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Past papers/ Audit & Ethics/ July 2021
Paper 8 Qs
Revision Test Paper (RTP) · July 2021

CA Inter Audit & Ethics

This page contains all 8 questions from the CA Inter Auditing & Ethics Revision Test Paper (RTP) for the July 2021 attempt cycle, sourced from VSI Jaipur.

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Q.1 00 marks easy Conversion of partnership firm into company ⚡ Try this Q →
Om, Sai and Radhe share profits and losses of a business as to 3:2:1 respectively. Their balance sheet as at 31st March, 2020 was as follows: Liabilities: Capital Accounts - Om 70,000; Sai 80,000; Radhe 10,000; General Reserve 22,000; Radhe's Loan 33,000; Mrs. Om's loan 15,000; Creditors 96,000; Bills Payable 14,000; Bank overdraft 60,000; Radhe's current A/c 56,000; Profit and Loss A/c 12,000. Total 4,00,000. Assets: Land and Building 1,40,000; Machinery 50,000; Motor Car 28,000; Furniture 12,000; Investments 18,000; Stock 18,000; Bills receivable 20,000; Loose tools 7,000; Debtors 38,000; Cash 1,000. Total 4,00,000. The partners decide to convert their firm into a Joint Stock Company. For this purpose ABC Ltd. was formed with an authorized capital of Rs. 10,00,000 divided into Rs. 100 equity shares. The business of the firm was sold to the company as at the date of balance sheet given above on the following terms: (i) Motor car, furniture, investments, loose tools, debtors and cash are not to be taken over by the company. (ii) Liabilities for bills payable and bank overdraft are to be taken over by the company. (iii) The purchase price is settled at Rs. 1,95,500 payable as to Rs. 75,500 in cash and the balance in company's fully paid shares of Rs. 100 each. (iv) The remaining assets and liabilities of the firm are directly disposed of by the firm as per details given below: Investments are taken over by Om for Rs. 13,000; debtors realize in all Rs. 20,000; Motor Car, furniture and loose tools fetch Rs. 24,000, Rs. 4,000, and Rs. 1,000 respectively. Om agrees to pay his wife's loan. The creditors were paid Rs. 94,000 in final settlement of their claims. The realization expenses amount to Rs. 500. Radhe's loan was transferred to his capital account. (v) The equity share received from the vendor company are to be divided among the partners in profit-sharing ratio. You are required to prepare Realization account, Partners' capital accounts, Cash account, ABC Ltd. account and Shares in ABC Ltd. account in the books of the partnership firm.
CTTP

Worked Solution

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Note on Balance Sheet: The liabilities side items (Om 70,000 + Sai 80,000 + Radhe 10,000 + Gen Reserve 22,000 + Radhe's Loan 33,000 + Mrs. Om's Loan 15,000 + Creditors 96,000 + Bills Payable 14,000 + Bank OD 60,000) already total ₹4,00,000. For the B/S to balance, Radhe's Current A/c ₹56,000 (Dr. balance) and P&L A/c ₹12,000 (Dr. balance/loss) must be on the Asset side. This interpretation is used throughout.

Preliminary Adjustments (before Realization):
P&L loss (₹12,000) charged in 3:2:1 — Om Dr. ₹6,000; Sai Dr. ₹4,000; Radhe Dr. ₹2,000.
General Reserve (₹22,000) credited in 3:2:1 — Om Cr. ₹11,000; Sai Cr. ₹7,333; Radhe Cr. ₹3,667.
Radhe's Current A/c (Dr.) transferred to Radhe's Capital — Radhe Dr. ₹56,000.

Adjusted Capital: Om ₹75,000 Cr.; Sai ₹83,333 Cr.; Radhe ₹44,333 Dr.

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REALIZATION ACCOUNT

Dr. side — Assets transferred ₹3,31,000 (Land & Building 1,40,000 + Machinery 50,000 + Motor Car 28,000 + Furniture 12,000 + Investments 18,000 + Stock 18,000 + Bills Receivable 20,000 + Loose Tools 7,000 + Debtors 38,000); Cash — Creditors paid ₹94,000; Cash — Realization expenses ₹500; Om's Capital A/c (Mrs. Om's Loan taken over by Om) ₹15,000; Radhe's Capital A/c (Radhe's Loan transferred to his Capital) ₹33,000; Profit on Realization (Cr. to Partners) ₹2,000. Total ₹4,75,500.

Cr. side — Sundry Liabilities ₹2,18,000 (Radhe's Loan 33,000 + Mrs. Om's Loan 15,000 + Creditors 96,000 + Bills Payable 14,000 + Bank OD 60,000); ABC Ltd. A/c (Purchase Consideration) ₹1,95,500; Om's Capital A/c (Investments taken over at ₹13,000) ₹13,000; Cash A/c (Debtors 20,000 + Motor Car 24,000 + Furniture 4,000 + Loose Tools 1,000) ₹49,000. Total ₹4,75,500.

Profit ₹2,000 distributed 3:2:1 — Om ₹1,000; Sai ₹667; Radhe ₹333.

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ABC LTD. ACCOUNT

Dr. — Realization A/c (Purchase Consideration) ₹1,95,500.
Cr. — Cash A/c ₹75,500; Shares in ABC Ltd. A/c ₹1,20,000. Total ₹1,95,500.

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SHARES IN ABC LTD. ACCOUNT

Dr. — ABC Ltd. A/c ₹1,20,000 (1,200 shares × ₹100 each).
Cr. — Om's Capital A/c ₹60,000 (600 shares); Sai's Capital A/c ₹40,000 (400 shares); Radhe's Capital A/c ₹20,000 (200 shares). Total ₹1,20,000.

Shares distributed in profit-sharing ratio 3:2:1.

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CASH ACCOUNT

Dr. — Balance b/d ₹1,000; ABC Ltd. A/c ₹75,500; Realization A/c (direct asset proceeds) ₹49,000; Radhe's Capital A/c (deficit brought in) ₹31,000. Total ₹1,56,500.

Cr. — Realization A/c (Creditors paid) ₹94,000; Realization A/c (Expenses) ₹500; Om's Capital A/c ₹18,000; Sai's Capital A/c ₹44,000. Total ₹1,56,500.

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PARTNERS' CAPITAL ACCOUNTS

Om's Capital:
Dr. — P&L A/c ₹6,000; Realization A/c (Investments taken) ₹13,000; Shares in ABC Ltd. ₹60,000; Cash A/c ₹18,000. Total ₹97,000.
Cr. — Balance b/d ₹70,000; General Reserve ₹11,000; Realization A/c (Mrs. Om's Loan) ₹15,000; Realization A/c (Profit) ₹1,000. Total ₹97,000.

Sai's Capital:
Dr. — P&L A/c ₹4,000; Shares in ABC Ltd. ₹40,000; Cash A/c ₹44,000. Total ₹88,000.
Cr. — Balance b/d ₹80,000; General Reserve ₹7,333; Realization A/c (Profit) ₹667. Total ₹88,000.

Radhe's Capital:
Dr. — Radhe's Current A/c ₹56,000; P&L A/c ₹2,000; Shares in ABC Ltd. ₹20,000. Total ₹78,000.
Cr. — Balance b/d ₹10,000; General Reserve ₹3,667; Realization A/c (Radhe's Loan) ₹33,000; Realization A/c (Profit) ₹333; Cash A/c (deficit paid) ₹31,000. Total ₹78,000.

Final settlement: Om receives ₹18,000 cash; Sai receives ₹44,000 cash; Radhe pays ₹31,000 cash to firm.

Section 39 of the Indian Partnership Act 1932 (dissolution of firm)Section 366 read with Schedule VI of the Companies Act 2013 (conversion of firm into company)
PLAN

Write it like this

Time target 28 min 48 sec

1The skeleton

- Start by re-reading the balance sheet critically — your first move is spotting that Radhe's Current A/c (Dr.) and P&L A/c (Dr./loss) sit on the Asset side, not the Liability side; examiners give a silent mark to students who handle this without being told.
- Do preliminary adjustments BEFORE opening Realization — distribute P&L loss and General Reserve to capitals in PSR, and close Radhe's Current A/c into his Capital; skipping this step cascades errors into every single account that follows.
- Segregate assets and liabilities into two buckets — 'taken over by ABC Ltd.' vs 'disposed of by firm directly'; write this rough list in your rough work margin because the Realization account's structure depends entirely on which bucket each item falls in.
- Open ABC Ltd. Account and Shares in ABC Ltd. Account as two separate accounts — ABC Ltd. A/c records the total purchase consideration (Dr.), settled by Cash and Shares (Cr.); Shares in ABC Ltd. A/c then distributes those shares to partners in PSR; examiners deduct for clubbing these into one entry.
- In the Capital Accounts, show every movement explicitly — Investments taken by Om, Mrs. Om's Loan borne by Om, Radhe's deficit brought in cash — each needs its own line; a lump-sum figure with no narration loses presentation marks even if the total is correct.
- End with a one-line Final Settlement note — state who receives cash and who pays cash; this signals to the examiner you have verified the accounts close to zero, which is the closing mark in conversion questions.**

2Examiner-rewarded phrases

“purchase consideration payable as to ₹X in cash and the balance in fully paid equity shares of ₹100 each”“assets taken over by the company / liabilities taken over by the company”“profit on realization transferred to Partners' Capital Accounts in their profit-sharing ratio”

3Common trap

Don't fall for this

Most students transfer ALL assets and ALL liabilities into Realization and then show the 'directly disposed' items as separate cash receipts — this double-counts assets and bloats the Realization account. Only the assets and liabilities actually transferred to ABC Ltd. enter Realization on the standard side; the ones the firm handles itself enter as contra cash entries. Get this segregation wrong and your purchase consideration figure will never reconcile.

Q.4 00 marks easy Buy back of securities and bonus issue - journal entries ⚡ Try this Q →
M/s. Vriddhi Infra Ltd. (a non-listed company) provide the following information as on 31.3.2020: Land and Building 21,50,000; Plant & Machinery 15,00,000; Non-current Investment 2,00,000; Trade Receivables 5,50,000; Inventories 1,80,000; Cash and Cash Equivalents 40,000; Share capital: 1,00,000 Equity Shares of Rs. 10 each fully paid up 10,00,000; Securities Premium 3,00,000; General Reserve 2,50,000; Profit & Loss Account (Surplus) 1,50,000; 10% Debentures (Secured by floating charge on all assets) 20,00,000; Unsecured Loans 8,00,000; Trade Payables 1,20,000. On 21st April, 2020 the Company announced the buy back of 15,000 of its equity shares @ Rs. 15 per share. For this purpose, it sold all its investment for Rs. 2.50 lakhs. On 25th April, 2020, the company achieved the target of buy back. On 1st May, 2020 the company issued one fully paid up share of Rs. 10 each by way of bonus for every eight equity shares held by the equity shareholders. You are required to pass necessary Journal Entries for the above transactions.
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Q.6 00 marks easy Amalgamation of companies - realisation account, bank accoun ⚡ Try this Q →
Mohan Ltd. gives you the following information as on 31st March, 2020: Share capital - Equity shares of Rs. 10 each: 3,00,000; 6,000, 9% cumulative preference shares of Rs. 10 each: 60,000; Profit and Loss Account (Dr. balance): 1,70,000; 10% Debentures of Rs. 100 each: 2,00,000; Interest payable on Debentures: 20,000; Trade Payables: 1,50,000; Property, Plant and Equipment: 3,40,000; Goodwill: 10,000; Inventory: 80,000; Trade Receivables: 1,10,000; Bank Balance: 20,000. A new company Ravi Ltd. is formed with authorised share capital of Rs. 4,00,000 divided into 40,000 Equity Shares of Rs. 10 each. The new company will acquire the assets and liabilities of Mohan Ltd. on the following terms: (i)(a) Mohan Ltd.'s debentures are paid by similar debentures in new company and for outstanding accrued interest on debentures, equity shares of equal amount are issued at par. (b) The trade payables are paid by issue of 12,000 equity shares at par in full and final settlement of their claims. (c) Preference shareholders are to get equal number of equity shares issued at par. Dividend on preference shares is in arrears for three years. Preference shareholders to forgo dividend for two years. For balance dividend, equity shares of equal amount are issued at par. (d) Equity shareholders are issued one share at par for every three shares held in Mohan Ltd. (ii) Current Assets are to be taken at book value (except inventory, which is to be reduced by 10%). Goodwill is to be eliminated. The Property, plant and equipment is taken over at Rs. 3,08,400. (iii) Remaining equity shares of the new company are issued to public at par fully paid up. (iv) Expenses of Rs. 5,000 to be met from bank balance of Mohan Ltd. This is to be adjusted from the bank balance of Mohan Ltd. before acquisition by Ravi Ltd. You are required to prepare: (a) Realisation account and Equity Shareholders' account in the books of Mohan Ltd. (b) Bank Account and Balance Sheet with notes to accounts in the books of Ravi Ltd.
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Q.7 00 marks easy Internal reconstruction - capital reduction scheme - journal ⚡ Try this Q →
Recover Ltd decided to reorganize its capital structure owing to accumulated losses and adverse market condition. The Balance Sheet of the company as on 31st March 2020 is as follows: Equity and Liabilities: Share capital (Note 1) 3,50,000; Reserves and surplus (Note 2) (70,000); Long-term borrowings (Note 3) 55,000; Trade Payables 80,000; Bank overdraft 90,000. Total 5,05,000. Assets: Property, Plant & Equipment (Note 4) 3,35,000; Intangible assets (Note 5) 50,000; Non-current investments (Note 6) 40,000; Inventories 30,000; Trade receivables 50,000. Total 5,05,000. Notes: (1) Share Capital: 20,000 Equity Shares of Rs. 10 each = 2,00,000; 15,000 8% Cumulative Preference Shares of Rs. 10 each (preference dividend in arrears for 4 years) = 1,50,000. (2) Securities premium 10,000; P&L debit balance (80,000). (3) 9% Debentures secured on freehold property 50,000; Accrued interest 5,000. (4) Freehold property 1,20,000; Leasehold property 85,000; Plant and machinery 1,30,000. (5) Goodwill 50,000. (6) Non-Trade investments at cost 40,000. Subsequent to approval by court of a scheme for the reduction of capital, the following steps were taken: i. The preference shares were reduced to Rs. 2.5 per share, and the equity shares to Rs. 1 per share. ii. One new equity