Question 1

Sub-Contract Costs for work executed – ₹7 Lakhs, Advances paid to Sub-Contractors – ₹4 Lakhs. Further Cost estimated to be incurred to complete the contract – ₹35 Lakhs. You are required to compute the Percentage of Completion, the Contract Revenue and Cost to be recognized as per AS-7.

Accepted Answer

**Note on Missing Data:** The question as stated does not provide the **Total Contract Price (Contract Revenue)**. Without this figure, Contract Revenue to be recognised cannot be computed numerically. However, all steps of the methodology are demonstrated below, and the **Percentage of Completion** and **Contract Cost to be recognised** are fully computed from the given data.

**Treatment of Advances under AS-7 (Accounting Standard 7 – Construction Contracts):**
As per AS-7, when computing the stage of completion using the cost-to-cost method, **costs incurred to date should relate only to work performed**. Advances paid to sub-contractors represent a prepayment for future work and are **excluded** from the numerator of the percentage of completion formula.

**Step 1 – Costs Incurred to Date (for work performed):**
Only Sub-Contract Costs for work executed are considered = **₹7 Lakhs**.
Advances paid to Sub-Contractors (₹4 Lakhs) are excluded as they do not reflect work performed.

**Step 2 – Total Estimated Contract Cost:**
Costs incurred to date (work performed): ₹7 Lakhs
Further costs estimated to complete: ₹35 Lakhs
Total Estimated Contract Cost = ₹7 + ₹35 = **₹42 Lakhs**

**Step 3 – Percentage of Completion:**
Percentage of Completion = (Costs incurred for work performed ÷ Total Estimated Contract Cost) × 100
= (7 ÷ 42) × 100 = **16.67%**

**Step 4 – Contract Revenue to be Recognised:**
As per AS-7, Contract Revenue to be recognised = Total Contract Price × Percentage o…

Question 2

Keeping in view the provisions of AS-4, you are required to state with reasons whether the above events are to be treated as Contingencies, Adjusting Events or Non-Adjusting Events occurring after Balance Sheet date.

Accepted Answer

**Framework under AS-4 (Events After the Balance Sheet Date):**

AS-4 (Revised) issued by ICAI classifies post-balance sheet events into: (a) **Contingencies** — uncertain conditions existing at the balance sheet date whose outcome depends on future events; (b) **Adjusting Events** — events after the balance sheet date that provide additional evidence of conditions existing at that date, requiring adjustment to financial statements; and (c) **Non-Adjusting Events** — events indicating conditions that arose after the balance sheet date, requiring only disclosure (no adjustment). The balance sheet date for Surya Limited is **31st March 2021**.

**(i) Suit filed on 5th April 2021 claiming ₹5 lakhs:**

This is a **Non-Adjusting Event** occurring after the balance sheet date. The legal claim (suit) came into existence on 5th April 2021 — i.e., after the balance sheet date. No legal obligation or liability existed as at 31st March 2021 arising from a pending suit. The underlying event (the advertisement) may have occurred before 31st March, but the contingent liability crystallised only upon filing of the suit. Since the condition did not exist at the balance sheet date, no adjustment is required. However, **disclosure** should be made in the financial statements as it is a material event. The possible liability of ₹5 lakhs should be disclosed by way of a note.

**(ii) Proposal to sell property in March 2021; offer registered on 15th April 2021:**

This is a **Non-Adjusting Event**…

Question 3

Comment on the accounting treatment and recognition of this transaction.

Accepted Answer

**Nature of the Arrangement — Service Contract vs. Lease**

The arrangement between Khuahi Limited and Mr. Happy must be examined to determine whether it constitutes a **lease** under AS 19 (Leases) or a **service/management contract**.

**Key Features of the Arrangement:**

(a) Khuahi Limited pays Mr. Happy a **fixed annual amount** for running the business.
(b) **Day-to-day management** is handled by Mr. Happy.
(c) **All financial and operating policy decisions** are taken by the **Board of Directors of Khuahi Limited** — i.e., Khuahi Limited retains strategic control.
(d) Mr. Happy holds **no voting power** in Khuahi Limited and is therefore not an owner.

**Whether this is a Lease under AS 19:**

As per **AS 19 (Leases)**, a lease is an agreement whereby the **lessor conveys to the lessee the right to use an asset** for an agreed period in return for a payment or series of payments. For an arrangement to contain a lease (as clarified by Appendix A of AS 19, based on IFRIC 4), the following conditions must both be satisfied:
1. Fulfillment of the arrangement is **dependent on the use of a specific asset**.
2. The arrangement **conveys the right to use** that asset.

In the given case:
- There is **no specific asset** being transferred to or used exclusively by Mr. Happy.
- Khuahi Limited does **not receive the right to use** any asset belonging to Mr. Happy — rather, Mr. Happy operates Khuahi Limited's own business.
- The **Board of Khuahi Limited** retains control over al…

Question 4

State with reasons whether the following statements are correct or incorrect. (Answer any seven)

Accepted Answer

**Answer: Any Seven of the Following**

**(a) FALSE** – Misstatement in financial statements can arise from either **error** (unintentional) or **fraud** (intentional). Not all misstatements result from fraud. Per **SA 240** (Standards on Auditing 240), fraudulent misstatements are deliberate, whereas errors are unintentional. The statement is incorrect as it presumes all misstatements are fraudulent.

**(b) TRUE** – The Chief Auditor of a Multi-State Co-operative Society is appointed by the **Annual General Meeting** (AGM). Under the **Multi-State Co-operative Societies Act, 1984**, the AGM has the authority to appoint the Chief Auditor, making the statement correct.

**(c) FALSE** – **Assertions** are representations made by **management** (not the auditor) regarding the financial statements. The auditor uses these assertions to identify types of potential misstatements. Assertions comprise existence/occurrence, completeness, rights and obligations, valuation/allocation, and presentation/disclosure. Per **SA 315**, assertions are management's claims, not auditor representations.

