CA Inter Audit & Ethics — Question Paper — November 2020

Calculation of Depreciation for A Ltd for the year ending 31st March, 2020 as per AS 10 (Revised) – Property, Plant and Equipment

(i) Machinery purchased on 1st April, 2015

As per AS 10 (Revised), depreciation is calculated on the Straight Line Method basis using the depreciable amount (Cost minus Residual Value) over the useful life. The machinery was purchased on 1st April, 2015 with a useful life of 5 years; therefore, the year ending 31st March, 2020 is the 5th and final year of useful life.

Depreciable Amount = ₹10,00,000 − ₹1,00,000 = ₹9,00,000
Annual Depreciation = ₹9,00,000 ÷ 5 = ₹1,80,000

(ii) Land of ₹50 lakhs

As per AS 10 (Revised), land has an unlimited useful life and is therefore not depreciated. The cost of land is not amortised unless there is a specific reason (e.g., quarry or landfill site). Accordingly, depreciation on land = NIL.

(iii) Self-constructed Machinery (completed 1st April, 2019)

As per AS 10 (Revised), depreciation of an asset begins when it is available for use, i.e., when it is in the location and condition necessary to be capable of operating in the manner intended by management. The fact that the company did not actually begin using the machine until 1st March, 2020 is irrelevant — depreciation must commence from 1st April, 2019 (date of completion / availability for use).

Full year depreciation applies for the year ending 31st March, 2020.

Annual Depreciation = ₹3,50,000 ÷ 10 = ₹35,000

Summary of Depreciation for year ending 31st March, 2020:

| Asset | Depreciation (₹) |
|---|---|
| (i) Purchased Machinery | 1,80,000 |
| (ii) Land | Nil |
| (iii) Self-constructed Machinery | 35,000 |
| Total | 2,15,000 |

Accounting Treatment of Government Grant Refund

When a government grant for fixed assets that was credited to (deducted from) the cost of the asset is refunded, it is dealt with under AS 12 - Accounting for Government Grants and Disclosure of Government Assistance. The refund requires reversal of the initial grant treatment and restoration of the asset to its original cost.

Initial Position of Mac Ltd.:
- Machinery original cost: ₹300 lakhs
- Government grant received: ₹60 lakhs (credited against cost)
- Net machinery cost recorded: ₹240 lakhs
- Useful life: 10 years; Depreciation rate: 10% WDV
- No depreciation charged on the grant amount

As on 31st March 2019:
- Accumulated depreciation (2 years on ₹240 lakhs): ₹45.6 lakhs
- Book value: ₹194.4 lakhs

Treatment of Refund in June 2019:

The refund is accounted for in two parts:

1. Payment of Refund: The liability for the grant is extinguished by payment of ₹60 lakhs

2. Restoration of Asset Cost: The machinery cost is restored from ₹240 lakhs to ₹300 lakhs, reversing the original grant benefit. The reversal is recognized as income/profit (Government Grant Recovery).

3. Impact on Depreciation: From 1st June 2019 onwards, depreciation is calculated on the full restored cost of ₹300 lakhs. For the period April-May 2019 (before refund), depreciation continues on ₹240 lakhs.

Depreciation Calculation for 2019-20:
- April-May 2019 (2 months): ₹194.4 lakhs × 10% × (2/12) = ₹3.24 lakhs
- WDV at 31st May 2019: ₹194.4 - ₹3.24 = ₹191.16 lakhs
- After restoration on 1st June: WDV = ₹300 - (₹45.6 + ₹3.24) = ₹251.16 lakhs
- June-March 2020 (10 months): ₹251.16 × 10% × (10/12) = ₹20.93 lakhs
- Total depreciation for 2019-20: ₹24.17 lakhs

Under AS 13 (Revised) – Investments, investments are classified based on management's intention and subsequently measured as follows: Long-term investments are stated at cost, with provisions made only for permanent decline in value. Current investments (short-term) are stated at the lower of cost and fair value (market value), with diminution in value recognized immediately.

Treatment of Shares of XYZ Ltd.:

Total investment: ₹50,000 (purchased 1st December 2019).
Market value: ₹47,500 (31st March 2020).
The stated temporary nature of the decline is critical.

Short-term shares (intended 6-month holding):
Cost allocated: ₹2,000
Proportionate market value: (₹2,000 ÷ ₹50,000) × ₹47,500 = ₹1,900
As a current investment, valued at lower of cost and market value = ₹1,900
Provision for diminution: ₹2,000 – ₹1,900 = ₹100 (expense in P&L)

Long-term shares (intended long-term holding):
Cost allocated: ₹48,000 (₹25,000 explicitly stated + ₹23,000 balance)
Proportionate market value: (₹48,000 ÷ ₹50,000) × ₹47,500 = ₹45,600
Since the decline is stated as temporary, no provision is recognized. Shown at cost = ₹48,000 under long-term investments.

Treatment of Gold and Silver:

Assuming these precious metals are classified as long-term investments (no short-term intention stated):

Gold: Cost ₹1,50,000; Market value ₹1,50,000
No change in value. Shown at cost = ₹1,50,000

Silver: Cost ₹3,00,000; Market value ₹3,03,000
Appreciation of ₹3,000 is not recognized under AS 13 (investments shown at cost). Shown at cost = ₹3,00,000

Balance Sheet Presentation (as on 31st March 2020):

Current Assets:
Current Investments (Shares of XYZ Ltd.): ₹1,900
Provision for diminution in value: (₹100) [deducted]
Net book value: ₹1,800

Non-Current Assets:
Long-term Investments:
– Shares of XYZ Ltd.: ₹48,000
– Gold: ₹1,50,000
– Silver: ₹3,00,000
Total: ₹2,01,000

Statement of Profit & Loss (year ending 31st March 2020):
Provision for diminution in value of current investments: ₹100 (operating expense)

Nature of Assets:

1. Factory Shed (₹240 lakhs): Qualifying Asset – Under construction from 15th April 2019 to March 2020, takes substantial time to get ready for intended use.

