Question 1

Mr. Saurabh held 10,000 equity share of BT Limited on 1st April 2021. Nominal value of the shares is ₹ 2 each and their book value is ₹ 7 per share. On 4th July, 2021 he purchased another 7,500 shares at ₹ 10 each. On 31st July, 2021 the company announced a Bonus and Right issue. Bonus was declared of one share for every five shares held and was received on 25th August, 2021. Right issue to be issued on 12th September 2021, which entitled the holders to subscribe to additional shares of ₹ 2 shares for every 7 shares held at ₹ 2 per share. Shareholders were entitled to transfer their rights in full or part. Mr. Saurabh sold whole of his entitlements to Nihal at ₹ 1.50 per share. Dividend was declared for the year ended 31st March 2021 @ 25% and received by Mr. Saurabh on 19th September 2021…

Accepted Answer

**Investment Account of Mr. Saurabh — Equity Shares of BT Limited (Current Investment)**

**Dr. Side**

| Date | Particulars | No. of Shares | Amount (₹) |
|---|---|---|---|
| 1 Apr 2021 | Balance b/d (10,000 × ₹7) | 10,000 | 70,000 |
| 4 Jul 2021 | Bank A/c — Purchase (7,500 × ₹10) | 7,500 | 75,000 |
| 25 Aug 2021 | Bonus Shares — 1:5 on 17,500 shares | 3,500 | — |
| | **Total** | **21,000** | **1,45,000** |

**Cr. Side**

| Date | Particulars | No. of Shares | Amount (₹) |
|---|---|---|---|
| 19 Sep 2021 | Bank A/c — Pre-acquisition Dividend (7,500 × ₹0.50) | — | 3,750 |
| 11 Dec 2021 | Bank A/c — Sale of shares (cost, FIFO) | 7,500 | 52,500 |
| 31 Mar 2022 | Balance c/d | 13,500 | 88,750 |
| | **Total** | **21,000** | **1,45,000** |

---

**Key Accounting Treatments:**

**Bonus Shares:** Received on 25 Aug 2021 (1 share per 5 held on 17,500 shares = 3,500 shares). Bonus shares are recorded at **nil cost**; the average cost per share reduces accordingly.

**Rights Issue and Sale of Entitlement:** Entitlement = 2/7 × 21,000 = 6,000 shares. Mr. Saurabh sold all rights to Nihal at ₹1.50/share = ₹9,000. Since the investment is a **current investment**, sale of rights is **credited to Profit & Loss Account** as income — it does not reduce the cost in the Investment Account.

**Pre-Acquisition Dividend:** Dividend @ 25% on ₹2 face value = ₹0.50/share. The 7,500 shares were purchased on 4 Jul 2021, after the year ended 31 Mar 2021. Since this dividend relates to a period **before …

Question 2

The Accountant of Shiva Limited has sought your opinion with relevant reasons, whether the following transactions will be treated as change in Accounting Policies or change in Accounting Estimates for the year ended 31st March, 2021. Please advise him in the following situations in accordance with the provisions of AS – 5, and analyze the depreciation information regarding Mohit Limited.

Accepted Answer

**Part (a): Classification under AS-5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies)**

AS-5 distinguishes between a **change in accounting policy** (change in the specific principles, bases, conventions, rules and practices) and a **change in accounting estimate** (revision of an estimate due to new information, changed circumstances or more experience). The effect of a change in estimate is included in current and future periods.

**(i) Provision for Doubtful Debts — Rate changed from 3% to 4%:**
This is a **Change in Accounting Estimate**. The underlying accounting policy — making a provision for doubtful debts — remains unchanged. Only the rate used to arrive at the estimate has been revised, presumably based on revised assessment of collectability or past experience. Per AS-5, a change in an estimate resulting from new information or developments is not a change in policy.

**(ii) Voluntary Gratuitous Scheme introduced in place of ad-hoc ex-gratia payments:**
This is a **Change in Accounting Policy**. Previously, ex-gratia payments were made on an ad-hoc basis (no systematic recognition). Now, a formal scheme has been adopted, changing the basis on which retirement obligations are recognised and measured. The shift from an ad-hoc approach to a structured policy constitutes a change in accounting policy.

**(iii) Useful life of furniture changed from 5 years to 3 years (SLM retained):**
This is a **Change in Accounting Estimate*…

Question 3

The following is the Balance Sheet of Purple Limited as at 31st March, 2022:

| Particulars | Notes | Amount in ₹ |
|---|---|---|
| **I. Equity and Liabilities** | | |
| **(1) Shareholder's Funds** | | |
| (a) Share Capital | 1 | 15,00,000 |
| (b) Reserves & Surplus | 2 | (3,00,000) |
| **(2) Current Liabilities** | | |
| (a) Trade Payables | | 2,20,000 |
| (b) Short Term Borrowings - Bank Overdraft | | 7,00,000 |
| **Total** | | **16,20,000** |
| **II. Assets** | | |
| **(1) Non-Current Assets** | | |
| (a) Property, Plant and Equipment | 3 | 10,20,000 |
| (b) Intangible Assets | 4 | 1,20,000 |
| **(2) Current Assets** | | |
| (a) Inventories | | 1,70,000 |
| (b) Trade Receivables | | 3,01,800 |
| (c) Cash and cash equivalents | | 7,600 |
| **Total** | | **16,20,000** |

Notes to Accounts…

Accepted Answer

**Note on Balance Sheet:** The original Balance Sheet as presented shows a total of ₹16,20,000 on the assets side. Working back: Assets = ₹16,20,000. For L&E to balance, Bank Overdraft must be ₹2,00,000 (not ₹7,00,000 as stated), since ₹15,00,000 − ₹3,00,000 + ₹2,20,000 + ₹2,00,000 = ₹16,20,000. The ₹7,00,000 figure for Bank Overdraft appears to be a transcription error in the question. The solution below uses Bank Overdraft = ₹2,00,000 to maintain balance sheet integrity.

**Background Analysis**

**Preference Shares:** 6,000 shares of ₹100 each = ₹6,00,000 at 6% per annum. Annual dividend = ₹36,000. Preference dividend arrears = 3 years × ₹36,000 = ₹1,08,000 (not addressed under the stated scheme — remains a contingent obligation).

**Reconstruction Scheme — Working:**

**(i) Preference Share Conversion (6% → 8%, total return unchanged):**
Current annual dividend = 6% × ₹6,00,000 = **₹36,000**. To maintain the same ₹36,000 at 8%: New Preference Capital = ₹36,000 ÷ 8% = **₹4,50,000**. Reduction in Preference Capital = ₹6,00,000 − ₹4,50,000 = **₹1,50,000** → credited to Capital Reduction Account. New face value per share = ₹4,50,000 ÷ 6,000 shares = **₹75 per share**. Thus, each existing ₹100 preference share is written down to ₹75, with 8% rate applied.

**(ii) Equity Share Reduction (₹10 → ₹8):**
Reduction per share = ₹10 − ₹8 = ₹2. Total reduction = 90,000 × ₹2 = **₹1,80,000** → credited to Capital Reduction Account.

**Capital Reduction Account (₹)**

| Dr. | ₹ | Cr. | ₹ …

Question 4

You are required to ascertain the amount of claim to be lodged with the Insurance Company for Loss of Stock.

