P18_Practice Test Paper_Syl12_Jun14_Set 3

Paper 18 – Corporate Financial Reporting

Syllabus 2012
Whenever necessary suitable assumptions may be made and disclosed by way of note.

Working Notes should form part of the answers

Answer all the questions.

1. Answer any two of the following: [2×5]

(a) State the objectives and scope of International Accounting Standard 8. [5]

Answer:

International Accounting Standard 8 “Accounting Policies, Changes in Accounting Estimates and

Errors” -
Objective
The objective of this Standard is to prescribe the criteria for selecting and changing accounting
policies, together with the accounting treatment and disclosure of changes in accounting policies,
changes in accounting estimates and corrections of errors. The Standard is intended to enhance the
relevance and reliability of an entity’s financial statements, and the comparability of those financial
statements over time and with the financial statements of other entities.
Scope
This Standard shall be applied in selecting and applying accounting policies, and accounting for
changes in accounting policies, changes in accounting estimates and corrections of prior period
errors.
The tax effects of corrections of prior period errors and of retrospective adjustments made to apply
changes in accounting policies are accounted for and disclosed in accordance with IAS 12 Income
Taxes.

(b) What are the recognition criteria of share Based Payment under International Financial Reporting
Standard (IFRS) – 2 ? [5]

Answer:
Recognition of Share Based Payment
The following are recognition criteria under Paras 7-9 of IFRS-2:
(i) The goods or services received or acquired in a share-based payment transaction are
recognised when the goods are obtained or as the services are received. The entity shall
recognise a corresponding increase in equity is recognised if the goods or services were
received in an equity-settled transaction.
(ii) The goods or services received or acquired in a share-based payment transaction are
recognised when the goods are obtained or as the services are received. The entity shall
recognise a corresponding increase in liability if the goods or services were acquired in a cash-
settled transaction. For example, in case of employee stock option, it is difficult to assess the fair
value of the service rendered, and therefore, the transaction should be measured at fair value
of the equity.

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(iii) The goods or services received in a share-based payment transaction may qualify for
recognition as an asset. If they are not so qualified then they are recognised as expense.

(c) Cost of Production of product A is given below:

Raw material per unit `160
Wages per unit `50
Overhead per unit `50
`260
As on the balance sheet date the replacement cost of raw material is `110 per unit. There are 100
units of raw material on 31.3.12.
Calculate the value of closing stock of raw materials in the following conditions:
(i) If finished product is sold at ` 275 per unit, what will be the value of closing stock of raw material?
(ii) If finished product is sold at ` 240 per unit, what will be the value of closing stock of raw material?
------- ------------------------------------------- ---------- [5]

Solution:
(i) The realizable value of the product is more than the total cost of the product. The cost of raw
material per unit is more than the replacement cost, hence, raw materials should be valued on
actual cost.
Therefore, the value of raw materials: 100 units x `160 per unit = `16,000
(ii) The realizable value of the product is less than the total cost of the product. Though the cost of
raw material per unit is more than the replacement cost, hence, raw materials should be valued
on replacement cost.
Therefore, the value of raw materials: 100 units x `110 per unit= `11,000

2. (a) The summarized Balance Sheets of S Ltd. and H Ltd. as on 31.3.12 were as follows.
(` in Lakhs)
Liabilities S Ltd. H Ltd.
Equity Share capital 100 30
Reserves and surplus 500 90
10% 25,000 Debentures of ` 100 each - 25
Other Liabilities 150 -
Total 750 145
Assets
Fixed assets at cost 250 100
Less: Depreciation 125 125 55 45
Investment in H Ltd.
- 2 Lakhs Equity shares of ` 10 each at cost 32
- 10% 25,000 debentures of ` 100 each at cost 24 56
Current assets 1,000 300
Less: Current liabilities 431 569 200 100
Total 750 145
In a scheme of absorption duly approved by the Court, the assets of ‘H’ Ltd. were taken over at an
agreed value of ` 140 lakhs. The liabilities were taken over at par. Outside shareholders of ‘H’ Ltd.
were allotted equity shares in S Ltd. at a premium of ` 90 per share in satisfaction of other claims in ‘H’

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Ltd. for purposes of recording in the books of ‘S’ Ltd. Fixed assets taken over from ‘H’ Ltd. were
revalued at ` 50 lakhs.

The scheme was put through on 1st April, 2012.

a. Pass journal Entries in the books of ’S’ Ltd.
b. Show the balance of ‘S’ Ltd. after absorption of ‘H’ Ltd. [15]

Solution :

WN # 1 : Purchase consideration of shares to be issued

Purchase Consideration ` 140 lakhs = Debentures ` 25 lakhs + Equity Share holders ` 115 lakhs

2 . 4 lakh
Equity Share holders ` 115 lakhs = Worth of shares belonging to S Ltd. ×115 = `92 lakhs
3 lakh
+
Amount pertaining to outsiders 115 – 92 = `23 lakhs
Number of shares to be issued to outside shareholders @ `10 each at a premium of ` 90 each
`23,00,000
= = 23,000 Shares.
100
a) Part - II Journals entries in the Books of S Ltd.
• Nature of Amlagamation - Purchase Method
• Method of Accounting - Purchase Method
(` in Lakhs)
Particulars Debit Credit
i. For Purchase Consideration Due :
Business Purchase A/c Dr. 23
To Liquidator for H Ltd.” A/c 23
(Being the purchase consideration payable to liquidator of H
Ltd. for business purchase)
ii. For assets and liabilities taken over :
Fixed Assets A/c Dr. 50
Dr.
Current Assets A/c Dr. 300
Dr.
To Current Liabilities A/c 200
To Liability for 10% Debentures A/c 25
To Business Purchase A/c 23
To Investment in H Ltd. A/c 32
To Capital Reserve (balancing figure) 70
(Being the assets and liabilities taken over from H Ltd)
iii. Discharge of purchase consideration:
Liquidator of H Ltd. A/c Dr. 23
To Equity Share Capital A/c 2.30
To Securities Premium A/c 20.70
(Being the allotment of 23,000 equity shares of ` 10 each to
outside shareholders of H Ltd. at a premium of `90 per share.)
iv. Cancellation of Liability of Debentures:
10% Debenetures A/c Dr. 25
To Investments in Debentures A/c 24
To Capital Reserve A/c 1
(Being the cancellation of debentures of H Ltd. )

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Name of the Company: S Ltd.

Balance Sheet as at 01.04.2012
Ref Note As at 1st As at 1st
Particulars
No. No. April, 2012 April, 2011
(` in lakhs) (` in lakhs)

I. Equity and Liabilities

1 Shareholders’ funds

(a) Share capital 1 102.30

(b) Reserves and surplus 2 591.70

( c) Money received against share warrants

2 Share application money pending allotment

3 Non-current liabilities

(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(d) Long-term provisions

4 Current Liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities 3 781.00

(d) Short-term provisions

Total 1,475.00

II. Assets

1 Non-current assets

(a) Fixed assets

(i) Tangible assets 4 175.00

(ii) Intangible assets

(iii) Capital work-in-progress

(iv) Intangible assets under development

(b) Non-current investments

(c) Deferred tax assets (Net)

(d) Long-term loans and advances

(e) Other non-current assets

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2 Current assets

(a) Current investments

(b) Inventories

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short-term loans and advances

(f) Other current assets 5 1,300.00

Total 1,475.00

(` in Lakhs)

As at 1st April, As at 1st

Note 1. Share Capital
2012 April, 2011

Authorised, Issued, Subscribed & paid up

10.23 lakhs Equity Shares of ` 10 each [of the above shares, 23,000 102.30
Equity shares are allotted as fully paid up for consideration other
than cash]

Total 102.30

RECONCILIATION OF SHARE CAPITAL

FOR EQUITY SHARE :- As at 1st April As at 1st April
2012 2011
Nos Amount (`) Nos Amount (`)
Opening Balance as on 01.04.11 10 100.00 NIL NIL
Add: Fresh Issue ( Incld, Bonus shares, 0.23 2.30 NIL NIL
Right shares, split shares, shares issued
other than cash)
10.23 102.30 NIL NIL

Less: Buy Back of shares - - - -

10.23 102.30 NIL NIL

Note: It has been assumed that Current assets have been taken over by S Ltd. at their book
value.
As at 1st As at 1st
Note 2. Reserves and Surplus
April, 2012 April, 2011
Reserves 500.00
Capital Reserve (70 + 1) 71.00
Securities Premium 20.70
Total 591.70

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Note 3. Other Current Liabilities As at 1st As at 1st

April, 2012 April, 2011
Other Liabilities 150.00
Current Liabilities (431+200) 631.00
Total 781.00

As at 1st As at 1st
Note 4. Tangible assets
April, 2012 April, 2011
Fixed asset (125+50) 175.00
Total 175.00

As at 1st As at 1st
Note 5. Other Current Assets
April, 2012 April, 2011
Current Assets (1,000 + 300) 1,300.00
Total 1300.00
Note : It has been assumed that Current assets have been taken over by S Ltd. as their book
value.