2. Machinery (₹30 lakhs): Non-Qualifying Asset – Purchased assets are ready for use upon purchase; 'installation' refers to commissioning, not a construction phase.

3. Working Capital (₹24 lakhs): Non-Qualifying Asset – Not a fixed or tangible asset; represents operational funding, not asset acquisition.

4. Vehicles (₹12 lakhs): Non-Qualifying Asset – Ready for use upon purchase; does not require substantial acquisition period.

5. Telephone Advances (₹8 lakhs): Non-Qualifying Asset – Advance payments, not acquisition of a qualifying asset; immaterial amount.

6. Technical Know-how (₹6 lakhs): Non-Qualifying Asset – Purchased intangible asset; does not necessarily take substantial time to acquire.

Treatment of Interest under AS 16:

AS 16 'Borrowing Costs' requires that borrowing costs directly attributable to acquisition or construction of a qualifying asset (one necessarily taking substantial time to get ready for intended use) must be capitalized as part of asset cost. All other borrowing costs are expensed in the period incurred.

Calculation:

Only Factory Shed qualifies for interest capitalization.

Capitalization Method: Proportion of qualifying assets to total borrowing
- Qualifying assets: Factory Shed = ₹240 lakhs
- Total loan: ₹320 lakhs
- Qualifying proportion: 240 ÷ 320 = 75%

Interest Capitalized = ₹40 lakhs × 75% = ₹30 lakhs
Interest Expensed = ₹40 lakhs × 25% = ₹10 lakhs

Accounting Treatment:

Capitalized Interest (₹30 lakhs):
- Added to the cost of Property, Plant & Equipment (Factory Building)
- Disclosed as part of the historical cost base
- Depreciated over the useful life of the factory shed (as a component of the asset's cost)
- Provides a more representative asset valuation

Expensed Interest (₹10 lakhs):
- Charged to Profit & Loss Statement as 'Finance Costs' or 'Interest Expense'
- Recognized as period expense under the matching principle
- Reduces profit for the year ending 31st March 2020

Investment Account of Mr. H — Equity Shares of ABC Ltd. (Face Value ₹10 each)
For the Year Ended 31st March 2020 | Valued at Average Cost

*(Note: The purchase price on 10th June 2019 is not stated in the question; ₹20 per share is assumed, as it produces arithmetically consistent results.)*

Dr. Side

| Date | Particulars | Shares | ₹ |
|------|-------------|--------|------|
| 01.04.2019 | To Balance b/d | 10,000 | 1,80,000 |
| 10.06.2019 | To Bank A/c (Purchase @ ₹20) | 10,000 | 2,00,000 |
| 14.07.2019 | To Bonus Shares (1:4 on 20,000 shares) | 5,000 | — |
| 30.09.2019 | To Bank A/c (Rights subscribed — 3,000 @ ₹12) | 3,000 | 36,000 |
| 15.01.2020 | To P&L A/c (Profit on sale) | — | 11,830 |
| | Total | 28,000 | 4,27,830 |

Cr. Side

| Date | Particulars | Shares | ₹ |
|------|-------------|--------|------|
| 31.08.2019 | By Bank A/c (Rights sold — 2,000 rights @ ₹5) | — | 10,000 |
| 15.01.2020 | By Bank A/c (Sale of 14,000 shares, net of 1% brokerage) | 14,000 | 2,14,830 |
| 31.03.2020 | By Balance c/d (14,000 shares @ ₹14.50) | 14,000 | 2,03,000 |
| | Total | 28,000 | 4,27,830 |

Accounting Treatments Applied:

Bonus Shares: ABC Ltd. declared a bonus of 1 share for every 4 held on 14th July 2019. Mr. H then held 20,000 shares. Bonus received = 20,000 ÷ 4 = 5,000 shares at nil cost. Under AS 13 — Accounting for Investments, bonus shares do not alter the total cost of investment; they increase the share count and reduce the average cost per share.

Rights Issue: Rights were offered on 31st August 2019 at 1 share per 5 shares held. After bonus, Mr. H held 25,000 shares. Total entitlement = 25,000 ÷ 5 = 5,000 rights. Issue price = ₹10 face value + 20% premium = ₹12 per share. Mr. H subscribed 60% (3,000 shares × ₹12 = ₹36,000, paid 30th September 2019) and sold the remaining 40% (2,000 rights × ₹5 = ₹10,000). Proceeds from sale of rights are credited to the Investment Account as a reduction in cost — such proceeds represent a partial recovery of the original investment and not a revenue gain.

Average Cost: Net cost after deducting rights-sale proceeds = ₹4,06,000 ÷ 28,000 shares = ₹14.50 per share.

Dividend: The 20% dividend for FY 2018-19 was received on 31st October 2019. Eligible shares = 20,000 (pre-bonus batches). Dividend = 20,000 × ₹10 × 20% = ₹40,000 — treated as income (P&L). No dividend is payable on bonus shares or rights shares as stated. Dividend does not appear in the Investment Account.

Sale of Shares: On 15th January 2020, 14,000 shares (half of 28,000) were sold at ₹15.50 per share, with 1% brokerage. Net proceeds = ₹2,14,830. Cost at ₹14.50 average = ₹2,03,000. Profit on sale = ₹11,830, credited to P&L Account.

Closing Balance as on 31st March 2020: 14,000 equity shares of ABC Ltd. at average cost of ₹14.50 per share = ₹2,03,000.

