Question 1

Cashier of A-One Limited embezzled cash amounting to ₹ 6,00,000 during March, 2012. However some cash comes to the notice of company management during April, 2012 only. Financial statements of the company is not yet approved by the Board of Directors of the company. With the help of provisions of AS 4 "Contingencies and Events Occurring after the Balance Sheet Date" decide, whether the embezzlement of cash should be adjusted in the books of accounts for the year ended March, 2012?

Accepted Answer

**(i) Embezzlement discovered in April 2012 — before approval of financial statements:**

As per **AS 4 — Contingencies and Events Occurring after the Balance Sheet Date** (issued by ICAI), events occurring after the balance sheet date are classified as either **adjusting events** or **non-adjusting events**.

**Adjusting events** are those that provide additional evidence of conditions that existed **at the balance sheet date**. Such events require adjustment of assets and liabilities in the financial statements.

In the present case, the embezzlement of ₹ 6,00,000 actually **occurred during March 2012**, i.e., before the balance sheet date of 31st March, 2012. The fact that it came to the notice of management only in April 2012 does not alter the underlying condition — the cash was already missing as on 31st March, 2012.

Since the financial statements have **not yet been approved** by the Board of Directors, the company is still in a position to incorporate the adjustment. Therefore, the embezzlement **should be adjusted** in the books of accounts for the year ended 31st March, 2012. The loss of ₹ 6,00,000 should be recognised and the cash/asset balance should be reduced accordingly.

**(ii) Embezzlement discovered only after approval of financial statements:**

If the embezzlement of ₹ 6,00,000 comes to the notice of management **only after the Board of Directors has approved the financial statements**, then it is no longer possible to adjust the financial statements for …

Question 2

M/s Mary Electricity Company laid down a Main at a cost of ₹ 40,00,000 in 2008. During 2011 company laid down an auxiliary Main for one-fourth of the old Main at a cost of ₹ 15,00,000. It also replaced part of old Main at a cost of ₹ 45,00,000. The cost of material and labour sops up by 15%. Sale of old materials realized ₹ 1,00,000. Old materials valued at ₹ 1,50,000 were used in auxiliary Main and those valued at ₹ 1,00,000 were used in replacement of the old Main. Show the Journal entries for recording the above transactions along with required workings.

Accepted Answer

**Topic: Replacement of Mains — Electricity Company (Fixed Assets)**

The transactions involve (i) laying an **Auxiliary Main** alongside one-fourth of the old Main, and (ii) **replacing** the old Main. The key principle is: the original cost of the replaced portion is estimated by deflating the current replacement cost using the price-rise index; the difference between new cost and old cost (net of salvage) is charged to Revenue Account.

**Working Notes** (see working_notes for step-by-step):

— Original cost of replaced portion = ₹40,00,000
— Old materials recovered = ₹3,50,000
— Balance of old Mains written off = ₹36,50,000
— Total cost of Auxiliary Main = ₹16,50,000
— Total cost of New Main (replacement) = ₹46,00,000

**Journal Entries in the books of M/s Mary Electricity Company:**

**Entry 1 — Cash expenditure on Auxiliary Main:**
Auxiliary Main A/c Dr. ₹15,00,000
  To Bank A/c ₹15,00,000
*(Being cash paid for laying auxiliary main)*

**Entry 2 — Old materials used in Auxiliary Main:**
Auxiliary Main A/c Dr. ₹1,50,000
  To Old Materials A/c ₹1,50,000
*(Being old materials of ₹1,50,000 utilised in construction of auxiliary main)*

**Entry 3 — Recovery of old materials from dismantled portion of old Main:**
Old Materials A/c Dr. ₹3,50,000
  To Old Mains A/c ₹3,50,000
*(Being old materials recovered: sold ₹1,00,000 + used in auxiliary ₹1,50,000 + used in replacement ₹1,00,000 = ₹3,50,000)*

**Entry 4 — Sale of old materials:**
Bank A/c Dr. ₹1,00,000
  To Old Materials A/c…

Question 3

A company had deferred research and development cost of ₹ 450 Lakhs. Sales expected in the subsequent years are as under:

| Years | Sales (₹ in Lakhs) |
|---|---|
| 1 | 1200 |
| 2 | 900 |
| 3 | 600 |
| 4 | 300 |

Accepted Answer

**Part (a): Amortization of Deferred Development Cost**

Development costs should be capitalized and amortized systematically over the period during which benefits are expected to accrue. Per **AS 26 (Intangible Assets)**, the amortization method should reflect the pattern of economic benefits expected from the asset.

