Question 1

The following balances appeared in the books of Oliva Ltd. as on 31-03-2022. [Trial balance with items including Inventory, Purchases, Manufacturing Expenses, Salaries, General Charges, Fixed Assets, Investments, Trade Receivables, Cash, Trade Payables totaling ₹24,07,200 each side]. From the above balances and the following information, prepare the company's statement of Profit and Loss for the year ended 31st March, 2022 and company's Balance Sheet as on that date: 1. Inventory on 31st March, 2022- Raw material ₹25,800 and finished goods ₹60,000. 2. Outstanding Expenses: Manufacturing Expenses ₹67,500 & Salaries & Wages ₹4,500. 3. Interest accrued on Securities ₹300. 4. General Charges prepaid ₹2,490. 5. Provide depreciation: Building @ 2% p.a., Machinery @ 10% p.a., Furniture @ 10% p.a.…

Accepted Answer

**Important Note:** The actual trial balance figures were not included in the question as presented (only item descriptions were given). The solution below uses **assumed figures that sum to ₹24,07,200 on each side**, reconstructed to match the described items. The methodology, adjustments, Schedule III format, and all workings are fully exam-correct — apply the same steps to actual trial balance data.

**(a) Statement of Profit and Loss for the year ended 31st March, 2022**
(As per **Schedule III of the Companies Act 2013**)

**I. Revenue from Operations (Sales):** ₹15,00,000
**II. Other Income** – Interest accrued on Securities (Adjustment 3): ₹300
**III. Total Revenue (I + II): ₹15,00,300**

**IV. Expenses:**

**Cost of Materials Consumed:** Opening Raw Material ₹30,000 + Purchases ₹8,00,000 − Closing Raw Material ₹25,800 = ₹8,04,200

**Changes in Inventories of Finished Goods:** Opening FG ₹75,000 − Closing FG ₹60,000 = ₹15,000 (decrease in stock → cost to P&L)

**Manufacturing Expenses:** ₹2,40,000 + Outstanding ₹67,500 (Adj. 2) = ₹3,07,500

**Employee Benefits Expense (Salaries & Wages):** ₹60,000 + Outstanding ₹4,500 (Adj. 2) = ₹64,500

**Other Expenses (General Charges):** ₹36,900 − Prepaid ₹2,490 (Adj. 4) = ₹34,410

**Depreciation and Amortisation Expense (Adj. 5):**
Building @ 2% on ₹5,00,000 = ₹10,000
Machinery @ 10% on ₹3,00,000 = ₹30,000
Furniture @ 10% on ₹60,000 = ₹6,000
Motor Vehicles @ 20% on ₹1,20,000 = ₹24,000
Total Depreciation = ₹70,000

**Total Expenses:…

Question 2

The following information of X Ltd. (a non-investment company) as on 31st March, 2022 was obtained: Authorized capital: 15,000 14% preference shares of ₹100 = ₹15,00,000; 1,50,000 Equity shares of ₹100 each = ₹1,50,00,000. Issued and subscribed capital: 14,000 14% preference shares of ₹100 each fully paid = ₹14,00,000; 1,30,000 Equity shares of ₹100 each ₹90 paid-up = ₹1,17,00,000. Capital reserves (₹1,75,000 is revaluation reserve) ₹2,00,000. Securities premium ₹50,000. 15% Debentures ₹70,00,000. Investment in shares, debentures, etc. ₹60,00,000. Profit and Loss account (debit balance) ₹13,50,000. You are required to compute Effective Capital as per the provisions of Schedule V to the Companies Act, 2013.

Accepted Answer

**Computation of Effective Capital of X Ltd. as per Schedule V to the Companies Act, 2013**

As per **Schedule V, Part II, Section II** of the Companies Act, 2013, **Effective Capital** is computed as the aggregate of: (i) paid-up share capital (excluding shares issued for non-cash consideration), (ii) securities premium account, (iii) reserves and surplus **excluding revaluation reserve**, and (iv) long-term loans and deposits repayable after one year — **reduced by** investments outside the business and accumulated losses (including debit balance of Profit & Loss Account) and preliminary expenses not written off.

**Items Included:**

- Paid-up Equity Share Capital (1,30,000 × ₹90): **₹1,17,00,000**
- Paid-up 14% Preference Share Capital (14,000 × ₹100): **₹14,00,000**
- Securities Premium: **₹50,000**
- Capital Reserve (excluding revaluation reserve of ₹1,75,000 out of ₹2,00,000): **₹25,000**
- 15% Debentures (long-term loans): **₹70,00,000**

**Total (A): ₹2,01,75,000**

**Items Deducted:**

- Investments in shares, debentures, etc.: **₹60,00,000**
- Profit and Loss Account (debit balance — accumulated loss): **₹13,50,000**

**Total (B): ₹73,50,000**

**Effective Capital = (A) − (B) = ₹2,01,75,000 − ₹73,50,000 = ₹1,28,25,000**

**Notes:** (1) Authorized capital is irrelevant for this computation. (2) Revaluation reserve of ₹1,75,000 is specifically excluded per Schedule V. (3) The debit balance in P&L represents an accumulated loss and is deducted in full.

Question 3

The Balance Sheet of Max Ltd. for the year ending 31st March, 2022 and 31st March, 2021 were summarised as: [Balance Sheet with Equity and Liabilities, Assets, Notes to Accounts]. The Profit and Loss statement for the year ended 31st March, 2022 disclosed: Profit before tax ₹8,000; Income Tax (₹7,000); Profit after tax ₹1,000. Further Information: 1. Depreciation on Building ₹1,000. 2. Depreciation on Furniture & Fixtures ₹2,000. 3. Depreciation on Cars ₹5,000. One car was disposed during the year for ₹3,400 whose written down value was ₹2,000. 4. Purchases investments for ₹6,000. 5. Sold investments for ₹10,000, cost ₹2,000. Prepare Cash Flow Statements for the year ended 31st March, 2022 as per AS-3 (revised) using indirect method.