share of Rs. 1 was issued for the arrears of preferred dividend for past 4 years. iii. The balance on Securities Premium Account was utilized and transferred to capital reduction account. iv. The debenture holders took over the freehold property at an agreed figure of Rs. 75,000 and paid the balance to the company after deducting the amount due to them. v. Plant and Machinery was written down to Rs. 1,00,000. vi. Non-trade Investments were sold for Rs. 32,000. vii. Goodwill and obsolete stock (included in the value of inventories) of Rs. 10,000 were written off. viii. A contingent liability of which no provision had been made was settled at Rs. 7,000 and of this amount, Rs. 6,300 was recovered from the insurance. You are required (a) to show the Journal Entries, necessary to record the above transactions in the company's books and (b) to prepare the Balance Sheet, after completion of the scheme.
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Q.8 00 marks easy Liquidation of company - liquidator's final statement of acc ⚡ Try this Q →
From the following Trial Balance of All Rounder Ltd., on 1st January, 2021, prepare liquidator's final statement of account: Debit balances: Plant 6,00,000; Stock-in-Trade 7,20,000; Sundry Debtors 1,70,000; Bank Balance 2,40,000; Preliminary Expenses 12,000; Profit and Loss A/c (Trading Loss) 60,000. Credit balances: 9% Preference Share Capital (2,500 shares at Rs. 100 each, fully paid) 2,50,000; Equity Share Capital: 4,000 shares at Rs. 100 each fully paid 4,00,000; 4,000 Equity Shares at Rs. 100 each, Rs. 50 paid up 2,00,000; Sundry Creditors 4,42,000; 6% Mortgage Loan 4,60,000; Outstanding Liabilities for Expenses 50,000. Total 18,02,000 each side. Following points should be kept in mind: 1. On 21st January, 2021, the Liquidator sold plant for Rs. 5,90,000 and stock-in-trade at 10% less than the Book Value. He realized 80% of Sundry Debtors, and incurred cost of collection of Rs. 3,700 (remaining Debtors are to be treated as bad). 2. The Loan Mortgage was discharged as on 31st January, 2021, along with interest for 6 months. Creditors were discharged subject to 5% discount. Outstanding Expenses paid at 20% less. 3. Preference Share Dividend is due for one year and paid with final payment. 4. Liquidation Expenses incurred are Rs. 3,600, and Liquidator's Remuneration is settled at 4% on disbursement to shareholders (preference and equity) excluding preference dividend, subject to minimum of Rs. 20,000. Liquidator's Remuneration to be rounded off to the multiple of Rs. 10.
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Q.11 00 marks easy Consolidated financial statements - minority interest and go ⚡ Try this Q →
A Ltd. acquired 70% equity shares of B Ltd. @ Rs. 20 per share (Face value - Rs. 10) on 31st March, 2021 at a cost of Rs. 140 lakhs. Calculate the amount of share of A Ltd. and minority interest in the net assets of B Ltd. on this date. Also compute goodwill/capital reserve for A Ltd. on acquisition of shares of B Ltd. from the following information available from the balance sheet of B Ltd. as on 31st March, 2021: (Rs. in lakhs) Property, plant and equipment: 360 Investments: 90 Current Assets: 140 Loans & Advances: 30 15% Debentures: 180 Current Liabilities: 100
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Q.16 00 marks easy AS 19 - lease classification - operating vs finance lease ⚡ Try this Q →
Sooraj Limited wishes to obtain a machine costing Rs. 30 lakhs by way of lease. The effective life of the machine is 14 years, but the company requires it only for the first 3 years. It enters into an agreement with Star Ltd., for a lease rental for Rs. 3 lakhs p.a. payable in arrears and the implicit rate of interest is 15%. The chief accountant of Sooraj Limited is not sure about the treatment of these lease rentals and seeks your advice. (use annuity factor at 15% for 3 years as 3.36)
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Q.17 00 marks easy AS 20 - weighted average number of shares - date of inclusio ⚡ Try this Q →
In the following list of shares issued, for the purpose of calculation of weighted average number of shares, from which date, weight is to be considered: (i) Equity Shares issued in exchange of cash, (ii) Equity Shares issued as a result of conversion of a debt instrument, (iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise, (iv) Equity Shares issued for rendering of services to the enterprise, (v) Equity Shares issued in lieu of interest and/or principal of another financial instrument, (vi) Equity Shares issued as consideration for the acquisition of an asset other than in cash.
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