**(d) FALSE** – These are distinctly different threats: **Advocacy threat** arises when an auditor promotes the client's interests at the expense of objective judgment, while **intimidation threat** occurs when the auditor is deterred from objectivity due to explicit/implicit threats. These are fundamentally different in nature and consequence, not merely a "thin difference." The Code of Ethics dis…

Question 5

The following data is provided for M/s. Raj Construction Co.
(i) Contract Price - ₹ 85 Lakhs
(ii) Materials issued - ₹ 21 Lakhs out of which Materials costing ₹ 4 Lakhs is still lying unused at the end of the period.
(iii) Labour Expenses for workers engaged at site - ₹ 16 Lakhs (out of which ₹ 1 Lakh is still unpaid)
(iv) Specific Contract Costs - ₹ 5 Lakhs

Accepted Answer

**Contract Costing – M/s. Raj Construction Co.**

Under **AS 7 (Construction Contracts)**, costs incurred on a contract include materials consumed (not merely issued), labour (whether paid or unpaid, as long as incurred), and specific contract costs directly attributable to the contract.

**Step 1 – Determine Cost of Work Done (Costs Incurred to Date)**

Materials consumed = Materials issued – Unused closing stock = ₹21L – ₹4L = **₹17 Lakhs**

Labour expenses incurred = ₹16 Lakhs *(Note: The ₹1 Lakh unpaid portion is still an expense incurred; it merely creates a liability – Outstanding Labour – and must be included)*

Specific Contract Costs = ₹5 Lakhs

**Total Cost of Work Done = ₹17 + ₹16 + ₹5 = ₹38 Lakhs**

**Step 2 – Compute Stage of Completion**

Since the total estimated contract costs equals the costs incurred (i.e., no further costs are anticipated), the contract is treated as fully executed:

Degree of Completion = Costs Incurred ÷ Total Estimated Costs = ₹38L ÷ ₹38L = **100%**

**Step 3 – Revenue and Profit Recognition**

Revenue to be recognised = Contract Price × Degree of Completion = ₹85L × 100% = **₹85 Lakhs**

Profit = Revenue – Cost of Work Done = ₹85L – ₹38L = **₹47 Lakhs**

**Contract Account (Summary)**

| Dr. Side | ₹ Lakhs | Cr. Side | ₹ Lakhs |
|---|---|---|---|
| Materials Issued | 21.00 | Closing Stock (unused) | 4.00 |
| Labour (incl. outstanding) | 16.00 | Cost of Work Done c/d | 38.00 |
| Specific Contract Costs | 5.00 | | |
| **Total** | **42.00*…

Question 6

Documentation of audit plan serves as a record of the planned nature, timing and extent of risk assessment procedures and planned audit procedures at the assertion level in response to the assessed risk. What all activities in the planning phase should form part of auditor's documentation? State with examples.

Accepted Answer

**Activities in the Planning Phase to be Documented by the Auditor:**

The auditor's documentation during the planning phase serves as the foundation for the entire audit and must comprehensively record the planned audit approach. The following activities constitute essential documentation:

**1. Risk Assessment Procedures and Findings**
The auditor must document the understanding of the entity and its environment, including business operations, industry dynamics, regulatory environment, and significant changes from prior periods. Example: For a textile manufacturing company, documentation should include understanding of raw material sourcing, labor regulations, textile policy changes, and export-import regulations affecting business.

**2. Materiality Levels**
Documentation of quantitative materiality benchmarks is critical. This includes overall materiality (typically 5% of PBT or revenue), performance materiality (usually 75% of overall materiality), and clearly trivial threshold. Example: For a company with PBT of ₹10 crores, overall materiality ₹50 lakhs, performance materiality ₹37.5 lakhs, and trivial threshold ₹5 lakhs should be documented with the rationale.

**3. Understanding of Internal Controls**
The auditor documents the design and implementation of key controls, assessment of control environment, and evaluation of specific controls relevant to major transaction cycles. Example: Documentation of understanding payroll controls including segregation of duties betw…

Question 7

CA B is appointed as an auditor of M/s. Divine Pharmacy, a wholesale medicines supplier. While auditing for the financial year 2020-21, CA B wants to use test checking technique. Advise CA B, what kind of precautions should be taken by him in this regard.

Accepted Answer

**Test Checking Technique and Precautions**

Test checking (audit sampling) is an important technique where the auditor examines a selected portion of items from a large population to draw conclusions about the entire population. CA B should observe the following precautions:

**1. Clear Identification of Population** The auditor must clearly identify and understand the nature, composition, and homogeneity of the population from which the sample is to be drawn. For M/s. Divine Pharmacy, this could be medicine inventory, receivables, or payables transactions.

**2. Determination of Appropriate Sample Size** The sample size should be determined based on: (a) the level of materiality set for the audit, (b) assessed level of risk (inherent and control risk), (c) nature and volume of transactions, and (d) degree of reliance on internal controls. Larger samples are needed for higher risk areas and lower materiality levels.

**3. Random Selection Method** The sample must be selected using a random or systematic method to ensure it is representative of the entire population and free from auditor bias. Haphazard or judgmental selection (other than for risk-based items) should be avoided.

**4. Stratification of Non-homogeneous Populations** When the population is not homogeneous (e.g., containing both routine and unusual transactions), it should be stratified into groups. Test checking should be applied separately to each stratum to ensure adequate coverage and appropriate sample size…

Question 8

In case of certain subject matters, limitations on the auditor's ability to detect material misstatements are particularly significant. Explain such assertion or subject matters.

Accepted Answer

An auditor's ability to detect material misstatements is subject to inherent limitations, and certain assertions and subject matters present particularly significant challenges. These limitations arise from the nature of audit evidence, management discretion, and transaction complexity.

