CA Inter Adv Accounting — Question Paper — May 2023

Analysis of Related Party Classification under Ind AS 24:

Definition of Related Party: According to Ind AS 24 (Related Party Disclosures), a related party is a person or entity that is related to the entity preparing financial statements. Related parties include: (a) entities under common control or significant influence; (b) associates and joint ventures; (c) key management personnel and their close family members; (d) entities controlled by KMP or their family; and (e) post-employment benefit plans.

Assessment of Sasha Ltd.: In this case, Sasha Ltd. is merely the only customer of Asha Ltd., purchasing all manufactured furniture worth ₹1,00,00,000. The mere fact that Sasha Ltd. is a major or sole customer does not automatically make it a related party. The question does not indicate any of the following:
- Ownership or control relationship between Asha Ltd. and Sasha Ltd.
- Significant influence by Sasha Ltd. over Asha Ltd.
- Common management or key personnel relationship.
- Any ownership linkage, directorate overlap, or control through shareholding.

Conclusion: Sasha Ltd. cannot be presented as a related party in the financial statements of Asha Ltd. solely on the basis of being the only customer. Presenting it as such would be incorrect and non-compliant with Ind AS 24.

Disclosure Requirement: While Sasha Ltd. is not a related party and related party disclosures under Ind AS 24 would not apply, Asha Ltd. should consider the following: (1) Concentration of revenue risk: The fact that 100% of sales are to a single customer represents significant concentration risk that may require disclosure in the financial statements as important information under general disclosure requirements. (2) Voluntary disclosure: Under the principle of fair presentation, entities may voluntarily disclose information about major customers or revenue concentration in notes to financial statements, though this is not mandatory under Ind AS 24. (3) Segment reporting: If applicable, segment information may disclose customer concentration if the entity has reportable segments.

Recommendation: Asha Ltd. should not classify Sasha Ltd. as a related party, but may consider disclosing the revenue concentration as material information in the notes to financial statements to provide users with a complete understanding of the business and its risks.

Applicable Standard: AS 17 – Segment Reporting (Note: The question refers to 'Ind AS-17'; however, under the ICAI CA Intermediate syllabus, Segment Reporting is governed by AS 17. For listed/Ind AS entities, Ind AS 108 applies. The analysis below follows AS 17 principles, which the question intends.)

Under AS 17, a business segment or geographical segment is a reportable segment if it satisfies ANY ONE of three quantitative threshold tests — the 10% Tests:

Test 1 – Revenue Test: Segment revenue ≥ 10% of combined revenue of all segments.
10% of ₹430 = ₹43

| Segment | Revenue | ≥ ₹43? | Reportable? |
|---------|---------|---------|-------------|
| A | 250 | Yes | Yes |
| B | 50 | Yes | Yes |
| C | 40 | No | — |
| D | 60 | Yes | Yes |
| E | 30 | No | — |

Test 2 – Result Test: |Segment result| ≥ 10% of the greater of (i) combined profit of all profit-making segments, or (ii) combined loss of all loss-making segments (absolute).
Profit segments: B(10) + C(10) + E(7) = 27; Loss segments: A(85) + D(15) = 100
Greater = 100; 10% threshold = ₹10

| Segment | |Result| | ≥ ₹10? | Reportable? |
|---------|----------|--------|-------------|
| A | 85 | Yes | Yes |
| B | 10 | Yes (=) | Yes |
| C | 10 | Yes (=) | Yes |
| D | 15 | Yes | Yes |
| E | 7 | No | — |

Test 3 – Asset Test: Segment assets ≥ 10% of total assets.
10% of ₹100 = ₹10

| Segment | Assets | ≥ ₹10? | Reportable? |
|---------|--------|---------|-------------|
| A | 50 | Yes | Yes |
| B | 20 | Yes | Yes |
| C | 15 | Yes | Yes |
| D | 10 | Yes (=) | Yes |
| E | 5 | No | — |

Consolidated Reportability: A segment is reportable if it satisfies any one of the three tests.
- A – Reportable (all three tests)
- B – Reportable (all three tests)
- C – Reportable (Result + Asset tests)
- D – Reportable (all three tests)
- E – Not reportable (fails all three tests)

75% Overall Revenue Test (AS 17 para 28): The aggregate external revenue of all reportable segments must be at least 75% of total enterprise revenue. Revenue of A+B+C+D = 250+50+40+60 = ₹400 out of ₹430 = 93%, which exceeds 75%. This condition is satisfied.

Conclusion: Segments A, B, C, and D must all be separately reported. The Accountant's opinion that only Segment A alone should be reported is NOT justified. Segment E alone need not be reported separately (it may be combined with unallocated items).

Plant and Machinery Account — Year ended 31st March, 2023

Under AS 10 (Property, Plant and Equipment), fixed assets are carried at cost less accumulated depreciation, and gains/losses on disposal are recognised in the Statement of Profit and Loss.

Opening WDV (1st April, 2022): ₹35,30,000

Addition 1 — Machinery ₹12,600 (1st June, 2022): On scrutiny, machinery worth ₹12,600 purchased on 1st June, 2022 was found to have been included in the Plant account (capital expenditure correctly recorded, but under the wrong sub-head within Plant & Machinery). Since the combined account "Plant and Machinery" is maintained, this amount is treated as an addition during the year and depreciated from the date of purchase (10 months: June 2022 to March 2023).

Part Exchange Transaction (30th June, 2022):
The old machine (WDV ₹9,60,000 as on 1st April, 2022) is disposed of after charging 3 months' depreciation. The new machine is capitalised at its full cost of ₹15,65,000 in accordance with AS 10 (cost = invoice price, not net exchange value).

Dr — Plant and Machinery Account — Cr

| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| Opening Balance (1.4.2022) | 35,30,000 | Disposal A/c (WDV at 30.6.22) | 9,36,000 |
| Bank A/c – Machinery (1.6.22) | 12,600 | Depreciation A/c | 3,99,425 |
| New Machine – Part Exchange (30.6.22) | 15,65,000 | Closing Balance (31.3.23) | 37,72,175 |
| Total | 51,07,600 | Total | 51,07,600 |

Disposal / Part Exchange Working:
WDV at disposal (after 3-month depreciation) = ₹9,36,000. Part exchange value = ₹8,25,000. Loss on exchange = ₹1,11,000 (charged to P&L).

Closing WDV of Plant and Machinery as on 31st March, 2023 = ₹37,72,175.
Total Depreciation charged for the year = ₹3,99,425. Loss on disposal = ₹1,11,000.

Note on Sub-parts (iii) & (iv): These are continuation sub-parts. The following assumed base values (typical for this class of ICAI question) are used — Plant cost: ₹20,00,000; Government grant received: ₹4,00,000; Useful life: 5 years; SLM; Purchase date: 1 April 2020.

Sub-part (iii) — Grant Deducted from Asset Cost; Grant Refunded ₹4,00,000 at end of 2022-23 [AS-12]

Under the cost deduction method, the grant of ₹4,00,000 was originally deducted from the asset cost, giving a net carrying amount of ₹16,00,000. Annual SLM depreciation = ₹3,20,000.

By 31 March 2023, three years of depreciation have been charged (FY 2020-21, 21-22, 22-23). WDV before refund = ₹16,00,000 − ₹9,60,000 = ₹6,40,000.

Upon refund of the grant, the carrying amount of the asset is increased by the amount refunded (per AS-12, Government Grants, issued by ICAI). The asset is reinstated and the remaining life is used to re-compute depreciation.

Revised carrying amount = ₹6,40,000 + ₹4,00,000 = ₹10,40,000. Remaining useful life = 2 years. Revised annual depreciation = ₹5,20,000.

Journal entry on refund: Plant & Machinery A/c Dr. ₹4,00,000 | To Grant Refund Payable A/c ₹4,00,000.

The higher depreciation (₹5,20,000 vs earlier ₹3,20,000) is treated as a change in accounting estimate and applied prospectively.

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Sub-part (iv) — Grant Treated as Deferred Income [AS-12]

Under the deferred income method, the full asset cost of ₹20,00,000 is capitalised. The grant of ₹4,00,000 is credited to a Deferred Government Grant account and released to the Profit & Loss account systematically over the asset's useful life (5 years) = ₹80,000 per year.

Annual depreciation on ₹20,00,000 over 5 years = ₹4,00,000 p.a.

Net charge to P&L each year = ₹4,00,000 − ₹80,000 = ₹3,20,000 — same net impact as the cost deduction method, confirming AS-12's alternative treatments produce equivalent results.

At end of 2022-23 (3 years): Asset WDV = ₹8,00,000; Deferred grant balance = ₹4,00,000 − ₹2,40,000 = ₹1,60,000.

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Part (d) — Borrowing Costs: Qualifying vs. Non-Qualifying Assets [AS-16]

Identifying Qualifying Assets: Under AS-16, Borrowing Costs, a qualifying asset is one that necessarily takes a substantial period to get ready. Building (₹70,00,000), Plant & Machinery (₹90,00,000), and Factory Shed (₹43,00,000) — all under construction — are qualifying assets. Furniture (₹23,00,000) is readymade and purchased directly; it is not a qualifying asset.

Step 1 — Specific Borrowing (for Building):
FI Loan ₹25,00,000 @ 12% → Interest = ₹3,00,000. This is directly capitalized to the Building account.

Step 2 — Weighted Average Capitalization Rate (General Borrowings):
8% Debentures ₹15,00,000: interest ₹1,20,000; 15% Term Loan ₹30,00,000: interest ₹4,50,000; 10% Other Loans ₹18,00,000: interest ₹1,80,000.
Total general borrowings = ₹63,00,000; Total interest = ₹7,50,000.
Capitalization rate = 7,50,000 ÷ 63,00,000 × 100 = 11.905%.

Step 3 — Capitalization to Qualifying Assets from General Borrowings:
Qualifying assets funded by general borrowings = Building balance (₹70,00,000 − ₹25,00,000) + P&M + Factory Shed = ₹45,00,000 + ₹90,00,000 + ₹43,00,000 = ₹1,78,00,000.
Interest eligible = 11.905% × ₹1,78,00,000 = ₹21,19,090. This exceeds actual general borrowing interest of ₹7,50,000, so capitalisation is capped at ₹7,50,000 (actual interest).

Step 4 — Non-Qualifying Asset (Furniture): No borrowing cost is capitalised. All borrowing interest has already been fully absorbed by qualifying assets.

Final Answer:
- Borrowing cost capitalised to qualifying assets = ₹3,00,000 (specific) + ₹7,50,000 (general) = ₹10,50,000
- Borrowing cost for non-qualifying assets (Furniture) = NIL (no capitalisation; no residual general interest remains for P&L charge either, as full interest is absorbed by qualifying assets)

Sub-part (1): Amount of Debentures and Shares to be issued

Step A — Capital Employed (at revalued figures)

Capital Employed = Revalued PPE + Revalued Current Assets − Trade Payables

X Ltd.: ₹71,00,000 + ₹29,95,000 − ₹59,70,000 = ₹41,25,000

Y Ltd.: ₹39,00,000 + ₹15,77,500 − ₹18,02,500 = ₹36,75,000

Step B — 7.5% Debentures to be issued (to provide 4% return on capital employed)

Required income = 4% × Capital Employed; Debenture face = Income ÷ 7.5%

X Ltd.: Income required = 4% × ₹41,25,000 = ₹1,65,000 → Debentures = ₹1,65,000 ÷ 7.5% = ₹22,00,000

Y Ltd.: Income required = 4% × ₹36,75,000 = ₹1,47,000 → Debentures = ₹1,47,000 ÷ 7.5% = ₹19,60,000

Step C — Equity Shares to be issued (in proportion to average net profit over 4 years)

Average Net Profit: X Ltd. = ₹1,24,00,000 ÷ 4 = ₹31,00,000; Y Ltd. = ₹1,24,00,000 ÷ 4 = ₹31,00,000

Ratio = 1 : 1. Total shares = 6,20,000 → Each company receives 3,10,000 equity shares of ₹3 each = ₹9,30,000

Summary — Purchase Consideration:

| Component | X Ltd. | Y Ltd. | Total |
|-----------|--------|--------|-------|
| Equity Shares (3,10,000 × ₹3) | ₹9,30,000 | ₹9,30,000 | ₹18,60,000 |
| 7.5% Debentures | ₹22,00,000 | ₹19,60,000 | ₹41,60,000 |
| Total PC | ₹31,30,000 | ₹28,90,000 | ₹60,20,000 |

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Sub-part (2): Balance Sheet of XY Ltd. immediately after amalgamation

The amalgamation is treated as Amalgamation in the Nature of Purchase under AS 14 — Accounting for Amalgamations. Assets and liabilities are recorded at revalued (fair) values. The inter-company balance of ₹1,37,250 (included in both debtors and creditors) is eliminated on consolidation. Excess of net assets acquired (₹78,00,000) over total purchase consideration (₹60,20,000) = Capital Reserve of ₹17,80,000.

Balance Sheet of XY Ltd. as on 31st March, 2023

EQUITY AND LIABILITIES

*Shareholders' Funds:*
Authorised Share Capital: ₹40,00,000 (as per Memorandum)
Issued, Subscribed & Paid-up: 6,20,000 Equity Shares of ₹3 each — ₹18,60,000
Capital Reserve — ₹17,80,000

*Non-Current Liabilities:*
7.5% Debentures — ₹41,60,000

*Current Liabilities:*
Trade Payables (₹77,72,500 − ₹1,37,250 inter-co. eliminated) — ₹76,35,250

Total Equity and Liabilities — ₹1,54,35,250

ASSETS

*Non-Current Assets:*
Property, Plant and Equipment (₹71,00,000 + ₹39,00,000) — ₹1,10,00,000

*Current Assets:*
(₹29,95,000 + ₹15,77,500 − ₹1,37,250 inter-co. eliminated) — ₹44,35,250

Total Assets — ₹1,54,35,250

*Note: The authorized share capital of ₹40,00,000 divided into 3,00,000 shares of ₹3 each appears to contain a typographical inconsistency in the question (3,00,000 × ₹3 = ₹9,00,000 ≠ ₹40,00,000). The issued capital is computed based on 6,20,000 shares × ₹3 = ₹18,60,000 as per the problem data.*

Sub-part (a) – TMP Company (Depreciation, Book Value & Exchange Profit/Loss):

The numerical data for the TMP case (original cost, rate of depreciation, exchange details, dates) appears to be missing from the question as presented. A complete solution requires: original cost of Plant & Machinery, depreciation method and rate, date of acquisition, exchange/disposal details and consideration received. The framework would be: (i) Depreciation = Opening WDV × Rate (or cost less salvage ÷ useful life for SLM); (ii) Closing Book Value = Opening WDV − Depreciation for the year; (iii) Profit/Loss on Exchange = Net consideration received − Book value at date of exchange. Please provide the original question data for a full numerical solution.

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Sub-part (b) – Trouser Limited: Option Analysis

Trouser Limited has a payable of ₹5,00,000 and must choose between two payment options. The borrowing rate is 15% p.a.

Option 1 – Pay immediately with 1% cash discount:
Net payment = ₹5,00,000 × (1 − 1%) = ₹4,95,000. Since Trouser must borrow to pay immediately at its borrowing rate of 15% p.a. for 4 months, the total cost at the end of 4 months = ₹4,95,000 + (₹4,95,000 × 15% × 4/12) = ₹4,95,000 + ₹24,750 = ₹5,19,750.

Option 2 – Pay after 4 months with 5% p.a. interest:
Interest = ₹5,00,000 × 5% × 4/12 = ₹8,333. Total payment = ₹5,00,000 + ₹8,333 = ₹5,08,333.

Recommendation: Choose Option 2. The total outflow under Option 2 (₹5,08,333) is ₹11,417 lower than Option 1 (₹5,19,750). Deferring the payment saves money because the interest charged by the supplier (5% p.a.) is significantly lower than Trouser Limited's own borrowing cost (15% p.a.). Alternatively, the effective annual rate of the cash discount = (₹5,000 / ₹4,95,000) × (12/4) = 3.03% p.a., which is far less than the 15% borrowing rate, confirming that it is uneconomical to avail the discount by borrowing.

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Sub-part (c) – Elesner Limited: Depreciation as per AS-12 for FY 2022-23

Plant purchased on 1 April 2021 for ₹60 lakhs. Useful life = 10 years. Salvage value = ₹10 lakhs. Government grant received = ₹20 lakhs. FY 2022-23 is Year 2 of the asset's life (depreciation calculation is the same each year under SLM, so year does not affect the annual charge).

Case (i) – Grant deducted from the cost of Plant (AS-12, Para 12):
Net carrying cost = ₹60L − ₹20L = ₹40 lakhs. Depreciable amount = ₹40L − ₹10L (salvage) = ₹30 lakhs. Annual depreciation = ₹30L ÷ 10 = ₹3,00,000 (₹3 lakhs). This is the depreciation charged to P&L for FY 2022-23.

Case (ii) – Grant treated as Deferred Income (AS-12, Para 13):
Full cost is retained in books. Depreciable amount = ₹60L − ₹10L = ₹50 lakhs. Annual depreciation = ₹50L ÷ 10 = ₹5,00,000. The deferred grant income is recognised in P&L proportionately over 10 years = ₹20L ÷ 10 = ₹2,00,000 per year as income. Depreciation charged to P&L = ₹5,00,000; Grant income credited = ₹2,00,000; Net P&L impact = ₹3,00,000. Both methods produce the same net charge of ₹3 lakhs, consistent with the principle under AS-12 (Accounting for Government Grants) that the economic benefit recognized should be symmetrical irrespective of the presentation method chosen.

MACHINERY ACCOUNT

Dr. | Particulars | Amount (₹) | Cr. | Particulars | Amount (₹)
---|---|---|---|---|---
| Opening Balance | — | | Depreciation (20% p.a. DDB) | 92,000
| To M/s Khanna Enterprises | 4,60,000 | | Repossession (one machine at book value) | 1,84,000
| (Cost of 2 machines @ ₹2,30,000 each) | | | |
| | | | Balance c/d (one machine net) | 1,95,500
| | 4,60,000 | | | 4,60,000

Balance b/d (31-03-2023):
- Cost of remaining machine: ₹2,30,000
- Less: Depreciation @ 20% p.a. DDB: ₹46,000
- Net Book Value: ₹1,84,000

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M/S KHANNA ENTERPRISES (OR M.K. TRADERS) ACCOUNT

Dr. | Particulars | Amount (₹) | Cr. | Particulars | Amount (₹)
---|---|---|---|---|---
| Bank—Down Payment (01-04-2022) | 1,40,000 | | To Machinery | 4,60,000
| Bank—1st Instalment (30-09-2022) | 1,00,000 | | |
| Bank—2nd Instalment (31-03-2023) | 95,600 | | |
| Bank—3rd Instalment (30-09-2023 assumed) | 85,600 | | |
| Interest on Outstanding Balance (accrued) | 12,800 | | |
| Repossessed Machine Adjustment (at 25% depreciation value) | 1,72,500 | | |
| Balance c/d (Outstanding liability—remaining machine) | 1,53,500 | | |
| | 4,60,000 | | | 4,60,000

Calculation of Outstanding Balance:
- Total payments made: ₹1,40,000 + ₹1,00,000 + ₹95,600 + ₹85,600 = ₹4,21,600
- Purchase price: ₹4,60,000
- Interest accrued (6 months @ 8% p.a. on ₹3,20,000 outstanding after down payment): ₹12,800
- Total liability: ₹4,72,800
- Less: Payments made: ₹4,21,600
- Outstanding before repossession: ₹51,200
- Less: Adjustment for repossessed machine (1/2 of liability and value): ₹(1,72,500 – 25,600) gain to buyer
- Outstanding liability (remaining machine): ₹1,53,500

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KEY TREATMENT NOTES:

1. Machinery Account: Recorded at hire purchase cost (₹4,60,000). Depreciation @ 20% p.a. DDB reduces the asset value. Repossession removes one machine at its net book value (₹1,84,000), not the adjusted value (₹1,72,500 used for settlement).

2. M.K. Traders Account: Recorded at acquisition cost. Payments reduce the liability. Interest accrual on outstanding balance recognized. Repossession adjustment credits the account with ₹1,72,500 (value @ 25% depreciation as per hire purchase terms), with any excess going toward reducing the remaining liability.

3. Interest Calculation: For the first 6 months (01-04-2022 to 30-09-2022), interest = ₹3,20,000 × 8% × 6/12 = ₹12,800 included in or accrued on the first instalment.

4. Depreciation: Applied @ 20% p.a. DDB on total cost for the full year before repossession. For the repossessed machine, the depreciation used for repossession valuation (25%) differs from books (20%), creating an adjustment.

5. Repossession Adjustment: The supplier's recovery value (₹1,72,500) exceeds the outstanding balance on that machine (₹25,600 = ₹51,200 ÷ 2), resulting in net reduction of remaining liability.

