₹31,20,000 / 6,50,000 = ₹4.80

Diluted EPS

Two dilutive instruments exist: options and convertible debentures.

(i) Options (Treasury Stock Method):
Shares purchasable at fair value from option proceeds = (₹20 × 80,000) / ₹25 = 64,000. Dilutive increment = 80,000 – 64,000 = 16,000 shares. No adjustment to earnings.

(ii) 12% Convertible Debentures:
Number of debentures = ₹30,00,000 / ₹100 = 30,000. Shares on conversion = 30,000 × 4 = 1,20,000 shares. After-tax interest saving = ₹30,00,000 × 12% × (1 – 30%) = ₹2,52,000 added to earnings.

Diluted Numerator = ₹31,20,000 + ₹2,52,000 = ₹33,72,000
Diluted Denominator = 6,50,000 + 16,000 + 1,20,000 = 7,86,000

Diluted EPS = ₹33,72,000 / 7,86,000 = ₹4.29

Since Diluted EPS (₹4.29) < Basic EPS (₹4.80), both options and debentures are dilutive and must be disclosed.

Lease Classification under AS 19 (Leases)

The lease is classified by applying the following two deterministic parameters:

Parameter 1 — Lease term is a major part of the useful life of the asset:
Lease term = 4 years; Useful life = 6 years. Proportion = 4/6 = 66.67%, which constitutes a major part of the economic life of the asset. This indicates a Finance Lease.

Parameter 2 — Present Value of Minimum Lease Payments (MLP) is substantially all of the Fair Value:
Unguaranteed residual value is NOT part of MLP (since it is not guaranteed by the lessee). Using the given IRR and PV factors:

Fair Value = (Annual Instalment × PV annuity factor) + (Unguaranteed RV × PV factor)
₹12,50,000 = (R × 3.312) + (₹1,20,000 × 0.735)
₹12,50,000 = (R × 3.312) + ₹88,200
R × 3.312 = ₹11,61,800
Annual Instalment (R) = ₹3,50,725 (approx.)

PV of MLP = ₹3,50,725 × 3.312 = ₹11,61,601 ≈ ₹11,61,800
Ratio = ₹11,61,800 / ₹12,50,000 = 92.94%, which is substantially all of the fair value. This confirms a Finance Lease.

Conclusion: This lease is a Finance Lease from K Limited's (lessor's) perspective since both deterministic parameters are satisfied.

Calculation of Unearned Finance Income:
Under AS 19, the lessor records the gross investment in the lease and defers the difference between gross investment and net investment as unearned finance income.

- Gross Investment = Total MLPs + Unguaranteed Residual Value = (₹3,50,725 × 4) + ₹1,20,000 = ₹14,02,900 + ₹1,20,000 = ₹15,22,900
- Net Investment (= Fair Value at commencement) = ₹12,50,000
- Unearned Finance Income = ₹15,22,900 − ₹12,50,000 = ₹2,72,900

Difference between Defined Contribution Plan (DCP) and Defined Benefit Plan (DBP):

A Defined Contribution Plan is a retirement plan where the employer contributes a fixed or determinable amount (usually a percentage of employee salary) into an individual account. The employee bears the investment risk and actuarial risk—benefits depend entirely on the contributions made and the investment returns earned. The employer's obligation is limited to the contribution commitment. Examples include provident funds and pension schemes with fixed employer contributions.

A Defined Benefit Plan is a retirement plan where the employer guarantees a specific benefit amount to employees based on a formula (typically linked to salary and service years). The employer bears both the investment risk and actuarial risk. The employer's obligation extends beyond contributions and may require additional funding if plan assets are insufficient. Actuarial valuations are mandatory, and the accounting treatment is complex under Ind AS 19.

Key differences: (1) DCP has fixed contributions but uncertain benefits; DBP has guaranteed benefits but variable costs; (2) DCP requires no actuarial valuation; DBP requires actuarial assumptions and regular revaluation; (3) DCP liability is limited; DBP liability can be substantial and indeterminate; (4) DCP accounting is simple; DBP accounting requires remeasurement of obligations and actuarial gains/losses.

Calculation of Defined Benefit Liability/Asset as on 31-3-2024:

Present Value of Defined Benefit Obligation = ₹36.0 lakhs

Less: Fair Value of Plan Assets = ₹(38.5) lakhs

Net Position = ₹(2.5) lakhs [Asset position]

Add: Past Service Cost not yet recognized = ₹7.5 lakhs

Less: Present Value of Available Future Refund = ₹(6.0) lakhs

Net Defined Benefit Asset = ₹1.0 lakh (or Defined Benefit Liability of negative ₹1.0 lakh, indicating an asset position)

The negative value indicates that the plan has a net asset position of ₹1.0 lakh as on 31-3-2024, meaning plan assets exceed obligations after accounting for unrecognized past service costs and available refunds.

Applicable Standard: AS 20 — Earnings Per Share

Step 1: Reconstruct Share History

Working backwards from 8,00,000 shares on 31-3-2024:
- 2,00,000 shares issued on 1-1-2024 → shares before that date = 6,00,000
- Bonus issue on 1-10-2023 was 1 share for every 5 → shares before bonus = 6,00,000 × 5/6 = 5,00,000
- Bonus shares issued = 5,00,000 / 5 = 1,00,000

Step 2: Weighted Average Number of Shares (Basic EPS)

Per AS 20, bonus shares are deemed outstanding from the beginning of the earliest period — no time-weighting for the bonus itself; earlier periods are adjusted by the bonus factor (6/5).

| Period | Dates | Actual Shares | Bonus Adj. | Months | Weighted Shares |
|---|---|---|---|---|---|
| April–September 2023 | 1-4-23 to 30-9-23 | 5,00,000 | × 6/5 = 6,00,000 | 6/12 | 3,00,000 |
| October–December 2023 | 1-10-23 to 31-12-23 | 6,00,000 | — | 3/12 | 1,50,000 |
| January–March 2024 | 1-1-24 to 31-3-24 | 8,00,000 | — | 3/12 | 2,00,000 |
| Total WANS (Basic) | | | | | 6,50,000 |

Basic EPS = ₹31,20,000 / 6,50,000 = ₹4.80

Step 3: Diluted EPS — Dilutive Instruments

(a) Employee Stock Options (Treasury Stock Method)

Shares issuable on exercise: 80,000
Proceeds if exercised: 80,000 × ₹20 = ₹16,00,000
Shares bought back at fair value (₹25): ₹16,00,000 / ₹25 = 64,000
Incremental dilutive shares = 80,000 − 64,000 = 16,000 shares (no earnings effect → EPS impact = ₹0 < ₹4.80 ∴ Dilutive)

(b) 12% Convertible Debentures

No. of debentures = ₹30,00,000 / ₹100 = 30,000
Additional shares on conversion = 30,000 × 4 = 1,20,000 shares
Interest saved (gross) = ₹30,00,000 × 12% = ₹3,60,000
Tax on savings = ₹3,60,000 × 30% = ₹1,08,000
After-tax earnings increase = ₹3,60,000 − ₹1,08,000 = ₹2,52,000
Per-share EPS impact = ₹2,52,000 / 1,20,000 = ₹2.10 < ₹4.80 ∴ Dilutive

Step 4: Diluted EPS Calculation

| | Earnings (₹) | Shares |
|---|---|---|
| Basic figures | 31,20,000 | 6,50,000 |
| Add: Options (incremental shares) | — | 16,000 |
| Add: Convertible Debentures | 2,52,000 | 1,20,000 |
| Diluted totals | 33,72,000 | 7,86,000 |

Diluted EPS = ₹33,72,000 / 7,86,000 = ₹4.29

Final Answers:
Basic EPS = ₹4.80 | Diluted EPS = ₹4.29

Answer: (A)

The question requires calculating depreciation for FY 2021-22 after adjusting for the grant refund on 1st April 2021.

Step 1: Initial Setup (1st April 2019)
Machine cost: ₹50,00,000; Government grant: ₹15,00,000 (credited to cost)
Carrying amount: ₹50,00,000 - ₹15,00,000 = ₹35,00,000
Depreciable amount: ₹35,00,000 - ₹5,00,000 (residual value) = ₹30,00,000
Annual depreciation: ₹30,00,000 ÷ 10 years = ₹3,00,000

Step 2: Depreciation charged for 2 years (FY 2019-20 and 2020-21)
Total accumulated depreciation as on 31st March 2021: ₹3,00,000 × 2 = ₹6,00,000
Net book value as on 31st March 2021: ₹35,00,000 - ₹6,00,000 = ₹29,00,000

Step 3: Treatment of Grant Refund (1st April 2021)
Under Ind AS 20, when a government grant related to a depreciable asset is refunded:
- The asset cost is adjusted upward to the original amount: ₹50,00,000
- Accumulated depreciation already recorded remains unchanged at ₹6,00,000
- Net book value becomes: ₹50,00,000 - ₹6,00,000 = ₹44,00,000

Step 4: Depreciation for FY 2021-22
Remaining useful life: 10 years - 2 years = 8 years
Residual value: ₹5,00,000 (unchanged)
Depreciable amount: ₹44,00,000 - ₹5,00,000 = ₹39,00,000
Depreciation for 2021-22: ₹39,00,000 ÷ 8 years = ₹4,87,500

Note: The impairment indication on 31st March 2023 and asset exchange on 1st April 2024 do not affect the FY 2021-22 depreciation calculation.

Part (a): Journal Entries for Capital Reconstruction

The following journal entries record the reconstruction transactions:

1. Call up Uncalled Capital (25,000 shares × ₹2)
Dr. Shareholders' A/c (Uncalled Capital) ₹50,000
Cr. Equity Share Capital A/c ₹50,000
(Being uncalled capital on 25,000 partly paid shares called up in full)

2. Reduction of Fully Paid Equity Shares (50,000 shares × ₹5 reduction)
Dr. Equity Share Capital A/c ₹2,50,000
Cr. Capital Reconstruction A/c ₹2,50,000
(Being fully paid equity shares reduced from ₹10 to ₹5 per share)

3. Reduction of Partly Paid Equity Shares (25,000 shares × ₹5 reduction)
Dr. Equity Share Capital A/c ₹1,25,000
Cr. Capital Reconstruction A/c ₹1,25,000
(Being partly paid equity shares reduced from ₹10 to ₹5 per share after being called up)

4. Reduction of Preference Share Capital (30,000 shares × ₹2.5 reduction)
Dr. Preference Share Capital A/c ₹75,000
Cr. Capital Reconstruction A/c ₹75,000
(Being preference shares reduced by ₹2.5 per share, rate increased to 9%)

5. Issue of Equity Shares for Forfeited Preference Dividend
(Assuming ₹1 per share annual dividend × 1 year × 30,000 shares = ₹30,000; 6,000 new equity shares @ ₹5)
Dr. Interest Payable A/c ₹30,000
Cr. Equity Share Capital A/c ₹30,000
(Being equity shares issued @ ₹5 each to preference shareholders for forfeited dividend arrears)

6. Reconstruction of Mr. X's Debt (Total claim: ₹2,50,000 debentures + ₹50,000 payable = ₹3,00,000)
Dr. 10% Debentures A/c ₹2,50,000
Dr. Trade Payables (Mr. X) A/c ₹50,000
Cr. Bank A/c ₹20,000
Cr. 12% Debentures (New) A/c ₹1,30,000
Cr. Capital Reconstruction A/c ₹1,50,000
(Being 50% of Mr. X's total debt (₹1,50,000) cancelled; ₹20,000 paid in cash; balance ₹1,30,000 converted to 12% debentures)

7. Reduction of Remaining 10% Debentures to 60% (₹4,50,000 - ₹2,50,000 = ₹2,00,000 reduced to ₹1,20,000)
Dr. 10% Debentures A/c ₹2,00,000
Cr. 9% Preference Share Capital A/c ₹1,20,000
Cr. Capital Reconstruction A/c ₹80,000
(Being remaining debentures reduced to 60% value; difference issued as 12,000 9% preference shares @ ₹10 each)

8. Settlement of Income Tax Provision (₹1,00,000 settled at ₹1,20,000)
Dr. Provision for Income Tax A/c ₹1,00,000
Dr. Capital Reconstruction A/c ₹20,000
Cr. Bank A/c ₹1,20,000
(Being income tax provision settled at ₹1,20,000)

9. Sale of Non-current Investments (Cost ₹2,80,000 @ Market Value ₹2,50,000)
Dr. Bank A/c ₹2,50,000
Dr. Capital Reconstruction A/c ₹30,000
Cr. Non-current Investments A/c ₹2,80,000
(Being non-current investments sold at market value of ₹2,50,000)

10. Inventory Taken Over by Creditors (₹1,00,000)
Dr. Trade Payables A/c ₹1,00,000
Cr. Inventory A/c ₹1,00,000
(Being inventory taken over by creditors as part of debt settlement)

11. Bad Debt Provision (2% on Trade Receivables)
(Assuming trade receivables as derived from balance sheet adjustments)
Dr. Capital Reconstruction A/c ₹[Amount calculated as 2% of TRs]
Cr. Provision for Doubtful Debts A/c ₹[Amount]
(Being provision for bad debts @ 2% on trade receivables)

12. Plant and Machinery Written Down (20%)
(Amount derived from balance sheet after asset adjustments)
Dr. Capital Reconstruction A/c ₹[20% of P&M value]
Cr. Plant and Machinery A/c ₹[20% of P&M value]
(Being plant and machinery written down by 20%)

13. Issue of 12% Debentures for Cash Requirement (₹65,000 overdraft + ₹85,000 cash = ₹1,50,000)
Dr. Bank A/c ₹1,50,000
Cr. 12% Debentures (New) A/c ₹1,50,000
(Being 12% debentures issued to meet overdraft and maintain cash balance of ₹85,000)

14. Payment of Bank Overdraft (₹65,000)
Dr. Bank Overdraft A/c ₹65,000
Cr. Bank A/c ₹65,000
(Being bank overdraft paid from bank balance)

15. Interest Payable Write-off (₹45,000)
Dr. Interest Payable A/c ₹45,000
Cr. Trade Payables A/c ₹45,000
(Being interest payable waived/adjusted as part of creditor settlement)

16. Closing of Capital Reconstruction Account and P&L Adjustment
Dr. Profit and Loss A/c ₹2,50,000
Dr. Goodwill A/c ₹[Balance amount]
Cr. Capital Reconstruction A/c ₹[Net surplus after all adjustments]
Cr. Reserve for Reconstruction ₹[Balance amount if any]
(Being P&L debit balance written off and surplus from reconstruction applied to write-off goodwill)

Part (b): Revised Share Capital Structure After Reconstruction

SUSTAIN LIMITED - REVISED CAPITAL STRUCTURE NOTE

Equity Shares of ₹5 each:
- Original 50,000 fully paid shares (reduced from ₹10 to ₹5) = 50,000 shares
- Original 25,000 partly paid shares (now fully paid @ ₹5) = 25,000 shares
- New shares issued for preference dividend arrears (6,000 @ ₹5) = 6,000 shares
- Total Equity Shares: 81,000 shares of ₹5 each = ₹4,05,000

9% Preference Shares:
- Original preference shares after reduction (30,000 @ ₹7.50 per share after ₹2.5 reduction) = ₹2,25,000
- New preference shares from debenture conversion (12,000 @ ₹10 per share) = ₹1,20,000
- Total 9% Preference Shares: 42,000 shares = ₹3,45,000 (comprising 30,000 @ ₹7.50 and 12,000 @ ₹10)

Debentures:
- 12% Debentures from Mr. X's reconstruction = ₹1,30,000
- 12% Debentures issued for cash/overdraft settlement = ₹1,50,000
- Total 12% Debentures = ₹2,80,000

Summary of Share Capital:
- Equity Share Capital: ₹4,05,000 (81,000 shares @ ₹5)
- Preference Share Capital: ₹3,45,000 (9% preference shares)
- Total Share Capital: ₹7,50,000
- 12% Debentures: ₹2,80,000
- Total Capital Structure: ₹10,30,000

Note: The reconstruction scheme results in rationalization of the capital structure. The company's borrowing has been reduced from ₹4,50,000 (10% debentures only) to ₹2,80,000 (12% debentures). While preference shares increase from ₹3,00,000 to ₹3,45,000, the overall fixed obligations are reduced, improving financial flexibility. The increased share capital (from ₹10,00,000 to ₹10,30,000 in absolute terms) reflects the conversion of debts to equity and preference shares, reducing the company's debt burden.

Note to Examiner / Student: The question references a Balance Sheet of Sustain Limited as on 31st March, 2024, but the actual financial figures (share capital, reserves, liabilities, asset values, accumulated losses, etc.) were not included in the question as submitted — only the placeholder '[Balance sheet provided with Equity and Liabilities and Assets sections]' appears.

Without the specific monetary figures, it is not possible to prepare the Capital Reduction Account, the Journal Entries, or the Revised Balance Sheet. However, the complete methodology for solving a Capital Reorganisation question of this type under the CA Intermediate syllabus is set out below.

Legal Framework: Capital Reduction / Reorganisation is governed by Sections 66 and 230–232 of the Companies Act, 2013 (with NCLT approval for Section 66 reductions). For accounting purposes, AS 4 (Contingencies and Events Occurring After the Balance Sheet Date) and general principles under the Companies (Accounting Standards) Rules, 2021 apply. The mechanics follow guidance in ICAI Study Material on 'Accounting for Amalgamation and Reconstruction.'

Step 1 — Identify the Scheme of Reconstruction. The scheme will specify: (a) reduction in face value / cancellation of paid-up capital, (b) waiver of dues by creditors, (c) revaluation of assets upward or downward, and (d) writing off fictitious assets (P&L debit balance, preliminary expenses, discount on issue, etc.).

Step 2 — Open Capital Reduction (Reconstruction) Account. This is a temporary account. Credits to it arise from: reduction in equity share capital, reduction in preference share capital, sacrifice by debenture holders / creditors, profit on revaluation of assets, and any other contribution. Debits to it are: writing off accumulated losses (P&L Dr balance), writing off goodwill, writing off fictitious assets, reduction in value of overvalued assets, and any capital reduction expenses.

Step 3 — Pass Journal Entries for each item in the scheme:
- Equity Share Capital A/c Dr (old face value portion cancelled) → Capital Reduction A/c Cr
- Preference Share Capital A/c Dr (if reduced) → Capital Reduction A/c Cr
- Capital Reduction A/c Dr → P&L (Accumulated Loss) A/c Cr [write-off]
- Capital Reduction A/c Dr → Goodwill / Fictitious Assets A/c Cr [write-off]
- Fixed Assets A/c Dr → Capital Reduction A/c Cr [if revalued upward]
- Capital Reduction A/c Dr → Fixed Assets A/c Cr [if written down]
- Any remaining balance in Capital Reduction A/c after writing off all losses → transferred to Capital Reserve.

Step 4 — Prepare Revised Balance Sheet after giving effect to all the above entries. The share capital will reflect new (reduced) paid-up values; fictitious assets will be nil; and a Capital Reserve may appear if the Capital Reduction Account had a surplus.

Key Examiner Expectations for 14 marks: (a) Correct Capital Reduction Account in T-format — 4 marks; (b) Journal Entries with narrations — 4 marks; (c) Revised Balance Sheet in Schedule III format — 5 marks; (d) Brief note on legal compliance — 1 mark.

Please resubmit the question with the complete Balance Sheet figures so that the full numerical solution, including all workings, can be provided accurately.

Note: This question appears to be part of a larger capital reduction scheme problem. The answer below is structured around the standard framework for such schemes as per the Companies Act, 2013 and AS 4 / relevant accounting principles. Specific figures from the parent question would be substituted in the placeholders shown.

(a) Journal Entries to Record the Capital Reduction Scheme

In a capital reduction scheme, the court/tribunal-confirmed reduction creates a Capital Reduction Account (also called Capital Reduction Reserve or Reconstruction Account). The steps are as follows:

Step 1 — Reduction of Share Capital (Source of funds):
Share Capital Account is debited to the extent of the reduction (difference between old and new face value, or cancellation of paid-up capital), and the corresponding credit goes to the Capital Reduction Account.

Share Capital A/c ...... Dr. (with amount reduced per share × no. of shares)
To Capital Reduction A/c
*(Being reduction in paid-up share capital as per the approved scheme)*

Step 2 — Writing off Goodwill:
Capital Reduction A/c ...... Dr. (with book value of goodwill written off)
To Goodwill A/c
*(Being goodwill written off pursuant to the scheme of capital reduction)*

Step 3 — Writing off Debit Balance of Profit & Loss Account:
Capital Reduction A/c ...... Dr. (with accumulated debit balance)
To Profit & Loss A/c
*(Being the accumulated debit balance in the Statement of Profit & Loss written off under the scheme)*

Step 4 — Writing down Inventory:
Capital Reduction A/c ...... Dr. (with amount of write-down)
To Inventory A/c
*(Being inventory written down to its net realisable value / reduced value as per the scheme)*

Step 5 — Transfer of Balance in Capital Reduction Account (if any surplus remains):
If after writing off all items, a credit balance remains in Capital Reduction Account, it is transferred to Capital Reserve, as it is a capital profit and cannot be distributed as dividend.
Capital Reduction A/c ...... Dr.
To Capital Reserve A/c
*(Being surplus in Capital Reduction Account transferred to Capital Reserve)*

Alternatively, if the debits exceed the credits (i.e., losses exceed the amount raised), additional sources (securities premium, general reserve) would be tapped before reaching the above entries.

(b) Note on Revised Share Capital Structure

After completion of the capital reduction scheme, the share capital note to the Balance Sheet is revised to reflect the reduced paid-up capital. The format is as prescribed under Schedule III to the Companies Act, 2013.

Note X — Share Capital

Particulars ................ ₹

Authorised Share Capital:
XX,XX,XXX equity shares of ₹ [new face value] each ...... ₹ [amount]

Issued, Subscribed and Paid-up Share Capital:
XX,XX,XXX equity shares of ₹ [new face value] each, fully paid-up ...... ₹ [amount]

Total ₹ [revised amount]

Key disclosures required: (i) Number of shares held by holding company (if any); (ii) Shareholders holding more than 5% shares; (iii) Reconciliation of number of shares at opening and closing (showing reduction during the year); (iv) Rights, preferences, and restrictions attached to shares.

Important: The reduction must be confirmed by the National Company Law Tribunal (NCLT) under Section 66 of the Companies Act, 2013. The revised Memorandum of Association reflecting the new authorised capital must also be filed with the Registrar of Companies.

Answer: (C)

The impairment loss of ₹6,25,000 is to be debited to the Profit & Loss Account.

Calculation of Carrying Amount as on 31st March 2023:

Phase 1: Initial Recognition (1st April 2019)
Cost of Machine: ₹50,00,000
Less: Government grant (credited to cost): ₹15,00,000
Net cost: ₹35,00,000
Depreciable amount = ₹35,00,000 – ₹5,00,000 = ₹30,00,000
Annual depreciation = ₹30,00,000 ÷ 10 years = ₹3,00,000

Phase 2: Depreciation up to Grant Refund (1st April 2019 to 31st March 2021)
Depreciation for 2 years = ₹3,00,000 × 2 = ₹6,00,000
Book value as on 1st April 2021 = ₹35,00,000 – ₹6,00,000 = ₹29,00,000

Phase 3: After Grant Refund (1st April 2021)
When the grant is refunded, under Ind AS 20, the cost of the asset must be restored to its original amount.
Cost of Machine: ₹50,00,000
Accumulated depreciation: ₹6,00,000 (reflects actual depreciation charged)
Book value as on 1st April 2021: ₹50,00,000 – ₹6,00,000 = ₹44,00,000

Phase 4: Depreciation from 1st April 2021 to 31st March 2023
Remaining useful life from original date = 10 – 2 = 8 years
Depreciable amount = ₹44,00,000 – ₹5,00,000 = ₹39,00,000
Annual depreciation = ₹39,00,000 ÷ 8 = ₹4,87,500
Depreciation for 2 years = ₹4,87,500 × 2 = ₹9,75,000

Book value as on 31st March 2023 (before impairment test):
₹44,00,000 – ₹9,75,000 = ₹34,25,000

Impairment Test (31st March 2023):
Carrying amount: ₹34,25,000
Recoverable amount: ₹28,00,000
Impairment loss = ₹34,25,000 – ₹28,00,000 = ₹6,25,000

Under Ind AS 36 (Impairment of Assets), the impairment loss is recognized immediately in the Profit & Loss Account unless the asset was previously revalued upward.

Part (a): Provision for Warranty under AS 29 — Principles and Calculations

AS 29 — Provisions, Contingent Liabilities and Contingent Assets requires that a provision be recognised when: (i) an enterprise has a present obligation as a result of a past event; (ii) it is probable that an outflow of resources will be required; and (iii) a reliable estimate can be made. After-sales warranty creates a present obligation; hence provision must be made at each balance sheet date.

The policy is: if the invoice was raised less than 1 year before the balance sheet date → 2.5% provision; if more than 1 year before the balance sheet date → 4.5% provision. No provision if the 2-year warranty period has expired by the balance sheet date.

Provision at 31st March 2023:

| Invoice Date | Amount (₹) | Age at 31.3.2023 | Warranty Expired? | Rate | Provision (₹) |
|---|---|---|---|---|---|
| 20 Feb 2021 | 42,000 | ~2 yrs 1 mth | YES (expired Feb 2023) | — | Nil |
| 17 Jul 2022 | 25,000 | ~8.5 months | No | 2.5% | 625 |
| 27 Jan 2022 | 47,000 | ~14 months | No | 4.5% | 2,115 |
| 1 Mar 2023 | 1,10,000 | ~1 month | No | 2.5% | 2,750 |
| 24 Aug 2023 | 34,000 | Future invoice | — | — | Nil |
| 20 Mar 2024 | 75,000 | Future invoice | — | — | Nil |

Total Provision at 31st March 2023 = ₹5,490

Provision at 31st March 2024:

| Invoice Date | Amount (₹) | Age at 31.3.2024 | Warranty Expired? | Rate | Provision (₹) |
|---|---|---|---|---|---|
| 20 Feb 2021 | 42,000 | >2 years | YES | — | Nil |
| 17 Jul 2022 | 25,000 | ~20 months | No (expires Jul 2024) | 4.5% | 1,125 |
| 27 Jan 2022 | 47,000 | ~26 months | YES (expired Jan 2024) | — | Nil |
| 1 Mar 2023 | 1,10,000 | ~13 months | No (expires Mar 2025) | 4.5% | 4,950 |
| 24 Aug 2023 | 34,000 | ~7 months | No (expires Aug 2025) | 2.5% | 850 |
| 20 Mar 2024 | 75,000 | ~11 days | No (expires Mar 2026) | 2.5% | 1,875 |

Total Provision at 31st March 2024 = ₹8,800

Part (b): Amount Debited to Profit & Loss Account for Year Ended 31st March 2024

Under AS 29, changes in the carrying amount of a provision are recognised in the Profit & Loss Account. The P&L charge is the net movement between opening and closing provisions, analysed as follows:

Opening Provision (1 April 2023) = ₹5,490

During the year: (i) Invoice 3 (27 Jan 2022) provision reversed as warranty expired in Jan 2024 → reversal of ₹2,115 (credit to P&L); (ii) Invoice 2 moves from 2.5% to 4.5% category — incremental charge of ₹500; (iii) Invoice 4 moves from 2.5% to 4.5% category — incremental charge of ₹2,200; (iv) Invoice 5 is a new provision at 2.5% — charge of ₹850; (v) Invoice 6 is a new provision at 2.5% — charge of ₹1,875.

Net Amount Debited to P&L = ₹8,800 − ₹5,490 = ₹3,310

Cash Flow Statement of BGH Limited for the year ended 31st March, 2024

Prepared as per AS 3 (Revised) — Cash Flow Statements using the Indirect Method.

Working Note — Net Profit for the year:
Opening P&L balance: ₹60,000; Closing P&L balance: ₹1,10,000. The dividend payable of ₹50,000 appearing in the 2023 Balance Sheet was declared in FY 2022-23 (already debited to that year's P&L). Hence, Net Profit for FY 2023-24 = ₹1,10,000 − ₹60,000 = ₹50,000.

Working Note — Goodwill: Decreased from ₹1,50,000 to ₹1,20,000 → amortisation of ₹30,000 (non-cash, to be added back).

(a) Cash Flow from Operating Activities

Net Profit for the year: ₹50,000
Add: Goodwill amortised (non-cash item): ₹30,000
Operating Profit before Working Capital Changes: ₹80,000

Adjustments for changes in Working Capital:
Add: Decrease in Trade Receivables (₹95,000 → ₹65,000): ₹30,000
Less: Increase in Inventory (₹30,000 → ₹55,000): (₹25,000)
Less: Decrease in Trade Payables (₹75,000 → ₹60,000): (₹15,000)
Add: Increase in Interest Payable on Bank Loan (₹20,000 → ₹25,000): ₹5,000

Net Cash from Operating Activities: ₹75,000

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(b) Cash Flow from Financing Activities

Inflows:
- Proceeds from issue of Share Capital (₹5,00,000 − ₹4,00,000): ₹1,00,000
- Proceeds from issue of 10% Debentures (issued at year end): ₹1,00,000
- Proceeds from Bank Loan (₹2,50,000 − ₹2,00,000): ₹50,000

Outflows:
- Dividend paid (Dividend Payable 2023, paid during FY 2024): (₹50,000)

Net Cash from Financing Activities: ₹2,00,000

Note: The 10% Debentures were issued at the end of the year; hence no interest accrued on debentures during FY 2023-24. Interest on Bank Loan is treated as an operating item (change in accrued interest payable reflected in working capital adjustments). Dividend paid is classified as a financing outflow as per AS 3.

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

Under AS 29, a provision must be recognised when a present obligation exists as a result of a past event, it is probable that an outflow of resources will be required, and a reliable estimate can be made. Warranty obligations meet all three criteria. The provision is made only for invoices within the 2-year warranty period; invoices beyond 2 years have no remaining obligation.

The rate applied depends on the age of the invoice as at the reporting date:
- Invoice raised less than 1 year ago → 2.5% of invoice amount
- Invoice raised more than 1 year ago (but within 2 years) → 4.5% of invoice amount
- Invoice raised more than 2 years ago → Nil (warranty expired)

(i) Provision as at 31st March 2023:

Invoice dated 20th Feb 2021: Age = ~2 years 1 month → Warranty expired (2-year period ended 20th Feb 2023) → Nil
Invoice dated 17th Jul 2021: Age = ~1 year 8.5 months → within 2 years, more than 1 year → 4.5% × ₹25,000 = ₹1,125
Invoice dated 27th Jan 2022: Age = ~1 year 2 months → within 2 years, more than 1 year → 4.5% × ₹47,000 = ₹2,115
Invoice dated 1st Mar 2023: Age = ~1 month → less than 1 year → 2.5% × ₹1,10,000 = ₹2,750
Invoices dated 24th Aug 2023 and 20th Mar 2024: Not yet raised as at 31st March 2023 → Nil

Total Provision as at 31st March 2023 = ₹1,125 + ₹2,115 + ₹2,750 = ₹5,990

(i) Provision as at 31st March 2024:

Invoice dated 20th Feb 2021: Warranty expired → Nil
Invoice dated 17th Jul 2021: Warranty expired 17th Jul 2023 → Nil
Invoice dated 27th Jan 2022: Warranty expired 27th Jan 2024 → Nil
Invoice dated 1st Mar 2023: Age = ~1 year 1 month → within 2 years, more than 1 year → 4.5% × ₹1,10,000 = ₹4,950
Invoice dated 24th Aug 2023: Age = ~7 months → less than 1 year → 2.5% × ₹34,000 = ₹850
Invoice dated 20th Mar 2024: Age = ~11 days → less than 1 year → 2.5% × ₹75,000 = ₹1,875

Total Provision as at 31st March 2024 = ₹4,950 + ₹850 + ₹1,875 = ₹7,675

(ii) Amount to be debited to Profit and Loss Account for the year ended 31st March 2024:

Provision required as at 31st March 2024 = ₹7,675
Less: Provision already created as at 31st March 2023 = ₹5,990

Amount to be debited to P&L Account = ₹7,675 − ₹5,990 = ₹1,685

This represents the incremental provision charge for the year, reflecting the change in outstanding warranty obligations as older invoices expired and new invoices were raised during the year.

Answer: (B)

Calculation of Net Book Value as on 1st April 2024:

Phase 1: 1 April 2019 to 31 March 2021 (2 years)
Machine cost after grant reduction: ₹50,00,000 – ₹15,00,000 = ₹35,00,000
Depreciable amount: ₹35,00,000 – ₹5,00,000 = ₹30,00,000
Annual depreciation: ₹30,00,000 ÷ 10 = ₹3,00,000
Accumulated depreciation (2 years): ₹6,00,000
NBV on 31 March 2021: ₹29,00,000

Grant Refund on 1 April 2021:
When the government grant is refunded due to non-fulfillment of conditions, the cost reduction is reversed under Ind AS 20 (Government Grants). The original cost of ₹50,00,000 is restored.
NBV after refund: ₹50,00,000 – ₹6,00,000 = ₹44,00,000

Phase 2: 1 April 2021 to 31 March 2023 (2 years)
Remaining useful life: 10 – 2 = 8 years
Depreciable amount: ₹44,00,000 – ₹5,00,000 = ₹39,00,000
Annual depreciation: ₹39,00,000 ÷ 8 = ₹4,87,500
Accumulated depreciation (2 years): ₹9,75,000
NBV on 31 March 2023 (before impairment): ₹34,25,000

Impairment on 31 March 2023:
Recoverable amount: ₹28,00,000
Impairment loss: ₹34,25,000 – ₹28,00,000 = ₹6,25,000
NBV after impairment: ₹28,00,000

Phase 3: 1 April 2023 to 1 April 2024 (1 year)
Revised depreciable amount: ₹28,00,000 (residual value = nil)
Revised useful life: 4 years
Annual depreciation: ₹28,00,000 ÷ 4 = ₹7,00,000
NBV on 1 April 2024: ₹28,00,000 – ₹7,00,000 = ₹21,00,000

Gain/Loss on Exchange on 1 April 2024:
Under Ind AS 16 (Property, Plant & Equipment), the gain or loss on exchange is determined by comparing the carrying amount with the fair value of consideration received. The company exchanged the old machine and received: (i) new machine valued at ₹18,00,000 + (ii) cash settlement of ₹2,00,000 = Total fair value received ₹20,00,000.

Loss on exchange = Fair value received – Carrying amount = ₹20,00,000 – ₹21,00,000 = Loss of ₹1,00,000

Important Note: The summarized Balance Sheets of Light Limited and Bright Limited referenced in the question have not been provided in the problem as submitted. Without those figures (share capital, reserves, individual asset values, and liabilities), it is not possible to populate the accounts with actual numbers. Below is the complete methodology, account structure, and working logic that must be applied once the balance sheet data is inserted — this covers every step a CA student needs to solve this question.

Conceptual Framework — Amalgamation in the Nature of Purchase

Since a new company (Rainbow Limited) is formed to acquire both companies, this is an Amalgamation in the nature of Purchase under AS 14 — Accounting for Amalgamations. The pooling method does not apply here as the conditions for pooling are not met (new company formed, shares issued at negotiated consideration).

PART (a) — Realisation Account

In each transferor company's books, a Realisation Account is opened to effect the transfer.

For Light Limited — Realisation Account:
- Dr. side: All assets transferred to Rainbow Limited at their book values (Land & Building at book value, NOT at ₹62 lakhs — revaluation gain is implicit in the higher PC received).
- Cr. side: All liabilities taken over by Rainbow Limited at book values; and Purchase Consideration received = 80,000 × ₹100 = ₹80,00,000 (shown as shares in Rainbow Limited at face value since issued at par).
- Balancing figure: Profit or Loss on Realisation → transferred to Equity Shareholders' Account.

For Bright Limited — Realisation Account:
- Dr. side: All assets at book values INCLUDING the 'Other Assets' that were obsolete.
- Cr. side: (i) Liabilities taken over by Rainbow Limited at book values; (ii) Cash received on sale of Other Assets = ₹50,000 (Bright Limited sold these itself before acquisition, so ₹50,000 appears as a credit in Realisation Account); (iii) Purchase Consideration = 64,000 × ₹100 = ₹64,00,000 in Rainbow Limited shares (only for assets actually transferred, i.e., after excluding Other Assets).
- Balancing figure: Profit or Loss on Realisation → transferred to Equity Shareholders' Account.

Equity Shareholders' Account (both companies)

This account records the settlement with shareholders:
- Dr. side: Share Capital (at face value); any debit balance in P&L; loss on realisation (if any).
- Cr. side: Reserves and Surplus; credit balance in P&L; profit on realisation (if any); Shares received from Rainbow Limited (at face value = purchase consideration).
- The account must balance — any surplus/deficit represents the gain or loss per share for existing shareholders.

PART (b) — Opening Balance Sheet of Rainbow Limited

Rainbow Limited records assets and liabilities taken over:
- Assets taken from Light Limited: All at book values except Land & Building, which is recorded at ₹62,00,000 (revalued figure — this is the agreed value forming part of the purchase consideration).
- Assets taken from Bright Limited: All at book values excluding the Other Assets (which were sold by Bright Limited before transfer and therefore do not come to Rainbow).
- Liabilities: All liabilities assumed from both companies at book values.
- Share Capital: 80,000 + 64,000 = 1,44,000 equity shares of ₹100 each = ₹1,44,00,000.
- Capital Reserve or Goodwill: Difference between net assets taken over (at agreed values) and purchase consideration paid; if PC > net assets → Goodwill; if PC < net assets → Capital Reserve.

Key Accounting Entry in Rainbow Limited's books:
Dr. Individual Assets (at agreed values) | Cr. Individual Liabilities | Cr. Equity Share Capital (PC) | Cr./Dr. Capital Reserve / Goodwill (balancing figure)

Please insert the Balance Sheet figures to complete all numerical computations. Once figures are available, the profit/loss on realisation, the equity shareholders' settlement, and the Capital Reserve/Goodwill in Rainbow Limited's Balance Sheet can all be precisely determined following the framework above.

(i) Cash Flow from Operating Activities for the year ended 31st March, 2024

Under AS 3 (Cash Flow Statements), the indirect method is used. We begin with Net Profit for the year and adjust for non-cash items and working capital changes.

Net Profit Determination: The Profit & Loss Account balance increased from ₹60,000 to ₹1,10,000. Since Dividend Payable reduced from ₹50,000 to nil during the year (indicating the prior year dividend was paid, and no new dividend was declared in 2023-24), Net Profit = ₹1,10,000 − ₹60,000 = ₹50,000.

Interest on Bank Loan (₹25,000 for current year) is reclassified to Financing Activities as per AS 3, so it is added back. Goodwill amortisation of ₹30,000 (₹1,50,000 − ₹1,20,000) is a non-cash charge, added back.

For working capital: Trade Receivables decreased by ₹30,000 (source); Inventory increased by ₹25,000 (use); Trade Payables decreased by ₹15,000 (use). Interest Payable is excluded from working capital as interest is classified under Financing.

Net Cash from Operating Activities = ₹95,000

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(ii) Cash Flow from Financing Activities for the year ended 31st March, 2024

Financing activities include transactions related to raising and repaying capital and borrowings, as well as dividend and interest payments when classified as financing outflows.

Inflows: Share Capital increased by ₹1,00,000 (fresh issue); 10% Debentures issued at year-end = ₹1,00,000; Bank Loan increased by ₹50,000.

Outflows: Dividend paid = ₹50,000 (opening Dividend Payable cleared during year); Interest paid on Bank Loan = ₹20,000 [Opening interest payable ₹20,000 + Interest charged ₹25,000 − Closing interest payable ₹25,000].

Net Cash from Financing Activities = ₹1,80,000

Note: The question as provided is incomplete — no balance sheet figures, purchase consideration details, or terms of amalgamation have been supplied. The solution below presents the complete framework and proforma accounts that would be prepared once the data is available. Any CA student should apply this structure to the actual figures given in the exam paper.

Nature of Transaction: Light Limited and Bright Limited are amalgamating to form Rainbow Limited. This is typically an Amalgamation in the nature of Merger or Purchase under AS 14 – Accounting for Amalgamations. The closing entries in the books of transferor companies (Light Ltd. and Bright Ltd.) and opening entries in the books of the transferee company (Rainbow Ltd.) follow a standard pattern.

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Part (a): Books of Light Limited (and similarly Bright Limited)

Step 1 – Realisation Account
The Realisation Account is opened to transfer all assets (at book value) and liabilities (at book value) of the transferor company. The difference between Purchase Consideration received and net assets represents profit or loss on realisation, transferred to Equity Shareholders' Account.

Format of Realisation Account (Dr. side: all assets at book value; Cr. side: all liabilities at book value + Purchase Consideration received from Rainbow Ltd. + Profit/Loss to Equity Shareholders A/c).

Step 2 – Equity Shareholders Account
This account collects: the paid-up share capital, all reserves and surplus (General Reserve, P&L balance, etc.), profit/loss on realisation, and finally discharges the shareholders by transferring shares/debentures/cash received from Rainbow Limited to individual shareholders.

Format of Equity Shareholders Account (Dr. side: shares/securities received from Rainbow Ltd. distributed to shareholders; Cr. side: Share Capital + Reserves + Profit on Realisation or adjusted for Loss on Realisation).

The same set of accounts is prepared identically in the books of Bright Limited.

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Part (b): Opening Balance Sheet of Rainbow Limited as at 31st March, 2024

Rainbow Limited records assets and liabilities taken over from both Light Ltd. and Bright Ltd. The method of recording depends on the nature of amalgamation:

- Under Pooling of Interests Method (Merger): Assets and liabilities are recorded at their existing book values; reserves of transferor companies are also brought forward.
- Under Purchase Method (Purchase): Assets and liabilities are recorded at agreed/fair values; any excess of Purchase Consideration over net assets is recorded as Goodwill; deficit is recorded as Capital Reserve.

Opening Balance Sheet of Rainbow Limited as at 31st March, 2024 will appear in the standard Schedule III format under the Companies Act, 2013:

Equity and Liabilities side: Share Capital issued to shareholders of Light Ltd. and Bright Ltd. + Reserves (if Pooling method) or Capital Reserve/Goodwill adjustment (if Purchase method) + Liabilities taken over from both companies.

Assets side: All assets taken over from Light Ltd. and Bright Ltd. at appropriate values + Goodwill (if any under Purchase method).

Final Answer: Once the specific balance sheet data, purchase consideration, and nature of amalgamation are provided, the Realisation Accounts, Equity Shareholders Accounts, and Opening Balance Sheet of Rainbow Limited can be completed by applying the above framework under AS 14 – Accounting for Amalgamations.

Answer: (C)

To calculate Deferred Tax Assets as on 31-03-2024, we must identify all temporary differences and track opening balances with changes in the current year.

Identification of Temporary Differences:

Deductible Temporary Differences (Creating DTA):

1. Preliminary Expenses: Unamortized ₹1,00,000 in tax records means written off for tax purposes under Section 35 of Income Tax Act, 1961, but amortized in accounting books. Creates DTA = ₹1,00,000 × 20% = ₹20,000

2. Employer PF Contribution: Disallowed in 2022-23 (creating DTA) but allowed in 2023-24. The reversal of this temporary difference means the DTA created in 2022-23 is utilized in 2023-24, reducing closing DTA = ₹82,000 × 20% = ₹16,400 reversal

Taxable Temporary Differences (Creating DTL) — Not included in gross DTA:

1. Depreciation: Tax depreciation ₹18,00,000 > Book depreciation ₹12,00,000. Since tax deduction is taken earlier, future taxable income will be higher, creating a DTL (not DTA) of ₹6,00,000 × 20% = ₹1,20,000

2. Interest: Accrued ₹4,50,000 in books but paid after year-end (15-05-2024). Only paid interest is deductible for tax, creating DTL = ₹4,50,000 × 20% = ₹90,000

3. Donation: ₹70,000 creates DTL if disallowed or excess over limits

Calculation of Deferred Tax Assets (Gross):

Opening DTA (as on 31-03-2023) = ₹1,20,000
Add: Preliminary Expenses DTA = ₹20,000
Less: Employer PF Contribution DTA reversal = (₹16,400)
Closing DTA as on 31-03-2024 = ₹1,23,600

The depreciation and interest differences create Deferred Tax Liabilities, which are computed separately and not offset against Deferred Tax Assets when reporting the gross DTA position.

Consolidated Balance Sheet of Super Limited and Clear Limited as on 31st March, 2024 (prepared as per AS 21 – Consolidated Financial Statements)

Note on data: Super Limited's standalone balance sheet as given has a ₹10,000 discrepancy (Assets = ₹1,33,80,000 vs. Liabilities = ₹1,33,90,000). Current Assets of Super are taken as ₹15,40,000 (assumed typo: ₹15,30,000 stated) to enable a balanced consolidated statement.

Key Adjustments:
(1) Goodwill arises because Super paid ₹41,50,000 for 75% of Clear acquired at incorporation when Clear's only equity was share capital of ₹50,00,000. Goodwill = ₹41,50,000 – ₹37,50,000 = ₹4,00,000 (Refer W1).
(2) Non-Controlling Interest (NCI) represents 25% of Clear's total equity at balance sheet date = 25% × ₹62,25,000 = ₹15,56,250 (Refer W2).
(3) Consolidated Reserves include Super's R&S plus Super's 75% share of Clear's post-acquisition reserves (all reserves are post-acquisition since acquired at incorporation), less unrealized profit of ₹30,000 on downstream sale = ₹34,63,750 (Refer W3).
(4) Unrealized Profit: Super sold goods costing ₹2,00,000 at 15% above cost (i.e., ₹2,30,000). Since entire inventory is unsold with Clear, unrealized profit of ₹30,000 is eliminated — reduced from Consolidated Reserves and from Current Assets (Refer W4).
(5) Inter-company Receivable/Payable: 25% of Super's Trade Receivables = ₹2,30,000 (the selling price owed by Clear). Eliminated from both Super's Current Assets and Clear's Current Liabilities (Refer W5).

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CONSOLIDATED BALANCE SHEET AS ON 31ST MARCH, 2024

| Particulars | ₹ |
|---|---|
| EQUITY AND LIABILITIES | |
| 1. Shareholders' Funds | |
| Share Capital (Super Ltd.) | 95,00,000 |
| Reserves and Surplus (W3) | 34,63,750 |
| 2. Non-Controlling Interest (W2) | 15,56,250 |
| 3. Non-Current Liabilities | |
| Long-Term Borrowings (₹5,00,000 + ₹2,00,000) | 7,00,000 |
| 4. Current Liabilities (W6) | 8,30,000 |
| TOTAL | 1,60,50,000 |

| Particulars | ₹ |
|---|---|
| ASSETS | |
| 1. Non-Current Assets | |
| (a) Property, Plant & Equipment (₹77,00,000 + ₹54,00,000) | 1,31,00,000 |
| (b) Goodwill on Consolidation (W1) | 4,00,000 |
| 2. Current Assets (W7) | 25,50,000 |
| TOTAL | 1,60,50,000 |

The consolidated balance sheet totals ₹1,60,50,000 on both sides.

Note to Examiner / Student: The question as submitted does not include the individual line-item figures for either Super Limited or Clear Limited — only the balance sheet totals (₹1,33,90,000 and ₹66,70,000 respectively) are provided. Without the breakup of Share Capital, Reserves & Surplus, Long-Term Borrowings, Short-Term Borrowings, Trade Payables, PPE, Non-Current Investments, Inventories, Trade Receivables, and Cash & Cash Equivalents for each entity, a complete numerical solution cannot be rendered.

Framework for solving this type of question (14 marks — likely Consolidated Balance Sheet or Ratio Analysis):

If the question requires Preparation of Consolidated Balance Sheet (Super Limited holding shares in Clear Limited), the steps under AS 21 — Consolidated Financial Statements are:

Step 1 — Identify the relationship. Determine the percentage of shares held by Super Limited in Clear Limited from the Non-Current Investments note. This establishes the parent-subsidiary relationship.

Step 2 — Calculate Cost of Control / Goodwill / Capital Reserve. Cost of Investment Less: Share in Net Assets of Clear Limited at acquisition date (Share Capital + Pre-acquisition Reserves × % held). If positive → Goodwill; if negative → Capital Reserve.

Step 3 — Calculate Minority Interest (Non-Controlling Interest). = (100% − Holding %) × Net Assets of Clear Limited at Balance Sheet date.

Step 4 — Eliminate Inter-company balances. Cancel any amounts in Trade Receivables of one entity matching Trade Payables of the other. Cancel Investment in subsidiary against subsidiary's share capital.

Step 5 — Add line by line. Combine each line item of both balance sheets, apply eliminations, and present the Consolidated Balance Sheet with Goodwill (or Capital Reserve) and Minority Interest as separate line items.

If the question requires Ratio Analysis, the following ratios would typically be computed and compared for both entities:
- Current Ratio = Current Assets ÷ Current Liabilities
- Debt-Equity Ratio = Long-Term Debt ÷ Shareholders' Funds
- Proprietary Ratio = Shareholders' Funds ÷ Total Assets
- Capital Gearing Ratio = Fixed Interest Bearing Funds ÷ Equity Shareholders' Funds
- Working Capital = Current Assets − Current Liabilities

Please re-submit the question with the complete balance sheet figures and notes to accounts so that the full 14-mark solution with all calculations can be provided.

Answer: (C)

To calculate Deferred Tax Liabilities (DTL) as on 31-03-2024, identify all taxable and deductible temporary differences.

Taxable Temporary Differences (leading to DTL):
1. Depreciation: Tax basis ₹18,00,000 exceeds book basis ₹12,00,000 = ₹6,00,000
2. Unamortized preliminary expenses (tax records): ₹1,00,000
3. Donation (not deductible for corporate tax purposes): ₹70,000
Gross taxable TD = ₹7,70,000

Deductible Temporary Differences (leading to DTA):
1. Interest accrued in books (₹4,50,000) but allowed for tax only on payment (15-05-2024): ₹4,50,000
Gross deductible TD = ₹4,50,000

Reversal Adjustment:
Employer PF contribution disallowed in 2022-23 but allowed in 2023-24: This reverses the previously created deductible TD of ₹82,000, reducing the closing DTA.

Net Calculation:
Net taxable TD for DTL = ₹7,70,000 − ₹4,50,000 = ₹3,20,000

Closing DTL Position:
Opening DTL: ₹2,10,000
New DTL from net taxable TD: ₹3,20,000 × 20% = ₹64,000
Closing DTL = ₹2,10,000 + ₹64,000 = ₹2,74,000 (gross approach)

Alternatively, recognizing only material new DTLs from depreciation and preliminary expenses net of interest: (₹6,00,000 + ₹1,00,000 − ₹4,50,000) × 20% = ₹52,000, yielding DTL of ₹1,52,000.

Part (a): Identification of Related Parties

For AX Limited:
BX Limited is a related party (70% shareholding establishes control). CX Limited is indirectly related through BX, though CX is not a direct subsidiary since BX holds only 30%.

For CX Limited:
BX Limited is a related party (30% shareholding ≥ 20% threshold for significant influence). DX Limited is a related party (40% shareholding indicates control or significant influence). AX Limited is a related party as the ultimate parent of the group through BX.

For EX Limited:
DX Limited is a related party (49% shareholding ≥ 20% threshold for significant influence).

Effect of Investment Divestment with Continued Supply:

Yes, this scenario significantly changes the related party status for EX Limited after 1st October 2023.

Analysis per AS 18: AS 18 defines related parties based on control, significant influence, key management personnel relationships, or group membership. Control is typically established by ownership exceeding 50%, while significant influence is indicated by 20% or more voting power. These are financial/ownership-based relationships that determine related party status.

When DX Limited divests its 49% investment in EX Limited on 1st October 2023, the shareholding relationship—which was the sole basis for the related party status—ceases to exist. The continued supply of goods throughout the year does not establish or maintain a related party relationship. AS 18 does not classify normal commercial relationships (supplier-customer) as related party relationships. A supply arrangement, even if economically important, does not demonstrate the control or significant influence required by AS 18 unless supported by evidence of power to direct financial and operating policies.

Revised Related Party Status for EX Limited:
- 1 April 2023 to 1 October 2023: DX Limited is a related party (49% ownership exists)
- 2 October 2023 to 31 March 2024: DX Limited is NOT a related party (ownership terminated)

Impact on Related Party Disclosures: Although DX ceases to be a related party after the divestment, all related party transactions occurring during the period 1 April 2023 to 1 October 2023 must still be disclosed separately in EX Limited's financial statements. Transactions after the divestment (goods supply from 2 October 2023 onwards) would be treated as ordinary commercial transactions.

No change to related party status for AX Limited or CX Limited, as they had no direct shareholding relationships with EX Limited that would be affected by this transaction.

Profit & Loss Account of Sky and Associates for the year ended 31st March, 2024

REVENUE FROM OPERATIONS
Sales: ₹8,20,000

COST OF GOODS SOLD
Opening Stock: ₹1,15,000
Add: Purchases: ₹6,50,000
Less: Closing Stock: (₹65,000)
Cost of Goods Sold: ₹7,00,000

Gross Profit: ₹1,20,000 (₹8,20,000 – ₹7,00,000)

LESS: OPERATING EXPENSES
Other Expenses: ₹25,000
Amortization of Deferred Expenditure: ₹1,800
Depreciation on Machinery: ₹60,000
Bad Debts (Trade Receivables): ₹5,000
Bank Penalty: ₹2,500
Interest on 8% Loan: ₹1,600
Total Expenses: ₹95,900

Net Profit before Wind-up Adjustments: ₹24,100

ADD: WIND-UP ADJUSTMENTS
Gain on Machinery Realization: ₹40,000
Discount from Creditors: ₹4,000
Total Adjustments: ₹44,000

Net Profit for the year ended 31st March, 2024: ₹68,100

For the buyback of shares, Z Limited must record the sale of investments used to finance the buyback and the retirement of the shares. The necessary journal entries are:

1. Sale of Investments:
Bank A/c Dr. ₹32,00,000
Loss on Sale of Investments Dr. ₹8,00,000
To Investments A/c ₹40,00,000

The company sold investments costing ₹40,00,000 for ₹32,00,000, resulting in a loss of ₹8,00,000.

2. Buyback and Retirement of Equity Shares:

Calculations:
- Shares to be bought back = 4,00,000 × 20% = 80,000 shares
- Cost of buyback = 80,000 shares × ₹15 per share = ₹12,00,000
- Nominal value of shares to be cancelled = 80,000 × ₹10 = ₹8,00,000
- Premium payable = ₹12,00,000 − ₹8,00,000 = ₹4,00,000

Equity Share Capital A/c Dr. ₹8,00,000
Securities Premium A/c Dr. ₹4,00,000
To Bank A/c ₹12,00,000

The entry cancels the nominal value of shares retired (₹8,00,000) and the premium of ₹4,00,000 is covered from the Securities Premium Account, which has an available balance of ₹6,00,000. As per Section 77(3) of the Companies Act 2013, the buyback can be financed from free reserves and the Securities Premium Account.

3. Transfer to Debenture Redemption Reserve (Compliance Requirement):

As per Section 77(8) of the Companies Act 2013, an amount equal to the nominal value of shares bought back must be transferred to Debenture Redemption Reserve. Since no debentures are outstanding, the transfer would be to General Reserve:

Retained Earnings/P&L Account Dr. ₹8,00,000
To General Reserve A/c ₹8,00,000

This ensures statutory compliance with the mandatory reserve requirement for share buybacks.

Journal Entries in the Books of Independent Branch

(i) Commission of ₹7,500 allocated by Head Office — no entry passed in branch books:

Head Office A/c &emsp; Dr. &emsp; ₹7,500
&emsp; To Commission Received A/c &emsp; ₹7,500
*(Being commission income allocated by Head Office to branch, now recorded in branch books)*

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(ii) Head Office paid ₹12,000 directly to branch's supplier — intimation received on bank reconciliation:

Creditors (Supplier) A/c &emsp; Dr. &emsp; ₹12,000
&emsp; To Head Office A/c &emsp; ₹12,000
*(Being payment of ₹12,000 made by HO to branch's supplier on branch's behalf, recorded on receipt of intimation)*

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(iii) Remittance of ₹85,000 sent by branch to HO — not yet received by HO:

No entry is required in the books of the branch. When the remittance was dispatched, the branch would have already passed the entry:
Head Office A/c Dr. / To Cash/Bank A/c. The non-receipt by HO is a timing difference and is a reconciling item in HO's books only. The branch books are already correct.

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(iv) Branch paid ₹9,800 as salary to HO's employee — wrongly debited to Salary A/c:

This is a rectification entry. The amount paid is on behalf of HO and should be debited to HO A/c, not Salary A/c.

Head Office A/c &emsp; Dr. &emsp; ₹9,800
&emsp; To Salary A/c &emsp; ₹9,800
*(Being rectification of wrong debit to Salary A/c; amount paid to HO's employee correctly transferred to Head Office A/c)*

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(v) Branch purchased Furniture ₹18,000 by cheque — Furniture A/c retained in HO books, no entry passed:

Since the Furniture account is maintained in HO books (not in branch books), the branch records the payment as an amount recoverable from / borne by HO:

Head Office A/c &emsp; Dr. &emsp; ₹18,000
&emsp; To Bank A/c &emsp; ₹18,000
*(Being purchase of furniture through cheque; since Furniture A/c is maintained in HO books, HO A/c is debited in branch books)*

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(vi) Branch incurred ₹5,500 expenses on behalf of other branches — not recorded:

Expenses incurred for other branches are ultimately the responsibility of HO (to be recovered from/passed to respective branches). Branch records it as:

Head Office A/c &emsp; Dr. &emsp; ₹5,500
&emsp; To Cash/Bank A/c &emsp; ₹5,500
*(Being expenses of ₹5,500 incurred on behalf of other branches of HO, now recorded in branch books)*

Part (i): Identification of Related Parties

For AX Limited as the reporting entity:
Related parties are: (1) BX Limited – AX holds 70% shares, constituting a subsidiary relationship; (2) CX Limited – BX (subsidiary of AX) holds 30% shares in CX, making CX an associate of AX through its subsidiary. DX Limited and EX Limited are not related parties as AX has no direct or indirect control or significant influence over them.

For CX Limited as the reporting entity:
Related parties are: (1) BX Limited – holds 30% shares in CX, providing significant influence as an associate; (2) DX Limited – holds 40% shares in CX, providing significant influence as an associate; (3) AX Limited – indirect parent entity, as AX controls BX which holds shares in CX. EX Limited is not a related party.

For EX Limited as the reporting entity:
Related party is: DX Limited – holds 49% shares in EX, providing significant influence. AX Limited, BX Limited, and CX Limited have no direct relationship with EX and are not related parties.

Part (ii): Impact of Sale on 1st October 2023

Yes, this scenario changes the answer for EX Limited only.

As per AS 18 (Accounting Standard on Related Party Disclosures), related parties are identified based on the existence of control or significant influence at the balance sheet date. When DX Limited sells its 49% investment on 1st October 2023, it immediately loses significant influence over EX Limited.

Revised Classification for EX Limited: DX Limited would NOT be classified as a related party at 31st March 2024 (the reporting date), as the investment was disposed before year-end. Once the relationship is terminated, the party ceases to be a related party at the balance sheet date.

Treatment of Transactions: Although DX is no longer a related party at year-end, the goods supplied during the period when the relationship existed (1st April to 30th September 2023 – when DX held 49%) must be segregated and separately disclosed as related party transactions for that period, as they occurred while the relationship was active. Goods supplied after 1st October 2023 are ordinary commercial transactions, not related party transactions.

No Change for AX Limited and CX Limited: The sale by DX does not affect their related party relationships, as EX was never a related party of either entity.

This demonstrates that AS 18 applies a substance-based approach where the timing of relationship termination (sale date) determines whether transactions are classified as related party transactions at the reporting date.

Answer: (C)

The reversal of Deferred Tax Assets refers to the reduction in DTA when temporary differences that created DTAs in prior years reverse in the current year.

Key Analysis:

DTA Reversal Item - PF Contribution (₹82,000):
In 2022-23, the employer PF contribution of ₹82,000 was disallowed for tax purposes but recorded as an expense in books. This created a temporary difference where Book Profit > Tax Profit, resulting in a DTA of ₹82,000 × 20% = ₹16,400 in 2022-23.

In 2023-24, the same expense is allowed in tax, reversing the prior year's temporary difference. The DTA created in 2022-23 now reverses in 2023-24.

Other Items - No DTA Reversal:
- Depreciation difference (₹6,00,000): Creates DTL, not DTA reversal
- Interest accrued (₹4,50,000): Creates NEW DTA of ₹90,000, not a reversal
- Preliminary expenses (₹1,00,000): Creates DTL (tax capitalized, books expensed), not DTA
- Donation (₹70,000): Creates DTL (permanent disallowance), not DTA

Therefore, the value of reversal of Deferred Tax Assets as on 31-03-2024 = ₹82,000 × 20% = ₹16,400

Answer: (B)

Under AS 22 (Accounting for Taxes on Income), a permanent difference is an item that creates a difference between book profit and taxable income, but this difference will never reverse in future periods. Deferred tax assets or liabilities are NOT recognized for permanent differences.

Analysis of each option:

(A) Employer PF Contribution: This was disallowed in 2022-23 but allowed in 2023-24. This represents a timing difference (temporary difference) because the disallowance reverses in the subsequent year. Over time, such items reverse completely.

(B) Donation: Donations (particularly to political parties or entities not covered under specific deduction sections like Section 80G) are not deductible for tax purposes under the Income Tax Act, 1961. When a donation is recorded in books but not allowed as a tax deduction, it creates a permanent difference. This difference will never reverse in future periods because donations of this type are categorically excluded from tax deductibility. The amount must be added back to compute taxable income, creating a permanent timing gap.

(C) Unamortized Preliminary Expenses: As per Section 35D of the Income Tax Act, preliminary expenses can be deducted. The difference between tax write-off and book amortization is a temporary difference that will reverse as the preliminary expenses are amortized in the books over future periods.

(D) Depreciation: The difference between book depreciation (₹12,00,000) and tax depreciation (₹18,00,000) is a temporary difference. As the asset is used and eventually fully written off in both books and tax records, this difference will reverse completely.

Donations (Option B) represent a permanent difference because they are categorically not deductible for tax purposes and this restriction applies indefinitely.

Answer: (A)

To calculate profit/loss on a fixed-price contract, we must determine the total estimated cost and compare it with the contract value.

Costs incurred/estimated:
Material used = Material purchased − Unused material = ₹125 Lakhs − ₹22 Lakhs = ₹103 Lakhs

Labour charges = ₹95 Lakhs

Depreciation on machinery = (Original cost ÷ Expected life) × Years used = (₹210 Lakhs ÷ 20 years) × 4 years = ₹42 Lakhs

Costs incurred to date = ₹103 + ₹95 + ₹42 = ₹240 Lakhs

Total estimated cost = Costs incurred + Estimated future costs = ₹240 Lakhs + ₹115 Lakhs = ₹355 Lakhs

Profit/(Loss) calculation:
Contract value = ₹350 Lakhs
Total estimated cost = ₹355 Lakhs

Loss on contract = ₹355 Lakhs − ₹350 Lakhs = ₹5 Lakhs

Note: Payment received (₹50 Lakhs) is a cash flow timing item and does not affect the profit/loss calculation on the contract.

Answer: (C)

Under AS 16 (Borrowing Costs), borrowing costs can be capitalized as part of the cost of a qualifying asset. A qualifying asset is defined as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Key distinction: Ace Limited's investment is in equity shares, which are financial assets. Financial assets are ready for their intended use (holding/investment) immediately upon acquisition and do NOT require a substantial preparation period. Therefore, equity shares are not qualifying assets under AS 16.

The critical error in the directors' reasoning is confusing the qualifying asset status of the investee company's project (Kay Limited's project) with that of Ace Limited's investment. For Ace Limited, the asset in question is the equity share investment itself, not Kay Limited's underlying project. Ace Limited's equity share investment is immediately ready for its intended use and therefore does not meet the definition of a qualifying asset.

Treatment: Since the equity share investment is not a qualifying asset, the ₹2 Lakhs interest on the borrowed funds must be charged to the Profit and Loss Account as an expense in the period incurred, not capitalized as part of the investment cost.

Note: Even though the market value (₹24 Lakhs) is below cost (₹25 Lakhs), the accounting treatment of interest capitalization is determined by AS 16 (not market value considerations), and option (C) correctly identifies that interest should be expensed.

Answer: (A)

To determine Cash Flow from Operating Activities, we must classify each cash item as operating, investing, or financing.

Operating Cash Inflows:
- Cash Sales: ₹15,56,000
- Collection of Trade Receivables: ₹7,40,000
- Income Tax Refund: ₹25,000

Operating Cash Outflows:
- Trade Payable (payment to suppliers): ₹19,60,000
- Office and Selling Expenses: ₹1,20,000
- Trade Commission: ₹40,500
- Underwriting Commission: ₹25,000
- Payment for Overheads: ₹46,000

Non-Operating Classifications:
Rent from investment property (₹64,000) is an investing activity. Interest on long-term borrowings (₹85,600) is a financing activity outflow. Loan receipt (₹5,00,000), share issuance (₹2,50,000), and preference share redemption (₹8,00,000) are financing activities. Sale of investment (₹49,500), brokerage on investment sale (₹9,200), and purchase of goodwill (₹50,000) are investing activities.

Operating cash flow = Total Operating Inflows − Total Operating Outflows = ₹23,21,000 − ₹21,91,500 = ₹1,29,500

Answer: (A) ₹54,300

Cash flows from investing activities include cash receipts and payments for the purchase or sale of investments, fixed assets, and intangible assets, as well as income earned from investment properties. According to AS 3 (Statement of Cash Flows), the following items from the given data constitute investing activities:

Investing Activities - Inflows:
- Rent from Property held as investment: ₹64,000
- Sale of Investment: ₹49,500
Total Inflows: ₹1,13,500

Investing Activities - Outflows:
- Brokerage on Sale of Investment: ₹9,200
- Purchases of Goodwill (intangible asset): ₹50,000
Total Outflows: ₹59,200

Net Cash Flow from Investing Activities = ₹1,13,500 - ₹59,200 = ₹54,300

Other items such as cash sales, trade receivables (operating), loan from bank, share issue (financing), preference share redemption, interest on borrowings, and income tax refund are classified under operating or financing activities, not investing activities.

Answer: (D) ` (1,60,600)

Cash Flow from Financing Activities comprises inflows and outflows directly related to changes in equity and long-term borrowings.

Financing Inflows:
• Loan from Bank: ` 5,00,000
• Issue of Shares: ` 2,50,000

Financing Outflows:
• Redemption of Preference Shares: ` 8,00,000
• Underwriting Commission (cost of share issuance): ` 25,000
• Interest on long-term borrowings: ` 85,600

Net Cash Flow from Financing Activities = (5,00,000 + 2,50,000) − (8,00,000 + 25,000 + 85,600) = ` (1,60,600) (cash outflow)

Note: The question lacks the balance sheets of Super Limited and Clear Limited, making complete preparation of the consolidated balance sheet impossible. The following addresses the consolidation adjustments required:

1. Inter-company Trade Receivable/Payable Elimination

When Super Limited has outstanding receivables from Clear Limited, these represent the same transaction from both entities' perspectives. In consolidation, inter-company receivables and payables must be fully eliminated. If 25% of Super Limited's Trade Receivables is due from Clear Limited, this amount should be eliminated from both the receivable line and the payable line of the consolidated balance sheet, with no net effect on the group's position.

2. Unrealized Profit in Inventory Adjustment

Super Limited sold inventory costing ₹2,00,000 to Clear Limited at 15% markup:
- Selling price: ₹2,00,000 × 1.15 = ₹2,30,000
- Unrealized profit: ₹2,30,000 - ₹2,00,000 = ₹30,000

Since the entire inventory remains unsold at year-end, the inventory is held at cost to the buyer (Clear Limited) of ₹2,30,000. For consolidation purposes, this must be adjusted to group cost of ₹2,00,000. The adjustment is:
- Debit: Retained Earnings/Profit & Loss (to eliminate unrealized profit) - ₹30,000
- Credit: Inventory - ₹30,000

This ensures the consolidated balance sheet reflects inventory at the cost to the group (cost of acquisition from the supplier), not at the inter-company transaction price.

3. Consolidated Balance Sheet Impact

The consolidated balance sheet would reflect:
- Inventory reduced by ₹30,000 (from ₹2,30,000 to ₹2,00,000)
- Consolidated profit reduced by ₹30,000 (unrealized profit)
- Inter-company balances fully eliminated
- Trade receivables reduced by the inter-company amount (25% of Super's receivables)
- Trade payables reduced by the corresponding liability in Clear Limited

Applicable Standard: These adjustments are required under Ind AS 110 (Consolidated Financial Statements), specifically Paragraphs 19-22 regarding elimination of intra-group transactions and balances, and Paragraph B86 regarding the elimination of unrealized profits.

Answer: (C)

Purchase of Goodwill is classified as a cash flow item from Investing Activities under AS 3 (Cash Flow Statements). Goodwill is an intangible asset, and AS 3 explicitly classifies all payments for acquisition of fixed assets (both tangible and intangible) as investing activities. This represents cash outflow for acquiring a long-term asset.

Why other options are incorrect:
(A) Underwriting Commission – Related to the issue of shares, classified as a financing activity.
(B) Trade Commission – Related to trading operations, classified as an operating activity.
(D) Interest on Long Term Borrowings – Classified as an operating activity as per standard practice in India.

Answer: (A)

According to Schedule III of the Companies Act, 2013, borrowings are classified as long-term if due beyond 12 months from the balance sheet date, and short-term if due within 12 months.

The loan of ₹5,00,000 is repaid in 10 half-yearly equal installments of ₹50,000 each (₹5,00,000 ÷ 10). By 31st March 2024, the first installment (December 2023) has been paid, leaving ₹4,50,000 outstanding.

From the balance sheet date of 31st March 2024, the next 12 months extend to 31st March 2025. During this period, two more installments fall due: June 2024 (₹50,000) and December 2024 (₹50,000), totaling ₹1,00,000. The remaining seven installments (₹3,50,000) are due after 12 months from the balance sheet date.

Therefore, ₹3,50,000 must be shown under 'Long-term borrowings' and ₹1,00,000 under 'Short-term borrowings' as per Schedule III classification requirements.