**Journal Entries and Adjustments**: Journal entries—particularly those that are unusual, complex, made at or near period end, or lacking supporting documentation—present high detection risk. Auditors cannot examine every entry in large populations, and entries made directly in the general ledger bypassing normal accounting systems are difficult to identify. Management can record fictitious or unsupported entries to manipulate reported results.

**Accounting Estimates**: Estimates involving significant judgment such as fair value measurements, provision for doubtful debts, inventory obsolescence, asset useful lives, and warranty provisions are inherently difficult to audit. Management possesses superior knowledge of underlying facts and can bias estimates to achieve desired financial results. Auditors can assess reasonableness but cannot definitively determine the "correct" estimate, making manipulation difficult to detect.

**Related Party Transactions**: Identifying all related parties and ensuring proper disclosure is challenging. Related parties may transact at arm's length prices, concealing the relationship. Management may intentionally hide relationships or transact at non-commercial t…

Question 9

The statutory auditor of ABC Ltd., CA Raj identifies certain inconsistencies while applying analytical procedures to the financial statement data of ABC Ltd. With referent to SA 520 on "Analytical Procedures" how CA Raj shall investigate such differences?

Accepted Answer

**Answer:**

According to **SA 520 - Analytical Procedures**, when CA Raj identifies significant unexpected differences or inconsistencies while applying analytical procedures, the investigation process shall follow a structured approach.

**Investigation Method:**

When analytical procedures identify unexpected differences that are inconsistent with other relevant information or differ significantly from expected values, CA Raj shall investigate such differences through the following steps:

**1. Make Inquiries of Management:** CA Raj shall make inquiries of the management regarding the basis for the amounts, ratios, or relationships disclosed in the financial statements. The auditor should seek management's explanation about:
- The reason for the inconsistency
- Whether management is aware of the difference
- The completeness and accuracy of supporting information available

**2. Evaluate Management's Response:** The auditor shall critically evaluate the response received from management by performing additional audit procedures as considered necessary under the circumstances. This ensures that the explanation is reasonable and supported by evidence.

**3. Examine Supporting Documentation:** CA Raj shall examine supporting documents and records to corroborate or refute the explanation provided by management. This may include:
- Underlying transaction records
- Supporting schedules and working papers
- Internal reports and management information

**4. Perform Other Analytica…

Question 10

The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor's report, that require adjustment of, or disclosure in, the financial statements have been identified. With reference to SA 560, what are the audit procedures included in the auditor's risk assessment?

Accepted Answer

**Subsequent Events** are events occurring between the balance sheet date and the date of the auditor's report that require adjustment to, or disclosure in, the financial statements. Under SA 560, the auditor must perform specific audit procedures to identify all such events.

**The audit procedures included in the auditor's risk assessment for subsequent events are:**

**1. Review of Minutes of Meetings**: The auditor shall read minutes of all meetings held by those charged with governance (board, audit committee, shareholder meetings) between the balance sheet date and the date of the auditor's report. These minutes may reveal material transactions, decisions, or commitments that require accounting treatment.

**2. Inquiries of Management**: The auditor shall make specific inquiries of management and those charged with governance regarding the occurrence of subsequent events. This includes asking about pending or threatened litigation, commitments, new financing arrangements, asset disposals, loan defaults, or other material events that might affect the financial statements.

**3. Review of Subsequent Transactions**: The auditor shall examine material transactions recorded after the balance sheet date, including reviewing the subsequent period's sales, purchases, cash receipts, and disbursements to identify events that represent conditions existing at the balance sheet date (adjusting events) versus new events (non-adjusting events).

**4. Review of Correspondence**: The au…

Question 11

CA Rohit is appointed as an auditor of Grace Ltd., he wants to design a suitable Confirmations request letter for a few debtors of Grace Ltd. As a senior auditor of the firm, explain to him with reference to SA 505 "External Confirmation" all the conditions that should be present on the Negative Confirmation requests at the due care substantive audit procedure to address an assessed risk of material misstatement at the assertion level.

Accepted Answer

**Conditions for Negative Confirmation Requests under SA 505**

Negative confirmation requests are less persuasive than positive confirmations and should only be used when specific conditions are satisfied as per SA 505 "External Confirmation" paragraphs A13–A14.

**1. Low Assessed Risk of Material Misstatement**
The auditor must assess the risk of material misstatement at the assertion level as **low**. This is the fundamental prerequisite because negative confirmations rely on the assumption that recipients will respond only if they disagree, making them suitable only when the risk environment is favourable.

**2. Reasonable Expectation of Due Consideration**
The auditor must have a **reasonable expectation that recipients will give the request due consideration**. This requires understanding the nature of the population (debtors of Grace Ltd.) and their likely responsiveness. If recipients are likely to ignore the request or treat it casually, negative confirmations are inappropriate.

**3. Homogeneous and Routine Transaction Population**
The population from which debtors are selected must be **homogeneous in nature** with **routine, recurring transactions**. Complex, one-time, or unusual transactions are unsuitable for negative confirmations. Grace Ltd.'s debtor base should comprise similar business counterparties with standard credit relationships and transaction patterns.

**4. Low Individual Materiality**
The **individual items being confirmed should not be highly mate…

Question 12

CA L is in the process of finalizing his Risk Assessment Procedures of Effulent Limited which include observation and inspection that may provide inquiries of management and others. Discuss few examples of audit procedures which include observation or inspection of the entity operations.

Accepted Answer

**Observation and Inspection as Risk Assessment Procedures**

As per SA 315 (Identifying and Assessing the Risks of Material Misstatement), observation and inspection are key audit procedures used to obtain an understanding of the entity and its environment for risk identification. Unlike inquiries alone, these procedures provide direct evidence of entity operations, controls, and potential risks. Following SA 500, observation and inspection enhance audit evidence quality by allowing the auditor to witness actual processes and examine physical items.

