CA Inter Audit & Ethics — Suggested Answers — November 2012

Answer the following questions:

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P, Q and R are partners sharing profits and losses in the ratio 3:2:1 after allowing interest on capital @ 9% p.a. Their Balance Sheet as at 31st March, 2012 is as follows: Liabilities: Capital Accounts – P ₹50,000; Q ₹30,000; R ₹20,000 (Total ₹1,00,000); Reserve Fund ₹60,000; Creditors ₹48,000; Total ₹2,08,000 Assets: Plant & Machinery ₹1,08,000; Fixtures ₹20,000; Stock ₹50,000; Sundry Debtors ₹30,000; Total ₹2,08,000 They applied for conversion of the firm into a Private Limited Company named PQR Pvt. Ltd. and the certificate was received on 01-04-2012. They decided to maintain the same profit sharing ratio and to preserve the priority in regard to repayment of capital as far as possible. For that purpose, they decided to insert a clause of issuance of Preference shares in Memorandum of Association in addition to issuance of Equity shares of ₹10 each. On 01-04-2012, the value of goodwill is to be determined on the basis of 2 years' purchase of the average profit from the business of the last 5 years. The particulars of profits are as under: Year ended 31.03.2008: Profit ₹10,000 Year ended 31.03.2009: Loss ₹5,000 Year ended 31.03.2010: Profit ₹18,000 Year ended 31.03.2011: Profit ₹27,000 Year ended 31.03.2012: Profit ₹30,000 The loss for the year ended 31-03-2009 was on account of loss by strike to the extent of ₹10,000. It was agreed that the rest of the assets are valued on the basis of the Balance Sheet as at 31-03-2012 except Plant & Machinery which is valued at ₹1,02,000. You are required to prepare (a) the Balance Sheet of the Company as at 01-04-2012, (b) Partners' Capital Account and (c) Statement showing the final settlement between the partners taking Q's capital as basis.

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M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2012 (₹ in '000): Equity & Liabilities: Authorised Capital: ₹5,000 Issued and Subscribed Capital: 3,00,000 Equity shares of ₹10 each fully paid up ₹3,000; 20,000 9% Preference Shares of ₹100 each (issued two months back for the purpose of buy back) ₹2,000; Total ₹5,000 Reserve and Surplus: Capital reserve ₹10; Revenue reserve ₹4,000; Securities premium ₹500; Profit and Loss account ₹1,800; Total ₹6,310 Non-current liabilities – 10% Debentures: ₹400 Current liabilities and provisions: ₹40 Total: ₹11,750 Assets: Fixed Assets: Cost ₹3,000 Less Provisions for depreciation ₹250 = ₹2,750 Non-current investments at cost: ₹5,000 Current assets, loans and advances (including cash and bank balances): ₹4,000 Total: ₹11,750 The following transactions took place on 1st April, 2012: (1) The company passed a resolution to buy back 20% of its equity capital @ ₹15 per share. For this purpose, it sold its investments of ₹30 lakhs for ₹25 lakhs. (2) The company redeemed the preference shares at a premium of 10% on 1st April, 2012. (3) Included in its investments were 'Investments in own debentures' costing ₹3 lakhs (face value ₹3.30 lakhs). These debentures were cancelled on 1st April, 2012. You are required to pass necessary Journal entries and prepare the Balance Sheet on 01.04.2012.

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Define the term Finance Lease. State any three situations when a lease would be classified as finance lease.

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Following are the summarized Balance Sheet of Companies K Ltd. and W Ltd., as at 31-12-2011 (₹ in '000): Liabilities: Equity shares of ₹100 each – K Ltd. ₹2,000; W Ltd. ₹1,500 | 10% Preference shares of ₹100 each – K Ltd. ₹700; W Ltd. ₹400 | General Reserve – K Ltd. ₹240; W Ltd. ₹170 | Profit and Loss Account – K Ltd. ₹15 | 12% Debentures of ₹100 each – K Ltd. ₹600; W Ltd. ₹200 | Sundry Creditors – K Ltd. ₹560; W Ltd. ₹315 | Totals – K Ltd. ₹4,100; W Ltd. ₹2,600 Assets: Goodwill – W Ltd. ₹20 | Other Fixed Assets – K Ltd. ₹2,400; W Ltd. ₹1,150 | Debtors – K Ltd. ₹625; W Ltd. ₹615 | Stock – K Ltd. ₹412; W Ltd. ₹680 | Cash at bank – K Ltd. ₹38; W Ltd. ₹155 | Own Debentures (Nominal value ₹2,00,000) – K Ltd. ₹192 | Discount on issue of debentures – W Ltd. ₹2 | Profit and Loss Account (Dr.) – W Ltd. ₹411 (debit balance) | Totals – K Ltd. ₹4,100; W Ltd. ₹2,600 On 01-04-2012, K Ltd. adopted the following scheme of reconstruction: (i) Each equity share shall be sub-divided into 10 equity shares of ₹10 each fully paid up. 50% of the equity share capital would be surrendered to the company. (ii) Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 80% of the dividend claim and accept payment for the balance. (iii) Own debentures of ₹80,000 (nominal value) were sold at ₹98 cum interest and remaining own debentures were cancelled. (iv) Debenture holders of ₹3,00,000 agreed to accept one machinery of book value of ₹3,20,000 in full settlement. (v) Creditors, Debtors and stock were valued at ₹5,00,000, ₹6,00,000 and ₹4,00,000 respectively. Goodwill, discount on issue of debentures and Profit and Loss account (Dr.) are to be written off. (vi) The company paid ₹20,000 as penalty to avoid capital commitments of ₹4,00,000. On 02.04.2012, a scheme of absorption was adopted. K Ltd. would take over W Ltd. The purchase consideration was fixed as below: (a) Equity shareholders of W Ltd. will be given 50 equity shares of ₹10 each fully paid up, in exchange for every 5 shares held in W Ltd. (b) Issue of 10% preference shares of ₹100 each in the ratio of 4 preference shares of K Ltd. for every 5 preference shares held in W Ltd. (c) Issue of 12% debentures of ₹100 each of K Ltd. for every 12% debentures in W Ltd. Pass necessary Journal entries in the books of K Ltd. and draw the resultant Balance Sheet as at 2nd April, 2012.

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The following figures are extracted from the books of KLM Bank Ltd. as on 31-03-2012: Interest and discount received: ₹38,00,160 Interest paid on deposits: ₹22,95,360 Issued and subscribed capital: ₹10,00,000 Salaries and allowances: ₹2,50,000 Directors Fees and allowances: ₹35,000 Rent and taxes paid: ₹1,00,000 Postage and telegrams: ₹65,340 Statutory reserve fund: ₹8,00,000 Commission, exchange and brokerage: ₹1,90,000 Rent received: ₹72,000 Profit on sale of investment: ₹2,25,800 Depreciation on assets: ₹40,000 Statutory expenses: ₹38,000 Preliminary expenses: ₹30,000 Auditor's fee: ₹12,000 The following further information is given: (1) A customer to whom a sum of ₹10 lakhs was advanced has become insolvent and it is expected only 55% can be recovered from his estate. (2) There was also other debts for which a provision of ₹2,00,000 was found necessary. (3) Rebate on bills discounted on 31-03-2011 was ₹15,000 and on 31-03-2012 was ₹20,000. (4) Income tax of ₹2,00,000 is to be provided. (5) The directors desire to declare 5% dividend. Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-2012 and also show how the Profit and Loss account will appear in the Balance Sheet if the Profit and Loss account opening balance was NIL as on 31-03-2011.

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Prepare the Fire Insurance Revenue A/c of Jasmine Fire Insurance Co. Ltd. as per IRDA regulations for the year ended 31st March, 2012 from the following details: Claims Paid: ₹5,00,000 Legal Expenses regarding claims: ₹10,000 Premiums received: ₹12,50,000 Re-insurance premium paid: ₹50,000 Commission: ₹3,00,000 Expenses of Management: ₹2,00,000 Provision against unexpired risk as on 1st April, 2011: ₹5,75,000 Claims unpaid on 1st April, 2011: ₹50,000 Claims unpaid on 31st March, 2012: ₹80,000 Provide for unexpired risk @ 50% less reinsurance.

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Himalayas Ltd. had ₹10,00,000 8% Debentures of ₹100 each as on 31st March, 2011. The company purchased in the open market the following debentures for immediate cancellation: On 01-07-2011 – 1,000 debentures @ ₹97 (cum interest) On 29-02-2012 – 1,800 debentures @ ₹99 (ex interest) Debenture interest due dates are 30th September and 31st March. Give Journal Entries in the books of the company for the year ended 31st March, 2012.

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Department A sells goods to Department B at a profit of 20% on cost and Department C at 15% profit on cost. Department B sells goods to A and C at a profit of 10% and 20% on sales respectively. Department C sells goods to A and B at 15% and 10% profit on cost respectively. Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging manager's commission, but before adjustment of unrealized profit are as under: Department A: ₹36,000 Department B: ₹27,000 Department C: ₹18,000 Stock lying at different departments at the end of the year: Transfer from Department A: held in Dept B ₹7,200; held in Dept C ₹5,750 Transfer from Department B: held in Dept A ₹19,000; held in Dept C ₹15,000 Transfer from Department C: held in Dept A ₹4,600; held in Dept B ₹3,300 Find out correct departmental profits after charging manager's commission.

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Annual lease rent = ₹40,000 at the end of each year Lease period = 5 years Guaranteed residual value = ₹14,000 Fair value at the inception (beginning) of lease = ₹1,50,000 Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.70, 0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively. Show the Journal entry to record the asset taken on finance lease in the books of the lessee.

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A new Plant X was acquired in exchange of old Plant B and on payment of ₹20,000. The carrying amount of the old Plant B was ₹1,75,000 (Historical cost less depreciation). The fair value of Plant B on the date of exchange was ₹1,50,000. Suggest the accounting entry in the books of the enterprise.

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A company is in a dispute involving allegation of infringement of patents by a competitor company who is seeking damages of a huge sum of ₹900 lakhs. The directors are of the opinion that the claim can be successfully resisted by the company. How would you deal with the same in the annual accounts of the company?

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State the conditions of issuance of Sweat Equity Shares by Joint Stock Companies.

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Give two examples each of the following items: (i) Change in Accounting Policy (ii) Change in Accounting Estimate (iii) Extra Ordinary Items (iv) Prior Period Items

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