Question 1

Conversion of Partnership firm into a Company: A and V, sharing profits and losses equally, desired to convert their business into a limited company on 31st December, 2021 when their balance sheet stood as follows:

Liabilities: Sundry creditors ₹1,92,000; Loan creditors ₹1,60,000; Bank overdraft ₹64,000; Reserve fund ₹24,000; Capital-A ₹1,60,000; Capital-V ₹1,60,000; Total ₹7,60,000
Assets: Sundry debtors ₹2,40,000; Bills receivable ₹40,000; Stock in trade ₹1,44,000; Patents ₹32,000; Plant and machinery ₹64,000; Land and building ₹2,40,000; Total ₹7,60,000

(a) The goodwill of the firm was to be valued at two years' purchase of the profits average of the previous three years.
(b) All assets and liabilities were taken over by the company. The loan creditor agreed to accept 7½% redeemable p…

Accepted Answer

**Conversion of Partnership Firm into a Limited Company — Realisation Account and Partners' Capital Accounts**

**Step 1 — Goodwill Valuation**

Profits given are *after* setting aside ₹8,000 p.a. to reserve fund (an appropriation, not an expense). Adjusted profits for goodwill:
- 2019: ₹1,20,000 + ₹8,000 = ₹1,28,000
- 2020: ₹1,44,000 + ₹8,000 = ₹1,52,000
- 2021: ₹1,68,000 + ₹8,000 = ₹1,76,000

Average profit = ₹4,56,000 ÷ 3 = **₹1,52,000**
Goodwill = 2 years' purchase = ₹1,52,000 × 2 = **₹3,04,000**

**Step 2 — Purchase Consideration**

Assets taken over at agreed values:
Sundry debtors ₹2,40,000 + Bills receivable ₹40,000 + Stock ₹1,44,000 + Patents ₹32,000 + Plant & Machinery ₹96,000 + Land & Building ₹4,00,000 + Goodwill ₹3,04,000 = **₹12,56,000**

Less: Liabilities taken over:
Sundry creditors ₹1,92,000 + Loan creditors ₹1,60,000 + Bank overdraft ₹64,000 = **₹4,16,000**

**Purchase Consideration (equity shares to vendors) = ₹8,40,000**

Note: Loan creditors (₹1,60,000) are settled by the company through issue of 7½% Redeemable Preference Shares.

**Step 3 — Profit on Realisation**

Dr side of Realisation = All book value assets = ₹7,60,000 (goodwill not in balance sheet, so not on Dr side)
Cr side = Liabilities discharged (₹4,16,000) + Company A/c/Purchase Consideration (₹8,40,000) = ₹12,56,000
Profit on Realisation = ₹12,56,000 − ₹7,60,000 = **₹4,96,000** (split equally: ₹2,48,000 each)

Verification: Gain on Plant ₹32,000 + Gain on Land & Building ₹1,60,000 + Goodwill …

Question 2

Accounting for ESOPs: Mehta Ltd. grants 1,500 stock options to its employees on 1.4.2019 at ₹50. The vesting period is two and a half years. The maximum exercise period is one year. Market price on that date is ₹80. Fair value per option is ₹30. All the options were exercised on 30.9.2022. Give the necessary journal entries if the face value of equity share is ₹10 per share.

Accepted Answer

**Accounting for ESOPs — Mehta Ltd.**

**Relevant Standard:** ICAI Guidance Note on Accounting for Share-based Payments (Fair Value Method). Under this guidance, the total employee compensation cost is measured at **fair value on the grant date** and spread over the **vesting period** on a straight-line basis.

**Key Data:**
- Grant date: 1.4.2019 | Exercise price: ₹50 | Face value: ₹10
- Fair value per option: ₹30 | Options granted: 1,500
- **Total compensation cost = 1,500 × ₹30 = ₹45,000**
- Vesting period: 2.5 years (1.4.2019 to 30.9.2021) = 30 months
- Exercise date: 30.9.2022

**Journal Entries:**

**Entry 1 — Year ended 31.3.2020** (12 months elapsed out of 30)
Expense = ₹45,000 × 12/30 = ₹18,000

Employee Compensation Expense A/c Dr. ₹18,000
  To Employee Stock Options Outstanding A/c ₹18,000
*(Being ESOP cost recognised for Year 1)*

**Entry 2 — Year ended 31.3.2021** (24 months elapsed; cumulative = ₹36,000)
Expense for year = ₹36,000 − ₹18,000 = ₹18,000