**Examples of Observation Procedures:**

**1. Observation of Inventory Storage and Handling**: The auditor directly observes how Effluent Limited stores raw materials, work-in-progress, and finished goods. This reveals risks related to inventory existence, obsolescence, and damage. The auditor can assess whether storage conditions are appropriate (temperature control, segregation by type) and identify control gaps such as lack of accountability over inventory movements or absence of periodic stock verification. Observing the physical layout helps identify obsolete or slow-moving inventory that may be overstated in the financial statements.

**2. Observation of Manufacturing and Quality Control Processes**: The auditor observes the production cycle and quality testing procedures. This procedure assesses risks related to production efficiency, product standards, and potential rework. Observation reveals whether quality checks are …

Question 13

Forceful Limited is a company dealing in mobile spare parts and having its showroom in almost all the states in the country. For FY 2020-21, the company transferred its accounts from manual to computerized system (SAP). PQR & Co., Chartered Accountants have undertaken an interim audit and have been appointed as the system auditor. PQR & Co., at the end of the audit concludes that there are certain findings and exceptions in IT environment and IT controls of the company which needs to be assessed and reported. Mention those points of consideration.

Accepted Answer

When assessing IT environment and IT controls findings and exceptions, the system auditor should consider and report the following key points:

**1. IT Governance and Organizational Structure**
Evaluate the existence of a formal IT governance framework with clear delineation of responsibilities among IT functions (system administration, development, operations, and user departments). Assess whether IT objectives are aligned with business objectives and whether appropriate approval mechanisms exist for critical IT decisions and expenditures.

**2. Access Controls and Authentication**
Review user access controls to ensure they are based on roles and responsibilities within the organization. Assess authentication mechanisms, password policies, periodic review of user access rights, and timely removal of access for terminated employees. For a multi-state operation like Forceful Limited, assess whether access controls prevent unauthorized transactions across different showrooms.

**3. System Development and Change Management** (Particularly critical for SAP transition)
Evaluate the formal change management process including approval workflows, testing protocols, and segregation between development, testing, and production environments. Assess the adequacy of user acceptance testing, documentation of changes, and rollback procedures. Review controls over patches and updates to the new system.

**4. Segregation of Duties**
Assess proper segregation between system administrators, dev…

Question 14

You are required to prepare the Balance Sheet of the new firm CH & Co., and pass necessary Journal Entries to record the amalgamation of both firms.

Accepted Answer

**Note:** The balance sheet figures (₹ in 000s) referenced in the question were not included in the data provided. The following answer presents the **complete methodological framework** with journal entries and balance sheet structure for Partnership Amalgamation — applicable to any figures that appear in the actual exam paper. Students should substitute the actual numbers from the balance sheets given.

**Key Observations from the Case:**
- **C & Co.:** Partners P and Q in ratio 4:1
- **H & Co.:** Partners O and R in ratio 3:2
- **New Firm CH & Co.:** Partners P, Q, R in ratio 3:2:1
- Partner O does **not** join the new firm — O's dues must be settled by H & Co. before amalgamation.

**Step 1 — Settle Partner O's Interest (in H & Co.'s books before closing)**

Since O does not join CH & Co., O's capital account balance (after adjusting share of Realisation profit/loss) is paid off or transferred to a loan account.

**Step 2 — Determine Purchase Consideration**

The purchase consideration for each old firm = Net Assets taken over by CH & Co. at agreed values (Assets taken over LESS Liabilities taken over). Goodwill, if any, is brought in at the agreed value.

---

**JOURNAL ENTRIES IN C & CO.'s BOOKS (Closing Entries)**

**(i)** Realisation A/c Dr. ₹XXX
   To Sundry Assets A/cs (Book Value of each asset) ₹XXX
*(Transfer of all assets to Realisation Account)*

**(ii)** Sundry Liabilities A/cs Dr. ₹XXX
   To Realisation A/c ₹XXX
*(Transfer of all liabilities to Realisation Acc…

Question 15

CA "X" while conducting an audit of Joyful Ltd. found a considerable increase in sales as compared to the previous year. As doubts that fictitious sales have been recorded by the company to overstate its profitability. Discuss any four audit procedures to be undertaken by the auditor to ensure revenue from sales of goods and services performed during the period is not overstated?

Accepted Answer

To address the auditor's concern regarding potentially fictitious sales and revenue overstatement, the following substantive audit procedures should be undertaken:

**1. Cut-off Testing** – The auditor should verify that sales transactions have been recorded in the correct accounting period. This involves examining sales invoices issued on or near the year-end date and tracing them to underlying delivery notes and goods out records. The objective is to ensure that sales recorded in the financial statements have actually been dispatched to customers in that period and that no sales from the subsequent period have been prematurely recorded. Reviewing the sales journal for transactions immediately before and after the year-end provides evidence that sales are not fictitiously advanced.

**2. Receivables Confirmation** – The auditor should send direct confirmations to selected customers requesting them to confirm the nature, amount, and terms of sales transactions recorded with them. This external corroboration is a highly reliable audit procedure under SA 505 (External Confirmations). Non-responses, exceptions, or disputes regarding recorded sales transactions would indicate potential fictitious sales, as genuine customers should acknowledge legitimate transactions. The auditor should select both large value transactions and a representative sample of smaller transactions.

**3. Matching Documentary Evidence** – The auditor should select a sample of recorded sales and trace each…

Question 16

A company provides the following 2 possible Capital Structure as on 31st March, 2021:

[Table showing Equity Share Capital, Reserves & Surplus (General Reserve, Securities Premium, Profit & Loss, Statutory Reserve), and Loan Funds with two situations]

The company is planning to offer buy back of Equity Share at a price of ₹ 75 per equity share.

You are required to calculate maximum permissible number of equity shares that can be bought back in both the situations as per Companies Act, 2013 and are also required to pass necessary Journal Entries in the situation where the buyback is possible.

Accepted Answer

**Note: The data table was not rendered in the question as received. The following solution uses standard assumed figures (clearly labelled) consistent with typical CA Intermediate exam problems on this topic. Students must substitute their actual given data and apply the same methodology.**

**Assumed Capital Structure (as on 31st March 2021):**

| Particulars | Situation I (₹) | Situation II (₹) |
|---|---|---|
| Equity Share Capital (1,00,000 shares @ ₹10 each) | 10,00,000 | 10,00,000 |
| General Reserve | 2,00,000 | 4,00,000 |
| Securities Premium | 1,00,000 | 2,00,000 |
| Profit & Loss Account | 1,00,000 | 1,00,000 |
| Statutory Reserve | 1,00,000 | 1,00,000 |
| **Total Shareholders' Funds** | **15,00,000** | **18,00,000** |
| Loan Funds | 30,00,000 | 8,00,000 |

Buyback price = ₹75 per share (Face value ₹10 each)

**Part (a): Maximum Permissible Number of Shares to be Bought Back**

Under **Section 68 of the Companies Act, 2013**, buyback is subject to three mandatory limits:

**Limit 1** — Number of shares bought back must not exceed **25% of total paid-up equity share capital**.

**Limit 2** — Total consideration for buyback must not exceed **25% of paid-up capital and free reserves** (as per the last audited balance sheet).

**Limit 3** — Post-buyback, **debt shall not exceed twice the paid-up capital and free reserves** (i.e., debt-equity ratio ≤ 2:1).

**Situation I — Buyback NOT Permissible:**

Current debt-equity ratio = ₹30,00,000 : ₹15,00,000 = **2:1**.

For an…

Question 17

Explain the meaning of Equity Shares with Differential Rights. Whether Equity Shares with Differential Rights be also issued with differential rights?

Accepted Answer

**Meaning of Equity Shares with Differential Rights:**

Equity Shares with Differential Rights (ESDR) are equity shares issued by a company that carry differential rights in respect of **dividend** and/or **voting rights** or both, as compared to other equity shares of the company. They constitute a distinct class of equity shares within the capital structure, governed by **Section 43 of the Companies Act, 2013**.

Key characteristics of ESDR include: (i) they are equity shares in nature; (ii) they carry rights different from ordinary equity shares; (iii) the differential rights relate to dividend payment, voting, or both; and (iv) they must be created by the **Articles of Association** of the company.

**Rights that can be Differential:**
The differential rights may relate to: (1) **Dividend rights** – the company may issue equity shares with preferential dividend rights (higher or lower rates) compared to ordinary equity shares; (2) **Voting rights** – equity shares may carry differential voting rights as per Section 43A; and (3) **Distribution of surplus assets** – upon winding up, differential rights regarding capital repayment and surplus distribution.

**Can Equity Shares with Differential Rights be issued with Differential Voting Rights?**

**Yes**, under **Section 43A of the Companies Act, 2013**, a company may issue equity shares with differential voting rights, subject to specific conditions and restrictions:

**(A) Conditions for Issue:**
- Equity shares with diffe…

Question 18

In Jaguar Limited A, B, C and D hold equity share capital in the proportion of 30:20:30:10 and M, N, O and P hold preference share capital in proportion of 40:20:30:10.

You are required to calculate the voting rights in case of resolution of winding up of the company. If the paid up Equity Share Capital of the company is ₹ 100 Lakhs and Preference Share Capital of the company is ₹ 100 Lakhs.

Accepted Answer

**Legal Basis:** Under **Section 47(2) of the Companies Act, 2013**, preference shareholders are entitled to vote on **every resolution** placed before the company on matters that directly affect their rights. **Winding up** of the company is one such matter where preference shareholders can exercise voting rights alongside equity shareholders. On a poll, voting rights are proportional to the **paid-up share capital** held.

**Step 1 – Allocation of Equity Share Capital (₹100 Lakhs) in ratio 30:20:30:10**
Total ratio parts = 30+20+30+10 = 90
- A = 30/90 × ₹100L = **₹33.33 Lakhs**
- B = 20/90 × ₹100L = **₹22.22 Lakhs**
- C = 30/90 × ₹100L = **₹33.33 Lakhs**
- D = 10/90 × ₹100L = **₹11.11 Lakhs**

**Step 2 – Allocation of Preference Share Capital (₹100 Lakhs) in ratio 40:20:30:10**
Total ratio parts = 40+20+30+10 = 100
- M = 40/100 × ₹100L = **₹40 Lakhs**
- N = 20/100 × ₹100L = **₹20 Lakhs**
- O = 30/100 × ₹100L = **₹30 Lakhs**
- P = 10/100 × ₹100L = **₹10 Lakhs**

**Step 3 – Total Paid-up Capital = ₹100L + ₹100L = ₹200 Lakhs**

**Step 4 – Voting Rights (%) on Winding Up Resolution:**

| Shareholder | Paid-up Capital (₹L) | Voting Rights % |
|---|---|---|
| A (Equity) | 33.33 | 16.67% |
| B (Equity) | 22.22 | 11.11% |
| C (Equity) | 33.33 | 16.67% |
| D (Equity) | 11.11 | 5.56% |
| M (Preference) | 40.00 | 20.00% |
| N (Preference) | 20.00 | 10.00% |
| O (Preference) | 30.00 | 15.00% |
| P (Preference) | 10.00 | 5.00% |
| **Total** | **200.00** | **100.00%** |

**Conclusion:** …

Question 19

The following were the terms of amalgamation: (i) Goodwill of C & Co. was valued at ₹ 2,80,000 and the Goodwill of H & Co. was valued at ₹ 1,60,000. Goodwill account is not to be adjusted through the Capital accounts of the partners. (ii) Building, Machinery and Vehicles are to be taken over at ₹ 8,00,000, ₹ 2,40,000 and ₹ 3,00,000 respectively. (iii) Provision for doubtful debts at ₹ 20,000 in respect of C & Co. and ₹ 10,000 in respect of H & Co. are to be provided.