Accepted Answer

**Cash Flow Statement of Max Ltd. for the year ended 31st March, 2022** (as per **AS-3 (Revised) — Cash Flow Statements**, Indirect Method)

**Note:** The balance sheet data (opening/closing balances of debtors, creditors, inventory, loans, share capital, etc.) and Notes to Accounts have not been provided in the question as presented. The solution below demonstrates the complete framework and computes all figures derivable from the given information. Working capital changes and financing activities would be populated once balance sheet figures are available.

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**A. Cash Flow from Operating Activities**

Net Profit before tax: ₹8,000

**Adjustments for non-cash and non-operating items:**
Add: Depreciation on Building — ₹1,000
Add: Depreciation on Furniture & Fixtures — ₹2,000
Add: Depreciation on Cars — ₹5,000
Less: Profit on disposal of car [₹3,400 − ₹2,000] — (₹1,400)
Less: Profit on sale of investments [₹10,000 − ₹2,000] — (₹8,000)

**Operating Profit before Working Capital Changes: ₹6,600**

Add/Less: Changes in working capital (to be computed from balance sheet — not provided):
± Decrease/Increase in Trade Receivables
± Decrease/Increase in Inventories
± Increase/Decrease in Trade Payables
± Other current asset/liability movements

**Cash Generated from Operations: ₹6,600 ± Working Capital Changes**

Less: Income Tax Paid — (₹7,000) [assumed fully paid; adjust if opening/closing tax liability differs]

**Net Cash from / (used in) Operating Activities (A) = (₹400) ± Wo…

Question 4

The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from 1st April 2021. The company got incorporated on 1st August 2021. The annual accounts were made up to 31st March, 2022 which revealed that the sales for the whole year totalled ₹24 lakhs out of which sales till 31st July, 2021 were for ₹6 lakhs. Gross profit ratio was 20%. The expenses from 1st April 2021, till 31st March, 2022 were: Salaries ₹75,000; Rent, Rates and Insurance ₹30,000; Sundry Office Expenses ₹72,000; Traveller's Commission ₹20,000; Discount allowed ₹16,000; Bad Debts ₹8,000; Directors' Fee ₹30,000; Tax Audit Fee ₹16,000; Depreciation on PPE ₹15,000; Debenture Interest ₹14,000. Prepare a statement showing the calculation of profits for the pre-incorporation and post-incorporati…

Accepted Answer

**Statement of Profit for Pre-Incorporation and Post-Incorporation Periods**

**Key Data:**
- Pre-incorporation period: 1st April 2021 to 31st July 2021 = **4 months**
- Post-incorporation period: 1st August 2021 to 31st March 2022 = **8 months**
- Sales (Pre): ₹6,00,000 | Sales (Post): ₹18,00,000 | Total: ₹24,00,000
- **Sales Ratio (Pre : Post) = 6 : 18 = 1 : 3**
- **Time Ratio (Pre : Post) = 4 : 8 = 1 : 2**

**Gross Profit Allocation** (GP @ 20% on Sales):
Total GP = ₹4,80,000 | Pre = ₹1,20,000 | Post = ₹3,60,000

**Basis of Expense Allocation:**
(i) **Sales ratio (1:3):** Traveller's Commission, Discount Allowed, Bad Debts — these vary with sales.
(ii) **Time ratio (1:2):** Salaries, Rent/Rates/Insurance, Sundry Office Expenses, Depreciation on PPE — these accrue over time.
(iii) **Post-incorporation only:** Directors' Fee, Tax Audit Fee, Debenture Interest — these arise only after incorporation.

| Particulars | Basis | Total (₹) | Pre-Incorp. (₹) | Post-Incorp. (₹) |
|---|---|---|---|---|
| **Gross Profit** | Sales | 4,80,000 | 1,20,000 | 3,60,000 |
| **Less: Expenses** | | | | |
| Salaries | Time 1:2 | 75,000 | 25,000 | 50,000 |
| Rent, Rates & Insurance | Time 1:2 | 30,000 | 10,000 | 20,000 |
| Sundry Office Expenses | Time 1:2 | 72,000 | 24,000 | 48,000 |
| Depreciation on PPE | Time 1:2 | 15,000 | 5,000 | 10,000 |
| Traveller's Commission | Sales 1:3 | 20,000 | 5,000 | 15,000 |
| Discount Allowed | Sales 1:3 | 16,000 | 4,000 | 12,000 |
| Bad Debts | Sales 1:3 | 8,000…

Question 5

Pass Journal Entries in the following circumstances:

Accepted Answer

**Part (i): Rise Limited — Bonus to make existing shares fully paid up**

Rise Limited has 75,000 equity shares of ₹10 each, called up at ₹7.50 per share. The uncalled amount per share is ₹2.50, and total uncalled = 75,000 × ₹2.50 = **₹1,87,500**. The company declares a bonus of ₹1,87,500 from General Reserve to apply against this uncalled amount, thereby making all shares fully paid.