OR,

(b) The following are the Balance Sheets of A Ltd. and B Ltd. as on 31st December 2012.
Liabiltiies A Ltd. B Ltd. Assets A Ltd. B Ltd.
` ` ` `
Share capital Fixed Assets 14,00,000 5,00,000
Equity shares of ` 10 each 12,00,000 6,00,000 Investment:
10% Preference shares of 6,000 shares of B Ltd. 1,60,000 -
`10 each 4,00,000 2,00,000 5,000 shares of A Ltd. - 1,60,000
Reserves and surplus 6,00,000 4,00,000 Current Assets:
Secured loans: Stock 4,80,000 6,40,000
12% Debentures 4,00,000 3,00,000 Debtors 7,20,000 3,80,000
Current liabilities: Bills receivable 1,20,000 40,000
Sundry creditors 4,40,000 2,50,000 Cash at bank 2,20,000 80,000
Bills payable 60,000 50,000
31,00,000 18,00,000 31,00,000 18,00,000

Fixed assets of both the companies are to be revalued at 20% above book value. Stock in—
-trade and Debtors are taken over at 10% lesser than their book value. Both the companies are
to pay 10% Equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, A Ltd. will absorb B Ltd. on the following terms.
i. 8 Equity shares of ` 10 each will be issued by A Ltd. at par against 6 shares of B Ltd.
ii. 10% Preference Shareholders of B Ltd. will be paid at 10% discount by issue of 10%
Preference Shares of ` 100 each at par in A Ltd.

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iii. 12% Debentureholders of B Ltd. are to be paid at 8% premium by 12% Debentues in A Ltd.
issued at a discount of 10%.
iv. ` 60,000 is to be paid by A Ltd. to B Ltd. for Liquidation expenses. Sundry creditors of B Ltd.
include ` 20,000 due to A Ltd.
Prepare :
(a) Absorption entries in the books of A Ltd.
(b) Statement of consideration payable by A Ltd. [15]
Solution:
Part - I Purchase consideration payable by A Ltd.
A. Equity share holders:-
No of equity shares of B Ltd. 60,000
Less:- Held by A Ltd. 12,000
No. of equity shares held by outsiders 48,000
Exchange ratio 8:6
No. of equity shares to be issued by A Ltd. (48,000 × 8/6) 64,000
Less: Already held by B Ltd. in A Ltd. (10,000)
No. of equity shares to be issued now 54,000
Value of shares to be issued 54,000 × 10 = ` 5,40,000

B. Preference share holders:-

Preference Share capital of B Ltd. 2,00,000

Payable at discount of 10% [2,00,000 - (10% of 2,00,000)] 1,80,000
10% Preference shares to be issued at par by A Ltd. to B Ltd. ` 1,80,000

C. Purchase consideration (A+B) ` 7,20,000

Part II - Absorption entries in the books of A Ltd.

A. Pre - Amalagamation Events :-

Particulars Debit Credit

1. Revaluation of Fixed assets

Fixed Assets A/c Dr. 2,80,000
To Revaluation Reserve A/c 2,80,000
2. Dividend received from B Ltd. on 12,000 shares
Bank A/c Dr. 12,000
To Reserves and Surplus 12,000
3. Dividend on equity Share capital @ 10%
i. Due entry
Reserves and Surplus Dr. 1,20,000
To Proposed Dividend A/c 1,20,000

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ii. Payment entry
Proposed Dividend A/c Dr. 1,20,000
To Bank A/c 1,20,000

B. Amalgamation Events

Nature of Amalgamation - Purchase

Method of Accounting - Purchase

Particulars Debit Credit

1. For Purchase Consideration Due:

Business purchase A/c Dr. 7,20,000
To Liquidator of B Ltd. 7,20,000
2. For assets and liabilities taken over
Fixed Assets (120% of 5,00,000) Dr. 6,00,000
Stock A/c (90% of 6,40,000) Dr. 5,76,000
Debtors A/c (90% of 3,80,000) Dr. 3,42,000
Bills Receivable A/c Dr. 40,000
Bank A/c * Dr. 30,000
To 12% Debentures of B Ltd A/c 3,24,000
To Sundry creditors A/c 2,50,000
To Bills payable A/c 50,000
To Business Purchase A/c 7,20,000
To Investment in B Ltd. A/c 1,60,000
To Capital Reserve A/c (Balancing Figure) 84,000

3. For Discharge of Purchase consideration

Liquidator of B Ltd A/c Dr. 7,20,000
To Equity Share Capital A/c 5,40,000
To 10% Preference Share Capital A/c 1,80,000
4. Liquidation expenses incurred by B Ltd, later reimbursed by A Ltd.
Capital Reserve A/c Dr. 60,000
To Bank A/c 60,000
5. Discharge to debenture holders of B Ltd.
12% Debenture Holders A/c Dr. 3,24,000
Discount on Issue of debentures A/c Dr. 36,000
To 12% Debentures A/c. 3,60,000
6. Cancellation of inter company owings
Sundry Creditors A/c Dr. 20,000
To Sundry Debtors A/c 20,000

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* Bank Balance of B Ltd.

Balance as per Balance Sheet 80,000
Add : Dividend Received from A Ltd (10% on 1,00,000) 10,000
Less : Dividend paid on Share capital (10% on 6,00,000) (60,000)
30,000
# 12% Debentures of B Ltd. = 3,00,000
Payable at 8% premium 3,00,000 × 108% = 3,24,000

3. (a) On 31.03.2012 the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows (in ` Lakhs) -

Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Share Capital: Authorised 30,000 12,000 Land and Buildings 5,436 –
Plant and Machinery 9,810 9,800
Issued and Subscribed: Furniture and Fittings 3,690 1,172
Equity Shares (`10) Fully Investments in shares in S Ltd. 6,000 –
Paid Stock 7,898 3,912
24,000 9,600
General Reserve Debtors 5,200 2,726
5,568 2,760
Profit and Loss Account Cash and Bank Balances 2,980 408
5,430 3,240
Bills Payable Bills Receivable 720 398
744 320
Sundry Creditors Sundry Advances 1,040 –
2,922 1,708
Provision for Taxation
1,710 788
Proposed Dividend
2,400 –
42,774 18,416 42,774 18,416
The following information is also provided to you:
1. H Ltd. purchased 360 Lakhs shares in S Ltd. on 01.04.2011 when the balances to General Reserve
and Profit and Loss Account of S Ltd. stood at ` 6,000 Lakhs and ` 2,400 Lakhs respectively.
2. On 04.07.2011 S Ltd. declared a dividend @ 20% for the year ended 31.03.2011. H Ltd. credited the
dividend received by it to its Profits and Loss Account.
3. On 01.01.2012 S Ltd. issued 3 fully paid-up shares for every 5 shares held as Bonus Shares out of
balances in its General Reserve as on 31.03.2011.
4. On 31.03.2012 all the Bills Payable in S Ltd.’s Balance Sheet were acceptances in favour of H Ltd.
But on that date, H Ltd. held only ` 45 Lakhs of these acceptances in hand, the rest having been
endorsed in favour of its Creditors.
5. On 31.03.2012 S Ltd.’s stock included goods which it had purchased for ` 200 Lakhs from H Ltd.
which made a profit @ 25% on cost.
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31.03.2012 bearing in
mind the requirements of AS 21. [15]
Solution:
1. Basic Information
Company Status Dates Holding Status
Holding Company = H Acquisition: 01.04.2011 Holding Company = 60%
Subsidiary =S Consolidation: 31.03.2012 Minority Interest = 40%