Accepted Answer

**Insurance Claim Calculation — M/s Preet Enterprises (Fire dated 28th September, 2022)**

**Step 1: Gross Profit Rate (from preceding year 2021-22)**

Using the trading results for the year ended 31st March, 2022:
Cost of Goods Sold = Opening Stock + Purchases − Closing Stock = ₹5,25,000 + ₹37,35,000 − ₹4,20,000 = ₹38,40,000
Gross Profit = Sales − COGS = ₹48,00,000 − ₹38,40,000 = ₹9,60,000
**GP Rate on Sales = 9,60,000 / 48,00,000 × 100 = 20%**
Since the firm maintains the same GP rate, 20% will be applied to the current period.

**Step 2: Memorandum Trading Account (1st April, 2022 to 28th September, 2022)**

To ascertain the value of stock on the date of fire, a **Memorandum Trading Account** is prepared incorporating the following adjustments:

**Adjusted Purchases:**
Purchases as given: ₹27,22,000. Add goods received but invoice not yet received (Additional Info i): ₹1,20,000. Adjusted Purchases = **₹28,42,000**.

**Adjusted Sales (Net Sales for COGS computation):**
Sales as given: ₹33,30,000.
Less: Goods included in sales but NOT dispatched (Additional Info iii): ₹90,000 — these goods have not left the warehouse and must be excluded.
Less: Goods sold to Ram & Co. on approval for which approval was NOT received for ½ of ₹1,50,000 (Additional Info iv — interpreted as one-half): ₹75,000 — title has not passed, so these remain in stock.
Adjusted Net Sales = ₹33,30,000 − ₹90,000 − ₹75,000 = **₹32,65,000**

**Advertisement Goods (Additional Info ii):**
Goods distributed for a…

Question 5

(iii) The company has made a profit of ₹ 1,28,000 before depreciation
(iv) Donation to private trust during the year is ₹ 15,000 (not allowed under Income tax laws.)
(v) Corporate tax is 40%.

Prepare relevant extract of statement of Profit & Loss for the year ending 31st March, 2022. Also show the effect of the above items on Deferred Tax Liability / Assets as per AS - 22.

Accepted Answer

**Note:** Items (i) and (ii) of the question appear to contain depreciation figures (book depreciation and tax depreciation) which are not reproduced here. The solution below demonstrates the complete methodology under **AS-22 (Accounting for Taxes on Income)**, using the given data. Assume **Book Depreciation = ₹30,000** (Companies Act) and **Tax Depreciation = ₹50,000** (Income Tax Act) as these are the standard companion figures for this type of question in ICAI study material.

**Relevant Extract of Statement of Profit & Loss for the year ending 31st March, 2022**

| Particulars | ₹ |
|---|---|
| Profit before Depreciation | 1,28,000 |
| Less: Depreciation (as per books) | (30,000) |
| **Profit Before Tax** | **98,000** |
| Less: Current Tax (W.N. 1) | (37,200) |
| Less: Deferred Tax Liability — created (W.N. 2) | (8,000) |
| **Profit After Tax** | **52,800** |

**Effect on Deferred Tax Liability / Asset as per AS-22**

**AS-22** requires recognition of deferred tax on **timing differences** — differences between taxable income and accounting income that originate in one period and reverse in subsequent periods. **Permanent differences** do NOT give rise to deferred tax.

**(a) Depreciation — Timing Difference:**
Tax depreciation (₹50,000) exceeds book depreciation (₹30,000) by ₹20,000. This means taxable income is currently lower than book income. The difference will reverse in future years. This creates a **Deferred Tax Liability (DTL)** of ₹20,000 × 40% = **₹8,000**. D…

Question 6

The following information is provided to you:
Net profit for the year 2022: ₹ 72,00,000
Weighted average number of equity shares outstanding as on 31st March 2022: 30,00,000 shares
Average Fair value of one equity share during the year 2022: ₹ 25.00
Weighted average number of shares under option during the year 2022: 6,00,000 shares
Exercise price for shares under option during the year 2022: ₹ 20.00

You are required to compute Basic and Diluted Earnings Per Share as per AS-20.

Accepted Answer

**Basic Earnings Per Share (AS-20)**

As per **AS-20 – Earnings Per Share**, Basic EPS is computed by dividing the net profit attributable to equity shareholders by the weighted average number of equity shares outstanding during the period.

**Basic EPS = Net Profit / Weighted Average Equity Shares**

Basic EPS = ₹72,00,000 / 30,00,000 shares = **₹2.40 per share**

---

**Diluted Earnings Per Share (AS-20)**

For diluted EPS, the effect of all **dilutive potential equity shares** (here, share options) must be considered. AS-20 requires use of the **Treasury Stock Method** to compute the incremental dilutive shares from options.

Under this method:
- Assume options are exercised and proceeds are used to buy back shares at the **average fair market price**.
- Only the **net incremental shares** (shares issued minus shares bought back) are added to the denominator.
- The **numerator (net profit) remains unchanged** since options do not affect profit.

**Step 1: Proceeds from assumed exercise of options**
Proceeds = Shares under option × Exercise Price = 6,00,000 × ₹20 = ₹1,20,00,000

**Step 2: Shares that could be purchased at fair value with those proceeds**
Shares bought back = ₹1,20,00,000 / ₹25 = 4,80,000 shares

**Step 3: Incremental (dilutive) shares**
Incremental shares = 6,00,000 − 4,80,000 = **1,20,000 shares**

**Step 4: Diluted weighted average shares**
Diluted shares = 30,00,000 + 1,20,000 = **31,20,000 shares**

**Step 5: Diluted EPS**
Diluted EPS = ₹72,00,000 / 31,…

Question 7

H Ltd. and S Ltd. provide the following information as at 31st March, 2022: Property, Plant and Equipment - H Ltd: ₹ 2,00,000, S Ltd: ₹ 2,60,000; Investments (14,000 Equity Shares of S Ltd.) - H Ltd: ₹ 2,32,000; Current Assets - H Ltd: ₹ 1,48,000, S Ltd: ₹ 1,40,000; Share capital (Fully paid equity shares of ₹ 10 each) - H Ltd: ₹ 3,00,000, S Ltd: ₹ 2,00,000; Profit and loss account - H Ltd: ₹ 1,00,000, S Ltd: ₹ 80,000; Trade Payables - H Ltd: ₹ 2,00,000, S Ltd: ₹ 1,20,000. Additional information: H Ltd. acquired the shares of S Ltd. on 1st July, 2021 and Balance of profit and loss account of S Ltd. on 1st April, 2021 was ₹ 60,000.

Accepted Answer

**Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2022**

**Step 1 — Determination of Holding Percentage**
Total shares of S Ltd. = ₹2,00,000 ÷ ₹10 = 20,000 shares. H Ltd. holds 14,000 shares. **Holding = 14,000/20,000 = 70%; NCI = 30%.**

**Step 2 — Pre-Acquisition and Post-Acquisition Profits of S Ltd.**
Total profit for FY 2021-22 = ₹80,000 − ₹60,000 = ₹20,000. Acquisition date is 1st July 2021, so pre-acquisition period = 3 months (April–June 2021) and post-acquisition period = 9 months (July 2021–March 2022). **Pre-acquisition profit** = 3/12 × ₹20,000 = **₹5,000**. P&L at acquisition = ₹60,000 + ₹5,000 = **₹65,000**. **Post-acquisition profit** = 9/12 × ₹20,000 = **₹15,000**.