Given the expected sales for the four years total ₹3,000 Lakhs, the development cost of ₹450 Lakhs should be amortized in proportion to expected sales in each year:

**Year 1:** (1,200/3,000) × 450 = **₹180 Lakhs**
**Year 2:** (900/3,000) × 450 = **₹135 Lakhs**
**Year 3:** (600/3,000) × 450 = **₹90 Lakhs**
**Year 4:** (300/3,000) × 450 = **₹45 Lakhs**

**Unamortized Expenditure at End of Year 3:** If it is discovered at the end of Year 3 that no further benefit will accrue in Year 4, the remaining unamortized amount of **₹45 Lakhs** (allocated to Year 4) should be **written off entirely in Year 3 itself** as an exceptional charge to the Profit and Loss Account. The assets must not be carried at a value beyond what is expected to generate economic benefits. The total charge to P&L in Year 3 would therefore be ₹135 Lakhs (₹90 Lakhs amortization + ₹45 Lakhs write-off).

---

**Part (b): Journal Entries for Asset Purchase with Government Grant (Year 1)**

**Machinery cost:** ₹25,00,000; **Useful life:** 10 years; **Salvage value:** ₹5,00,000; **Grant received:** ₹5,00,000 (deferred income method)

**Annual depreciation:** (25,00,000 − 5,00,000) / 10 = ₹2,00,000

**…

Question 4

Explain the concept of "Weighted average number of equity shares outstanding during the period". State how would you compute, based on AS-20, the weighted average number of equity shares in the following case:
1st April, 2011 - Balance of Equity Shares: 4,80,000
31st August, 2011 - Equity shares issued for cash: 3,60,000
1st February, 2012 - Equity shares bought back: 1,80,000
31st March, 2012 - Balance of equity shares: 6,00,000

Accepted Answer

**Concept of Weighted Average Number of Equity Shares Outstanding**

As per **AS-20 (Earnings Per Share)**, issued by ICAI, the weighted average number of equity shares outstanding during the period is the number of equity shares outstanding at the beginning of the period, **adjusted by shares bought back or issued during the period, multiplied by a time-weighting factor**. The time-weighting factor is the number of days or months the specific shares are outstanding as a proportion of the total number of days or months in the period.

The rationale is that the capital available to generate earnings changes each time shares are issued or bought back. Weighting adjusts for this so that EPS reflects the actual capital employed throughout the year.

**Key rules under AS-20:**
- Shares issued for **cash** are weighted from the date cash is receivable (generally the issue date).
- Shares **bought back** are weighted only up to the date of buyback; they are excluded thereafter.
- Shares issued as **bonus shares** are treated as if they were always outstanding (no time-weighting; prior periods also restated).

**Computation of Weighted Average Number of Equity Shares (Year: 1 April 2011 to 31 March 2012)**

The accounting year is 12 months. Based on the movements given:

- **1 April 2011:** Opening balance = 4,80,000 shares
- **31 August 2011:** Issue for cash = +3,60,000 → Balance becomes **8,40,000**
- **1 February 2012:** Buyback = −1,80,000 → Balance becomes **6,60,000**

Three p…

Question 5

Compute adjusted earning per share and basic earning per share based on the following information:
Net Profit 2010-11: ₹ 11,40,000
Net Profit 2011-12: ₹ 22,50,000
No. of equity shares outstanding until 31st December, 2011: 5,00,000
Bonus issue on 1st January, 2012: 1 equity share for each equity share outstanding as at 31st December, 2011

Accepted Answer

**Applicable Standard: AS 20 — Earnings Per Share**

As per **AS 20**, when bonus shares are issued, the weighted average number of equity shares outstanding during **all periods presented** must be adjusted retrospectively, as if the bonus issue had occurred at the beginning of the earliest period reported. This is because bonus shares are issued without any consideration and do not represent a real economic event in the current period.

**Bonus Factor:** 1 additional share for every 1 existing share → Bonus factor = **2** (shares are doubled)

**Basic EPS for 2011-12:**

The bonus issue on 1st January 2012 falls within the financial year 2011-12. Per AS 20, the weighted average shares for 2011-12 are computed treating the bonus as if issued at the start of the year:

Weighted Average Shares = 5,00,000 × 2 = **10,00,000 shares**

Basic EPS (2011-12) = ₹22,50,000 ÷ 10,00,000 = **₹2.25 per share**

**Adjusted EPS for 2010-11 (Restated):**

The previously reported EPS for 2010-11 must be restated to reflect the bonus issue, for comparability:

Adjusted EPS (2010-11) = ₹11,40,000 ÷ 10,00,000 = **₹1.14 per share**

(The originally reported EPS for 2010-11, before adjustment, would have been ₹11,40,000 ÷ 5,00,000 = ₹2.28 per share.)

**Summary:**
- Basic EPS (2011-12): **₹2.25 per share**
- Adjusted EPS (2010-11): **₹1.14 per share**

Question 6

Ajay Enterprise, a Partnership firm in which A, B and C are three partners sharing profits and losses in the ratio 4 : 3 : 3. The balance sheet of the firm as on 31st December, 2011 is as below:
Liabilities: A's Capital ₹ 15,000, B's Capital ₹ 7,500, C's Capital ₹ 15,000, B's Loan A/c ₹ 4,500, Sundry Creditors ₹ 16,500, Total ₹ 58,500
Assets: Factory Building ₹ 24,160, Plant & Machinery ₹ 16,275, Debtors ₹ 5,400, Stock -, Cash at Bank ₹ 275, Total ₹ 58,500

Accepted Answer

**Ajay Enterprise – Partnership Dissolution**

**Step 1: Identify Claims and Assets**

External Liabilities (to be paid first):
- Sundry Creditors: ₹16,500
- B's Loan Account (B is a creditor): ₹4,500
- Total External Liabilities: ₹21,000

Partners' Capital Accounts:
- A: ₹15,000 | B: ₹7,500 | C: ₹15,000 | Total: ₹37,500

Profit & Loss Ratio: A:B:C = 4:3:3 (Total = 10 parts)

Assets (at book value, since revaluation postponed):
- Factory Building: ₹24,160
- Plant & Machinery: ₹16,275
- Debtors: ₹5,400
- Stock: ₹nil
- Cash at Bank: ₹275
- **Total Assets: ₹46,110**

*Note: Balance sheet shows asset total as ₹58,500, but individual items sum to ₹46,110. Proceeding with individual figures as stated, which indicates an implied loss of ₹12,390.*

**Step 2: Calculate Implied Loss on Dissolution**

Assets realized (at book value): ₹46,110
Less: External Liabilities: (₹21,000)
Net Available for Partners: ₹25,110

Total Capital Accounts: ₹37,500
Implied Loss (shortfall): **₹12,390**

This loss is borne by partners in P&L ratio 4:3:3:
- A's share of loss: ₹12,390 × 4/10 = ₹4,956
- B's share of loss: ₹12,390 × 3/10 = ₹3,717
- C's share of loss: ₹12,390 × 3/10 = ₹3,717

**Step 3: Adjusted Capital Accounts**

- A: ₹15,000 – ₹4,956 = **₹10,044**
- B: ₹7,500 – ₹3,717 = **₹3,783**
- C: ₹15,000 – ₹3,717 = **₹11,283**
- Total: ₹25,110 ✓

**Step 4: Apply C's Liquidation Commission (10%)**

C is appointed as liquidating agent and receives 10% of the amount distributed:

C's Commission = ₹25,110 ×…

Question 7

Following is the Balance Sheet of M/s Competent Limited as on 31st March, 2012:
Liabilities: Equity Shares of ₹ 10 each fully paid ₹ 12,50,000, Revenue Reserve ₹ 14,00,000, Securities Premium ₹ 2,50,000, Provision for Loss Account ₹ 1,25,000, Secured Loans: 13% Debentures ₹ 18,75,000, Unsecured Loans ₹ 10,00,000, Current Liabilities ₹ 16,50,000, Total ₹ 76,50,000
Assets: Fixed Assets ₹ 46,50,000, Current Assets ₹ 30,00,000, Total ₹ 76,50,000

