CA Inter Adv Accounting — Question Paper — July 2021

PREPARATION OF FINANCIAL STATEMENTS FOR II LIMITED AS ON 31-3-2021

Note: The trial balance/opening balances for various accounts (Land, Plant & Machinery, Goodwill, Investments, Debtors, Creditors, etc.) have not been provided in the question. The following solution demonstrates the treatment of the adjustments given, but complete Balance Sheet and P&L Statement cannot be prepared without these details.

ISSUED AND PAID-UP EQUITY CAPITAL:
As on 1-4-2020: 7,200 shares fully paid @ ₹100 = ₹7,20,000
Issued 1-10-2020: 2,000 shares @ ₹50 paid
Forfeited on call: 100 shares @ ₹50 (were re-issued at ₹40 fully paid)
Net issued capital:
- 7,200 shares @ ₹100 fully paid = ₹7,20,000
- 1,900 shares @ ₹50 paid = ₹95,000
- 100 shares @ ₹40 fully paid = ₹4,000
Total Issued and Paid-up Equity Capital = ₹8,19,000

This should be shown in Schedule 2 of the Balance Sheet under Equity and Liabilities.

DIVIDEND ON EQUITY SHARES:
Dividend declared by Directors: 5% on equity capital of ₹8,19,000 = ₹40,950
This should be recognized as a liability in the Balance Sheet under Current Liabilities (Dividend payable), and transferred from General Reserve as stated in point (iii). The amount should be shown separately in the Note on Reserves and Surplus.

MACHINERY DISPOSALS (SUSPENSE ACCOUNT):
Cost of machinery sold = ₹1,00,000
Accumulated depreciation = ₹30,000
Book value = ₹70,000
Amount received (in Suspense) = ₹40,000
Loss on disposal = ₹30,000
This loss should be charged to the Statement of Profit and Loss under 'Other Expenses'. The machinery should be removed from the Gross Block and the depreciation removed from Accumulated Depreciation.

LAND REVALUATION:
Land to be revalued at ₹38,00,000. The increase (or decrease if applicable) should be credited (or debited) to Revaluation Reserve in Equity. The land should be shown in the Balance Sheet at the revalued amount of ₹38,00,000. As the previous value is not given, the revaluation adjustment cannot be quantified, but the treatment as per Schedule III requires the revalued amount to be shown in Notes to Accounts.

DEPRECIATION ON PLANT AND MACHINERY:
Depreciation to be provided at 10% on cost as per point (vi). The depreciation should be calculated on the gross block balance (after adjusting for disposals) and charged to the Statement of Profit and Loss under 'Depreciation and Amortization Expense'.

GOODWILL AMORTIZATION:
Goodwill to be amortized at 1/35 per annum as per point (vii). The amortization should reduce the Goodwill in the Balance Sheet and be charged to the Statement of Profit and Loss under 'Depreciation and Amortization Expense'.

FINANCIAL STATEMENT STRUCTURE (AS PER SCHEDULE III):
The Balance Sheet should present:
- Equity and Liabilities (Equity, Reserves and Surplus, Current Liabilities)
- Assets (Non-Current Assets, Current Assets)

The Statement of Profit and Loss should present:
- Revenue from Operations and Other Income
- Cost of Materials Consumed, Employee Expenses, Finance Costs, Depreciation, Other Expenses
- Profit Before Tax and Profit After Tax (Taxation ignored as per instruction)

NOTES TO ACCOUNTS should include:
- Note on Share Capital (showing authorized, issued, subscribed, and paid-up capital)
- Note on Reserves and Surplus (showing opening balance, additions, and closing balance, including revaluation reserve and general reserve post-dividend)
- Notes on Assets and Liabilities as per Schedule III requirements

Step 1: Determine Proper Insurable Cost Price

The item was sold for ₹30,000 with a gross profit of 25% on sales. This establishes the normal cost structure:
- GP amount = 25% × ₹30,000 = ₹7,500
- Proper COGS = ₹30,000 - ₹7,500 = ₹22,500

Although originally purchased for ₹20,000, the ₹22,500 represents the proper insurable value based on normal selling price and established profit margin for this item.

Step 2: Ascertain Loss from Write-off

At valuation on 31st March 2020, a write-off of ₹7,000 was recorded against this item:
- Insurable value (proper cost) = ₹22,500
- Write-off (damage/loss) = ₹7,000
- Current valuation = ₹22,500 - ₹7,000 = ₹15,500
- Loss suffered = ₹22,500 - ₹15,500 = ₹7,000

Step 3: Determine Claim Amount

Insurance claim = Lower of (Loss suffered, Insurance cover)
- Loss = ₹7,000
- Insurance cover = ₹30,000
- Claim = ₹7,000

The claim is limited to the actual loss of ₹7,000, which is well within the insurance cover of ₹30,000.

Hire Purchase — Finding Cash Price and Interest Allocation

Under the Hire Purchase System, interest is charged on the outstanding cash price balance (diminishing balance method). To find the total cash price, we work backwards from the last installment, since after the final payment the balance must become zero.

Working Backwards to Determine Cash Price:

Let the balance outstanding at the beginning of each year be B1, B2, B3, and B4 respectively (i.e., balance after paying the down payment / previous installment).

Since each year's opening balance grows by 12% and the installment is deducted at year-end:
> Opening Balance × 1.12 = Installment Paid

Year 4: B4 × 1.12 = ₹55,000 → B4 = 55,000 ÷ 1.12 = ₹49,107

Year 3: B3 × 1.12 = B4 + ₹87,000 = 49,107 + 87,000 = 1,36,107 → B3 = 1,36,107 ÷ 1.12 = ₹1,21,524

Year 2: B2 × 1.12 = B3 + ₹98,000 = 1,21,524 + 98,000 = 2,19,524 → B2 = 2,19,524 ÷ 1.12 = ₹1,96,004

Year 1: B1 × 1.12 = B2 + ₹1,06,000 = 1,96,004 + 1,06,000 = 3,02,004 → B1 = 3,02,004 ÷ 1.12 = ₹2,69,646

Total Cash Price = Down Payment + B1 = ₹1,40,000 + ₹2,69,646 = ₹4,09,646

Interest Included in Each Installment:

| Year | Opening Balance (₹) | Interest @12% (₹) | Installment (₹) | Principal Repaid (₹) |
|------|--------------------|--------------------|-----------------|----------------------|
| 1 | 2,69,646 | 32,358 | 1,06,000 | 73,642 |
| 2 | 1,96,004 | 23,520 | 98,000 | 74,480 |
| 3 | 1,21,524 | 14,583 | 87,000 | 72,417 |
| 4 | 49,107 | 5,893 | 55,000 | 49,107 |
| Total | | 76,354 | 3,46,000 | 2,69,646 |

Verification: Total payments = ₹1,40,000 + ₹3,46,000 = ₹4,86,000. Total Interest = ₹4,86,000 − ₹4,09,646 = ₹76,354 ✓

Conclusion: Total Cash Price of the machine = ₹4,09,646. Total interest paid over the hire purchase period = ₹76,354, allocated as ₹32,358, ₹23,520, ₹14,583, and ₹5,893 for Years 1 through 4 respectively.

Ltd was incorporated on 10th November 2020, requiring apportionment of 2020-21 expenses between pre-incorporation (proprietorship) and post-incorporation (company) periods. The basis of apportionment for each expense is as follows:

Entirely Pre-incorporation Expenses (Not charged to company P&L):

Preliminary Expenses: These are capitalized as intangible assets under Ind AS 38 and represent costs of incorporation (registration, legal, professional fees). They must not be charged to P&L but capitalized and amortized over 5 years or written off from capital.

Entirely Post-incorporation Expenses (Wholly chargeable to company):

Directors Fees: Directors can only be appointed after incorporation. This is entirely post-incorporation.

Statutory Audit Fees: Audits under Section 143 of the Companies Act, 2013 are mandatory only for incorporated companies. These are entirely post-incorporation.

Expenses to be Apportioned on Time Basis (Number of Days):

Salaries and General Expenses, Rent Expenses, Sale Promotion Expenses, and Advertisement Expenses: These are operating expenses that benefit both periods proportionally. Time basis (number of days) is the most rational and objective method. Calculate the proportion of days in each period from the total period under consideration.

Apportionment on Causative Basis:

Commission to Travelling Agents: This is directly linked to sales volume. Apportion on the basis of sales made during each period (pre and post incorporation), or alternatively, on time basis if sales data is not segregated.

Bad Debts: These relate to credit extended during each period. Apportion on the basis of credit sales ratio during pre and post incorporation periods. Alternatively, time basis may be used if segregation is not possible.

Tax Audit Fees u/s 44 AB of the Income Tax Act, 1961: These depend on whether the proprietorship business and the company separately exceeded the turnover limit of ₹10 crores (currently). If both periods are liable, apportion on the basis of turnover in each period. If only one period is applicable, it is wholly chargeable to that period.

General Principle: Pre-incorporation expenses should not be charged to the company's P&L account. They are either capitalized as preliminary expenses or adjusted against capital. For apportionable expenses, the causative factor (sales, usage, or time) determines the allocation to match revenues and expenses appropriately per the matching principle under Ind AS 8.

Note on Data: The question appears to contain a typographical error — "Materials issued ₹2 Lakhs" with ₹4 Lakhs lying unused is mathematically impossible. This has been read as Materials issued = ₹24 Lakhs (a common variant of this problem), giving materials consumed = ₹24 − ₹4 = ₹20 Lakhs.

Applicable Standard: AS-7 (Construction Contracts) issued by ICAI. Under AS-7, when the outcome of a construction contract can be estimated reliably, contract revenue and costs are recognised by reference to the stage of completion (Percentage of Completion Method).

Step 1 — Costs Incurred to Date (Numerator for % Completion)

Materials consumed (₹24 − ₹4 unused): ₹20 Lakhs. Labour expenses (₹16 Lakhs — unpaid ₹1 Lakh is still a cost incurred, only payment is pending): ₹16 Lakhs. Specific contract costs: ₹5 Lakhs. Sub-contract costs for work *executed* (₹7 Lakhs — advances of ₹4 Lakhs to subcontractors are excluded as they represent prepayments, not work done): ₹7 Lakhs.

Total Costs Incurred to Date = ₹48 Lakhs

Step 2 — Estimated Total Contract Cost

Total Contract Cost = Costs incurred to date + Further costs to complete = ₹48 + ₹35 = ₹83 Lakhs

Step 3 — Percentage of Completion

= (Costs incurred to date ÷ Total estimated costs) × 100 = (48 ÷ 83) × 100 = 57.83%

Step 4 — Contract Revenue to be Recognised

= Contract Price × % of Completion = ₹85 × (48/83) = ₹49.16 Lakhs

Step 5 — Contract Costs to be Recognised

Under AS-7, costs recognised = costs incurred to date that relate to work performed = ₹48 Lakhs

Step 6 — Contract Profit Recognised

= ₹49.16 − ₹48.00 = ₹1.16 Lakhs

*Verification:* Total estimated profit = ₹85 − ₹83 = ₹2 Lakhs. Profit recognised = ₹2 × 48/83 = ₹1.16 Lakhs ✓

Summary: % of Completion = 57.83% | Revenue Recognised = ₹49.16 Lakhs | Costs Recognised = ₹48.00 Lakhs | Profit = ₹1.16 Lakhs.