Employee Compensation Expense A/c Dr. ₹18,000
  To Employee Stock Options Outstanding A/c ₹18,000
*(Being ESOP cost recognised for Year 2)*

**Entry 3 — Period ended 30.9.2021 (Vesting Date)** (30 months; cumulative = ₹45,000)
Expense for period = ₹45,000 − ₹36,000 = ₹9,000

Employee Compensation Expense A/c Dr. ₹9,000
  To Employee Stock Options Outstanding A/c ₹9,000
*(Being balance ESOP cost recognised on vesting)*

**Entry 4 — Exercise on 30.9.2022** (all 1,500 options exercised)
Cash received = 1,500 × ₹50 = ₹…

Question 3

Buy Back of Securities: Umesh Ltd. resolves to buy back 4 lakhs of its fully paid equity shares of ₹10 each at ₹22 per share. This buyback is in compliance with the provisions of the Companies Act and does not exceed 25% of Company's paid up capital in the financial year. For the purpose, it issues 1 lakh 11% preference shares of ₹10 each at par, the entire amount being payable with applications. The company uses ₹16 lakhs of its balance in Securities Premium Account apart from its adequate balance in General Reserve to fulfill the legal requirements regarding buy-back. Give necessary journal entries to record the above transactions.

Accepted Answer

**Journal Entries in the Books of Umesh Ltd.**

The buyback involves three phases: (i) issue of fresh preference shares, (ii) buyback payment, and (iii) creation of Capital Redemption Reserve (CRR).

**Key computations before entries:**
- Total buyback consideration = 4,00,000 × ₹22 = **₹88,00,000**
- Nominal value of shares bought back = 4,00,000 × ₹10 = ₹40,00,000
- Premium on buyback = 4,00,000 × ₹12 = ₹48,00,000
- Fresh issue proceeds = 1,00,000 × ₹10 = ₹10,00,000
- Premium funded: Securities Premium ₹16,00,000 + General Reserve ₹32,00,000 = ₹48,00,000
- **CRR required** (as per **Section 69 of the Companies Act, 2013**) = Nominal value of shares bought back − Proceeds of fresh issue = ₹40,00,000 − ₹10,00,000 = **₹30,00,000** (to be transferred from General Reserve)

---

**Entry 1 — Receipt of application money for preference shares**

Bank A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp; Dr. &emsp; ₹10,00,000
&emsp; To Preference Share Application A/c &emsp;&emsp;&emsp;&emsp;&emsp; ₹10,00,000
*(Being application money received for 1,00,000, 11% Preference Shares of ₹10 each at par)*

---

**Entry 2 — Allotment of preference shares**

Preference Share Application A/c &emsp; Dr. &emsp; ₹10,00,000
&emsp; To 11% Preference Share Capital A/c &emsp;&emsp;&emsp; ₹10,00,000
*(Being allotment of 1,00,000, 11% Preference Shares of ₹10 each at par)*

---

**Entry 3 — Buyback of equity shares**

Equity Share Capital A/c &emsp;&emsp;&emsp;&emsp; Dr. &emsp; ₹40,00,000
Secur…

Question 4

Amalgamation of Companies: The balance sheets of Truth Limited and Myth Limited as at 31.03.2021 are given below. Myth Limited is to be amalgamated with Truth Limited from 1.04.2021. The amalgamation is to be carried out in the nature of purchase.

Balance Sheet (Truth Ltd. / Myth Ltd.):
Share Capital (equity shares of ₹10 each): ₹10,00,000 / ₹4,00,000
General Reserve: ₹5,05,000 / ₹2,30,000
Profit & Loss A/c: ₹4,45,000 / ₹1,58,000
Export Profit Reserve: ₹1,85,000 / ₹25,000
14% Debentures (Non-Current): nil / ₹1,50,000
Trade Payables: ₹90,000 / ₹1,42,000
Other Current Liabilities: ₹50,000 / ₹40,000
Total: ₹22,75,000 / ₹11,45,000

Property, Plant & Equipment: ₹15,75,000 / ₹6,80,000
Investments: ₹1,87,500 / ₹1,00,000
Inventory: ₹2,15,000 / ₹85,000
Trade Receivables: ₹2,02,500 / ₹1,75,000
Cash…

Accepted Answer

**Amalgamation in Nature of Purchase – Truth Limited Post-Acquisition Balance Sheet**

**Step 1: Calculate Average Profit and Goodwill for Myth Limited**

Average profit for 3 years = (₹2,55,000 + ₹2,15,000 + ₹2,14,000) ÷ 3 = ₹2,28,000

Non-trade investment of Myth Limited = 80% × ₹1,00,000 = ₹80,000
Income on non-trade investments = 15% × ₹80,000 = ₹12,000

Average profit for goodwill = ₹2,28,000 − ₹12,000 = ₹2,16,000

Using **Capitalization Method** at 18% normal rate of return:
Expected capital required = ₹2,16,000 ÷ 0.18 = ₹12,00,000

Net assets of Myth Limited = ₹11,45,000 − ₹3,32,000 = ₹8,13,000
(Total assets ₹11,45,000 less liabilities: Trade Payables ₹1,42,000 + Other Current Liabilities ₹40,000 + Debentures ₹1,50,000)

Goodwill (profit-based) = ₹12,00,000 − ₹8,13,000 = ₹3,87,000

**Step 2: Calculate Intrinsic Value Per Share**

Intrinsic value per share = (₹8,13,000 + ₹3,87,000) ÷ 40,000 shares = **₹30 per share**

Purchase consideration to shareholders = ₹30 × 40,000 = ₹12,00,000

**Step 3: Handle Debenture Replacement**

Current annual interest on 14% debentures = 14% × ₹1,50,000 = ₹21,000

12% debentures required to maintain same interest = ₹21,000 ÷ 0.12 = ₹1,75,000

Extra consideration to debenture holders = ₹1,75,000 − ₹1,50,000 = ₹25,000

Total goodwill = ₹3,87,000 + ₹25,000 = ₹4,12,000

**Step 4: Equity Shares to be Issued**

New shares issued = ₹12,00,000 ÷ ₹10 = 1,20,000 shares
Total shares after amalgamation = 1,00,000 + 1,20,000 = 2,20,000 shares

**Balan…

Question 5

Internal Reconstruction of a Company: Planet Limited has decided to reconstruct the Company since it has accumulated huge losses. The following is the balance sheet of the company as on 31st March, 2022 before reconstruction (₹ in lakh):

Share Capital (Authorised): 300 lakh Equity shares of ₹10 each = 3,000; 12 lakh 8% Preference Shares of ₹100 each = 1,200; Total = 4,200
Share Capital (Paid up): 150 lakh Equity Shares of ₹10 each fully paid = 1,500; 6 lakh 8% Preference Shares of ₹100 each fully paid = 600; Total = 2,100
Reserves & Surplus: Debit balance of P&L A/c = (783)
Long term Borrowings: 6% Debentures (Secured by freehold property) = 600; Directors' Loan = 450; Total = 1,050
Trade Payables: 153
Other Liabilities (Interest Accrued and Due on 6% Debentures): 36
Total: 2,556

Assets:…

Accepted Answer

**Internal Reconstruction of Planet Limited**

**(a) Journal Entries in the books of Planet Limited (₹ in lakh)**

**Entry 1 – Reduction of Preference Share Capital (₹100 to ₹75):**
8% Preference Share Capital A/c Dr **150** (6L × ₹25)
  To Capital Reduction A/c **150**
*(Being preference share capital written down by ₹25 per share)*

**Entry 2 – Reduction of Equity Share Capital (₹10 to ₹2):**
Equity Share Capital A/c Dr **1,200** (150L × ₹8)
  To Capital Reduction A/c **1,200**
*(Being equity share capital written down by ₹8 per share)*

**Entry 3 – Settlement of Preference Dividend Arrears (3 years):**
Capital Reduction A/c Dr **48**
  To Equity Share Capital A/c **48**
*(Being 1/3rd of ₹144 lakh arrear settled by issuing 24 lakh equity shares of ₹2 each; 2/3rd i.e. ₹96 lakh waived by preference shareholders — no entry for waiver as arrears were never recorded)*

**Entry 4 – Debenture holders take Freehold Property in part payment:**
6% Debentures A/c Dr **450**
  To Freehold Property A/c **450**
*(Being freehold property transferred at book value of ₹450 lakh; balance debentures ₹150 lakh remain)*

**Entry 5 – Payment of interest accrued on debentures:**
Interest Accrued & Due on 6% Debentures A/c Dr **36**
  To Bank A/c **36**
*(Being interest paid in cash as per scheme)*

**Entry 6 – Revaluation of remaining freehold property:**
Freehold Property A/c Dr **175**
  To Capital Reduction A/c **175**
*(Being remaining property revalued from ₹375 lakh to ₹550 lakh; gain = ₹17…

Question 6

Liquidation of Company: Debit and credit Balances of Blossam Ltd. as on 31.12.2021 were as follows:

Dr. Balances: Land & Building ₹1,25,000; Other Fixed Assets ₹3,00,000; Inventory ₹5,25,000; Trade receivables ₹1,00,000; Profit & Loss A/c (debit balance) ₹58,000; Total ₹11,08,000

Cr. Balances: 8,000 Preference Shares of ₹10 each ₹80,000; 12,000 Equity Shares of ₹10 each ₹1,20,000; Bank Loan ₹4,00,000; 8% Debentures ₹1,00,000; Interest Outstanding on Debentures ₹8,000; Trade payables ₹4,00,000; Total ₹11,08,000

The Company went into Liquidation on that date. Prepare liquidator's account after taking into account the following:
(a) Liquidation Expenses ₹3,000.
(b) Liquidator Remuneration ₹10,000.
(c) Bank Loan was secured by pledge of Stock.
(d) Debentures & Interest thereon are secured b…

Accepted Answer

**Liquidator's Statement of Account of Blossom Ltd. (as on 31.12.2021)**

**Realisation of Assets:**
Fixed assets (Land & Building and Other Fixed Assets) are realised at book value. Current assets (Inventory and Trade Receivables) are realised at 80% of book value.

**Order of Payment:** Under the Companies Act, the order is: (i) Secured creditors (from their specific security), (ii) Liquidation expenses, (iii) Liquidator's remuneration, (iv) Debentureholders with floating charge, (v) Unsecured creditors, (vi) Preference shareholders, (vii) Equity shareholders.

**Treatment of Bank Loan:** Bank Loan of ₹4,00,000 is secured by pledge of stock (Inventory). Inventory realised = ₹4,20,000. Bank Loan is fully paid (₹4,00,000) from inventory proceeds; surplus ₹20,000 flows into general pool.

**Treatment of Debentures:** 8% Debentures ₹1,00,000 + Outstanding Interest ₹8,000 = ₹1,08,000, secured by floating charge on all assets, paid after liquidation costs.

**Liquidator's Statement of Account**

| Dr. (Payments) | ₹ | Cr. (Receipts) | ₹ |
|---|---|---|---|
| Bank Loan (Secured — paid from Inventory) | 4,00,000 | Land & Building (at BV) | 1,25,000 |
| Liquidation Expenses | 3,000 | Other Fixed Assets (at BV) | 3,00,000 |
| Liquidator's Remuneration | 10,000 | Inventory (80% × ₹5,25,000) | 4,20,000 |
| 8% Debentures | 1,00,000 | Trade Receivables (80% × ₹1,00,000) | 80,000 |
| Interest Outstanding on Debentures | 8,000 | | |
| Trade Payables (Unsecured) | 4,00,000 | | |
| Preferenc…

Question 7

NBFCs: XYZ Finance Ltd. is a non-banking finance company. The extract of its balance sheet are as follows (₹ in lakhs):

Shareholders' Funds: Paid-up equity capital 200; General Reserve 600
Non-Current Liabilities: Loans 500; Deposits 600; Total 1,900

Assets: Property Plant and Equipment 900; Investments in shares of subsidiaries 250; Investments in debentures of group companies 400; Cash and bank balances 350; Total 1,900

You are required to compute 'Net Owned Fund' of XYZ Finance Ltd. as per Non-Banking Financial Company – Systemically Important Non-Deposit taking company and Deposit taking company (Reserve Bank) Directions, 2016.

Accepted Answer

**Net Owned Fund (NOF) of XYZ 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 in two stages:

**Stage 1 – Owned Fund:** The aggregate of paid-up equity capital and free reserves, after deducting accumulated losses, deferred revenue expenditure, and other intangible assets. Since no such deductions are present here:

Owned Fund = Paid-up Equity Capital + General Reserve = ₹200 + ₹600 = **₹800 lakhs**

**Stage 2 – Deduction for investments in group/subsidiary companies:** The Owned Fund is further reduced by the amounts representing: (i) investments in shares of subsidiaries and companies in the same group, and (ii) book value of debentures, bonds, loans, advances, and deposits made to subsidiaries and companies in the same group — **to the extent such aggregate amount exceeds 10% of the Owned Fund**.

Items attracting deduction:
- Investments in shares of subsidiaries = ₹250 lakhs
- Investments in debentures of group companies = ₹400 lakhs
- **Total = ₹650 lakhs**

10% of Owned Fund = 10% × ₹800 = ₹80 lakhs

Amount exceeding 10% of Owned Fund = ₹650 − ₹80 = **₹570 lakhs**

**Net Owned Fund = Owned Fund − Excess Amount = ₹800 − ₹570 = ₹230 lakhs**

Note: Loans of ₹500 lakhs (non-current liabilities), Deposits of ₹600 lakhs, PPE of ₹900 lakhs, and Cash & Bank of ₹350 lakhs do not affect the NOF computation directly.

Question 8

Banking Companies: The following are the figures extracted from the books of TOP Bank Limited as on 31.3.2022:

Interest and discount received: ₹59,29,180; Interest paid on deposits: ₹32,59,920; Issued and subscribed capital: ₹16,00,000; Salaries and allowances: ₹3,20,000; Directors fee and allowances: ₹48,000; Rent and taxes paid: ₹1,44,000; Postage and telegrams: ₹96,460; Statutory reserve fund: ₹12,80,000; Commission, exchange and brokerage: ₹3,04,000; Rent received: ₹1,04,000; Profit on sale of investments: ₹3,20,000; Depreciation on bank's properties: ₹48,000; Statutory expenses: ₹44,000; Preliminary expenses: ₹40,000; Auditor's fee: ₹28,000.

The following further information is given:
(i) A customer to whom ₹16 lakhs has been advanced has become insolvent and it is expected only 40%…

Accepted Answer

**Profit and Loss Account of TOP Bank Limited**
**For the year ended 31st March, 2022**

**Dr. Side (Expenditure)**

| Particulars | ₹ |
|---|---|
| Interest paid on deposits | 32,59,920 |
| Salaries and allowances | 3,20,000 |
| Directors' fee and allowances | 48,000 |
| Rent and taxes paid | 1,44,000 |
| Postage and telegrams | 96,460 |
| Depreciation on bank's properties | 48,000 |
| Statutory expenses | 44,000 |
| Preliminary expenses written off (Note iv) | 40,000 |
| Auditor's fee | 28,000 |
| Bad debts — insolvent customer (Note i) | 9,60,000 |
| Provision for doubtful debts (Note ii) | 2,10,000 |
| **Net Profit before tax** | **14,52,800** |
| **Total** | **66,51,180** |

**Cr. Side (Income)**

| Particulars | ₹ |
|---|---|
| Interest and discount received (net of rebate adjustment — Note iii) | 59,23,180 |
| Commission, exchange and brokerage | 3,04,000 |
| Rent received | 1,04,000 |
| Profit on sale of investments | 3,20,000 |
| **Total** | **66,51,180** |

---

**Profit and Loss Appropriation Account**

| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| Provision for Income-tax | 9,00,000 | Net Profit b/d | 14,52,800 |
| Transfer to Statutory Reserve Fund (25% of ₹5,52,800) | 1,38,200 | | |
| **Balance c/f** | **4,14,600** | | |
| **Total** | **14,52,800** | **Total** | **14,52,800** |

---

**Key Notes:**

**Note (i) — Bad Debts (Insolvent Customer):** Customer was advanced ₹16,00,000. Only 40% is recoverable. Irrecoverable amount = 60% × ₹16,00,000 = **₹9,60,000** charged…

Question 9

Consolidated Financial Statements: On 31st March, 2022, H Ltd. and S Ltd. give the following information (₹ in 000's):

H Ltd. / S Ltd.:
Equity Share Capital - Authorised: 5,000 / 3,000
Issued and subscribed (Equity Shares of ₹10 each fully paid): 4,000 / 2,400
General Reserve: 928 / 690
Profit and Loss Account (Cr. Balance): 1,305 / 810
Trade payables: 611 / 507
Provision for Taxation: 220 / 180
Other Provisions: 65 / 17
Plant and Machinery: 2,541 / 2,450
Furniture and Fittings: 615 / 298
Investment in Equity Shares of S Ltd.: 1,500 / nil
Inventory: 983 / 786
Trade receivables: 820 / 778
Cash and Bank Balances: 410 / 102
Sundry Advances (Dr. balances): 260 / 190

Trade payables (H Ltd. / S Ltd.): Bills Payable 124/80; Sundry creditors 487/427; Total 611/507
Trade receivables (H Ltd. / S L…

Accepted Answer

**Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2022** (₹ in 000's)

**Preliminary Workings:**

**Shares of S Ltd.:** S Ltd.'s current issued capital is ₹2,400 thousand (240,000 shares). Since a bonus of 3 for 5 was issued, original shares = 240,000 ÷ 1.6 = **150,000 shares** (₹1,500 thousand). H Ltd. purchased 90,000 shares out of 150,000 = **60% holding**. After bonus, H holds 90 + (90 × 3/5) = 144,000 shares out of 240,000 = 60% ✓. **Minority Interest (MI) = 40%.**

**Pre-acquisition Figures of S Ltd. (adjusted):**
At 1st April 2021: Share Capital ₹1,500, General Reserve ₹1,500, P&L ₹633.
Bonus issue (from pre-acq GR): Dr GR ₹900, Cr Share Capital ₹900.
Dividend (20% on ₹1,500 from pre-acq P&L): ₹300 paid; reduces pre-acq P&L.
Adjusted pre-acquisition figures: Share Capital ₹2,400; GR ₹600 (1,500 – 900); P&L ₹333 (633 – 300).

**Cost of Control / Capital Reserve:**
H Ltd. wrongly credited dividend received (60% × ₹300 = ₹180) to its P&L Account. Since dividend was out of pre-acquisition profits, it is a return of capital. For consolidation, H's P&L is reduced by ₹180 and cost of investment is adjusted.
Adjusted cost of investment = 1,500 – 180 = **₹1,320**.
H's share in S's adjusted pre-acquisition net worth = 60% × (2,400 + 600 + 333) = 60% × 3,333 = **₹1,999.8**.
**Capital Reserve = 1,999.8 – 1,320 = ₹679.8** (shown under Reserves & Surplus).

**Minority Interest:**
MI = 40% × (Share Capital + GR + P&L) = 40% × (2,400 + 690 + 810) = 40%…

Question 10

Explain accounting treatment of Contingent Gains as per AS 4 'Contingencies and Events occurring after the Balance Sheet Date'.

Accepted Answer

**Definition and Concept**: A contingent gain is a possible inflow of economic resources to an entity that depends on the occurrence of one or more uncertain events beyond the entity's control. Examples include pending legal cases where judgment is expected in favour of the entity, or potential insurance recoveries.

**General Principle – Non-recognition**: As per AS 4 'Contingencies and Events occurring after the Balance Sheet Date', contingent gains are **NOT recognized** in the financial statements. Unlike contingent liabilities, which may be provisioned based on probability, contingent gains are excluded from balance sheet recognition entirely. This conservative approach ensures that assets are not overstated and financial statements remain reliable.

**Reasons for Non-recognition**: Recognition would require the entity to anticipate favorable outcomes that are inherently uncertain. Recognizing contingent gains could mislead users by presenting optimistic scenarios as substantive assets when economic inflow remains questionable.

**Disclosure Requirements**: Contingent gains **must be disclosed** in the notes to the financial statements, but only when an inflow of economic benefits is **probable**. The disclosure should include: (a) a brief description of the nature of the contingent gain, (b) an estimate of the financial effect where determinable, and (c) uncertainties relating to the amount or timing of the inflow. The disclosure should be clear and not misleading about…

Question 11

AS 9 Revenue Recognition: When will revenue be recognized in the following situations?
(i) Where the purchaser makes a series of installment payments to the seller and the seller delivers the goods only when the final payment is received.
(ii) Where seller concurrently agrees to repurchase the same goods at a later date.
(iii) Where goods are sold to distributors, dealers or others for resale.
(iv) Commissions on service rendered as agent on insurance business.

Accepted Answer

**AS 9 - Revenue Recognition** provides that revenue should be recognized when the significant risks and rewards of ownership have been transferred to the buyer. The treatment in each situation is as follows:

**(i) Installment Sales with Deferred Delivery:**
Where goods are delivered only upon receipt of the final installment payment, **revenue is recognized when the final installment is received and the goods are delivered**. This is because the significant risks and rewards of ownership are transferred only at that point. The seller retains effective control until the final payment is made. Prior installments received are treated as liabilities (deferred revenue) until delivery occurs.

**(ii) Repurchase Agreements:**
Where the seller concurrently agrees to repurchase the goods at a later date, **revenue is NOT recognized on the initial sale**. The existence of a repurchase agreement indicates that the seller has retained the significant risks and rewards of ownership, or control over the goods. Such transactions are essentially financing arrangements rather than genuine sales. Revenue would be recognized only when the repurchase agreement is completed and the goods are finally disposed of to a third party.

**(iii) Sales to Distributors, Dealers, or Others for Resale:**
Where goods are sold to distributors or dealers for resale, **revenue is recognized when the goods are delivered to the distributor AND the significant risks and rewards of ownership have been transferred*…

Question 12

AS 17 Segment Reporting: A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market prices are generally 25% above cost. Is the policy adopted by the company correct?

Accepted Answer

**Answer: No, the policy adopted by the company is NOT correct.**

AS 17 (Accounting Standard 17) – Segment Reporting requires that **inter-segment transfers should be recorded at prices that would prevail between independent, unrelated parties (arm's length principle)**. The policy of charging at cost less 10% violates this fundamental principle.

**Issues with the Company's Policy:**

The company is charging **₹90 (Cost – 10%)** when market price is **₹125 (Cost + 25%)**. This below-cost transfer pricing creates several problems:

**1. Violates Arm's Length Principle:** Transfer prices should reflect what independent entities would charge. Market prices of cost plus 25% represent the fair market value. Charging below cost does not reflect genuine commercial transactions.

**2. Distorts Segment Performance:** Transferring at cost less 10% artificially inflates the profit margins of the receiving segment (who purchases cheaply) and suppresses profits of the supplying segment. This makes financial analysis and performance evaluation misleading.

**3. Does Not Reflect Economic Reality:** The transfer price should represent the economic value being exchanged. A 10% discount below cost is economically illogical and suggests cross-subsidization rather than genuine segment transactions.

**4. Disclosure Requirements:** While AS 17 requires disclosure of transfer pricing policies, no policy can justify below-cost transfers as compliant with the standard's requirements for fair repre…

Question 13

AS 18 Related Party Transactions: SP Hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return payable to the latter every year. The contract involves the day-to-day management of the hotel, while all financial and operating policy decisions are taken by the Board of Directors of the company. Mr. A does not own any voting power in SP Hotels Limited. Would he be considered as a related party of SP Hotels Limited?

Accepted Answer

**Answer: No, Mr. A would NOT be considered a related party of SP Hotels Limited.**

**Definition of Related Party under AS 18:** According to AS 18 - Related Party Transactions, a related party is one who has the ability to exercise control or significant influence over the enterprise, or is key management personnel. Control is defined as the power to govern the financial and operating policies, while significant influence is the power to participate in (but not control) financial and operating policy decisions. Key management personnel are those having authority and responsibility for planning, directing, and controlling the activities of the enterprise.

**Analysis of Mr. A's Position:** In the given case, Mr. A's engagement as a management contractor is limited to day-to-day operational management. Although he has responsibility for running the hotel's operations, the critical distinction is that:

(1) **No Control:** Financial and operating policy decisions rest with the Board of Directors, not with Mr. A. Therefore, he does not have the power to govern the enterprise's policies.

(2) **No Significant Influence:** Mr. A does not participate in policy-making decisions. He executes the policies and decisions established by the Board within the agreed management framework. Mere execution of decisions does not constitute participation in decision-making.

(3) **Not Key Management Personnel:** While Mr. A has responsibility for directing day-to-day operations, he lacks the br…

Question 14

AS 19 Leases: WIN Ltd. has entered into a three year lease arrangement with Tanya sports club in respect of Fitness Equipments costing ₹16,99,999.50. The annual lease payments to be made at the end of each year are structured in such a way that the sum of the Present Values of the lease payments and that of the residual value together equal the cost of the equipments leased out. The unguaranteed residual value of the equipment at the expiry of the lease is estimated to be ₹1,33,500. The assets would revert to the lessor at the end of the lease. Given that the implicit rate of interest is 10%, you are required to compute the amount of the annual lease payment and the unearned finance income. Discounting Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively.

Accepted Answer

**AS 19 – Leases: Computation of Annual Lease Payment and Unearned Finance Income**

**Step 1 – Compute PV of Residual Value**

The unguaranteed residual value of ₹1,33,500 reverts to the lessor at the end of Year 3.

PV of Residual Value = ₹1,33,500 × 0.751 = **₹1,00,258.50**

**Step 2 – Compute Annual Lease Payment**

Under **AS 19 (Leases)**, for a finance lease, the lessor records the asset at the **net investment** in the lease (i.e., the present value of minimum lease payments + unguaranteed residual value = cost of the asset).

Let the annual lease payment = L

Sum of discount factors (annuity for 3 years @ 10%) = 0.909 + 0.826 + 0.751 = **2.486**

Equation: L × 2.486 + ₹1,00,258.50 = ₹16,99,999.50

L × 2.486 = ₹16,99,999.50 − ₹1,00,258.50 = **₹15,99,741**

L = ₹15,99,741 ÷ 2.486 = **₹6,43,500**

**Step 3 – Compute Unearned Finance Income**

Under AS 19, the lessor recognises **Gross Investment** (total undiscounted cash inflows) less **Net Investment** (cost) as **Unearned Finance Income**, which is then allocated over the lease term using the actuarial method.

Gross Investment = Total Lease Payments + Residual Value
= (₹6,43,500 × 3) + ₹1,33,500
= ₹19,30,500 + ₹1,33,500
= **₹20,64,000**

Net Investment (Cost) = **₹16,99,999.50**

**Unearned Finance Income = ₹20,64,000 − ₹16,99,999.50 = ₹3,64,000.50**

**Summary:**
- Annual Lease Payment = **₹6,43,500**
- Unearned Finance Income = **₹3,64,000.50**

Question 15

AS 20 Earnings Per Share: The following information relates to XYZ Limited for the year ended 31st March, 2022:

Net Profit for the year after tax: ₹37,50,000
Number of Equity Shares of ₹10 each outstanding: 5,00,000
Convertible Debentures Issued by the Company (at the beginning of the year): 8% Convertible Debentures of ₹100 each: 50,000 nos.; Equity Shares to be issued on conversion: 55,000 nos.
Rate of Income Tax: 30%.

You are required to calculate Basic and Diluted Earnings Per Share (EPS).

Accepted Answer

**Basic Earnings Per Share:**

Basic EPS is calculated by dividing the net profit attributable to equity shareholders by the weighted average number of equity shares outstanding during the year, as per **AS 20 – Earnings Per Share**.

Basic EPS = Net Profit after tax ÷ Equity Shares outstanding
= ₹37,50,000 ÷ 5,00,000
= **₹7.50 per share**

**Diluted Earnings Per Share:**

For diluted EPS, we assume the 8% Convertible Debentures are converted into equity shares at the beginning of the year. This requires two adjustments:

(1) **Adjusted Earnings (Numerator):** Add back after-tax interest on convertible debentures to net profit, since on conversion, this interest would no longer be payable.

Interest on debentures = 50,000 × ₹100 × 8% = ₹4,00,000
Tax saving thereon = ₹4,00,000 × 30% = ₹1,20,000
After-tax interest saved = ₹4,00,000 – ₹1,20,000 = **₹2,80,000**

Adjusted Net Profit = ₹37,50,000 + ₹2,80,000 = **₹40,30,000**

(2) **Adjusted Shares (Denominator):** Add the potential equity shares to be issued on conversion.

Adjusted Shares = 5,00,000 + 55,000 = **5,55,000 shares**

Diluted EPS = ₹40,30,000 ÷ 5,55,000 = **₹7.26 per share** (approx.)

Since Diluted EPS (₹7.26) < Basic EPS (₹7.50), the convertible debentures are **dilutive** and must be included in the diluted EPS computation.

Dr	A (₹)	V (₹)	Cr	A (₹)	V (₹)
Equity Shares A/c	4,20,000	4,20,000	Balance b/d	1,60,000	1,60,000
			Reserve Fund A/c	12,000	12,000
			Realisation A/c (Profit)	2,48,000	2,48,000
Total	4,20,000	4,20,000	Total	4,20,000	4,20,000

CA Inter Audit & Ethics

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Dr	₹	Cr	₹
Sundry Debtors	2,40,000	Sundry Creditors A/c	1,92,000
Bills Receivable	40,000	Loan Creditors A/c	1,60,000
Stock in Trade	1,44,000	Bank Overdraft A/c	64,000
Patents	32,000	Company A/c (Purchase Consideration)	8,40,000
Plant & Machinery	64,000
Land & Building	2,40,000
A's Capital A/c (Profit)	2,48,000
V's Capital A/c (Profit)	2,48,000
Total	12,56,000	Total	12,56,000