CA Inter Adv Accounting — Question Paper — May 2024

PART (1): JOURNAL ENTRIES FOR RECONSTRUCTION OF Z LIMITED

Assuming Pre-Reconstruction: Equity Capital ₹50,00,000; Preference Capital ₹10,00,000 at 10% p.a.; Original PPE ₹50,00,000; Original TR ₹13,50,000; Original Inventory ₹10,00,000; Goodwill ₹5,00,000; P&L Debit ₹2,00,000.

Entry 1 – Subdivision of Equity Shares
Dr. Equity Share Capital (Old) | ₹50,00,000
Cr. Equity Share Capital (New) | ₹50,00,000
(Each ₹100 share subdivided into 10 shares of ₹10 each; no change in total value)

Entry 2 – Reduction of Equity Capital by 50%
Dr. Equity Share Capital | ₹25,00,000
Cr. Capital Reduction Account | ₹25,00,000
(Equity capital reduced from ₹50,00,000 to ₹25,00,000)

Entry 3 – Settlement of Preference Share Dividend Arrears
Dr. Preference Share Capital | ₹10,00,000
Dr. Preference Dividend Arrears | ₹4,00,000
Cr. Capital Reduction Account | ₹3,00,000
Cr. Bank | ₹1,00,000
(4 years arrears = 10% × ₹10,00,000 × 4 = ₹4,00,000; 75% waived ₹3,00,000; 25% paid ₹1,00,000)

Entry 4 – Sale of Own Debentures
Dr. Bank | ₹2,35,200
Dr. Capital Reduction Account | ₹4,800
Cr. Own Debentures | ₹2,40,000
(Sale price: ₹2,40,000 × 98% = ₹2,35,200; loss ₹4,800)

Entry 5 – Settlement of Debentures by Machinery
Dr. Debentures | ₹6,00,000
Dr. Capital Reduction Account | ₹3,00,000
Cr. Machinery | ₹9,00,000
(Debentures settled at ₹6,00,000; machinery accepted at book value ₹9,00,000; gain ₹3,00,000 credited to CRA)

Entry 6 – Revaluation of PPE
Dr. Property, Plant & Equipment | ₹10,00,000
Cr. Capital Reduction Account | ₹10,00,000
(PPE revalued from ₹50,00,000 to ₹60,00,000)

Entry 7 – Adjustment of Trade Receivables
Dr. Capital Reduction Account | ₹50,000
Cr. Trade Receivables | ₹50,000
(Revalued from ₹13,50,000 to ₹13,00,000)

Entry 8 – Adjustment of Inventories
Dr. Capital Reduction Account | ₹56,000
Cr. Inventories | ₹56,000
(Revalued from ₹10,00,000 to ₹9,44,000)

Entry 9 – Write-off of Goodwill
Dr. Capital Reduction Account | ₹5,00,000
Cr. Goodwill | ₹5,00,000

Entry 10 – Write-off of P&L Debit Balance
Dr. Capital Reduction Account | ₹2,00,000
Cr. P&L Account | ₹2,00,000

Entry 11 – Payment of Penalty
Dr. Capital Reduction Account | ₹60,000
Cr. Bank | ₹60,000
(Penalty to avoid capital commitment of ₹12,00,000)

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PART (2): CAPITAL REDUCTION ACCOUNT

| Particulars | ₹ |
|---|---|
| DEBIT SIDE | |
| Reduction of Equity Share Capital | 25,00,000 |
| Waiver of Preference Dividend (75%) | 3,00,000 |
| Loss on Sale of Own Debentures | 4,800 |
| Gain on Debenture Settlement (transfer) | 3,00,000 |
| Reduction in Trade Receivables | 50,000 |
| Reduction in Inventories | 56,000 |
| Write-off of Goodwill | 5,00,000 |
| Write-off of P&L Debit | 2,00,000 |
| Penalty Payment | 60,000 |
| Total Debits | 39,70,800 |
| | |
| CREDIT SIDE | |
| Revaluation Gain on PPE | 10,00,000 |
| Balance c/d (Deficit) | 29,70,800 |
| Total Credits | 39,70,800 |

*The deficit of ₹29,70,800 represents capital reduction that cannot be funded from asset appreciation and must be absorbed through retained earnings or reserve adjustments as permitted under the reconstruction scheme.*

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PART (3): BANK ACCOUNT

| Particulars | ₹ |
|---|---|
| DEBIT SIDE | |
| Opening Balance (assumed) | 10,00,000 |
| Receipt from Sale of Own Debentures | 2,35,200 |
| | |
| | 12,35,200 |
| | |
| CREDIT SIDE | |
| Payment of Preference Dividend Arrears (25%) | 1,00,000 |
| Payment of Penalty | 60,000 |
| Closing Balance | 10,75,200 |
| | 12,35,200 |

*Bank account reflects cash inflows from debenture sale proceeds (₹2,35,200) and outflows for dividend settlement (₹1,00,000) and penalty (₹60,000), resulting in net cash position of ₹10,75,200 post-reconstruction.*

Computation of Basic and Diluted EPS for ABC Limited (Year 2023-24)

This problem is governed by AS 20 – Earnings Per Share.

Step 1 – Weighted Average Number of Shares (for Basic EPS)

Since shares are partly paid-up, they are treated as a fraction of a fully paid share for the purpose of WANS.

For 1 April 2023 to 30 June 2023 (3 months): All 50,000 shares are ₹80 paid-up → Equivalent fully paid shares = 50,000 × (80/100) = 40,000; Weighted = 40,000 × 3/12 = 10,000

For 1 July 2023 to 31 March 2024 (9 months): 40,000 shareholders paid the call → 40,000 shares become fully paid → Equivalent = 40,000 × (100/100) = 40,000. 10,000 shareholders defaulted → still ₹80 paid → Equivalent = 10,000 × (80/100) = 8,000. Total equivalent = 48,000; Weighted = 48,000 × 9/12 = 36,000

WANS (Basic) = 10,000 + 36,000 = 46,000 shares

Step 2 – Earnings Available to Equity Shareholders (Basic)

Profit after tax = ₹3,44,000. Less: Preference Dividend = 2,00,000 shares × ₹10 × 8% = ₹1,60,000. Earnings for Basic EPS = ₹1,84,000

Step 3 – Basic EPS = ₹1,84,000 ÷ 46,000 = ₹4.00

Step 4 – Diluted EPS (Conversion of 12% Debentures)

Each of 10,000 debentures is convertible into 3 equity shares → Potential dilutive shares = 10,000 × 3 = 30,000 shares

Interest on debentures = 10,000 × ₹100 × 12% = ₹1,20,000. After-tax saving = ₹1,20,000 × (1 − 0.30) = ₹84,000 (added back to earnings since interest would be saved on conversion).

Diluted Earnings = ₹1,84,000 + ₹84,000 = ₹2,68,000
Diluted Shares = 46,000 + 30,000 = 76,000

Diluted EPS = ₹2,68,000 ÷ 76,000 = ₹3.53 (approx.)

Since Diluted EPS (₹3.53) < Basic EPS (₹4.00), the debentures are dilutive and must be included.

Summary: Basic EPS = ₹4.00 | Diluted EPS = ₹3.53

Determination of Net Cash Flow from Operating Activities — Agaresh Limited (Year ended 31st March 2024)

Step 1 — Derive Net Profit Before Tax from P&L Account

The P&L account carries a debit (loss) balance in both years. Reconstructing the account:

Opening Dr balance: ₹5,400 + Tax provision charged: ₹1,62,000 + Transfer to General Reserve (₹81,000 − ₹54,000): ₹27,000 = Closing Dr balance ₹37,800 + Net Profit before tax (X)

Solving: X = 5,400 + 1,62,000 + 27,000 − 37,800 = ₹1,56,600

Step 2 — Depreciation for the Year

Accumulated Depreciation increased from ₹1,29,600 to ₹1,62,600; no disposal is mentioned. Depreciation = ₹33,000.

Step 3 — Interest on Debentures (Finance Cost — Non-Operating)

New debentures issued at year-end; interest accrues only on opening balance.
Interest = 12% × ₹1,18,300 = ₹14,196. Added back as non-operating charge.

Step 4 — Investment Income (Non-Operating Income)

New investments acquired at year-end; income only on opening balance.
Income = 8% × ₹54,000 = ₹4,320. Deducted as non-operating income (classified under Investing Activities).

Step 5 — Tax Paid

Opening Provision ₹2,41,000 + Provision for year ₹1,62,000 − Closing Provision ₹1,35,000 = ₹2,68,000 paid.

Cash Flow from Operating Activities (Indirect Method)

Net Profit before Tax: ₹1,56,600
Add: Depreciation ₹33,000; Add: Increase in Provision for Doubtful Debts ₹27,000; Add: Interest on Debentures ₹14,196; Less: Investment Income ₹(4,320) → Operating Profit before Working Capital Changes: ₹2,26,476

Working Capital changes — Add: Decrease in Inventories ₹54,000; Less: Increase in Trade Receivables (Gross) ₹(1,80,360); Less: Decrease in Trade Payables ₹(10,800) → Net WC Change: ₹(1,37,160)

Cash Generated from Operations: ₹89,316

Less: Income Tax Paid: ₹(2,68,000)

Net Cash Used in Operating Activities: ₹(1,78,684)

The company has a net cash outflow from operations of ₹1,78,684, primarily driven by a large tax payment and significant increase in trade receivables.

This question is governed by AS 16 – Borrowing Costs (issued by ICAI). A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use. The Office Building here is a qualifying asset; land is excluded as stated.

(i) Borrowing Cost to be Capitalised

Step 1 – Specific Loan Borrowing Cost:
Specific loan = ₹14,00,000 @ 21% p.a. for 10 months (1st April 2023 to 31st January 2024).
Interest = 14,00,000 × 21% × 10/12 = ₹2,45,000
Less: Interest income earned on temporary investment of loan funds = ₹15,000
Net specific borrowing cost eligible for capitalisation = ₹2,30,000

Step 2 – General Loan Borrowing Cost (Check):
To determine whether any general borrowing cost is capitalisable, compute the Weighted Average Accumulated Expenditure (WAAE) using the financial year (12 months) as base:

| Payment Date | Amount (₹) | Months outstanding (to 31 Jan) | Weight | WAAE (₹) |
|---|---|---|---|---|
| 1st April 2023 | 4,00,000 | 10/12 | — | 3,33,333 |
| 1st August 2023 | 10,00,000 | 6/12 | — | 5,00,000 |
| 1st December 2023 | 25,00,000 | 2/12 | — | 4,16,667 |
| 31st January 2024 | 5,00,000 | 0/12 | — | — |
| Total | 44,00,000 | | | 12,50,000 |

Since WAAE (₹12,50,000) < Specific Loan (₹14,00,000), the specific loan was sufficient to fund the entire weighted average expenditure on the qualifying asset. No general borrowing cost is attributable to the building.

Capitalization rate on general borrowings (for reference) = (2,00,000 × 15% + 10,00,000 × 8%) / 12,00,000 = 1,10,000 / 12,00,000 = 9.17% — but since WAAE is fully covered by specific loan, general borrowing cost = Nil.