**Journal Entries in the books of Rise Limited:**

| Date | Particulars | Dr. (₹) | Cr. (₹) |
|------|-------------|---------|--------|
| | General Reserve A/c &emsp;&emsp;&emsp;&emsp; Dr. | 1,87,500 | |
| | &emsp;&emsp; To Bonus to Shareholders A/c | | 1,87,500 |
| | *(Being bonus of ₹2.50 per share declared out of General Reserve to make 75,000 shares fully paid up)* | | |
| | | | |
| | Bonus to Shareholders A/c &emsp;&emsp;&emsp;&emsp; Dr. | 1,87,500 | |
| | &emsp;&emsp; To Share Capital A/c | | 1,87,500 |
| | *(Being bonus applied to convert uncalled capital of ₹2.50 per share into paid-up capital, shares now fully paid at ₹10 each)* | | |

After these entries, Share Capital (paid-up) increases from ₹5,62,500 to **₹7,50,000**.

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**Part (ii): A Limited — Bonus shares issued (capitalization of reserves)**

A Limited has 7,50,000 fully paid equity shares of ₹10 each. It capitalises ₹7,50,000 from General Reserve by issuing 75,000 bonus shares of ₹10 each (1 share for every 10 shares held).

**Journal Entries in the books of A Limited:**

| Date | Particulars | Dr. (₹) | Cr. (₹) |
|------|-…

Question 6

Meeta Ltd. has decided to increase its existing share capital by making rights issue to its existing shareholders. The company is offering one new share for every two shares held by the shareholder. The market value of the share is ₹360 and the company is offering one share of ₹180 each. Calculate the value of a right. What should be the ex-right value of a share?

Accepted Answer

**Rights Issue — Value of a Right and Ex-Right Value**

**Given Information:**
The company offers **1 new share for every 2 shares held** (ratio 1:2). The current **market price (cum-right price) = ₹360** and the **rights issue price = ₹180**.

**Step 1: Theoretical Ex-Right Price (TERP)**

The formula for TERP is:

TERP = [(N × Cum-right Market Price) + Issue Price] / (N + 1)

Where N = number of existing shares required to get 1 right share = 2

TERP = [(2 × ₹360) + ₹180] / (2 + 1) = [₹720 + ₹180] / 3 = ₹900 / 3 = **₹300**

The **ex-right value of a share is ₹300**.

**Step 2: Value of a Right**

Value of a Right = Theoretical Ex-Right Price − Issue Price

Value of a Right = ₹300 − ₹180 = **₹120**

This represents the intrinsic worth of the privilege to subscribe to one new share at the below-market issue price.

**Summary:**
- Theoretical Ex-Right Price = **₹300 per share**
- Value of a Right = **₹120 per right (per new share)**

Question 7

Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of ₹100 each, fully paid up. The company had to redeem these shares at a premium of 10%. It was decided by the company to issue the following: (i) 40,000 Equity Shares of ₹10 each at par. (ii) 2,000 12% Debentures of ₹100 each. The issue was fully subscribed and all accounts were received in full. The payment was duly made. The company had sufficient profits. Show journal entries in the books of the company.

Accepted Answer

**Redemption of Preference Shares — Journal Entries in the Books of Dheeraj Limited**

**Key Calculations before Journal Entries:**

**Nominal value of Preference Shares redeemed** = 5,000 × ₹100 = ₹5,00,000

**Premium on Redemption** = 5,000 × ₹10 = ₹50,000 (charged to General Reserve, since company has sufficient profits and no Securities Premium is mentioned)

**Capital Redemption Reserve (CRR) required** under Section 55 of the Companies Act, 2013: When preference shares are redeemed out of profits, an amount equal to the **nominal value of shares redeemed** must be transferred to CRR, reduced by the proceeds of any **fresh issue of shares** (Debentures do NOT qualify as fresh issue of shares).

CRR = ₹5,00,000 − ₹4,00,000 (Equity Shares proceeds) = **₹1,00,000** (transferred from General Reserve)

**Journal Entries:**

| # | Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| 1 | Bank A/c                                     Dr. | 4,00,000 | |
| |     To Equity Share Capital A/c | | 4,00,000 |
| | *(Being 40,000 equity shares of ₹10 each issued at par, fully subscribed and paid up)* | | |
| 2 | Bank A/c                             &nbsp…

Question 8

XYZ Ltd. has issued 1,000, 12% convertible debentures of ₹100 each redeemable after a period of five years. According to the terms & conditions of the issue, these debentures were redeemable at a premium of 5%. The debenture holders also had the option at the time of redemption to convert 20% of their holdings into equity shares of ₹10 each at a price of ₹20 per share and balance in cash. Debenture holders amounting ₹20,000 opted to get their debentures converted into equity shares as per terms of the issue. You are required to calculate the number of shares issued and cash paid for redemption of ₹20,000 debenture holders.

Accepted Answer

**Calculation of Number of Shares Issued and Cash Paid for Redemption**

The debenture holders amounting to ₹20,000 (face value) opted to convert their debentures as per the terms of the issue.

**Step 1: Redemption Value of Debentures**
The debentures are redeemable at a **premium of 5%**, so the total amount due to these debenture holders:
Redemption Value = ₹20,000 × 105% = **₹21,000**

**Step 2: Amount to be Converted into Equity Shares**
As per terms, **20% of holdings** are converted into equity shares:
Amount converted = 20% × ₹21,000 = **₹4,200**

**Step 3: Number of Equity Shares Issued**
Equity shares are issued at **₹20 per share** (issue price):
Number of shares = ₹4,200 ÷ ₹20 = **210 shares**

**Step 4: Cash Paid**
Balance 80% of redemption value is paid in cash:
Cash paid = 80% × ₹21,000 = **₹16,800**

**Summary:**
- Number of equity shares issued = **210 shares** (of ₹10 each at a premium of ₹10)
- Cash paid = **₹16,800**

Question 9

Alpha Ltd. purchased 5,000, 13.5% Debentures of Face Value of ₹100 each of Pergot Ltd. on 1st May 2021 @ ₹105 on cum interest basis. The interest on these debentures is payable on 31st & 30th of March & September respectively. On August 1st 2021 the company again purchased 2,500 of such debentures @ ₹102.50 each on cum interest basis. On October 1st, 2021 the company sold 2,000 Debentures @ ₹103 each on ex-interest basis. The market value of the debentures as at the close of the year was ₹106. You are required to prepare the Investment in Debentures Account in the books of Alpha Ltd. for the year ended 31st Dec. 2021 on Average Cost Basis.

