CA Inter Adv Accounting — Question Paper — November 2023

AS-22 — Accounting for Taxes on Income 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.

Classification of each item:

(i) Depreciation — Tax > Book (₹20L vs ₹15L): Tax depreciation exceeds book depreciation by ₹5 lakhs. This is a timing difference — taxable income is lower now but will be higher in future years when the difference reverses. This creates a Deferred Tax Liability (DTL).

(ii) Interest to NBFC — accrued but not paid by 31.03.2023: Under Section 43B of the Income Tax Act, 1961, interest to a financial institution is deductible only on actual payment. Since ₹6 lakhs was paid on 30.06.2023 (after the year end), it is disallowed in 2022-23 for tax. Book income is lower (expense recognised) but taxable income is higher — more tax is paid now, less in future → Deferred Tax Asset (DTA).

(iii) Items disallowed in 2021-22 but allowed in 2022-23 (₹1.05L): These items had created a DTA in 2021-22 (tax paid in excess). In 2022-23, they are allowed for tax, so the timing difference reverses. This is a reversal of earlier DTA — it reduces the DTA balance in 2022-23.

(iv) Donation to Private Trust (₹40L): Donations to private trusts are not deductible under the Income Tax Act, 1961 (they do not qualify under Section 80G). This is a permanent difference — it will never reverse. No deferred tax is recognised on permanent differences under AS-22.

Summary on 31-03-2023:

Deferred Tax Liability (DTL): Arising from excess tax depreciation = ₹5.00 lakhs × 15% = ₹0.75 lakhs

Deferred Tax Asset (DTA): Net timing difference = Interest disallowed (₹6.00L) less reversal of prior DTA (₹1.05L) = ₹4.95 lakhs × 15% = ₹0.7425 lakhs

Final Answer: DTL = ₹0.75 lakhs | DTA = ₹0.7425 lakhs

Applicable Standard: AS 17 – Segment Reporting

Under AS 17, a segment is identified as a reportable segment if it meets ANY ONE of the three quantitative thresholds (10% tests). The question restricts analysis to the Revenue Test and the Assets Test.

Step 1 – Revenue Test (10% of Combined Total Revenue)

Total Revenue of all segments (internal + external) = 14,100 + 1,600 + 1,500 + 1,300 = ₹18,500

10% threshold = ₹1,850

| Segment | Internal | External | Total Revenue | Passes (≥ 1,850)? |
|---------|----------|----------|---------------|--------------------|
| Fan | 3,200 | 10,900 | 14,100 | Yes ✓ |
| Light | 200 | 1,400 | 1,600 | No ✗ |
| Lamp | 0 | 1,500 | 1,500 | No ✗ |
| Heater | 1,100 | 200 | 1,300 | No ✗ |

Step 2 – Assets Test (10% of Combined Total Assets)

Total Assets of all segments = 23,700 + 13,200 + 4,200 + 1,800 = ₹42,900

10% threshold = ₹4,290

| Segment | Total Assets | Passes (≥ 4,290)? |
|---------|--------------|--------------------|
| Fan | 23,700 | Yes ✓ |
| Light | 13,200 | Yes ✓ |
| Lamp | 4,200 | No ✗ (just below) |
| Heater | 1,800 | No ✗ |

Step 3 – 75% External Revenue Check

AS 17 also requires that external revenue of all reportable segments must be at least 75% of total enterprise external revenue.

Total external revenue = 10,900 + 1,400 + 1,500 + 200 = ₹14,000; 75% = ₹10,500

External revenue of reportable segments (Fan + Light) = 10,900 + 1,400 = ₹12,300, which exceeds ₹10,500. The 75% test is satisfied; no additional segments need to be designated as reportable.

Conclusion:

Garnet Limited has 2 reportable segments – Fan and Light – based on the Revenue and Assets criteria under AS 17.

- Fan qualifies under both the Revenue Test (₹14,100 ≥ ₹1,850) and the Assets Test (₹23,700 ≥ ₹4,290).
- Light qualifies under the Assets Test (₹13,200 ≥ ₹4,290), even though it fails the Revenue Test.
- Lamp fails both tests (Revenue: ₹1,500 < ₹1,850; Assets: ₹4,200 < ₹4,290).
- Heater fails both tests.

BALANCE SHEET ANALYSIS OF TOURMA LIMITED as at 31st March, 2023

A. Preliminary Data Extraction

Before computing ratios, the key aggregates are identified: Shareholders' Funds = ₹24.00 – ₹9.10 = ₹14.90 lakhs; Current Assets = ₹5.12 + ₹4.32 + ₹0.65 = ₹10.09 lakhs; Current Liabilities = ₹1.13 + ₹1.40 + ₹0.32 + ₹0.42 = ₹3.27 lakhs; Non-Current Assets = ₹7.80 + ₹1.70 + ₹1.80 = ₹11.30 lakhs; Total Assets = ₹21.39 lakhs.

B. Capital Structure Analysis

The company's share capital of ₹24.00 lakhs is the dominant component, constituting 112% of total assets. However, accumulated losses (negative Reserves & Surplus of ₹9.10 lakhs) have eroded the equity base to ₹14.90 lakhs, representing 69.66% of total assets. This negative reserve is a significant red flag indicating the company has not been profitable since its inception or has suffered sustained losses. The Proprietary Ratio (Shareholders' Funds ÷ Total Assets) = 14.90 ÷ 21.39 = 0.697 or ~70%, which is healthy and indicates a predominantly equity-financed business with low dependence on external debt. The Debt-Equity Ratio (Long-term Debt ÷ Shareholders' Funds) = 3.20 ÷ 14.90 = 0.21:1, well within safe limits (ideal ≤ 2:1), suggesting the company is low-geared with minimal financial risk from fixed-interest obligations. If bank overdraft is included in total debt, the ratio becomes 4.60 ÷ 14.90 = 0.31:1, still conservative.

C. Liquidity Analysis

The Current Ratio = Current Assets ÷ Current Liabilities = 10.09 ÷ 3.27 = 3.09:1. This exceeds the ideal standard of 2:1 and indicates a comfortable short-term liquidity position. However, one must look deeper. The Quick Ratio (Acid Test Ratio) = (Current Assets – Inventory) ÷ Current Liabilities = (10.09 – 5.12) ÷ 3.27 = 4.97 ÷ 3.27 = 1.52:1, which is above the ideal of 1:1, suggesting even after excluding inventory the company can meet current obligations. The Cash Ratio = Cash & Cash Equivalents ÷ Current Liabilities = 0.65 ÷ 3.27 = 0.20:1, which is low. This means only 20% of current liabilities can be immediately settled through cash, implying reliance on inventory conversion and receivable collection to service short-term debts.

D. Asset Composition Analysis

Non-Current Assets constitute ₹11.30 lakhs (52.8% of total assets): PPE at ₹7.80 lakhs (36.5%), Intangibles at ₹1.70 lakhs (7.9%), and Non-Current Investments at ₹1.80 lakhs (8.4%). The Fixed Assets to Net Worth Ratio = (PPE + Intangibles) ÷ Shareholders' Funds = 9.50 ÷ 14.90 = 0.64, which is healthy — meaning fixed assets are comfortably financed by shareholders' funds without over-dependence on long-term debt.

Current Assets at ₹10.09 lakhs (47.2% of total assets) are dominated by Inventory (₹5.12 lakhs = 50.7% of current assets) and Trade Receivables (₹4.32 lakhs = 42.8% of current assets). The high proportion of inventory and receivables relative to cash indicates that liquidity is contingent on efficient inventory turnover and timely collection of debtors. Cash represents only 6.4% of current assets, which is very low and a potential concern for day-to-day operational liquidity.

E. Working Capital Analysis

Net Working Capital = Current Assets – Current Liabilities = 10.09 – 3.27 = ₹6.82 lakhs. This is positive and relatively large compared to the scale of operations, suggesting the company is not under immediate liquidity pressure. However, the quality of working capital is moderate given the heavy weighting toward inventory and debtors rather than liquid assets.

F. Overall Assessment and Observations

*Strengths:* Low leverage (Debt-Equity = 0.21:1); strong current and quick ratios; equity-funded asset base (Proprietary Ratio ~70%); positive net working capital of ₹6.82 lakhs.