Accounting Treatment for Delhi Branch:

1. Goods Sent to Branch at 20% Markup:
Goods sent at 20% above cost must be recorded at cost price in the Branch Stock Account. The markup element represents profit not yet realized through sales:
- Journal Entry: Debit Branch Stock A/c (at cost), Credit Goods Sent to Branch A/c
- Simultaneously maintain a Profit on Goods Sent to Branch A/c to track the 20% markup for later adjustment when goods are sold or closing stock is valued

2. Sales Recording:
Based on monthly returns from branch (which maintains no books):
- Cash Sales: Recorded as Debit Bank A/c, Credit Branch Sales A/c. Branch remits cash immediately to HO, so Branch Cash A/c shows nil balance
- Credit Sales: Recorded as Debit Branch Debtors A/c, Credit Branch Sales A/c based on invoices/returns received
- Sales price includes the 20% markup over cost

3. Branch Expenses & Liabilities:
Expenses paid directly by HO on behalf of branch:
- Debit: Branch Expenses A/c (rent, utilities, salaries, etc.)
- Credit: Cash/Bank A/c (HO)
- These are accumulated in branch accounts and matched against branch sales

4. Accounting at Year-End:
Prepare Branch Trading & Profit/Loss Account:
- Opening Stock (at cost) + Goods Sent to Branch (at cost) - Closing Stock (at cost) = Cost of Goods Sold
- Less: COGS from Branch Sales to determine Gross Profit
- Less: Branch Expenses
- Calculate Unrealized Profit on Closing Stock = Closing Stock at cost × 20/120 (since goods were sent at 120% of cost)
- Net Profit = Gross Profit - Branch Expenses - Unrealized Profit on Closing Stock

5. Closing Stock Valuation:
Closing stock at branch is valued at cost price (AS 2 requirement). The profit element embedded in the invoice price (20% markup) must be eliminated:
- If closing stock (at branch price) = X, then Cost = X × 100/120
- Unrealized Profit = X - (X × 100/120) = X × 20/120

6. Consolidation into Main Books:
- Close Branch Trading A/c into Branch Profit & Loss A/c
- Transfer net profit from branch to main Profit & Loss A/c
- Branch Stock and Branch Debtors appear in the Balance Sheet with HO items
- Eliminate the entire Profit on Goods Sent to Branch A/c (as goods have been accounted for in COGS or closing stock adjustment)

7. Branch Debtors Follow-up:
Maintain a separate Branch Debtors Ledger for credit sales tracking. Recoveries reduce Branch Debtors and are remitted to HO bank account.

BRANCH ACCOUNTING - STOCK AND DEBTORS METHOD

First, we identify the opening stock markup. Given: Opening Stock at Invoice Price = ₹72,000 and Stock at Palna branch = ₹96,000. This indicates opening stock is ₹96,000 at invoice price and ₹72,000 at cost price, implying a 33.33% markup on cost (i.e., Invoice Price = Cost × 1.3333).

Closing Stock Valuation: Closing stock at cost = ₹1,25,000. At invoice price = ₹1,25,000 × 1.3333 = ₹1,66,667 (approx).

Goods available at invoice price = ₹96,000 (opening) + ₹4,40,000 (received) − ₹60,000 (returned) = ₹4,76,000

Less: Goods returned by customers (at invoice) = ₹14,000
Available for sale = ₹4,62,000

Cost of Goods Sold (at invoice) = ₹4,62,000 − ₹1,66,667 = ₹2,95,333

Net Sales = ₹1,85,000 (cash) + ₹6,25,000 (credit) − ₹14,000 (returned) = ₹7,96,000

BRANCH DEBTORS ACCOUNT

Opening Debtors (assumed ₹0) + Credit Sales ₹6,11,000 − Cash Received ₹4,38,000 − Bad Debts (net) ₹4,500 − Discount ₹7,500 = Closing Debtors ₹61,000

BRANCH STOCK ACCOUNT (at Invoice Price)

Opening Stock ₹96,000 + Goods Received ₹4,40,000 − Goods Returned ₹60,000 − COGS ₹2,95,333 = Closing Stock ₹1,66,667

BRANCH PROFIT & LOSS ACCOUNT

Gross Profit (₹7,96,000 − ₹2,95,333) = ₹5,00,667

Less: Operating Expenses:
- Rent, Rates & Taxes: ₹24,000
- Salaries & Wages: ₹72,000
- Office Expenses: ₹9,500
- Discount Allowed: ₹7,500
- Bad Debts (₹5,500 − ₹1,000 recovery): ₹4,500
- Total Expenses: ₹1,17,500

Profit before adjustment = ₹3,83,167

Add: Realized profit on opening stock (₹96,000 − ₹72,000) = ₹24,000
Less: Unrealized profit on closing stock (₹1,66,667 − ₹1,25,000) = ₹41,667

BRANCH NET PROFIT = ₹3,83,167 + ₹24,000 − ₹41,667 = ₹3,65,500

Answer: ₹2,23,426

The insurance claim under the Average Clause is calculated using the formula: Claim = (Average Stock / Sum Insured) × Loss

Step 1: Calculate Average Stock
Average Stock = (Opening Stock + Closing Stock) / 2 = (₹2,11,000 + ₹2,32,000) / 2 = ₹2,21,500

Here, the opening stock as on 01-04-2018 is ₹2,11,000, and the closing stock as on 15-09-2019 (closest to the fire date of 30-09-2019) is ₹2,32,000.

Step 2: Determine Loss
The loss (cost of stock destroyed in fire) equals the closing stock as on the date of fire = ₹2,32,000

Step 3: Apply Average Clause Formula
Since the average stock (₹2,21,500) is less than the sum insured (₹2,30,000), the claim is restricted:

Claim = (₹2,21,500 / ₹2,30,000) × ₹2,32,000 = 0.96304 × ₹2,32,000 = ₹2,23,426

The Average Clause penalizes the insured because they failed to maintain stock equal to the policy amount. The insured acts as a co-insurer for the shortfall, reducing their recoverable claim accordingly.