Consolidated Statement of Profit and Loss of G Ltd. and its Subsidiary K Ltd.
For the year ended 31st March, 2023
(All figures in ₹ Crores)

Particulars | ₹ Crores

I. INCOME

Sales and Other Income:
G Ltd. | 3,000
K Ltd. | 750
Less: Inter-company sales (G to K) | (200)
Less: Consultancy fees received by G from K [Note iii] | (5)
Less: Commission received by G from K [Note iii] | (20)
Net Sales and Other Income | 3,525

Increase in Inventory:
G Ltd. | 750
K Ltd. | 100
Less: Inter-company goods in K's inventory (at transfer price) | (100)
Less: Unrealized profit eliminated [Working Note 1] | (20)
Net Increase in Inventory | 730

Total Income (I) | 4,255

II. EXPENSES

Raw Material Consumed:
G Ltd. | 600
K Ltd. | 100
Less: K's raw material sourced from G (inter-company) | (100)
Net Raw Material Consumed | 600

Wages and Salaries (600 + 75) | 675

Production Expenses (100 + 50) | 150

Administrative Expenses:
G Ltd. | 75
K Ltd. | 25
Less: Consultancy fees paid by K to G (eliminated) | (5)
Net Administrative Expenses | 95

Selling and Distribution Expenses:
G Ltd. | 100
K Ltd. | 25
Less: Commission paid by K to G (eliminated) | (20)
Net Selling and Distribution Expenses | 105

Interest (75 + 30) | 105

Depreciation (75 + 30) | 105

Total Expenses (II) | 1,835

Consolidated Profit for the Year (I − II) | 2,420

Attributable to:
Minority Interest (NCI) — 25% × ₹515 [Working Note 2] | 128.75
Profit attributable to owners of G Ltd. | 2,291.25

Note on Additional Information (ii): The equity share capital of K Ltd. of ₹800 crores (fair value on acquisition) is relevant for computing Goodwill or Capital Reserve on consolidation in the Balance Sheet; it does not affect the Consolidated Statement of Profit and Loss.

Note on typo in question: Point (iii) refers to '₹20 crores paid to K Ltd.' which is treated as a typographical error; the commission is paid to G Ltd. (the parent), making it an inter-company transaction subject to elimination.

Applicable standard: AS 21 — Consolidated Financial Statements, which requires elimination of all intragroup transactions and unrealised profits in full.

Net Owned Fund (NOF) of SR Finance Ltd.

As per the Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 issued by the Reserve Bank of India, Net Owned Fund is computed as follows:

Step 1 – Compute Owned Fund:

Owned Fund = Paid-up Equity Capital + Free Reserves − Accumulated losses − Deferred revenue expenditure − Other intangible assets.

Owned Fund = ₹300 lakhs + ₹900 lakhs = ₹1,200 lakhs

(No accumulated losses or intangible assets are mentioned, so no deductions apply here.)

Step 2 – Identify Investments to be Deducted:

The following items must be deducted from Owned Fund to the extent they exceed 10% of Owned Fund:

(a) Investments in shares of subsidiaries and companies in the same group, and all other NBFCs; AND

(b) Book value of debentures, bonds, outstanding loans, advances, and deposits with subsidiaries and companies in the same group.

Here:
- Investments in shares of subsidiaries = ₹375 lakhs
- Investments in debentures of group companies = ₹600 lakhs
- Total = ₹975 lakhs

Step 3 – Compute the Deductible Excess:

10% of Owned Fund = 10% × ₹1,200 = ₹120 lakhs

Excess over 10% = ₹975 − ₹120 = ₹855 lakhs (this is the amount to be deducted)

Step 4 – Compute Net Owned Fund:

Net Owned Fund = Owned Fund − Excess investments
= ₹1,200 − ₹855 = ₹345 lakhs

The Net Owned Fund of SR Finance Ltd. is ₹345 lakhs.

Part (a): Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as on 31st March, 2023

Note: The balance sheets for H Ltd. and S Ltd. were provided in the original question. The solution below uses internally consistent assumed figures that incorporate all the given additional information. Key figures (Share Capitals: H ₹9,00,000; S ₹2,50,000) are as stated.

Holding Pattern: S Ltd. has 25,000 shares of ₹10 each. H Ltd. holds 15,000 shares = 60% holding; Minority Interest = 40%.

Pre/Post Acquisition Split: H Ltd. acquired shares on 1 July 2022. The financial year is April 2022 to March 2023 (12 months). Pre-acquisition period: 3 months (April to June 2022). Post-acquisition period: 9 months (July 2022 to March 2023). S Ltd.'s profit for the year = ₹20,000. Pre-acquisition profit = 3/12 × ₹20,000 = ₹5,000. Post-acquisition profit = 9/12 × ₹20,000 = ₹15,000.

Cost of Control (Capital Reserve): Net assets of S Ltd. at date of acquisition (1.7.2022) = ₹2,50,000 (Share Capital) + ₹50,000 (General Reserve, unchanged) + ₹5,000 (pre-acquisition profit) = ₹3,05,000. H's share at 60% = ₹1,83,000. Cost of Investment = ₹1,55,000. Since H's share in net assets (₹1,83,000) exceeds cost (₹1,55,000), Capital Reserve = ₹28,000.

Minority Interest: 40% × (₹2,50,000 + ₹50,000 + ₹20,000) = 40% × ₹3,20,000 = ₹1,28,000.

Unrealised Profit in Closing Stock: H Ltd. sold goods costing ₹8,000 for ₹10,000 to S Ltd. Profit = ₹2,000. 25% remains unsold. Unrealised profit = 25% × ₹2,000 = ₹500. Being downstream profit (parent to subsidiary), it reduces H Ltd.'s P&L and S Ltd.'s stock.

Inter-company Eliminations:
(i) S Ltd.'s Creditors include ₹4,000 to H Ltd. → eliminated against H Ltd.'s Debtors ₹4,000.
(ii) S Ltd.'s Bills Payable of ₹15,000 was in favour of H Ltd. H Ltd. discounted ₹8,000 with its creditors and holds ₹7,000. The ₹7,000 inter-company bills are eliminated. The ₹8,000 discounted bills represent S Ltd.'s obligation to third-party bill holders; S Ltd.'s Bills Payable ₹8,000 remains in consolidated accounts. A Contingent Liability note of ₹8,000 (bills discounted by H Ltd., not yet matured) must be disclosed.

Consolidated P&L Account: H Ltd. P&L ₹60,000 + H's share of post-acquisition profit (60% × ₹15,000 = ₹9,000) − Unrealised profit ₹500 = ₹68,500.

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Consolidated Balance Sheet of H Ltd. and Subsidiary (S Ltd.) as on 31st March, 2023

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Share Capital (H Ltd.) | 9,00,000 | Fixed Assets (H: 5,00,000 + S: 1,50,000) | 6,50,000 |
| Capital Reserve (WN 3) | 28,000 | Stock (H: 2,00,000 + S: 82,500 − UP: 500) | 2,82,000 |
| General Reserve (H Ltd.) | 1,50,000 | Debtors (H: 84,000 − 4,000 + S: 87,500) | 1,67,500 |
| Consolidated P&L (WN 5) | 68,500 | Bills Receivable (H: 7,000 − 7,000 + S: 10,000) | 10,000 |
| Minority Interest (WN 4) | 1,28,000 | Cash and Bank (H: 34,000 + S: 40,000) | 74,000 |
| Bills Payable (30,000 + 28,000 − 7,000) | 51,000 | | |
| Sundry Creditors (40,000 + 22,000 − 4,000) | 58,000 | | |
| Total | 13,83,500 | Total | 13,83,500 |

Contingent Liability: Bills of Exchange drawn by S Ltd. and discounted by H Ltd. with third parties (not yet matured) = ₹8,000.

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Part (b): Circumstances When Garner vs. Murray Rule is NOT Applicable

The rule in Garner vs. Murray (1904) provides that when a partner's capital account shows a debit balance (deficiency) due to insolvency, the remaining solvent partners must bear that loss in proportion to their last agreed capitals (not in profit-sharing ratio).

The rule is NOT applicable in the following circumstances:

1. When there are only two partners in the firm: If one of the two partners is insolvent, there is only one solvent partner remaining who must bear the entire deficiency of the insolvent partner. The question of apportioning between multiple solvent partners in capital ratio does not arise.

2. When all partners are insolvent: If every partner's capital account shows a debit balance, there are no solvent partners to absorb the deficiency. The rule simply cannot be applied.

3. When the Partnership Deed contains a contrary provision: If the deed specifies that all losses — including capital deficiencies arising from insolvency — shall be borne by partners in their profit-sharing ratio, the contractual arrangement overrides the common law rule.

4. When the capitals of solvent partners are in the same ratio as their profit-sharing ratio: In such cases, bearing the loss in capital ratio or profit-sharing ratio yields the identical result, making the distinction academic.

5. Applicability in India: Garner vs. Murray is an English decision and is not binding on Indian courts. In the absence of a partnership agreement, some Indian courts have not applied this rule, holding that the deficiency of an insolvent partner should be shared by the remaining partners in their profit-sharing ratio as per the principles of the Indian Partnership Act, 1932.

Statement of Profit and Loss of Traverse Limited for the year ended 31st March 2023 (as per Schedule III of the Companies Act, 2013)

I. Revenue from Operations
Sales: ₹47,22,600; Other Operating Revenue (Transfer Fees): ₹38,250
Total Revenue from Operations: ₹47,60,850

II. Other Income
Discount Received: ₹66,300; Interest on Investments: ₹55,000; Profit on Sale of Plant & Machinery (W.N. 1): ₹62,300
Total Other Income: ₹1,83,600

III. Total Revenue (I + II): ₹49,44,450

IV. Expenses
(a) Purchases of Stock-in-Trade: ₹28,86,600
(b) Changes in Inventories of Stock-in-Trade (Opening ₹4,97,250 − Closing ₹4,76,850): ₹20,400
(c) Employee Benefits Expense (Directors' Fees): ₹38,250
(d) Finance Costs — Debenture Interest ₹3,94,150 + Bank Interest ₹13,260: ₹4,07,410
(e) Depreciation and Amortisation Expense (W.N. 2): ₹3,59,765
(f) Other Expenses:
— Factory Expenses: ₹2,58,660
— Rates, Taxes and Insurance: ₹65,025
— Repairs: ₹1,49,685
— Sundry Expenses: ₹1,27,500
— Selling Expenses: ₹26,520
Sub-total Other Expenses: ₹6,27,390
Total Expenses: ₹43,39,815

V. Profit Before Tax (III − IV): ₹6,04,635

VI. Tax Expense — Provision for Income Tax @ 25%: ₹1,51,159

VII. Profit for the Year (V − VI): ₹4,53,476

Notes:
(1) Revaluation of Land: The surplus of ₹99,25,400 (₹1,08,63,000 − ₹9,37,600) on revaluation of Land is transferred to Revaluation Reserve directly under equity. It does not pass through the Statement of Profit and Loss per AS 10 (Accounting for Fixed Assets).
(2) Dividend: The dividend of 10% on equity declared by the Board on 4th April 2023 is an event after the reporting period. As per AS 4 (Contingencies and Events Occurring After the Balance Sheet Date), it is not recognised as a liability as at 31st March 2023 and is only disclosed as a subsequent event.
(3) The Miscellaneous Receipts of ₹1,42,800 represent sale proceeds of plant disposed of on 01.04.2022 and have been reclassified accordingly; the resultant profit of ₹62,300 is shown under Other Income.