**Step 3 — Goodwill / Cost of Control (AS 21)**
Under **AS 21** (Consolidated Financial Statements), goodwill on consolidation is the excess of cost of investment over the parent's share of net assets of the subsidiary at the date of acquisition. Cost of Investment = ₹2,32,000. H's share in S's net assets at acquisition = 70% × (₹2,00,000 + ₹65,000) = 70% × ₹2,65,000 = ₹1,85,500. **Goodwill = ₹2,32,000 − ₹1,85,500 = ₹46,500.**

**Step 4 — Non-Controlling Interest (NCI)**
NCI represents 30% of S Ltd.'s net assets at reporting date. Net assets of S Ltd. as at 31.3.2022 = ₹2,00,000 + ₹80,000 = ₹2,80,000. **NCI = 30% × ₹2,80,000 = ₹84,000.**

**Step 5 — Consolidated Profit and Loss Account**
H Ltd.'s standalone P&L = ₹1,00,000. Add: H's share of post-acquisition profit…

Question 8

Modern Stores of Delhi operates a retail branch at Nagpur. The Head office price list is ₹ 2,00,000 and the branch is charged at cost plus 60%. All the cash received by the Nagpur Branch is remitted to the Delhi Head Office. The Branch expenses are met by the Branch out of an Imprest Account which is reimbursed by the Delhi Head Office every month. The branch maintains a Sales Ledger and certain essential subsidiary records, but otherwise all branch transactions are recorded at Delhi. The following are the branch transactions that took place during the year ended 31st March, 2022: Goods received from Delhi at Selling Price ₹ 1,50,000; Cash Sales ₹ 69,000; Goods returned to Delhi at Selling Price ₹ 3,000; Credit Sales (Net of returns) ₹ 63,000; Authorized Reduction in Selling Price of Goods…

Accepted Answer

**BRANCH ACCOUNTING: MARKED-UP PRICE BASIS**

**Understanding the Markup Structure:**
Branch is charged at cost plus 60%, meaning Selling Price = Cost × 1.60. Therefore, Cost = Selling Price × (100/160) = Selling Price × 0.625. Profit ratio = 60% on cost or 37.5% on selling price.

**GOODS RECONCILIATION AT COST PRICE:**

**Conversion to Cost Price:**
- Opening Stock at SP ₹60,000 → Cost: ₹37,500
- Goods Received at SP ₹1,50,000 → Cost: ₹93,750
- Goods Returned at SP ₹3,000 → Cost: ₹1,875
- Goods in Transit at SP ₹1,800 → Cost: ₹1,125 (received 5.04.2022, after year-end)
- Closing Stock at SP ₹72,000 → Cost: ₹45,000

**Stock Available for Sale (at Cost):**
Opening Stock (Cost) ₹37,500 + Goods Received (Cost) ₹93,750 + Goods in Transit (Cost) ₹1,125 - Goods Returned (Cost) ₹1,875 = ₹1,30,500

**Cost of Goods Sold:**
₹1,30,500 (stock available) - ₹45,000 (closing stock at cost) = **₹85,500**

**PROFIT CALCULATION FOR THE YEAR:**

**Sales at Selling Price:**
Cash Sales ₹69,000 + Credit Sales (Net of Returns) ₹63,000 = **₹1,32,000**

**Gross Profit:**
₹1,32,000 (sales) - ₹85,500 (COGS) = **₹46,500**

**Less Expenses and Adjustments:**
- Authorized Reduction in Selling Price: ₹1,500
- Debtors Written Off as Irrecoverable: ₹2,000
- Cash Discount Allowed: ₹1,500
- Branch Expenses: ₹18,000
- Total Deductions: ₹23,000

**Net Profit for Year Ended 31.03.2022: ₹23,500**

**DEBTORS RECONCILIATION:**
Opening Debtors ₹40,000 + Credit Sales ₹63,000 - Cash Received ₹48,000 - Written Off ₹2,0…

Question 9

DS Finance Limited is a non-banking financial company. It provides you with the following information regarding the outstanding amount: 400 accounts for last one month (amount overdue ₹ 20 lakhs); 24 accounts for two months (amount overdue ₹ 12 lakhs); 10 accounts for more than 30 months (amount overdue ₹ 10 lakhs); 4 accounts for more than 3 years (amounts overdue ₹ 10 lakhs - already identified as sub-standard assets).

Accepted Answer

**Asset Classification and Provisioning for DS Finance Limited (NBFC)**

Under **RBI Prudential Norms for NBFCs**, an asset is classified as **Non-Performing Asset (NPA)** if interest or principal remains overdue for more than **6 months**. The four categories of assets are: Standard, Sub-Standard, Doubtful, and Loss Assets.

**Classification of DS Finance Limited's Portfolio:**

**(a) 400 accounts — overdue 1 month (₹20 lakhs):** Classified as **Standard Assets**. The overdue period is less than 6 months; hence, these do not qualify as NPA.

**(b) 24 accounts — overdue 2 months (₹12 lakhs):** Classified as **Standard Assets**. Again, overdue period is less than 6 months — no NPA status.

**(c) 10 accounts — overdue more than 30 months (₹10 lakhs):** Classified as **Doubtful Assets**. These became NPA at 6 months overdue; NPA period = 30 − 6 = 24 months, which exceeds the 18-month sub-standard ceiling. They fall under **Doubtful I** (doubtful for less than 1 year from the 18-month NPA mark).

**(d) 4 accounts — overdue more than 3 years / 36 months (₹10 lakhs):** These are **incorrectly classified as Sub-Standard**. With an overdue of 36+ months, the NPA period = 30+ months > 18 months. These must be **reclassified as Doubtful Assets (Doubtful II)** — having been doubtful for more than 12 months. Keeping them as sub-standard understates provisions and is non-compliant with RBI norms.

**Provisioning Requirement:**

Provision rates under RBI Prudential Norms: Standard — 0.25%;…

Question 10

M, N and O were in partnership sharing profits and losses in the ratio of 3:2:1. There was no provision in the agreement for interest on capitals or drawings. M died on 31st March, 2021 and on that date, the partners' balances were as follows:

Capital Account: M = ₹75,000 (Cr), N = ₹50,000 (Cr), O = ₹25,000 (Cr)

Current Account: M = ₹50,000 (Cr), N = ₹37,500 (Cr), O = ₹12,500 (Dr)

By the existing agreement, the sum due to M's estate was required to be paid within a period of 3 years, and minimum installment of ₹37,500 each were to be paid, the first such instalment falling due immediately after death and the subsequent instalments at half-yearly intervals. Interest @ 6% was to be credited half-yearly.

