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Past papers › Audit & Ethics › May 2016

CA Inter Audit & Ethics — Suggested Answers — May 2016

This page contains all 11 questions from the CA Inter Auditing & Ethics Suggested Answers for the May 2016 attempt cycle, sourced from VSI Jaipur.

QbInsurance Business Principles
6 marks medium
Write short notes on the following principles and terms of Insurance Business: (i) Principle of Indemnity (ii) Insurable Interest (iii) Principle of UBERRIMAE FIDEI (iv) Catastrophic Loss
QcAccounting Standard 16
4 marks medium
Write short note on 'Suspension of Capitalisation' in context of Accounting Standard 16.
Q2Partnership Amalgamation
16 marks very hard
Case: P & Co. Balance Sheet: Capitals - P ₹2,50,000, Q ₹1,80,000; Reserves ₹60,000; Sundry Creditors ₹1,30,000; Assets: Building ₹50,000, Plant & Machinery ₹1,60,000, Office equipment ₹50,000, Stock-in-trade ₹1,20,000, Sundry Debtors ₹1,60,000, Bank balance ₹40,000, Cash in hand ₹20,000, Due to R & Co. ₹1,00,000. R & Co. Balance Sheet: Capitals - Q ₹2,20,000, R ₹1,20,000; Reserves ₹1,50,000; Sundry Creditors ₹1,36,000; Due to P & Co. ₹1,00,000; Assets: Building ₹60,000, Plant & Machinery ₹1,70,000, Office equipment ₹46,000, Stock-in-trade ₹1,40,000, Sundry Debtors ₹2,00,000, Bank balance ₹1,00,000, …
P and Q are partners of P & Co., sharing Profit and Losses in the ratio of 3:1 and Q and R are partners of R & Co., sharing Profits and Losses in the ratio of 2:1. On 31st March, 2015, they decide to amalgamate and form a new firm M/s PQR & Co., wherein P, Q and R would be partners sharing profits and losses in the ratio of 3:2:1. The Balance Sheets of two firms on the above date are provided.
Q4Liquidation, Statement of Affairs, Deficiency Account
16 marks very hard
From the following particulars, prepare a Statement of Affairs and the Deficiency Account for submission to official liquidator of Sun City Development Ltd., which went into liquidation on 31st March, 2016. Liabilities: - 6,00,000 Equity shares of ₹ 10 each, ₹ 8 paid-up: ₹ 48,00,000 - 6% 2,00,000 Preference shares of ₹ 10 each: ₹ 20,00,000 - less: call in arrear: ₹ 1,00,000 (₹ 19,00,000) - 5% Debentures having a floating charge on the assets (interest paid up to 30th September, 2015): ₹ 20,00,000 - Mortgage on Land & Building: ₹ 16,00,000 - Trade Payable: ₹ 53,10,000 - Wage Payable: ₹ 4,00,000 - Secretary's Salary Payable @ ₹ 10,000 p.m.: ₹ 60,000 - Managing Director's Salary Payable @ ₹ 30,000 p.m.: ₹ 1,20,000 Assets: - Land & Building: Estimated to produce ₹ 26,00,000 (Book value ₹ 24,00,000) - Plant & Machinery: Estimated to produce ₹ 26,00,000 (Book value ₹ 40,00,000) - Tools & Equipments: Estimated to produce ₹ 80,000 (Book value ₹ 4,00,000) - Patents & Copyrights: Estimated to produce ₹ 6,00,000 (Book value ₹ 10,00,000) - Inventories: Estimated to produce ₹ 14,80,000 (Book value ₹ 17,40,000) - Investments in the hand of a Bank for an Overdraft of ₹ 38,00,000: Estimated to produce ₹ 34,00,000 (Book value ₹ 36,00,000) - Trade Receivables: Estimated to produce ₹ 12,00,000 (Book value ₹ 18,00,000) On 31st March, 2011 the Balance Sheet of the Company showed a General Reserve of ₹ 8,00,000 accompanied by a debit balance of ₹ 5,00,000 in the Profit & Loss Account. In 2012 the Company made a profit of ₹ 8,00,000 and declared a dividend of 10% on Equity Shares. The Company suffered a total loss of ₹ 21,80,000 besides loss of stock due to fire to the tune of ₹ 8,00,000 during financial years ending March 2013, 2014 and 2015. For the financial year ended 31st March, 2016, accounts were not made. The cost of winding-up is expected to be ₹ 3,00,000.
Q5Partnership amalgamation, LAP (Limited Accounting Project)
0 marks hard
Case: Amalgamation of two partnership firms (P & Co. and R & Co.) into a new firm (PQR & Co.) with specified asset valuations, depreciation, goodwill treatment, and cash adjustments.
The amalgamated firm took over the business on the following terms: (a) Building of P & Co. was valued at ₹ 1,50,000. (b) Plant & Machinery of P & Co. was valued at ₹ 2,75,000 and that of R & Co. at ₹ 2,50,000. (c) All stock in trade is to be appreciated by 20%. (d) Goodwill of P & Co. was valued at ₹ 1,20,000 and of R & Co. at ₹ 60,000, but the same will not appear in the books of PQR & Co. (e) Partners of new firm will bring the necessary cash to pay other partners to adjust their capitals according to the profit sharing ratio. (f) Provisions for doubtful debts has to be carried forward at ₹ 15,000 in respect of debtors of P & Co. and ₹ 30,000 in respect of debtors of R & Co. You are required to prepare the Balance Sheet of new firm and capital accounts of the partners in the books of old firms.
Q6Branch accounting, foreign exchange transactions
0 marks hard
Case: LAP (Liaison Account with New York Office): Trial Balance as at 1st April, 2014 with Stock on 1st April 2014: ₹ 300,000 (Dr.); Purchases and Sales: ₹ 800,000 (Dr.) / ₹ 1,200,000 (Cr.); Sundry Debtors & Creditors: ₹ 400,000 (Dr.) / ₹ 300,000 (Cr.); Bills of Exchange: ₹ 120,000 (Dr.) / ₹ 240,000 (Cr.); Wages & Salaries: ₹ 560,000 (Dr.); Rent, Rates & Taxes: ₹ 360,000 (Dr.); Sundry Charges: ₹ 160,000 (Dr.); Computers: ₹ 240,000 (Dr.); Bank Balance: ₹ 420,000 (Dr.); New York Office A/c: ₹ 1,620,000 (Cr.). Totals: ₹ 3,360,000 each side. Additional Information: (a) Computers were acquired from a rem…
You are asked to prepare in US dollars the revenue statement for the year ended 31st March, 2015 and the balance sheet as on that date of Bangalore branch as would appear in the books of New York head office of ABC & Co. You are informed that Bangalore branch account showed a debit balance of US $ 29845.35 on 31.3.2015 in New York books and there were no items pending reconciliation.
Q6aDepartmental Accounting - Interdepartmental Transfers and Pr
8 marks hard
There is transfer / sale among the three departments as below: Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively. Department Z charges 20% and 25% profit on cost to Departments X and Y respectively. Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Stocks lying at different Departments at the end of the year are as under: Transfer from Department X to Dept. Y: 75,000, to Dept. Z: 57,000. Transfer from Department Y to Dept. X: 70,000, to Dept. Z: 60,000. Transfer from Department Z to Dept. X: 30,000, to Dept. Y: 25,000. Departmental profits after charging Managers' commission, but before adjustment of unrealised profit are: Department X: ₹1,80,000, Department Y: ₹1,35,000, Department Z: ₹90,000. Find out the correct departmental profits after charging Managers' commission.
Q6bForeign Branch Accounting
8 marks very hard
Case: M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India). Bangalore branch is an integral foreign operation of M/s ABC & Co. Bangalore branch furnishes trial balance as on 31st March, 2015 with additional information
M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India). Bangalore branch is an integral foreign operation of M/s ABC & Co. Bangalore branch furnishes you with its trial balance as on 31st March, 2015 and the additional information given thereafter:
Q7Share Buyback, Redeemable Debentures
0 marks hard
The Company wants to buy back 25000 equity shares of ₹ 10 each, on 1st April, 2016 at ₹ 20 per share. Buy back of shares is duly authorised by its Articles and necessary resolution has been passed by the Company towards this. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets. Comment with your calculations, whether buy back of shares by the Company is within the provisions of the Companies Act, 2013. If yes, pass necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares.