CA Inter Adv Accounting — Question Paper — November 2020

BRANCH ACCOUNTING - STOCK AND DEBTORS METHOD

Under the Stock and Debtors Method, the Head Office maintains complete accounts for the branch in its own books. Three principal accounts are prepared: Branch Stock Account, Branch Debtors Account, and Branch Profit & Loss Account.

CALCULATION OF COST OF GOODS SENT:
Goods are sent at 20% above cost. Therefore:
Gross value at selling price: ₹8,40,000
Less: Goods returned at selling price: ₹60,000
Net goods sent at selling price: ₹7,80,000
Cost of goods sent = ₹7,80,000 ÷ 1.20 = ₹6,50,000

CALCULATION OF COST OF GOODS RETURNED:
Goods returned at selling price: ₹60,000
Cost = ₹60,000 ÷ 1.20 = ₹50,000

BRANCH STOCK ACCOUNT (In Head Office Books)

Dr. | Particulars | Amount | Cr. | Particulars | Amount
--- | --- | --- | --- | --- | ---
| Opening Stock | 72,000 | | Goods Returned to HO | 50,000
| Goods from HO (at cost) | 6,50,000 | | Closing Stock | 1,25,000
| | | | To P&L (Cost of Goods Sold) | 5,47,000
| Total | 7,22,000 | | Total | 7,22,000

BRANCH DEBTORS ACCOUNT (In Head Office Books)

Dr. | Particulars | Amount | Cr. | Particulars | Amount
--- | --- | --- | --- | --- | ---
| Opening Balance | 90,000 | | Goods Returned by Customers | 14,000
| Credit Sales | 6,25,000 | | Discount Allowed | 7,500
| Bad debts Recovered | 1,000 | | Bad debts Written off | 3,500
| | | | Cash Received from Debtors | 4,38,000
| | | | Closing Balance | 2,53,000
| Total | 7,16,000 | | Total | 7,16,000

BRANCH PROFIT & LOSS ACCOUNT (In Head Office Books)

Dr. | Particulars | Amount | Cr. | Particulars | Amount
--- | --- | --- | --- | --- | ---
| Cost of Goods Sold | 5,47,000 | | Cash Sales | 1,45,000
| Rent, Rates & Taxes | 24,000 | | Credit Sales | 6,25,000
| Salaries & Wages | 48,000 | | |
| Office Expenses | 9,200 | | |
| Discount Allowed | 7,500 | | |
| Goods Returned by Customers | 14,000 | | |
| Bad debts (Net: ₹3,500 - ₹1,000) | 2,500 | | |
| Branch Profit | 1,17,800 | | |
| Total | 7,70,000 | | Total | 7,70,000

BRANCH PROFIT: ₹1,17,800

The question references 'above investments' but specific investment details are not provided in the question text. To answer properly, details such as: investment type (equity/debt/mutual funds), cost of acquisition, classification (current/long-term), fair value as on 31st March 2020, and any dividend/interest received are required.

However, under AS 13 (Revised) – Investments, the following framework applies:

Classification: Investments must be classified as Current Investments (held for short-term/trading) or Long-term Investments (held for more than 12 months).

Valuation Method for Current Investments: Valued at the lower of cost and fair value (market value). If fair value falls below cost, the investment is written down, and the loss is recognized in the Profit & Loss Statement.

Valuation Method for Long-term Investments: Valued at cost. However, if there is a permanent diminution in value, the investment must be written down. The write-down is recognized in the P&L Statement.

Presentation in Balance Sheet: Current Investments are shown under Current Assets (valued at lower of cost/fair value). Long-term Investments are shown under Non-Current Assets (valued at cost, less any provision for permanent diminution).

Disclosures Required: Details of investments (name of investment, quantity, amount), nature (whether fully paid, partly paid), unrealized gains/losses on current investments, and any provisions for diminution must be disclosed in notes to accounts.

Treatment of Dividend/Interest: Dividend and interest received on investments are recognized as income in the period earned, irrespective of when cash is received.

For a complete solution, please provide the specific investment details from the case study, including acquisition cost, current fair value, and classification.

In the books of Mr. H, all equity share transactions are recorded in an Investment Account governed by AS 13 – Accounting for Investments.

Investment in Equity Shares of ABC Ltd. (Dr. Side)

| Date | Particulars | No. of Shares | ₹ |
|------|-------------|:-:|--:|
| 19/04/19 | To Balance b/d | 30,000 | 2,40,000 |
| 15/06/19 | To Bank – Purchase (@ ₹16 + 1.5% brokerage) | 10,000 | 1,62,400 |
| 15/07/19 | To Bonus Shares (1 for every 4 held on record date) | 10,000 | — |
| 30/09/19 | To Bank – Rights subscribed (6,000 × ₹6) | 6,000 | 36,000 |
| | Total | 56,000 | 4,38,400 |

Investment in Equity Shares of ABC Ltd. (Cr. Side)

| Date | Particulars | No. of Shares | ₹ |
|------|-------------|:-:|--:|
| 30/09/19 | By Bank – Rights sold (4,000 × ₹5) | — | 20,000 |
| 31/10/19 | By Bank – Pre-acquisition dividend (10,000 × ₹1) | — | 10,000 |
| 31/03/20 | By Balance c/d | 56,000 | 4,08,400 |
| | Total | 56,000 | 4,38,400 |

Treatment of Bonus Shares: Bonus shares (10,000) are received at nil cost. The total cost of ₹4,02,400 is now spread over 50,000 shares, reducing the average cost per share.

Treatment of Rights Sold: The 4,000 rights entitlements sold at ₹5 each (proceeds ₹20,000) are credited to the Investment Account as a reduction in cost, since the rights derive their value from the existing holding.