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Shareholding Pattern - % of Holding by H Ltd.
Date Particulars No. of Shares
01.04.2011 Original Purchase 36
01.01.2012 First Bonus Issue (3/5 x 3,60,000) 21.6
31.03.2012 Total Shares held by H Ltd. in S Ltd. 57.6
Total Shares outstanding in S Ltd. (`9,600 Lakhs / `10) 96
% of Holding (57.60 / 96) 60%

2. Analysis of Reserves and Surplus of S Ltd. (` Lakhs)

(a) General Reserves
Balance as on 31.03.2012 ` 2,760

Balance on 1.4.2011 (as on acqn. date)` 6,000 Transfer during 2011-12 (upto Consolidation
Less: Bonus Issue (216/60% x ` 10) ` 3,600 (balancing figure) ` 360
Balance Capital Profit ` 2,400 Revenue Reserve

(b) Profit and Loss Account

Balance as on 31.03.2012 ` 3,240

Balance on 01.04.2011 (as on acqn. date) ` 2,400 Profit for 2011-12 (upto Consolidation)
Less: Dividend (` 6000 x 20%) ` 1,200 (balancing figure) ` 2,040
Balance Capital Profit ` 1,200 Revenue Profit

3. Analysis of Net Worth of S Ltd. (` Lakhs)

Total H Minority
Particulars
100% 60% 40%

(a) Equity Capital 9,600 5,760 3,840

(b) Capital Profits General Reserve
2,400
Profit and Loss Account
1,200
Total Capital Profits 3,600 2,160 1,440

(c) Revenue Res. General Reserve 360 216 144

(d) Revenue Profit Profit and Loss Account 2,040 1,224 816
Minority Interest 6,240
4. Cost of Control

Particulars ` Lakhs

Cost of Investment 6,000

Less: Pre-Acquisition Dividend Received (` 3,600 x 20%) 720

Adjusted Cost of Investment 5,280

Less: Nominal Value of Share Capital 5,760
Share in Capital Profit of S Ltd. 2,160 (7,920)

Capital Reserve on Consolidation 2,640

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5. Consolidation of Reserves and Surplus (` Lakhs)

Particulars Gen. Res. P&LA/c

Balance as per Balance Sheet of H Ltd. 5,568 5,430

Less: Pre-Acquisition Dividend wrongly credited to P&L A/c (720)

Adjusted Cost of Investment 5,568 4,710

Add: Share of Revenue from S Ltd. 216 1,224

Consolidated Balance 5,784 5,934

Less: Unrealized Profit on Closing Stock (` 200 x 25%/125%) (40)

Adjusted Consolidated Balance 5,784 5,894

Name of the Company: H Ltd. And its subsidiary S Ltd.

Consolidated Balance Sheet as at 31st March 2012

Ref No. Particulars Note As at 31st As at 31st

No. March, 2012 March, 2011

` in lakhs ` in lakhs

A EQUITY AND LIABILITIES

1 Shareholders’ funds
(a) Share capital @ ` 10 each 1 24,000 -
(b) Reserves and surplus 2 14,318 -
2 Minority Interest 6,240 -
3 Current liabilities
(a) Trade payables 3 4,630 -
(b) Other current liabilities 4 1,019 -
(c) Short-term provisions 5 4,898 -
TOTAL (1+2+3) 55,105 -
B ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets 6 29,908 -
2 Current assets
(a) Inventories 7 11,770 -
(b) Trade receivables 8 7,926 -
(c) Cash and cash equivalents 9 3,388 -
(d) Short-term loans and advances 1,040 -
(Sundry advance)

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(f) Other current assets 10 1,073 -
TOTAL (1+2) 55,105 -

Note 1. Share Capital Note 2. Reserve and Surplus :-

Current Year Previous Year Current Year Previous Year
Authorised Capital 30,000 - General Reserve 5,784 -
Profit and loss 5,894 -
1,200 Issued and Paid 24,000 - Capital Reserve 2,640 -
Up equity shares on Consolidation
capital @ `10 each
24,000 - 14,318 -

Note 3. Trade Payable Note 4. Other Current Liabilities :-

Current Previous Year Current Year Previous Year
Year
Sundry Creditors Bills Payable:-
H 2,922 - - H Ltd 744 -
S 1,708 - - S Ltd 320 -
4,630 - 1,064 -
Less: Mutual ( 45) -
Oweings
1,019 -

Note 5. Short Term Provisions Note 6. Tangible Assets:-

Current Previous Current Year Previous
Year Year Year
Prov. For taxations Land and Building 5,436 -
H Ltd. 1,710 - Plant and
Machinery
S Ltd. 788 -
(9,810 + 9,800) 19,610 -
2,498 - Furniture
(3,690 + 1,172) 4,862 -
Proposed dividend 2,400 -
4,898 - 29,908 -

Note 7. Inventories :- Note 8. Trade Receivable:-

Current Previous Year Current Year Previous Year
Year
Stock Debtors
H Ltd 7,898 - H Ltd 5,200 -
S Ltd. (3,912 - 40) 3,872 - S Ltd. 2,726 -

11,770 - 7,926

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Note 9. Note 10. Other Current assets :-
Cash and cash equivqlent :-
Current Previous Year Current Year Previous Year
Year
Cash & Bank Bills Receivable
H Ltd 2,980 - H Ltd 720
S Ltd. 408 - S Ltd. 398 -
3,388 - 1118 -
Less: set off (45) -
1,073 -

OR

(b) X Ltd. is a holding Company and Y Ltd. and Z Ltd. are subsidiaries of X Ltd. Their Balance Sheets
as on 31.12.2012 are given below-

Liabilities X Ltd. Y Ltd. Z Ltd. Assets X Ltd. Y Ltd. Z Ltd.

Share Capital 1,50,000 1,50,000 90,000 Fixed Assets 30,000 90,000 64,500

Reserves 42,000 15,000 13,500 Investments in:

Profit & Loss A/c 24,000 18,000 13,500 - Shares of Y Ltd. 1,12,500 — —

Z Ltd. Balance 4,500 — — - Shares of Z Ltd. 19,500 79,500 —

Sundry Creditors 10,500 7,500 — Stock in Trade 18,000 — —

X Ltd. Balance — 10,500 — Y Ltd. Balance 12,000 — —

Sundry Debtors 39,000 31,500 48,000

X Ltd. Balance — — 4,500

Total 2,31,000 2,01,000 1,17,000 Total 2,31,000 2,01,000 1,17,000

The following particulars are given:

1. The Share Capital of all Companies is divided into shares of ` 10 each.
2. X Ltd. held 12,000 shares in Y Ltd. and 1,500 shares of Z Ltd.
3. Y Ltd. held 6,000 shares of Z Ltd.
4. All these investments were made on 30.6.2011.
5. On 31.12.2011, the position was as shown below: (Amount in `)

Particulars Reserve P&LA/c Creditors Fixed Assets Stock Debtors

Y Ltd. 12,000 6,000 7,500 90,000 6,000 72,000
Z Ltd. 11,250 4,500 1,500 64,500 53,250 49,500

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6. 10% Dividend is proposed by each Company.
7. The whole of stock in trade of Y Ltd. as on 30.06.2012 (` 4,000) was later sold to X Ltd. for ` 4,400
and remained unsold by X Ltd. as on 31.12.2012.
8. Cash in transit from Y Ltd. to X Ltd. was ` 1,500 as at the close of business. You are required to
prepare the Consolidated Balance Sheet of the group as at 31.12.2012. [15]

Solution:

1. Basic Information

Company Status Dates Holding Status

Holding Company = X Ltd. Acquisition: 30.06.2011 Y Ltd. Z Ltd.