*Weaknesses/Concerns:* Negative Reserves and Surplus of ₹9.10 lakhs is the most critical concern — it signals past losses and raises questions about long-term sustainability and profitability. The very low cash ratio (0.20:1) indicates poor immediate liquidity despite a healthy current ratio. Inventory-heavy current assets (50.7%) make the company vulnerable to demand slowdowns. Intangible assets at ₹1.70 lakhs should be assessed for recoverability.

*Conclusion:* Tourma Limited presents a mixed financial picture — structurally conservative with low debt and adequate working capital, but operationally stressed as evidenced by accumulated losses and thin cash reserves. The company needs to focus on profitability improvement, faster inventory turnover, and accelerated debtor collection to strengthen its overall financial health.

Part (a): Foreign Exchange Transaction - Import

As per AS 11 Foreign Exchange Transactions, transactions in foreign currency are recorded at the exchange rate on the transaction date.

Given: Plant and machinery imported on 1st October 2022 for ₹18,500. Payment made on the transaction date itself (1st October 2022) at exchange rate 1€ = ₹88.

Analysis: Foreign currency equivalent = ₹18,500 ÷ 88 = €210.23 (approx.). Since the payable was settled on the transaction date at the spot rate of 1st October 2022, there is no outstanding forex payable on 31st March 2023. Exchange Difference: NIL (no difference arises as settlement occurred on transaction date).

Balance Sheet Item (31st March 2023): Fixed Asset - Property, Plant & Machinery at ₹18,500 (gross, as depreciation is ignored per question).

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Part (b): Foreign Exchange Transaction - Export

Given: Goods exported on credit for ₹50,40,000 on 1st December 2022 at exchange rate 1€ = ₹84. Outstanding receivable on 31st March 2023 when rate is 1€ = ₹90.

Forex Amount: ₹50,40,000 ÷ 84 = €60,000

Original Recording (1st December 2022): Receivable recognized at ₹50,40,000

Closing Valuation (31st March 2023): €60,000 × ₹90 per euro = ₹54,00,000

Exchange Gain: ₹54,00,000 - ₹50,40,000 = ₹3,60,000 (Exchange Gain). The gain arises because the rupee weakened against the euro, requiring more rupees per euro at year-end.

Balance Sheet Item (31st March 2023): Receivable from Cream Ltd. €60,000 (or ₹54,00,000) stated separately as a current asset.

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Part (c): Inventory Valuation (AS 2)

(i) Sonu's Toy Retail Business:

Given: Opening stock ₹20,000, Purchases ₹1,47,000, Sales ₹1,54,000, Gross margin 10% on cost.

Cost of Goods Sold Calculation: Markup percentage = 10%. Therefore, COGS = Sales ÷ (1 + Markup%) = ₹1,54,000 ÷ 1.10 = ₹1,40,000

Closing Stock = Opening Stock + Purchases - COGS = ₹20,000 + ₹1,47,000 - ₹1,40,000 = ₹27,000

As per AS 2 Inventories, closing stock is valued at cost since selling price (₹1,54,000) indicates items are valued above cost.

(ii) Mohan's Chair Business:

Given: 250 chairs purchased at ₹300 each on 21st March 2023. Normal selling price ₹400 each. Due to manufacturing defect, NRV is 70% of normal selling price = ₹280 per chair. No sales in the year.

Valuation as per AS 2: Inventories are valued at the lower of Cost and Net Realizable Value.

- Cost: 250 × ₹300 = ₹75,000
- Net Realizable Value: 250 × ₹280 = ₹70,000

Since NRV (₹70,000) is lower than cost (₹75,000), inventory must be valued at NRV.

Closing Stock Value = ₹70,000 (with a write-down of ₹5,000 recognized as an expense)

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Part (d): Accounting for Government Grants (AS 20)

Given: Machinery cost ₹75 Lakhs, Government grant ₹10 Lakhs (shown net of grant as ₹65 Lakhs), Useful life 6 years, Residual value ₹5 Lakhs. In Year 3, ₹8 Lakhs becomes refundable due to non-compliance.

Depreciation Calculation: As per AS 20, when using the deduction method (asset shown net of grant), depreciation is calculated on the depreciable amount:

Depreciable Amount = Cost - Grant - Residual Value = ₹75 Lakhs - ₹10 Lakhs - ₹5 Lakhs = ₹60 Lakhs

Annual Depreciation = ₹60 Lakhs ÷ 6 years = ₹10 Lakhs per annum

Year 1 Journal Entries:

1. Dr. Machinery A/c ₹75,00,000 / To Accounts Payable A/c ₹75,00,000 (machinery purchased)

2. Dr. Bank A/c ₹10,00,000 / To Deferred Grant Income A/c ₹10,00,000 (government grant received)

3. Dr. Depreciation Expense A/c ₹10,00,000 / To Accumulated Depreciation A/c ₹10,00,000 (depreciation for year 1)

Year 3 Journal Entry:

Dr. Deferred Grant Income A/c ₹8,00,000 / To Grant Refund Payable A/c ₹8,00,000 (reversal of grant due to non-compliance)

After this entry, only ₹2 Lakhs of grant (₹10 Lakhs - ₹8 Lakhs) continues to offset the machinery cost. The refundable amount of ₹8 Lakhs is recognized as a current liability on the balance sheet.

Investment Account (Government Bonds - 10%) prepared under FIFO method of valuation demonstrates the opening balance, all purchases and sales during the financial year 2022-23, and the closing balance of government bond holdings.

Investment Account - Dr. side: Opening balance of 5,000 units at cost ₹4,85,000 is recorded. Purchases on 1st June 2022 of 600 units cum-interest at ₹99 per unit cost ₹59,400. Further purchase on 1st August 2022 of 2,400 units ex-interest at ₹97.50 per unit cost ₹2,34,000. Total debit side: 8,000 units at cost ₹7,78,400.

Investment Account - Cr. side: Sale on 1st October 2022 of 2,500 units ex-interest at ₹98.50 per unit fetches ₹2,46,250. Under FIFO method, these 2,500 units are from the opening balance at cost ₹97 per unit (₹2,42,500), resulting in gain of ₹3,750. Sale on 1st January 2023 of 3,000 units cum-interest at ₹99 per unit fetches ₹2,97,000. Using FIFO: 2,500 units from remaining opening balance at ₹97 (₹2,42,500) and 500 units from 1st June purchase at ₹99 (₹49,500), total cost ₹2,92,000, resulting in gain of ₹5,000. Closing balance comprises 100 units from 1st June purchase at ₹99 (₹9,900) and 2,400 units from 1st August purchase at ₹97.50 (₹2,34,000), totaling 2,500 units at cost ₹2,43,900. Total Cr. side: 8,000 units at ₹7,78,400.

Investment Account (10% Government Bonds)

| To | Units | Amount (₹) | By | Units | Amount (₹) |
|---|---|---|---|---|---|
| Opening Balance (1 Apr 22) | 5,000 | 4,85,000 | Sales (1 Oct 22) | 2,500 | 2,42,500 |
| Purchase (1 Jun 22) | 600 | 59,400 | Gain on Sale | — | 3,750 |
| Purchase (1 Aug 22) | 2,400 | 2,34,000 | Sales (1 Jan 23) | 3,000 | 2,92,000 |
| | | | Gain on Sale | — | 5,000 |
| | | | Closing Balance (31 Mar 23) | 2,500 | 2,43,900 |
| Total | 8,000 | 7,78,400 | Total | 8,000 | 7,78,400 |

Consolidation of Accounts — Minority Interest and Cost of Control

Relevant Standard: AS 21 — Consolidated Financial Statements (issued by ICAI)

Given Data:
- GB Limited holds 80% in TB Limited; Minority Interest (MI) = 20%
- Date of acquisition: 1st April 2016
- Cost of Investment = ₹5,00,000
- TB Ltd's Equity Share Capital at acquisition = ₹50,00,000
- TB Ltd's Reserves & Surplus at acquisition = ₹4,64,000

Cost of Control (Calculated at Date of Acquisition — Remains Constant)

The cost of control is a one-time computation at the date of acquisition. It does not change in subsequent years.

Cost of Control Account:

| Dr. Side | ₹ | Cr. Side | ₹ |
|---|---|---|---|
| Cost of Investment | 5,00,000 | 80% of Share Capital | 40,00,000 |
| Capital Reserve (balancing figure) | 38,71,200 | 80% of Reserves & Surplus | 3,71,200 |
| Total | 43,71,200 | Total | 43,71,200 |

Since the cost of investment (₹5,00,000) is less than GB's share of net assets at acquisition (₹43,71,200), the difference of ₹38,71,200 is treated as Capital Reserve in the Consolidated Balance Sheet. This Capital Reserve remains ₹38,71,200 for all years.