Accepted Answer

**Balance Sheet Analysis of M/s Competent Limited as on 31st March, 2012**

**(a) Shareholders' Funds (Net Worth)**

Shareholders' Funds represent the owners' stake in the company. It is computed by aggregating share capital and reserves, after adjusting for any loss provisions:
- Equity Share Capital: ₹12,50,000
- Revenue Reserve: ₹14,00,000
- Securities Premium: ₹2,50,000
- Less: Provision for Loss Account: (₹1,25,000)
- **Shareholders' Funds = ₹27,75,000**

The **number of equity shares** = ₹12,50,000 ÷ ₹10 = **1,25,000 shares**

The **book value per share** = ₹27,75,000 ÷ 1,25,000 = **₹22.20 per share**, indicating the shares are trading at a premium to face value on a net asset basis.

**(b) Long-Term Borrowings and Capital Employed**

**Long-term Debt:**
- 13% Debentures (Secured): ₹18,75,000
- Unsecured Loans: ₹10,00,000
- **Total Long-term Debt = ₹28,75,000**

**Capital Employed** = Shareholders' Funds + Long-term Borrowings
= ₹27,75,000 + ₹28,75,000 = **₹56,50,000**

This can be cross-verified from the assets side: Fixed Assets + Net Working Capital = ₹46,50,000 + ₹13,50,000 = ₹60,00,000. The difference arises due to the treatment of Provision for Loss Account; the asset-side figure includes it as a separate liability.

**(c) Key Financial Ratios**

**Current Ratio** = Current Assets ÷ Current Liabilities = ₹30,00,000 ÷ ₹16,50,000 = **1.82:1**
This is below the ideal benchmark of 2:1, suggesting the company's short-term liquidity position is slightly weak.

**Debt-Eq…

Question 8

Given below balance sheet of Vasudha Ltd and Vaishali Ltd as at 31st March, 2012. Goodwill of the Companies Vasudha Ltd. and Vaishali Ltd. is to be valued at ₹ 75,000 and ₹ 50,000 respectively. The book value of Vaishali Ltd is worth ₹ 1,24,000 and of Vasudha Ltd ₹ 175,000. Stock of Vaishali Ltd has been shown at 10% above of its cost. It is decided that Vasudha Ltd will absorb Vaishali Ltd without liquidating later, by taking over the entire business by issue of shares at the intrinsic value. You are required to draft the balance sheet of the two companies after putting through the scheme.

Accepted Answer

**Note:** The actual balance sheet figures of Vasudha Ltd and Vaishali Ltd were not included in the question as stated ('Given below balance sheet…'). The solution below demonstrates the complete methodology with all given adjustment figures applied, and shows the framework every CA student must follow. Where source balance sheet line items are absent, placeholder references (denoted [BS]) are used.

**Nature of Amalgamation**

This is an **Absorption**, where Vasudha Ltd (Transferee/Purchasing Company) takes over the entire business of Vaishali Ltd (Transferor/Vendor Company). Since Vaishali Ltd is not liquidated but continues to exist (the question specifies 'without liquidating latter'), this is treated as an **Amalgamation in the Nature of Purchase** under **AS 14 – Accounting for Amalgamations** (issued by ICAI). The **Purchase Method** is applied.

**Step 1 – Revaluation / Adjusted Net Assets of Vaishali Ltd (Transferor)**

Before calculating intrinsic value, assets and liabilities of both companies must be restated to fair value:

(a) **Goodwill** is to be recognised at ₹50,000 for Vaishali Ltd (given). If goodwill was absent or at a different figure in the books, the difference is adjusted.

(b) **Fixed Assets (Land/Property)** of Vaishali Ltd: book value stated as ₹1,24,000 (given). This is the fair value to be used.