AS-24 — Discontinuing Operations: Analysis of Rohini Limited

Sub-part (i): Whether gradual phasing out constitutes a 'discontinuing operation' under AS-24

As per AS-24 (Discontinuing Operations), a discontinuing operation is a component of an enterprise that the enterprise, pursuant to a single plan, is: (a) disposing of substantially in its entirety, (b) disposing of piecemeal, or (c) terminating through abandonment — and which represents a separate major line of business or geographical area of operations.

The initial disclosure event under AS-24 requires either: (a) a binding sale agreement for substantially all assets of the discontinuing operation, or (b) the board has approved and announced a detailed, formal plan for the discontinuance specifying assets to be disposed, expected manner and period of disposal, locations and employees affected, and estimated proceeds.

In the case of Rohini Limited, the company merely has a perspective plan to reduce passenger car production by 20% annually over 5 years. No specific plans have been drawn up for the sale of the division or its assets. A gradual reduction in production does not, by itself, constitute a discontinuing operation — it is essentially a scaling-down of operations, not an exit from a business component pursuant to a single formal plan. The initial disclosure event has not been triggered. Therefore, the gradual phasing out does NOT qualify as a discontinuing operation under AS-24.

Sub-part (ii): Whether a resolution to sell some assets and transfer few assets triggers AS-24

If Rohini Limited passes a resolution to sell some assets of the passenger car division and transfer few other assets to the new commercial vehicle factory, this does not trigger AS-24, for the following reasons:

1. The resolution covers only some assets — not substantially all assets of the passenger car division.
2. Transfer of assets to another factory within the same enterprise is an internal redeployment, not a disposal or abandonment.
3. The passenger car division is not being disposed of substantially in its entirety, nor is it being abandoned — it continues to operate (albeit at reduced scale).
4. There is no single formal plan that is sufficiently specific to meet the AS-24 criteria for initial disclosure.

Consequently, AS-24 is not applicable in this scenario. The transaction is more in the nature of asset restructuring rather than discontinuance of a component.

Sub-part (iii): Whether the answer changes if assets are to be sold in a phased but time-bound manner

Yes, the answer would be different in this case. If the company formally resolves to sell the assets of the passenger car division in a phased but time-bound manner, the following conditions under AS-24 are now satisfied:

1. There exists a single plan — the resolution itself constitutes a formal board-approved plan.
2. The disposal is piecemeal (assets sold individually over phases), which is explicitly recognised as a mode of discontinuance under AS-24.
3. The plan is time-bound, implying it is sufficiently specific with an identifiable period for completion — a key requirement for the initial disclosure event.
4. Substantially all assets of the division will eventually be disposed of pursuant to this plan.

Therefore, AS-24 would be triggered from the date of such a resolution. The initial disclosure event (board approval of a detailed formal plan) stands met, and Rohini Limited must make the disclosures required under AS-24 in its financial statements — including the description of the discontinuing operation, the business or geographical segment(s) to which it pertains, the date and nature of the initial disclosure event, and the expected timing of completion.

Step 1 — Total Sales for 2020-21

Previous year sales = ₹6,25,000. Current year sales = 6,25,000 × 120/100 = ₹7,50,000.
Cash Sales (20%) = ₹1,50,000; Credit Sales (80%) = ₹6,00,000.
Credit sales are collected by cheque only (per point 3); cash sales are collected as cash.

Step 2 — Purchases (via Creditors Account)

Opening creditors are assumed nil (not provided). Purchases = Payments + Closing creditors = 3,75,000 + 1,82,500 = ₹5,57,500.

Step 3 — Collections from Debtors

Opening debtors assumed nil. Collections = Credit sales − Closing debtors = 6,00,000 − 1,50,000 = ₹4,50,000 (received by cheque, credited to Bank).

Step 4 — Cash Book Analysis and Amount Stolen

Monthly cash sales = 1,50,000 ÷ 12 = ₹12,500. Monthly cash expenses = Salary ₹2,500 + Office ₹1,500 + Personal ₹625 = ₹4,625. Net surplus deposited each month = ₹7,875.

Since the cashier absconded on 31st March 2021, the March end-of-month deposit was NEVER made. Cash deposited ₹1,00,000 covers only April 2020 to February 2021 (11 months). The opening cash balance was deposited in April along with April's surplus:

₹1,00,000 = (11 × ₹7,875) + Opening cash → Opening cash = ₹1,00,000 − ₹86,625 = ₹13,375

Cash stolen on 31st March 2021 = March net (12,500 − 4,625) = ₹7,875

Step 5 — Bank Account Closing Balance

Opening bank nil + Collections from debtors ₹4,50,000 + Cash deposited ₹1,00,000 − Creditors ₹3,75,000 − Rent ₹20,000 = ₹1,55,000

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

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Opening Stock | — | Sales (Cash ₹1,50,000 + Credit ₹6,00,000) | 7,50,000 |
| Purchases | 5,57,500 | Closing Stock | 3,00,000 |
| Gross Profit c/d | 4,92,500 | | |
| Total | 10,50,000 | Total | 10,50,000 |
| Salaries (12 × ₹2,500) | 30,000 | Gross Profit b/d | 4,92,500 |
| Office Expenses (12 × ₹1,500) | 18,000 | | |
| Rent | 20,000 | | |
| Loss by Theft (Cash stolen) | 7,875 | | |
| Net Profit (to Capital A/c) | 4,16,625 | | |
| Total | 4,92,500 | Total | 4,92,500 |

*Note: Personal expenses ₹7,500 (₹625 × 12) are treated as Drawings — not a business expense.*
*Note: No furniture value was provided in the information; depreciation @ 10% p.a. could not be applied.*

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Balance Sheet as at 31st March, 2021

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital A/c | | Stock | 3,00,000 |
| Opening balance | 13,375 | Sundry Debtors | 1,50,000 |
| Add: Net Profit | 4,16,625 | Bank | 1,55,000 |
| Less: Drawings | (7,500) | Cash | NIL |
| | 4,22,500 | | |
| Creditors for Goods | 1,82,500 | | |
| Total | 6,05,000 | Total | 6,05,000 |

The Balance Sheet balances at ₹6,05,000. The amount stolen by the cashier is ₹7,875, charged as 'Loss by Theft' in the Profit & Loss Account.

Valuation of Closing Inventory as at 31st March, 2021 as per AS 2 (Valuation of Inventories)

Step 1 – Raw Material Cost per kg

Both opening stock (₹44,000 ÷ 2,200 kg = ₹20/kg) and purchases (₹4,00,000 ÷ 20,000 kg = ₹20/kg) are at the same rate, so the weighted average cost = ₹20 per kg.

Step 2 – Raw Materials Consumed

Total RM available = 2,200 + 20,000 = 22,200 kg. Closing RM = 1,800 kg. Therefore RM consumed = 20,400 kg — this confirms actual production of 20,400 units (1 kg per unit of finished goods).

Step 3 – Fixed Overhead Absorption (Normal Capacity Basis)

As per AS 2, fixed production overheads must be absorbed based on normal capacity (not actual production). Fixed overhead absorption rate = ₹3,00,000 ÷ 30,000 units = ₹10 per unit. Fixed overhead absorbed into production = 20,400 × ₹10 = ₹2,04,000. The unabsorbed portion of ₹96,000 (₹3,00,000 – ₹2,04,000) is written off to the Statement of P&L and is not carried to inventory.

Step 4 – Cost of Production per Unit (Finished Goods)

| Element | Amount (₹) |
|---|---|
| Raw Material consumed (20,400 kg × ₹20) | 4,08,000 |
| Direct Labour | 3,06,000 |
| Fixed Overhead (absorbed at normal capacity) | 2,04,000 |
| Total Cost of Production | 9,18,000 |

Cost per unit = ₹9,18,000 ÷ 20,400 = ₹45 per unit

Step 5 – NRV of Finished Goods

Expected selling price = ₹40 per unit. No selling costs are mentioned, so NRV = ₹40 per unit.

Since NRV (₹40) < Cost (₹45), the finished goods must be written down to NRV as per AS 2's lower of cost or NRV principle.

Closing Finished Goods = 2,400 units × ₹40 = ₹96,000

Step 6 – Valuation of Closing Raw Materials

As per AS 2, when the finished goods in which raw materials are incorporated are expected to be sold below cost, the raw materials themselves are written down. In such cases, the replacement cost is the best available measure of NRV for raw materials.

Cost of closing RM = 1,800 kg × ₹20 = ₹36,000
Replacement cost = 1,800 kg × ₹19 = ₹34,200

Since replacement cost (₹34,200) < cost (₹36,000), RM is valued at replacement cost.

Closing Raw Materials = ₹34,200

Summary – Value of Closing Inventory as at 31st March, 2021

| Item | Value (₹) |
|---|---|
| Closing Finished Goods (2,400 units @ ₹40 NRV) | 96,000 |
| Closing Raw Materials (1,800 kg @ ₹19 replacement cost) | 34,200 |
| Total Closing Inventory | 1,30,200 |

Relevant Provisions — Section 68 and Section 69 of the Companies Act, 2013

A company may buy back its own shares subject to the following three conditions being simultaneously satisfied:

Condition 1: The buy-back shall not exceed 25% of the aggregate of paid-up capital and free reserves of the company (by value of consideration).

Condition 2: The number of shares to be bought back shall not exceed 25% of total paid-up equity share capital in that financial year.

Condition 3: After buy-back, the debt-equity ratio shall not exceed 2:1 (i.e., total secured + unsecured debt ≤ 2 × post-buy-back net worth).

Common Data (both situations):
Paid-up Equity Capital = ₹30,00,000 → 3,00,000 shares @ ₹10 each
Free Reserves = General Reserve ₹12,00,000 + Securities Premium ₹6,00,000 + P&L ₹2,10,000 = ₹20,10,000
(Note: Statutory Reserve ₹4,20,000 is excluded — it is not a free reserve as it cannot be freely distributed)
Total Net Worth = ₹30,00,000 + ₹20,10,000 + ₹4,20,000 = ₹54,30,000

Condition 1 — Limit on buy-back amount:
25% of (₹30,00,000 + ₹20,10,000) = 25% of ₹50,10,000 = ₹12,52,500
Shares permissible = ₹12,52,500 ÷ ₹30 = 41,750 shares

Condition 2 — Limit on number of shares:
25% of 3,00,000 = 75,000 shares

Condition 3 — Debt-Equity Ratio:

*Situation 1 (Loan Funds = ₹25,00,000):*
Post buy-back net worth = ₹54,30,000 − ₹12,52,500 = ₹41,77,500
Debt-Equity Ratio = ₹25,00,000 ÷ ₹41,77,500 = 0.60:1 < 2:1 ✓ Condition satisfied.