Note: The actual numerical data from the Balance Sheet of Flora Limited has not been provided in the question. The question references a Balance Sheet with items such as Goodwill, Land, Furniture and Fixtures, Vehicles, Office Equipment, Long-term Investments, Stock-in-hand, Bills Receivables, Trade Receivables, and Cash and Bank Balances for 31st March 2023 and 31st March 2022 — but the specific ₹ figures are missing from the input.

Framework for solving this type of question (Comparative Balance Sheet Analysis):

A Comparative Balance Sheet is prepared to analyse changes in the financial position of a company over two periods. It shows absolute change (increase or decrease in ₹) and percentage change for each item.

Steps to prepare a Comparative Balance Sheet:

Step 1 — Classify assets and liabilities into Non-Current Assets (Fixed Assets + Long-term Investments), Current Assets (Stock, Bills Receivables, Trade Receivables, Cash & Bank), Non-Current Liabilities, and Current Liabilities.

Step 2 — Compute Absolute Change: Absolute Change = Amount in 31/03/2023 − Amount in 31/03/2022. A positive figure indicates an increase; a negative figure indicates a decrease.

Step 3 — Compute Percentage Change: Percentage Change = (Absolute Change ÷ Amount in 31/03/2022) × 100.

Step 4 — Interpret significant changes: Comment on trends such as increase in current assets indicating improved liquidity, increase in long-term investments indicating deployment of surplus funds, reduction in trade receivables indicating efficient collection, etc.

Key observations typically made in such analysis:
- An increase in Goodwill may indicate acquisition activity.
- An increase in Fixed Assets (Land, Furniture, Vehicles, Equipment) indicates capital expansion.
- A rise in Stock-in-hand without corresponding increase in sales may indicate slow-moving inventory.
- Increase in Cash and Bank Balances indicates improved liquidity.
- Decline in Bills Receivables / Trade Receivables indicates better collection efficiency.

Please provide the actual ₹ figures for both years so that the complete numerical solution — including the Comparative Balance Sheet with absolute and percentage changes — can be worked out step by step.

Cash Flow Statement — Operating Activities (Indirect Method)

As per AS 3 — Cash Flow Statements (issued by ICAI), the indirect method starts with Net Profit before Tax and Extraordinary Items and adjusts for non-cash items, non-operating items, and changes in working capital to arrive at Cash Generated from Operations.

Note: No financial data was provided with this question. The solution below presents the standard format with illustrative figures and all required workings to demonstrate the complete methodology as expected in the CA Intermediate exam.

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CASH FLOW STATEMENT (EXTRACT — OPERATING ACTIVITIES)
For the year ended 31st March, 2023

A. Cash Flow from Operating Activities

Net Profit before Tax and Extraordinary Items — ₹1,50,000

Adjustments for Non-Cash / Non-Operating Items:
Add: Depreciation — ₹30,000
Add: Amortisation of Goodwill — ₹5,000
Add: Loss on Sale of Fixed Asset — ₹4,000
Add: Interest Expense (Finance Cost) — ₹12,000
Less: Profit on Sale of Investments — (₹6,000)
Less: Dividend / Interest Income (Investing) — (₹8,000)

Operating Profit before Working Capital Changes — ₹1,87,000

Adjustments for Changes in Working Capital:
Increase in Trade Receivables — (₹15,000)
Decrease in Inventories — ₹10,000
Increase in Trade Payables — ₹8,000
Decrease in Other Current Liabilities — (₹3,000)
Increase in Prepaid Expenses — (₹2,000)

Cash Generated from Operations — ₹1,85,000
Less: Income Tax Paid (Net of Refund) — (₹35,000)

Net Cash from Operating Activities — ₹1,50,000

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Key Rules for Indirect Method:

1. Start with Net Profit before Tax (not after tax).
2. Add back all non-cash charges: depreciation, amortisation, provision for doubtful debts, loss on asset disposal.
3. Deduct non-cash income: profit on sale of assets/investments.
4. Reclassify finance costs (add back) and investing income (deduct) — these belong to Financing and Investing activities respectively.
5. Working Capital adjustments: Increase in current assets = cash outflow (deduct); Decrease in current assets = cash inflow (add). Increase in current liabilities = cash inflow (add); Decrease in current liabilities = cash outflow (deduct).
6. Income Tax Paid is shown separately after Cash Generated from Operations and is treated as operating unless specifically identifiable with financing/investing.
7. Extraordinary items (if any) — shown separately within operating activities.

Final Answer: Net Cash from Operating Activities = ₹1,50,000 (illustrative)

If actual data is provided, substitute the figures accordingly using the above framework.

Capital Structure Analysis of VJJ Ltd. as on 31st March, 2022

Step 1: Identification of Capital Structure Components

The capital structure of VJJ Ltd. comprises two broad categories — Shareholders' Funds (Equity) and Loan Funds (Debt).

Shareholders' Funds:
- Equity Share Capital (99 lakh shares of ₹10 each) = ₹990 lakhs
- General Reserve = ₹720 lakhs
- Securities Premium Account = ₹270 lakhs
- Profit & Loss Account = ₹270 lakhs
- Infrastructure Development Reserve = ₹540 lakhs
- Total Shareholders' Funds = ₹2,790 lakhs

Note: Infrastructure Development Reserve is a statutory capital reserve (not freely distributable). Securities Premium is also a capital reserve under Section 52 of the Companies Act, 2013.

Loan Funds (Fixed Charge Capital): ₹5,400 lakhs

Total Capital Employed = ₹2,790 + ₹5,400 = ₹8,190 lakhs

Step 2: Classification of Reserves
- Revenue (Free) Reserves = General Reserve + P&L Account = ₹720 + ₹270 = ₹990 lakhs
- Capital Reserves = Securities Premium + Infrastructure Dev. Reserve = ₹270 + ₹540 = ₹810 lakhs
- Total Reserves & Surplus = ₹1,800 lakhs

Step 3: Key Capital Structure Ratios

(i) Debt-Equity Ratio = Loan Funds ÷ Shareholders' Funds
= ₹5,400 ÷ ₹2,790 = 1.94 : 1
This indicates that for every ₹1 of equity, the company has ₹1.94 of debt — significantly leveraged.

(ii) Capital Gearing Ratio = Fixed Interest-Bearing Capital ÷ Equity Shareholders' Funds
= ₹5,400 ÷ ₹2,790 = 1.94
Since ratio > 1, VJJ Ltd. is Highly Geared — the company is heavily dependent on debt financing.

(iii) Proprietary Ratio = Shareholders' Funds ÷ Total Capital Employed
= ₹2,790 ÷ ₹8,190 = 34.06%
Only ~34% of total assets are financed by owners — indicating high financial risk.

(iv) Debt to Total Capital Ratio = Loan Funds ÷ Total Capital Employed
= ₹5,400 ÷ ₹8,190 = 65.94%

(v) Book Value per Equity Share = Shareholders' Funds ÷ Number of Shares
= ₹2,790 lakhs ÷ 99 lakh shares = ₹28.18 per share
(Number of shares = ₹990 lakhs ÷ ₹10 = 99 lakh shares)

Step 4: Observations on Capital Structure

1. High Financial Leverage: With a D/E ratio of ~1.94, VJJ Ltd. is highly geared. This amplifies EPS in good times but increases financial risk during downturns.
2. Capital Reserve Position: A significant portion of reserves (₹810 lakhs) are capital reserves (non-distributable), limiting the distributable surplus.
3. Book Value Premium: The book value of ₹28.18 per share exceeds the face value of ₹10 per share, reflecting accumulated retained earnings and premium.
4. Risk Assessment: The proprietary ratio of 34.06% is below the benchmark of 50%, suggesting the company relies heavily on external borrowings, exposing creditors to higher risk.

Conclusion: VJJ Ltd. has a highly geared capital structure with total capital employed of ₹8,190 lakhs, dominated by loan funds (65.94%). Management should evaluate optimal capital structure to balance financial risk and the benefit of financial leverage (trading on equity).

Investment Account in the Books of Mr. Atwood for the year ended 31st March 2023

Note on price interpretation: Bond purchase price ₹97 and sale price ₹99 are per ₹100 face value. Equity sale price ₹1.15 and market price ₹1.25 represent ₹115 and ₹125 per share respectively (expressed as a ratio of ₹100 face value, consistent with bond quotation convention).

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INVESTMENT ACCOUNT — EQUITY SHARES IN SUN LIMITED (Current Investment)

| Date | Particulars | Shares | ₹ | Date | Particulars | Shares | ₹ |
|---|---|---|---|---|---|---|---|
| 01.04.22 | Balance b/d | 3,000 | 3,30,000 | 01.01.23 | Bank (Sale @ ₹115) | 1,000 | 1,15,000 |
| 01.07.22 | Bank (Purchase) | 1,500 | 1,50,600 | 31.03.23 | Balance c/d | 5,300 | 4,04,314 |
| 15.10.22 | Bonus Shares (2:5) | 1,800 | — | | | | |
| 01.01.23 | P&L (Profit on Sale) | — | 38,714 | | | | |
| | Total | 6,300 | 5,19,314 | | Total | 6,300 | 5,19,314 |

Notes on Equity Account:
- Dividend of ₹45,000 (10% on ₹100 × 4,500 shares) received on 02.10.2022 is credited directly to P&L as Dividend Income (not routed through Investment Account).
- Closing Valuation: Cost ₹4,04,314 vs. Market Value (5,300 × ₹125) = ₹6,62,500 → Valued at ₹4,04,314 (cost is lower).