Part A: Ascertainment of Amount of Insurance Claim

For insurance claim purposes, stock is valued at cost price, not NRV. The ₹8,000 write-down on the slow-moving item is an NRV adjustment under AS 2 (Valuation of Inventories) and does NOT reduce the insurance claim.

Total stock at cost = Slow-moving item (₹12,000) + Goods sold at a loss — cost (₹9,000) + Remainder salvaged unsold (₹35,000) = ₹56,000.
Goods salvaged = ₹9,000 (cost of goods sold post-loss for ₹5,000) + ₹35,000 (unsold salvage) = ₹44,000.
Stock LOST = ₹56,000 − ₹44,000 = ₹12,000.
Amount of Claim to be lodged with Insurance Company = ₹12,000.

---

Part B: Cash Flow Statement as per AS 3 — Indirect Method
Year ended 31st March 2020

*(Net profit figure is missing from question data; back-calculated as ₹19,66,939 — see WN1.)*

A. Cash Flow from Operating Activities .............. ₹
Net Profit before Tax .............. 19,66,939
Add: Depreciation on PPE .............. 7,50,000
Add: Discount on Debentures written off .............. 45,000
Add: Interest on Debentures paid .............. 2,25,000
Less: Profit on sale of Investments .............. (30,000)
Less: Interest received on Investments .............. (60,000)
Less: Compensation received (non-operating) .............. (1,35,000)
Operating Profit before WC Changes .............. 27,61,939
Increase in Inventories .............. (4,27,500)
Decrease in Trade Receivables .............. 8,850
Increase in Trade Payables .............. 432
Increase in Outstanding Expenses .............. 9,805
Cash Generated from Operations .............. 23,53,526
Less: Income Tax paid .............. (1,57,500)
Net Cash from Operating Activities (A) .............. 21,96,026

B. Cash Flow from Investing Activities
Proceeds from sale of Investments .............. 4,80,000
Interest received .............. 60,000
Compensation received (suit) .............. 1,35,000
Purchase of Land — cash portion (WN4) .............. (36,000)
Net Cash from Investing Activities (B) .............. 6,39,000

C. Cash Flow from Financing Activities
Proceeds from issue of Equity Shares — cash (WN3) .............. 6,00,000
Redemption of 10% Preference Shares (WN5) .............. (23,62,500)
Preference Dividend paid FY 2018-19 (WN6) .............. (2,25,000)
Interest on Debentures paid .............. (2,25,000)
Equity Dividend paid FY 2018-19 (incl. DDT) .............. (7,50,000)
Interim Equity Dividend paid FY 2019-20 .............. (2,50,000)
Net Cash from Financing Activities (C) .............. (32,12,500)

Net Decrease in Cash (A+B+C) .............. (3,77,474)
Opening Cash and Cash Equivalents (01.04.2019) .............. 3,94,432
Closing Cash and Cash Equivalents (31.03.2020) .............. 16,958 ✓

*Supplementary non-cash disclosures:*
(i) Machinery acquired against 25,000 Equity Shares @ ₹12 = ₹3,00,000
(ii) Land partly acquired against 22,000 Equity Shares @ ₹12 = ₹2,64,000

Section 55 of Companies Act, 2013 - Redemption Requirements:

Preference shares may be redeemed only out of (i) profits available for distribution, or (ii) proceeds of fresh issue. The company must have sufficient distributable profits or reserves. When redeemed out of profits, a Capital Redemption Reserve equal to the redeemed amount must be created.

Conditions Satisfied:
• Preference shares expressed as redeemable at 10% premium ✓
• Company issuing fresh equity shares (₹18,00,000) specifically for redemption ✓
• Adequate reserves available (General Reserve ₹33,00,000; General Redemption Reserve ₹18,00,000) ✓

Accounting Treatment:

1. Fresh Equity Share Issue (1st March 2020 - Allotment)

Details: 1,50,000 shares @ ₹10 face + ₹2 premium = ₹12 per share = ₹18,00,000 total

Assuming 50% payable on allotment, 50% on 1st January 2021:

*Journal Entry (1st March 2020):*
- Dr. Bank A/c ₹9,00,000
- Dr. Calls in Arrears A/c ₹9,00,000
- Cr. Share Capital A/c ₹15,00,000
- Cr. Securities Premium A/c ₹3,00,000

2. Redemption of Preference Shares (31st March 2020)

Redemption Amount: 20,000 shares × (₹80 + 10% premium) = 20,000 × ₹88 = ₹17,60,000

Book Value to be written off: ₹24,00,000

Benefit on Redemption: ₹24,00,000 - ₹17,60,000 = ₹6,40,000 (credited to Capital Redemption Reserve)

*Journal Entry (31st March 2020):*
- Dr. Preference Share Capital A/c ₹24,00,000
- Cr. Bank A/c ₹17,60,000
- Cr. Capital Redemption Reserve A/c ₹6,40,000

The Preference Share account is completely written off; preference shareholders cease to have any claim on the company.

Balance Sheet Position (as at 31st March 2020):

Share Capital:
- Equity Shares: 6,00,000 + 1,50,000 = 7,50,000 shares @ ₹10 = ₹75,00,000
- Preference Shares: Closed/Redeemed = Nil

Reserves and Surplus:
- Securities Premium: ₹6,00,000 + ₹3,00,000 = ₹9,00,000
- General Redemption Reserve: ₹18,00,000 (unchanged)
- Capital Redemption Reserve (newly created): ₹6,40,000
- General Reserve: ₹33,00,000 (unchanged)

Current Liabilities:
- Calls in Arrears: ₹9,00,000 (due 1st January 2021)

Key Compliance Notes:
• Capital Redemption Reserve ₹6,40,000 is non-distributable capital and strengthens permanent capital of the company
• No profits were utilized; the fresh equity issue financing combined with the redemption benefit provided the funds
• All Section 55 conditions satisfied; statutory compliance achieved

Accounting Treatment for Redemption of Debentures — Aman Ltd.

Applicable Law: Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 as amended by the Companies (Share Capital and Debentures) Amendment Rules, 2019 (effective 16th August 2019), read with Section 71 of the Companies Act, 2013.

Step 1: Determination of Debenture Redemption Reserve (DRR) Requirement

Aman Ltd. is an unlisted company (other than AIF, Banking Company, NBFC and HFC). Under the amended Rule 18, such companies are required to maintain DRR equal to 10% of the outstanding debenture amount before redemption. Since the debentures are redeemed on 31st March 2020, the amended rules (post-August 2019) are applicable.

Total face value of debentures = 8,000 × ₹100 = ₹8,00,000

DRR required = 10% × ₹8,00,000 = ₹80,000

The company must create ₹80,000 in DRR by appropriating from profits before redemption.

Step 2: Debenture Redemption Investment (DRI) Requirement

Under Rule 18(7), on or before 30th April 2019, Aman Ltd. must invest or deposit a sum of not less than 15% of the amount of debentures maturing during the year ending 31st March 2020, in specified instruments (e.g., Government Securities, FDs in scheduled banks).

Investment required = 15% × ₹8,00,000 = ₹1,20,000

These investments must be kept unencumbered until the debentures are redeemed.

Step 3: Interest Payment

Annual interest on 9% debentures = 9% × ₹8,00,000 = ₹72,000 for the year 2019-20.

Step 4: Journal Entries for the year ending 31st March 2020

(i) Investment made on or before 30th April 2019:
DRR Investments A/c Dr. ₹1,20,000
To Bank A/c ₹1,20,000
(Investment of 15% of ₹8,00,000 in specified securities as per Rule 18(7))

(ii) For interest on debentures:
Debenture Interest A/c Dr. ₹72,000
To Bank A/c ₹72,000
(Payment of 9% interest on ₹8,00,000)

Profit & Loss A/c Dr. ₹72,000
To Debenture Interest A/c ₹72,000
(Transfer of debenture interest to P&L)

(iii) Creation of DRR (appropriation from profits):
Profit & Loss Appropriation A/c Dr. ₹80,000
To Debenture Redemption Reserve A/c ₹80,000
(Creating DRR @ 10% of ₹8,00,000 as per amended Rule 18)

(iv) On redemption of debentures on 31st March 2020:
9% Debentures A/c Dr. ₹8,00,000
To Debentureholders A/c ₹8,00,000
(Transfer of debenture liability to debentureholders account)

(v) Payment to debentureholders:
Debentureholders A/c Dr. ₹8,00,000
To Bank A/c ₹8,00,000
(Payment made to debentureholders on redemption)

(vi) Realization of DRR Investments:
Bank A/c Dr. ₹1,20,000
To DRR Investments A/c ₹1,20,000
(Realization of investments made for debenture redemption)

(vii) Transfer of DRR to General Reserve after redemption:
Debenture Redemption Reserve A/c Dr. ₹80,000
To General Reserve A/c ₹80,000
(Transfer of DRR to General Reserve after full redemption of debentures, as per Rule 18)

Conclusion: Aman Ltd. redeems debentures of ₹8,00,000 on 31st March 2020. The company was required to create DRR of ₹80,000 (10%) and make DRI of ₹1,20,000 (15%) by 30th April 2019. Post-redemption, DRR is transferred to General Reserve.

ACCOUNTS OF MR. NITESH AS ON 31ST MARCH, 2020

Note: Based on the given information, the following transactions occurred: (i) Interest on Govt. bonds @ 7% per annum = ₹7,000; (ii) Govt. bonds sold at par (₹100 each) on 31st March 2020; (iii) 1,000 Deed Debentures (long-term advances) purchased at ₹96.50 each on 30th March 2020 and cancelled on 31st March 2020, resulting in gain of ₹3,500 (₹1,00,000 nominal value – ₹96,500 cost); (iv) Issued Debentures assumed to be ₹1,00,000 at opening, redeemed at redemption gain.

(1) DEBENTURES ACCOUNT (Issued Debentures – being redeemed)

Dr. | Cr.
--- | ---
Cancellation/Redemption on 31.3.2020: ₹1,00,000 | Opening Balance (Issued): ₹1,00,000
Closing Balance: – |

(2) DEBENTURE REDEMPTION RESERVE ACCOUNT

Dr. | Cr.
Closing Balance: ₹60,000 | Opening Balance: ₹60,000

The Debenture Redemption Reserve remains intact. If debentures were redeemed at a gain, such gain may be transferred to General Reserve or retained as per company policy. However, based on typical treatment, the DRR is carried forward unless specifically used for redemption.

(3) INVESTMENT ACCOUNT (7% Secured Govt. Bonds)

Dr. | Cr.
Opening Balance: ₹1,00,000 | Sale (31.3.2020): ₹1,00,000
Closing Balance: – |

Interest on Investments: ₹7,000 (separately credited to Interest Income Account). The sale proceeds of ₹1,00,000 plus accrued interest of ₹7,000 totalling ₹1,07,000 were received on 31st March 2020.

(4) DEED DEBENTURES ACCOUNT (Investment in Debentures – Purchased and Cancelled)

Dr. | Cr.
Opening Balance: – |
Purchase (30.3.2020): ₹96,500 | Cancellation/Redemption (31.3.2020): ₹96,500
Closing Balance: – |

Gain on Redemption of Deed Debentures: ₹3,500 (credited to Profit & Loss Account). This gain arises because 1,000 Deed Debentures with nominal value of ₹100 each (total ₹1,00,000) were purchased at an average price of ₹96.50 each (total ₹96,500), resulting in a redemption gain of ₹3,500.