(c) **Stock Adjustment for Vaishali Ltd:** Stock is shown at 10% above cost in the books. Therefore:
- If book value of stock = S, then S = Cost × 1.10…

Question 9

The company wants to buy back 25,000 equity shares of ₹ 10 each, on 1st April, 2012, at ₹ 20 per share. Buy back of shares is duly authorized by its articles and necessary resolution passed by the company towards this. The payment for buy back of shares will be made by the debentures out of sufficient bank balance available as a part of Current Assets. Comment with your calculations, whether buy back of shares by company is within the provisions of the Companies Act, 1956. If not, pass necessary journal entries towards buy back of shares and proper Balance Sheet after buy back of shares.

Accepted Answer

**Buyback of Shares — Analysis under Section 77A of the Companies Act, 1956**

**Conditions to be satisfied for Buyback of Shares (Section 77A, Companies Act, 1956):**

For a buyback to be valid, the following conditions must be met:

(i) It must be authorised by the **Articles of Association**.
(ii) A **Special Resolution** must have been passed in the General Meeting (Board Resolution suffices only if buyback ≤ 10% of total paid-up capital and free reserves).
(iii) Buyback must be made only out of: (a) **free reserves**, (b) **securities premium account**, or (c) **proceeds of any fresh issue of shares or other specified securities** — NOT from proceeds of debentures.
(iv) Buyback in any financial year shall not exceed **25% of total paid-up equity capital and free reserves**.
(v) Post-buyback **debt-equity ratio shall not exceed 2:1**.
(vi) All shares proposed to be bought back must be **fully paid up**.
(vii) Company should not have defaulted in repayment of deposits, redemption of debentures/preference shares, payment of dividend, or repayment of term loans.

**Comment on Whether the Proposed Buyback is Valid:**

| Condition | Status |
|---|---|
| Authorised by Articles | Satisfied ✓ |
| Necessary resolution passed | Satisfied ✓ |
| Source of funds — from Debentures | **NOT Satisfied ✗** |

The company proposes to fund the buyback from **proceeds of Debentures**. Under Section 77A, debentures are **not a permitted source** for buyback. Only free reserves, securities prem…

Question 10

A Commercial Bank has the following capital funds and assets. Segregate the capital funds into Tier-I and Tier-II Capitals. Find out the risk-adjusted assets and capital adequacy ratio: Capital Funds - Paid up Equity Share Capital ₹ 760 Crore, Statutory Reserve ₹ 150 Crore, Share Premium ₹ 150 Crore, Capital Reserve (of which ₹ 40 Crore were due to revaluation of assets and balance due to sale) ₹ 90 Crore.

Accepted Answer

**Capital Adequacy Ratio (CAR) — Classification of Capital Funds and Computation**

Under **RBI guidelines** (based on **Basel II / Basel III norms**), a bank's capital is classified into **Tier-I (Core Capital)** and **Tier-II (Supplementary Capital)**.

**Tier-I Capital** consists of elements that are permanent, fully paid-up, and freely available to absorb losses. These include: Paid-up Equity Share Capital, Statutory Reserves, Share Premium, and Capital Reserves arising from actual sale proceeds (not revaluation).

**Tier-II Capital** consists of elements of a less permanent nature. **Revaluation Reserves** are included in Tier-II but are subject to a **discount of 55%** (i.e., only **45% of revaluation reserves** are eligible), since such reserves are contingent and may be unrealised.

**Classification of the given Capital Funds:**

**Tier-I Capital:**
- Paid-up Equity Share Capital: ₹760 Crore
- Statutory Reserve: ₹150 Crore
- Share Premium: ₹150 Crore
- Capital Reserve from sale of assets (₹90 Cr − ₹40 Cr revaluation): ₹50 Crore
- **Total Tier-I Capital: ₹1,110 Crore**

**Tier-II Capital:**
- Revaluation Reserve portion of Capital Reserve: ₹40 Crore
  Eligible amount @ 45% (discount of 55%): ₹40 × 45% = **₹18 Crore**
- **Total Tier-II Capital: ₹18 Crore**

**Total Capital Funds (Tier-I + Tier-II): ₹1,128 Crore**

**Note:** Tier-II Capital cannot exceed 100% of Tier-I Capital. Here, ₹18 Crore < ₹1,110 Crore, so the condition is satisfied.