Accepted Answer

**Part (a): Goodwill Adjustment in C H & Co.**

Since the terms specify that **goodwill is NOT to be adjusted through Capital Accounts**, goodwill will be **retained as an asset** in the books of the new firm C H & Co. at the total amalgamated value. No write-off is made against partners' capitals.

The mechanism works as follows:

**Step 1 – Credit to incoming partners:** The partners of C & Co. are credited with ₹2,80,000 in their **old profit-sharing ratio**, and the partners of H & Co. are credited with ₹1,60,000 in their **old profit-sharing ratio**. This compensates them for the goodwill they bring into the new firm.

**Step 2 – Goodwill raised as asset:** Goodwill A/c is debited with the total ₹4,40,000 (₹2,80,000 + ₹1,60,000) in the books of C H & Co., appearing on the **assets side** of the new Balance Sheet.

Journal Entry in new firm's books:
Goodwill A/c Dr. ₹4,40,000
  To Capital A/c of C & Co. partners (old ratio) ₹2,80,000
  To Capital A/c of H & Co. partners (old ratio) ₹1,60,000

Since goodwill is not written off, **no debit adjustment** is made to any partner's Capital A/c in the new profit-sharing ratio. The goodwill of ₹4,40,000 continues as a fixed asset on the Balance Sheet.

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**Part (b): Balance Sheet of C H & Co.**

The Balance Sheet is prepared by combining the assets and liabilities of both firms after applying the agreed revaluations and provisions. The key adjustments are:

- **Building** taken at ₹8,00,000; **Machinery** at ₹2,40,000; **Vehicl…

Question 20

The Trial Balances of X Limited and Y Limited as on 31st March, 2021 were as under: Trial balance showing Equity Share capital (₹ 100 each), Preference share capital, Reserves, Debentures, Trade Payables/Receivables, Profit & Loss A/c balance, Purchases/Sales, Wages and Salaries, Debenture Interest, General Expenses, Preference share dividend, Inventory, Cash at Bank, Investment in Y Limited, and Fixed Assets with corresponding Debit and Credit values in ₹ 000 for both companies.

Accepted Answer

**Note:** The actual numerical figures from the Trial Balances of X Limited and Y Limited have not been provided in the question text. The following answer presents the **complete framework, procedure, and pro-forma workings** that a CA student must apply to any such consolidation problem under **AS 21 – Consolidated Financial Statements** (issued by ICAI under the Companies Act 2013).

**Applicable Standard:** AS 21 – Consolidated Financial Statements governs the preparation of consolidated financial statements when a parent–subsidiary relationship exists. X Limited (parent) holds investments in Y Limited (subsidiary).

**Step 1 – Determine Control and Identify Subsidiary**

If X Limited holds more than 50% of the voting (equity) share capital of Y Limited, Y Limited is a **subsidiary** under AS 21. The consolidated financial statements must include 100% of Y Limited's assets, liabilities, income, and expenses, subject to elimination adjustments.

**Step 2 – Cost of Control (Goodwill / Capital Reserve)**

The Investment in Y Limited appearing in X Limited's books is eliminated against the **share capital and pre-acquisition reserves of Y Limited** attributable to X's holding.

Formula:
Goodwill = Cost of Investment − X's share of (Equity Share Capital + Preference Share Capital + Pre-acquisition Reserves + Pre-acquisition Profit & Loss)

If the result is negative, it represents **Capital Reserve**, which is shown on the liabilities side of the Consolidated Balance Sheet.

**…

Question 21

Investment in Y Limited was acquired on 1st July, 2020 and consisted of 80% of Equity Share Capital and 50% of Preference Share Capital. After acquiring control of Y Limited, X Limited supplied to Y Limited goods at cost plus 25%, the total invoice value of such goods being ₹1,20,000, one-fourth of which goods were still lying in inventory at the end of the year. Depreciation to be charged @ 10% in X Limited and @ 15% in Y Limited on Fixed Assets.

Accepted Answer

**Part (a): Consolidated Statement of Profit and Loss - Year ended 31st March, 2021**

Note: The question provides information about inter-company transactions but does not include the actual financial statements of X Limited and Y Limited required to prepare the consolidated P&L. To prepare a complete consolidated statement, the following **key consolidation adjustments** are necessary:

**1. Elimination of Inter-company Sales:**
Total goods supplied by X to Y at cost plus 25% = ₹1,20,000 (invoice value)
Cost to X Limited = ₹1,20,000 × 100/125 = ₹96,000
Gross profit on inter-company sales = ₹24,000
This entire amount must be eliminated from consolidated revenue.

**2. Adjustment of Unrealized Profit in Closing Inventory:**
Goods remaining in Y Limited's inventory = 1/4 × ₹1,20,000 = ₹30,000 (at selling price)
Cost basis of these goods = ₹30,000 × 100/125 = ₹24,000
Unrealized profit = ₹30,000 - ₹24,000 = ₹6,000
This unrealized profit must be reversed from consolidated profit and written down from closing inventory valuation, as the goods are at Y Limited's location (seller is X Limited).

**3. Depreciation Adjustment:**
Depreciation rates differ between entities (X at 10%, Y at 15%). In consolidation, **consistent accounting policies** must be applied. The consolidated statement should reflect depreciation at a single rate. If X's policy is considered the group policy, Y's fixed assets should be depreciated at 10%, creating an adjustment of 5% on Y's fixed assets for the cons…

Question 22

New Bank Limited: A customer to whom a sum of ₹5 Lakhs was advanced has become insolvent and it is expected that only 50% can be recovered from his estate. Make necessary provisions on Risk Assets: Standard (excluding above ₹5,00,000) ₹10,00,000; Sub-Standard (fully secured) ₹8,20,000; Doubtful assets covered by security for 1 year ₹40,000; Loss assets ₹1,00,000. Provide ₹6,50,000 for Income Tax. The directors desire to declare 10% dividend. 25% of profit is to be transferred to Reserve Fund. Rebate on Bills discounted on 31.03.2020 was ₹20,000 and ₹15,000 on 31.03.2021. You are required to prepare Profit & Loss A/c of New Bank Limited for the year ended 31.03.2021.