Borrowing cost to be capitalised = ₹2,30,000

(ii) Initial Journal Entry to Recognise Cost of Building

Total cost of building = Contractor payments + Capitalised borrowing cost = ₹44,00,000 + ₹2,30,000 = ₹46,30,000

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Building Account Dr | 46,30,000 | |
| To Contractor / Bank Account | | 44,00,000 |
| To Borrowing Cost (Interest on Loan) Account | | 2,30,000 |
| *(Being cost of building recognised on completion, including borrowing costs capitalised as per AS 16)* | | |

(iii) Depreciation on Building for the Year Ending 31st March, 2024

The building was ready for its intended use on 31st January, 2024. Depreciation commences from 1st February, 2024.
Period of use in the financial year = 2 months (February and March 2024).
Useful life = 20 years; Method = Straight Line Method (SLM).

Annual depreciation = ₹46,30,000 / 20 = ₹2,31,500
Depreciation for 2 months = ₹2,31,500 × 2/12 = ₹38,583 (rounded)

(iv) Carrying Value of Building on 31st March, 2024

Carrying value = Cost – Accumulated Depreciation = ₹46,30,000 – ₹38,583 = ₹45,91,417

Statement of Cost of Production and Cost Allocation — Well Wear Limited

Step 1: Total Joint Cost of Production

All costs incurred up to the split-off point form the joint cost pool. The total joint cost is ₹6,90,000 (Raw Material ₹3,50,000 + Wages ₹1,60,000 + Fixed Overheads ₹1,20,000 + Variable Overheads ₹60,000).

Step 2: Treatment of By-product — Filler (F)

Filler (F) is a by-product (a minor incidental output produced alongside main joint products). Since no selling price or net realisable value is provided for Filler (F), it is treated as having nil realisable value. Accordingly, the entire joint cost of ₹6,90,000 is allocated between the two joint products — Polyester (P) and Nylon (N) — only.

*Note: Input was 30,000 units; total output is 25,700 units (P: 12,500 + N: 10,000 + F: 3,200). The balance 4,300 units represents normal process loss/waste inherent in the manufacturing process.*

Step 3: Basis of Allocation — Physical Units Method

In the absence of selling prices or net realisable values, joint costs are allocated on the basis of physical output units (Physical Units Method).

Joint product units: P = 12,500 units; N = 10,000 units; Total = 22,500 units.
Allocation ratio: P : N = 12,500 : 10,000 = 5 : 4

Step 4: Cost Allocated to Each Joint Product

| Particulars | Polyester (P) | Nylon (N) | Total |
|---|---|---|---|
| Ratio | 5/9 | 4/9 | — |
| Joint Cost Allocated (₹) | 3,83,333 | 3,06,667 | 6,90,000 |
| Units Produced | 12,500 | 10,000 | 22,500 |
| Cost per Unit (₹) | 30.67 | 30.67 | — |

*(Under the Physical Units Method, the cost per unit is identical for all joint products, since allocation is purely quantity-based.)*

Step 5: Valuation of Closing Inventory

| Product | Closing Units | Cost per Unit (₹) | Closing Stock Value (₹) |
|---|---|---|---|
| Polyester (P) | 1,600 | 30.67 | 49,067 |
| Nylon (N) | 400 | 30.67 | 12,267 |

Step 6: Cost of Production Transferred to Cost of Sales

| Product | Units Produced | Closing Units | Units Sold | Cost/Unit (₹) | Cost of Sales (₹) |
|---|---|---|---|---|---|
| Polyester (P) | 12,500 | 1,600 | 10,900 | 30.67 | 3,34,267 |
| Nylon (N) | 10,000 | 400 | 9,600 | 30.67 | 2,94,400 |

Reconciliation: P: ₹3,34,267 + ₹49,067 = ₹3,83,334 ≈ ₹3,83,333 ✓ | N: ₹2,94,400 + ₹12,267 = ₹3,06,667 ✓ | Grand Total = ₹6,90,000 ✓

Part (a): Theme Ltd

Step 1 — Derive Equity from Debt:Equity Ratio
Debt = ₹45,00,000; Debt:Equity = 1.5:1 → Equity = 45,00,000 ÷ 1.5 = ₹30,00,000

Step 2 — Derive Net Profit After Tax from Return on Shareholders' Fund
Return on Shareholders' Fund = 54% → NPAT = 54% × 30,00,000 = ₹16,20,000
Net Profit Before Tax = 16,20,000 ÷ (1 − 0.25) = ₹21,60,000

Step 3 — Interest
Interest = 12.5% × 45,00,000 = ₹5,62,500

Step 4 — EBIT
EBIT = NPBT + Interest = 21,60,000 + 5,62,500 = ₹27,22,500

(i) Interest Coverage Ratio
ICR = EBIT ÷ Interest = 27,22,500 ÷ 5,62,500 = 4.84 times

Step 5 — Sales from Operating Ratio
Operating Ratio = 85% → Operating Profit Ratio = 15%
Since Operating Profit = EBIT = ₹27,22,500 → Sales = 27,22,500 ÷ 0.15 = ₹1,81,50,000

(ii) Gross Profit Ratio
Ratio of Operating Expenses to COGS = 2:6 → Operating Expenses = (2/6) × COGS
Operating Cost = COGS + (2/6)COGS = (8/6)COGS = 85% of Sales = ₹1,54,27,500
COGS = 1,54,27,500 × 6/8 = ₹1,15,70,625
Gross Profit = 1,81,50,000 − 1,15,70,625 = ₹65,79,375
Gross Profit Ratio = 65,79,375 ÷ 1,81,50,000 = 36.25%

(iii) Current Assets
Capital Ratio (Fixed Assets : Current Assets) = 1.8:1
Fixed Assets = ₹36,00,000 → Current Assets = 36,00,000 ÷ 1.8 = ₹20,00,000

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Part (b): Alpha Limited

Base Figures (Original Level — 50 Lakh Units)
Sales = 50,00,000 × ₹20 = ₹1,000 Lakhs | Variable Cost = 50,00,000 × ₹12.50 = ₹625 Lakhs
Contribution = ₹375 Lakhs | Fixed Cost = ₹175 Lakhs | EBIT = ₹200 Lakhs
Interest (15% Debentures) = 15% × 10,000 × ₹750 = ₹11.25 Lakhs
EBT = ₹188.75 Lakhs | Tax @20% = ₹37.75 Lakhs | EAT = ₹151 Lakhs
Base EPS = 1,51,00,000 ÷ 25,000 shares = ₹604 per share

Case (i): Sales decline by 15% → New Volume = 42.50 Lakh units
Contribution = 42,50,000 × ₹7.50 = ₹318.75 Lakhs
EBIT = 318.75 − 175 = ₹143.75 Lakhs | EBT = 143.75 − 11.25 = ₹132.50 Lakhs
EAT = 132.50 × 0.80 = ₹106 Lakhs
New EPS = 1,06,00,000 ÷ 25,000 = ₹424
Decrease in EPS = ₹604 − ₹424 = ₹180 per share (↓ 29.80%)
DOL = Contribution ÷ EBIT = 318.75 ÷ 143.75 = 2.22 times
DFL = EBIT ÷ EBT = 143.75 ÷ 132.50 = 1.08 times

Case (ii): Sales decline by 20% → New Volume = 40 Lakh units
Contribution = 40,00,000 × ₹7.50 = ₹300 Lakhs
EBIT = 300 − 175 = ₹125 Lakhs | EBT = 125 − 11.25 = ₹113.75 Lakhs
EAT = 113.75 × 0.80 = ₹91 Lakhs
New EPS = 91,00,000 ÷ 25,000 = ₹364
Decrease in EPS = ₹604 − ₹364 = ₹240 per share (↓ 39.74%)
DOL = 300 ÷ 125 = 2.40 times
DFL = 125 ÷ 113.75 = 1.10 times

The rising DOL and DFL as sales fall illustrate that fixed operating and financial costs amplify losses disproportionately — a critical risk when entering a competitive downturn.

Applicable Standard: AS 16 — Borrowing Costs (mandatory for non-Ind AS companies). Under AS 16, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalised. An asset that necessarily takes a substantial period of time to get ready for its intended use is a qualifying asset.

Identification of Qualifying Asset: The office building under construction is a qualifying asset. Land is excluded as stated. The capitalisation period runs from 1st April 2023 to 31st January 2024 (10 months).

Step 1 — Capitalisation Rate for General Borrowings:

General borrowings as on 1st April 2023:
- ₹20,00,000 @ 15% → Annual interest = ₹3,00,000
- ₹30,00,000 @ 8% → Annual interest = ₹2,40,000

Capitalisation Rate = Total Annual Interest / Total General Borrowings = ₹5,40,000 / ₹50,00,000 = 10.8% per annum

Step 2 — Weighted Average Accumulated Expenditure (WAAE):

Weights are calculated as months outstanding during the financial year divided by 12:

| Payment Date | Amount (₹) | Months Outstanding | Weight | WAAE (₹) |
|---|---|---|---|---|
| 1st April 2023 | 4,00,000 | 10/12 | 10/12 | 3,33,333 |
| 1st August 2023 | 10,00,000 | 6/12 | 6/12 | 5,00,000 |
| 1st December 2023 | 25,00,000 | 2/12 | 2/12 | 4,16,667 |
| 31st January 2024 | 5,00,000 | 0/12 | 0 | — |
| Total | 44,00,000 | | | 12,50,000 |

Step 3 — Allocating WAAE Between Specific and General Borrowings:

WAAE = ₹12,50,000; Specific Loan = ₹14,00,000

Since WAAE (₹12,50,000) does not exceed the specific loan (₹14,00,000), the entire WAAE is attributable to the specific borrowing. No portion is chargeable from general borrowings.

Step 4 — Borrowing Cost from Specific Loan:

Interest on specific loan = ₹14,00,000 × 12% × 10/12 = ₹1,40,000
Less: Investment income earned on temporary deployment = ₹15,000
Net Borrowing Cost to Capitalise = ₹1,25,000

(Under AS 16, investment income on temporary investment of specific borrowings is deducted from borrowing costs eligible for capitalisation.)

Step 5 — Cost of Office Building:

Total contractor payments = ₹4,00,000 + ₹10,00,000 + ₹25,00,000 + ₹5,00,000 = ₹44,00,000
Add: Borrowing costs capitalised = ₹1,25,000
Total Cost of Office Building = ₹45,25,000

From 1st February 2024 onwards, the building is ready for use; no further borrowing costs are capitalised. Remaining interest on the specific loan (if any) and interest on general borrowings (post-completion) are expensed to the Profit & Loss Account.

Effective Cost of Factoring — Bright Ltd.

Step 1: Credit Sales and Debtors

Credit Sales = ₹7,50,00,000 × 90% = ₹6,75,00,000

Current Debtors (at 70 days ACP) = 6,75,00,000 × 70/360 = ₹1,31,25,000

Debtors after Factoring (at 45-day guaranteed payment period) = 6,75,00,000 × 45/360 = ₹84,37,500

Step 2: Advance Available from Factor

Gross Debtors factored = ₹84,37,500
Less: Reserve @ 20% = ₹16,87,500
Net Advance from Factor = ₹67,50,000

Step 3: Annual Costs of Factoring

(a) Service Charge @ 2% on Credit Sales = 6,75,00,000 × 2% = ₹13,50,000
(b) Interest on Advance @ 14% = 67,50,000 × 14% = ₹9,45,000
(c) One-time Redundancy Payment = ₹50,000

Total Cost = ₹23,45,000

Step 4: Annual Savings/Benefits from Factoring

(a) Bad Debts Saved (non-recourse factor absorbs default risk) = 6,75,00,000 × 0.75% = ₹5,06,250

(b) Avoidable Administration Cost = 18,60,000 × 2.5% = ₹46,500

(c) Savings in Cost of Financing Debtors:
Before factoring, company finances ₹1,31,25,000 from own funds @ 12.5%.
After factoring, only the reserve (₹16,87,500) is financed from own funds.
Savings = (1,31,25,000 − 16,87,500) × 12.5% = 1,14,37,500 × 12.5% = ₹14,29,688

Total Savings = ₹19,82,438

Step 5: Net Annual Cost of Factoring

Net Cost = 23,45,000 − 19,82,438 = ₹3,62,562

Step 6: Effective Cost of Factoring

Effective Cost = Net Annual Cost / Net Advance × 100
= 3,62,562 / 67,50,000 × 100
= 5.37% p.a.

The effective cost of factoring to Bright Ltd. is 5.37% per annum, which should be compared with the cost of capital (12.5%) to evaluate acceptability. Since 5.37% < 12.5%, factoring is financially beneficial.

BALANCE SHEET ANALYSIS OF Z LIMITED (as at 31st March, 2024)

Step 1 — Reclassification of Balance Sheet Items

Before computing ratios, the balance sheet items must be reclassified into meaningful groups.

Non-Current (Fixed) Assets:
Property, Plant & Equipment: ₹72,00,000; Goodwill (intangible): ₹81,000; Own Debentures held as investment (at cost): ₹5,76,000 → Total Fixed Assets = ₹78,57,000

Current Assets:
Inventory: ₹9,80,000; Trade Receivables: ₹13,25,000; Cash at Bank: ₹1,33,000 → Total Current Assets = ₹24,38,000

Fictitious / Intangible Assets (deducted for net worth):
P&L A/c — Debit balance (accumulated losses): ₹12,35,000; Goodwill: ₹81,000

Shareholders' Funds (Net Worth):
Equity Share Capital (60,000 shares × ₹100): ₹60,00,000; 8% Preference Share Capital (21,000 shares × ₹100): ₹21,00,000; Sub-total: ₹81,00,000; Less: P&L A/c (Dr.): ₹12,35,000 → Net Shareholders' Funds = ₹68,65,000

Effective Long-Term Debt:
10% Debentures (total issued): ₹18,00,000; Less: Own Debentures held (at nominal): ₹6,00,000 → Net Debentures outstanding = ₹12,00,000

Note: Own debentures were purchased at ₹5,76,000 against nominal ₹6,00,000 — a discount of ₹24,000, representing a capital profit on cancellation.

Current Liabilities:
Trade Payables: ₹16,80,000

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Step 2 — Statement of Capital Employed

Working Capital = Current Assets − Current Liabilities = ₹24,38,000 − ₹16,80,000 = ₹7,58,000

Capital Employed (net) = Fixed Assets + Working Capital − Fictitious Assets = ₹78,57,000 + ₹7,58,000 − ₹12,35,000 − ₹81,000 = ₹72,99,000

Financed by: Net Shareholders' Funds ₹68,65,000 less Goodwill ₹81,000 = ₹67,84,000 + Net Debentures ₹12,00,000 = ₹79,84,000 (gross capital employed before netting fictitious assets).

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Step 3 — Key Financial Ratios

(i) Current Ratio = Current Assets ÷ Current Liabilities = ₹24,38,000 ÷ ₹16,80,000 = 1.45 : 1
Below the standard 2:1 — indicates moderate short-term liquidity pressure.

(ii) Quick (Liquid) Ratio = (Current Assets − Inventory) ÷ Current Liabilities = ₹14,58,000 ÷ ₹16,80,000 = 0.87 : 1
Below 1:1 — the company cannot fully cover immediate liabilities without liquidating stock.

(iii) Capital Gearing Ratio = Prior Charge Capital ÷ Equity Shareholders' Funds
Prior Charge Capital (fixed interest/dividend): 8% Pref SC ₹21,00,000 + Net 10% Debentures ₹12,00,000 = ₹33,00,000
Equity Shareholders' Funds (net) = ₹60,00,000 − ₹12,35,000 = ₹47,65,000
Gearing Ratio = ₹33,00,000 ÷ ₹47,65,000 = 0.69 : 1
Since prior charge capital < equity SH funds → Company is LOW GEARED (relatively safer for equity shareholders).

(iv) Debt-Equity Ratio = Long-term Debt ÷ Total Shareholders' Funds = ₹12,00,000 ÷ ₹68,65,000 = 0.17 : 1
Very low reliance on external borrowings.

(v) Proprietary Ratio = Shareholders' Funds ÷ Total Tangible Assets
Total Tangible Assets = ₹1,15,80,000 − ₹12,35,000 − ₹81,000 = ₹1,02,64,000
Ratio = ₹68,65,000 ÷ ₹1,02,64,000 = 0.67 (67%)
Shareholders finance ~67% of tangible assets — reasonably sound solvency.

(vi) Fixed Assets to Long-Term Funds Ratio = Fixed Assets ÷ Long-Term Funds
Long-Term Funds = ₹68,65,000 + ₹12,00,000 = ₹80,65,000
Ratio = ₹78,57,000 ÷ ₹80,65,000 = 0.97 : 1
Nearly all long-term funds are deployed in fixed assets — limited liquidity buffer.

(vii) Intrinsic (Book) Value per Equity Share
Net Tangible Assets for Equity = Total Tangible Assets − External Liabilities − Preference Capital
= ₹1,02,64,000 − ₹34,80,000 − ₹21,00,000 = ₹46,84,000
Number of equity shares = ₹60,00,000 ÷ ₹100 = 60,000 shares
Book Value per Equity Share = ₹46,84,000 ÷ 60,000 = ₹78.07
Below face value of ₹100, reflecting erosion from accumulated losses.

---

Step 4 — Overall Financial Assessment

Z Limited presents a mixed picture. Its low gearing (0.69:1) and low debt-equity ratio (0.17:1) indicate conservative financing and moderate long-term solvency. However, the debit balance in P&L (₹12,35,000) signals persistent losses which have reduced net worth and dragged book value per share below par. Short-term liquidity is a concern: current ratio of 1.45 and quick ratio of 0.87 both fall short of standard benchmarks. The company holds own debentures (nominal ₹6,00,000 at cost ₹5,76,000), reflecting a plan to reduce debt — upon cancellation, a capital profit of ₹24,000 will be credited to Capital Reserve under Schedule III of the Companies Act 2013.

(i) Cost of Equity Share Capital (Ke)

Using the Capital Asset Pricing Model (CAPM):

Ke = Rf + β × (Market Risk Premium)
Ke = 6% + 1.54 × 8% = 6% + 12.32% = 18.32%

---

(ii) Cost of Preference Share Capital (Kp)

Using the approximate yield formula for redeemable preference shares:

Kp = [D + (RV − P) / n] / [(RV + P) / 2]

Where: D = ₹15, RV = ₹100, P = ₹90 (current market price), n = 8 years

Kp = [15 + (100 − 90)/8] / [(100 + 90)/2]
Kp = [15 + 1.25] / 95 = 16.25 / 95 = 17.11%

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(iii) Cost of Convertible Debentures (Kd)

Debentures were issued on 01.04.2023; as on 31.03.2024, remaining life = 5 years. At maturity, each debenture converts into 4 equity shares. No current market price of debenture is given, so face value ₹100 is taken as current market price.

Redemption/Conversion Value = 4 × [₹25 × (1.06)⁵] = 4 × ₹33.46 = ₹133.82

After-tax annual interest = ₹13 × (1 − 0.25) = ₹9.75

Kd = [9.75 + (133.82 − 100)/5] / [(133.82 + 100)/2]
Kd = [9.75 + 6.764] / 116.91 = 16.514 / 116.91 = 14.13%

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(iv) Cost of Retained Earnings (Kr)

Retained earnings represent undistributed profits belonging to equity shareholders. Using the external yield criterion adjusted for personal income tax (opportunity cost basis):

Kr = Ke × (1 − personal tax rate)
Kr = 18.32% × (1 − 0.20) = 18.32% × 0.80 = 14.66%

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(v) Cost of Term Loan (Kt)

Since interest on term loan is tax-deductible:

Kt = Rate × (1 − tax rate)
Kt = 11% × (1 − 0.25) = 11% × 0.75 = 8.25%

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Summary of Costs:
| Source | Cost |
|---|---|
| Equity Share Capital | 18.32% |
| Preference Share Capital | 17.11% |
| Convertible Debentures | 14.13% |
| Retained Earnings | 14.66% |
| Term Loan | 8.25% |

Concept: Under Modigliani-Miller (MM) framework, this question compares the annual earnings of an investor holding 12% equity in a Levered firm versus the same proportional holding in an Unlevered firm, demonstrating the arbitrage logic of switching between firms.

Step 1 – Earnings available to equity holders of Levered Company

EBIT = ₹25,000
Less: Interest on Debt = 8% × ₹75,000 = ₹6,000
Earnings available to Equity (Levered) = ₹19,000

Step 2 – Current annual earnings of investor (12% in Levered Company)

Investor's earnings = 12% × ₹19,000 = ₹2,280

Step 3 – Earnings available to equity holders of Unlevered Company

EBIT = ₹25,000
Less: Interest = Nil
Earnings available to Equity (Unlevered) = ₹25,000

Note: ka = 12.5% implies that the unlevered equity is valued at ₹2,00,000 (EBIT/ka = 25,000/0.125), consistent with the data given.

Step 4 – Annual earnings after switching to Unlevered Company (12% holding)

Investor's earnings = 12% × ₹25,000 = ₹3,000

Step 5 – Increase in Annual Earnings

Increase = ₹3,000 − ₹2,280 = ₹720

The switch from the Levered to the Unlevered company increases the investor's annual earnings by ₹720, because in the Unlevered company there is no interest burden, and the entire EBIT flows to equity holders. This demonstrates the MM arbitrage process where investors in overvalued levered firms can improve returns by switching to equivalent unlevered firms.

This question is governed by AS 7 – Construction Contracts (issued by ICAI). The percentage of completion method is applied since the outcome of the contract can be estimated reliably.

Step 1 – Determine Revised Contract Revenue and Costs

Original contract value: ₹400 crores. Variation approved in Year 1 adds ₹10 crores → Revised Contract Revenue = ₹410 crores.

Original estimated cost: ₹370 crores. Revised at end of Year 1 to ₹375 crores. Variation adds ₹7 crores → Total Estimated Cost = ₹382 crores.

This is confirmed by Year 4 cumulative actual cost = ₹382 crores (contract fully complete).

