CA Inter Audit & Ethics — Question Paper — May 2023

Net Owned Fund (NOF) of SR Finance Ltd.

As per the Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, Net Owned Fund is computed as:

Step 1: Compute Owned Fund

Owned Fund = Paid-up Equity Capital + Free Reserves (less accumulated losses and intangible assets, if any)

Owned Fund = ₹300 + ₹900 = ₹1,200 lakhs

Step 2: Identify Investments requiring deduction

The following amounts must be deducted from Owned Fund to the extent they exceed 10% of Owned Fund:
- Investments in shares of subsidiaries = ₹375 lakhs
- Book value of debentures/bonds of group companies = ₹600 lakhs
- Total investments (qualifying deductions) = ₹975 lakhs

Step 3: Compute the deductible amount

10% of Owned Fund = 10% × ₹1,200 = ₹120 lakhs

Amount exceeding 10% of Owned Fund = ₹975 − ₹120 = ₹855 lakhs (this is the amount to be deducted)

Step 4: Compute Net Owned Fund

Net Owned Fund = Owned Fund − Excess investments over 10% of Owned Fund
= ₹1,200 − ₹855 = ₹345 lakhs

The Net Owned Fund of SR Finance Ltd. is ₹345 lakhs.

Statement (a): INCORRECT. The overall audit strategy, as described in SA 300, sets out the scope, timing, and direction of the audit and the nature of the engagement team's resources. While it includes a record of audit procedures, it encompasses much more: risk assessment areas, scoping decisions, reporting requirements, and resource allocation. The definition given in the statement is too narrow and incomplete. The strategy is a broader framework than just a record of procedures.

Statement (b): INCORRECT. Key Audit Matters (KAM) are communicated in accordance with SA 701. They represent matters of most significance during the audit of the financial statements, but they are NOT a separate opinion on individual matters. KAM is merely communication to those charged with governance about significant audit findings—not an independent audit opinion on those specific matters.

Statement (c): INCORRECT. The terminology is misapplied. Depreciation (not amortisation) is the systematic allocation of the depreciable amount of Property, Plant and Equipment over its useful life, as per Ind AS 16 (or AS 6). Amortisation refers to intangible assets and right-of-use assets. Applying the term "amortisation" to PPE is factually incorrect.

Statement (d): CORRECT. Section 143 of the Companies Act, 2013 explicitly provides that the remuneration of the auditor shall include both the remuneration payable to the auditor and any facility provided to him (such as office space, clerical assistance, etc.). This is a complete and accurate statement of the statutory provision.

Statement (e): INCORRECT. Appropriateness measures the quality of audit evidence—its relevance and reliability—not the quantity. As per SA 500, the quantity of evidence is determined based on the auditor's risk assessment. Sufficiency (quantity) and appropriateness (quality) are two distinct dimensions of audit evidence, and the statement conflates them.

Statement (f): CORRECT. Analytical procedures are required to be used in all three stages of an audit: (1) planning phase per SA 315, (2) substantive procedures per SA 330, and (3) overall review phase per SA 520. This is a mandatory requirement applicable to all audits, making the statement accurate.

Statement (g): CORRECT. In Co-operative societies, contribution to the Education Fund is a statutory charge on profit, not an appropriation of profit. It is deducted from profits before calculating the surplus available for distribution among members. This treatment is mandated under Co-operative Societies Act provisions and relevant accounting standards.

Statement (h): INCORRECT. The statement contains an internal contradiction and is factually misleading. Integrated ERP systems (SAP, Oracle, etc.) are complex and typically more difficult to audit, not easier. They require specialised knowledge, detailed understanding of system controls, and often extensive testing of integrated modules and data flows. Simpler off-the-shelf accounting software may be easier to audit, though potentially less robust. The statement is also self-contradictory ("time-consuming and easy").

Applicable Standard: AS 7 – Construction Contracts

Step 1 – Determine Stage of Completion

Under AS 7, the stage of completion is calculated using the cost-to-cost method:

Cost incurred to date = Work certified + Work not certified = ₹12,500 + ₹2,500 = ₹15,000 lakhs

Total estimated contract cost = Cost to date + Estimated further cost = ₹15,000 + ₹17,500 = ₹32,500 lakhs

Degree of completion = 15,000 / 32,500 × 100 = 46.15%

Step 2 – Check for Foreseeable Loss

Total contract price = ₹24,000 lakhs; Total estimated cost = ₹32,500 lakhs.

Since estimated cost (₹32,500) exceeds contract price (₹24,000), this is an onerous/loss contract. As per AS 7 (Para 35), the entire foreseeable loss of ₹8,500 lakhs (₹32,500 – ₹24,000) must be recognized as an expense immediately, irrespective of the stage of completion.

Step 3 – Revenue and Cost Recognition (Statement of P&L Extract)

| Particulars | ₹ Lakhs |
|---|---|
| Contract Revenue (46.15% × ₹24,000) | 11,076.92 |
| Contract Costs recognized (Revenue + Full foreseeable loss) | 19,576.92 |
| Net Loss recognized | (8,500.00) |

Breakdown of costs: Costs incurred ₹15,000 + Provision for future losses ₹4,576.92 = ₹19,576.92 lakhs.

Step 4 – Balance Sheet Extract

Total progress billings = Progress received + To be received = ₹11,000 + ₹3,000 = ₹14,000 lakhs.

Since progress billings (₹14,000) > Revenue recognized (₹11,076.92):

Current Liabilities:
- Gross amounts due to customers (Excess billing): ₹14,000 – ₹11,076.92 = ₹2,923.08 lakhs
- Provision for foreseeable losses (future costs): ₹4,576.92 lakhs

Current Assets:
- Trade receivables (progress payment to be received): ₹3,000 lakhs

Conclusion: Fisher Construction Co. must recognize a net loss of ₹8,500 lakhs in FY 2022-23 due to the contract being a loss contract. The foreseeable loss is recognized fully in the current year as mandated by AS 7.

Note: The question refers to AS-18, but Revenue Recognition is governed by AS-9 (Revenue Recognition) issued by the Institute of Chartered Accountants of India. AS-18 deals with Related Party Disclosures. The following analysis is made under AS-9.

(i) Consignment Sales — A Ltd.

Under AS-9, in a consignment arrangement, the consignor (Toy Ltd.) does not recognise revenue when goods are dispatched to the consignee. Revenue is recognised only when the consignee sells the goods to a third party, as risks and rewards of ownership transfer only at that point.

Goods sent = ₹5,00,000. Unsold with A Ltd. as on 31.03.2023 = 25%.
Therefore, 75% of goods have been sold by the consignee.
Revenue to be recognised = 75% × ₹5,00,000 = ₹3,75,000.
The remaining ₹1,25,000 (25% still lying with A Ltd.) shall not be recognised as revenue.

(ii) Bill and Hold Sale — B Ltd.

Under AS-9, in a 'bill and hold' arrangement, revenue may be recognised before physical delivery if: (a) it is probable that delivery will occur, (b) the goods are identified, on hand, and ready for delivery, (c) the buyer specifically acknowledges the deferred delivery instructions, and (d) normal payment terms apply.

Here, the sale was completed on 25th March, 2023, and the buyer B Ltd. itself requested the delayed delivery. The goods were identified and earmarked for B Ltd. All conditions for a bill-and-hold sale are satisfied.
Revenue of ₹2,25,000 should be recognised in FY 2022-23 (i.e., as on 25th March, 2023). Delivery date (15th April, 2023) does not delay revenue recognition.

(iii) Sale on Approval Basis

Under AS-9, for goods sold on approval or return basis, revenue is recognised when the buyer formally accepts the goods, or the approval period lapses without rejection.

Sale date: 17th November 2022. Approval period: 4 months → lapses on 17th March, 2023.

- For 75% of goods (₹2,62,500): Buyer sent approval by 31st December 2022. Revenue recognised on the date of approval — ₹2,62,500 recognised in FY 2022-23.
- For remaining 25% (₹87,500): Neither approval nor disapproval received up to 31st March 2023. However, the 4-month approval period expired on 17th March, 2023 (within FY 2022-23), and the goods are deemed accepted by efflux of time.

Revenue of ₹87,500 is also recognised by 17th March, 2023 (the date the period lapsed).
Total revenue from this transaction = ₹3,50,000.

Summary of Revenue to be Recognised in FY 2022-23:
- Consignment sales (A Ltd.): ₹3,75,000
- Bill and hold (B Ltd.): ₹2,25,000
- Sale on approval: ₹3,50,000
- Total Revenue = ₹9,50,000

Sub-part (i): Disclosure when related party relationship ceases mid-year

Under AS-18 (Related Party Disclosures), disclosure is required for transactions entered into with a related party during the period for which the relationship existed. The standard does not require retrospective or prospective disclosure beyond the tenure of the relationship.

In the given case, ABC Ltd. and its associate company were related parties only during Q1 (April 2022 – June 2022). After 30.06.2022, the related party relationship ceased to exist, and goods supplied thereafter were to an ordinary customer.

Conclusion: Only the transaction of ₹2,00,000 for Q1 (the period during which the related party relationship existed) needs to be disclosed as a related party transaction. Transactions entered into after the relationship ceased are treated as ordinary commercial transactions and do not require disclosure under AS-18. The disclosure does not extend to the entire financial year.

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Sub-part (ii): Directors of Arjun Ltd. constituting majority of Board of Bheem Ltd. in individual/professional capacity

Under AS-18, two enterprises are considered related if one enterprise is able to exercise significant influence over the other through the enterprise itself or through key management personnel acting in their capacity as such in that enterprise.

The critical distinction here is: the majority of directors of Arjun Ltd. sit on the Board of Bheem Ltd. in their individual capacity as professionals, and not by virtue of their being directors of Arjun Ltd.

Since the common directorship arises from their personal/professional standing and not from any representation or nomination by Arjun Ltd., there is no enterprise-level link connecting the two companies. Arjun Ltd. as an enterprise does not exercise or have the ability to exercise significant influence over Bheem Ltd.

Conclusion: Arjun Ltd. and Bheem Ltd. are NOT related parties under AS-18. The relationship is between the individuals in their personal professional capacity, not between the two companies. Accordingly, no related party disclosure is required between these two enterprises.

Governing Standard: This question is governed by AS 18 – Related Party Disclosures issued by the Institute of Chartered Accountants of India.

Definition of Related Party under AS 18:
AS 18 defines related parties as parties that are related to the reporting enterprise through:
(a) Control (directly or indirectly through intermediaries)
(b) Significant influence (through ownership of voting power, statute, or agreement)
(c) Key Management Personnel (KMP) and their relatives
(d) Enterprises owned or significantly influenced by KMP or their relatives

Analysis of the Given Case:
Adha Ltd. sells all its unmanufactured furniture worth ₹1,00,000 exclusively to Sasha Ltd. by virtue of a commercial agreement. Sasha Ltd. is the sole customer of Adha Ltd. The question is whether this economic dependence qualifies Sasha Ltd. as a related party.

AS 18 Specific Exclusion – Economic Dependence:
AS 18 explicitly provides that the following are NOT deemed to be related parties merely by virtue of the resulting economic dependence:
- A single customer, supplier, franchisor, distributor, or general agent with whom an enterprise transacts a significant volume of business.

This exclusion is categorical. The fact that Sasha Ltd. is the only buyer does not, by itself, establish any element of control or significant influence over Adha Ltd. The relationship is purely commercial/transactional.

Conclusion and Disclosure Requirement:
Adha Ltd. cannot classify Sasha Ltd. as a related party under AS 18 on the sole ground that Sasha Ltd. is its only customer. Accordingly, no disclosure under AS 18 is required for this transaction.

However, if Sasha Ltd. were to exercise control or significant influence over Adha Ltd. through any other means (e.g., shareholding, board representation, or agreement granting managerial authority), only then would AS 18 apply and full disclosure of the nature of the relationship, volume of transactions, outstanding balances, and pricing policy would be required in the financial statements.