Accepted Answer

**Investment in 13.5% Debentures of Pergot Ltd. Account**
(In the books of Alpha Ltd. for the year ended 31st December 2021 — Average Cost Basis)

The account is maintained in the standard **three-column format**: Interest | Cost (Principal) | Total.

**Key principles applied:**
- **Cum-interest purchase**: Total price paid is split — accrued interest (since last interest date) debited to Interest column; balance to Cost column.
- **Ex-interest sale**: Entire sale proceeds go to Cost column only.
- **Average Cost** recomputed after each purchase and applied on sale.
- **Accrued interest at year-end** carried forward (By Accrued Interest c/d); full year interest income transferred to P&L.

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**Dr. [Investment in 13.5% Debentures of Pergot Ltd. A/c] Cr.**

| Date | Particulars | No. | Interest ₹ | Cost ₹ | Total ₹ |
|---|---|---|---|---|---|
| 1.5.2021 | To Bank A/c (5,000 deb. @ ₹105 cum-int.) | 5,000 | 5,625.00 | 5,19,375.00 | 5,25,000.00 |
| 1.8.2021 | To Bank A/c (2,500 deb. @ ₹102.50 cum-int.) | 2,500 | 11,250.00 | 2,45,000.00 | 2,56,250.00 |
| 31.12.2021 | To P&L A/c (Interest income for the year) | — | 52,312.50 | — | 52,312.50 |
| 31.12.2021 | To P&L A/c (Profit on sale of 2,000 deb.) | — | — | 2,166.67 | 2,166.67 |
| | **Total** | **7,500** | **69,187.50** | **7,66,541.67** | **8,35,729.17** |

| Date | Particulars | No. | Interest ₹ | Cost ₹ | Total ₹ |
|---|---|---|---|---|---|
| 30.9.2021 | By Bank A/c (½-yr interest on 7,500 deb.) | — | 50,625.00 | — | 50,625.00…

Question 10

On 27th July, 2022, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were destroyed. However goods costing ₹5,000 could be salvaged. From the salvaged accounting records, the following information is available relating to the period from 1.4.2022 to 27.7.2022: 1. Stock as per balance sheet as on 1.4.2022 ₹63,000. 2. Purchases (including purchase of machinery costing ₹10,000) ₹2,92,000. 3. Wages (including wages paid for installation of machinery ₹3,000) ₹53,000. 4. Sales (including goods sold on approval basis amounting to ₹40,000, of which no approval has been received in respect of 1/4th of the goods) ₹4,12,300. 5. Cost of goods distributed as free sample ₹2,000. Other Information: (i) While valuing the stock on 31.3.2022, ₹1,000 had been written off in respect …

Accepted Answer

**Insurance Claim for Loss of Stock — M/s. Vijay Exports (Fire on 27.7.2022)**

**Step 1 — Adjustments to Basic Figures**

**Opening Stock (at cost):** Balance sheet stock ₹63,000 was stated after writing off ₹1,000 on slow-moving items. For the memorandum trading account, the stock must be restated at **cost**: ₹63,000 + ₹1,000 = **₹64,000**.

**Purchases (revenue only):** ₹2,92,000 less machinery ₹10,000 (capital item) = **₹2,82,000**.

**Wages (revenue only):** ₹53,000 less installation wages ₹3,000 (capital item) = **₹50,000**.

**Sales (adjusted):** Total sales ₹4,12,300 less goods on approval not yet approved (1/4 × ₹40,000 = ₹10,000) = **₹4,02,300**. Within this, slow-moving items were sold for ₹2,300 (cost ₹3,000, loss ₹700 — **abnormal**). Normal sales = ₹4,02,300 − ₹2,300 = **₹4,00,000**.

**Step 2 — Memorandum Trading Account (1.4.2022 to 27.7.2022)**

| **Dr** | ₹ | **Cr** | ₹ |
|---|---:|---|---:|
| Opening Stock (at cost) | 64,000 | Normal Sales (SP) | 4,00,000 |
| Purchases (net) | 2,82,000 | Sales — Slow-moving items (abnormal SP) | 2,300 |
| Wages (net) | 50,000 | Free Samples (at cost — abnormal) | 2,000 |
| **Gross Profit** (20% on normal sales ₹4,00,000) | 80,000 | Abnormal Loss (slow-moving items) | 700 |
| | | **Estimated Closing Stock** | 71,000 |
| **Total** | **4,76,000** | **Total** | **4,76,000** |

**Step 3 — Stock at the Time of Fire**

The estimated closing stock of ₹71,000 includes goods dispatched to customers on approval (not at the godown). C…

Question 11

Leena Transport Limited purchased from Ethnic Motors, 4 tempos costing ₹2,75,000 each on the hire purchase system on 1.1.2020. Payment was to be made ₹2,00,000 down and the balance in 3 equal annual instalments payable on 31.12.2020, 31.12.2021 and 31.12.2022 together with interest @ 12% p.a. Leena Transport Ltd. charge depreciation at the rate of 10% p.a. on the diminishing balance. It paid the instalment due at the end of the first year, i.e., 31.12.2020, but could not pay the next on 31.12.2021. Ethnic Motors decided to takeover 2 tempos and to leave the other 2 tempos with the purchaser on 1.1.2022, adjusting the value of the 2 tempos (taken over) against the amount due on 31.12.2021. The tempos taken over were valued on the basis of 15% depreciation (W.D.V method) annually. Show the n…

Accepted Answer

**Hire Purchase Accounts in the Books of Leena Transport Ltd.**

**Basic Calculations:**
Total cash price of 4 tempos = 4 × ₹2,75,000 = **₹11,00,000**
Down payment = ₹2,00,000; Balance = ₹9,00,000
Principal per instalment = ₹9,00,000 ÷ 3 = **₹3,00,000**

Instalment Schedule:
- 31.12.2020: ₹3,00,000 + (₹9,00,000 × 12%) = ₹3,00,000 + ₹1,08,000 = **₹4,08,000** (PAID)
- 31.12.2021: ₹3,00,000 + (₹6,00,000 × 12%) = ₹3,00,000 + ₹72,000 = **₹3,72,000** (NOT PAID)
- 31.12.2022: Revised (see below)

**Repossession Valuation (@ 15% WDV per Ethnic Motors):**
Value per tempo after 2 years = ₹2,75,000 × (0.85)² = ₹2,75,000 × 0.7225 = ₹1,98,687.50
2 tempos agreed value = 2 × ₹1,98,687.50 = **₹3,97,375**

Balance in Ethnic Motors A/c on 31.12.2021 = ₹6,72,000
Less: 2 tempos credited = ₹3,97,375
Remaining balance = **₹2,74,625**
Interest for 2022 = ₹2,74,625 × 12% = **₹32,955**
Final payment on 31.12.2022 = **₹3,07,580**

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**Tempos Account (in Leena Transport Ltd.'s Books)**

| Dr. | | | Cr. | | |
|-----|---|---|-----|---|---|
| **2020** | **Particulars** | **₹** | **2020** | **Particulars** | **₹** |
| 1.1.20 | To Ethnic Motors (HP) | 11,00,000 | 31.12.20 | By Depreciation A/c | 1,10,000 |
| | | | 31.12.20 | By Balance c/d | 9,90,000 |
| | **Total** | **11,00,000** | | **Total** | **11,00,000** |
| **2021** | | | **2021** | | |
| 1.1.21 | To Balance b/d | 9,90,000 | 31.12.21 | By Depreciation A/c | 99,000 |
| | | | 31.12.21 | By Balance c/d | 8,91,000 |
| | **Total** | **9,90,000** | | **…

Question 12

M/s. Bombay Cotton has 2 Departments Y and Z. The following information is provided for the year ended 31st March, 2022: Opening Stock - Y ₹60,000, Z ₹40,000. Purchases - Y ₹1,20,000, Z ₹3,05,400. Wages - Y ₹70,000, Z ₹32,000. Sales - Y ₹3,10,300, Z ₹3,72,700. Closing Stock - Y ₹23,700, Z ₹40,700. Other Expenses: Salaries ₹30,000; Rent ₹9,000; Advertisement ₹24,000; General Expenses ₹3,000; Depreciation ₹18,000. All Expenses are to be allocated between the Departments in the ratio of their Gross Profit. Department Y sells goods to Department Z at a profit of 25% on sales. Department Z sells goods to Department Y at a profit of 28% on cost. Each Department Manager is entitled to 10% Commission on Net Profit subject to unrealized profit on departmental sales being eliminated. Stock Transfer …

Accepted Answer

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

**TRADING ACCOUNT**

| Dr | Dept Y (₹) | Dept Z (₹) | Cr | Dept Y (₹) | Dept Z (₹) |
|----|-----------|-----------|-----|-----------|----------|
| Opening Stock | 60,000 | 40,000 | Sales (External) | 3,10,300 | 3,72,700 |
| Purchases | 1,20,000 | 3,05,400 | Transfer to Dept Z / Y | 40,000 | 50,000 |
| Wages | 70,000 | 32,000 | Closing Stock | 23,700 | 40,700 |
| Transfer from Dept Z / Y | 50,000 | 40,000 | | | |
| **Gross Profit c/d** | **74,000** | **46,000** | | | |
| **Total** | **3,74,000** | **4,63,400** | **Total** | **3,74,000** | **4,63,400** |

**PROFIT & LOSS ACCOUNT**

Gross Profit Ratio for allocation = Y : Z = 74,000 : 46,000 = **37 : 23** (Total = 60 parts)

| Dr | Dept Y (₹) | Dept Z (₹) | Cr | Dept Y (₹) | Dept Z (₹) |
|----|-----------|-----------|-----|-----------|----------|
| Salaries (37:23) | 18,500 | 11,500 | Gross Profit b/d | 74,000 | 46,000 |
| Rent (37:23) | 5,550 | 3,450 | | | |
| Advertisement (37:23) | 14,800 | 9,200 | | | |
| General Expenses (37:23) | 1,850 | 1,150 | | | |
| Depreciation (37:23) | 11,100 | 6,900 | | | |
| **Total Expenses** | **51,800** | **32,200** | | | |
| Net Profit before Unrealized Profit | 22,200 | 13,800 | | | |
| **Less: Unrealized Profit (Stock Reserve)** | | | | | |
| — Y's UP in Z's closing stock | **3,000** | — | | | |
| — Z's UP in Y's closing stock | — | **4,637.50** | | | |
| Adjusted NP (for commission base) | 19,200 | 9,162…

Question 13

M & S Co. of Lucknow has a branch (integral foreign operation) in Canberra, Australia. As on 31st March 2022, the following ledger balances have been extracted from the books of the Lucknow office and the Canberra branch. [Ledger balances provided in original]. The following information is also available: (i) Stock as at 31st March, 2022: Lucknow ₹1,50,000; Canberra A$ 3,125 (all stock from purchases made abroad). (ii) Head Office always sent goods to the Branch at cost plus 25%. (iii) Provision is to be made for doubtful debts at 5%. (iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20% on written down value. You are required to: (1) Convert the Branch Trial Balance into rupees by using the following exchange rates: Opening rate 1 A$ = ₹50; Closing rate…

Accepted Answer

**Note:** The original question references a ledger table ('[Ledger balances provided in original]') that was not included in the question text provided. The complete numerical solution cannot be computed without the actual trial balance figures. The following presents the **complete methodology, conversion framework, and all applicable rules** under AS 11, along with calculations for items where data is given, so a student can apply these to the actual figures.

**Governing Standard:** AS 11 – The Effects of Changes in Foreign Exchange Rates (ICAI). Since Canberra branch is an **Integral Foreign Operation**, monetary items are translated at closing rate, non-monetary items at historical rate, and income/expense items at the average rate. Exchange differences are recognized in the **Profit and Loss Account**.

**Part (1): Conversion of Branch Trial Balance (A$ → ₹)**

The applicable exchange rates for each item are:

**Opening Stock (A$):** Historical rate = ₹50 (rate at start of year / opening rate).
**Purchases (A$):** Average rate = ₹51.
**Goods Received from H.O. (A$):** Rate at which goods were originally sent by H.O. (typically opening or transaction rate = ₹50). This ensures consistency with H.O. books. If H.O. invoices at cost + 25%, the A$ figure in branch books × ₹50 should equal the rupee invoice price.
**Wages, Salaries, Rent and all Revenue Expenses (A$):** Average rate = ₹51.
**Sales (A$):** Average rate = ₹51.
**Buildings (A$):** Fixed asset historical rate = ₹…

Question 14

Aman, a readymade garment trader, keeps his books of account under single entry system. On the closing date, i.e. on 31st March, 2021 his statement of affairs showed: Aman's capital ₹4,80,000; Loan ₹1,50,000; Creditors ₹3,10,000; Building ₹3,25,000; Furniture ₹50,000; Motor car ₹90,000; Stock ₹2,00,000; Debtors ₹1,70,000; Cash in hand ₹20,000; Cash at bank ₹85,000. Riots occurred and a fire broke out on 31st March, 2022, destroying the books of accounts. The cashier had absconded with the available cash. You are furnished with: 1. Sales for 2021-22 were 20% higher than previous year's, of which 20% were for cash. He always sells at cost plus 25%. No cash purchases. 2. Collection from debtors ₹14,00,000, out of which ₹3,50,000 in cash. 3. Business expenses ₹2,00,000, of which ₹50,000 outsta…

Accepted Answer

**Trading and Profit & Loss Account of Aman for the year ended 31st March, 2022**

**Trading Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Opening Stock | 2,00,000 | By Sales | 18,00,000 |
| To Purchases | 15,40,000 | By Closing Stock | 3,00,000 |
| To **Gross Profit c/d** | **3,60,000** | | |
| **Total** | **21,00,000** | **Total** | **21,00,000** |

**Profit & Loss Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Business Expenses | 2,00,000 | By Gross Profit b/d | 3,60,000 |
| To Depreciation — Building | 16,250 | | |
| To Depreciation — Furniture | 2,500 | | |
| To Depreciation — Motor Car | 18,000 | | |
| To Repairs | 10,000 | | |
| To Travelling Expenses | 15,000 | | |
| To Loss by Defalcation (Cashier) | 45,000 | | |
| To **Net Profit transferred to Capital** | **53,250** | | |
| **Total** | **3,60,000** | **Total** | **3,60,000** |

**Balance Sheet of Aman as on 31st March, 2022**

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Capital (Opening ₹4,80,000 + Profit ₹53,250 − Drawings ₹75,000) | 4,58,250 | Building (₹3,25,000 − ₹16,250) | 3,08,750 |
| Loan | 1,50,000 | Furniture (₹50,000 − ₹2,500) | 47,500 |
| Creditors | 4,75,000 | Motor Car (₹90,000 − ₹18,000) | 72,000 |
| Outstanding Business Expenses | 50,000 | Stock | 3,00,000 |
| | | Debtors | 2,10,000 |
| | | Cash at Bank | 1,95,000 |
| | | Cash in Hand | Nil (defalcated) |
| **Total** | **11,33,250** | **Total** | **11,33,250** |

**Key Notes:** (1) **Sales** are determined using previous year'…

Question 15

Summarised Balance Sheet of Cloth Trader as on 31.03.2021: Equity & Liabilities: Proprietor's Capital ₹3,00,000; Profit & Loss Account ₹1,25,000; 10% Loan Account ₹2,10,000; Trade payables ₹50,000. Assets: Property, plant and equipment ₹3,60,000; Closing Inventory ₹1,50,000; Trade receivables ₹1,00,000; Deferred Expenses ₹50,000; Cash & Bank ₹25,000. Additional Information: (1) Remaining life of PPE is 8 years with even use pattern. Net realisable value on 31.03.2022 was ₹3,25,000. (2) Purchases and Sales in 2021-22: ₹22,50,000 and ₹27,50,000 respectively. (3) Cost and net realizable value of inventory on 31.03.2022: ₹2,00,000 and ₹2,50,000 respectively. (4) Expenses including interest on loan for the year: ₹78,000. (5) Deferred Expenses are amortized equally over 5 years. (6) Sundry Debto…

Accepted Answer

**Basis of Preparation:** Since going concern is NOT assumed, assets are valued at **Net Realisable Value (NRV)**, fictitious/deferred assets are fully written off, liabilities include penalties for early settlement, and trade payables are recorded at expected settlement amounts. This is the **Break-up / Liquidation Basis** as per the Framework for Preparation and Presentation of Financial Statements.

**Key Non-Going Concern Adjustments:**
- **PPE:** Not depreciated over remaining life; instead written down to NRV of ₹3,25,000. Loss = ₹3,60,000 − ₹3,25,000 = **₹35,000** charged to P&L.
- **Deferred Expenses:** Entirely written off = **₹50,000** (no future benefit under liquidation; normal amortisation of ₹10,000 p.a. is irrelevant).
- **Closing Inventory:** Valued at NRV = ₹2,50,000 (NRV > Cost, so NRV used under break-up basis).
- **Trade Receivables:** Provision of ₹5,000 (doubtful) + ₹25,000 (contingent on re-installation) = **₹30,000 provision**.
- **Trade Payables:** Recorded at expected settlement = ₹75,000 × 90% = ₹67,500. Discount gain of **₹7,500** credited to P&L.
- **Loan:** Early repayment penalty of **₹25,000** recognised as expense and added to loan liability.

**Trading Account for the year ended 31.03.2022**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Opening Stock | 1,50,000 | Sales | 27,50,000 |
| Purchases | 22,50,000 | Closing Stock (at NRV) | 2,50,000 |
| **Gross Profit c/d** | **6,00,000** | | |
| **Total** | **30,00,000** | **Total** | **30,00,000** |

**…

Question 16

The closing stock of finished goods (at cost) of a company amounted to ₹4,50,000. The following items were included at cost in the total: (a) 100 coats, which had cost ₹2,200 each and normally sold for ₹4,000 each. Owing to a defect in manufacture their NRV was determined at 50% of their normal selling price. (b) Shirts which had cost ₹50,000, their net realizable value at Balance sheet date was ₹55,000. Commission @ 10% on sales is payable to agents. What should the inventory value be according to AS 2 after considering the above items?

Accepted Answer

**AS 2 — Valuation of Inventories** requires that inventories be valued at the **lower of cost and net realisable value (NRV)**. NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale (e.g., selling commission).

**Item (a) — 100 Defective Coats:**
Cost per coat = ₹2,200; Total cost = ₹2,20,000. Normal selling price = ₹4,000. Due to manufacturing defect, NRV = 50% × ₹4,000 = ₹2,000 per coat; Total NRV = ₹2,00,000. Since NRV (₹2,00,000) < Cost (₹2,20,000), inventory is written down to ₹2,00,000. **Write-down = ₹20,000.**

**Item (b) — Shirts:**
The stated figure of ₹55,000 represents the **selling price**, not the true NRV, because a selling commission of 10% is separately payable to agents. True NRV = ₹55,000 − 10% × ₹55,000 = ₹55,000 − ₹5,500 = **₹49,500**. Since NRV (₹49,500) < Cost (₹50,000), inventory is written down to ₹49,500. **Write-down = ₹500.**

**Revised Inventory Value:**
Original closing stock at cost = ₹4,50,000. Less: Write-down on coats = ₹20,000. Less: Write-down on shirts = ₹500. **Inventory value as per AS 2 = ₹4,29,500.**

Question 17

RS Ltd. has acquired a heavy plant at a cost of ₹2,00,00,000. The estimated useful life is 10 years. At the end of the 2nd year, one of the major components i.e. the Boiler has become obsolete (which was acquired at price of ₹50,00,000) and requires replacement, as further maintenance is uneconomical. The remainder of the plant is perfect and is expected to last for next 8 years. The cost of a new boiler is ₹60,00,000. Can the cost of the new boiler be recognised as an asset, and, if so, what should be the carrying value of the plant at the end of second year?

Accepted Answer

**Yes**, the cost of the new boiler can be recognized as an asset. Under **AS 10 (Accounting Standard 10) - Property, Plant and Equipment**, when a major component of an item of PPE is replaced and has been identified to have a useful life different from other parts of the item, the cost of the replacement is recognized as an asset in its own right. The new boiler meets the recognition criteria as it will generate future economic benefits, the cost can be reliably measured, and it represents a separate component.

**Treatment of Old Boiler:** The old boiler must be derecognized from the assets. Since it had an original cost of ₹50,00,000 and has been used for 2 years with annual depreciation of ₹10,00,000 (calculated as ₹50,00,000 ÷ 10 years = ₹5,00,000; but on total plant basis = ₹2,00,00,000 ÷ 10 years = ₹20,00,000, so boiler share = ₹10,00,000), its carrying value is ₹40,00,000. Upon replacement, the carrying value is written off as a loss to the Profit & Loss Account.

**Carrying Value of Plant at End of Year 2:** Assuming straight-line depreciation at 10% per annum (₹2,00,00,000 ÷ 10 years), the calculation is as follows:

Original plant cost: ₹2,00,00,000
Less: Accumulated depreciation for 2 years (₹20,00,000 × 2): ₹40,00,000
Carrying value of plant at end of Year 2 (before replacement): ₹1,60,00,000

Adjustment for component replacement:
Less: Carrying value of old boiler being derecognized: ₹40,00,000
Add: Cost of new boiler (to be capitalized): ₹60,00,000

**Carrying…

Question 18

A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2022, when the exchange rate was ₹43 per US Dollar. The company had recorded the transaction in the books at the above mentioned rate. The payment for the import transaction was made on 5th April, 2022 when the exchange rate was ₹47 per US Dollar. However, on 31st March, 2022, the rate of exchange was ₹48 per US Dollar. The company passed an entry on 31st March, 2022 adjusting the cost of raw materials consumed for the difference between ₹47 and ₹43 per US Dollar. In the background of the relevant accounting standard, is the company's accounting treatment correct? Discuss.

Accepted Answer

**AS 11 – The Effects of Changes in Foreign Exchange Rates** establishes that foreign currency transactions are recorded at the exchange rate on the transaction date, and at each balance sheet date, foreign currency monetary items (such as outstanding payables) must be restated at the **closing exchange rates**. Exchange differences arising from restatement are recognized in the profit and loss statement.

**Analysis of Company's Treatment:**

The company correctly recorded the import at ₹43/USD on 5th January 2022. However, on 31st March 2022 (the balance sheet date), the company adjusted the cost of raw materials using the exchange rate of ₹47/USD. This rate is the **payment date rate (5th April 2022)**, not the closing rate on the balance sheet date. This violates AS 11 principles.

**Correct Treatment under AS 11:**

On 31st March 2022, the foreign currency payable (a monetary item) must be restated at the **closing rate of ₹48/USD**:
- Restated payable: USD 6,00,000 × ₹48 = ₹28,80,000
- Original carrying amount: USD 6,00,000 × ₹43 = ₹25,80,000
- Exchange loss: ₹28,80,000 – ₹25,80,000 = ₹3,00,000

Correct entry (31st March 2022):
Dr. Exchange Loss (P&L) ₹3,00,000
  Cr. Payable in Foreign Currency ₹3,00,000

**Company's Incorrect Entry:**

The company adjusted raw materials using ₹47/USD:
- Adjustment: USD 6,00,000 × (₹47 – ₹43) = ₹24,00,000
- Entry: Dr. Raw Materials ₹24,00,000; Cr. Payable ₹24,00,000

**Errors Committed:**

1. **Wrong Exchange Rate:** AS 11 requires use …

Question 19

Two case-based scenarios on Accounting Standards AS 12 and AS 13

Accepted Answer

**Part (a) — AS 12: Government Grants (Samrat Limited)**

**AS 12 — Accounting for Government Grants** governs the recognition and treatment of government subsidies.

The subsidy received by Samrat Limited is 25% of total investment of ₹80 crores. Since the grant is given with reference to the **total investment in an undertaking** (i.e., it is linked to the capital outlay as a whole, not to a specific depreciable asset), it falls under the category of **grants in the nature of promoters' contribution**.

As per **AS 12, Paragraph 11**, government grants in the nature of promoters' contribution — i.e., grants given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay — **shall be credited to Capital Reserve** and treated as part of shareholders' funds. Such grants are **not to be recognized as income** in the Statement of Profit and Loss.

Therefore, the action of Samrat Limited to recognize ₹20 crores as income **is NOT approved**. The correct accounting treatment is to credit the ₹20 crores to **Capital Reserve**, which forms part of equity and strengthens the balance sheet without distorting profitability.

---

**Part (b) — AS 13: Reclassification of Investments (Mother Mart Ltd.)**

As per **AS 13 — Accounting for Investments**, the following rules govern reclassification:

- **Current → Long-term:** Transfer at the **lower of cost or fair value** on the date of transfer. Any reduction below cost is charged t…

Question 20

Harish Construction Company is constructing a huge building project consisting of four phases. It is expected that the full building will be constructed over several years but Phase I and Phase II of the building will be started as soon as they are completed. Following is the detail of the work done on different phases of the building during the current year (₹ in lakhs): Phase I - Cash expenditure ₹10, Building purchased ₹24, Total ₹34. Phase II - Cash expenditure ₹30, Building purchased ₹34, Total ₹64. Phase III - Cash expenditure ₹25, Building purchased ₹30, Total ₹55. Phase IV - Cash expenditure ₹30, Building purchased ₹38, Total ₹68. Total expenditure of all phases ₹221. Loan taken @ 15% at the beginning of the year ₹200. During mid of the current year, Phase I and Phase II have becom…

Accepted Answer

**Applicable Standard: AS 16 – Borrowing Costs**

Under **AS 16**, borrowing costs directly attributable to acquisition or construction of a **qualifying asset** must be capitalized. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use. Capitalization must **cease** when substantially all activities necessary to prepare the asset for its intended use are complete.

Since Phase I and Phase II became operational at **mid-year (6 months)**, they cease to be qualifying assets after that point. Phase III and Phase IV remain qualifying assets for the **full year**.

**Step 1 – Total Borrowing Cost for the Year**
Interest = ₹200 × 15% = **₹30 lakhs**

**Step 2 – Capitalization Rate**
Since there is only one loan, Capitalization Rate = 15%

**Step 3 – Weighted Average Qualifying Expenditure**
Borrowing costs are capitalized only for the period an asset is a qualifying asset:
- Phase I: ₹34 × 6/12 = ₹17 lakhs
- Phase II: ₹64 × 6/12 = ₹32 lakhs
- Phase III: ₹55 × 12/12 = ₹55 lakhs
- Phase IV: ₹68 × 12/12 = ₹68 lakhs
- **Total Qualifying Weighted Expenditure = ₹172 lakhs**

**Step 4 – Borrowing Costs to be Capitalized**
= ₹172 × 15% = **₹25.8 lakhs** (does not exceed total interest of ₹30 lakhs; AS 16 constraint satisfied)

**Step 5 – Borrowing Costs to be Expensed**
= ₹30 – ₹25.8 = **₹4.2 lakhs** (relates to non-qualifying period of Phase I and Phase II post-operationalization)

**Phase-wise capitalized borrowing costs:**
- Pha…

CA Inter Adv Accounting

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