In ascertaining M's share, Goodwill (not recorded in the books) was to be valued at ₹…

Accepted Answer

**PARTNERS' CAPITAL ACCOUNTS (01.04.2021 to 30.06.2022)**

**Executors of M's Estate Account:**

| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| 01.04.2021 Bank | 37,500 | 31.03.2021 Capital | 75,000 |
| 30.09.2021 Bank | 37,500 | 31.03.2021 Current | 50,000 |
| 30.06.2022 Bank | 164,044.18 | Goodwill (3/6 × 1,12,500) | 56,250 |
| | | Asset Revaluation (3/6 × 75,000) | 37,500 |
| | | JA Policy Gain (3/6 × 15,000) | 7,500 |
| | | Interest 30.09.2021 | 5,662.50 |
| | | Interest 31.03.2022 | 4,707.38 |
| | | Interest 30.06.2022 (3 months) | 2,424.30 |
| **Total** | **239,044.48** | **Total** | **239,044.48** |

**N's Capital Account:**

| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| 30.06.2022 Bank | 50,000 | 31.03.2021 Balance b/f | 50,000 |
| | | 30.06.2022 Balance c/d | 50,000 |
| **Total** | **50,000** | **Total** | **100,000** |

**O's Capital Account:**

| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| 30.06.2022 Bank | 25,000 | 31.03.2021 Balance b/f | 25,000 |
| | | 30.06.2022 Balance c/d | 25,000 |
| **Total** | **25,000** | **Total** | **50,000** |

**PARTNERS' CURRENT ACCOUNTS (01.04.2021 to 30.06.2022)**

**N's Current Account:**

**For Year Ended 31.03.2022:**

| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| 31.03.2022 Drawings | 18,750 | 31.03.2021 Balance b/f | 37,500 |
| 31.03.2022 Balance c/d | 62,083.33 | 31.03.2022 Share of Profit (2/3 × 65,000) | 43…

Question 11

Differentiate an ordinary partnership firm with an LLP (Limited Liability Partnership) firm in respect of the following:
(i) Applicable Law
(ii) Perpetual Succession
(iii) Ownership of Assets
(iv) Liability of Partners/Members
(v) Principal – Agent Relationship

Accepted Answer

**Distinction between Ordinary Partnership Firm and Limited Liability Partnership (LLP)**

**(i) Applicable Law:**
An ordinary partnership firm is governed by the **Indian Partnership Act, 1932**. An LLP, on the other hand, is governed by the **Limited Liability Partnership Act, 2008**.

**(ii) Perpetual Succession:**
An ordinary partnership firm does **not** have perpetual succession. It is dissolved on the death, retirement, insolvency, or insanity of a partner (unless the partnership deed provides otherwise). An LLP has **perpetual succession** — it continues to exist irrespective of changes in its partners. Its existence is independent of its members.

**(iii) Ownership of Assets:**
In an ordinary partnership firm, the assets of the firm are **jointly owned by all the partners** in their individual capacity. The firm is not a separate legal entity and cannot hold property in its own name. In an LLP, the LLP is a **separate legal entity** and can own assets in its own name. Partners do not have direct ownership of the LLP's assets.

**(iv) Liability of Partners/Members:**
In an ordinary partnership firm, the liability of partners is **unlimited**. Each partner is personally liable for all the debts and obligations of the firm, jointly and severally, and their personal assets can be used to satisfy firm debts. In an LLP, the liability of each partner is **limited to their agreed contribution**. A partner is not personally liable for the wrongful acts or omissions of other p…

Question 12

The following is the Trial Balance of Annol Limited as on 31st March, 2023:

Accepted Answer

**Incomplete Question — Trial Balance Data Missing**

The question states 'The following is the Trial Balance of Annol Limited as on 31st March, 2023' but the actual trial balance figures (debit/credit balances, additional information/adjustments) have not been provided in the prompt.

To solve this question and prepare the **Statement of Profit & Loss** and **Balance Sheet** as per **Schedule III of the Companies Act, 2013**, please paste the complete trial balance including:
1. All line items with Dr/Cr balances
2. Additional notes/adjustments (e.g., closing stock, depreciation rates, outstanding expenses, provisions, etc.)

Once the data is provided, the full solution will be worked out step by step.

Question 13

MN Limited operates its business into various segments. Its financial year end is 30th June, 2022 and financial statements were approved by their approving authority on 15th June, 2022. The following material events took place:

Accepted Answer

**Note on dates:** The question as stated (year end 30th June 2022, approval 15th June 2022) contains an internal inconsistency since approval cannot precede year end. For the analysis below, the standard interpretation applied is: **Balance Sheet Date = 31st March, 2022** and **Approval Date = 15th June, 2022**, which is consistent with all events described and the standard Indian financial year. AS-4 (Contingencies and Events Occurring After the Balance Sheet Date) governs all three situations.

**(i) Fire destroying manufacturing plant — 7th April, 2022**

The fire occurred on 7th April 2022, which is **after the balance sheet date** (31st March 2022) but **before the approval date** (15th June 2022). Since the fire does not provide evidence of any condition that existed at the balance sheet date — the plant existed and was intact on 31st March 2022 — this is a **non-adjusting post balance sheet date event** under AS-4.

**Treatment:** No adjustment is to be made in the financial statements for the year ended 31st March 2022. However, since the loss of ₹15 crores is **material**, it must be **disclosed by way of a note** to the financial statements. The note should describe the nature of the event (fire), the estimated loss (₹15 crores), and the expected insurance recovery of ₹15 crores. This disclosure ensures users of financial statements are not misled about the entity's financial position after the balance sheet date.

**(ii) Claim for breach of patent — ₹12 crores rec…

Question 14

An unquoted long term investment made in the shares of Rachel Limited is shown in the books of Ziva Limited at a cost of ₹ 1,00,000. The audited financial statements of Rachel Limited received in May, 2021 showed that the company had been incurring cash losses with declining market share and the long term investment may not fetch more than ₹ 55,000.

Accepted Answer

**Accounting Treatment of Impaired Long-term Investment Under AS 13**

**Situation Analysis**: Ziva Limited holds an unquoted long-term investment in Rachel Limited shares at cost of ₹1,00,000. Audited financial statements (May 2021) evidence permanent decline in value: the company reports cash losses with declining market share, with estimated recoverable value at ₹55,000. A provision for diminution must be recognized.

**Applicable Standard**: Under **AS 13 – Investments**, long-term investments in unquoted shares are valued at cost. However, AS 13 requires a **provision for diminution in value** when there is permanent decline in the value of investments, evidenced by objective factors.

**Conditions Met for Provision**: (1) **Permanence of Decline**: Cash losses and declining market share indicate a structural, not temporary, deterioration. (2) **Strong Evidence**: Audited financial statements provide objective, reliable evidence of diminution. (3) **Measurable Decline**: Recoverable value (₹55,000) is clearly below cost (₹1,00,000), resulting in a diminution of ₹45,000.

**Accounting Treatment**: A provision must be created to bring the investment to its estimated net realizable value. The provision for diminution in value of ₹45,000 should be charged to profit and loss as an expense in the period when the evidence becomes available (May 2021).

**Journal Entry**:
Profit & Loss/Provision for Diminution in Investment     Dr.  ₹45,000
     To Provision for Diminution in Va…

Question 15

On 1st December, 2021 Ziva Limited had made an investment of ₹ 5,00,000 in 4000 Equity Shares of Garry Limited at a price of ₹ 125 per share with an intention to hold it for not more than six months. In the first week of March, 2022, Garry Limited suffered heavy loss due to an earthquake; the loss was not covered by an insurance policy. On 31st March, 2022, the shares of Garry Limited were trading at a price of ₹ 80 per share on the Stock Exchange.

How would you deal with the above investments in the books of Ziva Limited for the year ended 31st March, 2022 as per the provisions of Accounting Standard 13 'Accounting for Investments'?

Accepted Answer

The investment of ₹5,00,000 in 4,000 equity shares of Garry Limited is classified as a **short-term investment** under AS 13, since Ziva Limited intended to hold it for not more than six months (i.e., within 12 months of acquisition).

**Valuation Principle:** AS 13 requires short-term investments to be valued at the **lower of cost and fair value (market value)**. This valuation rule applies regardless of the reason for the decline (temporary or permanent, whether due to specific events like earthquake, or market conditions).

**Determination of Value:**
- Cost of investment: 4,000 shares × ₹125 = ₹5,00,000
- Fair value as on 31st March 2022: 4,000 shares × ₹80 = ₹3,20,000
- Lower of cost and fair value: **₹3,20,000**
- Provision for diminution in value: ₹5,00,000 − ₹3,20,000 = **₹1,80,000**

**Treatment in Books of Ziva Limited (Year ended 31st March 2022):**

**1. Journal Entry:**
Provision for Diminution in Value of Investments Dr. ₹1,80,000
    To Investments in Garry Limited            Cr. ₹1,80,000

**2. Profit & Loss Account:** The provision of ₹1,80,000 is charged as an expense in the P&L account for the year ended 31st March 2022.

**3. Balance Sheet Presentation:** The investment is shown as:
Investments in Garry Limited (4,000 shares at lower of cost and market value): ₹3,20,000

Or alternatively:
Investments in Garry Limited - at cost ₹5,00,000 less provision for diminution ₹1,80,000 = ₹3,20,000

**Note:** The earthquake loss uninsured is **not a determining fact…

Question 16

Trade Payables of Jured Limited includes amount due to Sterling Limited of ₹ 9,75,000 recorded at the prevailing exchange rate on the date of purchase; transaction recorded at US $ = ₹ 75.00. The exchange rate on Balance Sheet date (31st March, 2022) was US $ 1 = ₹ 79.00. The payment was made on 15th May, 2022 when the exchange rate was US $ 1 = ₹ 73.30.

You are asked to calculate the amount of exchange difference on 31st March, 2022 and 15th May, 2022 and also explain the accounting treatment accorded in the above case as per AS 11 in the books of Jured Limited.

Accepted Answer

**AS 11 — The Effects of Changes in Foreign Exchange Rates** governs the accounting for foreign currency transactions in the books of Jured Limited.

**Step 1 — Determine the USD Amount of the Transaction**

The payable was recorded at ₹9,75,000 when US$ 1 = ₹75.00.
USD amount of payable = ₹9,75,000 ÷ ₹75 = **US$ 13,000**

**Exchange Difference on 31st March 2022 (Balance Sheet Date)**

As per **AS 11 (paragraph 11)**, monetary items (such as trade payables) outstanding at the Balance Sheet date must be reported using the **closing rate** (i.e., the exchange rate at the Balance Sheet date).

Carrying value at transaction rate: US$ 13,000 × ₹75 = ₹9,75,000
Restated value at closing rate: US$ 13,000 × ₹79 = ₹10,27,000
**Exchange Difference = ₹52,000 (Loss)** — since the rupee has depreciated, the liability has increased.

This **exchange loss of ₹52,000** is charged to the **Profit & Loss Account** for FY 2021-22 and the trade payable is restated to ₹10,27,000 in the Balance Sheet.

**Journal Entry on 31st March 2022:**
Exchange Difference (Loss) A/c Dr. ₹52,000
    To Sterling Limited (Trade Payable) A/c ₹52,000

**Exchange Difference on 15th May 2022 (Date of Payment)**

As per **AS 11 (paragraph 13)**, exchange differences arising on **settlement** of monetary items are recognised in the P&L in the period in which they arise.

Carrying value (restated at 31st March 2022): US$ 13,000 × ₹79 = ₹10,27,000
Actual payment at settlement rate: US$ 13,000 × ₹73.30 = ₹9,52,900
**Excha…

Question 17

Following information of RJS Bank Limited for the year ended 31st March, 2022 are as under:

Particulars (₹ in '000):
Total interest earned and received on term loans: 6375.00
Interest earned on term loans classified as NPA: 1827.50
Interest received on term loans classified as NPA: 595.00
Total interest earned on cash credits and overdrafts: 14157.50
Interest earned but not received on cash credits and overdrafts treated as NPA: 2307.50
Interest on Deposits: 10300.00
Commission, exchange and brokerage: 502.50
Profit on sale of Investments: 4690.00
Profit on revaluation of Investments: 855.00
Income from Investments: 3433.00
Payment to and provision for employees: 6862.50
Rent, Taxes and Lighting: 962.50
Printing and Stationery: 155.00
Director's fees, allowances and expenses: 782.50
Repai…

Accepted Answer

**Profit and Loss Account of RJS Bank Limited for the year ended 31st March 2022** (₹ in thousands)

**INCOME:**

**I. Interest Earned** (Schedule 1): 16,992.50

**II. Other Income** (Schedule 2): 9,480.50

**TOTAL INCOME: 26,473.00**

**EXPENSES:**

**I. Interest Paid** (Schedule 3): 10,300.00

**II. Operating Expenses** (Schedule 4): 9,357.00

**TOTAL EXPENSES (before provision): 19,657.00**

**Profit before Provision for Risk Assets: 6,816.00**

**Less: Provision for Risk Assets** (Schedule 5): 2,540.63

**NET PROFIT: 4,275.37**

---

**SCHEDULE 1 – INTEREST EARNED**

From Term Loans: Total interest earned ₹6,375 less interest earned on NPA ₹1,827.50 plus interest actually received on NPA ₹595 = **₹5,142.50**

From Cash Credits and Overdrafts: Total interest earned ₹14,157.50 less interest earned but not received on NPA ₹2,307.50 = **₹11,850.00**

**Total Interest Earned: ₹16,992.50**

---

**SCHEDULE 2 – OTHER INCOME**

Commission, Exchange and Brokerage: ₹502.50; Profit on Sale of Investments: ₹4,690.00; Profit on Revaluation of Investments: ₹855.00; Income from Investments: ₹3,433.00

**Total Other Income: ₹9,480.50**

---

**SCHEDULE 3 – INTEREST ON DEPOSITS**

Interest on Deposits: **₹10,300.00**

---

**SCHEDULE 4 – OPERATING EXPENSES**

Payment to and Provision for Employees: ₹6,862.50; Rent, Taxes and Lighting: ₹962.50; Printing and Stationery: ₹155.00; Director's Fees, Allowances and Expenses: ₹782.50; Repairs and Maintenance: ₹140.00; Depreciation on Bank's Prope…

Question 18

On 1st April, 2021, the following balances appeared in the books of Globe Limited (an unlisted company other than AFSL, Banking Company, NBFC and HFC): (i) 50,000 9% Debentures of ₹100 each issued at par. (ii) Balance of Debenture Redemption Reserve (DRR) ₹5,00,000. (iii) Debenture Redemption Reserve (DRR) Investment representing ₹5,00,000 represented by 8.75% Secured Bonds of the Government of India at ₹100 each. Interest on Debentures was paid half-yearly on 30th of September and 31st of March. On 31st May, 2021, the company purchased 8,000 Debentures of 96 (ex-interest) per debenture and cancelled them on the same date. On 1st January, 2022, it further acquired another 10,000 own Debentures at ₹101 (cum-interest) per debenture and cancelled them on the same date. The funds required for …

Accepted Answer

**Globe Limited — Ledger Accounts for the year ended 31st March, 2022**

Globe Limited is an unlisted company (other than AFSL, Banking, NBFC, HFC), so the **Debenture Redemption Reserve (DRR) requirement is 10%** of outstanding debentures as per the Companies (Share Capital and Debentures) Amendment Rules, 2019.

**Key computations before preparing accounts:**

**31st May 2021 — Purchase of 8,000 debentures at ₹96 (ex-interest):**
- Ex-interest price per debenture = ₹96; Face value = ₹100
- Profit on cancellation = (100 − 96) × 8,000 = **₹32,000 → Capital Reserve**
- Accrued interest (1 Apr to 31 May = 2 months) = 8,000 × ₹100 × 9% × 2/12 = **₹12,000** (charged to Interest on Debentures A/c, paid separately since ex-interest)
- Bank payment: ₹7,68,000 (purchase) + ₹12,000 (accrued interest) = ₹7,80,000

**1st January 2022 — Purchase of 10,000 debentures at ₹101 (cum-interest):**
- Total payment = 10,000 × ₹101 = ₹10,10,000 (includes accrued interest)
- Accrued interest (1 Oct to 1 Jan = 3 months) = 10,000 × ₹100 × 9% × 3/12 = **₹22,500**
- Ex-interest cost = ₹10,10,000 − ₹22,500 = ₹9,87,500
- Profit on cancellation = ₹10,00,000 − ₹9,87,500 = **₹12,500 → Capital Reserve**

**DRR transfers to General Reserve (proportionate method):**
- On 31 May 2021: Required DRR after redemption = 10% × ₹42,00,000 = ₹4,20,000; Transfer = ₹5,00,000 − ₹4,20,000 = ₹80,000
- On 1 Jan 2022: Required DRR = 10% × ₹32,00,000 = ₹3,20,000; Transfer = ₹4,20,000 − ₹3,20,000 = ₹1,00,000
- On 31 Mar 2022:…

Question 19

Grouping Enterprises has 2 Departments, Department A and Department B. Department A manufactures Dyed Textile which is used by Department B for Clothes production. Total production of Department A is sold to Department B at Cost plus 20%. Following information for year ending 31st March, 2022: Department A: Opening Stock ₹1,25,000, Purchases ₹12,60,000, Sales ₹13,50,000, Wages ₹1,25,000, Closing Stock ₹3,47,900. Department B: Opening Stock ₹4,20,000, Purchases ₹22,90,000 (includes purchases from Department A), Sales ₹30,40,000, Wages ₹5,60,000, Closing Stock ₹5,36,000. Both Opening & Closing Stocks of Department B consisted 80% of Department A goods valued at Cost. Department A earned a Gross Profit of 20% in previous year. Other Information: (a) Rent paid ₹60,000 (b) Carriage outward ₹40,…

Accepted Answer

**Departmental Trading and Profit & Loss Account for the year ended 31st March 2022**

**KEY WORKING BEFORE THE ACCOUNTS:**

Department B's **external purchases** = ₹22,90,000 − ₹13,50,000 (transfer from A) = ₹9,40,000.

Transfer policy: Cost + 20% → GP as a percentage of transfer price = 20 ÷ 120 = **1/6**.

This rate applies to both years since the transfer policy is consistent. The previous year statement "GP of 20%" refers to 20% on cost (same policy), so the rate on transfer price = 1/6 for opening stock unrealized profit as well.

---

**DEPARTMENTAL TRADING ACCOUNT**

| Dr. | Dept A (₹) | Dept B (₹) | | Cr. | Dept A (₹) | Dept B (₹) |
|---|---|---|---|---|---|---|
| Opening Stock | 1,25,000 | 4,20,000 | | Transfer to Dept B / Sales | 13,50,000 | 30,40,000 |
| Purchases (External) | 12,60,000 | 9,40,000 | | Closing Stock | 3,47,900 | 5,36,000 |
| Transfer from Dept A | — | 13,50,000 | | | | |
| Wages | 1,25,000 | 5,60,000 | | | | |
| **Gross Profit c/d** | **1,87,900** | **3,06,000** | | | | |
| **Total** | **16,97,900** | **35,76,000** | | **Total** | **16,97,900** | **35,76,000** |

**Combined Gross Profit = ₹1,87,900 + ₹3,06,000 = ₹4,93,900**

---

**GENERAL PROFIT & LOSS ACCOUNT**

| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| To Stock Reserve (Closing — Unrealized Profit) | 71,467 | By Gross Profit b/d (A + B) | 4,93,900 |
| To Rent | 60,000 | By Stock Reserve (Opening — Unrealized Profit) | 56,000 |
| To Carriage Outward | 40,000 | | |
| To Other Administrative Expens…

Question 20

Answer any four of the following:

Accepted Answer

**Part (a) – Hire Purchase Accounting [5 Marks]**

To find the cash price, we recognize that the total Hire Purchase price of ₹3,00,000 comprises the cash price plus the interest (down payment) charged at 10% per annum over the 2.5-year period (5 half-yearly installments). Using simple interest on the original cash price:

Let Cash Price = C
Total HP Price = C + Interest
Interest = C × Rate × Time = C × 10% × 2.5 years = 0.25C

Therefore: C + 0.25C = ₹3,00,000
1.25C = ₹3,00,000
**Cash Price = ₹2,40,000**

**Interest (Down Payment) = ₹3,00,000 – ₹2,40,000 = ₹60,000**

This interest amount is spread across the five installments of ₹60,000 each, with a portion included in the first installment as specified.

**Part (b) – Accounting Equation [3 Marks]**

The fundamental accounting equation is: **Assets – Liabilities = Equity**. Each transaction is applied sequentially:

**Opening Balance (1st April 2021):**
Assets – Liabilities = Equity
₹12,00,000 – ₹3,00,000 = ₹9,00,000 ✓

**After Transaction 1** (Liability settled at 2% discount):
Cash paid: ₹50,000 × 98% = ₹49,000; Gain on settlement: ₹1,000
(₹12,00,000 – ₹49,000) – (₹3,00,000 – ₹50,000) = ₹9,00,000 + ₹1,000
**₹11,51,000 – ₹2,50,000 = ₹9,01,000** ✓

**After Transaction 2** (Dividends declared @ 15% on 1000 shares of FV ₹100 each):
Dividend amount: 1,000 × ₹100 × 15% = ₹15,000 (Liability created)
**₹11,51,000 – ₹2,65,000 = ₹8,86,000** ✓

**After Transaction 3** (Rent paid ₹20,000):
Assets decrease (cash outflow); Equity decreas…

Question 21

Indicate in respect of each whether revenue can be recognized and when it will be recognized as per AS - 9.
(i) Installment sales.
(ii) Delivery is delayed at buyer's request but buyer takes title and accepts billing.
(iii) Trade discounts and volume rebates.
(iv) Insurance agency commission for rendering services.
(v) Advertising commission.

Accepted Answer

Under **AS 9 (Revenue Recognition)**, revenue is recognized when significant risks and rewards of ownership transfer to the buyer, the amount is measurable, and economic benefits are probable. Here's the treatment for each scenario:

**(i) Installment Sales** – Revenue can be recognized at the point of sale when the buyer accepts the goods and risks/rewards transfer, even though payment is in installments. The installment terms do not defer revenue recognition unless there is doubt about ultimate collection. If collectibility is in doubt, a provision for bad debts may be necessary, but revenue is still recognized at sale.

**(ii) Delivery Delayed at Buyer's Request (but Title and Billing Accepted)** – Revenue should be recognized when the buyer takes title and accepts billing, as the significant risks and rewards have transferred to the buyer. The physical delay in delivery is at the buyer's request and does not prevent revenue recognition. The sale is complete from an accounting perspective.

**(iii) Trade Discounts and Volume Rebates** – Trade discounts are not treated as separate transactions; they reduce the gross price to determine the net revenue amount at the point of sale. Volume rebates depend on whether they are contingent: if contingent on achieving future sales volumes, the revenue is recognized net of the estimated rebate only when the contingency is satisfied. If unconditional or determinable at sale, they reduce revenue at that point.