Final Answer: Adha Ltd.'s desire to present Sasha Ltd. as a related party is not tenable under AS 18. The mere status of being the only customer, even with full economic dependence, does not create a related party relationship. AS 18 disclosures are not required in this case.

CONSOLIDATED STATEMENT OF PROFIT AND LOSS
G Ltd. with its Subsidiary K Ltd.
For the year ended 31st March 2023
(₹ in crores)

Revenue from Operations:
Sales and other Income (G Ltd. 3,000 + K Ltd. 750): ₹3,750
Less: Inter-company sales (G Ltd. to K Ltd.): (₹200)
Consolidated Sales and other Income: ₹3,550

Expenses:
Increase in Inventory (720 + 100): ₹820
Raw Material Consumed (600 + 100): ₹700
Wages and Salaries (600 + 75): ₹675
Production Expenses (100 + 50): ₹150
Administrative Expenses: ₹75 + ₹50 = ₹125
Less: Elimination of inter-company consultancy (₹5): (₹5)
Net Admin Expenses: ₹120
Selling and Distribution Expenses: ₹100 + ₹25 = ₹125
Less: Elimination of inter-company commission (₹20): (₹20)
Net S&D Expenses: ₹105
Interest (75 + 30): ₹105
Depreciation (75 + 30): ₹105
Less: Unrealized profit in closing inventory of K Ltd.: (₹20)

Total Expenses: ₹2,800

Profit for the Year: ₹3,550 - ₹2,800 = ₹750

Allocation of Profit:
K Ltd's profit (before unrealized profit adjustment): ₹750 - (₹100 + ₹100 + ₹75 + ₹50 + ₹45 + ₹25 + ₹30 + ₹30) = ₹295 crores
Less: Unrealized profit adjustment (affecting K Ltd's profit): (₹20)
K Ltd's adjusted profit: ₹275 crores

G Ltd's profit: ₹3,000 - ₹200 - (₹720 + ₹600 + ₹600 + ₹100 + ₹75 + ₹80 + ₹75 + ₹75) = ₹475 crores

Profit attributable to:
Owners of the parent (₹475 + 75% of ₹275): ₹681.25 crores
Non-controlling interest (25% of ₹275): ₹68.75 crores
Total Profit for the Year: ₹750.00 crores

Conclusion: The accountant is NOT justified in his opinion that only Segment A should be reported. Under AS-17 (Segment Reporting), issued by the ICAI, a segment qualifies as a reportable segment if it meets ANY ONE of the following three quantitative thresholds:

(i) Revenue Test: Segment revenue ≥ 10% of total combined revenue of all segments.
Threshold = 10% × ₹430 Cr = ₹43 Cr

(ii) Result Test: Absolute segment result ≥ 10% of the greater of — (a) combined result of profit-making segments, or (b) combined result of loss-making segments (absolute amount).
Profit segments (B + C + E) = 10 + 10 + 5 = ₹25 Cr
Loss segments (A + D) = 85 + 15 = ₹100 Cr
Greater amount = ₹100 Cr
Threshold = 10% × ₹100 Cr = ₹10 Cr

(iii) Assets Test: Segment assets ≥ 10% of total segment assets.
Threshold = 10% × ₹100 Cr = ₹10 Cr

Segment-wise Analysis:

Segment A: Revenue 250 ≥ 43 ✓ | Result |85| ≥ 10 ✓ | Assets 50 ≥ 10 ✓ → Reportable
Segment B: Revenue 50 ≥ 43 ✓ | Result |10| ≥ 10 ✓ | Assets 20 ≥ 10 ✓ → Reportable
Segment C: Revenue 40 < 43 ✗ | Result |10| ≥ 10 ✓ | Assets 15 ≥ 10 ✓ → Reportable (passes 2 tests)
Segment D: Revenue 60 ≥ 43 ✓ | Result |15| ≥ 10 ✓ | Assets 10 ≥ 10 ✓ → Reportable
Segment E: Revenue 30 < 43 ✗ | Result |5| < 10 ✗ | Assets 5 < 10 ✗ → Not Reportable

75% Revenue Rule check: Revenue of reportable segments (A+B+C+D) = 250+50+40+60 = ₹400 Cr. This is 400/430 = 93% of total revenue, which exceeds the minimum 75% threshold required under AS-17. The rule is satisfied.

Final Answer: Segments A, B, C, and D are all reportable segments. Segment E is not reportable and its results may be included in an 'Other Segments' column. The accountant's view that only Segment A need be reported is incorrect and not in accordance with AS-17.

(1) Computation of Shares and Debentures to be Issued

Step 1 — Average Net Profit (basis for equity share allocation)

The 6,20,000 equity shares are to be allocated in proportion to the average net profit of the last four years.

X Ltd.: (₹42,50,000 + ₹44,45,760 − ₹75,000 + ₹37,79,240) ÷ 4 = ₹1,24,00,000 ÷ 4 = ₹31,00,000

Y Ltd.: (₹26,50,000 + ₹27,60,000 + ₹34,00,000 + ₹35,90,000) ÷ 4 = ₹1,24,00,000 ÷ 4 = ₹31,00,000

Ratio of average profits = 31:31 = 1:1

Equity Shares Issued (assuming face value ₹10 each):
— X Ltd.: 3,10,000 shares × ₹10 = ₹31,00,000
— Y Ltd.: 3,10,000 shares × ₹10 = ₹31,00,000

Step 2 — Capital Employed (basis for debenture issue)

Capital Employed is computed from the revised balance sheets as on March 2023 (after revaluation of assets).

X Ltd.:
Revised PPE ₹71,00,000 + Revised Current Assets ₹29,95,000 = Total Assets ₹1,00,95,000
Less: External Liabilities ₹25,95,000
Capital Employed = ₹75,00,000

Y Ltd.:
Revised PPE ₹39,00,000 + Revised Current Assets ₹15,77,500 = Total Assets ₹54,77,500
Less: External Liabilities ₹17,27,500
Capital Employed = ₹37,50,000

Step 3 — Debentures to be Issued

The 7.5% Debentures are issued at par to generate an income equivalent to 4% return on capital employed.

Let D = debenture face value.
7.5% × D = 4% × Capital Employed → D = (4 ÷ 7.5) × CE = 8/15 × CE

X Ltd.: (8/15) × ₹75,00,000 = ₹40,00,000
Y Ltd.: (8/15) × ₹37,50,000 = ₹20,00,000
Total 7.5% Debentures = ₹60,00,000

Summary of Purchase Consideration:

| Component | X Ltd. | Y Ltd. | Total |
|---|---|---|---|
| Equity Shares (₹10 each) | ₹31,00,000 | ₹31,00,000 | ₹62,00,000 |
| 7.5% Debentures | ₹40,00,000 | ₹20,00,000 | ₹60,00,000 |
| Total PC | ₹71,00,000 | ₹51,00,000 | ₹1,22,00,000 |

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(2) Balance Sheet of XY Ltd. immediately after Amalgamation

First, Goodwill / Capital Reserve is computed under the Purchase Method as per AS 14 (Accounting for Amalgamations).

X Ltd.: Net Assets ₹75,00,000 > PC ₹71,00,000 → Capital Reserve = ₹4,00,000
Y Ltd.: Net Assets ₹37,50,000 < PC ₹51,00,000 → Goodwill = ₹13,50,000
Net Goodwill to be recognised = ₹13,50,000 − ₹4,00,000 = ₹9,50,000

Inter-company balance of ₹1,27,250 (included in liabilities of one and receivable of the other) is eliminated on amalgamation.

Balance Sheet of XY Ltd. (as at date of amalgamation)

Equity and Liabilities:
Share Capital — 6,20,000 Equity Shares of ₹10 each, fully paid: ₹62,00,000
7.5% Debentures (Non-Current): ₹60,00,000
Current Liabilities (₹25,95,000 + ₹17,27,500 − ₹1,27,250): ₹41,95,250
Total: ₹1,63,95,250

Assets:
Goodwill (Intangible): ₹9,50,000
Property, Plant & Equipment (₹71,00,000 + ₹39,00,000): ₹1,10,00,000
Current Assets (₹29,95,000 + ₹15,77,500 − ₹1,27,250): ₹44,45,250
Total: ₹1,63,95,250

The balance sheet balances at ₹1,63,95,250. Note: Under AS 14 (Purchase Method), goodwill arising on amalgamation is shown as an intangible asset and should be amortised over its useful life, not exceeding five years unless a longer period can be justified.

Part (a): Consolidated Balance Sheet as on 31st March, 2023

Note: The individual Balance Sheets of H Ltd. and S Ltd. as well as the shareholding percentage are not reproduced in the question as stated. The following solution presents all mandatory working adjustments that must be incorporated before preparing the Consolidated Balance Sheet, along with the treatment of each item of additional information.

Working Adjustment 1 — General Reserve (Pre-acquisition)
The General Reserve of S Ltd. remained unchanged since 31st March, 2022. If H Ltd. acquired shares before or on that date, the entire General Reserve is pre-acquisition and must be used to calculate Capital Reserve / Goodwill. If acquisition was after that date, the reserve is post-acquisition and forms part of Minority Interest and H Ltd.'s share of post-acquisition reserves.

Working Adjustment 2 — Post-acquisition Profit
Profit of S Ltd. for the year ended 31st March, 2023 = ₹2,00,000. This is a post-acquisition profit. It is to be split between:
- Minority Interest (MI) = MI% × ₹2,00,000
- H Ltd.'s share = H% × ₹2,00,000 (credited to Consolidated P&L / Revenue Reserves)

Working Adjustment 3 — Unrealised Profit on Inter-company Sales
H Ltd. sold goods costing ₹8,000 for ₹10,000 to S Ltd. Profit = ₹2,000. Of these goods, 25% remained unsold with S Ltd.
- Stock still lying with S Ltd. = 25% × ₹10,000 = ₹2,500
- Unrealised profit in closing stock = 25% × ₹2,000 = ₹500
- Adjustment: Reduce Consolidated Closing Stock by ₹500; reduce H Ltd.'s Consolidated Profit by ₹500 (since seller is H Ltd., entire unrealised profit belongs to H Ltd.'s group share).

Working Adjustment 4 — Inter-company Debtors and Creditors
Creditors of S Ltd. include ₹4,000 due to H Ltd. → This represents an intra-group balance and must be fully eliminated.
- Eliminate: Debtors of H Ltd. ↓ ₹4,000 | Creditors of S Ltd. ↓ ₹4,000

Working Adjustment 5 — Bills Payable / Bills Receivable (Endorsed Bills)
S Ltd. issued Bills Payable of ₹15,000 in favour of H Ltd. H Ltd. endorsed ₹8,000 of these to outside creditors.

- ₹7,000 (₹15,000 – ₹8,000) still held by H Ltd.: Fully intra-group → Eliminate Bills Payable of S Ltd. ₹7,000 and Bills Receivable of H Ltd. ₹7,000.
- ₹8,000 endorsed to outside creditors: H Ltd. no longer holds these bills; outside creditors now hold them. S Ltd.'s Bills Payable of ₹8,000 is a liability to outsiders and must be retained in the Consolidated Balance Sheet under Bills Payable. H Ltd.'s Bills Receivable has already been derecognised on endorsement, so no further elimination is needed for this portion.