Treatment of Dividend under AS 13:
- Post-acquisition dividend on 30,000 original shares (held before 31/03/19) = ₹30,000 → credited to Profit & Loss Account (income)
- Pre-acquisition dividend on 10,000 shares purchased on 15/06/19 (after the year ending 31/03/19, so dividend pertains to pre-acquisition profits) = ₹10,000 → deducted from Investment cost
- No dividend on bonus (10,000) and rights (6,000) shares per terms of issue clause (iii)

Final Answer: As at 31/03/2020, Mr. H holds 56,000 equity shares of ABC Ltd. at a total carrying cost of ₹4,08,400 (average cost ≈ ₹7.29 per share). Income recognised in P&L = ₹30,000 (post-acquisition dividend).

AS 16 — Borrowing Costs: Treatment of Interest for RHM Ltd.

Applicable Standard: AS 16 'Borrowing Costs' issued by ICAI requires that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalized as part of the cost of that asset. All other borrowing costs are recognized as an expense in the period in which they are incurred.

Definition of Qualifying Asset (Para 3, AS 16): A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

Rate of Interest: Total Interest ₹40 lakhs on a loan of ₹320 lakhs → Rate = 40/320 × 100 = 12.5% p.a.

Nature of Each Asset and Treatment of Interest:

(1) Construction of Factory Shed — ₹240 lakhs
This is a qualifying asset under AS 16, as construction necessarily takes a substantial period of time. Interest of ₹30 lakhs (₹240 × 12.5%) is to be capitalized and added to the cost of the factory shed. Since construction was completed by March 2020, capitalization ceases upon completion.

(2) Purchase of Machinery — ₹30 lakhs
Machinery purchased off-the-shelf and installed is a non-qualifying asset — it does not take substantial time to get ready for use. Interest of ₹3.75 lakhs (₹30 × 12.5%) is to be charged to Profit & Loss Account.

(3) Working Capital — ₹24 lakhs
Borrowing costs on funds used for working capital purposes do not relate to any long-term asset. This is not a capital asset at all. Interest of ₹3.00 lakhs (₹24 × 12.5%) is to be charged to Profit & Loss Account.

(4) Purchase of Vehicles — ₹12 lakhs
Vehicles are ready for use immediately upon purchase and are non-qualifying assets. Interest of ₹1.50 lakhs (₹12 × 12.5%) is to be charged to Profit & Loss Account.

(5) Advance for Tool Cranes etc. — ₹6 lakhs
Tool cranes are standard manufactured items that do not take a substantial period of time to be manufactured or made ready. They are non-qualifying assets. Interest of ₹0.75 lakhs (₹6 × 12.5%) is to be charged to Profit & Loss Account.

(6) Purchase of Technical Know-how — ₹6 lakhs
Technical know-how is an intangible asset acquired in a ready-to-use form. It is a non-qualifying asset since it does not require a substantial period of time to get ready. Interest of ₹0.75 lakhs (₹6 × 12.5%) is to be charged to Profit & Loss Account.

Summary Table:

Interest to be Capitalized (Factory Shed): ₹30.00 lakhs
Interest to be Charged to P&L (Machinery + Working Capital + Vehicles + Tool Cranes + Know-how): ₹3.75 + ₹3.00 + ₹1.50 + ₹0.75 + ₹0.75 = ₹9.75 lakhs
Total Interest = ₹39.75 lakhs (minor rounding variance due to question data; conceptual treatment remains as above)

Conclusion: Only the factory shed qualifies for capitalization of borrowing costs under AS 16. All remaining borrowing costs amounting to approximately ₹9.75 lakhs are revenue expenditure and must be expensed in the Statement of Profit & Loss for the year ended 31st March, 2020.

Cash Flow Statement of Manan Limited for the year ended 31st March 2020 (as per AS 3 — Cash Flow Statements, Indirect Method)

Note on Missing Data: The question states net profit is given 'after taking into account' certain items, but the actual net profit figure (₹ amount) is not provided in the question as presented. The framework below is complete; the net profit amount must be substituted when available. All other items are fully worked below.

---

A. Cash Flow from Operating Activities

Net Profit before Income Tax and Extraordinary Items (given): ₹ [XX]

Add back items already deducted in arriving at Net Profit:
- Depreciation on PPE: ₹7,50,000 (non-cash charge — added back)
- Discount on issue of Debentures written off: ₹45,000 (non-cash financing cost — added back)
- Interest on Debentures paid: ₹5,25,000 (financing cost — excluded from operating; to be shown under Financing Activities)

Less items already credited in arriving at Net Profit:
- Profit on sale of Investments (₹4,80,000 − ₹4,50,000): (₹30,000) (investing gain — excluded from operating; full proceeds shown under Investing)
- Interest received on Investments: (₹90,000) (investing income — to be shown under Investing Activities)

Operating Profit before Working Capital Changes: ₹ [XX + 13,20,000 − 1,20,000]

Add: Compensation received (from suit filed, excluded from Net Profit as extraordinary): ₹1,35,000

*(Changes in Working Capital — not provided in this question; must be incorporated from Balance Sheet comparatives)*

Cash Generated from Operations: ₹ [XXX]
Less: Income Tax Paid: (₹1,57,000)

Net Cash from Operating Activities: ₹ [A]

---

B. Cash Flow from Investing Activities

Proceeds from Sale of Investments: ₹4,80,000 (full sale proceeds, not just profit)
Interest received on Investments: ₹90,000

Net Cash from Investing Activities: ₹5,70,000 (Inflow)

---

C. Cash Flow from Financing Activities

Redemption of 10% Preference Shares at premium (see Working Notes): (₹24,36,000)
Interest on Debentures Paid: (₹5,25,000)

Net Cash from Financing Activities: ₹(29,61,000) (Outflow)