Minority Interest — Year-Wise Calculation

Under AS 21 (para 30-32), MI cannot be reduced below zero. Any excess losses of MI are absorbed by the parent (GB Limited). When the subsidiary subsequently earns profits, the parent first recovers previously absorbed losses before MI resumes its share.

MI at acquisition = 20% × ₹54,64,000 = ₹10,92,800

Year-wise closing MI:

| Year End | MI (₹) | Cost of Control |
|---|---|---|
| 01.04.2016 (Acquisition) | 10,92,800 | Capital Reserve: 38,71,200 |
| 31.03.2017 | 8,02,800 | Capital Reserve: 38,71,200 |
| 31.03.2018 | 3,38,800 | Capital Reserve: 38,71,200 |
| 31.03.2019 | Nil | Capital Reserve: 38,71,200 |
| 31.03.2020 | Nil | Capital Reserve: 38,71,200 |
| 31.03.2021 | Nil | Capital Reserve: 38,71,200 |
| 31.03.2022 | ₹73,760 | Capital Reserve: 38,71,200 |
| 31.03.2023 | ₹19,760 | Capital Reserve: 38,71,200 |

Key note for 2018-19 to 2021-22: MI was exhausted in 2018-19. Excess losses of ₹3,71,200 were absorbed by GB Limited. In 2021-22, after the parent recovered all absorbed losses (₹2,71,200 remaining after 2020-21 recovery), the balance profit of ₹3,68,800 was shared — MI receiving 20% = ₹73,760.

Scale Based Regulation (SBR) — Four Layers of NBFC Regulatory Framework

The Reserve Bank of India introduced the Scale Based Regulation (SBR) framework effective October 1, 2022, creating a four-tier regulatory structure for Non-Banking Financial Companies (NBFCs) based on their size, activity, complexity, and interconnectedness.

Layer 1 — NBFC-Base Layer (NBFC-BL): This is the bottom layer comprising NBFCs that are subject to the least degree of regulation. It includes: (i) Non-deposit taking NBFCs with an asset size below ₹1,000 crore, (ii) NBFC-P2P Lending Platforms, (iii) NBFC-Account Aggregators, (iv) Non-Operative Financial Holding Companies (NOFHC), and (v) NBFCs that do not avail public funds and have no customer interface. The regulatory requirements for this layer are relatively lighter, reflective of the lower systemic risk posed by such entities.

Layer 2 — NBFC-Middle Layer (NBFC-ML): This layer consists of NBFCs exposed to heightened regulatory oversight. It includes: (i) All deposit-taking NBFCs (NBFC-D) irrespective of asset size, (ii) Non-deposit taking NBFCs with an asset size of ₹1,000 crore and above, and (iii) NBFCs undertaking specific activities such as Standalone Primary Dealers (NBFC-SPD), Infrastructure Finance Companies (NBFC-IFC), Infrastructure Debt Fund NBFCs (IDF-NBFC), Housing Finance Companies (HFC), and Systemically Important Core Investment Companies (CIC). Enhanced prudential norms apply to entities in this layer.

Layer 3 — NBFC-Upper Layer (NBFC-UL): This layer comprises NBFCs specifically identified by the RBI as warranting enhanced regulatory requirements, based on a set of parameters and a scoring methodology. The top 10 eligible NBFCs in terms of asset size shall always reside in the Upper Layer, irrespective of other factors. Additional NBFCs may also be placed in this layer based on the supervisory judgment of RBI. NBFCs in this layer are subjected to bank-like regulations including enhanced capital requirements, leverage restrictions, and disclosure obligations.

Layer 4 — NBFC-Top Layer (NBFC-TL): The Top Layer is ideally expected to remain empty. It will be populated only if the RBI is of the opinion that there is a sizeable increase in potential systemic risk from specific NBFCs in the Upper Layer. Any NBFC placed in this layer will be subjected to the highest level of regulatory supervision, including higher capital charges and such other measures as RBI deems appropriate, essentially bringing them closest to banking-level regulation.

In essence, the SBR framework follows a pyramid structure — with the largest number of NBFCs in the Base Layer facing lighter regulation, and progressively fewer NBFCs attracting stricter oversight as they move up the layers, thereby ensuring proportionality between regulation and systemic risk.

FALGUNI LTD.

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH 2023

Revenue from Operations
Sales: ₹4,46,000
Less: Cost of Goods Sold:
Adjusted Purchases: ₹2,25,000
Add: Carriage Inward: ₹17,200
₹2,42,200
Less: Closing Stock: -₹1,12,000
Cost of Goods Sold: ₹1,30,200
Gross Profit: ₹3,15,800

Other Income
Rent Received: ₹24,000
Total Profit before Expenses: ₹3,39,800

Expenses
Salaries: ₹72,000
Director's Fees: ₹40,000
Rent Expenses: ₹1,30,000
Selling and Distribution Expenses: ₹46,600
Office Expenses: ₹28,000
Miscellaneous Expenses: ₹10,200
Depreciation: ₹1,80,000
Total Expenses: ₹5,06,800

Loss for the Year: -₹1,67,000
Add: Profit and Loss Account (brought forward): ₹40,000
Loss carried to Balance Sheet: -₹1,27,000

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BALANCE SHEET AS ON 31st MARCH 2023

EQUITY AND LIABILITIES

Shareholders' Funds
Equity Share Capital (10,000 shares × ₹100, fully paid): ₹10,00,000
Preference Share Capital (4,000 10% shares × ₹100): ₹4,00,000
Securities Premium Account: ₹50,000
Reserves and Surplus:
General Reserve: ₹2,85,000
Revaluation Surplus on Land (₹8,50,000 - ₹7,00,000): ₹1,50,000
Profit and Loss Account: -₹1,27,000
Total Reserves: ₹3,08,000
Total Shareholders' Funds: ₹17,58,000

Non-Current Liabilities
10% Debentures (2,000 debentures × ₹100): ₹2,00,000
6% Secured Loan from SFC (repayable after 3 years): ₹4,50,000
Total Non-Current Liabilities: ₹6,50,000

Current Liabilities
Trade Payables: ₹72,000
Bank Overdraft (from Nationalized Bank, long-term classified as current): ₹2,00,000
Loan from Director (Short-term): ₹1,00,000
Unclaimed Dividend: ₹23,000
Total Current Liabilities: ₹3,95,000

TOTAL EQUITY AND LIABILITIES: ₹27,03,000

ASSETS

Non-Current Assets
Property, Plant and Equipment:
Land (at professionally revalued amount): ₹8,50,000
Plant and Machinery: ₹14,00,000
Less: Accumulated Depreciation: -₹3,00,000
Net Book Value: ₹11,00,000
Furniture: ₹4,00,000
Less: Accumulated Depreciation: -₹1,90,000
Net Book Value: ₹2,10,000
Total Non-Current Assets: ₹21,60,000

Current Assets
Inventories (Closing Stock): ₹1,12,000
Trade Receivables: ₹3,10,000
Cash and Cash Equivalents:
Cash-in-hand: ₹1,34,000
Cash-at-Bank: ₹3,03,000
Subtotal: ₹4,37,000
Total Current Assets: ₹8,59,000

TOTAL ASSETS: ₹30,19,000

Note on Accounting Treatments: The Land has been revalued at ₹8,50,000 (professional valuation) against cost of ₹7,00,000, creating a revaluation surplus of ₹1,50,000 recognized in equity in accordance with applicable accounting standards. Depreciation provisions are offset against respective fixed assets. The discrepancy between total assets and total liabilities indicates verification of figures should be done; however, all items have been presented as per standard Balance Sheet classification. Equity shares include 2,500 shares issued for non-cash consideration (noted in disclosure requirements).

Partnership Dissolution — X, Y and Z (Profit Ratio 3:2:1)

Note on Balance Sheet: The given liabilities total ₹7,72,000 against assets total ₹7,74,000 — a ₹2,000 discrepancy, likely a typographical error in the Creditors figure. No realization values are provided; all assets are assumed realized at book value and all liabilities discharged at book value.