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INVESTMENT ACCOUNT — 9% BONDS (Current Investment)

*(Columns: Nominal Value | Interest | Principal/Cost)*

| Date | Particulars | NV (₹) | Int (₹) | Prin (₹) | Date | Particulars | NV (₹) | Int (₹) | Prin (₹) |
|---|---|---|---|---|---|---|---|---|---|
| 01.08.22 | Bank (Purchase, cum-int.) | 5,00,000 | 18,750 | 4,66,250 | 01.09.22 | Bank (Interest received) | — | 22,500 | — |
| 31.03.23 | P&L (Profit on sale) | — | — | 23,000 | 01.03.23 | Bank (Interest received) | — | 22,500 | — |
| 31.03.23 | P&L (Net Interest Income) | — | 27,000 | — | 31.03.23 | Bank (Sale @ ₹99 ex-int.) | 4,00,000 | — | 3,96,000 |
| | | | | | 31.03.23 | Balance c/d | 1,00,000 | 750 | 93,250 |
| | Total | 5,00,000 | 45,750 | 4,89,250 | | Total | 5,00,000 | 45,750 | 4,89,250 |

Notes on Bond Account:
- Purchase was cum-interest: accrued interest (5 months from 01.03.2022 to 01.08.2022) = ₹18,750 is separated; cost of bonds = ₹4,66,250 (₹93.25 per bond).
- Interest received on 01.09.2022 and 01.03.2023 = ₹22,500 each (6-month periods on 5,000 bonds).
- Bonds sold on 31.03.2023 at ₹99 ex-interest: no accrued interest received from buyer for the period 01.03.2023 to 31.03.2023 on 4,000 bonds sold.
- Accrued interest (₹750) on closing 1,000 bonds (1 month: March 2023) is carried as balance in the Interest column.
- Net Interest Income to P&L = ₹22,500 + ₹22,500 + ₹750 – ₹18,750 = ₹27,000.
- Closing Valuation: Cost ₹93,250 vs. Market (1,000 × ₹99) = ₹99,000 → Valued at ₹93,250 (cost is lower).

Summary of Profits/Income transferred to P&L:
- Profit on sale of 1,000 equity shares: ₹38,714
- Dividend income (equity): ₹45,000
- Profit on sale of 4,000 bonds: ₹23,000
- Net interest income (bonds): ₹27,000

Statement of Pre-incorporation and Post-incorporation Profits of Wringler Limited for the year ended 31st March 2023

Key Assumption: The question contains an apparent typographical error (both dates read as 1st August 2022). The standard interpretation is that Wringler Limited agreed to take over FIG Enterprises' business with effect from 1st April 2022 (commencement of the financial year), but due to procedural delay, the company was legally incorporated only on 1st August 2022. Accordingly:
- Pre-incorporation period: 1st April 2022 to 31st July 2022 = 4 months
- Post-incorporation period: 1st August 2022 to 31st March 2023 = 8 months
- Ratio (Pre : Post) = 4 : 8 = 1 : 2

Basis of Apportionment:
- Sales/Turnover basis (1:2): Cost of Goods Sold, Sales Manager's Salary, Bad Debts (items varying with business volume/sales activity)
- Time basis (1:2): Printing & Stationery, Rent, Depreciation, Audit Fees, Sundry Office Expenses, Interest on Loan (these accrue with passage of time)
- Post-incorporation only: Underwriting Commission (incurred for issue of securities after incorporation), Interest on Debentures (debentures issued post-incorporation), Donation (company policy decision after incorporation), Interest on Investment, Profit on Sale of Investment (investments made post-incorporation)

Statement of Pre and Post-incorporation Profits (₹)

| Particulars | Basis | Pre-inc. (4M) ₹ | Post-inc. (8M) ₹ |
|---|---|---|---|
| Sales | Time 1:2 | 39,90,000 | 79,80,000 |
| Less: Cost of Goods Sold | Sales 1:2 | (21,46,667) | (42,93,333) |
| Gross Profit | | 18,43,333 | 36,86,667 |
| Add: Interest on Investment | Post only | — | 60,000 |
| Add: Profit on Sale of Investment | Post only | — | 40,000 |
| Total Income | | 18,43,333 | 37,86,667 |
| Less: Expenses | | | |
| Printing & Stationery | Time 1:2 | 29,000 | 58,000 |
| Sales Manager's Salary | Sales 1:2 | 27,000 | 54,000 |
| Donation | Post only | — | 21,000 |
| Rent | Time 1:2 | 45,000 | 90,000 |
| Bad Debts | Sales 1:2 | 19,000 | 38,000 |
| Underwriting Commission | Post only | — | 56,000 |
| Depreciation | Time 1:2 | 23,400 | 46,800 |
| Interest on Debentures | Post only | — | 8,900 |
| Audit Fees | Time 1:2 | 5,000 | 10,000 |
| Sundry Office Expenses | Time 1:2 | 18,500 | 37,000 |
| Interest on Loan | Time 1:2 | 20,833 | 41,667 |
| Total Expenses | | 1,87,733 | 4,61,367 |
| Net Profit | | 16,55,600 | 33,25,300 |

Treatment of Pre-incorporation Profit: The pre-incorporation profit of ₹16,55,600 is a capital profit and must be transferred to Capital Reserve. It cannot be used for payment of dividends to shareholders. The post-incorporation profit of ₹33,25,300 is a revenue profit available for distribution.

Verification: Total profit = ₹16,55,600 + ₹33,25,300 = ₹49,80,900 (agrees with total revenue ₹1,20,70,000 less total expenses ₹70,89,100).

Branch Accounting — Foreign Branch (Seattle) Trial Balance Conversion into Rupees

Note on Question: The question refers to a Seattle Branch Trial Balance in US dollars that must have been provided in the original paper. The three items listed are adjustments to that trial balance. The solution below demonstrates the complete methodology, incorporates the three adjustments, and applies the correct conversion rates as per AS 11 — The Effects of Changes in Foreign Exchange Rates (integral foreign operations approach, applicable for CA Intermediate).

Conversion Rules (AS 11 — Integral Foreign Operation):

(i) Fixed Assets: Historical rate — rate on the date of acquisition.
(ii) Depreciation: Same historical rate as the related asset.
(iii) Opening Stock: Rate prevailing at the beginning of the year (₹79 per $1).
(iv) Closing Stock: Lower of cost (historical rate) or NRV (closing rate). Typically closing rate for simplicity — ₹83 per $1.
(v) Monetary items — Debtors, Creditors, Cash, Bank, Outstanding Liabilities: Closing rate ₹83 per $1.
(vi) Revenue items — Sales, Purchases, Expenses (Salaries, Rent, etc.): Average rate ₹79.50 per $1.
(vii) HO Current Account in Branch Books: Taken at the figure appearing in HO books after reconciliation — NOT converted at any exchange rate.
(viii) Exchange Difference: The trial balance will not tally after conversion; the difference (debit or credit) is the Exchange Fluctuation Gain/Loss, which is transferred to the Profit & Loss Account of the HO.

Incorporating the Three Adjustments Before Conversion:

Adjustment 1 — Outstanding Salaries ($500):
Salaries are a revenue (P&L) item → converted at average rate. Outstanding Salaries is a current liability (monetary) → converted at closing rate.
- Salaries A/c (Dr) in ₹ = $500 × ₹79.50 = ₹39,750
- Outstanding Salaries A/c (Cr) in ₹ = $500 × ₹83 = ₹41,500
- Difference of ₹1,750 forms part of the overall Exchange Fluctuation.

Adjustment 2 — Goods sent by HO to Branch (₹24,00,000):
The HO has dispatched goods costing ₹24,00,000 to the Seattle Branch. In the Branch books (maintained in $), this is recorded as a credit to the HO Current Account. The dollar amount in Branch books would be: ₹24,00,000 ÷ ₹79 (opening/historical rate at which goods were typically invoiced at the start of year) = $30,379.75, or as applicable at the transaction rate.
In the converted trial balance, the HO Account (Cr) is taken at the figure as per HO books, NOT re-converted.

Adjustment 3 — Reconciliation of HO Account:
HO books show ₹21,00,000 due from Branch (Branch Account Dr in HO books). The HO Account in the Branch Trial Balance (Cr side) must be adjusted to reflect ₹21,00,000 after reconciling goods in transit, remittances in transit, etc. The difference of ₹24,00,000 − ₹21,00,000 = ₹3,00,000 likely represents goods in transit (sent by HO but not yet received/recorded by Branch) — this is an inter-branch reconciling item.

Format of Converted Trial Balance:

All dollar figures from the original trial balance are converted using the appropriate rate per the rules above. The converted trial balance (Dr and Cr columns in ₹) will differ — the balancing figure is the Exchange Fluctuation, which is credited (gain) or debited (loss) to bring the trial balance into agreement.

Final Answer: The Seattle Branch Trial Balance is prepared by: (a) incorporating outstanding salaries ($500 Dr Salaries, $500 Cr Outstanding Salaries), (b) reconciling the HO Account at ₹21,00,000 (per HO books) after adjusting for ₹3,00,000 goods in transit, and (c) converting each line item at the applicable rate (₹79 historical / ₹83 closing / ₹79.50 average). The Exchange Fluctuation difference is the balancing figure transferred to P&L.

PART (a): DEPARTMENTAL TRADING ACCOUNTS

Only direct costs (materials and wages) appear in the Trading Account. Salaries and depreciation are indirect overheads allocated in the P&L Account. Transfer prices are computed on direct-cost base.

| Particulars | Dept A (₹) | Dept B (₹) | Dept C (₹) |
|---|---|---|---|
| To Opening Stock | 3,50,000 | 2,20,000 | 3,80,000 |
| To Materials Consumed | 7,20,000 | 7,60,000 | — |
| To Wages | 1,60,000 | 1,80,000 | 3,20,000 |
| To Transfer from Dept A | — | 11,20,000 | — |
| To Transfer from Dept B | — | — | 25,00,000 |
| To Gross Profit c/d | 3,20,000 | 5,00,000 | 4,60,000 |
| Total | 15,50,000 | 27,80,000 | 36,60,000 |
| By Transfer to Dept B | 11,20,000 | — | — |
| By Transfer to Dept C | — | 25,00,000 | — |
| By Sales | — | — | 26,40,000 |
| By Closing Stock | 4,30,000 | 2,80,000 | 10,20,000 |
| Total | 15,50,000 | 27,80,000 | 36,60,000 |

Dept A direct cost = ₹3,50,000 + ₹7,20,000 + ₹1,60,000 − ₹4,30,000 = ₹8,00,000; transferred at cost + 40% = ₹11,20,000.
Dept B direct cost = ₹2,20,000 + ₹11,20,000 + ₹7,60,000 + ₹1,80,000 − ₹2,80,000 = ₹20,00,000; transferred at cost + 25% = ₹25,00,000.
Dept C: Dr ₹32,00,000 vs Cr ₹36,60,000 → Gross Profit ₹4,60,000.

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PART (b): PROFIT AND LOSS ACCOUNT

Indirect overheads are allocated on prescribed bases. Interest on Loan is a financing charge excluded from departmental allocation.

Allocation summary:

| Overhead | Basis | Dept A | Dept B | Dept C | Total |
|---|---|---|---|---|---|
| Salaries ₹1,90,000 | Employees 18:15:12 | 76,000 | 63,333 | 50,667 | 1,90,000 |
| Depreciation ₹2,88,000 | Machinery 12:15:6 | 1,04,727 | 1,30,909 | 52,364 | 2,88,000 |

*(Floor space data 10,000:8,000:6,000 sq ft is given but no overhead is allocated on that basis — treated as unused/distractor.)*

Profit and Loss Account

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Salaries | 1,90,000 | Gross Profit — Dept A | 3,20,000 |
| Depreciation | 2,88,000 | Gross Profit — Dept B | 5,00,000 |
| Interest on Loan | 1,02,000 | Gross Profit — Dept C | 4,60,000 |
| Net Profit c/d | 7,00,000 | | |
| Total | 12,80,000 | Total | 12,80,000 |

Net Profit (before unrealised profit adjustment) = ₹7,00,000

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PART (c): GENERAL LOSS ACCOUNT

Inter-departmental transfers at inflated prices embed unrealised profits in the closing stocks of Departments B and C (per condition v, 80% of each department's stock is sourced from the upstream department). These must be eliminated to arrive at the true profit of the enterprise.

Unrealised Profit — Opening Stocks:

| Stock Component | Computation | Amount (₹) |
|---|---|---|
| B's OS — A's profit (80% of ₹2,20,000 = ₹1,76,000) | 1,76,000 × 40/140 | 50,286 |
| C's OS — B's profit (80% of ₹3,80,000 = ₹3,04,000) | 3,04,000 × 25/125 | 60,800 |
| C's OS — A's profit via B (B's cost = ₹2,43,200; 80% from A = ₹1,94,560) | 1,94,560 × 40/140 | 55,589 |
| Total | | 1,66,675 |

Unrealised Profit — Closing Stocks:

| Stock Component | Computation | Amount (₹) |
|---|---|---|
| B's CS — A's profit (80% of ₹2,80,000 = ₹2,24,000) | 2,24,000 × 40/140 | 64,000 |
| C's CS — B's profit (80% of ₹10,20,000 = ₹8,16,000) | 8,16,000 × 25/125 | 1,63,200 |
| C's CS — A's profit via B (B's cost = ₹6,52,800; 80% from A = ₹5,22,240) | 5,22,240 × 40/140 | 1,49,211 |
| Total | | 3,76,411 |

General Loss Account

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Provision — Unrealised Profit in Closing Stock | 3,76,411 | By Provision released — Opening Stock | 1,66,675 |
| | | By General Loss (transferred to P&L) | 2,09,736 |
| Total | 3,76,411 | Total | 3,76,411 |

The General Loss of ₹2,09,736 is charged to the P&L Account.

Adjusted (True) Net Profit = ₹7,00,000 − ₹2,09,736 = ₹4,90,264

Conditions for Buy-Back of Equity Shares under Companies Act, 2013

Section 68 of the Companies Act, 2013 governs the buy-back of shares by a company. A Joint Stock Company must fulfill the following conditions to buy-back its equity shares:

1. Authorization by Articles of Association: The buy-back must be authorized by the Articles of Association of the company. If not so authorized, the Articles must first be amended.

2. Special Resolution or Board Resolution: Buy-back must be authorized by a special resolution passed in the general meeting. However, if the buy-back is 10% or less of the total paid-up equity capital and free reserves, it may be authorized by a Board Resolution alone.

3. Ceiling on Buy-Back (25% Limit): The buy-back of equity shares in any financial year shall not exceed 25% of the total paid-up equity capital and free reserves of the company in that financial year.

4. Debt-Equity Ratio: After the buy-back, the ratio of the aggregate of secured and unsecured debts owed by the company shall not be more than twice the paid-up capital and its free reserves (i.e., Debt : Equity ≤ 2:1). The Central Government may prescribe a higher ratio for a class or classes of companies.

5. Fully Paid-Up Shares: Only fully paid-up shares can be bought back. Partly paid shares are not eligible for buy-back.

6. Sources of Buy-Back: The buy-back may be made out of —
- The company's free reserves;
- The securities premium account; or
- The proceeds of the issue of any shares or other specified securities (but not out of the proceeds of an earlier issue of the same kind of shares or same kind of specified securities).

7. Filing of Declaration of Solvency: The company must file with the Registrar of Companies (ROC) and the Securities and Exchange Board of India (SEBI) (in case of listed companies) a Declaration of Solvency signed by at least two directors (one being the Managing Director, if any), stating that the Board has made full inquiry into the affairs of the company and that the company will not be rendered insolvent within a period of one year from the date of declaration.

8. Completion of Buy-Back: The buy-back must be completed within 1 year from the date of passing of the special resolution or the Board resolution, as the case may be.

9. Gap Between Two Buy-Backs: No offer of buy-back shall be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back, if any.

10. Extinguishment of Securities: The securities bought back shall be extinguished and physically destroyed within 7 days of the last date of completion of the buy-back.

11. Capital Redemption Reserve (CRR): Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the Capital Redemption Reserve Account. The details of such transfer shall be disclosed in the balance sheet.

12. Prohibition on Further Issue: The company shall not make any further issue of the same kind of shares (including allotment of new shares under clause (a) of sub-section (1) of Section 62) or other specified securities within a period of 6 months after the completion of buy-back, except by way of a bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity, or conversion of preference shares or debentures into equity shares.

Non-compliance with the provisions of Section 68 renders the buy-back void and the company and every officer in default shall be liable to penalty as prescribed under Section 68(11) of the Companies Act, 2013.

Liquidator's Statement of Account — Hari Ltd. (Liquidation)

The liquidator must distribute available assets in the following priority under the Companies Act, 2013: (1) Secured creditors to the extent of their security, (2) Preferential creditors (none mentioned here), (3) Unsecured creditors, (4) Preference shareholders, and (5) Equity shareholders.

Step 1 — Calls on Partly Paid Shares

The ₹75 paid-up equity shares have an uncalled amount of ₹25 per share. Number of shares = ₹3,00,000 ÷ ₹75 = 4,000 shares. Calls collected = 4,000 × ₹25 = ₹1,00,000. These are brought into the liquidation pool.

Step 2 — Total Realisable Assets

Fixed Assets ₹4,00,000 + Inventory ₹2,40,000 + Trade Receivables ₹4,80,000 + Calls on partly paid shares ₹1,00,000 = ₹12,20,000. The P&L Account (Dr. balance ₹6,00,000) represents accumulated losses — it is not an asset and is ignored in realisation.

Step 3 — Payment to Secured Creditor (Bank)

Bank loan of ₹2,00,000 is secured against Inventory of ₹2,40,000. Bank is paid ₹2,00,000 fully from inventory proceeds. Surplus from inventory = ₹40,000 flows back to the general pool.

Step 4 — Amount Available After Secured Creditor

₹12,20,000 − ₹2,00,000 = ₹10,20,000 available for unsecured creditors and shareholders.

Step 5 — Payment to Unsecured Creditors (Trade Payables)

Trade payables = ₹7,00,000. Fully paid from the pool. Balance remaining = ₹10,20,000 − ₹7,00,000 = ₹3,20,000.

Step 6 — Payment to Preference Shareholders

Preference share capital = 2,000 × ₹100 = ₹2,00,000. No arrears of dividend are payable given the debit P&L balance. Preference shareholders are paid ₹2,00,000 in full. Balance = ₹3,20,000 − ₹2,00,000 = ₹1,20,000.

Step 7 — Distribution to Equity Shareholders

Total equity shares = Fully paid 4,000 shares + Partly paid 4,000 shares = 8,000 shares. Amount available = ₹1,20,000. Distribution per equity share = ₹1,20,000 ÷ 8,000 = ₹15 per share.

Fully paid equity shareholders receive ₹15 per share (loss of ₹85 per share). Partly paid equity shareholders paid ₹25 as call and receive ₹15 back — net outflow ₹10 per share in addition to capital already paid.

Conclusion: Trade payables and Bank are paid in full. Preference shareholders are repaid fully. Equity shareholders receive only ₹15 per share (₹1,20,000 in total), reflecting the accumulated loss of ₹6,00,000 borne ultimately by equity.

PART (a): PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH 2023

To Opening Stock: ₹35,000
Add: Purchases: ₹41,000
Less: Closing Stock: ₹75,000
Cost of Goods Sold: ₹1,000

By Sales (on credit): ₹53,600

Gross Profit: ₹52,600

Less: Expenses:
Petty Expenses (cash): ₹7,500
Outstanding Expenses: ₹2,100
Total Expenses: ₹9,600

Less: Depreciation on Fixed Assets (10% of ₹20,000): ₹2,000

Net Profit: ₹41,000

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PART (b): BALANCE SHEET AS AT 31st MARCH 2023

LIABILITIES & CAPITAL | ASSETS
---|---
Capital Account: | Fixed Assets:
Opening Balance: ₹93,000 | Gross Value: ₹20,000
Add: Net Profit: ₹41,000 | Less: Depreciation (10%): ₹2,000
₹134,000 | Net Value: ₹18,000
Less: Drawings: ₹24,000 | |
Closing Balance: ₹110,000 | Current Assets:
| Stock: ₹75,000
Current Liabilities: | Sundry Debtors: ₹27,000
Sundry Creditors: ₹3,000 | Cash in Hand & Bank: ₹(4,900)*
Outstanding Expenses: ₹2,100 | |
₹5,100 | Total Assets: ₹115,100
| |
TOTAL: ₹115,100 | TOTAL: ₹115,100

*Note: The closing cash balance as derived from the given figures shows a deficiency of ₹4,900. This suggests a possible inconsistency or missing information in the problem data. In practice, this would indicate either unreported receipts, additional investments, or an error in the stated opening figures. For examination purposes, the balance sheet should reflect the closing capital of ₹110,000 derived from opening capital plus profit less drawings.

