Question 1

NAT, a listed entity, as on 1st April, 2021 had the following capital structure: 10,00,000 Equity Shares having face value of ₹ 1 each and 10,00,000 8% Preference Shares having face value of ₹ 10 each. During the year 2021-2022, the company had profit after tax of ₹ 90,00,000. On 1st January, 2022, NAT made a bonus issue of one equity share for every 2 equity shares outstanding as at 31st December, 2021. On 1st January, 2022, NAT issued 2,00,000 equity shares of ₹ 1 each at their full market price of ₹ 7.60 per share. NAT's shares were trading at ₹ 8.05 per share on 31st March, 2022. Further it has been provided that the basic earnings per share for the year ended 31st March, 2021 was previously reported at ₹ 62.30.

Accepted Answer

**Part (i): Calculation of Basic EPS for the year ended 31st March, 2022**

**Step 1 – Earnings available to equity shareholders:**
Profit after tax = ₹90,00,000
Less: Preference dividend = 8% × 10,00,000 shares × ₹10 = ₹8,00,000
**Earnings available to equity shareholders = ₹82,00,000**

**Step 2 – Weighted Average Number of Shares (WANS):**
Under **AS-20 (Earnings Per Share)**, the bonus issue on 1st January 2022 is treated retrospectively (as if always outstanding), while the 2,00,000 shares issued at full market price are weighted only from their date of issue.

- Period 1 (1 Apr 2021 to 31 Dec 2021 – 9 months): Actual shares = 10,00,000; adjusted for bonus (×1.5) = 15,00,000; weighted = 15,00,000 × 9/12 = **11,25,000**
- Period 2 (1 Jan 2022 to 31 Mar 2022 – 3 months): Shares = 15,00,000 (post-bonus) + 2,00,000 (new issue) = 17,00,000; weighted = 17,00,000 × 3/12 = **4,25,000**

**Total WANS = 15,50,000**

**Basic EPS for 2021-22 = ₹82,00,000 ÷ 15,50,000 = ₹5.29**

**Comparative figure (restated for 2020-21):**
Previously reported EPS = ₹62.30. Since a bonus issue was made during 2021-22, AS-20 requires that the prior year EPS be restated by dividing by the bonus factor (1.5).
**Restated Basic EPS for 2020-21 = ₹62.30 ÷ 1.5 = ₹41.53**

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**Part (ii): Different treatment of Bonus Issue vs. Issue at Full Market Price**

**Bonus Issue:** No consideration is received when bonus shares are issued. The number of shares increases without any corresponding inflow of resources…

Question 2

Alloy Fabrication Limited is engaged in manufacturing of iron and steel rods. The company is in the process of finalization of the financial statements for the year ended 31st March, 2023 and seeks your advice on the following issues in line with the provisions of AS-29:

Accepted Answer

**Part (i): Furnace Lining Replacement**

The company SHOULD provide a provision for the replacement of the furnace lining.

**Analysis under AS-29:** The furnace was installed on 1st April 2019, and the lining requires replacement every 5 years for technical reasons. As at 31st March 2023, nearly four years have elapsed, with replacement due in approximately one month (1st April 2024). The three recognition criteria under AS-29 are satisfied: (1) a **present obligation** exists (the company will definitely replace the lining), (2) an outflow is **probable** (virtually certain), and (3) a **reliable estimate** can be made based on current replacement costs.

**Recommendation:** Recognize a **provision for the estimated cost** of lining replacement. The estimated amount should be based on current market prices. Alternatively, apply the **component approach** by treating the lining as a separate asset component and depreciating it over the 5-year replacement cycle.

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**Part (ii): Consumer Court Case**

**A. Penalty of ₹50 Lakhs:**

The penalty is a **contingent liability**, NOT a provision. Although the company received a notice for ₹50 Lakhs, the probability of the penalty being levied is only **30%** (100% − 70% = 30%). Under AS-29, a provision is recognized only when the probability of outflow exceeds 50% ("more likely than not"). At 30%, this threshold is not met. Therefore, **no provision should be recorded**. However, since the probability is not remote, this continge…

Question 3

Grace Ltd., a firm of contractors provided the following information in respect of a contract for the year ended 31st March, 2022: Fixed Contract Price with an escalation clause ₹ 35,000; Work Certified ₹ 17,500; Work not Certified (includes ₹ 26,25,000 for materials issued, out of which material lying unused at the end of the period is ₹ 1,40,000) ₹ 3,815; Estimated further cost to completion ₹ 17,325; Progress Payment Received ₹ 14,000; Payment to be Received ₹ 4,900; Escalation in cost is by 8% and accordingly the contract price is increased by 8%.

Accepted Answer

**Applicable Standard: AS 7 — Construction Contracts (Revised)**

**Step 1: Revised Contract Price after Escalation**

Original fixed contract price = ₹35,000 (₹'000s). Escalation = 8%.
**Revised Contract Price = ₹35,000 × 1.08 = ₹37,800**

**Step 2: Total Cost Incurred to Date**

Cost of work certified + Cost of work not certified (net of unused materials):
= ₹17,500 + ₹3,815 − ₹140 (unused materials)
= **₹21,175**

Note: Unused material of ₹1,40,000 (₹140 in ₹'000s) is excluded as it has not been consumed and remains an asset (closing stock on site).

**Step 3: Total Estimated Contract Cost**
= Cost incurred to date + Estimated further cost to completion
= ₹21,175 + ₹17,325 = **₹38,500**

**Step 4: Foreseeable Loss**
= Total Estimated Cost − Revised Contract Price
= ₹38,500 − ₹37,800 = **₹700 (Loss)**

Since the contract is expected to result in a net loss, **AS 7 requires the entire foreseeable loss of ₹700 to be recognised immediately** in the Statement of Profit & Loss, irrespective of the stage of completion.

**Step 5: Stage of Completion**
= Cost incurred to date / Total estimated cost = ₹21,175 / ₹38,500 = **55%**

**Step 6: Revenue Recognised in P&L**
= Stage of completion × Revised contract price
= 55% × ₹37,800 = **₹20,790**

**Step 7: Contract Costs Recognised in P&L**
Since the full foreseeable loss must be absorbed:
= Revenue recognised + Total foreseeable loss
= ₹20,790 + ₹700 = **₹21,490**

Breakdown: ₹21,175 already incurred; ₹315 = provision for anticipated…

Question 4

TQ Cycles Ltd. is in the manufacturing of bicycles, a labour intensive manufacturing sector. In April 2022, the Government enhanced the minimum wages payable to workers with retrospective effect from the 1st January, 2022. Due to this legislative change, the additional wages for the period from January 2022 to March 2022 amounted to ₹ 30 lakhs. The management asked the Finance manager to charge ₹ 30 lakhs as prior period item while finalizing financial statements for the year 2022-23. Further, the Finance manager is of the view that this amount being abnormal should be disclosed as extraordinary item in the Profit and loss account for the financial year 2021-22. Discuss with reference to applicable Accounting Standards.

Accepted Answer

The applicable Accounting Standard here is **AS 5 — Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies**.

**(a) Whether ₹30 lakhs is a Prior Period Item:**

As per **paragraph 15 of AS 5**, prior period items are defined as income or expenses which arise in the current period as a result of **errors or omissions** in the preparation of financial statements of one or more prior periods.

In the present case, the additional wages of ₹30 lakhs for the period January 2022 to March 2022 have arisen not because of any error or omission in preparing the financial statements of FY 2021-22, but solely due to a **retrospective legislative change** by the Government (enhancement of minimum wages). There was no mistake or oversight on the part of TQ Cycles Ltd. when preparing prior period statements — at that time, the obligation simply did not exist.

Therefore, the management's view to classify ₹30 lakhs as a **prior period item is incorrect**. This amount should be recognised as an **ordinary expense of the current period FY 2022-23** (the period in which the legislative change became known and the obligation arose, i.e., April 2022), and charged to the Profit and Loss Account of FY 2022-23 as a normal wage cost.

**(b) Whether ₹30 lakhs qualifies as an Extraordinary Item:**

As per **paragraph 12 of AS 5**, extraordinary items are income or expenses that arise from events or transactions that are **clearly distinct from the ordinary activities**…

Question 5

While Ltd. acquired 2,250 shares of Black Ltd. on 1st October, 2020. The summarized balance sheets of both the companies as on 31st March, 2021 are given below:

Equity and Liabilities:
Shareholder's fund: Share capital (Equity shares of ₹ 100 each fully paid up), Reserves and Surplus, General Reserve, Profit and loss account
Current Liabilities: Trade payables, Due to White Ltd.

Assets:
Non-current assets: Property, Plant and Equipment
Investments: Shares in Black Ltd. (2,250 shares)
Current assets: Inventories, Due from Black Ltd., Cash and Cash equivalents

Other Information:
(i) During the year, Black Limited fabricated a machine, which is sold to White Ltd. for ₹ 39,000, the transaction being completed on 30th March, 2021.
(ii) Cash in transit from Black Ltd. to White Ltd. was ₹ 6,00…

Accepted Answer

**Note:** The actual balance sheet figures for White Ltd. and Black Ltd. were not fully captured in the question as presented (the table did not render). The solution below uses **illustrative figures** consistent with the given information clues (inter-company balances, pre-acquisition data) and demonstrates the complete consolidation methodology required under **AS 21 – Consolidated Financial Statements** and **Schedule III of the Companies Act, 2013**.

**Assumed Balance Sheets as at 31st March, 2021:**

Cost of machine fabricated by Black = ₹30,000; sold to White = ₹39,000; unrealized profit = ₹9,000.

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**Step A – Determine Shareholding**

Black Ltd. total shares = 3,000 (₹3,00,000 ÷ ₹100). White holds 2,250 shares = **75% (Holding)**. **Minority Interest (MI) = 25%**.

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**Step B – Pre-acquisition Net Assets of Black Ltd. (as at 1st October, 2020)**

Profits earned evenly → 6 months pre-acquisition (April–September 2020), 6 months post-acquisition (October 2020–March 2021).

Changes in Black's …

Question 6

From the above information, you are required to: (i) Compute the contract revenue to be recognized for the year ended 31st March, 2022 and (ii) Calculate the Profit / Loss for the year ended 31st March, 2022 and additional provision for loss to be made, if any, for the year ended 31st March, 2022.

Accepted Answer

**Unable to solve this question without the supporting information.** The question states 'From the above information, you are required to...' but the contract details, costs, progress data, and other relevant figures are not provided. To compute contract revenue under **Ind AS 115 (Revenue from Contracts with Customers)**, the following information is required: (1) Total contract value; (2) Costs incurred to date; (3) Estimated total costs to complete; (4) Progress of performance obligations; (5) Any milestone or completion percentages; (6) Details of any variations or claims; (7) Opening balances of contract assets/liabilities if applicable. Similarly, for calculating profit/loss and provision, we need the detailed cost breakup and work completion status. Please provide the complete question with all underlying data/information.

Question 7

Ajay, Vijay and Sanjay have been in partnership for a number of years, sharing profits and losses in the ratio 7:7:4 as a wholesale stationery trading business under the name "AVS Traders". On 31st March, 2021, it was found that some frauds were committed by Sanjay during the year 2020-2021. So, it was decided to dissolve the partnership business on 31st March, 2021 when their Balance sheet stood as under: [Balance sheet with Capital accounts: Ajay ₹1,80,000, Vijay ₹1,80,000, Sanjay overdraw; General Reserve ₹36,000; Trade Creditors ₹80,000; Bills payables ₹30,000; Assets: Building ₹1,90,000, Inventory ₹1,30,000, Investments ₹50,000, Trade Debtors ₹70,000, Cash & Bank ₹26,000, Sanjay's Capital (overdrawn) ₹40,000]. Additional Information: (1) Following frauds were committed by Sanjay: Inve…

Accepted Answer

**Dissolution of AVS Traders — 31st March, 2021**

The partnership is dissolved after discovery of frauds by Sanjay. The procedure involves: (i) recording frauds, (ii) distributing General Reserve, (iii) preparing Realization Account, (iv) closing Partners' Capital Accounts, and (v) preparing Bank Account. All remaining assets are assumed realized at book value since no other realization figures are given.

**Step 1 — Recording the Two Frauds**

**Fraud 1:** Investments costing ₹8,000 were sold by Sanjay at ₹11,000; proceeds misappropriated. Entry: Dr. Sanjay's Capital A/c ₹11,000 | Cr. Investments A/c ₹8,000 | Cr. Profit on Realization A/c ₹3,000. The ₹3,000 profit flows through the Realization Account and is shared in 7:7:4.

**Fraud 2:** Cheque of ₹7,000 received from trade debtors, not recorded and misappropriated. Entry: Dr. Sanjay's Capital A/c ₹7,000 | Cr. Trade Debtors A/c ₹7,000.

Total amount charged to Sanjay for frauds = ₹11,000 + ₹7,000 = **₹18,000**.

**Step 2 — General Reserve Distribution (₹36,000 in ratio 7:7:4)**
Ajay: ₹14,000 | Vijay: ₹14,000 | Sanjay: ₹8,000.

**Step 3 — Realization Account**

Dr. side: All assets transferred at book value — Building ₹1,90,000 + Inventory ₹1,30,000 + Investments ₹50,000 + Trade Debtors ₹70,000 = ₹4,40,000; plus liabilities discharged (Trade Creditors ₹80,000 + Bills Payable ₹30,000) = ₹1,10,000. Total Dr. = ₹5,50,000.

Cr. side: Liabilities transferred in (Trade Creditors ₹80,000 + Bills Payable ₹30,000) = ₹1,10,000; Bank …

Question 8

B Ltd. is to declare and pay ₹ 1 per equity share as dividend, before the following amalgamation takes place with Z Ltd. Z Ltd. was incorporated to take over the business of both A Ltd. and B Ltd. (a) The authorized share capital of Z Ltd. is ₹ 60 lakhs divided into 6 lakhs equity shares of ₹ 10 each. (b) As per Registered Valuer the value of equity shares of A Ltd. is ₹ 18 per share and of B Ltd. is ₹ 12 per share respectively and agreed by respective shareholders of the companies. (c) 10% Debentures of A Ltd. to be issued 12% Debentures of Z Ltd. at par in consideration of their holdings. (d) A contingent liability of A Ltd. of ₹ 2,00,000 is to be treated as actual liability. (e) Liquidation expenses including Registered Valuer fees of A Ltd. ₹ 50,000 and B Ltd. ₹ 30,000 respectively to …

Accepted Answer

**Important Note:** The question as provided is **missing the Balance Sheets of A Ltd. and B Ltd.**, which are essential inputs for computing purchase consideration, net assets taken over, and the resulting Goodwill or Capital Reserve. The solution below presents the complete framework, journal entry structure, and methodology that must be applied once the balance sheets are available.

**Key Conditions Summary:**

**Purchase Consideration Computation (Framework):**

For **A Ltd.:** PC = Number of equity shares × ₹18. Since debentures are exchanged at par (10% Debentures of A Ltd. → 12% Debentures of Z Ltd.), the equity purchase consideration is only for equity shareholders. Number of Z Ltd. shares issued = PC_A ÷ ₹20 (i.e., ₹10 face + ₹10 premium).

For **B Ltd.:** B Ltd. first pays ₹1 per share as dividend (reducing its cash/net assets). The agreed value is ₹12 per share (as per Registered Valuer). Effective purchase consideration per share to B Ltd. equity holders = ₹12 − ₹1 = ₹11 (post-dividend, reflecting reduced net assets). Number of Z Ltd. shares issued = (No. of B shares × ₹11) ÷ ₹20.

**Treatment of Special Items:**
- Contingent liability of A Ltd. ₹2,00,000 → recognised as **actual liability** in Z Ltd.'s books (increases liabilities assumed; affects Goodwill/Capital Reserve computation).
- Liquidation expenses ₹50,000 (A Ltd.) + ₹30,000 (B Ltd.) = ₹80,000 borne by Z Ltd. → debited to **Goodwill A/c** (under purchase method, AS 14 — Accounting for Amalgamations).
-…

Question 9

XYZ Ltd. has 5 business segments. Profit / Loss of each of the segments for the year ended 31st March, 2022 has been provided below. You are required to identify from the following whether reportable or not reportable segments, on the basis of "profitability test" as per AS-17.

| Segment | Profit (Loss) ₹ in lakhs |
|---|---|
| A | 225 |
| B | 25 |
| C | (175) |
| D | (20) |
| E | (105) |

Accepted Answer

**Profitability Test under AS-17 (Segment Reporting)**

As per **AS-17 issued by the ICAI**, a segment is considered reportable if the **absolute amount of its profit or loss** is **10% or more** of the greater of:
(i) the combined profit of all segments that earned a profit, OR
(ii) the combined loss (in absolute terms) of all segments that incurred a loss.

**Step 1: Segregate profitable and loss-making segments**

Profitable segments: A (₹225 lakhs), B (₹25 lakhs) → Combined Profit = **₹250 lakhs**

Loss-making segments: C (₹175 lakhs), D (₹20 lakhs), E (₹105 lakhs) → Combined Loss (absolute) = **₹300 lakhs**

**Step 2: Determine the greater of the two**

Greater of ₹250 lakhs and ₹300 lakhs = **₹300 lakhs**

**Step 3: Calculate the 10% threshold**

10% × ₹300 lakhs = **₹30 lakhs**

**Step 4: Apply the threshold to each segment**

| Segment | Profit/(Loss) ₹ lakhs | Absolute Value | ≥ ₹30 lakhs? | Reportable? |
|---------|----------------------|----------------|--------------|-------------|
| A | 225 | 225 | Yes | **Reportable** |
| B | 25 | 25 | No | **Not Reportable** |
| C | (175) | 175 | Yes | **Reportable** |
| D | (20) | 20 | No | **Not Reportable** |
| E | (105) | 105 | Yes | **Reportable** |

**Conclusion:** Segments **A, C, and E** are reportable segments under the Profitability Test as per AS-17. Segments **B and D** are not reportable under this test (though they may qualify under the Revenue Test or Asset Test).

Question 10

What are the disclosures requirements for operating leases by the lessee as per AS-19 ?

Accepted Answer

**Disclosure Requirements for Operating Leases by the Lessee as per AS-19 (Leases)**

AS-19 issued by the Institute of Chartered Accountants of India governs the accounting treatment and disclosure of leases. For **operating leases**, the lessee is required to make the following disclosures in its financial statements:

**1. Future Minimum Lease Payments (Non-Cancellable Leases)**

The lessee shall disclose the total of **future minimum lease payments** under non-cancellable operating leases for each of the following periods:
- Not later than **one year**;
- Later than one year but not later than **five years**;
- Later than **five years**.

This disclosure helps users of financial statements assess the future cash outflow obligations of the entity.

**2. Future Minimum Sublease Payments Receivable**

The lessee must also disclose the total of **future minimum sublease payments** expected to be received under non-cancellable subleases at the balance sheet date. This is relevant where the lessee has further subleased the asset to a third party.

**3. Lease Payments Recognised in the Statement of Profit and Loss**

The lessee is required to disclose the **lease payments recognised as an expense** during the period in the Statement of Profit and Loss, with **separate disclosure** of:
- **Minimum lease payments**;
- **Contingent rents** (i.e., payments that are not fixed in amount but are based on a factor other than the passage of time, such as sales volume or usage); and
- **Su…

Question 11

The position of Bad Luck Limited on its liquidation on 31st March, 2022 is as follow:

Issued and paid up capital:
90,000, 10% Preference Shares of ₹ 100 each, fully paid
90,000 Equity Shares of ₹ 100 each, fully paid up
30,000 Equity Shares of ₹ 50 each, ₹ 40 paid up
10,000 Equity Shares of ₹ 10 each, ₹ 4 paid up

Calls in arrears are ₹ 3,00,000 and calls received in advance ₹ 2,55,000. Preference dividends are in arrears for two years. Amount left with the liquidator after discharging of all liabilities is ₹ 1,25,15,000. Articles of Association of the company provide for payment of preference dividend arrears in priority to return of equity capital.

You are required to prepare the Liquidator's Final Statement of Account.

Accepted Answer

**Liquidator's Final Statement of Account of Bad Luck Limited (as on 31st March, 2022)**

**RECEIPTS (Dr.) side:**

| Particulars | ₹ |
|---|---|
| Cash/Bank balance after discharging all liabilities | 1,25,15,000 |
| Add: Calls in arrears collected from equity shareholders | 3,00,000 |
| **Total** | **1,28,15,000** |

**PAYMENTS (Cr.) side:**

| Particulars | ₹ |
|---|---|
| Calls received in advance — returned to shareholders | 2,55,000 |
| Arrears of preference dividend (2 years @ 10% on ₹90,00,000) | 18,00,000 |
| Preference share capital returned (90,000 × ₹100) | 90,00,000 |
| Equity shareholders (see working below) | 17,60,000 |
| **Total** | **1,28,15,000** |

**Notes on priority:**
As per the **Articles of Association**, preference dividend arrears (₹18,00,000) are paid before any return of equity capital. **Calls in advance** (₹2,55,000) are a liability and are repaid ahead of share capital. **Calls in arrears** (₹3,00,000) are an asset recovered by the liquidator and form part of the distributable pool.

**Distribution to Equity Shareholders:**

Amount available for equity = ₹17,60,000

Total paid-up equity capital = ₹1,02,40,000 (see working notes)

Return per ₹1 of paid-up capital = 17,60,000 ÷ 1,02,40,000 = **11/64 per ₹1** (i.e., ~₹17.1875 per ₹100 paid-up)

| Class of Equity Shares | Paid-up Capital (₹) | Amount Returned (₹) |
|---|---|---|
| 90,000 shares × ₹100 fully paid | 90,00,000 | 15,46,875 |
| 30,000 shares × ₹40 paid | 12,00,000 | 2,06,250 |
| 10,000 …

Question 12

Write a short note on Non-performing assets of a banking company.

Accepted Answer

**Non-Performing Assets (NPAs) of a Banking Company**

A **Non-Performing Asset (NPA)** is a loan or advance where the borrower has stopped making interest or principal repayments. As per **Reserve Bank of India (RBI) guidelines** issued under the **Banking Regulation Act, 1949**, an asset is classified as NPA when it ceases to generate income for the bank.

**Definition:** An asset (including a leased asset) becomes non-performing when it ceases to generate income for the bank. Specifically, a term loan is classified as NPA if interest and/or instalment of principal remains **overdue for more than 90 days** at the end of a quarter.

**Classification of NPAs:**

RBI guidelines require banks to classify NPAs into the following three categories based on the period of default:

1. **Sub-Standard Assets:** An asset which has remained NPA for a period **less than or equal to 12 months**. Such assets have well-defined credit weaknesses that jeopardise the liquidation of the debt. Banks are required to make a **provision of 15%** on the outstanding balance for secured advances and **25%** for unsecured advances.

2. **Doubtful Assets:** An asset which has remained in the Sub-Standard category for a period of **12 months or more**. The bank makes provisions ranging from **25% to 100%** depending on the age of the doubtful asset:
   - Up to 1 year: 25% of secured portion
   - 1 to 3 years: 40% of secured portion
   - More than 3 years: 100% of secured portion
   - Unsecured portion: 1…

Question 13

Dee Bank provides you the following information relating to their two cash credit accounts. State with reason whether the above cash credit accounts are NPA or not?

Accepted Answer

**Classification of Cash Credit Accounts as NPA — Dee Bank**

As per **RBI Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRAC Norms)**, a cash credit account is treated as a **Non-Performing Asset (NPA)** if it remains **'out of order'** for a period exceeding **90 days**.

An account is considered **'out of order'** if:
(i) The outstanding balance continuously exceeds the sanctioned limit or drawing power; **OR**
(ii) Where the outstanding is within the sanctioned limit/drawing power, there are **no credits continuously for 90 days**, or the **credits are not sufficient to cover the interest debited** during the same period.

The period under review is **01.01.2021 to 31.03.2021 = 90 days** (Jan: 31 + Feb: 28 + Mar: 31 = 90 days).

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**Account A — Conclusion: NPA**

The outstanding amount of ₹3,600 lakhs is within the drawing power of ₹4,200 lakhs (and well within the sanctioned limit of ₹4,500 lakhs). However, the credits received during the period are ₹120 lakhs, which are **less than the interest debited of ₹288 lakhs**. Since credits are insufficient to cover interest debited, the account is treated as **'out of order'**. This condition has persisted for the entire 90-day period (01.01.2021 to 31.03.2021). Therefore, **Account A is classified as NPA** as on 31.03.2021.

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**Account B — Conclusion: Not NPA**

The outstanding amount of ₹2,000 lakhs is within the drawing power of ₹2,500 lakhs. Further, the credits received during the p…

Question 14

A partnership was being dissolved. The following assets and liabilities were realised as follows: (ii) A true creditor agreed to take over investments of the book value of ₹ 9,600 at ₹ 13,000. The rest of the trade creditors were settled at a discount of 10%. (iii) Other assets were realised as follows: Inventory ₹ 1,20,000; Building 110% of book value; Investments The rest of the investments were sold at a profit of ₹ 7,000; Trade Debtors The rest of the trade debtors were realised at a discount of 10%. (iv) The Bills payable were settled at a discount of ₹ 500. (v) The expenses of dissolution amounted to ₹ 8,060. (vi) It was found out, that realisation from Sanjay's private assets would be ₹ 7,000. You are required to prepare: (1) Realisation Account (2) Cash & Bank Account (3) Partner's…

Accepted Answer

**Note:** The question as presented is missing item **(i)** — the opening Balance Sheet with asset book values, liability balances, and partners' capital accounts (including partner names and profit-sharing ratios). Without this data, exact figures for the Realisation Account, Cash & Bank Account, and Partners' Capital Account cannot be computed. The answer below provides the **complete accounting framework, treatment for every given item, and the standard proforma**, so that a student can slot in the opening figures once available.

**Part (a): Accounts on Dissolution**

**Realisation Account** records all assets (at book value) on the debit side and all liabilities (at book value) on the credit side. Proceeds realised and liabilities settled are then recorded at actual amounts to arrive at profit or loss on realisation.

**Treatment of each item given:**

**(ii) Creditor taking over Investments (₹9,600 book value at ₹13,000):**
Debit Realisation A/c with investment book value ₹9,600 (when transferring asset in). Credit Realisation A/c ₹13,000 for liability discharged. The net effect: the creditor accepts ₹13,000 worth of investments in lieu of his debt — this saves cash equal to the debt discharged. Profit on investment = ₹13,000 − ₹9,600 = **₹3,400** (reflected as higher realisation). Remaining creditors settled at 10% discount → discount = 10% × remaining creditors balance → credit Realisation A/c (gain).

**(iii) Realisation of Other Assets:**
- Inventory: Realised at ₹1…

Question 15

Quick Ltd. has the following capital structure as on 31st March, 2021: Share Capital (Equity Shares of ₹ 10 each, fully paid) ₹ 462 Crores; Reserves and Surplus - General Reserve ₹ 336 Crores, Securities Premium Account ₹ 126 Crores, Profit and Loss Account ₹ 126 Crores, Statutory Reserve ₹ 180 Crores, Capital Redemption Reserve ₹ 87 Crores, Plant Revaluation Reserve ₹ 33 Crores (Total Reserves ₹ 888 Crores); Loan Funds - Secured ₹ 2,200 Crores, Unsecured ₹ 320 Crores (Total ₹ 2,520 Crores). On the recommendations of the Board of Directors, on 16th September, 2021, the shareholders of the company have approved a proposal to buy-back of equity shares. The prevailing market value of the company's share is ₹ 20 per share and in order to induce the existing shareholders to offer their shares f…

Accepted Answer

**Maximum Number of Shares that can be Bought Back**

Under **Section 68 of the Companies Act, 2013**, a company can buy back its own shares subject to the following conditions/limits. The most restrictive limit governs.

**Buy-back Price:** Market value = ₹20; Premium = 50% over market = ₹10; **Buy-back price = ₹30 per share**

**Total shares outstanding** = ₹462 Crores ÷ ₹10 = **46.2 Crore shares**

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**Limit 1: 25% of Total Paid-up Equity Share Capital (by number)**

Maximum shares = 25% × 46.2 Crore = **11.55 Crore shares**

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**Limit 2: 25% of (Paid-up Share Capital + Free Reserves)**

Free reserves available for buy-back:
- General Reserve: ₹336 Crores
- Securities Premium: ₹126 Crores (explicitly permitted under Section 68)
- Profit & Loss Account: ₹126 Crores
- **Total Free Reserves = ₹588 Crores**

*Note: Statutory Reserve, Capital Redemption Reserve, and Plant Revaluation Reserve are excluded — these are not distributable free reserves.*

Maximum amount = 25% × (₹462 + ₹588) = 25% × ₹1,050 = **₹262.5 Crores**

Max shares = ₹262.5 Cr ÷ ₹30 = **8.75 Crore shares**

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**Limit 3: Post Buy-back Debt-Equity Ratio ≤ 2:1 (Section 68(2)(d))**

Existing Debt (Loan Funds) = ₹2,520 Crores
Existing Equity (Share Capital + All Reserves) = ₹462 + ₹888 = **₹1,350 Crores**

For Debt : Equity ≤ 2 : 1 post buy-back:
₹2,520 ÷ (₹1,350 − X) ≤ 2
→ ₹1,350 − X ≥ ₹1,260
→ X ≤ **₹90 Crores**

Max shares = ₹90 Cr ÷ ₹30 = **3 Crore shares**

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**Binding Limit: 3 Crore shares** (Debt…

Question 16

You are required to compute the maximum number of shares that can be bought back in the light of the above information and also under a situation where the loan funds of the company were either ₹ 1,680 Crores or ₹ 2,100 Crores. Assuming that the entire buy-back is completed by 31st December, 2021, Pass the necessary accounting entries (narrations not required) in the books of the company in each situation.

Accepted Answer

**Computation of Capital Funds of Deluxe Commercial Bank under the Banking Regulation Act, 1949**

For banks, Capital Funds are classified into **Tier 1 (Core) Capital** and **Tier 2 (Supplementary) Capital** as per RBI guidelines issued under the Banking Regulation Act, 1949.

**Tier 1 Capital (Core Capital):**

Tier 1 capital comprises paid-up equity capital, statutory reserves, securities premium, and capital reserves arising out of sale of assets (not revaluation). Accumulated losses (debit balance in P&L) are deducted.

| Particulars | ₹ Crores |
|---|---|
| Paid-up Equity Share Capital | 2,400.00 |
| Statutory Reserves | 480.00 |
| Securities Premium | 480.00 |
| Capital Reserve (Sale of assets only): ₹288 – ₹128 | 160.00 |
| **Less:** P&L Account (Dr. Balance) | **(48.00)** |
| **Total Tier 1 Capital** | **3,472.00** |

**Note:** Capital Reserve arising out of **revaluation of assets (₹128 Cr)** is excluded from Tier 1 capital as it is not a realised gain.

**Tier 2 Capital (Supplementary Capital):**

Revaluation reserves may be included in Tier 2 capital at **45%** of their value (i.e., after applying a 55% discount as per RBI Basel guidelines), to account for the possibility that such reserves may not be fully realisable.

| Particulars | ₹ Crores |
|---|---|
| Revaluation Reserve @ 45% of ₹128 Cr | 57.60 |
| **Total Tier 2 Capital** | **57.60** |

**Check:** Tier 2 Capital (₹57.60 Cr) ≤ Tier 1 Capital (₹3,472 Cr) — condition satisfied.

**Total Capital Funds = Tier …

Question 17

You are required to: (i) Segregate the capital funds into Tier I and Tier II capitals, and (ii) Find out the risk-adjusted asset and risk weighted assets ratio.

Accepted Answer

**Capital Adequacy and Basel Norms - Capital Segregation and Risk-Weighted Assets Ratio**

**Part (i): Segregation of Capital into Tier I and Tier II**

**Tier I Capital (Core Capital)** comprises the most stable and loss-absorbing capital elements:
- **Common Equity Tier 1 (CET1)**: Paid-up equity capital, statutory reserves, capital reserves, retained earnings, and other comprehensive income, less prescribed deductions such as intangible assets, deferred tax assets, and goodwill.
- **Additional Tier 1 (AT1)**: Perpetual instruments and perpetual debt instruments issued by the bank that satisfy prescribed regulatory criteria, net of prescribed deductions.

**Tier II Capital (Supplementary Capital)** includes subordinated instruments and other components:
- Perpetual subordinated debt instruments with a minimum maturity period of 10 years
- Revaluation reserves (within prescribed limits)
- Hybrid debt instruments meeting Basel III criteria
- General loan loss provisions and other contingency reserves (within limits)
- Investment fluctuation reserves

**Part (ii): Risk-Adjusted Assets and Risk-Weighted Assets Ratio**

**Risk-Weighted Assets (RWA)** are calculated by applying risk weights to balance sheet and off-balance sheet exposures. The formula is: **RWA = Sum of (Exposure Value × Risk Weight)** for each exposure category.

**Risk Weights** under Basel III are assigned based on counterparty credit risk:
- Sovereign exposures: 0% to 150% (depending on ratings)
- Bank exposu…

Question 18

On 1st April 2021, a company offered 100 shares to each of its 5,000 employees at ₹ 50 per share. The employees are given 3 years to accept the offer. The shares issued under the plan shall be subject to lock-in on transfer for three years from the grant date. The market price of shares of the company on the grant date is ₹ 60 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 56 per share and fair value per option worked out to be ₹ 6.

On 31st March, 2022, 4,000 employees accepted the offer and paid ₹ 50 per share purchased. Nominal value of each share is ₹ 10.

You are required to pass journal entries (with narration) as would appear in the books of the company up to 31st March, 2022.

Accepted Answer

**This is an Employee Share Purchase Plan (ESPP) under Ind AS 102 (Share-based Payments).**

The company must recognize the employee benefit as compensation expense over the 3-year vesting period. The fair value of the benefit is ₹6 per share (the difference between fair value of ₹56 and exercise price of ₹50). Since only 4,000 employees accepted the offer by 31st March 2022, the total benefit relating to them is ₹24,00,000 (4,00,000 shares × ₹6), which must be spread over 3 years. For Year 1, the expense is ₹8,00,000 (₹24,00,000 ÷ 3).

When shares are accepted and cash is received, the issuance is recorded at the amounts actually paid. The excess of cash over nominal value (₹50 - ₹10 = ₹40 per share) is credited to Securities Premium.

**Journal Entries to be passed:**

**1. For the year ended 31st March 2022 - Recognition of Employee Compensation Expense:**

Dr. Employee Compensation Expense / Administrative Expense   ₹8,00,000
    Cr. ESPP Compensation Reserve (Equity)                            ₹8,00,000

Narration: To record employee share benefit compensation expense for the year ended 31st March 2022 in respect of the Employee Share Purchase Plan. (Being one-third of the fair value benefit on 4,00,000 shares: 4,00,000 shares × ₹6 benefit per share ÷ 3 years vesting period)

**2. On 31st March 2022 - Issuance of Shares Under ESPP:**

Dr. Cash/Bank                                    ₹2,00,00,000
    Cr. Share Capital (4,00,000 × ₹10)                      ₹40,00,000
    C…

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