---

Net Increase/Decrease in Cash and Cash Equivalents = A + ₹5,70,000 − ₹29,61,000

Add: Opening Cash and Cash Equivalents
= Closing Cash and Cash Equivalents

---

Key Classification Principles Applied:

- Depreciation and discount written off: Non-cash items — added back to Net Profit in Operating Activities.
- Interest on Debentures: Under AS 3, interest paid may be classified as Operating or Financing; showing it under Financing Activities is the preferred treatment for non-financial entities as it reflects cost of financing.
- Profit on sale of investments (not full proceeds): Reversed from Operating profit; full proceeds of ₹4,80,000 shown under Investing Activities.
- Interest received: Reversed from Operating profit; shown under Investing Activities.
- Compensation received: Extraordinary item excluded from Net Profit — added separately in Operating Activities.
- Preference share redemption: Financing Activity (repayment of capital including premium).
- Income tax paid: Classified under Operating Activities unless specifically identifiable with Financing or Investing.

Assumed working base: Total 12% Debentures outstanding on 1st April, 2019 = 2,000 debentures × ₹100 each = ₹2,00,000. This is consistent with DRR opening balance of ₹50,000 (= 25% of ₹2,00,000 as per Rule 18 of Companies (Share Capital and Debentures) Rules, 2014). Of these, 1,000 debentures are cancelled via own debentures route (30th March 2020) and the remaining 1,000 are redeemed at par on 31st March 2020 using proceeds of DRR investments.

Key accounting treatment: Own debentures purchased below face value (at ₹96.50 vs face value ₹100) are recorded in Own Debentures Account at face value; the difference of ₹3.50 per debenture (= ₹3,500 total) is credited to Capital Reserve at the time of purchase.

Interest on 7% Govt. Bonds: 7% × ₹1,00,000 = ₹7,000 is received on 31st March 2020. This is credited to Interest on Investment Account (P&L) and does not pass through the four accounts below.

After full redemption of debentures, DRR is transferred to General Reserve as per the Companies Act, 2013 provisions.

---

(1) 12% Debentures Account

| Dr | Date | Particulars | ₹ | Date | Particulars | ₹ | Cr |
|---|---|---|---|---|---|---|---|
| | 30.03.2020 | Own Debentures A/c (1,000 debentures cancelled at face value) | 1,00,000 | 01.04.2019 | Balance b/d | 2,00,000 | |
| | 31.03.2020 | Bank A/c (1,000 debentures redeemed at par) | 1,00,000 | | | | |
| | | Total | 2,00,000 | | Total | 2,00,000 | |

---

(2) Debenture Redemption Reserve Account

| Dr | Date | Particulars | ₹ | Date | Particulars | ₹ | Cr |
|---|---|---|---|---|---|---|---|
| | 31.03.2020 | General Reserve A/c (transferred after full redemption) | 50,000 | 01.04.2019 | Balance b/d | 50,000 | |
| | | Total | 50,000 | | Total | 50,000 | |

---

(3) DRR Investment Account (7% Govt. Bonds)

| Dr | Date | Particulars | ₹ | Date | Particulars | ₹ | Cr |
|---|---|---|---|---|---|---|---|
| | 01.04.2019 | Balance b/d (1,000 bonds × ₹100) | 1,00,000 | 31.03.2020 | Bank A/c (realized at par) | 1,00,000 | |
| | | Total | 1,00,000 | | Total | 1,00,000 | |

---

(4) Own Debentures Account

| Dr | Date | Particulars | ₹ | Date | Particulars | ₹ | Cr |
|---|---|---|---|---|---|---|---|
| | 30.03.2020 | Bank A/c (1,000 debentures × ₹96.50 — purchase cost) | 96,500 | 30.03.2020 | 12% Debentures A/c (cancelled at face value ₹100 each) | 1,00,000 | |
| | 30.03.2020 | Capital Reserve A/c (profit: ₹100 – ₹96.50 = ₹3.50 × 1,000) | 3,500 | | | | |
| | | Total | 1,00,000 | | Total | 1,00,000 | |

Note: The gain of ₹3,500 on purchase of own debentures below face value is credited to Capital Reserve (not P&L), as it is a capital profit arising from a capital transaction.

Hire Purchase Transactions in the Books of Mr. Nilesh

Step 1 — Calculation of Interest and Outstanding Balance

The cash price of the Tractor is ₹11,30,000. After the down payment of ₹2,50,000 on 1st April 2017, the outstanding hire purchase balance is ₹8,80,000. Interest is charged at 8% p.a. on this reducing balance, with ₹3,00,000 principal repaid each year (except the final instalment of ₹2,80,000).

| Year End | Opening Balance (₹) | Interest @ 8% (₹) | Principal Repaid (₹) | Total Instalment (₹) | Closing Balance (₹) |
|---|---|---|---|---|---|
| 31/3/2018 | 8,80,000 | 70,400 | 3,00,000 | 3,70,400 | 5,80,000 |
| 31/3/2019 | 5,80,000 | 46,400 | 3,00,000 | 3,46,400 | 2,80,000 |
| 31/3/2020 | 2,80,000 | 22,400 | 2,80,000 | 3,02,400 | — |

Total Interest = ₹1,39,200. Total Hire Purchase Price = ₹11,30,000 + ₹1,39,200 = ₹12,69,200.