Key Calculations:
- Purchases calculated from Sundry Creditors account: Opening Balance ₹13,000 + Purchases - Cash Payment ₹36,000 - Cheque Payment ₹15,000 = Closing ₹3,000; therefore Purchases = ₹41,000
- Sales derived from given net profit of ₹41,000 working backwards through COGS (Opening Stock ₹35,000 + Purchases ₹41,000 - Closing Stock ₹75,000 = ₹1,000)
- Collections from Debtors calculated as ₹39,600 (Opening ₹13,000 + Sales ₹53,600 - Closing ₹27,000)

SHARE BUYBACK – MAXIMUM PERMISSIBLE NUMBER AND ACCOUNTING ENTRIES

PART (i): COMPUTATION OF MAXIMUM PERMISSIBLE SHARES

The maximum permissible shares for buyback are governed by Section 68, Companies Act 2013. The buyback amount cannot exceed the lower of: (a) 10% of aggregate of paid-up capital and free reserves; or (b) 25% of (paid-up capital + securities premium account balance).

Critical exclusion: Infrastructure Development Reserve created to satisfy income tax requirements is excluded from "free reserves" per Section 68(2)(e).

Note: The question as presented lacks essential balance sheet details (paid-up capital, free reserves breakdown, securities premium balance, and total issued shares) required for exact numerical computation. The methodology below illustrates the correct approach.

Buyback consideration per share: ₹5.25 × 1.20 = ₹6.30 per share

Required calculation framework:
1. Identify total paid-up capital (P)
2. Identify free reserves excluding Infrastructure Development Reserve (R)
3. Identify securities premium account balance (SP)
4. Maximum permissible amount = Min of: [10% of (P + R)] OR [25% of (P + SP)]
5. Maximum shares = Maximum permissible amount ÷ ₹6.30

For illustration, if assumed paid-up capital is ₹1,000 lakh, free reserves (after excluding infrastructure reserve) ₹3,000 lakh, and securities premium ₹2,000 lakh:

Scenario 1 (₹3,600 lakh loan funds): The loan amount does not directly limit the buyback under Section 68; limits are reserve-based. However, funds available for buyback should be sufficient. Assuming maximum permissible ₹400 lakh (lower of 10% × ₹4,000 lakh = ₹400 lakh OR 25% × ₹3,000 lakh = ₹750 lakh), maximum shares ≈ 63.49 lakh shares.

Scenario 2 (₹4,500 lakh loan funds): If loan position improves and treasury/cash available increases, the buyback limit under Section 68 remains unchanged (reserve-based), but funds availability for actual buyback improves. Shares calculation remains same unless reserves themselves change.

PART (ii): ACCOUNTING ENTRIES

Assuming Scenario 1: Loan funds ₹3,600 lakh (63.49 lakh shares @ ₹6.30)

Buyback amount = 63.49 lakh × ₹6.30 = ₹400 lakh (approximately)

Journal Entries in the books of the company:

Entry 1 – Recording the buyback (during buyback period):
Dr. Capital Redemption Reserve A/c (for face value of shares repurchased: 63.49 lakh × ₹1* = ₹63.49 lakh)
Dr. General Reserve / Free Reserve A/c (for premium: ₹400 lakh – ₹63.49 lakh = ₹336.51 lakh)
Cr. Bank A/c ₹400.00 lakh
*Assuming face value ₹1 per share; adjust per actual par value

*(Narration: "Being the cost of equity shares bought back – 63.49 lakh shares @ ₹6.30 per share under shareholders' approval dated 2nd September 2023, completed on 9th December 2023, in accordance with Section 68, Companies Act 2013")

Entry 2 – Cancellation/Retirement of buyback shares (upon completion):
Dr. Share Capital A/c (face value of shares: ₹63.49 lakh)
Cr. Capital Redemption Reserve A/c ₹63.49 lakh

*(Narration: "Being the cancellation of 63.49 lakh equity shares bought back and retired")

Assuming Scenario 2: Loan funds ₹4,500 lakh (Same share calculation; entries identical in structure)

The regulatory maximum remains unchanged (reserve-based under Section 68). Entries are identical to Scenario 1. The enhanced loan position (₹4,500 lakh vs ₹3,600 lakh) improves liquidity but does not increase the permissible buyback quantity unless accompanied by increased paid-up capital or free reserves.

Dr. Capital Redemption Reserve A/c ₹63.49 lakh
Dr. General Reserve / Free Reserve A/c ₹336.51 lakh
Cr. Bank A/c ₹400.00 lakh

*(Narration: Same as Scenario 1)*

Key compliance notes: (1) Buyback approved before 09/12/2023 completion ✓; (2) Infrastructure Development Reserve correctly excluded from reserve calculation ✓; (3) Capital Redemption Reserve created to replace paid-up capital of cancelled shares ✓; (4) Free reserves depleted only for premium amount ✓.

Bills Discounted — Rebate Calculation and Journal Entries (as on 31.03.2023)

(i) Rebate on Bills Discounted as on 31.03.2023

All six bills listed have due dates after 31.03.2023; hence all are outstanding on the balance sheet date. The rebate on bills discounted represents the unexpired (unearned) portion of discount, calculated as:

Rebate = Face Value × Rate of Discount × Unexpired Days / (100 × 365)

The unexpired days are counted from 31.03.2023 to each bill's due date:

| Bill (₹) | Due Date | Days (31.03.23 to Due Date) | Rate | Rebate (₹) |
|---|---|---|---|---|
| 36,000 | 07.06.2023 | 68 | 12% | 804.82 |
| 34,200 | 14.06.2023 | 75 | 12% | 843.29 |
| 14,000 | 19.07.2023 | 110 | 10% | 421.92 |
| 14,000 | 10.08.2023 | 132 | 15% | 759.45 |
| 12,500 | 05.09.2023 | 158 | 13% | 703.42 |
| 11,000 | 07.10.2023 | 190 | 14% | 801.64 |
| Total | | | | ₹4,334.54 ≈ ₹4,335 |

Rebate on Bills Discounted as on 31.03.2023 = ₹4,335

Journal Entries:

Entry 1 — 01.04.2022 (Reversal of opening rebate brought forward):
Rebate on Bills Discounted A/c Dr. ₹65,500
To Discount on Bills Discounted A/c ₹65,500
*(Being opening rebate transferred to Discount account on commencement of new year)*

Entry 2 — 31.03.2023 (Creation of closing rebate on unexpired discount):
Discount on Bills Discounted A/c Dr. ₹4,335
To Rebate on Bills Discounted A/c ₹4,335
*(Being rebate on unexpired portion of discount on bills outstanding as on 31.03.2023)*

Entry 3 — 31.03.2023 (Transfer of net discount to Profit & Loss):
Discount on Bills Discounted A/c Dr. ₹1,86,165
To Profit and Loss A/c ₹1,86,165
*(Being net discount for the year transferred to P&L account)*

(ii) Amount of Discount Credited to Profit & Loss Account

Discount credited to P&L is computed through the Discount on Bills Discounted Account:

| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| Closing Rebate c/d | 4,335 | Opening Rebate b/d | 65,500 |
| Transfer to P&L | 1,86,165 | Discount received during year | 1,25,000 |
| Total | 1,90,500 | Total | 1,90,500 |

Amount of Discount credited to Profit & Loss Account = ₹1,86,165

LLP Regulatory Requirements under the Limited Liability Partnership Act, 2008 and LLP Rules, 2009

1. Books of Accounts (Section 34(1) of the LLP Act, 2008)

Every LLP is required to maintain proper books of accounts at its registered office. The books must be maintained on cash basis or accrual basis and in accordance with the double entry system of accounting. All books of accounts must be preserved for a period of 8 years from the date of their creation.

2. Financial Disclosures – Statement of Account and Solvency

Every LLP must prepare a Statement of Account and Solvency in Form 8 for each financial year (April 1 to March 31). This statement must be:
- Filed with the Registrar of Companies within 30 days from the end of six months of the financial year, i.e., by 30th October each year.
- Signed by the designated partners of the LLP.
- It contains the statement of assets and liabilities, and a declaration of solvency by the designated partners.

Failure to file Form 8 attracts a penalty of ₹100 per day for each day of default.

3. Audit Requirements (Section 34(2) of the LLP Act, 2008)

Audit of accounts is not mandatory for all LLPs. It is compulsory only if:
- The annual turnover exceeds ₹40 lakhs, OR
- The contribution exceeds ₹25 lakhs.

Where required, the audit must be conducted by a Chartered Accountant in practice as defined under the Chartered Accountants Act, 1949. LLPs below these thresholds are not compulsorily required to get their accounts audited, though they may voluntarily do so.

4. Annual Return (Section 35 of the LLP Act, 2008)

Every LLP must file an Annual Return in Form 11 with the Registrar of Companies within 60 days of the closure of the financial year, i.e., by 30th May each year. The Annual Return contains details of:
- Total number of partners and designated partners,
- Changes in partners/designated partners during the year,
- Total contribution received by partners.

Form 11 must be certified by a Company Secretary in practice if the turnover exceeds ₹5 crores or the contribution exceeds ₹50 lakhs; otherwise, it can be self-certified by a designated partner.

Summary Table:

| Requirement | Form | Due Date | Threshold |
|---|---|---|---|
| Statement of Account & Solvency | Form 8 | 30th October | All LLPs |
| Annual Return | Form 11 | 30th May | All LLPs |
| Audit | — | Before filing Form 8 | Turnover > ₹40L or Contribution > ₹25L |

Assumption: Face value of shares = ₹10 per share (not stated in question; standard assumption).

The question involves accounting for Employee Stock Options (ESOPs) under the Guidance Note on Accounting for Employee Share-based Payments issued by ICAI. The grant date is 1st April, 2022, and the exercise window is 1st March, 2023 to 31st March, 2023 — all within the financial year 2022-23.

The fair value method is applied: total compensation expense is measured as the fair value per option (₹90) multiplied by total options granted. This expense is recognised over the vesting period. Since the entire vesting period falls within FY 2022-23, the full expense is booked in a single year.

For lapsed options (50 employees who did not exercise): since the options lapsed *after* vesting (employees chose not to exercise during the exercise window), the compensation expense already recognised is not reversed. Instead, the corresponding Employee Stock Options Outstanding balance is transferred to General Reserve.

Journal Entries in the books of ABC Ltd. for the year ended 31st March, 2023:

(1) On recognition of Employee Compensation Expense (vesting of options):
Employee Compensation Expense A/c   Dr.   ₹33,75,000
  To Employee Stock Options Outstanding A/c   ₹33,75,000
*(Being fair value of 37,500 options recognised as compensation expense: 250 × 150 × ₹90)*

(2) On exercise of options by 200 employees (30,000 options exercised between 01-03-2023 and 31-03-2023):
Bank A/c   Dr.   ₹21,00,000
Employee Stock Options Outstanding A/c   Dr.   ₹27,00,000
  To Share Capital A/c   ₹3,00,000
  To Securities Premium A/c   ₹45,00,000
*(Being exercise price received + ESOP outstanding transferred on issue of 30,000 shares)*

(3) On lapse of options held by 50 employees (7,500 options not exercised):
Employee Stock Options Outstanding A/c   Dr.   ₹6,75,000
  To General Reserve A/c   ₹6,75,000
*(Being ESOP outstanding transferred to General Reserve on lapse of vested options — no reversal of expense as options lapsed post-vesting)*

Verification: ESOP Outstanding: ₹33,75,000 created — ₹27,00,000 transferred on exercise — ₹6,75,000 transferred on lapse = Nil balance. ✓

PART (i): TIME RATIO AND SALES RATIO

Assuming incorporation date of 1st September 2022 (indicated by loan repayment and rent period ending):

Time Ratio = 5:7
Pre-incorporation: 1st April to 31st August 2022 = 5 months
Post-incorporation: 1st September 2022 to 31st March 2023 = 7 months

Sales Ratio:
Pre-incorporation sales:
- April-June (₹6,00,000 × 3 months) = ₹18,00,000
- July-August (₹9,00,000 × 2 months) = ₹18,00,000
- Total = ₹36,00,000

Post-incorporation sales:
- September-January (₹9,00,000 × 5 months) = ₹45,00,000
- February-March (₹15,75,000 × 2 months) = ₹31,50,000
- Total = ₹76,50,000

Sales Ratio = 36,00,000 : 76,50,000 = 8:17 (or 36:76.5)

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PART (ii): STATEMENT ASCERTAINING PRE AND POST-INCORPORATION PROFITS/LOSSES

[Note: Complete P&L figures not provided in case excerpt. Following items would be allocated:]

Items allocation principles:
- Sales & COGS: Split using Sales Ratio (8:17)
- Interest on Loan: ₹1,50,000 × 10% × 5/12 = ₹6,250 (entirely pre-incorporation) — loan repaid 1st Sept
- Additional Rent: ₹5,000 × 3 months = ₹15,000 (entirely pre-incorporation) — June to August only
- Bad Debts: Adjust for ₹17,000 recovery relating to November 2022 sale (post-incorporation item)
- Audit Fee: Deductible; entirely post-incorporation — Wringler Limited's statutory audit
- Donation to Political Party: Not deductible under Section 80A of Income Tax Act 1961 — disallowed in both periods
- Sales Manager Salary: Split — pre-incorporation includes original rate (April-June) and increased rate (July-August); post-incorporation from 1st July applies increased rate (Sept-March)
- Investments: Sale in June 2022 — entirely pre-incorporation; gain/loss recognized accordingly

Statement Format:
Each item should be split between pre-incorporation (deducted from Gross Profit per sales ratio or time allocation) and post-incorporation (charged to Profit & Loss Account). Pre-incorporation profit/loss flows to Capital Reserve or deducted from opening Capital. Post-incorporation profit flows to Retained Earnings.

---

PART (iii): BALANCE SHEET APPEARANCE

Under AS 26 (Events After Balance Sheet Date) and pre/post-incorporation accounting principles:

Pre-incorporation Loss/Profit:
- If loss: Written off against Capital Reserve or deducted from Share Capital (disclosed separately as Capital Adjustment)
- If profit: Added to Capital Reserve (appearing in Reserves & Surplus section, under Other Reserves)

Post-incorporation Profit/Loss:
- Appears as Retained Earnings within Reserves & Surplus section of Balance Sheet
- If loss: Shown as negative/deducted from opening balance

Specific items in Balance Sheet:
- Investment gain/loss (June 2022 sale): Pre-incorporation; impact flows through Capital Reserve
- Bad debts recovered (₹17,000): Post-incorporation credit in P&L Account
- Donation: Disallowed deduction; added back to profit (tax effect only, not Balance Sheet impact)
- Additional rent: Pre-incorporation expense; flows to Capital Reserve via profit allocation

Disclosure: The split between pre and post-incorporation periods must be disclosed in Schedule to Accounts per SA 570 (Going Concern) and accounting policy notes.

Sub-part (i): Sub-division of Equity Shares

The 1,000 equity shares of ₹100 each (with ₹80 per share called up and paid up) are sub-divided into 10,000 equity shares of ₹10 each (₹8 per share called up and paid up). The total authorised/issued capital of ₹1,00,000 and the called-up amount of ₹80,000 remain unchanged; only the denomination changes.

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Equity Share Capital A/c (1,000 shares × ₹100) Dr | 1,00,000 | |
| To Equity Share Capital A/c (10,000 shares × ₹10) | | 1,00,000 |

*(Being 1,000 equity shares of ₹100 each sub-divided into 10,000 equity shares of ₹10 each; called-up amount proportionately reduces from ₹80 per old share to ₹8 per new share)*

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Sub-part (ii): Conversion of Shares into Stock

1,000 fully-paid equity shares of ₹100 each are converted into ₹1,00,000 worth of equity stock. Stock is not divided into shares of fixed denomination and is freely transferable in any amount.

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Equity Share Capital A/c (1,000 shares × ₹100) Dr | 1,00,000 | |
| To Equity Stock A/c | | 1,00,000 |

*(Being 1,000 fully paid-up equity shares of ₹100 each converted into ₹1,00,000 equity stock as per resolution)*

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Sub-part (iii): Conversion of Preference Shares into 11% Unsecured Debentures (including arrears)

The 1,500 cumulative preference shares of ₹100 each (fully paid = ₹1,50,000) plus arrears of preference dividend of ₹33,000 are together converted into 11% unsecured debentures of ₹100 each. Total debentures to be issued = (₹1,50,000 + ₹33,000) ÷ ₹100 = 1,830 debentures. Since cumulative dividend arrears were not recorded in the books (dividends were not declared), they are now charged to the Statement of Profit and Loss.

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| 1,500 Cumulative Preference Share Capital A/c Dr | 1,50,000 | |
| Statement of Profit & Loss A/c (dividend arrears) Dr | 33,000 | |
| To 11% Unsecured Debentures A/c (1,830 × ₹100) | | 1,83,000 |

*(Being 1,500 cumulative preference shares of ₹100 each along with arrears of dividend of ₹33,000 converted into 1,830 units of 11% unsecured debentures of ₹100 each)*

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Sub-part (iv): Write-off of Goodwill and Patents

Intangible assets — Goodwill (₹80,000) and Patents (₹27,800) — are written off to the Statement of Profit and Loss. The total amount written off is ₹1,07,800.

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Statement of Profit & Loss A/c Dr | 1,07,800 | |
| To Goodwill A/c | | 80,000 |
| To Patents A/c | | 27,800 |

*(Being goodwill of ₹80,000 and patents of ₹27,800 written off to Statement of Profit and Loss)*

Preliminary Analysis:

Storck Limited has two classes of equity shares:
- Fully paid shares: 1,50,000 shares × ₹10 = ₹15,00,000
- Partly paid shares: 1,20,000 shares × ₹10 (₹6 called up) = ₹7,20,000 called-up

Nature of the Bonus Issue:

On 01.04.2022, the company undertakes a two-part bonus action exclusively in respect of the partly paid shareholders:
1. Conversion: The uncalled amount of ₹4 per share (₹10 − ₹6) on 1,20,000 partly paid shares is capitalized via bonus → 1,20,000 × ₹4 = ₹4,80,000 (no new shares issued; existing shares made fully paid).
2. Additional Allotment: Holders of partly paid shares are also allotted new fully paid bonus shares "in the same ratio" — i.e., in the same ratio as the conversion bonus bears to the face value: ₹4 / ₹10 = 2:5 (2 bonus shares for every 5 partly paid shares held). New bonus shares = 1,20,000 × 2/5 = 48,000 shares × ₹10 = ₹4,80,000.

Total Bonus Required: ₹4,80,000 + ₹4,80,000 = ₹9,60,000

Sources (Minimum Reduction in Free Reserves):

To minimise the use of free reserves, non-free reserves are utilised first. Under Section 63 of the Companies Act 2013, bonus shares may be issued from free reserves, Securities Premium Account, or Capital Redemption Reserve Account. Capital Reserve (non-distributable) is used before free reserves to the extent permissible:

| Source | ₹ |
|---|---|
| Capital Redemption Reserve | 80,000 |
| Capital Reserve | 2,10,000 |
| Securities Premium Account | 2,20,000 |
| General Reserve | 4,50,000 |
| Total | 9,60,000 |

*Note: The Securities Premium of ₹75,000 relating to shares issued to vendors under a scheme of absorption is fully available for bonus issue as per Section 52(2)(a) of the Companies Act 2013 — there is no restriction on using such premium for capitalisation via bonus shares.*

Journal Entries in the Books of Storck Limited:

Entry 1 — Transfer of Reserves to Bonus Issue Account:

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Capital Redemption Reserve A/c Dr. | 80,000 | |
| Capital Reserve A/c Dr. | 2,10,000 | |
| Securities Premium A/c Dr. | 2,20,000 | |
| General Reserve A/c Dr. | 4,50,000 | |
|  To Bonus Issue A/c | | 9,60,000 |
| *(Capitalisation of reserves for bonus issue as per Board Resolution dated 01.04.2022)* | | |

Entry 2 — Making Partly Paid Shares Fully Paid via Bonus:

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bonus Issue A/c Dr. | 4,80,000 | |
|  To Equity Share Capital A/c | | 4,80,000 |
| *(Capitalisation of uncalled amount on 1,20,000 partly paid shares: 1,20,000 × ₹4 = ₹4,80,000, making them fully paid)* | | |

Entry 3 — Allotment of Additional Fully Paid Bonus Shares:

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bonus Issue A/c Dr. | 4,80,000 | |
|  To Equity Share Capital A/c | | 4,80,000 |
| *(Allotment of 48,000 fully paid bonus shares of ₹10 each to holders of partly paid shares in ratio 2:5 — same ratio as bonus used for conversion)* | | |

Post-bonus Share Capital:
- Existing fully paid: 1,50,000 shares
- Partly paid converted to fully paid: 1,20,000 shares
- New bonus shares allotted: 48,000 shares
- Total: 3,18,000 shares × ₹10 = ₹31,80,000