**Capital Adequacy Ratio (CAR)…

Question 11

The following balances appeared in the books of Paradise Ltd on 1-4-2011: (i) 12% Debentures - ₹ 7,50,000 (ii) Balance of Sinking Fund ₹ 6,00,000 (iii) Sinking Fund Investment ₹ 6,00,000 represented by 10% ₹ 6,50,000 secured bonds of Government of India. Annual contribution to the Sinking Fund was ₹ 1,20,000 made on 31st March each year. On 31-3-2012, balance at bank was ₹ 3,00,000 before receipt of interest. The company sold the investment at 90%, for redemption of debentures at a premium of 10% on the above date. You are required to prepare the following accounts for the year ended 31st March, 2012: (1) Debentures Account (2) Sinking Fund Account (3) Sinking Fund Investment Account (4) Bank Account (5) Debentures Holders Account

Accepted Answer

**Preliminary Computations before preparing accounts:**

**Interest on Sinking Fund Investment:** Face value of 10% Govt. bonds = ₹6,50,000. Interest = 10% × ₹6,50,000 = ₹65,000.

**Sale proceeds of investment:** Sold at 90% of face value = 90% × ₹6,50,000 = ₹5,85,000. Book value = ₹6,00,000. **Loss on sale = ₹15,000** (charged to Sinking Fund A/c).

**Redemption of debentures:** Face value = ₹7,50,000 + 10% premium = ₹75,000. **Total payable to debenture holders = ₹8,25,000.** The premium is charged to Sinking Fund A/c.

**Annual debenture interest:** 12% × ₹7,50,000 = ₹90,000.

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**(1) 12% Debentures Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Debenture Holders A/c | 7,50,000 | Balance b/d (1-4-2011) | 7,50,000 |
| **Total** | **7,50,000** | **Total** | **7,50,000** |

---

**(2) Sinking Fund Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Sinking Fund Investment A/c (Loss on sale) | 15,000 | Balance b/d (1-4-2011) | 6,00,000 |
| Debenture Holders A/c (Premium on redemption) | 75,000 | P&L / Appropriation A/c (Annual contribution) | 1,20,000 |
| General Reserve A/c (Transfer) | 6,95,000 | Sinking Fund Investment A/c (Interest on Govt. bonds) | 65,000 |
| **Total** | **7,85,000** | **Total** | **7,85,000** |

*Note: On redemption, the balance in Sinking Fund is transferred to General Reserve as the debentures have been fully redeemed.*

---

**(3) Sinking Fund Investment Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Balance b/d (1-4-2011) | 6,00,000 | Bank …

Question 12

The following further information are given:
(1) Salaries outstanding ₹ 400
(2) Depreciate office equipment and Furniture & Fixtures @10% p.a. at written down value.
(3) The Head Office sent goods to Branch for ₹ 15,80,000.
(4) The Head Office shown an amount of ₹ 20,50,000 due from Branch.
(5) Stock on 31st March, 2012 = ₹ 21,500.
(6) There were no transit items either at the start or at the end of the year.
(7) On April 1, 2010 while the fixed assets were purchased the rate of exchange was ₹ 45 to $ 1. On April 1, 2011, the rate was ₹ 47 to $ 1. On March 31, 2012, the rate was ₹ 50 per $. Average Rate during the year was ₹ 45 to one $.

Prepare:
(a) Trial balance incorporating adjustments given converting dollars into rupees.
(b) Trading, Profit and Loss Account for the year ended 31st M…

Accepted Answer

**CRITICAL ISSUE: The question as presented is incomplete.** The problem provides adjustment items (1) through (7) but does not include the base **Trial Balance of the Foreign Branch** that these adjustments should be applied to. Without opening balances for Sales, Purchases, Expenses, Fixed Assets, Stock, Receivables, and Liabilities, a complete trial balance and financial statements cannot be prepared.

**What the question requires (if trial balance were provided):**

**(a) Trial Balance with Adjustments (Converting $ to ₹):**
The approach would be:
1. Convert all foreign currency items to rupees at appropriate rates:
   - Fixed assets purchased on 1.4.2010: Use rate ₹45 per $
   - Opening balances on 1.4.2011: Use closing rate of previous year (₹47 per $)
   - Current year transactions: Use average rate ₹45 per $ for P&L items
   - Closing balances on 31.3.2012: Use closing rate ₹50 per $ (for balance sheet items like receivables/payables)
2. Apply adjustments:
   - Salaries outstanding: ₹400
   - Depreciation on office equipment and Furniture & Fixtures @ 10% p.a. on WDV
   - Goods from HO to Branch: ₹15,80,000 (affects stock and inter-company transaction)
   - HO's claim: ₹20,50,000 (inter-company account)
   - Closing stock: ₹21,500
3. **Exchange gain/loss** on retranslation of opening balances and monetary items must be computed and shown separately.

**(b) Trading, P&L Account and Balance Sheet:**
With complete trial balance data, the financial statements would show:
…

Question 13

On 1st April 2012, a company offered 100 shares to each of its 400 employees at ₹ 25 per share. The employees are given a month to accept the share. The shares issued under the plan shall be subject to lock-in to transfer for three years from the grant date i.e. 30th April, 2013. The market price of shares of the company on the grant date was ₹ 35 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 28 per share.

Upto 30th April, 2012, 50% of employees accepted the offer and paid ₹ 25 per share purchased. Nominal value of each share is ₹ 10. Record the issue of shares in the books of the company under the aforesaid plan.

Accepted Answer

This is an **equity-settled share-based payment** transaction governed by **Ind AS 102 - Share-based Payments**. The employees receive shares at a price below fair value, and the difference represents employee compensation that should be expensed over the vesting period.

**Calculation of Shares Issued:**
Total employees who accepted the offer = 400 × 50% = 200 employees
Shares per employee = 100
Total shares issued = 200 × 100 = 20,000 shares

**Analysis of Fair Value and Employee Benefit:**
Fair value at grant date = ₹28 per share
Cash paid by employees = ₹25 per share
Benefit granted per share = ₹28 − ₹25 = ₹3 per share
Total employee benefit/compensation = ₹3 × 20,000 = **₹60,000**

This benefit arises because employees acquire shares at ₹25 while the fair value (reflecting post-vesting transfer restrictions) is ₹28. The difference represents the value of the employee share plan benefit.

**Share Capital and Premium Computation:**
Cash received from employees = 20,000 shares × ₹25 = ₹5,00,000
Share Capital (at nominal value) = 20,000 shares × ₹10 = ₹2,00,000
Share Premium = Cash received − Share Capital = ₹5,00,000 − ₹2,00,000 = ₹3,00,000

**Journal Entry (30th April 2012):**
Dr. Cash/Bank Account                    ₹5,00,000
Dr. Employee Share Plan Expense/Reserve  ₹60,000
   Cr. Share Capital (Nominal)                      ₹2,00,000
   Cr. Share Premium                               ₹3,00,000

**Accounting Treatment and Subsequent Recognition:**
The **Employee Share Pla…

Question 14

Tiger Motor Car Limited signed an agreement with its employees union for revision of wages on 01.07.2011. The revision of wages is with retrospective effect from 01.04.2008. The arrear wages up to 31.03.2011 amounted to ₹ 3,50,000. In view of the provisions of AS 3 "Net Profit or Loss for the Period, Prior Period Adjustments" in Accounting Policies", decide whether a separate disclosure of arrear wages is required while preparing financial statements for the year ending 31.03.2012.

Accepted Answer

**Answer:** No separate disclosure of arrear wages as a prior period adjustment is required under AS 3 for the financial statements ending 31.03.2012.

**Reasoning:** AS 3 'Net Profit or Loss for the Period, Prior Period Adjustments' defines prior period items as income or expenses which arise in the current period as a result of **errors or omissions** in the preparation of financial statements of one or more prior periods. The key requirement is that a prior period item must involve a correction of an error or omission from prior period records.

In this case, the arrear wages do NOT constitute a prior period item because:

1. **No Error or Omission Existed:** During the periods 2008-2011, wages were correctly recorded and paid at the rates applicable under the employment agreement existing at that time. There was no error or omission in the prior period financial statements.

2. **New Event in Current Period:** The wage revision agreement was signed on 01.07.2011, which is in the current financial year 2011-12. This is a new contractual event that crystallized in the current period, not a correction of a prior period error.

3. **Retrospective Impact:** Although the agreement has retrospective effect from 01.04.2008, this does not make it a prior period adjustment. It is a settlement of a new liability arising from a current period agreement.

**Accounting Treatment:** The arrear wages of ₹3,50,000 should be recognized in the Statement of Profit and Loss for 2011-12 as a w…

Question 15

An airline is required by law to overhaul its aircraft once in every five years. The Pacific Airlines which operates aircrafts does not provide any provision as required by law in final accounts. Discuss with reference to relevant Accounting Standard 29.

Accepted Answer

**Applicability of AS 29:**

AS 29 (Provisions, Contingent Liabilities and Contingent Assets) requires that a provision must be recognized when three conditions are simultaneously satisfied: (1) an entity has a present obligation (legal or constructive) as a result of a past event; (2) it is probable that an outflow of resources will be required to settle the obligation; and (3) a reliable estimate can be made of the obligation's amount.

**Analysis of Pacific Airlines' Situation:**

Applying AS 29 to the aircraft overhaul requirement, all three conditions are clearly met. **First**, the airline has a **present legal obligation** imposed by law to overhaul aircraft once every five years—this is not a conditional or future obligation but an existing legal requirement. **Second**, the **past event** that creates this obligation is the operation and use of the aircraft itself; as aircraft are operated, the obligation to perform periodic overhaul crystallizes. **Third**, it is **highly probable** (virtually certain) that economic resources will be required to satisfy the legal mandate—there is no conditionality or uncertainty about whether the overhaul will be required. **Fourth**, a **reliable estimate** of the overhaul cost can be made using manufacturer specifications, technical standards, historical maintenance records, and industry practices.

**Measurement Under AS 29:**

The provision should be measured at the **best estimate of the expected expenditure** required to settl…

Question 16

X Ltd. sold JCB Machine having WDV of ₹ 50 Lakhs to Y Ltd for ₹ 60 Lakhs and the same JCB was leased back by Y Ltd to X Ltd. The lease is operating.

Comment according to relevant Accounting Standard if:
(i) Sale price of ₹ 60 Lakhs is equal to fair value.
(ii) Fair value is ₹ 50 Lakhs and sale price is ₹ 45 Lakhs.
(iii) Fair value is ₹ 55 Lakhs and sale price is ₹ 62 Lakhs.
(iv) Fair value is ₹ 45 Lakhs and sale price is ₹ 48 Lakhs.

Accepted Answer

**Accounting Treatment of Sale-Leaseback Transactions under Ind AS 116**

The accounting treatment of sale-leaseback transactions involving an **operating lease leaseback** is governed by Ind AS 116 (Leases), paragraphs 89-91. The core principles are:

**Principle 1:** If Fair Value < Carrying Amount (WDV), recognize the loss immediately.
**Principle 2:** If Sale Price < Fair Value, defer the loss over the lease term.
**Principle 3:** If Sale Price > Fair Value, defer the gain over the lease term.

**Analysis of Each Scenario:**

**(i) Sale Price ₹60 Lakhs = Fair Value ₹60 Lakhs; WDV ₹50 Lakhs**

Since the sale price equals fair value, the transaction is at arm's length with no financing element. Fair Value exceeds WDV, so no immediate loss recognition is required. The entire gain of ₹10 Lakhs (₹60 - ₹50) should be **recognized immediately in the profit and loss statement**. No deferral is needed as the sale price matches fair value exactly.

**(ii) Fair Value ₹50 Lakhs; Sale Price ₹45 Lakhs; WDV ₹50 Lakhs**

Fair value equals carrying amount, so no loss must be recognized at the fair value level. However, the sale price (₹45 Lakhs) is below fair value (₹50 Lakhs), indicating a sub-fair-value transaction. The loss of ₹5 Lakhs (FV ₹50 - SP ₹45) should be **deferred and recognized over the lease term**. No gain or loss is recognized in the current period; the ₹5 Lakhs loss is amortized as an expense over the leaseback period.

**(iii) Fair Value ₹55 Lakhs; Sale Price ₹62 Lakhs;…

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