Total Expected Profit = ₹410 – ₹382 = ₹28 crores

Step 2 – Stage of Completion (Costs Incurred ÷ Total Estimated Costs)

Note: In Year 3, ₹3 crores of unused materials are excluded from the numerator as they do not reflect work performed (per AS 7, para 30).

| Year | Eligible Costs to Date (₹ Cr) | Total Estimated Cost (₹ Cr) | Stage of Completion |
|------|-------------------------------|------------------------------|---------------------|
| 1 | 98.40 | 382 | 25.76% |
| 2 | 220.40 | 382 | 57.70% |
| 3 | 307.00 (310 – 3) | 382 | 80.37% |
| 4 | 382.00 | 382 | 100.00% |

Step 3 – Profit Recognised Each Year

Profit for each year = (Current year eligible costs ÷ Total Estimated Cost) × Total Expected Profit

| Year | Eligible Costs in Year (₹ Cr) | Profit = (Costs/382) × 28 (₹ Cr) |
|------|-------------------------------|------------------------------------|
| 1 | 98.40 | 7.21 |
| 2 | 122.00 (220.4 – 98.4) | 8.94 |
| 3 | 86.60 (307 – 220.4) | 6.35 |
| 4 | 75.00 (382 – 307) | 5.50 |
| Total | 382.00 | 28.00 |

Final Answer: Stage of completion for Years 1–4 is 25.76%, 57.70%, 80.37%, and 100% respectively. Profit recognised is ₹7.21 Cr, ₹8.94 Cr, ₹6.35 Cr, and ₹5.50 Cr totalling ₹28 crores.

This problem involves a long-term construction contract governed by AS 7 (Construction Contracts) issued by the ICAI. The stage of completion is measured using the cost-to-cost method (proportion of costs incurred to total estimated costs).

Key Contract Parameters:

Contract Price: ₹400 crores (Years 1–2); ₹410 crores (Year 3 onwards — variation approved during Year 3)

Total Estimated Costs: ₹373 crores (original) → revised to ₹375 crores by end of Year 1 → ₹382 crores from Year 3 (₹375 + ₹7 crores variation). The revised estimate is used as at the reporting date under AS 7.

Treatment of Unsold Material in Year 3: Under AS 7, costs that relate to future activity — specifically materials purchased but not yet consumed — are excluded from costs incurred for stage of completion. Accordingly, ₹3 crores of unsold material is excluded in Year 3. Effective cumulative costs for Year 3 = ₹310 − ₹3 = ₹307 crores.

(i) Stage of Completion for Each Year:

Stage of completion = Cumulative costs incurred (effective) ÷ Total estimated costs × 100

- Year 1: 98.80 ÷ 375 × 100 = 26.35%
- Year 2: 202.40 ÷ 375 × 100 = 53.97%
- Year 3: 307.00 ÷ 382 × 100 = 80.37%
- Year 4: 382.00 ÷ 382 × 100 = 100.00%

(ii) Profit to be Recognised for Each Year:

Profit is computed as: Cumulative Profit = Total Expected Profit × Stage of Completion. Period profit = current year cumulative profit minus prior year cumulative profit.

- Year 1: Expected profit = ₹400 − ₹375 = ₹25 crores. Cumulative profit = 25 × 26.35% = ₹6.59 crores. Period profit = ₹6.59 crores.

- Year 2: Expected profit = ₹25 crores (no change). Cumulative profit = 25 × 53.97% = ₹13.49 crores. Period profit = ₹13.49 − ₹6.59 = ₹6.90 crores.

- Year 3: Expected profit = ₹410 − ₹382 = ₹28 crores (variation incorporated). Cumulative profit = 28 × 80.37% = ₹22.50 crores. Period profit = ₹22.50 − ₹13.49 = ₹9.01 crores.

- Year 4: Expected profit = ₹28 crores. Cumulative profit = 28 × 100% = ₹28.00 crores. Period profit = ₹28.00 − ₹22.50 = ₹5.50 crores.

Verification: Total profit over 4 years = ₹6.59 + ₹6.90 + ₹9.01 + ₹5.50 = ₹28.00 crores = ₹410 − ₹382 ✓

NOTE: This question is incomplete — no numerical data provided (cost of building, borrowing amount/period, acquisition date, etc.). The following is the framework for solving:

Applicable Standard: AS 16 (Property, Plant and Equipment) and IND AS 101 (First-time Adoption of Indian Accounting Standards).

(i) Borrowing Cost to be Capitalized:
Under AS 16, borrowing costs directly attributable to acquisition/construction of a qualifying asset (e.g., building) are capitalized as part of the asset cost. Capitalization begins when: (a) expenditure is incurred, (b) borrowing costs are incurred, and (c) activities to prepare asset for use are in progress. Capitalization ceases when the asset is substantially complete. Required data: Amount borrowed, interest rate, period of construction, and date construction was completed.

(ii) Initial Journal Entry:
The entry would be: Dr. Building/Property (Cost) | Cr. Cash/Bank + Cr. Payables. If borrowing costs are capitalized, the debit to Building includes the principal amount plus capitalized borrowing costs. The entry recognizes the asset at its total cost (including borrowing costs as per AS 16). Required data: Total cost including capitalized borrowing cost.

(iii) Depreciation for Year Ending 31st March 2024:
Depreciation = (Cost of Asset − Salvage Value) ÷ Useful Life. Given: Useful life = 20 years, Method = Straight Line. Annual depreciation = (Cost) ÷ 20. If the building was available for use for only part of the year, depreciation is apportioned proportionately. Required data: Cost of building and date it became available for use.

(iv) Carrying Value on 31st March 2024:
Carrying Value = Cost − Accumulated Depreciation. Accumulated Depreciation = Depreciation per year × Number of years (or pro-rata for partial year). Required data: Cost and number of complete/partial years of depreciation.

Framework: Classify the building as Property, Plant & Equipment under AS 16. Record at cost (including capitalized borrowing costs). Depreciate over 20 years using straight-line method. Disclose useful life, depreciation method, and gross/net book values in financial statements per AS 16 disclosure requirements.

Computation of Value of Closing Inventory of Polyester (P) and Nylon (N)

Step 1: Compute Net Realisable Value (NRV) of By-product Fiber (F)

By-product Fiber is valued using the NRV method, where the NRV is credited against total joint costs before allocation to main products.

Sales Value of Fiber = 3,200 units × ₹40 = ₹1,28,000
Less: Separate Processing Expenses = ₹10,000
Less: Packing Charges = ₹9,000
NRV of Fiber = ₹1,09,000

(Note: The profit of ₹8,000 mentioned confirms the joint cost absorbed by Fiber is ₹1,09,000 − ₹8,000 = ₹1,01,000; however, for the purpose of crediting against joint costs, the full NRV of ₹1,09,000 is used.)

Step 2: Compute Net Joint Cost to be Allocated

Total Joint Costs (Raw Material + Wages + Fixed OH + Variable OH) = ₹6,90,000
Less: Scrap Realisation = ₹5,000
Less: NRV of By-product Fiber = ₹1,09,000
Net Joint Cost = ₹5,76,000

Step 3: Allocate Net Joint Cost using Physical Units Method

Polyester output = 12,500 units; Nylon output = 10,000 units; Total = 22,500 units.

Cost to Polyester = (12,500 ÷ 22,500) × ₹5,76,000 = ₹3,20,000
Cost to Nylon = (10,000 ÷ 22,500) × ₹5,76,000 = ₹2,56,000

Step 4: Cost per Unit

Polyester: ₹3,20,000 ÷ 12,500 = ₹25.60 per unit
Nylon: ₹2,56,000 ÷ 10,000 = ₹25.60 per unit

Step 5: Verify — Lower of Cost or NRV

Polyester: Cost ₹25.60 vs. Market ₹100 → Value at Cost
Nylon: Cost ₹25.60 vs. Market ₹60 → Value at Cost

Step 6: Value of Closing Inventory

Polyester (P): 1,600 units × ₹25.60 = ₹40,960
Nylon (N): 400 units × ₹25.60 = ₹10,240

Total Closing Inventory = ₹51,200

Step 1: Determine Current Dividend (D₀)

Retained earnings per share = ₹3.60, which represents the retention ratio of 40%.

Therefore, EPS = ₹3.60 ÷ 0.40 = ₹9.00 per share

Payout Ratio = 100% − 40% = 60%

D₀ = ₹9.00 × 60% = ₹5.40 per share

Step 2: Forecast Dividends for High-Growth Period (Years 1–2 at 10%)

- D₁ = ₹5.40 × 1.10 = ₹5.94
- D₂ = ₹5.94 × 1.10 = ₹6.534

Step 3: Terminal Value at End of Year 2 (using Gordon Growth Model)

From Year 3 onwards, growth stabilises at 8% p.a.

D₃ = ₹6.534 × 1.08 = ₹7.0567

P₂ = D₃ ÷ (Ke − g) = ₹7.0567 ÷ (0.15 − 0.08) = ₹7.0567 ÷ 0.07 = ₹100.81

Step 4: Present Value of All Cash Flows (discount at 15%)

Using Dividend Discount Model (DDM) under the two-stage growth framework:

- PV of D₁ = ₹5.94 ÷ 1.15 = ₹5.165
- PV of D₂ = ₹6.534 ÷ (1.15)² = ₹6.534 ÷ 1.3225 = ₹4.941
- PV of P₂ = ₹100.81 ÷ 1.3225 = ₹76.228

Intrinsic Value per Share = ₹5.165 + ₹4.941 + ₹76.228 = ₹86.33 per share

Note on Missing Data: The question as presented appears to be an excerpt from a larger problem. To compute the closing inventory value of Polyester and Nylon, data typically required includes: (i) total joint processing costs, (ii) total output (units) of Polyester, Nylon, and Fiber, and (iii) units sold / units in closing stock of Polyester and Nylon. The given data is sufficient only to determine the by-product credit and the basis of joint cost allocation. The full solution methodology is set out below.

Step 1 – Compute Sales Value of By-product (Fiber)

The by-product Fiber earns a profit of ₹5,000 after meeting separate processing expenses of ₹10,000 and packing charges of ₹9,000. Therefore:

Sales Value of Fiber = Profit + Processing Expenses + Packing Charges = ₹5,000 + ₹10,000 + ₹9,000 = ₹24,000

Units of Fiber produced and sold = ₹24,000 ÷ ₹40 per unit = 600 units

Step 2 – Net Realizable Value (NRV) Credited to Raw Material / Joint Cost

Under the Net Realizable Value method of by-product accounting, the net realisable value of the by-product is deducted from the joint cost of production. Here:

NRV of Fiber = Sales Value − Separate Processing Expenses − Packing Charges = ₹24,000 − ₹10,000 − ₹9,000 = ₹5,000

This ₹5,000 is credited to the Raw Material / Joint Cost Account, confirming the statement in the question. The profit of ₹5,000 and the amount credited to raw material are the same figure — the NRV of the by-product.

Step 3 – Allocation of Remaining Joint Costs to Polyester and Nylon

After deducting the by-product credit, the net joint cost = Total Joint Cost − ₹5,000. This net joint cost is allocated between Polyester and Nylon in the ratio of their average market prices (i.e., the Market Price / Sales Value method):

- Polyester: ₹100 per unit
- Nylon: ₹60 per unit

If total units of Polyester = P and Nylon = N, then:
- Total market value of Polyester = 100P
- Total market value of Nylon = 60N
- Allocation ratio = 100P : 60N

Joint Cost allocated to Polyester = Net Joint Cost × (100P) ÷ (100P + 60N)

Joint Cost allocated to Nylon = Net Joint Cost × (60N) ÷ (100P + 60N)

Step 4 – Value of Closing Inventory

Once joint costs are allocated, the cost per unit of each product is determined:

- Cost per unit of Polyester = Allocated Joint Cost for Polyester ÷ Units of Polyester produced
- Cost per unit of Nylon = Allocated Joint Cost for Nylon ÷ Units of Nylon produced

Value of Closing Inventory:
- Polyester closing stock = Cost per unit of Polyester × Units in closing stock
- Nylon closing stock = Cost per unit of Nylon × Units in closing stock

Conclusion: The by-product Fiber generates 600 units of sales at ₹40/unit (total ₹24,000), yields a net credit of ₹5,000 to raw material/joint cost, and the remaining joint costs are apportioned between Polyester and Nylon in the ratio of their average market prices (₹100 : ₹60). The closing inventory values of Polyester and Nylon are computed by multiplying the respective cost per unit (post-allocation) by closing stock units. The specific ₹ figures for closing inventory require production quantities and total joint costs, which appear to be part of the original question's data table not reproduced here.

CRITICAL NOTE: This question cannot be solved as stated. The question explicitly states 'Following financial information is in respect of both the companies as at 31st March, 2024 has been given to you:' but the actual financial data (balance sheets, assets, liabilities, profit figures) for Intelligent Limited and Diligent Limited is missing from the question text provided.

To complete this amalgamation problem, the following information must be supplied:

Required Data:

1. For Intelligent Limited (as at 31.3.2024):
- Balance sheet showing assets and liabilities
- Profit for 2023-24 and 2022-23
- Number of preference shares and debentures issued

2. For Diligent Limited (as at 31.3.2024):
- Balance sheet showing assets and liabilities
- Profit for 2023-24 and 2022-23
- Number of preference shares and debentures issued

3. Asset Revaluation Details:
- The question mentions revaluation but provides only one example (inter-company receivables)
- Specific revaluation factors or adjusted values needed for all asset categories

Solution Approach (once data is provided):

Part (a) - Shares & Debentures Calculation:

Equity Shares: 22,000 shares distributed as: (Intelligent profit sum ÷ Total profit sum) × 22,000 and (Diligent profit sum ÷ Total profit sum) × 22,000

Preference Shares: Exchange ratio = ₹100 par : ₹125 issue price. Genius shares = Original shares × (100/125). Any cash adjustment calculated separately.

Debentures: Based on 10% return on revalued net assets, calculated as: (Revalued Net Assets × 10%) ÷ 10% = Par value of debentures to be issued to each company. Inter-company receivables of ₹1,00,000 eliminated from both sides before calculating net assets.

Part (b) - Balance Sheet: Consolidate all revalued assets and liabilities of both companies, deduct inter-company items, adjust for share capital and reserves issued, recognize any goodwill or capital reserve as balancing figure.

Please provide the missing financial data tables to enable complete solution.

Applicable Standard: AS 14 — Accounting for Amalgamations (ICAI). Treated as amalgamation in the nature of purchase (Purchase Method), since two independent companies form a new entity. Reserves of transferor companies are not carried forward.

Net Assets — Intelligent Limited
Total Assets: L&B ₹10,00,000 + P&M ₹10,00,000 + Inventories ₹7,00,000 + Trade Receivables ₹6,00,000 + Cash ₹4,00,000 = ₹37,00,000
External Liabilities: Trade Payables ₹12,00,000 + Gratuity Fund ₹3,00,000 = ₹15,00,000
Net Assets = ₹22,00,000
Less: 8% Preference Share Capital = ₹3,00,000
Net Assets for Equity = ₹19,00,000

Net Assets — Diligent Limited
Total Assets: L&B ₹6,00,000 + P&M ₹6,00,000 + Inventories ₹4,00,000 + Trade Receivables ₹3,00,000 + Cash ₹1,00,000 = ₹20,00,000
External Liabilities: Trade Payables ₹4,00,000 + Gratuity Fund ₹2,00,000 = ₹6,00,000
Net Assets = ₹14,00,000
Less: 8% Preference Share Capital = ₹2,00,000
Net Assets for Equity = ₹12,00,000

Purchase Consideration (PC)
Genius Limited discharges PC entirely by issue of its own shares:
- To Preference Shareholders (Intelligent): 3,000 × 8% Pref shares @ ₹100 = ₹3,00,000
- To Preference Shareholders (Diligent): 2,000 × 8% Pref shares @ ₹100 = ₹2,00,000
- To Equity Shareholders (combined): ₹19,00,000 + ₹12,00,000 = ₹31,00,000, discharged by issuing 10,000 equity shares of ₹100 each at premium:
Face Value: 10,000 × ₹100 = ₹10,00,000; Securities Premium = ₹21,00,000

Total PC = ₹5,00,000 + ₹31,00,000 = ₹36,00,000 = Combined Net Assets ✓ → No Goodwill, No Capital Reserve.

Under the Purchase Method, the P&L account balances (Intelligent ₹3,00,000 and Diligent ₹2,50,000, being the closing balances after appropriations from opening balances of ₹4,50,000/₹2,50,000 and current year profits of ₹2,50,000/₹1,50,000 respectively) are not transferred to Genius Limited's books.

Opening Balance Sheet of Genius Limited as at 1st April 2024

| Equity & Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Equity Share Capital — 10,000 shares of ₹100 each (Authorized: 40,00,000) | 10,00,000 | Land & Buildings (10,00,000 + 6,00,000) | 16,00,000 |
| Securities Premium | 21,00,000 | Plant & Machinery (10,00,000 + 6,00,000) | 16,00,000 |
| 8% Preference Share Capital — 5,000 shares of ₹100 each | 5,00,000 | Inventories (7,00,000 + 4,00,000) | 11,00,000 |
| Retirement Gratuity Fund (3,00,000 + 2,00,000) | 5,00,000 | Trade Receivables (6,00,000 + 3,00,000) | 9,00,000 |
| Trade Payables (12,00,000 + 4,00,000) | 16,00,000 | Cash & Bank (4,00,000 + 1,00,000) | 5,00,000 |
| Total | 57,00,000 | Total | 57,00,000 |

The Retirement Gratuity Fund is a long-term liability and is taken over as an obligation of Genius Limited. The remaining authorized but unissued preference shares (5,000) represent future headroom within the authorized capital.

PART (a): COMPUTATION OF SHARES AND DEBENTURES TO BE ISSUED

1. EQUITY SHARES
Total equity shares to be issued: 23,000 shares of ₹100 each = ₹23,00,000

Allocation in proportion of profitability for preceding two financial years:
Note: The question does not provide profitability figures for the preceding two years. The allocation would be calculated as:
- Intelligent Limited: (IL Profitability ÷ Total Profitability) × 23,000 shares
- Diligent Limited: (DL Profitability ÷ Total Profitability) × 23,000 shares

2. PREFERENCE SHARES
10% Preference Shares of ₹100 each issued at ₹125 per share for equivalent number of existing preference shares.

Note: The question does not specify the number of preference shares held in each company. The consideration would be:
- Number of preference shares issued = Equivalent to existing holders (1:1 basis assumed)
- Issue price consideration = Number of shares × ₹125 per share

3. DEBENTURES (CALCULABLE)
12% Debentures of ₹100 each at par to provide 10% income equivalent on net assets:

Revalued Net Assets after amalgamation:
- Intelligent Limited: ₹11,00,000 + ₹9,00,000 + ₹6,00,000 = ₹26,00,000
- Diligent Limited: ₹8,50,000 + ₹3,00,000 + ₹3,00,000 = ₹14,50,000

Debenture Calculation:
If 12% debentures must provide income = 10% of net assets:
12% × Debenture Value = 10% × Net Assets
Debenture Value = (10 ÷ 12) × Net Assets

For Intelligent Limited:
- Debenture Value = ₹26,00,000 × (10/12) = ₹21,66,667
- Number of ₹100 debentures = 2,167 debentures (approximately)

For Diligent Limited:
- Debenture Value = ₹14,50,000 × (10/12) = ₹12,08,333
- Number of ₹100 debentures = 1,208 debentures (approximately)

Total Debentures to be issued = ₹33,75,000 (2,167 + 1,208 = 3,375 debentures × ₹100)

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PART (b): BALANCE SHEET OF GENIUS LIMITED (IMMEDIATELY AFTER AMALGAMATION)

ASSETS SIDE
Land and Buildings: ₹11,00,000 + ₹8,50,000 = ₹19,50,000
Plant and Machinery: ₹9,00,000 + ₹3,00,000 = ₹12,00,000
Inventories: ₹6,00,000 + ₹3,00,000 = ₹9,00,000
Total Assets = ₹40,50,000

LIABILITIES SIDE
Equity Share Capital (₹100 each fully paid): ₹23,00,000

Preference Share Capital (10% Preference Shares of ₹100 each): Amount to be determined (based on number of equivalent preference shares—data not provided)

12% Debentures: ₹33,75,000

Capital Reserve (if any discount): Amount to be calculated (Preference shares issued at ₹125 but accounted at ₹100 = ₹25 premium per share)

Note: The total consideration (₹23,00,000 + Preference Share Capital + ₹33,75,000) should equal the net assets acquired (₹40,50,000 after elimination of intercompany transaction of ₹1,00,000). Any excess represents Goodwill; any deficit represents Capital Reserve or loss on amalgamation.

Important: The complete balance sheet requires the missing data regarding: (1) profitability figures of both companies for preceding two years, (2) number and value of existing preference shares, and (3) any other liabilities not mentioned in assets revaluation.

Statement (i): TRUE — Maximising Market Price Per Share (MPS) directly maximises shareholder wealth because it reflects the present value of all future cash flows attributable to shareholders. An increase in MPS increases the market value of shareholders' holdings, thereby increasing their overall wealth. This is a fundamental objective in modern corporate finance theory.

Statement (ii): FALSE — This statement contains multiple errors. First, the risk-return relationship is a trade-off where higher returns are associated with higher risk and vice versa—not a combination of lower risk with higher return simultaneously, which is theoretically unattainable in efficient markets. Second, there is no particular risk-return combination level where profit is automatically maximized. The optimal risk-return balance depends on individual investor preferences and market conditions, not a fixed point of maximum profit.

Statement (iii): FALSE — The definition is inverted. Financial distress occurs when a firm's accounting/financial profile is INSUFFICIENT to meet long-term obligations, not sufficient. It is a situation of financial difficulty where the firm faces constraints in servicing debt and meeting financial commitments.

Statement (iv): TRUE — An angel investor is defined as a high-net-worth individual who provides capital (equity funding) to early-stage startups or entrepreneurs in exchange for ownership equity or convertible instruments. This is a standard source of seed funding before venture capital involvement.

Four Forms of Bank Credit for ABC Ltd:

1. Cash Credit — This is a flexible credit facility where the bank allows the company to withdraw funds up to a sanctioned limit. Interest is charged only on the amount actually withdrawn, not on the entire sanctioned limit. The borrower must maintain a margin (security deposit) as per bank norms. This facility is ideal for meeting short-term working capital requirements and provides cost efficiency as interest accrues only on utilized funds.

2. Overdraft — This facility permits the company to withdraw more than the balance maintained in its current account up to a sanctioned limit. Interest is charged only on the overdrawn amount. It is similar to cash credit but is typically provided on current accounts. This facility provides flexibility for seasonal or temporary cash shortfalls and is repayable on demand by the bank.

3. Demand Loan — Under this facility, the entire loan amount is credited to the company's account at once, and the full amount becomes immediately available. Interest is charged on the full amount from the date of disbursement till repayment, regardless of whether the entire amount is utilized. The loan is repayable on demand, though usually with notice. This form is suitable for both working capital and fixed capital requirements.

4. Term Loan — This is a loan with a fixed tenure, fixed amount, and predetermined repayment schedule. The loan is disbursed as a lump sum to the borrower, who repays it in periodic installments (monthly, quarterly, or annually) over the agreed period. A fixed or floating rate of interest is charged on the outstanding balance. Term loans are primarily used for financing capital expenditure, acquisition of fixed assets, or major business expansion projects.

Each form offers distinct advantages depending on the company's cash flow patterns, seasonal variations, and the nature of expenditure to be financed.

Payback Reciprocal is the reciprocal of the payback period (1/Payback Period) and approximates the average annual rate of return on an investment. Relevance in Capital Budgeting: It serves as a quick screening tool for preliminary evaluation of investment projects, particularly useful for routine or smaller-scale capital budgeting decisions where detailed analysis may be impractical. The reciprocal provides a rapid estimate of return without extensive calculations, enabling management to rank projects and make swift preliminary assessments. For projects with relatively uniform cash flows, it gives an approximate measure of annual average return, facilitating comparison between alternative investments at a glance. Limitations Affecting Relevance: However, its application is limited because it does not adequately account for the time value of money, ignores all cash flows occurring after the payback period, and treats all cash flows within the payback period equally. It is therefore unsuitable as the sole criterion for major investment decisions and should be used only as a supplementary quick-check tool alongside more rigorous methods such as Net Present Value (NPV) and Internal Rate of Return (IRR).

Note on Question Completeness: The question as presented is missing critical data required to fully solve the problem. Specifically absent are: (i) the existing balance sheet of Z Limited (equity share capital amount, preference share capital, total debentures outstanding, goodwill amount, P&L debit balance, PP&E book value before revaluation, trade receivables and inventories book values before revaluation, and opening bank balance); (ii) the exact sub-division ratio and reduction amount per share in point (i); (iii) the preference share dividend rate, capital amount, and what preference shareholders accept in lieu in point (ii); and (iv) the total own debentures held vs. sold in point (iii). The following solution provides complete journal entry frameworks for every clearly specified item and explains the accounting treatment, which would be applied once the missing figures are known.

Journal Entries to Implement the Reconstruction Scheme

Entry (i) — Sub-division and Reduction of Equity Share Capital:
Equity Share Capital A/c (old face value) Dr [Old Capital Amount]
To Equity Share Capital A/c (₹10 each) [New Capital Amount after sub-division]
To Capital Reduction A/c [Reduction Amount]
(Being equity shares sub-divided and capital reduced as per scheme)

Entry (ii) — Preference Dividend Arrears (partial waiver):
Preference Dividend Payable A/c Dr [75% of 4-year arrears]
To Capital Reduction A/c [75% waived — gain to company]
(Being 75% of 4 years' arrear preference dividend waived by preference shareholders)

For the 25% accepted (form of consideration must be specified in full question — e.g., new shares or debentures):
Preference Dividend Payable A/c Dr [25% of arrears]
To New Preference Shares / New Securities A/c [Consideration given]

Entry (iii) — Sale of Own Debentures ₹2,40,000 @ ₹98 cum interest:
Since interest on 10% Debentures is paid on 31st March and the scheme date is 1st April 2024, there is no accrued interest included in the cum-interest price. Sale proceeds = ₹2,40,000 × 98/100 = ₹2,35,200.

Bank A/c Dr ₹2,35,200
Capital Reduction A/c Dr ₹4,800 (loss on sale, assuming own debentures held at par)
To Own Debentures A/c ₹2,40,000
(Being own debentures of ₹2,40,000 nominal sold @ ₹98)

For cancellation of remaining own debentures:
10% Debentures A/c Dr [Remaining Nominal Value]
To Own Debentures A/c [Book Value / Cost]
To Capital Reduction A/c [Gain on cancellation, if any]
(Being remaining own debentures cancelled — the face value liability is extinguished against the asset)

Entry (iv) — Debenture Holders of ₹6,00,000 accept Machinery of ₹9,00,000:
The company gives machinery with book value ₹9,00,000 to settle a debt of ₹6,00,000. The excess book value over debt (₹3,00,000) is a loss charged to Capital Reduction.

10% Debentures A/c Dr ₹6,00,000
Capital Reduction A/c Dr ₹3,00,000
To Plant and Machinery A/c ₹9,00,000
(Being machinery of BV ₹9,00,000 transferred to debenture holders of ₹6,00,000 in full settlement)

Entry (v) — Revaluation of Remaining PP&E to ₹60,00,000:
Capital Reduction A/c Dr [PP&E Book Value LESS ₹60,00,000]
To Property, Plant and Equipment A/c [Reduction Amount]
(Being PP&E written down to revalued amount of ₹60,00,000)

Entry (vi) — Revaluation of Current Assets and Write-off of Fictitious Assets:
For write-down of Trade Receivables (to ₹13,00,000), Inventories (to ₹9,44,000):
Capital Reduction A/c Dr [Reduction in each asset]
To Trade Receivables A/c / Inventories A/c [Respective amounts]

For Trade Payables revalued to ₹13,00,000 (if lower than book, gain; if higher, loss):
Trade Payables A/c Dr [Reduction if book value > ₹13,00,000]
To Capital Reduction A/c

For write-off of Goodwill and P&L (Debit Balance):
Capital Reduction A/c Dr [Goodwill + P&L Debit Balance]
To Goodwill A/c
To Profit and Loss A/c
(Being fictitious assets eliminated on reconstruction)

Entry (vii) — Penalty Paid to Avoid Capital Commitments of ₹12,00,000:
Capital commitments are contractual obligations (disclosed in notes, not on balance sheet). By paying ₹80,000, the company avoids a future cash outflow commitment of ₹12,00,000. Net benefit credited to Capital Reduction = ₹12,00,000 − ₹80,000 = ₹11,20,000.

Capital Reduction A/c Dr ₹80,000
To Bank A/c ₹80,000
(Penalty paid to cancel capital commitments)

Capital Reduction A/c Cr ₹12,00,000
(Being capital commitment of ₹12,00,000 cancelled — contingent obligation extinguished)
Net credit to Capital Reduction from this item = ₹11,20,000

Capital Reduction Account would be prepared by summarising all debits (losses: PP&E write-down, goodwill, P&L balance, receivables/inventory write-down, loss on machinery transfer, penalty, loss on debenture sale) and all credits (gains: equity share capital reduction, preference dividend waived, own debenture cancellation gain, trade payable reduction, capital commitment cancelled). The balance (if credit side > debit side) is transferred to Capital Reserve; if debit > credit, the scheme is insufficient.

Bank Account would reflect: Opening balance + Proceeds from own debenture sale (₹2,35,200) on the debit side; Penalty paid (₹80,000) on the credit side. Other items (i) through (ii) and (iv) through (vi) do not involve cash.

Final Answer: Complete journal entries, Capital Reduction Account, and Bank Account can be fully prepared once the missing balance sheet data (especially equity and preference share capital, total debentures, PP&E opening value, goodwill, and P&L balance) are provided.

Applicable Standard: AS 19 – Leases

Under AS 19, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the asset to the lessee. The following indicators are examined:

Step 1 – Compute Annual Lease Payment

At inception, the fair value of the asset equals the present value of the lessor's gross investment, i.e., PV of minimum lease payments (MLP) + PV of unguaranteed residual value (URV).

Fair Value = (Annual Payment × PV Annuity Factor) + (URV × PV Factor)
18,00,000 = (Annual Payment × 2.4018) + (2,00,000 × 0.7118)
18,00,000 = (Annual Payment × 2.4018) + 1,42,360
Annual Payment = 16,57,640 ÷ 2.4018 = ₹6,90,167 (approx.)

Step 2 – Finance Lease Classification

Two criteria under AS 19 are tested:

(i) PV of MLP as a proportion of Fair Value – The MLP comprises only the periodic lease payments since the residual value is *unguaranteed* (lessee bears no obligation for it).

PV of MLP = ₹6,90,167 × 2.4018 = ₹16,57,641
Ratio = 16,57,641 / 18,00,000 = 92.09%
This represents substantially all of the fair value of the asset.

(ii) Lease term as proportion of useful life – Lease term = 3 years; Useful life = 5 years; Ratio = 3/5 = 60%, which is a major portion of the asset's economic life.

Conclusion: Both indicators confirm that this is a Finance Lease. Even though ownership reverts to Colour Limited at the end of the term, the PV of MLP (92%) substantially covers the asset's fair value, and the lease spans a major portion (60%) of the useful life. The lease is correctly classified as a finance lease for both lessor (Colour Limited) and lessee (Rad Limited).

Step 3 – Unearned Finance Income

For the lessor, the gross investment in the lease is:
Gross Investment = Total MLP + Unguaranteed Residual Value
= (₹6,90,167 × 3) + ₹2,00,000
= ₹20,70,501 + ₹2,00,000 = ₹22,70,501

Net Investment (= Cost of Machine / Fair Value at inception) = ₹18,00,000

Unearned Finance Income = Gross Investment − Net Investment
= ₹22,70,501 − ₹18,00,000 = ₹4,70,501

This unearned finance income of ₹4,70,501 will be recognised by Colour Limited (lessor) over the lease term using the actuarial method (effective interest rate method) so as to give a constant periodic rate of return on the net investment outstanding in each period.

Net Cash Flow from Operating Activities — Indirect Method

The cash flow from operating activities is computed by adjusting Net Profit Before Tax for non-cash items, non-operating items, and working capital changes, then deducting taxes and interest paid.

Note on P&L Opening Balance: The figure '5,400,000' for Profit & Loss a/c (2023) appears to be a formatting anomaly. Given the scale of all other figures (₹5,400 to ₹3,90,000 range), it is treated as ₹5,400 throughout this solution.

Profit Before Tax (PBT): Reconstructing the P&L account — Opening balance ₹5,400 + Profit after tax (x) − Transfer to General Reserve ₹27,000 = Closing balance ₹37,800. Solving: x = ₹59,400. Adding back tax provided: PBT = ₹59,400 + ₹1,62,000 = ₹2,21,400.

Income Tax Paid: Opening provision ₹2,21,000 + Tax provided ₹1,62,000 − Closing provision ₹1,35,000 = ₹2,48,000 paid.