Format of Consolidated Balance Sheet (as on 31st March, 2023)

The CBS is prepared by combining line-by-line the assets and liabilities of H Ltd. and S Ltd., then applying the above adjustments. Key line items:

- Share Capital: Only H Ltd.'s share capital
- Minority Interest: Computed on net assets of S Ltd. (share capital + reserves) at acquisition + post-acquisition share of profit
- Goodwill / Capital Reserve: Cost of investment vs. H Ltd.'s share of net assets of S Ltd. at acquisition date
- General Reserve / P&L: H Ltd.'s own reserves + H Ltd.'s share of post-acquisition profit of S Ltd. – Unrealised profit ₹500
- Bills Payable: Consolidated figure – ₹7,000 eliminated + ₹8,000 retained
- Creditors: Eliminate intra-group ₹4,000
- Stock / Closing Inventory: Reduce by ₹500 unrealised profit

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Part (b): Circumstances when Garner v/s Murray Rule is NOT Applicable

The Garner v/s Murray Rule (1904) states that on dissolution of a firm, if an insolvent partner has a debit balance in his Capital Account, the deficiency (loss) is to be borne by the solvent partners in proportion to their last agreed Capitals (not in profit-sharing ratio).

The rule does NOT apply in the following circumstances:

1. When ALL partners are insolvent: The rule presupposes some solvent and some insolvent partners. If every partner is insolvent, the rule cannot operate — losses are shared in the profit-sharing ratio under the general rule.

2. When the Partnership Deed contains a contrary provision: If the deed expressly provides that ALL losses, including capital deficiency, shall be shared in the profit-sharing ratio, the contractual agreement overrides the Garner v/s Murray rule.

3. When the solvent partner(s) also have a Debit Balance in Capital Account: If the so-called 'solvent' partner's capital is also in deficit (after bearing losses), the rule cannot be applied since there is no positive capital to form the basis of the ratio.

4. When there are only TWO partners: If one partner is insolvent, the entire deficiency falls on the sole solvent partner — the question of apportionment in capital ratio does not arise.

5. In Piecemeal Distribution of Assets: When assets are realised and distributed in instalments before all realisation is complete, the Garner v/s Murray rule is generally not applied since the final position of each partner is not yet determined.

6. When the deficiency arises on a partner's Current Account (not Capital Account): The rule specifically applies to capital deficiency on dissolution; it does not cover deficits on current accounts or drawings accounts unless transferred to capital.

In India, under Section 48 of the Indian Partnership Act, 1932, losses (including capital losses) are to be borne in profit-sharing ratio unless the deed provides otherwise, making Garner v/s Murray an English common law rule whose application in India is subject to the partnership agreement.

Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2023

*(Prepared under AS 21 – Consolidated Financial Statements)*

Note on Balance Sheet: The question as presented shows Cash at Bank of H Ltd. as ₹90,000; however this makes H Ltd.'s asset side total ₹13,10,000 against liabilities of ₹12,30,000. The correct figure must be ₹10,000 (a likely transcription error), which makes H Ltd.'s balance sheet balance at ₹12,30,000 on both sides. All workings proceed on this corrected basis.

Consolidated Balance Sheet as at 31st March, 2023

| Particulars | ₹ |
|---|---|
| Equity & Liabilities | |
| Share Capital (H Ltd. only) | 9,00,000 |
| Reserves & Surplus: | |
| Capital Reserve (WN 3) | 22,750 |
| General Reserve (H Ltd.) | 1,60,000 |
| Surplus – P&L (WN 5) | 91,250 |
| Minority Interest (WN 4) | 1,26,000 |
| Bills Payable (40,000 + 20,000) | 60,000 |
| Trade Creditors (50,000 + 30,000) | 80,000 |
| Total | 14,40,000 |

| Particulars | ₹ |
|---|---|
| Assets | |
| Machinery (7,00,000 + 1,50,000) | 8,50,000 |
| Furniture (1,80,000 + 70,000) | 2,50,000 |
| Stock-in-Trade | 1,00,000 |
| Trade Debtors (60,000 + 50,000) | 1,10,000 |
| Bills Receivable (25,000 + 35,000) | 60,000 |
| Cash at Bank (10,000 + 20,000) | 30,000 |
| Cash in Hand | 40,000 |
| Total | 14,40,000 |

The Investment in Equity Shares of S Ltd. (₹1,55,000) is eliminated against H Ltd.'s share of S Ltd.'s net assets at acquisition, resulting in a Capital Reserve of ₹22,750. The share capital shown is only H Ltd.'s; S Ltd.'s share capital is subsumed in the Minority Interest and Capital Reserve workings.

Nature and Method of Amalgamation

The amalgamation of X Ltd. and Y Ltd. into a newly formed XY Ltd. is governed by AS 14 – Accounting for Amalgamations. Since XY Ltd. is a freshly incorporated entity and no details suggest all five conditions of merger are satisfied, this is treated as Amalgamation in the Nature of Purchase and accounted for under the Purchase Method.

Under the Purchase Method, XY Ltd. records assets and liabilities of both transferor companies at their book values (agreed values). Accumulated losses of the transferor companies are not taken over. Any excess of net assets over purchase consideration is credited to Capital Reserve on Amalgamation.

Step 1 – Identification of Accumulated Losses (Balancing Figure)

The given balance sheets do not explicitly state reserves or accumulated losses. Balancing the figures reveals debit P&L balances:

- X Ltd.: Assets ₹89,70,000 vs. Share Capital + Trade Payable ₹93,95,000 → Accumulated Loss = ₹4,25,000
- Y Ltd.: Assets ₹53,39,500 vs. Share Capital + Trade Payable ₹54,12,500 → Accumulated Loss = ₹73,000

These accumulated losses are not transferred to XY Ltd. under the Purchase Method.

Step 2 – Net Assets of Transferor Companies

X Ltd. Net Assets: PPE ₹58,25,000 + Current Assets ₹31,45,000 − Trade Payables ₹59,70,000 = ₹30,00,000
Y Ltd. Net Assets: PPE ₹37,40,000 + Current Assets ₹15,99,500 − Trade Payables ₹18,02,500 = ₹35,37,000
Combined Net Assets = ₹65,37,000

Step 3 – Purchase Consideration

XY Ltd. is incorporated with an authorized and issued capital of 8,00,000 equity shares of ₹5 each = ₹40,00,000 (purchase consideration settled by issuing the entire authorized share capital).

Capital Reserve on Amalgamation = Combined Net Assets − Purchase Consideration = ₹65,37,000 − ₹40,00,000 = ₹25,37,000

Step 4 – Journal Entries in the Books of XY Ltd.

(i) For recording purchase consideration:
Business Purchase A/c Dr. ₹40,00,000
To Liquidators of X Ltd. and Y Ltd. A/c ₹40,00,000
(Being purchase consideration acknowledged)

(ii) For taking over assets and liabilities at agreed values:
Property, Plant & Equipment A/c Dr. ₹95,65,000
Current Assets A/c Dr. ₹47,44,500
To Trade Payables A/c ₹77,72,500
To Business Purchase A/c ₹40,00,000
To Capital Reserve A/c ₹25,37,000
(Being assets and liabilities of X Ltd. and Y Ltd. taken over; excess of net assets over PC credited to Capital Reserve under AS 14)

(iii) For settling purchase consideration by issue of shares:
Liquidators of X Ltd. and Y Ltd. A/c Dr. ₹40,00,000
To Equity Share Capital A/c ₹40,00,000
(Being 8,00,000 equity shares of ₹5 each issued as purchase consideration)

Step 5 – Balance Sheet of XY Ltd. as on 31st March, 2023

Equity & Liabilities:
Share Capital (8,00,000 equity shares of ₹5 each, fully paid): ₹40,00,000
Capital Reserve (on Amalgamation): ₹25,37,000
Trade Payables: ₹77,72,500
Total: ₹1,43,09,500

Assets:
Property, Plant & Equipment (₹58,25,000 + ₹37,40,000): ₹95,65,000
Current Assets (₹31,45,000 + ₹15,99,500): ₹47,44,500
Total: ₹1,43,09,500

The Balance Sheet tallies at ₹1,43,09,500. The Capital Reserve of ₹25,37,000 arises because the purchase consideration (₹40,00,000) is less than the combined net assets acquired (₹65,37,000), as per the Purchase Method under AS 14.

Analysis of Capital Structure of VJJ Ltd. as on 31st March, 2022

Step 1 – Classification of Capital

The capital of VJJ Ltd. is classified into Owned Funds (Shareholders' Funds) and Borrowed Funds (Loan Funds).

Shareholders' Funds:
Equity Share Capital: ₹990 Lakhs; General Reserve: ₹720 Lakhs; Securities Premium Account: ₹270 Lakhs; Profit & Loss Account: ₹270 Lakhs; Infrastructure Development Reserve: ₹1,800 Lakhs. Total Shareholders' Funds = ₹4,050 Lakhs.

Borrowed Funds: Loan Funds = ₹5,400 Lakhs.

Total Capital Employed = ₹9,450 Lakhs.

Step 2 – Key Capital Structure Ratios

Debt-Equity Ratio = Loan Funds / Shareholders' Funds = 5,400 / 4,050 = 1.33 : 1 (or 4:3). The company is highly leveraged, as debt exceeds equity.

Proprietary Ratio = Shareholders' Funds / Total Capital = 4,050 / 9,450 = 42.86%. This indicates that less than half the assets are financed by owners.

Capital Gearing Ratio = Fixed Interest / Fixed Dividend Bearing Capital / Equity Shareholders' Funds = 5,400 / 4,050 = 1.33 (Highly Geared).

Step 3 – Bonus Share Eligibility under Section 63, Companies Act 2013

Under Section 63 of the Companies Act, 2013, a company may issue fully paid-up bonus shares only from: (i) free reserves, (ii) Securities Premium Account, or (iii) Capital Redemption Reserve.

Reserves available for Bonus Issue:
- General Reserve: ₹720 Lakhs ✓
- Securities Premium Account: ₹270 Lakhs ✓
- Profit & Loss Account: ₹270 Lakhs ✓
- Total Available: ₹1,260 Lakhs

Infrastructure Development Reserve: ₹1,800 Lakhs – NOT available. This is a statutory/specific-purpose reserve (created under provisions such as Section 80-IA of the Income Tax Act, 1961 or sector-specific legislation) and does not qualify as a free reserve; it cannot be utilised for bonus issue.

Step 4 – Maximum Bonus Issue Computation

Existing equity shares = ₹990 Lakhs / ₹10 = 99 Lakh shares

Maximum bonus share capital issuable = ₹1,260 Lakhs
Maximum bonus shares = ₹1,260 Lakhs / ₹10 = 126 Lakh shares

Maximum bonus ratio = 126 : 99 = 14 : 11 (i.e., 14 bonus shares for every 11 shares held)

Step 5 – Capital Structure Post-Bonus Issue (at maximum ratio of 14:11)

After capitalising all available free reserves (₹1,260 Lakhs):
- Equity Share Capital: ₹990 + ₹1,260 = ₹2,250 Lakhs (225 lakh shares × ₹10)
- General Reserve: Nil (fully utilised)
- Securities Premium: Nil (fully utilised)
- P&L Account: Nil (fully utilised)
- Infrastructure Development Reserve: ₹1,800 Lakhs (unchanged)
- Total Net Worth: ₹4,050 Lakhs (same as before – only composition changes)
- Loan Funds: ₹5,400 Lakhs
- Total Capital Employed: ₹9,450 Lakhs

Note: The Debt-Equity Ratio remains 1.33:1 after the bonus issue since total shareholders' funds are unchanged; only the composition between share capital and reserves shifts. The bonus issue strengthens the paid-up capital base and signals financial health, but does not alter the financial leverage of the company.

Conclusion: VJJ Ltd. can issue a maximum of 126 lakh bonus shares (ratio 14:11) by capitalising ₹1,260 Lakhs of free reserves. The Infrastructure Development Reserve of ₹1,800 Lakhs is not available for this purpose.

Note: This sub-question requires the balance sheet from the main question stem. The following solution uses assumed figures consistent with the question's parameters (₹3,600 lakh vs ₹4,500 lakh loan scenarios yielding different outcomes). Students should substitute actual balance sheet values using the identical methodology.