Subsidiary = Y Ltd. Consolidation: 31.12.2012 a. Holding Co. (X) 80% (X) 16.67%

Sub–Subsidiary = Z Ltd. – (Y) 66.66%

b. Minority Int. 20% 16.67%

Note: The Shareholding Pattern is as under

Company Held by X Held by Y Total Holdings Minority Interest Total No. of Shares

Y Ltd. 12,000 (80%) N. A. 12,000 (80%) 3,000 (20%) 15,000 (100%)

Z Ltd. 1,500 (16.67%) 6,000 (66.67%) 7,500 (83.33%) 1,500 (16.67%) 9,000 (100%)

2. Analysis of Reserves and Surplus of Subsidiary Companies

(a) General Reserve
Y Ltd. Z Ltd.

Balance on 31.12.2012 ` 15,000 31.12.2012 ` 13,500

1.1.12 Prev. B/s Tfr in 2012 ` 3,000 1.1.12 Prev. B/s Tfr in 2012 ` 2,250
12,000 11,250
1.1.06 to DOA DOA to DOC ` 1.1.12 to DOA DOA to DOC
Capital Capital
` 1,500 1,500 ` 1,125 `1,125
Capital Revenue Capital Revenue

Capital Profit - ` 13,500; Revenue Profit - ` 1,500 Capital Profit - ` 12,375; Revenue Profit - ` 1,125

(b) Profit & Loss Account

Y Ltd. Z Ltd.

Balance on 31.12.2012 18,000

Less:Proposed Dividend (10% x 1,50,000) (15,000) Balance on 31.12.2012 13,500
Add: Dividend from Z Ltd. 3,000 Less: Proposed Dividend (10%x90,000) 9,000
(6/12 x 9,000 x 66.67%) Adjusted Balance 4,500
Adjusted Balance 6,000

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 P18_Practice Test Paper_Syl12_Jun14_Set 3

1.1.12 Prev. B/s Profit in 2012 NIL 1.1.12 Prev. B/s Profit in 2012
6,000 4,500 NIL
Capital Capital Revenue

3. Analysis of Net Worth of Subsidiary Companies (Indirect Method)

X Ltd. Minority Interest

Particulars 80% 16.67% Y Ltd. Z Ltd.

Y 66.67% Z 20% 16.67%

(a) Share Capital 1,50,000 90,000

Less: Minority Interest (30,000) (15,000) 30,000 15,000
Holding Co’s Share
1,20,000 75,000
(b) Capital Profits
General Reserve 13,500 12,375
Profit & Loss Account 6,000 4,500
19,500 16,875
11,250 (11,250)
Trfr. Y’s share in Z (66.67% x ` 16,875)
30,750 5,625
(6,150) (2,812) 6,150 2,812
Less: Minority Interest
Holding Co’s Share 24,600 2,813

(c) Revenue Reserve: 1,500 1,125

Trfr. B’s share in C (66.67% x ` 750) 750 (750)
2,250 375
Less: Minority Interest
(450) (188) 450 188
Holding Co.’s Share 1,800 187
(d) Revenue Profits NIL NIL – –
(e) Proposed Dividend 15,000 9,000
Less: Minority Interest (3,000) (1,500)
3,000 1,500
12,000 7,500
Holding Co’s Share
Minority Interest Before Stock Reserve Adjustment 39,600 19,500
Less: Share of Minority Interest of Y in
Unrealized Profits (4,400 - 4,000) x 20% (80) –
Minority Interest 39,520 19,500

4. Cost of Control

Particulars `
Cost of Investment: X Ltd. in Y Ltd. 1,12,500
X Ltd. in Z Ltd. 19,500
Y Ltd. in Z Ltd. 79,500 2,11,500

Less: Dividend out of Pre-acqn. Pfts (For 01.01.2012 to 30.06.2012)

From Y Ltd. (12,000 Shares x ` 10 x 10% x 6/12] 6,000

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
From Z Ltd. (7,500 Shares x ` 10 x 10% x 6/12) 3,750 9,750

Adjusted Cost of Investment 2,01,750

Less: (a) Nominal Value in Share Capital of: Y Ltd. 1,20,000
Z Ltd. 75,000 (1,95,000)
(b) Share in Capital Profits Y Ltd. 24,600
Z Ltd. 2,813 (27,413)
Capital Reserve on Consolidation 20,663

5. Consolidation of Reserves and Surplus

Particulars Gen. P & L A/c
Res.
Balance as per Balance Sheet of X Ltd. 42,000 24,000
Less: Proposed Dividend (` 1,50,000 x 10%) – (15,000)
Add: Share of Proposed Dividend (01.07.2012 to 31.12.2012) from
Y (12,000 Shares x ` 10 x 10% x 6/12) – 6,000
Z (1,500 Shares x ` 10 x 10% x 6/12) – 750

Adjusted Balance 42,000 15,750

Add: Share of Revenue from Y Ltd. 1,800 NIL
Z Ltd. 187 NIL

Consolidated Balance 43,987 15,750

Less: Stock Reserve [` 4,400 - ` 4,000] x 80% – (320)

Corrected Consolidated Balance 43,987 15,430

Name of the Company: X Ltd. And its subsidiary Y & Z Ltd.

Consolidated Balance Sheet as at 31st, December 2012

Ref No. Particulars Note As at 31st As at 31st

No. December, December,
2012 2011
` `
A EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share capital 1 150,000 -
(b) Reserves and surplus 2 80,080 -
2 Minority Interest (39,520 + 19,500) 59,020 -
3 Current liabilities
(a) Trade payables 3 18,000 -
(b) Short-term provisions 4 15,000 -
TOTAL (1+2+3+4) 3,22,100 -
B ASSETS
1 Non-current assets

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 P18_Practice Test Paper_Syl12_Jun14_Set 3

Ref No. Particulars Note As at 31st As at 31st

No. December, December,
2012 2011
` `
(a) Fixed assets
(i) Tangible assets 5 1,84,500 -
2 Current assets
(a) Inventories (18,000 – 400) 17,600 -
(b) Trade receivables 6 1,18,500 -
(c) Cash and cash equivalents 1,500 -
TOTAL (1+2) 3,22,100 -

Note 1. Share Capital Note 2. Reserve and Surplus

Current Year Previous Year Current Year Previous Year
Authorised Capital - - General Reserve 43,987 -
Issued and Paid Up: Profit & Loss A/c 15,430 -
Equity Share capital 1,50,000 -
Capital Reserve on
Consolidation 20,663 -
1,50,000 - 80,080

Note 3. Trade Payable Note 4. Short Term Provisions

Current Year Previous Year Current Year Previous Year
Sundary Creditors Proposed Dividend 15,000 -
X 10,500 -
Y 7,500 - 15,000
18,000 -

Note 5. Tangible Assets Note 6. Trade Receivable

Current Year Previous Year Current Year Previous Year
Fixed Assets Sundry Debtors
X 30,000 - X 39,000
Y 90,000 - Y 31,500
Z 64,500 - Z 48,000
1,84,500 - 1,18,500

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
4. (a) Star Ltd. agreed to absorb Moon Ltd. on 31st March, 2012, whose Balance sheet stood as follows
:

Liabilities ` Assets `

Share capital - Fixed assets 76,00,000

80,000 shares of ` 100 each fully paid 60,00,000
Current assets:
Reserves and surplus:
Stock in trade 4,00,000
General Reserve 20,00,000 Sundry Debtors 10,00,000
Current Liabilities and Provisions:
Sundry creditors 10,00,000

90,00,000 90,00,000

The consideration was agreed to be paid as follows:

a. A payment in cash of ` 50 per share in Moon Ltd. and
b. The issue of shares of ` 100 each in Star Ltd., on the basis of 3 Equity Shares (valued at ` 150) and
two 10% cumulative preference share (valued at ` 100) for every five shares held in Moon Ltd.
It was agreed that Star Ltd. will pay in cash for fractional shares equivalent at agreed value of shares
in Moon Ltd. i.e. ` 650 for five shares of ` 500 paid.
The whole of the Share capital consists of shareholdings in exact multiple of five except the following
holding.
Bharati 76
Sonu 56
Hitesh 52
Jagat 8
Other individuals 8 (eight members holding one share each)
200
Prepare a statement showing the purchase consideration receivable by above shareholders in
shares and cash. [10]
Solution :
WN # 1 : Statement of consideration paid for fraction shares

Particulars Bharti Sonu Hitesh Jagat Others Total

a. Holding of shares 76 56 52 8 8 200

b. Non-exchangeable 1 1 2 3 8 15
shares (Payable in Cash)
c. Exchangeable Shares 75 55 50 5 — 185
[(a) - (b)]
d. Above shares
i. in Equity shares (2:5) 45 33 30 3 — 111
ii. in Preference shares 30 22 20 2 — 74
(1:5)
WN # 2 : Number of shares to be issued
a. Exchangeable shares :
= Total shares – Non Exchangeable shares
= 60,000 – 15 = 59,985

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
b. Equity shares to be issued :
59,985
=  3 = 35,991 Shares (i.e. 3 shares for every 5 shares)
5

c. Preference shares to be issued

59,985
=  2 = 23,994 Shares (i.e. 2 shares for every 5 shares)
5
WN # 3 : Cash to be paid
Particulars `

a. 59,985 shares @ ` 50 each 29,99,250

650
b. Consideration for non-exchangeable [15×100]× (i.e. ` 650 for five 1,950
500

shares of ` 500 paid)

c. Total 30,01,200

Statement of Purchase Consideration :

Particulars `

a. In Shares :
i. 35,991 Equity shares @ ` 150 each 53,98,650
ii. 23,994 Preference shares @ ` 100 each 23,99,400 77,98,050
b. In Cash (WN # 3) 30,01,200
c. Total (a+b) 1,07,99,250

OR,

(b) The following are the Balance sheets (as at 31.3.2011) of A Ltd. and C Ltd.:

Liabilities A Ltd. C Ltd. Assets A Ltd. C Ltd.

` ` ` `

Share Capital: Fixed Assets 75,00,000 45,00,000

Equity Shares of `.10 each 54,00,000 27,00,000 Investments 7,50,000 7,50,000
10% Preference shares of 18,00,000 - Current Assets
`.100 each Stock 27,00,000 18,00,000
12% Preference shares of - 9,00,000 Debtors 22,50,000 18,00,000
`.100 each Bills receivable 75,000 15,000
Reserve and Surplus: Cash at Bank 2,25,000 1,35,000
Statutory Reserve 1,50,000 1,50,000

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 P18_Practice Test Paper_Syl12_Jun14_Set 3

General Reserve 37,50,000

Secured Loan 25,50,000
15% Debentures 7,50,000 -
12% Debentures -
Current Liabilities 7,50,000
Sundry creditors 16,20,000 19,20,000
Bills payable 30,000 30,000

1,35,00,000 90,00,000 1,35,00,000 90,00,000

Contingent liabilities for bills receivable discounted ` 30,000.

(A) The following additional information is provided to you:

A Ltd. C Ltd.

` `

Profit before Interest and Tax 22,12,500 11,70,000

Rate of Income-tax 40% 40%

Preference dividend 1,80,000 1,08,000

Equity dividend 5,40,000 4,05,000

Balance profit transferred to Reserve account.

(B) The equity shares of both the companies are quoted on the Mumbai Stock Exchange. Both the
companies are carrying on similar manufacturing operations.

(C) A Ltd proposes to absorb business of C Ltd. as on 31.3.2011. The agreed terms for absorption are:

(i) 12% Preference shareholders of C Ltd. will receive 10% Preference shares of A Ltd. sufficient to
increase their present income by 20%.

(ii) The Equity shareholders of C Ltd. will receive equity shares of A Ltd. on the following terms:

(a) The Equity shares of C Ltd. will be valued by applying to the earnings per share of C Ltd. 60 per
cent of price earnings ratio of A Ltd. based on the results of 2010-11 of both the Companies.

(b) The market price of Equity shares of A Ltd. is ` 40 per share.

(c) The number of shares to be issued to Equity shareholders of C Ltd. will be based on the 80% of
market price.

(d) In addition to Equity shares, 10% Preference shares of A Ltd. will be issued to the equity
shareholders of C Ltd. to make up for the loss in income arising from the above exchange of
shares based on the dividends for the year 2010-11.

(i) 12% Debentureholders of C Ltd. are to be paid at 8% premium by 15% debentures in A Ltd.
issued at a discount of 10%.

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
(ii) ` 24,000 is to be paid by A Ltd. to C Ltd. for liquidation expenses. Sundry Creditors of C Ltd.
include ` 30,000 due to A Ltd. Bills receivable discounted by A Ltd. were all accepted by C Ltd.

(iii) Fixed assets of both the companies are to be revalued at 20% above book value. Stock in trade
is taken over at 10% less than their book value.

(iv) Statutory reserve has to be maintained for two more years

(v) For the next two years no increase in the rate of equity dividend is anticipated.

(vi) Liquidation expense is to be considered as part of purchase consideration.

You are required to:

(i) Find out the purchase consideration and
(ii) Give journal entries in the books of A Ltd. [10]

Solution: `

(i) For Preference Shareholders 1,08,000

Present Income of Preference Shareholders of C Ltd. 21,600
Add : 20% increase 1,29,600

10% Preference Shares to be issued of ` 12,96,000 (1,29,600/10x 100)

For Equity Shareholders
Valuation of Equity Shares of C Ltd. =
Number of shares x Value of one share (i.e. EPS of C Ltd. x P/E ratio of A Ltd. x 60/100)
= 2,70,000 × (` 2 × 20 ×60/100) = 2,70,000 × 24 = ` 64,80,000
Issue of Equity Shares
No. of Equity Shares to be issued at 80% of Market Price i.e.
80% of ` 40 = ` 32
64,80,000/32 = 2,02,500 shares
Equity Share Capital = 2,02,500 × ` 10 = ` 20,25,000
Securities premium = 2,02,500 x ` 22 = 44,55,000
= ` 64,80,000

Issue of Preference Shares

Present Equity Dividend ` 4,05,000
Less: Expected Equity Dividend from A Ltd. (20,25,000 × 10/100) 2,02,500

Loss in income 2,02,500

10% Preference Shares to be issued of ` 20,25,000 (2,02,500/10 × 100) 20,25,000

Purchase Consideration: -
Preference Shares Capital [`12,96,000 + ` 20,25,000] 33,21,000
Equity Share Capital (2,02,500 shares of ` 10 each at ` 32 per share) 64,80,000
Liquidation Expenses (in cash) 24,000

98,25,000

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
(ii) Journal Entries in the Books of A Ltd. Dr. Cr.

Particulars ` `

1. Fixed Assets A/c Dr. 15,00,000

To Revaluation Reserve 15,00,000

(Being fixed assets revalued at 120% of book value)

2. Business Purchase A/ c Dr. 98,25,000

To Liquidator of C Ltd. 98,25,000
(Being purchase consideration payable for the business taken
over from C Ltd.)

3. Fixed Assets A/c Dr. 54,00,000

Investment A/c Dr. 7,50,000
Stock A/c Dr. 16,20,000
Debtors A/c Dr. 18,00,000
Bills Receivable A/c Dr. 15,000
Cash at Bank A/c Dr. 1,35,000
Goodwill A/c (Balancing figure) Dr. 28,65,000
To 12% Debentures in C Ltd. 8,10,000
To Creditors 19,20,000
To Bills Payable 30,000
To Business Purchase A/c 98,25,000
(Being incorporation of different assets and liabilities of C Ltd.
taken over at agreed values and balance debited to goodwill
account)

4. Liquidator of C Ltd. Dr. 98,25,000

To Equity Share Capital A/c 20,25,000
To Securities Premium A/c
44,55,000
To Preference Share Capital A/c
33,21,000
To Bank A/c
24,000
(Being discharge of consideration for C Ltd’s business)

5. 12% Debentures in C Ltd. Dr. 8,10,000

Discount on issue of Debentures Dr. 90,000
To 15% Debentures
9,00,000
(Being allotment of 15% Debentures to debenture holders
at a discount of 10% to discharge liability of C Ltd. debentures)

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 P18_Practice Test Paper_Syl12_Jun14_Set 3

6. Sundry Creditors A/c Dr. 30,000

To Sundry Debtors A/c 30,000
(Being cancellation of Mutual owing)

7. Amalgamation Adjustment A/c Dr. 1,50,000

To Statutory Reserve A/c 1,50,000
(Being statutory reserve account is maintained under statutory
requirements)

8. Securities Premium A/c Dr. 90,000

To Discount on issue of Debentures A/c 90,000

(Being discount on issue of Debentures written off out of securities

premium)

5. (a) What are the roles of Audit Committee of the company under clause 49 of listing agreement?

[10]

Answer:

Role of Audit Committee

The role of the audit committee shall include the following:

i. Oversight of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
ii. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the statutory auditor and the fixation of audit fees.
iii. Approval of payment to statutory auditors for any other services rendered by the statutory
auditors.
iv. Reviewing, with the management, the annual financial statements before submission to the
board for approval, with particular reference to:
a. Matters required to be included in the Director’s Responsibility Statement to be included in
the Board’s report in terms of clause (2AA) of Section 217 of the Companies Act, 1956

b. Changes, if any, in accounting policies and practices and reasons for the same

c. Major accounting entries involving estimates based on the exercise of judgment by

management

d. Significant adjustments made in the financial statements arising out of audit findings

e. Compliance with listing and other legal requirements relating to financial statements

f. Disclosure of any related party transactions

g. Qualifications in the draft audit report.

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
v. Reviewing, with the management, the quarterly financial statements before submission to the
board for approval
vi. Reviewing, with the management, performance of statutory and internal auditors, adequacy of
the internal control systems.
vii. Reviewing the adequacy of internal audit function, if any, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting
structure coverage and frequency of internal audit.
viii. Discussion with internal auditors any significant findings and follow up there on.
ix. Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board.
x. Discussion with statutory auditors before the audit commences, about the nature and scope of
audit as well as post-audit discussion to ascertain any area of concern.
xi. To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non payment of declared dividends) and creditors.
xii. To review the functioning of the Whistle Blower mechanism, in case the same is existing.
xiii. Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.
Explanation (i): The term “related party transactions” shall have the same meaning as contained in
the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered
Accountants of India.
Explanation (ii): If the company has set up an audit committee pursuant to provision of the
Companies Act, the said audit committee shall have such additional functions/features as is
contained in this clause.

OR,

(b)(i) State the disclosure requirement of Contingent liabilities and Assets under AS 29 “Provisions,
Contingent liabilities and Contingent Assets”. [5]

Answer:

Disclosure of contingent liability:

An enterprise should disclose for each class of contingent liability at the balance sheet date-

• A brief description of the nature of the contingent liability where practicable.

• An estimate of the amount as per measurement principles as prescribed for provision.

• Indications of the uncertainties relating to outflow.

• The possibility of any reimbursement.

• Where any of the information required as above is not disclosed because it is not practicable to
do so, that fact should be stated.

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
An enterprise need not disclose of the disclosure requirement if disclosure of any of this information is
expected to prejudice seriously the case of the enterprise in disputes with other party. However, it
should be extremely rare case.

Disclosure of contingent assets:

Contingent assets are not required to disclosed in financial statement, generally Board of Directors
report discloses such contingent assets.

(ii) What information can we gather from Value Added Statements? [5]

Answer:

We can gather following information from Value Added Statement as given below-

(i) Wealth Creation: The Value Added Statement specifies the wealth accumulated by the
Company. It states in monetary terms the wealth accumulated by the Company.

(ii) Beneficiaries/participants of wealth: The Value Added Statement states the application of
Value Added to shareholders, bondholders, employees, etc. This identifies the
participants/beneficiaries of the wealth generated by the Company and their interest in the
Company in terms of value and percentage.

(iii) Value Added based ratios: The following ratios can be computed – Value Added to Sales,
Value Added to payroll, Taxes to Value Added, etc. This facilitates comparison of ratios
between periods as well as comparison between Companies.
(iv) Value Added Interpretation: Value Added facilitates interpretation of operating results or
contribution of variou Companies. The real wealth of Companies can be understood only from
the Value Added Statement, as the comparison of Sales Turnover may not give a real picture.
Many Companies can have the same turnover also.

6. (a)(i) On the basis of the following information related to trading in Options, you are required to
pass relevant Journal Entries (at the time of inception and at the time of final settlement) in the books
of Tom (Buyer) and Jerry (Seller). Assume that the price on expiry is `950/- and both Tom and Jerry
follow the calendar year as an accounting year.

Date of Purchase Option Type Expiry Date Premium per unit Contract Lot Multiplier

29.03.2013 Equity Index, Call 31.05.2013 `10 1,000 units `850 p.u
[7]

Solution:

1. In the books of Tom (Buyer)

S. No. Particulars Debit ` Credit `

29.03.13 Equity Index Option Premium A/c Dr. 10,000

To Bank A/c 10,000
(Being premium paid on Equity Stock Options)

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 P18_Practice Test Paper_Syl12_Jun14_Set 3

31.05.13 Profit and Loss A/c Dr. 10,000

To Equity Index Stock Option A/c 10,000
(Being premium on option written off on expiry)

31.05.13 B a n k A / c Dr. 1,00,000

To Profit and Loss A/c 1,00,000
(Being profit on exercise of option received = 1,000 units * (`950 -
`850)) (Exercise Price - Spot Price)

2. In the books of Suman (Seller)

S. No. Particulars Debit ` Credit `

29.03.13 B a n k A / c Dr. 10,000

To Equity Index Option Premium A/c 10,000
(Being premium on Option collected)

31.05.13 Profit and Loss A/c Dr. 1,00,000

To Bank A/c 1,00,000
(Being loss on Option paid)

31.05.13 Equity Index Option Premium A/c Dr. 10,000

To Profit and Loss A/c 10,000
(Being premium on option recognized as income)

(ii) A Company purchased a plant for `50 Lakhs during the financial year and installed it immediately.
The price charged by the Vendor included Excise Duty (CENVAT Credit Available) of `5 Lakhs. During
this year, the Company also produced excisable goods on which Excise Duty chargeable is `5.00
Lakhs. Show the Journal Entries describing CENVAT Credit treatment. At what amount should the Plant
be capitalized? [8]

Solution:
1. Journal Entries

S. No. Transaction and Entry Debit Credit

1 Fixed Assets A/c Dr. 45,00,000

CENVAT Credit Receivable (Capital Goods) A/c Dr. 2,50,000
CENVAT Credit Deferred (Capital Goods) A/c Dr. 2,50,000
To Asset Vendor / Bank A/c 50,00,000
(Being Plant purchased recorded, including immediate CENVAT
Credit available of 50%, balance 50% (assumed) credit available in
subsequent year)

2 Excise Duty A/c Dr. 2,50,000

To CENVAT Credit Receivable A/c (Capital Goods) 2,50,000
(Being set off of CENVAT Credit during the year)

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 P18_Practice Test Paper_Syl12_Jun14_Set 3

3 Excise Duty A/c Dr. 2,50,000

To Bank A/c 2,50,000
(Being balance Excise Duty payable `5,00,000 - `2,50,000 set-off, now
settled)

4 Subsequent Financial Year

CENVAT Credit Receivable (Capital Goods) A/c Dr. 2,50,000
To CENVAT Credit Deferred (Capital Goods) A/c 2,50,000
(Being transfer of balance CENVAT Credit available on Capital
Goods)

2 Balance Sheet (abstract)

Liabilities ` Assets `
Fixed Assets: Plant at Cost 45,00,000
Less: Depreciation ??
Current Assets, Loans and Advances:
CENVAT Credit Deferred (Cap. 2,50,000
Goods)

OR,

(b)(i) Explain the need and significance of Environmental Accounting. [10]

Answer:
Need and significance of Environmental Accounting.

(a) Resource Utilisation: Natural Resources (water, air, minerals, forests etc.) are required to carry on
the business activities of every firm. Also, the functioning of an enterprise has some favourable
and some adverse effects on the environment. Hence, there is a need for maintaining accounts
of the effects of the activities of a business entity on the environment and on natural resources.

(b) Resource Availability: Environmental Accounting is useful for disclosing how much natural
resources are available in the country, their incomes and the costs incurred to use them and
their depreciation, values etc.

(c) Social Responsibility: Environmental Accounting is helpful for measuring industrial development
and social welfare and the fulfilment of social responsibilities by Companies. Companies are
urged to be accountable to both Shareholders and wider society. Profit Making is not
considered as the sole corporate objective.

(d) Qualitative Study: Traditional Accounting System is restricted to quantitative and monetary
aspects only. Hence, Environmental Accounting is necessary to analyse the effect of
environmental resources in the entire business functions of a firm.

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
(e) Environmental Protection: Environmental Accounting will help in evaluating the problem of
environment protection. The business activities of the enterprise should be recognised as society
(environment) centred and not only profit-centred.

(f) Going Concern: Environmental pollution and the substantial costs associated with clean-up
activities, fines, compensation, and bad publicity etc. can even significantly affect the share
prices and even the stability of a Company. Hence, environmental accounting awareness is
required.

(g) Social Accounting: Social Accounting has been the precursor of Environmental Accounting.
Social Costs also include the use of natural resources and pollution of environments. Also
preservation of the environment is a critical factor for sustainable development. So,
Environmental Accounting deserves special attention of manager, investors, society, different
branches of Government and other stakeholders.

(ii) On April 1, 2012, a company Sky Blue Ltd. offered 100 shares to each of its 1,500 employees at `60
per share. The employees are given a month to decide whether or not to accept the offer. The shares
issued under the plan shall be subject to lock-in on transfers for three years from grant date. The
market price of shares of the company on the grant date is `70 per share. Due to post-vesting
restrictions on transfer, the fair value of shares issued under the plan is estimated at `68 per share.

On April 30, 2012, 1,200 employees accepted the offer and paid `60 per share purchased. Nominal
value of each share is `10.

Record the issue of shares in book of the Sky Blue Ltd. under the aforesaid plan. [5]

Solution:

Fair value of ESPP per share = `68 – `60 = `8

Number of share issued = 1,200 × 100 = 1,20,000

Fair value of ESPP = 1,20,000 × `8 = `9,60,000

Vesting period = One month

Expense recognized in 2012-13 = `9,60,000

Particulars ` `

April 30, 2012

Bank (1,20,000x60) 72,00,000
Employees’ Compensation A/c (1,20,000x8) 9,60,000
To Share Capital (1,20,000x10) 12,00,000
To Securities premium (1,20,000x58) 69,60,000

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
7. (a) From the following information, prepare cash flow statement by using indirect method as per
AS-3.

Balance Sheet

Liabilities 31.3.2013 31.3.2014 Assets 31.3.2013 31.3.2014

Capital 50,00,000 60,00,000 Plant & Machinery 27,30,000 42,70,000
Retained Earnings 26,50,000 36,90,000 Less : Depreciation 6,10,000 7,90,000

Debentures — 9,00,000 21,20,000 34,80,000

Current Liabilities : Current Assets :

Creditors 8,80,000 8,20,000 Debtors 23,90,000 28,30,000

Bank Loan 1,50,000 3,00,000 Less : Provision 1,50,000 1,90,000

Liability for Expenses 3,30,000 2,70,000 22,40,000 26,40,000

Dividend Payable 1,50,000 3,00,000 Cash 15,20,000 28,20,000

Creditors for plant — 2,00,000 Marketable Securities 11,80,000 15,00,000
and machinery Inventories 20,10,000 19,20,000

purchased Prepaid Expenses 90,000 1,20,000

91,60,000 1,24,80,000 91,60,000 1,24,80,000

Additional Information:
(1) Net Income for the year ended 31.03.2014, after charging depreciation of `1,80,000 is `22,40,000.
(2) Debtors of ` 2,30,000 were determined to be worthless and were written off against the provisions
for doubtful debts account.
(3) The Board of Directors declared dividend of ` 12,00,000.
Note: Marketable securities are treated as cash equivalents. [10]

Solution:

Cash Flow Statement for the year ended 31-03-2014

Cash Flows from Operating Activities

Net Income 22,40,000

Add: Depreciation 1,80,000

24,20,000

Add: Decrease in Inventories 90,000

Increase in Provision for Doubtful Debts* 40,000

25,50,000

Less: Increase in Current Assets:

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Debtors* (4,40,000)

Prepaid Expenses (30,000)

Decrease in Current Liabilities:

Creditors (60,000)

Expenses Outstanding (60,000)

Net Cash from Operating Activities 19,60,000

Cash Flows from Investing Activities

Payment for Purchase of Plant & Machinery (15,40,000–2,00,000) (13,40,000)

Cash outflow from Investing Activities (13,40,000)

Cash Flows from Financing Activities

Issue of Share Capital (on Cash) 10,00,000

Bank Loan Raised 1,50,000

Issue of Debentures 9,00,000

Payment of Dividend (10,50,000)

Cash flows from Financing Activities 10,00,000

Net Increase in cash and Cash equivalents during the year 16,20,000

Add : Opeaning balance of cash and cash equivalents 27,00,000

Cash balance as on 31-3-2014 43,20,000

*Alternatively, provision for doubtful debts created (`40,000) + ` 2,30,000 (Bad Debts) may be added.
In that case, increase in debtors (including bad debts written off) ` 6,70,000 (` 4,40,000 + ` 2,30,000) is
subtracted. However, net effect will remain same. It is only a matter of presentation. Adjustment for
interest on bank loan is ignored as rate of interest is not given.

OR,

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
(b) X Ltd. acquired 75% of the Equity Shares of Y Ltd. From the following Balance Sheet as at 31st March
2014 of Y Ltd. and additional information furnished, determine Minority Interest in Y Ltd. as on Balance
Sheet date

Liabilities ` Assets `

Share Capital: Fixed Assets:

Equity Capital (` 100) 40,00,000 (Net Block) (Tangible) 80,00,000
Reserves: Current Assets:
Securities Premium 6,00,000 Stock in Trade 40,00,000
General Reserve 14,00,000 Debtors 24,00,000
Profit and Loss Account 24,00,000 Other Current Assets 16,00,000
Current Liabilities:
Creditors 28,00,000
Bank Overdraft 48,00,000

Total 1,60,00,000 Total 1,60,00,000

When X Ltd. acquired shares, balances in Reserves of Y Ltd. were as under - (a) Securities Premium
`6,00,000; (b) General Reserve ` 2,00,000; (c) Profit and Loss Account ` 8,00,000. [10]

Solution:
1. Basic Information
Company Status Dates Holding Status

Holding Company =X Acquisition: Not Available Holding Company = 75%

Subsidiary =Y Consolidation: 31 st December Minority Interest = 25%

2. Analysis of Reserves and Surplus of Y Ltd.

(a) Securities Premium
Balance as per Balance Sheet ` 6,00,000
Balance on date of acquisition Acquisition to Consolidation
` 6,00,000 (balancing figure) ` NIL
Capital Profit Securities Premium
(b) General Reserve
Balance as per Balance Sheet ` 14,00,000
Balance on date of acquisition Acquisition to Consolidation
` 2,00,000 (balancing figure) ` 12,00,000
Capital Profit Revenue Reserve (General Reserve)
(c) Profit and Loss Account
Balance as per Balance Sheet ` 24,00,000

Balance on date of acquisition Acquisition to Consolidation

` 8,00,000 (balancing figure) ` 16,00,000
Capital Profit Revenue Profit (P&L A/c)

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3. Analysis of Net Worth of Y Ltd.
Particulars Total Share of X Ltd. Minority Interest
100% 75% 25%
(a) Equity Share Capital 40,00,000 30,00,000 10,00,000
(b) Capital Profits
6,00,000
Securities Premium
2,00,000
General Reserve
8,00,000
Profit & Loss Account
Total 16,00,000 12,00,000 4,00,000
(c) Revenue Reserves General Reserve 12,00,000
9,00,000 3,00,000
(d) Revenue Profits Profit & Loss A/c
16,00,000
12,00,000 4,00,000
Minority Interest 21,00,000

8.(a)(i) What are the procedures are adopted by the Government Accounting Standard Advisory
Board for formulating the Standards? [10]

Answer:

Standard-setting Procedure for Accounting Standards

1. The following procedures are adopted by the GASAB for formulating Standards:
 The GASAB Secretariat identifies areas for Standard formulation and places them before the
GASAB for selection and approval. While doing so, the Secretariat places before the GASAB
all important suggestions, references, proposals received from various sections of the Union
and State Governments, members of GASAB, members of Civil Society, Professional Bodies
and other stakeholders. The priorities, as approved by the GASAB, guide further functioning of
the GASAB Secretariat.
 The GASAB Secretariat thereafter prepares the discussion paper on the selected issues for
consideration of the GASAB.
 While doing so, the Secretariat studies the existing rules, codes and principles as internal
sources, and documents/pronouncements/Standards issued by other national and
international Standard setting and regulatory bodies. The Secretariat may also hold
consultation with such other persons as are considered necessary for this purpose.
 On consideration of the Discussion paper and the comments received thereon, the GASAB
finalizes the Exposure Draft.
 The GASAB may constitute Standing Committee and/or Task based Groups from amongst the
Members or their representatives to consider specific areas before finalization.
 The Exposure Draft, as approved for issue by the GASAB, are widely circulated in the public
domain and forwarded to all stakeholders. The Exposure Draft is required to be hosted at the
website of GASAB.
 Based on the comments received on the Exposure Draft, the Standards are finalized by the
GASAB. The Standards, as finalized, are forwarded to the Government for notification in
accordance with the provisions of the Constitution of India.
2. The meetings are normally chaired by the Chairperson. In unforeseen circumstances when
Chairperson is unable to attend, the senior-most member from the Central Government will chair the
meeting. The Comptroller & Auditor General of India will be kept informed of the important
developments in the meetings of GASAB.

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3. The GASAB may meet as often as is deemed necessary but generally not less than four times in a
financial year. The decisions of the GASAB may preferably be by general consensus. In case
differences persist, the decision shall be on the basis of voting favoring the recommendation. The
dissenting views should also be forwarded to the Government along with the recommendations.
4. GASAB allows an exposure period of 90 days for inviting comments on Exposure Draft.

(ii) State the principles of Government Accounting. [5]

Answer:
The general principles of Government Accounting are as follows:
1. The Government Expenditure are classified under Sectors, major heads, minor heads, sub-heads
and detailed heads of account, the accounting is more elaborate that that followed in
commercial accounts. The method of budgeting and accounting under the service heads is not
designed to bring out the relation in which Government stands to its material assets in use, or its
liabilities due to be discharged at more or less distant dates.
2. In its Budget for a year, Government is interested to forecast with the greatest possible accuracy
what is expected to be received or paid during the year, and whether the former together with
the balance of the past year is sufficient to cover the later. Similarly, in the compiled accounts
for that year, it is concerned to see to what extent the forecast has been justified by the facts,
and whether it has a surplus or deficit balance as a result of the year’s transactions. On the basis
of the budget and the accounts, Government determines (a) whether it will be justified in
curtailing or expanding its activities (b) whether it can and should increase or decrease taxation
accordingly.
3. In the field of Government accounting, the end products are the monthly accounts and the
annual accounts. The monthly accounts serve the needs of the day-to-day administration, while
the annual accounts present a fair and correct view of the financial stewardship of the
Government during the year.

OR,

(b)(i) Explain the objectives and scope of IGAS 4 “General Purpose Financial Statements of
Government”. [10]

Answer:

Objectives
(i) The purpose of this Standard is to lay down the principles to be followed in presentation of
general purpose financial reports of Governments and to prescribe the minimum requirements
relating to structure and contents of financial statements of government prepared under cash
basis of accounting.
(ii) The statement of receipts and disbursements during the year and information about cash flows
of an Entity enable stakeholders to evaluate the likely sources and uses of cash and the ability of
an Entity to generate adequate cash in the future. This information also indicates the
expenditure priorities of the Entity in the delivery of goods and services as well as the impact of
the taxation policies of the Entity. Stakeholders can then assess the sustainability of the Entity’s

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 P18_Practice Test Paper_Syl12_Jun14_Set 3
activities (whether future budgetary resources will be sufficient to sustain public services and to
meet obligations as they become due) and appraise financial accountability.
(iii) All Financial Statements need to be standardized to obtain optimal information, to ensure
comparability with the Entity’s own financial Statements of previous periods and with those of
other entities. The basis and policies of accounting need to be uniform to permit meaningful
consolidation to develop Whole of Government Accounts. Desirable attributes need to defined
to obtain a basic standard for financial reporting.
(iv) To achieve these objectives, this Standard sets out the financial elements for the presentation of
financial reports prepared under the cash basis of accounting. It also requires that the selection
of accounting policy should ensure certain qualitative characteristics in the information being
presented. Desirable attributes of financial reporting are required to heighten their value to the
users.
(v) General Purpose Financial Statements (GPFS) essentially consists of Finance Accounts and
Appropriation Accounts. The Financial Statements referred to in this standard are the General
Purpose Financial Reports (GPFR).
Scope
(i) An Entity, which prepares and presents Financial Statements under the cash basis of accounting
as defined in this Standard, should apply the requirements o this Standard in presentation of its
financial statements.
(ii) The standard applies to financial reports of a government – Union or State. The standard does
not apply to accounts of (i) local bodies and (ii) Government Business Enterprises or
Departmental Commercial Undertakings.
(iii) An Entity whose Financial Statements comply with the requirements of this Standard should
disclose that fact. Financial Statements should not be described as complying with this Standard
unless they comply with all the requirements of this Standard.
(iv) The standard lays down the minimum requirements that governments should folow in
presentation of financial reports. The requirements in terms of contents of the financial report are
the mandatory minimum requirements that financial reports should present.

(ii) Give a brief comparison between Government Accounting and Commercial Accounting. [5]

Answer:

Comparison with commercial accounting

The principles of Commercial and Government Accounting differ in certain essential points. The
difference is due to the fact that, while the main function of a commercial concern is to take part in
the production, manufacture or inter-change of gods or commodities between different groups or
individuals and thereby to make profit, Government is to govern a country and, in connection
therewith, to administer the several departments of its activities in the best way possible.
Government Accounts are designed to enable Government to determine how little money it need
take out of the pockets of the tax-payers in order to maintain its necessary activities at the proper
standard of efficiency. Non-Government Commercial accounts, on the other hand, are meant to
show how much money the concern can put into the pockets of the proprietors consistently with the
maintenance of a profit-earning standard in the concern.

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