*Situation 2 (Loan Funds = ₹1,20,00,000):*
Even before any buy-back: Ratio = ₹1,20,00,000 ÷ ₹54,30,000 = 2.21:1 > 2:1 ✗ Condition already violated.
Since the existing ratio already exceeds 2:1, buy-back is NOT permissible in Situation 2.

Maximum Permissible Buy-back:
- Situation 1: Minimum of 41,750 and 75,000 = 41,750 equity shares
- Situation 2: Nil — buy-back is not permissible (debt-equity ratio exceeds 2:1 even without buy-back)

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Journal Entries for Situation 1 — Buy-back of 41,750 Shares at ₹30 each:

Total consideration = 41,750 × ₹30 = ₹12,52,500
Face value cancelled = 41,750 × ₹10 = ₹4,17,500
Premium on buy-back = ₹12,52,500 − ₹4,17,500 = ₹8,35,000

As per Section 52 of the Companies Act, 2013, premium on buy-back is charged first to Securities Premium Account (₹6,00,000), and the balance (₹2,35,000) to General Reserve.

Entry 1 — Buy-back of shares (payment to shareholders):

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| Equity Share Capital A/c Dr. | 4,17,500 | |
| Securities Premium A/c Dr. | 6,00,000 | |
| General Reserve A/c Dr. | 2,35,000 | |
| &nbsp;&nbsp;&nbsp;To Bank A/c | | 12,52,500 |
*(Being 41,750 equity shares of ₹10 each bought back at ₹30 per share)*

Entry 2 — Transfer to Capital Redemption Reserve (Section 69):

| Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|
| General Reserve A/c Dr. | 4,17,500 | |
| &nbsp;&nbsp;&nbsp;To Capital Redemption Reserve A/c | | 4,17,500 |
*(Being Capital Redemption Reserve created equal to face value of shares bought back, as required by Section 69 of the Companies Act, 2013)*

Post Buy-back Capital Structure (Situation 1):
Equity Share Capital: ₹25,82,500 | CRR: ₹4,17,500 | General Reserve: ₹5,47,500 | Securities Premium: Nil | P&L: ₹2,10,000 | Statutory Reserve: ₹4,20,000 | Loan Funds: ₹25,00,000. Debt-Equity = 0.60:1.

Part (i) — Goodwill Adjustment Among Partners

Since goodwill is not to be maintained in CH & Co, the adjustment is effected directly through the Partners' Capital Accounts. Each partner is credited for the goodwill contributed from the old firm (in old PSR) and debited for their share of total goodwill in the new firm (in new PSR 6:3:1).

Total Combined Goodwill = ₹2,80,000 (C & Co) + ₹1,60,000 (H & Co) = ₹4,40,000

Goodwill Adjustment Table:

| Partner | Credited (Old Ratio) | Debited (New Ratio 6:3:1) | Net Adjustment |
|---------|----------------------|---------------------------|----------------|
| P | C & Co (4/5): ₹2,24,000 | 6/10 × ₹4,40,000 = ₹2,64,000 | ₹40,000 Dr |
| Q | C & Co (1/5): ₹56,000 + H & Co (1/3): ₹53,333 = ₹1,09,333 | 3/10 × ₹4,40,000 = ₹1,32,000 | ₹22,667 Dr |
| R | H & Co (2/3): ₹1,06,667 | 1/10 × ₹4,40,000 = ₹44,000 | ₹62,667 Cr |

The net adjustments sum to zero, confirming no external cash movement. P's and Q's Capital Accounts are debited; R's Capital Account is credited. Note: Q is a partner in both firms and hence receives credit from both old firms' goodwill.

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Part (ii) — Balance Sheet of CH & Co as at 31st March, 2021

Revaluation — C & Co (P:Q = 4:1): Building appreciation ₹2,00,000 (Cr), Machinery loss ₹80,000 (Dr), Provision for DD ₹20,000 (Dr) → Net Revaluation Profit = ₹1,00,000 → P: ₹80,000 Cr; Q: ₹20,000 Cr.

Revaluation — H & Co (Q:R = 1:2): Vehicles loss ₹50,000 (Dr), Provision for DD ₹10,000 (Dr) → Net Revaluation Loss = ₹60,000 → Q: ₹20,000 Dr; R: ₹40,000 Dr.

Partners' Adjusted Capital Accounts:

P: ₹6,00,000 + Reserve (4/5 × 2,00,000 = ₹1,60,000) + Revaluation ₹80,000 − Goodwill ₹40,000 = ₹8,00,000

Q (combined from both firms): C & Co portion: ₹4,00,000 + ₹40,000 + ₹20,000 = ₹4,60,000; H & Co portion: ₹3,00,000 + ₹50,000 − ₹20,000 = ₹3,30,000; Combined ₹7,90,000 − Goodwill ₹22,667 = ₹7,67,333

R: ₹2,00,000 + Reserve (2/3 × 1,50,000 = ₹1,00,000) − Revaluation ₹40,000 + Goodwill ₹62,667 = ₹3,22,667

Total Actual Capital = ₹18,90,000

Fixing Capital in PSR — Q as Basis (Q holds 3/10):
Total Capital Pool = ₹7,67,333 × 10/3 = ₹25,57,778
P required: ₹15,34,667 | Q required: ₹7,67,333 | R required: ₹2,55,778

Current Accounts: P's actual (₹8,00,000) < required (₹15,34,667) → ₹7,34,667 Dr (shown on Assets side); R's actual (₹3,22,667) > required (₹2,55,778) → ₹66,889 Cr (shown on Liabilities side).

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Balance Sheet of CH & Co as at 31st March, 2021

| Liabilities | ₹ | Assets | ₹ |
|----------------|-------|-----------|-------|
| Capital — P | 15,34,667 | P's Current A/c (Dr) | 7,34,667 |
| Capital — Q | 7,67,333 | Building | 8,00,000 |
| Capital — R | 2,55,778 | Machinery | 4,00,000 |
| R's Current A/c (Cr) | 66,889 | Vehicles | 3,00,000 |
| Creditors | 7,00,000 | Stock | 2,80,000 |
| | | Debtors | 5,60,000 |
| | | Less: Prov for DD | (30,000) |
| | | Net Debtors | 5,30,000 |
| | | Cash / Bank | 2,80,000 |
| Total | 33,24,667 | Total | 33,24,667 |

Note: Balance sheet figures from both firms are treated as ₹'000s (e.g., 600 = ₹6,00,000), consistent with the revaluation figures provided. The ₹30 rounding on Q's goodwill (arising from H & Co's 1:2 ratio on ₹1,60,000) is absorbed in the nearest-rupee approximation.

NBFC Provision Calculation — Shaktiman Pvt Financiers Limited (Year ended 31st March, 2021)

As per RBI Master Direction — NBFC-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, non-performing assets (NPAs) of NBFCs are classified and provisioned as follows. Since interest is overdue but not recognised in Profit and Loss Account, all the assets listed below are NPAs. Auto rickshaw loans are secured by hypothecation of the vehicle; hence, secured asset provisioning rates apply.

Asset Classification based on Period Overdue:

- Up to 12 months overdue → Sub-standard Asset (NPA for ≤ 12 months): Provision @ 10% of Net Book Value (NBV)
- Up to 24 months overdue → Doubtful-1 Asset (NPA for 12–24 months): Provision @ 20% of NBV (secured)
- 30 months overdue → Doubtful-2 Asset (NPA for 24–48 months): Provision @ 30% of NBV (secured)
- 45 months overdue → Doubtful-2 Asset (NPA for 24–48 months): Provision @ 30% of NBV (secured)
- 60 months overdue → Doubtful-3 Asset (NPA for > 48 months): Provision @ 100% of NBV (secured)

Note: The interest overdue amounts (₹750 Cr, ₹200 Cr, etc.) are not recognised in P&L and hence are already excluded from income. Provision is computed on the Net Book Value of the principal outstanding.

Total Provision required = ₹15,825 Crore.

Under AS-4, events occurring after the balance sheet date (31st March 2021) are classified as either Adjusting Events or Non-Adjusting Events based on whether they provide evidence of conditions that existed at the balance sheet date.

(i) Suit filed on 29th April 2021 for ₹5 lakhs:
Non-Adjusting Event. The suit was filed after the balance sheet date. Although the suit relates to the Company's advertisement, no evidence is provided that the Company was aware of a potential claim or liability at the balance sheet date (31st March 2021). The suit filing on 29th April 2021 represents a new claim that became apparent after the balance sheet date. Under AS-4, this does not provide evidence of a condition that existed at the balance sheet date. Therefore, it should not be adjusted in the financial statements. However, it should be disclosed as a contingent liability in the notes to the financial statements if the obligation is possible (not remote) and material.

(ii) Sale of immovable property - proposal sent March 2021, deed registered 15th April 2021:
Non-Adjusting Event. A proposal to sell is an offer, not a binding agreement. The question indicates the deed was registered only on 15th April 2021, suggesting the sale agreement was not finalized by the balance sheet date. The substantive event (completion of the sale agreement) occurred after the balance sheet date. Therefore, under AS-4, this is a Non-Adjusting Event. The property should remain in the balance sheet at its book value of ₹30 lakhs. The gain of ₹15 lakhs (₹45 lakhs - ₹30 lakhs) should not be recognized. Alternatively, if evidence shows the sale agreement was accepted and finalized by 31st March 2021 with the deed being a mere formality, it could be treated as Adjusting.

(iii) Acquisition of business - terms decided by March 2021, financial resources arranged in April 2021:
Adjusting Event. The terms and conditions for the acquisition were finalized and decided by the end of March 2021. This indicates a binding agreement existed at the balance sheet date. The arrangement of financial resources in April 2021 is merely the execution or implementation of the decision, not a condition precedent to the agreement itself. Under AS-4, the finalized agreement constitutes evidence of a commitment/liability that existed at the balance sheet date. Therefore, it is an Adjusting Event. The acquisition should be recognized in the balance sheet with appropriate adjustments, and a provision for ₹50 lakhs should be recorded. (Note: If the agreement was explicitly contingent upon arranging resources, it would be Non-Adjusting.)

(iv) Theft of cash ₹4 lakhs - occurred March 2021, detected after approval of financial statements:
Adjusting Event. The theft occurred in March 2021, before the balance sheet date (31st March 2021). Although it was detected after the financial statements were approved, the event (the loss/theft) itself occurred before the balance sheet date. Under AS-4, adjusting events are those that provide evidence of conditions existing at the balance sheet date. The theft, having occurred on a date before 31st March, is evidence of a loss that existed at that date. The timing of detection does not affect the classification. Therefore, the loss of ₹4 lakhs should be adjusted in the financial statements by recording an expense and reducing the cash balance accordingly.

Sub-part (c): AS-12 Treatment of Government Loans/Grants in the Books of Gamma Limited (referred to as Alpa Limited in the sub-part — treated as the same entity for this answer)

Governing Standard: AS-12 "Accounting for Government Grants" issued by ICAI governs the recognition, measurement, and disclosure of government grants. Under AS-12, "government grants" are defined as assistance by government in the form of cash or its equivalents in return for past or future compliance with certain conditions relating to the operating activities of the enterprise.

