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Past papers/ Audit & Ethics/ November 2016
Paper 11 Qs
Suggested Answers · November 2016

CA Inter Audit & Ethics

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

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Q.3(b) 05 marks medium Buy-back of shares and bonus issue — journal entries ⚡ Try this Q →
The following is the summarised Balance Sheet of M/s Vriddhi Ltd. as on 31st March, 2016: Equity & Shareholders' Fund: - Share Capital: 1,00,000 Equity Shares of ₹10 each fully paid: ₹10,00,000 - Securities Premium: ₹3,00,000 - Profit & Loss: ₹5,50,000 - Other Reserves: ₹2,50,000 Non-Current Liabilities: - Long Term Borrowings (Secured by floating charge): ₹20,00,000 Non-Current Assets: - Land & Building: ₹21,50,000 - Plant & Machinery: ₹15,00,000 - Investments: ₹2,00,000 Current Assets: - Cash and Cash Equivalents: ₹1,50,000 - Others: ₹40,000 The company proposes to buy back 25,000 of its equity shares @ ₹15 per share. For this purpose it sold all its investments for ₹2.50 lakhs. On 25th April, 2016, the company achieved the target of buy back. On 1st May, 2016, the company issued one fully paid up share of ₹10 each by way of bonus for every five equity shares held by the equity shareholders. You are requested to pass necessary Journal Entries for all the above transactions. All necessary workings should form part of your answer.
CTTP

Worked Solution

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Buy-back of Shares and Bonus Issue — Journal Entries in the books of M/s Vriddhi Ltd.

Preliminary Workings:

The company proposes to buy back 25,000 equity shares @ ₹15 per share. Total buy-back consideration = 25,000 × ₹15 = ₹3,75,000.

To fund the buy-back, investments (book value ₹2,00,000) are sold for ₹2,50,000, yielding a profit of ₹50,000 credited to Profit & Loss A/c. Cash available = ₹1,50,000 (opening) + ₹2,50,000 (sale proceeds) = ₹4,00,000, which is sufficient.

Premium on buy-back = 25,000 × (₹15 − ₹10) = ₹1,25,000 — charged to Securities Premium Account (permissible under Section 52(2) of the Companies Act, 2013).

Capital Redemption Reserve (CRR): As per Section 69 of the Companies Act, 2013, when shares are bought back out of free reserves, a sum equal to the nominal value of shares bought back must be transferred to CRR. Nominal value = 25,000 × ₹10 = ₹2,50,000 — transferred from Profit & Loss A/c.

Bonus Issue: After buy-back, remaining shares = 1,00,000 − 25,000 = 75,000 shares. Bonus ratio = 1 share for every 5 held. Bonus shares = 75,000 ÷ 5 = 15,000 shares of ₹10 each = ₹1,50,000 — funded from Capital Redemption Reserve (permitted under Section 63(1)(c) of the Companies Act, 2013).

Journal Entries:

Entry 1 — Sale of Investments (April 2016)
Bank A/c Dr. ₹2,50,000
To Investments A/c ₹2,00,000
To Profit & Loss A/c ₹50,000
(Being investments sold at a profit of ₹50,000)

Entry 2 — Buy-back of 25,000 Equity Shares @ ₹15 each (25th April 2016)
Equity Share Capital A/c Dr. ₹2,50,000
Securities Premium A/c Dr. ₹1,25,000
To Bank A/c ₹3,75,000
(Being 25,000 equity shares of ₹10 each bought back at ₹15 per share; premium charged to Securities Premium as per Section 52(2))

Entry 3 — Transfer to Capital Redemption Reserve (25th April 2016)
Profit & Loss A/c Dr. ₹2,50,000
To Capital Redemption Reserve A/c ₹2,50,000
(Being nominal value of shares bought back transferred to CRR as required under Section 69 of the Companies Act, 2013)