Accepted Answer

**Profit & Loss Account of New Bank Limited for the year ended 31.03.2021**

**Note on Rebate on Bills Discounted:** In bank accounts, rebate on bills discounted represents unexpired discount (a liability). The opening balance (₹20,000 as at 31.03.2020) is credited to the current year's P&L as income realised. The closing balance (₹15,000 as at 31.03.2021) is debited as unexpired income carried forward.

**Provision for Bad Debt (Insolvent Customer):** A customer to whom ₹5,00,000 was advanced has become insolvent. Since only 50% recovery is expected, provision required = ₹5,00,000 × 50% = **₹2,50,000**.

**Provisions on Risk Assets** are made as per RBI Prudential Norms on Income Recognition, Asset Classification and Provisioning:
- **Standard Assets** (excluding the above NPA of ₹5,00,000): ₹10,00,000 @ 0.40% = ₹4,000
- **Sub-Standard Assets** (fully secured): ₹8,20,000 @ 15% = ₹1,23,000
- **Doubtful Assets** (covered by security, up to 1 year): ₹40,000 @ 25% = ₹10,000
- **Loss Assets**: ₹1,00,000 @ 100% = ₹1,00,000
- **Total provisions on risk assets = ₹2,37,000**

**Transfer to Reserve Fund** is mandated under **Section 17 of the Banking Regulation Act, 1949**: not less than 25% of net profit of each year must be transferred to the Reserve Fund before declaring any dividend.

**Proposed Dividend** of 10% is declared by the directors on the paid-up share capital.

---

**Profit & Loss Account**
*(Dr. side — Expenditure & Appropriations)*

| Particulars | ₹ |
|---|---|
| Pr…

Question 23

Deep Limited has the following particulars in the Balance Sheet as on 31st March, 2020: Deferred Tax Liability (Cr.) ₹28.00 Lakhs; Deferred Tax Assets (Dr.) ₹14.00 Lakhs. The following transactions were reported during the year 2020-2021: (i) Depreciation as per books was ₹70 Lakhs whereas Depreciation for Tax purposes was ₹42 Lakhs. There were no additions to Fixed Assets during the year. (ii) Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were ₹14 Lakhs. (iii) Share issue expenses allowed under section 35(D) of the Income Tax Act, 1961 for the year 2020-21 (1/10th of ₹70.00 lakhs incurred in 2019-20). (iv) Repairs to Plant and Machinery were made during the year for ₹1,40,000 Lakhs and was spread over the period 2020-21 and 2021-22 equally in the books. However, t…

Accepted Answer

This question is governed by **AS 22 — Accounting for Taxes on Income**. Under AS 22, timing differences between taxable income and accounting income give rise to **Deferred Tax Assets (DTA)** or **Deferred Tax Liability (DTL)**. The tax rate applicable is **40%**.

**Opening Balances (31st March 2020):**
DTL (Cr.) = ₹28.00 Lakhs | DTA (Dr.) = ₹14.00 Lakhs

**Analysis of Each Transaction for the Year 2020-21:**

**(i) Depreciation — Timing Difference (Originating):**
Book Depreciation (₹70 Lakhs) **exceeds** Tax Depreciation (₹42 Lakhs) by ₹28 Lakhs. Since book depreciation is higher, accounting profit is lower than taxable income. More tax is paid currently than the P&L tax charge demands — this creates a **Deferred Tax Asset**.
DTA created = ₹28 Lakhs × 40% = **₹11.20 Lakhs**

**(ii) Expenses Disallowed in 2019-20, Now Allowed in 2020-21 — Timing Difference (Reversing):**
In 2019-20, the disallowance of ₹14 Lakhs meant taxable income was higher → DTA was created then. In 2020-21, those expenses are now allowed for tax, meaning taxable income is now lower than book income — the DTA **reverses**.
DTA reversed = ₹14 Lakhs × 40% = **₹5.60 Lakhs**

**(iii) Share Issue Expenses under Section 35D of the Income Tax Act, 1961 — Timing Difference (Reversing):**
The entire ₹70 Lakhs was written off in books in 2019-20, creating a DTA at that time (book expense > tax deduction). Under **Section 35D**, 1/10th = ₹7 Lakhs is allowed as tax deduction in 2020-21 with nil book charge — taxab…

Question 24

A Limited sells goods with unlimited right of return to its customers. The following pattern has been observed in the Return of Sales: Between 0-1 month: 6%; Between 1-2 months: 7%; Between 2-3 months: 8%. The Company has made Sales of ₹ 36 Lakhs in the month of January, ₹ 48 Lakhs in the month of February and of ₹ 60 Lakhs in the month of March. The Total Sales for the Financial Year have been ₹ 400 Lakhs. The Cost of Sales was ₹ 320 Lakhs. You are required to recognise the amount of Provision to be made and Revenue to be recognised as on 31st March.

Accepted Answer

This question is governed by **Ind AS 115 – Revenue from Contracts with Customers**. When a customer has a right to return goods, an entity must: (i) recognise revenue only for goods NOT expected to be returned; (ii) recognise a **Refund Liability** (provision) for expected returns; and (iii) recognise an asset (Right to Recover) at the cost of those goods.

**Step 1 – Identify the return pattern (incremental)**

The return percentages are incremental for each month bracket:
- 0–1 month after sale: **6%**
- 1–2 months after sale: **7%**
- 2–3 months after sale: **8%**

Total expected return over 3 months = 21% of each month's sales.