Note on Y's Current Account: Y has a Credit balance of ₹12,000 (Liabilities side) and a Debit balance of ₹36,000 (Assets side). Both are transferred through Y's Capital Account.

Distribution of Reserves (₹2,16,000) in ratio 3:2:1
X = ₹1,08,000 | Y = ₹72,000 | Z = ₹36,000

Realization Account (₹)
Dr: Building 3,08,000 | Furniture & Fittings 51,600 | Investments 10,800 | Stock 1,95,400 | Debtors 1,12,800 | Total 6,78,600
Cr: Creditors A/c 1,03,200 | Bank A/c (net proceeds) 5,75,400 | Total 6,78,600
No Profit / No Loss on Realization.

Partners' Capital Accounts (₹)
Dr: Current A/c-Dr (Y) 36,000 | Bank — X 3,87,000, Y 1,18,800, Z 97,000
Cr: Capital b/d — X 2,26,200, Y 70,800, Z 61,000 | Current A/c-Cr — X 52,800, Y 12,000 | Reserves — X 1,08,000, Y 72,000, Z 36,000
Totals: X ₹3,87,000 | Y ₹1,54,800 | Z ₹97,000 (both sides balance)

Bank Account (₹)
Dr: Balance b/d 59,400 | Realization A/c 5,75,400 | Total 6,34,800
Cr: Loan A/c Z 30,000 | Capital A/c X 3,87,000 | Capital A/c Y 1,18,800 | Capital A/c Z 97,000 | Balance Sheet error 2,000 | Total 6,34,800

Final Settlement: X receives ₹3,87,000. Y receives ₹1,18,800. Z receives ₹97,000 as capital plus ₹30,000 as loan repayment = ₹1,27,000 total. The ₹2,000 unreconciled balance in the Bank Account is attributable to the ₹2,000 imbalance in the given Balance Sheet.

Note: The question as provided appears to be incomplete. The Balance Sheet as on 31st March, 2022 has been given (which serves as the Opening Statement of Affairs), along with four general operating assumptions (i) to (iv). However, for a 15-mark Single Entry System problem, the question would normally also include either: (a) a Summary of Cash/Bank transactions for the year 2022–23, OR (b) Closing balances of assets and liabilities as on 31st March, 2023, OR (c) Total receipts and payments during the year — none of which have been provided here.

What CAN be established from the given data:

The Opening Capital of Mr. Gurneet as on 1st April, 2022 = ₹ 3,08,000 (as per the Balance Sheet on 31st March, 2022).

Framework for solving such questions (Single Entry — Conversion Method / Statement of Profit):

Step 1 — Prepare Opening Statement of Affairs (already given as Balance Sheet on 31.03.2022). Capital = Total Assets − External Liabilities = ₹ 3,53,000 − ₹ 45,000 = ₹ 3,08,000. ✓ Confirmed.

Step 2 — Prepare Closing Statement of Affairs using closing balances (data missing).

Step 3 — Compute Profit / Loss using:
Closing Capital + Drawings − Additional Capital Introduced − Opening Capital = Profit or Loss

Step 4 — Apply the Gross Profit Ratio (20% on cost = 20/120 on sales = 16.67% on sales) to reconcile sales, purchases, and stock figures.

Step 5 — Apply Depreciation on Furniture @ 10% p.a. on Diminishing Balance:
Opening Furniture = ₹ 60,000 → Depreciation for 2022–23 = ₹ 6,000 → Closing WDV = ₹ 54,000.

Step 6 — Prepare Trading and Profit & Loss Account and Closing Balance Sheet.

Key relationships given:
- GP is 20% on cost, so GP % on sales = 20/120 = 16.67%. If Sales = S, then COGS = S × 100/120 and GP = S × 20/120.
- All purchases paid by cheque (affects bank balance).
- Credit sales collected by cheque only; cash sales in hand/bank.

If the complete question is shared (with closing balances or cash/bank summary), the full solution including Trading & P&L Account and Closing Balance Sheet can be prepared. The methodology above is the correct approach as per the CA Intermediate Paper 1 (Accounts) syllabus under Single Entry System / Incomplete Records.

Final Answer: Cannot be fully computed without the transaction data or closing balances for the year ended 31st March, 2023. The opening capital is confirmed at ₹ 3,08,000.

Citrine Limited - Liquidation Accounts

Issue with Given Data: The stated cash receipt of ₹7,55,800 exceeds the total asset sale proceeds of ₹7,08,300 (₹2,98,200 + ₹4,10,100). This appears to be a typographical error. The solution assumes asset sale proceeds of ₹7,08,300 are split between cash and debentures based on logical division.

REALISATION ACCOUNT

Debit Side:
- Property, Plant & Equipment: ₹5,15,000
- Inventory: ₹4,50,000
- Trade Receivables: ₹1,85,000
- Total Assets to be Realised: ₹11,50,000

Credit Side:
- Sale of PP&E: ₹2,98,200
- Sale of Inventory: ₹4,10,100
- 8% Debentures (at 5% premium): ₹3,15,000 (approximately 3,000 debentures × ₹100 × 1.05)
- Loss on Realisation: ₹1,26,700
- Total: ₹11,50,000

LIQUIDATOR'S BANK/CASH ACCOUNT

Receipts:
- Opening Bank Balance: ₹90,000
- Cash from Asset Sale: ₹3,93,300 (assumed split)
- Collection of Trade Receivables: ₹1,85,000
- Total Available: ₹5,68,300

Payments (in Order of Priority):
- Bank Loan (7%, Secured by Floating Charge): ₹3,60,000
- Trade Payables: ₹2,75,000
- Outstanding Expenses (including Bank Interest): ₹76,000
- Closing Balance/Deficiency: -₹42,700

DISTRIBUTION ANALYSIS

Creditors' Priority:
1. Secured Creditors: 7% Bank Loan (₹3,60,000) — PAID IN FULL from floating charge assets
2. Unsecured Creditors: Trade Payables (₹2,75,000) + Outstanding Expenses (₹76,000) = ₹3,51,000
- Available cash after secured creditor payment: ₹5,68,300 - ₹3,60,000 = ₹2,08,300
- Shortfall: ₹3,51,000 - ₹2,08,300 = ₹1,42,700
- Pro-rata distribution to unsecured creditors: ₹2,08,300 / ₹3,51,000 = 59.26% of their claims

Shareholders' Position:
- Preference Shareholders (₹2,50,000): NO distribution — insufficient funds after creditors' claims
- Equity Shareholders (₹6,40,000 total paid-up capital): NO distribution — only loss remains

8% Debentures Received (₹3,15,000): These constitute an asset of the liquidation estate but would require separate liquidation/sale to generate additional funds for distribution. If treated as in-kind distribution to general creditors/equity (depending on legal priority), this would provide partial relief. Standard treatment: debentures may be sold and proceeds used for further distribution on pro-rata basis.

Deficiency Account Summary:
- Total Liabilities: ₹6,72,000 (excluding P&L accumulated loss)
- Loss on Liquidation: ₹1,26,700 (from realisation)
- Total to be met from Assets: ₹7,98,700
- Available from asset sale proceeds (excluding debentures initially): ₹3,93,300
- Shortfall: ₹4,05,400

The accumulated loss (Dr. P&L of ₹3,61,000) indicates negative equity position, resulting in ultimate insolvency with shareholders receiving nothing and creditors experiencing pro-rata loss absorption on unsecured portions.

Calculation of Net Profit under Section 198 of the Companies Act 2013 for Managerial Remuneration

The net profit for the purpose of managerial remuneration is computed by starting with the Net Profit as per the Profit and Loss Account and making prescribed adjustments under Section 198 of the Companies Act 2013.

Step 1 — Adjusted Net Profit under Section 198:

Net Profit as per P&L Account: ₹14,20,000

Add back (items to be added as per Section 198):
- Director's Fees: ₹32,000
- Managerial Remuneration (Subtotal): ₹1,25,000
- Income Tax (provision charged to P&L): ₹2,40,000
- Book Depreciation (charged to P&L): ₹4,20,000
- Development Rebate Reserve: ₹15,000
- Capital expenditure included in admin expenses (new office building): ₹8,000
- Total Additions: ₹8,40,000

Less (items to be deducted as per Section 198):
- Depreciation as per Companies Act 2013 (Schedule II): ₹3,95,000
- Profit on Sale of Land (capital profit — excluded under Section 198): ₹1,20,000
- Total Deductions: ₹5,15,000

Net Profit under Section 198 = ₹14,20,000 + ₹8,40,000 – ₹5,15,000 = ₹17,45,000

Note: Government subsidy of ₹3,00,000 is already included in P&L income. Under Section 198(3), bounties and subsidies received from Government are credited (i.e., included), so no further adjustment is required. The capital expenditure of ₹8,000 wrongly debited to revenue is added back as it is not a revenue charge.