---

Tractor Account (in books of Mr. Nilesh)

| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| 1/4/2017 | To Jai Ltd (Cash Price) | 11,30,000 | 31/3/2018 | By Depreciation A/c | 1,13,000 |
| | | | 31/3/2018 | By Balance c/d | 10,17,000 |
| | Total | 11,30,000 | | Total | 11,30,000 |
| 1/4/2018 | To Balance b/d | 10,17,000 | 31/3/2019 | By Depreciation A/c | 1,13,000 |
| | | | 31/3/2019 | By Balance c/d | 9,04,000 |
| | Total | 10,17,000 | | Total | 10,17,000 |
| 1/4/2019 | To Balance b/d | 9,04,000 | 31/3/2020 | By Depreciation A/c | 1,13,000 |
| | | | 31/3/2020 | By Balance c/d | 7,91,000 |
| | Total | 9,04,000 | | Total | 9,04,000 |

*Note: Depreciation = 10% × ₹11,30,000 = ₹1,13,000 p.a. on Straight Line Method (applied on Cash Price).*

---

Jai Ltd Account (Hire Vendor) in books of Mr. Nilesh

| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| 1/4/2017 | To Bank (Down Payment) | 2,50,000 | 1/4/2017 | By Tractor A/c | 11,30,000 |
| 31/3/2018 | To Bank (Instalment 1) | 3,70,400 | 31/3/2018 | By Interest A/c | 70,400 |
| 31/3/2018 | To Balance c/d | 5,80,000 | | | |
| | Total | 12,00,400 | | Total | 12,00,400 |
| 31/3/2019 | To Bank (Instalment 2) | 3,46,400 | 1/4/2018 | By Balance b/d | 5,80,000 |
| 31/3/2019 | To Balance c/d | 2,80,000 | 31/3/2019 | By Interest A/c | 46,400 |
| | Total | 6,26,400 | | Total | 6,26,400 |
| 31/3/2020 | To Bank (Instalment 3) | 3,02,400 | 1/4/2019 | By Balance b/d | 2,80,000 |
| | | | 31/3/2020 | By Interest A/c | 22,400 |
| | Total | 3,02,400 | | Total | 3,02,400 |

The Jai Ltd account is fully squared off after the third instalment on 31st March 2020, confirming the tractor is now fully paid. The net book value of the tractor as on 31st March 2020 is ₹7,91,000 (₹11,30,000 − 3 × ₹1,13,000).

M/s Rohan & Sons — Financial Statements for the Year Ended 31st March, 2020

Note on Opening Balance Sheet: The opening balance sheet as given has an apparent typographical discrepancy — assets aggregate to ₹15,85,000 whereas liabilities aggregate to ₹14,95,000 (difference ₹90,000). All workings below use the stated individual figures; the same ₹90,000 difference flows into the closing Balance Sheet.

---

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

*Dr side (Trading):*
To Opening Stock — ₹3,75,000
To Purchases — ₹18,92,000
To Gross Profit c/d (25% on Sales of ₹24,60,000) — ₹6,15,000
Total — ₹28,82,000

*Cr side (Trading):*
By Sales — ₹24,60,000
By Closing Stock — ₹4,22,000
Total — ₹28,82,000

*Dr side (P&L):*
To Expenses (15% × ₹24,60,000) — ₹3,69,000
To Depreciation on Fixed Assets — ₹71,000
To Loss on Sale of Fixed Asset — ₹18,000
To Net Profit c/d — ₹1,57,000
Total — ₹6,15,000

*Cr side (P&L):*
By Gross Profit b/d — ₹6,15,000
Total — ₹6,15,000

---

Fixed Assets Account for the year ended 31st March, 2020

*Dr side:*
To Balance b/d — ₹6,50,000
To Bank A/c (Purchase of new FA) — ₹60,000
Total — ₹7,10,000

*Cr side:*
By Bank A/c (Sale proceeds) — ₹36,000
By P&L A/c — Loss on Sale [WDV at sale ₹54,000 − proceeds ₹36,000] — ₹18,000
By P&L A/c — Depreciation — ₹71,000
By Balance c/d (WDV) — ₹5,85,000
Total — ₹7,10,000

---

Cash & Bank Account for the year ended 31st March, 2020

*Dr side:*
To Balance b/d — ₹1,95,000
To Trade Debtors A/c (Collections) — ₹24,40,000
To Fixed Assets A/c (Sale proceeds) — ₹36,000
Total — ₹26,71,000

*Cr side:*
By Trade Creditors A/c (Payments) — ₹18,60,000
By Expenses A/c — ₹3,69,000
By Fixed Assets A/c (Purchase) — ₹60,000
By Balance c/d — ₹3,82,000
Total — ₹26,71,000

---

Balance Sheet as at 31st March, 2020

*Liabilities:*
Capital — ₹12,50,000
Profit & Loss A/c (₹1,45,000 + ₹1,57,000) — ₹3,02,000
Trade Creditors (March 2020 purchases) — ₹1,32,000
Total — ₹16,84,000

*Assets:*
Fixed Assets (WDV) — ₹5,85,000
Closing Stock — ₹4,22,000
Trade Debtors (Feb + Mar sales) — ₹3,85,000
Cash & Bank — ₹3,82,000
Total — ₹17,74,000

*Note: The ₹90,000 difference is entirely on account of the discrepancy in the opening balance sheet data as given in the question.*

Final Answer — Net Profit for the year: ₹1,57,000; Closing Cash & Bank: ₹3,82,000; Closing Fixed Assets (WDV): ₹5,85,000.

Identification of Inter-Departmental Profit Margins

Before computing unrealised profit, the profit fraction (profit ÷ transfer price) embedded in each inter-departmental transaction must be established.

Department A sells to:
- Dept B: 20% on cost → Profit fraction = 20/120 = 1/6 of transfer price
- Dept C: 50% on cost → Profit fraction = 50/150 = 1/3 of transfer price

Department B sells to:
- Dept A: 15% on sales → Profit fraction = 15/100 of transfer price
- Dept C: 10% on sales → Profit fraction = 10/100 of transfer price

Department C sells to:
- Dept A: 10% on cost → Profit fraction = 10/110 = 1/11 of transfer price
- Dept B: 5% on cost → Profit fraction = 5/105 = 1/21 of transfer price

Assumption regarding stock composition (standard textbook approach for clean numerics): Dept A's closing stock sourced from Dept B; Dept B's closing stock sourced from Dept A; Dept C's closing stock sourced from Dept B.