Hire Purchase Accounting – Interest Suspense Method in the books of Mr. Nitesh

Under the Interest Suspense Method, the asset is recorded at cash price, the HP vendor is credited at the total hire purchase price (cash price + total interest), and a Interest Suspense Account is opened as a suspense/contra account for the total interest, which is written off year by year as interest accrues.

Step 1 – Determine HP Price and Interest Schedule

Cash Price = ₹11,50,000 | Down Payment = ₹2,50,000 | Balance (principal) = ₹9,00,000
Three annual instalments of ₹3,00,000 principal + 8% interest on outstanding balance:

- Year 1 Interest: 8% × ₹9,00,000 = ₹72,000 → Instalment = ₹3,72,000
- Year 2 Interest: 8% × ₹6,00,000 = ₹48,000 → Instalment = ₹3,48,000
- Year 3 Interest: 8% × ₹3,00,000 = ₹24,000 → Instalment = ₹3,24,000
- Total Interest = ₹1,44,000 | Total HP Price = ₹12,94,000

SLM Depreciation = 10% × ₹11,50,000 = ₹1,15,000 p.a.

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TRACTOR ACCOUNT (in the books of Mr. Nitesh)

| Dr. | | | Cr. | | |
|---|---|---|---|---|---|
| Date | Particulars | ₹ | Date | Particulars | ₹ |
| 6/4/2017 | To Raj Ltd A/c (Cash Price) | 11,50,000 | 31/3/2018 | By Depreciation A/c | 1,15,000 |
| | | | 31/3/2018 | By Balance c/d | 10,35,000 |
| | Total | 11,50,000 | | Total | 11,50,000 |
| 1/4/2018 | To Balance b/d | 10,35,000 | 31/3/2019 | By Depreciation A/c | 1,15,000 |
| | | | 31/3/2019 | By Balance c/d | 9,20,000 |
| | Total | 10,35,000 | | Total | 10,35,000 |
| 1/4/2019 | To Balance b/d | 9,20,000 | 31/3/2020 | By Depreciation A/c | 1,15,000 |
| | | | 31/3/2020 | By Balance c/d | 8,05,000 |
| | Total | 9,20,000 | | Total | 9,20,000 |
| 1/4/2020 | To Balance b/d | 8,05,000 | | | |

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INTEREST SUSPENSE ACCOUNT

| Dr. | | | Cr. | | |
|---|---|---|---|---|---|
| Date | Particulars | ₹ | Date | Particulars | ₹ |
| 6/4/2017 | To Raj Ltd A/c | 1,44,000 | 31/3/2018 | By Interest A/c | 72,000 |
| | | | 31/3/2018 | By Balance c/d | 72,000 |
| | Total | 1,44,000 | | Total | 1,44,000 |
| 1/4/2018 | To Balance b/d | 72,000 | 31/3/2019 | By Interest A/c | 48,000 |
| | | | 31/3/2019 | By Balance c/d | 24,000 |
| | Total | 72,000 | | Total | 72,000 |
| 1/4/2019 | To Balance b/d | 24,000 | 31/3/2020 | By Interest A/c | 24,000 |
| | Total | 24,000 | | Total | 24,000 |

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RAJ LTD ACCOUNT (HP Vendor)

| Dr. | | | Cr. | | |
|---|---|---|---|---|---|
| Date | Particulars | ₹ | Date | Particulars | ₹ |
| 6/4/2017 | To Bank (Down payment) | 2,50,000 | 6/4/2017 | By Tractor A/c | 11,50,000 |
| 31/3/2018 | To Balance c/d | 10,44,000 | 6/4/2017 | By Interest Suspense A/c | 1,44,000 |
| | Total | 12,94,000 | | Total | 12,94,000 |
| 31/3/2018 | To Bank A/c | 3,72,000 | 1/4/2018 | By Balance b/d | 10,44,000 |
| 31/3/2018 | To Balance c/d | 6,72,000 | | | |
| | Total | 10,44,000 | | Total | 10,44,000 |
| 31/3/2019 | To Bank A/c | 3,48,000 | 1/4/2019 | By Balance b/d | 6,72,000 |
| 31/3/2019 | To Balance c/d | 3,24,000 | | | |
| | Total | 6,72,000 | | Total | 6,72,000 |
| 31/3/2020 | To Bank A/c | 3,24,000 | 1/4/2020 | By Balance b/d | 3,24,000 |
| | Total | 3,24,000 | | Total | 3,24,000 |

The Raj Ltd account closes to nil after the final instalment on 31/3/2020, confirming all hire purchase obligations are fully discharged.

Analysis and Presentation of Profit & Loss Account of X Ltd for the year ended 31st March, 2020

The draft Profit & Loss Account is analysed below to identify the nature of each item and present the results in a structured manner as required under Schedule III of the Companies Act, 2013.

Classification of Items on the Debit Side:

The expenses charged against profit (i.e., revenue expenses) are: Administrative Expenses ₹5,96,400; Advertisement Expenses ₹1,10,500; Sales Commission ₹1,05,550; Director's Fees ₹1,48,900; Interest on Debentures ₹56,000; Managerial Remuneration ₹3,05,540; and Depreciation on Fixed Assets ₹5,78,530. These together constitute the total operating and financial charges = ₹19,01,420.

Provision for Taxation ₹12,50,600 represents a charge against profit for income tax liability for the year and is shown as Tax Expense in the Statement of Profit & Loss under Schedule III.

Appropriations of Profit: Transfer to General Reserve ₹3,50,000 and Transfer to Investment Revaluation Reserve ₹25,800 are appropriations of profit (not charges), totalling ₹3,75,800. Under Schedule III format, these are shown as movements in Other Equity and not in the Statement of P&L.

Note on Investment Revaluation Reserve: Transfer to Investment Revaluation Reserve (₹25,800) represents unrealised gains/losses on revaluation of investments. Under AS 13 (Accounting for Investments), such reserves are created for long-term investments and are a capital reserve — it is an appropriation, not an income statement item.

Credit Side Items:
- Balance b/d ₹7,23,300 = Opening retained earnings (surplus brought forward).
- Gross Profit from Trading A/c ₹42,53,650 = Core operating profit transferred from Trading Account.
- Subsidies received from Government ₹3,50,000 = Other income. Under AS 12 (Accounting for Government Grants), revenue grants related to revenue expenditure are credited to Profit & Loss Account.

Statement of Profit (Reconstructed):

Gross Profit from Trading Account = ₹42,53,650
Add: Government Subsidies (Other Income) = ₹3,50,000
Total Income = ₹46,03,650

Less: Total Operating & Finance Charges = ₹19,01,420
Net Profit before Tax = ₹27,02,230

Less: Provision for Taxation = ₹12,50,600
Net Profit after Tax = ₹14,51,630

Less: Appropriations (General Reserve + Investment Revaluation Reserve) = ₹3,75,800
Surplus available = ₹10,75,830

Add: Opening Balance (Balance b/d) = ₹7,23,300
Balance carried forward = ₹17,99,130

Note: The Balance c/d stated in the draft as ₹16,01,090 appears to reflect a possible transcription discrepancy in one or more line items (the debit side totals per given figures compute to approximately ₹51,28,910 against the stated total of ₹53,28,900, a difference of ₹2,00,000). Students should verify the original figures; the methodology and classification above remain correct.

Key Compliance Points under Companies Act, 2013:
1. Managerial Remuneration (₹3,05,540) must be verified for compliance with Section 197 read with Schedule V of the Companies Act, 2013, which limits managerial remuneration to 11% of net profits computed under Section 198.
2. Interest on Debentures (₹56,000) is a finance cost and must be disclosed separately under Schedule III.
3. Director's Fees must be disclosed separately as per Schedule III requirements for companies.
4. Depreciation must comply with Schedule II of the Companies Act, 2013 for useful lives of assets.

Computation of Net Profit under Section 198 of the Companies Act, 2013 for the year ending 31st March, 2020:

Step 1 – Trading Account (2019-20)
Opening Stock (from 31.3.2019 Balance Sheet) is ₹76,000. Purchases for the year are ₹6,25,000. Sales are ₹7,50,000. Closing Stock is taken at its Net Realisable Value (NRV) of ₹90,000 (lower of cost or NRV, per AS 2 – Valuation of Inventories). Gross Profit = ₹7,50,000 + ₹90,000 − ₹76,000 − ₹6,25,000 = ₹1,39,000.

Step 2 – Net Profit (before managerial remuneration)
From Gross Profit of ₹1,39,000, the following are deducted:
- Depreciation as per Schedule II of the Companies Act, 2013: ₹63,750 (given; this is the permissible depreciation for Section 198 purposes)
- Deferred Expenditure written off: ₹24,000 (unamortised deferred expense carried in the 31.3.2019 Balance Sheet; must be charged off as it is a fictitious asset not recognised under current framework)

Net Profit = ₹1,39,000 − ₹63,750 − ₹24,000 = ₹51,250

Step 3 – Maximum Limits of Managerial Remuneration under Section 197 of the Companies Act, 2013

Section 197 prescribes the following ceilings computed on Net Profits determined under Section 198:

(a) Overall ceiling (all managerial personnel combined): 11% of Net Profits = 11% × ₹51,250 = ₹5,637.50

(b) For a single Managing Director / Whole-Time Director / Manager: 5% of Net Profits = ₹2,562.50

(c) For more than one MD/WTD/Manager: 10% of Net Profits = ₹5,125.00

(d) For part-time directors where MD/WTD exists: 1% of Net Profits = ₹512.50

(e) For part-time directors where no MD/WTD exists: 3% of Net Profits = ₹1,537.50

Note: The Net Realisable Value of Fixed Assets (₹90,000) exceeds the closing Written Down Value (₹1,03,000 − ₹63,750 = ₹39,250), so no impairment write-down is required. The NRV figure of ₹90,000 in Additional Information (i) has been applied to Closing Stock valuation. The Bank Loan, Trade Payables, and Capital from the Balance Sheet are not relevant for Section 198 computation.

Note: This question references 'Additional Information (Continued)', indicating it is part of a larger question whose main data (Trial Balance / Opening Balance Sheet) has not been provided here. The solution below presents the non-going concern adjustments derivable from the given additional information, along with the complete framework for Profit & Loss Account and Balance Sheet.

Concept — Non-Going Concern (Break-Up) Basis:
When a firm is NOT a going concern, financial statements are prepared on a break-up/realisable value basis rather than historical cost. Key differences: (a) assets are valued at net realisable values, (b) all fictitious/deferred assets are written off immediately, (c) penalties and settlement discounts are recognised, and (d) contingent losses are fully provided for.

Adjustment-wise Analysis of Additional Information:

(iii) Closing Stock:
Cost = ₹60,000; NRV = ₹66,000. Under going concern (AS 2 — Valuation of Inventories), stock is valued at lower of cost or NRV = ₹60,000. Under non-going concern basis, stock is valued at NRV (realisable value) = ₹66,000. Surplus of ₹6,000 is a gain in P&L.

(iv) General Expenses:
General expenses including interest on loan = ₹33,900. Charged to P&L account as normal.

(v) Deferred Expenditure — Full Write-off:
Total deferred expenditure = ₹6,000 × 3 years = ₹18,000. Amortisation: 2018-19: ₹6,000; 2019-20: ₹6,000 (normal); Remaining for 2020-21: ₹6,000. Under non-going concern basis, no future benefit is assumed, so the remaining ₹6,000 must be written off immediately in 2019-20. Total P&L charge for deferred expenditure in 2019-20 = ₹6,000 (normal) + ₹6,000 (accelerated write-off) = ₹12,000. Balance Sheet shows Nil for deferred expenditure.

(vi) Debtors — Enhanced Provision:
Total debtors = ₹65,000. Under going concern: provision of ₹5,000 (doubtful); net debtors = ₹60,000. Under non-going concern basis: the ₹10,000 whose collection depends on 'successful negotiations' is also unlikely to be realised — full provision required. Total provision = ₹5,000 + ₹10,000 = ₹15,000. Net realisable value of debtors = ₹65,000 − ₹15,000 = ₹50,000. Additional charge to P&L = ₹10,000.

(vii) Trade Payables — Discount on Settlement:
Closing trade payables = ₹48,000, likely settled at 5% discount. Amount payable = ₹48,000 × 95% = ₹45,600. Discount = ₹2,400 → credited to P&L (gain on settlement). Balance Sheet liability = ₹45,600.

(viii) Prepayment Penalty on Bank Loan:
Under non-going concern, the bank loan will be prepaid. Penalty = ₹4,000 → charged to P&L. Added to Bank Loan liability in Balance Sheet.

(ix) Cash & Bank Balance:
Shown at face value = ₹1,65,200 in Balance Sheet.

Summary of Non-Going Concern Impact on P&L (Net Effect of Additional Information Items):

| Item | Dr (Charge) | Cr (Gain) |
|---|---|---|
| Stock revaluation gain (NRV over cost) | — | ₹6,000 |
| Accelerated write-off of deferred exp. | ₹6,000 | — |
| Additional provision for debtors | ₹10,000 | — |
| Gain on trade payables settlement | — | ₹2,400 |
| Prepayment penalty on bank loan | ₹4,000 | — |
| General expenses (incl. interest) | ₹33,900 | — |

Complete Profit & Loss Account and Balance Sheet can only be fully prepared once the main Trial Balance figures (Sales, Purchases, Opening Stock, Capital, Bank Loan amount, etc.) from Part (i) and (ii) of the question are available. The adjustments above must be applied on top of those base figures.

Final Answer: Under non-going concern basis, the net additional charge to P&L (beyond normal expenses) is ₹6,000 + ₹10,000 + ₹4,000 − ₹6,000 − ₹2,400 = ₹11,600 (net adverse). Debtors reduce to ₹50,000; Stock increases to ₹66,000; Trade payables reduce to ₹45,600; Deferred expenditure = Nil; Bank loan increases by ₹4,000 penalty.

Part (a): Statement of Pre and Post-Incorporation Profits

Determination of Key Ratios:

Moon Ltd. was incorporated on 1st August, 2019. The financial year runs from 1st April, 2019 to 31st March, 2020.
- Pre-incorporation period: 1st April, 2019 to 31st July, 2019 = 4 months
- Post-incorporation period: 1st August, 2019 to 31st March, 2020 = 8 months
- Time ratio (Pre : Post) = 4 : 8 = 1 : 2

Since Moon Ltd. initiated an advertising campaign that increased monthly sales by 25% post-incorporation, monthly sales post-incorporation = 1.25 units vs. 1 unit pre-incorporation.
- Pre-incorporation total sales = 4 × 1 = 4 units
- Post-incorporation total sales = 8 × 1.25 = 10 units
- Sales ratio (Pre : Post) = 4 : 10 = 2 : 5

Basis of Allocation of Expenses:

| Item | Basis | Reason |
|---|---|---|
| Gross Profit | Sales (2:5) | Sales vary with volume |
| Salaries | Time (1:2) | Accrues evenly over time |
| Rent, Rates & Taxes | Time (1:2) | Accrues evenly over time |
| Commission on Sales | Sales (2:5) | Directly linked to sales |
| Depreciation | Time (1:2) | Accrues evenly over time |
| Interest on Debentures | Post only | Debentures issued by company after incorporation |
| Director's Fees | Post only | Directors exist only after incorporation |
| Advertisement | Post only | Campaign initiated by Moon Ltd. after incorporation |

Statement Showing Pre and Post-Incorporation Profits

| Particulars | Pre-Incorporation (₹) | Post-Incorporation (₹) |
|---|---|---|
| Gross Profit (2:5) | 1,80,000 | 4,50,000 |
| *Less:* Salaries (1:2) | 42,000 | 84,000 |
| Rent, Rates & Taxes (1:2) | 24,000 | 48,000 |
| Commission on Sales (2:5) | 11,429 | 28,571 |
| Depreciation (1:2) | 20,000 | 40,000 |
| Interest on Debentures (Post) | — | 36,000 |
| Director's Fees (Post) | — | 24,000 |
| Advertisement (Post) | — | 48,000 |
| Net Profit | 82,571 | 1,41,429 |

Total Net Profit = ₹82,571 + ₹1,41,429 = ₹2,24,000

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Part (b): Treatment of Pre and Post-Incorporation Profits in Accounts

Pre-Incorporation Profit — Capital Profit:
Profits earned before the date of incorporation are not earned by the company since the company was not in existence. These are treated as capital profits and must be transferred to Capital Reserve Account. They are not available for distribution as dividend to shareholders. They may be utilised to:
- Write off preliminary expenses or goodwill;
- Set off capital losses;
- Issue bonus shares (if permitted as fully paid bonus).

Post-Incorporation Profit — Revenue Profit:
Profits earned from the date of incorporation onwards are revenue profits of the company. These are transferred to the Profit & Loss Account and are available for:
- Declaration and payment of dividend to shareholders;
- Creation of general reserve or other statutory/voluntary reserves;
- Retained earnings carried forward as per the Companies Act, 2013.

The distinction is critical because distributing pre-incorporation profits as dividend would amount to return of capital to shareholders, which is impermissible under company law.