Step 2 — Maximum Limits of Managerial Remuneration (Section 197 of the Companies Act 2013):

- Overall limit (all managerial personnel combined): 11% of ₹17,45,000 = ₹1,91,950
- One Managing Director / Whole-Time Director / Manager: 5% of ₹17,45,000 = ₹87,250
- Two or more Managing Directors / Whole-Time Directors: 10% of ₹17,45,000 = ₹1,74,500
- Part-time (non-whole-time) Directors — where company has MD/WTD/Manager: 1% of ₹17,45,000 = ₹17,450
- Part-time (non-whole-time) Directors — where company has no MD/WTD/Manager: 3% of ₹17,45,000 = ₹52,350

Rights Issue — Ex-Rights Price and Value of Right

Z Ltd. is making a rights issue in the ratio of 2 new shares for every 5 existing shares held. The cum-rights market price is ₹420 and the issue (subscription) price is ₹245.

Step 1: Calculate Ex-Rights Price

The ex-rights price is calculated by taking the weighted average of the existing shares at market price and the new shares at issue price:

Ex-Rights Price = (5 × ₹420 + 2 × ₹245) / (5 + 2) = ₹2,590 / 7 = ₹370 per share

Step 2: Calculate Value of Right

The value of right per new (right) share represents the benefit accruing to the shareholder over the issue price:

Value of Right (per new share) = Ex-Rights Price − Issue Price = ₹370 − ₹245 = ₹125 per right share

Alternatively, expressed per existing share held:

Value of Right (per existing share) = (2/5) × ₹125 = ₹50 per existing share

Conclusion: The ex-rights market price is ₹370 per share and the value of right is ₹125 per new share (or ₹50 per existing share). A shareholder holding 5 shares has a right worth ₹250 (2 rights × ₹125), which keeps total wealth unchanged whether the right is exercised or sold.

Classification of a Company as Small and Medium Sized Company (SMC) under Companies (Accounting Standards) Rules, 2021

Under the Companies (Accounting Standards) Rules, 2021, an SMC is defined as a company that satisfies ALL of the following criteria simultaneously:

Criterion 1 — Not Listed: The equity or debt securities of the company are not listed and are not in the process of listing on any stock exchange, whether in India or outside India.

Criterion 2 — Nature of Business: The company is not a bank, not a financial institution, and does not carry on insurance business.

Criterion 3 — Turnover Limit: The turnover (excluding other income) of the company does not exceed ₹250 crore in the immediately preceding accounting year.

Criterion 4 — Borrowings Limit: The borrowings of the company (including public deposits) do not exceed ₹50 crore at any time during the immediately preceding accounting year.

Criterion 5 — Holding/Subsidiary Relationship: The company is not a holding company or a subsidiary company of a company that is itself not an SMC.

Important Note on Compliance: A company that ceases to be an SMC during any particular year shall not qualify as an SMC for the immediately following two consecutive accounting years even if it subsequently satisfies the criteria. Conversely, a company that becomes an SMC (i.e., satisfies all the above criteria) shall be considered an SMC with effect from the beginning of the accounting year in which it satisfies the criteria.

Significance: SMCs are permitted to follow relaxed disclosure norms and certain exemptions/relaxations from full compliance with specified Accounting Standards as provided under the Companies (Accounting Standards) Rules, 2021.

Pre-incorporation Period: 1st April, 2022 to 31st May, 2022 = 2 months
Post-incorporation Period: 1st June, 2022 to 31st March, 2023 = 10 months

(i) Time Ratio and Sales Ratio

Time Ratio (Pre : Post) = 2 : 10 = 1 : 5

Sales Calculation:
Pre-incorporation monthly sales = ₹8,00,000; Period = 2 months
Pre-incorporation total sales = 2 × ₹8,00,000 = ₹16,00,000

Post-incorporation monthly sales = ₹8,00,000 × (1 + 2/3) = ₹8,00,000 × 5/3 = ₹13,33,333
Post-incorporation period = 10 months
Post-incorporation total sales = 10 × ₹13,33,333 = ₹1,33,33,333

Sales Ratio (Pre : Post) = 16,00,000 : 1,33,33,333 = 48 : 400 = 3 : 25

(ii) Statement Ascertaining Pre and Post-incorporation Profit/Loss for the year ended 31st March, 2023

Note: Profit on sale of investments (₹4,00,000) is removed from Gross Profit (adjusted GP = ₹32,63,000 − ₹4,00,000 = ₹28,63,000) and credited entirely to post-incorporation period, since the sale occurred on 15th June, 2022 (post-incorporation). Sales Promotion (₹1,06,000) is allocated on Sales Ratio; remaining General Expenses (₹9,00,000) on Time Ratio; Carriage Outward on Sales Ratio; Rent, Rates & Taxes and Expenses on Time Ratio; Share Issue Expenses entirely to post-incorporation.

| Particulars | Basis | Pre-inc (₹) | Post-inc (₹) |
|---|---|---:|---:|
| Gross Profit (adjusted) | Sales 3:25 | 3,06,750 | 25,56,250 |
| Add: Profit on Sale of Investments | Post only | — | 4,00,000 |
| Total Income (A) | | 3,06,750 | 29,56,250 |
| Less: Expenses | | | |
| Expenses | Time 1:5 | 83,333 | 4,16,667 |
| Rent, Rates and Taxes | Time 1:5 | 1,12,000 | 5,60,000 |
| General Expenses (excl. Sales Promotion) | Time 1:5 | 1,50,000 | 7,50,000 |
| Sales Promotion | Sales 3:25 | 11,357 | 94,643 |
| Carriage Outward | Sales 3:25 | 20,614 | 1,71,786 |
| Share Issue Expenses | Post only | — | 55,000 |
| Total Expenses (B) | | 3,77,304 | 20,48,096 |
| Net Profit / (Loss) [A − B] | | (70,554) | 9,08,154 |

Conclusion: Pre-incorporation Loss = ₹70,554 (transferred to Capital Reserve or adjusted against Share Premium). Post-incorporation Profit = ₹9,08,154 (available for distribution as dividends).

Note: The question as provided is an extract from a larger problem. The hire purchase terms — specifically the cash price (or HP price), down payment, installment amounts, HP rate of interest, total number of scooters, and date of purchase — are required for a complete numerical solution. These were evidently stated in an earlier part of the original question. The methodology below is complete and applicable once those figures are substituted.

Part (i) — Cash Price of Scooters and Interest per Installment:

In hire purchase accounting, the cash price is the outright purchase price of the asset. The HP price equals the total of down payment plus all installments. The difference is the total interest (HP charges).

Step 1 — Total Interest:
Total HP Charges = Total HP Price − Cash Price

Step 2 — Allocation of Interest per Installment (Sum-of-Digits Method):
For 3 installments, SYD = 3 + 2 + 1 = 6
- Interest in Installment 1 = 3/6 × Total Interest
- Interest in Installment 2 = 2/6 × Total Interest
- Interest in Installment 3 = 1/6 × Total Interest

If the interest rate is given (say r% p.a.) and installment amount is known, the cash price is found by discounting all future payments at r% (annuity method), where: Cash Price = Down Payment + Installment × PVAF(r%, 3 years)

Part (ii) — Scooters Account and Ree Motors Account:

At 31 March 2023, Mr. Anoj has not paid the 3rd installment. Ree Motors repossesses 3 scooters, agreeing to set off ₹ 1,94,450 (the agreed value of repossessed scooters) against the amount outstanding.

WDV of Repossessed Scooters (3 scooters at 31 March 2023) = Cash Price of 3 Scooters × (1 − 0.20)^n, where n = number of years since purchase.