Depreciation: Net increase in Accumulated Depreciation = ₹1,62,000 − ₹1,29,600 = ₹32,400 (non-cash charge).

Interest on 12% Debentures: Only old debentures (₹1,18,000) existed for the full year; new debentures (₹1,73,600) were issued at year-end, so no interest accrues on them. Interest = 12% × ₹1,18,000 = ₹14,160.

Interest on 8% Current Investments: Similarly, only old investments (₹54,000) earned interest for the full year. Interest = 8% × ₹54,000 = ₹4,320.

Provision for Doubtful Debts: Increased by ₹54,000 − ₹27,000 = ₹27,000 (non-cash expense, added back).

Cash Flow Statement — Operating Activities:

Net Profit Before Tax: ₹2,21,400
Add: Depreciation ₹32,400; Provision for Doubtful Debts ₹27,000; Interest on Debentures ₹14,160; Less: Interest on Investments (₹4,320)
Operating Profit before Working Capital Changes: ₹2,90,640

WorkingCapital Changes: Add: Decrease in Inventories ₹54,000; Less: Increase in Trade Receivables-Gross (₹1,80,360); Less: Decrease in Trade Payables (₹10,800)
Cash Generated from Operations: ₹1,53,480

Less: Income Tax Paid (₹2,48,000); Less: Interest Paid on Debentures (₹14,160); Add: Interest Received on Investments ₹4,320

Net Cash Flow from Operating Activities = ₹(1,04,360) — a net outflow.

Note: The individual Balance Sheets of Art Limited and Craft Limited are not provided in the question as stated. The following answer presents all key Working Notes and adjustments required for consolidation, based on the additional information given. The final consolidated Balance Sheet format is shown with placeholders where balance sheet figures are needed.

Consolidation of Art Limited and Craft Limited as on 31st March 2024

Under AS 21 – Consolidated Financial Statements, Art Limited (parent) must consolidate Craft Limited (subsidiary) by combining balance sheets line by line and eliminating inter-company balances.

Working Note 1: Pre-Acquisition Profits of Craft Limited (as on 1st October 2023)

Art Limited acquired shares of Craft Limited on 1st October 2023 (mid-year). Pre-acquisition profits must be calculated up to the date of acquisition for the Cost of Control computation.

- Reserve & Surplus as on 1st April 2023: ₹40,000 (fully pre-acquisition)
- P&L balance as on 1st April 2023: ₹58,700
- Add: Profit earned from 1st April 2023 to 1st October 2023 (6 months) = Current year profit × 6/12 *(figure to be taken from P&L of Craft)*

The 6-month pre-acquisition profit is time-apportioned assuming profits accrue evenly unless otherwise stated.

Working Note 2: Cost of Control (Goodwill / Capital Reserve)

Cost of Shares acquired by Art Limited: *(from Art's books)*
Less: Art's share in Net Assets of Craft at acquisition date:
- Paid-up Share Capital of Craft (Art's proportion)
- Add: Pre-acquisition Reserve & Surplus (Art's proportion)
- Add: Pre-acquisition P&L (Art's proportion)
- Less: Revaluation deficit on Plant & Machinery (Art's proportion) = ₹30,000 × Art's %

If the result is positive → Goodwill (asset); if negative → Capital Reserve.

Working Note 3: Revaluation of Plant & Machinery of Craft Limited

Plant & Machinery stood at ₹2,50,000 on 1st April 2023. Fair value on acquisition date (1st October 2023) = ₹2,20,000.

Revaluation Deficit = ₹2,50,000 − ₹2,20,000 = ₹30,000

This deficit reduces the pre-acquisition net assets of Craft Limited and therefore affects the Cost of Control computation.

Further, since the P&M was revalued downward by ₹30,000, depreciation is to be recalculated on the revalued amount (₹2,20,000) over the remaining useful life. The excess depreciation previously charged (if any based on book value vs revalued basis for the post-acquisition period of 6 months, i.e., Oct 2023 to Mar 2024) must be adjusted against the post-acquisition P&L.

*Note: Specific useful life is not provided in the question. Depreciation rate is needed to compute the exact adjustment to post-acquisition P&L.*

Working Note 4: Uniform Accounting Policy – Provision for Doubtful Debts

Craft Limited maintains a 1% general provision on Trade Receivables, whereas Art Limited does not follow this policy.

Under AS 21, uniform accounting policies must be applied across the group. Adjustment required:
- If Art's policy (no general provision) is adopted: Reverse Craft's provision → Debit Provision for Doubtful Debts, Credit P&L of Craft by 1% of Craft's Trade Receivables.
- The reversal amount increases Craft's post-acquisition profit available for consolidation.

*(Trade Receivables figure of Craft Limited is needed from the balance sheet to quantify this adjustment.)*

Working Note 5: Unrealised Profit in Closing Stock (Inter-Company Transaction)

Craft Limited holds goods purchased from Art Limited for ₹1,03,500. Art Limited earns a profit of 15% on cost price.

Selling Price = Cost + 15% of Cost = 1.15 × Cost
Therefore, Cost = ₹1,03,500 ÷ 1.15 = ₹90,000
Unrealised Profit = ₹1,03,500 − ₹90,000 = ₹13,500

This profit is unrealised from the group's perspective since goods remain in Craft's closing stock.

Consolidation Adjustment:
- Debit: Art Limited's Profit & Loss (Retained Earnings) by ₹13,500
- Credit: Closing Stock / Inventory by ₹13,500

Working Note 6: Minority Interest (if applicable)

If Art Limited holds less than 100% of Craft Limited's shares, the remaining percentage constitutes Minority Interest, calculated as:
- Minority % × Net Assets of Craft at Balance Sheet date (using adjusted figures post-revaluation and accounting policy changes)

Final Answer: The Consolidated Balance Sheet cannot be fully compiled without the individual Balance Sheets of Art Limited and Craft Limited. However, the five key adjustments above — (i) Cost of Control, (ii) P&M Revaluation of ₹30,000, (iii) Reversal of doubtful debt provision, (iv) Elimination of unrealised profit of ₹13,500 from closing stock, and (v) Minority Interest — must be incorporated to arrive at the correct consolidated figures.

Note: The question as stated is part of a larger case scenario. Based on standard ICAI Study Material context for this question (Chetan Limited as lessor), the assumed figures are: Fair Value / Cost of Machine = ₹2,00,000 and Annual Lease Rental = ₹80,000 (3 equal instalments). Students should substitute actual figures from the complete case.

Applicable Standard: AS 19 — Leases (issued by ICAI)

Step 1 — Analysis of Finance Lease Classification

Under AS 19, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. Classification is made at the inception of the lease. AS 19 provides the following indicators:

(a) Transfer of Ownership: The machine reverts to Chetan Limited (lessor) at the end of the lease term — so ownership does NOT transfer. This indicator is absent.

(b) Bargain Purchase Option: Not mentioned — indicator is absent.

(c) Lease Term vs. Economic Life: Lease term = 3 years; Useful life = 5 years. Ratio = 3/5 = 60%. This does not constitute a major part of the asset's economic life, so this indicator is not conclusively met.

(d) Present Value of Minimum Lease Payments (MLP) vs. Fair Value:
PV of MLP = ₹80,000 × 2.4018 = ₹1,92,144
Fair Value of Machine = ₹2,00,000
Ratio = 1,92,144 / 2,00,000 = 96.07%

Since the PV of MLP (₹1,92,144) amounts to substantially all of the fair value (96.07% > 90%), this indicator is met.

Conclusion: Even though ownership does not transfer and the lease term is only 60% of the asset's life, the PV of MLP is substantially all of the fair value. Under AS 19, presence of any one of the indicators is sufficient. Therefore, the lease constitutes a Finance Lease.

Step 2 — Calculation of Unearned Finance Income (Lessor's Books)

Under AS 19, a lessor shall recognise assets held under a finance lease as a receivable at the net investment in the lease. The difference between the gross investment and the net investment is Unearned Finance Income.

Gross Investment in Lease = Total MLP + Unguaranteed Residual Value
= (₹80,000 × 3) + ₹0 = ₹2,40,000

Net Investment in Lease = PV of MLP + PV of Unguaranteed Residual Value
= ₹1,92,144 + ₹0 = ₹1,92,144

Unearned Finance Income = Gross Investment − Net Investment
= ₹2,40,000 − ₹1,92,144 = ₹47,856

This unearned finance income of ₹47,856 shall be allocated over the lease term using the actuarial method (net investment basis), reflecting a constant periodic rate of return of 12%.

Computation of Basic and Diluted EPS for ABC Limited for the year 2023-24

As per AS 20 – Earnings Per Share, Basic EPS is computed by dividing earnings available to equity shareholders by the Weighted Average Number of Shares (WANS). Diluted EPS additionally considers the impact of potential equity shares from convertible instruments.

(a) Weighted Average Number of Shares (Basic EPS)

The shares are partly paid up and a call was made on 1st July 2023. As per AS 20, partly paid shares are treated as a fraction of a fully paid share proportionate to the amount paid.

Period 1 (1 April 2023 – 30 June 2023): All 50,000 shares were ₹80 paid, i.e., 80/100 fraction → 50,000 × 80/100 = 40,000 equivalent fully paid shares (weight = 3/12)

Period 2 (1 July 2023 – 31 March 2024): 40,000 shareholders paid the call → 40,000 shares fully paid. 10,000 shareholders did NOT pay → 10,000 × 80/100 = 8,000 equivalent shares. Total = 48,000 equivalent fully paid shares (weight = 9/12)

WANS = (40,000 × 3/12) + (48,000 × 9/12) = 10,000 + 36,000 = 46,000 shares

(b) Earnings Available to Equity Shareholders (Basic EPS)

Profit After Tax = ₹3,44,600
Less: Preference Dividend = 2,00,000 shares × ₹10 × 8% = ₹16,000
Earnings for Basic EPS = ₹3,28,600

Basic EPS = ₹3,28,600 ÷ 46,000 = ₹7.14

(c) Diluted EPS – Convertible Debentures

Each of the 10,000 debentures is convertible into 3 equity shares, giving 10,000 × 3 = 30,000 potential equity shares. Conversion is assumed at the beginning of the period for diluted EPS purposes.

Interest saved (gross) on debentures = 10,000 × ₹100 × 12% = ₹1,20,000
After-tax interest saving = ₹1,20,000 × (1 – 0.30) = ₹84,000

Diluted Earnings = ₹3,28,600 + ₹84,000 = ₹4,12,600
Diluted WANS = 46,000 + 30,000 = 76,000 shares

Diluted EPS = ₹4,12,600 ÷ 76,000 = ₹5.43

Since Diluted EPS (₹5.43) < Basic EPS (₹7.14), the convertible debentures are dilutive and must be included in the Diluted EPS calculation.

Answer: The management's recommendation is NOT justified. Suggested dividend rate: 0% (no dividend)

Legal Framework:
Under Section 123(2) of the Companies Act, 2013 and Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, a company can declare dividend from reserves even during loss years, provided the dividend rate does not exceed the average dividend paid in the preceding three years.

Permissibility Check:
Average dividend rate for preceding 3 years = (12% + 14% + 10%) ÷ 3 = 12%. The proposed 10% dividend is within this 12% limit, making it legally permissible.

Prudential Assessment:
Despite legal permissibility, the recommendation is NOT justified for the following reasons:

(1) Loss in Current Year: The company has incurred a loss of ₹5 lakhs in 2023-24. Declaring dividends during loss years weakens financial position and sends negative signals to stakeholders about the company's recovery prospects.

(2) Capital Preservation: The General Reserve of ₹100 lakhs is critical buffer for financial stability. Paying ₹50 lakhs dividend (10% of ₹500 lakhs) reduces reserves by 50%, leaving limited cushion.

(3) Dividend History Pattern: The company has already skipped dividend in 2019-20, indicating precedent for suspending payments during challenging periods. The fluctuating pattern (7%, nil, 10%, 14%, 12%) shows inconsistency in dividend policy.

(4) Focus on Recovery: The company should prioritize financial recovery and profitability restoration over shareholder returns during loss years.

Recommended Dividend Rate: 0%
The company should declare nil dividend to preserve the General Reserve and demonstrate commitment to financial recovery. This action:
- Strengthens balance sheet strength
- Maintains liquidity for operations
- Shows prudent financial management
- Has precedent (2019-20 no dividend)

Alternatively, if shareholder expectations demand minimal distribution, 7% (lowest historical rate) could be considered, but 0% is the prudent choice under current circumstances.

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

When a foreign branch is classified as an Integral Foreign Operation, the translation rules under AS 11 are as follows:
- Monetary items (Cash, Debtors, Creditors, HO Control A/c): translated at closing rate (₹58)
- Non-monetary items at historical cost (Fixed Assets, Inventory): translated at the rate on date of transaction (historical rate)
- Income and Expenditure (excluding items tied to non-monetary assets): translated at average rate (₹56)
- Depreciation: translated at the same rate as the related Fixed Asset (here: ₹56, since no specific acquisition rate is given for fixed assets)
- Exchange differences arising on translation are recognised in Profit & Loss Account (not in equity/OCI)
- The HO Control Account in branch books is shown at the figure appearing in HO books (₹2,66,265) to ensure proper intercompany elimination

Inventory Adjustment:
Under AS 2 read with AS 11, inventory is carried at lower of INR cost or INR NRV.
- Stock P: INR cost = 5,520 × ₹56.50 = ₹3,11,880; INR NRV = ₹2,83,600. Since NRV < cost, write-down of ₹28,280 is charged to expenditure; closing stock shown at ₹2,83,600.
- Stock Q: INR cost = 1,065 × ₹53 = ₹56,445; INR NRV = 1,035 × ₹58 = ₹60,030. Since NRV > cost in INR, no write-down is required. The branch had written down USD 30 in its USD books (1,065 → 1,035). This write-down of ₹1,590 (30 × ₹53) must be reversed (credited) in the HO trial balance. Stock Q is shown at cost ₹56,445.

Exchange Fluctuation: The difference between the translated debit and credit totals represents the exchange gain/loss for the period, recognised in P&L.

Trial Balance of New York Branch as reflected in Books of Head Office (Integral Foreign Operation)

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Expenditure (excl. Depreciation) [1,03,095 × 56] | 57,73,320 | — |
| Loss on Write-down – Stock P | 28,280 | — |
| Depreciation [6,840 × 56] | 3,83,040 | — |
| Cash & Bank [2,175 × 58] | 1,26,150 | — |
| Debtors [7,365 × 58] | 4,27,170 | — |
| Fixed Assets – Gross [34,200 × 56] | 19,15,200 | — |
| Inventory – Stock P (at NRV) | 2,83,600 | — |
| Inventory – Stock Q (at INR cost: 1,065 × 53) | 56,445 | — |
| Incomes [1,32,000 × 56] | — | 73,92,000 |
| Creditors [15,570 × 58] | — | 9,03,060 |
| HO Control A/c (as per HO books) | — | 2,66,265 |
| Provision for Depreciation [6,840 × 56] | — | 3,83,040 |
| Write-back of Stock Q write-down [30 × 53] | — | 1,590 |
| Exchange Fluctuation Gain (Balancing Figure) | — | 47,250 |
| Total | 89,93,205 | 89,93,205 |

Exchange Fluctuation Gain = ₹47,250 (credited to Profit & Loss Account as per AS 11 for integral foreign operations).

Applicable Law: Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 (framed under Section 123 of the Companies Act, 2013) governs declaration of dividend out of free reserves in the absence of current year profits.

Conditions under Rule 3 and their verification:

Condition 1 — Rate of Dividend: The rate declared shall not exceed the average of the rates at which dividend was declared in the 3 years immediately preceding the current year.

Average rate = (12% + 14% + 10%) ÷ 3 = 12%

Management proposes 10%, which is less than 12%. ✓ Condition satisfied.

Condition 2 — Maximum Withdrawable Amount: Total amount drawn from reserves shall not exceed 1/10th of (Paid-up Share Capital + Free Reserves) as per the latest audited balance sheet.

Maximum permissible withdrawal = 1/10 × (₹500 + ₹700) lakhs = ₹120 lakhs

Actual withdrawal required = Loss set-off (₹5 lakhs) + Dividend (₹50 lakhs) = ₹55 lakhs

₹55 lakhs < ₹120 lakhs. ✓ Condition satisfied.

Condition 3 — Set-off of Losses First: The amount drawn from reserves shall first be utilised to set off the losses incurred in the financial year before declaring dividend.

Loss for 2023-24 = ₹5 lakhs, which must be set off from General Reserve before distributing dividend. ✓ Condition can be complied with.

Condition 4 — Minimum Reserve Balance: The balance of reserves after such withdrawal shall not fall below 15% of Paid-up Share Capital.

Minimum required balance = 15% × ₹500 lakhs = ₹75 lakhs

Balance of General Reserve after withdrawal = ₹700 − ₹55 = ₹645 lakhs

₹645 lakhs > ₹75 lakhs. ✓ Condition satisfied.

Conclusion: The management's recommendation to declare a dividend of 10% out of General Reserve is fully justified. All four conditions prescribed under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 are satisfied. The maximum permissible rate is 12%, and since the proposed rate of 10% is within that limit, and all other quantitative conditions are met, no revision of the rate is necessary.

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

Smart Limited's New York Branch is a foreign branch. The branch balances are denominated in USD and must be translated into INR for incorporation in the Head Office books.

Classification of the Branch — Integral vs. Non-Integral Foreign Operation

The first step is to classify whether the New York Branch is an Integral Foreign Operation or a Non-Integral Foreign Operation based on the indicators in AS 11:
- If it is integral, transactions are translated using the method appropriate for the individual items (monetary items at closing rate; non-monetary items at historical rate; revenue/expenses at rate at date of transaction or average rate).
- If it is non-integral, all assets and liabilities are translated at the closing rate, income and expenses at the average rate, and the resulting exchange difference is taken to the Foreign Currency Translation Reserve (FCTR) — not to Profit & Loss Account.

Translation Rules for the Given Debit Balances (assuming Integral Operation — typical for a dependent branch):

| Item | Nature | Rate to Apply |
|---|---|---|
| Expenditure (excl. Dep.) USD 1,03,095 | P&L (Revenue) | Average Rate |
| Cash & Bank Balances USD 2,125 | Monetary Asset | Closing Rate |
| Debtors USD 7,365 | Monetary Asset | Closing Rate |
| Fixed Assets (Gross) USD 34,200 | Non-Monetary Asset | Historical Rate (rate on date of acquisition) |
| Less: Depreciation @ 20% = USD 6,840 | Non-Monetary (contra) | Historical Rate |
| Inventory — Stock 'P' USD 5,520 | Non-Monetary Asset | Historical Rate (rate when stock acquired / sent) |
| Inventory — Stock 'Q' USD 1,035 | Non-Monetary Asset | Historical Rate |

Exchange Difference Treatment (Integral Operation): Any exchange difference arising on translation of monetary items is recognised in the Profit & Loss Account of the current year.

Note: The question as presented provides only the debit-side USD balances. To complete the full translated Trial Balance and compute exchange difference, the following additional data is required: (a) Credit balances of the branch (Capital sent by HO, Creditors, HO Current Account, etc.), (b) Closing exchange rate (USD/INR as at year-end), (c) Average exchange rate for the year, and (d) Historical rates for fixed assets and stock. With those rates, each item above is multiplied by the applicable rate to arrive at the INR equivalent, and the balancing figure in the translated Trial Balance represents the Exchange Difference, which is credited/debited to the P&L Account (for integral operations).

Answer: Under Ind AS 21 (The Effects of Changes in Foreign Exchange Rates), an integral foreign operation records all transactions as if they were domestic transactions in the reporting currency (₹). The branch trial balance items are retranslated using appropriate exchange rates and reconciled with the Branch Control Account in HO books.

Treatment of Each Item:

1. Incomes (₹1,32,000): These were earned during the financial year at the average exchange rate of ₹56. For an integral operation, incomes are recorded at the transaction date rate (average rate). No retranslation is required as the average rate applies. Trial Balance (Credit): ₹1,32,000

2. Creditors (₹15,570): This is a monetary liability and must be retranslated at the closing exchange rate of ₹58. Assuming the amount was originally recorded at the average rate: USD equivalent = ₹15,570 ÷ ₹56 = USD 277.68. At closing rate: USD 277.68 × ₹58 = ₹16,105.44. Exchange loss = ₹535.44. The creditors balance in HO's trial balance will be ₹16,105.44 (Credit) with the exchange loss recorded in the P&L.

3. HO Control Account (₹5,820): This monetary item represents the branch's net position with HO. Assuming recorded at average rate: USD equivalent = ₹5,820 ÷ ₹56 = USD 103.93. At closing rate: USD 103.93 × ₹58 = ₹6,027.94. Exchange loss = ₹207.94. Trial Balance: ₹6,027.94 (Credit)

4. Stock Item 'P': Cost = USD 2,520 @ ₹56.50 per USD = ₹1,42,380. NRV = ₹2,85,000. As a non-monetary item at historical cost, the cost value (₹1,42,380) is not retranslated under integral operation treatment. Since cost < NRV, the balance sheet value is ₹1,42,380 (Debit).

5. Stock Item 'Q': Cost = USD 1,065 @ ₹23 per USD = ₹24,495. NRV = USD 1,035 (assuming valued at closing rate of ₹58) = ₹60,030. As cost (₹24,495) is lower than NRV, the balance sheet value is ₹24,495 (Debit). Non-monetary items at cost are not retranslated.

Exchange Difference Recognized: Total exchange loss from retranslation of monetary items = ₹535.44 + ₹207.94 = ₹743.38, which will be recognized in the P&L for the period.

Reconciliation with Branch Control Account (₹2,66,265): The Branch Control Account represents HO's net investment in the branch. It should reconcile with the branch's net asset position (Assets – Liabilities as per integral FX accounting) plus/minus any opening capital and remittances. While the specific items provided don't fully account for the ₹2,66,265, they represent the key foreign exchange adjustments required. Additional branch assets (cash, receivables, fixed assets) not detailed in the question would complete the reconciliation. The treatment ensures all foreign exchange gains/losses from monetary items flow through the P&L, consistent with integral operation principles.