Key Distinction — Loan vs. Grant:
A government loan that is repayable with market-rate interest is treated as a liability (borrowing), not a government grant, and is outside the scope of AS-12. However, a forgivable loan — one where the lender (government) undertakes to waive repayment under prescribed conditions — is treated as a government grant when there is reasonable assurance that the enterprise will meet the terms for forgiveness.

(a) Loan received from the Central Government on privatisation of Effusion Transport Plan:
This loan is received in the context of privatisation and has a promotional/developmental character. If the loan is at a nil or concessional rate of interest or carries a forgivable clause on compliance with privatisation conditions, it partakes the nature of a government grant. Treatment under AS-12:
- If it is a forgivable loan → Recognise as a government grant (deferred income) when there is reasonable assurance the conditions will be fulfilled. Credit to a Deferred Government Grant Account and transfer to the Profit & Loss Account on a systematic basis over the period the enterprise recognises costs the grant is intended to compensate.
- If it is related to a specific fixed asset acquired under the privatisation plan → Either (i) present the grant as a deduction from the gross value of the asset and depreciate the net amount, or (ii) treat the grant as a Deferred Income and credit it to the P&L over the useful life of the asset proportionate to depreciation. Both treatments are permitted under AS-12.
- If it is a genuine repayable loan at market interest → It is not a government grant and must be disclosed as a long-term borrowing under Schedule III of the Companies Act, 2013.

(b) Loan received from State Government for providing Medical Facilities during the pandemic:
This loan is received for a specific revenue purpose (meeting pandemic-related medical expenses). Its treatment:
- If it is a forgivable loan (i.e., the State Government waives repayment on the enterprise establishing that the funds were used for medical facilities) → Treat as a revenue grant under AS-12. Recognise in the Profit & Loss Account in the period in which the related expenditure is incurred, as income or as a deduction from the related expense.
- AS-12 requires that a government grant shall not be credited directly to shareholders' funds. Revenue grants must be reflected in P&L.
- If repayable → Classify as a short-term/long-term borrowing (not a grant).

Disclosure: AS-12 requires disclosure of (i) nature and extent of grants recognised, (ii) accounting policy adopted, and (iii) unfulfilled conditions and contingencies attached to recognised grants.

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Sub-part (d): Cash Flow Statement of Gamma Limited for the year ended 31st March, 2021 — AS-3 (Revised)

Note: The cash account summary referred to in the question has not been provided as part of the information given here. Therefore, the actual numerical cash flow statement cannot be prepared. The following framework explains how the transactions mentioned would be classified under AS-3 (Revised).

Classification of Government Loans/Grants in Cash Flow Statement:

Under AS-3 (Revised), cash flows are classified into three activities:

1. Financing Activities: Receipt of a government loan (repayable borrowing) is classified as an inflow under Financing Activities — since it represents a cash inflow from borrowings. Repayment of such loans is an outflow under Financing Activities.

2. Investing Activities: If a government grant is received specifically as compensation for the cost of a fixed asset (capital grant), the cash receipt is classified as an inflow under Investing Activities.

3. Operating Activities: If a government grant is received for current/revenue expenditure (e.g., the pandemic medical facility grant), the cash receipt is an inflow under Operating Activities under the direct method, or adjusted in the indirect method reconciliation.

Format Outline (Indirect Method) for reference:

Cash Flow from Operating Activities: Start with Net Profit before tax; add back non-cash items; adjust working capital changes; deduct taxes paid.

Cash Flow from Investing Activities: Include purchase/sale of fixed assets, capital grants received.

Cash Flow from Financing Activities: Include proceeds from government loans, repayment of loans, dividends paid.

Note to students: To prepare the actual cash flow statement, the cash account summary (opening balance, all receipts, all payments, closing balance with ledger details) must be provided. The numerical preparation should follow AS-3 (Revised) format with reconciliation of cash and cash equivalents at end of the year.

Treatment under AS 18 - Related Party Disclosures:

Scenario 1: Mr. Happy's Transaction

Mr. Happy is NOT a related party under AS 18. This is because:

(a) No Voting Power: Mr. Happy does not own any voting interest in the company, eliminating him as a controlling party.

(b) No Significant Influence: Under AS 18, significant influence requires the power to participate in financial and operating policy decisions. Here, the contract explicitly states that the Board of Directors alone takes all financial and operating policy decisions, while Mr. Happy handles only day-to-day management. Day-to-day operational management, without authority over policy decisions, does not constitute significant influence.

(c) Not Key Management Personnel: Mr. Happy's role is limited to operational/management tasks, not strategic planning or controlling direction at the entity level.

Conclusion: The fixed annual amount payable to Mr. Happy is a regular operating transaction and does not require disclosure as a related party transaction under AS 18. However, if material, it should be disclosed as a significant operating expense in the normal course.

Scenario 2: Shri Bhanu's Remuneration

Shri Bhanu IS a related party under AS 18 because he is a relative of key management personnel. AS 18 specifically includes close family members of KMP as related parties.

(a) Related Party Identification: Even though Shri Bhanu left the service on 1st July 2020 (before year-end), his remuneration of ₹1,50,000 for the period 1st April 2020 to 30th June 2020 constitutes a related party transaction that occurred during the reporting period.

(b) Disclosure Required: This transaction must be disclosed in the notes to the financial statements as of 31st March 2021 under related party transactions, specifically under "Compensation of related parties" or "Transactions with relatives of KMP."

(c) Nature of Disclosure: The disclosure should clearly state:
- Nature of relationship (relative of KMP)
- Description of transaction (remuneration/salary)
- Amount: ₹1,50,000
- Period of employment: 1st April 2020 to 30th June 2020
- Status: Separated from service on 1st July 2020

Key Principle: AS 18 requires disclosure of transactions that occurred during the reporting period with parties who were related during that period, regardless of their status at the balance sheet date.

Departmental Trading and Profit & Loss Account of M/s K. Creations for the year ended 31st March, 2021

Key Accounting Treatment: The Dyed Fabric Department transfers fabric to the Readymade Garments Department at its usual selling price (₹3,00,000). This transfer is shown as credit (By Transfer) in Dyed Fabric's Trading Account and debit (To Transfer from Dyed Fabric) in Readymade's Trading Account. Since no information on the proportion of transferred goods remaining in closing stock is given, no unrealised profit adjustment is made.

Plant & Equipment (WDV) figures are given as balance sheet items; since no depreciation rate is specified, depreciation is not charged in P&L.

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DEPARTMENTAL TRADING ACCOUNT for the year ended 31st March, 2021

| Particulars | Dyed Fabric (₹) | Readymade (₹) | Total (₹) | Particulars | Dyed Fabric (₹) | Readymade (₹) | Total (₹) |
|---|---:|---:|---:|---|---:|---:|---:|
| To Opening Stock | 2,40,000 | 1,20,000 | 3,60,000 | By Sales | 31,06,000 | 3,12,50,000 | 3,43,56,000 |
| To Purchases | 20,12,000 | 1,50,00,000 | 1,70,12,000 | By Transfer to Readymade Dept. | 3,00,000 | — | 3,00,000 |
| To Transfer from Dyed Fabric Dept. | — | 3,00,000 | 3,00,000 | By Closing Stock | 6,00,000 | 22,50,000 | 28,50,000 |
| To Direct Expenses | 1,00,000 | 19,50,000 | 20,50,000 | | | | |
| To Gross Profit c/d | 16,54,000 | 1,61,30,000 | 1,77,84,000 | | | | |
| Total | 40,06,000 | 3,35,00,000 | 3,75,06,000 | Total | 40,06,000 | 3,35,00,000 | 3,75,06,000 |

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DEPARTMENTAL PROFIT & LOSS ACCOUNT for the year ended 31st March, 2021

| Particulars | Dyed Fabric (₹) | Readymade (₹) | Total (₹) | Particulars | Dyed Fabric (₹) | Readymade (₹) | Total (₹) |
|---|---:|---:|---:|---|---:|---:|---:|
| To Carriage Outward | 3,00,000 | 67,30,000 | 70,30,000 | By Gross Profit b/d | 16,54,000 | 1,61,30,000 | 1,77,84,000 |
| To Rent & Warehousing | 4,50,000 | 12,00,000 | 16,50,000 | | | | |
| To Net Profit | 9,04,000 | 82,00,000 | 91,04,000 | | | | |
| Total | 16,54,000 | 1,61,30,000 | 1,77,84,000 | Total | 16,54,000 | 1,61,30,000 | 1,77,84,000 |

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Summary of Results:
- Gross Profit — Dyed Fabric: ₹16,54,000
- Gross Profit — Readymade Garments: ₹1,61,30,000
- Net Profit — Dyed Fabric: ₹9,04,000
- Net Profit — Readymade Garments: ₹82,00,000
- Total Net Profit of the Firm: ₹91,04,000

Meaning of Equity Shares with Differential Rights

Under Section 43 of the Companies Act, 2013, the share capital of a company can be of two kinds: preference share capital and equity share capital. Within equity share capital, a company may issue equity shares with differential rights as to dividend, voting or otherwise. Such shares are commonly known as DVR shares (Differential Voting Rights shares).

Equity shares with differential rights are shares that carry different rights compared to ordinary equity shares — these differences may relate to:
- Dividend rights (e.g., higher dividend but lower voting power)
- Voting rights (e.g., one vote per ten shares, or multiple votes per share)
- Any other rights as may be specified

Conditions for Issue of Equity Shares with Differential Rights

As per Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, a company may issue equity shares with differential rights subject to the following conditions:

1. The Articles of Association of the company must authorize the issue of such shares.
2. The issue must be authorized by an ordinary resolution passed at a general meeting of shareholders (a special resolution is required if the Articles so provide).
3. The shares with differential rights shall not exceed 26% of the total post-issue paid-up equity share capital, including equity shares with differential rights issued at any point of time.
4. The company must have a consistent track record of distributable profits for the last three years.
5. The company must not have defaulted in filing financial statements and annual returns for the immediately preceding three financial years.
6. There must be no subsisting default in: payment of declared dividend, repayment of matured deposits, redemption of preference shares or debentures due for redemption, or payment of interest on such deposits or debentures.
7. The company must not have been penalised by a Court or Tribunal during the last three years for any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999, or any other special Act.

Whether Equity Shares Can Be Issued with Differential Voting Rights

Yes, equity shares can be issued with differential voting rights. Section 43(a)(ii) of the Companies Act, 2013 expressly permits issue of equity shares with differential rights as to voting. Therefore, a company may issue equity shares carrying:
- Superior voting rights (e.g., 10 votes per share) — often retained by promoters to maintain control, or
- Inferior voting rights (e.g., 1 vote per 10 shares) — often offered with higher dividends to attract investors.

However, the cap of 26% of total post-issue paid-up equity share capital applies to shares with differential voting rights as well.

Additionally, a company must disclose in its Board Report the following particulars: total number of shares allotted with differential rights, details of the differential rights, percentage of such shares to total post-issue equity, the diluted EPS pursuant to the issue, and a statement by the Board that the issue is in compliance with the prescribed conditions.

In conclusion, equity shares with differential rights — including differential voting rights — are a valid and recognized form of share capital under the Companies Act, 2013, subject to strict regulatory conditions to protect the interests of ordinary shareholders.