Profit or Loss on Repossession = Agreed Value (₹ 1,94,450) − WDV of 3 Scooters
- If Agreed Value > WDV → Profit on Repossession (Cr. P&L)
- If Agreed Value < WDV → Loss on Repossession (Dr. P&L)

Balance in Ree Motors Account after repossession adjustment = 3rd Installment Due (principal + accrued interest) − ₹ 1,94,450

This balance is paid after 3 months with interest @ 18% p.a.:
Late Payment Interest = Balance × 18% × 3/12

SCOOTERS ACCOUNT (Dr.) | (Cr.)
1 Apr 2020 To Ree Motors (Cash price, all scooters) | 31 Mar 2021 By Depreciation A/c (20% on WDV, Year 1)
| 31 Mar 2022 By Depreciation A/c (Year 2)
| 31 Mar 2023 By Depreciation A/c (Year 3)
| 31 Mar 2023 By Ree Motors A/c (agreed value of 3 repossessed scooters) ₹ 1,94,450
| 31 Mar 2023 By P&L A/c (Loss on repossession, if any)
| 31 Mar 2023 By Balance c/d (WDV of remaining scooters)

REE MOTORS ACCOUNT (Dr.) | (Cr.)
1 Apr 2020 To Bank (Down payment) | 1 Apr 2020 By Scooters A/c (cash price)
31 Mar 2021 To Bank (1st instalment — principal portion) | 31 Mar 2021 By Interest A/c (interest — Year 1)
31 Mar 2022 To Bank (2nd instalment — principal portion) | 31 Mar 2022 By Interest A/c (interest — Year 2)
31 Mar 2023 To Scooters A/c (₹ 1,94,450 — repossessed scooters) | 31 Mar 2023 By Interest A/c (interest — Year 3)
30 Jun 2023 To Bank (balance principal paid) | 30 Jun 2023 By Interest A/c (18% p.a. for 3 months)
30 Jun 2023 To Bank (late payment interest) |

The balance in Ree Motors Account is nil after the final payment on 30 June 2023.

Final Answer: The cash price and interest per installment cannot be numerically determined from the information provided in this extract alone. The accounts are prepared using the methodology above, with ₹ 1,94,450 credited in both Scooters Account (repossession) and Ree Motors Account (settlement), and late payment interest = Remaining Balance × 18/100 × 3/12.

BRANCH ACCOUNT (STOCK AND DEBTORS METHOD) for the year ended 31st March 2023

Debit Side:
To Opening Stock (at cost): ₹1,00,000
To Goods sent to branch (at invoice price): ₹6,00,000
To Salaries and staff welfare: ₹54,000
To Rent and taxes: ₹9,000
To Other office expenses: ₹2,500
To Bad debts written off: ₹9,500
To Discounts allowed to debtors: ₹5,500
To Sales returns: ₹11,000
To Closing Stock (at cost): ₹1,20,000
To Closing Debtors: ₹1,33,000
To Loss for the year: ₹61,250
Total: ₹11,05,750

Credit Side:
By Opening Debtors: ₹1,10,000
By Returns to H.O. (at invoice price): ₹60,000
By Normal loss in transit: ₹12,000
By Cash sales: ₹95,750
By Credit sales: ₹3,83,000
By Cash received from debtors: ₹3,45,000
By Profit on goods sent (normal profit @ 20%): ₹1,00,000
Total: ₹11,05,750

The account balances. The branch has incurred a loss of ₹61,250 for the year, offset by the recognition of unrealized profit of ₹1,00,000 on goods sent at invoice price (20% markup on cost of ₹5,00,000). The closing stock at ₹1,20,000 contains deferred profit of ₹24,000 (@ 20%) that will be realized in the next period when sold.

The following terms are defined under the Limited Liability Partnership Act, 2008:

(i) Foreign Limited Liability Partnership

As per Section 2(1)(d) of the LLP Act, 2008, 'Foreign Limited Liability Partnership' means a limited liability partnership formed, incorporated or registered outside India which establishes a place of business within India. Such a foreign LLP is required to comply with the provisions of Chapter X (Sections 59-62) of the LLP Act, 2008 relating to establishment of place of business in India.

(ii) Business

As per Section 2(1)(e) of the LLP Act, 2008, 'Business' includes every trade, profession, service and occupation. This is an inclusive definition, meaning the term is not restricted to commercial trade alone but encompasses all forms of professional services, vocations, and occupational activities carried on by an LLP.

(iii) Designated Partner

As per Section 2(1)(j) of the LLP Act, 2008, 'Designated Partner' means any partner designated as such pursuant to Section 7 of the Act. Section 7 mandates that every LLP shall have at least two designated partners who are individuals, and at least one of them shall be a resident in India. Designated partners are responsible for doing all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the Act, including filing of any document, return, statement and the like report pursuant to the provisions of the LLP Act. They are liable to all penalties imposed on the LLP for any contravention of the provisions.

(iv) Resident in India for the purpose of Section 7 of LLP Act, 2008

For the purpose of Section 7 of the LLP Act, 2008, a person is said to be a 'Resident in India' if he has stayed in India for a period of not less than 182 days during the immediately preceding one year. This requirement ensures that at least one designated partner has a sufficient physical presence and connection to India, facilitating effective compliance and regulatory oversight of the LLP.

A Liquidator's Statement of Account is a statement prepared during company liquidation showing the realization of assets, settlement of liabilities, and distribution of surplus to shareholders according to their legal priority.

NOTE: The question as presented lacks the opening Balance Sheet (Fact i), which should contain details of:
- All assets and their book values
- All liabilities and their amounts
- Preference and Equity capital structure
- Details of calls on partly paid shares
- Amount of bank loan and debentures

Without these opening balances, a complete numerical statement cannot be prepared. The answer below demonstrates the required FORMAT and TREATMENT of transactions:

LIQUIDATOR'S STATEMENT OF ACCOUNT

PART A: RECEIPTS AND DISBURSEMENTS

Receipts:
Trade Receivables realized: ₹1,41,700
Interest on Debentures (6 months): [Amount from opening balances]
Calls on Partly Paid Shares: [Amount less irrecoverable amount on 500 shares]

Disbursements:
Bank Loan (principal): [From opening balances]
Bank Interest (1st Oct 2022 to 30th April 2023 = 6 months): [Calculate on loan amount]
Trade Payables (after 4% discount): [Opening amount less 4%]
Outstanding Expenses: ₹24,000
Liquidation Expenses: ₹32,800
Liquidator's Remuneration: 25% on assets realized (excluding cash) = 0.25 × ₹1,41,700 = ₹35,425

Net Amount Available for Distribution: Total Receipts − Total Disbursements

PART B: DISTRIBUTION OF SURPLUS

Priority of Distribution (as per Companies Act 2013, Section 434):

1. Preference Dividends in Arrears (2 years outstanding): Preference dividends must be paid to preference shareholders from available surplus before the principal amount of preference shares.

2. Preference Shareholders (principal amount): Preference shareholders have priority over equity shareholders. They are paid in cash as per Fact (viii).

3. Debenture Holders: Debentures on Citrine Limited along with debenture interest (6 months received on 30th Sept 2023) are distributed rateably among equity shareholders as per Fact (ix), suggesting debentures form part of equity distribution.

4. Equity Shareholders: Receive balance of cash and debentures rateably after all prior claims are met.

KEY ACCOUNTING TREATMENTS:

- Bank Interest (Fact iii): Interest from 1st October 2022 to 30th April 2023 (6 months) is a disbursement from the liquidation fund, not a debt claim.

- Trade Payables Discount (Fact iv): The 4% discount reduces the amount payable. The discount received is credited to the Realisation Account.

- Liquidator's Remuneration (Fact vi): Calculated at 25% on assets realized (₹1,41,700) excluding cash = ₹35,425. This is treated as an expense of liquidation.

- Calls on Partly Paid Shares (Fact x): The amount irrecoverable on 500 shares is a loss borne by the liquidation fund; it reduces the total amount available for distribution.

- Distribution of Debentures (Fact ix): Since debentures are distributed rateably to equity shareholders (not redeemed from cash), equity shareholders receive both cash balance and debenture securities.

ESSENTIAL MISSING INFORMATION for complete solution:
(i) Opening Balance Sheet showing asset values, liability amounts, preference capital, equity capital, and details of partly paid shares.

Part (i): Relevant Schedules in Financial Statements of Admi Bank Limited

Working adjustments before schedule preparation:

(a) Cash Credits include a doubtful account with unrealised interest of ₹2 lakhs. As per RBI prudential norms, interest on NPA accounts must not be recognised as income. Hence, Cash Credits are reduced by ₹2 lakhs (unrealised interest): ₹1,819 – ₹2 = ₹1,817 Lakhs.

(b) Current Accounts include overdrawn accounts of ₹156 lakhs, which represent advances (assets), not liabilities. Net Current Account Deposit = ₹1,234 – ₹156 = ₹1,078 Lakhs. The ₹156 lakhs overdrafts are classified under Schedule 9 – Advances as 'Overdrafts'.

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Schedule 3 – Deposits (Liabilities Side)

A. Demand Deposits
(i) From Banks: Nil
(ii) From Others (Current Accounts – net of overdrafts): ₹1,078 Lakhs

B. Savings Bank Deposits: ₹1,852 Lakhs

C. Term Deposits
(i) From Banks: Nil
(ii) From Others (Fixed Deposits): ₹581 Lakhs

Total Deposits: ₹3,511 Lakhs

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Schedule 9 – Advances (Assets Side)

Part A – Classification by Nature

(i) Bills Purchased and Discounted: ₹835 Lakhs
(ii) Cash Credits, Overdrafts and Loans Repayable on Demand:
– Cash Credits (net of unrealised interest ₹2L): ₹1,817 Lakhs
– Overdrafts (Overdrawn Current Accounts): ₹156 Lakhs
Sub-Total: ₹1,973 Lakhs
(iii) Term Loans: ₹1,532 Lakhs

Total (A): ₹4,340 Lakhs

Part B – Classification by Security

(i) Secured by Tangible Assets:
– Cash Credits (75% of ₹1,817): ₹1,362.75 Lakhs
– Term Loans (50% of ₹1,532): ₹766.00 Lakhs
– Bills Discounted (secured by bills): ₹835.00 Lakhs
Sub-Total: ₹2,963.75 Lakhs

(ii) Covered by Bank/Government Guarantees:
– Term Loans (50% of ₹1,532): ₹766.00 Lakhs

(iii) Unsecured:
– Cash Credits (25% of ₹1,817): ₹454.25 Lakhs
– Overdrafts (no security stated): ₹156.00 Lakhs
Sub-Total: ₹610.25 Lakhs

Total (B): ₹4,340 Lakhs ✓ (agrees with Part A)

*Note: The doubtful principal of ₹13 lakhs (₹15L – ₹2L unrealised interest) is included in Cash Credits above. A provision for doubtful assets as per RBI Income Recognition and Asset Classification (IRAC) norms should be created against this amount; provision details are not required by this question.*

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Part (ii): Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

As per the Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949, CRR and SLR are computed on Net Demand and Time Liabilities (NDTL). For this question, Total Deposits represent the Demand and Time Liabilities (DTL).

Total DTL (from Schedule 3): ₹3,511 Lakhs

Cash Reserve Ratio (CRR) @ 4%:
CRR = 4% × ₹3,511 = ₹140.44 Lakhs
This amount must be maintained as cash balance with the RBI.

Statutory Liquidity Ratio (SLR) @ 25%:
SLR = 25% × ₹3,511 = ₹877.75 Lakhs
This amount must be maintained in the form of gold, approved government securities, or cash.

Part (a) — Trading and Profit & Loss Account and Balance Sheet

The financial data (Trial Balance / ledger balances) required to prepare the Trading and Profit & Loss Account and the Balance Sheet has not been provided in the question as presented. Part (a) cannot be solved without the underlying figures. All workings will be shown once the data is available. *(This answer focuses on Part (b) which carries 5 marks and contains complete data.)*

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Part (b) — Disclosure Requirements under AS 1 (Disclosure of Accounting Policies)

AS 1 issued by the Institute of Chartered Accountants of India governs the disclosure of significant accounting policies. It recognises three Fundamental Accounting Assumptions: Going Concern, Consistency, and Accrual. If these are followed, no disclosure is required; disclosure is mandatory only when they are not followed. All other significant accounting policies must be disclosed.

(i) Charging a probable loss with 25% probability of losing a suit:

This treatment is incorrect and the disclosure does not cure the error. A 25% probability does not constitute a 'probable' loss in accounting. Under AS 4 (Contingencies and Events Occurring After the Balance Sheet Date), a loss should be provided for in the books only when it is probable (i.e., more likely than not) that a liability has been incurred. A 25% chance of loss is a possible contingency, not a probable one. The correct treatment is to disclose it as a contingent liability by way of a note to the financial statements, not to charge it to the Profit & Loss Account. The accountant's disclosure under AS 1 of this policy does not make the underlying treatment acceptable. The accounting policy must be corrected.

(ii) Capitalising revenue expenditure and maintenance costs:

This treatment is fundamentally incorrect and cannot be legitimised merely by disclosure. Revenue expenditure (day-to-day maintenance, repairs) must be charged to the Profit & Loss Account in the period it is incurred. Capitalising such expenses violates AS 10 (Property, Plant and Equipment), which permits capitalisation only when the expenditure increases the future economic benefits of the asset beyond the previously assessed standard. AS 1 requires disclosure of significant accounting policies, but it does not permit the adoption of policies that are contrary to applicable Accounting Standards. Disclosure of a wrong policy does not make it acceptable; the company must reverse the capitalisation and charge these costs to revenue.

(iii) Following accrual basis of accounting since incorporation:

Acrual is one of the three Fundamental Accounting Assumptions recognised by AS 1. As per Para 23 of AS 1, when the fundamental accounting assumptions (Going Concern, Consistency, Accrual) are followed in the preparation of financial statements, specific disclosure is not required. Disclosure is required only when a fundamental assumption has not been followed. Since A Ltd. is following the accrual basis, the chief accountant's disclosure is not necessary. It is not wrong to disclose it, but AS 1 does not mandate it in this case.

(iv) Change from 2% provision to actual-expense basis for after-sales/warranty expenses:

This is a change in accounting policy, i.e., switching from the accrual-based provision method to a cash/actual basis for warranty expenses. Under AS 1 (read with AS 5 — Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies), a change in accounting policy should be made only if it is required by statute or by an Accounting Standard, or if the change results in a more appropriate presentation of the financial statements. Merely because actual expenses are lower does not automatically justify the change; however, if the change leads to a more accurate reflection of the financial position, it may be permissible.

Mandatory disclosures required:
- The fact that an accounting policy has been changed.
- The reason for the change.
- The financial effect of the change: at 2% of ₹50 crores, the provision that would have been created = ₹1,00,00,000 (₹1 crore). By switching to the actual-expense basis, the company is not creating a provision of ₹1 crore, which inflates profits by ₹1 crore in the current year. This amount must be disclosed separately so that users of financial statements can assess the impact.

Final Answer: Cases (i) and (ii) represent incorrect accounting treatments; disclosure alone does not validate them and corrections are required. In case (iii), disclosure is unnecessary as accrual is a followed fundamental assumption. In case (iv), the change in accounting policy is permissible provided the financial effect of ₹1 crore is disclosed with reasons, as required by AS 1 and AS 5.

Applicable Law: Section 68 of the Companies Act, 2013 governs buy-back of shares by a company. Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 supplements these provisions.

Buy-Back Price Calculation:
The company proposes to buy back shares at a premium of 150% on the face value of ₹110.
Buy-back price per share = ₹110 + (150% × ₹110) = ₹110 + ₹165 = ₹275 per share.
Total buy-back consideration = 80,000 × ₹275 = ₹2,20,00,000 (₹2.20 crores).

Conditions under Section 68 that must be satisfied:

(1) Authorization by Articles: The buy-back must be authorised by the Articles of Association of the company.

(2) Approval: Buy-back exceeding 10% of total paid-up equity capital and free reserves requires approval by a special resolution passed in general meeting. If it is within 10%, a Board resolution suffices.

(3) 25% Limit on Paid-up Capital and Free Reserves (Most Critical Check): The buy-back must not exceed 25% of the aggregate of paid-up equity capital and free reserves of the company as per the latest audited financial statements. The total buy-back amount of ₹2,20,00,000 must not exceed this 25% limit.

(4) 25% Limit on Total Paid-up Equity Capital: The number of shares proposed to be bought back in any financial year must not exceed 25% of the total paid-up equity shares of the company. The 80,000 shares proposed must not exceed 25% of the total outstanding equity shares.

(5) Post Buy-Back Debt-Equity Ratio: After completion of buy-back, the ratio of secured and unsecured debts owed by the company must not exceed twice the paid-up capital and free reserves (i.e., Debt : Equity ≤ 2:1). The company must verify this post-buyback position.

(6) Fully Paid-up Shares: Only fully paid-up shares can be bought back. Partly paid shares are not eligible.

(7) Source of Funds: Buy-back must be made only from — (a) free reserves, (b) securities premium account, or (c) proceeds of any shares or specified securities. However, buy-back is not permitted from the proceeds of an earlier issue of the same kind of shares.

(8) Declaration of Solvency: The Board of Directors must make a declaration of solvency (in Form SH-9), certifying that the company will not be rendered insolvent within one year after the buy-back, filed with the Registrar of Companies.

(9) Time Gap: No further issue of the same kind of shares/securities shall be made within 6 months of the buy-back (except by way of bonus issue, conversion of warrants, ESOPs, etc.).

(10) Completion Period: The buy-back must be completed within 1 year from the date of passing the special resolution or Board resolution.

Conclusion: Whether the company can or cannot proceed with the buy-back depends on verification of the above conditions — particularly Conditions (3), (4), and (5). If the total consideration of ₹2,20,00,000 is within 25% of paid-up equity capital and free reserves, the 80,000 shares are within 25% of total paid-up equity shares, and the post-buyback debt-equity ratio does not exceed 2:1, the company is eligible to proceed with the buy-back. Any breach of even one of these financial limits will render the buy-back non-compliant under the Companies Act, 2013.

Applicable Standard: The question is governed by the Guidance Note on Accounting for Employee Share-based Payments issued by the ICAI (based on AS 15 framework).

Key Parameters:
- Grant date: 1.4.2020 | Exercise price: ₹50 | Face value: ₹10
- Fair value per option: ₹30 | Options granted: 3,000
- Vesting period: 2.5 years (ends 30.9.2022) | All options exercised: 30.9.2023

Total Compensation Cost = 3,000 × ₹30 = ₹90,000, amortized over 2.5 years (30 months).

Journal Entries:

1. Year ended 31st March 2021 (12 months of vesting recognized):
Employee Compensation Expense A/c Dr. ₹36,000
To Employee Stock Options Outstanding A/c ₹36,000
*(Being ESOP expense recognized: 12/30 × ₹90,000)*

2. Year ended 31st March 2022 (next 12 months of vesting recognized):
Employee Compensation Expense A/c Dr. ₹36,000
To Employee Stock Options Outstanding A/c ₹36,000
*(Being ESOP expense recognized: 12/30 × ₹90,000)*

3. Year ended 31st March 2023 (remaining 6 months of vesting: 1.4.2022 to 30.9.2022):
Employee Compensation Expense A/c Dr. ₹18,000
To Employee Stock Options Outstanding A/c ₹18,000
*(Being ESOP expense recognized: 6/30 × ₹90,000; vesting completed 30.9.2022)*

4. On 30th September 2023 (Exercise of all 3,000 options):
Bank A/c Dr. ₹1,50,000
Employee Stock Options Outstanding A/c Dr. ₹90,000
To Share Capital A/c ₹30,000
To Securities Premium A/c ₹2,10,000
*(Being 3,000 equity shares of ₹10 each issued on exercise of stock options at ₹50 each; ESOP Outstanding transferred to Securities Premium)*

Note: The Employee Compensation Expense A/c is closed to the Statement of Profit & Loss each year in the normal course of accounting. The Employee Stock Options Outstanding A/c (a component of Other Equity) accumulates until exercise, at which point it is transferred to Securities Premium along with the cash received.

AS 24 – Discontinuing Operations issued by the ICAI governs the recognition, measurement, and disclosure of operations that an enterprise is discontinuing. The standard applies when an enterprise undertakes a discontinuance that is material in its entirety. The following are five key disclosure and presentation requirements:

1. Initial Disclosure Event: When an enterprise commits to a formal plan of discontinuance or enters into a binding sale agreement for the component, it must disclose this fact in the financial statements of that period. The initial disclosure event triggers all subsequent disclosure obligations. Details must include a description of the discontinuing operation and the expected date of completion.

2. Description and Identification: The enterprise must disclose a description of the discontinuing operation, the business or geographical segment (as per AS 17) to which it belongs, the date and nature of the initial disclosure event, and the expected timing of completion of the discontinuance. This ensures users can identify the affected segment and understand the scope of discontinuance.

3. Disclosure of Financial Impact – Revenue, Expenses and Pre-tax Profit/Loss: AS 24 requires separate disclosure of the revenue, expenses, pre-tax profit or loss, and income tax expense attributable to the discontinuing operation either on the face of the Statement of Profit and Loss or in the notes thereto. This allows users to distinguish the continuing business results from those of the operation being wound down.

4. Carrying Amount of Assets and Liabilities: The enterprise must disclose the carrying amounts of total assets and total liabilities to be disposed of as part of the discontinuance. Where a binding sale agreement exists, the net selling price or range of prices and the expected timing of the cash receipt must also be disclosed. This enables assessment of the financial exposure and net realisation.

5. Cash Flow Disclosure: AS 24 requires disclosure of the net cash flows attributable to the operating, investing, and financing activities of the discontinuing operation. This may be presented either on the face of the Cash Flow Statement (as per AS 3) with separate columns, or in the notes. It helps users evaluate the liquidity impact of the discontinuance.

Additional Point (if required): Any gain or loss recognised on the actual disposal of assets or settlement of liabilities attributable to the discontinuing operation must be disclosed separately. Once an binding sale agreement is signed for all or substantially all assets, any resulting gain or loss is recognised when the sale is completed.

Presentation Note: Disclosures are required for each period until the discontinuance is complete, and comparative information for prior periods presented must be restated to segregate continuing and discontinuing operations, ensuring consistency and comparability across reporting periods.

Step 1 — Carrying Value after 3 years of amortization

The software was capitalized at ₹57,60,000 and amortized at ₹6,40,000 p.a. for the first three years. Accordingly:

Carrying Value at the end of Year 3 = ₹57,60,000 − (3 × ₹6,40,000) = ₹57,60,000 − ₹19,20,000 = ₹38,40,000

Step 2 — Impairment Check (as per AS 28 — Impairment of Assets)

At the end of Year 3, the software's remaining useful life is revised to 5 more years. Before re-amortizing, an impairment review is required.

Total future net cash flows (recoverable amount estimate, undiscounted) = ₹23,04,000 + ₹29,44,000 + ₹28,16,000 + ₹25,60,000 + ₹21,76,000 = ₹1,28,00,000

Since recoverable amount (₹1,28,00,000) > Carrying Value (₹38,40,000), no impairment loss arises.

Step 3 — Amortization for Years 4 to 8 (as per AS 26 — Intangible Assets)

Under AS 26, the amortization method should reflect the pattern of economic benefits expected to be consumed. Since the net cash flows vary year to year, amortization is charged in proportion to the net cash flows in each year.

Amortization for each year = (Net cash flow of that year ÷ Total net cash flows) × Carrying Value

- Year 4: (₹23,04,000 ÷ ₹1,28,00,000) × ₹38,40,000 = 18% × ₹38,40,000 = ₹6,91,200
- Year 5: (₹29,44,000 ÷ ₹1,28,00,000) × ₹38,40,000 = 23% × ₹38,40,000 = ₹8,83,200
- Year 6: (₹28,16,000 ÷ ₹1,28,00,000) × ₹38,40,000 = 22% × ₹38,40,000 = ₹8,44,800
- Year 7: (₹25,60,000 ÷ ₹1,28,00,000) × ₹38,40,000 = 20% × ₹38,40,000 = ₹7,68,000
- Year 8: (₹21,76,000 ÷ ₹1,28,00,000) × ₹38,40,000 = 17% × ₹38,40,000 = ₹6,52,800

Total amortization Years 4–8 = ₹6,91,200 + ₹8,83,200 + ₹8,44,800 + ₹7,68,000 + ₹6,52,800 = ₹38,40,000 ✓ (fully amortized)

Summary of Amortization:

Year 1 — ₹6,40,000 | Year 2 — ₹6,40,000 | Year 3 — ₹6,40,000 | Year 4 — ₹6,91,200 | Year 5 — ₹8,83,200 | Year 6 — ₹8,44,800 | Year 7 — ₹7,68,000 | Year 8 — ₹6,52,800