Unrealised Profit in Department A's Closing Stock (₹1,14,000 — from B):
Dept B sells to A at 15% on sales → Unrealised profit = 15% × ₹1,14,000 = ₹17,100

Unrealised Profit in Department B's Closing Stock (₹60,000 — from A):
Dept A sells to B at 20% on cost → Profit fraction = 1/6 → Unrealised profit = (1/6) × ₹60,000 = ₹10,000

Unrealised Profit in Department C's Closing Stock (₹15,200 — from B):
Dept B sells to C at 10% on sales → Unrealised profit = 10% × ₹15,200 = ₹1,520

Summary of Department-wise Unrealised Profit on Closing Stock:

| Department | Closing Stock | Source Dept | Profit Fraction | Unrealised Profit |
|---|---|---|---|---|
| A | ₹1,14,000 | B | 15/100 | ₹17,100 |
| B | ₹60,000 | A | 20/120 | ₹10,000 |
| C | ₹15,200 | B | 10/100 | ₹1,520 |
| Total | | | | ₹28,620 |

Total unrealised profit to be eliminated = ₹28,620.

The qualitative characteristics of financial statements are the attributes that make the information provided in financial statements useful to users. These are discussed in the Framework for Preparation and Presentation of Financial Statements issued by the ICAI.

1. Understandability:
Information must be readily understandable by users who have a reasonable knowledge of business, economic activities, and accounting, and who are willing to study the information with reasonable diligence. However, information about complex matters should not be omitted merely because it may be too difficult for certain users to understand.

2. Relevance:
Information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present, or future events or confirming or correcting their past evaluations. The relevance of information is affected by its nature and materiality. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

3. Reliability:
Information must be reliable — free from material error and bias, and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent. Reliability encompasses the following sub-qualities:

- Faithful Representation: Information must represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent.
- Substance Over Form: Transactions and events are accounted for and presented in accordance with their substance and economic reality, not merely their legal form.
- Neutrality: Information must be free from bias — the financial statements are not neutral if, by the selection or presentation of information, they influence the making of a decision in order to achieve a predetermined result.
- Prudence: The inclusion of a degree of caution in the exercise of judgements needed in making estimates under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.
- Completeness: Information in financial statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading.

4. Comparability:
Users must be able to compare the financial statements of an enterprise over time in order to identify trends in its financial position and performance. Users must also be able to compare financial statements of different enterprises to evaluate their relative financial position, performance, and changes in financial position. Hence, the measurement and display of the financial effect of like transactions and events must be carried out in a consistent manner throughout an enterprise and over time. An important implication of this characteristic is that users must be informed of the accounting policies employed, any changes in those policies, and the effects of such changes.

PART (a): Investment Account

⚠️ Critical Issue: This question is incomplete and cannot be solved as stated. The question asks to prepare an Investment Account for the sale of shareholdings but provides no information about:

• Opening balance/number of shares held by Mr. H
• Cost price or book value of shares
• Date of original purchase
• Any other shareholding details

Without these fundamental details, the Investment Account cannot be prepared. This appears to be part of a larger case scenario where such information should have been provided in the opening facts. A complete question would require: (i) Opening shares held; (ii) Cost per share; (iii) Number of shares sold on 15th January 2020; (iv) Valuation method (average cost specified).

Normal Format (if data were provided):
Investment Account would show: Opening balance at average cost → Sale proceeds (₹15 × quantity - 1% brokerage) → Gain/Loss on sale → Closing balance at average cost.

---

PART (b): Insurance Claim Calculation

Step 1: Reconstruct stock position and loss

Stock destroyed in fire (30th September 2019):
• Slow moving item: Original cost ₹12,000 (written off ₹8,000 by 31st March 2019, but original cost used for insurance)
• Item sold during year: Cost ₹9,000 (sold at loss ₹4,000 = sold for ₹5,000; NOT destroyed in fire)
• Remaining stock: Valued at original cost (destroyed in fire, specific amount not separately given)
• Salvaged goods value: ₹35,000

Step 2: Calculate loss by fire

For insurance claim purposes, we calculate claim on ORIGINAL COST basis:

Assuming total original cost of stock destroyed = ₹12,000 (slow moving) + amount for remaining stock

Loss by Fire = Original Cost of Destroyed Stock - Salvage Value
= Original Cost - ₹35,000

Step 3: Apply Average Clause (Underinsurance)

Under average clause, if the insurance value is less than the original cost of stock at risk, the claim is proportionally reduced:

Claim = Loss × (Insurance Value / Original Cost of Stock at Risk)

Claim = (Original Cost - ₹35,000) × (₹1,20,000 / Original Cost)

Note on Incomplete Data: The original cost of stock destroyed is not explicitly stated in total. In a properly framed question, this would be either: (i) given directly; (ii) calculable from opening stock + purchases - sales; or (iii) derivable from valuation records. With ₹12,000 (slow moving item) + unknown amount for remaining stock, the exact claim cannot be finalized without complete inventory data.

Illustrative Example (if total original cost destroyed = ₹60,000):
Loss = ₹60,000 - ₹35,000 = ₹25,000
Claim = ₹25,000 × (₹1,20,000 / ₹60,000) = ₹25,000 × 2 = ₹50,000

(Note: This example assumes the insurance value exceeds half the original cost; actual figure depends on complete stock data.)

Interest Suspense Method - Hire Purchase Accounting

The question seeks preparation of accounts under the Interest Suspense method but lacks essential transaction data (cost of tractor, down payment, number of instalments, rate of interest, and payment dates). However, the structure and accounting treatment are as follows:

TRACTOR ACCOUNT (Asset)

This account records the capital asset at its cash/hire purchase price. On the debit side, the full hire purchase price (including down payment and present value of future instalments) is recorded, treating the entire amount as the asset's cost. This account remains constant throughout the hire purchase period, reflecting the fixed asset on the balance sheet at its capitalized value.

INTEREST SUSPENSE ACCOUNT (Liability)

This is a suspense/liability account that captures the total interest component implicit in the hire purchase agreement. The total interest payable over the tenure is calculated and credited to this account initially. Each accounting period, interest is recognized and debited from this account, transferred to the Profit & Loss Statement as 'Interest on Hire Purchase.' The account is progressively reduced as interest is recognized, ultimately closing to zero upon final payment.

The formula for calculating total interest is: Sum of all instalments minus the cash/hire purchase price.

RAJ LTD ACCOUNT (Creditor)

This account records the liability to Raj Ltd, the hire vendor. It is credited with the total amount payable (sum of all instalments). As each instalment is paid, the account is debited, reducing the liability progressively. Upon final payment, this account closes to zero.

Double Entry Mechanism

At inception: Dr. Tractor Account / Dr. Interest Suspense Account; Cr. Raj Ltd Account (for total instalments payable)

Upon payment of each instalment: Dr. Raj Ltd Account; Cr. Bank/Cash Account

Periodic interest recognition: Dr. P&L (Interest Expense); Cr. Interest Suspense Account

Key Features of Interest Suspense Method: (1) The full asset value is capitalized immediately, avoiding understatement of fixed assets. (2) Interest is recognized systematically over the hire purchase period, ensuring matching principle compliance. (3) The Interest Suspense account acts as a contra-liability, ensuring accurate financial position reporting. (4) This method is preferred under Ind AS 116 and AS 19 (as applicable) for clearer presentation of the asset and interest components.

Without specific transaction details (amount, instalments, interest rate, payment schedule), the actual numerical entries cannot be prepared. A complete question would require these particulars to construct the accounts with specific debit and credit entries and running balances.

Note on the Question: The balance sheet shows 30,000, 10% Preference Shares of ₹100 each at ₹24,00,000. Since 30,000 × ₹50 = ₹15,00,000 (not ₹24,00,000), the paid-up amount is interpreted as ₹80 per share (30,000 × ₹80 = ₹24,00,000), which appears to be a typographical error in the question.

Key Conditions under Section 55 of the Companies Act, 2013:
Only fully paid-up preference shares can be redeemed. A sum equal to the nominal value of shares redeemed (less nominal value of fresh issue) must be transferred to Capital Redemption Reserve (CRR) from distributable profits. Premium on redemption is charged to Securities Premium Account under Section 52(2)(c).

Journal Entries in the Books of Apit Ltd.

| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 1 Mar 2020 | Bank A/c Dr. | 2,40,000 | |
| |  To Equity Share Application A/c | | 2,40,000 |
| | *(Application on 1,20,000 equity shares @ ₹2 each)* | | |
| 1 Mar 2020 | Equity Share Application A/c Dr. | 2,40,000 | |
| | Equity Share Allotment A/c Dr. | 8,40,000 | |
| |  To Equity Share Capital A/c | | 8,40,000 |
| |  To Securities Premium A/c | | 2,40,000 |
| | *(Allotment: ₹2 application + ₹5 face value = ₹7 face; ₹2 premium per share)* | | |
| 20 Mar 2020 | Bank A/c Dr. | 8,40,000 | |
| |  To Equity Share Allotment A/c | | 8,40,000 |
| | *(Allotment money received)* | | |
| 31 Mar 2020 | 10% Preference Share Final Call A/c Dr. | 6,00,000 | |
| |  To 10% Preference Share Capital A/c | | 6,00,000 |
| | *(Final call of ₹20/share to make 30,000 preference shares fully paid: 30,000 × ₹20)* | | |
| 31 Mar 2020 | Bank A/c Dr. | 6,00,000 | |
| |  To 10% Preference Share Final Call A/c | | 6,00,000 |
| | *(Final call amount received)* | | |
| 31 Mar 2020 | General Reserve A/c Dr. | 18,00,000 | |
| |  To Capital Redemption Reserve A/c | | 18,00,000 |
| | *(CRR: Nominal value redeemed ₹30,00,000 − Fresh issue nominal ₹12,00,000)* | | |
| 31 Mar 2020 | Securities Premium A/c Dr. | 3,00,000 | |
| |  To Premium on Redemption of Pref. Shares A/c | | 3,00,000 |
| | *(10% premium on ₹30,00,000 nominal: 30,000 × ₹10, u/s 52(2)(c))* | | |
| 31 Mar 2020 | 10% Preference Share Capital A/c Dr. | 30,00,000 | |
| | Premium on Redemption of Pref. Shares A/c Dr. | 3,00,000 | |
| |  To Preference Shareholders A/c | | 33,00,000 |
| | *(Redemption of 30,000 preference shares @ ₹110 each)* | | |
| 31 Mar 2020 | Preference Shareholders A/c Dr. | 33,00,000 | |
| |  To Bank A/c | | 33,00,000 |
| | *(Payment to preference shareholders on redemption)* | | |

Balance Sheet of Apit Ltd. (Extract) after Redemption as at 31st March 2020

I. Equity and Liabilities

Share Capital:
6,00,000 Equity Shares of ₹10 each, fully paid up → ₹60,00,000
1,20,000 Equity Shares of ₹10 each, ₹7 called up and paid up → ₹8,40,000
Total Called-up and Paid-up Share Capital → ₹68,40,000
*(Note: ₹3 per share / ₹3,60,000 uncalled — final call due 1st January 2021)*
10% Preference Shares: Nil (fully redeemed)

Reserves and Surplus:
| Particulars | ₹ |
|---|---|
| Securities Premium | 5,40,000 |
| Capital Redemption Reserve | 36,00,000 |
| General Reserve | 17,00,000 |
| Total Reserves | 58,40,000 |

Final Answer: After redemption, Equity Share Capital (paid-up) = ₹68,40,000; Securities Premium = ₹5,40,000; CRR = ₹36,00,000; General Reserve = ₹17,00,000; Preference Share Capital = Nil.

Step 1: Determination of Balance b/d (Opening Balance)

The credit side total is ₹53,38,950. Since only two figures are given on the credit side (Balance from Trading A/c ₹42,53,650 and Government Subsidies ₹3,50,000), the Balance b/d = ₹53,38,950 − ₹42,53,650 − ₹3,50,000 = ₹7,35,300.

Step 2: Net Profit before Provision for Taxation

The Net Profit before tax is derived by considering only income and revenue expenses for the current year, excluding opening balance, tax provisions, and reserve transfers:

Total Income (Gross Profit + Subsidies) = ₹42,53,650 + ₹3,50,000 = ₹46,03,650
Less: Revenue Expenses (Administrative + Advertisement + Sales Commission + Director's Fees + Interest on Debentures + Managerial Remuneration + Depreciation) = ₹19,01,260
Net Profit before tax = ₹27,02,390

Step 3: Net Profit as per Section 198 of the Companies Act, 2013

Under Section 198 of the Companies Act 2013, Net Profit for determining the ceiling on Managerial Remuneration is computed by adding back items that Section 198(5) disallows as deductions — specifically managerial remuneration and director's fees:

Net Profit before tax = ₹27,02,390
Add: Managerial Remuneration (disallowed deduction u/s 198(5)) = ₹3,05,580
Add: Director's Fees (disallowed deduction) = ₹1,48,900
Net Profit as per Section 198 = ₹31,56,870

Step 4: Verification of Managerial Remuneration

As per Section 197(1) of the Companies Act 2013, total managerial remuneration payable to all managerial personnel shall not exceed 11% of Net Profit as per Section 198.

Maximum permissible remuneration = 11% × ₹31,56,870 = ₹3,47,256 (approx.)
Actual Managerial Remuneration paid = ₹3,05,580

Since ₹3,05,580 < ₹3,47,256, the Managerial Remuneration is within the permissible limit under Section 197 read with Section 198 of the Companies Act 2013.

Note on Investment Revaluation Reserve: The transfer of ₹25,800 to Investment Revaluation Reserve represents an unrealised gain and does not affect the Net Profit as per Section 198, as it is an appropriation after computing profits.

Note on the ₹6,31,750 figure: The depreciation figure of ₹6,31,750 cited at the outset appears to belong to a prior sub-part of a composite question and cannot be reconciled with the Fixed Assets of ₹1,05,000 appearing in the balance sheet (even at 100% depreciation, the charge cannot exceed ₹1,05,000). The answer below calculates depreciation afresh from the additional information provided.

Step 1 – Depreciation on Fixed Assets (Schedule II, Companies Act 2013)
Fixed assets as at 31.3.2019 = ₹1,05,000. Remaining life = 6 years, even use (Straight Line Method). Annual depreciation = ₹1,05,000 ÷ 6 = ₹17,500. Net Book Value as at 31.3.2020 = ₹1,05,000 − ₹17,500 = ₹87,500. Since NRV (₹90,000) > NBV (₹87,500), no additional impairment is recognised.

Step 2 – Gross Profit for year ending 31.3.2020
Opening stock (from balance sheet) = ₹76,000. Purchases = ₹6,25,000. Closing stock is not given; it is assumed equal to opening stock (₹76,000) so that Cost of Goods Sold = ₹6,25,000. Gross Profit = Sales − COGS = ₹7,80,000 − ₹6,25,000 = ₹1,55,000.

Step 3 – Net Profit under Section 198 of the Companies Act 2013
Under Section 198 of the Companies Act 2013, net profits for the purpose of managerial remuneration are computed by deducting ordinary working charges, depreciation as per Schedule II, interest on borrowings, and other normal expenses.

Gross Profit: ₹1,55,000
Less: Depreciation (Schedule II): ₹17,500
Less: Interest on 11% Bank Loan (11% × ₹80,000): ₹8,800
Less: Deferred Expenditure written off (full write-off per Schedule III): ₹24,000
Net Profit (Section 198) = ₹1,04,700

Step 4 – Maximum Managerial Remuneration under Section 197 of the Companies Act 2013
Section 197 prescribes the following ceilings on total managerial remuneration payable by a public company:

| Category | Rate | Amount |
|---|---|---|
| Total managerial remuneration (all directors combined) | 11% of net profits | ₹11,517 |
| MD / WTD – where only one such person | 5% of net profits | ₹5,235 |
| MD / WTD – where more than one such person | 10% of net profits | ₹10,470 |
| Other (part-time) directors – where MD/WTD exists | 1% of net profits | ₹1,047 |
| Other (part-time) directors – where no MD/WTD | 3% of net profits | ₹3,141 |

Maximum total managerial remuneration = ₹11,517 (11% of ₹1,04,700).

If profits are inadequate, remuneration may still be paid subject to the limits in Schedule V of the Companies Act 2013 with approval as required.

Note: The question as presented includes only items (iii) through (ix). Items (i) and (ii) — which typically contain the trial balance or opening balances — appear to be missing from the extract. The complete P&L and Balance Sheet totals require those figures. The solution below demonstrates all calculable adjustments under the not going concern basis and shows how each item is treated, forming the essential working for the complete statements.

Governing Standard: Under AS 1 — Disclosure of Accounting Policies, the going concern assumption is a fundamental accounting assumption. When it is abandoned, assets must be stated at net realizable / break-up values, all deferred/fictitious assets are written off immediately, uncertain receivables are fully provided, and all foreseeable losses including premature repayment penalties are recognized.

Treatment of Each Item Under Not Going Concern:

(iii) Stock: Under going concern → lower of cost or NRV = ₹60,000. Under not going concern → valued at NRV = ₹66,000. Gain of ₹6,000 credited to P&L. (AS 2 lower-of-cost-or-NRV rule applies only on going concern basis.)

(iv) General Expenses: ₹53,000 (including interest on loan) debited to P&L in full.

(v) Deferred Expenditure: Original total = 5 × ₹6,000 = ₹30,000. Amortised in 2018-19 = ₹6,000. Balance at 1.4.2019 = ₹24,000. Under not going concern, the entire unamortised balance ₹24,000 is written off to P&L (future benefit cannot be realised). Deferred Expenditure appears as NIL in Balance Sheet.

(vi) Debtors — Provision: Both the definitely doubtful ₹5,000 and the conditionally doubtful ₹10,000 (dependent on re-installation — impossible to achieve on wind-down) are fully provided. Total provision = ₹15,000 debited to P&L. Net Debtors on Balance Sheet = ₹65,000 − ₹15,000 = ₹50,000.

(vii) Trade Payables: Likely settled at 5% discount → net settlement = ₹48,000 × 95% = ₹45,600. Gain = ₹2,400 credited to P&L. Balance Sheet shows ₹45,600.

(viii) Prepayment Penalty: Bank loan repaid early under wind-down. Penalty ₹4,000 debited to P&L and accrued as outstanding liability.

(ix) Cash & Bank: Stated at face value = ₹1,65,200 (no adjustment).

Summary of P&L Adjustments (Not Going Concern):

| Item | Amount (₹) | Nature |
|---|---|---|
| Gain on stock (NRV > Cost) | 6,000 | Credit |
| Gain on trade payables (5% disc.) | 2,400 | Credit |
| Write-off of deferred expenditure | 24,000 | Debit |
| Provision for doubtful debts | 15,000 | Debit |
| Prepayment penalty on bank loan | 4,000 | Debit |
| General expenses (incl. interest) | 53,000 | Debit |

Balance Sheet (Not Going Concern) — Key Line Items:

*Assets:* Stock ₹66,000 | Debtors (net) ₹50,000 | Cash & Bank ₹1,65,200 | Deferred Expenditure NIL

*Liabilities:* Trade Payables ₹45,600 | Bank Loan [from trial balance] + Prepayment Penalty ₹4,000

The trial balance figures from items (i) and (ii) must be incorporated to finalize the totals of both statements.

Statement showing Pre-incorporation and Post-incorporation Profits of Moon Ltd.

Determination of Ratios:

The company was incorporated on 1st August, 2019 and took over the business w.e.f. 1st April, 2019.
- Pre-incorporation period: 1st April 2019 to 31st July 2019 = 4 months
- Post-incorporation period: 1st August 2019 to 31st March 2020 = 8 months
- Time ratio = 4 : 8 = 1 : 2

Since Moon Ltd. initiated an advertising campaign resulting in monthly sales increasing by 25% post-incorporation, the Sales ratio is calculated as:
- Pre-incorporation monthly sales = 1 unit × 4 months = 4 units
- Post-incorporation monthly sales = 1.25 units × 8 months = 10 units
- Sales ratio = 4 : 10 = 2 : 5

Basis of allocation:
- Gross Profit → Sales ratio (2:5), as GP fluctuates with sales
- Salaries, Rent Rates & Taxes, Depreciation → Time ratio (1:2), as these accrue with passage of time
- Commission on Sales → Sales ratio (2:5), as it varies with sales
- Interest on Debentures → Entirely post-incorporation (debentures can only be issued by a registered company)
- Director's Fees → Entirely post-incorporation (directors are appointed only after incorporation)
- Advertisement → Entirely post-incorporation (the campaign was initiated by Moon Ltd. after incorporation)

Statement of Pre and Post-Incorporation Profits:

| Particulars | Basis | Total (₹) | Pre-incorp. (₹) | Post-incorp. (₹) |
|---|---|---|---|---|
| Gross Profit | Sales 2:5 | 6,30,000 | 1,80,000 | 4,50,000 |
| Less: Expenses | | | | |
| Salaries | Time 1:2 | 1,56,000 | 52,000 | 1,04,000 |
| Rent, Rates & Taxes | Time 1:2 | 72,000 | 24,000 | 48,000 |
| Commission on Sales | Sales 2:5 | 40,600 | 11,600 | 29,000 |
| Depreciation | Time 1:2 | 60,000 | 20,000 | 40,000 |
| Interest on Debentures | Post only | 36,000 | — | 36,000 |
| Director's Fees | Post only | 24,000 | — | 24,000 |
| Advertisement | Post only | 48,000 | — | 48,000 |
| Total Expenses | | 4,36,600 | 1,07,600 | 3,29,000 |
| Net Profit | | 1,93,400 | 72,400 | 1,21,000 |

(ii) Treatment of Profits in the Accounts:

Pre-incorporation profit (₹72,400) is a capital profit because it was earned before the company came into legal existence. It represents the excess of assets over liabilities at the time of incorporation. Such profit must be transferred to Capital Reserve and cannot be distributed as dividend to shareholders, as it did not arise from the trading operations of the company. It may, however, be used to write off capital losses or preliminary/formation expenses.

Post-incorporation profit (₹1,21,000) is a revenue profit earned during the normal course of the company's trading operations after incorporation. This profit is available for distribution as dividend to shareholders, transfer to General Reserve, or retention in the Profit and Loss Account as per the Board's decision, subject to applicable provisions of the Companies Act, 2013.