Legal Basis: Under Section 47(2) of the Companies Act, 2013, preference shareholders are entitled to vote on every resolution placed before the company on the question of winding up (here referred to as 'doubling up' of the company). Their voting rights are in proportion to their paid-up preference share capital relative to the total paid-up capital of the company.

Step 1 – Total Paid-Up Capital
Total Paid-Up Capital = ₹100 Lakhs (Equity) + ₹50 Lakhs (Preference) = ₹150 Lakhs

Step 2 – Individual Share Amounts

*Equity Shareholders (ratio 30:30:30:10 → total 100 parts):*
- A = 30/100 × ₹100 L = ₹30 Lakhs
- B = 30/100 × ₹100 L = ₹30 Lakhs
- C = 30/100 × ₹100 L = ₹30 Lakhs
- D = 10/100 × ₹100 L = ₹10 Lakhs

*Preference Shareholders (ratio 40:20:10:10 → total 80 parts):*
- M = 40/80 × ₹50 L = ₹25 Lakhs
- N = 20/80 × ₹50 L = ₹12.50 Lakhs
- O = 10/80 × ₹50 L = ₹6.25 Lakhs
- P = 10/80 × ₹50 L = ₹6.25 Lakhs

Step 3 – Voting Rights as % of Total Capital (₹150 Lakhs)

| Shareholder | Paid-Up Capital (₹ L) | Voting Rights (%) |
|---|---|---|
| A | 30.00 | 20.00% |
| B | 30.00 | 20.00% |
| C | 30.00 | 20.00% |
| D | 10.00 | 6.67% |
| Total Equity | 100.00 | 66.67% |
| M | 25.00 | 16.67% |
| N | 12.50 | 8.33% |
| O | 6.25 | 4.17% |
| P | 6.25 | 4.17% |
| Total Preference | 50.00 | 33.33% |
| Grand Total | 150.00 | 100.00% |

Conclusion: On the winding-up resolution, equity shareholders collectively hold 66.67% and preference shareholders collectively hold 33.33% of total voting rights, with individual rights as computed above.

Type of Branch Accounting System: The Noida branch of Mahabir (Mohali) maintains its own full set of books of account. Goods are supplied from Head Office at cost price, and the cost is recorded in the Head Office (H.O.) books. This is characteristic of a Dependent Branch with Full Books (also called the Memo System or Wholesale Branch system), where the branch records all transactions independently but the H.O. maintains a Branch Current Account to track its net investment and dealings with the branch.

Analysis of the Branch Balance Sheet (31st March 2020):

On the Liabilities side, the H.O. Account (₹1,88,000 Cr.) represents the net amount owed by the branch to the Head Office — this is the balancing/current account between the two entities. The Creditors (₹62,000) represent amounts owed by the branch to external trade creditors for purchases made locally.

On the Assets side, Debtors (₹2,54,000) represent amounts receivable from customers for credit sales. Cash at Bank (₹26,000) is liquid funds held by the branch. The Building Extension A/c has been closed by transfer to H.O. Account — this means capital expenditure incurred by the branch on building extension has been transferred to the Head Office, and the H.O. will capitalise it in its own books. The entry passed in branch books for this transfer is: Dr. H.O. A/c / Cr. Building Extension A/c (reducing the H.O. Cr. balance in branch books). The implied amount of Building Extension = ₹30,000 (derived as the balancing figure, since Debtors + Cash = ₹2,80,000 while Creditors + H.O. = ₹2,50,000; the difference of ₹30,000 represents the Building Extension that was transferred to H.O. prior to the balance sheet date, effectively reducing H.O. A/c from ₹2,18,000 to ₹1,88,000).

Journal Entries in Head Office Books (Mohali):

To record the branch balance sheet items in H.O. books at year-end, the following entries are passed:

(1) To record Branch Debtors and Cash:
Dr. Branch Debtors A/c ₹2,54,000
Dr. Branch Cash at Bank A/c ₹26,000
Cr. Branch Current A/c ₹2,80,000
(Being branch assets incorporated in H.O. books)

(2) To record Branch Creditors:
Dr. Branch Current A/c ₹62,000
Cr. Branch Creditors A/c ₹62,000
(Being branch liability incorporated in H.O. books)

(3) To record Building Extension capitalised by H.O.:
Dr. Building Extension A/c ₹30,000
Cr. Branch Current A/c ₹30,000
(Being building extension transferred from branch books to H.O. books and capitalised)

Branch Current Account in H.O. Books:

The Branch Current Account in H.O. books is the mirror image of the H.O. Account in branch books. If H.O. A/c in branch books = ₹1,88,000 Cr., then Branch A/c in H.O. books = ₹1,88,000 Dr. Additionally, the Building Extension ₹30,000 is now capitalised in H.O. books via the Branch Current A/c (as a credit to Branch A/c = receipt of asset from branch).

Net Branch Current Account (H.O. Books):
Dr. side: Goods sent to Branch + Cash/expenses paid for branch + Building Extension
Cr. side: Cash remitted by branch + Returns from branch
Closing Dr. balance = ₹1,88,000 (representing net H.O. investment/amount due from branch)

Key Principle: In this system, the H.O. Account in branch books and the Branch Account in H.O. books must be reconciled and should show equal and opposite balances. Any difference at year-end arises due to goods-in-transit or cash-in-transit, which must be identified and adjusted before finalisation of accounts.

Final Answer: The branch balance sheet reflects a position where the branch owes ₹1,88,000 to H.O. (net), has Debtors of ₹2,54,000 and Cash of ₹26,000 as assets, and Creditors of ₹62,000 as external liability. The Building Extension of ₹30,000 has been transferred to H.O. books for capitalisation. In H.O. books, the Branch Current Account shows a net debit balance of ₹1,88,000, representing the H.O.'s net stake in the branch.

Note: The question as presented appears to be incomplete — it provides the opening Balance Sheet as on 31st March, 2020 but does not include the subsequent year's transactions or a specific task (e.g., prepare Trading and Profit & Loss Account and Balance Sheet for 2020-21). The answer below presents the given Balance Sheet in proper format and highlights the arithmetic discrepancy noted in the data.

Balance Sheet of Mr. Arun (Readymade Garments)
As on 31st March, 2020

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital A/c | 5,05,000 | Furniture | 50,000 |
| Creditors | 1,02,500 | Closing Stock | 3,50,000 |
| | | Debtors | 1,25,000 |
| | | Cash in Hand | 55,000 |
| | | Cash at Bank | 27,500 |
| Total | 6,07,500 | Total | 6,07,500 |

Arithmetic Verification: The stated total is ₹6,07,500. Adding the individual asset figures as originally given (Furniture ₹50,000 + Stock ₹3,50,000 + Debtors ₹1,25,000 + Cash in Hand ₹55,000 + Cash at Bank ₹47,500) yields ₹6,27,500, which does not tally. For the Balance Sheet to balance at ₹6,07,500, Cash at Bank must be ₹27,500 (not ₹47,500 as stated). This appears to be a typographical error in the question. The corrected figure of ₹27,500 has been used above.

Key observations about Mr. Arun's financial position:

(i) Working Capital: Current Assets (Stock + Debtors + Cash in Hand + Cash at Bank) = ₹3,50,000 + ₹1,25,000 + ₹55,000 + ₹27,500 = ₹5,57,500. Current Liabilities (Creditors) = ₹1,02,500. Net Working Capital = ₹4,55,000, indicating a healthy liquidity position.

(ii) Capital Structure: The business is entirely proprietor-funded (sole proprietorship). No external borrowings are recorded. Capital of ₹5,05,000 represents the proprietor's net worth.

(iii) Stock dominance: Closing Stock of ₹3,50,000 constitutes approximately 62.9% of total assets, which is typical for a readymade garments trading business where inventory is the primary working asset.

(iv) Solvency: Total Assets (₹6,07,500) comfortably exceed Total Outside Liabilities (₹1,02,500), confirming the business is fully solvent.

If the question intends preparation of Final Accounts for 2020-21, the Closing Stock as on 31st March, 2020 (₹3,50,000) would become the Opening Stock for FY 2020-21, and the transactions for the year would need to be incorporated to prepare the Trading Account, Profit & Loss Account, and Balance Sheet as on 31st March, 2021. Since those transactions are not provided in the question, a complete final accounts solution cannot be demonstrated.

Final Answer: Balance Sheet as on 31st March, 2020 balances at ₹6,07,500 (with Cash at Bank corrected to ₹27,500). Net Working Capital = ₹4,55,000. Net Worth (Capital) = ₹5,05,000.

(a) Deferred Tax Assets and Liabilities – Deep Limited (AS 22)

As per AS 22 – Accounting for Taxes on Income, deferred tax is recognised on timing differences between taxable income and accounting income. The impact of each item is analysed below:

Opening balances (31.3.2020): DTL (Cr.) ₹28 L; DTA (Dr.) ₹14 L

Item (i) – Depreciation: Book depreciation (₹70 L) > Tax depreciation (₹42 L) → Taxable income > Accounting income by ₹28 L → More tax paid currently → Timing difference creates DTA. DTA ↑ by ₹28 L × 40% = ₹11.20 L

Item (ii) – Previously disallowed expenses now allowed (₹14 L): In 2019-20, these were charged in books but disallowed for tax, creating DTA. In 2020-21, the timing difference reverses → DTA ↓ by ₹14 L × 40% = ₹5.60 L

Item (iii) – Section 35D of the Income Tax Act, 1961 (Share issue expenses): ₹70 L was fully expensed in books in 2019-20, but Section 35D permits only 1/5th = ₹14 L per year for tax. In 2019-20, DTA was created on the unallowed balance. In 2020-21, ₹14 L is allowed for tax but no book expense → reversal → DTA ↓ by ₹14 L × 40% = ₹5.60 L

Item (iv) – Repairs of Plant & Machinery (₹140 L): Books spread the cost equally: ₹70 L in 2020-21 and ₹70 L in 2021-22. Tax allows the full ₹140 L in 2020-21. Timing difference = ₹140 L − ₹70 L = ₹70 L. Taxable income < Accounting income → Less tax paid now; more will be paid in 2021-22 → DTL ↑ by ₹70 L × 40% = ₹28 L

Position as on 31st March 2021:

| | DTA (₹ L) | DTL (₹ L) |
|---|---|---|
| Opening (31.3.2020) | 14.00 | 28.00 |
| Add: Created – Item (i) | 11.20 | – |
| Add: Created – Item (iv) | – | 28.00 |
| Less: Reversed – Item (ii) | (5.60) | – |
| Less: Reversed – Item (iii) | (5.60) | – |
| Closing (31.3.2021) | 14.00 | 56.00 |

Net DTL as on 31.3.2021 = ₹56 L − ₹14 L = ₹42 L (Cr.)

The DTA of ₹14 L and DTL of ₹56 L are shown separately on the Balance Sheet.

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(b) Distribution of Surplus in Liquidation – Earth Limited

The surplus of ₹32,00,000 available after discharging all liabilities is to be distributed among equity shareholders. Since all three categories are equity shareholders (no stated priority among them), the surplus is distributed in proportion to their nominal (face) value of shares, as equity shares represent a fractional ownership of the nominal capital.

Total nominal capital = ₹2,00,00,000. Since surplus (₹32,00,000) < total paid-up capital (₹1,26,40,000), shareholders receive back only a fraction of their paid-up amount.

Distribution rate = ₹32,00,000 ÷ ₹2,00,00,000 = ₹0.16 per ₹1 of nominal value (i.e., 16% of face value)

| Category | Nominal Capital (₹) | Distribution (₹) | Per Share (₹) |
|---|---|---|---|
| 32,000 shares × ₹100 face | 32,00,000 | 5,12,000 | ₹16.00 |
| 48,000 shares × ₹100 face | 48,00,000 | 7,68,000 | ₹16.00 |
| 12,00,000 shares × ₹10 face | 1,20,00,000 | 19,20,000 | ₹1.60 |
| Total | 2,00,00,000 | 32,00,000 | |

Note: Each shareholder sustains a capital loss (receives less than paid-up amount) as surplus is insufficient to repay full paid-up capital.

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(c) Provision for Returns and Revenue Recognition – A Limited

As per AS 9 – Revenue Recognition, when goods are sold with a right of return and future returns can be estimated reliably, revenue is recognised net of expected returns. A provision is made for returns expected to arise from recent sales.

Analysis as on 31st March (end of financial year):

January sales (₹36 L) – 2 months old:
Returns in 0–1 month (February) and 1–2 months (March) have already occurred. Only 2–3 month returns are still pending (due in April). Provision = 8% × ₹36 L = ₹2.88 L

February sales (₹48 L) – 1 month old:
Returns in 0–1 month (March) have occurred. Pending: 1–2 month + 2–3 month = (7% + 8%) = 15%. Provision = 15% × ₹48 L = ₹7.20 L

March sales (₹60 L) – just made:
No returns have yet occurred. All returns pending: 6% + 7% + 8% = 21%. Provision = 21% × ₹60 L = ₹12.60 L

Total Provision for Returns = ₹2.88 + ₹7.20 + ₹12.60 = ₹22.68 Lakhs

Sales prior to January are more than 3 months old; their return cycle is complete and those revenues are fully recognized.

Revenue to be Recognised = Total Sales − Provision = ₹400 L − ₹22.68 L = ₹377.32 Lakhs

Additionally, a corresponding asset for the right to recover returned goods = ₹22.68 L × (₹320 L ÷ ₹400 L) = ₹18.144 Lakhs (at cost of sales ratio of 80%) is recognised on the balance sheet.

Note: The question lacks critical data (opening balance, cost of investments, quantity of shares) needed to prepare complete accounts. The following explains the treatment and format required under AS 13 for reclassification:

AS 13 – Accounting for Investments: Key Principles

Current vs Long-term Classification: Current investments are valued at lower of cost or market value at each reporting date. Long-term investments are valued at cost, unless there is a permanent diminution in value. On reclassification from current to long-term, the transfer must occur at the lower of cost or market value at the date of reclassification (15th May 2021 in this case).

Part (i) – Investment Account (Current Investment)

The Investment Account under average cost method would show:
- Opening balance (at cost or lower of cost/market value as on 31st March 2021)
- Add: Purchases during 2020-21 (at cost)
- Less: Sales during 2020-21 (using average cost)
- Less: Reclassification to long-term on 15th May 2021 (at lower of cost or ₹130 market value)
- Closing balance: NIL (assuming full reclassification)

Average cost per share = Total cost of investments / Total units held

Once calculated, the reclassification entry:
Dr. Long-term Investment Account (at lower of cost or ₹130)
Cr. Current Investment Account

Part (ii) – Profit & Loss Account Treatment for 2020-21

The P&L Account should recognize:

1. Unrealized Gain/Loss on Current Investments (until 15th May 2021): Any revaluation to market value should be shown in P&L as a separate line item: "Gain/(Loss) on Revaluation of Current Investments."

2. Gain/Loss on Reclassification: When reclassifying to long-term at ₹130 (or lower of cost), if market value (₹130) exceeds the average cost per share, the difference is a realized gain (shown in P&L). If cost exceeds market value, show as a loss.

Format:
- Gain/(Loss) on Revaluation of Current Investments: [Amount]
- Gain/(Loss) on Reclassification to Long-term Investments: [Amount]

Part (iii) – Valuation Under AS 13 for Reclassification

Per AS 13, the investment in equity shares should be reclassified at ₹130 per share (market value on 15th May 2021) if this is lower than the average cost per share. If average cost is lower than ₹130, reclassify at cost.

Valuation Rule: Reclassify at Lower of:
- Cost (using average cost method)
- Market value on 15th May 2021 (₹130 per share)

Post-reclassification, the long-term investment account will be maintained at this revalued amount. As a long-term investment, subsequent revaluations are NOT taken to P&L (only if permanent diminution occurs).

Summary: The reclassification gain/loss (the difference between cost and ₹130) is recognized in P&L in 2020-21. Thereafter, the equity shares are held as long-term investments at the reclassified value, with no further revaluation adjustments unless there is a permanent diminution.

Trial Balance Analysis and Financial Statements Preparation

ISSUES IDENTIFIED IN THE TRIAL BALANCE:

1. Duplicate Equity Capital Entries: The TB contains two different equity capital figures—'Equity Capital (Shares of ₹100 each): ₹8,05,000' and '9,000 equity shares of ₹100 each: ₹9,00,000'. The second figure is mathematically correct (9,000 × ₹100 = ₹9,00,000) and should be the authorized issued capital. The first entry (₹8,05,000) appears to be erroneous and should be removed or investigated.

2. Missing Closing Inventory: The TB shows opening inventory (31-03-2020) of ₹3,50,000 but does not provide closing inventory (31-03-2021), which is essential for computing Cost of Goods Sold (COGS) for the P&L Account. This must be obtained from physical verification or stock records.

3. Suspense Account: The presence of ₹40,000 in Suspense Account indicates unreconciled/unidentified transactions. This must be investigated and cleared before finalizing statements.

CORRECTED TRIAL BALANCE (assuming removal of duplicate equity entry and clearing of suspense through adjustments):

The TB should be revised to reflect: (a) ₹9,00,000 as Equity Capital (9,000 shares of ₹100 each), and (b) investigation of the ₹40,000 suspense and ₹8,05,000 anomaly.

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31-03-2021:

To (Expenses):
Opening Inventory (31-03-2020): ₹3,50,000
Add: Advanced Purchases: ₹2,32,100
Less: Closing Inventory (31-03-2021): *[To be verified]*
(Cost of Goods Sold cannot be finalized without closing inventory)

Factory Expenses: ₹15,00,000
Administration Expenses: ₹3,00,000
Selling Expenses: ₹14,00,000
Depreciation on Plant & Machinery: ₹1,32,000
Interest on 9% Debentures (₹4,00,000 × 9%): ₹36,000

By (Revenue):
Sales: ₹60,20,000

Net Profit before COGS adjustment: ₹[To be determined after closing inventory is provided]
Add: Profit brought forward (previous year): ₹22,800
Profit carried forward (31-03-2021): ₹[To be determined]

BALANCE SHEET AS ON 31-03-2021:

Equity & Liabilities:
Equity Capital (9,000 shares of ₹100 each): ₹9,00,000
General Reserve: ₹40,00,000
Profit & Loss Account (Profit b/fd + Current year profit): ₹22,800 + *[Current year profit]*
9% Debentures: ₹4,00,000
Trade Payables: ₹10,40,000

Non-current Assets:
Goodwill: ₹12,50,000
Land at cost: ₹24,00,000
Plant & Machinery: ₹7,70,000
Less: Provision for Depreciation: (₹1,32,000)
Net Plant & Machinery: ₹6,38,000

Current Assets:
Trade Receivables: ₹19,60,000
Inventories (31-03-2021): *[To be verified through physical stock]*
Bank: ₹2,30,800

Key Adjustments Required:
- Closing inventory must be obtained and adjusted in the P&L Account
- Suspense Account (₹40,000) requires investigation to identify and clear the underlying error
- The duplicate equity capital entry (₹8,05,000) must be resolved—it may represent called-up capital not paid, which would appear as a debit on the Assets side, or it may be a clerical error
- Depreciation has been provided (₹1,32,000), reducing P&M value to ₹6,38,000

CONCLUSION:
The financial statements cannot be finalized until: (1) closing inventory is determined, (2) suspense account is cleared, and (3) the duplicate equity capital item is clarified. Once these are resolved, the P&L Account profit/loss and the Balance Sheet totals can be finalized and verified to ensure assets equal liabilities plus equity.

Physical Capital Maintenance Concept holds that profit is earned only after the entity has maintained its physical productive capacity — i.e., its ability to produce/hold the same quantity of goods as at the start of the period. Under this concept, assets are measured at current replacement cost, and any holding gain is treated as a capital maintenance adjustment, not profit.

Given Information:
Opening capital = ₹1,20,000 represented by 6,000 units @ ₹20 per unit. All 6,000 units were sold @ ₹30 per unit. Withdrawals during the year = ₹60,000. Closing price of the product = ₹25 per unit.

Computation of Retained Profit under Physical Capital Maintenance (Current Cost):

Step 1 — Sales Revenue: 6,000 units × ₹30 = ₹1,80,000

Step 2 — Current Cost of Goods Sold (Replacement Cost): To maintain the same physical capacity of 6,000 units at the current year-end price of ₹25 per unit: 6,000 × ₹25 = ₹1,50,000

Step 3 — Current Cost Profit: ₹1,80,000 − ₹1,50,000 = ₹30,000
This ₹30,000 represents profit after maintaining physical capital. The remaining ₹30,000 (i.e., ₹60,000 historical profit minus ₹30,000 current cost profit) is a capital maintenance reserve — not distributable profit.

Step 4 — Retained Profit after Withdrawals: ₹30,000 − ₹60,000 = ₹(30,000) — a deficit of ₹30,000
This means the trader has over-withdrawn and has eroded physical capital by ₹30,000.

If the Trader Had Not Withdrawn Any Amount:
Retained Profit = Current Cost Profit − Withdrawals = ₹30,000 − ₹0 = ₹30,000 (positive)

Yes, the answer would be different. Without withdrawal, the trader retains a profit of ₹30,000, which is sufficient to maintain the physical capital of 6,000 units at current prices. With the ₹60,000 withdrawal, the trader has consumed not just the current cost profit but also ₹30,000 of physical capital, resulting in a deficit.

Branch Accounting — Noida Branch (Independent Books Method)

Since Noida branch maintains its own independent set of books, the H.O. Account in the branch books acts as a capital/equity account representing HO's net investment in the branch.

Working Derivations (see Working Notes):

Opening Creditors (derived) = ₹28,600; Opening Cash (derived) = ₹35,690; Opening H.O. Account (Cr) = ₹7,090

Closing Debtors = ₹34,001; Prepaid Insurance = ₹5,650; Building (14,000 + 5,000) = ₹19,000

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(a) Branch Trading and Profit & Loss Account for 6 months ended 30-09-2020

Dr side:
To Purchases — ₹64,500 | To Gross Profit c/d — ₹2,13,500 | Total ₹2,78,000

To Wages — ₹24,000
To Salaries (incl. advance) — ₹15,600
To General Expenses — ₹7,800
To Fire Insurance (6/12 × ₹11,300) — ₹5,650
To Manager's Salary — ₹16,890
To Discount Allowed — ₹16,999
To Net Profit transferred to H.O. A/c — ₹1,31,161
Total ₹2,18,100

Cr side:
By Sales — ₹2,78,000 | Total ₹2,78,000

By Gross Profit b/d — ₹2,13,500
By Discount Earned — ₹4,600
Total ₹2,18,100

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Head Office Account in Noida Branch Books

Dr side:
To Cash (Remittance to H.O.) — ₹32,000
To Balance c/d — ₹1,06,251
Total ₹1,38,251

Cr side:
By Balance b/d (Opening) — ₹7,090
By Net Profit (from P&L) — ₹1,31,161
Total ₹1,38,251

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Balance Sheet of Noida Branch as on 30-09-2020

Liabilities:
H.O. Account — ₹1,06,251
Total ₹1,06,251

Assets:
Building (₹14,000 + ₹5,000) — ₹19,000
Sundry Debtors — ₹34,001
Prepaid Fire Insurance — ₹5,650
Cash in Hand — ₹47,600
Total ₹1,06,251

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(b) Journal Entries in Noida Branch Books

1. Purchases on credit:
Purchases A/c Dr ₹64,500 | To Sundry Creditors A/c ₹64,500

2. Credit Sales:
Sundry Debtors A/c Dr ₹2,78,000 | To Sales A/c ₹2,78,000

3. Wages paid:
Wages A/c Dr ₹24,000 | To Cash/Bank A/c ₹24,000

4. Salaries paid (inclusive of advance):
Salaries A/c Dr ₹15,600 | To Cash/Bank A/c ₹15,600

5. General Expenses:
General Expenses A/c Dr ₹7,800 | To Cash/Bank A/c ₹7,800

6. Fire Insurance paid (1 year):
Fire Insurance A/c Dr ₹11,300 | To Cash/Bank A/c ₹11,300

7. Remittance to Head Office:
H.O. Account Dr ₹32,000 | To Cash/Bank A/c ₹32,000

8. Manager's Salary:
Manager's Salary A/c Dr ₹16,890 | To Cash/Bank A/c ₹16,890

9. Collections from debtors:
Cash/Bank A/c Dr ₹2,27,000 | To Sundry Debtors A/c ₹2,27,000

10. Discount allowed to customers:
Discount Allowed A/c Dr ₹16,999 | To Sundry Debtors A/c ₹16,999

11. Discount earned from creditors:
Sundry Creditors A/c Dr ₹4,600 | To Discount Earned A/c ₹4,600

12. Cash paid to creditors:
Sundry Creditors A/c Dr ₹88,500 | To Cash/Bank A/c ₹88,500

13. Building purchased:
Building A/c Dr ₹14,000 | To Cash/Bank A/c ₹14,000

14. Further building payments:
Building A/c Dr ₹5,000 | To Cash/Bank A/c ₹5,000

15. Prepaid insurance adjustment (closing):
Prepaid Insurance A/c Dr ₹5,650 | To Fire Insurance A/c ₹5,650

16. Net Profit transferred to H.O. Account:
Profit & Loss A/c Dr ₹1,31,161 | To H.O. Account ₹1,31,161

The Balance Sheet of Noida Branch as on 30-09-2020 totals to ₹1,06,251 on both sides.

Part (a) — Amalgamation of Black Limited and White Limited

The balance sheets of Black Limited and White Limited as on 1st July, 2020 have not been reproduced in the question as presented. The framework for solving each sub-part is as follows, and the answers depend entirely on the figures in those balance sheets:

(i) No. of Shares to be issued by Black Limited:
Under AS 14 – Accounting for Amalgamations, purchase consideration is computed as the aggregate of shares, debentures, cash, or other assets agreed to be transferred. Number of shares = Purchase Consideration ÷ Agreed value (or face value) per equity share of Black Limited.

(ii) Net Current Assets:
Net Current Assets = Current Assets (Inventories + Trade Receivables + Cash & Bank + Short-term loans & advances) minus Current Liabilities (Trade Payables + Short-term borrowings + Other current liabilities). Compute separately for Black Limited (post-merger) and White Limited (pre-merger closing figures).

(iii) Balance of Profit or Loss of Black Limited:
If the amalgamation is in the nature of merger (pooling of interests), the accumulated P&L of White Limited is also brought in. If it is a purchase, only Black Limited's existing P&L ± any capital reserve or goodwill arising on amalgamation affects the balance. Excess of net assets taken over above purchase consideration → Capital Reserve; shortfall → Goodwill.

(iv) Property, Plant and Equipment after Takeover:
In a purchase method amalgamation, PPE of the transferor (White Limited) is recorded at fair/agreed values in the books of Black Limited. Post-takeover PPE = Black Limited's existing PPE + PPE of White Limited at agreed value.

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Part (b) — Profit and Loss Account of New Bank Limited for the year ended 31st December 2021

The P&L account of a banking company is prepared as per the Third Schedule to the Banking Regulation Act, 1949.

Schedule 13 — Interest Earned: Interest and Discount received ₹48,11,200 + Interest on Cash Credit ₹2,65,000 + Interest on Overdraft ₹1,20,000 = ₹51,96,200

Schedule 14 — Other Income: Commission, Exchange & Brokerage ₹1,45,000 + Profit on Sale of Investments ₹1,15,000 + Rent Received ₹65,000 = ₹3,25,000

Total Income = ₹55,21,200

Schedule 15 — Interest Expended: Interest paid on Deposits = ₹2,25,200

Schedule 16 — Operating Expenses: Salaries & Allowances ₹8,40,510 + Postage & Telegram ₹60,000 + Depreciation on Bank's Property ₹40,000 + Auditors' Fees ₹5,000 + Statutory Expenses ₹38,000 = ₹9,83,510

Total Expenditure = ₹12,08,710

Net Profit before appropriation = ₹43,12,490

As per Section 17 of the Banking Regulation Act, 1949, every banking company shall transfer a sum equal to not less than 20% of its net profit each year to a Statutory Reserve Fund (before any dividend is declared), until this fund equals its paid-up capital. Since the existing Statutory Reserve Fund (₹8,00,000) is less than the Paid-up Capital (₹16,00,000), the transfer is mandatory.

Transfer to Statutory Reserve Fund = 20% × ₹43,12,490 = ₹8,62,498

Balance of Profit carried to Balance Sheet = ₹43,12,490 − ₹8,62,498 = ₹34,49,992

AB Limited — Journal Entries for Year Ended 31st March, 2021

Background and Key Computations:

Issue Details: 3,00,000 partly convertible 8% debentures issued at ₹100. Only 2,50,000 debentures applied for by public → issue undersubscribed by 50,000 debentures. Since issue was underwritten, underwriters are called upon to subscribe to the remaining 50,000 debentures. Total debentures allotted = 3,00,000.

Convertible vs Non-Convertible Split per debenture:
— Convertible portion: 60% × ₹100 = ₹60
— Non-convertible portion: 40% × ₹100 = ₹40

Date of Conversion: 7 months from closure date (1-6-2020) = 1-1-2021

Conversion Calculation (1-1-2021):
Total convertible amount = 3,00,000 × ₹60 = ₹1,80,00,000
No. of equity shares issued = ₹1,80,00,000 ÷ ₹80 (market value) = 2,25,000 equity shares
Share Capital credited = 2,25,000 × ₹10 = ₹22,50,000
Securities Premium = 2,25,000 × ₹70 = ₹1,57,50,000

Interest Periods:
— 30-9-2020: 4 months from allotment (1-6-2020 to 30-9-2020) on full ₹3,00,00,000 = ₹8,00,000
— 31-3-2021: Split into:
(a) 1-10-2020 to 31-12-2020 (3 months, pre-conversion): ₹3,00,00,000 × 8% × 3/12 = ₹6,00,000
(b) 1-1-2021 to 31-3-2021 (3 months, post-conversion): ₹1,20,00,000 × 8% × 3/12 = ₹2,40,000
Total 31-3-2021 interest = ₹8,40,000

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JOURNAL ENTRIES IN THE BOOKS OF AB LIMITED

Entry 1 — Application money from public (1-6-2020)
Bank A/c Dr. ₹2,50,00,000
To 8% Debenture Application A/c ₹2,50,00,000
*(Application money for 2,50,000 debentures @ ₹100 each)*

Entry 2 — Underwriters subscribe to remaining 50,000 debentures (1-6-2020)
Bank A/c Dr. ₹50,00,000
To 8% Debenture Application A/c ₹50,00,000
*(Underwriters called upon to subscribe 50,000 debentures @ ₹100 each)*

Entry 3 — Allotment of 3,00,000 debentures (1-6-2020)
8% Debenture Application A/c Dr. ₹3,00,00,000
To 8% Convertible Debentures A/c ₹1,80,00,000
To 8% Non-Convertible Debentures A/c ₹1,20,00,000
*(Allotment of 3,00,000 partly convertible debentures; ₹60 convertible + ₹40 non-convertible per debenture)*

Entry 4 — Underwriting commission paid
Underwriting Commission A/c Dr. ₹3,00,000
To Bank A/c ₹3,00,000
*(Commission @ 1% on total issue size of ₹3,00,00,000)*

Entry 5 — Debenture interest paid on 30-9-2020
Debenture Interest A/c Dr. ₹8,00,000
To Bank A/c ₹8,00,000
*(Interest for 4 months: 1-6-2020 to 30-9-2020 on ₹3,00,00,000 @ 8% p.a.)*

Entry 6 — Conversion of convertible portion (1-1-2021)
8% Convertible Debentures A/c Dr. ₹1,80,00,000
To Equity Share Capital A/c ₹22,50,000
To Securities Premium A/c ₹1,57,50,000
*(Conversion of 60% portion of 3,00,000 debentures; 2,25,000 equity shares of ₹10 each issued at market value ₹80 each)*

Entry 7 — Debenture interest paid on 31-3-2021
Debenture Interest A/c Dr. ₹8,40,000
To Bank A/c ₹8,40,000
*(₹6,00,000 for 3 months pre-conversion on ₹3,00,00,000 + ₹2,40,000 for 3 months post-conversion on non-convertible ₹1,20,00,000)*

Entry 8 — Transfer of debenture interest to P&L
Statement of Profit & Loss A/c Dr. ₹16,40,000
To Debenture Interest A/c ₹16,40,000
*(Total interest for year: ₹8,00,000 + ₹8,40,000)*

Entry 9 — Write-off of underwriting commission against Securities Premium
Securities Premium A/c Dr. ₹3,00,000
To Underwriting Commission A/c ₹3,00,000
*(Written off against Securities Premium as permitted under Section 52(2)(b) of the Companies Act, 2013)*

Closing Balance: Non-Convertible Debentures Outstanding = ₹1,20,00,000 (to be shown in Balance Sheet as of 31-3-2021)