**(iv) Insurance Agency C…

Question 22

P&I Limited furnishes the following Balance Sheet as at 31st March, 2022. On 19th April, 2022, the company announced the buy-back of 25% of its Equity Share @ ₹ 15 per share. For this purpose, to retire all of its investments for ₹ 750 lakhs. On 9th April, 2022, the company achieved the target of buy-back. You are required to pass necessary journal entries for the above transaction.

Accepted Answer

**Applicable Law:** Section 68 of the Companies Act, 2013 governs buy-back of securities. A **Capital Redemption Reserve (CRR)** must be created equal to the nominal (face) value of shares bought back when the source is free reserves.

**Working Assumptions (Balance Sheet not fully reproduced in question):**
Investments are liquidated for ₹750 lakhs = total buy-back consideration. Buy-back price = ₹15 per share; Face value assumed = ₹10 per share; therefore Premium on buy-back = ₹5 per share. Number of shares bought back = ₹750 lakhs ÷ ₹15 = **50 lakh shares**. Nominal value of shares bought back = 50 lakh × ₹10 = ₹500 lakhs. Premium on buy-back = 50 lakh × ₹5 = ₹250 lakhs.

**Journal Entries in the books of P&I Limited**

**(1) On sale of Investments (19th April 2022 — to generate funds):**
Bank A/c &emsp; Dr. &emsp; ₹750 lakhs
&emsp; To Investments A/c &emsp; ₹750 lakhs
*(Being investments encashed to fund the buy-back of equity shares)*

**(2) On buy-back of 50 lakh Equity Shares @ ₹15 per share (9th April 2022 — target achieved):**
Equity Share Capital A/c &emsp; Dr. &emsp; ₹500 lakhs
Securities Premium Reserve A/c &emsp; Dr. &emsp; ₹250 lakhs
&emsp; To Bank A/c &emsp; ₹750 lakhs
*(Being 50 lakh equity shares of ₹10 each bought back at ₹15 per share; premium charged to Securities Premium Reserve as per Section 52 of the Companies Act, 2013)*

**(3) Transfer to Capital Redemption Reserve (mandatory under Section 68(7) of the Companies Act, 2013):**
General Reserve A/c &ems…

Question 23

The following items pertain to a scheme of reconstruction: (iii) The arrears of dividend on preference shares are cancelled. (iv) The debit balance of Goodwill account is written off entirely. (v) Land and Building and Plant and Machinery are revalued at 85% and 90% of their respective book values. (vi) Book debts amounting to ₹ 14,400 are to be treated as bad and hence to be written off. (vii) The company expects to earn a profit at the rate of ₹ 90,000 per annum from the current year which would be utilized entirely for reducing the debt balance of Profit and loss accounts for 3 years. The remaining balance of the said account would be written off at the time of capital reduction process. (viii) The balance of total capital reduction is to be utilized in writing down Patents. (ix) A secu…

Accepted Answer

**Note: Items (i) and (ii) of the reconstruction scheme and the original Balance Sheet are not provided in the question. The solution below covers journal entries for items (iii) to (ix) in standard format, explains the Capital Reduction Account structure, and provides the reconstructed Balance Sheet framework. Numerical totals for Capital Reduction Account and Patents written down cannot be computed without the original balance sheet figures.**

**Journal Entries for Scheme of Reconstruction**

**(iii) Cancellation of Arrears of Dividend on Preference Shares:**
Arrears of Preference Dividend A/c ... Dr. (₹ XXX)
    To Capital Reduction A/c (₹ XXX)
*(Being arrears of dividend on preference shares cancelled as part of reconstruction scheme)*

**(iv) Writing off Goodwill:**
Capital Reduction A/c ... Dr. (₹ XXX)
    To Goodwill A/c (₹ XXX)
*(Being debit balance of Goodwill account written off entirely)*

**(v) Revaluation of Fixed Assets:**
Capital Reduction A/c ... Dr. (₹ XXX)
    To Land & Building A/c [15% reduction] (₹ XXX)
    To Plant & Machinery A/c [10% reduction] (₹ XXX)
*(Being Land & Building revalued at 85% and Plant & Machinery at 90% of respective book values; loss on revaluation transferred to Capital Reduction Account)*

**(vi) Writing off Bad Debts:**
Capital Reduction A/c ... Dr. ₹14,400
    To Book Debts (Debtors) A/c ₹14,400
*(Being book debts of ₹14,400 treated as bad and written off)*

**(vii) Writing off remaining P&L debit balance:**
Future profits will r…

Question 24

Following Trial Balance is extracted from the books of ABC Ltd. as on 1st April, 2021:

| Debit | ₹ | Credit | ₹ |
|---|---|---|---|
| Bad Debts | 18,500 | Term Loan from Public Sector Bank | 1,02,09,000 |
| Interest on Term Loan | 8,05,000 | Trade Payables | 55,08,875 |
| Land | 24,00,000 | Provision for Depreciation | |
| Factory Building | 36,80,000 | On Plant | 9,37,500 |
| Plant and Machinery | 62,50,000 | On Furniture and Fittings | 82,500 |
| Furniture and Fittings | 8,25,000 | On Factory Building | 1,84,000 |
| Trade Receivables | 64,75,000 | Provision for Doubtful Debts | 25,000 |
| Advance Income Tax Paid | 37,500 | Bills Payable | 1,25,000 |
| Stock (1st April, 2021) | 9,23,000 | | |
| Bank Balances | 9,75,000 | | |
| Cash on Hand | 1,31,875 | | |
| Total | 3,28,47,875 | Total |…

Accepted Answer

**BALANCE SHEET OF ABC LTD. AS ON 31ST MARCH 2022** (as per Schedule III, Companies Act, 2013)

**EQUITY AND LIABILITIES**

**Equity**
- Authorized Share Capital: 2,00,000 shares of ₹10 each = ₹20,00,000
- Issued, Subscribed and Paid-up Capital: 1,00,000 shares of ₹10 each = ₹10,00,000
- Reserves and Surplus:
  - General Reserve (transfer per Adj. 7): ₹1,00,000
  - Retained Earnings/Accumulated Losses: (₹21,90,310) [Loss per calculation]
  - Less: Proposed Dividend (post-balance sheet date, Adj. 10): Not recognized
  Total Equity: ₹(10,90,310)

**Non-Current Liabilities**
- Borrowings: Term Loan from PSB (long-term portion) = ₹85,09,000 [₹1,02,09,000 - ₹17,00,000 current]
- Note: Hypothecated against Plant and Machinery (Adj. 8)

**Current Liabilities**
- Borrowings (Current portion of Term Loan): ₹17,00,000
- Trade Payables: ₹55,08,875
- Bills Payable: ₹1,25,000
- Other Current Liabilities:
  - Outstanding Rent (Adj. 2): ₹20,000
  - Outstanding Wages (Adj. 2): ₹1,56,560
  - Interest on Term Loan (accrued): ₹8,05,000
- Current Tax Liability (Adj. 6): ₹5,47,578 [25% of ₹21,90,310]

**ASSETS**

**Non-Current Assets - Property, Plant and Equipment**
| Asset | Gross Block | Accumulated Depreciation | Net Block |
|-------|-------------|--------------------------|----------|
| Land | ₹24,00,000 | — | ₹24,00,000 |
| Factory Building | ₹36,80,000 | ₹3,68,000 | ₹33,12,000 |
| Plant & Machinery | ₹62,50,000 | ₹15,62,500 | ₹46,87,500 |
| Furniture & Fittings | ₹8,25,000 | ₹1,65,000 | ₹6…

Question 25

During year 1, the earnings of the enterprise increased by 12 percent, and the enterprise expects earnings will continue to increase at this rate over the next two years. The enterprise, therefore, expects that the earnings target will be achieved, and hence the equity holders will have an exercise price of ₹ 300.

During year 2, the earnings of the enterprise increased by 13 percent, and the enterprise continues to expect that the earnings target will be achieved.

During year 3, the earnings of the enterprise increased by only 3 percent, and hence the earnings target was not achieved. The negative completes three years' service, and therefore satisfies the service conditions. Because the earnings target was not achieved, the 1000 vested stock options have an exercise price of ₹ 400.

(d)…

Accepted Answer

**Sub-part (d): Contingent Loss and Accounting Treatment under AS 29**

**AS 29 — Provisions, Contingent Liabilities and Contingent Assets** governs the recognition and measurement of provisions. A provision must be recognised when: (i) a present obligation exists as a result of a past event, (ii) it is **probable** (more likely than not) that an outflow of economic resources will be required, and (iii) a reliable estimate can be made.

Where there are a **large number of similar obligations**, AS 29 permits (and requires) the use of the **expected value method** — i.e., probability-weighted average of all possible outcomes — to determine the provision amount. The 20 pending lawsuits constitute such a population.

**Category 1 — Five cases (100% win probability):**
No outflow is expected. No provision is required, and these need not be disclosed even as contingent liabilities.

**Category 2 — Ten cases:**
Probability of loss = 40% (low damages) + 10% (high damages) = **50%**.
Expected loss per case = (40% × ₹12,00,000) + (10% × ₹20,00,000) = ₹4,80,000 + ₹2,00,000 = **₹6,80,000**.
Total for 10 cases = 10 × ₹6,80,000 = **₹68,00,000**.

**Category 3 — Remaining five cases:**
Probability of loss = 30% (low damages) + 20% (high damages) = **50%** (win probability treated as 50% since probabilities must sum to 100%).
Expected loss per case = (30% × ₹10,00,000) + (20% × ₹21,00,000) = ₹3,00,000 + ₹4,20,000 = **₹7,20,000**.
Total for 5 cases = 5 × ₹7,20,000 = **₹36,00,000**.

**Total …

Question 26

Star Limited agreed to take over Moon Limited on 1st April, 2022. The terms and conditions of takeover were as follows:

(i) Star Limited issued 70,000 Equity shares of ₹ 100 each at a premium of ₹ 10 per share to the equity shareholders of Moon Limited.

(ii) Cash payment of ₹ 1,25,000 was made to the equity shareholders of Moon Limited.

(iii) 25,000 fully paid Preference shares of ₹ 70 each issued at par to discharge the preference shareholders of Moon Limited.

Accepted Answer

**(i) Meaning of Consideration for Amalgamation as per AS-14:**

As per **AS-14 (Accounting for Amalgamations)**, **"Consideration for Amalgamation"** means the **aggregate of the shares and other securities issued and the payment made in the form of cash or other assets** by the transferee company (Star Limited) to the shareholders of the transferor company (Moon Limited).

The consideration may be in the form of:
- Equity or preference shares issued by the transferee company
- Debentures or bonds issued
- Cash payments
- Any other assets transferred

Importantly, **the consideration is determined at the date of amalgamation**. Where shares are issued as consideration, they are recorded at **fair value** (i.e., issue price including premium), not merely face value.

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**(ii) Calculation of Purchase Consideration:**

Purchase Consideration under AS-14 includes all payments made to **both equity and preference shareholders** of the transferor company (Moon Limited).

| Particulars | Calculation | Amount (₹) |
|---|---|---|
| 70,000 Equity Shares of ₹100 each at premium of ₹10 | 70,000 × ₹110 | 77,00,000 |
| Cash paid to Equity Shareholders | — | 1,25,000 |
| 25,000 Preference Shares of ₹70 each at par | 25,000 × ₹70 | 17,50,000 |
| **Total Purchase Consideration** | | **95,75,000** |

**The Purchase Consideration amounts to ₹95,75,000.**

Question 27

The following information is provided by Sarvovar Limited, a Non-Investment company, incurring losses from past 2 years:

Share Capital (Issued & Subscribed): ₹ 1,05,73,000
Capital Reserve: ₹ 90,000
Securities Premium: ₹ 67,000
Public Deposits: ₹ 14,50,000
Trade Payables: ₹ 1,96,000
Investment in other Co's Shares: ₹ 50,00,000
Profit & Loss (Dr.): ₹ 10,25,000

Sarvovar Limited has a one Whole time Director Mr. Shyam. You are required to calculate the effective capital and also the maximum remuneration that can be paid to Mr. Shyam, if no special resolution is passed at the General Meeting of the company for the payment of remuneration for a period not exceeding three years.

Accepted Answer

**Part (d): Effective Capital and Director Remuneration**

**Calculation of Effective Capital:**
Effective Capital is calculated under Schedule V of the Companies Act, 2013 as: Paid-up Share Capital + Capital Reserve - Accumulated Losses (P&L Debit Balance).

Relevant items from the balance sheet:
- Share Capital (Issued & Subscribed): ₹1,05,73,000
- Capital Reserve: ₹90,000
- P&L Account (Dr.): ₹10,25,000

Note: Securities Premium, Public Deposits, Trade Payables, and Investments in other companies' shares are not included in effective capital for this purpose.

Effective Capital = ₹1,05,73,000 + ₹90,000 - ₹10,25,000 = **₹96,38,000**

**Maximum Remuneration Without Special Resolution:**
When no special resolution is passed for remuneration, Schedule V, Part II (Non-Investment Companies) provides that a whole-time director shall receive remuneration limited to **3% of the effective capital per annum**.

Maximum Annual Remuneration = 3% of Effective Capital
= 3% × ₹96,38,000
= **₹2,89,140 per annum**

This amount represents the maximum salary that can be paid to Mr. Shyam without a special resolution. No commission or other remuneration can be provided during the period of losses.

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**Part (c): Objectives and Advantages of Accounting Standards**

**Objectives of Accounting Standards:**
Accounting Standards aim to establish a common financial reporting language. Their primary objectives are: (1) to ensure uniformity and consistency in accounting practices across entities an…

CA Inter Adv Accounting

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Date	Particulars	No. of Shares	Amount (₹)
1 Apr 2021	Balance b/d (10,000 × ₹7)	10,000	70,000
4 Jul 2021	Bank A/c — Purchase (7,500 × ₹10)	7,500	75,000
25 Aug 2021	Bonus Shares — 1:5 on 17,500 shares	3,500	—
	Total	21,000	1,45,000

Date	Particulars	No. of Shares	Amount (₹)
19 Sep 2021	Bank A/c — Pre-acquisition Dividend (7,500 × ₹0.50)	—	3,750
11 Dec 2021	Bank A/c — Sale of shares (cost, FIFO)	7,500	52,500
31 Mar 2022	Balance c/d	13,500	88,750
	Total	21,000	1,45,000

Item	₹
Profit on sale of 7,500 shares	7,500 (Cr)
Income from sale of rights (6,000 × ₹1.50)	9,000 (Cr)
Post-acquisition dividend income (10,000 × ₹0.50)	5,000 (Cr)