Entry 4 — Bonus Issue of 15,000 Shares of ₹10 each (1st May 2016)
Capital Redemption Reserve A/c Dr. ₹1,50,000
To Equity Share Capital A/c ₹1,50,000
(Being 15,000 fully paid bonus shares of ₹10 each issued in ratio of 1:5 to existing shareholders; funded from CRR as per Section 63(1)(c) of the Companies Act, 2013)

Post-transaction Share Capital = ₹10,00,000 − ₹2,50,000 (buy-back) + ₹1,50,000 (bonus) = ₹9,00,000 (90,000 shares of ₹10 each fully paid)

Section 52(2) of the Companies Act 2013Section 63(1)(c) of the Companies Act 2013Section 68 of the Companies Act 2013Section 69 of the Companies Act 2013
PLAN

Write it like this

Time target 9 min

1The skeleton

- Start with Preliminary Workings block — calculate buy-back consideration, profit on investments, and CRR amount BEFORE writing a single journal entry; examiners allocate marks to workings separately and you lose them if buried inside narrations.
- Write Entry 1 as sale of investments — don't jump straight to buy-back; cash availability must be established first, and the ₹50,000 profit line is a mark-scoring detail most students skip.
- In Entry 2, debit Securities Premium — not General Reserve or P&L — explicitly cite Section 52(2) in the narration; that section reference is what converts a guess into a confirmed correct answer.
- Entry 3 must be a standalone CRR transfer entry — never club it with Entry 2; cite Section 69 in the narration and show nominal value (not buy-back price) as the amount.
- For bonus entry, recompute shares on POST-buy-back base (75,000 not 1,00,000) — debit CRR, not P&L or Securities Premium, and cite Section 63(1)(c) to clinch the funding-source mark.
- Close with a 1-line post-transaction capital reconciliation — '₹10,00,000 − ₹2,50,000 + ₹1,50,000 = ₹9,00,000 (90,000 shares)' — takes 10 seconds and shows the examiner your entries are internally consistent.

2Examiner-rewarded phrases

“Being nominal value of shares bought back transferred to Capital Redemption Reserve as required under Section 69 of the Companies Act, 2013”“Premium on buy-back charged to Securities Premium Account as permissible under Section 52(2) of the Companies Act, 2013”“Being fully paid bonus shares issued out of Capital Redemption Reserve as per Section 63(1)(c) of the Companies Act, 2013”

3Common trap

Don't fall for this

Heads up — the single biggest mark-killer here is computing bonus shares on 1,00,000 (original shares) instead of 75,000 (post-buy-back shares). Your bonus entry becomes ₹2,00,000 instead of ₹1,50,000 and the entire CRR balance blows up — cascading error across two entries.

Q.4 16 marks very hard Company liquidation — Receiver's account and Liquidator's ac ⚡ Try this Q →
The summarised Balance Sheet of M/s X Limited as at 31st March, 2016 is as follows: Equity & Liabilities: - Share Capital: - 50,000 equity shares of ₹10 each fully paid: ₹5,00,000 - 75,000; 10% Preference Shares of ₹10 fully paid up: ₹7,50,000 - 25,000 Equity Shares of ₹10 each, ₹8 per share paid up: ₹2,00,000 - Non-Current Liabilities: - Debentures: ₹10,75,000 - Long-term Borrowings: ₹7,50,000 - Others: ₹3,50,000 - Current Liabilities: ₹1,50,000; ₹1,90,000 - Tax Assessment (completed February 2016): ₹1,25,000 Non-Current Assets: - Land & Building: ₹6,50,000 - Current Assets: ₹21,80,000 Mortgage loan was secured against Land and Building. Debentures were secured by a floating charge on all assets. The company was unable to meet the payments and therefore the Debenture Holders appointed a Receiver. He brought the Land & Building to auction and realised ₹8,00,000. He also took charge of Sundry Assets of value ₹11,80,000 and realised ₹10,00,000. Bank overdraft was secured by personal guarantee of the Directors and on the Bank raising a demand, the Directors paid off the due from their personal resources. Cost incurred by the Receiver were ₹9,750 and by the Liquidator ₹15,000. The Receiver was not entitled to any remuneration but the Liquidator was to receive 2% fee on the value of assets realised by him. Preference Shareholders have not been paid Dividend for the period after 31st March, 2014 and interest for the last half year was due to Debenture Holders. Rest of the Assets were realised at ₹7,50,000. Prepare the Accounts to be submitted by the Receiver and Liquidator.
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Q.5(a) 10 marks hard Banking company accounts — Bills for Collection, Acceptances ⚡ Try this Q →
From the following facts drawn from the records of Honest Bank for the year ended 31st March, 2015, prepare the accounts as mentioned:
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Q.5(b) 06 marks medium Insurance company accounts — Unexpired Risk Reserve journal ⚡ Try this Q →
From the following information given by M/s Long Live Insurance Co. Ltd., you are required to pass necessary Journal Entries (with narration and required working notes) relating to Unexpired Risk Reserve. Also show 'Unexpired Risk Reserve Account for 2015-16' in columnar form: (i) On 31.03.2015, it had reserve for unexpired risk amounting to ₹80 crores. Its composition was as under: (a) ₹30 crores in respect of Marine insurance business (b) ₹40 crores in respect of Fire insurance business (c) ₹10 crores in respect of Miscellaneous insurance business (ii) M/s Long Live Insurance Co. Ltd. reserves 100% of net premium income in respect of Marine insurance business and 50% of net premium income in respect of Fire and Miscellaneous insurance. (iii) During 2015-16, the following business was conducted (Premium in ₹ lakhs): Fire Marine Misc Premium collected (from insured): 36 86 24 Ceded in respect of risk undertaken: 14 10 8 Premium paid/payable to other insurance companies: 10 10 15
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Q.6(a) 08 marks hard Departmental accounts — Memorandum Stock and Mark-up account ⚡ Try this Q →
W' Shyam Udyos, a retail store, has two departments, Department X and Department Y for each of which stock account and memorandum 'mark-up' account is kept. All the goods supplied to each department are debited to stock account at cost plus a 'mark-up', which together make up the selling price of the goods and in the account the sale proceeds of the goods are credited. The amount of 'mark-up' is credited to the Departmental Mark-up Account. If the selling price of any goods is reduced below its normal selling price, the reduction 'mark-down' is adjusted both in the Stock Account and the Departmental Mark-up Account. The rate of 'mark up' for X Department is 33-1/3% of the cost and for Y Department is 50% of the cost. The following figures have been taken from the books for the year ended March 2016: Dept X (₹) Dept Y (₹) Stock on April 1 at cost: 3,15,000 5,58,000 Sales: 22,17,000 28,02,000 Purchases: 28,68,000 37,50,000 Notes: (1) The stock of Department X on April 1, 2015 included goods the selling price of which had been marked down by ₹37,800. These goods were sold during the year at the reduced prices. (2) Certain stock of the value of ₹2,07,000 purchased from Department X was later in the year transferred to Department Y and sold for ₹3,10,500. As a result, though the cost of the goods is included in Department X, the sale proceeds have been credited to Department Y. (3) During the year 2015-16, to promote the goods, they were marked down: Dept X: Cost ₹1,68,000, Mark-down ₹10,800 Dept Y: Cost ₹3,00,000, Mark-down ₹60,000 All the goods marked down were sold except Department Y goods of the value of ₹1,50,000 marked down by ₹30,000. (4) At the time of stock taking on 31st March, 2016, it was discovered that stock of Department X of the cost of ₹11,700 was missing and it was decided that the amount be written off. You are required to prepare for both the departments for the year ended 31st March, 2016: (a) The Memorandum Stock Account, and (b) The Memorandum Mark-up Account.
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Q.6(b) 08 marks hard Branch accounting — Branch Account and Head Office Trading & ⚡ Try this Q →
Mr. Chem Swami of Chennai trades in Refined Oil and Ghee. He has a branch at Salem. He despatched 30 tins of Refined Oil @ ₹1,500 per tin and 20 tins of Ghee @ ₹5,000 per tin on 1st of every month. The Branch has incurred expenditure of ₹45,890 which is met out of its collections; this is in addition to expenditure directly paid by Head Office. Following are the other details: Chennai H.O. (₹) Salem B.O. (₹) Goods despatched — Refined Oil: 27,50,000 — Goods despatched — Ghee: 46,28,000 — Direct Expenses: 6,35,800 76,800 Sales — Refined Oil: 24,10,000 5,95,000 Sales — Ghee: 38,40,500 14,50,000 Collection during the year: 20,15,000 — Remittance to Head Office: — 19,50,000 Balance sheet items as on 01.04.2015 and 31.03.2016: Chennai H.O.: - Furniture & Fixtures: ₹44,000 / ₹8,90,000 - Other assets: ₹10,65,000 / ₹15,70,000 - Building: ₹5,10,800 / ₹7,14,780 - Debtors: ₹98,600 Salem Branch: - Furniture & Fixtures: ₹22,500 / ₹19,500 - Stock: ₹40,000 / ₹90,000 - Debtors: ₹1,80,000 / (closing as per balance sheet) - Cash in Hand: ₹25,600 / (closing as per balance sheet) - Creditors: ₹21,800 / ₹21,420 Additional Information: (i) Addition to Building on 01.04.2015: ₹2,41,600 by H.O. (ii) Rate of depreciation: Furniture & Fixture @ 10% and Building @ 5% (already adjusted in the above figures) (iii) The Branch Manager is entitled to 10% commission on overall net profits, charging such commission (iv) The General Manager is entitled to a salary of ₹20,000 per month (v) General expenses incurred by Head Office: ₹1,86,000 You are requested to prepare Branch Account in the Head Office books and also Chem Swami Trading and Profit & Loss Account (excluding branch transactions) for the year ended 31st March, 2016.
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Q.7(a) 04 marks medium AS 11 — Foreign currency operations — definitions ⚡ Try this Q →
With reference to AS 11, define the following: (i) Integral Foreign Operation (ii) Non-Integral Foreign Operation
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Q.7(b) 04 marks medium AS 29 — Contingent liability — copyright infringement disput ⚡ Try this Q →
M/s XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding alleged infringement of Copyrights. The competitor has filed a suit in the court of law seeking damages of ₹250 lakhs. The Directors are of the view that the claim can be successfully resisted. How would the matter be dealt in the annual accounts of the Company in the light of AS-29? Explain in brief giving reasons for your answer.
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Q.7(c) 04 marks medium Financial statement elements — measurement bases (historical ⚡ Try this Q →
Explain in brief, the alternative measurement bases for determining the value at which an element can be recognised in the Balance Sheet or Statement of Profit and Loss.
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Q.7(d) 04 marks medium LLP Act — Designated Partner — roles and liabilities ⚡ Try this Q →
Write short notes on Designated Partner in a Limited Liability Partnership and what are their liabilities.
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Q.7(e) 04 marks medium Marine insurance accounts — Net Premium earned and Net Claim ⚡ Try this Q →
From the following particulars of M/s Tsunami Marine Insurance Limited for the year ending 31st March, 2016, find out: (i) Net Premium earned (ii) Net Claims incurred Direct Business (₹ in lakhs): PREMIUM: Col 1 Col 2 Premium: 4,440 376 Receivable — 01.04.2015: 200 18 Receivable — 01.04.2016: 189 16 Paid (Reinsurance): 305 Payable — 01.04.2015: 14 Payable — 01.04.2016: 9 CLAIMS: Paid: 3,450 227 Payable — 01.04.2015: 45 8 Payable — 01.04.2016: 48 6 Recoverable — 01.04.2015: 101 20 Recoverable — 01.04.2016: 19
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