PROFIT & LOSS ACCOUNT OF NEW BANK LIMITED FOR THE YEAR ENDED 31.03.2021

Note: This answer requires complete operating figures from Question 11(b). The following shows treatment of all adjustments with available calculations:

ADJUSTMENTS REQUIRED:

1. Insolvency Provision: Customer advance of ₹5,00,000 with 50% recovery expected: Provision = ₹5,00,000 × 50% = ₹2,50,000 (debited to P&L)

2. Provisions for Risk Assets (as per RBI guidelines):
- Standard Assets: 0.4% × ₹10,00,000 = ₹4,000
- Sub-Standard (fully secured): 20% × ₹8,20,000 = ₹1,64,000
- Doubtful assets (covered, 1 year): 25% × ₹40,000 = ₹10,000
- Loss Assets: 100% × ₹1,00,000 = ₹1,00,000
- Total Risk Asset Provisions = ₹2,78,000 (debited to P&L)

3. Rebate on Bills Discounted: Opening balance 31.03.2020 ₹20,000 reversed; current year provision 31.03.2021 ₹15,000 created. Net impact: ₹5,000 credit to P&L (reduction in provision)

P&L ACCOUNT STRUCTURE (with given adjustments):

Income side: Operating Profits/Earnings (from Q11(b)) + Net credit from rebate adjustment

Expense side:
- Insolvency provision: ₹2,50,000
- Risk asset provisions: ₹2,78,000
- Total provisions: ₹5,28,000
- Income Tax Provision: ₹6,50,000
- Profit Before Appropriations = Operating Profit - ₹12,28,000 (approx., less rebate credit of ₹5,000)

APPROPRIATIONS:
- Transfer to Reserve Fund: 25% of Net Profit
- Dividend (10%): Calculated on paid-up capital (not provided in question)
- Retained Earnings to Balance Sheet

KEY ACCOUNTING TREATMENTS:

Provisions for doubtful debts reduce taxable income under Section 36(1)(vii) of the Income Tax Act, 1961. Risk asset classifications follow RBI Master Circular on Prudential Norms (current year standards for NPA classification). Rebate on bills discounted is treated as a contingent liability adjustment under Ind AS 109 Financial Instruments (impairment provisions). Dividend appropriation is post-provision of income tax. Reserve fund transfer is mandatory as per Banking Regulation Act 1949, Section 17 requiring transfer of minimum 50% of profits; here 25% is transferred (directors' discretion within statutory limits).

The reconstruction scheme of Sagra Limited involves cancellation of old share capital, issue of new securities, revaluation of assets, and write-off of accumulated losses using the Reconstruction Reserve created from the reduction in share capital.

Journal Entry 1: Cancellation of Old Equity Share Capital
Dr. Equity Share Capital (Old) ₹75,00,000
Cr. Equity Shareholders' Accounts ₹75,00,000
(To cancel 750,000 equity shares @ ₹10 each)

Journal Entry 2: Issue of New Securities
Dr. Equity Shareholders' Accounts ₹75,00,000
Cr. Equity Share Capital (New) ₹45,00,000
Cr. 6% Preference Share Capital ₹18,00,000
Cr. 7% Debentures ₹2,50,000
Cr. Reconstruction Reserve ₹9,50,000
(To record issue of 450,000 new equity shares @ ₹10, 180,000 preference shares @ ₹10, and debentures of ₹2,50,000)

Journal Entry 3: Write-off Goodwill
Dr. Reconstruction Reserve ₹2,70,000
Cr. Goodwill ₹2,70,000
(To write-off goodwill as per reconstruction scheme)

Journal Entry 4: Reduction in Plant & Machinery
Dr. Reconstruction Reserve ₹1,00,000
Cr. Plant & Machinery ₹1,00,000
(To reduce Plant & Machinery value by ₹1,00,000)

Journal Entry 5: Reduction in Furniture
Dr. Reconstruction Reserve ₹88,000
Cr. Furniture ₹88,000
(To reduce Furniture value by ₹88,000)

Journal Entry 6: Write-down of Investment
Dr. Reconstruction Reserve ₹4,20,000
Cr. Investment ₹4,20,000
(To write-down investment from ₹6,00,000 to market value of ₹1,80,000)

Journal Entry 7: Write-off P&L Account Debit Balance
Dr. Reconstruction Reserve ₹2,25,000
Cr. P&L Account ₹2,25,000
(To write-off accumulated losses of ₹2,25,000)

Journal Entry 8: Appreciation of Building
Dr. Building ₹1,50,000
Cr. Reconstruction Reserve ₹1,50,000
(To record appreciation in building value by ₹1,50,000)

Journal Entry 9: Utilization of General Reserve
Dr. General Reserve ₹42,000
Cr. Reconstruction Reserve ₹42,000
(To utilize General Reserve balance for reconstruction purposes)

Journal Entry 10: Transfer of Reconstruction Reserve Surplus to Capital Reserve
Dr. Reconstruction Reserve ₹59,000
Cr. Capital Reserve ₹59,000
(To transfer the surplus of Reconstruction Reserve after all adjustments to Capital Reserve)

Employee Stock Option Plan — Graded Vesting (Intrinsic Value Method)

Under the graded vesting schedule, each tranche is treated as a separate grant with its own vesting period and compensation expense is recognised over that period. The intrinsic value per option at grant date is ₹7.

Step 1 — Total Options Granted

Total options = 6,000 × 1,000 employees = 60,00,000 options

Tranche 1 (25%, vests end of Year 1): 15,00,000 options — vesting period 1 year
Tranche 2 (25%, vests end of Year 2): 15,00,000 options — vesting period 2 years
Tranche 3 (50%, vests end of Year 3): 30,00,000 options — vesting period 3 years

Step 2 — Expected Options to Vest (after 3% p.a. forfeiture)

Tranche 1: 15,00,000 × (0.97)¹ = 14,55,000 options
Tranche 2: 15,00,000 × (0.97)² = 15,00,000 × 0.9409 = 14,11,350 options
Tranche 3: 30,00,000 × (0.97)³ = 30,00,000 × 0.912673 = 27,38,019 options

Step 3 — Total Compensation Expense per Tranche (@ ₹7)

Tranche 1: 14,55,000 × ₹7 = ₹1,01,85,000
Tranche 2: 14,11,350 × ₹7 = ₹98,79,450
Tranche 3: 27,38,019 × ₹7 = ₹1,91,66,133

Total Compensation Expense = ₹3,92,30,583

Step 4 — Annual & Cumulative Cost Recognition

Under graded vesting each tranche is spread over its own vesting period:

Year 1:
Tranche 1 → ₹1,01,85,000 × 1/1 = ₹1,01,85,000
Tranche 2 → ₹98,79,450 × 1/2 = ₹49,39,725
Tranche 3 → ₹1,91,66,133 × 1/3 = ₹63,88,711
Cost for Year 1 = ₹2,15,13,436 | Cumulative = ₹2,15,13,436

Year 2:
Tranche 1 → Nil (fully expensed)
Tranche 2 → ₹98,79,450 × 1/2 = ₹49,39,725
Tranche 3 → ₹1,91,66,133 × 1/3 = ₹63,88,711
Cost for Year 2 = ₹1,13,28,436 | Cumulative = ₹3,28,41,872

Year 3:
Tranche 1 & 2 → Nil
Tranche 3 → ₹1,91,66,133 × 1/3 = ₹63,88,711
Cost for Year 3 = ₹63,88,711 | Cumulative = ₹3,92,30,583

The total cumulative cost of ₹3,92,30,583 equals the aggregate compensation expense for all three tranches, confirming accuracy.

Preliminary Notes:

Authorised Capital: The figure ₹30,00,000 implies 3,00,000 equity shares of ₹10 each (assumed correction from the question, as 1,00,000 × ₹10 = ₹10,00,000 ≠ ₹30,00,000).

Step 1 – Final Call on 1st April 2020:
A final call of ₹2 per share is made on 2,00,000 equity shares. Call amount = 2,00,000 × ₹2 = ₹4,00,000. After receipt, all 2,00,000 shares become fully paid-up at ₹10 each.

Step 2 – Bonus Issue:
Bonus ratio is 1 share for every 4 shares held. After final call, shares held = 2,00,000. Bonus shares = 2,00,000 ÷ 4 = 50,000 shares. Amount to be capitalised = 50,000 × ₹10 = ₹5,00,000.

Reserves Available for Bonus (as per Section 63 of the Companies Act, 2013):
Bonus shares may be issued from free reserves, Securities Premium Account, or Capital Redemption Reserve. However, Securities Premium not realised in cash (₹75,000) CANNOT be used as it does not represent actual cash inflow — such use is not permitted.

Available reserves: Capital Redemption Reserve ₹1,20,000 + General Reserve ₹3,60,000 + Profit & Loss ₹6,00,000 = ₹10,80,000 (sufficient).

Order of utilisation: CRR → General Reserve → P&L
- CRR: ₹1,20,000 (fully used)
- General Reserve: ₹3,60,000 (fully used)
- P&L: ₹5,00,000 − ₹4,80,000 = ₹20,000

Authorised Capital check: Post-bonus shares = 2,00,000 + 50,000 = 2,50,000 × ₹10 = ₹25,00,000 < ₹30,00,000 authorised. No increase needed.

Journal Entries in the Books of K Ltd:

(1) For Final Call – 1st April 2020:
Equity Share Final Call A/c ........Dr. ₹4,00,000
To Equity Share Capital A/c ₹4,00,000
*(Final call of ₹2 per share on 2,00,000 equity shares)*

(2) For Receipt of Call Money – 25th April 2020:
Bank A/c ........Dr. ₹4,00,000
To Equity Share Final Call A/c ₹4,00,000
*(Call money received on 2,00,000 shares)*

(3) For Declaration of Bonus:
Capital Redemption Reserve A/c ........Dr. ₹1,20,000
General Reserve A/c ........Dr. ₹3,60,000
Profit & Loss A/c ........Dr. ₹20,000
To Bonus to Shareholders A/c ₹5,00,000
*(Bonus declared: 1 share per 4 held, capitalising reserves per Section 63)*

(4) For Issue of Bonus Shares:
Bonus to Shareholders A/c ........Dr. ₹5,00,000
To Equity Share Capital A/c ₹5,00,000
*(50,000 fully paid bonus shares of ₹10 each allotted)*

Extract of Balance Sheet of K Ltd (after Bonus Issue)

Equity and Liabilities:

*Share Capital:*
Authorised: 3,00,000 Equity shares of ₹10 each — ₹30,00,000
Issued, Subscribed & Paid-up: 2,50,000 Equity shares of ₹10 each, fully paid — ₹25,00,000
(Of the above, 50,000 shares of ₹10 each were issued as fully paid bonus shares by capitalisation of reserves)

*Reserves & Surplus:*
Securities Premium (not realised in cash) — ₹75,000
Profit & Loss Account — ₹5,80,000
Total Reserves & Surplus — ₹6,55,000

*(General Reserve and Capital Redemption Reserve — Nil, fully utilised for bonus issue)*