Assumed Balance Sheet Position (pre-buyback):
Equity Share Capital (₹10 each, fully paid): ₹2,000 lakh → 200 lakh shares outstanding. Securities Premium Account: ₹500 lakh. General Reserve: ₹200 lakh. Infrastructure Development Reserve (IDR): ₹400 lakh — this is NOT a free reserve as it is created to satisfy income tax requirements (it cannot be distributed as dividend). Profit & Loss Account: ₹100 lakh. Free Reserves = ₹800 lakh (SP ₹500 + GR ₹200 + P&L ₹100; IDR excluded).

Step 1 — Buyback Price
Buyback price = ₹22 × 120% = ₹26.40 per share

Step 2 — Three Statutory Conditions under Section 68(2) of the Companies Act, 2013

Condition A — 25% of (Paid-up Capital + Free Reserves) by value [Section 68(2)(a)]:
Maximum permissible amount = 25% × (₹2,000 + ₹800) = ₹700 lakh
Maximum shares = ₹700 lakh ÷ ₹26.40 = 26.51 lakh → 26 lakh shares

Condition B — 25% of total paid-up equity capital by number [Section 68(2)(c)]:
Maximum = 25% × 200 lakh = 50 lakh shares → Not binding

Condition C — Post-buyback Debt:Equity ≤ 2:1 [Section 68(2)(d)]:
Post-buyback capital and free reserves = ₹2,800 lakh − (n × ₹26.40) lakh
(Total pool reduces by the full buyback consideration paid)

When Loan Funds = ₹3,600 lakh:
Required: 3,600 ≤ 2 × (2,800 − 26.40n) → n ≤ 37.87 lakh → Not binding
Maximum permissible = 26 lakh shares (Condition A is the binding constraint)

When Loan Funds = ₹4,500 lakh:
Required: 4,500 ≤ 2 × (2,800 − 26.40n) → n ≤ 20.83 lakh → 20 lakh shares (binding)
Maximum permissible = 20 lakh shares (Condition C is the binding constraint)

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ACCOUNTING ENTRIES — Scenario 1: Loan Funds = ₹3,600 lakh (Buyback of 26 lakh shares)

Buyback of 26 lakh equity shares of ₹10 each at ₹26.40 per share; completed 09/12/2022.

*Entry 1 — On buyback and payment to shareholders (09/12/2022):*
Dr. Equity Share Capital A/c (26 lakh × ₹10): ₹260.00 lakh
Dr. Securities Premium Account (26 lakh × ₹16.40): ₹426.40 lakh
Cr. Bank A/c: ₹686.40 lakh
*(Being 26 lakh equity shares of ₹10 each bought back at a premium of ₹16.40 per share at ₹26.40 per share as per shareholders' approval dated 02/09/2022, under Section 68 of the Companies Act, 2013; premium charged to Securities Premium Account)*

*Entry 2 — Creation of Capital Redemption Reserve (09/12/2022):*
Dr. General Reserve A/c: ₹200.00 lakh
Dr. Profit & Loss Account: ₹60.00 lakh
Cr. Capital Redemption Reserve A/c: ₹260.00 lakh
*(Being Capital Redemption Reserve created equal to the nominal value of ₹260 lakh of equity shares bought back, transferred from free reserves as mandated by Section 68(7) of the Companies Act, 2013)*

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ACCOUNTING ENTRIES — Scenario 2: Loan Funds = ₹4,500 lakh (Buyback of 20 lakh shares)

Buyback restricted to 20 lakh shares due to the post-buyback Debt:Equity ratio constraint.

*Entry 1 — On buyback and payment to shareholders (09/12/2022):*
Dr. Equity Share Capital A/c (20 lakh × ₹10): ₹200.00 lakh
Dr. Securities Premium Account (20 lakh × ₹16.40): ₹328.00 lakh
Cr. Bank A/c: ₹528.00 lakh
*(Being 20 lakh equity shares of ₹10 each bought back at ₹26.40 per share as per shareholders' approval dated 02/09/2022, under Section 68 of the Companies Act, 2013; number of shares restricted by post-buyback debt-equity ratio of 2:1)*

*Entry 2 — Creation of Capital Redemption Reserve (09/12/2022):*
Dr. General Reserve A/c: ₹200.00 lakh
Cr. Capital Redemption Reserve A/c: ₹200.00 lakh
*(Being Capital Redemption Reserve created equal to the nominal value of ₹200 lakh of equity shares bought back, as required under Section 68(7) of the Companies Act, 2013)*

Key point: The Infrastructure Development Reserve is excluded from free reserves in all calculations as it is earmarked for tax purposes and cannot be distributed as dividend. The buyback is funded from free reserves and Securities Premium Account per Section 68(1) of the Companies Act, 2013.

Analysis of Bills Discounted — Rebate on Bills Discounted (Closing) as on 31.03.2023

The accounting year ends on 31st March 2023. Bills outstanding beyond 31.03.2023 carry an unexpired discount element. This unexpired portion is computed as Rebate on Bills Discounted (Closing) — a liability representing income received in advance — using the formula:

Rebate = Face Value × Discount Rate × (Days from 01.04.2023 to Due Date) / 365

The closing rebate computed for each bill is as follows (refer Working Notes for detailed steps):

| Bill | Face Value (₹) | Rate | Days | Rebate (₹) |
|------|---------------|------|------|------------|
| (i) | 36,000 | 12% | 68 | 805 |
| (ii) | 34,200 | 12% | 75 | 843 |
| (iii)| 14,000 | 10% | 110 | 422 |
| (iv) | 14,000 | 15% | 132 | 759 |
| (v) | 12,500 | 13% | 158 | 703 |
| (vi) | 11,000 | 14% | 190 | 801 |
| Total | | | | ₹4,333 |

Discount on Bills Account (for the year ended 31.03.2023)

| Dr | ₹ | Cr | ₹ |
|----|---|-------|---|
| To Rebate on Bills Discounted (Closing) c/f | 4,333 | By Rebate on Bills Discounted (Opening) b/f | 5,500 |
| To Profit & Loss A/c (Net Discount Income) | 1,26,167 | By Discount Received during the year | 1,25,000 |
| Total | 1,30,500 | Total | 1,30,500 |

Net Discount Income transferred to Profit & Loss Account = ₹1,26,167.

Note: Opening rebate (₹5,500) represents discount deferred from the previous year that has now accrued; it is credited to the Discount Account. The closing rebate (₹4,333) represents unearned income carried forward to 2023-24.

Note: The question as provided does not include the underlying data (bill amounts, due dates, discount rates, opening rebate balance). The solution below uses illustrative data typical of ICAI study material. The student must substitute actual data from the question paper.

Concept: Rebate on Bills Discounted represents the unexpired portion of discount income on bills not yet matured as on the balance sheet date. It is a current liability (unearned income). Only the expired portion is credited to Profit & Loss Account.

Assumed Data:
- Opening balance of Rebate on Bills Discounted (1-4-2022): ₹18,500
- Total discount received during 2022-23: ₹1,85,000
- Discount rate: 15% p.a.; Year basis: 365 days

Bills not matured as on 31-3-2023:

| Bill | Amount (₹) | Due Date | Unexpired Days |
|------|-----------|----------|----------------|
| A | 2,00,000 | 15-4-2023 | 15 days |
| B | 3,00,000 | 30-4-2023 | 30 days |
| C | 1,50,000 | 31-5-2023 | 61 days |
| D | 1,00,000 | 30-6-2023 | 91 days |

(i) Rebate on Bills Discounted as on 31-3-2023:

Rebate = Amount × Rate × Unexpired Days / 365

Bill A: ₹2,00,000 × 15/100 × 15/365 = ₹1,233
Bill B: ₹3,00,000 × 15/100 × 30/365 = ₹3,699
Bill C: ₹1,50,000 × 15/100 × 61/365 = ₹3,760
Bill D: ₹1,00,000 × 15/100 × 91/365 = ₹3,740

Total Rebate on Bills Discounted = ₹12,432

Journal Entries:

Entry 1 — On 1-4-2022 (reversal of opening rebate):
Rebate on Bills Discounted A/c Dr. ₹18,500
To Discount on Bills Discounted A/c ₹18,500
*(Being opening rebate transferred to Discount account)*

Entry 2 — During 2022-23 (discount earned):
Bank A/c / Bills Discounted A/c Dr. ₹1,85,000
To Discount on Bills Discounted A/c ₹1,85,000
*(Being discount received during the year on bills discounted)*

Entry 3 — On 31-3-2023 (creation of closing rebate):
Discount on Bills Discounted A/c Dr. ₹12,432
To Rebate on Bills Discounted A/c ₹12,432
*(Being rebate on unexpired bills as on 31st March 2023 carried forward)*

Entry 4 — On 31-3-2023 (transfer to P&L):
Discount on Bills Discounted A/c Dr. ₹1,91,068
To Profit & Loss A/c ₹1,91,068
*(Being net discount income for the year transferred to Profit & Loss Account)*

(ii) Amount of Discount credited to Profit & Loss Account:

Discount to P&L = Opening Rebate + Discount Received during year − Closing Rebate
= ₹18,500 + ₹1,85,000 − ₹12,432
= ₹1,91,068

This figure represents only the expired (earned) portion of discount income for 2022-23, in accordance with the accrual concept and prudence principle under AS 1 (Disclosure of Accounting Policies).

Sub-part (i): Subdivision of Equity Shares

When equity shares are subdivided, the total paid-up capital remains unchanged. The 1,000 shares of ₹100 each with ₹80 called up (total paid-up = ₹80,000) are converted into 10,000 shares of ₹10 each with ₹8 per share called up (total paid-up = ₹80,000). This is a memorandum entry — no real change in capital.

Journal Entry:
Equity Share Capital A/c (1,000 shares @ ₹80 called up) — Dr. ₹80,000
To Equity Share Capital A/c (10,000 shares @ ₹8 called up) — ₹80,000
*(Being 1,000 equity shares of ₹100 each, ₹80 called up, subdivided into 10,000 equity shares of ₹10 each, ₹8 per share called up)*

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Sub-part (ii): Conversion of Shares into Stock

For this sub-part, equity shares are assumed fully paid (₹100 each). Conversion of shares into stock does not alter total capital; stock can be transferred in any fractional amount unlike shares. The entry replaces the Share Capital account with a Stock account.

Journal Entry:
Equity Share Capital A/c (1,000 shares × ₹100) — Dr. ₹1,00,000
To Equity Stock A/c — ₹1,00,000
*(Being 1,000 fully paid equity shares of ₹100 each converted into equity stock of ₹1,00,000)*

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Sub-part (iii): Conversion of Preference Shares into 11% Unsecured Debentures (including dividend arrears)

The preference share capital (₹1,50,000) and arrears of preference dividend (₹33,000) are together converted into 11% Unsecured Debentures of ₹100 each. Total debentures to be issued = ₹1,83,000 ÷ ₹100 = 1,830 debentures.

Journal Entry:
1,500 Cumulative Preference Share Capital A/c — Dr. ₹1,50,000
Preference Dividend Arrears A/c (or P&L A/c) — Dr. ₹33,000
To 11% Unsecured Debentures A/c (1,830 debentures × ₹100) — ₹1,83,000
*(Being 1,500 cumulative preference shares of ₹100 each fully paid, along with preference dividend arrears of ₹33,000, converted into 1,830 11% Unsecured Debentures of ₹100 each)*

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Sub-part (iv): Writing off Patents and Goodwill

Intangible assets — Goodwill (₹80,000) and Patents (₹27,000) — are written off by debiting the Statement of Profit & Loss (or Capital Reserve if available). Total write-off = ₹1,07,000.

Journal Entry:
Statement of Profit & Loss A/c — Dr. ₹1,07,000
To Goodwill A/c — ₹80,000
To Patents A/c — ₹27,000
*(Being Goodwill and Patents written off and charged to Profit & Loss Account)*