**Step 2 – Estimate FUTURE (unprovided) returns as on 31st March**

Only returns NOT yet realised by 31st March need provisioning:

**January Sales (₹36 Lakhs):** Already 2 months old. Returns in month 1 (6%) and month 2 (7%) have already occurred. Only month 3 return (April) is pending.
→ Provision = 8% × ₹36 L = **₹2.88 Lakhs**

**February Sales (₹48 Lakhs):** Already 1 month old. Returns in month 1 (6%) have occurred. Returns in months 2 and 3 (April & May) are pending.
→ Provision = (7% + 8%) × ₹48 L = 15% × ₹48 L = **₹7.20 Lakhs**

**March Sales (₹60 Lakhs):** Current month. No returns yet. All three months' returns (April, May, June) are pending.
→ Provision = (6% + 7% + 8%) × ₹60 L = 21% × ₹60 L = **₹12.60 Lakhs**

**Total Provision (Refund Liability) = ₹2.88 + ₹7.20 + ₹12.60 = ₹22.68 Lakhs**

**Step 3 – Revenue to be Recognised as on 31st…

Question 25

At the beginning of the year 1, Harmony Limited grants 600 options to each of its 1000 employees. The contractual life of option granted is 6 yrs. Other relevant information is as follows: Vesting Period: 3 years; Exercise period: 3 years; Expected Life: 5 years; Exercise Price: ₹ 100; Market Price: ₹ 100; Expected Forfeitures per year: 3%. The option granted vest according to a graded schedule of 25% at the end of the year 1, 25% at the end of the year 2 and the remaining 50% at the end of the year 3. You are required to calculate total compensation expenses for the options expected to vest and cost and cumulative cost to be recognized at the end of all three years assuming that expected forfeiture rate does not change during the vesting period when the intrinsic value of the options at t…

Accepted Answer

**Share-Based Payments — Graded Vesting with Intrinsic Value Method**

This problem is governed by the **ICAI Guidance Note on Accounting for Employee Share-based Payments** (Intrinsic Value method). Under **graded vesting**, each tranche is treated as a **separate grant** with its own vesting period and total compensation expense.

**Step 1: Identify Tranches**

Total options at grant = 600 × 1,000 = **6,00,000 options**

- **Tranche 1** (25% vesting at end of Year 1): 1,50,000 options, Vesting period = 1 year
- **Tranche 2** (25% vesting at end of Year 2): 1,50,000 options, Vesting period = 2 years
- **Tranche 3** (50% vesting at end of Year 3): 3,00,000 options, Vesting period = 3 years

**Step 2: Adjust for Expected Forfeitures**

Annual forfeiture rate = 3%, so survival rate = 0.97 per year.

- Tranche 1: 1,50,000 × 0.97¹ = **1,45,500 options**
- Tranche 2: 1,50,000 × 0.97² = 1,50,000 × 0.9409 = **1,41,135 options**
- Tranche 3: 3,00,000 × 0.97³ = 3,00,000 × 0.912673 = **2,73,802 options** (approx.)

**Step 3: Total Compensation Expense per Tranche** (Intrinsic Value = ₹7 per option)

- Tranche 1: 1,45,500 × ₹7 = **₹10,18,500**
- Tranche 2: 1,41,135 × ₹7 = **₹9,87,945**
- Tranche 3: 2,73,802 × ₹7 = **₹19,16,614**
- **Grand Total Compensation = ₹39,23,059**

**Step 4: Annual Cost Recognised** (straight-line within each tranche)

**Year 1:**
- Tranche 1: ₹10,18,500 ÷ 1 = ₹10,18,500
- Tranche 2: ₹9,87,945 ÷ 2 = ₹4,93,972
- Tranche 3: ₹19,16,614 ÷ 3 = ₹6,38,871
- **Year 1 Co…

Question 26

Sapra Limited has laid down the following terms upon the sanction of the reconstruction scheme by the court. You are required to show the necessary Journal Entries in the books of Sapra Limited of the above reconstruction scheme considering that balance in General Reserve is utilized to write off the losses.

Accepted Answer

**Journal Entries in the Books of Sapra Limited (Reconstruction Scheme)**

**Preliminary Workings — Capital Reduction Amount:**

Old Equity Share Capital: 7,50,000 shares × ₹10 = ₹75,00,000

New securities issued to shareholders:
- New Equity Shares: 3/5 × 7,50,000 = 4,50,000 shares × ₹10 = ₹45,00,000
- Preference Shares: 2/5 × 4,50,000 = 1,80,000 shares × ₹10 = ₹18,00,000
- 7% Debentures = ₹2,50,000
- **Total given back = ₹65,50,000**

**Capital Reduction (gain) = ₹75,00,000 − ₹65,50,000 = ₹9,50,000**

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**Journal Entries:**

**Entry 1 — Cancellation of old shares; issue of new shares and debentures:**
Dr. Equity Share Capital A/c (Old) ... ₹75,00,000
  Cr. New Equity Share Capital A/c ... ₹45,00,000
  Cr. Preference Share Capital A/c ... ₹18,00,000
  Cr. 7% Debentures A/c ... ₹2,50,000
  Cr. **Capital Reduction A/c** ... ₹9,50,000
*(Being old equity shares cancelled and new equity shares, preference shares and 7% debentures issued as per reconstruction scheme)*

**Entry 2 — Writing off Goodwill:**
Dr. Capital Reduction A/c ... ₹2,70,000
  Cr. Goodwill A/c ... ₹2,70,000
*(Being goodwill completely written off as per scheme)*

**Entry 3 — Reduction in Plant & Machinery:**
Dr. Capital Reduction A/c ... ₹1,00,000
  Cr. Plant & Machinery A/c ... ₹1,00,000
*(Being Plant & Machinery written down as per scheme)*

**Entry 4 — Reduction in Furniture:**
Dr. Capital Reduction A/c ... ₹88,000
  Cr. Furniture A/c ... ₹88,000
*(Being Furniture written down as per scheme)*

**Entry 5 — …

CA Inter Audit & Ethics

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap