ADVANCED ACCOUNTING ARIVUPRO ACADEMY

INDEX – BOOK VERSION 6

TOPIC PAGE NO
INTERNAL RECONSTRUCTION 1.1-1.47
BUYBACK OF SECURITIES & EQUITY SHARES WITH DIFFERENTIAL RIGHTS 2.1-2.33
ACCOUNTING FOR EMPLOYEE STOCK OPTION PLAN 3.1-3.13
AMALGAMATION OF COMPANIES 4.1-4.46
DISSOLUTION & AMALGAMATION OF PARTNERSHIP FIRM 5.1-5.64
CONSOLIDATED FINANCIAL STATEMENTS 6.1-6.49
AS 4 – CONTINGENCIES & EVENTS OCCURRING AFTER THE BALANCE SHEET 7.1-7.13
DATE
AS 5 – NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND 8.1-8.9
CHANGES IN ACCOUNTING POLICIES
AS 7 – CONSTRUCTION CONTRACTS 9.1-9.10
AS 9 – REVENUE RECOGNITION 10.1-10.10
AS 17 –SEGMENT REPORTING 11.1-11.9
AS 18 – RELATED PARTY DISCLOSURES 12.1-12.6
AS 19 – LEASES 13.1- 13.11
AS 20 – EARNINGS PER SHARE 14.1- 14.4
AS 22 – ACCOUNTING FOR TAXES ON INCOME 15.1- 15.9
AS 24 – DISCONTINUING OPERATIONS 16.1 – 16.3
AS 26 – INTANGIBLE ASSETS 17.1 – 17.14
AS 29 – PROVISION, CONTINGENT LIABILITIES & CONTIGENT ASSETS 18.1 – 18.10
LIQUIDATION OF COMPANIES 19.1 – 19.24
FINANCIAL STATEMENT OF BANKING COMPANIES 20.1 – 20.37
NON BANKING FINANCIAL COMPANIES 21.1-21.12

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Chapter 1 INTERNAL RECONSTRUCTION

• When a company has been making losses for a number of years, the financial position does
not present a true and fair view of the state of the affairs of the company.
• In such a company the assets are overvalued, the assets side of the balance sheet consists of
fictitious assets, useless intangible assets and debit balance in the profit and loss account.
• Such a situation brings the need for reconstruction.
• Reconstruction is a process by which affairs of a company are reorganized by revaluation of
assets, reassessment of liabilities and by writing off the losses already suffered by reducing
the paid up value of shares and/or varying the rights attached to different classes of shares.

DIFFERENCE BETWEEN INTERNAL AND EXTERNAL RECONSTRUCTION-

Basis Internal Reconstruction External Reconstruction
Liquidation The existing company is not The existing company is
liquidated liquidated.
Formation No new company is formed but only A new company is formed to take
the rights of shareholders and over the liquidated company.
creditors are changed.
Reduction of capital There is certain reduction of capital There is no reduction of capital.
and sometimes the outside In fact there is a fresh share
liabilities like debenture holders capital of the company.
may have to reduce their claim.
Legal position Internal reconstruction is done as External reconstruction is
per provisions of section 66 of the regulated by section 232 of the
Companies Act, 2013 Companies Act, 2013.

METHODS OF INTERNAL RECONSTRUCTION:

• Alteration of share capital :
✓ Sub-divide or consolidate shares into smaller or higher Denomination
✓ Conversion of share into stock or vice-versa

• Variation of shareholders’ rights :

✓ Only the specific rights are changed. There is no change in the amount of capital.

• Reduction of share capital

• Compromise, arrangements etc.
• Surrender of Shares.

While preparing the balance sheet of a reconstructed company, the following points are to be kept in mind:
(a) After the name of the company, the words “and Reduced” should be added only if the Court so
orders.
(b) In case of fixed assets, the amount written off under the scheme of reconstruction must be shown
for five years.

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1. On 31-12-20X1, B Ltd. had 20,000, Rs 10 Equity Shares as authorized capital and the shares were all
issued on which Rs 8 was paid up. In June, 20X2 the company in general meeting decided to sub-
divide each share into two shares of Rs 5 with Rs 4 paid up. In June, 20X3 the company in general
meeting resolved to consolidate 20 shares of Rs 5, Rs 4 per share paid up into one share of Rs 100
each, Rs 80 paid up.

Pass entries and show how share capital will appear in notes to Balance Sheet as on 31-12-20X1, 31-12-
20X2 and 31-12-20X3.

Solution

Journal Entries
20X2 Rs Rs
June Equity Share Capital (Rs 10) A/c Dr. 1,60,000
To Equity Share Capital (Rs 5) A/c 1,60,000
(Being the sub-division of 20,000 shares of
Rs 10 each with Rs 8 paid up into 40,000
shares Rs 5 each with Rs 4 paid up by
resolution in general meeting dated )
20X3 Equity Share Capital (Rs 5) A/c Dr. 1,60,000
June To Equity Share Capital (Rs 100) A/c 1,60,000
(Being consolidation of 40,000 shares of
Rs 5 with Rs 4 paid up into 2,000 Rs 100
shareswith Rs 80 paid up)

Notes to Balance Sheet

Liabilities: Rs
As on 31-12-20X1
1. Share Capital
Authorized:
2,00,000
20,000 Equity Shares of Rs 10 each
Issued, Subscribed and Paid up:
20,000 Equity Shares of Rs 10 each Rs 8 per share paid up 1,60,000
As on 31-12-20X2 2,00,000
1. Share Capital
Authorized:
40,000 Equity Shares of Rs 5 each
Issued, Subscribed and Paid up:
40,000 Equity Shares of Rs 5 each Rs 4 per share paid up 1,60,000
As on 31-12-20X3 Rs
1. Share Capital
Authorized:
2,000 Equity Shares of Rs 100 each 2,00,000
Issued, Subscribed and Paid up:
2,000 Equity Shares of Rs 100 each Rs 80 per share paid up 1,60,000

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2. C Ltd. had Rs 5,00,000 authorized capital on 31-12-20X1 divided into shares of Rs 100 each out of
which 4,000 shares were issued and fully paid up. In June 20X2 the Company decided to convert the
issued shares into stock. But in June, 20X3 the Company re-converted the stock into shares of Rs 10
each, fully paid up.
Pass entries and show how Share Capital will appear in Notes to Balance Sheet as on 31-12-20X1, 31-12-
20X2 and 31-12-20X3.

Solution
Journal Entries

20X2
June Equity Share Capital A/c Dr. 4,00,000
To Equity Stock A/c 4,00,000
(Being conversion of 4,000 fully paid Equity
Shares of Rs 100 into Rs 4,00,000 Equity
Stock as per resolution in general meeting
dated…)
20X3
June Equity Stock A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being re-conversion of Rs 4,00,000 Equity
Stock into 40,000 shares of Rs 10 fully paid
Equity Shares as per resolution in General
Meeting dated...)

Notes to Balance Sheet

As on 31-12-20X1
Share Capital
Authorized 5,00,000
5,000 Equity Shares of Rs 100 each

Issued and Subscribed

4,000 Equity Shares of Rs 100 each fully called up 4,00,000
As on 31-12-20X2 Rs
Share Capital
Authorized
5,000 Equity Shares of Rs 100 each 5,00,000
Issued and Subscribed
Equity Stock- 4,000 Equity Shares of Rs 100 converted into Stock 4,00,000
As on 31-12-20X3 Rs
Share Capital

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Authorized
50,000 Equity Shares of Rs 10 each 5,00,000
Issued and Subscribed
40,000 Equity Shares of Rs 10 each fully called up 4,00,000

3. The Balance Sheet of A & Co. Ltd. as at 31-3-20X2 is as follows:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 11,50,000
B Reserves and Surplus 2 (5,35,000)
2 Non-current liabilities
A Long-term borrowings 3 3,75,000
3 Current liabilities
A Trade Payables 3,00,000
B Short term borrowings - Bank Overdraft 1,95,000
C Other current liabilities 4 1,22,500
Total 16,07,500
Assets
1 Non-current assets
A Property, plant and equipment 5 4,75,000
B Intangible assets 6 1,67,500
C Non-current investments 7 55,000
2 Current assets
A Inventories 4,25,000
B Trade receivables 4,85,000
Total 16,07,500

Notes to accounts
Rs
1 Share Capital
Equity share capital:
75,000 Equity Shares of Rs 10 each 7,50,000
Preference share capital:
4,000 6% Cumulative Preference Shares of Rs 100 each 4,00,000
11,50,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (5,35,000)
(5,35,000)
3 Long-term borrowings

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Secured
6% Debentures (secured on the freehold property) 3,75,000
3,75,000
4 Other current liabilities
Loan from directors 1,00,000
Interest payable on 6% debentures 22,500
1,22,500
5 Property plant and Equipment
Freehold property 4,25,000
Plant 50,000
4,75,000
6 Intangible assets
Goodwill 1,30,000
Patents 37,500
1,67,500
7 Non-current investments
Investments at cost 55,000
55,000

The Court approved a Scheme of re-organization to take effect on 1-4-20X2, whereby:

(i) The Preference shares to be written down to Rs 75 each and Equity Shares to Rs 2 each.
(ii) Of the Preference Share dividends which are in arrears for four years, three fourths to be waived and
Equity Shares of Rs 2 each to be allotted for the remaining quarter.
(iii) Interest payable on debentures to be paid in cash.
(iv) Debenture-holders agreed to take over freehold property, book value Rs 1,00,000 at a valuation of Rs
1,20,000 in part repayment of their holdings and to provide additional cash of Rs 1,30,000 secured by a
floating charge on company’s assets at an interest rate of 8% p.a.
(v) Patents and Goodwill to be written off.
(vi) Inventory to be written off by Rs 65,000.
(vii) Amount of Rs 68,500 to be provided for bad debts.
(viii) Remaining freehold property after giving to debenture holders, to be re-valued at Rs 3,87,500.
(ix) Investments be sold for Rs 1,40,000.
(x) Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares of Rs 2 each
and as to 5% in cash, and balance 5% being waived.
(xi) There were capital commitments totalling Rs 2,50,000. These contracts are to be cancelled on payment
of 5% of the contract price as a penalty.
(xii) Ignore taxation and cost of the scheme.
You are requested to show Journal entries reflecting the above transactions (including cash transactions)
and prepare the Balance Sheet of the company after completion of the Scheme.

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Solution
Journal of A & Co. Ltd.
Dr. Cr.
Rs Rs
20X2 Equity Share Capital A/c (Rs 10) Dr. 7,50,000
April 1 To Capital Reduction A/c 6,00,000
To Equity Share Capital A/c (Rs 1,50,000
2)

(Reduction of equity shares of Rs 10 each to

shares of Rs 2 each as per Reconstruction
Scheme dated...)
” 6% Cum. Preference Share Capital A/c Dr. 4,00,000
(Rs 100)
To Capital Reduction A/c 1,00,000
To Pref. Share Capital A/c (Rs 75) 3,00,000
(Reduction of preference shares of Rs 100
each to shares of Rs 75 each as per
reconstruction scheme)
” Capital Reduction Account Dr. 24,000
To Equity Share Capital Account 24,000
(Arrears of preference dividends satisfied by the
issue of equity shares, 25% of the amount due,
Rs 96,000)
” Freehold Property A/c Dr. 82,500
To Capital Reduction A/c 82,500
(Appreciation in the value of property:
Book value Revalued Figure
Rs 1,00,000 Rs 1,20,000
Rs 3,25,000 Rs 3,87,500
Total Rs 4,25,000 Rs 5,07,500
Profit on revaluation: Rs 82,500)
” 6% Debentures A/c Dr. 1,20,000
To Freehold Property A/c 1,20,000
(Claims of debenture-holders, in part, in
respect of principal discharged by transfer of
freehold property vide Scheme of
Reconstruction)
” Interest payable A/c Dr. 22,500
To Bank A/c 22,500
(Debenture interest paid)

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” Bank A/c Dr. 1,30,000

To 8% Debentures A/c 1,30,000
(8% Debentures issued for cash)
” Bank A/c Dr. 1,40,000
To Investment A/c 55,000
To Capital Reduction A/c 85,000
(Sale of Investment for Rs 1,40,000 cost being
Rs 55,000; profit credited to Capital Reduction
Account)
” Directors’ Loan A/c Dr. 1,00,000
To Equity Share Capital A/c 90,000
To Bank A/c 5,000
To Capital Reduction A/c 5,000
(Directors’ loan discharged by issue of equity
shares of Rs 90,000, cash payments of Rs
5,000 and surrender of Rs 5,000, vide Scheme
of Reconstruction)
” Capital Reduction A/c Dr. 8,48,500
To Patents 37,500
To Goodwill 1,30,000
To Inventory 65,000
To Provision for Doubtful Debts 68,500
To Bank 12,500
To Profit & Loss Account 5,35,000
(Writing off patents, goodwill, profit and loss
account and reducing the value of stock,
making the required provision for doubtful
debts and payment for cancellation of capital
commitments)
Note: Penalty charges for cancellation of the contract amounts to Rs 12,500 (2,50,000X5%) being paid in
cash.

Balance Sheet of A & Co. Ltd. (And Reduced) as at 1st April, 20X2
Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 5,64,000
2 Non-current liabilities
A Long-term borrowings 2 3,85,000
3 Current liabilities

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A Trade Payables 3,00,000

12,49,000
Assets Total
1 Non-current assets
A Property, plant and equipment 3 4,37,500
B Intangible assets 4 -
2 Current assets
A Inventories 3,60,000
B Trade receivables 5 4,16,500
C Cash and cash equivalents 35,000
12,49,000
Total

Notes to accounts
1 Share Capital
Equity share capital
1,32,000 Equity shares of 2 each (of the above57,000 2,64,000
shares have been issued for consideration other than
cash)
Preference share capital
4,000 6% Preference shares of 75 each 3,00,000
Total 5,64,000

2 Long-term borrowings
Secured
6% Debentures 2,55,000
8% Debentures 1,30,000
Total 3,85,000
3 Property, plant and equipment
Freehold property 4,25,000
Add: Appreciation under scheme of Reconstruction 82,500
Less: Disposed of (1,20,000) 3,87,500
Plant 50,000
Net carrying value 4,37,500
4 Intangible assets
Goodwill 1,30,000
Less: Written off under scheme of Reconstruction (1,30,000)
Net carrying value NIL
Patents 37,500
(37,500) -

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Less: Written off under scheme of Reconstruction - NIL

5 Net carrying value 4,85,000
Trade Receivables 68,500
Less: Provision for doubtful debts 4,16,500

4. Given below is the Balance sheet of Rebuilt Ltd. as at 31.3.20X1:

Particulars Notes
Equity and Liabilities
1
Shareholders’ funds
A Share capital 1 13,50,000
B Reserves and Surplus 2 (4,51,000)
Non-current liabilities
A Long-term borrowings (Loan) 3 5,73,000
Current liabilities
A Trade Payables 2,07,000
B Other current liabilities 35,000
Total 17,14,000
Assets
Non-current assets
A Property, plant and equipment 4 6,68,000
B Intangible assets 5 3,18,000
Current assets
A Inventories 4,00,000
B Trade receivables 3,28,000
Total 17,14,000

Notes to accounts
Rs
1 Share Capital
Equity share capital 7,50,000
15,000 Equity Shares of Rs 50 each
Preference share capital
12,000, 7% Cumulative Preference Shares of Rs 50 each
(Preference dividend is in arrears for five years) 6,00,000
Total 13,50,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (4,51,000)
(4,51,000)
3 Long-term borrowings

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Loan 5,73,000
5,73,000
4 Property, plant and Equipment
Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,68,000
6,68,000
5 Intangible assets
Trademarks and Goodwill at cost 3,18,000
3,18,000

The Company is not earning profits, short of working capital and a scheme of reconstruction has been
approved by both the classes of shareholders. A summary of the scheme is as follows:
(a) The equity shareholders have agreed that their Rs 50 shares should be reduced to Rs 2.50 by
cancellation of Rs 47.50 per share. They have also agreed to subscribe for three new equity shares of Rs
2.50 each for each equity share held.
(b) The preference shareholders have agreed to cancel the arrears of dividends and to accept for each Rs 50
share, 4 new 5% preference shares of Rs 10 each, plus 6 new equity shares of Rs 2.50 each, all credited as
fully paid.
(c) Lenders to the company for Rs 1,50,000 have agreed to convert their loan into share and for this
purpose they will be allotted 12,000 new preference shares of Rs 10 each and 12,000 new equity shares of
Rs 2.50 each.
(d) The directors have agreed to subscribe in cash for 40,000, new equity shares of Rs 2.50 each in addition
to any shares to be subscribed by them under (a) above.
(e) Of the cash received by the issue of new shares, Rs 2,00,000 is to be used to reduce the loan due by the
company.
(f) The equity share capital cancelled is to be applied:
i. to write off the debit balance in the profit and loss A/c; and
ii. to write off Rs 35,000 from the value of plant.

Any balance remaining is to be used to write down the value of trademarks and goodwill.

Show by journal entries how the financial books are affected by the scheme and prepare the balance sheet
of the company after reconstruction. The nominal capital as reduced is to be increased to Rs 6,50,000 for
preference share capital and Rs 7,50,000 for equity share capital.

Solution
In the books of Rebuilt Ltd.
Journal Entries
Particulars Debit Credit

1. Equity share capital A/c (50) Dr. 7,50,000

To Equity share capital A/c (2.50) 37,500
To Capital reduction A/c 7,12,500
(Being equity capital reduced to nominal value
of 2.50 each)
2. Bank A/c Dr. 1,12,500

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To Equity share capital 1,12,500

(Being 3 right shares against each share was
issued and subscribed)
3. 7% Preference share capital A/c (50) Dr. 6,00,000
Capital reduction A/c Dr. 60,000
To 5% Preference share capital ( 10) 4,80,000
To equity share capital (50) 1,80,000
(Being 7% preference shares of 50 each
converted to 5% preference shares of 10 each
and also given to them 6 equity shares for
every share held)
4. Loan A/c Dr. 1,50,000
To 5% Preference share capital A/c 1,20,000
To Equity share capital A/c 30,000
(Being loan to the extent of 1,50,000
converted into share capital)
5. Bank A/c Dr. 1,00,000
To Equity share application money A/c 1,00,000
(Being shares subscribed by the directors)

6. Equity share application money A/c Dr. 1,00,000

To Equity share capital A/c 1,00,000
(Being application money transferred to capital
A/c)
7. Loan A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being loan repaid)
8. Capital reduction A/c Dr. 6,52,500
To Profit and loss A/c 4,51,000
To Plant A/c 35,000
To Trademarks and Goodwill A/c (Bal.fig.) 1,66,500
(Being losses and assets written off to the
extent required)

Balance sheet of Rebuilt Ltd. (and reduced) as at 31.3.20X1

Particulars Notes
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 10,60,000
2 Non-current liabilities
a Long-term borrowings 2,23,000
3 Current liabilities
a Trade Payables 2,07,000
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b Other current liabilities 35,000

Total 15,25,000
Assets
1 Non-current assets
a Property, plant and equipment 2 6,33,000
b Intangible assets 3 1,51,500

2 Current assets
a Inventories 4,00,000
b Trade receivables 3,28,000
c Cash and cash equivalents 4 12,500
Total 15,25,000

Notes to accounts
`
1. Share Capital
Authorized capital:
65,000 Preference shares of 10 each 6,50,000
3,00,000 Equity shares of 2.50 each 7,50,000 14,00,000
Issued, subscribed and paid up:
1,80,000 equity shares of 2.5 each 4,60,000
60,000, 5% Preference shares of 10 each 6,00,000 10,60,000
2. Property plant and equipment
Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,33,000 6,33,000
3. Intangible assets
Trademarks and goodwill 1,51,500
4. Cash and cash equivalents
Bank (1,12,500+1,00,000-2,00,000) 12,500

5. Repair Ltd. is in the hands of a receiver for debenture holders who hold a charge on all assets except
uncalled capital. Repair Ltd. gives the following information as regards creditors on 31st March,
20X1:

Property, plant and equipment (Cost 3,90,000) - estimated at 1,50,000

Cash in hand of the receiver 2,70,000
Charged under debentures 4,20,000
Uncalled capital 1,80,000
Deficiency 7,50,000
6,000 shares of 60 each, 30 paid up 1,80,000

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First debentures 3,00,000

Second debentures 6,00,000
Unsecured trade payables 4,50,000
A holds the first debentures for Rs 3,00,000 and second debentures for Rs 3,00,000. He is also an unsecured
creditor for Rs 90,000. B holds second debentures for Rs 3,00,000 and is an unsecured trade payables for Rs
60,000.

The following scheme of reconstruction is proposed:

1. A is to cancel Rs 2,10,000 of the total debt owing to him, to bring Rs 30,000 in cash and to take first
debentures (in cancellation of those already issued to him) for Rs 5,10,000 in satisfaction of all his claims.
2. B is to accept Rs 90,000 in cash in satisfaction of all claims by him.
3. In full settlement of 75% of the claim, unsecured creditors (other than A and B) agreed to accept four
shares of Rs 7.50 each, fully paid against their claim for each share of Rs 60. The balance of 25% is to be
postponed and to be payable at the end of three years from the date of Court’s approval of the scheme.
The nominal share capital is to be increased accordingly.
4. Uncalled capital is to be called up in full and Rs 52.50 per share cancelled, thus making the shares of Rs
7.50 each.
Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary
journal entries.

Solution
Journal Entries
Particulars Debit Credit

First debentures A/c Dr. 3,00,000

Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 90,000
To A’s A/c 6,90,000
(Being A’s total liability ascertained)

A’s A/c Dr. 2,10,000

To Capital reduction A/c 2,10,000
(Being cancellation of debt upto ` 2,10,000)
Bank A/c Dr. 30,000
To A’s A/c 30,000
(Being cash received in course of settlement)
A’s A/c Dr. 5,10,000
To First debentures A/c 5,10,000
(Being liability of A, discharged against first
debentures)
Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 60,000
To B’s A/c 3,60,000
(Being B’s liability ascertained)

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B’s A/c Dr. 3,60,000

To Bank A/c 90,000
To Capital reduction A/c 2,70,000
(Being B’s liability discharged)
Unsecured trade payables A/c Dr. 3,00,000
To Equity share capital A/c 1,12,500
To Loan (Unsecured) A/c 75,000
To Capital reduction A/c 1,12,500
(Being settlement of unsecured creditors)
Share call A/c Dr. 1,80,000
To Share capital A/c 1,80,000
(Being final call money due)
Bank A/c Dr. 1,80,000
To Share call A/c 1,80,000
(Being final call money received)

Share capital A/c (Face value ` 60) Dr. 3,60,000

To Share capital (Face value ` 7.50) 45,000
To Capital reduction A/c 3,15,000
(Being share capital reduced to ` 7.50 each)
Capital reduction A/c Dr. 9,07,500
To Profit and loss A/c 8,70,000
To Capital Reserve 37,500
(Being reconstruction surplus used to write off
losses and balance transfer to capital reserve)

Working Notes:
1. Settlement of claim of remaining unsecured creditors
75% of ` 3,00,000 2,25,000
Considering their claim for share of ` 60 each
2,25,000/60 =3,750 shares
Less: Number of shares to be issued
3,750 x 4= 15,000 shares of ` 7.5 each
Total value= 15,000 x 7.50 (1,12,500)
Transferred to Capital reduction A/c 1,12,500

2. Ascertainment of profit and loss account’s debit balance at the time of reconstruction
` `
Asset
Property, plant and equipment 3,90,000
Cash 2,70,000 6,60,000

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Less: Capital & Liabilities:

Share capital 1,80,000
1st Debenture 3,00,000
nd
2 Debenture 6,00,000
Unsecured trade payables 4,50,000 (15,30,000)
Profit and loss A/c (Debit balance) (8,70,000)

6. Vaibhav Ltd. gives the following ledger balances as at 31st March 20X1:
Rs
Property, Plant and Equipment 2,50,00,000
Investments (Market-value Rs 19,00,000) 20,00,000
Current Assets 2,00,00,000
P & L A/c (Dr. balance) 12,00,000
Share Capital: Equity Shares of Rs 100 each 2,00,00,000
6%, Cumulative Preference Shares of Rs 100 each 1,00,00,000
5% Debentures of Rs 100 each 80,00,000
Creditors 1,00,00,000
Provision for taxation 2,00,000

The following scheme of Internal Reconstruction is sanctioned:

(i) All the existing equity shares are reduced to Rs 40 each.
(ii) All preference shares are reduced to Rs 60 each.
(iii) The rate of Interest on Debentures increased to 6%. The Debenture holders surrender their existing
debentures of Rs 100 each and exchange the same for fresh debentures of Rs 70 each for every debenture
held by them.
(iv) Property, Plant and Equipment is to be written down by 20%.
(v) Current assets are to be revalued at Rs 90,00,000.
(vi) Investments are to be brought to their market value.
(vii) One of the creditors of the company to whom the company owes Rs 40,00,000 decides to forgo 40% of
his claim. The creditor is allotted with 60000 equity shares of Rs 40 each in full and final settlement of his
claim.
(viii) The taxation liability is to be settled at Rs 3,00,000.
(ix) It is decided to write off the debit balance of Profit & Loss A/c.

Pass journal entries and show the Balance Sheet of the company after giving effect to the above.

Solution
Journal Entries in the books of Vaibhav Ltd.

(i) Equity share capital ( 100) A/c Dr. 2,00,00,000

To Equity Share Capital ( 40) A/c 80,00,000
To Capital Reduction A/c 1,20,00,000

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(Being conversion of equity share capital of

100 each into 40 each as per reconstruction
scheme)
(ii) 6% Cumulative Preference Share capital 1,00,00,000
( 100) A/c Dr.
To 6% Cumulative Preference Share 60,00,000
Capital ( 60)A/c
To Capital Reduction A/c 40,00,000
(Being conversion of 6% cumulative preference
shares capital of 100 each into
60 each as per reconstruction scheme)
(iii) 5% Debentures (100) A/c Dr. 80,00,000
To 6% Debentures (70) A/c 56,00,000
To Capital Reduction A/c 24,00,000
(Being 6% debentures of 70 each issued to
existing 5% debenture holders. The balance
transferred to capital reduction account as per
reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 40,00,000
To Equity Share Capital (40) A/c 24,00,000
To Capital Reduction A/c 16,00,000
(Being a creditor of 40,00,000 agreed to surrender
his claim by 40% and was allotted 60,000 equity
shares of 40 each in full settlement of his dues as
per reconstruction scheme)

(v) Provision for Taxation A/c Dr. 2,00,000

Capital Reduction A/c Dr. 1,00,000

To Liability for Taxation A/c 3,00,000

(Being conversion of the provision for taxation
into liability for taxation for settlement of the
amount due)
(vi) Capital Reduction A/c Dr. 199,00,000
To P & L A/c 12,00,000
To Property, Plant and Equipment A/c 50,00,000
To Current Assets A/c 110,00,000
To Investments A/c 1,00,000
To Capital Reserve A/c (Bal. fig.) 26,00,000
(Being amount of Capital Reduction utilized in
writing off P & L A/c (Dr.) Balance, PPE, Current
Assets, Investments and the Balance transferred
to Capital Reserve)
(vii) Liability for Taxation A/c Dr. 3,00,000
To Current Assets (Bank A/c) 3,00,000
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(Being the payment of tax liability)

Balance Sheet of Vaibhav Ltd. (and reduced) as at 31st March, 20X1

Particulars Notes
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 164,00,000
b Reserves and Surplus 2 26,00,000
2 Non-current liabilities
Long-term borrowings 3 56,00,000
3 Current liabilities
Trade Payables (1,00,00,000 less 40,00,000) 60,00,000
Total 3,06,00,000
Assets
1 Non-current assets
a Property, plant and equipment 4 2,00,00,000

b Investments 5 19,00,000
2 Current assets 6 87,00,000
Total 3,06,00,000

Notes to accounts

1. Share Capital
Equity share capital
Issued, subscribed and paid up
2,60,000 equity shares of 40 each
(of the above 60,000 shares have been issued 1,04,00,000
for consideration other than cash)
Preference share capital
Issued, subscribed and paid up
1,00,000 6% Cumulative Preference shares of
60,00,000
60 each
Total 1,64,00,000
2. Reserves and Surplus
Capital Reserve 26,00,000
3. Long-term borrowings
Secured
6% Debentures 56,00,000
4. Property, Plant and Equipment
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Carrying value 2,50,00,000

Adjustment under scheme of reconstruction (50,00,000) 2,00,00,000
5. Investments
20,00,000
Adjustment under scheme of reconstruction (1,00,000) 19,00,000
6. Current assets
2,00,00,000
Adjustment under scheme of reconstruction (1,10,00,000)
90,00,000
Taxation liability paid (3,00,000) 87,00,000

Working Note:
Capital Reduction Account
To Liability for taxation 1,00,000 By Equity share capital 1,20,00,000
A/c
To P & L A/c 12,00,000 By 6% Cumulative
To Property, plant and preferences
equipment 50,00,000
To Current assets 1,10,00,000 Share capital 40,00,000
To Investment 1,00,000 By 5% Debentures 24,00,000
To Capital Reserve
(Bal. fig.) 26,00,000 By Sundry creditors 16,00,000
2,00,00,000 2,00,00,000

7. Following is the Balance Sheet of ABC Ltd. as at 31st March, 20X1:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 26,00,000
B Reserves and Surplus 2 (4,05,000)
2 Non-current liabilities
A Long-term borrowings 3 12,00,000
3 Current liabilities
A Trade Payables 5,92,000
B Short term borrowings - Bank overdraft 1,50,000
Total 41,37,000
Assets
1 Non-current assets
A Property, plant and equipment 4 11,50,000
B Intangible assets 5 70,000

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C Non-current investment 6 68,000

2
Current assets
A Inventory 14,00,000
B Trade receivables 14,39,000
C Cash and cash equivalents 10,000
Total 41,37,000

Notes to accounts:
Rs
1 Share Capital
Equity share capital:
2,00,000 Equity Shares of Rs 10 each 20,00,000
6,000, 8% Preference shares of Rs 100 each 6,00,000
26,00,000
2 Reserves and Surplus
Debit balance of Profit and loss A/c (4,05,000)
(4,05,000)
3 Long-term borrowings
9% debentures 12,00,000
12,00,000
4 Property, Plant and Equipment
Plant and machinery 9,00,000
Furniture and fixtures 2,50,000
11,50,000
5 Intangible assets
Patents and copyrights 70,000
70,000
6 Non-current investments
Investments (market value of Rs 55,000) 68,000
68,000

The following scheme of reconstruction was finalized:

(i) Preference shareholders would give up 30% of their capital in exchange for allotment of 11% Debentures
to them.
(ii) Debenture holders having charge on plant and machinery would accept plant and machinery in full
settlement of their dues.
(iii) Inventory equal to Rs 5,00,000 in book value will be taken over by trade payables in full settlement of
their dues.
(iv) Investment value to be reduced to market price.
(v) The company would issue 11% Debentures for Rs 3,00,000 and augment its working capital requirement
after settlement of bank overdraft.
Pass necessary Journal Entries in the books of the company. Prepare Capital Reduction account and Balance
Sheet of the company after internal reconstruction.

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Solution
In the Books of ABC Ltd.
Journal Entries
Particulars
8% Preference share capital A/c Dr. 6,00,000
To 11% Debentures A/c 4,20,000
To Capital reduction A/c 1,80,000
[Being 30% reduction in liability of preference share
capital and issue of 11% debentures]
9% Debentures A/c Dr. 12,00,000
To Plant & machinery A/c 9,00,000
To Capital reduction A/c 3,00,000
[Settlement of debenture holders by allotment of
plant & machinery]
Trade payables A/c Dr. 5,92,000
To Inventory A/c 5,00,000
To Capital reduction A/c 92,000
[Being settlement of creditors by giving Inventories]

Bank A/c Dr. 3,00,000

To 11% Debentures A/c 3,00,000
[Being fresh issue of debentures]
Bank overdraft A/c Dr. 1,50,000
To Bank A/c 1,50,000
[Being settlement of bank overdraft]
Capital reduction A/c Dr. 5,72,000
To Investment A/c 13,000
To Profit and loss A/c 4,05,000
To Capital reserve A/c 1,54,000
[Being decrease in investment and profit and loss
account (Dr. bal.); and balance of capital reduction
account transferred to capital reserve]

Capital Reduction Account

To Investments A/c 13,000 By Preference share capital A/c 1,80,000

To Profit and loss A/c 4,05,000 By 9% Debenture holders A/c 3,00,000
To Capital reserve A/c 1,54,000 By Trade payables A/c 92,000
5,72,000 5,72,000

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Balance Sheet of ABC Ltd. (And Reduced) As at 31st March 20X1

Particulars Note No
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 20,00,000
(b) Reserves and Surplus 2 1,54,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 7,20,000
Total 28,74,000

II. Assets
(1) Non-current assets
(a) Property, plant and equipment 4 2,50,000
(b) Intangible assets 5 70,000
(c) Non-current investments 6 55,000
(2) Current assets
(a) Inventories (Rs 14,00,000 – Rs 9,00,000
5,00,000)
(b) Trade receivables 14,39,000
(c) Cash and cash equivalents
Cash at Bank (W. N.) 1,60,000
Total 28,74,000

Notes to Accounts

1. Share Capital
2,00,000 Equity shares of Rs 10 each fully paid-up 20,00,000
2. Reserve and Surplus
Capital Reserve 1,54,000
3. Long Term Borrowings
11% Debentures (Rs 4,20,000 + Rs 3,00,000) 7,20,000
4. Property, Plant and Equipment
Plant & machinery 9,00,000
Less: Adjustment on scheme of reconstruction 9,00,000 -
Furniture & fixtures 2,50,000
5 Intangible assets
Patents & copyrights 70,000
3,20,000
6. Non-Current Investments
Investments (Rs 68,000 – Rs 13,000) 55,000
Working Note:
Cash at bank = Opening balance + 11% Debentures issued – Bank overdraft paid
= Rs 10,000 + Rs 3,00,000 – Rs 1,50,000 = Rs 1,60,000
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8. The balance sheet of Indu Ltd as at 31st March was as follows-

Liabilities Amount Assets Amount
10,000 Equity shares of Rs 100 10,00,000 Machinery 3,50,000
each
15% Debentures 3,00,000 Stock 2,53,000
Accrued Interest 45,000 Debtors 2,30,000
Creditors 52,000 Bank 20,000
Provisions for Income Tax 36,000 P&L a/c 5,80,000
TOTAL 14,33,000 TOTAL 14,33,000

Following scheme of reconstruction has been approved –

• Each share shall be sub divided into 10 fully paid shares of Rs 10 each
• After sub division each shareholder shall surrender to the company, 50% of his holdings for the
purpose of re issue to debenture holders and creditors.
• Out of the shares surrendered, 10,000 shares of Rs 10 each shall be converted into 10% preference
shares of Rs 10 each fully paid up.
• The claims of debenture holders shall be reduced by 50%. In consideration of the reduction, the
debenture holders shall receive preference shares of Rs 1,00,000 which are converted out of shares
surrendered.
• Creditors claim shall be reduced by 25% and balance claim is to be settled by the issue of equity
shares of Rs 10 each out of the shares surrendered.
• Balance of P&L a/c to be written off.
• The shares surrendered and not reissued shall be cancelled. Journalize

9. Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by the
court-
1. Furniture and Fixtures which stood at the books at Rs 1,50,000 to be written down to Rs 95,000. The
freehold premises which was valued at Rs 7,00,000 showed an appreciation of Rs 55,000.
2. Plant and machinery showed fall in value of Rs 89,000, to be recorded in the books. Investment at Rs
2,00,000 was brought down to the existing market value at Rs 1,05,000.
3. Debenture holders accepted to receive the following in lieu of their present 9% debentures of Rs
2,50,000-
a. 1/5th of the total to be paid in cash to them.
b. To take over the land and buildings of value Rs 72,000.
c. To forgo the remaining unpaid portion as a policy of reconstruction.

Write off the profit and loss A/c debit balance at Rs 70,000 which had been accumulated over the years. In
case of any shortfall, the balance of the General reserve of Rs 1,50,000 can be utilized to write off the losses
under reconstruction scheme.

Show the necessary journal entries as part of the reconstruction process considering that balance in general
reserve utilized to write off the losses as per reconstruction scheme.

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SOLUTION-
Journal entries in the books of Parth Ltd.
Dr. Cr.
Reconstruction A/c Dr. 2,39,000
To Furniture and Fixtures A/c 55,000
To Plant and machinery A/c 89,000

To Investment A/c 95,000

(Writing off overvalued assets as per Reconstruction
Scheme dated.)
Freehold premises A/c Dr. 55,000
To Reconstruction A/c 55,000
(Being the increase in the premises credited to
reconstruction account as per reconstruction scheme)
9% Debentures A/c Dr. 2,50,000
To Bank A/c 50,000
To Land and building A/c 72,000
To Reconstruction A/c 1,28,000
(Being the debenture holders claim settled partly and
foregone partly as per reconstruction scheme)
Reconstruction A/c Dr. 70,000
To Profit and loss A/c 70,000
(Being the loss written off as per reconstruction
scheme)
General reserve A/c Dr. 1,26,000
To Reconstruction A/c 1,26,000
(Being the balance in general reserve utilized to write
off the losses as per reconstruction scheme)

10. The following scheme of reconstruction has been approved for Win Limited:
(i) The shareholders to receive in lieu of their present holding at 1,00,000 shares of Rs 10 each, the
following:
(a) New fully paid Rs 10 Equity shares equal to 3/5th of their holding.
(b) 10% Preference shares fully paid to the extent of 1/5th of the above new equity shares.
(c) Rs 40,000, 8% Debentures.
(ii) An issue of Rs 1 lakh 10% first debentures was made and allotted, payment for the same being received
in cash forthwith.
(iii) Goodwill which stood at Rs 1,40,000 was completely written off.
(iv) Plant and machinery which stood at Rs 2,00,000 was written down to Rs 1,50,000.
(v) Freehold property which stood at Rs 1,50,000 was written down by Rs 50,000.

You are required to draw up the necessary Journal entries in the Books of Win Limited for the above
reconstruction. Suitable narrations to Journal entries should form part of your answer.

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SOLUTION-
Journal Entries
` `
Equity Share Capital (old) A/c Dr. 10,00,000
To Equity Share Capital (` 10) A/c 6,00,000
To 10% Preference Share Capital A/c 1,20,000
To 8% Debentures A/c 40,000
To Capital Reduction A/c 2,40,000
(Being new equity shares, 10% Preference Shares,
8% Debentures issued and the balance transferred
to Reconstruction account as per the Scheme)

Bank A/c Dr. 1,00,000

To 10% First Debentures A/c 1,00,000
(Being allotment of 10% first Debentures)
Capital Reduction A/c Dr. 2,40,000
To Goodwill Account 1,40,000
To Plant and Machinery Account 50,000
To Freehold Property Account 50,000
(Being Capital Reduction Account utilized for
writing off of Goodwill, Plant and Machinery and
Freehold property as per the scheme)

11. Green Limited had decided to reconstruct the Balance Sheet since it has accumulated huge losses.
The following is the Balance Sheet of the Company as at 31.3.20X1 before reconstruction:
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 65,00,000
B Reserves and Surplus 2 (20,00,000)
2 Non-current liabilities
A Long-term borrowings 3 15,00,000
3 Current liabilities Total
A Trade Payables 5,00,000
65,00,000

Assets
1 Non-current assets
A Property, plant and equipment 4 45,00,000
B Intangible assets 5 20,00,000
2 Current assets Nil
Total 65,00,000

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Notes to accounts
Rs
1 Share Capital
Equity share capital
Authorized share capital
75,00,000
1,50,000 Equity shares of Rs 50 each
Issued, subscribed and paid up capital
50,000 Equity Shares of Rs 50 each 25,00,000
1,00,000 Equity shares of Rs 50 each, Rs 40 paid up 40,00,000
65,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (20,00,000)
(20,00,000)
3 Long-term borrowings
Secured: 12% First debentures 5,00,000
12% Second debentures 10,00,000
15,00,000
4 Property, Plant and Equipment
Building 10,00,000
Plant 10,00,000
Computers 25,00,000
45,00,000
5 Intangible assets
Goodwill 20,00,000
20,00,000

The following is the interest of Mr. X and Mr. Y in Green Limited:

Mr. X Mr. Y
Rs Rs
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
Trade payables 2,00,000 1,00,000
12,00,000 6,00,000
Fully paid up Rs 50 shares 3,00,000 2,00,000
Partly paid up shares (Rs 40 paid up) 5,00,000 5,00,000

The following Scheme of Reconstruction is approved by all parties interested and also by the Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be converted
into equity shares of Rs 20 each.
(b) Mr. X is to cancel Rs 7,00,000 of his total debt (other than share amount) and to pay Rs 2 lakhs to the
company and to receive new 14% First Debentures for the balance amount.
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(c) Mr. Y is to cancel Rs 3,00,000 of his total debt (other than equity shares) and to accept new 14% First
Debentures for the balance.
(d) The amount thus rendered available by the scheme shall be utilised in writing off of Goodwill, Profit and
Loss A/c Loss and the balance to write off the value of computers.

You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the
reconstructed company.

SOLUTION-
Journal Entries in books of Green Limited
Dr. Cr.
Rs Rs
Bank Account Dr. 10,00,000
To Equity Share Capital Account 10,00,000
(Balance of Rs 10 per share on 1,00,000 equity shares
called up as per reconstruction scheme)

Equity Share Capital Account (Rs 50) Dr. 75,00,000

To Equity Share Capital Account (Rs 20) 30,00,000

To Capital Reduction Account 45,00,000

(Reduction of equity shares of Rs 50 each to shares of

Rs 20 each as per reconstruction scheme)

12% First Debentures Account Dr. 3,00,000

12% Second Debentures Account Dr 7,00,000
Trade payables Account Dr. 2,00,000
To X 12,00,000

(The total amount due to X, transferred to his account)

Bank Account Dr 2,00,000

To X 2,00,000

(The amount paid by X under the reconstruction

scheme)

12% First Debentures Account Dr. 2,00,000

12% Second Debentures Account Dr 3,00,000
Trade payables Account Dr. 1,00,000
To Y 6,00,000

(The total amount due to Y, transferred to his account)

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Y A/c Dr 6,00,000
To 14% First Debentures Account 3,00,000

To Capital Reduction Account 3,00,000

(The amount due to Y discharged by issue of 14% first

debentures)

X A/c Dr 14,00,000
To 14% First Debentures Account 7,00,000

To Capital Reduction Account 7,00,000

(The amount due to X discharged by issue of 14% first

debentures)

Capital Reduction Account Dr 55,00,000

To Goodwill Account 20,00,000

To Profit and Loss Account 20,00,000

To Computers Account 15,00,000

(The balance amount of capital reduction account
utilised in writing off goodwill, profit and loss account,
and computers - Working Note)

Balance Sheet of Green Limited (and reduced) as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
2 Non-current liabilities
a Long-term borrowings 2 10,00,000
3 Current liabilities
a Trade Payables 2,00,000
Total 42,00,000
Assets
1 Non-current assets
a Property, plant and equipment 3 30,00,000
2 Current assets
Cash and cash equivalents 12,00,000
Total 42,00,000

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Notes to accounts
`
1. Share Capital
Equity share capital
Issued, subscribed and paid up
1,50,000 equity shares of ` 20 each 30,00,000
Total 30,00,000
2. Long-term borrowings
Secured
14% First Debentures 10,00,000
Total 10,00,000

3. Property, Plant and Equipment

Building 10,00,000
Plant 10,00,000
Computers 10,00,000
Total 30,00,000

Working Note:
Capital Reduction Account

To Goodwill A/c 20,00,000 By Equity Share Capital A/c 45,00,000

To P & L A/c 20,00,000 By X 7,00,000
To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000
55,00,000 55,00,000

12. The following is the Balance Sheet of Weak Ltd. as at 31.3.20X1:

Particulars Notes Rs
Equity and Liabilities
1
Shareholders’ funds
A Share capital 1 1,50,00,000
B Reserves and Surplus 2 (6,00,000)

2 Non-current liabilities
A Long-term borrowings 3 40,00,000
3 Current liabilities
A Trade Payables 50,00,000
B Short term provisions 4 1,00,000
Total 2,35,00,000

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Assets
1 Non-current assets
A Property, plant and equipment 1,25,00,000
B Non-current investment 5 10,00,000
2 Current assets 1,00,00,000
Total 2,35,00,000

Notes to accounts
Rs
1 Share Capital
Equity share capital
1,00,000 Equity Shares of Rs 100 each 1,00,00,000
50,000, 12% Cumulative Preference shares of Rs 100 each 50,00,000
1,50,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (6,00,000)
(6,00,000)
3 Long-term borrowings
40,000, 10% debentures of Rs100 each 40,00,000
40,00,000
4 Short term provisions
Provision for taxation 1,00,000
1,00,000
5 Non-current investments
Investments (market value of Rs 9,50,000) 10,00,000
10,00,000

The following scheme of reorganization is sanctioned:

(i) All the existing equity shares are reduced to Rs 40 each.
(ii) All preference shares are reduced to Rs 60 each.
(iii) The rate of interest on debentures is increased to 12%. The debenture holders surrender their existing
debentures of Rs 100 each and exchange the same for fresh debentures of Rs 70 each for every debenture
held by them.
(iv) One of the creditors of the company to whom the company owes Rs 20,00,000 decides to forgo 40% of
his claim. He is allotted 30,000 equity shares of Rs 40 each in full satisfaction of his claim.
(v) Property, plant and equipment are to be written down by 30%.
(vi) Current assets are to be revalued at Rs 45,00,000.
(vii) The taxation liability of the company is settled at Rs 1,50,000.
(viii) Investments to be brought to their market value.
(ix) It is decided to write off the debit balance of Profit and Loss account.

Pass Journal entries and show the Balance sheet of the company after giving effect to the above.

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SOLUTION-
Journal Entries in the books of Weak Ltd.

(i) Equity share capital (Rs 100) A/c Dr. 1,00,00,000

To Equity Share Capital (Rs 40) A/c 40,00,000
To Capital Reduction A/c 60,00,000
(Being conversion of equity share capital of
Rs 100 each into Rs 40 each as per
reconstructionscheme)
(ii) 12% Cumulative Preference Share capital 50,00,000
(Rs 100) A/c Dr.
To 12% Cumulative Preference Share 30,00,000
Capital (Rs 60) A/c
To Capital Reduction A/c 20,00,000
(Being conversion of 12% cumulative preference
share capital of Rs 100 each into Rs 60 each as per
reconstruction scheme)

(iii) 10% Debentures A/c Dr. 40,00,000

To 12% Debentures A/c 28,00,000
To Capital Reduction A/c 12,00,000
(Being 12% debentures issued to 10% debenture-
holders for 70% of their claims. The balance
transferred to capital reduction account as per
reconstruction scheme)
(iv) Trade payables A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
To Capital Reduction A/c 8,00,000
(Being a creditor of Rs 20,00,000 agreed to
surrender his claim by 40% and was allotted
30,000 equity shares of Rs 40 each in full
settlement of his dues as per reconstruction
scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Capital Reduction A/c Dr. 50,000
To current assets(bank A/c) A/c 1,50,000
(Being liability for taxation settled)
(vi) Capital Reduction A/c Dr. 99,00,000
To P & L A/c 6,00,000
To Property, plant and equipment A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000

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(Being amount of Capital Reduction utilized in

writing off P & L A/c (Dr.) Balance, Property, plant
and equipment, Current Assets, Investments
through capital reduction account)
(vii) Capital Reduction A/c Dr 50,000
50,000
To capital Reserve A/c
(Being balance in capital reduction account
transferred to capital reserve account)

Balance Sheet of Weak Ltd. (and reduced) as at 31.3.20X1

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 82,00,000
b Reserves and Surplus 2 50,000
2 Non-current liabilities
a Long-term borrowings 3 28,00,000
3 Current liabilities
a Trade Payables 30,00,000
Total 1,40,50,000
Assets
1 Non-current assets
a Property, plant and equipment 4 87,50,000
b Investments 5 9,50,000
2 Current assets 6 43,50,000
Total 1,40,50,000

Notes to accounts
Rs Rs
1. Share Capital
Equity share capital
Issued, subscribed and paid up
1,30,000 equity shares of Rs 40 each 52,00,000
Preference share capital
Issued, subscribed and paid up
50,000 12% Cumulative Preference shares of Rs 60 each 30,00,000
Total 82,00,000
2. Reserves and Surplus
50,000
Capital Reserve

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3. Long-term borrowings
Secured
12% Debentures 28,00,000
4. Property, plant and Equipment
1,25,00,000
Total PPE

(37,50,000)
Adjustment under scheme of reconstruction 87,50,000

5. Investments 10,00,000
Adjustment under scheme of reconstruction (50,000) 9,50,000
6. Current assets 45,00,000
Adjustment under scheme of reconstruction (1,50,000) 43,50,000

Working Note:
Capital Reduction Account
Rs Rs
To Current Asset 50,000 By Equity share capital 60,00,000
To P & L A/c 6,00,000 By 12% Cumulative 20,00,000
preference share
capital
To Property, plant and 37,50,000 By 10% Debentures 12,00,000
equipment
To Current assets 55,00,000 By Trade payables 8,00,000
To Investment 50,000
To Capital Reserve
(bal. fig.) 50,000
1,00,00,000 1,00,00,000

13. The following is the Balance Sheet of X Ltd. as at 31st March, 20X1:
Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 36,00,000
B Reserves and Surplus 2 (14,40,000)
2 Non-current liabilities
A Long-term borrowings 3 6,00,000
3 Current liabilities
A Trade Payables 3,00,000
B Short term borrowings - Bank overdraft 6,00,000
Total 36,60,000

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Assets
1 Non-current assets
A Property, plant and equipment 4 30,00,000
B Intangible assets 5 90,000
2 Current assets
a Inventories 2,60,000
b Trade receivables 2,80,000
C Cash and cash equivalents 30,000
Total 36,60,000

Notes to accounts
Rs
1 Share capital
24,000 Equity Shares of Rs 100 each 24,00,000
12,000, 10% Preference Shares of Rs 100 each 12,00,000
Total 36,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (14,40,000)
(14,40,000)
3 Long-term borrowings
10% debentures 6,00,000
6,00,000
4. Property, plant and Equipment
Land and Building 12,00,000
Plant and Machinery 18,00,000
30,00,000
5 Intangible assets
Goodwill 90,000
90,000

On the above date, the company adopted the following scheme of reconstruction:
(i) The equity shares are to be reduced to shares of Rs 40 each fully paid and the preference shares to be
reduced to fully paid shares of Rs 75 each.
(ii) The debenture holders took over Inventories and Trade receivables in full satisfaction of their claims.
(iii) The Land and Building to be appreciated by 30% and Plant and machinery to be depreciated by 30%.
(iv) The debit balance of profit and loss account and intangible assets are to be eliminated.
(v) Expenses of reconstruction amounted to Rs 5,000.
Give journal entries incorporating the above scheme of reconstruction and prepare the reconstructed
Balance Sheet

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SOLUTION-
In the books of X Ltd: Journal Entries
31st March, 20X1
(i) Equity Share Capital A/c (Rs 100) Dr. 24,00,000
To Equity Share Capital A/c (Rs 9,60,000
40)

To Capital Reduction A/c 14,40,000

(Being 24,000 equity shares of Rs 100 each
reduced to Rs 40 each fully paid up)
(ii) 10% Preference Share Capital A/c (Rs 100) Dr. 12,00,000
To 10% Preference Share Capital 9,00,000
A/c(Rs 75)
To Capital Reduction A/c 3,00,000
(Being 12,000 Preference shares of Rs 100
eachreduced to Rs 75 each fully paid up)
(iii) 10% Debentures A/c Dr. 6,00,000
To Inventories A/c 2,60,000
To Trade receivables A/c 2,80,000
To Capital Reduction A/c 60,000
(Being debenture holders given Inventories and
Trade receivables in full settlement of their claims)
(iv) Land & Building A/c Dr. 3,60,000
To Capital Reduction A/c 3,60,000
(Being Land & Building appreciated by 30%)
(v) Capital reduction A/c Dr. 5,000
To Cash A/c 5,000
(Being expenses of reconstruction paid)
(vi) Capital Reduction A/c Dr. 20,70,000
To Goodwill A/c 90,000
To Profit and Loss A/c 14,40,000
To Plant & Machinery A/c 5,40,000
(Being various losses written off, assets
writtendown through Capital Reserve A/c)
(vii) Capital Reduction Dr. 85,000
To Capital Reserve A/c (Bal. Fig.) 85,000
(Being balance in Capital Reduction
A/ctransferred to Capital Reserve A/c)

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Balance Sheet (And Reduced) of X Ltd as at 31st March, 20X1

Particulars Notes No. Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 18,60,000
b Reserves and Surplus 2 85,000
2 Current liabilities
a Trade Payables 3,00,000
b Short term borrowings 6,00,000
Total 28,45,000
Assets
1 Non-current assets
a Property, plant and equipment 3 28,20,000
2 Current assets
Cash and cash equivalents (30,000 -5,000) 25,000
Total 28,45,000

Notes to accounts
1. Share Capital Rs
Equity share capital
24,000 equity shares of Rs 40 each fully paid up 9,60,000
Preference share capital
12,000, 10% Preference shares of Rs 75
9,00,000
eachfully paid up
Total 18,60,000
2. Reserves and Surplus
Capital Reserve 85,000
3. Property, plant and Equipment
Land and Building 15,60,000
Plant and Machinery 12,60,000
Total 28,20,000

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ADDITIONAL QUESTIONS ON INTERNAL RECONSTRUCTION-

14. Recover Ltd decided to reorganize its capital structure owing to accumulated losses and adverse
market condition. The Balance Sheet of the company as on 31st March 2020 is as follows-
Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 3,50,000
B Reserves and surplus 2 (70,000)
2 Non-current liabilities
A Long-term borrowings 3 55,000

3 Current liabilities
A Trade Payables 80,000
B Short term Borrowings – Bank overdraft 90,000
5,05,000
Assets
1 Non-current assets
A Property, Plant Equipment 4 3,35,000
B Intangible assets 5 50,000
C Non-current investments 6 40,000
2 Current assets
A Inventories 30,000
B Trade receivables 50,000
5,05,000

Notes to accounts:

1 Share Capital Rs
Equity share capital:
20,000 Equity Shares of Rs 10 each 2,00,000
Preference share capital:
15,000 8% Cumulative Preference Shares of Rs 10 each
(preference dividend has been in arrears for 4 years) 1,50,000
3,50,000
2 Reserves and surplus
Securities premium 10,000
Profit and loss account (debit balance) (80,000)
(70,000)
3 Long-term borrowings
Secured
9% Debentures (secured on the freehold property 50,000
Accrued interest on 9% debentures 5,000

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55,000
4 Property, Plant and Equipment
Freehold property 1,20,000
Leasehold property 85,000
Plant and machinery 1,30,000
3,35,000

5 Intangible assets
Goodwill 50,000
50,000
6 Non-current investments
Non-Trade investments at cost 40,000
40,000

Subsequent to approval by court of a scheme for the reduction of capital, the following steps were taken:
i. The preference shares were reduced to Rs 2.5 per share, and the equity shares to Rs 1 per share.
ii. One new equity share of Rs 1 was issued for the arrears of preferred dividend for past 4 years.
iii. The balance on Securities Premium Account was utilized and was transferred to capital reduction
account.
iv. The debenture holders took over the freehold property at an agreed figure of Rs 75,000 and paid the
balance to the company after deducting the amount due to them.
v. Plant and Machinery was written down to Rs 1,00,000.
vi. Non-trade Investments were sold for Rs 32,000.
vii. Goodwill and obsolete stock (included in the value of inventories) of Rs 10,000 were written off.
viii. A contingent liability of which no provision had been made was settled at Rs 7,000 and of this amount,
Rs 6,300 was recovered from the insurance.

You are required (a) to show the Journal Entries, necessary to record the above transactions in the
company’s books and (b) to prepare the Balance Sheet, after completion of the scheme (RTP MAY 2021)

SOLUTION-
Journal entries In the books of Recover Ltd
Particulars Dr. Cr.

8% Cumulative Preference share capital (` 10) A/c Dr. 1,50,000

To 8% Cumulative Preference share capital 37,500
(`2.5) A/c
To Capital reduction (` 7.5) A/c 1,12,500
(Preference shares being reduced to shares of ` 2.5
per share and remaining transferred to capital
reduction account as per capital reduction scheme)
Equity share capital A/c (`10) Dr. 2,00,000
To Equity Share capital A/c (` 1) 20,000
To Capital reduction A/c (` 9) 1,80,000
(Equity shares reduced to ` 1 per share with the
remaining amount transferred to capital reduction ac
as a part of the internal reconstruction scheme.)

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Capital reduction A/c Dr. 48,000

To Equity share capital A/c 48,000
(Equity shares of ` 1 issued in lieu of the arrears of
preference dividend for 4 years as a part of the
internal reconstruction scheme)
Securities Premium A/c Dr. 10,000
To Capital reduction A/c 10,000
(Amount from the securities premium utilized towards
the capital reduction a/c as a part of the internal
reconstruction scheme)
9% Debentures A/c Dr. 50,000
Accrued interest on debentures A/c Dr 5,000
Bank A/c Dr. 20,000
Capital reduction A/c Dr. 45,000
To Freehold property A/c 1,20,000
(Debenture holders being paid by the sale of property,
which is sold at a loss debited to the capital reduction
account. Amount received in excess being refunded
to company by debenture holders as a part of the
internal reconstruction scheme.)
Capital reduction A/c Dr. 90,000
To Plant and Machinery Ac 30,000
To Goodwill A/c 50,000
To Inventory A/c 10,000
(The assets written off as a part of the internal
reconstruction scheme)
Bank A/c Dr. 32,000
Capital reduction A/c Dr. 8,000
To Investments A/c 40,000
(Investments sold at a loss debited to capital
reduction account as a part of the internal
reconstruction scheme)
Contingent Liability A/c Dr. 7,000
To Bank A/c 7,000

(Contingent liability paid as a part the internal

ofreconstruction scheme)
Bank A/c Dr. 6,300
Capital reduction A/c Dr. 700
To Contingent Liability A/c 7,000
(The insurance company remitting par of the
contingency payment amount) t
Capital reduction A/c Dr. 80,000
To Profit and loss A/c 80,000

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(Accumulated losses written off to capital reduction

account as a part of the internal reconstruction
scheme).
Capital reduction A/c Dr. 30,800
To Capital reserve A/c 30,800
(The balance in capital reduction account transferred
to capital reserve as a part of the internal
reconstruction scheme)

Balance sheet of Recover Ltd. as at 31st March 2020 (and reduced)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,05,500
B Reserves and surplus 2 30,800
2 Non-current liabilities
A Long-term borrowings -
3 Current liabilities
A Trade Payables 80,000
B Bank Overdraft 90,000
3,06,300
Total
Assets
1 Non-current assets
A Property, Plant and Equipment 3 1,85,000

2 Current assets
A Inventories 20,000
B Trade receivables 50,000
C Cash and cash equivalents 4 51,300
Total 3,06,300

Notes to accounts:
1 Share Capital `
Equity share capital
68,000 Equity Shares of ` 1 each 68,000
Preference share capital
15,000 8% Cumulative Preference Shares of ` 2.5 each 37,500
1,05,500
2 Reserves and surplus
Capital reserve 30,800
3 Property, Plant and Equipment
Leasehold property 85,000
Plant and machinery 1,00,000

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1,85,000
4 Cash and cash equivalents
Bank A/c (20,000+32,000-7000+6,300) 51,300

15. Z Limited provides the following information as on 31st March, 2021:

Particulars Amount in
Share Capital:
5,00,000 Equity shares of Rs 10 each fully paid up 50,00,000
9%, 20,000 Preference shares of Rs 100 each fully paid up 20,00,000
Reserves and Surplus:
Profit and Loss Account (Dr. balance) 14,60,000
Non-Current Liabilities:
10% Secured Debentures 16,00,000
Current Liabilities:
Interest due on Debentures 1,60,000
Trade Payables 5,00,000
Loan from Directors 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000

Non-Current Assets:
Property, plant and Equipment:
Land & Buildings 30,00,000
Plant & Machinery 12,50,000
Furniture & Fixtures 2,50,000
Intangible Assets:
Goodwill 11,00,000
Patents 5,00,000
Current Assets:
Trade Investments 5,00,000
Trade Receivables 5,00,000
Inventory 10,00,000
Note: Preference dividend is in arrears for last 2 years.
Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover Rs 1,00,000 and Rs 60,000
were also payable to Mr. Y and Mr. Z respectively as trade payable.

The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of Rs 5.00 each.
(ii) The Preference shares be reduced to Rs 50 each and the preference shareholders agreed to forego their
arrears of preference dividends, in consideration of which 9% preference shares are to be converted into
10% preference shares.
(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including interest on
debentures. Mr. Y and Mr. Z also agreed to pay Rs 1,00,000 and Rs 60,000 respectively in cash and to
receive new 12% debentures for the balance amount.

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(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo their 50% claims.
(v) Directors also waived 60% of their loans and accepted equity shares for the balance.
(vi) Capital commitments of Rs 3.00 lacs were cancelled on payment of Rs 15,000 as penalty.
(vii) Directors refunded Rs 1,00,000 of the fees previously received by them.
(viii) Reconstruction expenses paid Rs 15,000.
(ix) The taxation liability of the company was settled for Rs 75,000 and was paid immediately.
(x) The Assets were revalued as under:
Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to pass journal entries for all the above-mentioned transactions including amounts to be
written off for Goodwill, Patents and Loss in Profit and Loss account. Also prepare Bank Account and
Reconstruction A/c (RTP MAY 2022)

SOLUTION-
Journal Entries in the Books of Z Ltd.

(i) Equity Share Capital (` 10 each) A/c Dr. 50,00,000

To Equity Share Capital (` 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of
` 10 each fully paid into same number of fully
paid equity shares of ` 5 each as per scheme of
reconstruction.)
(ii) 9% Preference Share Capital (` 100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (` 50 10,00,000
each) A/c
To Reconstruction A/c 10,00,000
(Being conversion of 9% preference share of
` 100 each into same number of 10% preference
share of ` 50 each and claims of preference
dividends settled as per scheme of
reconstruction.)

(iii) 10% Secured Debentures A/c Dr. 9,60,000

Trade payables A/c Dr. 1,00,000
Interest on Debentures payable A/c Dr. 96,000
Bank A/c Dr. 1,00,000
To 12% Debentures A/c 6,78,000
To Reconstruction A/c 5,78,000
(Being ` 11,56,000 due to Y (including trade
payables) cancelled and 12% debentures
allotted for the amount after waving 50% as
per
scheme of reconstruction.)

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(iv) 10% Secured Debentures A/c Dr. 6,40,000

Trade Payables 60,000
Interest on debentures payable A/c 64,000
Bank A/c 60,000
To 12% debentures A/c 4,42,000
To Reconstruction A/c 3,82,000
(Being ` 7,64,000 due to Z (including trade
payables) cancelled and 12% debentures
allotted for the amount after waving 50% as
per
scheme of reconstruction.)
(v) Trade payables A/c Dr. 1,70,000
To Reconstruction A/c 1,70,000
(Being remaining trade payables sacrificed 50%of
their claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (` 5) A/c 40,000
To Reconstruction A/c 60,000
(Being Directors' loan claim settled by issuing
8,000 equity shares of ` 5 each as per scheme of
reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made towards penalty of 5% for
cancellation of capital commitments of ` 3
Lakhs.)
(viii) Bank A/c Dr. 1,00,000
To Reconstruction A/c 1,00,000

(Being refund of fees by directors credited

toreconstruction A/c.)
(ix) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 75,000
To Reconstruction A/c 25,000
(Being payment of tax liability in full settlement
against provision for tax)
(xi) Land and Building A/c Dr. 2,00,000
To Reconstruction A/c 2,00,000
(Being appreciation in value of Land & Building
recorded)
(xii) Reconstruction A/c Dr. 49,85,000
To Goodwill A/c 11,00,000
To Patent A/c 5,00,000

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To Profit and Loss A/c 14,60,000

To Plant and Machinery A/c 6,50,000
To Furniture & Fixture A/c 1,00,000
To Trade Investment A/c 50,000
To Inventory A/c 2,50,000
To Trade Receivables A/c 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruction,
balance of reconstruction A/c transfer to Capital
Reserve.)

Bank Account
` `
To Reconstruction (Y) 1,00,000 By Balance b/d (overdraft) 1,00,000
To Reconstruction(Z) 60,000 By Reconstruction A/c 15,000
To Reconstruction A/c 1,00,000 (capital commitment
(refund of earlier fees by penalty paid)
directors)

By Reconstruction A/c 15,000

(reconstruction
expenses paid)
By Provision for tax A/c 75,000
(tax paid)
By Balance c/d 55,000
2,60,000
2,60,000

Reconstruction Account
` `
To Bank (penalty) 15,000 By Equity Share
To Bank (reconstruction expenses) 15,000 Capital A/c 25,00,000
To Goodwill 11,00,000 By 9% Pref. Share
To Patent 5,00,000 Capital A/c 10,00,000
To P & L A/c 14,60,000 By Mr. Y (Settlement) 5,78,000
To P & M 6,50,000 By Mr. Z (Settlement) 3,82,000
To Furniture and Fixtures 1,00,000 By Trade Payables A/c 1,70,000
To Trade investment 50,000 By Director’s loan 60,000
To Inventory 2,50,000 By Bank 1,00,000
To Trade Receivables 1,00,000 By Provision for tax 25,000
To Capital Reserve (bal. fig.) 7,75,000 By Land and Building 2,00,000
50,15,000 50,15,000

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16. The Balance Sheet of Revise Limited as at 31st March, 20X1 was as follows :
Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 10,00,000
B Reserves and surplus 2 (6,00,000)
2 Non-current liabilities
A Long-term borrowings 3 2,00,000
3 Current liabilities
A Trade Payables 72,000
B Other current liabilities 4 24,000
C Short term provisions 5 24,000
Total 7,20,000
Assets
1 Non-current assets
A Property, Plant and Equipment 6 1,00,000
2 Current assets
A Inventory 3,20,000
B Trade receivables 2,70,000
C Cash and cash equivalents 30,000
Total 7,20,000

Notes to Accounts

`
1 Share Capital
Equity share capital
10,000 Equity Shares of ` 100 each 10,00,000
10,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (6,00,000)
(6,00,000)

3 Long-term borrowings
12% debentures 2,00,000
2,00,000
4 Other current liabilities
Interest payable on debentures 24,000
24,000
5 Short term provisions
Provision for taxation 24,000

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24,000
6 Property, Plant and Equipment
Machinery 1,00,000
1,00,000

It was decided to reconstruct the company for which necessary resolution was passed and sanctions were
obtained from appropriate authorities. Accordingly, it was decided that: (a) Each share is sub-divided into
ten fully paid up equity shares of ` 10 each. (b) After sub-division, each shareholder shall surrender to the
company 50% of his holding, for the purpose of re-issue to debenture holders and trade payables as
necessary. (c) Out of shares surrendered, 10,000 shares of ` 10 each shall be converted into 12% preference
shares of ` 10 each, fully paid up. (d) The claims of the debenture-holders shall be reduced by 75 per cent.
In consideration of the reduction, the debenture holders shall receive preference shares of ` 1,00,000 which
are converted out of shares surrendered. (e) Trade payables claim shall be reduced to 50 per cent, it is to be
settled by the issue of equity shares of ` 10 each out of shares surrendered. (f) Balance of profit and loss
account to be written off. (g) The shares surrendered and not re-issued shall be cancelled. You are required
to show the journal entries giving effect to the above and the resultant Balance Sheet

Solution

Dr. Cr.
` `
Equity Share Capital (` 100) A/c Dr. 10,00,000
To Share Surrender A/c 5,00,000
To Equity Share Capital (` 10) A/c 5,00,000
(Subdivision of 10,000 equity shares of ` 100 each
into 1,00,000 equity shares of ` 10 each and
surrender of 50,000 of such subdivided shares as
per capital reduction scheme)
12% Debentures A/c Dr. 1,50,000
Interest payable A/c Dr. 18,000
To Reconstruction A/c 1,68,000
(Transferred 75% of the claims of the debenture
holders to reconstruction account in consideration
of which 12% preference shares are being issued
out of share surrender account as per capital
reduction scheme)
Trade payables A/c Dr. 72,000
To Reconstruction A/c 72,000
(Transferred claims of the trade payables to
reconstruction account, 50% of which is being
clear reduction and equity shares are being issued
in consideration of the balance)
Share Surrender A/c Dr. 5,00,000

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To 12% Preference Share Capital A/c 1,00,000

To Equity Share Capital A/c 36,000
To Reconstruction A/c 3,64,000
(Issued preference and equity shares to discharge
the claims of the debenture holders and the trade
payables respectively as a per scheme and the
balance in share surrender account is being
transferred to reconstruction account)
Reconstruction A/c Dr. 6,04,000
To Profit and Loss A/c 6,00,000
To Capital Reserve A/c 4,000
(Adjusted debit balance of profit and loss account
against the reconstruction account and the
balance in the latter is being transferred to capital
reserve)

Balance Sheet of Revise Limited (and reduced) as at...

Particulars Note No. `

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,36,000
(b) Reserves and Surplus 2 4,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 50,000
(3) Current Liabilities
(a) Other current liabilities 4 6,000
(b) Short-term provisions 5 24,000
Total 7,20,000
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 6 1,00,000
(2) Current assets
(a) Inventories 3,20,000

(b) Trade receivables 2,70,000

(c) Cash and cash equivalents 30,000
Total 7,20,000

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Notes to Accounts

`
1. Share Capital
Equity Share Capital
Issued Capital: 53,600 Equity Shares of ` 10 each 5,36,000
Preference Share Capital
Preference Shares 1,00,000
(Of the above shares all are allotted as fully paid up pursuant
to capital reduction scheme by conversion of equity shares
without payment being received in cash)
6,36,000
2. Reserve and Surplus
Capital Reserve 4,000
3. Long-term borrowings
Unsecured Loans
12% Debentures 50,000
4. Other current liabilities
Interest payable on debentures 6,000
5. Short-term provisions
Provision for Income-tax 24,000
6. Property, plant and Equipment
Machinery 1,00,000

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Chapter 2 BUYBACK OF SECURITIES & EQUITY SHARES WITH DIFFERENTIAL

RIGHTS
MEANING-
• Buy back of shares means purchase of its own shares by a company.
• When shares are bought back by a company, they have to be cancelled by the company.
• Thus, shares buy back results in decrease in share capital of the company.

OBJECTIVES/ADVANTAGES OF BUY-BACK OF SHARES:

• To increase earning per share if there is no dilution in company’s earnings as the buy-back of shares
reduces the outstanding number of shares.
• To increase promoters holding as the shares which are bought back are cancelled.
• To discourage others to make hostile bid to take over the company as the buy back will increase the
promoters holding.
• To pay surplus cash to shareholders when the company does not need it for business.

AS PER SECTION 68 OF COMPANIES ACT 2013 A COMPANY MAY BUY BACK ITS OWN SHARES OUT OF -
• Free Reserves
• Securities Premium or
• Proceeds of issue of any shares or other specified securities

IMPORTANT PROVISIONS FOR BUY BACK -

• Company’s Articles of Association must contain authorization for buy back
• A special resolution has to be passed at general meeting of the company for buy back above 10%
and upto 25% of total paid up equity share capital and free reserves
• Buyback of equity shares in any financial year should not exceed 25% of its total paid up equity
capital & Free reserves .
• The ratio of the aggregate of secured and unsecured debts owed by the company after buy back is
not more than twice the paid up capital and its free reserves (Debt Equity ratio should not exceed 2)
Secured + Unsecured Debts < 2
Paid up capital + Free Reserves
• All the shares for buy back are fully paid up
• There should be gap of 1 year between two buy back
• Every buy-back shall be completed within twelve months from the date of passing the special
resolution, or the resolution passed by the board of directors.
• CRR is created from Free Reserves
• CRR is created to fill the capital gap.
• Journal entry for CRR is
General Reserve/P&L a/c Dr
To CRR a/c
• Ignore Premium on Buyback and Premium on fresh issue of shares& securities for CRR purpose.

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EQUITY SHARES WITH DIFFERENTIAL RIGHTS-

• Section 43 Companies Amendment Act, 2013 allows companies to issue equity shares with
differential rights as to dividend, voting or otherwise in accordance with such rules as may be
prescribed.

RELEASE OF PREFERENCE SHAREHOLDER RESTRICTIVE VOTING RIGHTS -

It is provided further that where the dividend in respect of a class of preference shares has not been paid
for a period of two years or more, such class of preference shareholders shall have a right to vote on all the
resolutions placed before the company.

RELATIVE WEIGHT OF EQUITY AND PREFERENCE SHARE CAPITAL, WHEN ENTITLED TO VOTE -
It is further provided that the proportion of the voting rights of equity shareholders to the voting rights of
the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity
shares bears to the paid-up capital in respect of the preference shares,

Example 1: Equity capital is held by X, Y and Z in the proportion of 40:40:20. A, B and C hold preference
share capital in the proportion of 50:30:20. If the paid up equity share capital of the company is Rs 1 Crore
and Preference share capital is Rs 50 Lakh, then relative weight in the voting right of equity shareholders
and preference shareholders will be 2/3 and 1/3. The respective voting right of various shareholders will be

Solution
X = 2/3 X 40/100 = 4/15
Y = 2/3 X 40/100 = 4/15
Z = 2/3 X 20/100 = 2/15
A = 1/3 X 50/100 = 1/6
B = 1/3 X 30/100 = 1/10
C = 1/3 X 20/100 = 2/30

Hence their relative weights are 4/15:4/15:1/15:1/6:1/10:2/30 or 8:8:4:5:3:2.

Their voting power is X (26.67%), Y (26.67%), Z (13.33%), A (16.67%), B (10%) and C (6.67%)

SHARE CAPITAL AND DEBENTURES RULES, 2014-

• The articles of association of the company authorizes the issue of shares with differential rights;
• The issue of shares is authorized by an ordinary resolution passed at a general meeting of the
shareholders: Provided that where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
• The voting power in respect of shares with differential rights shall not exceed seventy four percent
of the total voting power including voting power in respect of equity shares with differential rights
issued at any point of time
• The company has not defaulted in filing financial statements and annual returns for three financial
years immediately preceding the financial year in which it is decided to issue such shares;
• The company has no subsisting default in the payment of a declared dividend to its shareholders or
repayment of its matured deposits or redemption of its preference shares or debentures that have
become due for redemption or payment of interest on such deposits or debentures or payment of
dividend.

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• The company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or statutory dues
1. M Ltd. furnishes the following Balance Sheet as at 31st March, 20X1:
Particulars Notes Rs (in 000)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 5,000
B Reserves and Surplus 2 6,310
2 Non-current liabilities
Long term borrowings 3 400
3 Current liabilities
A Trade Payables 40
Total 11,750
Assets
1 Non-current assets
A Property, plant and Equipment 4 2,750
B Non-Current Investments (at cost) 5,000
2 Current assets
A Inventories 1,000
B Trade receivables 2,000
C Cash and Cash equivalents 1,000
Total 11,750

Notes to accounts
No. Particulars Rs in (‘000)
1 Share Capital
Authorized, Issued and Subscribed Capital:
3,00,000 Equity shares of Rs 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
Total 5,000
2 Reserves and Surplus
Capital reserve 10
Revenue reserve 4,000
Securities premium 500
Profit and Loss account 1,800
Total 6,310
3 Long term borrowings
10% Debentures 400
4 Property, Plant and Equipment (PPE)
PPE: Cost 3,000
Less: Provision for depreciation (250)

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Net carrying value 2,750

The company passed a resolution to buy-back 20% of its equity capital @ Rs 15 per share. For this purpose,
it sold its investments of Rs30 lakhs for Rs 25 lakhs.

You are required to pass necessary Journal entries.

Solution
Journal Entries in the books of M Ltd. in ‘000
Particulars Dr. Cr.
1. Bank A/c Dr. 2,500
Profit and Loss A/c Dr. 500

To Investment A/c 3,000

(Being investment sold for the purpose of buy-back
of Equity Shares)
2. Equity share capital A/c Dr. 600
Premium payable on buy-back Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back of equity shares)
3. Equity shares buy-back A/c Dr. 900
To Bank A/c 900
(Being payment made for buy-back of equity shares)
4. Securities Premium A/c Dr. 300
To Premium payable on buy-back 300
(Being premium payable on buy-back charged from
Securities premium)
5. Revenue reserve A/c Dr. 600
To Capital Redemption Reserve A/c 600
(Being creation of capital redemption reserve to
theextent of the equity shares bought back)

2. Anu Ltd. (a non-listed company) furnishes you with the following balance sheet as at 31st March,
20X1: (in crores Rs)
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A
Share capital 1 100
B
Reserves and 2 300
2 A Surplus
Total
Current liabilities 40
Trade Payables 440

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Assets
1 Non-current assets
A Property, plant and equipment 3 -
B Non-Current Investments 4 100
2 Current assets
A Trade receivables 140
B Cash and Cash equivalents 200
Total 440

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed share capital:
12% Redeemable preference shares of Rs 100 each, 75
fullypaid up
Equity shares of Rs 10 each, fully paid up 25
Total 100
2 Reserves and Surplus
Capital reserve 15
Securities premium 25
Revenue reserves 260
Total 300
3 Property, Plant and Equipment
PPE Cost 100
Less: Provision for depreciation (100)
Net carrying value NIL
4 Non-Current Investments
Non-current investments at cost (Market value 100
Rs 400 Cr.)

The company redeemed preference shares on 1st April, 20X1. It also bought back 50 lakhs equity shares of
Rs 10 each at Rs 50 per share. The payments for the above were made out of the huge bank balances,
which appeared as a part of current assets.

You are asked to:

(i) Pass journal entries to record the above.
(ii) Prepare balance sheet as at 1.4.20X1.

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Solution
Journal entries in the books of Anu Ltd. Rs in crores
Particulars Dr. Cr.
st
1 12% Preference share capital A/c Dr. 75
April, To Preference shareholders A/c 75
20X1 (Being preference share capital account
transferred to shareholders account)
Preference shareholders A/c Dr. 75
To Bank A/c 75
(Being payment made to shareholders)
Shares buy-back A/c Dr. 25
To Bank A/c 25
(Being 50 lakhs equity shares bought back @ Rs 50
per share)
Equity share capital A/c (50 lakhs х Rs 10) Dr. 5
Securities premium A/c (50 lakhs х Rs 40) Dr. 20
To Shares buy-back A/c 25
(Being cancellation of shares bought back)
Revenue Reserve A/c Dr. 80
To Capital Redemption Reserve A/c (75+5) 80
(Being creation of capital redemption reserve to
the extent of the face value of preference shares
redeemed and equity shares bought back)

(ii) Balance Sheet of Anu Ltd as at 1.4.20X1 (in crores Rs)

Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 20
B Reserves and Surplus 2 280
2 Current liabilities
A Trade Payables 40
Total 340
Assets
1 Non-current assets
A Property, plant and equipment 3 -
B Non-Current Investments 4 100

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2 Current assets
A Trade receivables 140
B Cash and Cash equivalents 5 100
Total 340

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed share capital
20
200 lakhs Equity shares of Rs10 each fully paid
Total 20
2 Reserves and Surplus
Capital reserve 15
Capital redemption reserve 80
Securities premium 25
Less: Utilization for buy-back of shares (20) 5

Revenue Reserve 260

Less: transfer to Capital redemption reserve (80) 180
Total 280
3 Property, plant and Equipment
PPE: cost 100
Less: Provision for depreciation (100)
Net carrying value -
4 Non-Current Investments
Non-current investments at cost 100
(Market value Rs400 Crores)
5 Cash and Cash Equivalents
Cash and Cash Equivalents as on 31.3.20X1 200
Less: Bank payment for redemption and buy-back (100)
Total 100

3. Dee Limited (a non-listed company) furnishes the following Balance Sheet as at 31st March, 20X1:
(in thousand )
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,700
B Reserves and Surplus 2 9,700

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2 Current liabilities
A Trade Payables 1,400
Total 13,800
Assets
1 Non-current assets
A Property, plant and Equipment 9,300
B Non-Current Investments 3,000

2 Current assets
A Inventories 500
B Trade receivables 200
C Cash and Cash equivalents 800
Total 13,800

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
2,50,000 Equity shares of Rs 10 each fully paid up 2,500
2,000, 10% Preference shares of Rs 100 each 200
(Issued two months back for the purpose of buy-back)
Total 2,700
2 Reserves and Surplus
Capital reserve 1,000
Revenue reserve 3,000
Securities premium 2,200
Profit and loss account 3,500
Total 9,700

The company passed a resolution to buy-back 20% of its equity capital @ Rs 50 per share. For this purpose,
it sold all of its investment for Rs 22,00,000.
You are required to pass necessary journal entries and prepare the Balance Sheet.

Solution
Journal Entries in the books of Dee Limited (in thousand)
Particulars Dr. Cr.
(i) Bank Account Dr. 2,200
Profit and Loss Account Dr. 800
To Investment Account 3,000
(Being the investments sold at loss for the purpose of
buy-back)

(ii) Equity Share buy-back Account Dr. 2,500

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To Bank Account 2,500

(Being the payment made on buy-back)
(iii) Equity Share Capital Account Dr. 500
Premium Payable on Buy-Back Account Dr. 2,000
2,500
To Equity Shares Buy-Back Account
(Being the buy-back amount allocated to equity share
capital)
(iv) Securities premium Account Dr. 2,000
To Premium payable on buy-back Account 2,000
(Being the premium payable on buy-back adjusted
against securities premium account)
(v) Revenue reserve Account Dr. 300
To Capital Redemption Reserve Account 300
(Being the amount equal to nominal value of equity
shares bought back out of free reserves transferred to
capital redemption reserve account)

Balance Sheet of Dee Limited as at 1st April, 20X1 (After buy-back of shares) (in thousand)
Particulars Notes Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,200
B Reserves and Surplus 2 6,900
2 Current liabilities
A Trade Payables 1,400
Total 10,500
Assets
1 Non-current assets
A Property, plant and Equipment 9,300
2 Current assets
A Inventories 500

B Trade receivables 200

C Cash and Cash equivalents 500
Total 10,500

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
2,50,000 Equity shares of Rs 10 each fully paid up 2,000
2,000, 10% Preference shares of Rs 100 each 200
(Issued two months back for the purpose of buy-
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back)
Total 2,200
2 Reserves and Surplus
Capital reserve 1,000
Capital redemption reserve 300
Securities Premium 2,200
Less: Premium payable on buy-back of shares (2,000) 200
Revenue reserve 3,000
Less: Transfer to Capital redemption reserve (300) 2,700
Profit and loss A/c 3,500
Less: Loss on investment (800) 2,700
Total 6,900

4. Extra Ltd. (a non-listed company) furnishes you with the following Balance Sheet as at 31st March,
20X1: (in lakhs)
Particulars Notes
Equity and Liabilities
1
Shareholders’ funds
A Share capital 1 120
B Reserves and Surplus 2 118

2 Non-current liabilities
3
Long term borrowings 4
3 Current liabilities
A Trade Payables 70
Total 312
Assets
1 Non-current assets
A Property, plant and Equipment 50
B Non-current Investments 120
2 Current assets
A Cash and Cash equivalents 142
Total 312

Notes to accounts
No. Particulars
1 Share Capital
Authorized, issued and subscribed capital:
Equity shares of 10 each fully paid 100
9% Redeemable preference shares of 100 each fully paid 20

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Total 120
2 Reserves and Surplus
Capital reserves 8
Revenue reserves 50
Securities premium 60
Total 118
3 Long term borrowings
10% Debentures 4

(i) The company redeemed the preference shares at a premium of 10% on 1st April, 20X1.
(ii) It also bought back 3 lakhs equity shares of Rs 10 each at Rs 30 per share. The payment for the above
was made out of huge bank balances.
(iii) Included in its investment were “investments in own debentures” costing Rs 2 lakhs (face value Rs 2.20
lakhs). These debentures were cancelled on 1st April, 20X1.
(iv) The company had 1,00,000 equity stock options outstanding on the above-mentioned date, to the
employees at Rs 20 when the market price was Rs30 (This was included under current liabilities). On
1.04.20X1 employees exercised their options for 50,000 shares.
(v) Pass the journal entries to record the above.
(vi) Prepare Balance Sheet as at 01.04.20X1.

Solution (Rs in lakhs)

Date Particulars Debit Credit

20X1
1st April 9% Redeemable preference share capital A/c Dr. 20.00
Premium on redemption of preference shares A/c Dr. 2.00
To Preference shareholders A/c 22.00
(Being preference share capital transferred to
shareholders account)
Preference shareholders A/c Dr. 22.00
To Bank A/c 22.00
(Being payment made to shareholders)
Equity shares buy-back A/c Dr. 90.00
To Bank A/c 90.00
(Being 3 lakhs equity shares of 10 each bought
back @ 30 per share)
Equity share capital A/c Dr. 30.00
Securities premium A/c Dr. 60.00
To Equity Shares buy-back A/c 90.00
(Being cancellation of shares bought back)
Revenue reserve A/c Dr. 50.00

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To Capital redemption reserve A/c 50.00

(Being creation of capital redemption reserve
account to the extent of the face value of
preference shares redeemed and equity shares
bought back as per the law)
10% Debentures A/c Dr. 2.20
To Investment (own debentures) A/c 2.00
To Profit on cancellation of own debentures A/c 0.20
(Being cancellation of own debentures costing
2 lakhs, face value being 2.20 lakhs and the
balance being profit on cancellation of
debentures)
Bank A/c Dr. 10.00
Employees stock option outstanding (Current
liabilities) A/c Dr. 5.00
To Equity share capital A/c 5.00
To Securities premium A/c 10.00
(Being the allotment to employees, of 50,000
shares of 10 each at a premium of 20 per share
in exercise of stock options byemployees)

Securities premium A/c Dr. 2.00

To Premium on redemption of preference 2.00
shares A/c
(Being premium on redemption of preference
shares adjusted through securities premium)

Balance Sheet of Extra Ltd. as at 01.04.20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 75.00
B Reserves and Surplus 2 66.20

2 Non-current liabilities
Long term borrowings 3 1.80
3 Current liabilities
A Other Current Liabilities 4 65.00
Total 208
Assets

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1 Non-current assets
A Property, plant and Equipment 50.00
B Non-current Investments 5 118.00
2 Current assets
A Cash and Cash equivalents 6 40.00
Total 208

Notes to Accounts
No. Particulars
1 Share Capital
Equity shares of 10 each fully paid 100
Less: Cancellation of bought back shares (30)
Add: Shares issued against ESOP 5
Total 75
2 Reserves and Surplus
Capital Reserve
Opening balance 8.00
Add: Profit on cancellation of debentures 0.20 8.20
Revenue reserves
Opening balance 50.00
Less: Creation of Capital Redemption Reserve (50.00) -
Securities Premium
Opening balance 60.00
Less: Adjustment for cancellation of equity shares (60.00)

Less: Adjustment for premium on redemption of (2.00)

preference shares
Add: Shares issued against ESOP at premium 10.00 8.00
Capital Redemption Reserve 50.00
Total 66.20
3 Long term borrowings
10% Debentures 4.00
Less: Cancellation of own debentures (2.20)
Total 1.80
4. Other Current liabilities
Opening balance 70.00
Less: Adjustment for ESOP outstanding (5.00)
Total 65.00
5. Non-current investments
Opening balance 120.00

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Less: Investment in own debentures (2.00)

Total 118.00
6. Cash and Cash Equivalents
Opening balance 142.00
Less: Payment to preference shareholders (22.00)
Less: Payment to equity shareholders (90.00)
Add: Share price received against ESOP 10.00
Total 40.00

5. Pratham Ltd. (a non-listed company) has the following Capital structure as on 31st March, 20X1:

Particulars Rs Rs
Equity Share Capital (shares of Rs 10 each fully paid 30,00,000
Reserves & Surplus
32,50,000
General Reserve

Security Premium Account 6,00,000

Profit & Loss Account 4,30,000
Revaluation Reserve 6,20,000 49,00,000
Loan Funds 42,00,000

You are required to compute by Debt Equity Ratio Test, the maximum number of shares that can be bought
back in the light of above information, when the offer price for buy-back is Rs 30 per share.

6. Perrotte Ltd. (a non-listed company) has the following Capital Structure as on 31.03.20X1:
Particulars (in crores)
(1) Equity Share Capital (Shares of Rs 10 each fully - 330
paid)
(2) Reserves and Surplus
General Reserve 240 -
Securities Premium Account 90 -
Profit & Loss Account 90 -
Infrastructure Development Reserve 180 600
(3) Loan Funds 1,800

The Shareholders of Perrotte Ltd., on the recommendation of their Board of Directors, have approved on
12.09.20X1 a proposal to buy-back the maximum permissible number of Equity shares considering the large
surplus funds available at the disposal of the company.

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The prevailing market value of the company’s shares is Rs 25 per share and in order to induce the existing
shareholders to offer their shares for buy-back, it was decided to offer a price of 20% over market.
You are also informed that the Infrastructure Development Reserve is created to satisfy Income-tax Act
requirements.

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 Rs 1,200
crores or Rs 1,500 crores.

Assuming that the entire buy-back is completed by 09.12.20X1, show the accounting entries in the
company’s books in each situation.

Solution
Statement determining the maximum number of shares to be bought back
Number of shares
Particulars When loan fund is
Rs 1,800 crores Rs 1,200 crores Rs 1,500 crores
Shares Outstanding Test 8.25 8.25 8.25
(W.N.1)
Resources Test (W.N.2) 6.25 6.25 6.25
Debt Equity Ratio Test Nil 3.75 Nil
(W.N.3)
Maximum number of shares
that can be bought back Nil 3.75 Nil
[least of the above]

Journal Entries for the Buy-Back (applicable only when loan fund is Rs 1,200 crores)
Rs in crores

Particulars Debit Credit

(a) Equity share buy-back account Dr. 112.5
To Bank account 112.5
(Being buy-back of 3.75 crores equity shares of Rs 10
each @ Rs 30 per share)
(b) Equity share capital account Dr. 37.5
Securities premium account Dr. 75

To Equity share buy-back account 112.5

(Being cancellation of shares bought back)
(c) General reserve account Dr. 37.5
To Capital redemption reserve account 37.5
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of share capital bought back out of redeemed
through free reserves)

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Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 33
25% of the shares outstanding 8.25

2. Resources Test
Particulars
Paid up capital (Rsin crores) 330
Free reserves (Rsin crores) 420
Shareholders’ funds (Rsin crores) 750
25% of Shareholders fund (Rsin crores) Rs187.5 crores
Buy-back price per share Rs30
Number of shares that can be bought back (shares in 6.25 crores shares
crores)

3. Debt Equity Ratio Test

Particulars When loan fund is
1,800 1,200 1,500
crores crores crores
(a) Loan funds (in crores) 1,800 1,200 1,500
(b) Minimum equity to be
maintained after buy-back in the 900 600 750
ratio of 2:1 (in crores)
(c) Present equity shareholders fund 750 750 750
(in crores)

(d) Future equity shareholder fund N.A. 712.5 N.A.

(in crores) (750-37.5)
(e) Maximum permitted buy-back of Nil 112.5 Nil
Equity (in crores) [(d) – (b)]

(f) Maximum number of shares 3.75

thatcan be bought
back @ 30 per share (shares in Nil Nil
crores)

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7. SMM Ltd. has the following capital structure as on 31st March, 20X1: Rs in crore
Particulars Situation Situation
I II
(i) Equity share capital (shares of Rs10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200

Infrastructure Development Reserve 320 320

(StatutoryReserve)
(iii) Loan Funds 3,200 6,000

The company has offered buy-back price of Rs 30 per equity share. You are required to calculate maximum
permissible number of equity shares that can be bought back in both situations and also required to pass
necessary Journal Entries.

SOLUTION-
Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
Particulars When loan fund is
Rs 3,200 crores Rs 6,000 crores
Shares Outstanding Test (W.N.1) 30 30
Resources Test (W.N.2) 24 24
Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be 24 Nil
bought back [least of the above]

Journal Entries for the Buy-Back (applicable only when loan fund is Rs3,200 crores)
` in crores
Particulars Debit Credit
(a) Equity shares buy-back account Dr. 720
To Bank account 720
(Being payment for buy-back of 24 crores equity
shares of ` 10 each @ ` 30 per share)
(b) Equity share capital account Dr. 240
Premium Payable on buy-back account Dr. 480
To Equity share buy-back account 720
(Being cancellation of shares bought back)

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Securities Premium account Dr. 400

General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buy-back account 480
(Being Premium Payable on buy-back account
charged to securities premium and general
reserve/Profit & Loss A/c)

(c) General Reserve / Profit & Loss A/c Dr. 240

To Capital redemption reserve account 240
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of share capital bought back out of
redeemed through free reserves)

Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 120
25% of the shares outstanding 30

2. Resources Test
Particulars
Paid up capital (Rsin crores) 1,200
Free reserves (Rsin crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (Rsin crores) 2,880
25% of Shareholders fund (Rsin crores) Rs720 crores
Buy-back price per share Rs30
Number of shares that can be bought back 24 crores shares

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back
Particulars When loan fund is
Rs3,200 crores Rs6,000 crores
(a) Loan funds (Rs) 3,200 6,000
(b) Minimum equity to be 1,600 3,000
maintained after buy-back in
the ratio of 2:1 (Rs) (a/2)
(c) Present equity shareholders 2,880 2,880
fund (Rs)
(d) Future equity shareholders 2,560 (2,880-320) N.A.
fund

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(e) Maximum permitted buy- 960 Nil

back of Equity (Rs) [(d) – (b)]
(f) Maximum number of shares 32 crore shares
that can be bought back @ Nil
Rs 30 per share
As per the provisions of the
Companies Act, 2013, Qualifies Does not Qualify
company

8. KG Limited furnishes the following Balance Sheet as at 31st March, 20X1:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,200
B Reserves and Surplus 2 810
2 Non-current liabilities
Long term borrowings 3 750
3 Current liabilities
A Trade Payables 745
B Other Current Liabilities 195
Total 3,700
Assets
1 Non-current assets
A Property, plant and equipment 4 2,026
B Non-current Investments 74
2 Current assets
A Inventories 600
B Trade receivables 260
C Cash and Cash equivalents 740
Total 3,700

Notes to accounts
No. Particulars
1 Share Capital
Authorized, issued and subscribed capital

Equity share capital (fully paid up shares of Rs 10 each) 1,200

2 Reserves and Surplus
Securities premium 175
General reserve 265
Capital redemption reserve 200
Profit & loss A/c 170

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Total 810
3 Long term borrowings
12% Debentures 750
4 Property, plant and equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2,026

On 1st April, 20X1, the company announced the buy-back of 25% of its equity shares @ Rs 15 per share. For
this purpose, it sold all of its investments for Rs 75 lakhs.

On 5th April, 20X1, the company achieved the target of buy-back. On 30th April, 20X1 the company issued
one fully paid up equity share of Rs 10 by way of bonus for every four equity shares held by the equity
shareholders.

You are required to:

(1) Pass necessary journal entries for the above transactions.
(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares.

SOLUTION-

Journal Entries In the books of KG Limited

Date Particulars Dr. Cr.
20X1 (Rs in lakhs)
April 1 Bank A/c Dr. 75
To Investment A/c 74

To Profit on sale of investment 1

(Being investment sold on profit)
April 5 Equity share capital A/c Dr. 300
Securities premium A/c Dr. 150
To Equity shares buy-back A/c 450
(Being the amount due to equity shareholders on
buy-back)
Equity shares buy-back A/c Dr. 450
To Bank A/c 450
(Being the payment made on account of buy-back of
30 Lakh Equity Shares)
April 5 General reserve A/c Dr. 265
Profit and Loss A/c Dr. 35
To Capital redemption reserve A/c 300
(Being amount equal to nominal value of buy-back
shares from free reserves transferred to capital
redemption reserve account as per the law)

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April 30 Capital redemption reserve A/c Dr. 225

To Bonus shares A/c (W.N.1) 225
(Being the utilization of capital redemption reserve to
issue bonus shares)
Bonus shares A/c Dr. 225
To Equity share capital A/c 225
(Being issue of one bonus equity share for every four
equity shares held)

Balance Sheet (After buy-back and issue of bonus shares)

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,125
B Reserves and Surplus 2 436
2 Non-current liabilities
Long term borrowings 3 750

3 Current liabilities
A Trade Payables 745
B Other Current Liabilities 195
Total 3,251
Assets
4
1 Non-current assets
A Property, plant and equipment 2,026
2 Current assets
A Inventories 600
B Trade receivables 260
C Cash and Cash equivalents 365
Total 3,251

Notes to accounts
No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
1,125
Equity share capital (fully paid up shares of Rs 10 each)
2 Reserves and Surplus
General Reserve 265
Less: Transfer to CR (265) -
Capital Redemption Reserve 200
Add: Transfer due to buy-back of shares from P/L 35

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Add; Transfer due to buy-back of shares from

GeneralReserve 265
Less: Utilisation for issue of bonus shares (225) 275
Securities premium 175
Less: Adjustment for premium paid on buy-back (150) 25
Profit & Loss A/c 170
Add: Profit on sale of investment 1

Less: Transfer to CRR (35) 136

Total 436
3 Long term borrowings
12% Debentures 750
4 Property, Plant and Equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2,026

Working Notes:
1. Amount of bonus shares = 25% of (1,200 – 300) lakhs = Rs 225 lakhs
2. Cash at bank after issue of bonus shares
Particulars Rs in lakhs
Cash balance as on 1st April, 20X1 740
Add: Sale of investments 75
815
Less: Payment for buy-back of shares (450)
365

9. Following is the Balance Sheet of Competent Limited as at 31st March, 20X1:

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 12,50,000
B Reserves and Surplus 2 18,75,000
2 Non-current liabilities
Long term borrowings 3 28,75,000

3 Current liabilities
A Other Current Liabilities 16,50,000
Total 76,50,000
Assets
1 Non-current assets

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A Property, plant and Equipment 46,50,000

4
2 Current assets
A Other Current Assets 30,00,000
Total 76,50,000

Notes to accounts
No. Particulars
1 Share Capital
Authorized, issued and subscribed capital:
12,50,000
Equity share capital (fully paid up shares of Rs 10 each)
2 Reserves and Surplus
Securities premium 2,50,000
Profit and loss account 1,25.000
Revenue reserve 15,00,000
Total 18,75,000
3 Long term borrowings
14% Debentures 18,75,000
Unsecured Loans 10,00,000
Total 28,75,000
4 Property, plant and equipment
Land and Building 19,30,000
Plant and machinery 18,00,000
Furniture and fitting 9,20,000
Net carrying value 46,50,000

The company wants to buy-back 25,000 equity shares of Rs 10 each, on 1st April, 20X1 at Rs 20 per share.
Buy-back of shares is duly authorized by its articles and necessary resolution has been passed by the
company towards this. The payment for buy-back of shares will be made by the company out of sufficient
bank balance available shown as part of Current Assets.

Comment with your calculations, whether buy-back of shares by company is within the provisions of the
Companies Act, 2013. If yes, pass necessary journal entries towards buy-back of shares and prepare the
Balance Sheet after buy-back of shares.

SOLUTION-

Determination of Buy-back of maximum no. of shares as per the Companies Act, 2013
1. Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding 1,25,000
25% of the shares outstanding 31,250

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2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves
Particulars
Paid up capital (Rs) 12,50,000
Free reserves (Rs) (15,00,000 + 2,50,000 + 1,25,000) 18,75,000
Shareholders’ funds (Rs) 31,25,000
25% of Shareholders fund (Rs) 7,81,250
Buy-back price per share Rs 20
Number of shares that can be bought back (shares) 39,062
Actual Number of shares for buy-back 25,000

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back
Particulars Rs
(a) Loan funds (Rs) (18,75,000+10,00,000+16,50,000) 45,25,000
(b) Minimum equity to be maintained after buy-back
in the ratio of 2:1 (Rs) (a/2) 22,62,500
(c) Present equity/shareholders fund (Rs) 31,25,000
(d) Future equity/shareholders fund (Rs) (see W.N.) 28,37,500
2F
(31,25,000 – 2,87,500)
(e) Maximum permitted buy-back of Equity 5,75,000
(Rs)[(d) – (b)]
(f) Maximum number of shares that can be bought 28,750 shares
back @ Rs 20 per share
(g) Actual Buy-Back Proposed 25,000 Shares

Summary statement determining the maximum number of shares to be bought back

Particulars Number of shares
Shares Outstanding Test 31,250
Resources Test 39,062
Debt Equity Ratio Test 28,750
Maximum number of shares that can be bought 28,750
back [least of the above]

Company qualifies all tests for buy-back of shares and came to the conclusion that it can buy maximum
28,750 shares on 1st April, 20X1.

However, company wants to buy-back only 25,000 equity shares @ Rs 20. Therefore, buy-back of 25,000
shares, as desired by the company is within the provisions of the Companies Act, 2013.

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Journal Entries for buy-back of shares

Particulars Debit (Rs) Credit (Rs)
(a) Equity shares buy-back account Dr. 5,00,000
To Bank account 5,00,000
(Being buy-back of 25,000 equity shares of Rs
10 each @ Rs 20 per share)
(b) Equity share capital account Dr. 2,50,000
Securities premium account Dr. 2,50,000
To Equity shares buy-back account 5,00,000
(Being cancellation of shares bought back)
(c) Revenue reserve account Dr. 2,50,000
To Capital redemption reserve account 2,50,000
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of capital bought back through free
reserves)

Balance Sheet of M/s. Competent Ltd. as at 31st March, 20X1

Particulars Notes
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 10,00,000
B Reserves and Surplus 2 16,25,000
2 Non-current liabilities
Long term borrowings 3 28,75,000
3 Current liabilities
A Other Current Liabilities 16,50,000
Total 71,50,000
Assets
1 Non-current assets
A Property, plant and equipment 4 46,50,000
2 Current assets
A Other Current Assets (30,00,000 – 5,00,000) 25,00,000
Total 71,50,000

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Notes to accounts

No. Particulars Rs
1 Share Capital
Authorized, issued and subscribed capital:
Equity share capital (fully paid up shares of 10,00,000
Rs 10 each)
2 Reserves and Surplus
Profit and Loss A/c 1,25,000
Revenue reserves 15,00,000

Less: Transfer to CRR (2,50,000) 12,50,000

Securities premium 2,50,000
Less: Utilization for share buy-back (2,50,000) -
Capital Redemption Reserves 2,50,000
Total 16,25,000
3 Long term borrowings
14% Debentures 18,75,000
Unsecured Loans 10,00,000
Total 28,75,000
4 Property, plant and equipment
Land and Building 19,30,000
Plant and machinery 18,00,000
Furniture and fitting 9,20,000
Net carrying value 46,50,000

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ADDITIONAL QUESTIONS ON BUYBACK OF SECURITIES

10. (i) Can preference shares be also issued with differential rights? Explain in brief.
(ii) Explain the conditions under Companies (Shares Capital and Debentures) Rules 2014, to deal with equity
shares with differential rights (DEC 2021 – 5 MARKS)

SOLUTION-
(i) No; the preference shares cannot be issued with differential rights. It is only the equity shares, which are
issued. Equity shares with Differential Rights means the share with dissimilar rights as to dividend, voting or
otherwise.

(ii) As per Share Capital and Debentures Rules, 2014, for equity shares with differential rights, following
conditions to be compulsorily complied with:
• The articles of association of the company authorizes the issue of shares with differential rights;
• The issue of shares is authorized by an ordinary resolution passed at a general meeting of the
shareholders: Provided that where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
• The voting power in respect of shares with differential rights shall not exceed seventy four percent of the
total voting power including voting power in respect of equity shares with differential rights issued at any
point of time;
• The company has not defaulted in filing financial statements and annual returns for three financial years
immediately preceding the financial year in which it is decided to issue such shares;
• The company has no subsisting default in the payment of a declared dividend to its shareholders or
repayment of its matured deposits or redemption of its preference shares or debentures that have become
due for redemption or payment of interest on such deposits or debentures or payment of dividend;
• The company has not defaulted in payment of the dividend on preference shares or repayment of any
term loan from a public financial institution or State level financial institution or scheduled Bank that has
become repayable or interest payable thereon or dues with respect to statutory payments relating to its
employees
•The company has not been penalized by Court or Tribunal during the last three years of any offence under
the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities
Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act,
under which such companies being regulated by sectoral regulators

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11. Mohan Ltd. furnishes the following summarised Balance Sheet on 31st March 2021.
(Rs in Lakhs)
Amount
Equity and Liabilities:
Shareholders’ fund
Share Capital
Equity Shares of 10 each fully paid up 780
6% Redeemable Preference shares of 50 each fully Paid up 240
Reserves and Surplus
Capital Reserves 58
General Reserve 625
Securities Premium 52
Profit & Loss 148
Revaluation Reserve 34
Infrastructure Development Reserve 16

Non-current liabilities
7% Debentures 268
Unsecured Loans 36
Current Liabilities 395
2652
Assets:
Non-current Assets
Plant and Equipment less depreciation 725
Investment at cost 720
Current Assets 1207
2652

Other Information:
(1) The company redeemed preference shares at a premium of 10% on 1st April,2021.
(2) It also offered to buy back the maximum permissible number of equity shares of Rs 10 each at Rs 30 per
share on 2nd April 2021.
(3) The payment for the above was made out of available bank balance, which appeared as a part of the
current assets.
(4) The company had investment in own debentures costing Rs 60 lakhs (face value Rs 75 lakhs). These
debentures were cancelled on 2nd April 2021.
(5) On 4th April 2021 company issued one fully paid-up equity share of Rs 10 each by way of bonus for
every five equity shares held by the shareholders.

You are required to:

(a) Calculate maximum possible number of equity shares that can be bought back as per the Companies
Act, 2013 and
(b) Record the Journal Entries for the above-mentioned information (DEC 2021 – 10 MARKS)

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SOLUTION-
(i) Statement determining the maximum number of shares to be bought back
Number of shares (in lakhs)
Particulars When loan fund is Rs 304 lakhs
Shares Outstanding Test (W.N.1) 19.5
Resources Test (W.N.2) 11.175
Debt Equity Ratio Test (W.N.3) 29.725
Maximum number of shares that can 11.175
bebought back [least of the above]
Thus, the company can buy 11,17,500 Equity shares at Rs 30 each.

Working Notes:
1. Shares Outstanding Test
Particulars (Shares in lakh)
Number of shares outstanding 78
25% of the shares outstanding 19.5

2. Resources Test
Particulars
Paid up capital (Rs in lakh) 780
Free reserves (Rs in lakh) (625+52+148-24-240*) 561
Shareholders’ funds (Rs in lakh) 1341
25% of Shareholders fund (Rs in lakh) 335.25
Buy-back price per share 30
Number of shares that can be bought back 11.175
*Amount transferred to CRR is excluded from free reserves.
Premium on redemption also reduced.

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back
Particulars Rs In lakh
(a) Loan funds (Rs) 304
(b) Minimum equity to be maintained after buy- 152
back in the ratio of 2:1 (Rs) (a/2)
(c) Present equity shareholders fund (Rs) 1341
(d) Future equity shareholders fund (Rs) (see 1043.75 (1341-297.25)
W.N.4)
(e) Maximum permitted buy-back of Equity 891.75
(Rs)[(d) – (b)]
(f) Maximum number of shares that can 29.725
bebought back @ Rs 30 per share
As per the provisions of the Companies Act, Qualifies
2013, company

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Alternatively, when current liabilities are considered as part of loan funds, in that case Debt Equity Ratio
Test will be done as follows:
Particulars ` in lakh
(a) Loan funds (`) 699
(b) Minimum equity to be maintained after 349.5
buy-back in the ratio of 2:1 (a/2)
(c) Present equity shareholders fund 1341
(d) Future equity shareholders fund 1093.125 (1341-247.875)

(e) Maximum permitted buy-back of Equity 743.625

[(d) – (b)]
(f) Maximum number of shares that can be 24.7875
bought back @ ` 30 per share
As per the provisions of the Companies Qualifies
Act, 2013, company

(ii) Journal Entries for Buy Back

Date Particulars Debit Credit
2021
1st April 6% Redeemable preference share capital A/c Dr. 240
Premium on redemption of preference shares Dr. 24
A/c
To Preference shareholders A/c 264
(Being preference share capital transferred
to shareholders account)
Preference shareholders A/c Dr. 264
To Bank A/c 264
(Being payment made to shareholders)
General Reserve or P&L A/c* Dr. 24

To Premium on redemption 24
ofpreference shares A/c
(Being premium on redemption of
preferenceshares adjusted through securities
premium)
2nd April Equity shares buy-back A/c Dr. 335.25
To Bank A/c 335.25
(Being 11.175 lakhs equity shares of ` 10
each bought back @ ` 30 per share)
Equity share capital A/c Dr. 111.75
Securities Premium A/c Dr. 52
General Reserve or P&L A/c Dr. 171.50
To Equity Shares buy-back A/c 335.25
(Being cancellation of shares bought back)
General reserve A/c Dr. 351.75

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To Capital redemption reserve A/c 351.75

(Being creation of capital redemption reserve
account to the extent of the face value of
preference shares redeemed and equity
shares bought back as per the law ie. 240+
111.75 lakhs)
2nd April 7% Debentures A/c Dr. 75
To Investment (own debentures) A/c 60
To Profit on cancellation of own 15
debentures A/c
(Being cancellation of own debentures
costing ` 60 lakhs, face value being ` 75
lakhs and the balance being profit on
cancellation of debentures)
4th April Capital Redemption Reserve Dr. 133.65
To Bonus Shares A/c 133.65
(Being issue of one bonus equity share for
every five equity shares held)
Bonus shares A/c Dr. 133.65
To Equity share capital A/c 133.65
(Being bonus shares issued)

Working Note: Bonus Share to be issued =66.825 (78 - 11.175) lakh shares divided by 5 = 13.365 lakh
shares.

Note: *Securities premium has not been utilized for the purpose of premium payable on redemption of
preference shares assuming that the company referred in the question is governed by Section 133 of the
Companies Act, 2013 and complies with the Accounting Standards prescribed for them. Alternative entry
considering otherwise is also possible by utilizing securities premium amount.

12. Rohan Ltd. furnishes the following information as at 31-03-2021.

Share Capital:
Equity Share Capital of Rs 20 each fully paid up 50,00,000
10,000, 10% Preference Shares of Rs 100 each fullypaid up 10,00,000 60,00,000

Reserves & Surplus:

Capital Reserve 1,00,000
Security Premium 12,00,000
Revenue Reserve 5,00,000
Profit and Loss 25,50,000 43,50,000
12% Debentures 12,50,000
Current Liabilities and Provisions 5,50,000
Property, Plant and Equipment 1,00,75,000
Current Assets:
Investment 3,00,000
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Inventory 2,00,000
Cash and Bank 15,75,000 20,75,000

The shareholders adopted the following resolution on 31st March, 2021:

(1) Buy back 25% of the paid-up capital and it was decided to offer a price of 20% over market price. The
prevailing market value of the company's share is Rs 30 per share.
(2) To finance the buy-back of shares, company:
(a) Issues 3,000, 14% debentures of Rs 100 each at a premium of 20%.
(b) Issues 2,500, 10% preference shares of Rs 100 each.
(3) Sell investment worth Rs 1,00,000 for Rs 1,50,000.
(4) Maintain a balance of RsRs 2,00,000 in Revenue Reserve.
(5) Later, the company issue three fully paid up equity shares of Rs 20 each by way of bonus for every 15
equity shares held by the equity shareholders.

You are required to pass the necessary journal entries to record the above transactions (RTP NOV 2021)

SOLUTION-
Journal Entries In the books of Rohan Limited
Particulars Dr. Cr.

1. Bank A/c Dr. 3,60,000

To 14 % Debenture A/c 3,00,000
To Securities Premium A/c 60,000
(Being 14 % debentures issued to finance buy back)
2. Bank A/c Dr. 2,50,000
To 10% preference share capital A/c 2,50,000
(Being 10% preference share issued to finance buy
back)
3. Bank A/c Dr. 1,50,000
To Investment A/c 1,00,000
To Profit on sale of investment 50,000
(Being investment sold on profit)
4. Equity share capital A/c (62,500 x `20) Dr. 12,50,000
Premium on buyback or Securities premium A/c Dr. 10,00,000
(62,500 x `16)
To Equity shares buy back A/c (62,500 x `36) 22,50,000
(Being the amount due to equity shareholders on
buy back)
5. Equity shares buy back A/c Dr. 22,50,000
To Bank A/c 22,50,000
(Being the payment made on account of buy back of
62,500 Equity Shares as per the Companies Act)
6. Revenue reserve Dr. 3,00,000
Profit and Loss A/c Dr. 7,00,000
To Capital redemption reserve A/c 10,00,000

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(Being amount equal to nominal value of buy back

shares from free reserves transferred to capital
redemption reserve account as per the law)
[12,50,000 less 2,50,000]
7. Capital redemption reserve A/c Dr. 7,50,000
To Bonus shares A/c 7,50,000
(Being the utilization of capital redemption reserve to
issue 37,500 bonus shares)
8. Bonus shares A/c Dr. 7,50,000
To Equity share capital A/c 7,50,000
(Being issue of 3 bonus equity share for every
15 equity shares held)

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Chapter 3 ACCOUNTING FOR EMPLOYEE STOCK OPTION PLAN

ESOP is a plan under which the Company grants employees stock option. Employee Stock Option is a plan
that gives the employees of the company, the option for a specified period of time to purchase or subscribe
to the shares of the company, at a fixed determinable price.

IMPORTANT TERMS TO BE REMEMBERED

• Grant: Grant means issue of option to the employees under ESOS.
• Grant Date : It is date on which this scheme is approved by the shareholders
• Vesting: It is the process by which the employee is given the right to apply for shares of the
company against the option granted to him in pursuance of employee stock option scheme.
• Vesting Period: It is the time period between grant date and the date on which all the
specified vesting conditions of an employee share based payment plan are to be satisfied.
• Option: Option means a right but not an obligation granted to an employee for a specified
period of time in pursuance of ESOS to purchase or subscribe to the shares of the company
at a pre-determined price.
• Exercise Period: It is the time period after vesting within which the employee should
exercise his right to apply for shares against the option vested in him in pursuance of the
ESOS.
• Exercise Price: It is the price payable by the employee for exercising the option granted to
him in pursuance of ESOS.
• Intrinsic Value is the difference between the fair value of the shares to which the
counterparty has the (conditional or unconditional) right to subscribe or which it has the
right to receive, and the price (if any) the counterparty is (or will be) required to pay for
those shares. For example, a share option with an exercise price of Rs 15, on a share with a
fair value of Rs 20, has an intrinsic value of Rs 5.
• Fair Value: It is the amount for which stock option granted or a share offered for purchase
could be exchanged between knowledgeable, willing parties in an arm’s length transaction

For accounting purposes, employee share-based payment plans are classified into the following categories:
• Equity-settled: Under these plans, the employees receive shares.
• Cash-settled: Under these plans, the employees receive cash based on the price (or value) of the
enterprise's shares.
• Employee share-based payment plans with cash alternatives: Under these plans, either the
enterprise or the employee has a choice of whether the enterprise settles the payment in cash or by
issue of shares

GRADED VESTING -
• Graded vesting refers to a situation where options under a plan vest on different dates.
• For example, a plan may provide that shares offered to an employee shall vest in proportion of 2:3:5
in three years commencing from fourth year.
• Thus if an employee is offered 100 shares under the plan, 20 shares shall vest in year 4, 30 shares
shall vest in year 5 and 50 shares shall vest in year 6.
• In these cases, based on vesting dates, the plan is segregated in into different groups. Each of these
groups is then treated as a separate plan with specific vesting period and expected life.

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1. A Company has its share capital divided into shares of Rs 10 each. On 1st April, 20X1 it granted
10,000 employees’ stock options at Rs 40, when the market price was Rs 130. The fair value of
options, calculated using an option pricing model, is Rs 90 per option. The options were to be
exercised between 15th March, 20X2 and 31st March, 20X2. The employees exercised their options
for 9,500 shares only; the remaining options lapsed. The company closes its books on 31st March
every year.

Show Journal Entries.

Solution
Particulars Dr. Cr.
` `
15 March Bank A/c
th
(9,500 x 40) Dr. 3,80,000
20X2 to Employee compensation expense A/c
[9,500 x 90) Dr. 8,55,000
31st March To Equity share capital A/c (9,500 x 10) 95,000

20X2 To Securities premium A/c [9,500 x (130-10)] 11,40,000

(Being allotment to employees of 9,500 equity
shares of ` 10 each at a premium of ` 120 per share
in exercise of stock options by employees)
31st Profit and Loss A/c Dr. 8,55,000
March To Employee compensation expense A/c 8,55,000
20X2 (Being transfer of employee compensation expense
to profit and loss account)

2. ABC Ltd. grants 1,000 employees stock options on 1.4.20X0 at Rs 40, when the market price is Rs
160. The fair value of options, calculated using an option pricing model, is Rs 120 per option. The
vesting period is 2½ years and the maximum exercise period is one year. 300 unvested options lapse
on 1.5.20X2. 600 options are exercised on 30.6.20X3. 100 vested options lapse at the end of the
exercise period.

Pass Journal Entries giving suitable narrations.

Solution
In the books of ABC Ltd. - Journal Entries
Date Particulars Dr. Cr.
31.3.20X1 Employees compensation expense account Dr. 48,000
To Employee stock option outstanding 48,000
account
(Being compensation expenses recognized in
respect of the employee stock option i.e.
1,000 options granted to employees at a fair
value of Rs 120 each, amortized on straight
1
line basis over 2 years)
2
(1,000 stock options x Rs 120 / 2.5 years)

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Profit and loss account Dr. 48,000

To Employees compensation expenses 48,000

account
(Being expenses transferred to profit and loss
account at year end)
31.3.20X2 Employees compensation expenses account Dr. 48,000
To Employee stock option outstanding 48,000
account
(Being compensation expense recognized in
respect of the employee stock option i.e. 1,000
options granted to employees, amortized on
1
straight line basis over 2 years)
2
(1,000 stock options x Rs 120 / 2.5 years)
Profit and loss account Dr. 48,000
To Employees compensation expenses 48,000
account
(Being expenses transferred to profit and loss
account at year end)
31.3.20X3 Employee Stock Option Outstanding A/c Dr. 12,000
(W.N.1)
To General Reserve A/c (W.N.1) 12,000
(Being excess of employees
compensationexpenses transferred to
general reserve account)
30.6.20X3 Bank A/c (600 × Rs 40) Dr. 24,000
Employee stock option outstanding account Dr. 72,000
(600 × Rs 120)
To Equity share capital account 6,000
(600 × Rs 10)
To Securities premium account 90,000
(600 x Rs 150)
(Being 600 employee stock option exercised at
an exercise price of Rs 40 each)
01.10.20X3 Employee stock option outstanding account Dr. 12,000
(W.N.2)

To General reserve account (W.N.2) 12,000

(Being ESOS outstanding A/c on lapse of 100
options at the end of exercise of option period
transferred to General Reserve A/c)

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Working Notes:
1. On 31.3.20X3, ABC Ltd. will examine its actual forfeitures and make necessary adjustments, if any, to
reflect expenses for the number of options that actually vested. Considering that 700 stock options have
completed 2.5 years vesting period, the expense to be recognized during the year is in negative i.e.
No. of options actually vested (700 x 120) Rs 84,000
Less: Expenses recognized Rs (48,000 + 48,000) (Rs 96,000)
Excess expense transferred to general reserve Rs 12,000

2. Similarly, on 1.10.20X3, Employee Stock Option Outstanding Account will be

No. of options actually vested (600 x 120) Rs 72,000
Less: Expenses recognized (Rs 84,000)
Excess expense transferred to general reserve Rs 12,000
Employee Stock Options Outstanding will appear in the Balance Sheet under a separate heading, between
‘Share Capital’ and ‘Reserves and Surplus’.

3. Arihant Limited has its share capital divided into equity shares of Rs 10 each. On 1-10-20X1, it
granted 20,000 employees’ stock options at Rs 50 per share, when the market price was Rs 120 per
share. The fair value of options, calculated using an option pricing model, is Rs 70 per option The
options were to be exercised between 10th December, 20X1 and 31st March, 20X2. The employees
exercised their options for 16,000 shares only and the remaining options lapsed. The company
closes its books on 31st March every year. Show Journal Entries (with narration) as would appear in
the books of the company upto 31st March, 20X2.

Solution
Journal Entries in the books of Arihant Ltd
Rs Rs
10.12.X1 Bank A/c (16,000 x 50) Dr. 8,00,000
to Employee compensation expense Dr. 11,20,000
31.3.X2 A/c(16,000 x 70) 1,60,000
To Equity share capital A/c (16,000 x 10)
To Securities premium A/c (16,000 x 110) 17,60,000
(Being shares issued to the employees
against the options vested to them in
pursuance of Employee Stock Option Plan)
31.3.X2 Profit and Loss A/c Dr. 11,20,000
To Employee compensation expense A/c 11,20,000
(Being transfer of employee compensation
expenses to Profit and Loss Account)

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4. Ajanta grants 120 share options to each of its 460 employees. Each grant is conditional on the
employee working for Ajanta over the next three years. Ajanta has estimated that the fair value of
each share option is Rs 12. Ajanta estimates that 25% of employees will leave during the three-year
period and so forfeit their rights to the share options. Everything turns out exactly as expected.
Required:
Calculate the amounts to be recognized as expense during the vesting period.
Solution
Year Calculation Expense Cumulative
for Period expense
Rs Rs
1 55,200 options x 75% x Rs 12 x 1/3 years 1,65,600 1,65,600
2 (55,200 options x 75% x Rs 12 x 2/3 1,65,600 3,31,200
years)
- Rs 165,600
3 (55,200 options x 75% x Rs 12 x 3/3 1,65,600 4,96,800
years)
- Rs 331,200

5. P Ltd. granted option for 8,000 equity shares of nominal value of Rs 10 on 1st October, 20X0 at Rs 80
when the market price was Rs 170. Fair value per option is Rs 90. The vesting period is 4½ years,
4,000 unvested options lapsed on 1st December, 20X2, 3,000 options were exercised on 30th
September, 20X5 and 1,000 vested options lapsed at the end of the exercise period. Pass Journal
Entries for above transactions.
Solution
Journal Entries In the books of P Ltd
Date Particulars
31.3.20X1 Employees compensation expense account Dr. 80,000
To Employee stock option outstanding 80,000
account
(Being compensation expenses for 6 months
recognized in respect of the employee stock
options i.e. 8,000 options granted to
employees at a fair value of Rs 90 each,
1
amortized on straight line basis over 4
2
years [(8,000 stock options x Rs 90) / 4.5
years] x 0.5]) (W.N.1)
Profit and loss account Dr. 80,000
To Employees compensation expenses 80,000
account
(Being expenses transferred to profit and
loss account at the year end)
31.3.20X2 Employees compensation expense account Dr. 1,60,000
To Employee stock option outstanding 1,60,000
account

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(Being compensation expense recognized in

respect of the employee stock option i.e.
8,000 options granted to employees,
1
amortized on straight line basis over 4
2
years [(8,000 stock options x Rs 90) / 4.5
years) x 1 year])
Profit and loss account Dr. 1,60,000
To Employees compensation expense 1,60,000
account
(Being expenses transferred to profit and
loss account at year end)
31.3.20X3 Employees compensation expense account Dr. 80,000
To Employee stock option outstanding 80,000
account
(Being compensation expense recognized in
respect of the employee stock option i.e.
4,000 options, amortized on straight line
1
basis over 4 years [(4,000 stock options x
2
Rs 90) / 4.5 years])
Employee stock option outstanding account Dr. 1,20,000
(W.N.2)
To General Reserve account (W.N.2) 1,20,000
(Being excess of employees compensation
expenses transferred to general reserve
account)
Profit and loss account Dr. 80,000
To Employees compensation expenses 80,000
account
(Being expenses transferred to profit and
loss account at year end)

31.3.20X4 Employees compensation expense account Dr. 80,000

To Employee stock option outstanding 80,000
account
(Being compensation expenses recognized in
respect of the employee stock option i.e.
4,000 options, amortized on straight line
1
basis over 4 years [(4,000 stock options x
Rs
2
90) / 4.5 years])

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Profit and loss account Dr. 80,000

To Employees compensation expenses 80,000
account
(Being expenses transferred to profit and
loss account at year end)
31.3.20X5 Employees compensation expense account Dr. 80,000
To Employee stock option outstanding 80,000
account
(Being compensation expenses recognized in
respect of the employee stock option i.e.
4,000 options, amortised on straight line
1
basis over 4 years [(4,000 stock options x
Rs
2
90) / 4.5 years])
Profit and loss account Dr. 80,000
To Employees compensation expense 80,000
account
(Being expenses transferred to profit and
loss account at year end)
30.9.20X5 Bank A/c (3,000 × Rs 80) Dr. 2,40,000
Employee stock option outstanding Dr. 2,70,000
To Equity share capital account (3,000 30,000
x Rs 10)

To Securities premium [(Rs 170 – Rs 4,80,000

10) x3,000]
(Being 3,000 employee stock option exercised
at an exercise price of Rs 80 each)
Employee stock option outstanding account Dr. 90,000
(W.N.3)
To General reserve account (W.N.3) 90,000
(Being ESOS outstanding A/c transferred to
General Reserve A/c on lapse of 1000 vested
options at the end of the exercise period)

Working Notes:
1. At 1.12.X2, 4,000 unvested option lapsed on which till date expenses recognized to be transferred to
general reserve = Rs (80,000 + 1,60,000) x 4,000 / 8,000 = Rs 1,20,000
2. Expenses charged on lapsed vested options transferred to general reserve
= 1,000 x Rs 90 = Rs 90,000

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6. Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.20X1 for Rs 20,
depending upon the employees at the time of vesting of options. Options would be exercisable
within a year when it is vested. The market price of the share is Rs 50 each. These options will vest
at the end of year 1 if the earning of Choice Ltd. is 16%, or it will vest at the end of the year 2 if the
average earning of two years is 13%, or lastly it will vest at the end of the third year if the average
earning of 3 years will be 10%. 5,000 unvested options lapsed on 31.3.20X2. 4,000 unvested options
lapsed on 31.3.20X3 and finally 3,500 unvested options lapsed on 31.3.20X4. Consider fair value per
option is Rs 30.
Following were the earnings of Choice Ltd in the last 3 years:
Year ended on Earning (in %)
31.3.20X2 14%
31.3.20X3 10%
31.3.20X4 7%

850 employees exercised their vested options within a year and remaining options were unexercised at the
end of the contractual life. Pass Journal entries for the above.

Solution
Date Particulars Rs Rs
31.3.20X2 Employees compensation expense A/c Dr. 14,25,000
To ESOP outstanding A/c 14,25,000
(Being compensation expense
recognized in respect of the ESOP i.e. 100
options each granted to 1,000 employees
at a fair value of Rs 30 each, amortised on
straight line basis over vesting years (Refer
W.N.)
Profit and Loss A/c Dr. 14,25,000
To Employees compensation 14,25,000
expenses A/c
(Being expenses transferred to profit and
Loss A/c)
31.3.20X3 Employees compensation expenses A/c Dr. 3,95,000
To ESOP outstanding A/c 3,95,000
(Being compensation expense recognized
in respect of the ESOP- Refer W.N.)
Profit and Loss A/c Dr. 3,95,000
To Employees compensation 3,95,000
expenses A/c
(Being expenses transferred to profit and
Loss A/c)
31.3.20X4 Employees compensation Expenses A/c Dr. 8,05,000
To ESOP outstanding A/c 8,05,000
(Being compensation expense recognized
in respect of the ESOP- Refer W.N.)

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Profit and Loss A/c 8,05,000

To Employees compensation 8,05,000
expenses A/c
(Being expenses transferred to profit and
Loss A/c)

20X4-X5 Bank A/c (85,000 × Rs 20) Dr. 17,00,000

ESOP outstanding A/c Dr. 25,50,000
[(26,25,000/87,500) x 85,000]
To Equity share capital (85,000 x Rs 8,50,000
10)
To Securities premium A/c (85,000 x 34,00,000
Rs 40)
(Being 85,000 options exercised at an
exercise price of Rs 50 each)
31.3.20X5 ESOP outstanding A/c Dr. 75,000
To General Reserve A/c 75,000
(Being ESOP outstanding A/c on lapse of
2,500 options at the end of exercise of
option period transferred to General
Reserve A/c)

Working Note:
Statement showing compensation expense to be recognized at the end of:
Particulars Year 1 Year 2 Year 3
(31.3.20X2) (31.3.20X3) (31.3.20X4)
Number of options 95,000 options 91,000 options 87,500 options
expected to vest
Total compensation expense Rs 28,50,000 Rs 27,30,000 Rs 26,25,000
accrued (50-20)
Compensation expense of 28,50,000 x 1/2 27,30,000 x 2/3 Rs 26,25,000
the year = Rs 14,25,000 = Rs 18,20,000
Compensation expense
recognized previously Nil Rs 14,25,000 Rs 18,20,000

Compensation expenses to
be recognized for the year Rs 14,25,000 Rs 3,95,000 Rs 8,05,000

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ADDITIONAL QUESTIONS ON EMPLOYEE STOCK OPTIONS

7. Suvidhi Ltd. offered 50 shares to each of its 1500 employees on 1st April 2017 for Rs 30. Option
would be exercisable within a year it is vested. 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 is
Rs 50 per share on grant date. Due to post vesting restrictions on transfer, the fair value of shares
issued under the plan is estimated at Rs 38 per share.

On 31st March, 2018,1200 employees accepted the offer and paid Rs 30 per share purchased. Nominal
value of each share is Rs 10.
Record the issue of shares in the books of the company under the aforesaid plan

(MAY 2018 & MOCK PAPER)

Solution

Journal Entries in the books of Suvidhi Ltd.

DATE ENTRY Dr Cr

31.3.18 Bank A/c (60,000 shares x Rs 30) Dr 18,00,000

Employees stock compensation expense A/c Dr. 4,80,000
To Share Capital A/c (60,000 shares x Rs 10) 6,00,000
To Securities Premium(60,000 shares x Rs 28) 16,80,000
(Being shares issued under ESOP @ Rs 30 to 1,200
employees)

31.3.18 Profit & Loss A/c 4,80,000

To Employees stock compensation expense A/c 4,80,000
(Being Employees stock compensation expense
transferred to Profit & Loss A/c)

Working Note:
• Fair value of an option = Rs 38 – Rs 30 = Rs 8
• Number of shares issued = 1,200 employees x 50 shares/employee = 60,000 shares
• Fair value of ESOP which will be recognized as expenses in the year 2017-2018 :
= 60,000 shares x Rs 8 = Rs 4,80,000
• Vesting period = 1 year
• Expenses recognized in 2017-2018 = Rs 4,80,000

8. PQ Ltd. grants 100 stock options to each of its 1,000 employees on 1-4-2015, conditional upon the
employee remaining in the company for 2 years. The fair value of the option is Rs 18 on the grant
date and the exercise price is Rs 55 per share. The other information is given as under:
(i) Number of employees expected to satisfy service condition are 930 in the 1st year and 850 in the 2nd
year.
(ii) 40 employees left the company in the 1st year of service and 880 employees have actually completed 2
year vesting period.
You are required to calculate ESOP cost to be amortized by PQ Ltd. in the years 2015-2016 and 2016-2017.
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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Solution:

Particulars 2015-2016 2016-2017

a. No. of options expected to vest under 93,000 (930 x 100) 88,000 (880 x 100)
the scheme
b. Fair value of options per share 18 18
c. TOTAL Expense to be recognised 93,000 * 18 * ½ = 88,000* 18 =
837,000 15,84,000
d. Expense recognised previously - 837,000
e. Expense to be recognised in current 837,000 7,47,000
financial year ( e =c-d)

9. The following particulars in respect of stock options granted by a company are available:
Grant date – 01/04/2016
Number of employees covered - 50
Number of options granted per employee - 1000
Fair value of option per share on grant date – 9

The options will vest to employees serving continuously for 3 years from vesting date, provided the share
price is Rs 65 or above at the end of 2018-19.

The estimates of number of employees satisfying the condition of continuous employment were 48 on
31/03/17, 47 on 31/03/18. The number of employees actually satisfying the condition of continuous
employment was 45.

The share price at the end of 2018-19 was Rs 68.

You are required to compute expenses to be recognised in each year in the books of the company.

Solution

Particulars 2016-2017 2017-2018 2018-19

a. No. of options expected to vest 48*1000 = 47*1000= 47,000 45*1000=
under the scheme 48,000 45,000
b. Fair value of options per share 9 9 9
c. TOTAL Expense to be 48,000* 9 * 1/3 = 47,000*9*2/3= 45000*9*3/3=
recognised 144,000 282,000 405,000
d. Expense recognised previously 0 144,000 282,000
e. Expense to be recognised in 144,000 138,000 123,000
current financial year ( e =c-d)

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10. On 1st April, 20X1, a company offered 100 shares to each of its 500 employees at Rs 50 per share.
The employees are given a year 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 Rs 60 per share. Due to post-vesting restrictions on transfer, the fair
value of shares issued under the plan is estimated at Rs 56 per share.

On 31st March, 20X2, 400 employees accepted the offer and paid Rs 50 per share purchased. Nominal
value of each share is Rs 10.
Record the issue of share in the books of the company under the aforesaid plan.

Solution-
Fair value of an option = Rs 56 – Rs 50 = Rs 6
Number of shares issued (400 X 100) = 40,000 Shares
Fair value of ESOP = 40,000 shares x Rs 6 = Rs 2,40,000
Vesting period = 1 Year
Expenses recognized in 20X1 – X2 = Rs 2,40,000

Date Entry Amount

31/03/20X1 Bank A/c Dr (40,000 x 50) 20,00,000
Employee Compensation Expense A/c Dr 240,000
To Share Capital (40,000 x 10) 400,000
To Securities Premium A/c (40,000x 46) 18,40,000
(Being ESOP exercised on 400 shares accounted)

31/03/20X1 P&L A/c Dr 240,000

To Employee Compensation Expense A/c Dr 240,000
(Being Employee Compensation Expense Transferred to P&L A/c)

11. At the beginning of year 1, an enterprise grants 10,000 stock options to a senior executive,
conditional upon the executive remaining in the employment of the enterprise until the end of
year 3. The exercise price is Rs 40. However, the exercise price drops to Rs 30 if the earnings of the
enterprise increase by at-least an average of 10 per cent per year over the three-year period.

On the grant date, the enterprise estimates that the fair value of the stock options, with an exercise price of
Rs 30, is Rs 16 per option. If the exercise price is Rs 40, the enterprise estimates that the stock options have
a fair value of Rs 12 per option.

During year 1, the earnings of the enterprise increased by 12 per cent, and the enterprise expects that
earnings will continue to increase at this rate over the next two years. The enterprise, therefore, expects
that the earnings target will be achieved, and hence the stock options will have an exercise price of Rs 30.

During year 2, the earnings of the enterprise increased by 13 per cent, and the enterprise continues to
expect that the earnings target will be achieved.

During year 3, the earnings of the enterprise increased by only 3 per cent, and therefore the earnings target
was not achieved. The executive completes three years’ service, and therefore satisfies the service
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condition. Because the earnings target was not achieved, the 10,000 vested stock options have an exercise
price of Rs 40.

You are required to calculate the amount to be charged to Profit and Loss Account every year on account of
compensation expenses.

Solution
Calculation of compensation expense to be charged every year
Year Calculation Expense for the year Cumulative expense
(Rs) (Rs)
1 10,000 x Rs 16 x 1/3 53,333 53,333
2 10,000 x Rs 16 x 2/3 53,334 1,06,667
3 10,000 x Rs 12 x 3/3 13,333 1,20,000

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Chapter 4 AMALGAMATION OF COMPANIES

• In an amalgamation, two or more companies are combined into one by merger or by one taking
over the other.

Therefore, the term ‘amalgamation’ contemplates two kinds of activities:

• Two or more companies join to form a new company or
• Absorption and blending of one by the other. Thus, amalgamation include absorption.
• The purpose of companies joining together is to secure various advantages such as economies of
large scale production, avoiding competition, increasing efficiency, expansion etc.
• The companies going into liquidation or merged companies are called vendor companies or
transferor companies. The new company which is formed to take over the liquidated companies or
the company with which the transferor company is merged is called transferee or vendee.
• Wherever an undertaking is being carried on by a company and is in substance transferred, not to
an outsider, but to another company consisting substantially of the same shareholders with a view
to its being continued by the transferee company, there is external reconstruction.

Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more companies In this case an In this case, a newly
are wound up and a new existing company formed company takes
company is formed to take takes over the over the business of an
over their business. business of one or existing company.
more existing
companies.
Minimum number of At least three companies At least two Only two companies
Companies involved are involved. companies are are involved
involved
Number of new Only one resultant No new resultant Only one resultant
resultant companies company is formed. Two company is formed company is formed.
companies are wound up Under this case a
to form a single resultant newly formed
company. company takes over
the business of an
existing company.
Objective Amalgamation is done to Absorption is done External reconstruction
cut competition & reap the to cut competition & is done to reorganise
economies in large scale reap the economies the financial structure
in large scale of the company.
Example A Ltd. and B Ltd. A Ltd. takes over the B Ltd. is formed to take
amalgamate to form C Ltd. business of another over the business of an
existing company B existing company A
Ltd. Ltd.

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TYPES OF AMALGAMATION-
The Institute of Chartered Accountants of India has introduced Accounting Standard -14 (AS 14) on
‘Accounting for Amalgamations’. The standard recognizes two types of amalgamation –
• Amalgamation in the nature of merger is an amalgamation where there is a genuine pooling not
merely of assets and liabilities of the transferor and transferee companies but also of the
shareholders’ interests and of the businesses of the companies.
• Amalgamation in the Nature of Purchase

AS PER AS 14, AMALGAMATION IN THE NATURE OF MERGER IS AN AMALGAMATION WHICH SATISFIES

ALL THE FOLLOWING CONDITIONS:
✓ All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company
✓ No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies. For example, if transferor company is
following straight line method of depreciation, the book value of the assets of the transferor
company will be revised by applying the written down method of depreciation.
✓ Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the amalgamation,
by the transferee company or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
✓ The consideration for the amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders of the transferee company is discharged by the
transferee company wholly by the issue of equity shares in the transferee company, except that
cash may be paid in respect of any fractional shares
✓ The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.

METHODS OF ACCOUNTING FOR AMALGAMATIONS -

Pooling of Interest Method - Used in case of amalgamation in the nature of merger
Purchase Method – Used in case of Amalgamation in the Nature of Purchase

Goodwill arising on Amalgamation in case of Purchase method should be amortized over 5 years unless
longer period can be justified.

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PROBLEMS
1. The Balance Sheet of Partha Ltd as on 31st March is given below - (in 000’s)

Liabilities Amount Assets Amount

Share Capital: Equity 50,50 Sundry Fixed Assets 50,00
Shares of Rs 10 each
8% Preference Shares 9,50 Stock 20,00

12% Debentures 15,00 Debtors 10,00

Sundry Creditors & Other 10,00 Cash & Bank 5,00
Liabilities
Total 85,00 Total 85,00
Krishna Ltd agrees to take over Partha Ltd, by issuing requisite number of Preference Shares of 10/- each at
par to the Preference Shareholders of Partha Ltd, and requisite number of Equity Shares of 10/- each at par
to the Equity Shareholders of Partha Ltd. Purchase Consideration is settled as per Book Value of the assets,
and the Debentures will be taken over by Krishna Ltd on the agreement that these will be paid off at 10%
premium after one year. Debenture holders of Partha Ltd will accept 12% Debentures of Krishna Ltd.

Calculate Purchase Consideration.

2. Trimurthi Company Ltd was incorporated for the purpose of acquiring Brahma Ltd, Vishnu Ltd and Shiva
Ltd. The Balance Sheet of these Companies as on 31st March is as follows:
Particulars Brahma Ltd Vishnu Ltd Shiva Ltd
Tangible Fixed Assets at Cost Less Depreciation 5,00,000 4,00,000 3,00,000

Goodwill - 60,000 -

Other Assets 2,00,000 2,80,000 85,000

Total Assets 7,00,000 7,40,000 3,85,000
Share Capital ( Rs 10 each) 4,00,000 5,00,000 2,50,000

Profit and Loss Account 1,50,000 1,10,000 60,000

10% Debentures 70,000 - 40,000
Sundry Creditors 80,000 1,30,000 35,000
Total Liabilities 7,00,000 7,40,000 3,85,000
Average Annual Profits before Debenture Interest 90,000 1,20,000 50,000
Professional Valuation of Tangible Assets on 31st 6,20,000 4,80,000 3,60,000
March
The Directors in their negotiations agreed that –
(i) the recorded Goodwill of Vishnu Ltd is valueless,
(ii) The Other Assets of the Brahma Ltd are worth 30,000/-,
(iii) The valuation of 31st March in respect of Tangible Fixed Assets should be accepted,
(iv) These adjustments are to be made by the individual Company before the completion of the acquisition.

The acquisition agreement provides for the issue of 12% Unsecured Debentures to the value of the Net
Assets of the Companies Brahma Ltd, Vishnu Ltd and Shiva Ltd and for the issuance of 10/- Nominal Value
Ordinary Shares for the Capitalized Average Profits of each acquired Company in excess of the Net Assets
contributed. Capitalization Rate = 10%.
You are required to calculate Purchase Consideration and show the Purchase Consideration as discharged
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3. Star and Moon had been carrying on business independently. They agree to amalgamate and form a
new Company Neptune Ltd with an Authorized Share Capital of Rs 2,00,000/- divided into 40,000
Equity Shares of 5/- each.

On 31st March, the respective Balance Sheets of Star and Moon were as follows: (in Rs)
Particulars Star Moon
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
Less: Current Liabilities (2,98,500) (90,125)
Balance representing 1,82,500 1,76,250
Capital

Additional Information: Revalued figures of Fixed and Current Assets were as follows:
Particulars Star Moon
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875

The Debtors and Creditors include Rs 21,675/- owed by Star to Moon.

• The Purchase Consideration is satisfied by issue of the following Shares and Debentures:
30,000 Equity Shares of Neptune Ltd to Star and Moon, in the proportion to the profitability of their
respective business, based on the Average Net Profit during the last three years which were as
follows:
Particulars Star Moon
Year before last Profit 2,24,788 1,36,950
Last Year (Loss) / Profit (1,250) 1,71,050
This Year Profit 1,88,962 1,79,500
• 15% Debentures in Neptune Ltd at par to provide an Income equivalent to 8% Return on Capital
Employed in their respective business as on 31st March, after revaluation of assets.

Required: (1) Compute the amount of Debentures and Shares to be issued to Star and Moon, and

4. P and Q have been carrying on same business independently. Due to competition in the market, they
decided to amalgamate and form a new company called PQ Ltd. Following is the Balance Sheet of P and
Q as at 31st March:
Liabilities P Q Assets P Q
Capital 7,75,000 8,85,000 Plant & Machinery 4,85,000 6,14,000
Current 6,23,500 5,57,600 Building 7,50,000 6,40,000
Liabilities Current Assets 1,63,500 1,58,600

TOTAL 13,98,500 14,12,600 TOTAL 13,98,500 14,12,600

CA SANDESH .C H Page 4.4

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Following are the additional information:

a. Liabilities of P include 50,000/- due to Q for purchases made. Q made a profit of 20% on sale to P.
b. P has goods purchased from Q, cost to Q being 10,000/-. This is included in the Current Assets of P as on
31st March.
c. The assets of P and Q are revalued as under:
Particulars P Q
Plant & Machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000

d. The Purchase Consideration is to be discharged as under:

i. Issue 24,000 Equity Shares of 25 each fully paid, up in proportion of the profitability in the preceding 2
years, which are given below:
Particulars P Q
1st Year 2,62,800 2,75,125
nd
2 Year 2,12,200 2,49,875
Total 4,75,000 5,25,000

ii. Issue 12% Preference Shares of Rs 10 each at par, to provide Income equivalent to 8% Return on Capital
Employed in the business as on 31st March, after revaluation of assets of P and Q respectively.

You are required to:

a. Compute the amount of Equity and Preference Shares issued to P and Q.

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Particulars Note No. Amount (Rs in Lakhs)

Equity and Liabilities
(1) Shareholders’Funds (a) Share Capital 1 1,150
(b) Reserves and Surplus 2 (87)
(2) Non-Current
Liabilities Long-Term Borrowings 3 630
(3) Current Liabilities Trade Payables 170
Total 1,863
Assets
(1) Non-Current Assets Tangible Assets 4 1,152
(2) Current Assets Inventories 380
Trade Receivables 256
Cash and Cash Equivalents 5 75
Total 1,863

5. Balance sheet of V ltd as on 31.03.2014 :

Notes:

(1) Share Capital Authorised:

Issued, Subscribed and Paid up:
80 Lakh Equity Shares of Rs 10 each, fully paid up 800
35 Lakh 12% Cumulative Preference Shares of Rs 10 each, fully paid up 350
Total 1,150

(2) Reserves and Surplus: Debit Balance of Profit & Loss Account (87)
Total (87)

(3) Long-Term Borrowings

10% Secured Cumulative Debentures of Rs 100 each, fully paid up 600
Outstanding Debenture Interest 30
Total 630

Land and Buildings - 445 , Plant and Machinery-593 Furniture, Fixtures and Fittings-114
Total 1,152

(5) Cash and Cash Equivalents

Balance at Bank 69
Cash in Hand 6
Total 75

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

On 1st April 2014, P Ltd took over the entire business of V Ltd on the following terms:
• V Ltd’s Equity Shareholders would receive 4 fully paid Equity Shares of P Ltd of Rs 10 each issued at a
Premium of Rs 2.50 each for every Five Shares held by them in V Ltd.

• Preference Shareholders of V Ltd would get 35 Lakh 13% Cumulative Preference Shares of Rs 10 each
fully paid up in P Ltd, in lieu of their present holding.

• All the Debentures of V Ltd would be converted into equal number of 10.5% Secured Cumulative
Debentures of Rs 100 each, fully paid up after the take over by P Ltd, which would also pay Outstanding
Debenture Interest in cash.
• Expenses of Amalgamation would be borne by P Ltd. Expenses came to be Rs 2 Lakh. P Ltd discovered
that its Creditors included Rs 7 Lakh due to V Ltd for goods purchased.
• Also P Ltd’s Stock included goods of the Invoice Price of Rs 5 Lakh earlier purchased from V Ltd, which
had charged profit at 20% of the Invoice Price.

You are required to:

Pass Journal Entries in the books of P Ltd, assuming it to be an amalgamation in the nature of Merger.

6. Balance Sheet as on 31st March was as follows –

Liabilities Gee Ltd Pee Ltd Assets Gee Ltd Pee Ltd

Equity Share Capital (10 each) 25,00,000 15,00,000 Buildings 12,50,000 7,75,000

14% Preference Share Capital 11,00,000 8,50,000 Plant & Machinery 16,25,000 8,50,000
(100 each)

General Reserve 2,50,000 2,50,000 Furniture 2,87,500 1,75,000

Export Profit reserve 1,50,000 1,00,000 Investments 3,50,000 2,50,000

Investment Allowance Reserve - 50,000 Stock 6,25,000 4,75,000

P&L A/c 3,75,000 1,25,000 Debtors 4,00,000 4,60,000

15% Debentures (100 each) 2,50,000 1,75,000 Bills Receivable 50,000 55,000

Creditors 1,50,000 75,000 Cash at bank 3,62,500 2,60,000

Bills payable 75,000 1,00,000

Other current liabilities 1,00,000 75,000

Total 49,50,000 33,00,000 Total 49,50,000 33,00,000

All the Bills Receivable of Pee Ltd were having Gee Ltd’s acceptances. Gee Ltd takes over Pee Ltd on the
above date. The Purchase Consideration is discharged as follows –

(a) Issued 1, 65,000 Equity Shares of Rs 10 each at par to the Equity Shareholders of Pee Ltd.
(b) Issued 15% Preference Shares of Rs 100 each to discharge the Preference Shareholders of
Pee Ltd at 10% Premium.

(c) The Debentures of Pee Ltd will be converted into equivalent number of Debentures of Gee
Ltd.
CA SANDESH .C H Page 4.7
ADVANCED ACCOUNTING ARIVUPRO ACADEMY

(d) The Statutory Reserves of Pee Ltd is to be maintained for two more years.
(e) Expenses of Amalgamation amounting to Rs 10,000 will be borne by Gee Ltd.
Show the opening Journal Entries and the Opening Balance Sheet of Gee Ltd as at 1 st April after
amalgamation on the assumption that the amalgamation is In the nature of Merger.

7. Balance sheet of Mitra Ltd as on 31st March –

Liabilities Amount Assets Amount
Share Capital: Fixed Assets:
1,00,000 Equity Shares of Rs 10 10,00,000 Land and Building 7,64,000
each fully paid up
Reserves and Surplus: Current Assets:
Capital Reserve 42,000 Stock 7,75,000
Contingency Reserve 2,70,000 Sundry Debtors - 160,000
Profit and Loss A/c 2,52,000 Less: Provision for Doubtful 1,52,000
Debts (8,000)
Current Liabilities and Provisions: Bills Receivable 30,000
Bills Payable 40,000 Cash at Bank 3,29,000
Sundry Creditors 2,26,000
Provision for Income Tax 2,20,000
Total 20,50,000 Total 20,50,000
On 1st April, Jagan Limited agreed to absorb Mitra Limited on the following terms and conditions:
• Jagan Limited will take over the Assets at the following values- (a) Land and Building - Rs 10,80,000,
(b) Stock - Rs 7,70,000, (c)Bills Receivable - Rs 30,000.
• Purchase Consideration will be settled by Jagan Ltd as under - 4,100 fully paid 10% Preference
Shares of Rs 100 will be issued, and the balance will be settled by issuing Equity Shares of Rs 10 each
at Rs 8 Paid Up.
• Liquidation Expenses are to be Reimbursed by Jagan Ltd to the extent of Rs 5,000.
• Sundry Debtors realized Rs 1,50,000. Bills Payable were settled for Rs 38,000. Income Tax
Authorities fixed the Taxation Liability at Rs 2,22,000 and the same was paid.
• Creditors were finally settled with the cash remaining, after meeting Liquidation Expenses
amounting to Rs 8,000.

Required - (1) Calculate the Number of Equity and Preference Shares to be allotted by Jagan Ltd, in
discharge of Purchase Consideration, (2) Prepare Realization A/c, Bank A/c, Equity Shareholders A/c and
Jagan Ltd’s A/c, in the books of Mitra Ltd

8. Ram Limited and Shyam Limited carry on business of a similar nature and it is agreed that they should
amalgamate. A new Company, Ram and Shyam Limited, is to be formed to which the Assets and
Liabilities of the existing Companies, with certain exceptions, are to be transferred. On 31 st March 2014,
the Balance Sheets of the two Companies were as under:

Balance Sheet of Ram Li mited as at 31st March 2014

Liabilities Rs Assets Rs
Issued and Subscribed Share Capital: Freehold Property, at cost 2,10,000
30,000 Equity Shares of Rs 10 each, 3,00,000 Plant and Machinery, at cost Less Depre 50,000
General Reserve 1,60,000 Motor Vehicles, at cost Less Depreciation 20,000
Profit and Loss Account 40,000 Stock 1,20,000
Sundry Creditors 1,50,000 Debtors 1,64,000
Cash at Bank 86,000
CA SANDESH .C H Page 4.8
ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Total 6,50,000 Total 6,50,000

st
Balance S heet of Shyam Limited as at 31 March 2014
Liabilities Rs Assets Rs
Issued and Subscribed Share Capital: Freehold Property, at cost 1,20,000
16,000 Equity Shares of Rs 10 each, 1,60,000 Plant and Machinery, at cost Less Depre 30,000
Profit and Loss Account 40,000 Stock 1,56,000
6% Debentures 1,20,000 Debtors 42,000
Sundry Creditors 64,000 Cash at Bank 36,000
Total 3,84,000 Total 3,84,000

Assets and Liabilities are to be taken at Book Value, with the following exceptions:
• Goodwill of Ram Limited and of Shyam Limited is to be valued at Rs 1,60,000 and Rs 60,000 respectively.
• Motor Vehicles of Ram Limited are to be valued at Rs 60,000.
• Debentures of Shyam Ltd are to be discharged by the issue of 6% Debentures of Ram and Shyam Ltd at a
Premium of 5%.
• The Debtors of Shyam Ltd. realized fully and Bank Balance of Shyam Limited are to be retained by the
Liquidator and the Sundry Creditors of Shyam Ltd are to be paid out of the proceeds thereof.
You are required to:
• Compute the basis on which Shares in Ram and Shyam Limited will be issued to the Shareholders of the
existing Companies, assuming that the Nominal Value of each Share in Ram and Shyam Limited is Rs 10.
• Draw up a Balance Sheet of Ram and Shyam Limited as of 1st April 2014, the date of completion of
amalgamation.

9. Following is the summarized Balance Sheet of Arun Ltd as at 31 st March

Liabilities Amount Assets Amount
Equity Share Capital (Rs 100 each) 15,00,000 Land and Building 10,00,000
11% Preference Share Capital 5,00,000 Plant and Machinery 7,00,000
General Reserve 3,00,000 Furniture and Fittings 2,00,000
Sundry Creditors 2,00,000 Stock-in-Trade 3,00,000
Sundry Debtors 2,00,000
Cash in Hand and at Bank 1,00,000
Total 25,00,000 Total 25,00,000

Mitra Ltd agreed to take over Arun Ltd on the following terms:
• Each Equity Share in Arun Ltd for the purpose of absorption is to be valued at Rs 80.
• Equity Shares will be issued by Mitra Ltd by valuing its each Equity Share of Rs 100 each at Rs 120
per share.
• 11% Preference Shareholders of Arun Ltd will get 11% Redeemable Debentures of Mitra Ltd at
equivalent value.
• All the Assets and Liabilities of Arun Ltd will be recorded at the same value in the books of Mitra
Ltd
• Required – Calculate Purchase Consideration and Pass journal entries in Mitra Ltd (Assume
Purchase Method)

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

10. The summarized Balance Sheet of SRISHTI Ltd as on 31 st March 2014, was as follows:
Liabilities Rs Assets Rs
Equity Shares of Rs 10 fully paid 30,00,000 Goodwill 5,00,000
Export Profit Reserves 8,50,000 Tangible Fixed Assets 30,00,000
General Reserves 50,000 Stock 10,40,000
Profit and Loss Account 5,50,000 Debtors 1,80,000
9% Debentures 5,00,000 Cash & Bank 2,80,000
Trade Creditors 1,00,000 Preliminary Expenses 50,000
Total 50,50,000 Total 50,50,000

ANU Ltd agreed to absorb the business of SRISHTI Ltd with effect from 1st April, 2014.
(a) The Purchase Consideration settled by ANU Ltd as agreed:
(i) 4,50,000 Equity Shares of Rs 10 each issued by ANU Ltd by valuing its Shares at Rs 15 per Share.
(i) Cash Payment equivalent to Rs 2.50 for every Share in SRISHTI Ltd.
(b) The issue of such an amount of fully paid 8% Debentures in ANU Ltd at 96%, as is sufficient to
discharge 9% Debentures in SRISHTI Ltd at a premium of 20%.
(c) ANU Ltd will take over the Tangible Fixed Assets at 100% more than the Book Value, Stock at Rs 7,10,000 and
Debtors at their face value, subject to a provision of 5% for Doubtful Debts.
(d) The actual cost of liquidation of SRISHTI Ltd was Rs 75,000. Liquidation Cost of SRISHTI Ltd is to be reimbursed
by ANU Ltd to the extent of Rs 50,000.
(e) Statutory Reserves are to be maintained for 1 more year.
Close the books of SRISHTI Ltd and Prepare journal entries in the books of ANU Ltd.

11. The following is the Balance Sheet of Arudra Ltd as at 31st March:
Liabilities Rs Assets Rs
8,000 Equity Shares of Rs 100 each 8,00,000 Building 3,40,000
10% Debentures 4,00,000 Machinery 6,40,000
Loan from Directors 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Misc. Expenditure 34,000
Total 17,60,000 Total 17,60,000
Bhagya Ltd agreed to absorb Arudra Ltd on the following terms and conditions:
(a) Bhagya Ltd would take over all Assets, except Bank Balance, at their Book Values less 10%.
Goodwill is to be valued at 4 years’ purchase of Super Profits, assuming that the Normal Rate of
Return be 8% on the combined amount of Share Capital and General Reserve
(b) Bhagya Ltd is to take over Creditors at Book Value
(c) The Purchase Consideration is to be paid in cash to the extent of Rs 6,00,000 and the balance in
fully paid Equity Shares of Rs 100 each at Rs 125 per Share.

The Average Profit is Rs 1,24,400. The Liquidation Expenses amounted to Rs 16,000. Bhagya Ltd sold
prior to 31st March, goods costing Rs 1,20,000 to Arudra Ltd for Rs 1,60,000. Rs 1,00,000 worth of
goods are still in Stock of Arudra Ltd on 31s March. Creditors of Arudra Ltd include Rs 40,000 still due
to Bhagya Ltd.
Show the necessary Ledger Accounts to close the books of Arudra Ltd and prepare the Balance Sheet
of Bhagya Ltd as at 1st April, after the takeover.

CA SANDESH .C H Page 4.10

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

SOLUTION –

BALANCE SHEET OF BHAGYA LTD (AFTER ABSORPTION) as on 1st April

Particulars Note No Amount
I. EQUITY & LIABILITIES
1. Share Holder’s Funds:
a. Share Capital 1 4,88,000
b. Reserves & Surplus
Securities Premium (4,800 x 25) 1,22,000

2. Current Liabilities:
(a) Trade Payables
Creditors (3,20,000 – Mutual Owings 40,000) 2,80,000
(b) Bank OD 6,00,000
TOTAL 14,90,000

II. ASSETS
1. Non Current Assets
(a) PPE
i. Tangible Asses 2 8,82,000
ii. Intangible Assets
Goodwill (2,16,000 + 15,000) 231,000

2. Current Assets-
(a) Inventory (198,000 – Stock Reserve 15,000) 183,000
(b) Trade Receivables
Debtors (234,000 – Mutual Owings 40,000) 194,000

TOTAL 14,90,000

Notes To Accounts
Note # Particulars Amount
1 Share Capital
Authorized, Issued, Subscribed and Paid Up capital
4,880 shares of Rs 100 each 4,88,000
( All shares are issued for consideration other than cash)

2 Tangible Assets:
Building 306,000
Plant & Equipment 5,76,000
TOTAL 8,82,000

CA SANDESH .C H Page 4.11

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

12. Gowri Ltd and Ambika Ltd had the following Balance Sheets as on 31st March - (in Lacs)
Liabilities Gowri Ambika Assets Gowri Ambika
Share Capital of Rs 100 50 - Fixed Assets 83 160
each
Share Capital of Rs 10 - 80 Current Assets 69 168
each
Capital Reserve 10 - Investments 17 -

General Reserve 36 100 Goodwill 2 -

Secured Loans - 40
Unsecured Loans 22 -
Sundry Creditors 42 46
Provision for Taxation 11 52
Proposed Dividend - 10
TOTAL 171 328 TOTAL 171 328
Gowri Ltd is amalgamated with Ambika Limited on the above date. For the purpose of amalgamation, the
Goodwill of Gowri Ltd is considered valueless. There are also arrears of depreciation of Gowri Ltd amounting to
Rs 4,00,000.

The Shareholders in Gowri Ltd are allotted, in full satisfaction of their claims, Shares in Ambika Limited in the
same proportion as the respective Intrinsic Values of the Shares of the two Companies bear to one another.

Pass Journal Entries in the books of both the Companies, to give effect to the above.

SOLUTION-
JOURNAL ENTRIES IN THE BOOKS OF GOWRI LTD
Realization A/c Dr 1,71,00,000
To Fixed Assets A/c 83,00,000
To Current Assets A/c 69,00,000
To Investment A/c 17,00,000
To Goodwill A/c 2,00,000
( being Assets transferred to Realization A/c)

Unsecured Loans A/c Dr 22,00,000

Sundry Creditors A/c Dr 42,00,000
Provision for Taxation A/c Dr 11,00,000
To Realization A/c 75,00,000
(Being Liabilities transferred to Realization A/c

Ambika Ltd A/c Dr 90,00,000

To Realization A/c 90,00,000
(Being PC receivable recorded)

Equity Shareholders A/c Dr 6,00,000

To Realization A/c 6,00,000
( being Realization Loss Transferred)

CA SANDESH .C H Page 4.12

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Share Capital A/c Dr 50,00,000

Capital Reserve A/c Dr 10,00,000
General Reserve A/c Dr 36,00,000
To Equity Shareholders A/c 96,00,000
(Being capital and reserves & surplus transferred)

Equity Shares in Ambika Ltd A/c Dr 90,00,000

To Ambika Ltd 90,00,000
(Being PC received recorded)

Equity Shareholders A/c Dr 90,00,000

To Equity Shares in Ambika Ltd 90,00,000
(Being shares distributed to shareholders)

Balance Sheet of Ambika Ltd as on 31st March (After Absorption)

Particulars Note No Amount
I. EQUITY & LIABILITIES
1. Share Holder’s Funds:
a. Share Capital 1 1,20,00,000
b. Reserves & Surplus 2 1,50,00,000

2. Non Current Liabilities-

(a) Long Term Borrowings
i. Secured Loans 40,00,000
ii. Unsecured Loans 22,00,000

2. Current Liabilities:
(a) Trade Payables
Creditors (42,00,000+46,00,000) 88,00,000
(b) Short Term Provisions
Provision for Taxation (11,00,000+52,00,00) 63,00,000
(c) Proposed Dividend 10,00,000
TOTAL 4,93,00,000

II. ASSETS
1. Non Current Assets
(a) PPE
i. Tangible Assets (79,00,000+1,60,00,000) 2,39,00,000

(b) Non Current Investments 17,00,000

2. Current Assets (69,00,000+1,68,00,000) 2,37,00,000

TOTAL 4,93,00,000

CA SANDESH .C H Page 4.13

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Notes To Accounts
Note # Particulars Amount
1 Share Capital
Authorized, Issued, Subscribed and Paid Up capital
12,00,000 shares of Rs 10 each 1,20,00,000
( Of the Above, 400,000 shares are issued for consideration other than
cash)

2 Reserves & Surplus

General Reserve 1,00,00,000
Securities Premium 50,00,000
TOTAL 1,50,00,000

13. Following are the summarized balance sheet of K Ltd and W ltd as at 31 st March(Rs in ‘000)
Liabilities K Ltd W Ltd Assets K Ltd W Ltd
Equity Share Capital 2,000 1,500 Goodwill 20 -
(Rs 100)
10% Preference 700 400 Other Fixed Assets 2,400 1,150
shares (Rs 100)
General Reserve 240 170 Debtors 625 615
P&L A/c - 15 Stock 412 680
12% Debentures( Rs 600 200 Bank 38 155
100)
Creditors 560 315 Own Debentures(Nominal 192 -
Value of Rs 2,00,000)
Discount on issue of 2 -
Debentures
P&L A/c 411 -
TOTAL 4,100 2,600 TOTAL 4,100 2,600

On 1st June (3 months after the above balance sheet date) K ltd adopted the following scheme of
reconstruction –
• Each Equity share shall be sub divided in to 10 equity shares of Rs 10 each fully paid up. 50% of the
equity share capital would be surrendered to the company.
• Preference dividends are in arrears for 3 years. Preference shareholders agreed to waive 80% of the
dividend claim and accept payment for the balance.
• Own Debentures of Rs 80,000( Nominal value) were sold at Rs 98 cum interest and remaining own
debentures were cancelled.
• Debenture holders of Rs 3,00,000 agreed to accept one Machinery of book value of Rs 3,20,000 in
full settlement.
• Creditors, Debtors and stock were valued at 5,00,000 , 6,00,000 and 4,00,000 respecctively.
Goodwill, Discount on issue of debentures and P&L (Dr) to be written off.
• The company paid Rs 20,000 as penalty to avoid capital commitments of Rs 4,00,000

CA SANDESH .C H Page 4.14

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

On 2nd June a scheme of absorption was adopted. K Ltd would take over W ltd. The purchase consideration
was fixed as below –
• Equity shareholders of W Ltd will be given 50 equity shares of Rs 10 each fully paid up, in exchange
for every 5 shares held in W ltd.
• Issue of 10% Preference shares of Rs 100 each in the ratio of 4 preference shares of K ltd for every 5
preference shares held in W ltd.
Issue of 12% Debentures of Rs 100 each of K ltd for every 12% Debentures in W ltd.

Pass necessary journal entries in the books o f K ltd and prepare balance sheet as at 2 nd June .

Solution –

Journal Entries in the books of K ltd

Equity Share Capital A/c Dr (20,000 *100) 20,00,000
To Equity Share Capital A/c ( 200,000 * 10) 20,00,000

Equity Share Capital A/c Dr 10,00,000

To Reconstruction A/c 10,00,000

Reconstruction A/c Dr (700,000 * 10% * 3 * 20%) 42,000

To Bank A/c 42,000

Bank A/c Dr ( 800 * 98) 78,400

To Own Debentures ( 80,000 * 192,000 /200,000) 76,800
To Reconstruction A/c 1600

12% Debentures A/c Dr 120,000

To Own Debentures ( 120,000 * 192,000 /200,000) or (192000-76800) 115,200
To Reconstruction A/c 4800

12% Debentures A/c Dr 300,000

Reconstruction A/c Dr 20,000
To Machinery A/c 320,000

Creditors A/c Dr (560,000 – 500,000) 60,000

To Reconstruction 60,000

Reconstruction A/c Dr 37,000

To Debtors (625,000 - 600,000) 25,000
To Stock A/c (412,000 - 400,000) 12,000

Reconstruction A/c Dr 20,000

To Bank A/c 20,000

Reconstruction A/c Dr 433,000

To Goodwill 20,000
To Discount on issue of debentures 2000
To P&L A/c 4,11,000

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Reconstruction A/c Dr 514,400

To Capital Reserve A/c 514,400

Computation of Purchase Consideration (PC)

(a) To equity shareholders of W Ltd ( 15,000 * 50 /5 * 10) = 15,00,000

(b) To Preference shareholders of W ltd ( 4000 * 4 /5 * 100) = 320,000
TOTAL PC = 18,20,000

Merger Method
Paid up capital ( 15,00,000+400,000) = 19,00,000
PC = 18,20,000
Capital Reserve = 80,000

Journal Entries in the books of K ltd ( Merger Method)

Business Purchase A/c Dr 18,20,000

To Liquidator of W ltd 18,20,000

Fixed Assets A/c Dr 11,50,000

Stock A/c Dr 680,000
Debtors A/c Dr 615,000
Cash at bank A/c Dr 155,000
To Sundry Creditors 315,000
To 12% Debentures of W ltd 200,000
To P&L a/c 15,000
To Business Purchase A/c 18,20,000
To General Reserve 170,000
To Capital Reserve 80,000

12% Debentures of W ltd 200,000

To 12% Debentures (K ltd) 200,000

Liquidator of W ltd A/c Dr 18,20,000

To Equity Share capital A/c 15,00,000
To 9% Preference Share capital A/c 3,20,000

CA SANDESH .C H Page 4.16

ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Balance Sheet of K ltd as on 2nd June ( After absorption & Internal Reconstruction)

I. Equity & Liabilities

1. Shareholders Funds
a . Share Capital
i. 250,000 equity shares of Rs 10 each 25,00,000
Ii 10,200 preference shares of Rs 100 each 10,20,000 35,20,000
b. Reserves & Surplus
Capital Reserve ( 514,400+80,000) 594,400
General Reserve ( 240,000+170,00) 410,000
P&L a/c (0+15,000) 15,000 10,19,400

2. Non current liabilities

12% Debentures ( 600,000-120,000-300,000+200,000) 380,000

3. Current Liabilities-
Creditors (560,000-60,000+315,000) 8,15,000
TOTAL 57,34,400
II Assets
1. Non Current Assets
Tangible Fixed Assets ( 24,00,000-320,000+11,50,000) 32,30,000

2. Current Assets
Inventories ( 412,000-12,000+680,000) 10,80,000
Trade Receivables (625,000-25,000+615,000) 12,15,000
Cash & Cash Equivalents ( 38,000+78,400-20,000+155,000-42,000) 209,400
TOTAL 57,34,400

CA SANDESH .C H Page 4.17

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ADDITIONAL QUESTIONS ON AMALGAMATION OF COMPANIES

14. K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two
companies on the date of amalgamation was as under:

Particulars K Ltd L Ltd Particulars K Ltd L Ltd

Equity Shares of Rs 100 8,00,000 3,00,000 Goodwill 80,000 -
each
7% Preference Share of Rs 4,00,000 3,00,000 Land & Building 4,50,000 3,00,000
100 each
5% Debentures 2,00,000 - Plant & Machinery 6,20,000 5,00,000
General Reserve - 1,00,000 Furniture and 60,000 20,000
Fittings
P&L A/c 3,71,375 97,175 Trade receivables 2,75,000 1,75,000
Trade payables 1,00,000 2,10,000 Stores & inventory 2,25,000 1,40,000
Secured Loan - 2,00,000 Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
18,71,375 12,07,175 18,71,375 12,07,175
The terms of amalgamation are as under:

(1) The assumption of liabilities of both the Companies.

(2) Issue of 5 Preference shares of Rs 20 each in LK Ltd. @ Rs 18 paid up at premium of Rs 4 per share for
each preference share held in both the Companies.
(3) Issue of 6 Equity shares of Rs 20 each in LK Ltd. @ Rs 18 paid up at a premium of Rs 4 per share for each
equity share held in both the Companies. In addition, necessary cash should be paid to the Equity
Shareholders of both the Companies as is required to adjust the rights of shareholders of both the
Companies in accordance with the intrinsic value of the shares of both the Companies.
(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5%
debentures in K Ltd. at a discount of 5% after takeover.
(5) The assets and liabilities are to be taken at book values inventory and trade receivables for which
provisions at 2% and 2 ½ % respectively to be raised.
(6) The trade receivables of K Ltd. include Rs 20,000 due from L Ltd.
(7) The LK Ltd. is to issue 15,000 new equity shares of Rs 20 each, Rs 18 paid up at premium of Rs 4 per
share so as to have sufficient working capital. Prepare ledger accounts in the books of K Ltd. and L Ltd. to
close their books. ( Study Material Question)

Solution-

In the books of K ltd

Realization A/c
To Goodwill 80,000 By 5% Debentures 200,000
To Land & Building 450,000 By Trade Payables 100,000
To Plant & Machinery 620,000 By LK Ltd ( PC) 15,60,000
To Furniture 60,000 By Equity 51,375
shareholders
A/c
To Trade Receivables 275,000
To Stores & Inventory 225,000
To Cash at bank 120,000

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To cash in hand 41,375

To Preference 40,000
Shareholders
19,11,375 19,11,375

Equity shareholders A/c

To Realization A/c 51,375 By Share capital 800,000
To Equity shares in LK Ltd 10,56,000 By P&L a/c 371,375
To Cash 64,000
11,71,375 11,71,375

Preference shareholders A/c

By Share capital 400,000
To Preference shares in LK Ltd 440,000 By Realization a/c 40,000

440,000 440,000

LK Ltd
By Equity shares in LK Ltd 10,56,000
To Realization A/c 15,60,000 By Preference shares in LK 440,000
Ltd
By Cash 64,000
15,60,000 15,60,000

In the books of L ltd

Realization A/c
To Goodwill - By Trade Payables 210,000
To Land & Building 300,000 By Secured Loan 200,000
To Plant & Machinery 500,000 By LK Ltd ( PC) 790,000
To Furniture 20,000 By Equity 37,175
shareholders
A/c
To Trade Receivables 175,000
To Stores & Inventory 140,000
To Cash at bank 55,000
To cash in hand 17,175
To Preference 30,000
Shareholders
12,37,175 12,37,175

Equity shareholders A/c

To Realization A/c 37,175 By Share capital 300,000
To Equity shares in LK Ltd 396,000 By P&L a/c 97,175
To Cash 64,000 By Reserve 100,000
4,97,175 4,97,175

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Preference shareholders A/c

By Share capital 300,000
To Preference shares in LK Ltd 330,000 By Realization a/c 30,000

330,000 330,000

LK Ltd
By Equity shares in LK Ltd 396,000
To Realization A/c 790,000 By Preference shares in LK 330,000
Ltd
By Cash 64,000
790,000 790,000

WN1 – Purchase Consideration ( Net Asset Method)

Particulars K Ltd L Ltd
Goodwill 80,000 -
Land & Building 450,000 300,000
Plant & Machinery 620,000 500,000
Furniture 60,000 20,000
Trade Receivables ( at 2.5% less) 268,125 170,625
Inventory ( at 2% less) 220,500 137,200
Cash at bank 120,000 55,000
Cash in hand 41,375 17,175
Debentures (200,000) -
Trade Payables (100,000) (210,000)
Secured Loans (300,000) (200,000)
Net Assets = PC 15,60,000 790,000
Discharge of PC
(a) Equity shares of LK ltd 10,56,000 396,000
( 8000 * 6*22) (3000 * 6 *22)
(b) Preference share of LK Ltd 440,000 330,000
(4000 * 5* 22) (3000 * 5 * 22)
(c) Cash ( Balancing figure) 64,000 64,000
(15,60,000 – 10,56,000 – (790,000-396,000-
440,000) 330,000)

15. The following are the summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 20X1:

Particulars P Ltd Q Ltd Particulars P Ltd Q Ltd

Equity Shares of Rs 10 each 6,00,000 3,00,000 Fixed Assets 7,00,000 2,50,000
10 % Preference Share of 2,00,000 1,00,000 Investment 80,000 80,000
Rs 100 each
Reserves & Surplus 3,00,000 2,00,000 Inventory 2,40,000 3,20,000
12% Debentures 2,00,000 1,50,000 Debtors 3,60,000 1,90,000
Sundry Creditors 2,20,000 1,25,000 Bills Receivable 60,000 20,000
Bills Payable 30,000 25,000 Cash at Bank 1,10,000 40,000
15,50,000 9,00,000 15,50,000 9,00,000

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• Fixed Assets of both the companies are to be revalued at 15% above book value.
• Inventory in Trade and Debtors are taken over at 5% 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, P Ltd. will absorb Q Ltd. on the following terms:

(i) 8 Equity Shares of Rs 10 each will be issued by P Ltd. at par against 6 shares of Q Ltd.
(ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of 10% Preference Shares of
Rs 100 each at par in P Ltd.
(iii) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12% Debentures in P Ltd. issued at a
discount of 10%.
(iv) Rs 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry Creditors of Q Ltd. include Rs
10,000 due to P Ltd.

Prepare:
(a) Journal entries in the books of P Ltd.
(b) Statement of consideration payable by P Ltd.

Solution

Journal Entries in the Books of P Ltd.

Fixed Assets A/c Dr 1,05,000

To Revaluation Reserve 1,05,000
(Revaluation of fixed assets at 15% above book value)

Reserve and Surplus A/c Dr 60,000

To Equity Dividend 60,000
(Declaration of equity dividend @ 10%)

Equity Dividend 60,000

To Bank Account 60,000
(Payment of equity dividend)

Business Purchase Account 4,90,000

To Liquidator of Q Ltd. 4,90,000
(Consideration payable for the business taken over from Q Ltd.)

Fixed Assets (115% of Rs 2,50,000) 2,87,500

Inventory (95% of Rs 3,20,000 ) 3,04,000
Debtors 1,90,000
Bills Receivable 20,000
Investment 80,000
Cash at Bank (Rs 40,000 –Rs 30,000 dividend paid) 10,000
To Provision for Bad Debts (5% of Rs 1,90,000) 9,500
To Sundry Creditors 1,25,000
To 12% Debentures in Q Ltd. 1,62,000
To Bills Payable 25,000
To Business Purchase Account 4,90,000
To Capital Reserve (Balancing figure) 80,000
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(Incorporation of various assets and liabilities taken over from Q

Ltd. at agreed values and difference of net assets and purchase
consideration being credited to capital reserve)

Liquidator of Q Ltd 4,90,000

To Equity Share Capital 4,00,000
To 10% Preference Share Capital 90,000
(Discharge of consideration for Q Ltd.’s business)

12% Debentures in Q Ltd. (Rs 1,50,000 × 108%) 1,62,000

Discount on Issue of Debentures 18,000
To 12% Debentures 1,80,000
(Allotment of 12% Debentures to debenture holders of Q Ltd. at
a discount of 10%)

Sundry Creditors of Q Ltd 10,000

To Sundry Debtors of P Ltd. 10,000
(Cancellation of mutual owing)

Goodwill 30,000
To Bank 30,000
(Being liquidation expenses reimbursed to Q Ltd.)

Capital Reserve 30,000

To Goodwill 30,000
(Being goodwill set off)

(b) Statement of Consideration payable by P Ltd. for 30,000 shares (payment method)

Shares to be allotted ( 30,000 * 8 /6 ) = 40,000 shares of P Ltd

Value (40,000 *10 ) = 4,00,000

For 10% preference shares, to be paid at 10% discount

(100,000 * 90/100) = 90,000

Total PC (4L+90,000) = 4,90,000

16. Explain the treatment for Retirement Gratuity Fund on the liability side of Selling companies
Balance Sheet ?

Solution –
• Treat it as normal liability
• Transfer it to Realization A/c in Selling company books
• Normally new company takes over this liability (as it relates to employees) so account it in journal
entry no 2 in Purchasing company books by crediting the Retirement Gratuity Fund Liability A/c

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17. The following are the summarized Balance Sheets of X Ltd. and Y Ltd :

Particulars X ltd Y Ltd

Equity Share Capital 1,00,000 50,000
Profit & Loss A/c 10,000 -
Trade payables 25,000 5,000
Loan X Ltd. - 15,000
1,35,000 70,000

Sundry Assets 1,20,000 60,000

Loan Y Ltd 15,000 -
Profit & Loss A/c - 10,000
1,35,000 70,000
A new company XY Ltd. is formed to acquire the sundry assets and trade payables of X Ltd. and Y Ltd. and
for this purpose, the sundry assets of X Ltd. are revalued at Rs 1,00,000. The debt due to X Ltd. is also to be
discharged in shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd.

Solution
In the books of X Ltd

Realization A/c
To Sundry Assets 120,000 By Trade Payables 25,000
To Loan Y ltd 15,000 By XY Ltd (PC) ( WN1) 90,000
By shareholders A/c (Loss on 20,000
realization)
120,000 120,000

Shareholders A/c
To Realization A/c 20,000 By Equity Share capital 100,000
To shares in XY Ltd 90,000 By P&L A/c 10,000

110,000 110,000

Shares In XY Ltd
To XY Ltd 90,000 By shareholders a/c 90,000

90,000 90,000

XY ltd
To Realization A/c 90,000 By shares in XY Ltd 75,000

WN1 –Purchase Consideration (Net Asset Method)

Sundry Assets ( Agreed value) 100,000
Loan to Y ltd 15,000
Creditors (25,000)
NA=PC 90,000

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18. Explain the treatment in the purchasing company books for Merger Method if selling company has
cost of issue of debentures on the Asset side of Balance Sheet ?

Solution –
• Transfer cost of issue of debentures to P&L a/c and take over that reduced balance in P&L a/c
(In Journal entry no 2).
• As ,In Merger method all the reserves & surplus of selling company are taking over and accounted in
Purchasing company books.

19. Show the Treatment of following components when X Ltd. absorbs Y Ltd. on the following terms:
• Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of
preceding three financial years (2016-17 : Rs 90,000; 2015-16 : Rs 78,000 and 2014-15: Rs 72,000).
The profits of 2014 -15 included credit of an insurance claim of Rs 25,000 (fire occurred in 2013-14
and loss by fire Rs 30,000 was booked in Profit and Loss Account of that year). In the year 2015 -16,
there was an embezzlement of cash by an employee amounting to Rs 10,000.
• There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to Rs
15,000 and such asset was also taken over by X Ltd. ( MAY 2018)

Solution:
Computation of goodwill
Profit of 2016-17 90,000
Profit of 2015-16 adjusted ( 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (` 72,000 – 25,000) 47,000
225,000
Average profit 75,000

Goodwill to be valued at 2 times of average profits = Rs 75,000 x 2 = Rs 1,50,000

Unrecorded Current Assets –

• In the books of selling company – No treatment
• In the books of Purchasing company –
✓ Treat it as normal asset taken over and consider this as well for PC calculation under
NA method
✓ Record this asset in Journal entry no 2 as ‘Unrecorded Current Assets’

20. The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2019:
Liabilities Assets Amount
14,000 Equity shares of Rs. 100 14,00,000 Sundry Assets 18,00,000
each, fully paid up
General reserve 10,000
10% Debentures 2,00,000
Trade payables 140,000
Bank overdraft 50,000

18,00,000 18,00,000

B Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under Net Assets
method on the basis: Market value of 75% of the sundry assets is estimated to be 12% more than the book
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value and that of the remaining 25% at 8% less than the book value. The liabilities are taken over at book
values. There is an unrecorded liability of Rs. 25,000.

Solution

Calculation of Purchase Consideration under Net Assets Method

Sundry assets
(a) For 75% (18,00,000 * 75% *112 /100) 15,12,000
(b) For 25% (18,00,000 * 25% *92 /100 414,000

10% Debentures (2,00,000)

Trade payables (140,000)
Bank overdraft (50,000)
Unrecorded Liability (25,000)
Net Assets = Purchase Consideration 15,11,000

21. P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital,
equal to the combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities
and undertakings of the two companies in exchange for share in PQ Ltd.
The Summarized Balance Sheets of P Ltd. and Q Ltd. as on 31 st March, 2017 (the date of amalgamation) are
given below:

Summarized balance sheets as at 31-03-2017

Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.

Equity & liabilities: Assets:

Shareholders Fund Non-current
Assets:
a. Share Capital 6,00,000 8,40,000 Fixed Assets 7,20,000 10,80,000
(excluding
Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current Liabilities a. Inventories 3,60,000 6,60,000
Bank Overdraft - 5,40,000 b. Trade 4,80,000 7,80,000
receivables
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000

The consideration was to be based on the net assets of the companies as shown in the above Balance
Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted
average of net profits for the three years ended 31 st March, 2017. The weights for this purpose for
the years 2014-15, 2015-16 and 2016-17were agreed as 1, 2 and 3 respectively.

The profit had been: 2014 -15 = 300,000; 2015- 16 =525,000; 2016-17= 630,000

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The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed
net assets value of these companies.

In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of ` 10 each at the same rate of
premium as issued for discharging purchase consideration to P Ltd. and Q Ltd.

You are required to:

(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare required journal entries in the books of PQ Ltd.; and
(iii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary
journal entries.

Solution-
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:
Amount of Share Capital as per balance Rs
sheet
P Ltd. 6,00,000
Q Ltd. 8,40,000
14,40,000
Share of P Ltd.= Rs 14,40,000 x [21,60,000/ (21,60,000 +14,40,000)]
= Rs 8,64,000 or 86,400 shares
Securities premium = Rs 21,60,000 – Rs 8,64,000 = Rs 12,96,000
Premium per share = Rs 12,96,000 / Rs 86,400 = Rs 15
Issued 86,400 shares @ Rs 10 each at a premium of Rs 15 per share

Share of Q Ltd. = Rs 14,40,000 x [14,40,000/ (21,60,000 + 14,40,000)]

= Rs 5,76,000 or 57,600 shares
Securities premium = Rs 14,40,000 – Rs 5,76,000 = Rs 8,64,000
Premium per share = Rs 8,64,000 / Rs 57,600 = Rs 15
Issued 57,600 shares @ Rs 10 each at a premium of Rs 15 per share

(ii) Journal Entries in the books of PQ Ltd.

Particulars Dr. Cr.
Business purchase account Dr 36,00,000
.
To Liquidator of P Ltd. Account 21,60,000
To Liquidator of Q Ltd. Account 14,40,000
(Being the amount of purchase
consideration payable to liquidator of P
Ltd. and Q Ltd. for assets taken over)

Goodwill Dr 5,40,000
.
Fixed assets account Dr 7,20,000

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.
Inventory account Dr 3,60,000
.
Trade receivables account Dr 4,80,000
.
Cash at bank Dr 3,00,000
.
To Trade payables account 2,40,000
To Business purchase account 21,60,000
(Being assets and liabilities of P Ltd. taken
over)

Fixed assets account Dr 10,80,000

.
Inventory account Dr 6,60,000
.
Trade receivables account 7,80,000
To bank overdraft account 5,40,000
To Trade payables account 5,40,000
To Business purchase account 14,40,000
(Being assets and liabilities of Q Ltd.
taken over)

Liquidator of P Ltd. Account Dr 21,60,000

To Equity Share Capital A/c (86,400 x 8,64,000
10)
To Securities premium (86,400 x 15) 12,96,000
(Being the allotment of shares as per
agreement for discharge of purchase
consideration)

Liquidator of Q Ltd. Account Dr 14,40,000

To Equity Share Capital A/c (57,600 x 5,76,000
10)
To Securities premium (57,600 x 15) 8,64,000
(Being the allotment of shares as per
agreement for discharge of purchase
consideration)

Bank A/c Dr 18,00,000

To Equity share capital account 7,20,000
To Securities premium 10,80,000
(Equity share capital issued to raise
working capital)

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(iii) Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 21,60,000
b Reserves and Surplus 2 32,40,000
2 Current liabilities
a Trade payables (2,40,000 + 5,40,000) 7,80,000
Total 61,80,000

Assets
1 Non-current assets
A Fixed assets
Tangible assets (7,20,000 + 10,80,000) 18,00,000
Intangible assets (goodwill) 4 5,40,000
2 Current assets
a Inventories (3,60,000 + 6,60,000) 10,20,000
b Trade receivables (4,80,000 +7,80,000) 12,60,000
c Cash and cash equivalents 3 15,60,000
Total 61,80,000

Notes to accounts

1 Share Capital
Issued, subscribed and paid up share capital
2,16,000 Equity shares of Rs 10 each 21,60,000
(Out of the above 1,44,000 shares issued for non-cash
consideration under scheme of amalgamation)
2 Reserves and Surplus
Securities premium 32,40,000
(@ 15 for 2,16,000 shares)
3 Cash and cash equivalents
Cash at Bank 15,60,000
4 Intangible Assets
Goodwill 5,40,000

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Working Notes:
1. Calculation of goodwill of P Ltd.
Particulars Amount Weight Weighted
amount

2014-15 3,00,000 1 3,00,000

2015-16 5,25,000 2 10,50,000
2016-17 6,30,000 3 18,90,000
Total (a+b+c) 14,55,000 6 32,40,000
weighted Average =
[Total weighted amount/Total of weight]
[ 32,40,000/6]
Goodwill 5,40,000

2. Calculation of Net assets

P Ltd. Q Ltd.
Assets
Goodwill 5,40,000
Fixed assets 7,20,000 10,80,000
Inventory 3,60,000 6,60,000
Trade receivable 4,80,000 7,80,000
Cash at bank 3,00,000
Less: Liabilities
Bank overdraft 5,40,000
Trade payables 2,40,000 5,40,000
Net assets or Purchase consideration 21,60,000 14,40,000

3. New authorized capital = 14,40,000 + 12,00 000 = 26,40,000

4. Cash and Cash equivalents

P Ltd. Balance 3,00,000
Cash received from Fresh issue (72,000 X 25) 18,00,000
21,00,000
Less: Bank Overdraft 5,40,000
15,60,000*
*The balance of cash and cash equivalents has been shown after setting off
overdraft amount.

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22. P Ltd. and Q Ltd. decided to amalgamate as on 01.04.2018. Their summarized Balance Sheets as on
31.03.2018 were as follows:
(In ‘000)
Particulars P Ltd. Q Ltd.
Source of Funds:
Equity share capital (10 each) 300 280
9% preference share Capital (100 each) 60 40
Investment allowance Reserve 10 4
Profit and Loss Account 68 68
10 % Debentures 100 60
Trade Payables 50 30
Tax provision 14 8
Total 602 490
Application of Funds:
Building 120 100
Plant and Machinery 160 140
Investments 80 50
Trade receivables 90 70
Inventories 72 80
Cash and Bank 80 50
Total 602 490
From the following information, you are required to prepare the Balance Sheet as on 01.04.2018 of a new
company, R Ltd., which was formed to take over the business of both the companies and took over all the
assets and liabilities:
(i) 50 % Debenture are to be converted into Equity Shares of the New Company.
(ii) Investments are non- current in nature.
(iii) Fixed Assets of P Ltd. were valued at 10% above cost and that of Q Ltd. at 5% above cost
(iv) 10 % of trade receivables were doubtful for both the companies. Inventories to be carried at
cost
(v) Preference shareholders were discharged by issuing equal number of 9% preference shares at
par
(vi) Equity shareholders of both the transferor companies are to be discharged by issuing Equity
shares of 10 each of the new company at a premium of 5 per share.
Give your answer on the basis that amalgamation is in the nature of purchase.

SOLUTION-
Balance Sheet of M/s R ltd as at 1.4.2018
Particulars Notes in'000
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 6,55,980
b Reserves and Surplus 2 2,77,990
2 Non-current liabilities

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A Long-term borrowings 3 80,000

3 Current liabilities
a Trade Payables 4 80,000
B Short term provision 5 22,000
Total 11,15,970
Assets
1 Non-current assets
A Property, Plant & Equipment
Tangible assets 6 5,60,000
b Non-current investments 7 1,30,000
2 Current assets
a Inventory 8 1,52,000
b Trade receivables 9 1,44,000
c Cash and cash equivalents 10 1,29,970
Total 11,15,970

Notes to accounts
in'000
1. Share Capital
Equity share capital
55,598 Equity shares of 10 each, fully paid up (W.N.2) 5,55,980
Preference share capital
9% Preference share capital (Share of 100 each) (W.N.2) 1,00,000
6,55,980
2. Reserves and Surplus
Securities premium (W.N.2) 2,77,990
Investment allowance reserve
14,000
(10,000+4,000)
Amalgamation adjustment reserve (14,000)
2,77,990
3. Long-term borrowings
Secured
10% Debentures (50% of 1,60,000) 80,000
4. Trade Payables (50,000+ 30,000) 80,000
5. Short term provisions
Provision for tax (14,000+ 8,000) 22,000
6. Tangible assets
Building (1,32,000+1,05,000) 2,37,000
Plant and machinery (1,76,000+1,47,000) 3,23,000
5,60,000
7. Non – current Investments (80,000+ 50,000) 1,30,000
8. Inventory

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Stock (72,000+ 80,000) 1,52,000

9. Trade receivables
Trade receivables {90% of (90,000+ 70,000)} 1,44,000
10. Cash and cash equivalents
Cash and Bank ( 80,000+ 50,000 – 30) 1,29,970

Working Notes:
1. Calculation of value of equity shares issued to transferor companies
P Ltd. Q Ltd.

Assets taken over:

Building 1,32,000 1,05,000
Plant and machinery 1,76,000 1,47,000
Investments 80,000 50,000
Inventories 72,000 80,000
Trade receivables 81,000 63,000
Cash & Bank 80,000 50,000
6,21,000 4,95,000
Less: Liabilities:
10% Debentures 1,00,000 60,000
Trade payables 50,000 30,000
Tax Provision 14,000 8,000

Less: Preference Share 60,000 40,000

Capital
3,97,000 3,57,000

2. Number of shares issued to equity shareholders, debenture holders and preference shareholders
P Ltd. Q Ltd. Total
Equity shares issued @ 15 per share
(including 5 premium)
3,97,000/15 26,466
Shares(*)
3,57,000/15 23,800 shares 50,266
Shares
Equity share capital @ 10 2,64,660 2,38,000 5,02,660
Securities premium @ 5 1,32,330 1,19,000 2,51,330
3,96,990 3,57,000 7,53,990

50% of Debentures are converted into equity shares @ 15 per share

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1,00,000/2 = 50,000/15 3,332

Shares**
60,000/2 = 30,000/15 2,000 shares 5,332
Shares
Equity share capital @ 10 33,320 20,000 53,320
Security premium@ 5 16,660 10,000 26,660
49,980 30,000 79,980
9% Preference share capital issued 60,000 40,000 1,00,000

1 Cash paid for fraction of shares = Rs 3,97,000 less Rs 3,96,990 = Rs10

2 Cash paid for fraction of shares = Rs 50,000 less Rs 49,980 = 20

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23. Explain the treatment in Selling Company books for Underwriting Commission of Rs 40,000
appearing on the Asset side of Balance Sheet of Selling Company?

Solution –
Transfer Underwriting Commission of Rs 40,000 to Equity Shareholder’s A/c.

Journal Entry for Transfer-

Equity Shareholder’s A/c Dr 40,000
To Underwriting Commission A/c 40,000

24. The financial position of two companies M/s. Abhay Ltd. and M/s. Asha Ltd. as on 31 -3-2015 is as
follows:
Balance Sheet as on 31-3-2015
Abhay Ltd. Asha Ltd.
Sources of Funds
Share Capital – Issued and Subscribed
15,000 equity shares @ 100, fully paid 15,00,000
10,000 equity shares @ 100, fully paid 10,00,000
General Reserve 2,75,000 1,25,000
Profit & Loss 75,000 25,000
Securities Premium 1,50,000 50,000
Contingency Reserve 45,000 30,000
12% Debentures, @ 100 fully paid 2,50,000
Sundry Creditors 55,000 35,000
21,00,000 15,15,000
Application of Funds
Land and Buildings 8,50,000 5,75,000
Plant and Machinery 3,45,000 2,25,000
Goodwill 1,45,000
Inventory 4,20,000 2,40,000
Sundry Debtors 3,05,000 2,85,000
Bank 1,80,000 45,000
21,00,000 15,15,000

They decided to Merge and form a new company M/s Abhilasha Ltd as on 01/04/2015 on the following
terms –
• Goodwill to be valued at 2 years purchase of the super profits. The normal rate of return is 10% of
the combined share capital and general reserve. All other reserves are to be ignored for the purpose
of goodwill. Average profits of M/s. Abhay Ltd. is 2,75,000 and M/s. Asha Ltd. is 1,75,000.
• Land and Buildings, Plant and machinery and Inventory of both companies to be valued at 10%
above book value and a provision of 10% to be provided on Sundry Debtors.
• 12% debentures to be redeemed, by the issue of 12% preference shares of M/s. Abhilasha Ltd. (face
value of 100), at a premium of 10%.
• Sundry creditors to be taken over at book value. There is an unrecorded liability of 15,500 of M/s.
Asha Ltd. as on 1-4-2015.

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• The bank balance of both companies to be taken over by M/s. Abhilasha Ltd. After deducting
liquidation expenses of ` 60,000 to be borne by M/s. Abhay Ltd. and M/s. Asha Ltd. in the ratio of
2 : 1.

You are required to:

(i) Compute the basis on which shares of M/s. Abhilasha Ltd. are to be issued to the shareholders of the
existing company assuming that the nominal value of per share of M/s. Abhilasha Ltd. is 100.
(ii) Draw Balance Sheet of M/s. Abhilasha Ltd. as on 1-4-2015 after the amalgamation

SOLUTION
(i) Computation of Purchase consideration and Basis for issue of Shares

Abhay Ltd. Asha Ltd.

Average profits 2,75,000 1,75,000
Less: Normal profits 1,77,500 1,12,500
Super Profit 97,500 62,500
Goodwill (at 2 years purchase) 1,95,000 1,25,000
Land and Building 9,35,000 6,32,500
Plant and Machinery 3,79,500 2,47,500
Inventory 4,62,000 2,64,000
Debtors less provision 2,74,500 2,56,500
Bank (less liquidation expenses 40,000: 20,000) 1,40,000 25,000
23,86,000 15,50,500
Less: Creditors (55,000) (50,500)
Debentures - (2,75,000)
Purchase consideration (Basis for issue of shares) 23,31,000 12,25,000
To be satisfied by issue of equity share of Abhilasha 23,310 12,250
Ltd. @ 100 face value

(ii) Balance Sheet of Abhilasha Ltd. (After Amalgamation) as on 01.04.2015

Particulars Note # Amount

I EQUITY & LIABILITIES
1. Shareholder’s Funds
Share Capital 1 38,31,000
Reserves & Surplus 0

2. Current Liabilities
Trade Payables 105,500
TOTAL 39,36,500

II ASSETS
1. Non Current Assets
PPE:
Tangible Assets 2 21,94,500

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Intangible Assets 3 3,20,000

2. Current Assets:
Inventories (462,000+264,000) 726,000
Trade Receivables 4 5,31,000
Cash & Cash Equivalents 5 1,65,000
TOTAL 39,36,500

Notes to accounts

1. Share Capital
Equity share capital
35,560 equity shares of 100 each
35,56,000
2,750 12% Preference shares @ 100
2,75,000 38,31,000
each (The above shares have been
issued for consideration other than
cash)
2. Tangible assets
Fixed Assets
Land and Building ( 9,35,000 + 6,32,500) 15,67,500
Plant and Machinery ( 3,79,500 + 2,47,500) 6,27,000 21,94,500
3. Intangible assets
Goodwill (1,95,000 + 1,25,000) 3,20,000
Current Assets
4. Trade Receivables (3,05,000 + 2,85,000) 5,90,000
Less: Provision for doubtful debts (59,000) 5,31,000
5. Cash and cash equivalents (Bank) 1,65,000

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25. P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized
balance sheets of both the companies on the date of amalgamation stood as below:

Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.

Equity Shares ( 100 8,20,000 3,20,000 Land & Building 4,50,000 3,40,000
each)
9% Pref. Shares 3,80,000 2,80,000 Furniture & 1,00,000 50,000
(100 each) Fittings
8% Debentures 2,00,000 1,00,000 Plant & 6,20,000 4,50,000
Machinery
General Reserve 1,50,000 50,000 Trade 3,25,000 1,50,000
receivables
Profit & Loss A/c 3,52,000 2,05,000 Inventory 2,33,000 1,05,000

Unsecured Loan - 1,75,000 Cash at bank 2,08,000 1,75,000

Trade payables 88,000 1,60,000 Cash in hand 54,000 20,000

19,90,000 12,90,000 19,90,000 12,90,000

PQ Ltd. took over the assets and liabilities of both the companies at book value after creating provision @
5% on inventory and trade receivables respectively and depreciating Furniture & Fittings by @ 10%, Plant
and Machinery by @ 10%. The trade receivables of P Ltd. include Rs 25,000 due from Q Ltd.

PQ Ltd. will issue:

(i) 5 Preference shares of Rs 20 each @ Rs 18 paid up at a premium of Rs 4 per share for each pref. share
held in both the companies.
(ii) 6 Equity shares of Rs 20 each @ Rs 18 paid up a premium of Rs 4 per share for each equity share held in
both the companies.
(iii) 6% Debentures to discharge the 8% debentures of both the companies.
(iv) 20,000 new equity shares of Rs 20 each for cash @ Rs 18 paid up at a premium of Rs 4 per share.

PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per the
intrinsic value of the shares of both the companies.

Calculate Purchase Consideration.

Solution-
Purchase consideration(PC)
Particulars P Ltd Q Ltd
Payable to preference 4,18,000 3,08,000
shareholders:
Preference shares at 22 per 10,82,400 4,22,400
share
Cash [See W.N. (ii)] 1,01,700 61,850
TOTAL PC 16,02,100 7,92,250

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WN (ii) Value of Net Assets-

Particulars P Ltd Q Ltd

Land & Building 4,50,000 3,40,000
Plant & Machinery less 10% Depreciation 5,58,000 4,05,000
Furniture & Fittings less 10% Depreciation 90,000 45,000
Trade receivables less 5% 3,08,750 1,42,500
Inventory less 5% 2,21,350 99,750
Cash at Bank 2,08,000 1,75,000
Cash in hand 54,000 20,000
Less: Debentures (2,00,000) (1,00,000)
Less: Trade payables (88,000) (1,60,000)
Less: Secured Loans - (1,75,000)
NET ASSETS (A) 16,02,100 7,92,250
PC Payable in shares (B) 15,00,400 7,30,400
(418,000+10,82,400) (308,000+422,400)
PC Payable in Cash (A-B) 101,700 61,850

26. The following Balance Sheets are given as at 31st March, 20X1:

Particulars Best Ltd. (in Better Ltd. (in

lakhs) lakhs)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 20 10
(shares of 100 each, fully pad)
B Reserves and Surplus 10 8
2 Current liabilities 20 2
Total 50 20
Assets
1 Non-current assets
A Property, Plant and Equipment 25 15
B Non-current investments 5 -
2 Current assets 20 5
Total 50 20

The following further information is given —

(a) Better Limited issued bonus shares on 1st April, 20X1, in the ratio of one share for every two held, out of
Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the basis of the latter’s Balance
Sheet, the consideration taking the form of allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be 150 and the shares in Better Ltd. were valued at
Rs100 after the issue of the bonus shares. The allotment of shares is to be made on the basis of these
values.

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(d) Liabilities of Better Ltd., included Rs1 lakh due to Best Ltd., for purchases from it, on which Best Ltd.,
made profit of 25% of the cost. The goods of Rs50,000 out of the said purchases, remained in stock on the
date of the above Balance Sheet.

Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best Ltd.,
and prepare the Balance Sheet as at 1st April, 20X1 after the takeover. (STUDY MATERIAL)

Solution

Realization A/c
To PPE A/c 15,00,000 By Liabilities A/c 2,00,000
To Current Assets A/c 5,00,000 By Best Limited (PC) ( WN1) 15,00,000
By shareholders A/c (Loss on 3,00,000
realization)
20,00,000 20,00,000

Shareholders A/c
To Realization A/c 300,000 By Equity Share capital 15,00,000
To shares in Best Ltd 15,00,000 By Reserves & Surplus A/c 300,000
(800,000-500,000)
{After Bonus Issue}
18,00,000 18,00,000

Share Capital A/c

By Balance B/d 10,00,000
To Shareholders A/c 15,00,000 By Reserves & Surplus (Bonus 500,000
Issue)
15,00,000 15,00,000

Reserves & Surplus A/c

To Share Capital (Bonus issue) 500,000 By Balance B/d 800,000
To Shareholders A/c 300,000
800,000 800,000

Journal Entries in the books of Best Ltd.

Date Particulars Amount

01/04/20X1 Business Purchase A/c Dr 15,00,000
To Liquidator of Better Ltd 15,00,000

01/04/20X1 Property, Plant and Equipment A/c Dr 15,00,000

Current Assets A/c Dr. 5,00,000
To Liabilities A/c 2,00,000
To Liquidator of Better Ltd. 15,00,000
To Capital Reserve A/c 3,00,000
(Assets & Liabilities of Better Ltd. taken over for an agreed purchase
consideration of 15,00,000 as per agreement dated....)

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01/04/20X1 Liquidator of Better Ltd. 15,00,000

To Share Capital A/c 10,00,000
To Securities Premium A/c 5,00,000
(Discharge of Purchase consideration by the issue of equity shares of
10,00,000 at a premium of Rs50 per share as per agreement)

01/04/20X1 Trade payables A/c Dr. 1,00,000

To Trade receivables A/c 1,00,000
(Amount due from Better Ltd., and included in its creditors taken over,
cancelled against own Trade receivables)

Capital Reserve A/c Dr. 10,000

To Current Asset (Stock) A/c 10,000
(Unrealized profit on stock included in current assets of Better Ltd.
written off to Reserve Account. 20% on sale value of `50,000 shall be
eliminated as unrealized profit)

Working Note :

Calculation of Purchase consideration:

Issued Capital of Better Ltd. (after bonus issue) at Rs100 per share Rs15,00,000

Purchase consideration has been discharged by Best Ltd. by the issue of shares for Rs10,00,000 at a
premium of Rs5,00,000. This gives the value of Rs150 per share.

Balance Sheet of Best Ltd. (After absorption)

Particulars Notes
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 17,90,000
2 Current liabilities 21,00,000
Total 68,90,000
Assets
1 Non-current assets
a Property, Plant and Equipment 3 40,00,000
b Non-current investments 5,00,000
2 Current assets 23,90,000
Total 68,90,000

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Notes to accounts

1 Share Capital
Equity share capital
Issued & Subscribed
30,000 shares of 100 (of the above 10,000
shares have been issued for consideration 30,00,000
other than cash)
Total 30,00,000

2 Reserves and Surplus

Capital Reserve (3,00,000 – 10,000) 2,90,000
Securities Premium 5,00,000
Other reserves and surplus 10,00,000
Total 17,90,000
3 Property, Plant and Equipment
PPE 25,00,000
Acquired during the year 15,00,000 40,00,000
Total 40,00,000

27. The financial position of two companies Hari Ltd. and Vayu Ltd. as at 31st March, 20X1 was as
under:

Particulars Notes Hari Ltd. Vayu Ltd.

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 11,00,000 4,00,000
B Reserves and Surplus 2 70,000 70,000

2 Non-current liabilities
A Long term provisions 3 50,000 20,000
3 Current liabilities
A Trade Payables 1,30,000 80,000
Total 13,50,000 5,70,000
Assets
1 Non-current assets
A Property, Plant and Equipment 4 8,00,000 2,50,000
B Intangible assets 5 50,000 25,000

2 Current assets
A Inventories 2,50,000 1,75,000
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B Trade receivables 2,00,000 1,00,000

C Cash and Cash equivalents 50,000 20,000
Total 13,50,000 5,70,000

Notes to accounts
Hari Ltd. Vayu Ltd.
1 Share Capital
Equity shares of 10 each 10,00,000 3,00,000
9% Preference Shares of 100 each 1,00,000 --
10% Preference Shares of 100 each -- 1,00,000
11,00,000 4,00,000
2 Reserves and Surplus
General reserve 70,000 70,000
70,000 70,000
3 Long term Provisions
Retirement gratuity fund 50,000 20,000
50,000 20,000
4 Property, plant and Equipment
Land and Building 3,00,000 1,00,000
Plant and machinery 5,00,000 1,50,000
8,00,000 2,50,000
5 Intangible assets
Goodwill 50,000 25,000
50,000 25,000

Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of Hari
Ltd.
(b) Goodwill of Vayu Ltd. is valued at ` 50,000, Buildings are valued at 1,50,000 and the Machinery at
1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ 5% premium.

Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition entries in the
books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31st March, 20X1.

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Solution
In the Books of Vayu Ltd.

Realization Account

To Sundry Assets 5,70,000 By Retirement 20,000

Gratuity Fund
To Preference Shareholders By Trade payables 80,000
(Premium on Redemption) 10,000 By Hari Ltd. (Purchase
To Equity Shareholders Consideration) 5,30,000
(Profit on Realization) 50,000 ____ _
6,30,000 6,30,000

Equity Shareholders Account

` `
To Equity Shares of Hari Ltd. 4,20,000 By Share Capital 3,00,000
By General Reserve 70,000
By Realization
Account
(Profit on
____ _ realization) 50,000
4,20,000 4,20,000

Preference Shareholders Account

` `
To 9% Preference Shares of 1,10,000 By Preference Share 1,00,000
Hari Ltd. Capital
By Realization
Account
(Premium on
Redemption of
Preference
Shares) 10,000
1,10,000 1,10,000

Hari Ltd. Account

` `
To Realization Account 5,30,000 By 9% Preference Shares 1,10,000
____ _ By Equity Shares 4,20,000
5,30,000 5,30,000

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In the Books of Hari Ltd.

Journal Entries

Dr. Cr.

Business Purchase A/c Dr. 5,30,000

To Liquidators of Vayu Ltd. Account 5,30,000
(Being business of Vayu Ltd. taken over)
Goodwill Account Dr. 50,000
Building Account Dr. 1,50,000

Machinery Account Dr. 1,60,000

Inventory Account Dr. 1,57,500
Trade receivables Account Dr. 1,00,000
Bank Account Dr. 20,000
To Retirement Gratuity Fund Account 20,000
To Trade payables Account 80,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 5,30,000
(Being Assets and Liabilities taken over as per
agreed valuation).
Liquidators of Vayu Ltd. A/c Dr. 5,30,000
To 9% Preference Share Capital A/c 1,10,000
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 20,000
(Being Purchase Consideration satisfied as
above).

Balance Sheet of Hari Ltd. (after absorption) as at 31st March, 20X1

Particulars Notes
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 16,10,000
B Reserves and Surplus 2 90,000
2 Non-current liabilities
A Long-term provisions 3 70,000
3 Current liabilities
A Trade Payables 2,10,000
Short term provision 7,500
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B Total 19,87,500

Assets
1 Non-current assets
A Property, Plant and Equipment 4 11,10,000
B Intangible assets 5 1,00,000
2 Current assets
A Inventories 4,07,500
Trade receivables 6 3,00,000
B Cash and cash equivalents 70,000
C Total 19,87,500

Notes to accounts
`
1 Share Capital
Equity share capital
1,40,000 Equity Shares of 10 each fully paid 14,00,000
(Out of above 40,000 Equity Shares were
issued in consideration other than for cash)
Preference share capital
2,100 9% Preference Shares of 100 each (Out 2,10,000
of above 1,100 Preference Shares were issued
in consideration other than for cash)
Total 16,10,000
2 Reserves and Surplus
Securities Premium 20,000
General Reserve 70,000
Total 90,000
3 Long-term provisions
Retirement Gratuity fund 70,000
Total 70,000
4 Short term Provisions
Provision for Doubtful Debts 7,500

5 Property, Plant and Equipment

Buildings 4,50,000
Machinery 6,60,000
Total 11,10,000
6 Intangible assets
Goodwill 1,00,000
7 Trade receivables 3,00,000

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Working Notes:
Purchase Consideration:
Goodwill 50,000
Building 1,50,000
Machinery 1,60,000
Inventory 1,57,500
Trade receivables 92,500
Cash at Bank 20,000
6,30,000
Less: Liabilities:
Retirement Gratuity Fund (20,000)
Trade payables (80,000)
Net Assets/ Purchase Consideration 5,30,000
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd. 1,00,000
Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd. to be satisfied by issue of
40,000 Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000

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Chapter 5 DISSOLUTION OF PARTNERSHIP ACCOUNTS

A PARTNERSHIP IS DISSOLVED OR COMES TO AN END ON:

(a) the expiry of the term for which it was formed or the completion of the venture for which it was entered
into;
(b) death of a partner;
(c) insolvency of a partner.

A FIRM STANDS DISSOLVED IN THE FOLLOWING CASES:

(i) The partners agree that the firm should be dissolved;
(ii) All partners except one become insolvent;
(iii) The business becomes illegal;
(iv) In case of partnership at will, a partner gives notice of dissolution; and
(v) The court orders dissolution.

The court has the option to order dissolution of a firm in the following circumstances :
(a) Where a partner has become of unsound mind;
(b) Where a partner suffers from permanent incapacity;
(c) Where a partner is guilty of misconduct of the business;
(d) Where a partner transfers his interest or share to a third party;
(e) Where the business cannot be carried on except at a loss

LIMITED LIABILITY PARTNERSHIP –

Limited liability partnership(LLP) means a partnership formed and registered under the Limited Liability
Partnership (LLPs) Act, 2008

Nature of Limited Liability Partnership –

• A limited liability partnership is a body corporate formed and incorporated under this Act and is a
legal entity separate from that of its partners.
• A limited liability partnership should have perpetual succession.
• Any change in the partners of a limited liability partnership should not affect the existence, rights
or liabilities of the limited liability partnership.

Distinction between an ordinary partnership firm and an LLP:

Key Elements Partnerships LLPs
Applicable Law Indian Partnership Act 1932 The Limited Liability Partnerships
Act, 2008
Registration Optional Compulsory with ROC
Creation Created by an Agreement Created by Law
Body Corporate NO YES
Separate Legal Entity NO YES
Perpetual Succession Partnerships do not have perpetual It has perpetual succession and
succession individual partners may come
and go
Number of Partners Minimum 2 and Maximum 50 Minimum 2 but no maximum
limit
Liability of Partners / Unlimited: Partners are severally Limited to the extent of their
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Members and jointly liable for actions of contribution towards LLP except
other partners and the firm and in case of intentional fraud or
their liability extends to personal wrongful act of omission or
assets commission by a partner.

CONVERSION OF FIRM INTO LIMITED LIABILITY PARTNERSHIP:

• Section 55 of LLP Act: A firm may convert into a LLP in accordance with the provisions of the Act and
the Second Schedule to the Act.
• Section 56 of LLP Act: A private limited company may convert into an LLP in accordance with the
provisions of the Act and the Third Schedule to the Act.
• Section 57 of LLP Act: An unlisted public limited company may convert into an LLP in accordance
with the provisions of the Act and the Fourth Schedule to the Act.

WINDING UP AND DISSOLUTION:

♦ Under section 63 of the LLP Act, 2008 an LLP may be wound up voluntarily or by the Tribunal and such
LLP so wound up may be dissolved

♦Under section 64 and LLP may be wound up by the Tribunal:

• If the LLP decides that it should be wound up by the Tribunal;
• If for a period of more than six months, the number of partners of the LLP is reduced below two;
• If the LLP is unable to pay its debts;
• If the LLP has acted against the interests of the integrity and sovereignty of India, the security of
The state or public order;
• If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar
For five consecutive financial years;
• If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

1. X, Y, and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of 4: 3: 2.
Following is the Balance Sheet of the firm as on 31st March, 20X1:
Balance Sheet as on 31st March, 20X1
Liabilities ` Assets `
Partners’ Capitals: Fixed Assets 5,00,000
X 4,00,000 Stock in trade 3,00,000
Y 3,00,000 Sundry debtors 5,00,000
Z 2,00,000 Cash in hand 10,000
General Reserve 90,000
Sundry Creditors 3,20,000
13,10,000 13,10,000

Partners of the firm decided to dissolve the firm on the above-said date.
Fixed assets realized Rs 5,20,000 and book debts Rs 4,40,000.
Stocks were valued at Rs 2,50,000 and it was taken over by partner Y.
Creditors allowed discount of 5% and the expenses of realization amounted to Rs 6,000.
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You are required to prepare:

(i) Realization account; (ii) Partners capital account; and (iii) Cash account.

Solution
(i) Realization Account
Particulars ` Particulars `
To Fixed assets 5,00,000 By Creditors 3,20,000
To Stock in trade 3,00,000 By Cash (5,20,000+4,40,000) 9,60,000
To Debtors 5,00,000 By Y (Stock taken over) 2,50,000
To Cash – Expenses 6,000 By Loss transferred to
partners’ capital accounts
To Cash -Creditors X 35,555
(3,20,000 x 95%) 3,04,000 Y 26,667
Z 17,778
16,10,000 16,10,000

(ii) Partners’ Capital Accounts

Particulars X Y Z Particulars X Y Z
` ` ` ` ` `
To Realization 35,555 26,667 17,778 By Balance 4,00,000 3,00,000 2,00,000
Account b/d
To Realization - 2,50,000 - By General 40,000 30,000 20,000
Account reserve
To Cash 4,04,445 53,333 2,02,222
4,40,000 3,30,000 2,20,000 4,40,000 3,30,000 2,20,000

(iii) Cash Account

Particulars ` Particulars `
To Balance b/d 10,000 By Realization A/c (Expenses) 6,000
To Realization A/c 9,60,000 By Realization A/c (Creditors) 3,04,000
(Fixed assets and
book debts realized) By X 4,04,445
By Y 53,333
By Z 2,02,222
9,70,000 9,70,000

2. P, Q, and R were partners sharing profits and losses in the ratio of 3: 2: 1, no partnership salary or
interest on capital being allowed. Their balance sheet on 30th June, 20X1 is as follows:
Liabilities ` Assets `
Fixed Capital Fixed Assets:
P 20,000 Trademark 40,000
Q 20,000 Freehold Property 8,000
R 10,000 50,000 Plant and Equipment 12,800

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Current Motor Vehicle 700

Accounts:
P 500 Current Assets
Q 9,000 9,500 Stock 3,900
Loan from P 8,000 Trade Debtors 2,000
Trade Creditors 12,400 Less: Provision (100) 1,900
Cash at Bank 200
Miscellaneous losses
R's Current Account 400
Profit and Loss Account 12,000
79,900 79,900

On 1st July, 20X1 the partnership was dissolved. Motor Vehicle was taken over by Q at a value of ` 500 but no
cash passed specifically in respect of this transaction. Sale of other assets realized the following amounts:
`
Trademark Nil
Freehold Property 7,000
Plant and Equipment 5,000
Stock 3,000
Trade Debtors 1,600

Trade Creditors were paid ` 11,700 in full settlement of their debts. The costs of dissolution amounted to `
1,500. The loan from P was repaid, P and Q were both fully solvent and able to bring in any cash required but
R was forced into bankruptcy and was only able to bring 1/3 of the amount due.
You are required to show:
(a) Cash and Bank Account,
(b) Realization Account, and
(c) Partners Fixed Capital Accounts (after transferring Current Accounts’ balances).

Solution
Cash / Bank Account
Particulars ` Particulars `
To Balance b/d 200 By Realization A/c- 11,700
Creditors
To Realization A/c- By Realization A/c- 1,500
Expenses
Freehold property 7,000 By P’s Loan A/c 8,000
Plant and Equipment 5,000 By P’s Capital A/c 14,200
Stock 3,000 By Q’s Capital A/c 24,200
Trade Debtors 1,600
To Capital Accounts:
P 25,500
Q 17,000

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R 300 42,800
59,600 59,600

Realization Account
Particulars ` Particulars `
To Trademark 40,000 By Trade Creditors 12,400
To Freehold Property 8,000 By Provision for Bad Debts 100
To Plant and Equipment 12,800 By Bank:
To Motor Vehicle 700 Freehold Property 7,000
To Stock 3,900 Plant and Equip. 5,000
To Sundry Debtors 2,000 Stock 3,000
To Bank (Creditors) 11,700 Debtors 1,600 16,600
To Bank (Expenses) 1,500 By Q (Car) 500
By Capital Accounts: (Loss)
P 25,500
Q 17,000
R 8,500 51,000
80,600 80,600

Partners’ Capital Accounts

Particulars P Q R Particulars P Q R
` ` ` ` ` `
To Current A/c 5,500 — 2,400 By Balance b/d 20,000 20,000 10,000
(Transfer) (WN)
To Realization A/c 25,500 17,000 8,500 By Current A/c — 5,000 —
(Loss) (Transfer)
(WN)
To Realization A/c — 500 — By Bank — — 300
(Car) By Bank 25,500 17,000 —
To R's Capital A/c 300 300 — (realization
(Deficiency) loss)
To Bank 14,200 24,200 — By P & Q — — 600
(Deficiency)
45,500 42,000 10,900 45,500 42,000 10,900

Working Note
Particulars P Q R
Current Account Balance 500 (Cr) 9000 (Cr) 400 (Dr)
Less: share of Profit & Loss A/c (debit balance) 6000 (Dr) 4000 (Dr) 2000 (Dr)
Adjusted Current Account Balance 5500 (Dr) 5000 (Cr) 2400 (Dr)

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3. Amal and Bimal are in equal partnership. Their Balance Sheet stood as under on 31st March, 20X1
when the firm was dissolved:
Liabilities ` Assets `
Creditors A/c 4,800 Plant & Machinery 2,500
Amal's Capital A/c 750 Furniture 500
Debtors 1,000
Stock 800
Cash 200
Bimal's drawings 550
5,550 5,550

The assets realized as under:

Particulars `
Plant & Machinery 1,250
Furniture 150
Debtors 400
Stock 500

The expenses of realization amounted to ` 175. Amal's private estate is not sufficient even to pay his private
debts, whereas Bimal's private estate has a surplus of ` 200 only.
Show necessary ledger accounts to close the books of the firm.

Solution
In the books of M/s Amal and Bimal
Realization Account
Particulars ` Particulars `
To Sundry Assets: By Cash A/c:
Plant & Machinery 2,500 Plant & Machinery 1,250
Furniture 500 Furniture 150
Debtors 1,000 Debtors 400
Stock 800 Stock 500 2,300
Cash A/c-expenses 175 By Partners' Capital A/c
Loss on realization
(Bal. fig.)
Amal 1,337
Bimal 1,338 2,675
4,975 4,975

Cash Account
Particulars ` Particulars `
March 31, 20X1 March 31, 20X1
To Balance b/d 200 By Realization A/c- expenses 175

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To Realization A/c By Sundry Creditors A/c (Bal. fig.) 2,525

- Sale of sundry assets 2,300
To Bimal's Capital A/c 200
2,700 2,700

Sundry Creditors Account

Particulars ` Particulars `
To Cash A/c 2,525 By Balance b/d 4,800

To Deficiency A/c- 2,275

transfer (bal. fig.)
4,800 4,800

Partners' Capital Accounts

Particulars Amal Bimal Particulars Amal Bimal
To Balance b/f — 550 By Balance b/f 750 —
To Realization A/c By Cash A/c — 200
- loss 1,337 1,338 By Deficiency
A/c- transfer (bal. fig.) 587 1,688
1,337 1,888 1,337 1,888

Deficiency Account
Particulars ` Particulars `
To Partners' Capital A/c By Sundry Creditors A/c 2,275
Amal 587
Bimal 1,688
2,275 2,275

4. A, B, C, and D sharing profits in the ratio of 4:3:2:1 decided to dissolve their partnership on 31st March
20X1 when their balance sheet was as under:
Liabilities ` Assets `
Creditors 15,700 Bank 535
Employees Provident Fund 6,300 Debtors 15,850
Capital Accounts: Stock 25,200
A 40,000 Prepaid Expenses 800
B 20,000 60,000 Plant & Machinery 20,000
Patents 8,000
C’s Capital A/c 3,200
D’s Capital A/c 8,415
82,000 82,000

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Following information is given to you: -

1. One of the creditors took some of the patents whose book value was Rs 5,000 at a valuation of Rs 3,200.
Balance of the creditors were paid at a discount of Rs 400.
2 There was a joint life policy of Rs 20,000 (not mentioned in the balance sheet) and this was surrendered
for Rs 4,500.
3 The remaining assets were realized at the following values: - Debtors Rs 10,800; Stock Rs 15,600; Plant
and Machinery Rs 12,000; and Patents at 60% of their book-values. Expenses of realization amounted to Rs
1,500.
D became insolvent and a dividend of 25 paise in a rupee was received in respect of the firm's claim against
his estate. Prepare necessary ledger accounts.

Solution
Realization Account
Particulars ` Particulars `
To Sundry Assets: - By Creditors 15,700
Debtors 15,850 By Employee’s 6,300
Stock 25,200 Provident Fund
Prepaid Expenses 800 By Bank A/c:
Plant & Machinery 20,000 Joint Life Policy 4,500
Patents 8,000 69,850 Debtors 10,800
To Bank-Creditors: 12,100 Stock 15,600
(` 15,700 –` 3,200 -
` 400)
To Bank A/c 6,300 Plant and Machinery 12,000
Employee’s (P.F)
To Bank A/c (expenses) 1,500 Patents 60% of
(` 8,000 – ` 5,000) 1,800 44,700
By Loss transferred to:
A’s Capital A/c 9,220
B’s Capital A/c 6,915
C’s Capital A/c 4,610
D’s Capital A/c 2,305 23,050
89,750 89,750

Capital Accounts
Particulars Particulars
A (`) B (`) C (`) D (`) A (`) B (`) C(`) D (`)
To Bal. b/d — — 3,200 8,415 By Bal. b/d 40,000 20,000 — —
To Realization By Bank
A/c 9,220 6,915 4,610 2,305 (Realization loss) 9,220 6,915 4,610 —
To D’s Capital By Bank
(Deficiency) 5,360 2,680 — — (Recovery) — — — 2,680
To Bank 34,640 17,320 — — By A’s Capital (2/3) — — — 5,360
By B’s Capital (1/3) — — — 2,680
By Bank A/c — 3,200 —
49,220 26,915 7,810 10,720 49,220 26,915 7,810 10,720

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Bank Account
Particulars ` Particulars `
To Balance b/d 535 By Realization A/c 12,100
To Realization A/c 44,700 By Realization A/c 6,300
To A’s Capital A/c 9,220 By Realization A/c 1,500
To B’s Capital A/c 6,915 By A’s Capital A/c 34,640
To D’s Capital A/c 2,680 By B’s Capital A/c 17,320
To C’s Capital A/c (4,610 + 3,200) 7,810
71,860 71,860
Working Note
D’s loss will be borne by A and B only because only solvent partners having credit balance has to bear the
loss on account of insolvency. C will bring his share of loss in cash.

5. M/s X, Y, and Z who were in partnership sharing profits and losses in the ratio of 2:2:1 respectively, had
the following Balance Sheet as on December 31, 20X1:
Liabilities ` ` Assets ` `
Capital: X 29,200 Fixed Assets 40,000
Y 10,800 Stock 25,000

Z 10,000 50,000 Book Debts 25,000

Z’s Loan 5,000 Less: Provision (5,000) 20,000
Loan from Mrs. X 10,000 Cash 1,000
Sundry Trade Creditors 25,000 Advance to Y 4,000
90,000 90,000

The firm was dissolved on the date mentioned above due to continued losses. After drawing up the balance
sheet given above, it was discovered that goods amounting to Rs 4,000 have been purchased in November,
20X1 and had been received but the purchase was not recorded in books.

Fixed assets realized Rs 20,000; Stock Rs 21,000 and Book Debt Rs 20,500. Similarly, the creditors allowed a
discount of 2% on average. The expenses of realization come to Rs 1,080. X agreed to take over the loan of
Mrs. X. Y is insolvent, and his estate is unable to contribute anything.

Give accounts to close the books; work according to the decision in Garner vs. Murray.

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Solution
Realization Account
Particulars ` Particulars `
To Sundry By Provision for Doubtful 5,000
Debts
Fixed Assets 40,000 By Cash 61,500
(transfer) (20,000+21,000+20,500)
Stock 25,000 By Sundry Trade Creditors
Book Debts 25,000 (Discount) 29,000
To Cash—Expenses 1,080 By Loss: X (2/5) 9,600
- Creditors 28,420 Y (2/5) 9,600
Z (1/5) 4,800 24,000
1,19,500 1,19,500

Sundry Trade Creditors

Particulars ` Particulars `
To Realization A/c 29,000 By Balance b/d 25,000

By Partners Capital Accounts

(Purchase omitted) 4,000
29,000 29,000

Z’s Loan Account

Particulars ` Particulars `
To Cash Account 5,000 By Balance b/d 5,000

Mrs. X’s Loan Account

Particulars ` Particulars `
To X’s Capital A/c – 10,000 By Balance b/d 10,000
transfer

Cash Account
Particulars ` Particulars `
To Balance b/d 1,000 By Sundry Trade Creditors (after 28,420
deducting disscountof 2%)
To Realization A/c- By Realization A/c – expenses 1,080
assets realized 61,500 By Z’s Loan 5,000
To X’s Capital A/c* 9,600 By X’s Capital A/c 34,300
To Z’s Capital A/c* 4,800 By Z’s Capital A/c 8,100
76,900 76,900
*X and Z bring these amounts to make good their share of the loss on realization. In actual practice they will
not be bringing any cash; only a notional entry will be made.

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Capital Accounts
Particulars X Y Z Particulars X Y Z
` ` ` ` ` `
To Sundry By Balance b/d 29,200 10,800 10,000
Trade
Creditors- 1,600 1,600 800
omission
To Balance c/d 27,600 9,200 9,200
29,200 10,800 10,000 29,200 10,800 10,000
To Advance - 4,000 - By Balance b/d 27,600 9,200 9,200

To Realization 9,600 9,600 4,800 By Mrs. X’s 10,000 - -

A/c- loss Loan
To Y’s Capital 3,300 - 1,100 By Cash 9,600 - 4,800
A/c (Realization
loss)
By X’s Capital 3,300
A/c
To Cash 34,300 - 8,100 By Z’s Capital - 1,100 -
A/c
47,200 13,600 14,000 47,200 13,600 14,000
Note: Y’s deficiency comes to Rs 4,400 (difference in the two sides of his Capital Account); this has been
debited to X and Z in the ratio of 27,600: 9,200 i.e., capital standing up just before dissolution but after
correction of error committed while drawing up the accounts for 20X1.

6. Yash, Tanish, and Ruchika were partners sharing Profit & Loss in ratio of 3:2:1. Balance Sheet of the
firm is as follows:
Liabilities ` Assets `
Fixed Capital: Fixed Assets 45,000
- Yash 50,000 Investments 15,000
- Tanish 20,000 Current Assets:
- Ruchika 10,000 - Stock 10,000
Current Accounts: - Debtors 27,500
- Yash 6,000 - Cash & Bank 12,500
- Ruchika 4,000 Current Account:
Unsecured Loans 15,000 - Tanish 10,000
Current Liabilities 15,000
1,20,000 1,20,000

On 1st April, 20X1 all the partners agreed to form a new company YTR Pvt. Ltd., which will take over the
firm as going concern including goodwill, but excluding cash and bank balances. The following matters were
also agreed upon:
(i) Goodwill should be valued at 3 years’ purchase of super-profits.
(ii) Actual profit for the purpose of goodwill valuation will be ` 20,000.
(iii) The normal rate of return will be 17.50% per annum of Fixed Capital.
(iv) All other Assets and Liabilities will be taken over at book value.

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(v) The purchase consideration will be paid partly in share of ` 1 each and partly in cash. Yash and Tanish to
acquire interest in new company in the ratio of 3:2 at face value. Ruchika agreed to retire after taking her
share in cash.
(vi) Realization expenses amounted to ` 5,000.

Prepare Realization Account, Cash and Bank Account, YTR Private Limited Account, and Capital Accounts of
the partners.

Solution
Realization Account
Particulars ` Particulars `
To Sundry Assets By Unsecured Loans 15,000
Fixed Assets 45,000 By Current Liabilities 15,000
Investments 15,000 By YTR Pvt Ltd. (W.N. 2) 85,500
Stock 10,000
Debtors 27,500 97,500
To Bank A/c (Realization 5,000
Expenses)
To Profit on realization
transferred to
Yash 6,500
Tanish 4,333
Ruchika 2,167 13,000
1,15,500 1,15,500

Cash and Bank Account

Particulars ` Particulars `
To Balance b/d 12,500 By Realization A/c – Expenses 5,000
To YTR(P) Ltd. 8,667 By Ruchika Capital A/c 16,167
21,167 21,167

YTR Pvt. Ltd.

Particulars ` Particulars `
To Realization A/c 85,500 By Cash and bank A/c 8,667
By Equity Shares in YTR 76,833
Pvt. Ltd. A/c
85,500 85,500

Partners’ Capital Accounts

Particulars Yash Tanish Ruchika Particulars Yash Tanish Ruchika
` ` ` ` ` `
To Current A/c - 10,000 − By Balance b/d 50,000 20,000 10,000
To Cash and bank − − 16,167 By Current A/c 6,000 − 4,000
A/c

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To Equity Shares in 46,100 30,733 − By Realization 6,500 4,333 2,167

YTR Ltd. A/c
(in 3:2)
To Tanish’s capital 16,400 − − By Yash’s capital 16,400 −
A/c- adjustment A/c -
adjustment
62,500 40,733 16,167 62,500 40,733 16,167

Working Notes:
1. Calculation of Goodwill
Particulars `
Actual profits 20,000
Less: Normal Rate of Return @ 17.5% of fixed capital worth ` 80,000 14,000
Super Profits 6,000
Goodwill valued at 3 years’ purchase 18,000

2. Calculation of Purchase Consideration

Particulars `
Total value of assets as per Balance Sheet 1,20,000
Less: Cash and Bank Balances 12,500
Current account 10,000
97,500

Add: Goodwill 18,000

1,15,500
Less:Liabilities taken over
Unsecured Loan 15,000
Current Liabilities 15,000
Purchase Consideration 85,500

7. The following is the Balance Sheet of A, B, C on 31st December, 20X1 when they decided to dissolve the
partnership:
Liabilities ` Assets `
Creditors 2,000 Sundry Assets 48,500
A’s Loan 5,000 Cash 500
Capital Accounts:
A 15,000
B 18,000
C 9,000
49,000 49,000

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The assets realized the following sums in installments:

I 1,000
II 3,000
III 3,900
IV 6,000
V 20,1001
34,000

The expenses of realization were expected to be ` 500 but ultimately amounted to ` 400 only. Show how at each
stage the cash received should be distributed between partners. They share profits in the ratio of 2:2:1.

Solution

Statement showing Realization and Distribution of Cash Payments

Particulars Realization Creditors Partners’ Partners’
Loan Capitals
` ` ` `
1. After taking into account 1,000 1,000 - -
cash balance and amount
set aside for expenses
2. 3,000 1,000 2,000 -
3. 3,900 - 3,000 900
4. 6,000 - - 6,000
Including saving in 20,100 - - 20,100
expenses
34,000 2,000 5,000 27,000

Statement of Distribution on Capital Accounts

(1) Calculation to determine the mode of distribution of ` 900
Particulars Total A B C
` ` ` `
Balance 42,000 15,000 18,000 9,000
Less: Possible loss, should remaining
assets prove to be worthless (in (41,100) (16,440) (16,440) (8,220)
their profit-sharing ratio)
+ 900 – 1,440 + 1,560 + 780
Deficiency of A’s capital written off
against those of B and C in the ratio of
their capital, 18,000:9,000 (Garner vs. (960) (480)
Murray)
Manner in which the first ` 900
should be distributed + 600 + 300

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(2) Distribution of ` 6,000

Balance after making payment of
amount shown in step (1) 41,100 15,000 17,400 8,700
Less: Possible Loss assuming remaining
asset to be valueless (in their profit (35,100) (14,040) (14,040) (7,020)
sharing ratio)
Balance available and to be distributed 6,000 960 3,360 1,680

(3) Distribution of ` 20,100

Balance after making payment of
amount shown in step (2) 35,100 14,040 14,040 7,020
Less: Possible loss, assuming remaining
assets to be valueless (in their profit (15,000) (6,000) (6,000) (3,000)
sharing ratio)
Manner of distribution of ` 20,100 20,100 8,040 8,040 4,020
Summary:
Balance 42,000 15,000 18,000 9,000
Total amounts paid 27,000 9,000 12,000 6,000
Loss 15,000 6,000 6,000 3,000

8. Ajay Enterprises, a Partnership firm in which A, B, and C are three partners sharing profits and losses
in the ratio of 4: 3: 3. the balance sheet of the firm as on 31st December, 20X1 is as below:
Liabilities Rs Assets Rs
A’ s Capital 15,000 Factory Building 24,160
B’ s Capital 7,500 Plant & Machinery 16,275
C’ s Capital 15,000 Debtors 5,400
B’ s Loan 4,500 Stock 12,390
Sundry Creditors 16,500 Cash at Bank 275
58,500 58,500

On balance sheet date all the three partners have decided to dissolve their partnership. Since the
realization of assets was protracted, they decided to distribute amounts as and when feasible and for this
purpose, they appoint C who was to get as his remunerations 1% of the value of the assets realized other
than cash at Bank and 10% of the amount distributed to the partners.

Assets were realized piecemeal as under:

First installment Rs 18,650
Second installment Rs 17,320
Third installment Rs 10,000
Last instilment Rs 7,000
Dissolution expenses were provided for estimated amount of Rs 3,000
The creditors were settled finally for Rs 15,900

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Prepare a statement showing distribution of cash amongst the partners by ‘Higher Relative Capital
Method’.

Solution
Statement showing distribution of cash amongst the partners
Particulars Creditor B’s
s Loan
A (`) B (`) C (`)
Balance Due 16,500 4,500 15,000 7,500 15,000
On 1st Installment
amount with the firm 18,925
` (275 + 18,650)
Less: Dissolution
expenses provided for (3,000)
15,925
Less: C’s remuneration
of 1% on assets (187)
realized (18,650 x 1%)
15,738
Less: Payment made (15,738) (15,738)
to creditors
Balance due Nil 762
2nd installment 17,320
realized
Less: C’s remuneration
of 1% on assets (173)
realized (17,320 x 1%)
17,147
Less: Payment made (162) (162)
to creditors
Transferred to P& L 600
A/c
Balance available 16,985
Less: Payment for B’s (4,500) (4,500)
loan A/c
Amount available for
distribution to 12,485 nil
partners
Less: C’s remuneration
of 10% of the amount
distributed to (1,135)

partners (12,485 x
10/110)
Balance distributed to
partners on the basis 11,350
of HRCM
Less: Paid to C (W.N.1) (3,750) (3,750)
7,600 11,250
Less: Paid to A and C
in 4:3 (W.N.1) (7,600) (4,343) - (3,257)

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Balance due nil 10,657 7,500 7,993

Amount of 3rd 10,000
installment
Less: C’s remuneration
of 1% on assets (100)
realized (10,000 x 1%)
9,900
Less: C’s remuneration
of 10% of the amount
distributed to (900)
partners (9,900 x
10/110)
9,000
Less: Paid to A and C
in 4:3 for (` 8,750 – (1,150) (657) - (493)
7,600) (W.N.1)
7,850 10,000 7,500 7,500
Less: Paid to A, B, and (7,850) (3,140) (2,355) (2,355)
C in 4:3:3
Balance due nil 6,860 5,145 5,145
Amount of 4th and
last installment 7,000
Less: C’s remuneration
of 1% on assets (70)
realized (7,000 x 1%)
6,930
Less: C’s remuneration
of 10% of the amount
distributed to (630)

partners (6,930 x
10/110)
6,300
Less: Paid to A, B, and (6,300) (2,520) (1,890) (1,890)
C in 4:3:3
Loss suffered by 4,340 3,255 3,255
partners

Working Note:
(i) Rs 275 added to the first installment received on sale of assets represents the Cash in Bank
(ii) The amount due to Creditors at the end of the utilization of First Installment is Rs 762/-. However, since
the creditors were settled for Rs 15,900/- only the balance 162/- were paid and the balance Rs 600/- was
transferred to the Profit & Loss Account.

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(iii) Highest Relative Capital Basis

Particulars A B C
` ` `
Balance of Capital Accounts (A) 15,000 7,500 15,000
Profit-sharing ratio 4 3 3
Capital Profit sharing ratio 3,750 2,500 5,000
Capital in profit sharing ratio taking
B’s Capital as base (B) 10,000 7,500 7,500
Excess of A’s Capital and C’s Capital 5,000 nil 7,500
(A-B) =(C)
Again, repeating the process
Profit-sharing ratio 4 3
Capital Profit sharing ratio 1,250 2,500
Capital in profit sharing
ratio taking A’s Capital as base (D) 5,000 3,750
Excess of C’s Capital (C-D) =(E) nil 3,750

Therefore, firstly Rs 3,750 is to be paid to C then A and C to be paid in proportion of 4:3 upto Rs 8,750 to
bring the capital of all partners A, B, and C in proportion to their profit- sharing ratio. Thereafter, balance
available will be paid in their profit-sharing ratio 4:3:3 to all partners viz A, B, and C.

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ILLUSTRATION 9
The firm of LMS was dissolved on 31.3.20X1, at which date its Balance Sheet stood as follows:
Liabilities Rs Assets Rs
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capital:
L 15,00,000
M 10,00,000
S 5,00,000
47,00,000 47,00,000

Partners share profits equally. A firm of Chartered Accountants is retained to realize the assets and
distribute the cash after discharge of liabilities. Their fees which include all expenses is fixed at Rs 1,00,000.
No loss is expected on realization since fixed assets include valuable land and building.
Realizations are:
S. No. Amount in Rs
1 5,00,000 (including cash and bank)
2 15,00,000
3 15,00,000
4 30,00,000
5 30,00,000

The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You are
required to prepare a statement showing distribution of cash with necessary workings.

Solution
In the Books of M/s LMS
Statement of Piecemeal Distribution (Under Higher Relative Capital method)
Particulars Amount Creditors Bank L’s loan Capital A/cs
Available Loan
L M S
Balance due 2,00,000 5,00,000 10,00,000 15,00,000 10,00,000 5,00,000
1st Installment
(including
cash and bank 5,00,000
balances)
Less: Liquidator’s
Expenses and fee (1,00,000)
4,00,000
Less: Payment
to Creditors
and repayment
of Bank
Loan in the (4,00,000) (1,14,286) (2,85,714) – – – –
ratio of 2:5
Balance Due – 85,714 2,14,286 10,00,000 15,00,000 10,00,000 5,00,000

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2nd Installment 15,00,000

Less: Payment
to Creditors
and repayment (3,00,000) (85,714) (2,14,286) – – – –
of bank loan in
full settlement
Balance Due 12,00,000 Nil Nil 10,00,000 15,00,000 10,00,000 5,00,000
Less: (10,00,000) (10,00,000) – – –
Repayment of
L’s Loan
Balance Due 2,00,000 - 15,00,000 10,00,000 5,00,000
Less: Payment
to Mr. L
towards (2,00,000) (2,00,000) – –
relative higher
capital (W.N. 1)
Balance Due Nil Nil 13,00,000 10,00,000 5,00,000
3rd Installment 15,00,000
Less: Payment
to Mr. L
towards higher (3,00,000) (3,00,000) – –
relative capital

(W.N. 2)
Balance Due 12,00,000 10,00,000 10,00,000 5,00,000
Less: Payment
to Mr. L & Mr.
M towards
excess capital (10,00,000) (5,00,000) (5,00,000) –
(W.N. 1&2)
Balance Due 2,00,000 5,00,000 5,00,000 5,00,000
Less: Payment
to all the (2,00,000) (66,667) (66,667) (66,666)
partners
equally
Balance due Nil 4,33,333 4,33,333 4,33,334
4th Installment 30,00,000
Less: Payment
to all the (30,00,000) (10,00,000) (10,00,000) (10,00,000)
partners
equally
Realization
profit credited 5,66,667 5,66,667 5,66,666
to Partners
5th Installment 30,00,000
Less: payment
to all partners (30,00,000) 10,00,000 10,00,000 10,00,000
equally
Realization
profit credited 15,66,667 15,66,667 15,66,666
to partners

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Working Notes:
(i) Scheme of payment of surplus amount of Rs 2,00,000 out of second Installment:
Particulars Capital A/cs
L M S
Rs Rs Rs
Balance (i) 15,00,000 10,00,000 5,00,000
Profit sharing ratio (ii) 1 1 1
Capital taking S’s Capital (iii) 5,00,000 5,00,000 5,00,000
Excess Capital (iv) = (i) – (iii) 10,00,000 5,00,000
Profit-Sharing Ratio 1 1
Excess capital taking
M’s Excess Capital as base (v) 5,00,000 5,00,000
Higher Relative Excess (iv) – (iv) 5,00,000

So, Mr. L should get Rs 5,00,000 first which will bring down his capital account balance from Rs 15,00,000 to
Rs 10,00,000. Accordingly, surplus amounting to Rs 2,00,000 will be paid to Mr. L towards higher relative
capital.

(ii)Scheme of payment of Rs 15,00,000 realized in 3rd Installment:

–Payment of Rs 3,00,000 will be made to Mr. L to discharge higher relativecapital. This makes the higher
capital of both Mr. L and Mr. M Rs 5,00,000as compared to capital of Mr. S.
–Payment of Rs 5,00,000 each of Mr. L & Mr. M to discharge the highercapital.
–Balance Rs 2,00,000 equally to L, M and S, i.e., Rs 66,667 Rs 66,667 andRs66,666 respectively.

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ILLUSTRATION 10
Daksh Associates is a reputed firm. On account of certain misunderstandings between the partners, it was
decided to dissolve the firm as on 31st December, 20X1. Their Balance Sheet as on 31st December, 20X1
was as follows:
Liabilities Rs Assets Rs
Capitals: Land and Buildings 7,00,000
Daksh 3,00,000 Other Fixed Assets 3,00,000
Yash 2,00,000 Stock in Trade 2,00,000
Siddhart (Minor) 1,00,000 6,00,000 Debtors 4,00,000
Trade Loans 3,00,000 Bills Receivable 1,50,000
Bank Overdraft 3,00,000 Trademark 30,000
Other Loans 2,00,000 Cash 20,000
Creditors 2,00,000
Siddhart’s Loan 2,00,000
18,00,000 18,00,000

It was decided that Mr. Daksh will be in-charge of Realization. He will set apart Rs 10,000 towards expenses.
He will be paid a remuneration of 5 percent on the amounts distributed to the partners towards their
contribution other than loans. Assets realized are as under:

Date Particulars Rs
1-1-20X2 Debtors 3,50,000
15-1-20X2 Fixed Assets 4,00,000
1-2-20X2 Debtors 50,000
15-2-20X2 Bills Receivable 1,40,000
1-3-20X2 Fixed Assets 50,000
15-3-20X2 Land and Buildings 8,00,000

Prepare a statement showing how the money received on various dates will be distributed assuming:
(a)The actual expenses of realization amounted to Rs 20,005.
(b)The firm is solvent.
(c)The profit-sharing ratio was as under:
Profit Loss
Daksh 2 1
Yash 2 1
Siddhart 1 Nil
5 2

(d)The final dissolution is made on 15th March, 20X2

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ILLUSTRATION 11
P, Q, and R are partners sharing profits and losses as to 2:2:1. Their Balance Sheet as on 31st March, 20X1 is
as follows:
Liabilities Rs Assets Rs
Capital accounts Plant and Machinery 1,08,000
P 1,20,000 Fixtures 24,000
Q 48,000 Stock 60,000
R 24,000 1,92,000 Sundry debtors 48,000
Reserve Fund 60,000 Cash 60,000
Creditors 48,000
3,00,000 3,00,000

They decided to dissolve the business. The following are the amounts realized:
Particulars Rs
Plant and Machinery 1,02,000
Fixtures 18,000
Stock 84,000
Sundry debtors 44,400

Creditors allowed a discount of 5% and realization expenses amounted to Rs 1,500. There was an
unrecorded asset of Rs 6,000 which was taken over by Q at Rs 4,800. An amount of Rs 4,200 due for GST
had come to notice during the course of realization and this was also paid

You are required to prepare:

(i) Realization account. (ii) Partners’ capital accounts. (iii) Cash account.

SOLUTION-
Realization Account
Particulars ` Particulars `
To Debtors 48,000 By Creditors 48,000
To Stock 60,000 By Cash A/c (Assets realized):
To Fixtures 24,000 Plant and Machinery
1,02,000
To Plant and machinery 1,08,000 Fixtures 18,000
To Cash A/c (Creditors) 45,600 Stock 84,000
To Cash A/c (GST) 4,200 Sundry Debtors 44,400 2,48,400

To Cash A/c (Realization 1,500 By Q (Unrecorded asset) 4,800

expenses)
To Profit on Realization
P 3,960
Q 3,960
R 1,980 9,900
3,01,200 3,01,200

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Partners’ Capital Accounts

Particulars P Q R Particulars P Q R
` ` ` ` ` `
To Realization A/c 4,800 By Balance b/d 1,20,000 48,000 24,000
(unrecorded
asset)
To Cash (Bal. Fig.) 1,47,960 71,160 37,980 By Reserve 24,000 24,000 12,000
fund
By Realization
A/c (Profit) 3,960 3,960 1,980
1,47,960 75,960 37,980 1,47,960 75,960 37,980

Cash Account
Particulars ` Particulars `
To Balance b/d 60,000 By Realization A/c (Creditors) 45,600
To Realization A/c (Assets) 2,48,400 By Realization A/c (Expenses) 1,500
By Realization A/c (GST) 4,200
By P’s Capital A/c 1,47,960
By Q’s Capital A/c 71,160
By R’s Capital A/c 37,980
3,08,400 3,08,400

ILLUSTRATION 12
Amit, Sumit, and Kumar are partners sharing profit and losses in the ratio 2:2:1. The partners decided to
dissolve the partnership on 31st March 20X1 when their Balance Sheet was as under:
Liabilities Amount Assets Amount
Capital Accounts: Land & Building 1,35,000
Amit 55,200 Plant & Machinery 45,000
Sumit 55,200 Furniture 25,500
General Reserve 61,500 Investments 15,000
Kumar's Loan A/c 15,000 Book Debts 60,000
Loan from D 1,20,000 Less: Prov. for bad debts (6,000) 54,000
Trade Creditors 30,000 Stock 36,000
Bills Payable 12,000 Bank 13,500
Outstanding Salary 7,500 Capital Withdrawn:
_______ Kumar 32,400
3,56,400 3,56,400

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The following information is given to you:

(i) Realization expenses amounted to Rs 18,000 out of which Rs 3,000 was borne by Amit.
(ii) A creditor agreed to takeover furniture of book value Rs 12,000 at Rs 10,800. The rest of the creditors
were paid off at a discount of 6.25%.
(iii) The other assets realized as follows:
Furniture - Remaining taken over by Kumar at 90% of book value
Stock - Realized 120% of book value
Book Debts - Rs 12,000 of debts proved bad, remaining were fully realized
Land & Building - Realized Rs 1,65,000
Investments -Taken over by Amit at 15% discount
(iv) For half of his loan, D accepted Plant & Machinery and Rs 7,500 cash. The remaining amount was paid at
a discount of 10%.
(v) Bills payable were due on an average basis of one month after 31st March 20X1, but they were paid
immediately on 31st March @ 6% discount "per annum".

Prepare the Realization Account, Bank Account and Partners’ Capital Accounts in the books of Partnership
firm.

SOLUTION-
Realization Account
Particulars ` Particulars `
To Land and Building 1,35,000 By Provision for bad debts 6,000
To Plant and Machinery 45,000 By Loan from D 1,20,000
To Furniture 25,500 By Trade creditors 30,000
To Investments 15,000 By Bills payable 12,000
To Book debts 60,000 By Outstanding salary 7,500
To Stock 36,000 By Kumar - Furniture taken over
To Bank (Realization (13,500 x .9) 12,150
expenses) 15,000 By Bank A/c -
Stock Realized 43,200

To Amit– Realization Land & Building 1,65,000

expenses 3,000
Debtors 48,000 2,56,200
To Bank A/c -
Bill payable 11,940 By Amit (Investment taken over) 12,750
D’s Loan 61,500
Creditors 18,000
Salary 7,500
To Profit transferred to
partners’ capital
Accounts
Amit 9,264
Sumit 9,264
Kumar 4,632 23,160
4,56,600 4,56,600

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Bank Account
Particulars ` Particulars `
To Balance b/d 13,500 By Realization A/c
(payment of liabilities:
11,940+ 7,500 + 54,000
+ 15,000 + 18,000 +
7,500) 1,13,940
To Realization A/c By Amit 79,314
(assets realized) 2,56,200
To Kumar 12,618 By Sumit 89,064
2,82,318 2,82,318

Partners’ Capital Accounts

Particulars Amit Sumit Kumar Particulars Amit Sumit Kumar
` ` ` ` ` `
To Balance b/d 32,400 By Balance b/d 55,200 55,200
By Kumar’s Loan 15,000
To Realization A/c 12,750 By General 24,600 24,600 12,300
(Investment taken Reserve
over)

To Realization A/c 12,150 By Realization 3,000

(Furniture taken A/c (expense)
over)
To Bank A/c 79,314 89,064 By Realization 9,264 9,264 4,632
A/c (profit)
By Bank A/c 12,618
92,064 89,064 44,550 92,064 89,064 44,550

Working Notes:
1. Payment for Bills Payable
Particulars Amount (`)
Bills Payable as per Balance Sheet 12,000
Less: Discount for early payment {12,000 x 6% x (1/12)} 60
Amount Paid in Cash 11,940

2. Payment to D’s Loan

Particulars Amount (`)
D’s Loan as per Balance Sheet 120,000.00
50% of Loan adjusted as below:
Plant & Machinery accepted at Book Value (` 45,000) and
` 7,500 in cash. 7,500
Balance 50% of Loan adjusted as below:
In cash after allowing discount of 10% i.e. ` 60,000 –
` 6,000 =` 54,000. 54,000

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3. Payment to Trade Creditors

Particulars Amount (`)
Trade Creditors as per Balance Sheet 30,000
Less: Furniture of Book Value ` 12,000 accepted at
value ` 10,800 10,800
19,200
Less: Discount @ 6.25% 1,200
Amount paid in Cash 18,000

4. Furniture taken over by Kumar

Particulars Amount (`)
Furniture as per Balance Sheet 25,500
Less: Furniture of Book Value ` 12000 accepted by trade
Creditors 12,000
13,500
Less: 10% of Book Value 1,350
Value of Furniture taken over by Kumar 12,150

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AMALGAMATION, CONVERSION AND SALE OF PARTNERSHIP FIRMS

When two or more partnership firms are amalgamated, the books of old firm are closed and books of the
new firm are opened

9. B and S are partners of S & Co. sharing profits and losses in the ratio of 3:1. S and T are
partners of T & Co. sharing profits and losses in the ratio of 2:1.

On 31st October, 20X1, they decided to amalgamate and form a new firm M/s. BST & Co. wherein B, S, and
T would be partners sharing profits and losses in the ratio of 3:2:1.

Their balance sheets on that date were as under:

Liabilities S & Co. T & Co. Assets S & Co. T & Co.
Rs Rs Rs Rs
Due to X & Co. 40,000 − Cash in hand 10,000 5,000
Due to S & Co. − 50,000 Cash at bank 15,000 20,000
Other Creditors 60,000 58,000 Due from T & Co. 50,000 −
Reserves 25,000 50,000 Due from X & Co. − 30,000
Capitals Other Debtors 80,000 1,00,000
B 1,20,000 − Stock 60,000 70,000
S 80,000 1,00,000 Furniture 10,000 3,000
T − 50,000 Vehicles − 80,000
Machinery 75,000 −
Building 25,000
3,25,000 3,08,000 3,25,000 3,08,000

The amalgamated firm took over the business on the following terms:
(a) Goodwill of S & Co. was worth Rs 60,000 and that of T & Co. Rs 50,000. Goodwill account was not to be
opened in the books of the new firm; the adjustments being recorded through capital accounts of the
partners.
(b) Building, machinery, and vehicles were taken over at Rs 50,000, Rs 90,000 and Rs 1,00,000 respectively.
(c) Provision for doubtful debts has to be carried forward at Rs 4,000 in respect of debtors of S & Co. and Rs
5,000 in respect of debtors of T & Co.

You are required to:

(i) Compute the adjustments necessary for goodwill.
(ii) Pass the journal entries in the books of BST & Co. assuming that excess/deficit capital (taking T’s Capital
as base) with reference to share in profits are to be transferred to current accounts.

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Solution
(i) Adjustment for raising & writing off of goodwill:
Raised in old profit-sharing Written off in Difference
ratio new ratio
S & Co. T & Co. Total
3:1 2:1 ` 3:2:1 `
B 45,000 - 45,000 Cr. 55,000 Dr. 10,000 Dr.
S 15,000 33,333 48,333 Cr. 36,666 Dr. 11,667 Cr.
T − 16,667 16,667 Cr. 18,334 Dr. 1,667 Dr.
60,000 50,000 1,10,000 1,10,000

(ii) Books of BST & Co.

Journal Entries
20X1 Particulars Dr. Cr.
` `
Oct. 31 Cash Account Dr. 10,000
Bank Account Dr. 15,000
T & Co. Dr. 50,000
Sundry Debtors Dr. 80,000
Stock Account Dr. 60,000
Furniture Account Dr. 10,000
Machinery Account Dr. 90,000
Building Account Dr. 50,000
To Provision for Doubtful debts 4,000
To X & Co. 40,000
To Sundry Creditors 60,000
To B’s Capital Account 1,65,750

To S’s capital Account 95,250

(Sundry assets and liabilities of M/s S & Co.
taken over at the values stated as per agreement
dated.)
Cash Account Dr. 5,000
Bank Account Dr. 20,000
X & Co. Account Dr. 30,000
Sundry Debtors A/c Dr. 1,00,000
Stock Account Dr. 70,000
Furniture Account Dr. 3,000
Vehicles Account Dr. 1,00,000
To Provision for Doubtful Debts 5,000
To S & Co. 50,000
To Sundry Creditors 58,000
To S’s Capital Account 1,43,333

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To T’s Capital Account 71,667

(Sundry assets and liabilities of M/s T & Co. taken
over at the values stated as per agreement dated.)
B’s Capital Account Dr. 10,000
T’s Capital Account Dr. 1,667
To S’s Capital Account 11,667
(Adjustment in capital accounts consequent on
raising goodwill of S & Co. for ` 60,000, T & Co.
for ` 50,000 and writing off the same in the new
ratio between B, S, T as per agreement)
S & Co. 50,000
To T Co. 50,000
(Mutual indebtedness of S & Co. and T & Co.,
canceled on taking over of the two firms)
B’s Current Account Dr. 54,250
To B’s Capital Account 54,250
(Amount credited to B’s Capital to bring capital
in the profit-sharing ratio)

S’s Capital Account Dr. 1,10,250

To S’s Current Account 1,10,250
(Excess amount in S’s Capital Account
transferred to S’s current account to reduce the
balance in capital accounts in accordance with
the profit-sharing ratio)

Working Notes:
(i) Balance of Capital Accounts on transfer of business to M/s BST & Co.
(a) S & Co. B’s S’s
Capital Capital
` ` `
As per Balance Sheet 1,20,000 80,000
Credit for Reserve 18,750 6,250
Profit on Revaluation 40,000
Less: Provision for doubtful debts (4,000) 27,000 9,000
1,65,750 95,250

(b) T & Co. S’s T’s

Capital Capital
` ` `
As per Balance Sheet 1,00,000 50,000
Credit for Reserve 33,333 16,667
Profit on Revaluation 20,000
Less: Provision for doubtful debts (5,000) 10,000 5,000
1,43,333 71,667

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(ii) Capital in the new firm

Particulars B S T
` ` `
Balance as taken over 1,65,750 95,250
- 1,43,333 71,667
1,65,750 2,38,583 71,667

Adjustment for Goodwill –10,000 +11,667 –1,667

1,55,750 2,50,250 70,000
Total capital, ` 4,20,000* in the
new
ratio of 3:2:1, taking T’s Capital 2,10,000 1,40,000 70,000
as the basis
Transfer to Current Account 54,250 (Dr.) 1,10,250 (Cr.) —

*T’s Capital is Rs 70,000 and it is 1/6 of total. The total, therefore, is Rs 4,20,000.

10. The following is the Balance Sheet of Messers A and B as on 31st March 20X5:
Liabilities Rs Assets Rs
A’s Capital 40,000 Buildings 50,000
B’s Capital 50,000 90,000 Stock 30,000
A’s Loan 10,000 Debtors 20,000
General Reserve 10,000 Investment
Liabilities 20,000 6% Debentures in X Ltd. 20,000
Cash 10,000
1,30,000 1,30,000

It was agreed that Mr. C is to be admitted for a fifth share in the future profits from 1st April 20X5. He is
required to contribute cash towards goodwill and Rs 10,000 towards capital.
The following further information is furnished:
(i) The partners A and B shared the profits in the ratio 3:2.
(ii) Mr. A was receiving a salary of Rs 500 p.m. from the very inception of the firm in 20X1 in addition to
share of profit.
(iii) The future profit ratio between A, B, and C will be 3:1:1. Mr. A will not get any salary after the
admission of Mr. C.
(iv) (a) The goodwill of the firm should be determined on the basis of 2 years’ purchase of the average
profits from business of the last 5 years. The particulars of the profits are as under:
Year Ended Rs
Profit 20,000
Loss 10,000
Profit 20,000
Profit 25,000
Profit 30,000

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The above profits and losses are after charging the salary of Mr. A. The profit of the year ended 31st March
20X1 included an extraneous profit of Rs 30,000 and the loss of the year ended 31st March 20X2 was on
account of loss by strike to the extent of Rs 20,000.
(b) It was agreed that the value of the goodwill of the firm should appear in the books of the firm.
(v) The trading profit for the year ended 31st March, 20X6 was Rs 40,000 before depreciation.
(vi) The partners had drawn each Rs 1,000 p.m. as drawings.

(vii) The value of the other assets and liabilities as on 31st March, 20X6 were as under:
Building (before depreciation) 60,000
Stock 40,000
Debtors Nil
Investment 20,000
Liabilities Nil

(viii) Provide depreciation at 5% on buildings on the closing balance and interest at 6% on A’s loan.
(ix) They applied for conversion of the firm into a Private Limited Company i.e. ABC Pvt. Ltd. Certificate
received on 1-4-20X6. They decided to convert Capital A/cs of the partners into share capital in the ratio of
3: 1:1 on the basis of total Capital as on 31-3-20X6. If necessary, partners have to subscribe to fresh capital
or withdraw.

Prepare the Statement of Profit and Loss for the year ended 31st March, 20X6 and the Balance Sheet of the
company.

Solution
Messers A, B, and C
Statement of Profit & Loss for the year ended 31st March, 20X6
Particulars ` Particulars `
To Dep. Building (60,000x5%) 3,000 By Trading Profit 40,000
To Interest on A’s loan 600 By Interest on Debentures 1,200
(10,000 x 6%)
To Net Profit to:
A’s Capital A/c 22,560
B’s Capital A/c 7,520
C’s Capital A/c 7,520
41,200 41,200

Balance Sheet of the ABC Pvt Ltd. as at 1-4-20X6

Particulars Notes No. `
I Equity and Liabilities
Shareholders’ funds 1,59,120
Non-current liabilities
Long term borrowings 1 10,600
Total 1,69,720

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Assets
Non-current assets
Property, Plant and Equipment 2 57,000
Intangible assets 3 39,600
Non-current investments 20,000
Current assets
Inventories 40,000
Cash and cash equivalents 13,120
Total 1,69,720

Notes to Accounts
`
1. Long term borrowings
Loan from A 10,600
2. Property, Plant and Equipment (net)
Land and Building (60,000 – 3,000) 57,000
3. Intangible asset
Goodwill 39,600

Working Notes:
1. Calculation of goodwill:
Year ended 31st March
Particulars 20X1 20X2 20X3 20X4 20X5
` ` ` ` `
Book Profits 20,000 (10,000) 20,000 25,000 30,000
Adjustment for extraneous
profit 20X1 and abnormal loss
20X2 (30,000) 20,000 — — —
(10,000) 10,000 20,000 25,000 30,000
Add Back: Remuneration of A 6,000 6,000 6,000 6,000 6,000
(4,000) 16,000 26,000 31,000 36,000
Less: Debenture Interest being
non-operating income* (1,200) (1,200) (1,200) (1,200) (1,200)
(5,200) 14,800 24,800 29,800 34,800

Total Profit from 20X2 to 20X5 1,04,200

Less: Loss for 20X1 (5,200)
99,000
Average Profit 19,800
Goodwill equal to 2 years’ 39,600
purchase
Contribution from C, equal to 7,920
1/5

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2. Partners’ Capital Accounts as on 31 March 20X6

Particulars A B C Particulars A B C
` ` ` ` ` `
To Drawings 12,000 12,000 12,000 By Balance 40,000 50,000 —
b/d
To Balance 80,320 65,360 13,440 By General 6,000 4,000 —
c/d Reserve
By Goodwill 23,760 15,840 —
By Bank — — 17,920
By Profit & 22,560 7,520 7,520
Loss A/c
92,320 77,360 25,440 92,320 77,360 25,440

3. Balance Sheet as on 31st March, 20X6

Liabilities ` ` Assets ` `
A’s Capital 80,320 Goodwill 39,600*
B’s Capital 65,360 Land & Building 60,000
C’s Capital 13,440 Less: Dep. (3,000) 57,000
A’s Loan 10,000 Investments 20,000
Add: Int. due 600 10,600 Stock-in-trade 40,000
Cash (Working Note 5) 13,120**
1,69,720 1,69,720

4. Conversion into Company

Particulars `
Capital: A 80,320

B 65,360
C 13,440
Share Capital 1,59,120
Distribution of share: A (3/5) 95,472
B (1/5) 31,824
C (1/5) 31,824

A should subscribe shares of Rs 15,152 (Rs 95,472 – Rs 80,320) and C should subscribe shares of Rs 18,384
(Rs 31,824 – Rs 13,440). B should withdraw Rs 33,536 (Rs 65,360 – Rs 31,824) subscribing to shares worth
Rs 31,824.
* It is shown in the books of the firm only to determine the closing capital of partners inclusive of goodwill
before conversion.

5. Closing cash balance can be derived as shown below:

Particulars ` `
Trading profit (assume realized) 40,000
Add: Debenture Interest 1,200
Add: Decrease in Debtors Balance 20,000

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61,200
Less: Increase in stock 10,000
Less: Decrease in Liabilities 20,000 (30,000)
Cash Profit 31,200
Add: Opening cash balance 10,000
Add: Cash brought in by C 17,920
59,120
Less: Drawings 36,000
Less: Additions to Building 10,000 (46,000)
13,120

11. Hari, Lal, and Jay have been in partnership for a number of years, sharing profits/losses in
the ratio of 2:2:1 as wholesale stationers trading under the name ‘Hari Brothers’. They decide
to convert their partnership into a limited company (with effect from 1st January, 20X2) to
be known as Hari Ltd.

Immediately prior to this conversion, the balance sheet of partnership as on 31st December 20X1 was as
follows:

Balance Sheet As on 31st December 20X1

Liabilities Rs Rs Assets Rs
Capital accounts Fixed assets
Hari 70,000 (at written down value)
Lal 30,000 Land & Buildings 50,000
Jay 20,000 1,20,000 Plant & Machinery 30,000
Current accounts Motor vehicles 20,000
Hari 7,000 Current Assets:
Lal 5,000 Inventories 60,000
Jay 3,000 15,000 Debtors 25,000
Current liabilities Axis Bank account 5,000
Creditors 25,000
Dena Bank account 20,000 45,000
Long-term liabilities
Loan-Hari 3,000
Loan-Gopi Ltd. 7,000 10,000
1,90,000 1,90,000

The terms of conversion are that Hari Ltd. is to take over the assets and liabilities of Hari Brothers as
follows:
Particulars Valuation for take-over
Land and Building 96,000
Plant and Machinery 28,000

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Motor vehicles 15,000

Inventories 60,000
Debtors 24,000
Creditors 25,000
Goodwill 10,000

The closing balance in Axis Bank account is to be transferred to Dena Bank account before all the other
dissolution entries are affected in the partnership ledgers.
Lal took over one of the motor vehicles at an agreed amount of Rs 2,000. All other liabilities were paid from
the Dena Bank account.

The purchase consideration is discharged by an issue at par of Rs 60,000 10% Debentures (fully paid) to the
partners in their capital account proportions as shown in the above balance sheet plus equity shares in Hari
Ltd. of Rs 1 each (fully paid to make up the balance due to each partner).

You are required to

(i) prepare (a) Realization Account (b) Partners’ Capital Accounts (c) Bank account of Axis Bank and Dena
Bank in the books of Hari Brothers;
(ii) ‘Business purchase account’ and ‘Hari Brothers’ account in Hari Ltd.'s books.

Solution
(i) (a) In the books of Hari Brothers
Realization Account
Particulars ` ` Particulars `
To Land and buildings 50,000 By Creditors 25,000
To Plant and machinery 30,000 By Lal’s capital A/c 2,000
To Motor vehicles 20,000 By Dena Bank A/c 25,000
To Inventories 60,000 By Hari Ltd. (W.N.ii) 1,83,000
To Debtors 25,000
To Partners’ capital
accounts
Hari (2/5) 20,000
Lal (2/5) 20,000
Jay (1/5) 10,000 50,000
2,35,000 2,35,000

(b) Partners' Capital Accounts

Particulars Hari Lal Jay Particulars Hari Lal Jay
` ` ` ` ` `
To Realization A/c 2,000 By Balance b/d 70,000 30,000 20,000
(motor vehicle
takeover)
To 10% 35,000 15,000 10,000 By Current A/c 7,000 5,000 3,000
Debentures*

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To Equity shares 62,000 38,000 23,000 By Realization A/c

Profit 20,000 20,000 10,000
97,000 55,000 33,000 97,000 55,000 33,000
* Debentures have been issued in the proportion of capital account balances i.e. in ratio of 7:3:2.

(c) Bank Account

Particulars Axis Dena Particulars Axis Dena
Bank Bank Bank Bank
` ` ` `
To Balance b/d 5,000 - By Balance b/d - 20,000
To Axis Bank - 5,000 By Loan (Gopi Ltd.) - 7,000
To Realization A/c - 25,000 By Loan-Hari - 3,000
By Dena Bank 5,000
5,000 30,000 5,000 30,000

(ii) In the books of Hari Ltd.

Business Purchase Account
Particulars ` Particulars `
To Creditors 25,000 By Land and buildings 96,000
To Dena Bank (overdraft) 25,000 By Plant and Machinery 28,000
To Hari Brothers 1,83,000 By Motor Vehicles 15,000
By Inventories 60,000
By Debtors 24,000
By Goodwill 10,000
2,33,000 2,33,000

Hari Brothers Account

Particulars ` Particulars `
To 10% Debentures A/c 60,000 By Business purchase 1,83,000
To Equity share capital A/c 1,23,000
1,83,000 1,83,000

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12. A and B were carrying on business sharing profits and losses equally. The firm’s Balance
Sheet as at 31.12.20X1 was:
Liabilities Rs Assets Rs
Sundry 60,000 Stock 60,000
Creditors
Bank overdraft 35,000 Machinery 1,50,000
Capital A/cs: Debtors 70,000
A 1,40,000 Joint Life Policy 9,000
B 1,30,000 2,70,000 Leasehold Premises 34,000
Profit & Loss A/c 26,000
Drawings Accounts:
A 10,000
B 6,000 16,000
3,65,000 3,65,000
The business was carried on till 30.6.20X2. The partners withdrew in equal amounts half the amount of
profits made during the period of six months after charging depreciation at 10% p.a. on machinery and
after writing off 5% on leasehold premises. In the half-year, sundry creditors were reduced by Rs 10,000
and bank overdraft by Rs 15,000.

On 30.6.20X2, stock was valued at Rs 75,000 and Debtors at Rs 60,000; the Joint Life Policy had been
surrendered for Rs 9,000 before 30.6.20X2 and other items remained the same as at 31.12.20X1.

On 30.6.20X2, the firm sold the business to a Limited Company. The value of goodwill was fixed at Rs
1,00,000 and the rest of the assets were valued on the basis of the Balance Sheet as at 30.6.20X2. The
company paid the purchase consideration in Equity Shares of Rs 10 each.

You are required to prepare: (a) Balance Sheet of the firm as on 30.6.20X2; (b) The Realization Account; (c)
Partners’ Capital Accounts showing the final settlement between them.

Solution
(a) Balance Sheet as on 30.6.20X2
Liabilities ` ` Assets ` `
Capital Accounts: Machinery 1,50,000
A’s balance as on Less: Depreciation
1.1.20X2 1,17,000 @ 10% p.a. (7,500) 1,42,500
Add: Profit for 6 11,800 Leasehold premises 34,000
months
1,28,800 Less: Written-off (1,700) 32,300
@5%
Less: Drawings for 6 Stock 75,000
months (5,900) 1,22,900
B’s balance as on Sundry Debtors 60,000
1.1.20X2 1,11,000
Add: Profit for 6 11,800
months
1,22,800

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Less: Drawings for 6

(5,900) 1,16,900
months
Sundry Creditors 50,000
Bank overdraft 20,000
3,09,800 3,09,800

(b) Realization Account

Particulars ` Particulars `
To Machinery A/c 1,42,500 By Sundry Creditors A/c 50,000
To Leasehold Premises A/c 32,300 By Bank Overdraft A/c 20,000
To Stock A/c 75,000 By Limited Company A/c 3,39,800
(W.N.2)

To Sundry Debtors A/c 60,000

To A’s Capital A/c 50,000
To B’s Capital A/c 50,000
4,09,800 4,09,800
(c) Partners’ Capital Accounts
Date Particulars A B Date Particulars A B
` ` ` `
1.1.X2 To Profit & 13,000 13,000 1.1.X2 By Balance b/d 1,40,000 1,30,000
Loss A/c
To Drawings 10,000 6,000
A/c
29.6.X2 To Balance c/d 1,17,000 1,11,000
1,40,000 1,30,000 1,40,000 1,30,000
30.6.X2 To Drawings 5,900 5,900 30.6.X2 By Balance b/d 1,17,000 1,11,000
A/c
To Shares in 1,72,900 1,66,900 30.6.X2 By Profit & Loss 11,800 11,800
Limited Appropriation
Company A/c
A/c
By Realization A/c 50,000 50,000
1,78,800 1,72,800 1,78,800 1,72,800

Working Notes:
(1) Ascertainment of profit for the 6 months ended 30th June, 20X2
Closing Assets: ` `
Stock 75,000
Sundry Debtors 60,000
Machinery less depreciation 1,42,500
Leasehold premises less written off 32,300
3,09,800
Less: Closing liabilities:
Sundry Creditors 50,000
Bank overdraft 20,000 (70,000)
Closing Net Assets 2,39,800
Less: Opening combined capital:
A – ` (1,40,000 – 13,000 – 10,000) 1,17,000
B – ` (1,30,000 – 13,000 – 6,000) 1,11,000 (2,28,000)
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Profit before adjustment of drawings 11,800

Add: Combined drawings during the 6 months (equal to 11,800
profit)
Profit for 6 months 23,600

(2) Ascertainment of purchase consideration:

Closing net assets (as above) Rs 2,39,800 + Goodwill Rs 1,00,000 = Rs 3,39,800

13. A, B and C were in partnership sharing profits and losses 3:2:1. There was no provision in the
agreement for interest on capitals or drawings.

A died on 31.12.20X0 and on that date, the partners’ balances were as under:
Capital Account: A – Rs 60,000; B- Rs 40,000; C- Rs 20,000
Current Account: A – Rs 29,000; B – Rs 20,000; C – Rs 5,000 (Dr.).

By the partnership agreement, the sum due to A’s estate was required to be paid within a period of 3 years,
and minimum installment of Rs 20,000 each were to be paid, the first such installment falling due
immediately after death and the subsequent installments at half-yearly intervals. Interest @ 5% p.a. was to
be credited half-yearly.

In ascertaining his share, goodwill (not recorded in the books) was to be valued at Rs 60,000 and the assets,
excluding the Joint Endowment Policy (mentioned below), were valued at Rs 36,000 in excess of the book
values.

No Goodwill Account was raised and no alteration was made to the book values of fixed assets. The Joint
Assurance Policy shown in the books at Rs 20,000 matured on 1.1.20X1, realizing Rs 26,000; payments of Rs
20,000 each were made to A’s Executors on 1.1.20X1, 30.6.20X1 and 31.12.20X1. B and C continued trading
on the same terms as previously and the net profit for the year to 31.12.20X1 (before charging the interest
due to A’s estate) amounted to Rs 32,000. During that period, the partners' drawings were: B- Rs 15,000;
and C- Rs 8,000.

On 1.1.20X2, the partnership was dissolved and an offer to purchase the business as a going concern for Rs
1,40,000 was accepted on that day. A cheque for that sum was received on 30.6.20X2.

The balance due to A’s estate, including interest, was paid on 30.6.20X2 and on that day, B and C received
the sums due to them.

You are required to write-up the Partners’ Capital and Current Accounts from 1.1.20X1 to 30.6.20X2. Show
also the account of the executors of A.

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Solution
Partners’ Current Accounts
Particulars A B C Particulars A B C
1.1.20X1 ` ` ` 1.1.20X1 ` ` `
To Balance b/d --- ---- 5,000 By Balance b/d 29,000 20,000 --
To A’s Current - 20,000 10,000 By B’s Current A/c 20,000 -- --
A/c – – goodwill
goodwill
(W.N.1)
To A’s Current - 12,000 6,000 By C’s Current A/c 10,000 - -
A/c – – goodwill
Revaluation
Profit (W.N.2)
To A’s 80,000 - - By B’s Current A/c 12,000 - -
Capita – Revaluation
lA/c – profit
transfer
By C’s Current A/c 6,000
– Revaluation
profit
By Joint Life 3,000 2,000 1,000
Policy A/c
(` 26,000 –
` 20,000)
By Balance c/d 10,000 20,000
80,000 32,000 21,000 80,000 32,000 21,000
1.1.20X1 31.12.20X1
To Balance b/d 10,000 20,000 By Profit & Loss 17,617 8,808
Appropriation
A/c
31.12.20X1 By Balance c/d 7,383 19,192
To Drawings A/c 15,000 8,000
25,000 28,000 25,000 28,000
1.1.20X2 30.6.20X2
To Balance b/d 7,383 19,192 By Realization A/c 12,573 6,287
-profit
To B’s Capital By C’s Capital A/c --- 12,905
A/c – transfer – transfer
5,190 ---
12,573 19,192 12,573 19,192

Partners’ Capital Accounts

Particulars A B C Particulars A B C
1.1.20X1 ` ` ` 1.1.20X1 ` ` `
To A’s Executors 1,40,000 ---- --- By Balance b/d 60,000 40,000 20,000
A/c
To Balance c/d --- 40,000 20,000 By A’s Current A/c 80,000 -- --
1,40,000 40,000 20,000 1,40,000 40,000 20,000
31.12.20X1 1.1.20X1
To Balance c/d 40,000 20,000 By Balance b/d 40,000 20,000
40,000 20,000 40,000 20,000
30.6.20X2 1.1.20X2
To C’s Current --- 12,905 By Balance b/d 40,000 20,000
A/c –
transfer
To Bank A/c 45,190 7,095 30.6.20X2

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By B’s Current A/c

– transfer 5,190 --
-
45,190 20,000 45,190 20,000
A’s Executors Account
Date Particulars ` Date Particulars `
1.1.20X1 To Bank A/c 20,000 1.1.20X1 To A’s Capital A/c 1,40,000
1.1.20X1 To Balance c/d 1,20,000
1,40,000 1,40,000
30.6.20X1 To Bank A/c 20,000 1.1.20X1 By Balance b/d 1,20,000
30.6.20X1 To Balance c/d 1,03,000 30.6.20X1 By Interest A/c 3,000
1,23,000 1,23,000
31.12.20X1 To Bank A/c 20,000 1.7.20X1 By Balance b/d 1,03,000
31.12.20X1 To Balance c/d 85,575 31.12.20X1 By Interest A/c 2,575
1,05,575 1,05,575
30.6.20X2 To Bank A/c 87,715 1.1.20X2 By Balance b/d 85,575
30.6.20X2 By Interest A/c 2,140
87,715 87,715
Working Notes:
(1) Adjustment in regard to Goodwill
Partners A B C
Share of goodwill before death 30,000 20,000 10,000

Share of goodwill after death - 40,000 20,000

Gain (+)/Sacrifice (-) (30,000) 20,000 10,000
Cr. Dr. Dr.

(2) Adjustment in regard to revaluation of assets

Partners A B C
Share of profit on revaluation (`) 18,000 12,000 6,000
credited to all the partners
Debited to the continuing partners (`) - 24,000 12,000
(`) (18,000) 12,000 6,000
Cr. Dr. Dr.

(3) Ascertainment of Profit for the year ended 31.12.20X1

` `
Profit before charging interest on balance due to A’s 32,000
executors
Less: Interest payable to A’s executors:
from 1.1.20X1 to 30.6.20X1 3,000
From 1.7.20X1 to 31.12.20X1 2,575 (5,575)
Balance of profit to be shared by B and C 26,425

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(4) Balance Sheet as at 31.12.20X1

Liabilities ` Assets `
Capital Account – B 40,000 Sundry Assets (balancing figure) 1,19,000
Capital Account – C 20,000 Partners’ Current A/cs –B 7,383
A’s Executors A/c 85,575 Partners’ Current A/cs- C 19,192
1,45,575 1,45,575

(5) Realization Account

Particulars ` Particulars `
To Sundry Assets A/c 1,19,000 By Bank A/c (purchase 1,40,000
To Interest A/c – A’s Executors 2,140 consideration)
To Partners’ Capital A/cs – B 12,573
To Partners’ Capital A/cs – C 6,287
1,40,000 1,40,000

14. Prabhu & Co. is a partnership firm consisting of Mr. Prabhu, Mr. Bhola and Mr. Shiv who
share profits and losses in the ratio of 2:2:1 and Bhagwan Ltd. is a company doing similar
business.
The firm and the company provide the following ledger balances as on 31.3.20X1:
Prabhu & Co. Bhagwan Ltd.
Debit balances: Rs Rs
Plant & machinery 2,50,000 8,00,000
Furniture & 25,000 1,12,500
fixtureStock in 1,00,000 4,25,000
trade

Sundry debtors 1,00,000 4,12,500

Cash at bank 5,000 2,00,000
Cash in hand 20,000 50,000
Credit balances:
Equity share Capital-
Equity shares of Rs 10 each 10,00,000
Partners’ capitals:
Prabhu 1,00,000
Bhola 1,50,000
Shiv 50,000
General reserve 50,000 3,50,000
Sundry creditors 1,50,000 6,50,000

It was decided that the firm Prabhu & Co. be dissolved and all the assets (except cash in hand and cash at
bank) and all the liabilities of the firm be taken over by Bhagwan Ltd. by issuing 25,000 shares of Rs 10 each
at a premium of Rs 2 per share.

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Partners of Prabhu & Co. agreed to divide the shares issued by Bhagwan Ltd. in the profit-sharing ratio and
bring necessary cash for settlement of their capital.

The creditors of Prabhu & Co. includes Rs 50,000 payable to Bhagwan Ltd. An unrecorded liability of Rs
12,500 of Prabhu & Co. must also be taken over by Bhagwan Ltd.

Prepare:
(i) Realization account, Partners’ capital accounts and Cash in hand/Bank a/c in the books of Prabhu & Co.
(ii) Pass journal entries in the books of Bhagwan Ltd. for acquisition of Prabhu & Co.

Solution
(i) In the books of Prabhu & Co.
Realization Account
Particulars ` Particulars `
To Plant & Machinery 2,50,000 By Sundry Creditors 1,50,000
To Furniture & Fixture 25,000 By Bhagwan Ltd. (Refer W.N.) 3,00,000

To Stock in trade 1,00,000 By Partners’ Capital

Accounts (loss):
To Sundry Debtors 1,00,000 Prabhu’s Capital A/c 10,000
Bhola’s Capital A/c 10,000
Shiv’s Capital A/c 5,000
4,75,000 4,75,000

Partners’ Capital Accounts

Particulars Prabhu Bhola Shiv Particulars Prabhu Bhola Shiv
` ` ` ` ` `
To Realization A/c 10,000 10,000 5,000 By Balance 1,00,000 1,50,000 50,000
b/d
To Shares in Bhagwan By General
Ltd. (W.N.1) 1,20,000 1,20,000 60,000 Reserve 20,000 20,000 10,000
To Cash - 40,000 - By Cash 10,000 - 5,000
1,30,000 1,70,000 65,000 1,30,000 1,70,000 65,000

Cash and Bank Account

Particulars ` ` Particulars ` `
To Balance b/d 20,000 5,000 By Cash A/c 5,000
(Contra)
To Bank A/c 5,000 By Bhola 40,000
(Contra)*
To Prabhu 10,000
To Shiv 5,000
40,000 5,000 40,000 5,000

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(ii) In the Books of Bhagwan Ltd.

Journal Entries
Particulars Dr. (`) Cr. (`)
1. Business Purchase Account Dr. 3,00,000
To Liquidators of Prabhu & Co. 3,00,000
(Being business of Prabhu & Co.
purchased and payment due)
2. Plant and Machinery A/c Dr. 2,50,000

Furniture and Fixture A/c Dr. 25,000

Stock in Trade A/c Dr. 1,00,000
Sundry Debtors A/c Dr. 1,00,000
To Sundry Creditors 1,50,000
To Unsecured Liability 12,500
To Business Purchase Account 3,00,000
To Capital Reserve (B.F.) 12,500
(Being takeover of all assets and liabilities)
3. Liquidators of Prabhu & Co. Dr. 3,00,000
To Equity Share Capital Account 2,50,000
To Securities Premium Account 50,000
(Being purchase consideration discharged
in the form of shares of ` 10 each issued at
a premium of ` 2 each)
4. Sundry Creditors Account Dr. 50,000
To Sundry Debtors Account 50,000
(Being mutual owing eliminated)

Working Note:
Computation of purchase consideration:
25,000 Equity shares of Rs 12 each = Rs 3,00,000
Equity shares to be given to partners:
Prabhu = 10,000 Shares @ Rs 12 = Rs 1,20,000
Bhola = 10,000 shares @ Rs 12 = Rs 1,20,000
Shiv = 5,000 shares @ Rs 12 = Rs 60,000

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ADDITIONAL QUESTIONS ON AMALGAMATION, SALE OF PARTNERSHIP FIRM TO A COMPANY

15. A and B carrying on business in partnership sharing profits and losses equally, wished
to dissolve the firm and sell the business to AB Limited Company on 31.03.2018 when the
firm's position was as follows: (MAY 2018)

Liabilities Amount Assets Amount

A’s Capital 7,50,000 Land & Building 5,00,000
B’s Capital 5,00,000 Furniture 2,00,000
Sundry Creditors 3,00,000 Stock 5,00,000
Debtors 330,000
Cash 20,000
15,50,000 15,50,000

The arrangement with AB Limited Company was as follows:

(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and stock were purchased at book value less 15%.
(iii) The Goodwill of the firm was valued at Rs 2,00,000.
(iv) The firm's debtors, cash and creditors were not to be taken over, but the company agreed to collect the
book debts of the firm and discharge the creditors of the firm as an agent, for which services the company
was to be paid 5% on all collections from the firm's debtors and 3% on cash paid to firm's creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares of Rs 10 each at a
premium of Rs 2 per share.
The company collected all the amounts from the debtors. The creditors were paid off less by Rs 5,000
allowed as discount. The company paid the balance due to the vendors in cash.
Prepare the Realisation A/c, the Capital Accounts of the Partners and the Cash Account in the books of the
Partnership firm.

Solution
In the Books of Partnership Firm
Realization Account

Particulars Amount Particulars Amount

To Land & Building 5,00,000 By Sundry Creditors 3,00,000
To Furniture 2,00,000 By AB Ltd ( PC as per WN 1) 13,95,000
To Stock 5,00,000 By AB Ltd. Company – Sundry Debtors 3,13,500
3,30,000 Less – Commission
(3,30,000 * 5% = 16,500)
To Debtors 3,30,000
To AB Ltd. Co. - Sundry Creditors 2,95,000
( 3,00,000 -5000)
To AB Ltd. Co. - Commission 8850
(3% * 295,000)
To Profit transferred to
A’ capital 87,325
B’s capital 87,325

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Capital Accounts of Partners

Particulars A B Particulars A B
To Shares in AB Ltd. 8,19,900 5,75,100 By Balance b/d 7,50,000 5,00,000
Co.– (W.N.2)
To Cash – Final 17,425 12,225 By Realization a/c – 87,325 87,325
Payment Profit
8,37,325 5,87,325 8,37,325 5,87,325

Cash Account
Particulars Amount Particulars Amount
To Balance b/d 20,000 By A’s Capital A/c- Final 17,425
payment
To AB Ltd. Co. (Amount realized 9,650 By B’s Capital A/c- Final 12,225
from Debtors less amount paid Payment
to creditors) –(W.N.3)
29,650 29,650

WN 1 -Calculation of Purchase consideration:

Particulars Amount
Land & Building 6,00,000
Furniture 1,70,000
Stock 4,25,000
Goodwill 2,00,000
13,95,000

WN2 - Distribution of shares among partners

The shares received from the company have been distributed between the two partners A & B in the ratio
of their final claims i.e., 8,37,325: 5,87,325 (*Refer Note)

No. of shares received from the company = 13,95,000/12= 1,16,250

A gets [(1,16,250 X 8,37,325)/14,24,650] = 68,325 shares valued at 68,325 x 12 = Rs 8,19,900.
B gets the remaining 47,925 shares, valued at Rs 5,75,100 (47,925 x 12)

WN3 - Calculation of net amount received from AB Ltd on account of amount realized from debtors less
amount paid to creditors:
Amount realized from Debtors 330,000
Less - Commission for realization from debtors (5% on 3,30,000) (16,500)
3,13,500
Less - Amount paid to creditors (2,95,000 )
18,500
Less - Commission for cash paid to creditors (3% on 2,95,000) 8,850
Net amount received 9,650
*Note: In the above situation, shares received from AB Ltd. Company have been distributed between two
partners A and B in the ratio of their final claims. Alternatively, shares received from AB Ltd. can be
distributed among the partners in their profit sharing ratio i.e. Rs 13,95,000 x ½ = Rs 6,97,500 each. In that
case, firm will pay cash amounting Rs 1,39,825 to A and will receive cash Rs 1,10,175 from B. Partners’
capital accounts and cash account will, accordingly get changed.

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16. Explain the nature of Limited Liability Partnership. Who can be a designated partner in
a Limited Liability Partnership? (MOCK PAPER)

Solution
Nature of Limited Liability Partnership:
• A limited liability partnership is a body corporate formed and incorporated under the LLP Act, 2008
and is a legal entity separate from that of its partners.
• A limited liability partnership shall have perpetual succession and any change in the partners of a
limited liability partnership shall not affect the existence, rights or liabilities of the limited liability
partnership.

Designated partners:
• Every limited liability partnership shall have at least two designated partners who are individuals
and at least one of them shall be a resident in India.
• In case of a limited liability partnership in which all the partners are bodies corporate or in which
one or more partners are individuals and bodies corporate, at least two individuals who are
partners of such limited liability partnership or nominees of such bodies corporate shall act as
designated partners.

17. Write short notes on extent of liability of LLP and its Partners (MAY 2018)

Solution –

Extent of Liability of LLP and its partners -

• Every partner of an LLP for the purpose of its business is an agent of the LLP but is not an agent of
other partners. Obligations of LLP are solely its obligations and liabilities of LLP are to be met out of
properties of LLP.
• The partners of an LLP in the normal course of business are not liable for the debts of the LLP. The
LLP is liable if a partner of LLP is liable to any person as a result of wrongful or omission on his part in
the course of business of the LLP or with his authority. However, a partner will be liable for his own
wrongful acts or commissions, but will not be liable for the wrongful acts or commissions of other
partners of the LLP. Thus a partner may be called to pay the liability of an LLP under exceptional
circumstances.
• If an LLP or any of its partners act with the intent to defraud creditors of the LLP or any other person
or for any fraudulent purpose, then the liability of the LLP and the concerned partners is unlimited.
However, where the fraudulent act is carried out by a partner, the LLP is not liable if it is established
by the LLP that the act was without the knowledge or authority of the LLP. Where the business is
carried out with fraudulent intent or for fraudulent purpose, every person who was knowingly a
party is punishable with imprisonment and fine.

18. Amit paid Rs 50,000 as premium to other partners of the firm at the time of his
admission to the firm, with a condition that it will not be dissolved before expiry of five
years. The firm is dissolved after three years. Amit claims refund of premium. Explain –
(1) Whether he is entitled to get a refund of the premium? If yes, list the criteria for the calculation of the
amount of the refund.
(2) Also explain any two conditions when no claim in this respect will arise. (NOV 2018)

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Solution-

If the firm is dissolved before the term expires, as is the case, Amit, being a partner who has paid premium
on admission, will have to be repaid / refunded.

The criteria for calculation of refund amount are:

(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence

No claim for refund will arise if:

(1) the firm is dissolved due to the death of a partner;
(2) the dissolution is mainly due to the partner’s (claiming refund) own misconduct; and
(3) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or
any part of it.

19. Explain the Limitations of Liability of Limited Liability Partnership (LLP) and its partners.
(RTP MAY 2018)

Solution-

• The Liabilities of an LLP shall be met out of the properties of the LLP.
• A partner is not personally liable, directly or indirectly (for an obligation of an LLP arising out of a
contract or otherwise), solely by reason of being a partner in the LLP.
• An LLP is not bound by anything done by a partner in dealing with a person, if:
✓ The partner does not have the authority to act on behalf of the LLP in doing a particular act; and
✓ The other person knows that the partner has no authority or does not know or believe him to be
a partner in the LLP.
✓ The liability of the LLP and the partners perpetrating fraudulent dealings shall be unlimited for
all or any of the debts or other liabilities of the LLP.

20. Explain the Treatment of Investment Fluctuation Fund/ Reserve appearing in Liability
side of Balance Sheet of Partnership Firm on Dissolution of Partnership Firm?

Solution

• Distribute Investment Fluctuation Fund/ Reserve to the partners in Profit sharing ratio to the Credit
side of Partnership Account.
• Or Transfer Investment Fluctuation Fund/ Reserve to the Realization A/c

21. Explain the Treatment for -

(a) Expenses of realization which were initially estimated to be 10,800 but after few months actual amount
spent was only 8,000 ?
(b) What will be your answer if initially it was estimated at Rs 10,000 but later after few months actual
expense was Rs 15,000

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Solution –
(a) When expense was estimated at 10,800 but spent was Rs 8,000
• Deduct 10,800 from the Initial balance ( cash available or first installment)
• Add 2800 to the last installment balance and do the apportionment
• Above steps are applicable for Maximum loss method and Higher Relative Capital Method.

(b) When expense was estimated at 10,000 but spent was Rs 15,000
• Deduct 10,000 from the Initial balance ( cash available or first installment)
• Deduct 5000 more from the last installment balance and do the apportionment
• Above steps are applicable for Maximum loss method and Higher Relative Capital Method.

22. P, Q, R and S are sharing profits and losses in the ratio 3 : 3 : 2 : 1. Frauds committed
by R during the year were found out and it was decided to dissolve the partnership on 31st
March, 2019 when their Balance Sheet was as under: (RTP NOV 2019)

Liabilities Amount Assets Amount

Capitals: Building 1,90,000
P 1,50,000 Stock 1,30,000
Q 1,50,000 Investments 50,000
R - Debtors 70,000
S 60,000 Cash 30,000
General reserve 40,000 R’ capital 40,000
Trade creditors 80,000
Bills payable 30,000
5,10,000 5,10,000

Following information is given to you:

(i) A cheque for Rs 7,000 received from debtor was not recorded in the books and was misappropriated
by R.
(ii) Investments costing Rs 8,000 were sold by R at Rs 11,000 and the funds transferred to his personal
account. This sale was omitted from the firm’s books.
(iii) A creditor agreed to take over investments of the book value of Rs 9,000 at Rs 13,000. The rest of the
creditors were paid off at a discount of 5%.
(iv) The other assets realized as follows:
Building 110% of book value
Stock Rs 1,20,000
Investments- The rest of investments were sold at a profit of Rs 7,000
Debtors- The rest of the debtors were realized at a discount of 10%
(v) The bills payable were settled at a discount of Rs 500.
(vi) The expenses of dissolution amounted to Rs 8,000
(vii) It was found out that realization from R’s private assets would only be Rs 7,000.

Prepare Realization Account, Cash Account and Partner’s Capital Accounts. All workings should part of your
answer.

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SOLUTION
Realization Account

Particulars Amount Particulars Amount

To Building 1,90,000 By Trade creditors 80,000
To Stock 1,30,000 By Bills payable 30,000
To Investment 50,000 By Cash :
To Debtors 70,000 Building 2,09,000
To Cash-creditors paid (WN 1) 63,650 Stock 1,20,000
To Cash-expenses 8,000 Investments (W.N.2) 40,000
To Cash-bills payable (30,000-500) 29,500 Debtors (W.N. 3) 56,700 4,25,700
To Partners’ Capital A/cs By R’s Capital A/c (Receipt 7,000
from Debtors unrecorded)
P 4,183 By R’s Capital A/c (Receipt 11,000
from Investments unrecorded
Q 4,183
R 2,789
S 1,395
5,53,700 5,53,700

Capital Accounts of Partners

Particulars P Q R S Particulars P Q R S
To Balance b/d - - 40,000 - By Balance 1,50,000 1,50,000 - 60,000
b/d
To Realization - - 7,000 - By General 13,333 13,333 8,889 4,445
A/c-Debtors Reserve
misappropriation
To Realization - - 11,000 - By 4,183 4,183 2,789 1,395
A/c-Investment- Realization
misappropriation profit
To R’s capital A/c 16,421 16,421 - 6,480 By Cash - - 7,000 -
(W.N. 4) A/c
To Cash A/c 1,51,095 1,51,095 - 59,360 By P’s 16,421
capital A/c
By Q’s 16,421
capital A/c
By S’s 6,480
capital A/c
1,67,516 1,67,516 58,000 65,840 1,67,516 1,67,516 58,000 65,840

Cash Account
Particulars Amount Particulars Amount
To Balance b/d 30,000 By Realization-creditors paid 63,650
To Realization – assets realized 4,25,700 By Realization-bills payable 29,500
To R’s capital A/c 7,000 By Realization-expenses 8,000
By Capital accounts:
P 1,51,095
Q 1,51,095
S 59,360
4,62,700 4,62,700
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WORKING NOTES

1. Amount paid to creditors in cash:

Book value 80,000
Less: Creditors taking over investments ( 13,000)
67,000
Less: Discount @ 5% (3,350)
63,650

2. Amount received from sale of investments:

Book value 50,000
Less: Misappropriated by R (8,000)
42,000
Less: Taken over by a creditor (9,000)
33,000
Add: Profit on sale of investments 7,000
Cash received from sale of remaining investment 40,000

3.Amount received from debtors:

Book value 70,000
Less: Unrecorded receipt (7,000)
63,000
Less: Discount @ 10% (6,300)
56,700

4. Deficiency of R:
Balance of capital as on 31st March, 2019 40,000
Debtors-misappropriation 7,000
Investment-misappropriation 11,000
58,000
Less: Realization Profit (2,789)
General reserve (8,889)
Contribution from private assets (7,000)
Net deficiency of capital 39,322

This deficiency of Rs 39,322 in R’s capital account will be shared by other partners P, Q and S in their
Adjusted capital ratio ( After Adjusting General Reserve of 163,333( 150000+13,333) : 163,333
(150000+13,333) : 64,445( 60,000+4445)

Accordingly,
P’s share of deficiency = [39,322 x (163,333/391,111)] = Rs 16,421
Q’s share of deficiency = [39,322 x (163,333/391,111)] = Rs 16,421
S’s share of deficiency = [39,322 x (64,445/391,111)] = Rs 6,480

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23. State the circumstances when Garner V/s Murray rule is not applicable ( MAY 2019)

Solution
Garner vs Murray rule is non-applicable in the following cases:
• When the solvent partner has a debit balance in the capital account. Only solvent partners will bear
the loss of capital deficiency of insolvent partner in their capital ratio. If incidentally a solvent
partner has a debit balance in his capital account, he will escape the liability to bear the loss due to
insolvency of another partner.
• When the firm has only two partners.
• When there is an agreement between the partners to share the deficiency in capital account of
insolvent partner.
• When all the partners of the firm are insolvent

24. Explain the Treatment in Higher Relative capital method when –

• More than one external (outside) liabilities like creditors for Rs 3,00,000, Bank OD – Rs 3,00,000
Other loans- Rs 2,00,000, Bills payable – 2,00,000 exist and Money available is Rs 17.9 lacs.
• When one of the partner ‘C’ is a minor and has a capital of Rs 1 lacs and C has also given Loan to the
Partnership Firm for 2 lacs.
• CA Firm was appointed for dissolution activities and their fess was fixed at 1,00,000
• A& B are other 2 partners with capital of 3,00,000 & 2,00,000 respectively.
• Profit sharing ratio among A , B & C was 2:2:1
• Loss sharing ratio among A & B was 1:1 ( Minor does not share loss of the firm)

Solution-
Assuming all the external liabilities have equal priority, The money available will be distributed in their
Liability ratio.
• Firstly out of 17.9 lacs any money towards realization expense (Rs 1,00,000) will be deducted
• Out of 16.9 lacs, 10 lacs will be distributed to all the external liability holders in their liability ratio of
3:3:2:2 ( If money has realized in stages then till 10 lacs is realized keep distributing money available
in 3:3:2:2 ratio)
• Out of 6.9 lacs, Minor’s loan will be settled for 2 lacs
• Out of 4.9 lacs, Minor’s capital will be settled for 1 lacs
• Out of 3.9 lacs first 1 lacs will be paid to A ( As A has excess capital compared to his profit sharing
ratio as per Higher relative capital method)
• Balance 2.9 lacs will be distributed both to A& B in their profit sharing ration of 1:1

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25. Read, Write and Add give you the following Balance Sheet as on 31st March, 2011.

Liabilities Rs Assets Rs
Read’s Loan 15,000 Plant and Machinery at cost 30,000
Capital Accounts: Fixtures and Fittings 2,000
Read 30,000 Stock 10,400
Write 10,000 Debtors 18,400
Add 2,000 42,000 Less: Provision (400) 18,000
Sundry Creditors 17,800 Joint Life Policy 15,000
Loan on Hypothecation of Patents and Trademarks 10,000
6,200 Cash at Bank 8,000
Stock
12,400
Joint Life Policy Reserve
93,400 93,400

The partners shared profits and losses in the ratio of Read 4/9, Write 2/9 and Add 1/3. Firm
was dissolved on 31st March, 2011 and you are given the following information:
(a) Add had taken a loan from insurers for Rs 5,000 on the security of Joint Life Policy.
The policy was surrendered and Insurers paid a sum of Rs 10,200 after deducting Rs 5,000 for Add’s loan
and Rs 300 as interest thereon.

(b) The firm had previously purchased some shares in a joint stock company and had written them off on
finding them useless. The shares were now found to be worth Rs 3,000 and the loan creditor agreed to
accept the shares at this value.

SOLUTION-

Loan on Hypothecation of Stock Account

To Realisation A/c 3,000 By Balance b/d 6,200

To Bank A/c 3,200
6,200 6,200

Joint Life Policy Account

To Balance b/d 15,000 By Joint Life Policy Reserve 12,400

A/c
To Realisation A/c 12,900 By Bank A/c (10,200 + 5,300) 15,500
27,900 27,900

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26. A, B, C and D are sharing profits and losses in the ratio 5 : 5 : 4 : 2. Frauds committed by C
during the year were found out and it was decided to dissolve the partnership on 31st
March, 2012 when their Balance Sheet was as under:

Liabilities Amount Assets Amount

Capital Building 1,20,000
A 90,000 Stock 85,500
B 90,000 Investments 29,000
C - Debtors 42,000
D 35,000 Cash 14,500
General reserve 24,000 C 15,000
Trade creditors 47,000
20,000 3,06,000
Bills payable
3,06,000
Following information is given to you:
(i) A cheque for Rs 4,300 received from debtor was not recorded in the books and was misappropriated by
C.
(ii) Investments costing Rs 5,400 were sold by C at Rs 7,900 and the funds transferred to his personal
account. This sale was omitted from the firm’s books.

(iii) A creditor agreed to take over investments of the book value of Rs 5,400 at Rs 8,400. The rest of the
creditors were paid off at a discount of 2%.

(iv) The other assets realized as follows:

Building - 105% of book value
Stock - Rs 78,000
Investments - The rest of investments were sold at a profit of Rs 4,800
Debtors - The rest of the debtors were realized at a discount of 12%

(v) The bills payable were settled at a discount of Rs 400.

(vi) The expenses of dissolution amounted to Rs 4,900

(vii) It was found out that realization from C’s private assets would only be Rs 4,000.

Prepare the necessary Ledger Accounts.

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SOLUTION-
Realisation account
Particulars Rs Particulars Rs
To Building 1,20,000 By Trade 47,000
To Stock 85,500 creditors By 20,000
To Investment 29,000 Bills payable
To Debtors 42,000
By Cash
To Cash-creditors paid 37,828
Building 1,26,000
(W.N.1)
To Cash-expenses 4,900 Stock 78,000
To Cash-bills payable 19,600 Investment (W.N.2) 23,000 2,60,176
(20,000-400) Debtors (W.N. 3) 33,176
To Partners’ Capital A/cs By Debtors-unrecorded 4,300
A 171 By Investments- 7,900
B 171 unrecorded
C 137
D 69 548
3,39,376 3,39,376

Cash Account
Particulars Amount Particulars Amount

To Balance b/d 14,500 By Realisation-creditors paid 37,828

To Realisation – assets realised By Realisation-bills payable 19,600
Building 1,26,000
By Realisation-expenses
Stock 78,000 4,900

Investments 23,000 By Capital account A

B 90,531
Debtors 33,176 2,60,176 D
90,531
To C’s capital A/c 4,000 35,286
2,78,676 2,78,676

Partner’s Capital A/c

Particulars A B C D Particulars A B C D
To Balance B/d - - 15,000 - By Balance 90,000 90,000 - 35,000
B/d
To Debtors - - 4,300 - By General 7,500 7,500 6,000 3,000
Misappropriation Reserve
To Investment - - 7,900 By 171 171 137 69
Misappropriation Realization
Profit
To C’s Capital A/c 7,140 7,140 - 2,783 By Cash A/c - - 4,000 -
(WN 4)
To Cash 90,531 90,531 - 35,286 By A’s - - 7,140 -
Capital

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By B’s - - 7,140 -
Capital
By D’s - - 2,783 -
Capital
97,671 97,671 27,200 38,069 97,671 97,671 27,200 38,069

Working Notes:
1. Amount paid to creditors

Book value 47,000

Less: Creditors taking over investments ( 8,400)
38,600
Less: Discount @ 2% (772)
37,828

2. Amount received from sale of investments

Book value 29,000

Less: Misappropriated by C (5,400)
23,600
Less: Taken over by a creditor (5,400)
18,200
Add: Profit on sale of investments 4,800
23,000

3. Amount received from debtors

Book value 42,000

Less: Unrecorded receipt (4,300)
37,700
Less: Discount @ 12% (4,524)
33,176

4. Deficiency of C

Balance of capital as on 31st March, 2012 15,000

Debtors-misappropriation 4,300
Investment-misappropriation 7,900
27,200
Less: Realisation Profit (137)
General reserve (6,000)
Contribution from private assets (4,000)
Net deficiency of capital 17,063

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Adjusted Capital of A,B & D

Particulars A B D
Capital Balance 90,000 90,000 35,000
before date of
Dissolution
Add : Share General 7,500 7,500 3,000
Reserve ( 24,000 in
5:5:4:2)
Adjusted Capital 97,500 97,500 38,000

The deficiency of Rs 17,063 in C’s capital account will be shared by other partners A, B and D in their
capital ratio of 975 : 975 : 380

Accordingly,
A’s share of deficiency ( 17,063 x 975/2300) = 7,140
B’s share of deficiency ( 17,063 x 975/2300) = 7,140
D’s share of deficiency ( 17,063 x 380/2300) = 2,783

27. P, Q, R and S had been carrying on business in partnership sharing profits & losses in the
ratio of 4:3:2:1. They decided to dissolve the partnership on the basis of following Balance
Sheet as on 30th April, 2011:

Liabilities Amount Assets Amount

Capital Accounts Land & building 2,46,000
P 1,68,000 Furniture & fixtures 65,000
Q 1,08,000 2,76,000 Stock 1,00,000
General reserve 95,000 Debtors 72,500
Capital reserve 25,000 Cash in hand 15,500
Sundry creditors 36,000 Capital overdrawn:
Mortgage loan 1,10,000 R 25,000
S 18,000 43,000
5,42,000 5,42,000

R became insolvent and nothing was realized from his private estate. R’s Loss after all adjustments = Rs
21,060. Calculate Loss of R to be taken up by other partners.

Solution-
As per Garner Vs. Murray rule, solvent partners have to bear the loss due to insolvency of a partner in their
capital ratio.

Calculation of Capital Ratio of Solvent Partners

P Q S

Opening capital 1,68,000 1,08,000 (18,000)

Add: General reserve 38,000 28,500 9,500
Capital reserve 10,000 7,500 2,500
2,16,000 1,44,000 (6,000)

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Though S is a solvent partner yet he cannot be called upon to bear loss on account of insolvency of R
because his capital account has a debit balance.

Therefore, capital ratio of P & Q = 216 : 144 = 3 : 2

P’s Share of Loss (21,060 X 3/5) = 12,636
Q’s Share of Loss (21,060 X 2/5) = 8,424

28. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were
9,600, 6,000 and 8,400 respectively

After paying creditors, the liabilities and assets of the firm were:

Liability for interest on loans from : Investments 1,000

Spouses of partners 2,000 Furniture 2,000
Partners 1,000 Machinery 1,200
Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.

You are required to prepare a statement showing the distribution of cash as and when available,
applying maximum possible loss procedure.

Solution-

Particulars Realization Interest Interest A’s Capital B’s Capital C’s Capital Total
on Loans on Loans Capital
From From
partner’s partners
Spouse
Balance - 2,000 1,000 9,600 6,000 8,400 24,000
Due (A)
Sale of 1000 (1000) -
Investment
Sale of 2000 (1000) (1000)
Furniture
Sale of 1200
Machinery
(Maximum (11,400) (6840) (4560) (22800)
Possible
Loss is
22,800
(24,000 –
1200)
distributed
to
Partner’s
in 5:3:2
Amounts - - (1800) (840) 3840 (1200)
at credit
Deficiency 1800 840 (2640) -

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of A and B
written off
against C
Amount - - 1200 1200
paid (B)
Balances in 9600 6000 7200 22,800
capital
accounts

Sale of 4000
stock
Maximum (9400) (5640) (3760) (18,800)
possible
loss of
18,800
(22,800-
4000)
allocated
in 5:3:2
Amount 200 360 3440 4000
paid (C)
Balances 9400 5640 3760 18800
in capital
accounts
left
unpaid—
Loss ( A-B-
C)

29. Ramesh, Roshan and Rohan were partners of the firm ‘3R Enterprises’ sharing profits and
losses in the ratio of 3:2:1 respectively. On 31st March, 2011 their Balance Sheet stood as
follows:

Liabilities Assets
Ramesh's Capital A/c 16,80,000 Land and Buildings 14,00,000
Roshan's Capital A/c 11,60,000 Machinery 11,00,000
Rohan's Capital A/c 6,70,000 Furniture 6,10,000
General Reserve 6,30,000 Stock 8,40,000
Creditors 6,00,000 Debtors 6,00,000
Cash at Bank 1,90,000
47,40,000 47,40,000

• On the above-mentioned date, the partners decided to convert their firm into a private limited
company and named it ‘3R Enterprises (Private) Ltd.'.
• The company took over all the assets including cash at bank and all the creditors for Rs 42,00,000
payable in the form of fully paid equity shares of Rs 10 each. It recorded in its books, land and
buildings at Rs 16,40,000, machinery at Rs 9,90,000 and created a provision for bad debts @ 5% on
debtors.
• The expenses of the take-over came to Rs 23,000 which were paid and borne by the company.
• The expenses of getting the company incorporated were Rs 57,000.
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• The partners distributed the company's shares amongst themselves in their profit sharing ratio.
They settled their accounts by paying or receiving cash.

Pass journal entries in the books of the company for Expense on takeover of Rs 23,000 & Incorporation
Expense of Rs 57,000

SOLUTION-

In the Books of 3R Enterprises (Private) Ltd

Journal Entries
Capital reserve A/c (Expenses of takeover) Dr 23,000
To Bank A/c 23,000
(Expenses for take over debited to capital reserve)
(Because in this problem, New Company made Capital Profit (Capital Reserve). If it was
Loss Scenario then we would have debited to Goodwill A/c. IF it was Neither Profit or
loss scenario, we can Debit Rs 23,000 to P&L A/c.

Preliminary expenses A/c Dr 57,000

To Bank A/c 57,000
(Expenses incurred to get the company
incorporated)

30. Mohit, Neel and Om were Partners sharing Profits and Losses in the ratio of 5:3:2
respectively. The Trial Balance of the Firm on 31st March, 2019 was the following:
Particulars
Machinery at Cost 2,00,000
Inventory 1,37,400
Trade receivables 1,24,000
Trade payables 1,69,400
Capital A/cs:
Mohit 1,36,000
Neel 90,000
Om 46,000
Drawing A/cs:
Mohit 50,000
Neel 46,000
Om 34,000
Depreciation on Machinery 80,000
Profit for the year ended 31st March 2,48,600
Cash at Bank 1,78,600
7,70,000 7,70,000

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Interest on Capital Accounts at 10% p.a. on the amount standing to the credit of Partners' Capital Account
at the beginning of the year, was not provided before preparing the above Trial Balance. On the above date,
they formed a MNO Private Limited Company with an Authorized Share Capital of 2,00,000 shares of Rs 10
each to be divided in different classes to take over the business of Partnership firm.

You are provided the following information:

1. Machinery is to be transferred at Rs 1,40,000.
2. Shares in the Company are to be issued to the partners, at par, in such numbers, and in such classes as
will give the partners, by reason of their shareholdings alone, the same rights as regards interest on capital
and the sharing of profit and losses as they had in the partnership.
3. Before transferring the business, the partners wish to draw from the partnership profits to such an
extent that the bank balance is reduced to Rs 1,00,000. For this purpose, sufficient profits of the year are to
be retained in profit-sharing ratio.
4. Assets and liabilities except Machinery and Bank, are to be transferred at their book value as on the
above date.

You are required to prepare:

(a) Statement showing the workings of the Number of Shares of each class to be issued by the company, to
each partner.
(b) Capital Accounts showing all adjustments required to dissolve the Partnership.
(c) Balance Sheet of the Company immediately after acquiring the business of the Partnership and Issuing of
Shares.

Solution-

(a) Number of Shares to be issued to Partners

Assets: Machinery 1,40,000 + Inventory 1,37,400 +Trade 5,01,400

Receivable 1,24,000 + Bank 1,00,000
Less: Liabilities taken over (1,69,400)
Net Assets taken over (Purchase Consideration) 3,32,000

Classes of Shares to be issued : Mohit Neel Om Total

10% Preference Shares of 10 each (to 1,36,000 90,000 46,000 2,72,000
retain rights as to Interest on Capital)

Balance in Equity Shares of 10 each 30,000 18,000 12,000 60,000

(3,32,000 -2,72,000) (issued in profit
sharing ratio)
1,66,000 1,08,000 58,000 3,32,000

(b) Partners’ Capital Accounts

Particulars Mohit Neel Om Particulars Mohit Neel Om
To Drawings 50,000 46,000 34,000 By balance 1,36,000 90,000 46,000
b/d
To 10% 1,36,000 90,000 46,000 By Interest 13,600 9,000 4,600
Preference on
share Capital
capital

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To 30,000 18,000 12,000 By profit for 1,10,700 66,420 44,280

Equity the year
Shares 5:3:2
(W.N. 1)
To Bank – 54,300 17,420 6,880 By 10,000 6,000 4,000
Additional Machine
drawings ry* A/c
(Bal figure)
Total 2,70,300 1,71,420 98,880 2,70,300 1,71,420 98,880
* Gain on Transfer of Machinery = 1,40,000 – (2,00,000- 80,000) = 20,000 in 5:3:2 ratio.

(c) Balance sheet of MNO Ltd. as on 31st March, 2019 (after Takeover of Firm)

Note no.
I Equity and Liabilities:
(1) Shareholders Funds
Share Capital 1 3,32,000
(2) Current Liabilities
Trade Payables 1,69,400
Total 5,01,400
II Assets
(1) Non-Current Assets
Property, plant & equipment 1,40,000
(2) Current Assets:
(a) Inventories 1,37,400
(b) Trade Receivables 1,24,000
(c) Cash and Cash Equivalents 1,00,000
Total 5,01,400

Notes to Accounts
Particulars
1. Shares capital
Authorized shares capital 20,00,000
Issued, Subscribed & paid up
6,000 Equity Shares of 10 each 60,000
27,200 10% Preference Shares capital of 10 each 2,72,000
(All above shares issued for consideration other 3,32,000
than cash, in takeover of partnership firm)

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Working Note 1: Profit & Loss Appropriation Account for the year ended 31st March, 2019
Particulars Particulars
To Interest on Capital: By Net Profit (Given) 2,48,600
Mohit [1,36,000 x 10%] 13,600
Neel [ 90,000 x 10%] 9,000
Om [ 46,000 x 10%] 4,600 27,200
To Profits transferred to
Capital in profit sharing
ratio 5:3:2
Mohit 1,10,700
Neel 66,420
Om 44,280 2,21,400

Total 2,48,600 Total 2,48,600

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Chapter 6 CONSOLIDATED FINANCIAL STATEMENTS

Holding company:
It may be defined as one, which has one or more subsidiary companies and enjoys control over them

Subsidiary Company:
Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a company in
which the holding company -
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total share capital either at its own or together
with one or more of its subsidiary companies

Companies Act, 2013 mandated the companies having one or more subsidiaries, to
prepare Consolidated Financial Statements. According to this section, where a company
has one or more subsidiaries, it shall, in addition to separate financial statements will
prepare a consolidated financial statement of the company and of all the subsidiaries in the
same form and manner as that of its own.
It shall also attach along with its financial statements, a separate statement containing the
salient features of the financial statement of its subsidiary or subsidiaries in the prescribed
form.
Consolidated Financial Statements are intended to show the financial position of the group
as a whole - by showing the economic resources controlled by them, by presenting the
obligations of the group and the results the group achieves with its resources.

The main advantages of consolidation are given below:

(i) Single Source Document: From the consolidated financial statements,
the users of accounts can get an overall picture of the holding company
and its subsidiaries. Consolidated Profit and Loss Account gives the
overall profitability of the group.
(ii) Intrinsic value of share: Intrinsic share value of the holding company
can be calculated directly from the Consolidated Balance Sheet.
(iii) Acquisition of Subsidiary: The Minority Interest data of the
Consolidated Financial Statement indicates the amount payable to the
outside shareholders of the subsidiary company at book value which is
used as the starting point of bargaining at the time of acquisition of a
subsidiary by the holding company.
(iv) Evaluation of Holding Company in the market: The overall financial
health of the holding company can be judged using Consolidated
Financial Statements. Those who want to invest in the shares of the
holding company or acquire it, need such consolidated statement for
evaluation.

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COMPONENTS OF CONSOLIDATED FINANCIAL STATEMENTS:

• Consolidated Balance Sheet
• Consolidated Statement of Profit and Loss Account
• Consolidated Cash Flow Statement
• Notes and statements and explanatory schedules

CONSOLIDATION PROCEDURES:
The various steps involved in the consolidation process are as follows:
• the carrying amount of the parent’s investment in each subsidiary and the parent’s
portion of equity of each subsidiary are eliminated. In case cost of acquisition
exceeds or is less than the acquirer’s interest, goodwill or capital reserve is
calculated retrospectively.
• intragroup transactions, including sales, expenses and dividends, are eliminated, in
full;
• unrealised profits resulting from intragroup transactions that are included in the
carrying amount of assets, such as inventory and fixed assets, are eliminated in full;
• unrealised losses resulting from intragroup transactions that are deducted in
arriving at the carrying amount of assets are also eliminated unless cost cannot be
recovered;
• minority interest in the net income of consolidated subsidiaries for the reporting
period are identified and adjusted against the income of the group in order to arrive
at the net income attributable to the owners of the parent; and
• minority interests in the net assets of consolidated subsidiaries are identified and
presented in the consolidated balance sheet separately from liabilities and the
parent shareholders’ equity.

CALCULATION OF GOODWILL/CAPITAL RESERVE (COST OF CONTROL)

• Goodwill =
Cost of Investment - Parent’s share in the equity of the subsidiary on date of
investment
• Capital Reserve =
Parent’s share in the equity of the subsidiary on date of investment – Cost of investment

Example:
H Ltd. acquires 70% of the equity shares of S Ltd. on 1.1.20x1. On that date, paid up capital
of S Ltd. was 10,000 equity shares of Rs 10 each; accumulated reserve balance was Rs
1,00,000. H Ltd. paid Rs 1,60,000 to acquire 70% interest in the S Ltd. Assets of S Ltd. were
revalued on 1.1.20x1 and a revaluation loss of Rs 20,000 was ascertained. The book value
of shares of S Ltd. is calculated as shown below:

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Rs
70% of the Equity Share Capital Rs 1,00,000 70,000
70% of Accumulated Reserve Rs 1,00,000 70,000
70% of Revaluation Loss Rs 20,000 (14,000)
1,26,000
So, H Ltd. paid a positive differential of Rs 34,000 i.e. Rs (1,60,000 – 1,26,000). This
differential is called goodwill and is shown in the balance sheet under the head
intangibles.

1. From the following data, determine in each case:

(1) Minority interest at the date of acquisition and at the date of consolidation.
(2) Goodwill or Capital Reserve.
(3) Amount of holding company’s profit in the consolidated Balance Sheet assuming holding company’s
own Profit & Loss Account to be ` 2,00,000 in each case:

Subsidiary % shares Cost Date of Consolidation

Company owned acquisition Date
1.1.20X1 31.12.20X1
Case Share Profit & Share Profit &
Capital Loss Capital Loss
Account Account

Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000

Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 55,000

Solution
(1) Minority Interest = Equity attributable to minorities
Equity is the residual interest in the assets of an enterprise after deducting all its liabilities i.e. in this case it
should be equal to Share Capital + Profit & Loss A/c

Minority % Minority interest Minority interest

Shares Owned as at the date of as at the date of
acquisition consolidation
[E] [E] x [A + B] [E] X [C + D]
Case 1 [100-90] 10 % 15,000 17,000
Case 2 [100-85] 15 % 19,500 18,000
Case 3 [100-80] 20 % 14,000 14,000
Case 4 [100-100] NIL Nil Nil

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A = Share capital on 1.1.20X1

B = Profit & loss account balance on 1.1.20X1
C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1

(2) Calculation of Goodwill or Capital Reserve

Shareholding Cost Total Parent’s Goodwill Capital

Equity Portion of Reserve
equity
% [F] [G] [A] + [B] [F] x [H] ` [G] – [H] ` [H] – [G]
= [H]
Case 1 90 % 1,40,000 1,50,000 1,35,000 5,000 —
Case 2 85 % 1,04,000 1,30,000 1,10,500 — 6,500
Case 3 80 % 56,000 70,000 56,000 Nil Nil
Case 4 100 % 1,00,000 90,000 90,000 10,000 —

(3) The balance in the Profit & Loss Account on the date of acquisition (1.1.20X1) is Capital profit, as such the balance
of Consolidated Profit & Loss Account shall be equal to Holding Co.’s profit.

On 31.12.20X1 in each case the following amount shall be added or deducted from the balance of holding Co.’s Profit
& Loss account

% Share P & L as P & L as on P & L post Amount to be

holding on consolidation acquisition added /
1.1.20X1 date (deducted) from
holding’s P & L
[K] [L] [M] [N] = [M]-[L] [O] = [K] x [N]
1 90 % 50,000 70,000 20,000 18,000
2 85 % 30,000 20,000 (10,000) (8,500)
3 80 % 20,000 20,000 NIL NIL
4 100 % 40,000 55,000 15,000 15,000

2. XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 20X1 for Rs1,40,000. The issued capital of
ABC Ltd., on 1st January, 20X1 was Rs1,00,000 and the balance in the Profit & Loss Account was Rs
60,000.

During the year ended 31st December, 20X1, ABC Ltd. earned a profit of Rs20,000 and at year end, declared
and paid a dividend of Rs15,000.

Show by an entry how the dividend should be recorded in the books of XYZ Ltd.

What is the amount of minority interest as on 1st January, 20X1 and 31st December, 20X1? Also please
check whether there should be any goodwill/ capital reserve at the date of acquisition.

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Solution
Total dividend paid isRs15,000 (out of post-acquisition profits), hence dividend received by XYZ will be
credited to P & L.
XYZ Ltd.’s share of dividend = Rs15,000 X 80% = Rs12,000

In the books of XYZ Ltd.

` `
Bank A/c Dr. 12,000
To Profit & Loss A/c 12,000
(Dividend received from ABC Ltd credited to
P&L A/c being out of post-acquisition profits –
as explained above)

Goodwill on consolidation (at the date of ` `

acquisition):
Cost of shares 1,40,000
Less: Face value of capital i.e. 80% of capital 80,000
Add: Share of capital profits [60,000X 80 %] 48,000 (1,28,000)
Goodwill 12,000
Minority interest on:
- 1st January, 20X1:
20% of ` 1,60,000 [1,00,000 + 60,000] 32,000
- 31st December, 20X1: 33,000
20% of `1,65,000 [1,00,000 + 60,000 + 20,000
– 15,000]

3. Exe Ltd. acquires 70% of equity shares of Zed Ltd. as on 31st March, 20X1 at a cost of Rs 70 lakhs.
The following information is available from the balance sheet of Zed Ltd. as on 31st March, 20X1:

Rs in lakhs
Property, plant and equipment 120
Investments 55
Current Assets 70
Loans & Advances 15
15% Debentures 90
Current Liabilities 50

The following revaluations have been agreed upon (not included in the above figures):
Property, plant and equipment Up by 20%
Investments Down by 10%

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Zed Ltd. declared and paid dividend @ 20% on its equity shares as on 31st March, 20X1 (Face value - Rs 10
per share). Exe Ltd. purchased the shares of Zed Ltd. @ Rs 20 per share.
Calculate the amount of goodwill/capital reserve on acquisition of shares of Zed Ltd.

Solution
Revalued net assets of Zed Ltd. as on 31st March, 20X1

Rs in lakhs Rs in lakhs
Property, plant and equipment [120 X 120%] 144.0
Investments [55 X 90%] 49.5
Current Assets 70.0
Loans and Advances 15.0
Total Assets after revaluation 278.5
Less: 15% Debentures 90.0
Current Liabilities 50.0 (140.0)
Equity / Net Worth 138.5
Exe Ltd.’s share of net assets (70% of 138.5) 96.95
Exe Ltd.’s cost of acquisition of shares of Zed Ltd.
(Rs 70 lakhs – Rs 7 lakhs*) 63.00
Capital reserve 33.95
* Total Cost of 70 % Equity of Zed Ltd Rs 70 lakhs
Purchase Price of each share Rs 20
Number of shares purchased [70 lakhs /Rs 20] 3.5 lakhs
Dividend @ 20 % i.e. Rs 2 per share Rs 7 lakhs
Since dividend received is for pre-acquisition period, it has been reduced from the cost of investment in the
subsidiary company.

4. A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.20X1 at cost of Rs 10,00,000 when B Ltd. had an
equity share capital of Rs 10,00,000 and reserves and surplus of Rs 80,000. In the four consecutive
years, B Ltd. fared badly and suffered losses of Rs 2,50,000, Rs 4,00,000, Rs 5,00,000 and Rs 1,20,000
respectively. Thereafter in 20X5-X6, B Ltd. experienced turnaround and registered an annual profit
of Rs 50,000. In the next two years i.e. 20X6-X7 and 20X7-X8, B Ltd. recorded annual profits of Rs
1,00,000 and Rs 1,50,000 respectively. Show the minority interests and cost of control at the end of
each year for the purpose of consolidation

Solution

The losses applicable to the minority in a consolidated subsidiary may exceed the minority interest in the
equity of the subsidiary. The excess, and any further losses applicable to the minority, are adjusted against
the majority interest except to the extent that the minority has a binding obligation to, and is able to, make
good the losses. If the subsidiary subsequently reports profits, all such profits are allocated to the majority
interest until the minority's share of losses previously absorbed by the majority has been recovered.
Accordingly, the minority interests will be computed as follows:
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Year Profit/(Loss) Minority Additional Minority's Share Cost of

Interest Consolidated of losses borne Control
(30%) P & L (Dr.) by A Ltd.
Cr.
` Balance
At the time of -
acquisition in 3,24,000
20X1 -
(W.N.)
20X1-X2 (2,50,000) (75,000) (1,75,000) 2,44,000
(W.N.)
Balance 2,49,000
20X2-X3 (4,00,000) (1,20,000) (2,80,000) 2,44,000
Balance 1,29,000
20X3-X4 (5,00,000) (1,50,000) (3,50,000) 2,44,000
(21,000)
Loss of 21,000 (21,000) 21,000 21,000
minority
borne by
Holding Co.
Balance Nil (3,71,000)
20X4-X5 (1,20,000) (36,000) (84,000) 2,44,000
Loss of
minority 36,000 (36,000) 36,000 57,000
borne by
Holding Co.
Balance Nil (1,20,000)
20X5-X6 50,000 15,000 35,000 2,44,000
Profit share (15,000) 15,000 (15,000) 42,000

of minority
adjusted
against
losses of
minority
absorbed by
Holding Co.

Balance Nil 50,000

20X6-X7 1,00,000 30,000 70,000
Profit share (30,000) 30,000 (30,000) 12,000 2,44,000
of minority
adjusted
against
losses of
minority
absorbed by
Holding Co.
Balance Nil 100,000

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20X7-X8 1,50,000 45,000 1,05,000 (12,000) Nil 2,44,000

(12,000) 12,000
Balance 33,000 1,17,000

Working Note:

Calculation of Minority interest and Cost of control on 1.4.20X1

Share of Holding Co. Minority Interest

100% 70% 30%
Share Capital 10,00,000 7,00,000 3,00,000
Reserve 80,000 56,000 24,000
7,56,000 3,24,000
Less: Cost of investment (10,00,000)
Goodwill 2,44,000

5. H Ltd. acquired 3,000 shares in S Ltd., at a cost of Rs4,80,000 on 31.7.20X1. The capital of S Ltd.
consisted of 5,000 shares of Rs 100 each fully paid. The Profit & Loss Account of this company for
20X1 showed an opening balance of Rs1,25,000 and profit for the year was Rs 3,00,000. At the end
of the year, it declared a dividend of 40%. Record the entry in the books of H Ltd., in respect of the
dividend. Assume calendar year as financial year.

Solution
The profits of S Ltd., have to be divided between capital and revenue profits from the point of view of the
holding company:

Capital Revenue
Profit Profit
Rs Rs
Balance on 1.1.20X1 1,25,000 —
Profit for 20X1 (3,00,000 × 7/12) 1,75,000 (3,00,000×5/12) 1,25,000
Total 3,00,000 1,25,000
Proportionate share of H Ltd. (3/5) 1,80,000 75,000

Total dividend declared = Rs5,00,000 X 40 % = Rs 2,00,000

H Ltd.’s share in the dividend = Rs 2,00,000 X 3/5 = Rs 1,20,000

There can be two situations as regards the treatment of dividend of Rs 1,20,000:

(1) The profit for 20X1 has been utilised to pay the dividend.
The share of H Ltd in profit for the first seven months of S Ltd = Rs 1,05,000
(i.e. Rs 1,75,000 × 3/5)
Profit for the remaining five months = Rs 75,000
(i.e.Rs 1,25,000 × 3/5).

The dividend of Rs 1,20,000 will be adjusted in this ratio of 1,05,000: 75,000

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=Rs 70,000 out of profits up to 31.7.20X1 and Rs 50,000 out of profits after that date.

The dividend out of profits subsequent to 31.7.20X1 will be revenue income and that out of earlier profits
will be capital receipt. Hence the entry will be:

Rs Rs
Bank Dr. 1,20,000

To Investment Account 70,000

To Profit and Loss Account 50,000

(2) Later profits have been utilised first and then pre- acquisition profits.
In such a case, the whole of Rs 75,000 (share of H Ltd. in profits of S Ltd., after 31.7.20X1) would be
received and treated as revenue income; the remaining dividend, Rs45,000 (Rs1,20,000 less Rs 75,000)
would be capital receipt. The entry would be:

Rs Rs
Bank Dr. 1,20,000
To Investment Account 45,000
To Profit & Loss Account 75,000

6. On 31st March, 20X1, P Ltd. acquired 1,05,000 shares of Q Ltd. for Rs 12,00,000. The position of Q
Ltd. on that date was as under:

Rs
Property, plant and equipment 10,50,000
Current Assets 6,45,000
1,50,000 equity shares of Rs 10 each fully paid 15,00,000
Pre-incorporation profits 30,000
Profit and Loss Account 60,000
Trade payables 1,05,000

P Ltd. and Q Ltd. give the following information on 31st March, 20X3:

P Ltd. Q Ltd.
Rs Rs
Equity shares of Rs 10 each fully paid (before bonus 45,00,000 15,00,000
issue)
Securities Premium 9,00,000 –

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Pre-incorporation profits – 30,000

General Reserve 60,00,000 19,05,000
Profit and Loss Account 15,75,000 4,20,000
Trade payables 5,55,000 2,10,000
Property, plant and equipment 79,20,000 23,10,000
Investment: 1,05,000 Equity shares in Q Ltd. at cost 12,00,000 –
Current Assets 44,10,000 17,55,000

Directors of Q Ltd. made bonus issue on 31.3.20X3 in the ratio of one equity share of Rs 10 each fully paid
for every two equity shares held on that date. Bonus shares were issued out of post-acquisition profits by
using General Reserve.

Calculate as on 31st March, 20X3 (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated
Profit and Loss Account in each of the following cases:
(a) Before issue of bonus shares;
(b) Immediately After issue of bonus shares.

Solution
Shareholding pattern

Particulars Number of Shares % of holding

a. P Ltd.
(i) Purchased on 31.03.20X1 1,05,000

(ii) Bonus Issue (1,05,000/2) 52,500

Total 1,57,500 70%

b. Minority Interest 67,500 30%

Calculations of (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss
Account as on 31st March, 20X3:
(a) Before issue of bonus shares

(i) Cost of control/capital reserve ` `

Investment in Q Ltd. 12,00,000

Less: Face value of investments 10,50,000

Capital profits (W.N.) 63,000 (11,13,000)
Cost of control 87,000
(ii) Minority Interest `
Share Capital 4,50,000
Capital profits (W.N.) 27,000

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Revenue profits (W.N.) 6,79,500

11,56,500
(iii) Consolidated profit and loss account – P Ltd. `
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. (W.N.) 15,85,500
31,60,500

(b) Immediately after issue of bonus shares

(i) Cost of control/capital reserve ` `

Face value of investments (` 10,50,000 + 15,75,000
` 5,25,000)
Capital Profits (W.N.) 63,000 16,38,000
Less: Investment in Q Ltd. (12,00,000)
Capital reserve 4,38,000
(ii) Minority Interest `
Share Capital (` 4,50,000 + ` 2,25,000) 6,75,000
Capital Profits (W.N.) 27,000
Revenue Profits (W.N.) 4,54,500
11,56,500
(iii) Consolidated Profit and Loss Account – P Ltd. `
Balance 15,75,000
Add: Share in revenue profits of Q Ltd. 10,60,500
(W.N.)
26,35,500

Working Note:
Analysis of Profits of Q Ltd.
Capital Profits Revenue Profits
(Before and Before After Bonus
after issue of Bonus Issue Issue
bonus shares)
` ` `
Pre-incorporation profits 30,000
Profit and loss account on 60,000
31.3.20X1
90,000
General reserve* 19,05,000 19,05,000
Less: Bonus shares (7,50,000)
11,55,000
Profit for period of 1st April,

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20X1 to 31st March, 20X3 3,60,000 3,60,000

(` 4,20,000 – ` 60,000)
22,65,000 15,15,000
P Ltd.’s share (70%) 63,000 15,85,500 10,60,500
Minority’s share (30%) 27,000 6,79,500 4,54,500
*Share of P Ltd. in General reserve has been adjusted in Consolidated Profit and Loss Account

7. Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31 March, 20X1 from the
following information:

H Ltd. S Ltd.
PPE 5,00,000 3,00,000
Investments
(2,000 equity shares of S Ltd.) 2,20,000
Current Assets 1,55,000 1,00,000
Share capital (Fully paid equity shares of 10 each) 5,00,000 2,50,000
Profit and loss account 2,00,000 1,00,000
Trade Payables 1,75,000 50,000
H Ltd. acquired the shares of S Ltd. on 31st March, 20X1.

Solution
Percentage of holding:

No. of Shares Percentage

Holding Co : 2,000 (80%)
Minority shareholders : 500 (20%)
TOTAL SHARES : 2,500

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March,20X1
Note No Amount
I EQUITY AND LIABILITIES
1 Shareholder’s Fund
(a) Share Capital 1 5,00,000
(b) Reserve and Surplus 2 2,60,000
2 Minority interest 3 70,000
3 Current Liabilities
(a) Trade payables 4 2,25,000
Total 10,55,000
II ASSETS

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1. Non-Current Assets
PPE 5 8,00,000
2. Current Assets 6 2,55,000
Total 10,55,000

Notes to Accounts
Amounts

1 Share capital
50,000 Equity Shares @ 10 each 5,00,000
2 Reserve and Surplus
Capital Reserve (W.N. ) 60,000
Profit and loss account 2,00,000
2,60,000
3 Minority Interest
Paid up value of shares 50,000
Add: Share in Profit and loss account 20,000 70,000
4 Trade payables
H Ltd. 1,75,000
S Ltd. 50,000
2,25,000

5 PPE
H Ltd. 5,00,000
S Ltd. 3,00,000
8,00,000
6 Current Assets
H Ltd. 1,55,000
S Ltd. 1,00,000
2,55,000

Working Note:
Determination of Goodwill/(Capital Reserve)
Cost of investment 2,20,000
Less: Paid up value of shares (80% of 2,50,000) 2,00,000
Share in pre-acquisition profits
(80% of 1,00,000) 80,000 (2,80,000)
Capital Reserve (60,000)

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8. H Ltd. and S Ltd. provide the following information as at 31st March,20X2:

H Ltd. S Ltd.
Rs Rs
PPE 1,00,000 1,30,000
Investments (8,000 equity shares of S Ltd.) 1,26,000
Current Assets 74,000 70,000
Share capital (Fully paid equity shares of Rs10 each) 1,50,000 1,00,000
Profit and loss account 50,000 40,000
Trade Payables 1,00,000 60,000
Additional information
H Ltd. acquired the shares of S Ltd. on 1-7-20X1 and Balance of profit and loss account of S Ltd. on 1-4-20X1
was 30,000.

Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31st March, 20X2.

Solution
Percentage of holding:

No. of Shares Percentage

Holding Co : 8,000 (80%)
Minority shareholders : 2,000 (20%)
TOTAL SHARES : 10,000

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X2
Note No Amount
I EQUITY AND LIABILITYES
1 Shareholder’s Fund
(a) Share Capital 1 1,50,000
(b) Reserve and Surplus 2 56,000
2 Minority interest 3 28,000
3 Current Liabilities
(a) Trade payables 4 1,60,000
Total 3,94,000
II ASSETS
1 Non-Current Assets:
PPE 5 2,30,000
Intangible Asset 6 20,000
2 Current Assets 7 1,44,000
Total 3,94,000

Notes to Accounts
Amount
1 Share capital 1,50,000
15,000 Equity Shares @ 10 each

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2 Reserve and Surplus

Profit and loss account (50,000+ 80% of 9/12 x 10,000) 56,000

3 Minority Interest
Share capital (20% of 1,00,000) 20,000
Share in Profit and loss account (40,000 X 20%) 8,000 28,000
4 Trade payables
H Ltd. 1,00,000
S Ltd. 60,000
1,60,000
5 PPE
H Ltd. 1,00,000
S Ltd. 1,30,000
2,30,000
6 Intangible Asset
Cost of Investment 1,26,000
Less: Paid up value of shares (80% of ` 1,00,000)
Share in pre-acquisition profits (80,000)
80% of [30,000+3/12(40,000-30,000)] (26,000)
Goodwill 20,000
7 Current Assets
H Ltd. 74,000
S Ltd. 70,000
1,44,000

9. From the Balance Sheets and information given below, prepare Consolidated Balance Sheet of Virat
Ltd. and Anushka Ltd. as at 31st March. Virat Ltd. holds 80% of Equity Shares in Anushka Ltd. since
its (Anushka Ltd.’s) incorporation.

Balance Sheet of Virat Ltd. and Anushka Ltd. as at 31st March, 20X1
Particulars Note Virat Ltd. Anushka Ltd.
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,00,000 4,00,000

(b) Reserves and Surplus 2 1,00,000 1,00,000

(2) Non-current Liabilities
Long Term Borrowings 2,00,000 1,00,000
(3) Current Liabilities
(a) Trade Payables 1,00,000 1,00,000
Total 10,00,000 7,00,000

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II. Assets
(1) Non-current assets
(a) Property, Plant and 4,00,000 3,00,000
Equipment
(b) Non-current 3 3,20,000 -
investments
(2) Current Assets 1,60,000 2,00,000
(a) Inventories 80,000 1,40,000
(b) Trade Receivables 40,000 60,000
(c) Cash & Cash Equivalents
Total 10,00,000 7,00,000

Notes to Accounts
Particulars Virat Ltd. Anushka Ltd.

1. Share capital
60,000 equity shares of ` 10 each
fully paid up 6,00,000 --
40,000 equity shares of ` 10 each
fully paid up -- 4,00,000
Total 6,00,000 4,00,000
2. Reserves and Surplus
General Reserve 1,00,000 1,00,000
Total 1,00,000 1,00,000
3. Non-current investments
Shares in Anushka Ltd 3,20,000 --

Solution
Consolidated balance Sheet of Virat Ltd. and its Subsidiary Anushka Ltd. as at 31st March, 20X1
Particulars Note Amount
I EQUITY AND LIABILITIES:
(1) Shareholders’ Funds:
(a) Share Capital 1 6,00,000
(b) Reserve and Surplus 2 1,80,000
(2) Minority Interest 3 1,00,000
(3) Non-Current Liabilities:
Long Term Borrowings 4 3,00,000
(4) Current Liabilities:
Trade Payables 5 2,00,000
Total 13,80,000
II ASSETS:
(1) Non-Current Assets

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Property, Plant & Equipment 6 7,00,000

(2) Current Assets:

(a) Inventories
7 3,60,000
(b) Trade receivables
8 2,20,000
(c) Cash and Cash Equivalents
9 1,00,000
Total 13,80,000

Notes to Accounts
Particulars ` `
1. Share capital
60,000 equity shares of `10 each fully paid up 6,00,000
2. Reserves and Surplus
General Reserve 1,00,000
Add: General reserve of Anushka Ltd (80%) 80,000

Total 1,80,000
3. Minority interest
20% share in Anushka Ltd (WN 3) 1,00,000
4 Long term borrowings
Long term borrowings of Virat 2,00,000
Add: Long term borrowings of Anushka 1,00,000
Total 3,00,000
5. Trade payables
Trade payables of Virat 1,00,000
Add: Trade payables of Anushka 1,00,000
Total 2,00,000
6. Property, Plant and Equipment (PPE)
PPE of Virat Ltd 4,00,000
Add: PPE of Anushka Ltd 3,00,000
Total 7,00,000
7. Inventories
Inventories of Virat Ltd 1,60,000
Add: Inventories of Anushka Ltd 2,00,000
Total 3,60,000
8. Trade receivables
Trade receivables of Virat Ltd 80,000
Add: Trade receivables of Anushka Ltd 1,40,000
Total 2,20,000

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9 Cash and cash equivalents

Cash and cash equivalents of Virat Ltd 40,000
Add: Cash and cash equivalents of Anushka Ltd 60,000
Total 1,00,000

Working Notes:
1. Basic Information
Company Status Dates Holding Status
Holding Co. = Virat Acquisition: Anushka’s Holding Company =
Ltd. Incorporation 80%
Subsidiary = Anushka Consolidation: 31st March, Minority Interest =
Ltd. 20X1 20%
2. Analysis of General Reserves of Anushka Ltd
Since Virat holds shares in Anushka since its incorporation, the entire Reserve balance of `1,00,000 will be
Revenue.

3. Consolidation of Balances
Holding- 80%, Total Minority Holding Company
Minority - 20% Interest

Equity Capital 4,00,000 80,000 3,20,000 -

General Reserves 1,00,000 20,000 Nil (pre-acq) 80,000
(post-acq)
Total 1,00,000 3,20,000 80,000
Cost of Investment (3,20,000) -
Goodwill/capital reserve NIL
Parent’s Balance 1,00,000
Amount for 1,80,000
Consolidated Balance
Sheet

10. From the following balance sheets of H Ltd. And its subsidiary S Ltd. drawn up at 31st March, 20X1,
prepare a consolidated balance sheet as at that date, having regard to the following:

(i) Reserves and Profit and Loss Account of S Ltd. stood at Rs 25,000 and Rs 15,000 respectively on the date
of acquisition of its 80% shares by H Ltd. on 1st April, 20X0.
(ii) Machinery (Book-value Rs 1,00,000) and Furniture (Book value Rs 20,000) of S Ltd. were revalued at Rs
1,50,000 and Rs 15,000 respectively on 1st April, 20X0 for the purpose of fixing the price of its shares.
[Rates of depreciation computed on the basis of useful lives: Machinery 10%, Furniture 15%.]

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Balance Sheet of H Ltd. and S Ltd. as at 31st March, 20X1

Particulars Note H Ltd. (`) S Ltd. (`)
No.
I. Equity and Liabilities
(1) Shareholder’s Funds
(a) Share Capital 1 6,00,000 1,00,000
(b) Reserves and Surplus 2 3,00,000 1,00,000
(2) Current Liabilities
(a) Trade Payables 1,50,000 57,000
Total 10,50,000 2,57,000
II. Assets
(1) Non-current assets
(a) Property, Plant and 3 4,50,000 1,07,000
Equipment
(b) Other non- current 4 6,00,000 1,50,000
investments
Total 10,50,000 2,57,000
Notes to Accounts
` H Ltd. S Ltd.
(`) (`)
1. Share capital
6,000 equity shares of ` 100 each, fully paid up 6,00,000 --
1,000 equity shares of ` 100 each, fully paid up
Total -- 1,00,000
6,00,000 1,00,000
2. Reserves and Surplus

General reserves 2,00,000 75,000

Profit and loss account 25,000
1,00,000
Total 3,00,000 1,00,000
3. Property, Plant and Equipment
Machinery 3,00,000 90,000
Furniture 17,000
Total 1,50,000 1,07,000
4,50,000
4. Other Non-current investments
Non-current Investments 4,40,000 1,50,000
Shares in S Ltd.
(800 shares at `200 each) 1,60,000 --
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Total 6,00,000 1,50,000

Solution
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 20X1
Particulars Note
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,00,000
(b) Reserves and Surplus 2 3,44,600
(2) Minority Interest 3 48,150
(3) Current Liabilities
(a) Trade Payables 2,07,000
Total 11,99,750
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 4 5,97,750
(b) Intangible assets 5 12,000

(c) Other non-current investments 6 5,90,000

Total 11,99,750

Notes to Accounts
`
1. Share capital
6,000 equity shares of ` 100 each,
fully paid up 6,00,000
Total 6,00,000
2. Reserves and Surplus
Reserves 2,00,000
Add: 4/5th share of S Ltd.’s post-
acquisition reserves (W.N.3) 40,000 2,40,000
Profit and Loss Account 1,00,000
Add: 4/5th share of S Ltd.’s post-
acquisition profits (W.N.4) 4,600 1,04,600
Total 3,44,600
3. Minority interest in S Ltd. (WN 5) 48,150
4. Property, plant and equipment
Machinery
H. Ltd. 3,00,000
S Ltd. 1,00,000
Add: Appreciation 50,000

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1,50,000
Less: Depreciation (1,50,000 X 10%) (15,000) 1,35,000
Furniture
H. Ltd. 1,50,000
S Ltd. 20,000
Less: Decrease in value (5,000)
15,000
Less: Depreciation (15,000 X 15%) (2,250) 12,750 5,97,750
5. Intangible assets

Goodwill [WN 6] 12,000

6. Other non-current investments
H Ltd. 4,40,000
S Ltd. 1,50,000
Total 5,90,000

Working Notes:
1. Pre-acquisition profits and reserves of S Ltd.
Reserves 25,000
Profit and Loss Account 15,000
40,000
H Ltd.’s = 4/5 (or 80%) × 40,000 32,000
Minority Interest= 1/5 (or 20%) × 40,000 8,000
2. Profit on revaluation of assets of S Ltd.
Profit on Machinery (1,50,000 – 1,00,000) 50,000
Less: Loss on Furniture (20,000 – 15,000) 5,000
Net Profit on revaluation 45,000
H Ltd.’s share 4/5 × 45,000 36,000
Minority Interest 1/5 × 45,000 9,000
3. Post-acquisition reserves of S Ltd.
Post-acquisition reserves (Total reserves less pre-acquisition 50,000
reserves = 75,000 – 25,000)
H Ltd.’s share 4/5 × 50,000 40,000
Minority interest 1/5 × 50,000 10,000
4. Post -acquisition profits of S Ltd.
Post-acquisition profits (Profit & loss account balance lesspre- 10,000
acquisition profits = 25,000 – 15,000)
Add: Excess depreciation charged on furniture @ 15%
on 5,000 i.e. (20,000 – 15,000) 750
10,750
Less: Under depreciation on machinery @ 10%
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on ` 50,000 i.e. (1,50,000 – 1,00,000) (5,000)

Adjusted post-acquisition profits 5,750
H Ltd.’s share 4/5 × 5,750 4,600
Minority Interest 1/5 × 5,750 1,150
5. Minority Interest
Paid-up value of (1,000 – 800) = 200 shares
held by outsiders i.e. 200 × ` 100 (or 1,00,000 X 20%) 20,000
Add: 1/5th share of pre-acquisition profits and reserves 8,000
1/5th share of profit on revaluation 9,000
1/5th share of post-acquisition reserves 10,000
1/5th share of post-acquisition profit 1,150
48,150
6. Cost of Control or Goodwill
Price paid by H Ltd. for 800 shares(A) 1,60,000
Intrinsic value of the shares-
Paid-up value of 800 shares held by H Ltd. i.e. 800 × ` 100 80,000
(or 1,00,000 X 80%)
Add: 4/5th share of pre-acquisition profits and reserves 32,000
4/5th share of profit on the revaluation 36,000
Intrinsic value of shares on the date of acquisition (B) 1,48,000
Cost of control or Goodwill (A – B) 12,000

11. a. A Ltd. holds 80% of the equity capital and voting power in B Ltd. A Ltd. sells inventories costing Rs
180 lacs to B Ltd at a price of Rs 200 lacs. The entire inventories remain unsold with B Ltd. at the
financial year end i.e. 31 March 20X1.

b. A Ltd. holds 75% of the equity capital and voting power in B Ltd. A Ltd. purchases inventories costing Rs
150 lacs from B Ltd at a price of Rs 200 lacs. The entire inventories remain unsold with A Ltd. at the financial
year end i.e. 31 March 20X1.
Suggest the accounting treatment for the above mentioned transactions in the consolidated financial
statements of A Ltd. giving reference of the relevant guidance/standard.

Solution

a. This would be the case of downstream transaction. In the consolidated profit and loss account for the
year ended 31 March 20X1, entire transaction of sale and purchase of Rs 200 lacs each, would be
eliminated by reducing both sales and purchases (cost of sales).
Further, the unrealized profits of Rs 20 lacs (i.e. Rs 200 lacs – Rs 180 lacs), would be eliminated from the
consolidated financial statements for financial year ended 31 March 20X1, by reducing the consolidated
profits/ increasing the consolidated losses, and reducing the value of closing inventories as of 31 March
20X1.

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b. This would be the case of upstream transaction. In the consolidated profit and loss account for the year
ended 31 March 20X1, entire transaction of sale and purchase of Rs 200 lacs each, would be eliminated by
reducing both sales and purchases (cost of sales).

Further, the unrealized profits of Rs 50 lacs (i.e. Rs 200 lacs – Rs 150 lacs), would be eliminated in the
consolidated financial statements for financial year ended 31 March 20X1, by reducing the value of closing
inventories by Rs 50 lacs as of 31 March 20X1. In the consolidated balance sheet as of 31 March 20X1, A
Ltd.’s share of profit from B Ltd will be reduced by Rs 37.50 lacs (being 75% of Rs 50 lacs) and the minority’s
share of the profits of B Ltd would be reduced by Rs 12.50 lacs (being 25% of Rs 50 lacs).

12. H Ltd and its subsidiary S Ltd provide the following information for the year ended 31st March,
20X3:

H Ltd. S Ltd.
(Rs in lacs) (Rs in lacs)
Sales and other income 5,000 1,000
Increase in Inventory (closing less opening) 1,000 200
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50
Other Information: H Ltd. sold goods to S Ltd. of Rs 120 lacs at cost plus 20%. Inventory of S Ltd. includes
such goods valuing Rs 24 lacs. Administrative expenses of S Ltd. include Rs 5 lacs paid to H Ltd. as
consultancy fees. Selling and distribution expenses of H Ltd. include Rs 10 lacs paid to S Ltd. as commission.

H Ltd. holds 80% of equity share capital of Rs 1,000 lacs in S Ltd. prior to 20X1-20X2. H Ltd. took credit to its
Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd. for the year
20X1-20X2.
Prepare a consolidated statement of profit and loss..

Solution
Consolidated statement of profit and loss of H Ltd. and its subsidiary S Ltd. for the year ended on 31st
March, 20X3
Particulars Note No. ` in Lacs
I. Revenue from operations 1 5,865
II. Total Income 5,865
III. Expenses
Cost of material purchased/consumed 2 1,180
Changes of inventories of finished goods 3 (1,196)
Employee benefit expense 4 950
Finance cost 5 150

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Depreciation and amortization expense 6 150

Other expenses 7 535
Total expenses 1,769
IV. Profit before tax (II-III) 4,096

Notes to Accounts
` in Lacs ` in Lacs
1. Revenue from operations
Sales and other income
H Ltd. 5,000
S Ltd. 1,000
6,000
Less: Inter-company sales (120)
Consultancy fees received by H Ltd. from S Ltd. (5)
Commission received by S Ltd. from H Ltd. (10) 5,865

2. Cost of material purchased/consumed

H Ltd. 800
S Ltd. 200
1,000
Less: Purchases by S Ltd. from H Ltd. (120) 880
Direct expenses (Production)
H Ltd. 200
S Ltd. 100 300
1,180
3. Changes of inventories of finished goods
H Ltd. 1,000
S Ltd. 200
20
Less: Unrealized profits ` 24 lacs ×
120 (4) 1,196
Employee benefits and expenses
4.
Wages and salaries:
H Ltd.
800
S Ltd.
150 950
Finance cost
5.
Interest:
H Ltd.
100
S Ltd.
50 150
Depreciation
6.
H Ltd.
100

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S Ltd. 50 150
7. Other expenses
Administrative expenses
H Ltd. 200
S Ltd. 100
Less: Consultancy fees received by H Ltd. from S Ltd. (5) 295

Selling and distribution Expenses:

H Ltd. 200
S Ltd. 50
Less: Commission received by S Ltd. from H Ltd. (10) 240
535

13. Subsidiary B Ltd. provides the following balance sheet:

Particulars Note 20X0 20X1

No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000 5,00,000
(b) Reserves and Surplus 2 2,86,000 7,14,000

(2) Current Liabilities

(a) Short term borrowings 3 -- 1,70,000
(b) Trade Payables 4,90,000 4,94,000
(c) Short-term provisions 4 3,10,000 4,30,000
Total 15,86,000 23,08,000
II. Assets
(1) Non-current assets
(a) Property, Plant and 5 2,72,000 2,24,000
Equipment
(b) Non-current Investment 4,00,000
(2) Current assets
(a) Inventories 5,97,000 7,42,000
(b) Trade Receivables 5,94,000 8,91,000
(c) Cash & Cash Equivalents 51,000 3,000
(d) Other current assets 6 72,000 48,000
Total 15,86,000 23,08,000

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20X0 20X1

1. Share capital
5,000 equity shares of `10 each, fully paid up 5,00,000 5,00,000
2. Reserves and Surplus
General Reserves 2,86,000 7,14,000
3. Short term borrowings
Bank overdraft -- 1,70,000
4. Short term provisions
Provision for taxation 3,10,000 4,30,000
5. Property, plant and equipment
Cost 3,20,000 3,20,000
Less: Depreciation (48,000) (96,000)
Total 2,72,000 2,24,000

6. Other current Assets

Prepaid expenses 72,000 48,000

Also consider the following information:

(a) B Ltd. is a subsidiary of A Ltd. Both the companies follow calendar year as the accounting year.
(b) A Ltd. values inventory on weighted average basis while B Ltd. used FIFO basis. To bring B Ltd.’s values in
line with those of A Ltd, its value of inventory is required to be reduced by Rs12,000 at the end of 20X0 and
Rs 34,000 at the end of 20X1.
(c) B Ltd. deducts 1% from Trade Receivables as a general provision against doubtful debts.
(d) Prepaid expenses in B Ltd. include advertising expenditure carried forward of Rs 60,000 in 20X0 andRs
30,000 in 20X1, being part of initial advertising expenditure of Rs 90,000 in 20X0 which is being written off
over three years. Similar amount of advertising expenditure of A Ltd. has been fully written off in 20X0.
Restate the balance sheet of B Ltd. as at 31st December, 20X1 after considering the above information, for
the purpose of consolidation. Would restatement be necessary to make the accounting policies adopted by
A Ltd. and B Ltd. uniform.

Solution
Restatement would be required to make the accounting policies of A Ltd and B Ltd uniform

Adjusted reserves of B Ltd.:

Rs Rs
Reserves as given 7,14,000
Add: Provision for doubtful debts 9,000
{[8,91,000 / 99 X 100]-8,91,000}
7,23,000
Less: Reduction in value of Inventory 34,000
Advertising expenditure to be written off 30,000 (64,000)
Adjusted reserves 6,59,000

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Note: No adjustment would be required in respect of opening inventory of B Ltd as that will not have any
impact on P&L.

Restated Balance Sheet of B Ltd as at 31st December, 20X1

Particulars Note No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000
(b) Reserves and Surplus 2 6,59,000
(2) Current Liabilities
(a) Short term borrowings 3 1,70,000
(b) Trade Payables 4,94,000
(c) Short-term provision 4 4,30,000
Total 22,53,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 5 2,24,000
(b) Non-current Investment 4,00,000
(2) Current assets
(a) Inventories 6 7,08,000
(b) Trade Receivables 7 9,00,000

(c) Cash & Cash Equivalents 3,000

(d) Other current assets 8 18,000
Total 22,53,000

Notes to Accounts
20X1

1. Share capital
5,000 equity shares of Rs 10 each, fully paid up 5,00,000
2. Reserves and Surplus
General Reserves (refer to WN) 6,59,000
3. Short term borrowings
Bank overdraft 1,70,000
4. Short term provisions
Provision for taxation 4,30,000
5. Property, plant and equipment
Cost 3,20,000
Less: Depreciation (96,000)

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Total 2,24,000
6. Inventory
Actual inventory 7,42,000
Less: Change in method of valuation (34,000)
Total 7,08,000
7. Trade receivables
Actual trade receivables 8,91,000
Add: Adjustment for provision 9,000
Total 9,00,000
8. Other current Assets
Prepaid expenses
48,000

14. Hemant Ltd. purchased 80% shares of Power Ltd. on 1st January, 20X1 for Rs 2,10,000. The issued
capital of Power Ltd., on 1st January, 20X1 was Rs 1,50,000 and the balance in the Profit & Loss
Account was Rs 90,000. During the year ended 31st December, 20X1, Power Ltd. earned a profit of
Rs 30,000 and at year end, declared and paid a dividend of Rs 22,500. What is the amount of
minority interest as on 1st January, 20X1 and 31st December, 20X1? Also compute goodwill/ capital
reserve at the date of acquisition.

SOLUTION-
Total dividend paid is Rs 22,500 (out of post-acquisition profits), hence dividend received by Hemant will be
credited to P & L account. Hemant Ltd.’s share of dividend = Rs 22,500 X 80% = Rs 18,000

Goodwill on consolidation (at the date of Rs Rs

acquisition):
Cost of shares 2,10,000
Less: Face value of capital i.e. 80% of capital 1,20,000
Add: Share of capital profits [90,000 X 80 %] 72,000 (1,92,000)
Goodwill 18,000
Minority interest on:
- 1st January, 20X1:
20% of Rs 2,40,000 [1,50,000 + 90,000] 48,000

- 31st December, 20X1:

20% of Rs2,47,500 [1,50,000 + 90,000 + 30,000 – 49,500
22,500]

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15. King Ltd. acquires 70% of equity shares of Queen Ltd. as on 31st March, 20X1 at a cost of Rs 140
lakhs. The following information is available from the balance sheet of Queen Ltd. as on 31st March,
20X1:

Rs in lakhs
Property, plant and equipment 240
Investments 110
Current Assets 140
Loans & Advances 30
15% Debentures 180
Current Liabilities 100

The following revaluations have been agreed upon (not included in the above figures):
Property, plant and equipment- up by 20% and Investments- down by 10%.
King Ltd. purchased the shares of Queen Ltd. @ Rs20 per share (Face value - Rs10).

Calculate the amount of goodwill/capital reserve on acquisition of shares of Queen Ltd.

SOLUTION-
Revalued net assets of Queen Ltd. as on 31st March, 20X1

` in lakhs ` in lakhs
PPE [240 X 120%] 288
Investments [110 X 90%] 99
Current Assets 140
Loans and Advances 30
Total Assets after revaluation 557
Less: 15% Debentures 180.0

Current Liabilities 100.0 (280)

Equity / Net Worth 277
King Ltd.’s share of net assets (70% of 277) 193.9
King Ltd.’s cost of acquisition of shares of Queen Ltd.
(`140 lakhs) (140)
Capital reserve 53.9

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16. From the following information, determine Minority Interest on the date of acquisition and on the
date of consolidation in each case:

Case Subsidiary % of Cost Date of Consolidation date

Company Share Acquisition
owned
01-01-20X1 31-12-20X1
Share Profit Share Profit
Capital and Loss Capital and Loss
A/c A/c
Rs Rs Rs Rs
Case-A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
Case-B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Case-C Z 70% 98,000 40,000 20,000 40,000 20,000
Case-D M 95% 75,000 60,000 35,000 60,000 55,000

SOLUTION-

Minority Interest = Equity attributable to minorities

Equity is the residual interest in the assets of an enterprise after deducting all its liabilities i.e. in this case, it
should be equal to Share Capital + Profit & Loss A/c
A = Share capital on 1.1.20X1
B = Profit & loss account balance on 1.1.20X1
C = Share capital on 31.12.20X1
D = Profit & loss account balance on 31.12.20X1

Minority Minority interest Minority interest as

% Shares as at the date of at the date of
Owned acquisition consolidation
[E] [E] x [A + B] ` [E] X [C + D] `
Case A [100-90] 10 % 22,500 23,500
Case B [100-75] 25 % 50,000 40,000
Case C [100-70] 30 % 18,000 18,000
Case D [100-95] 5% 4,750 5,750

17. A Ltd acquired 1,600 ordinary shares of Rs100 each of B Ltd on 1st July, 20X1. On 31st December,
20X1, the balance sheets of the two companies were as given below:

Balance Sheet of A Ltd. and its subsidiary, B Ltd as at 31st December, 20X1
Particulars Note A Ltd. B Ltd.
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000 2,00,000
(b) Reserves and Surplus 2 2,97,200 1,82,000

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(2) Current Liabilities

(a) Trade Payables 47,100 17,400
(b) Short term borrowings 3 80,000
Total 9,24,300 3,99,400
II. Assets
(1) Non-current assets
(d) Property, Plant and Equipment 4 3,90,000 3,15,000
(b) Non-current Investments 5 3,40,000 --
(2) Current assets
(a) Inventories 1,20,000 36,400
(b) Trade receivables 59,800 40,000
(c) Cash & Cash equivalents 6 14,500 8,000
Total 9,24,300 3,99,400

Notes to Accounts
A Ltd. B Ltd.
Rs Rs
1. Share Capital
5,000 shares of Rs 100 each, fully paid up 5,00,000 -
2,000 shares of Rs 100 each, fully paid up - 2,00,000
Total 5,00,000 2,00,000

2. Reserves and Surplus

General Reserves 2,40,000 1,00,000
Profit & loss 57,200 82,000
Total 2,97,200 1,82,000
3. Short term borrowings
Bank overdraft 80,000 --
4. Property plant and equipment
Land and building 1,50,000 1,80,000
Plant & Machinery 2,40,000 1,35,000
Total 3,90,000 3,15,000
5. Non-current Investments
Investment in B Ltd (at cost) 3,40,000 --
6. Cash & Cash equivalents
Cash 14,500 8,000
The Profit & Loss Account of B Ltd. showed a credit balance of Rs30,000 on 1st January, 20X1 out of which a
dividend of 10% was paid on 1st August, 20X1; A Ltd. credited the dividend received to its Profit & Loss
Account. The Plant & Machinery which stood at Rs 1,50,000 on 1st January, 20X1 was considered as worth
Rs1,80,000 on 1st July, 20X1; this figure is to be considered while consolidating the Balance Sheets. The rate
of depreciation on plant & machinery is 10% (computed on the basis of useful lives).

Prepare consolidated Balance Sheet as at 31st December, 20X1

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SOLUTION-
Consolidated Balance Sheet of A Ltd. and its subsidiary, B Ltd as at 31st December, 20X1
Particulars Note No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 5,00,000
(b) Reserves and Surplus 2 3,08,800

(2) Minority Interest 83,600

(3) Current Liabilities
(a) Trade Payables 3 64,500
(b) Short term borrowings 4 80,000
Total 10,36,900
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 5 7,41,000
(b) Intangible assets 6 17,200
(2) Current assets
(a) Inventories 7 1,56,400
(b) Trade receivables 8 99,800
(c) Cash & Cash equivalents 9 22,500
Total 10,36,900

Notes to Accounts
Rs
1. Share Capital
5,000 shares of Rs 100 each 5,00,000
2. Reserves and Surplus
Reserves 2,40,000
Profit & loss (Refer to W.N 8) 68,800
Total 3,08,800
3. Trade Payables
A Ltd. 47,100
Add: B Ltd 17,400
Total 64,500
4. Short term borrowings
Bank overdraft 80,000

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5. Property, plant and equipment

Land and building- A Ltd 1,50,000
Add: Land and building- B Ltd 1,80,000 3,30,000
Plant & Machinery (Refer to W.N 7) 4,11,000
Total 7,41,000
6. Intangible assets
Goodwill (refer to W.N 6) 17,200
7. Inventories
A Ltd. 1,20,000
B Ltd. 36,400
Total 1,56,400
8 Trade Receivables
A Ltd. 59,800
B Ltd. 40,000
Total 99,800
9 Cash & Cash equivalents
Cash of A Ltd 14,500
Add: cash of B Ltd. 8,000
Total 22,500

Share holding Pattern

Total Shares of B Ltd 2,000 shares
Shares held by A Ltd 1,600 shares i.e. 80 %
Minority Shareholding 400 shares i.e. 20 %

Working Notes:

1. The dividend @ 10% on 1,600 shares - Rs16,000 received by A Ltd. should have been credited to the
investment A/c, being out of pre-acquisition profits. A Ltd., must pass a rectification entry, viz.
Profit & Loss Account Dr.Rs 16,000
To Investment Rs 16,000

2. The Plant & Machinery of B Ltd. would stand in the books at Rs 1,42,500 on 1st July, 20X1, considering
only six months’ depreciation on Rs 1,50,000 total depreciation being Rs 15,000. The value put on the
assets being Rs 1,80,000, there is an appreciation to the extent of Rs 37,500 (1,80,000 – 1,42,500).

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3. Capital profits of B Ltd.

Rs Rs
Reserve on 1st January, 20X1 (Assumed there is no 1,00,000
movement in reserves during the year and hence
balance as on 1st January 20X1 is same as of
31st December 20X1)
Profit & Loss Account Balance on 1st January, 20X1 30,000
Less: Dividend paid (20,000) 10,000
Profit for 20X1:
Total Rs 82,000
Less: Rs10,000
Rs 72,000
Proportionate upto 1st July, 20X1 on time basis 36,000
(Rs 72,000/2)
Appreciation in value of Plant & Machinery 37,500
1,83,500
Less: 20% due to outsiders (36,700)
Holding company’s share 1,46,800

4. Revenue profits of B Ltd.:

Profit after 1st July, 20X1 [(82,000 – 10,000) x ½] 36,000

Less: Depreciation
10% depreciation on Rs1,80,000 for 6 months 9,000
nd
Less: Depreciation already charged for 2 half year on
(1,500)
1,50,000 (7,500)
34,500
Less: 1/5 due to outsiders (6,900)
Share of A Ltd. 27,600

5. Minority interest:

Par value of 400 shares (2,00,000 X 20%) 40,000

Add: 1/5Capital Profits [WN 3] 36,700
1/5 Revenue Profits [WN 4] 6,900
83,600

6. Cost of Control:

Amount paid for 1,600 shares 3,40,000

Less: Dividend out of pre-acquisition profits (16,000) 3,24,000
Par value of shares 1,60,000

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Capital Profits –share of A Ltd. [WN 3] 1,46,800 (3,06,800)

Cost of Control or Goodwill 17,200

7. Value of plant & Machinery:

A Ltd. 2,40,000
B Ltd. 1,35,000
Add: Appreciation on 1st July, 20X1 [1,80,000 – 37,500
(1,50,000 – 7,500)]
1,72,500
Add: Deprecation for 2nd half charged on pre- 7,500
revalued value
Less: Depreciation on Rs1,80,000 for 6 months (9,000) 1,71,000
4,11,000

8. Profit & Loss Account (Consolidated):

A Ltd. as given 57,200

Less: Dividend transferred to Investment A/c (16,000) 41,200
Share of A Ltd. in revenue profits of B Ltd. (WN 4) 27,600
68,800

18. On 31st March, 20X1, the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:

Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note H Ltd.(Rs S Ltd.(Rs
No. in Lacs) in Lacs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 12,000 4,800

(b) Reserves and Surplus 2 5,499 3,000

(2) Current Liabilities
(a) Trade payables 3 1,833 1,014
(b) Short term provisions 4 855 394
(c) Other current liabilities 1,200 -
(Dividend payable)
Total 21,387 9,208
II. Assets
(1) Non-current assets

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Property, Plant and Equipment 5 9,468 5,486

Non-current Investments 3,000
(Shares in S Ltd.)
(2) Current assets
(a) Inventories 3,949 1,956
(b) Trade receivables 6 2,960 1,562
(c) Cash and cash equivalents 1,490 204
(d) Short term loans and advances 7 520
Total 21,387 9,208

Notes to Accounts
H Ltd.(Rs S Ltd.(Rs
in lacs) in lacs)
1. Share Capital
Authorized share capital 15,000 6,000
Equity shares of Rs 10 each, fully paid up
Issued and Subscribed:
Equity shares of Rs 10 each, fully paid up 12,000 4,800
2. Reserves and surplus
General Reserve 2,784 1,380
Profit and Loss Account: 2,715 1,620
Total 5,499 3,000
3. Trade Payables
Creditors 1,461 854

Bills Payable 372 160

1,833 1,014
4. Short term provisions
Provision for Taxation 855 394
5. Property, plant and equipment
Land and Buildings 2,718 -
Plant and Machinery 4,905 4,900
Furniture and Fittings 1,845 586
Total 9,468 5,486
6. Trade receivables
Debtors 2,600 1,363
Bills Receivable 360 199
Total 2,960 1,562
7. Short term loans and advances
Sundry Advances 520 --

The following information is also provided to you:

(a) H Ltd. purchased 180 lakh shares in S Ltd. on 31st March, 20X0 when the balances of General Reserve
and Profit and Loss Account of S Ltd. stood at Rs 3,000 lakh and Rs1,200 lakh respectively.

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(b) On 1st April, 20X0, S Ltd. declared a dividend @ 20% for the year ended 31st March, 20X0. H Ltd.
credited the dividend received by it to its Profit and Loss Account.
(c) On 1st January, 20X1, S Ltd. issued 3 fully paid-up bonus shares for every 5 shares held out of balances of
its general reserve as on 31st March, 20X0.
(d) On 31st March, 20X1, 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 Rs 45 lakh of these acceptances in hand, the rest having been endorsed in
favour of its trade payables.
(e) On 31st March, 20X1, S Ltd.’s inventory included goods which it had purchased for Rs 100 lakh 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 31st March, 20X1.

SOLUTION-
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 20X1
Particulars Note No. (` in Lacs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 12,000
(b) Reserves and Surplus 2 7,159
(2) Minority Interest [W.N.6] 3,120
(3) Current Liabilities
(a) Trade payables 3 2,802
(b) Short term provisions 4 1,249
(c) Other current liabilities 5 1,200
Total 27,530
II. Assets
(1) Non-current assets
Property, Plant and Equipment 6 14,954
(2) Current assets
(a) Inventories 7 5,885
(b) Trade receivables 8 4,477
(c) Short term loans and advances 9 520
(d) Cash and cash equivalents 10 1,694
Total 27,530

Notes to Accounts
( in (in
lacs) lacs)
1. Share Capital
Authorized share capital 15,000
Equity shares of 10 each, fully paid up

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Issued and Subscribed:

Equity shares of 10 each, fully paid up 12,000
Total 12,000
2. Reserves and surplus
Capital Reserve (Note 5) 1,320
General Reserve (2,784 + 108) 2,892
Profit and Loss Account:
H Ltd. 2,715
Less: Dividend wrongly credited 360
Unrealized Profit 20 (380)
2,335
Add: Share in S Ltd.’s Revenue profits 612 2,947
Total 7,159
3. Trade payables
Creditors
H Ltd. 1,461
S Ltd. 854 2,315
Bills Payable
H Ltd. 372
S Ltd. 160
532
Less: Mutual owing (45) 487 2,802

4.
Short term provisions
Provision for Taxation
H Ltd. 855
S Ltd.
394
Total
1,249
Other current liabilities
5.
Dividend payable

H Ltd. 1,200
6. Property, plant and equipment
Land and Buildings
H Ltd. 2,718
Plant and Machinery
H Ltd. 4,905
S Ltd. 4,900 9,805
Furniture and Fittings
H Ltd. 1,845
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S Ltd. 586 2,431

Total 14,954
7. Inventories
Stock
H Ltd. 3,949
S Ltd. 1,956
5,905
Less: Unrealized profit (20) 5,885
8. Trade receivables
Debtors
H Ltd. 2,600
S Ltd. 1,363 3,963
Bills Receivable
H Ltd. 360
S Ltd. 199
559
Less: Mutual Owing (45) 514 4,477
9. Short term loans and advances
Sundry Advances 520
10. Cash and cash equivalents
Cash and Bank Balances 1,694

Share holding pattern of S Ltd.

Shares as on 31st March, 20X1 (Includes bonus shares 480 lakh shares (4,800 lakhs/
issued on 1st January, 20X1) ` 10)

H Ltd.’s holding as on 1st April, 20X0 180 lakhs

Add: Bonus received on 1st January, 20X1 108 lakhs (180 / 5 × 3)

Total H Ltd.’s holding as on 31st March, 20X1 288 lakhs i.e. 60 % [288/480×100]

Minority Shareholding 40%

Working Notes:
1. S Ltd.’s General Reserve Account
in lakhs in lakhs
To Bonus to equity 1,800 By Balance b/d 3,000
shareholders (WN-8)
To Balance c/d 1,380 By Profit and Loss A/c 180
(Balancing figure)
3,180 3,180

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2. S Ltd.’s Profit and Loss Account

in lakhs in lakhs
To General Reserve 180 By Balance b/d 1,200
[WN 1]
To Dividend paid By Net Profit for the
(20% on `3,000 lakhs) 600 year* 1,200
To Balance c/d 1,620 (Balancing figure)
2,400 2,400
*Out of Rs 1,200 lakhs profit for the year, Rs 180 lakhs has been transferred to reserves.

3. Distribution of Revenue profits

Rs in lakhs
Revenue profits (W. N. 2) 1,200

Less: Share of H Ltd. 60% (720)

(General Reserve Rs 108 + Profit and Loss Account Rs
612)
Share of Minority Shareholders (40%) 480
Note: The question can also be solved by taking Rs 1,080 lakhs as post acquisition Profit and Loss balance
and Rs 180 lakhs as post acquisition General Reserve balance. The final answer will be same.

4. Calculation of Capital Profits

Rs in lakhs
General Reserve on the date of acquisition less bonus shares 1,200
(Rs 3,000 – Rs 1,800)
Profit and loss account on the date of acquisition less dividend 600
paid (Rs 1,200 – Rs 600)
1,800
H Ltd.’s share = 60% of Rs 1,800 lakhs = Rs 1,080 lakhs
Minority interest = Rs 1,800 – Rs 1,080 = Rs 720 lakhs

5. Calculation of capital reserve

Rs in lakhs
Paid up value of shares held (60% of Rs4,800) 2,880
Add: Share in capital profits [WN 4] 1,080
3,960
Less: Cost of shares less dividend received (Rs 3,000 – Rs (2,640)
360)
Capital reserve 1,320

6. Calculation of Minority Interest

Rs in lakhs
40% of share capital (40% of Rs 4,800) 1,920
Add: Share in revenue profits [WN 3] 480

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Share in capital profits [WN 4] 720

3,120

7. Unrealized profit in respect of inventory

Rs 100 lakhs X 25 /125 = Rs 20 lakhs

8. Computation of bonus to equity shareholders

Rs In lakhs
Shares as on 31 March 20X1 including bonus share
issued on 1 January 20X1 4,800
Or we can say these are 1 + 3/5 or 8/5
i.e. Shares before bonus issue should have been 4,800 / 8/5 = 3000
Accordingly, bonus issue would be (4,800-3,000) 1,800

19. On 31.03.2014, the Balance sheet of H ltd and its subsidiary S ltd are –
Equity & Liabilities H Ltd S ltd
Equity Share Capital of Rs 10 each 4,00,000 1,00,000
General Reserve 75,000 35,000
P&L A/c 45,000 27,500
Creditors 35,000 25,000
Bills Payable 25,000 15,000
TOTAL 5,80,000 2,02,500
Assets
Land & Buildings 1,20,000 40,000
Machinery 1,50,000 10,000
Investments in S ltd (7500 shares at cost) 1,40,000 -
Stock 52,500 85,500
Debtors 80,000 45,000
Bills Receivable 22,500 15,000
Cash & Bank 15,000 7,000
TOTAL 5,80,000 2,02,500

Draw a consolidated balance sheet as at 31.03.2014 after considering the following –

a) H ltd acquired the shares on 31st July 2013

b) The balances of General Reserve and P&L a/c on 1st April 2013 of S ltd were Rs 10,000 and Rs
7,500 respectively
c) In Jan 2014 H ltd sold to S ltd goods costing Rs 7,500 for Rs 10,000. On 31 st March 2014, 50%
of these goods were lying as unsold in Godown of S ltd.
d) Bills Receivable of Rs 12,500 of H ltd are received from S ltd.
e) Creditors of S Ltd include Rs 6,000 due to H ltd.

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ADDITIONAL QUESTIONS ON CONSOLIDATION

20. The following summarised Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepared as on
31st March, 2019:

H Ltd. S Ltd. (Rs)

(Rs)
Equity and Liabilities
Shareholders' Funds
Equity Share Capital (fully paid up shares of Rs 10 12,00,000 2,00,000
each)
Reserves and Surplus
General Reserve 4,35,000 1,55,000
Profit and Loss Account 2,80,000 65,000
Current Liabilities
Trade Payables 3,25,000 1,25,000
TOTAL 22,40,000 5,45,000
H Ltd. S Ltd. (Rs)
(Rs)
Assets
Non-Current Assets
Property, Plant and Equipment
Machinery 6,40,000 1,80,000
Furniture 3,75,000 34,000
Non-Current Investments
Shares in S Ltd - 16,000 shares @ Rs 20 each 3,20,000 -
Current Assets
Inventories 2,68,000 62,000
Trade Receivables 4,73,000 2,37,000
Cash and Bank 1,64,000 32,000
TOTAL 22,40,000 5,45,000
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2018. On the date of acquisition, General Reserve and Profit Loss
Account of S Ltd. stood at Rs 50,000 and Rs 30,000 respectively.

• Machinery (book value Rs 2,00,000) and Furniture (book value Rs 40,000) of S Ltd. were revalued
at Rs 3,00,000 and Rs 30,000 respectively on 1st April,2018 for the purpose of fixing the price of its
shares (rates of depreciation computed on the basis of useful lives: Machinery 10% and Furniture
15%).
• Trade Payables of H Ltd. include Rs 40,000 due to S Ltd. for goods supplied since the acquisition of
the shares. These goods are charged at 10% above cost. The inventories of H Ltd. includes goods
costing Rs 55,000 (cost to H Ltd.) purchased from S Ltd.
You are required to prepare the Consolidated Balance Sheet of H Ltd with its subsidiary S Ltd. as at 31st March,
2019 (RTP NOV 2019 & MTP MARCH 2022: 15 MARKS)

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SOLUTION-

Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2019

Particulars Note
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 12,00,000
(1,20,000 equity shares of 10
each)
(b) Reserves and Surplus 1 8,16,200
(2) Minority Interest (W.N.4) 99,300
(3) Current Liabilities
(a) Trade Payables 2 4,10,000
Total 25,25,500

II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment
(i) Tangible assets 3 13,10,500
(ii) Intangible assets 4 24,000
(b) Current assets
(i) Inventories 5 3,25,000
(ii) Trade Receivables 6 6,70,000
(iii) Cash at Bank 7 1,96,000
Total 25,25,500

Notes to Accounts

1. Reserves and Surplus

General Reserves 4,35,000
Add: 80% share of S Ltd.’s post-
acquisition reserves (W.N.3) 84,000 5,19,000
Profit and Loss Account 2,80,000
Add: 80% share of S Ltd.’s post- 21,200
acquisition profits (W.N.3)
Less: Unrealised gain (4,000) 17,200 2,97,200
8,16,200
2. Trade Payables
H Ltd. 3,25,000
S Ltd. 1,25,000
Less: Mutual transaction (40,000) 4,10,000
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3. Tangible Assets
Machinery
H Ltd. 6,40,000
S Ltd. 2,00,000
Add: Appreciation 1,00,000
3,00,000
Less: Depreciation (30,000) 2,70,000 9,10,000
Furniture
H. Ltd. 3,75,000
S Ltd. 40,000

Less: Decrease in value (10,000)

30,000
Less: Depreciation 25,500
(4,500) 4,00,500
13,10,500
4. Intangible assets
Goodwill [WN 5] 24,000
5. Inventories
H Ltd. 2,68,000
S Ltd. 62,000 3,30,000
Less: Inventory reserve (5,000)
3,25,000
6. Trade Receivables
H Ltd. 4,73,000
S Ltd. 2,37,000
7,10,000
Less: Mutual transaction (40,000)
6,70,000
7. Cash and Bank
H Ltd. 1,64,000
S Ltd. 32,000 1,96,000

Working Notes:

1.Profit or loss on revaluation of assets in the books of S Ltd. and their bookvalues as on 1.4.2018

Machinery
Revaluation as on 1.4.2018 3,00,000
Less: Book value as on 1.4.2018 (2,00,000)
Profit on revaluation 1,00,000
Furniture
Revaluation as on 1.4.2018 30,000
Less: Book value as on 1.4.2018 (40,000)
Loss on revaluation (10,000)

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2.Calculation of short/excess depreciation

Machinery Furniture
Upward/ (Downward) Revaluation (W.N. 4) 1,00,000 (10,000)
Rate of depreciation 10% p.a. 15% p.a.
Difference [(short)/excess] (10,000) 1,500

3.Analysis of reserves and profits of S Ltd. as on 31.03.2019-

Pre-acquisition Post-acquisition profits (1.4.2018

profit upto – 31.3.2019)
1.4.2018
(Capital profits) General Profit and loss
Reserve account
General reserve as on 31.3.2019 50,000 1,05,000
Profit and loss account as on 31.3.2019 30,000 35,000

Upward Revaluation of machinery as on 1,00,000

1.4.2018
Downward Revaluation of Furniture as on (10,000)
1.4.2018
Short depreciation on machinery (W.N. 5) (10,000)

Excess depreciation on furniture (W.N. 5) 1,500

Total 1,70,000 1,05,000 26,500

4.Minority Interest-

Paid-up value of (2,00,000 x 20%) 40,000

Add: 20% share of pre-acquisition profits and
reserves 16,000
[(20% of (50,000 + 30,000)]
20% share of profit on revaluation 18,000
20% share of post-acquisition reserves 21,000
20% share of post-acquisition profit 5,300
1,00,300
Less: Unrealised Profit on Inventory
(55,000 x 10/110) x 20% (1,000)
99,300

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5.Cost of Control or Goodwill-

Cost of Investment 3,20,000

Less: Paid-up value of 80% shares 1,60,000
80% share of pre-acquisition profits and reserves

( 64,000 + 72,000) 1,36,000 (2,96,000)

Cost of control or Goodwill 24,000

21. Moon Ltd. and its subsidiary Star Ltd. provided the following information for the year ended 31st
March, 2021:

Particulars Moon Ltd (Rs) Star Ltd. (Rs)

Equity Share Capital 20,000,000 6,000,000
Finished Goods Inventory as on 01.04.2020 4,200,000 3,010,000
Finished Goods Inventory as on 31.03.2021 8,575,000 3,762,500
Dividend Income 1,680,000 437,500
Other non-operating Income 350,000 105,000
Raw material consumed 13,930,000 4,725,000
Selling and Distribution Expenses 3,325,000 1,575,000
Production Expenses 3,150,000 1,400,000
Loss on sale of investments 262,500 Nil
Sales and other operating income 33,250,000 19,075,000
Wages and Salaries 13,300,000 2,450,000
General and Administrative Expenses 2,800,000 1,225,000
Royalty paid Nil 50,000
Depreciation 315,000 140,000
Interest expense 175,000 52,500

Other information

• On 1st September 2018 Moon Ltd., acquired 50,000 equity shares of Rs 100 each fully paid up in Star Ltd.

• Star Ltd. paid a dividend of 10% for the year ended 31st March 2020. The dividend was correctly
accounted for by Moon Ltd.

• Moon Ltd. sold goods of Rs 17,50,000 to Star Ltd. at a profit of 20% on selling price. Inventory of Star Ltd.
includes goods of Rs 7,00,000 received from Moon Ltd.

• Selling and Distribution expenses of Star Ltd. include Rs 2,12,500 paid to Moon Ltd. as brokerage fees.

• General and Administrative expenses of Moon Ltd. include Rs 2,80,000 paid to Star Ltd. as consultancy
fees.

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• Star Ltd. used some resources of Moon Ltd., and Star Ltd. paid Rs 50,000 to Moon Ltd. as royalty.

Prepare Consolidated Statement of Profit and Loss of Moon Ltd. and its subsidiary Star Ltd. for the year
ended 31st March, 2021 as per Schedule III to the Companies Act, 2013 (DEC 2021: 15 MARKS)

SOLUTION-

Consolidated statement of profit and loss of Moon Ltd. and its subsidiary Star Ltd. for the year ended on
31st March, 2021

Particulars Note No.

Revenue from operations 1 5,00,32,500
Other Income 2 23,10,000
Total revenue (I) 5,23,42,500
Expenses:
Cost of material purchased/consumed 3 2,14,55,000
Changes (Increase) in inventories of finished goods 4 (49,87,500)
Employee benefit expense 5 1,57,50,000
Finance cost 6 2,27,500
Depreciation and amortization expense 7 4,55,000
Other expenses 8 84,32,500
Total expenses (II) 4,13,32,500
Profit before tax (II-III) 1,10,10,000

Notes to Accounts:

1. Revenue from operations

Sales and other operating revenues1
Moon Ltd. 3,32,50,000
Star Ltd. 190,75,000
523,25,000
Less: Inter-company sales (17,50,000)
Consultancy fees received by (2,80,000)
Star Ltd. from Moon Ltd.
Royalty received by Moon Ltd. (50,000)
from Star Ltd.
5,00,32,500
Brokage received by Moon Ltd. (2,12,500)
from Star Ltd.

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2. Other Income
Dividend income:
Moon Ltd. 16,80,000
Star Ltd. 4,37,500 21,17,500
Loss on sale of investments Star Ltd. (2,62,500)
Other Non-operating Income
Moon Ltd. 3,50,000
Star Ltd. 1,05,000 4,55,000 23,10,000
3. Cost of material purchased/consumed
Moon Ltd. 1,39,30,000
Star Ltd. 47,25,000
1,86,55,000
Less: Purchases by Star Ltd. From
Moon Ltd. (17,50,000) 1,69,05,000
Direct expenses (Production)
Moon Ltd. 31,50,000
Star Ltd. 14,00,000 45,50,000 2,14,55,000
4. Changes (Increase) in inventories of
finished goods
Moon Ltd. 43,75,000
Star Ltd. 7,52,500
51,27,500
Less: Unrealized profits ` 7,00,000 ×
20/100 (1,40,000) 49,87,500

5. Employee benefits and expenses

Wages and salaries:
Moon Ltd. 1,33,00,000
Star Ltd. 24,50,000 1,57,50,000
6 Finance cost
Interest:
Moon Ltd. 1,75,000
Star Ltd. 52,500 2,27,500

7. Depreciation
Moon Ltd. 3,15,000
Star Ltd. 1,40,000 4,55,000
8. Other expenses
General & Administrative expenses:
Moon Ltd. 28,00,000
Star Ltd. 12,25,000
40,25,000
Less: Consultancy fees received byStar (280,000) 37,45,000
Ltd. from Moon Ltd.

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Royalty:
Star Ltd. 50,000
Less: Received by Moon Ltd. Selling (50,000) Nil
and distribution Expenses:
Moon Ltd. 33,25,000
Star Ltd. 15,75,000
49,00,000
Less: Brokerage received by Moon (2,12,500) 46,87,500 84,32,500
Ltd. from Star Ltd.

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Chapter 7 AS 4: CONTINGENCIES & EVENTS OCCURRING AFTER THE BALANCE

SHEET DATE

Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial statements
are approved by the Board of Directors in the case of a company, and, by the corresponding approving
authority in the case of any other entity.

There are two types of events, which can be identified, viz. -

• Adjusting Events: Those which provide further evidence of conditions that existed at the Balance Sheet Date,
• Non-Adjusting Events: Those which are indicative of conditions that arose subsequent to Balance Sheet Date.

ADJUSTING EVENTS -
The following events occurring after the Balance Sheet Date should be considered and adjusted’in the
Financial Statements

Nature of event Example

Events relating to conditions existing at the Balance Amount due from a customer as at 31st March is
Sheet date, and provide additional information considered doubtful. Information on his insolvency
materially affecting the determination of the is received on 15th April.
amounts of assets/liabilities there at
Events providing information that the fundamental Destruction of a major Production Plant, or Loss of
accounting assumption - Going Concern - is not substratum of the enterprise.
appropriate

ACCOUNTING TREATMENT:
• Assets and Liabilities as at the Balance Sheet should be adjusted.
• Suitable disclosure should be made for the above in the Financial Statements.

NON-ADJUSTING EVENTS: -
Nature of event Example
(a) Event does not relate to conditions existing at As at 31st March, Cost of Investments is Rs 75,000.
the Balance Sheet date (Market Value Rs 90,000) Its value declines to Rs
40,000 on 25th April.

ACCOUNTING TREATMENT:
• Balance Sheet figures need not be adjusted.
• If the events or their effects are significant, disclosure may be made in the report of the approving
authority (e.g. Board of Directors).
DISCLOSURE-
Disclosure of events occurring after the balance sheet date requires the following information should be
provided:
•The nature of the event;
•An estimate of the financial effect, or a statement that such an estimate cannot be made.

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1. In X Co. Ltd., theft of cash of 5 lakhs by the cashier in January, 20X1 was detected only in May,
20X1. The accounts of the company were not yet approved by the Board of Directors of the
company.
Decide whether the theft of cash has to be adjusted in the accounts of the company for the year ended
31.3.20X1.

Solution
As per AS 4 (Revised) ‘Contingencies and Events occurring after the Balance Sheet Date’, an event occurring
after the balance sheet date may require adjustment to the reported values of assets, liabilities, expenses
or incomes.

If a fraud of the accounting period is detected after the balance sheet date but before approval of the
financial statements, it is necessary to recognise the loss amounting 5,00,000 and adjust the accounts of
the company for the year ended 31st March, 20X1.

2. An earthquake destroyed a major warehouse of ACO Ltd. on 20.5.20X2. The accounting year of the
company ended on 31.3.20X2. The accounts were approved on 30.6.20X2. The loss from earthquake
is estimated at Rs 30 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or
non-adjusting event and how the fact of loss is to be disclosed by the company.

Solution
AS 4 (Revised) “Contingencies and Events Occurring after the Balance Sheet Date”, states that adjustments
to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events
do not relate to conditions existing at the balance sheet date. The destruction of warehouse due to
earthquake did not exist on the balance sheet date i.e. 31.3.20X2. Therefore, loss occurred due to
earthquake is not to be recognised in the financial year 20X1-20X2.

However, according to the standard, unusual changes affecting the existence or substratum of the
enterprise after the balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements. As per the information given in
the question, the earthquake has caused major destruction; therefore, fundamental accounting assumption
of going concern would have to be evaluated. Considering that the going concern assumption is still valid,
the fact of earthquake together with an estimated loss of Rs 30 lakhs should be disclosed in the report of
the approving authority for financial year 20X1-X2 to enable users of financial statements to make proper
evaluations and decisions.

3. A company has filed a legal suit against the debtor from whom Rs 15 lakh is recoverable as on
31.3.20x1. The chances of recovery by way of legal suit are not good as per legal opinion given by
the counsel in April, 20x1. Can the company provide for full amount of Rs 15 lakhs as provision for
doubtful debts? Discuss

Solution
As per AS 4 (Revised) “Contingencies and Events Occurring After the Balance Sheet Date”, assets and
liabilities should be adjusted for events occurring after the balance sheet date that provide additional
evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date. In the
given case, company should make the provision for doubtful debts, as legal suit has been filed on 31st
March, 20X1 and the chances of recovery from the suit are not good. Though, the actual result of legal suit
will be known in future yet situation of non-recovery from the debtors exists before finalisation of financial

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statements. Therefore, provision for doubtful debts should be made for the year ended on 31st March,
20X1.

4. In preparing the financial statements of R Ltd. for the year ended 31st March, 20x1, you come across
the following information. State with reasons, how you would deal with this in the financial
statements:

The company invested 100 lakhs in April, 20x1 before approval of Financial Statements by the Board of
directors in the acquisition of another company doing similar business, the negotiations for which had
started during the year.

Solution
AS 4 (Revised) defines "Events Occurring after the Balance Sheet Date" as those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Approving Authority in the case of a company. Accordingly, the
acquisition of another company is an event occurring after the balance sheet date. However, no adjustment
to assets and liabilities is required as the event does not affect the determination and the condition of the
amounts stated in the financial statements for the year ended 31st March, 20X1. The disclosure should be
made in the report of the approving authority of those events occurring after the balance sheet date that
represent material changes and commitments affecting the financial position of the enterprise, the
investment of 100 lakhs in April, 20X1 for the acquisition of another company should be disclosed in the
report of the Approving Authority to enable users of financial statements to make proper evaluations and
decisions.

5. A Limited Company closed its accounting year on 30.6.20x1 and the accounts for that period were
considered and approved by the board of directors on 20th August, 20x1. The company was
engaged in laying pipe line for an oil company deep beneath the earth. While doing the boring work
on 1.9.20x1 it had met a rocky surface for which it was estimated that there would be an extra cost
to the tune of Rs 80 lakhs. You are required to state with reasons, how the event would be dealt
with in the financial statements for the year ended 30.6.20x1.

Solution
AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date defines 'events
occurring after the balance sheet date' as 'significant events, both favourable and unfavourable, that occur
between the balance sheet date and the date on which financial statements are approved by the Board of
Directors in the case of a company'. The given case is discussed in the light of the above-mentioned
definition and requirements given in AS 4 (Revised). In this case the incidence, which was expected to push
up cost, became evident after the date of approval of the accounts. So it is not an 'event occurring after the
balance sheet date'.

6. While preparing its final accounts for the year ended 31st March, 20X1 a company made a provision
for bad debts @ 5% of its total trade receivables. In the last week of February, 20X1 a trade
receivable for Rs 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by
any insurance policy. In April, 20X1 the trade receivable became a bankrupt. Can the company
provide for the full loss arising out of insolvency of the trade receivable in the final accounts for the
year ended 31st March, 20X1?

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Solution
As per Accounting Standard 4, Assets and Liabilities should be adjusted for events occurring after the
balance sheet date that provide additional evidence to assist estimation of amounts relating to conditions
existing at the balance sheet date.

So full provision for bad debt amounting to Rs 2 lakhs should be made to cover the loss arising due to the
insolvency in the Final Accounts for the year ended 31st March, 20X1. It is because earthquake took place
before the balance sheet date.

Had the earthquake taken place after 31st March, 20X1, then this would have been treated as non-
adjusting event and only disclosure required as per AS 4 (Revised), would have been sufficient.

7. During the year 20X1-20X2, Raj Ltd. was sued by a competitor for Rs 15 lakhs for infringement of a
trademark. Based on the advice of the company's legal counsel, Raj Ltd. provided for a sum of Rs 10
lakhs in its financial statements for the year ended 31st March, 20X2. On 18th May, 20X2, the Court
decided in favour of the party alleging infringement of the trademark and ordered Raj Ltd. to pay
the aggrieved party a sum of Rs 14 lakhs. The financial statements were prepared by the company's
management on 30th April, 20X2, and approved by the board on 30th May, 20X2.

Solution
As per AS 4 (Revised), adjustments to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the determination of the
amounts relating to conditions existing at the balance sheet date.

In the given case, since Raj Ltd. was sued by a competitor for infringement of a trademark during the year
20X1-X2 for which the provision was also made by it, the decision of the Court on 18th May, 20X2, for
payment of the penalty will constitute as an adjusting event because it is an event occurred before approval
of the financial statements. Therefore, Raj Ltd. should adjust the provision upward by Rs 4 lakhs to reflect
the award decreed by the Court to be paid by them to its competitor.

Had the judgment of the Court been delivered on 1st June, 20X2, it would be considered as an event
occurring after the approval of the financial statements which is not covered by AS 4 (Revised). In that case,
no adjustment in the financial statements of 20X1-X2 would have been required.

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ADDITIONAL QUESTIONS ON AS 4 -CONTINGENCIES AND EVENTS OCCURRING AFTER THE

BALANCE SHEET DATE

8. The financial statements of Alpha Ltd. for the year 2019-2020 were approved by the Board of
Directors on 15th July, 2020. The following information was provided:
(i) A suit against the company’s advertisement was filed by a party on 20th April, 2020 claiming damages of
Rs 25 lakhs.
(ii) The terms and conditions for acquisition of business of another company had been decided by March,
2020. But the financial resources were arranged in April, 2020 and amount invested was 50 lakhs.
(iii) Theft of cash of 5 lakhs by the cashier on 31st March, 2020, was detected on 16th July, 2020.
(iv) The company started a negotiation with a party to sell an immovable property for 40 lakhs in March,
2020. The book value of the property is 30 lakh on 31st March, 2020. However, the deed was registered on
15th April, 2020.
(v) A major fire had damaged the assets in a factory on 5th April, 2020. However, the assets were fully
insured.
With reference to AS 4, state whether the above mentioned events will be treated as contingencies,
adjusting events or non-adjusting events occurring after the balance sheet date
(MTP MARCH 2022 : 5MARKS)

SOLUTION-
(i) Non-adjusting event: Suit filed against the company is a contingent liability but it was not existing as on
date of balance sheet date as the suit was filed on 20th April after the balance sheet date. As per AS 4,
'Contingencies' is restricted to conditions or situations at the balance sheet date, the financial effect of
which is to be determined by future events which may or may not occur. Hence, it will have no effect on
financial statement and will be a non-adjusting event.

(ii) Adjusting event: In the given case, terms and conditions for acquisition of business were finalised
before the balance sheet date and carried out before the closure of the books of accounts but transaction
for payment of financial resources was effected in April, 2020. Hence, necessary adjustment to assets and
liabilities for acquisition of business is necessary in the financial statements for the year ended 31st March
2020.

(iii) Non-adjusting event: Only those events which occur between the balance sheet date and the date on
which the financial statements are approved, may indicate the need for adjustments to assets and liabilities
as at the balance sheet date or may require disclosure.
In the given case, as the theft of cash was detected on 16th July, 2020 ie after approval of financial
statements, no adjustment is required.

(iv) Non-adjusting event: Adjustments to assets and liabilities are not appropriate for events occurring after
the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. In the
given case, sale of immovable property was under proposal stage (negotiations only started) on the balance
sheet date, and was not finalized. Therefore, adjustment to assets for sale of immovable property is not
necessary in the financial statements for the year ended 31st March, 2020. Disclosure may be given in
Report of approving Authority.

(v) Non-adjusting event: Adjustments to assets and liabilities are not appropriate for events occurring after
the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. The
condition of fire occurrence was not existing on the balance sheet date. Only the disclosure regarding fire
and loss, being completely insured may be given in the report of approving authority.

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9. The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were approved
on 30th April, 2018. On 15th April, 2018 a fire occurred in the factory and office premises. The loss
by fire is of such a magnitude that it was not possible to expect the enterprise Dee Limited to start
operation again.

State with reasons, whether the loss due to fire is an adjusting or non- adjusting event and how the fact of
loss is to be disclosed by the company in the context of the provisions of AS-4 (Revised).

Solution
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date”, an event
occurring after the balance sheet date should be an adjusting event even if it does not reflect any condition
existing on the balance sheet date, if the event is such as to indicate that the fundamental accounting
assumption of going concern is no longer appropriate.

The fire occurred in the factory and office premises of an enterprise after 31 March, 2018 but before
approval of financial statement of 30.4.18. The loss by fire is of such a magnitude that it is not reasonable to
expect the Dee Ltd. to start operations again, i.e., the going concern assumption is not valid.

Since the fire occurred after 31/03/18, the loss on fire is not a result of any condition existing on 31/03/18.
But the loss due to fire is an adjusting event the entire accounts need to be prepared on a liquidation basis
with adequate disclosures by the company by way of note in its financial statements in the following
manner:

“Major fire occurred in the factory and office premises on 15th April, 2018 which has made impossible for
the enterprise to start operations again. Therefore, the financial statements have been prepared on
liquidation basis”

10. The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April, 2017,
considered and approved the Audited Financial results along with Auditors Report for the Financial
Year ended 31st March, 2017 and recommended a dividend of Rs 2 per equity share (on 2 crore fully
paid up equity shares of Rs 10 each) for the year ended31st March, 2017 and if approved by the
members at the forthcoming Annual General Meeting of the company on 18th June, 2017, the same
will be paid to all the eligible shareholders.

Discuss on the accounting treatment and presentation of the said proposed dividend in the annual accounts
of the company for the year ended 31st March, 2017 as per the applicable Accounting Standard and other
Statutory Requirements

Solution-
As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet Date” vide
Companies (Accounting Standards) Amendments Rules, 2016 dated 30th March, 2016, the events which
take place after the balance sheet date, are sometimes reflected in the financial statements because of
statutory requirements or because of their special nature.

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However, dividends declared after the balance sheet date but before approval of financial statements are
not recognized as a liability at the balance sheet date because no statutory obligation exists at that time.
Hence such dividends are disclosed in the notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends are to be disclosed in the
notes to financial statements. Accordingly, the dividend of Rs 4 crores recommended by New Graphics Ltd. in its
Board meeting on 18th April, 2017 shall not be accounted for in the books for the year 2016-17 irrespective of the
fact that it pertains to the year 2016-17 and will be paid after approval in the Annual General Meeting of the
members / shareholders.

11. A Company entered into an agreement to sell its immovable property to another company for Rs 35
lakhs. The property was shown in the Balance Sheet at Rs 7 lakhs. The agreement to sell was
concluded on 15th February, 2011 and sale deed was registered on 30th April, 2011.

You are required to state, with reasons, how this event would be dealt with in the financial statements for
the year ended 31st March, 2011.

Answer
According AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, assets and liabilities
should be adjusted for events occurring after the balance sheet date that provide additional evidence to
assist the estimation of amounts relating to conditions existing at the balance sheet date.

In the given case, sale of immovable property was carried out before the closure of the books of accounts.
This is clearly an event occurring after the balance sheet date but agreement to sell was effected on 15th
February 2011 i.e. before the balance sheet date. Registration of the sale deed on 30th April, 2011, simply
provides additional information relating to the conditions existing at the balance sheet date.

Therefore, adjustment to assets for sale of immovable property is necessary in the financial statements for
the year ended 31st March, 2011.

12. A Company follows April to March as its financial year. The Company recognizes cheques dated 31st
March or before, received from customers after balance sheet date, but before approval of financial
statement by debiting ‘Cheques in hand account’ and crediting ‘Debtors account’. The ‘cheques in
hand’ is shown in the Balance Sheet as an item of cash and cash equivalents. All cheques in hand are
presented to bank in the month of April and are also realised in the same month in normal course
after deposit in the bank. State with reasons, whether the collection of cheques bearing date 31st
March or before, but received after Balance Sheet date is an adjusting event and how this fact is to
be disclosed by the company?

Answer
Even if the cheques bear the date 31st March or before, the cheques received after 31st March do not
represent any condition existing on the balance sheet date i.e. 31st March. Thus, the collection of cheques
after balance sheet date is not an adjusting event.

Cheques that are received after the balance sheet date should be accounted for in the period in which they
are received even though the same may be dated 31st March or before as per AS 4 Contingencies and
Events Occurring after the Balance Sheet Date.

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13. In preparing the financial statements of Lotus Limited for the year ended 31st March, 2010 you
come across the following information. State with reason, how you would deal with this in the
financial statements?

The company invested Rs 50 lakhs in April, 2010 in the acquisition of another company doing similar
business, the negotiations for which had just started.

Answer
As per AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, events occurring after the
balance sheet date which do not affect the figures stated in the financial statements would not normally
require disclosure in the financial statements although they may be of such significance that they may
require a disclosure in the report of the approving authority to enable users of financial statements to make
proper evaluations and decisions.

The investment of Rs 50 lakhs in April 2010 for acquisition of another company is under negotiation stage,
and has not been finalized yet. On the other hand it is also not affecting the figures stated in the financial
statements of 2009-10, hence the details regarding such negotiation and investment planning of Rs 50 lakhs
in April, 2010 in the acquisition of another company should be disclosed in the Directors’ Report to enable
users of financial statements to make proper evaluations and decision.

14. Cashier of A-One Limited embezzled cash amounting to Rs 6,00,000 during March, 2012 . However
same comes to the notice of Company management during April, 2012 only. Financial statements of
the company is not yet approved by the Board of Directors of the company. With the help of
provisions of AS 4 “Contingencies and Events Occurring after the Balance Sheet Date” decide,
whether the embezzlement of cash should be adjusted in the books of accounts for the year ending
March, 2012?

What will be your reply, if embezzlement of cash comes to the notice of company management only after
approval of financial statements by the Board of Directors of the company?

Answer
As per AS 4, assets and liabilities should be adjusted for events occurring after the balance sheet date that
provide additional evidence to assist the estimation of amounts relating to conditions existing at the
balance sheet date.

Though the theft, by the cashier Rs 6,00,000, was detected after the balance sheet date (before approval of
financial statements) but it is an additional information materially affecting the determination of the cash
amount relating to conditions existing at the balance sheet date.

Therefore, it is necessary to make the necessary adjustments in the financial statements of the company for
the year ended 31st March, 2012 for recognition of the loss amounting Rs 6,00,000.

If embezzlement of cash comes to the notice of company management only after approval of financial
statements by board of directors of the company, then the treatment will be done as per the provisions of
AS 5. This being extra ordinary item should be disclosed in the statement of profit and loss as a part of loss
for the year ending March, 2013. The nature and the amount of prior period items should be separately
disclosed on the statement of profit and loss in a manner that its impact on current profit or loss can be
perceived.

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15. Neel Limited has its corporate office in Mumbai and sells its products to stockists all over India. On
31st March, 2013, the company wants to recognize receipt of cheques bearing date 31st March,
2013 or before, as "Cheques in Hand" by reducing "Trade Receivables". The "Cheques in Hand" is
shown in the Balance Sheet as an item of cash and cash equivalents. All cheques are presented to
the bank in the month of April 2013 and are also realized in the same month in normal course after
deposit in the bank. State with reasons, whether each of the following is an adjusting event and how
this fact is to be disclosed by the company, with reference to the relevant accounting standard.

(i) Cheques collected by the marketing personnel of the company from the stockists on or before 31st
March, 2013.
(ii) Cheques sent by the stockists through courier on or before 31st March, 2013.

Answer
(i) Cheques collected by the marketing personnel of the company is an adjusting event as the
marketing personnel’s are employees of the company and therefore, are representatives of the
company. Handing over of cheques by the stockist to the marketing employees discharges the
liability of the stockist.
Therefore, cheques collected by the marketing personnel of the company on or before 31st March, 2013
require adjustment from the stockists’ accounts i.e. from ‘Trade Receivables A/c’ even though these
cheques (dated on or before 31st March, 2013) are presented in the bank in the month of April, 2013 in the
normal course.

Hence, collection of cheques by the marketing personnel is an adjusting event as per AS 4 ‘Contingencies
and Events Occurring after the Balance Sheet Date’. Such ‘cheques in hand’ will be shown in the Balance
Sheet as ‘Cash and Cash equivalents’ with a disclosure in the Notes to accounts about the accounting policy
followed by the company for such cheques.

(ii) Even if the cheques bear the date 31st March or before and are sent by the stockists through courier on
or before 31st March, 2013, it is presumed that the cheques will be received after 31st March. Collection of
cheques after 31st March, 2013 does not represent any condition existing on the balance sheet date i.e.
31st March. Thus, the collection of cheques after balance sheet date is not an adjusting event. Cheques that
are received after the balance sheet date should be accounted for in the period in which they are received
even though the same may be dated 31st March or before as per AS 4. Moreover, the collection of cheques
after balance sheet date does not represent any material change affecting financial position of the
enterprise, so no disclosure in the Director’s Report is necessary.

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16. State with reasons, how the following events would be dealt with in the financial statements of
Pradeep Ltd. for the year ended 31st March, 2013:
(i) An agreement to sell a land for Rs 30 lakh to another company was entered into on 1st March, 2013. The
value of land is shown at Rs 20 lakh in the Balance Sheet as on 31st March, 2012. However, the Sale Deed
was registered on15th April, 2013.

(ii) The negotiation with another company for acquisition of its business was started on 2 nd February, 2013.
Pradeep Ltd. invested Rs 40 lakh on 12th April, 2013.

Answer
(i) According to AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, assets and
liabilities should be adjusted for events occurring after the balance sheet date that provide additional
evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date.

In the given case, sale of immovable property was carried out before the closure of the books of accounts.
This is clearly an event occurring after the balance sheet date but agreement to sell was effected on 1st
March, 2013 i.e. before the balance sheet date. Registration of the sale deed on 15th April, 2013, simply
provides additional information relating to the conditions existing at the balance sheet date. Therefore,
adjustment to assets for sale of land is necessary in the financial statements of Pradeep Ltd. for the year
ended 31st March, 2013.

(ii) AS 4 (Revised) defines "Events occurring after the balance sheet date" as those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Board of Directors in the case of a company. Accordingly, the
acquisition of another company is an event occurring after the balance sheet date. However, no adjustment
to assets and liabilities is required as the event does not affect the determination and the condition of the
amounts stated in the financial statements for the year ended 31st March, 2013.

Applying provisions of the standard which clearly state that/disclosure should be made in the report of the
approving authority of those events occurring after the balance sheet date that represent material changes
and commitments affecting the financial position of the enterprise, the investment of Rs 40 lakhs in April,
2013 in the acquisition of another company should be disclosed in the report of the Board of Directors to
enable users of financial statements to make proper evaluations and decisions

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17. As per the provision of AS 4, you are required to state with reason whether the following
transactions are adjusting event or non-adjusting event for the year ended 31.03.2021 in the books
of NEW Ltd. (accounts of the company were approved by board of directors on 10.07.2021):
1. Equity Dividend for the year 2020-21 was declared at the rate of 7% on 15.05.2021.
2. On 05.03.2021, 53,000 cash was collected from a customer but not deposited by the cashier. This fraud
was detected on 22.06.2021.
3. One building got damaged due to occurrence of fire on 23.05.221. Loss was estimated to be 81,00,000.
(DEC 2021 : 5 MARKS)

SOLUTION-
(i) If dividends are declared after the balance sheet date but before the financial statements are approved,
the dividends are not recognized as a liability at the balance sheet date because no obligation exists at that
time unless a statute requires otherwise. Such dividends are disclosed in the notes. Thus, no liability for
dividends needs to be recognized in financial statements for financial year ended 31st March, 2021 and
declaration of dividend is non-adjusting event.

(ii) As per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’ an event occurring after
the balance sheet date may require adjustment to the reported values of assets, liabilities, expenses or
incomes if such events relate to conditions existing at the balance sheet date. In the given case, fraud of the
accounting period is detected after the balance sheet date but before approval of the financial statements,
it is necessary to recognize the loss. Thus loss amounting 53,000 should be adjusted in the accounts of the
company for the year ended 31st March, 2021 as it is adjusting event.

(iii) AS 4 states that adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet date. The
damage of one building due to fire did not exist on the balance sheet date i.e. 31.3.2021. Therefore, loss
occurred due to fire is not to be recognized in the financial year 2020-2021 as it is non-adjusting event.
However, according to the standard, unusual changes affecting the existence or substratum of the
enterprise after the balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements. As per the information given in
the question, the fire has caused major destruction; therefore, fundamental accounting assumption of
going concern would have to be evaluated. Considering that the going concern assumption is still valid, the
fact of fire together with an estimated loss of ` 81 lakhs should be disclosed in the report of the approving
authority for financial year 2020-21 to enable users of financial statements to make proper evaluations and
decisions.

18. A case is going on between ABC Ltd. and Tax department on claiming the exemption for certain
items, for the year 2019-2020. The court has issued the order on 15th April and rejected the claim of
the company. Accordingly, company is liable to pay the additional tax. The financial statements were
approved on 31st May, 2020. Shall company account for such tax in the year 2019-2020 or shall it
account for in the year 2020-2021? (RTP MAY 2021)

SOLUTION-

To decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.

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Here both the conditions are satisfied. Court order is a conclusive evidence which has been received before
approval of the financial statements since the liability is related to earlier year. The event will be
considered as an adjusting event and accordingly the amount will be adjusted in accounts of 2019-2020

19. Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the year
ended 31st March 2020 are to be approved by the approving authority on 30th June 2020. During
the first quarter of 2020-2021, the following events / transactions has taken place.
The accountant of the company seeks your guidance for the following:

(i) Tee Ltd. has an inventory of 50 stitching machines costing at Rs 5,500 per machine as on 31st March
2020. The company is expecting a heavy decline in the demand in next year. The inventories are valued at
cost or net realizable value, whichever is lower. During the month of April 2020, due to fall in demand, the
prices have gone down drastically. The company has sold 5 machines during April, 2020 at a price of Rs
4,000 per machine.

(ii) A fire has broken out in the company's godown on 15th April 2020. The company has estimated a loss of
Rs 25 lakhs of which 75% is recoverable from the Insurance company.

(iii) A suit against the company's advertisement was filed by a party on 10th April, 2020 10 days after the
year end claiming damages of Rs 20 lakhs.

You are required to state with reasons, how the above transactions will be dealt with in the financial
statements for the year ended 31 March 2020 (RTP MAY 2022)

SOLUTION-
Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial statements
are approved by the Board of Directors in the case of a company, and, by the corresponding approving
authority in the case of any other entity. Assets and liabilities should be adjusted for events occurring after
the balance sheet date that provide additional evidence to assist the estimation of amounts relating to
conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption
of going concern is not appropriate. In the given case, financial statements are approved by the approving
authority on 30 June 2020. On the basis of above principles, following will be the accounting treatment in
the financial statements for the year ended at 31 March 2020:

(i) Since on 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the stitching machine.
Therefore, decline in the value during April, 2020 will be considered as an adjusting event. Hence, Tee Ltd.
needs to adjust the amounts recognized in its financial statements w.r.t. net realizable value at the end of
the reporting period. Accordingly, inventory should be written down to Rs 4,000 per machine. Total value of
inventory in the books will be 50 machines x Rs 4,000 = Rs 2,00,000.

(ii) A fire took place after the balance sheet date i.e. during 2020-2021 financial year. Hence, the financial
statements for the year 2019-2020 should not be adjusted for loss occurred due to fire. However, in this
circumstance, the going concern assumption will be evaluated. In case the going concern assumption is
considered to be appropriate even after the occurrence of fire, no disclosure of the same is required in the
financial statements.

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(iii) The contingency is restricted to conditions existing at the balance sheet date. However, in the given
case, suit was filed against the company’s advertisement by a party on 10th April for amount of Rs 20 lakhs.
Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event.

20. XYZ Ltd. operates its business into various segments. Its financial year ended on 31st March, 2020
and the financial statements were approved by their approving authority on 15th June, 2020. The
following material events took place:

a. A major property was sold (it was included in the balance sheet at Rs 25,00,000) for which contracts had
been exchanged on 15th March, 2020. The sale was completed on 15th May, 2020 at a price of Rs
26,50,000.

b. On 2nd April, 2020, a fire completely destroyed a manufacturing plant of the entity. It was expected that
the loss of Rs 10 million would be fully covered by the insurance company.

c. A claim for damage amounting to Rs 8 million for breach of patent had been received by the entity prior
to the year-end. It is the director's opinion, backed by legal advice that the claim will ultimately prove to be
baseless. But it is still estimated that it would involve a considerable expenditure on legal fees.

You are required to state with reasons, how each of the above items should be dealt with in the financial
statements of XYZ Ltd. for the year ended 31st March, 2020 (RTP NOV 2021)

SOLUTION-

(a) The sale of property should be treated as an adjusting event since contracts had
been exchanged prior to the year-end. The effect of the sale should be reflected
in the financial statements ended on 31.3.2020 and the profit on sale of
property Rs 1,50,000 would be considered.
(b) The event is a non-adjusting event since it occurred after the year-end and does
not relate to the conditions existing at the year-end. However, it is necessary to
consider the validity of the going concern assumption having regard to the extent
of insurance cover. Also, since it is said that the loss would be fully recovered
by the insurance company, the fact should be disclosed by way of a note to the
financial statements.
(c) On the basis of evidence provided, the claim against the company will not
succeed. Thus, Rs 8 million should not be provided in the account, but should be
disclosed by means of a contingent liability with full details of the facts. Provision
should be made for legal fee expected to be incurred to the extent that they
are not expected to be recovered.

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Chapter 8 AS 5: NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS
AND CHANGES IN ACCOUNTING POLICIES

The objective of AS 5 is to prescribe the classification and disclosure of certain items in the statement of
profit and loss so that all enterprises prepare and present such a statement on a uniform basis Accordingly,
AS 5 requires the classification and disclosure of extraordinary and prior period items, and the disclosure of
certain items within profit or loss from ordinary activities.

(a) Profit or loss from ordinary activities: Any activities which are undertaken by an enterprise as part of its
business

(b) Extraordinary items: Income or expenses that arise from events or transactions that are clearly distinct
from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or
regularly. The nature and the amount of each extraordinary item should be separately disclosed
in the statement of profit and loss

(c) Exceptional items: When items of income and expense within profit or loss from ordinary activities are
of such size, nature or incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed separately.
Example –
• The write-down of inventories to net realisable value as well as the reversal of such write-downs,
• Disposals of items of fixed assets
• Disposals of long-term investments
• Litigation settlements

(d) Prior period items are income or expenses which arise in the current period as a result of errors or
omissions in the preparation of the financial statements of one or more prior periods.

(e) CHANGES IN ACCOUNTING ESTIMATES - An estimate may have to be revised if changes occur in the
circumstances based on which the estimate was made, or as a result of new information, more experience
or subsequent developments.

For example, Sachin purchased a new machine costing Rs 10 lacs. Useful life was taken to be for 10 years,
therefore, depreciation was charged at 10% on original cost each year. After 5 years when carrying amount
was Rs 5 lacs for the machine, management realises that machine can work for another 2 years only and
they decide to write off Rs 2.5 lacs each year. This is not an example of prior period item but change in
accounting
estimate.
(f) CHANGES IN ACCOUNTING POLICIES –

Accounting policies are the specific accounting principles and the methods of applying those principles
adopted by an enterprise in the preparation and presentation of financial statements
Accounting Policies can be changed only:
• When the adoption of a different accounting policy is required by statute; or
• For compliance with an Accounting Standard; or
• When it is considered that the change would result in a more appropriate presentation of the
financial statements of the enterprise Any change in an accounting policy which has a material
effect should be disclosed.

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1. Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuel surcharge
of Rs 5.30 lakhs for the period October, 2008 to September, 2015 has been received and paid in
February, 2016. However, the same was accounted in the year 2016-17. Comment on the
accounting treatment done in the said case

Solution
The final bill having been paid in February, 2016 should have been accounted for in the annual accounts of
the company for the year ended 31st March, 2016. However, it seems that as a result of error or omission
in the preparation of the financial statements of prior period i.e., for the year ended 31st March 2016, this
material charge has arisen in the current period i.e., year ended 31st March, 2017. Therefore it should be
treated as 'Prior period item' as per AS 5. As per AS 5, prior period items are normally included in the
determination of net profit or loss for the current period. An alternative approach is to show such items in
the statement of profit and loss after determination of current net profit or loss. In either case, the
objective is to indicate the effect of such items on the current profit or loss.

It may be mentioned that it is an expense arising from the ordinary course of business. Although abnormal
in amount or infrequent in occurrence, such an expense does not qualify an extraordinary item as per AS 5.
For better understanding, the fact that power bill is accounted for at provisional rates billed by the state
electricity board and final adjustment thereof is made as and when final bill is received may be mentioned
as an accounting policy.

2. (i) During the year 2016-2017, a medium size manufacturing company wrote down its inventories to
net realisable value by Rs 5,00,000. Is a separate disclosure necessary?

(ii) A company signed an agreement with the Employees Union on 1.9.2016 for revision of wages with
retrospective effect from 30.9.2015. This would cost the company an additional liability of Rs 5,00,000 per
annum. Is a disclosure necessary for the amount paid in 2016-17 ?

Solution
(i) Although the case under consideration does not relate to extraordinary item, but the nature and amount
of such item may be relevant to users of financial statements in understanding the financial position and
performance of an enterprise and in making projections about financial position and performance. AS 5 on
‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’ states that:
“When items of income and expense within profit or loss from ordinary activities are of such size, nature or
incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the
nature and amount of such items should be disclosed separately.”
Circumstances which may require separate disclosure of items of income and expense in accordance with
AS 5 include the write-down of inventories to net realisable value as well as the reversal of such write-
downs.

(ii) It is given that revision of wages took place on 1st September, 2016 with retrospective effect from
30.9.2015. Therefore wages payable for the half year from 1.10.2015 to 31.3.2016 cannot be taken as an
error or omission in the preparation of financial statements and hence this expenditure cannot be taken as
a prior period item. Additional wages liability of Rs 7,50,000 (for 1½ years @ 5,00,000 per annum) should
be included in current year’s wages.

It may be mentioned that additional wages is an expense arising from the ordinary activities of the
company. Such an expense does not qualify as an extraordinary item. However, as per AS 5, when items of
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income and expense within profit or loss from ordinary activities are of such size, nature or incidence that
their disclosure is relevant to explain the performance of the enterprise for the period, the nature and
amount of such items should be disclosed separately.

3. The company finds that the inventory sheets of 31.3.2016 did not include two pages containing
details of inventory worth Rs 14.5 lakhs. State, how you will deal with the following matters in the
accounts of Omega Ltd. for the year ended 31st March, 2017.

Solution
AS 5 on ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, defines
Prior Period items as "income or expenses which arise in the current period as a result of errors or
omissions in the preparation of the financial statements of one or more prior periods”.
Rectification of error in inventory valuation is a prior period item vide AS 5. Separate disclosure of this item
as a prior period item is required as per AS 5.

4. Explain whether the following will constitute a change in accounting policy or not as per AS 5.

(i) Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-
gratia payments to employees on retirement.

(ii) Management decided to pay pension to those employees who have retired after completing
5 years of service in the organisation. Such employees will get pension of Rs 20,000 per month.
Earlier there was no such scheme of pension in the organisation.

Solution
As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, the
adoption of an accounting policy for events or transactions that differ in substance from previously
occurring events or transactions, will not be considered as a change in accounting policy.

(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-
gratia payments to employees on retirement is not a change in an accounting policy.

(ii) Similarly, the adoption of a new accounting policy for events or transactions which did not occur
previously or that were immaterial will not be treated as a change in an accounting policy.

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ADDITIONAL QUESTIONS ON AS 5 - NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND
CHANGES IN ACCOUNTING POLICIES

5. PQR Ltd. is in the process of finalizing its accounts for the year ended 31st March, 2018. The
company seeks your advice on the following:

(i) Company created a provision for bad and doubtful debts at 2.5% on debtors in preparing the financial
statements for the year 2017-18. Subsequently, on a review of the credit period allowed and financial
capacity of the customers, the company decides to increase the provision to 8% on debtors as on
31.03.2018. The accounts were not approved by the Board of Directors till the date of decision. While
applying the relevant accounting standard, can this revision be considered as an extra ordinary item or prior
period item?

Solution-
(i) In the given case, a limited company created 2.5% provision for doubtful debts for the year 2017-2018.
Subsequently, the company revised the estimates based on the changed circumstances and wants to create
8% provision.
As per AS 5, the revision in rate of provision for doubtful debts will be considered as change in estimate and
is neither a prior period item nor an extraordinary item.

The effect of such change should be shown in the profit and loss account for the year ending 31st March,
2018.

6. As per the provisions of AS-5, extraordinary items should not be disclosed in the statement of profit
and loss as a part of net profit or loss for the period.

Solution-
False: The nature and the amount of each extraordinary item should be separately disclosed in the
statement of profit and loss in a manner that its impact on current profit or loss can be perceived.

7. Bela Ltd. has a vacant land measuring 20,000 sq. mts, which it had no intention to use in the
future. The Company decided to sell the land to tide over its liquidity problems and made a profit of
Rs10 Lakhs by selling the said land. Moreover, there was a fire in the factory and a part of the
unused factory shed valued at Rs 8 Lakhs was destroyed. The loss from fire was set off against the
profit from sale of land and profit of Rs 2 lakhs was disclosed as net profit from sale of assets.

You are required to examine the treatment and disclosure done by the company and advise the company in
line with AS 5.

Solution-
As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”
Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for
the period. The nature and the amount of each extraordinary item should be separately disclosed in the
statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
In the given case the selling of land to tide over liquidation problems as well as fire in the Factory does not
constitute ordinary activities of the Company. These items are distinct from the ordinary activities of the
business. Both the events are material in nature and expected not to recur frequently or regularly. Thus,
these are Extraordinary Items.

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Therefore, in the given case, disclosing net profits by setting off fire losses against profit from sale of land is
not correct. The profit on sale of land, and loss due to fire should be disclosed separately in the statement
of profit and loss.

8. The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the
following transactions will be treated as change in Accounting Policy or not for the year ended 31st
March, 2017. You are required to advise him in the following situations in accordance with the
provisions of AS 5

(i) Provision for doubtful debts was created @ 2% till 31st March, 2016. From the Financial year 2016-2017,
the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2017, the management has introduced a formal gratuity scheme in
place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a period of 5 years. From
current year, the useful life of furniture has been changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after completing 5 years of
service in the organization. Such employees will get pension of Rs 20,000 per month. Earlier there was no
such scheme of pension in the organization.
(v) During the year ended 31st March, 2017, there was change in cost formula in measuring the cost of
inventories

Solution-
(i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March, 2016.
Subsequently in 2016-17, the company revised the estimates based on the changed circumstances and
wants to create 3% provision. Thus change in rate of provision of doubtful debt is change in estimate and is
not change in accounting policy. This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that differ in substance from
previously occurring events or transactions, will not be considered as a change in accounting policy.
Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments
to employees on retirement is a transaction which is substantially different from the previous policy, will
not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and is not a change in
accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur previously should
not be treated as a change in an accounting policy. Hence the introduction of new pension scheme is not a
change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in accounting policy

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9. A limited company created a provision for bad and doubtful debts at 2.5% on debtors in preparing
the financial statements for the year 2010-2011. Subsequently on a review of the credit period
allowed and financial capacity of the customers, the company decided to increase the provision to
8% on debtors as on 31.3.2011. The accounts were not approved by the Board of Directors till the
date of decision. While applying the relevant accounting standard can this revision be considered as
an extraordinary item or prior period item?

Answer
As AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, the
preparation of financial statements involves making estimates which are based on the circumstances
existing at the time when the financial statements are prepared. It may be necessary to revise an estimate
in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision
of an estimate, by its nature, does not bring the adjustment within the definitions of a prior period item or
an extraordinary item.

In the given case, a limited company created 2.5% provision for doubtful debts for the year 2010-2011.
Subsequently in 2011 the company revised the estimates based on the changed circumstances and wants
to create 8% provision. As per AS-5 (Revised), this change in estimate is neither a prior period item nor an
extraordinary item.

However, as per AS 5 (Revised), a change in accounting estimate which has material effect in the current
period, should be disclosed and quantified. Any change in the accounting estimate which is expected to
have a material effect in later periods should also be disclosed and quantified.

10. S.T.B. Ltd. makes provision for expenses worth Rs 7,00,000 for the year ending March 31, 2011, but
the actual expenses during the year ending March 31, 2012 comes to Rs 9,00,000 against provision
made during the last year. State with reasons whether difference of Rs 2,00,000 is to be treated as
prior period item as per AS-5.

Answer
As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, as a
result of the uncertainties inherent in business activities, many financial statement items cannot be
measured with precision but can only be estimated. The estimation process involves judgments based on
the latest information available. The use of reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability.

Estimates may have to be revised, if changes occur regarding the circumstances on which the estimate was
based, or as a result of new information, more experience or subsequent developments.

As per the standard, the effect of a change in an accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. Prior period items
are income or expenses which arise in the current period as a result of errors or omissions in the
preparation of the financial statements of one or more prior periods. Thus, revision of an estimate by its
nature i.e. the difference of Rs 2 lakhs, is not a prior period item.

Therefore, in the given case expenses amounting Rs 2,00,000 (i.e. Rs 9,00,000 – Rs 7,00,000)
relating to the previous year recorded in the current year, should not be regarded as prior period item.

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11. Give two examples on each of the following items:

(i) Change in Accounting Policy
(ii) Change in Accounting Estimate
(iii) Extra Ordinary Items
(iv) Prior Period Items.

Answer
(i) Examples of Changes in Accounting Policy:
a. Valuation of PPE at Cost or Revaluation Model/ Translation of Foreign Currency Items.
b. Change in cost formula in measuring the cost of inventories.
(ii) Examples of Changes in Accounting Estimates:
a. Change in estimate of provision for doubtful debts on sundry debtors.
b. Change in estimate of useful life of fixed assets.
(iii) Examples of Extraordinary items:
a. Loss due to earthquakes / fire / strike
b. Attachment of property of the enterprise by government
(iv) Examples of Prior period items:
a. Applying incorrect rate of depreciation in one or more prior periods.
b. Omission to account for income or expenditure in one or more prior periods.

12. Closing Stock for the year ending on 31st March, 2013 is Rs 1,50,000 which includes stock damaged
in a fire in 2011-12. On 31st March, 2012, the estimated net realizable value of the damaged stock
was Rs 12,000. The revised estimate of net realizable value of damaged stock included in closing
stock at 2012-13 is Rs 4,000. Find the value of closing stock to be shown in Profit and Loss Account
for the year 2012-13, using provisions of Accounting Standard 5.

Answer
The fall in estimated net realisable value of damaged stock Rs 8,000 is the effect of change in accounting
estimate. As per para 25 of AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies’, the effect of a change in accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. It is presumed that
the loss by fire in the year ended 31.3.2012, i.e. difference of cost and NRV was shown in the profit and loss
account as an extra-ordinary item.

Therefore, in the year 2012-13, revision in accounting estimate should also be classified as extra-ordinary
item in the profit and loss account and closing stock should be shown excluding the value of damaged
stock.
Value of closing stock for the year 2012-13 will be as follows:

Particulars Amount
Closing Stock (including damaged goods) 150,000
Less: Revised value of damaged goods (4000)
Closing stock (excluding damaged goods) 146,000

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13. State whether the following items are examples of change in Accounting Policy / Change in
Accounting Estimates / Extraordinary items / Prior period items / Ordinary Activity:
(JAN 2021: 5 MARKS)

Sr. No. Particulars Answer

(i) Actual bad debts turning out to Change in Accounting Estimates
bemore than provisions
(ii) Change from Cost model to Change in Accounting Policy
Revaluation model for measurement
of carrying amount of PPE
(iii) Government grant receivable as Extra -ordinary Items
compensation for expenses incurred
in previous accounting period
(iv) Treating operating lease as finance Prior- period Items
lease.
(v) Capitalisation of borrowing cost on Prior-period Items (as interest on
working capital working capital loans is not eligible for
capitalization)
(vi) Legislative changes having long term Ordinary Activity
retrospective application
(vii) Change in the method of depreciation Change in Accounting Estimates
from straight line to WDV
(viii) Government grant becoming Extra -ordinary Items
refundable
(ix) Applying 10% depreciation instead of Prior- period Items
15% on furniture
(x) Change in useful life of fixed assets Change in Accounting Estimates

14. XYZ Ltd. is in the process of finalizing its account for the year ended 31st March, 2020. The company
seeks your advice on the following:

The company's tax assessment for assessment year 2017-18 has been completed on 14th February, 2020
with a demand of Rs5.40 crore. The company paid the entire due under protest without prejudice to its
right of appeal. The company files its appeal before the appellate authority wherein the grounds of appeal
cover tax on additions made in the assessment order for a sum of Rs3.70 crore (RTP MAY 2021)

SOLUTION-
Since the company is not appealing against the addition of Rs 1.70 crore (Rs 5.40 crore less Rs 3.70 crore),
therefore, the same should be provided/ expensed off in its accounts for the year ended on 31st March,
2020. However, the amount paid under protest can be kept under the heading ‘Long-term Loans &
Advances / Short-term Loans and Advances’ as the case may be alongwith disclosure as contingent liability
of Rs 3.70 crore.

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15. There was a major theft of stores valued at Rs 10 lakhs in the preceding year which was detected
only during current financial year (2020-2021). How will you deal with this information in preparing
the financial statements of R Ltd. for the year ended 31st March, 2021 (RTP NOV 2021)

SOLUTION-

Due to major theft of stores in the preceding year (2019-2020) which was detected only during the current
financial year (2020–2021), there was overstatement of closing inventory of stores in the preceding year.
This must have also resulted in the overstatement of profits of previous year, brought forward to the
current year. The adjustments are required to be made in the current year as 'Prior Period Items' as per

AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
Accordingly, the adjustments relating to both opening inventory of the current year and profit brought
forward from the previous year should be separately disclosed in the statement of profit and loss together
with their nature and amount in a manner that their impact on the current profit or loss can be perceived.
Alternatively, it may be assumed that in the preceding year, the value of inventory of stores as found out by
physical verification of inventories was considered in the preparation of financial statements of the
preceding year. In such a case, only the disclosure as to the theft and the resulting loss is required in the
notes to the accounts for the current year i.e, year ended 31st March, 2021

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Chapter 9 AS7: CONSTRUCTION CONTRACTS

Construction Contract: It is a Contract specifically negotiated for the construction of an asset or a combination
of assets that are closely inter-related or inter-dependent in terms of their design, technology and function
or their ultimate purpose or use. AS - 7 should be applied in accounting for Construction Contracts in the
Financial Statements of Contractors

Fixed Price Contract is a Construction Contract in which the Contractor agrees to a Fixed Contract Price, or a
Fixed Rate Per Unit of Output, which in some cases is subject to Cost Escalation Clauses.
Examples: Rama Contractors enter into an agreement with a client for Construction of a house at a fixed
price of Rs 9 Lakhs,

Cost Plus Contract is a Construction Contract in which the Contractor is reimbursed for allowable or otherwise
defined costs, plus percentage of these costs or a fixed fee

PERCENTAGE COMPLETION METHOD –

• Construction contracts are mostly long term, i.e. they take more than one accounting year to
complete. This means, the final outcome (profit/ loss) of a construction contract can be determined
only after a number of years from the year of commencement of construction are over.
• It is nevertheless possible to recognise revenue annually in proportion of progress of work to be
matched with corresponding construction costs incurred in that year. This method of accounting,
called the stage of completion method (percentage completion method)
• AS 7 prescribes that the percentage completion method should not be used unless it is possible to
make a reasonable estimate of the final outcome of the contract.

AS PER AS 7, THE OUTCOME OF FIXED PRICE CONTRACTS CAN BE ESTIMATED RELIABLY WHEN ALL THE
FOLLOWING CONDITIONS ARE SATISFIED:
• Total contract revenue can be measured reliably;
• It is probable that the economic benefits associated with the contract will flow to the enterprise;
• Both the contract costs to complete the contract and the stage of contract completion at the
reporting date can be measured reliably; and
• The contract costs attributable to the contract can be clearly identified and measured reliably so
that actual contract costs incurred can be compared with prior estimates.

SEGMENTING :
When a Contract covers a number of assets, the Construction of each asset should be treated as a separate
Construction Contract when -
• Separate proposals have been submitted for each asset,
• Each asset has been subject to separate negotiation, and the Contractor and Customer have been
able to accept or reject that part of the Contract relating to each asset, and
• The costs and revenues of each asset can be identified.

COMBINING :
A group of Contracts, whether with a single customer or with several customers, should be treated as a
single Construction Contract when
• The group of Contracts is negotiated as a single package,

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• The Contracts are so closely inter-related that they are, in effect, part of a single project with an
overall profit margin, and
• The Contracts are performed concurrently or in a continuous sequence

ADDITIONAL ASSET:
A Contract may provide for the Construction of an additional asset at the option of the customer or may be
amended to include the Construction of an additional asset. The Construction of the additional asset should
be treated as a separate Construction Contract when -
• The asset differs significantly in design, technology or function from the asset or assets covered by
the original Contract, or
• The price of the asset is negotiated without regard to the original Contract price.

1. Sambu Ltd negotiates with Indian Oil, for construction of “Franchise Retail Petrol Outlet Stations”.
Based on proposals submitted to different Zonal Offices of Indian Oil, the final approval for one
outlet each in Berhampore, Salem, Vadodara and Warrangal is awarded to Sambu Ltd. Agreement
(in single document) is entered into with Indian Oil for Rs 245 Lakhs. The agreement lays down
values for each of the four outlets (Rs 44 + 66 + 80 + 55 Lakhs) in addition to individual completion
time. Comment whether Sambu Ltd will treat it as a single contract or four separate contracts.

INCENTIVE PAYMENT -

2. Nandi, a Contractor, has just entered into a contract with a Local Municipal Body for building a
Flyover. As per the contract terms, Nandi will receive an additional Rs 2 Crores, if the construction of
the Flyover were to be finished within a period of two years of the commencement of the contract.
Nandi wants to recognize this revenue since in the past he has been able to meet similar targets
very easily. Give your views on the above

CONTRACT COST –
• Direct Cost- Labour cost, Material Cost, Depreciation of PPE used in Construction contracts like
Crane, Hiring Charges of Plant & Machinery
• Allocated Cost – Like Insurance charges, Borrowing Cost.
• Other Cost Specifically chargeable to Customer – Customised Cost
• COST EXCLUSIONS- General Administrative Overheads and Selling & Distribution Overheads

RECOGNITION:
• Contract Revenue is recognised as Revenue in P & L Statement, in the accounting period in which
the work is performed. It is recognised on Percentage on completion method.
• Contract Costs are usually recognised as an Expense in the P & L Statement in the accounting
periods in which the related work is performed.
• Any expected excess of Total Contract Costs over Total Contract Revenue for the Contract is
recognised as an expense immediately
• When the outcome of a construction contract can be estimated reliably, contract revenue and
contract costs associated with the construction contract should be recognised as revenue and
expenses respectively by reference to the stage of completion of the contract activity at the
reporting date. An expected loss on the construction contract should be recognised as an expense
immediately
• When the outcome of a construction contract cannot be estimated reliably:
(a) Revenue should be recognised only to the extent of contract costs incurred of which recovery
is probable;
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(b) Contract costs should be recognised as an expense in the period in which they are incurred.
(c) An expected loss on the construction contract should be recognised as an expense
immediately

HOW IS THE STAGE OF COMPLETION DETERMINED:

• Physical Completion Method, i.e. Completion of a physical proportion of the Contract work. For
example, a Contract provides for laying roads for a distance of 150 kilometres. If 36 kilometres of
road stretch have been, completed at the end of the financial year, the stage of completion is 36 +
150 = 24%.
• Technical Survey / Estimate Method, i.e. Surveys of work performed. For example, a Contract provides
for Construction of a dam over a river. The Architect surveying the work at the end of a financial
year reports that 40% of the work is completed. The stage of completion is 40% in this case.
• Proportionate Cost Method – Cost Incurred till date / Estimated total costs

DISCLOSURE REQUIREMENTS -
• The amount of contract revenue recognised as revenue in the period;
• The methods used to determine the contract revenue recognised in the period; and
• The methods used to determine the stage of completion of contracts in progress.

3. Compute the percentage of completion and the Contract Revenues and Costs to be recognised from
the following data.
Contract Price - Rs 75 Lakhs
Materials issued - Rs 18 Lakhs of which Materials costing Rs 3 Lakhs is still lying unused at the end of the
period.
Labour paid for workers engaged at site - Rs 12 Lakhs (Rs 2 Lakhs is still payable)
Specific Contract Costs - Rs 6 Lakhs, Sub-Contract Costs for work executed - Rs 5 Lakhs, Advances paid to
sub contractors - Rs 3 Lakhs
Cost estimated to be incurred to complete the Contract - Rs 30 Lakhs

4. A Company took a Construction Contract for Rs 100 Lakhs in January. It was found that 80% of the
Contract was completed at a cost of Rs 92 Lakhs on the closing date i.e. 31 st March. The Company
estimates further expenditure of Rs 23 Lakhs for completing the Contract. The Expected Loss would
be Rs 15 Lakhs. Can the Company recognise the loss in the Financial Statements prepared for the
year ended 31st March?

5. Certain Ltd has signed at 31st March, the Balance Sheet date, a contract where the Total Revenue is
estimated at Rs 15 Crores and Total Cost is estimated at Rs 20 Crores. No work began on the
contract. Is the Contractor required to give any accounting effect for the year ended 31 st March?

6. A Company undertakes a number of Contracts. Following particulars are extracted in respect of

certain loss making Contracts. Determine the amount of Expected Loss that should be recognized ?
Contract A B C D
Contract Price 15 12.50 87.50 10
Cost Incurred till date 12 10.90 2.5 6
Costs expected to be incurred to complete the 4 3.60 88 4
Contract

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7. On 31st October 20X1, Bharat Construction Co. Ltd. undertook a Contract to construct a Flyover for
Rs 215 Crores. On 31st March 20X2, the Company found that the Work is Certified for Rs 100 Crores
and Work to be Certified is for Rs 35 Crores. Prudent estimates of additional Cost for Completion
was Rs 90 Crores. What amount should be charged to Revenue in the Financial Accounts for the year
ended 31st March 20X2

8. The following data is given for a financial period in respect of various contacts undertaken by Daksha
Ltd
(in Lakhs)
Contract A B C D E F
Costs incurred till date 40.00 10.00 6.00 75.00 40.00 120.00
Recognised Profits 6.00 Nil Nil Nil 8.00 11.00
Recognised Losses Nil 2.00 1.00 13.00 Nil Nil
Progress Billings 36.00 5.00 7.00 70.00 30.00 114.00
Determine the amount to be shown in the Balance Sheet for the above.

9. Sankar Ltd undertook a Contract for building a Crane for Rs 10 Lakhs. As on 31 st March of a financial
year, it incurred a cost of Rs 1.50 Lakhs and expects that Rs 9 Lakhs more will be required for
completing the crane. It has received so far Rs 1.20 Lakhs as Progress Payment. Discuss the
treatment of the above under AS – 7

SOLUTION-
Particulars Amount
(1)Contract Price 10,00,000
(2)Cost Incurred till date 150,000
(3)Estimated Further Cost 900,000
(4)Total Estimated cost (2) +(3) 10,50,000
(5)Percentage of Completion {2/4 *100} 14.29%
(6)Revenue to be Recognised { 1 * 5} 1,42,900
(7)Cost to be Recognised 150,000
(8)Loss on Contract{7-6} 7100
(9)Total Loss to be Recognised {4-1} 50,000
(10)Additional Provision required {9-8} 42,900

Amount Due From /(To) Customer = 150,000-50,000-120,000

Amount Due From /(To) Customer = (20,000)

10. Pinaki & Co. a Firm of Contractors, obtained a Contract for Construction of bridges across the river
Revathi. The following details are available in the records kept for the year ending 31 st March.
(information in Lacs)

Total Contract Price 1000 Progress payment received 400

Cost incurred till date 605 Progress payment to be received 140
Estimated further cost 495

Firm seeks your advice on the presentation of accounts as per AS 7

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ADDITIONAL QUESTIONS ON AS7- CONSTRUCTION CONTRACTS

11. X Ltd. commenced a construction contract on 01/04/13. The fixed contract price agreed was Rs
2,00,000. The company incurred Rs 81,000 in 2013-14 for 45% work and received Rs 79,000 as
progress payment from the customer. The cost incurred in 2014-15 was Rs 89,000 to complete the
rest of work

Solution-
P&L A/c
Year Particulars Amount(‘000) Year Particulars Amount(‘000)
2013- To Construction 81 2013-14 By Contract Price 90
14 Costs (for 45% work) (45% of Contract
Price)
To Net profit 9
(for 45% work)
90 90

2014- To Construction 89 2014-15 By Contract Price 110

15 Costs (for 55% work) (55% of Contract
Price)
To Net profit 21
(for 45% work)
110 110

Customer A/c
Year Particulars Amount(‘000) Year Particulars Amount(‘000)
2013- To Contract Price 90 2013-14 By Bank 79
14
By Balance c/d 11
90 90

2014- To Balance b/d 11 2014-15 By Bank 121

15
To Contract Price 110
121 121

12. i) AP Ltd., a construction contractor, undertakes the construction of commercial complex for Kay
Ltd. AP Ltd. submitted separate proposals for each of 3 units of commercial complex. A single
agreement is entered into between the two parties. The agreement lays down the value of each of
the 3 units, i.e. Rs 50 Lakh Rs 60 Lakh and Rs 75 Lakh respectively. Agreement also lays down the
completion time for each unit. Comment, with reference to AS- 7, whether AP Ltd., should treat it as
a single contract or three separate contracts.

(ii) On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a building for Rs 45
lakhs. On 31st March, 2018, the company found that it had already spent Rs 32.50 lakhs on the
construction. Additional cost of completion is estimated at Rs 15.10 lakhs. What amount should be charged
to revenue in the final accounts for the year ended 31st March, 2018 as per provisions of AS-7?

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Solution-

(i) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the construction of
each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and customer have been able to
accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified. Therefore, Mr. AP Ltd. is required to treat
construction of each unit as a separate construction contract as the above-mentioned conditions of AS 7
are fulfilled in the given case

ii)
Particulars Amount ( In Lacs)
Cost of construction incurred till date 32.50
Add: Estimated future cost 15.10
Total estimated cost of construction 47.60
Percentage of completion till date to total estimated cost of construction
=32.5/47.6 *100
= 68.28 %

Revenue to be recognised = 30.73 lacs (45 lacs * 68.28%)

Total foreseeable loss to be recognized as expense = 2.6 lacs ( 47.6-45)

13. Uday Constructions undertake to construct a·bridge for the Government of Uttar Pradesh. The
construction commenced during the financial year ending 31.03.2016 and is likely to be completed
by the next financial year. The contract is for a fixed price of Rs 12 crores with an escalation clause.
The costs to complete the whole contract are estimated at Rs 9.50 crores of rupees. You are·given
the following information for the year ended 31.03.2016:
• Cost incurred upto 31.03.2016 Rs 4 crores
• Cost estimated to complete the contract Rs 6 crores

Escalation in cost by 5% and accordingly the contract price· is increased by 5%.

You are required to identify the state of completion and calculate the revenue and profit to be recognized
for the year as per AS 7.

Solution-

Particulars Amount( In crores)

Cost of construction of bridge incurred 31.3.16 4
Add: Estimated future cost 6
Total estimated cost of construction 10
Contract Price (12 crore x 1.05) 12.6
Percentage of completion till date ( 4/10 * 100 ) 40%
Revenue to be recognised ( 40% * 12.6) 5.04
Cost to be recognised 4
Profit for the year ended 31st March, 2016 ( 5.04-4) 1.04

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14. Sagar Ltd. has issued convertible bonds for Rs 65 crores which are due to mature on 30th
September, 2018. While preparing financial statements for the year ending 31st March, 2018,
company expects that bond holders will not exercise their option of converting bonds to equity
shares. How should the company classify the convertible bonds as per the requirements of
Schedule-Ill to the Companies Act, 2013 as on 31st March, 2018?

Also state, whether classification of convertible Bonds as per Schedule-III to the Companies Act will change
if the company expects that convertible bond holders will convert their holdings into equity shares of Sagar
Ltd.

Solution-

Schedule III to the companies Act, 2013 provides that:

“A liability should be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting date. Terms of a liability that could, at the option of the counterparty, result in
its settlement by the issue of equity instruments and do not affect its classification.”

In the present situation, Sagar Ltd. does not have an unconditional right to defer settlement of the liability
for at least 12 months after the reporting date, hence Sagar Ltd. should classify the FCCBs as current
liabilities as on 31st March 2018.

The position will be same even when the bond holders are expected to convert their holdings into equity
shares of Sagar Ltd. Expectations cannot be called as unconditional rights. Thus, in this situation also, Sagar
Ltd. should classify the FCCBs as current liabilities as on 31st March 2018.

15. A construction contractor has a fixed price contract for Rs 9,000 lacs to build a bridge in 3 years time
frame. A summary of some of the financial data is as under:
(Amount in lacs)
Year 1 Year 2 Year 3
Initial Amount for revenue agreed in contract 9,000 9,000 9,000
Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting 2,093 6,168* 8,100**
date
Estimated profit for whole contract 950 1,000 1,000
*Includes Rs 100 lacs for standard materials stored at the site to be used in year 3 to complete the work.

**Excludes Rs 100 lacs for standard material brought forward from year 2.

The variation in cost and revenue in year 2 has been approved by customer.

Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss to be
recognized in the Statement of Profit and Loss as per AS-7 (revised).

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Answer
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in three years
are computed below: (Amount in lacs)
Up to the Recognized in Recognized in
reporting date previous years current year
Year 1
Revenue (9,000 x 26%) 2,340 - 2,340
Expenses (8,050 x 26%) 2,093 - 2,093
Profit 247 - 247
Year 2
Revenue (9,200 x 74%) 6,808 2,340 4,468
Expenses (8,200 x 74%) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200 x 100%) 9,200 6,808 2,392
Expenses (8,200 x 100%) 8,200 6,068 2,132
Profit 1,000 740 260

Working Note:
Year 1 Year 2 Year 3
Revenue after consider variations 9,000 9,200 9,200
Less: Estimated profit for whole contract 950 1,000 1,000
Estimated total cost of the contract (A) 8,050 8,200 8,200
Actual cost incurred up to the reporting 2,093 6,068 8,200
date (B) (6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%

16. X Ltd. commenced a construction contract on 01/04/X1. The contract price agreed was reimbursable
cost plus 10%. The company incurred Rs 1,00,000 in 20X1-X2, of which cost of Rs 90,000 is
reimbursable. The further non-reimbursable costs to be incurred to complete the contract are
estimated at Rs 5,000. The other costs to complete the contractcould not be estimated reliably.
Prepare P&L A/c of X Ltd

SOLUTION-
Contract Revenue to be Recognised = 90,000+ 10% of 90,000 = 99,000
Cost Incurred till date= 100,000
Further Estimated Cost = 5000
Total Cost= 105,000
Total Loss = 6000
Loss Recognised = 100,000-99,000 = 1000
Additional Provision required = 5000 (6000-1000)

Profit & Loss Account

Amount(‘000) Amount(‘000)
By Contract Price
To Construction Costs 100 99
(90+10%)
To Provision for loss 5 By Net loss 6
105 105

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17. The following data is provided for M/s. Raj Construction Co.
(i) Contract Price - Rs 85 lakhs
(ii) Materials issued - Rs 21 Lakhs out of which Materials costing Rs 4 Lakhs is still lying unused at the end of
the period.
(iii) Labour Expenses for workers engaged at site - Rs 16 Lakhs (out of which Rs 1 Lakh is still unpaid)
(iv) Specific Contract Costs - Rs 5 Lakhs
(v) Sub-Contract Costs for work executed - Rs 7 Lakhs, Advances paid to sub-contractors - Rs 4 Lakhs
(vi) Further Cost estimated to be incurred to complete the contract - Rs 35 Lakhs

You are required to compute the Percentage of Completion, the Contract Revenue and Cost to be
recognized as per AS-7 (JULY 2021: 5 MARKS)

SOLUTION-
Computation of contract cost
Rs Lakh Rs Lakh
Material cost incurred on the contract (net of closing stock) 21-4 17
Add: Labour cost incurred on the contract (including 16
outstanding amount)
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7

Cost incurred (till date) 45

Add: further cost to be incurred 35
Total contract cost 80

Percentage of completion = Cost incurred till date/Estimated total cost

= Rs 45,00,000/Rs 80,00,000
= 56.25%

Contract revenue and costs to be recognized:

Contract revenue (Rs 85,00,000x56.25%) = Rs 47,81,250
Contract costs = Rs 45,00,000

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18. Bricks Ltd. signed on 01/04/21, a construction contract for Rs 1,50,00,000. Following particulars are
extracted in respect of contract, for the period ending 31/03/22:
- Materials issued Rs 75,00,000
- Labour charges paid Rs 36,00,000
- Hire charges of plant Rs 10,00,000
- Other contract cost incurred Rs 15,00,000
- Out of material issued, material lying unused at the end of period is Rs 4,00,000
- Labour charges of Rs 2,00,000 are still outstanding on 31.3.22.
- It is estimated that by spending further Rs 33,50,000 (including material unused Rs 4,00,000), the work
can be completed in all respect.

You are required to compute profit/loss to be taken to Profit & Loss Account and additional provision for
foreseeable loss as per AS 7. (MTP APRIL 2022: 5 MARKS)

SOLUTION-
Statement showing the amount of profit/loss to be taken to Profit and Loss Account and additional provision for the
foreseeable loss as per AS 7
Cost of Construction Rs Rs
Material Issued 75,00,000
Less: Unused Material at the end of period 4,00,000 71,00,000
Labour Charges paid 36,00,000
Add: Outstanding on 31.03.2022 2,00,000 38,00,000
Hire Charges of Plant 10,00,000
Other Contract cost incurred 15,00,000
Cost incurred upto 31.03.2022 1,34,00,000

Add: Estimated future cost 33,50,000

Total Estimated cost of construction 1,67,50,000
Degree of completion (1,34,00,000/1,67,50,000 x 100) 80%
Revenue recognized (80% of 1,50,00,000) 1,20,00,000
Total foreseeable loss (1,67,50,000 - 1,50,00,000) 17,50,000
Less: Loss for the current year (1,34,00,000 - 1,20,00,000) 14,00,000
Loss to be provided for 3,50,000

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Chapter 10 AS 9: REVENUE RECOGNITION

It deals with recognition of revenue arising in the course of ordinary activities of the enterprise from
• Sale of Goods,
• Rendering of Services
• The use by others of enterprise resources yielding Interest, Royalty & Dividends.

AS - 9 does not deal with the following aspects of revenue recognition to which special considerations apply
Revenue arising from -
• Construction Contracts [Refer AS - 7]
• Hire Purchase and Lease Agreements [Refer AS - 19 for Leases]
• Government Grants and other similar Subsidies [Refer AS - 12]
• Revenue of Insurance Companies arising from Insurance Contracts.

Revenue is Gross inflow of cash, receivables or other consideration arising in the course of ordinary
activities of an enterprise from Sale of Goods, Rendering of services ,Use by others of enterprise resources
yielding Interest, Royalties & Dividends.

REVENUE FROM SALE OF GOODS -

• Revenue from sales or service transactions should be recognised when the performance obligation
is satisfied.
• Performance obligation is satisfied when –
➢ The seller of goods has transferred to the buyer the property in the goods for a price
➢ all significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
➢ no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods

Revenue from service transactions –

Revenue is usually recognised as the service is performed, either - (a) by the Proportionate Completion
Method or (b) by the Completed Service Contract Method.

Particulars Proportionate Completion Method Completed Service Contract Method

1. Meaning It is a method of accounting, which It is a method of accounting, which recognises
recognises revenue in the P&L Statement revenue in the P&L Statement only when the
proportionately with the degree of rendering of services under a contract is completed
completion of services under a contract. or substantially completed.
2. Act performed Performance consists of the execution of Performance consists of the execution of one
more than one act. single act,

3. Treatment Revenue is recognised proportionately Revenue is recognised only after the single or final
based on the acts performed. act is fully performed or substantially performed.

4. Explanation Revenue recognized under this method This method is relevant to the patterns of
would be determined on the basis of - (a) performance and accordingly revenue is
Contract Value, (b) Associated Costs, (c) recognized when the sole or final act takes place
Number of acts, or other suitable basis. and the service becomes chargeable.

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Revenue from rendering of services should be recognised if the following conditions are satisfied -
1. Performance The performance may consist of execution of one or more acts. It should be measured
of Service using either - (a) Completed Service Contract Method, or (b) Proportionate
Completion Method, whichever relates the revenue to the work accomplished.
2. Certainty of There is no significant uncertainty regarding the amount of consideration that will be
Amount derived from rendering the service.

3. Certainty of It is reasonable to expect ultimate collection at the time of performance. Otherwise,

Collection revenue recognition should be postponed.

Use by Others of Enterprise Resources Yielding Interest, Royalties and Dividends

• Interest: Charges for the use of cash resources or amounts due to the enterprise. Revenue is
recognised on a time proportion basis.
• Royalties: charges for the use of such assets as know-how, patents, trade marks and copyrights.
Revenue is recognised on an accrual basis in accordance with the terms of the agreement.
• Dividends: rewards from the holding of investments in shares. Revenue is recognised when the
owner’s right to receive payment is established

1. Virupaksh Ltd is engaged in manufacturing and supply of gear boxes to IA Ltd but 10% thereof is
retained and paid after one year, if there is satisfactory performance of the parts supplied.
Virupaksh Ltd accounts for only 90% of Invoice Values as sale at the time of supply, and balance 10%
is accounted as sale in the year of receipt of payment. Comment.

2. The Investments of Ramesh Ltd includes 5,000 Equity Shares of Rs 100 each in Amudhan Bank Ltd.
The Bank declared 20% dividend for the year ended 31st March 2013 at its General Meeting held on
30.06.2013. Ramesh Ltd finalised its accounts for the year ended 31.03.2013 on 30.08.2013 and it
includes Rs 1,00,000 being the amount of Dividend by it from Amudhan Bank Ltd in its Other
Income, subsequent to its Balance Sheet date before approval by the Board of Directors. Comment
on whether the accounting treatment is correct.

Uncertainty of Collection affects the timing of revenue recognition in the following manner -
Situation Revenue Recognition
(a) No Uncertainty as to ultimate At the time of sale or rendering of service (even if
collection. payment is received in instalments).

(b) Uncertainty as to collection arises at Postponed to the extent of uncertainty involved. Revenue
the time of claim / sale / rendering the is recognised only to the extent of certainty.
service.

(c) Uncertainty as to collection arises Since revenue would already have been recognised, a
after claim / sale / rendering of the separate provision is made. Revenue already recognised
service. should not be adjusted.

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REVENUE RECOGNITION PRINCIPLES IN SPECIAL CASES

Goods delivered but Revenue should be recognised only when the installation and
acceptance subject to inspection are complete and the customer accepts delivery of goods.
installation / inspection etc. Where the installation is a very simple and normal process, e.g.
consumer goods like TV, Washing Machine, etc. sale may be recognised
even when installation at customer's place is not complete
Goods sold on approval basis, Revenue should not be recognised until –
i.e. Sale or Return Actual Acceptance: The Buyer has formally accepted the goods or
Implied Acceptance: The Buyer has done an act adopting the
transaction or
Lapse of Rejection Time: The time period for rejection has elapsed or
where no time has been fixed, a reasonable time has elapsed
Consignment Sales Consignment Sales means an arrangement wherein one person
(Consignor / Principal) sends goods to another (Consignee / Agent), to
be sold by the latter on behalf of and at the risk of the former.
Recognition: Revenue on Consignment Sales is recognised only when
goods are sold by the agent to a third party
Cash on Delivery Sales Revenue should be recognised only when the Seller or his agent
receives Cash.
Delivery Delayed at Buyer Recognise Revenue on date of sale
Request
Goods Sold and Repurchased Don’t Recognise Revenue as it is a Finance Arrangement
Later on

3. Vishnu Ltd purchased goods on credit from Pinaki Ltd, for Rs 5 Crores for export purposes. Upon the
export order being cancelled, Vishnu Ltd decided to sell the same in the domestic market at a
discounted price. Accordingly Pinaki Ltd was requested to offer a price discount of 25%. Pinaki Ltd
wants to adjust the sales figure to the extent of discount requested by Vishnu Ltd. State your views

4. Siva Ltd sold goods worth Rs 50,000 to Ganga Ltd. Ganga Ltd asked for discount of Rs 8,000 which
was agreed by Siva Ltd. The sale was effected and goods were despatched. After receiving goods,
items worth Rs 7,000 was found, defective, which they returned immediately. They made the
payment of Rs 35,000 to Siva Ltd, whose Accountant booked the Sales for Rs 35,000 . Discuss
whether the accounting treatment is correct.

5. The Board of Directors decided on 31.3.20X2 to increase the sale price of certain items
retrospectively from 1st January, 20X2. In view of this price revision with effect from 1st January
20X2, the company has to receive Rs 15 lakhs from its customers in respect of sales made from 1st
January, 20X2 to 31st March, 20X2. Accountant cannot make up his mind whether to include Rs 15
lakhs in the sales for 20X1-20X2.Advise.

Solution
Price revision was effected during the current accounting period 20X1-20X2. As a result, the company
stands to receive Rs 15 lakhs from its customers in respect of sales made from 1st January, 20X2 to 31st
March, 20X2. If the company is able to assess the ultimate collection with reasonable certainty, then
additional revenue arising out of the said price revision may be recognized in 20X1-20X2.

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6. Baidyanath Ltd has taken a Transit Insurance Policy. Suddenly, during the current financial year, the
percentage of accident has gone up to 7%. So, the Company wants to recognise the claims made as
revenue in the current financial year in accordance with relevant AS. Do you agree?

7. On 25th September, Planet Advertising Limited obtained advertisement rights for World Cup Hockey
Tournament to be held in Nov / Dec of that year, for Rs 520 Lakhs. They furnish the following
information:

• The Company obtained the advertisements for 70% of available time for Rs 700 Lakhs by 30 th
September.
• For the balance time, they got bookings in October for Rs 240 Lakhs.
• All the advertisers paid the full amount at the time of booking the Advertisement.
• 40% of the Advertisements appeared before the public in November and balance 60% appeared in
December month. Calculate the Profit or Loss to be recognized for the month of November and
December, as per AS- 9.

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ADDITIONAL QUESTIONS ON AS9- REVENUE RECOGNITION-

8. Y Ltd., used certain resources of X Ltd. In return X Ltd. received Rs 10 lakhs and Rs 15 lakhs as
interest and royalties respective from Y Ltd. during the year 2016-17. You are required to state
whether and on what basis these revenues can be recognised by X Ltd.

Solution-
As per AS 9 on Revenue Recognition, revenue arising from the use by others of enterprise resources
yielding interest and royalties should only be recognised when no significant uncertainty as to measurability
or collectability exists. These revenues are recognised on the following bases:
(i) Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable.
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.

9. A claim lodged with the Railways in March, 2015 for loss of goods of Rs 2,00,000 had been passed
for payment in March, 2017 for Rs 1,50,000. No entry was passed in the books of the Company,
when the claim was lodged. Advise P Co. Ltd. about the treatment of the following in the Final
Statement of Accounts for the year ended 31st March, 2017.

Solution -
AS 9 on ‘Revenue Recognition’ states that where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the
extent of uncertainty involved. When recognition of revenue is postponed due to the effect of
uncertainties, it is considered as revenue of the period in which it is properly recognised. In this case it may
be assumed that collectability of claim was not certain in the earlier periods. This is supposed from the fact
that only Rs 1,50,000 were collected against a claim of Rs 2,00,000. So this transaction can not be taken as a
Prior Period Item.

In the light of AS 5, it will not be treated as extraordinary item. However, AS 5 states that when items of
income and expense within profit or loss from ordinary activities are of such size, nature, or incidence that
their disclosure is relevant to explain the performance of the enterprise for the period, the nature and
amount of such items should be disclosed separately. Accordingly, the nature and amount of this item
should be disclosed separately.

10. Given below are the following informations of B.S. Ltd.

(i) Goods of Rs 50,000 were sold on 18-03-2018 but at the request of the buyer these were delivered on 15-
04-2018.
(ii) On 13-01-2018 goods of Rs 1,25,000 are sent on consignment basis of which 20% of the goods unsold
are lying with the consignee as on 31-03-2018.
(iii) Rs 1,00,000 worth of goods were sold on approval basis on 01-12-2017. The period of approval was 3
months after which they were considered sold. Buyer sent approval for 75% goods up to 31-01-2018 and no
approval or disapproval received for the remaining goods till 31-03-2018.

You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to be recognized as
revenue for the year ended 31st March, 2018 in above cases in the context of AS-9.

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Solution-
Case (i)
The sale is complete but delivery has been postponed at buyer’s request. B.S. Ltd. Should recognize the
entire sale of Rs 50,000 for the year ended 31st March, 2018.

Case (ii)
In case of consignment sale revenue should not be recognized until the goods are sold to a third party.20%
goods lying unsold with consignee should be treated as closing inventory and sales should be recognized for
Rs 1,00,000 (80% of Rs 1,25,000).

Case (iii)
In case of goods sold on approval basis, revenue should not be recognized until the goods have been
formally accepted by the buyer or the buyer has done an act adopting the transaction or the time period for
rejection has elapsed or where no time has been fixed, a reasonable time has elapsed. Therefore, revenue
should be recognized for the total sales amounting Rs 1,00,000 as the time period for rejecting the goods
had expired.

Thus total revenue amounting Rs 2,50,000 (50,000 + 1,00,000+ 1,00,000) will be recognized for the year
ended 31st March, 2018 in the books of B.S. Ltd.

11. Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing Rs 5,00,000 every
month for next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire
payment of Rs 30,00,000 and Raj Ltd. started dispatching the goods. In fourth month, due to fire in
premise of Heena Ltd., Heena Ltd. requested to Raj Ltd. not to dispatch goods worth Rs 15,00,000
ready for dispatch. Raj Ltd. accounted Rs 15,00,000 as sales and transferred the balance to Advance
received against Sales account

Comment upon the above treatment by Raj Ltd. with reference to the provision of AS-9

SOLUTION-

As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance should be
regarded as being achieved when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived
from the sale of the goods.

In the given case, transfer of property in goods results in or coincides with the transfer of significant risks
and rewards of ownership to the buyer. Also, the sale price has been recovered by the seller. Hence, the
sale is complete but delivery has been postponed at buyer’s request. Raj Ltd. should recognize the entire
sale of Rs 30,00,000 (Rs 5,00,000 x 6) and no part of the same is to be treated as Advance Received against
Sales.

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12. A manufacturing company has the following stages of production and sale in manufacturing fine
paper rolls:
Date Activity Cost to Date Net Realizable value
15.1.16 Raw Material 1,00,000 80,000
20.1.16 Pulp (WIP 1) 1,20,000 1,20,000
27.1.16 Rough & thick paper (WIP 2) 1,50,000 1,80,000
15.2.16 Fine Paper Rolls 1,80,000 3,50,000
20.2.16 Ready for sale 1,80,000 3,50,000
15.3.16 Sale agreed and invoice raised 2,00,000 3,50,000
02.4.16 Delivered and paid for 2,00,000 3,50,000

Explain the stage on which you think revenue will be generated and calculate how much would be net
profit for year ending 31.3.16 on this product as per AS 9.

Solution-

According to AS 9 “Revenue Recognition”, in a transaction involving the sale of goods, performance should
be regarded as being achieved when the following conditions have been fulfilled:
• the seller of goods has transferred to the buyer the property in the goods for a price or all significant
risks and rewards of ownership have been transferred to the buyer and the seller retains no
effective control of the goods transferred to a degree usually associated with ownership; and
• no significant uncertainty exists regarding the amount of the consideration that will be derived from
the sale of the goods.

Thus, sales will be recognized only when following two conditions are satisfied:
(i) The sale value is fixed and determinable.
(ii) Property of the goods is transferred to the customer.

Both these conditions are satisfied only on 15.3.2016 when sales are agreed upon at a price and goods
are allocated for delivery purpose through invoice. The amount of net profit Rs 1,50,000
(3,50,000 – 2,00,000) would be recognized in the books for the year ending 31st March, 2016.

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13. Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale is
payment of consideration in 14 days and in the event of delay interest is chargeable @ 15% per
annum. The Company has not realized interest from the dealers in the past. However, for the year
ended 31.3.2015, it wants to recognise interest due on the balances due from dealers. The amount
is ascertained at Rs 9 lakhs. Decide, whether the income by way of interest from dealers is eligible
for recognition as per AS 9?

Answer
As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection with reasonable
certainty is lacking at the time of raising any claim, the revenue recognition is postponed to the extent of
uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably certain that the
ultimate collection will be made.

In this case, the company never realized interest for the delayed payments make by the dealers. Hence, it
has to recognize the interest only if the ultimate collection is certain.

14. M/s. Moon Ltd. sold goods worth Rs 6,50,000 to Mr. Star. Mr. Star asked for a trade discount
amounting to Rs 53,000 and same was agreed to by M/s. Moon Ltd. The sale was effected and
goods were dispatched. On receipt of goods, Mr. Star has found that goods worth Rs 67,000 are
defective. Mr. Star returned defective goods to M/s. Moon Ltd. and made payment due amounting
to Rs 5,30,000. The accountant of M/s. Moon Ltd. booked the sale for Rs 5,30,000. Discuss the
contention of the accountant with reference to Accounting Standard (AS) 9.

Answer
As per AS 9 „Revenue Recognition‟, revenue is the gross inflow of cash, receivable or other consideration
arising in the course of the ordinary activities of an enterprise from the sale of goods. However, trade
discounts and volume rebates given in the ordinary course of business should be deducted in determining
revenue. Revenue from sales should be recognized at the time of transfer of significant risks and rewards. If
the delivery of the sales is not subject to approval from customers, then the transfer of significant risks and
rewards would take place when the sale is affected and goods are dispatched.

In the given case, if trade discounts allowed by M/s. Moon Ltd. are given in the ordinary course of business,
M/s. Moon Ltd. should record the sales at Rs 5,97,000 (i.e. Rs 6,50,000 – Rs 53,000) and goods returned
worth Rs 67,000 are to be recorded in the form of sales return. However, when trade discount allowed by
M/s. Moon Ltd. is not in the ordinary course of business, M/s. Moon Ltd. should record the sales at gross
value of Rs 6,50,000. Discount of Rs 53,000 in price and return of goods worth Rs 67,000 are to be adjusted
by suitable provisions. M/s Moon Ltd. might have sent the credit note of Rs 1,20,000 to Mr. Star to account
for these adjustments. In both the cases, the contention of the accountant to book the sales for Rs
5,30,000 is not correct.

15. Sarita Publications publishes a monthly magazine on the 15th of every month. It sells advertising
space in the magazine to advertisers on the terms of 80% sale value payable in advance and the
balance within 30 days of the release of the publication. The sale of space for the March 2014 issue
was made in February 2014. The magazine was published on its scheduled date. It received Rs
2,40,000 on 10.3.2014 and Rs 60,000 on 10.4.2014 for the March 2014 issue. Discuss in the context
of AS 9 the amount of revenue to be recognized and the treatment of the amount received from
advertisers for the year ending 31.3.2014. What will be the treatment if the publication is delayed
till 2.4.2014 ?

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Answer
As per AS 9 „Revenue Recognition‟, „In a transaction involving the rendering of services, performance
should be measured either under the completed service contract method or under the proportionate
completion method, whichever relates the revenue to the work accomplished‟.

In the given case, income accrues when the related advertisement appears before public. The
advertisement service would be considered as performed on the day the advertisement is seen by public
and hence revenue is recognized on that date. In this case, it is 15.03.2014, the date of publication of the
magazine.

Hence, Rs 3,00,000 (Rs 2,40,000 + Rs 60,000) is recognized as income in March, 2014. The terms of payment
are not relevant for considering the date on which revenue is to be recognized. Rs 60,000 is treated as
amount due from advertisers as on 31.03.2014 and Rs 2,40,000 will be treated as payment received against
the sale.

However, if the publication is delayed till 02.04.2014 revenue recognition will also be delayed till the
advertisements get published in the magazine. In that case revenue of Rs 3,00,000 will be recognized for
the year ended 31.03.2015 after the magazine is published on 02.04.2014. The amount received from sale
of advertising space on 10.03.2014 of Rs 2,40,000 will be considered as an advance from advertisers for the
year ended 31st March, 2014.

16. In the year 20X1-X2, XYZ supplied goods on Consignment basis to ABC – a retail outlet worth Rs
10,00,000. As per the terms, ABC will only pay XYZ for the goods which are sold by them to the third
party. Rest of the goods can be returned back to XYZ and ABC will not have any further liability for
these goods.

During the year 20X1-X2, ABC has sold goods worth Rs 5,50,000 only and rest of the goods are still lying in
its store which may get sold by next year. Advise XYZ, how much revenue it can recognize in its books for
period 20X1-X2.

Solution
As per AS 9, For consignment risk and rewards are not transferred to the customer on just delivery of the
goods and no revenue should be recognized until the goods are sold to a third party. Therefore, XYZ can
recognize revenue of Rs 5,50,000 only.

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17. (HOMEWORK QUESTION)

Tonk Tanners is engaged in manufacturing of leather shoes. They provide you the following information for
the year ended 31st March,2020:
(i) On 31st December, 2019 shoes worth Rs 3,20,000 were sent to Mohan Shoes for sale on consignment
basis of which 25% shoes were unsold and lying with Mohan Shoes as on 31st March, 2020.
(ii) On 10th January, 2020, Tonk Tanner supplied shoes worth 4,50,000 to Shani Shoes and concurrently
agrees to re-purchase the same goods on 11th April. 2020.
(iii) On 21st March, 2020 shoes worth 1,60,000 were sold to Shoe Shine but due to refurbishing of their
showroom being underway, on their request, shoes were delivered on 12th April, 2020.
You are required to advise the accountant of Tonk Tanners, when amount is to be recognised as revenue in
2019 -20 in above cases in the context of AS 9.

SOLUTION-

(i) Shoes sent to Mohan Shoes (consignee) for consignment sale

In case goods are sent for consignment sale, revenue is recognized when significant risks of ownership have
passed from seller to the buyer.
In the given case, Mohan Shoes is the consignee i.e. an agent of Tonk Tanners and not the buyer. Therefore,
the risk and reward is considered to vest with Tonk Tanners only till the time the sale is made to the third
party by Mohan Shoes; although the goods are held by Mohan Shoes. Hence, in the year 2019-2020, the
sale will be recognized for the amount of goods sold by Mohan Shoes to the third party i.e. for
3,20,000 x 75% = ` 2,40,000.

(ii) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same goods at a
later date
For such transactions that are in substance a financing agreement, the resulting cash inflow is not revenue
and should not be recognised as revenue in the year 2019-2020. Hence, sale of 4,50,000 to Shani Shoes
should not be recognized as revenue.

(iii) Delivery is delayed at buyer’s request

On 21st March, 2020, if Shoe Shine takes title and accepts billing for the goods then it is implied that the
sale is complete and all the risk and rewards of ownership has been transferred to the buyer. In case no
significant uncertainty exists regarding the amount of consideration for sale, revenue shall be recognized in
the year 2019-2020 irrespective of the fact that the delivery is delayed on the request of Shoe Shine

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Chapter 11 AS 17: SEGMENT REPORTING

This standard establishes principles for reporting financial information about different types of products
and services an enterprise produces and different geographical areas in which it operates.

A business segment is a distinguishable component of an enterprise that is engaged in providing an

individual product or service or a group of related products or services and that is subject to risks and
returns that are different from those of other business segments.

A geographical segment is a distinguishable component of an enterprise that is engaged in providing

products or services within a particular economic environment and that is subject to risks and returns that
are different from those of components operating in other economic environments.

If the risks and returns of an enterprise are affected predominantly by differences in the products and
services it produces, its primary format for reporting segment information should be business segments,
with secondary information reported geographically.

Similarly, if the risks and returns of the enterprise are by the fact that it operates in different countries or
other geographical areas, its primary format for reporting segment information should be geographical
segments, with secondary information reported for groups of related products and services.

IDENTIFYING REPORTABLE SEGMENTS-

A business segment or geographical segment should be identified as a reportable segment if:
a. Its revenue from sales to external customers and from transactions with other segments is 10% or more
of the total revenue, external and internal, of all segments; or
b. Its segment result, whether profit or loss, is 10% or more of –
(i) The combined result of all segments in profit, or
(ii) The combined result of all segments in loss,
Whichever is greater in absolute amount; or
c. Its segment assets are 10% or more of the total assets of all segments.

If total external revenue attributable to reportable segments constitutes less than 75% of the total
enterprise revenue, additional segments should be identified as reportable segments, even if they do not
meet the 10% thresholds, until at least 75% of total enterprise revenue is included in reportable segments.

A segment identified as a reportable segment in the immediately preceding period because it satisfied the
relevant 10% thresholds should continue to be a reportable segment for the current period
notwithstanding that its revenue, result, and assets all no longer meet the 10% thresholds.

If a segment is identified as a reportable segment in the current period because it satisfies the relevant 10%
thresholds then preceding-period segment data should be provided for comparison purpose.

Segment revenue is the aggregate of

• The portion of enterprise revenue that is directly attributable to a segment,
• The relevant portion of enterprise revenue that can be allocated on a reasonable basis to a
segment, and
• Revenue from transactions with other segments of the enterprise.

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Segment revenue does not include:

• Extraordinary items as defined in AS 5.
• Interest or dividend income, including interest earned on advances or loans to other segments
unless the operations of the segment are primarily of a financial nature; and
• Gains on sales of investments or on extinguishment of debt unless the operations of the segment
are primarily of a financial nature.

Segment expense is the aggregate of

• The expense resulting from the operating activities of a segment that is directly attributable to the
segment, and
• The relevant portion of enterprise expense that can be allocated on a reasonable basis to the
segment,
• Including expense relating to transactions with other segments of the enterprise.

Segment expense does not include:

• Extraordinary items as defined in AS 5.
• Interest expense, including interest incurred on advances or loans from other segments, unless the
operations of the segment are primarily of a financial nature.
• Losses on sales of investments or losses on extinguishment of debt unless the operations of the
segment are primarily of a financial nature.
• Income tax expense; and
• General administrative expenses, head-office expenses.

Segment result is segment revenue less segment expense.

SEGMENT ASSETS –
• They are those operating assets that are employed by a segment in its operating activities and
• That either are directly attributable to the segment or can be allocated to the segment on a
reasonable basis.
• If the segment result of a segment includes interest or dividend income, its segment assets include
the related receivables, loans, investments, or other interest or dividend generating assets.

Segment assets do not include:

• income tax assets;
• assets used for general enterprise or head-office purposes

SEGMENT LIABILITIES -
• They are those operating liabilities that result from the operating activities of a segment and
• That either are directly attributable to the segment or can be allocated to the segment on a
reasonable basis.
• If the segment result of a segment includes interest expense, its segment liabilities include the
related interest-bearing liabilities.
• Examples of segment liabilities include trade and other payables, accrued liabilities, customer
advances, product warranty provisions, and other claims relating to the provision of goods and
services.

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Segment liabilities do not include:

• income tax liabilities;
• borrowings and other liabilities that are incurred for financing rather than operating purposes.

PRIMARY REPORTING FORMAT-

An enterprise should disclose the following for each reportable segment:
a. Segment revenue, classified into segment revenue from sales to external customers and segment
revenue from transactions with other segments;
b. Segment result;
c. Total carrying amount of segment assets;
d. Total amount of segment liabilities;
e. Total cost incurred during the period to acquire segment assets that are expected to be used during more
than one period (tangible and intangible fixed assets);
f. Total amount of expense included in the segment result for depreciation and amortisation in respect of
segment assets for the period.

SECONDARY SEGMENT INFORMATION-

If primary format of an enterprise for reporting segment information is business segments, it should also
report the following information:
a. Segment revenue from external customers by geographical area based on the geographical location of its
customers, for each geographical segment whose revenue from sales to external customers is 10% or more
of enterprise revenue;
b. The total carrying amount of segment assets by geographical location of assets, for each geographical
segment whose segment assets are 10% or more of the total assets of all geographical segments; and
c. The total cost incurred during the period to acquire segment assets that are expected to be used during
more than one period (tangible and intangible fixed assets) by geographical location of assets, for each
geographical segment whose segment assets are 10% or more of the total assets of all geographical
segments.

If primary format of an enterprise for reporting segment information is geographical segments (whether
based on location of assets or location of customers), it should also report the following segment
information for each business segment whose revenue from sales to external customers is 10% or more of
enterprise revenue or whose segment assets are 10% or more of the total assets of all business segments:
a. Segment revenue from external customers;
b. The total carrying amount of segment assets; and
c. The total cost incurred during the period to acquire segment assets that are expected to be used during
more than one period (tangible and intangible fixed assets).

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1. The Chief Accountant of Sports Ltd. gives the following data regarding its six segments( Rs in Lacs)
Particulars M N O P Q R TOTAL
Segment Assets 40 80 30 20 20 10 200
Segment Results 50 (190) 10 10 (10) 30 (100)
Segment 300 620 80 60 80 60 1200
Revenue

The Chief accountant is of the opinion that segments “M” and “N” alone should be reported. Is he justified
in his view? Discuss

Solution
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified as a
reportable segment if:

Its revenue from sales to external customers and from other transactions with other segments is 10% or
more of the total revenue- external and internal of all segments; or

Its segment result whether profit or loss is 10% or more of:

♦ The combined result of all segments in profit; or
♦ The combined result of all segments in loss,
whichever is greater in absolute amount; or

Its segment assets are 10% or more of the total assets of all segments.

If the total external revenue attributable to reportable segments constitutes less than 75% of total
enterprise revenue, additional segments should be identified as reportable segments even if they do not
meet the 10% thresholds until atleast 75% of total enterprise revenue is included in reportable segments.

On the basis of turnover criteria segments M and N are reportable segments.

On the basis of the result criteria, segments M, N and R are reportable segments (since their results in
absolute amount is 10% or more of ` 200 lakhs).

On the basis of asset criteria, all segments except R are reportable segments.

Since all the segments are covered in at least one of the above criteria all segments have to be reported
upon in accordance with Accounting Standard (AS) 17. Hence, the opinion of chief accountant is wrong.

2. A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market
prices are generally 25% above cost. Is the policy adopted by the company correct?

Solution
AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis that the
enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and any
change therein should be disclosed in the financial statements. Hence, the enterprise can have its own
policy for pricing inter-segment transfers and hence, inter-segment transfers may be based on cost, below
cost or market price. However, whichever policy is followed, the same should be disclosed and applied
consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by the company is
correct if, followed consistently.

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3. M/s XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company are Rs 10.00
crores. Segment X has Rs2.00 crores, segment Y has Rs 3.00 crores and segment Z has Rs 5.00
crores. Deferred tax assets included in the assets of each segments are X- Rs 0.50 crores, Y— Rs 0.40
crores and Z— Rs 0.30 crores. The accountant contends that all the three segments are reportable
segments. Comment

Solution
According to AS 17 “Segment Reporting”, segment assets do not include income tax assets. Therefore, the
revised total assets are Rs 8.8 crores [Rs 10 crores – (Rs 0.5 + Rs 0.4 + Rs 0.3)]. Segment X holds total assets
of Rs 1.5 crores (Rs 2 crores – Rs 0.5 crores);
Segment Y holds Rs 2.6 crores (Rs 3 crores – Rs 0.4 crores); and Segment Z holds Rs 4.7 crores (Rs 5 crores –
Rs 0.3 crores). Thus all the three segments hold more than 10% of the total assets, all segments are
reportable segments

4. Microtech Ltd. produces batteries for scooters, cars, trucks, and specialised batteries for invertors
and UPS. How many segments should it have and why?

Solution
In case of Microtech Ltd., the basic product is the batteries, but the risks and returns of the batteries for
automobiles (scooters, cars and trucks) and batteries for invertors and UPS are affected by different set of
factors. In case of automobile batteries, the risks and returns are affected by the Government policy, road
conditions, quality of automobiles, etc. whereas in case of batteries for invertors and UPS, the risks and
returns are affected by power condition, standard of living, etc. Therefore, it can be said that Microtech Ltd.
has two business segments viz-‘Automobile batteries’ and ‘batteries for Invertors and UPS’.

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ADDITIONAL QUESTIONS ON AS17- SEGMENT REPORTING-

5. PK Ltd. has identified business segment as its primary reporting format. It has identified India,
USA and UK as three geographical segments. It sells its products in the Indian market, which
constitutes 70 percent of the Company’s sales. 25 per cent is sold in USA and the balance is sold in
UK. Is PK Ltd. as part of its geographical secondary segment information, required to disclose
segment revenue from export sales, where such sales are not significant?

Solution-
As per AS 17 if primary format of an enterprise for reporting segment information is business segments, it
should also report segment revenue from external customers by geographical area based on the
geographical location of its customers, for each geographical segment whose revenue from sales to
external customers is 10 per cent or more of enterprise revenue. Accordingly, for the purposes of disclosing
secondary segment information, PK Ltd. is not required to disclose segment revenue from export sales to
UK, since that segment does not meet the 10 per cent or more of enterprise revenue threshold. However,
other secondary segment information as per AS 17 should be disclosed in respect of this segment if the
thresholds prescribed in the AS 17 are met.

6. Calculate the segment results of a manufacturing organization from the following information:

Segments A B C TOTAL
Directly attributed 5,00,000 3,00,000 1,00,000 9,00,000
revenue
Enterprise revenue 1,10,000
(allocated in 5 : 4 : 2 basis)
Revenue from
transactions with other
segments -
Transaction from B 1,00,000 - 50,000 1,50,000
Transaction from C 10,000 50,000 - 60,000
Transaction from A - 25,000 1,00,000 1,25,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses 77,000
(allocated in 5 : 4 : 2 basis)
Expenses on transactions
with other segments -
Transaction from B 75,000 - 30,000
Transaction from C 6,000 40,000 -
Transaction from A - 18,000 82,000

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Solution-

Segments A B C TOTAL
Directly attributed 5,00,000 3,00,000 1,00,000 9,00,000
revenue
Enterprise revenue 50,000 40,000 20,000 1,10,000
(allocated in 5 : 4 : 2 basis)
Revenue from
transactions with other
segments -
Transaction from B 1,00,000 - 50,000 1,50,000
Transaction from C 10,000 50,000 - 60,000
Transaction from A - 25,000 1,00,000 1,25,000
Total segment revenue as 6,60,000 4,15,000 2,70,000 13,45,000
per AS 17 (A)
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses 35,000 28,000 14,000 77,000
(allocated in 5 : 4 : 2 basis)
Expenses on transactions
with other segments -
Transaction from B 75,000 - 30,000 1,05,000
Transaction from C 6,000 40,000 - 46,000
Transaction from A - 18,000 82,000 1,00,000
Total segment expenses 4,16,000 2,36,000 2,01,000 8,53,000
as per AS 17 (B)
Segment result (A-B) 2,44,000 1,79,000 69,000 4,92,000

7. Identify Reportable segments from the following data of Z ltd

Amount in Lacs
Particulars A B C D TOTAL
External 30 6.5 8.5 5 50
Revenue
Internal 0 0 1 49 50
Revenue
TOTAL 30 6.5 9.5 54 100

Solution-
10% Revenue Test
Total Internal & External Revenue of All Segments = 100 lacs
10% of 100 = 10 lacs
Therefore A & D are reportable segments

External Revenue of Segments A & D ( 30+5) = 35 lacs

75% of Total revenue of Z ltd ( 50*75%) = 37.5 lacs

Since the external revenue of reportable segments ( A&D = 35 Lacs) is not 75% or more of Total
enterprise revenue (Rs 37.5 Lacs), Management of Z ltd should identify and report more additional
segments.

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8. Prepare a segmental report for publication in Diversifiers Ltd. from the following details of the
company’s three divisions and the head office:

Rs (‘000)
Forging Shop Division
Sales to Bright Bar Division 4,575
Other Domestic Sales 90
Export Sales 6,135
Bright Bar Division 10,800
Sales to Fitting Division 45
Export Sales to Rwanda 300
345
Fitting Division

Export Sales to Maldives 270

Particulars Head Forging Bright Bar Fitting

Office Shop Division Division
(‘000) Division (‘000) (‘000)
(‘000)
Pre-tax operating result 240 30 (12)
Head office cost reallocated 72 36 36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180

Solution

Diversifiers Ltd. Segmental Report

Amount in ‘000
DIVISION INTER SEGMENT CONSOLIDATED
PARTICULARS FORGING BRIGHT FITTING ELIMINATIONS TOTAL
SHOP BAR
SEGMENT REVENUE
SALES:
DOMESTIC 90 - - - 90
EXPORT 6,135 300 270 - 6,705
EXTERNAL SALES 6,225 300 270 - 6,795
INTER-SEGMENT SALES 4,575 45 - 4,620 -
TOTAL REVENUE 10,800 345 270 4,620 6,795
SEGMENT RESULT 240 30 (12) 258
(GIVEN)

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HEAD OFFICE EXPENSES (144)

OPERATING PROFIT 114
INTEREST EXPENSE (16)
PROFIT BEFORE TAX 98
INFORMATION IN
RELATION TO ASSETS
AND LIABILITIES:
FIXED ASSETS 300 60 180 - 540
NET CURRENT ASSETS 180 60 135 - 375
SEGMENT ASSETS 480 120 315 - 915
UNALLOCATED - - - -
CORPORATE ASSETS 147
(75 + 72)
TOTAL ASSETS 1,062
SEGMENT LIABILITIES 30 15 180 - 225
UNALLOCATED 57
CORPORATE LIABILITIES
TOTAL LIABILITIES 282

Sales Revenue by Geographical Market ( Rs000)

HOME EXPORT EXPORT TO EXPORT TO CONSOLIDATED

SALES SALES (BY RWANDA MALDIVES TOTAL
FORGING
SHOP
DIVISION)
EXTERNAL 90 6,135 300 270 6,795
SALES

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Chapter 12 AS 18: RELATED PARTY DISCLOSURES

Related party - Parties are considered to be related if at any time during the reporting period one party has
the ability to control the other party or exercise significant influence over the other party in making
financial and/or operating decisions.

Examples –
a. Enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by,
or are under common control with, the reporting enterprise
b. Associates and joint ventures of the reporting enterprise
c. Individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that
gives them control or significant influence over the enterprise, and relatives of any such individual.
d. Key management personnel and relatives of such personnel

IN THE CONTEXT OF AS 18, THE FOLLOWING ARE DEEMED NOT TO BE RELATED PARTIES:
a. Two companies simply because they have a director in common
b. A single customer, supplier, franchiser, distributor, general agent, Providers of Finance, Trade Unions &
Government departments and government agencies including government sponsored bodies with whom
an enterprise transacts a significant volume of business.

SUBSTANTIAL INTEREST-
• An enterprise/individual is considered to have a substantial interest in another enterprise if that
enterprise or individual owns, directly or indirectly, 20% or more interest in the voting power of the
other enterprise.
• Similarly, an individual is considered to have a substantial interest in an enterprise, if that individual
owns, directly or indirectly, 20 per cent or more interest in the voting power of the enterprise.

SIGNIFICANT INFLUENCE:
• Participation in the financial and/or operating policy decisions of an enterprise, but not control of
those policies.
• It may be exercised in several ways, for example, by representation on the board of directors,
participation in the policy making process, material inter-company transactions, interchange of
managerial personnel or dependence on technical information.
• Significant influence may be gained by share ownership, statute or agreement. As regards share
ownership, if an investing party holds, directly or indirectly through intermediaries, 20 per cent or
more of the voting power of the enterprise, it is presumed that the investing party does have
significant influence, unless it can be clearly demonstrated that this is not the case.

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1. Identify the related parties in the following cases as per AS 18

A Ltd. holds 51% of B Ltd.
B Ltd holds 51% of O Ltd.
Z Ltd holds 49% of O Ltd

Solution –

Reporting entity- A Ltd.

• B Ltd. (subsidiary) is a related party
• O Ltd.(subsidiary) is a related party

Reporting entity- B Ltd.

• A Ltd. (holding company) is a related party
• O Ltd. (subsidiary) is a related party

Reporting entity- O Ltd.

• A Ltd. (holding company) is a related party
• B Ltd. (holding company) is a related party
• Z Ltd. (investor/ investing party) is a related party

Reporting entity- Z Ltd.

• O Ltd. (associate) is a related party

KEY MANAGEMENT PERSONNEL:

Those persons who have the authority and responsibility for planning, directing and controlling the
activities of the reporting enterprise.

RELATIVES OF KMP FOR AS 18:

In relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may
be expected to influence, or be influenced by, that individual in his/her dealings with the reporting
enterprise

DISCLOSURE-
• Name of the related party and nature of the related party relationship where control exists should
be disclosed irrespective of whether or not there have been transactions between the related
parties.
• If there have been transactions between related parties, during the existence of a related party
relationship, the reporting enterprise should disclose the following:

(i) The name of the transacting related party;

(ii) A description of the relationship between the parties;
(iii) A description of the nature of transactions
(iv) Volume of the transactions
(v) Any other elements of the related party transactions necessary for an understanding
of the financial statements
(vi) Amounts written off or written back in the period in respect of debts due from or to
related parties

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2. Narmada Ltd. sold goods for Rs 90 lakhs to Ganga Ltd. during financial year ended 31-3-2017. The
Managing Director of Narmada Ltd. own 100% of Ganga Ltd. The sales were made to Ganga Ltd. at
normal selling prices followed by Narmada Ltd.

The Chief accountant of Narmada Ltd contends that these sales need not require a different
treatment from the other sales made by the company and hence no disclosure is necessary as per
the accounting standard. Is the Chief Accountant correct?

Solution
As per AS 18 ‘Related Party Disclosures’, Enterprises over which a key management personnel is able to
exercise significant influence are related parties. This includes enterprises owned by directors or major
shareholders of the
reporting enterprise and enterprise that have a member of key management in common with the reporting
enterprise.

In the given case, Narmada Ltd. and Ganga Ltd are related parties and hence disclosure of transaction
between them is required irrespective of whether the transaction was done at normal selling price.

Hence the contention of Chief Accountant of Narmada Ltd is wrong.

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ADDITIONAL QUESTIONS ON AS18-RELATED PARTY DISCLOSURES

3. Identify the related parties in the following cases as per AS-18

(i) Maya Ltd. holds 61 % shares of Sheetal Ltd.

Sheetal Ltd. holds 51 % shares of Fair Ltd.
Care Ltd. holds 49% shares of Fair Ltd.
(Give your answer - Reporting Entity wise for Maya Ltd., Sheetal Ltd., Care Ltd. And Fair Ltd.)

(ii) Mr. Subhash Kumar is Managing Director of A Ltd. and also holds 72% capital of B Ltd.

Solution –

(i) (a) Reporting entity- Maya Ltd.

• Sheetal Ltd. (subsidiary) is a related party
• Fair Ltd.(subsidiary) is a related party

(b) Reporting entity- Sheetal Ltd.

• Maya Ltd. (holding company) is a related party
• Fair Ltd. (subsidiary) is a related party

(c) Reporting entity- Fair Ltd.

• Maya Ltd. (holding company) is a related party
• Sheetal Ltd. (holding company) is a related party
• Care Ltd. (investor/ investing party) is a related party

(d) Reporting entity- Care Ltd.

• Fair Ltd. (associate) is a related party

(ii) Mr. Subhash Kumar is Key management personnel as he has the authority for planning, directing and
controlling the activities of A Ltd. He also holds substantial interest in B Ltd. as he holds 72% capital of B
Ltd. Thus, Mr. Subhash is related party for both A Ltd. and B Ltd. Moreover, as per the definition of
related party relationship described in para 3 of AS 18, enterprises over which Subhash is able to exercise
significant influence are also related parties. Thus, A Ltd. and B Ltd. will also be construed as related to
each other.

4. Following transactions are disclosed as on 31st March, 2018:

(i) Mr. Sumit, a relative of Managing Director, received remuneration of Rs 2,10,000 for his services in the
company for the period from 1st April, 2017 to 30th June, 2017. He left the service on 1st July, 2017
Should the relative be identified as a related party as on closing date i.e. on 31-3-2018 for the purpose of
AS-18.

(ii) Goods sold amounting to Rs 50 lakhs to associate company during the 1st quarter ended on 30th June,
2017. After that related party relationship ceased to exist. However, goods were supplied as was supplied
to any other ordinary customer.
Decide whether transactions of the entire year have to be disclosed as related party transactions.

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Solution-

(i) According to AS 18 ‘Related Party Disclosures’, parties are considered to be related if at any time during
the reporting period, one party has the ability to control the other party or exercise significant influence
over the other party in making financial and/or operating decisions.

Hence, Mr. Sumit a relative of key management personnel should be identified as related party as at the
closing date i.e. on 31.3.2018 as he received remuneration for his services in the company from1st
April,2017 to 30th June, 2017and this period comes under the reporting period.

(ii) As per provision of AS 18, the transactions only for the period in which related party relationships exist
need to be reported.

Hence, transactions of the entity with its associate company for the first quarter ending 30.06.2017 only are
required to be disclosed as related party transactions. Transactions of the entire year need not be disclosed
as related party transactions and transactions for the period (after 1st July) in which related party
relationship did not exist need not be reported.

Hence transaction of sale of goods with the associate company for first quarter ending 30th June, 2017 for
Rs 50 Lakhs only are required to be disclosed as related party transaction on 31.3.18.

5. SP hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return
payable to the later every year. The contract involves the day-to-day management of the hotel,
while all financial and operating policy decisions are taken by the Board of Directors of the company.
Mr. A does not own any voting power in SP Hotels Limited. Would he be considered as a related
party of SP Hotels Limited”?

Solution-
Mr. A will not be considered as a related party of SP Hotels Limited in view of paragraph 3(c) of AS 18
which states, “individuals owning, directly or indirectly, an interest in the voting power of the reporting
enterprise that gives them control or significant influence over the enterprise, and relatives of any such
individual”. In the above example, in the absence of share ownership, Mr. A would not be considered to
exercise significant influence on SP Hotels Limited, even though there is an agreement giving him the power
to manage the company. Further, the fact that Mr. A does not have the ability to direct or instruct the
board of directors does not qualify him as a key management personnel.

6. Is remuneration paid to Board of Directors a related party transaction? Explain

Solution-
In case of a Company, the Managing Director, whole time director, manager and any person in accordance
with whose directions or instructions the board of directors of the company is accustomed to act, are
usually considered Key Managerial Personnel (KMP).

Persons who do not have the authority and responsibility for planning, directing and controlling the
activities of the enterprise would not be KMP. Conversely, persons without any formal titles may be
considered to be KMP, if they plan, direct and control the activities of the enterprise.

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Further, as per Sec 2(76) of Companies Act, 2013, a related party includes a director or his relative. Sec
2(34) defines a director as a director appointed to the Board of a Company.

Hence, remuneration paid to Board of Directors will be considered as related party transaction.

7. Sun Ltd. sold goods for Rs 50 lakhs to Moon Ltd. during financial year ended 31st March 2017 at
normal selling price followed by Sun Ltd. The Managing Director of Sun Ltd. holds 75% shares of
Moon Ltd. The Chief accountant of Sun Ltd contends that these sales need not require a different
treatment from the other sales made by the company and hence no disclosure is necessary as per
the accounting standard. You are required to examine and advise whether the contention of the
Chief Accountant is correct?

Solution-
As per AS 18 ‘Related Party Disclosures’, Enterprises over which a key management personnel is able to
exercise significant influence are related parties. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprise that have a member of key management in
common with the reporting enterprise.

In the given case, Sun Ltd. and Moon Ltd are related parties and hence disclosure of transaction between
them is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Sun Ltd is wrong

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Chapter 13 AS 19: LEASES

Objective: The objective of AS - 19 is to prescribe, for Lessees and Lessors, the appropriate accounting
policies and disclosures, in relation to Finance Leases and Operating Leases
A Lease is an agreement whereby - the Lessor conveys to the Lessee, the right to use an asset for an agreed
period of time, in return for a payment or series of payments (called Lease Rentals).

Minimum Lease Payments (MLP) are the payments over the lease term that the Lessee is, or can be required,
to make, excluding Contingent Rent, Costs for Services and Taxes to be paid by and reimbursed to the Lessor

Contingent Rent is that portion of the Lease Payments that is not fixed in amount but is based on a factor
other than just the passage of time (e.g. Percentage of Sales, Amount of Usage, Price Indices, Market Rates
of interest, etc.)
Example: In addition to fixed monthly Lease Rent, a lease agreement provides that the Lessee should pay 3%
of his Annual Sale Revenue to the Lessor, as a consideration for generating revenue by utilizing the asset.
This payment constitutes Contingent Rent, and is not includible in MLP

1. Compute the MLP in the following independent situations where Anand and Balu are the Lessor
and Lessee respectively –
• Monthly Lease Rent = Rs 25,000, Lease Term = 32 months, Chandru, a third party, provides a
guarantee to Anand, that Rs 55,000 will be paid as Residual Value.
• Monthly Lease Rent = Rs 15,000 for 48 months, together with 2.5% of the Sales Revenue per annum,
Balu guarantees to pay Anand Rs 10,000 as Residual Value of the asset.

Guaranteed Residual Value (GRV) Unguaranteed Residual Value (URV)

(a) For the Lessee: That part of the Residual Value which is
guaranteed by the Lessee or by a party on behalf of the Lessee URV of a Leased Asset is the amount by
(the amount of the guarantee being the maximum amount that which
could, in any event, become payable), and the Residual Value of the asset exceeds its
(b) For the Lessor: That part of the Residual Value which is Guaranteed Residual Value.
guaranteed by or on behalf of the Lessee, or by an independent
third party who is financially capable of discharging the Hence, URV = RV - GRV
obligations under the guarantee. (OR) RV = GRV + URV

For the Lessor -

Gross Investment in the Lease= Minimum Lease Payments + Unguaranteed GI = MLP + URV
Residual Value.
Unearned Finance Income = (MLP + URV) less (Present Value of MLP & UFI = GI - (PV of GI)
URV)

Net Investment in the Lease = Gross Investment - Unearned Finance NI = GI – UFI

Income.

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NON-CANCELLABLE LEASE-
A non-cancellable lease is a lease that is cancellable only:
(a) upon the occurrence of some remote contingency; or
(b) with the permission of the lessor; or
(c) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
(d) upon payment by the lessee of an additional amount such that, at inception, continuation of the lease
is reasonably certain

2. A Lease Agreement of 10 years allows the Lessee to cancel the agreement after 5 years by payment
of an additional amount equivalent to 2 years’ Lease Rental. Is it a Non-Cancellable Lease of ten
years?

Solution
Principle: If the cancellation of lease by the Lessee is allowed only after payment of additional amount such
that the continuation of lease at the inception of the lease proved to be certain, the Lease is considered as
a Non-Cancellable Lease. The additional amount to be paid (i.e. Cancellation Penalty) should be evaluated
in the context of continuity of the lease agreement.
Analysis: If the penalty is nominal, then at the inception of the lease it is doubtful whether the lease will be
continued beyond 5 years. In that case, it should be treated as non-cancellable for a period of 5 years.
Conclusion: In the given case, the penalty is not nominal. The savings in next five years'Lease Rent may be
substantially equal to two years Lease Rental paid as Cancellation Penalty. The condition stated in AS-19
should be interpreted in the proper perspective. Thus, the above lease will be considered as non-
cancellable for 10 years

3. Classify the following into either Operating or Finance Lease:

Description Solution
(i) Lessee has option to purchase the asset at lower than Fair Value, at the Finance Lease
end of lease term.
(ii) Economic Life of the Asset is 7 years, Lease Term in 6 years, but asset is Finance Lease
not acquired at the end of the leased term.
(iii) Economic Life of the Asset is 6 years, Lease Term is 2 years, but the Asset Finance Lease
is of special nature and has been procured only for use of the Lessee.

(iv) Present Value (PV) of Minimum Lease Payment (MLP) = “X”. Fair Value of Operating Lease
the Asset is “Y”

LEASE WOULD BE CLASSIFIED AS A FINANCE LEASE IF

• Transfer of ownership of the asset to the Lessee by the end of the lease term,
• Option to purchase the asset, to the Lessee, at a price which is sufficiently lower than the fair value at
the date the option becomes exercisable such that, at the inception of the lease, it is reasonably
certain that the option will be exercised,
• Lease Term is for the major part of the economic life of the asset even if title is not transferred,
• Present Value of the Minimum Lease Payments at the inception of the lease amounts to atleast
substantially all of the Fair Value of the Leased Asset, (i.e. PV of MLP = Fair Value approximately),
and

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• The Leased Asset is of a specialised nature such that only the Lessee can use it without major
modifications being made.

ACCOUNTING FOR FINANCE LEASES (BOOKS OF LESSEE)-

On the date of inception of Lease, Lessee should show it as an asset and corresponding liability at lower of:
• Fair value of leased asset at the inception of the lease
• Present value of minimum lease payments from the standpoint of the lessee

ACCOUNTING FOR FINANCE LEASES (BOOKS OF LESSOR)-

The lessor should recognise assets given under a finance lease in its balance sheet as a receivable at an
amount equal to the net investment in the lease

ACCOUNTING FOR OPERATING LEASES (BOOKS OF LESSEE)-

Lease payments under an operating lease should be recognised as an expense in the statement of profit
and loss of a lessee on a straight line basis over the lease term unless another systematic basis is more
representative of the time pattern of the user’s benefit

ACCOUNTING FOR OPERATING LEASES (BOOKS OF LESSOR) –

• The lessor should present an asset given under operating lease as fixed assets in its balance sheets.
• Lease income from operating leases should be recognised in the statement of profit and loss on a
straight line basis over the lease term, unless another systematic basis is more representative of the
time pattern in which benefit derived from the use of the leased asset is diminished.

INITIAL DIRECT COSTS-

Initial direct costs, such as commissions and legal fees, are often incurred by lessor’s in negotiating and
arranging a lease. For finance leases, these initial direct costs are incurred to produce finance income and
are either recognised immediately in the statement of profit and loss or allocated against the finance
income over the lease term.

4. Anand Ltd availed a lease from Bhagwan Ltd. The terms and conditions of the Lease are as under: ,
• Lease Period is 3 years, in the beginning of the year 2013, for equipment costing Rs 10,00,000 and
has an expected useful life of 5 Years.
• The Fair Market Value is also Rs 10,00,000.
• The property reverts back to the Lessor on termination of the lease.
• The Unguaranteed Residual Value is estimated at Rs 1,00,000 at the end of the 3rd year.
• 3 equal annual payments are made at the end of each year.

Consider IRR = 10%. Present Value of Rs 1 due at the end of 3 rd year at 10% rate of interest is Rs 0.7513.
Present Value of annuity of Rs 1 due at the end of 3rd year at 10% IRR is Rs 2.4868. Is this Lease a Finance
Lease. Also calculate Unearned Finance Income

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5. Win Ltd has entered into a three-year lease arrangement with M/s Tanya Sports Club in respect of
Fitness Equipments costing Rs 16,99,999.50. The Annual Lease Payments to be made at the end of
each year are structured in such as way that the sum of the Present Values of the Lease Payments
and that of the Residual Value together equal the cost of the Equipments leased out. Unguaranteed
Residual Value of Equipment at eh expiry of the lease is estimated to be Rs 1,33,500. The Assets
would revert to the Lessor at the end of the lease. Given that the Implicit Rate of Interest is 10%,
you are required to compute the amount of the Annual Lease and the Unearned Finance Income.
Discounting Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively.

6. Prakash Limited leased a Machine to Badal Limited on the following terms –

Particulars Amount in lacs
Fair Value of the Machine 48
Lease Term 5 yrs
Lease Rental per annum 8
Guaranteed Residual Value 1.6
Expected Residual Value 3
Internal Rate of Return 15%
Discount Rates for 1st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718 and 0.4972 . Ascertain Unearned Finance Income

7. Classify the following into either operating or finance lease:

If Present value (PV) of Minimum lease payment (MLP) = "X"; Fair value of the asset is "Y" and X=Y
(RTP MAY 2022)

SOLUTION-
The lease is a finance lease if X = Y, or if X substantially equals Y.

8. Lessee Ltd took a Machine on lease from Lessor Ltd, the Fair Value being Rs 7,00,000. The economic
life of the Machine as well as the lease term is 3 Years. At the end of each year Lessee Ltd pays Rs
3,00,000. The Lessee has guaranteed a Residual Value (GRV) of Rs 22,000 on expiry of the lease.
However, Lessor Ltd estimates that the Residual Value of the machinery will be only Rs 15,000.
Implicit Rate of Return (IRR) is 15% p.a. and Present Value Factors at 15% are 0.869,0.756 and 0.657
at the end of first, second and third years respectively. Calculate the Value of Machine to; be
considered by Lessee Ltd, and the interest (Finance Charges) in each year.

9. Ambika ltd leased a machinery to bhanu ltd on the following terms –

Fair value of machinery 20 lacs Guaranteed Residual Value 1 lacs
Lease Term 5 yrs Expected Residual Value 2 lacs
Lease rental per annum 5 lacs Internal Rate of Return 15%

Depreciation on SLM Method at 20% per annum. Calculate Finance charges and journalise in the books of
lessee under Finance Lease.

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10. Bhrigu Ltd wishes to obtain a Machine Tool costing (Fair Value) Rs 20 Lacs by way of lease. The life of
the machine tool is 12 years but the Company requires it only for the first five years. It enters into
an agreement with Maharaj Ltd for a lease rental of Rs 2 Lacs p.a.

Bhrigu Ltd is not sure about the treatment of these lease rentals, and hence requests your assistance.
Assume Implicit Rate of Interest at 15%. PV Factors are: 0.87, 0.76, 0.66, 0.57 and 0.50.

Solution-
(a) Lease term = 5 years
(b)Useful Life = 12 years
Percentage = 5/12 * 100 = 42%

(d) Fair Value of Asset = 20,00,000

(e) Present value of MLP = 672,000 [200,000 X 3.36]
Percentage = 672,000 / 20,00,000 x 100 = 34%

Therefore it is an operating Lease

In the Books of Lessee-

Lessee has to be recognise Lease Rental paid on Straight Line Basis or any other systematic basis

Journal Entries in book of Lessee-

Particulars Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Lease Rental A/c Dr 200,000 200,000 200,000 200,000 200,000
To Bank A/c 200,000 200,000 200,000 200,000 200,000
(Being Lease Rental paid)

P&l A/c Dr 200,000 200,000 200,000 200,000 200,000

To Lease Rental A/c 200,000 200,000 200,000 200,000 200,000
(Being Lease Rental
Transferred)

11. A Ltd has initiated a lease for 3 yrs for an equipment costing 1.5 lacs with expected useful life of 4
years. The asset would revert to Global Ltd under the lease agreement. Other information available
in respect of lease agreement is –
• The Unguaranteed Residual Value of the equipment after the expiry of the lease term is estimated
at Rs 20,000.
• The implicit rate of interest is 10%.
• The annual payments have been determined in such a way that the Present Value of the Lease
Payment plus the Residual Value is equal to the Cost of the asset,

Ascertain in the hands of Global Ltd - (a) Annual Lease Payment, (b) Unearned Finance Income, (c)
Segregation of Finance Income.

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SOLUTION-
Journal Entries In the books of Global ltd (Lessor) For Finance Lease
Particulars Yr 1 Yr 2 Yr 3
Lease Receivable A /c Dr 150,000 - -
To Equipment A/c 150,000 - -
(Being Equipment Given on Finance Lease Accounted)

Lease Receivable A /c Dr 15,000 11,071 6,811

To Interest / Finance Income 15,000 11,071 6,811
(Being Interest Income Accounted)

Bank A/c Dr 54,294 54,294 74,294

To Lease Receivable A /c 54,294 54,294 74,294
(Being Lease Rental Receipt Accounted)

Interest/Finance Income A/c Dr 15,000 11,071 6,811

To P&L A/c 15,000 11,071 6,811
(Being Interest Income transferred to P&L A/c)

12. Chandika Silk Mills leased its looms to Kali Looms Ltd for a period of five years from 1st April 2013,
for a lumpsum lease of Rs 10,50,000 payable in full in advance. The Lessor agreed to incur the
expenditure for Repairs and Maintenance of the looms which were as under: Financial Year 2013-
2014 Rs 4,700, Financial Year 2014-2015 Rs 5,200.

WDV of the Looms on 01.04.2013 was Rs 4,60,000 and depreciation at 33 1/3 % was to be charged.

Pass Journal Entries in the books of the Lessor for Operating Lease. Show relevant entries for the year
2013-2014, if the Lessor closes its account on 31st March every year.

SOLUTION
Journal Entries in the books for Chandika Silks(Lessor) for Operating Lease
Particulars Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Bank A/c Dr 10,50,000 - - - -
To Lease Rental Advance A/c 10,50,000 - - - -
(Being Lease Advance
Received)

Lease Rental Advance A/c Dr 210,000 210,000 210,000 210,000 210,000

To Lease Rental Income A/c 210,000 210,000 210,000 210,000 210,000
(Being Lease Rental Income
for the year )
{10,50,000 / 5 = 210,000

Lease Rental Income A/c Dr 210,000 210,000 210,000 210,000 210,000

To P&L A/c 210,000 210,000 210,000 210,000 210,000
(Being Lease Rental Income
Transferred)

Repairs A/c Dr 4700 5200 - - -

To Bank A/c 4700 5200 - - -
(Being Repairs Accounted)

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Depreciation A/c Dr 153,333

To Equipment A/c 153,333
(460,000 x 1/3)
(Being Depreciation
Accounted)

P&L A/c Dr 158,033

To Repairs A/c 4700
To Depreciation A/c 153,333
(Being Repairs & Depreciation
Transferred)

SALE AND LEASEBACK TRANSACTION-

• A Sale and Leaseback Transaction involves the Sale of an Asset by the Vendor, and the leasing of the
same asset back to the Vendor.
• The Vendor / Seller is thus the Lessee, and the Buyer of the Asset is the Lessor.
• The Lease Payments and the Sale Price are usually interdependent, as they are negotiated as a
package

WHERE SALE AND LEASEBACK RESULTS IN FINANCE LEASE -

The excess or deficiency of sales proceeds over the carrying amount should be deferred and amortised over
the lease term in proportion to the depreciation of the leased asset

WHERE SALE AND LEASEBACK RESULTS IN OPERATING LEASE –

• If Sale price = Fair Value then Profit or loss should be recognised immediately.
• Sale Price < Fair Value then Profit should be recognised immediately. The loss should also be
recognised immediately except that, if the loss is compensated by future lease payments at below
market price, it should be deferred and amortised in proportion to the lease payments over the
period for which the asset is expected to be used.
• Sale Price > Fair Value then The excess over fair value should be deferred and amortised over the
period for which the asset is expected to be used.

13. Angiras Ltd sold JCB Machine having WDV of Rs 50 Lakhs to Brihaspati Ltd for Rs 60 Lakhs and the
same machinery was leased back by Brihaspati Ltd to Angiras Ltd. The lease is an Operating Lease.
Comment according to relevant AS if –
Sale Price of Rs 60 Lakhs is equal to Fair Value.
Fair Value is Rs 50 Lakhs and Sale Price is Rs 45 Lakhs.
Fair Value is Rs 55 Lakhs and Sale Price is Rs 62 Lakhs.
Fair Value is Rs 45 Lakhs and Sale Price is Rs 48 Lakhs

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DISCLOSURES MADE BY THE LESSEE IN FINANCE LEASE –

(a) assets acquired under finance lease as segregated from the assets owned;
(b) for each class of assets, the net carrying amount at the balance sheet date;
(c) a reconciliation between the total of minimum lease payments at the balance sheet date and their
present value. In addition, an enterprise should disclose the total of minimum lease payments at the
balance sheet date, and their present value, for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;

(d) contingent rents recognised as expense in the statement of profit and loss for the period
(e) a general description of the lessee's significant leasing arrangements

DISCLOSURES MADE BY THE LESSOR IN FINANCE LEASE –

(a) a reconciliation between the total gross investment in the lease at the balance sheet date, and the
present value of minimum lease payments receivable at the balance sheet date. In addition, an enterprise
should disclose the total gross investment in the lease and the present value of minimum lease payments
receivable at the balance sheet date, for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) unearned finance income;
(c) the unguaranteed residual values accruing to the benefit of the lessor;
(d) the accumulated provision for uncollectible minimum lease payments Receivable
(a) contingent rents recognised in the statement of profit and loss for the period
(b) a general description of the significant leasing arrangements of the lessor

DISCLOSURES MADE BY THE LESSEE IN OPERATING LEASE –

(a) the total of future minimum lease payments under non-cancelable operating leases for each of the
following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to be received under non-cancelable
subleases at the balance sheet date;
(c) lease payments recognised in the statement of profit and loss for the period, with separate amounts for
minimum lease payments and contingent rents
(d) a general description of the lessee's significant leasing arrangements

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DISCLOSURES MADE BY THE LESSOR IN OPERATING LEASE –

(a) for each class of assets, the gross carrying amount, the accumulated depreciation and accumulated
impairment losses at the balance sheet date; and
(i) the depreciation recognised in the statement of profit and loss for the period;
(ii) impairment losses recognised in the statement of profit and loss for the period;
(iii) impairment losses reversed in the statement of profit and loss for the period;
(b) the future minimum lease payments under non-cancelable operating leases in the aggregate and for
each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(c) total contingent rents recognised as income in the statement of profit and loss for the period;
(d) a general description of the lessor ’s significant leasing arrangements.

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ADDITIONAL QUESTIONS ON AS 19 - LEASES

14. A Ltd. sold machinery having WDV of Rs 40 lakhs to B Ltd. for Rs 50 lakhs and the same machinery
was leased back by B Ltd. to A Ltd. The lease back is operating lease.

Comment if –
(a) Sale price of Rs 50 lakhs is equal to fair value.
(b) Sale price of Rs 50 Lakhs & Fair value is Rs 60 lakhs.
(c) Fair value is Rs 45 lakhs and sale price is Rs 38 lakhs.
(d) Fair value is Rs 40 lakhs and sale price is Rs 50 lakhs.
(e) Fair value is Rs 46 lakhs and sale price is Rs 50 lakhs
(f) Fair value is Rs 35 lakhs and sale price is Rs 39 lakhs (JAN 2021: 5 MARKS)

Solution
Following will be the treatment in the given cases:
(a) When sales price of Rs 50 lakhs is equal to fair value, A Ltd. should immediately recognise the profit of
Rs 10 lakhs (i.e. 50 – 40) in its books.
(b) When fair value is Rs 60 lakhs then also profit of Rs 10 lakhs should be immediately recognised by A Ltd.
(c) When fair value of leased machinery is Rs 45 lakhs & sales price is Rs 38 lakhs, then loss of Rs 2 lakhs
(40 – 38) to be immediately recognised by A Ltd. in its books provided loss is not compensated by future
lease payment.
(d) When fair value is Rs 40 lakhs & sales price is Rs 50 lakhs then, profit of Rs 10 lakhs is to be deferred and
amortised over the lease period.
(e) When fair value is Rs 46 lakhs & sales price is Rs 50 lakhs, profit of Rs 6 lakhs (46 - 40) to be immediately
recognised in its books and balance profit of Rs 4 lakhs (50-46) is to be amortised/deferred over lease
period.
(f) When fair value is Rs 35 lakhs & sales price is Rs 39 lakhs, then the loss of Rs 5 lakhs (40-35) to be
immediately recognised by A Ltd. in its books and profit of Rs 4 lakhs (39-35) should be amortised/deferred
over lease period.

15. A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease
rentals to yield 30% profit margin on cost Rs 1,50,000. Economic life of the machine is 5 years and
output from the machine are estimated as 40,000 units, 50,000 units, 60,000 units, 80,000 units and
70,000 units consecutively for 5 years. Straight line depreciation in proportion of output is
considered appropriate.

Compute the following:

(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease (DEC 2021: 5 MARKS)

SOLUTION-

(i) Annual lease rent

Total lease rent
= 130% of Rs 1,50,000 X Output during lease period
Total output

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= 130% of Rs 1,50,000 x (40,000 +50,000+ 60,000)

(40,000 + 50,000 +60,000 + 80,000 + 70,000)
= 1,95,000 x 1,50,000 units
3,00,000 units
= Rs 97,500
Annual lease rent = Rs 97,500 / 3 = Rs 32,500

(ii) Lease rent Income to be recognized in each operating year

Total lease rent should be recognised as income in proportion of output during lease period, i.e. in the
proportion of 40 : 50 : 60.

Hence income recognised in years 1, 2 and 3 will be as:

Year 1 Rs 26,000,
Year 2 Rs 32,500 and
Year 3 Rs 39,000.

(iii) Depreciation for three years of lease

Since depreciation in proportion of output is considered appropriate, the depreciable amount Rs 1,50,000
should be allocated over useful life 5 years in proportion of output, i.e. in proportion of 40 : 50 : 60 : 80 : 70
.

Depreciation for year 1 is Rs 20,000, year 2 = 25,000 and year 3 = 30,000.

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Chapter 14 AS 20: EARNINGS PER SHARE (EPS)

Basic EPS = Net profit (loss) attributable to equity shareholders / Weighted Average No of equity shares

Potential Equity Share: A Potential Equity Share is a Financial Instrument or other contract that entitles, or
may entitle, its holder to Equity Shares. Example -Debt Instruments or Preference Shares that are
convertible into Equity Shares

Theoretical Ex Rights Fair value per share =

Fair Value of shares before rights issue + Total Amount from Rights Issue
No of shares outstanding before rights issue + no of right shares

Adjustment Factor = Fair value per share immediately prior to rights issue
Theoretical Ex Rights Fair value per share

1. From the following information, calculate EPS ( Amount in crores)

Profit before VRS Payments after 75 Provision for Taxation 10
depreciation
Depreciation 10 Paid Up Share Capital (Shares of Rs 10 93
each fully paid)
VRS payments 32.10

2. Ravi ltd follows calendar year for reporting. It issued Rs 80 lacs equity shares at par on 15th
September. It also bought back Rs 20 lacs equity shares at par on 1 st December. Equity capital was
Rs 150 lacs at the end of the year. Calculate weighted average no of equity shares o/s during the
period if price of each share is Rs 100. Compute basic EPS is Net profit attributable to equity
shareholders is Rs 10 lacs.

3. At the beginning of financial year co issued 1.2 lac equity shares of Rs 100 each, Rs 50 per share was
called up on that date and paid by all. The remaining Rs 50 was called up on 1st Sept. All
shareholders paid except one shareholder having 24,000 shares. NP is Rs 2.64 Lacs after dividend on
preference shares and Dividend distribution tax of Rs 64,000. Compute basic EPS
(Financial Year is April to March)

4. Surya Ltd issued 8,00,000 Equity Shares of Rs 100 each on 15th October. During the reporting period
(financial year), the Company purchased an asset on 1st December for Rs 25 Lakhs and issued
1,00,000 Equity Shares treated as Rs 25 paid up. At the beginning of the year (1st April), Surya’s
Equity Capital was 5 Lakh Shares of Rs 100 each. Calculate Weighted Average Number of Equity
Shares & Basic EPS, if Net Profit for the period is Rs 37.50 Lakhs

5. As on 31.03.2013, the Equity Share Capital of Aditya Ltd is Rs 10 Crores divided into Shares of Rs 10
each. During the financial year 2013-2014, it has issued Bonus Shares in the ratio of 1:1. The Net
Profit after Tax for the years 31.03.2013 and 31.03.2014 are Rs 8.50 Crores and Rs 11.50 Crores
respectively. EPS disclosed in the accounts for two years is Rs 8.50 and Rs 5.75 respectively.
Comment on the above.

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6. Compute the Basic EPS for Savita Ltd from the following data –
Net Profit: Last Year: Rs 20,00,000, This Year: Rs 30,00,000
No. of Shares outstanding prior to Rights Issue -10,00,000 Shares.
Right Issue: One new Share for each four outstanding, i.e. 2,50,000 Shares. Rights Issue Price - Rs 20. Last
date of Exercise of Rights-31st March.
Fair Rate of one Equity Share immediately prior to exercise of Rights: Rs 25. Calendar year is followed.

7. The following information is available for a Company for two years. Compute Basic EPS.
Net Profit for the Year 2012-2013 - Rs 25,00,000; Year 2013-2014 - Rs 40,00,000
No. of Shares outstanding prior to Rights Issue was 12,00,000 Shares.
Right Issue : One new share for each three outstanding i.e. 4,00,000 Shares, and Right Issue Price Rs 22
Last date of exercise of rights: 30.06.2013.
Fair Rate of one Equity Share immediately prior to exercise of rights on 30.06.2013: Rs 28.

8. Divakar Ltd gives you the following information. Compute Diluted EPS
Net Profit for Current Year – Rs 2,00,00,000
Number of Equity Shares Outstanding – 40,00,000
Basic EPS –Rs 5
Number of 11% Convertible Debentures of Rs 100 each (Each Debenture is convertible into 8 equity shares)
– 50,000
Interest Expense for the current year –Rs 5.5 Lacs
Tax Saving relating to Interest Expense (30%) – Rs 1.65 Lacs

9. Net Profit for Current Year – Rs 1,00,00,000

Number of Equity Shares Outstanding – 50,00,000
Interest Expense for the current year –Rs 12 Lacs
Income tax rate – 30%
Number of 12% Convertible Debentures of Rs 100 each (Each Debenture is convertible into 10 equity
shares) – 1,00,000.
Compute basic and diluted EPS

10. Net Profit for Current Year – Rs 85,50,000

Number of Equity Shares Outstanding – 20,00,000
Interest Expense for the current year –Rs 6 Lacs
Income tax rate – 30%
Number of 8% Convertible Debentures of Rs 100 each (Each Debenture is convertible into 10 equity shares)
– 1,00,000.
Compute basic and diluted EPS

11. Compute Diluted Earnings Per Share with the following information of Hiranyagarbha Ltd
Net Profit for the period attributable to Equity Shareholders = Rs 50 Lakhs.
Number of Equity Shares outstanding = 10 Lakhs.
12% Convertible Preference Shares of Rs 100 each = 50,000 (Each Preference Share is convertible into 8
Equity Shares).
Corporate Income-Tax Rate is 30% while Dividend Distribution Tax Rate is 12.5%.

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12. Compute Basic and Diluted EPS of A ltd

Net Profit for the period = Rs 10 Lakhs.
Weighted Average Number of Equity Shares outstanding = 4 Lakhs.
Weighted Average Number of Equity Shares under Option during the year = 2 lakhs
Exercise Price of options = Rs 20
Average price of equity shares for the last six months of the year = Rs 25

13. Compute Basic and Diluted EPS of S ltd

Net Profit for the period = Rs 30 Lakhs.
Weighted Average Number of Equity Shares outstanding = 12 Lakhs.
No of options given to employees = 2 lakh shares
Exercise Price of options = Rs 15
Average fair value of one equity share during the year = Rs 25

When Equity shares are issued Date to be considered

In exchange for cash Date when cash is receivable
As a result of conversion of debt instruments Date of conversion
In exchange for settlement of a liability Date when settlement becomes effective
As consideration for acquisition of Asset Date on which Asset is recognised
For rendering of service to the company Date on which service is rendered.
For Amalgamation in the nature of PURCHASE Date of Acquisition
For Amalgamation in the nature of MERGER Beginning of reporting period ( because it
is pooling of two companies interest so)
By the way of Bonus issue/Share Split/ Beginning of earliest period reported
Consolidation of shares

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ADDITIONAL QUESTIONS ON AS 20 - EPS

14. On 1st April, 20X1 a company had 6,00,000 equity shares of Rs 10 each (Rs 5 paid up by all
shareholders). On 1st September, 20X1 the remaining Rs 5 was called up and paid by all
shareholders except one shareholder having 60,000 equity shares. The net profit for the year ended
31st March, 20X2 was Rs 21,96,000 after considering dividend on preference shares of Rs 3,40,000.

You are required to compute Basic EPS for the year ended 31st March, 20X2 as per Accounting Standard 20
"Earnings Per Share".

SOLUTION-

Date No of Paid up value Total Paid up No of shares of WANES

(1) shares (2) per share capital Rs 10 each (6)
(3)= (1) * (2) (4) (5) = (4) / 10
01/04/20x1 600,000 5 30,00,000 300,000 125,000
{300,000*5/12}
01/09/20x1 540,000 5 27,00,000 270,000 332,500
{600,000- {570,000*7/12}
60,000}
TOTAL 457,500

BEPS = EAESH / WANES

BEPS = 21,96,000 / 457,500
BEPS = 4.8

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Chapter 15 AS 22: ACCOUNTING FOR TAXES ON INCOME

• This standard prescribes the accounting treatment of taxes on income and follows the concept of
matching expenses against revenue for the period.
• Taxable income may be significantly different from the accounting income.
• Difference between taxable income and accounting income arises due to two main reasons.

Firstly, there are differences between items of revenue and expenses as appearing in the statement of
profit and loss and the items which are considered as revenue, expenses or deductions for tax purposes,
known as Permanent Difference.

Secondly, there are differences between the amount in respect of a particular item of revenue or expense
as recognised in the statement of profit and loss and the corresponding amount which is recognised for the
computation of taxable income, known as Timing Difference

Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and
loss, before deducting income-tax expense.

Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with
the tax laws.

Deferred tax is the tax effect of timing differences.

1. Rama Ltd., has provided the following information:

Depreciation as per accounting records – Rs 2,00,000
Depreciation as per income tax records – Rs 5,00,000
Unamortised preliminary expenses as per tax record – Rs 30,000

There is adequate evidence of future profit sufficiency. How much deferred tax asset/ liability should be
recognised as transition adjustment? Tax rate 50%.

SOLUTION-

Table showing calculation of deferred tax asset / liability

Particulars Amount Timing Deferredtax Amount@ 50%
differences
Excess depreciation as per tax 3,00,000 Timing Deferred tax liability 1,50,000
records ( 5,00,000 – 2,00,000)
Unamortised preliminary 30,000 Timing Deferredtax asset
expenses as per tax records (15,000)
Net deferred tax liability 1,35,000

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2. Omega Limited is working on different projects which are likely to be completed within 3 years
period. It recognises revenue from these contracts on percentage of completion method for
financial statements during 20x0-20x1, 20x1-20x2 and 20x2-20x3 for Rs 11,00,000, Rs 16,00,000 and
Rs 21,00,000 respectively.

However, for Income-tax purpose, it has adopted the completed contract method under which it has
recognised revenue of Rs 7,00,000, Rs 18,00,000 and Rs 23,00,000 for the years 20x0-20x1, 20x1-20x2 and
20x2-20x3 respectively. Income-tax rate is 35%. Compute the amount of deferred tax asset/liability for the
years 20x0-20x1, 20x1-20x2 and 20x2-20x3.

Solution
Calculation of Deferred Tax Asset/Liability in Omega Limited
Year Accounting Taxable Timing Timing Deferred Deferred
Income Income Difference Difference Tax Tax
(balance) Liability
(balance)
20X0- 20X1 11,00,000 7,00,000 4,00,000 4,00,000 1,40,000 1,40,000

20X1-20X2 16,00,000 18,00,000 (2,00,000) 2,00,000 (70,000) 70,000

20X2- 20X3 21,00,000 23,00,000 (2,00,000) NIL (70,000) NIL

48,00,000 48,00,000

3. From the following details of A Ltd. for the year ended 31-03-2017, calculate the deferred tax asset/
liability as per AS 22 and amount of tax to be debited to the Profit and Loss Account for the year.
Particulars Amount
Accounting Profit 6,00,000
Book Profit as per MAT 3,50,000
Profit as per Income Tax Act 60,000
Tax rate 20%
MAT rate 7.50%

Solution
Tax as per accounting profit 6,00,000×20%= Rs 1,20,000
Tax as per Income-tax Profit 60,000×20% =Rs 12,000
Tax as per MAT 3,50,000×7.50%= Rs 26,250
Tax expense= Current Tax +Deferred Tax
Rs 1,20,000 = Rs 12,000+ Deferred tax

Therefore, Deferred Tax liability as on 31-03-20X1

= Rs 1,20,000 – Rs 12,000 = Rs 1,08,000

Amount of tax to be debited in Profit and Loss account for the year 31-03-20X1
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= Rs 12,000 + Rs 1,08,000 + Rs 14,250 (26,250 – 12,000)
= Rs 1,34,250

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ADDITIONAL QUESTIONS ON AS 22 – ACCOUNTING FOR TAXES ON INCOME

4. Example on MAT –
A ltd has following taxable profit & MAT profit as per 115 JB of income tax act 1961.
Tax rate is 30% , MAT rate at 10%

Year Taxable Profit as per Income tax Profit as per MAT

Provision
1 10,000 100,000
2 30,000 100,000
3 100,000 100,000
Show tax to be paid by company & MAT credit treatment?

Solution-

Year Taxable Profit as Tax as per Tax as per Tax MAT MAT Actual
(1) Profits per MAT normal MAT payable credit Balance Tax paid
(2) (3) Income tax (5) = {Higher Available
provisions (3) *10% of (4) &
(4) = (3) }
(3) *30%
1 10,000 100,000 3,000 10,000 10,000 7,000 7,000 10,000
2 30,000 100,000 9,000 10,000 10,000 1,000 8,000 10,000
3 100,000 100,000 30,000 10,000 30,000 0 0 22,000
(30k-8k)

5. The Accountant of Sohna Ltd. provides the following information for the year ended 31-03-2019:

Particulars Amount
Accounting Profit 7,50,000
Book Profit as per MAT 4,37,500
Profit as per Income Tax Act 90,000
Tax rate 20%
MAT rate 7.50%

You are required to calculate the deferred tax asset/ liability as per AS 22 and amount of tax to be debited
to the Profit and Loss Account for the year

Solution –

Tax as per accounting profit (7,50,000 * 20%) = Rs 1,50,000

Tax as per Income-tax Profit ( 90,000 * 20%) = Rs 18,000
Tax as per MAT (4,37,500 * 7.50%) = Rs 32,812.50

Tax expense= Current Tax + Deferred Tax

Rs 1,50,000 = Rs 18,000+ Deferred tax
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Therefore, Deferred Tax liability as on 31-03-2019

= Rs 1,50,000 – Rs 18,000 = Rs 1,32,000

Amount of tax to be debited in Profit and Loss account for the year 31-03-2019
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= Rs 18,000 + Rs 1,32,000 + Rs 14,812.50 (32,812.50 – 18,000)
= Rs 1,64,812.50

MAT CREDIT can be carried forward for 15 years.

6. How is Minimum Alternative Tax (MAT) to be presented in the financial statements?

Solution –
MAT is treated as the current tax. The tax expense arising on account of payment of MAT should be
charged at the gross amount, in the normal way, to the profit and loss account in the year of payment of
MAT. In the year in which the MAT credit becomes eligible to be recognized as an asset in accordance with
the recommendations contained in the Guidance Note on Accounting for Credit Available in respect of
Minimum Alternate Tax under the Income Tax Act, the said asset should be created by way of a credit to
the profit and loss account and presented as a separate line item therein.

MAT credit should be presented under the head under the head ‘Non-current Assets’ sub head ‘Long-term
Loans and Advances’ as per Schedule III to the Companies Act, 2013 considering that there being a
convincing evidence of realization of the asset, it is of the nature of a pre-paid tax which would be adjusted
against the normal income tax during the specified period. The asset may be reflected as ‘MAT credit
entitlement’.

In the year of set-off of credit, the amount of credit availed should be shown as a deduction from the
‘Provision for Taxation’ on the liabilities side of the balance sheet. The unavailed amount of MAT credit
entitlement, if any, should continue to be presented under the head ‘Loans and Advances’ if it continues to
meet the considerations stated in the Guidance Note.

7. Write short note on Timing difference and Permanent Difference as per AS 22

Solution-

Matching of taxes against revenue for a period poses special problems arising from the fact that in number
of cases, taxable income may be different from the accounting income. The divergence between taxable
income may be different from the accounting income arises due to two main reasons: Firstly, there are
differences between items of revenue and expenses as appearing in the statement of profit and loss and
the items which are considered as revenue, expenses or deductions for tax purposes, known as Permanent
Difference. Secondly, there are differences between the amount in respect of a particular item of revenue
or expense as recognised in the statement of profit and loss and the corresponding amount which is
recognised for the computation of taxable income, known as Timing Difference.

Permanent differences are the differences between taxable income and accounting income which arise in
one accounting period and do not reverse subsequently. For example, an income exempt from tax or an
expense that is not allowable as a deduction for tax purposes.

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Timing differences are those differences between taxable income and accounting income which arise in one
accounting period and are capable of reversal in one or more subsequent periods. For e.g., Depreciation
etc.

8. Is it permissible not to recognize deferred tax liability on the ground that the Company expects
that there will be losses both for accounting and tax purposes in near future? You are required to
give advise to the company.

Solution-
The Company should provide for deferred tax liability on the timing differences irrespective for the fact that
these timing differences will reverse in the period in which the Company expects to be in loss both from the
accounting as well as tax point of view.

9. Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year
of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs 1,000
lakhs and Rs 2,000 lakhs respectively. From the third year it is expected that the timing difference
would reverse each year by Rs 50 lakhs. Assuming tax rate of 40%, you are required to compute to
the deferred tax liability at the end of the second year and any charge to the Profit and Loss
account.

Solution-
As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”, deferred tax in respect of
timing differences which originate during the tax holiday period and reverse during the tax holiday period,
should not be recognized to the extent deduction from the total income of an enterprise is allowed during
the tax holiday period as per the provisions of sections 10A and 10B of the Income-tax Act. Deferred tax in
respect of timing differences which originate during the tax holiday period but reverse after the tax holiday
period should be recognized in the year in which the timing differences originate. However, recognition of
deferred tax assets should be subject to the consideration of prudence. For this purpose, the timing
differences which originate first should be considered to reverse first.

Out of Rs 1,000 lakhs depreciation, timing difference amounting Rs 400 lakhs (Rs 50 lakhs x 8 years) will
reverse in the tax holiday period and therefore, should not be recognized. However, for Rs 600 lakhs (Rs
1,000 lakhs – Rs 400 lakhs), deferred tax liability will be recognized for Rs 240 lakhs (40% of Rs 600 lakhs) in
first year. Adjustments are done on the basis of FIFO method.

In the second year, the entire amount of timing difference of Rs 2,000 lakhs will reverse only after tax
holiday period and hence, will be recognized in full. Deferred tax liability amounting Rs 800 lakhs (40% of Rs
2,000 lakhs) will be created by charging it to profit and loss account and the total balance of deferred tax
liability account at the end of second year will be Rs 1,040 lakhs (240 lakhs + 800 lakhs).

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10. PQR Ltd.'s accounting year ends on 31st March. The company made a loss of Rs 2,00,000 for the
year ending 31.3.20X1. For the years ending 31.3.20X2 and 31.3.20X3, it made profits of Rs 1,00,000
and Rs 1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight
years and tax rate is 40%. By the end of 31.3.20X1, the company feels that there will be sufficient
taxable income in the future years against which carry forward loss can be set off. There is no
difference between taxable income and accounting income except that the carry forward loss is
allowed in the years ending 20X2 and 20X3 for tax purposes. Prepare a statement of Profit and Loss
for the years ending 20X1, 20X2 and 20X3.
Solution

Statement of Profit and Loss

31.3.20X1 31.3.20X2 31.3.20X3

Profit (Loss) (2,00,000) 1,00,000 1,20,000

Less: Current tax (20,000 x 40%) (8,000)
Deferred tax:
Tax effect of timing differences originating 80,000
during the year (2,00,000 x 40%)
Tax effect of timing differences
reversed/adjusted during the year (40,000) (40,000)
(1,00,000 x 40%)
Profit (Loss) After Tax Effect (1,20,000) 60,000 72,000

11. The following particulars are stated in the Balance Sheet of Deep Limited as on 31st March, 2020:
Deferred Tax Liability (Cr.) = 28 Lacs
Deferred Tax Assets (Dr.) = 14 Lacs

The following transactions were reported during the year 2020-2021:

(i) Depreciation as per books was Rs 70 Lakhs whereas Depreciation for Tax purposes was Rs 42 Lakhs.
There were no additions to Fixed Assets during the year.
(ii) Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were Rs 14 Lakhs.
(iii) Share issue expenses allowed under section 35(D) of the Income Tax Act, 1961 for the year 2020-21
(1/10th of Rs 70.00 lakhs incurred in 2019-20).
(iv) Repairs to Plant and Machinery were made during the year for Rs 140.00 Lakhs and was spread over the
period 2020-21 and 2021-22 equally in the books. However, the entire expenditure was allowed for
income-tax purposes in the year 2020-21.
(v) Donation to Private Trust = 20 Lacs (not allowed under Income Tax Laws).
(vi) Interest to Financial Institutions of Rs 20 Lacs accounted in the books on accrual basis, but actual
payment was made before the due date of filing return and allowed for tax purpose also.

Tax Rate to be taken at 40%.

You are required to show the impact of above items on Deferred Tax Assets and Deferred Tax Liability as on
31st March, 2021. (JULY 2021: 5 Marks)

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SOLUTION-
Impact of various items in terms of deferred tax liability/deferred tax asset on 31.3.21
Transactions Analysis Nature of Effect Amount
difference

Difference in Generally, written Responding Reversalof 28 lakhs x 40%

depreciation down value method of timing DTL
= Rs 11.20 lakhs
depreciation isadopted difference
under IT Act which
leads tohigher
depreciationin earlier
years of useful life
of the asset in
comparisonto later
years.

Disallowances, as Tax payable for the Responding Reversalof 14 lakhs x 40%

per IT Act, of earlier year was timing DTA
= 5.6 lakhs
earlier years higher on this difference
account.

Share issue Due to disallowance of Responding Reversalof 7 lakhs x 40%

expenses full expenditure timing DTA
= Rs 2.8 lakhs
under IT Act, tax difference
payable in the earlier
years was higher.

Repairs toplant Due to allowance of Originating Increasein 70 lakhs x 40%

and machinery full expenditure timing DTL
=28 lakhs
under IT Act, tax difference
payable of thecurrent
year will be less.

Donation to Disallowed under Permanent No Impact on -

Private Trust Income Tax Laws Difference DTA / DTL

Interest to It is allowed as No timing No Impact on -

Financial deduction under IT difference DTA / DTL
Institutions Act, if the payment
is made before the
due date of filing
the return of
income

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12. The following information is furnished in respect of Slate Ltd. for the year ending 31-3-2019:
(i) Depreciation as per books Rs 2,80,000
Depreciation for tax purpose Rs 1,90,000
The above depreciation does not include depreciation on new additions.
(ii) A new machinery purchased on 1.4.18 costing Rs 1,20,000 on which 100% depreciation is allowed in the
1st year for tax purpose whereas Straight-line method is considered appropriate for accounting purpose
with a life estimation of 4 years.
(iii) The company has made a profit of Rs 6,40,000 before depreciation and taxes.
(iv) Corporate tax rate of 40%.
Prepare relevant extract of statement of Profit and Loss for the year ending 31-3-2019 and also show the
effect of above items on deferred tax liability/asset as per AS 22 (RTP MAY 2021)

SOLUTION-
Statement of Profit and Loss for the year ended 31st March, 2019 (Extract)
Rs
Profit before depreciation and taxes 6,40,000
Less: Depreciation for accounting purposes
(2,80,000+30,000) (3,10,000)
Profit before taxes (A) 3,30,000
Less: Tax expense (B)
Current tax (W.N.1) (3,30,000 x 40%) 1,32,000
Deferred tax (W.N.2) NIL (1,32,000)
Profit after tax (A-B) 1,98,000

Working Notes:
1. Computation of taxable income
Amount (Rs)
Profit before depreciation and tax 6,40,000
Less: Depreciation for tax purpose (1,90,000 + 1,20,000) (3,10,000)
Taxable income 3,30,000
Tax on taxable income @ 40% 1,32,000

2. Impact of various items in terms of deferred tax liability / deferred tax asset
S. Transactions Analysis Nature of Effect Amount
No. difference
(i) Difference in Generally, Responding Reversal (2,80,000 -
depreciation written down timing of DTL 1,90,000) x
value method difference 40%
ofdepreciation = (36,000)
is

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adopted under
IT Act which
leads to higher
depreciation in
earlier years of
useful life of the
asset in
comparison to
(ii) later years.
Depreciation Due to Timing Creation (1,20,000
on new allowance of full difference – 30,000) x
of DTL
machinery amount as 40%
expenditure = 36,000
under IT Act, tax
payable in the
earlier years is
less.

Net impact NIL

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Chapter 16 AS 24: DISCONTINUING OPERATIONS

• The objective of AS 24 is to establish principles for reporting information about discontinuing

operations.
• Thereby enhancing the ability of users of financial statements to make projections of an enterprise's
cash flows, earnings-generating capacity, and financial position by segregating information about
discontinuing operations from information about continuing operations.

A discontinuing operation is a component of an enterprise:

a. That the enterprise, pursuant to a single plan, is:
(i) Disposing of substantially in its entirety, such as by selling the component in a single transaction
or by demerger or spin-off of ownership of the component to the enterprise's shareholders or
(ii) Disposing of piecemeal, such as by selling off the component's assets and settling its liabilities
individually or
(iii) Terminating through abandonment and
b. That represents a separate major line of business or geographical area of operations.
c. That can be distinguished operationally and for financial reporting purposes.

Examples of activities that do not necessarily satisfy criterion (a) of the definition, but that might do so in
combination with other circumstances, include:
• Gradual or evolutionary phasing out of a product line or class of service.
• Discontinuing, even if relatively abruptly, several products within an ongoing line of business.
• Shifting of some production or marketing activities for a particular line of business from one location
to another and
• Closing of a facility to achieve productivity improvements or other cost savings.

A component can be distinguished operationally and for financial reporting purposes - criterion (c) of the
definition of a discontinuing operation - if all the following conditions are met:
• The operating assets and liabilities of the component can be directly attributed to it.
• Its revenue can be directly attributed to it.
• At least a majority of its operating expenses can be directly attributed to it.

INITIAL DISCLOSURE EVENT (IDE) -

IDE is the earliest occurrence of either –
(a) The enterprise has entered into a binding sale agreement for substantially all of the assets
attributable to the discontinuing operation or
(b) The enterprise Board of Directors or similar governing body has both
▪ Approved a detailed formal plan for discontinuance and
▪ Made an announcement of the plan

DISCLOSURE-
Initial Disclosure
a. A description of the discontinuing operation(s)
b. The business or geographical segment(s) in which it is reported as per AS 17
c. The date and nature of the initial disclosure event.
d. The date or period in which the discontinuance is expected to be completed if known or determinable
e. The carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total
liabilities to be settled

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f. The amounts of revenue and expenses in respect of the ordinary activities attributable to the
discontinuing operation during the current financial reporting period
g. The amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation
during the current financial reporting period, and the income tax expense related thereto

1. A consumer goods producer has changed the product line as follows:

Particulars Dish washing Bar Clothes washing Bar
(Per month) (Per month)
January 2016 - September 2016 2,00,000 2,00,000
October 2016 - December 2016 1,00,000 3,00,000
January 2017 - March 2017 Nil 4,00,000

The company has enforced a gradual enforcement of change in product line on the basis of an overall plan.
The Board of Directors has passed a resolution in March 2016 to this effect. The company follows calendar
year as its accounting year. You are required to examine whether it should it be treated as discontinuing
operation as per AS 24?

Solution
As per AS 24 ‘Discontinuing Operations’, a discontinuing operation is a component of an enterprise:
(i) that the enterprise, pursuant to a single plan, is:
(1) disposing of substantially in its entirety,
(2) disposing of piecemeal, or
(3) terminating through abandonment; and
(ii) that represents a separate major line of business or geographical area of operations; and
(iii) that can be distinguished operationally and for financial reporting purposes.

As per provisions of the standard, business enterprises frequently close facilities, abandon products or even
product lines, and change the size of their work force in response to market forces. While those kinds of
terminations generally are not, in themselves, discontinuing operations, they can occur in connection with a
discontinuing operation. Examples of activities that do not necessarily satisfy criterion of discontinuing
operation are gradual or evolutionary phasing out of a product line or class of service, discontinuing, even if
relatively abruptly, several products within an ongoing line of business;

In the given case, the company has enforced a gradual enforcement of change in product line hence is not
a discontinued operation.

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ADDITIONAL QUESTIONS ON AS 24- DISCONTINUING OPERATIONS

2. (i) What are the disclosure and presentation requirements of AS 24 for discontinuing
operations?
(ii) Give few examples of activities that do not necessarily satisfy criterion (a) of paragraph 3 of
AS 24, but that might do so in combination with other circumstances.

SOLUTION-
(i) An enterprise should include the following information relating to a discontinuing operation in its
financial statements beginning with the financial statements for the period in which the initial disclosure
event (as defined in paragraph 15) occurs:

(a) a description of the discontinuing operation(s);

(b) the business or geographical segment(s) in which it is reported as per AS 17, Segment Reporting
(c) the date and nature of the initial disclosure event;
(d) the date or period in which the discontinuance is expected to be completed if known or determinable;
(e) the carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total
liabilities to be settled;
(f) the amounts of revenue and expenses in respect of the ordinary activities attributable to the
discontinuing operation during the current financial reporting period;
(g) the amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation
during the current financial reporting period, and the income tax expense related thereto; and
(h) the amounts of net cash flows attributable to the operating, investing, and financing activities of the
discontinuing operation during the current financial reporting period.

(ii) Examples of activities that do not necessarily satisfy criterion (a) of paragraph 3, but that might do so in
combination with other circumstances, include:
• Gradual or evolutionary phasing out of a product line or class of service;
• Discontinuing, even if relatively abruptly, several products within an ongoing line of business;
• Shifting of some production or marketing activities for a particular line of business from one location
to another; and Closing of a facility to achieve productivity improvements or other cost savings.

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Chapter 17 AS 26: INTANGIBLE ASSETS

An intangible asset is
➢ an identifiable
➢ non-monetary asset
➢ without physical substance
➢ held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes

• An intangible asset can be clearly distinguished from goodwill if the asset is separable.
• An asset is separable if the enterprise could rent, sell, exchange or distribute the specific future
economic benefits attributable to the asset without also disposing of future economic benefits that
flow from other assets used in the same revenue earning activity

ASSETS IN PHYSICAL SUBSTANCE -

(a) Physical Form: Generally, Intangible Assets do not have any physical substance. However, some may
be contained in or on a physical substance e.g. Compact Disk for Computer Software, Legal
Documentation for Licence or Patent, Film for motion pictures.
(b) Treatment: The cost of the physical substance containing the Intangible Assets is not significant.
Therefore, the physical substance containing an Intangible Asset, though tangible in nature, is
commonly treated as a part of the Intangible Asset contained in or on it

(c) Combination of Tangible and Intangible Elements:

➢ An asset may have both intangible and tangible elements that are inseparable.
➢ The presence of predominant element determines whether such an asset is treated as Fixed Asset
under AS - 10, or as an Intangible Asset under AS - 26.
Example: A Software without which a computer controlled machine tool cannot operate, is an integral part
of the related hardware, and it is treated as a Fixed Asset. When the software is not an integral part of
related hardware, the software is treated as an Intangible Asset.

CONDITIONS FOR RECOGNITION : AN INTANGIBLE ASSET SHOULD BE RECOGNISED ONLY IF-

• It is probable that the future economic benefits that are attributable to the asset will flow to the
Enterprise, and
• The cost of the asset can be measured reliably.

THE COST OF AN INTANGIBLE ASSET COMPRISES:

• Its purchase price,
• Any import duties and other taxes (other than those subsequently recoverable by the enterprise
from the taxing authorities), and
• Any directly attributable expenditure on making the asset ready for its intended use. Directly
attributable expenditure includes, for example, professional fees for legal services. Any trade
discounts and rebates are deducted in arriving at the cost

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INTANGIBLE ASSET PURCHASED THROUGH EXCHANGE :

• When an Intangible Asset is acquired in exchange for other assets(except cash & bank) of the
reporting Enterprise, the Intangible asset acquired is recorded at Fair Value(FV) of Asset given up or
FV of Asset Acquired which ever is more clearly Evident.
• If the transaction lacks commercial substance or Fair value of either asset given up or acquired
cannot be measured then Intangible Asset Acquired is recorded at Book Value of Asset Given up(No
Profit/Loss is Booked)

ACQUISITION BY WAY OF A GOVERNMENT GRANT

• In some cases, an intangible asset may be acquired free of charge, or for nominal consideration, by
way of a government grant. This may occur when a government transfers or allocates to an
enterprise intangible assets such as airport landing rights, licences to operate radio or television
stations etc.
• Intangible asset acquired free of charge is recorded at Nominal value & Intangible Asset Acquired for
nominal consideration is recognised at acquisition cost, ;
• Any Expenditure that is directly attributable to making the asset ready for its intended use is also
included in the cost of the asset.

1. Due to the contribution of Great Men Ltd to the Society, the State Government has given a product
licence at a nominal consideration of Rs 40 Lakhs. The market price of the license is however Rs 3
Crores. The Company incurred Rs 4 Lakhs as expenditure in registration and initial operation of the
licence. At what price should the license be recorded?

INTERNALLY GENERATED GOODWILL-

Internally generated goodwill is not recognised as an asset because it is not an identifiable resource
controlled by the enterprise that can be measured reliably at cost.

INTERNALLY GENERATED INTANGIBLE ASSETS-

To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise
classifies the generation of the asset into
• Research Phase &
• Development Phase

If an enterprise cannot distinguish the research phase from the development phase of an internal project to
create an intangible asset, the enterprise treats the expenditure on that project as if it were incurred in the
research phase only.

The cost of an internally generated intangible asset is the sum of expenditure incurred from the time when
the intangible asset first meets the recognition criteria. Reinstatement of expenditure recognised as an
expense in previous annual financial statements or interim financial reports is prohibited

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Research Phase Activities Development Phase Activities

(a) Research Activities include activities aimed at Development Activities include :
obtaining new knowledge, design, construction and testing of pre-production or pre-
(b) search for, evaluation and final selection of, use prototypes and models, design of tools, jigs, moulds
applications of research findings or other knowledge, and dies involving new technology.
(c) search for alternatives of materials, devices,
products, processes, systems or services, and
(d) formulation, design, evaluation and final selection
of possible alternatives for new or improved
materials, devices, products, processes, systems or
services.

Research Phase Treatment Development Phase Treatment

Recognition as EXPENSE Recognition as ASSET

Intangible Asset arising from the Research (or Intangible Asset arising from Development (or from
from the research phase of an internal project) Development Phase of an internal project) should be
should not be recognised. recognised only when the Enterprise demonstrates all of
the following -
Expenditure on Research (or on the Research Phase (a) technical feasibility of completing the Intangible Asset
of an internal project) should be recognised as an so that it will be available for use or sale,
expense when it is incurred. (b) its intention to complete the Intangible Asset and use
or sell it,
Reason: During the Research Phase of a project, an (c) its ability to use or sell the Intangible Asset,
Enterprise cannot demonstrate - (d) manner of generation of probable future economic
• The existence of an Intangible Asset and benefits by Intangible Asset, existence of a market for the
• The probable future economic benefits arising output of the Intangible Asset or Intangible Asset itself or,
from such Asset. if it is to be used internally, usefulness of the asset,
Therefore, this expenditure is recognised as an (e) availability of adequate technical, financial and other
expense when it is incurred. resources to complete the development and to use or sell
the Intangible Asset, and
(f) its ability to measure the expenditure attributable to
the Intangible Asset during its development reliably.

COST EXCLUSIONS-
The following are not components of the cost of an internally generated intangible asset, these should be
expensed off in profit and loss account:
a. Selling, administrative and other general overhead expenditure unless this expenditure can be directly
attributed to making the asset ready for use.
b. Clearly identified inefficiencies and initial operating losses incurred before an asset achieves planned
performance and
c. Expenditure on training the staff to operate the asset.
(d) expenditure on relocating or re-organising of an enterprise.

MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION-

After initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation
and any accumulated impairment losses.
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2. A Pharma Company spent Rs 33 Lakhs during the accounting year ended 31 st March, on a research
project to develop a drug to treat a dreaded disease. Experts are of the view that it may take four
years to establish whether the drug will be effective or not and even if found effective it may take
two to three more years to produce the medicine, which can be marketed. The Company wants to
treat the expenditure as Deferred Revenue Expenditure. Comment

3. Himalaya Ltd, in the past three years, spent Rs 75,00,000 to develop a Drug to treat a dreaded
disease, which was charged to P&L A/c since they did not meet the relevant Accounting Standard
criteria for capitalization. In the current year, approval of the concerned Government Authority has
been received. The Company wishes to capitalize Rs 75,00,000 and disclose it as a Prior Period Item.
Is it correct? Give reasons

PRINCIPLES INVOLVED IN AMORTISATION OF INTANGIBLE ASSETS.

• Purpose: The future economic benefits contained in an asset are used over time, hence the carrying
amount is reduced to reflect that consumption.
• Allocation: The Depreciable Amount should be allocated on a systematic basis over the best
estimate of the asset's useful life.
• Presumptive Life: AS - 26 assumes that the useful life of an Intangible Asset will not exceed a period
of 10 years.
• Commencement: Amortisation should commence when the asset is available for use.
• Change in Fair Value or Recoverable Amount: Amortisation is recognised whether or not there has
been an increase in the asset's Fair Value or Recoverable Amount

AMORTIZATION METHOD -
• A variety of amortisation methods can be used to allocate the depreciable amount of an asset on a
systematic basis over its useful life.
• These methods include the straight-line method, the diminishing balance method and the unit of
production method.
• The method used for an asset is selected based on the expected pattern of consumption of
economic benefits and is consistently applied from period to period

RESIDUAL VALUE –
Residual value is the amount, which an enterprise expects to obtain for an asset at the end of its useful life
after deducting the expected costs of disposal.
The residual value of an intangible asset should be assumed to be zero unless:
a. There is a commitment by a third party to purchase the asset at the end of its useful life or
b. There is an active market for the asset and:
i. Residual value can be determined by reference to that market and
ii. It is probable that such a market will exist at the end of the asset's useful life.

REVIEW OF AMORTISATION PERIOD AND AMORTISATION METHOD -

• The amortisation period and the amortisation method should be reviewed at least at each
financial year end.
• If the expected useful life of the asset is significantly different from previous estimates, the
amortisation period should be changed accordingly.

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• If there has been a significant change in the expected pattern of economic benefits from the
asset, the amortisation method should be changed to reflect the changed pattern. Such
changes should be accounted for in accordance with AS 5.

RETIREMENTS AND DISPOSALS-

An intangible asset should be de recognised (eliminated from the balance sheet) if
➢ disposed or
➢ when no future economic benefits are expected from its use and subsequent disposal.

DISCLOSURE REQUIREMENTS-
a) The useful lives or the amortisation rates used.
b) The amortisation methods used.
c) The gross carrying amount and the accumulated amortisation (aggregated with accumulated
impairment losses) at the beginning and end of the period
d) A reconciliation of the carrying amount at the beginning and end of the period showing:
i. Additions, indicating separately those from internal development and through
amalgamation.
ii. Retirements and disposals.
iii. Impairment losses recognised in the statement of profit and loss during the period.
iv. Impairment losses reversed in the statement of profit and loss during the period.
v. Amortisation recognised during the period and
vi. Other changes in the carrying amount during the period.

4. Radha Limited is showing an Intangible Asset at Rs 85 Lakhs as on 1.4.2014. This Asset was acquired
for Rs 112 Lakhs on 1.4.2011 and the same was available for use, from that date. The Company has
been following the policy of Amortization of the Intangible Asset over a period of 12 years on
Straight Line Basis. Comment on the accounting treatment of the above with reference to the
relevant Accounting Standard.

5. Srimathi Ltd acquired patent right for Rs 400 Lakhs. The product life cycle has been estimated to be
5 years and the amortization was decided in the ratio of estimated future cash flows which are as
under -

Year 1 2 3 4 5
Estimated Future Cash Flows (Rs in Lakhs) 200 200 200 100 100

After 3rd year, it was ascertained that the patent would have an estimated balance future life of 3 years and
the estimated cash flow after 5th yr is expected to be 50 lacs each yr. Determine amortization ?

6. Preetha Ltd got a license to manufacture certain medicines for 10 years at a License Fee of Rs 200
Lakhs. Given below is the pattern of expected production and expected Operating Cash Inflow:
Year Production of Bottles (In Lacs) Net Operating Cash Flow ( In Lacs)
1 300 900
2 600 1800
3 650 2300
4 – 10 800 p.a 3200 p.a

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Net Operating Cash Flow has increased for third year because of better inventory management and
handling method. Suggest the amortization method

7. A Company has deferred R&D Cost of Rs 150 Lakhs. Sales expected in the subsequent years
are as under -
Year I II III IV
Sales (Rs in Lakhs) 400 300 200 100

Suggest how R&D Cost should be charged to Profit & Loss Account. Also, if at the end of the III year, it is felt
that no further benefit will accrue in the IV year, how the unamortized expenditure would be dealt with in
the accounts of the Company?

8. Pinaki Ltd is engaged in research on a new Process Design for its product. It had incurred Rs 10 Lakhs
on research during first 5 months of the financial year 2013-2014. The development of the process
began on 1st September 2013, and upto 31st March 2014, a sum of Rs 8 Lakhs was incurred as
Development Phase Expenditure, which meets the Asset Recognition Criteria. From 1 st April 2014,
the Company has implemented the new Process Design and it is likely that this will result in after-tax
saving of Rs 2 Lakhs per annum for next five years. The Cost of Capital is 10%. The Present Value of
Annuity Factor of Rs 1 for 5 years @ 10% is 3.7908. Decide the treatment of Research and
Development Cost of the Project as per AS-26

9. ABC Ltd, developed a Know-How by incurring expenditure of Rs 20 Lakhs. The Know-How was used
by the Company from 01.04.20x1. The useful life of the asset is 10 years from the year of
commencement of its use. The Company has not amortised the asset till 31.03.20x8. Pass Journal
Entry to give effect to the value of Know-How as per AS - 26 for the year ended 31.03.20x8.

Solution
Journal Entry
Profit and Loss A/c (Prior period item) Dr 12,00,000
Amortization A/c Dr 2,00,000
To Know-how A/c 14,00,000
[Being amortization of 7 years (out of which
amortization of 6 years charged as prior period
item)]

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ADDITIONAL QUESTIONS ON AS26- INTANGIBLE ASSETS

10. A company with a turnover of Rs 250 crores and an annual advertising budget of Rs 2 crores had
taken up the marketing of a new product. It was estimated that the company would have a turnover
of Rs 25 crores from the new product. The company had debited to its Profit and Loss account the
total expenditure of Rs 2 crore incurred on extensive special initial advertisement campaign for the
new product.
Is the procedure adopted by the company correct?

Solution

AS 26 mentions that expenditure on advertising and promotional activities should be recognised as an

expense when incurred.

In the given case, advertisement expenditure of Rs 2 crores had been taken up for the marketing of a new
product which may provide future economic benefits to an enterprise by having a turnover of Rs 25 crores.
Here, no intangible asset or other asset is acquired or created that can be recognised.

Therefore, the accounting treatment by the company of debiting the entire advertising expenditure of Rs 2
crores to the Profit and Loss account of the year is correct.

11. A company acquired a patent at a cost of Rs 160 lakhs for a period of 5 years and the product life
cycle is also 5 years. The company capitalized the cost and started amortising the asset at Rs 16
lakhs per year based on the economic benefits derived from the product manufactured under the
patent. After 2 years it was found that the product life cycle may continue for another 5 years from
then (the patent is renewable and the company can get it renewed after 5 years). The net cash flows
from the product during these 5 years were expected to be Rs 50 lakhs, Rs 30 lakhs, Rs 60 lakhs, Rs
70 lakhs and Rs 40 lakhs. Find out the amortization cost of the patent for each of the years.

Solution-

Company amortized Rs 16,00,000 per annum for the first two years. Hence, Amortization for the first two
years (Rs 16,00,000 X 2) = Rs 32,00,000.
Remaining carrying cost after two years = Rs 1, 28, 00,000 (1,60,00,000 – 32,00,000)

Since after two years it was found that the product life cycle may continue for another 5 years, hence the
remaining carrying cost Rs128 lakhs will be amortized during next 5 years in the ratio of net cash arising
from the sale of the products of Fast Limited.

The amortization cost of the patents may be computed as follows:

Year Net Cash Flows Amortization Ratio Amortization Amount
III 50,00,000 50/250 = 0.2 128 lacs * 0.2 = 25.6 lacs
IV 30,00,000 30/250 = 0.12 128 lacs * 0.12 = 15.36 lacs
V 60,00,000 60/250= 0.24 128 lacs * 0.24 = 30.72 lacs
VI 70,00,000 70/250 = 0.28 128 lacs * 0.28 = 35.84 lacs
VII 40,00,000 40/250= 0.16 128 lacs * 0.16 = 20.48 lacs
TOTAL 250,00,000 1 128 lacs

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12. K Ltd. launched a project for producing product X in October, 2016. The Company incurred Rs 40
lakhs towards Research and Development expenses upto 31st March, 2017. Due to prevailing
market conditions, the Management came to conclusion that the product cannot be manufactured
and sold in the market for the next 10 years. The Management hence wants to defer the
expenditure write off to future years.
You are required to advise the Company as per the applicable Accounting Standard

Solution-

As per provisions of AS 26 “Intangible Assets”, expenditure on research should be recognized as an expense

when it is incurred. An intangible asset arising from development (or from the development phase of an
internal project) should be recognized if, and only if, an enterprise can demonstrate all of the conditions
specified in para 44 of the standard. An intangible asset (arising from development) should be derecognized
when no future economic benefits are expected from its use according to para 87 of the standard. Thus, the
manager cannot defer the expenditure write off to future years in the given case.

Hence, the expenses amounting Rs 40 lakhs incurred on the research and development project has to be
written off in the current year ending 31st March, 2017.

13. Desire Ltd. acquired a patent at a cost of Rs 1,00,00,000 for a period of 5 years and the product
life-cycle is also 5 years. The company capitalized the cost and started amortizing the asset on SLM.
After two years it was found that the product life-cycle may continue for another 5 years from then.
The net cash flows from the product during these 5 years were expected to be Rs 45,00,000, Rs
42,00,000, Rs 40,00,000, Rs 38,00,000 and Rs 35,00,000. Patent is renewable and company changed
amortization method from 3rd year (i.e. from SLM to ratio of expected new cash flows).

You are required to compute the amortization cost of the patent for each of the years (1st year to 7th year).

Solution –

Company amortized Rs 20,00,000 per annum ( 100,00,000/5 ) for the first two years. Hence, Amortization
for the first two years (Rs 20,00,000 X 2) = Rs 40,00,000.
Remaining carrying cost after two years = Rs 60,00,000 (1,00,00,000 – 40,00,000)

Year Net Cash Flows Amortization Ratio Amortization Amount

I - - 20 lacs
II - - 20 lacs
III 45,00,000 45/200 = 0.225 60 lacs * 0.225 = 13.5 lacs
IV 42,00,000 42/200 = 0.21 60 lacs * 0.21 = 12.6 lacs
V 40,00,000 40/200 = 0.2 60 lacs * 0.2 = 12 lacs
VI 38,00,000 38/200 = 0.19 60 lacs * 0.19 = 11.4 lacs
VII 35,00,000 35/200 = 0.175 60 lacs * 0.175 = 10.5 lacs
TOTAL 200,00,000 1 100 lacs

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14. A company acquired for its internal use a software on 28.01.2012 from the USA for US $
1,00,000. The exchange rate on that date was Rs 52 per USD. The seller allowed trade discount @ 5 %. The
other expenditure were:
(i) Import Duty : 20%
(ii) Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
(iv) Installation expenses : Rs 25,000
(v) Profession fees for Clearance from Customs : Rs 20,000

Compute the cost of Software to be capitalized.

Answer
Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software $ 1,00,000
Less: Trade discount @ 5% ($ 5,000)
$ 95,000
Cost in Rs (US $ 95,000 x Rs 52) 49,40,000
Add: Import duty on cost @ 20% (Rs) 9,88,000
59,28,000
Purchase tax @ 10% (Rs) 5,92,800
Installation expenses (Rs) 25,000
Profession fee for clearance from customs (Rs) 20,000
Cost of the software to be capitalized (Rs) 65,65,800

Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as part of the
cost of the asset.

15. During 20X1-X2, an enterprise incurred costs to develop and produce a routine low risk computer
software product, as follows:

Particular Amount
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000
Product masters for training materials (Phase 5) 19,500
Packing the products (1,500 units) (Phase 6) 16,500

After completion of phase 2, it was established that the product is technically feasible for the market.

You are required to state how the above referred cost to be recognized in the books of accounts.

SOLUTION
As per AS 26, costs incurred in creating a computer software product should be charged to research and
development expense when incurred until technological feasibility/asset recognition criteria has been
established for the product. Technological feasibility/asset recognition criteria have been established upon
completion of detailed program design, coding and testing.

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In this case, Rs 90,000 would be recorded as an expense (Rs 50,000 for completion of detailed program
design and Rs 40,000 for coding and testing to establish technological feasibility/asset recognition
criteria).

Cost incurred from the point of technological feasibility/asset recognition criteria until the time when
products costs are incurred are capitalized as software cost (63,000+ 18,000+ 19,500) = Rs 1,00,500.

Packing cost Rs 16,500 should be recognized as expenses and charged to P & L A/c.

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16. Surgical Ltd, is developing a new production process of surgical equipment. During the financial year
ended 31st March 2020 the total expenditure incurred on the process was Rs 67 lakhs. The
production process met the criteria for recognition as an intangible asset on 1st January 2020.
Expenditure incurred till this date was Rs 35 lakhs.

Further expenditure incurred on the process for the financial year ending 31st March 2021 Rs 105 lakhs. As
on 31st March 2021, the recoverable amount of technique embodied in the process is estimated to be Rs
89 lakhs. This includes estimates of future cash outflows and inflows.

Under the provisions of AS 26, you are required to ascertain:

(i) The expenditure to be charged to Profit and Loss Account for the year ended 31st March 2020;
(ii) Carrying amount of the intangible asset as on 31st March 2020;
(iii) Expenditure to be charged to Profit and Loss Account for the year ended 31st March 2021;
(iv) Carrying amount of the intangible asset as on 31st March 2021 (DEC 2021: 5 MARKS)

SOLUTION-
As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020
Rs 35 lakhs is recognized as an expense because the recognition criteria were not met until 1stJanuary
2020. This expenditure will not form part of the cost of the production process recognized as an intangible
asset in the balance sheet.

(ii) Carrying value of intangible asset as on 31.03.2020

At the end of financial year, on 31st March 2020, the production process will be recognized (i.e. carrying
amount) as an intangible asset at a cost of Rs 32 (67-35) lacs (expenditure incurred since the date the
recognition criteria were met, i.e., from 1stJanuary 2020).

(iii) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2021
(Rs in lacs)
Carrying Amount as on 31.03.2020 32
Expenditure during 2020 – 2021 105
Book Value 137
Recoverable Amount (89)
Impairment loss 48
Rs 48 lakhs to be charged to Profit and loss account for the year ending 31.03.2021.

(iv) Carrying value of intangible asset as on 31.03.2021

(Rs in lacs)
Book Value 137
Less: Impairment loss (48)
Carrying amount as on 31.03.2021 89

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17.PIL Ltd. is showing an intangible asset at Rs 72 lakhs as on 31-3-2022. This asset was acquired for Rs
120 lakhs as on 01-04-2016 and the same was used from that date. The company has been following
the policy of amortization of the intangible assets over a period of 15 years, on straight line basis.
You are required to comment on the accounting treatment of asset with reference to AS 26 “Intangible
Assets” and also give the necessary rectification journal entry in the books (MTP APRIL 2022-5 MARKS)

SOLUTION-
As per AS 26 'Intangible Assets', the depreciable amount of an intangible asset should be allocated on systematic
basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible
asset will not exceed ten years from the date when the asset is available for use. The Company has been following
the policy of amortization of the intangible asset over a period of 15 years on straight line basis. The period of 15
years is more than the maximum period of 10 years specified as per AS 26.

Accordingly, the company would be required to restate the carrying amount of intangible asset as on
31.3.2022 at Rs 48 lakhs i.e. Rs 120 lakhs less Rs 72 lakhs (Rs 120 Lakhs / 10 years x 6 years = 72 Lakhs). The
difference of Rs 24 Lakhs (Rs 72 lakhs – Rs 48 lakhs) will be adjusted against the opening balance of revenue
reserve. The carrying amount of Rs 48 lakhs will be amortized over remaining 4 years by amortizing Rs 12
lakhs per year.

The necessary journal entry (for rectification) will be

Revenue Reserves Dr. Rs 24 Lakhs
To Intangible Assets Rs 24 Lakhs
(Adjustment to reserves due to restatement of the carrying amount of intangible asset)

18. Naresh Ltd. had the following transactions during the financial year 2019-2020:
(i) Naresh Ltd. acquired running business of Sunil Ltd. for Rs 10,80,000 on 15th May, 2019. The fair value of
Sunil Ltd.'s net assets was Rs 5,16,000. Naresh Ltd. is of the view that due to popularity of Sunil Ltd.’s
product in the market, its goodwill exists.

(ii) Naresh Ltd. had taken a franchise on July 2019 to operate a restaurant from Sankalp Ltd. for Rs 1,80,000
and at an annual fee of 10% of net revenues (after deducting expenditure). The franchise expires after 6
years. Net revenues were Rs 60,000 during the financial year 2019-2020.

(iii) On 20th August, 2019, Naresh Ltd, incurred costs of Rs 2,40,000 to register the patent for its product.
Naresh Ltd. expects the patent’s economic life to be 8 years.

Naresh Ltd. follows an accounting policy to amortize all intangibles on straight line basis over the maximum
period permitted by accounting standards taking a full year amortization in the year of acquisition. Goodwill
on acquisition of business to be amortized over 5 years (SLM) as per AS 14.

Prepare a schedule showing the intangible assets section in Naresh Ltd. Balance Sheet at 31st March, 2020.

(RTP MAY 2021)

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SOLUTION-

Balance Sheet (Extract relating to intangible asset) as on 31st March 2020

Note No. Rs
Assets
(1) Non-current assets
Intangible assets 1 8,11,200

Notes to Accounts (Extract)

Rs Rs
1. Intangible assets
Goodwill (Refer to note 1) 4,51,200
Franchise (Refer to Note 2) 1,50,000
Patents (Refer to Note 3) 2,10,000 8,11,200

Working Notes:

Rs
(1) Goodwill on acquisition of business
Cash paid for acquiring the business (purchase consideration) 10,80,000
Less: Fair value of net assets acquired (5,16,000)
Goodwill 5,64,000
Less: Amortisation as per AS 14 ie. over 5 years (as per SLM) (1,12,800)
Balance to be shown in the balance sheet 4,51,200
(2) Franchise 1,80,000
Less: Amortisation (over 6 years) (30,000)
Balance to be shown in the balance sheet 1,50,000
(3) Patent 2,40,000
Less: Amortisation (over 8 years as per SLM) (30,000)
Balance to be shown in the balance sheet 2,10,000

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19. PQR Ltd. has acquired a Brand from another company for Rs 100 lakhs. PQR Ltd. contends that since
the said brand is a very popular and famous brand, no amortization needs to be provided. Comment
on this in line with the Accounting Standards (RTP MAY 2022)

SOLUTION-

AS 26 ‘Intangible Assets” provides that an intangible asset should be measured initially at cost. After initial
recognition, an intangible asset should be carried at cost less any accumulated amortization and any
accumulated impairment losses. The amount of an intangible asset should be allocated on a systematic
basis over the best estimate of its useful life for computing amortization. There is a rebuttable presumption
that the useful life of an intangible asset will not exceed 10 years from the date when the asset is available
for use. It must be ensured that the value of brand is amortized in accordance with AS 26, as brand is
considered to be intangible asset.

The contention of PQR Ltd. that Brand is very popular and famous, hence no amortization needs to be
provided is not correct as there is no persuasive evidence that the useful life of the intangible asset will
exceed 10 years

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Chapter 18 AS 29: PROVISIONS, CONTINGENT LIABILITIES (CL) AND CONTINGENT

ASSETS (CA)

• AS 29 does not apply to executory contracts except where the contract is onerous
• Executory contracts are contracts under which neither party has performed any
of its obligations or both parties have partially performed their obligations to an equal extent
• Check whether Obligation exists.
• Obligation is the scenario where entity has no realistic alternative to avoid the liability( not in the
hands of company to be avoided)
• If no Obligation exists then no need for any Provision or CL.
Obligation can be Legal or Constructive
• Legal Obligation arises from contract or law.
• Constructive Obligation arises from past events.

• Provision – It is a liability with uncertain timing or amount.

• PROVISION WOULD BE RECOGNISED WHEN -

(a) An enterprise has a present obligation as a result of a past event; and
(b) It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.

• LIABILITY – It is a present obligation of the entity arising from past events , the settlement of which
is expected to result in outflow of economic resources.

• CONTINGENT LIABILITY – It is
(a) A possible obligation that arises from past events and the existence of which will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly within the control
of the enterprise; or
(b) A present obligation that arises from past events but is not recognised because:
i. It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
ii. A reliable estimate of the amount of the obligation cannot be made.

PROBABLE = MORE LIKELY (MORE THAN 50 %)

POSSIBLE = NOT MORE LIKELY ( Less than or equal to 50 %)

CONTIGENT ASSETS –
• If Virtually certain then Recognise it as an Asset
• If Highly Probable then Disclose it as an Contingent Asset Else Ignore

REIMBURSEMENTS:
• When entity is required to settle any provision or liability and expects to get reimbursement from
another party and
• It is virtually certain that reimbursement will be received if entity settles the obligation

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• Then such reimbursement (Maximum to the extent of provision/ liability shall be recognised as a
separate asset.

ONEROUS CONTRACTS-
➢ Contracts where expected costs to fulfill the contract is higher than the benefit to be generated from the contract.
➢ Provision should be made for lower of
i. Penalty payable to exit contract
ii. Excess of cost of servicing the contract over future expected benefits from such contracts.

RESTRUCTURING –
The following are examples of events that may fall under the definition of restructuring:
(a) Sale or termination of a line of business
(b) The closure of business locations in a country or region or the relocation of business activities from one
country or region to another
(c) Changes in management structure, for example, eliminating a layer of management
(d) Fundamental re-organisations that have a material effect on the nature and focus of the enterprise's
operations

A restructuring provision does not include such costs as:

(a) Retraining or relocating continuing staff;
(b) Marketing; or
(c) Investment in new systems and distribution networks

➢ Provision should be made for committed cost on account of Restructuring

➢ Company is said to be committed to Restructuring when it has entered into a Binding Agreement

FUTURE OPERATING LOSSES -

• Future operating losses do not meet the definition of a liability and the general recognition criteria,
therefore provisions should not be recognised for future operating losses.

DISCLOSURE REQUIREMENTS -
For each class of provision, an enterprise should disclose:
(a) The carrying amount at the beginning and end of the period;
(b) Additional provisions made in the period, including increases to existing provisions;
(c) Amounts used (i.e. incurred and charged against the provision) during the period; and
(d) Unused amounts reversed during the period.

1. At the end of the financial year ending on 31st December, 2017, a company finds that there are
twenty law suits outstanding which have not been settled till the date of approval of accounts by
the Board of Directors. The possible outcome as estimated by the Board is as follows:

Particulars Probability Loss (Rs)

In respect of five cases (Win) 100% -
Next ten cases:
Win 60% -
Lose (Low damages) 30% 1,20,000
Lose (High damages) 10% 2,00,000

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Remaining five cases:

Win 50% -
Lose (Low damages) 30% 1,00,000
Lose (High damages) 20% 2,10,000
Ascertain the amount of contingent loss and the accounting treatment in respect thereof.

Solution -
According to AS 29 (Revised) ‘Provisions, Contingent Liabilities and Contingent Assets’, contingent liability
should be disclosed in the financial statements if following conditions are satisfied:
(i) There is a present obligation arising out of past events but not recognised as provision.
(ii) It is not probable that an outflow of resources embodying economic benefits will be required to settle
the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability to be recognised as
provision

Expected loss in next ten cases = 30% of Rs 1,20,000 + 10% of Rs 2,00,000

= Rs 36,000 + Rs 20,000
= Rs 56,000

Expected loss in remaining five cases = 30% of Rs 1,00,000 + 20% of Rs 2,10,000

= Rs 30,000 + Rs 42,000
= Rs 72,000

To disclose contingent liability on the basis of maximum loss will be highly unrealistic. Therefore, the better
approach will be to disclose the overall expected loss of Rs 9,20,000 (Rs 56,000 × 10 + Rs 72,000 × 5) as
contingent liability.

2. EXOX Ltd. is in the process of finalising its accounts for the year ended 31st March, 2017. The
company seeks your advice on the following:
(i) The Company’s sales tax assessment for assessment year 2014-15 has been completed on 14th February,
2017 with a demand of Rs 2.76 crore. The company paid the entire due under protest without prejudice to
its right of appeal. The Company files its appeal before the appellate authority wherein the grounds of
appeal cover tax on additions made in the assessment order for a sum of 2.10 crore.

(ii) The Company has entered into a wage agreement in May, 2017 whereby the labour union has accepted
a revision in wage from June, 2016. The agreement provided that the hike till May, 2017 will not be paid to
the employees but will be settled to them at the time of retirement. The company agrees to deposit the
arrears in Government Bonds by September, 2017.

Answer
(i) Since the company is not appealing against the addition of Rs 0.66 crore the same should be provided for
in its accounts for the year ended on 31st March, 2017. The amount paid under protest can be kept under
the heading ‘Loans & Advances’ and disclosed along with the contingent liability of Rs 2.10 crore.

(ii) The arrears for the period from June, 2017 to March, 2017 are required to be provided for in the
accounts of the company for the year ended on 31st March, 2017.

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ADDITIONAL QUESTIONS ON AS 29 – PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS

3. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms
of the contract for sale the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within three years from the date of sale. On past
experience, it is probable (i.e. more likely than not) that there will be some claims under the
warranties.

Solution –

• Present obligation as a result of a past obligating event - The obligating event is the sale of the
product with a warranty, which gives rise to an obligation.
• An outflow of resources embodying economic benefits in settlement - Probable for the warranties
as a whole.

Conclusion - A provision is recognised for the best estimate of the costs of making good under the
warranty products sold before the balance sheet date.

4. An enterprise in the oil industry causes contamination but does not clean up because there is no
legislation requiring cleaning up, and the enterprise has been contaminating land for several years.
At 31 March 2005 it is virtually certain that a law requiring a clean-up of land already contaminated
will be enacted shortly after the year end.

Solution-
• Present obligation as a result of a past obligating event - The obligating event is the contamination
of the land because of the virtual certainty of legislation requiring cleaning up.
• An outflow of resources embodying economic benefits in settlement - Probable.

Conclusion - A provision is recognised for the best estimate of the costs of the clean-up.

5. Y ltd has filed case against X ltd for compensation of Rs 10 lacs for patent infringement. Legal
Council of X ltd opines that there is 90% chance of loosing the case. Should X ltd make Provision?

Solution
A Provision is recognised for the best estimate of the amount to settle the obligation.

6. A retail store has a policy of refunding purchases by dissatisfied customers, even though it is
under no legal obligation to do so. Its policy of making refunds is generally known.

SOLUTION-
• Present obligation as a result of a past obligating event - The obligating event is the sale of the
product, which gives rise to an obligation because obligations also arise from normal business
practice, custom and a desire to maintain good business relations or act in an equitable manner.
• An outflow of resources embodying economic benefits in settlement - Probable, a proportion of
goods are returned for refund
Conclusion - A provision is recognised for the best estimate of the costs of refunds.

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7. The government introduces a number of changes to the income tax system. As a result of these
changes, an enterprise in the financial services sector will need to retrain a large proportion of its
administrative and sales workforce in order to ensure continued compliance with financial services
regulation. At the balance sheet date, no retraining of staff has taken place.

SOLUTION-
• Present obligation as a result of a past obligating event - There is no obligation because no
obligating event (retraining) has taken place.
Conclusion - No provision is recognised (As company can escape from this by hiring new employees or
asking existing employees to bear training cost themselves.)

8. During 2004-05, Enterprise A gives a guarantee of certain borrowings of Enterprise B, whose

financial condition at that time is sound. During 2005-06, the financial condition of Enterprise B
deteriorates and at 30 September 2005 Enterprise B goes into liquidation.

SOLUTION
(a) At 31 March 2005
• Present obligation as a result of a past obligating event - The obligating event is the giving of the
guarantee, which gives rise to an obligation.
• An outflow of resources embodying economic benefits in settlement - No outflow of benefits is
probable at 31 March 2005.

Conclusion - No provision is recognised . The guarantee is disclosed as a contingent liability unless the
probability of any outflow is regarded as remote

(b) At 31 March 2006

• Present obligation as a result of a past obligating event - The obligating event is the giving of the
guarantee, which gives rise to a legal obligation.
• An outflow of resources embodying economic benefits in settlement - At 31 March 2006, it is
probable that an outflow of resources embodying economic benefits will be required to settle the
obligation.

Conclusion - A provision is recognised for the best estimate of the obligation.

9. After a wedding in 2004-05, ten people died, possibly as a result of food poisoning from products
sold by the enterprise. Legal proceedings are started seeking damages from the enterprise but it
disputes liability. Up to the date of approval of the financial statements for the year 31 March 2005,
the enterprise’s lawyers advise that it is probable that the enterprise will not be found liable.
However, when the enterprise prepares the financial statements for the year 31 March 2006, its
lawyers advise that, owing to developments in the case, it is probable that the enterprise will be
found liable.

SOLUTION
(a) At 31 March 2005
• Present obligation as a result of a past obligating event - On the basis of the evidence available
when the financial statements were approved, there is no present obligation as a result of past
events.
• Conclusion - No provision is recognised. The matter is disclosed as a contingent liability unless the
probability of any outflow is regarded as remote.
(b) At 31 March 2006

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• Present obligation as a result of a past obligating event - On the basis of the evidence available,
there is a present obligation.
• An outflow of resources embodying economic benefits in settlement - Probable.

Conclusion - A provision is recognised for the best estimate of the amount to settle the obligation.

10. A furnace has a lining that needs to be replaced every five years for technical reasons. At the
balance sheet date, the lining has been in use for three years.

SOLUTION-
• Present obligation as a result of a past obligating event - There is no present obligation.

Conclusion - No provision is recognised. The cost of replacing the lining is not recognised because, at the
balance sheet date, no obligation to replace the lining exists independently of the company’s future actions
- even the intention to incur the expenditure depends on the company deciding to continue operating the
furnace or to replace the lining.

11. An airline is required by law to overhaul its aircraft once in every five years. The pacific Airlines
which operate aircrafts does not provide any provision as required by law in its final accounts. You
are required to comment on the validity of the treatment done by the company in line with the
provisions of AS 29

SOLUTION-
• Present obligation as a result of a past obligating event - There is no present obligation but a future
one.

Conclusion - No provision is recognised. Even a legal requirement to overhaul does not make the costs of
overhaul a liability, because no obligation exists to overhaul the aircraft independently of the enterprise’s
future actions - the enterprise could avoid the future expenditure by its future actions, for example by
selling the aircraft.

However, an obligation might arise to pay fines or penalties under the legislation after completion of five
years. Assessment of probability of incurring fines and penalties depends upon the provisions of the
legislation and the stringency of the enforcement regime. A provision should be recognized for the best
estimate of any fines and penalties if airline continues to operate aircrafts for more than five years.

12. 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 Rs
200 lacs.
The Directors are of the view that the claim can be successfully resisted by the Company.
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

SOLUTION-
As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision should be recognized
when
(a) an enterprise has a present obligation as a result of a past event;

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(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision should be recognized.

In the given situation, since, the directors of the company are of the opinion that the claim can be
successfully resisted by the company, therefore there will be no outflow of the resources.

Hence, no provision is required. The company will disclose the same as contingent liability by way of the
following note:

“Litigation is in process against the company relating to a dispute with a competitor who alleges that the
company has infringed copyrights and is seeking damages of Rs 200 lakhs. However, the directors are of the
opinion that the claim can be successfully resisted by the company.”

13. The company has not made provision for warrantee in respect of certain goods considering that
the company can claim the warranty cost from the original supplier.
You are required to examine in line with the provisions of AS 29.

Solution
As per provisions of AS 29 “Provisions, Contingent Liabilities and Contingent Assets”, where some or all of
the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement should be recognized when, and only when, it is virtually certain that reimbursement will
be received if the enterprise settles the obligation. The reimbursement should be treated as a separate
asset. The amount recognized for the reimbursement should not exceed the amount of the provision.

It is apparent from the question that the company had not made provision for warranty in respect of
certain goods considering that the company can claim the warranty cost from the original supplier.
However, the provision for warranty should have been made as per AS 29 and the amount claimable as
reimbursement should be treated as a separate asset in the financial statements of the company rather
than omitting the disclosure of such liability. Accordingly, it can be said that the accounting treatment
adopted by the company with respect to warranty is not correct.

14. ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine
amounting to Rs. 4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd. had to
change its method of production. The new method will not require the machine ordered and so it
shall be scrapped after delivery. The expected scrap value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd

Solution-
• A liability is recognized when outflow of economic resources in settlement of a present obligation
can be anticipated and the value of outflow can be reliably measured.
• In the given case, ABC Ltd. should recognize a liability of Rs. 4,00,000 payable to XYZ Ltd.
• When flow of economic benefit to the enterprise beyond the current accounting period is
considered improbable, the expenditure incurred is recognized as an expense rather than as an
asset.

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• In the present case, flow of future economic benefit from the machine to the enterprise is
improbable. The entire amount of purchase price of the machine should be recognized as an
expense.

Hence ABC Ltd. should charge the amount of Rs. 4,00,000 (being loss due to change in production method)
to Profit and loss statement and record the corresponding liability (amount payable to XYZ Ltd.) for the
same amount in the books for the year ended 31st March, 2018.

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15. An engineering goods company provides after sales warranty for 2 years to its customers.

Based on past experience, the company has been following policy for making provision for
warranties on the invoice amount, on the remaining balance warranty period:
Less than 1 year : 3% provision
More than 1 year : 2% provision

The company has raised invoices as under:

Invoice Date Amount

19th January, 2011 40,000
29th January, 2012 25,000
15th October, 2012 90,000

Calculate the provision to be made for warranty under Accounting Standard 29 as at 31st March, 2012 and
31st March, 2013. Also compute amount to be debited to Profit and Loss Account for the year ended 31st
March, 2013.

Answer
Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’

As at 31st March, 2012 = Rs 40,000 x .02 + Rs 25,000 x .03

= Rs 800 + Rs 750 = Rs 1,550

As at 31st March, 2013 = Rs 25,000 x .02 + Rs 90,000 x .03

= Rs 500 + Rs 2,700 = Rs 3,200

Amount debited to Profit and Loss Account for year ended 31st March, 2013

Balance of provision required as on 31.03.2013 3,200

Less: Opening Balance as on 1.4.2012 (1,550)
Amount debited to profit and loss account 1,650

Note: No provision will be made on 31st March, 2013 in respect of sales amounting Rs 40,000 made on
19th January, 2011 as the warranty period of 2 years has already expired.

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16. An organization operates an offshore oilfield where its licensing agreement requires it to remove
the oil rig at the end of production and restore the seabed. Ninety percent of the eventual costs
relate to the removal of the oil rig and restoration of damage caused by building it, and ten percent
arise through the extraction of oil. At the balance sheet date, the rig has been constructed but no oil
has been extracted. With reference to AS-29, how would you deal with this in the annual accounts
of the company at the Balance Sheet date?

SOLUTION-
The construction of the oil rig creates an obligation under the terms of the license to remove the rig and
restore the seabed and is thus an obligating event. At the balance sheet date, however, there is no
obligation to rectify the damage that will be caused by extraction of the oil. An outflow of resources
embodying economic benefits in settlement is probable. Thus, a provision is recognized for the best
estimate of ninety per cent of the eventual costs that relate to the removal of the oil rig and restoration
of damage caused by building it. These costs are included as part of the cost of the oil rig.

However, there is no obligation to rectify the damage that will be caused by extraction of oil, as no oil
has been extracted at the balance sheet date. So, no provision is required for the cost of extraction of oil
at balance sheet date. Ten per cent of costs that arise through the extraction of oil are recognized as a
liability when the oil is extracted.

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Chapter 19 LIQUIDATION OF COMPANIES

Liquidation: It is the legal procedure by which the company comes to an end

Contributory - The term "Contributory" means every person liable to contribute to the assets of the
Company in the event of its being wound up
(a) "List A" Contributories: "List A" contains the names of present members of the Company, i.e. Members
whose names appear in the Register of Members as on the date of commencement of winding up of the
Company.
(b) “List B" Contributories: Shareholders who had transferred Partly Paid Shares (otherwise than by
operation of law or by death) within one year, prior to the date of winding up may be called upon to pay an
amount to pay off such Creditors as existed on the date of transfer of shares. These Transferors are called
as B List Contributories.

Liability of B List Contributories will crystallize only:

(a) when the existing assets available with the liquidator are not sufficient to cover the liabilities;
(b) when the existing shareholders fail to pay the amount due on the shares to the Liquidator

PREFERENTIAL CREDITORS-
• Government Taxes: All revenues, taxes, Cess and rates due from the company to the Central
Government or a State Government or to a local authority at the relevant date, and having become
due and payable within the twelve months immediately before that date;
• Salary and Wages: All wages or salary including wages payable for time or piece work and salary
earned wholly or in part by way of commission of any employee in respect of services rendered to
the company and due for a period not exceeding four months within the 12 months immediately
before the relevant date.
• Holiday Remuneration: All accrued holiday remuneration becoming payable to any employee, or in
the case of his death, to any other person claiming under him, on the termination of his
employment before, or by the winding up order, or, as the case may be, the dissolution of the
company;
• Contribution under ESI Act: Unless the company is being wound up voluntarily merely for the
purposes of reconstruction or amalgamation with another company, all amount due in respect of
contributions payable during the period of twelve months immediately before the relevant date by
the company as the employer of persons under the Employees’ State Insurance Act, 1948 or any
other law for the time being in force;
• Compensation in respect of death of disablement
• PF, Pension Fund or Gratuity Fund:

OVERRIDING PREFERENTIAL PAYMENTS-

In the winding up of a company, the following debts should be paid in priority to all other debts, as per
section 326:
a. workmen’s dues; and
b. where a secured creditor has realized a secured asset, so much of the debts due to such secured creditor
as could not be realized by him or the amount of the workmen’s portion in his security (if payable under the
law), whichever is less, pari-passu with the workmen’s dues

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PAYMENTS ARE MADE AND SHOWN IN THE FOLLOWING ORDER :

(a) Legal charges;
(b) Liquidator’s expenses;
(c) Debenture holders (including interest up to the date of winding up if the company is insolvent and to the
date of payment if it is solvent);
(d) Creditors:
(i) Preferential (in actual practice, preferential creditors are paid before debenture holders having a floating
charge);
(ii) Unsecured creditors;
(e) Preferential shareholders (Arrears of dividends on cumulative preference shares should be paid up to
the date of commencement of winding up); and
(f) Equity shareholders.

1. In which sequence the following payments will be made while preparing the liquidator’s statement
of account? 1. Debenture holders 2. Unsecured creditors 3. Legal charges 4. Equity shareholders. 5.
Preference shareholders.

Solution:
Payments will be made in the following order while preparing the liquidator’s statement of account:
1. Legal charges 2. Debenture holders 3. Unsecured creditors
4. Preference shareholders 5. Equity shareholders

2. Amounts payable in winding-up of a company are as follows:

Secured Creditors Rs 1,25,000
Workmen's Due Rs 2,50,000

Show the payments made and treatment of balance in the following two instances :
(i) If the security realized is Rs 2,00,000
(ii) If the security realized is Rs 1,00,000

Solution
(i) If the value of the security (realized) is Rs 2,00,000:
Particulars Secured Workmen Total
creditors compensation
Amount payable 1,25,000 2,50,000 3,75,000
Less: security realized and paid in pro 66,667 1,33,333 2,00,000
rata 1:2
Balance treated as overriding pref. 58,333 1,16,667 1,75,000
creditors
Balance treated as unsecured creditors - - -

(ii) If the value of the security (realized) is 1,00,000:

Particulars Secured Workmen Total
creditors compensation
Amount payable 1,25,000 2,50,000 3,75,000
Less: security realized and paid in 33,333 66,667 1,00,000
pro rata 1:2

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Balance treated as overriding pref. 66,667 1,83,333 2,50,000

creditors
Balance treated as unsecured 25,000 - 25,000
creditors
Note: Unsatisfied portion of secured creditors to the extent which could not be paid because of their
security being used for workmen’s dues, is to be treated as overriding preferential payment and the
remaining potion is to be treated as unsecured.

3. A company went into liquidation whose creditors are Rs 36,000. This amount of Rs 36,000 includes
Rs 6,000 on account of wages of 15 men at Rs 100 per month for 4 months, immediately before the
date of winding up, Rs 9,000 being the salaries of 5 employees at Rs 300 per month for the previous
6 months, Rent for godown for the last six months amounting to Rs 3,000; Income-tax deducted out
of salaries of employees Rs 1,000. In addition it is estimated that the company would have to pay Rs
3,000 as compensation to an employees for injuries suffered by him, which was contingent liability
not accepted by the company and not included in above said creditors figure. Find the amount of
Preferential Creditors.

Solution:
Calculation of Preferential Creditors

Tax deducted at source on salaries 1,000

Wages (15 men for 4 months at Rs 100 each) 6,000
Salaries (5 men for 4 months at Rs 300 each) 6,000
Workmen’s compensation 3,000
Total 16,000
Note: (i) Wages or Salaries payable to any employee due for the period not exceeding 4 months within the
twelve months next before commencement of winding up subject to maximum 20,000 per claimant are
preferential creditors. (ii) Rent for godown is not included in preferential creditors.

4. In a liquidation which commenced on April 2, 20X2 certain creditors could not receive payments out
of the realisation of assets and out of the contributions from “A” list contributories. The following
are the details of certain transfers, which took place in 20X1 and 20X2.
Shareholders Number of shares Date of ceasing Creditors remaining
transferred at the date to be member unpaid and
of ceasing to be member outstanding
X 1,500 1st March 20X1 4,000
A 1,000 1st May 20X1 6,000
B 1,500 1st July 20X1 7,500
C 300 1st Nov. 20X1 8,000
D 200 1st Feb. 20X2 9,500

All the shares were Rs 10 each, Rs 6 paid up ignoring expenses of and remuneration to liquidators, etc.,
show the amount to be realised from the various persons listed above.

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Solution
X will not be liable since he transferred his shares prior to one year preceding the date of winding up.

Statement of Liabilities of B list contributors

A B C D Amount to
Creditors Outstanding 1,000 1,500 300 200 be paid to the
on the date of ceasing Shares Shares Shares Shares Creditors
to be member
(1) 6,000 2,000 3,000 600 400 6,000
(2) 1,500 - 1,125 225 150 1,500
(3) 500 - - 300 200 500
(4) 1,500 - - - 1,500 50
Total (a) 2,000 4,125 1,125 2,250 8,050
(b) maximum liability 4,000 6,000 1,200 800
on shares held
(c) Amount paid (a)
or(b)
whichever is lower 2,000 4,125 1,125 800

5. Sky Ltd. went into Liquidation on 1st April, 20X1. Following are the details regarding share capital of
the company:-
I. 20,000 Equity shares of Rs 100 each, Rs 75 paid up.
II. 30,000 Equity shares of Rs 100 each, Rs 40 paid up.
III. 80,000 Equity shares of Rs 100 each, Rs 65 paid up.

Surplus available with the Liquidator, after discharging all the liabilities is Rs 20,00,000.
Distribute this surplus money among different categories of shareholders.

Solution
Particulars I II III Total
No. of shares 20,000 30,000 80,000 1,30,000
Equity share capital
(@ ` 100) 20,00,000 30,00,000 80,00,000 1,30,00,000
Paid up share Capital (A) 15,00,000 12,00,000 52,00,000 79,00,000
Loss due to Liquidation (B) (9,07,692) (13,61,538) (36,30,770) (59,00,000)
(` 59,00,000 in 2:3:8)
Surplus amount distributed
among different categories of 5,92,308 (1,61,538) 15,69,230 20,00,000
shareholders (A) – (B)
Note: Shareholders of category I and III will get surplus amount, while category II shareholders will pay Rs
1,61,538

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6. Wind Ltd. went into liquidation on 31st March, 20X1. Following details regarding share capital of the
company:-
I. 15,000 Equity shares of Rs 100 each, Rs 90 paid up.
II. 40,000 Equity shares of Rs 50 each, Rs 25 paid up.
III. 2,00,000 Equity shares of Rs 10 each, filly paid up.
Surplus available with the liquidator after payment of all the liabilities Rs 12,00,000.
Distribute this surplus money among different categories of shareholders.

Solution
Particulars I II III Total
No. of shares 15,000 40,000 2,00,000 2,55,000
Equity share capital
(@ ` 100/50/10) 15,00,000 20,00,000 20,00,000 55,00,000
Paid up share capital (A) 13,50,000 10,00,000 20,00,000 43,50,000
Loss due to Liquidation (B) (8,59,090) (11,45,455) (11,45,455) (31,50,000)
(` 31,50,000 in the ratio of 15:20:20)
Surplus amount distributed among
different categories of shareholders 4,90,910 (1,45,455) 8,54,545 12,00,000
(A) – (B)
Note:- Shareholders of category I and III will get surplus amount, while category II shareholders will pay Rs
1,45,455.

7. The position of Neha Ltd. on its liquidation is as under:

5,000, 10% Preference Shares of Rs 100 each Rs 60 paid up
2,000, Equity shares of Rs 75 each, Rs 50 paid up
Unsecured Creditors Rs 99,000
Liquidation Expenses Rs 1,000
Liquidator is entitled to a commission of 2% on the amount realized from calls made on contributories

You are required to prepare Liquidator’s Final Statement of Account if the total assets realized Rs 3,80,400.

Solution
Liquidator’s Final Statement of Account
Receipts ` Payments `
Assets realized 3,80,400 Liquidation Expenses 1,000
Call on contributories: 2,000 20,000 Liquidator’s Remuneration 400
Equity Shares @ ` 10 per share Unsecured Creditors 99,000
(W.N.) Preference Shareholders 3,00,000
4,00,400 4,00,400

Working Notes:
(i) Calculation of Shortage of funds Rs
Total Amount Available 3,80,400
Less: liquidation Expenses (1,000)
Balance 3,79,400
Less: Unsecured Creditors (99,000)

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Balance 2,80,400
Less: Pref. Shareholders (3,00,000)
Shortage of Funds 19,600

(ii) Calculation of funds required to meet shortage and commission payable on Calls to be made
(to be called from equity shareholders)
= Shortage of funds x 100 / 100-Rate of Commission
=19,600×100 / (100-2) = 20,000

(iii) Uncalled Capital @ Rs 25 on 2,000 shares = Rs 50,000

(iv) Amount of Calls to be made from equity shareholders (least of funds required and uncalled capital) i.e.
Rs 20,000 i.e. Rs 10 per Share

(v) Commission on Call = Rs 20,000 x 2/100 = Rs 400

8. Omega Ltd. resolved on 31st March, 20X1 that the company be wound up voluntarily. The following
was the trial balance extracted from its books as on that date:
Rs Rs
Property, plant and equipment 2,00,000
Inventory 1,20,000
Book debts 2,40,000
Cash in hand 40,000
Profit and loss A/c (Dr. balance) 3,00,000
1,000, 6% Pref. Shares of Rs 100 each, fully paid 1,00,000
2,000 Equity shares of Rs 100 each, fully paid 2,00,000
2,000 Equity shares of Rs 100 each Rs 75 paid up 1,50,000

Loan from bank (on security of stock) 1,00,000

Trade Payables 3,50,000
9,00,000 9,00,000

The assets realized the following amounts (after all costs of realization and liquidator’s commission
amounting to Rs 5,000 paid out of cash in hand).
Rs
Property, plant and equipment 1,68,000
Inventory 1,10,000
Trade Receivables 2,30,000

Calls on partly paid shares were made but the amounts due on 200 shares were found to be irrecoverable.
You are required to prepare Liquidator’s final statement of account.

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Solution
Liquidator’s Final Statement Account
` ` `
To Cash in hand 40,000 By Liquidator’s 5,000
To Assets realized: remuneration
and expenses
Property, plant and 1,68,000 By Trade 3,50,000
equipment Payables
Inventory (1,10,000 – By Preference 1,00,000
1,00,000) 10,000 shareholders
Book debts 2,30,000 By Equity
4,08,000 shareholders @ 20,000
` 10 on 2,000
shares
To Cash - proceeds of
call on 1,800 equity
shares @ ` 15* 27,000
4,75,000 4,75,000

Working Note:
Return per equity share

Cash available before paying preference shareholders

(4,48,000 – 3,55,000) 93,000
Add: Notional calls 1,800 shares (2,000-200) × 25 45,000
1,38,000
Less: Preference share capital (1,00,000)
Available for equity shareholders 38,000
Return per share= 38,000
= 10
3,800 (4,000 − 200)
and Loss per Equity Share (100-10) = 90
*Calls to be made @ Rs 15 per share (Rs 90-75) on 1,800 shares.

9. M. Ltd. resolved on 31st December, 20X0 that the company be wound up voluntarily. The following
were the ledger balances extracted from its books as on that date:
Rs
Equity shares of Rs 10 each 2,00,000
9% Preference shares of Rs 10 each 1,00,000
Plant (less depreciation w/o Rs 85,000) 2,15,000
Stock in trade 2,50,000
Trade receivables 55,000
Trade payables 75,000
Bank balance 74,000

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Preliminary Expenses 6,000

Profit & Loss A/c (Dr. balance on 1st January, 20X0) 30,000
Outstanding Expenses (including mortgage interest) 25,000
4% Mortgage loan (secured by floating charge) 2,00,000

On 1st January, 20X1 the liquidator sold M. Ltd.’s Plant for Rs 2,05,000 and stock in trade forRs 2,00,000.
The sale was completed in January, 20X1 and the consideration satisfied as to Rs 2,62,200 in cash and as to
the balance in 6% Debentures of the purchasing company issued to the liquidator at a premium of 2%.
The remaining steps in the liquidation were as follows:
(1) The liquidator realized Rs 52,000 out of the book debts and the cost of collection amounted to Rs 2,000.
(2) The loan mortgage was discharged on 31st January, 20X1 along with interest from 31st July, 20X0. Trade
payables were discharged subject to 2% and outstanding expenses excluding mortgage interest were
settled for Rs 2,000;
(3) On 30th June 20X1 six month’s interest on debentures was received from M. Ltd.
(4) Liquidation expenses amounting to Rs 3,000 and liquidator’s remuneration of 3% on disbursements to
members (Subject to minimum of Rs 5,000) were paid on 30th June, 20X1 when:
(a) The preference shareholders were paid out in cash; and
(b) The debentures on M. Ltd. and the balance of cash were distributed rateably among the equity
shareholders.

Prepare the Liquidator’s Statement of Account showing the distribution.

Solution
Liquidator’s Final Statement of Account
Receipts ` Payments `
Balance at Bank 74,000 Liquidator’s Remuneration 7,302
(2,50,700 X 3/103)
Sundry Assets Realized:
Trade Receivables 52,000 Liquidation Expenses 3,000
Less: cost of Collection (2,000) 50,000
Mortgage Loan 2,00,000
Interest on Loan 4,000
6% Debentures 1,42,800
Cash 2,62,200 Trade payables: 73,500
Interest on Debentures 4,200 (75,000X98%)
(6 months) Outstanding Expenses 2,000

Preference Shareholders:
Preference Capital

1,00,000
Equity Shareholders:
6% Debentures 1,42,800
Cash (Balancing Figure) 598
Total 5,33,200 Total 5,33,200

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Working Notes:
Rs
1. Assets sold including stock in trade (2,05,000+2,00,000) 4,05,000
Consideration received:
By way of Cash 2,62,200
By Rs1,40,000, 6% Debentures (at a premium of 2%) 1,42,800
2. Total Amount with the Liquidator 5,33,200
Less: Payments
(3,000+2,00,000+4,000+73,500+2,000) 2,82,500
Amount available for disbursement to shareholders 2,50,700
3. Disbursement to Shareholders
Preference Shareholders 1,00,000
Equity Shareholders: 1,43,398
(By way of 6% Debentures, ie, Rs 1,42,800 & the remaining
amt in cash Rs 598)

10. Prakash Processors Ltd. went into voluntary liquidation on 31st December, 20X1. It gives you the
following ledger balances as on this date:
Rs
Issued and subscribed capital:
5,000 10% cumulative preference shares
of Rs 100 each, fully paid 5,00,000
2,500 equity shares of Rs 100 each, Rs 75 paid 1,87,500
7,500 equity shares of Rs 100 each, Rs 60 paid 4,50,000
15% Debentures secured by a floating charge 2,50,000
Interest outstanding on Debentures 37,500
Creditors 3,18,750

Land and Building 2,50,000

Machinery and Plant 6,25,000
Patents 1,00,000
Stock 1,37,500
Trade receivables 2,75,000
Cash at Bank 75,000
Profit and Loss A/c (Dr. balance) 2,81,250

Preference dividends were in arrears for 2 years and the creditors included Preferential creditors of Rs
38,000.

The assets realised as follows :

Land and Building Rs 3,00,000; Machinery and Plant Rs 5,00,000; Patents Rs 75,000; Stock Rs 1,50,000;
Trade receivablesRs 2,00,000.

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The expenses of liquidation amounted to Rs 27,250. The liquidator is entitled to a commission of 3% on

assets realised except cash. Assuming the final payments including those on debentures is made on 30th
June, 20X2 show the liquidator’s Statement of Account.

Solution
Prakash Processors Limited - Liquidator’s Statement of Account
Receipts ` Payments `
To Assets realised - By Liquidation expenses 27,250
Bank 75,000 By Preferential creditors 38,000
By Liquidator’s Remuneration 36,750
(W.N.1)
Other assets: By Debenture holders:
Land etc. 3,00,000 Debentures 2,50,000
Machinery etc. 5,00,000 Interest payable 37,500
Patents 75,000 Interest 1-1-X2/30-6-X2 18,750 3,06,250
Stock 1,50,000
Trade receivables 2,00,000 12,25,000
To Call on equity 19,875 By Unsecured creditors 2,80,750
shareholders (7,500
× ` 2.65)
By Preference shareholders:

Preference capital 5,00,000

Arrear of Dividend 1,00,000 6,00,000
12,89,000
By Equity shareholders -
` 12.35 on 2,500 shares 30,875

13,19,875 13,19,875

Working Notes:
(1) Liquidator’s remuneration 12,25,000 × 3/100 =Rs 36,750

(2) As the company is solvent, interest on the debentures will have to be paid for the period
1-1-20X2 to 30-6-20X2
= 2,50,000 x 15 / 10 x 1 /2
= 18,750

(3) Total equity capital - paid up 6,37,500

Less : Balance available after payment to unsecured and
preference shares (13,00,000 — 12,89,000) (11,000)
Loss to be born by 10,000 equity shares 6,26,500
Loss per share 62.65
Hence, amount of call on 60 paid share 2.65
Refund to share on 75 paid 12.35

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11. Confidence Builders Ltd. gives the following ledger balances as on 30th September, 20X3:

Land and Building 1,20,000

Sundry Current Assets 3,95,000
Profit and Loss Account (Dr. balance) 38,500
Debenture Issue expenses not written off 2,000
Share Capital
Issued: 11% Pref. Shares of Rs 10 each 1,00,000
10,000 equity shares of Rs 10 each, fully paid up 1,00,000

5,000 equity shares of Rs 10 each, Rs 7.50 per share paid up 37,500

13% Debentures 1,50,000
Mortgage Loan 80,000
Bank Overdraft 30,000
Creditors for Trade 32,000
Income-tax arrears:
(assessment concluded in July 20X3)
Assessment year 20X1-20X2 21,000
Assessment year 20X2-20X3 5,000

Mortgage loan was secured against land and buildings. Debentures were secured by a floating charge on all
the other assets. The company was unable to meet the payments and therefore the debenture holders
appointed a Receiver for the Debenture holders, he brought the land and buildings to auction and realised
Rs 1,50,000. He also took charge of Sundry assets of value of Rs 2,40,000 and realised Rs 2,00,000. The Bank
Overdraft was secured by a personal guarantee of two of the Directors of the Company and on the Bank
raising a demand, the Directors paid off the due from their personal resources. Costs incurred by the
Receiver were Rs 2,000 and by the Liquidator Rs 2,800. The Receiver was not entitled to any remuneration
but the liquidator was to receive 3% fee on the value of assets realised by him. Preference shareholders had
not been paid dividend for period after 30th September 20X1 and interest for the last half year was due to
the debenture holders. Rest of the assets were realised at Rs 1,00,000.

Prepare the accounts to be submitted by the Receiver and Liquidator.

Solution
Receiver’s Receipts and Payments Account
Receipts ` Payments `
Sundry Assets realised 2,00,000 Costs of the Receiver 2,000
Surplus received from Preferential payments:
Mortgage: Paid Taxes
Sale Proceeds of land raised within 12 months 26,000
and building 1,50,000
Less: Applied to Debentures holders:-

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Discharge Principal 1,50,000

of mortgage loan (80,000) 70,000 Interest for half year 9,750 1,59,750
Surplus transferred
to the Liquidator 82,250
2,70,000 2,70,000

Liquidator’s Final Statement of Account

Receipts ` Payments `
Surplus received from Cost of Liquidation 2,800
Receiver 82,250 Remuneration to Liquidator 3,000
(1,00,000x 3%)
Assets Realised 1,00,000 Unsecured Creditors:
Calls on Contributories: For Trade 32,000
On holder of 5,000 Directors for payment
at the rate of of Bank O/D 30,000 62,000
` 2.17 per share 10,850
Preferential Shareholders:
Principal 1,00,000
Arrears of
Dividends 22,000 1,22,000
Equity shareholder:
Return of money to 3,300
contributors to holders of
10,000 shares at 33 paise
each
1,93,100 1,93,100

Working Note :
Call from partly paid shares
Deficit before call from Equity Shares (1,82,250 — 1,89,800) = 7,550
Notional call on 5,000 shares @ Rs 2.50 each 12,500
Net balance after notional call (a) 4,950
No. of shares deemed fully paid (b) 15,000
Refund on fully paid shares 4,950/ 15,000 33p
Calls on party paid share (2.50 — 0.33) Rs 2.17

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12. X Ltd. went into voluntary liquidation on 1st April, 20X1. The following balances are extracted from
its books on that date:
Rs
Machinery 90,000
Leasehold properties 1,20,000
Stock 3,000
Debtors 1,50,000
Investments 18,000
Cash in hand 3,000
Profit and loss account (Dr. balance) 1,20,000
Share Capital: 24,000 Equity Shares of Rs 10 each 2,40,000
Debentures (Secured by Floating charge) 1,50,000
Bank overdraft 54,000
Creditors 60,000

The following assets are valued as under:

Rs
Machinery 1,80,000
Leasehold properties 2,18,000
Investments 12,000
Stock 6,000
Debtors 1,40,000

The bank overdraft is secured by deposit of title deeds of leasehold properties. There were preferential
creditors amounting Rs 3,000 which were not included in creditors of Rs 60,000.

Prepare a statement of affairs to be submitted to the meeting of members/creditors.

Solution
Statement of Affairs of X Co. Ltd. on the 1st day of April, 20X1
Assets not specifically pledged : Estimated
realisable
values
Cash in Hand 3,000
Investments 12,000
Debtors 1,40,000
Stock 6,000
Machinery 1,80,000
3,41,000
Assets specifically pledged :
(a) (b) (c) (d)
Estimated Due to Deficiency Surplus
Realisable Secured ranking as carried to
Value Creditors unsecured last column

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` ` ` `
Lease hold 2,18,000 54,000 — 1,64,000
property
Estimated surplus from assets specifically pledged 1,64,000
Estimated total assets available for preferential
creditors, debentures holders secured by floating
charge, and unsecured creditors 5,05,000
Summary of Gross assets
Gross realisable value of assets
specifically pledged ` 2,18,000
Other assets ` 3,41,000
Gross Assets ` 5,59,000
` Gross Liabilities (to be deducted from surplus or
added to deficiency as the case may be)
Secured creditors to the extent to which claims are
estimated to be covered by assets
54,000 Specifically pledged

3,000 Preferential creditors 3,000

Estimated balance of assets available for
debenture holders secured by a floating charge 5,02,000
and unsecured creditors
1,50,000 Debentures 1,50,000
Estimated surplus as regard debenture holders 3,52,000
60,000 Creditors 60,000
2,67,000 2,92,000
Estimated surplus as regards creditors [being
difference between gross assets (d) and gross
liabilities (e)]
Issued and called up capital :
24,000 equity shares of ` 10 each 2,40,000
Estimated surplus as regard members 52,000

13. Insol Ltd. is to be liquidated. The following balances are extracted as at 1st April 20X1 from its
books:
Rs
2,50,000 equity shares of Rs 10 each 25,00,000
Secured debentures (on land and buildings) 10,00,000
Unsecured loans 20,00,000
Trade creditors 35,00,000
Land and Building 5,00,000
Other Property, plant and Equipment 20,00,000

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Current assets 45,00,000

Profit and Loss A/c (Dr. balance) 20,00,000
Contingent liabilities are :
For bills discounted 1,00,000
For excise duty demands 1,50,000

On investigation, it is found that the contingent liabilities are certain to devolve and that the assets are
likely to be realised as follows:—
• Land & Buildings 11,00,000
• Other Property, plant and Equipment 18,00,000
• Current assets 35,00,000
Taking the above into account, prepare the statement of affairs.

Solution
Statement of Affairs of Insol Ltd. (in Liquidation) as on 1st April 20X1

List A – Assets Not Specifically Pledged Estimated

Realizable
Value
Other Property, Plant and Equipment 18,00,000
Current Assets 35,00,000
TOTAL (A) 53,00,000
List B – Assets Specifically pledged
Asset Estimated Due to Deficiency Surplus 100,000
Realizable Secured
Value Creditors
Buildings 11,00,000 10,00,000 - 100,000

Estimated Total assets available for Preferential creditors, 54,00,000

debenture holders having floating charge

Gross Liabilities Liability Amount

10,00,000 Secured Creditors as per list B to the extent to which -
claims are estimated to be covered by Assets specifically
pledged
150,000 List C –Preferential Creditors 150,000
Estimated balance available for Debenture holders 52,50,000
- List D- Debentures secured by floating charge -
Estimated Surplus as regards to debenture holders 52,50,000
List E- Unsecured Creditors
20,00,000 Unsecured Loan 20,00,000
35,00,000 Trade Creditors 35,00,000
100,000 Contingent Liability on Bills discounted 100,000
Estimated surplus/(deficit) as regards to creditors (3,50,000)

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Issued and Called up Capital:

List F – Preference Share capital Nil
List G – Equity Share Capital 25,00,000
Estimated Deficiency ( List H) (28,50,000)

14. M Co ltd went into voluntary liquidation on 1st March. Following balance were available on that
date –
Liabilities Amount Assets Amount
50,000 equity shares of Rs 5,00,000 Buildings 1,50,000
10 each
Debentures (Secured by a 2,00,000 Plant & Machinery 2,10,000
floating charge)
Bank OD 30,000 Stock in trade 95,000
Creditors 40,000 Debtors 75,000 65,000
Less – Provision (10,000)
Calls in arrears 1,00,000
Cash in hand 10,000
P&L A/c 1,40,000
TOTAL 7,70,000 TOTAL 7,70,000

Plant & Machinery was valued at Rs 1,50,000. Buildings at 1,20,000. Loss of Rs 15,000 is expected on stock.
Debtors will realize Rs 70,000. Calls in arrears are expected to realize 90%. Bank OD is secured against
buildings. Preferential creditors for taxes and wages is Rs 6,000.
Miscellaneous expenses outstanding is Rs 2,000

Prepare Statement of Affairs.

Solution –
Statement of Affairs of M ltd as on 1st March
List A – Assets Not Specifically Pledged Estimated
Realizable
Value
Cash In hand 10,000
Debtors 70,000
Calls in Arrears ( 1L * 90% ) 90,000
Stock 80,000
Plant & Machinery 1,50,000
TOTAL (A) 4,00,000
List B – Assets Specifically pledged
Asset Estimated Due to Deficiency Surplus 90,000
Realizable Secured
Value Creditors
Buildings 1,20,000 30,000 - 90,000

Estimated Total assets available for Preferential 4,90,000

creditors, debenture holders having floating charge
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Gross Liabilities Liability Amount

30,000 Secured Creditors as per list B to the extent to which -
claims are estimated to be covered by Assets specifically
pledged
6,000 List C –Preferential Creditors 6,000
Estimated balance available for Debenture holders 4,84,000
2,00,000 List D- Debentures secured by floating charge 2,00,000
Estimated Surplus as regards to debenture holders 2,84,000
34,000 List E- Unsecured Creditors (40,000-6000) 34,000
Estimated surplus as regards to creditors 2,50,000
Issued and Called up Capital:
List F – Preference Share capital Nil
List G – Equity Share Capital 5,00,000
Estimated Deficiency ( List H) (2,50,000)

List H Deficiency Account

Items contributing to deficiency
Excess of capital & liabilities over assets: -
Net Dividends or Bonuses -
Net Trading losses after charging depreciation, taxation, interest on debentures etc (1,40,000)
Estimated losses now written off
Bad Debtors 5,000
Plant & Machinery 60,000
Buildings 30,000
Stock 15,000 (1,10,000)
Other Items contributing to deficiency ( Calls in arrears irrecoverable portion) (10,000)

Items reducing deficiency:

Excess of assets over capital & liabilities -
Net Trading profits after charging depreciation, taxation, interest on debentures etc -
Other Items reducing deficiency ( Provision on debtors not required) 10,000

Deficiency as shown by the Statement of Affairs (2,50,000)

15. XYZ Limited is being would up by the tribunal. All the assets of the company have been charged to
the company’s bankers to whom the company owes Rs 5 crores. The company owes following
amounts to others:
• Dues to workers – Rs 1,25,00,000
• Taxes Payable to Government – Rs 30,00,000
• Unsecured Creditors – Rs 60,00,000

You are required to compute with the reference to the provision of the Companies Act, 2013 the amount
each kind of creditors is likely to get if the amount realized by the official liquidator from the secured assets
and available for distribution among creditors is only Rs 4,00,00,000

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SOLUTION-
Section 326 of the Companies Act, 2013 is talks about the overriding preferential payments to be made
from the amount realized from the assets to be distributed to various kind of creditors. According to the
proviso given in the section 326 the security of every secured creditor should be deemed to be subject to a
pari passu change in favor of the workman to the extent of their portion.

Workman’s share to Secured Asset = Amount Realized x Workman Dues

Workman Dues + Secured loan

= 4,00,00,000 𝑋 1,25,00,000
1,25,00,000 +5,00,00,000

= 80,00,000

Amount available to secured creditor is Rs 400 Lakhs – 80 Lakhs = 320 Lakhs

Hence, no amount is available for payment of government dues and unsecured creditors.

16. Rain Ltd. went into liquidation on 31st March, 20X1. Following are the details regarding share capital
of the company:-
I. 30,000 Equity shares of Rs 100 each, Rs 80 paid up.
II. 80,000 Equity shares of Rs 50 each, Rs 25 paid up.
III. 4,00,000 Equity shares of Rs 10 each, fully paid up.

Surplus available with the liquidator after payment of all the liabilities Rs 24,00,000. Distribute this surplus
money among different categories of shareholders.

SOLUTION-

Particulars I II III Total

No. of shares 30,000 80,000 4,00,000 5,10,000
Equity share capital (@ 30,00,000 40,00,000 40,00,000 1,10,00,000
` 100/50/10)
Paid up share capital (A) 24,00,000 20,00,000 40,00,000 84,00,000
Loss due to Liquidation (B) (16,36,364) (21,81,818) (21,81,818) (60,00,000)
(` 60,00,000 in the ratio of 3:4:4)
Surplus amount distributed
among different categories of 7,63,636 (1,81,818) 18,18,182 24,00,000
shareholders (A) – (B)
Note: Shareholders of category I and III will get surplus amount, while category II shareholders will pay
1,81,818.

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17. A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount
distributed to Preferential creditors and 3% on the payment made to unsecured creditors. The
assets were realized for Rs 50,00,000 against which payment was made as follows:
Liquidation Rs 50,000
Secured Creditors Rs 20,00,000
Preferential Creditors Rs 1,50,000
The amount due to Unsecured creditors was Rs 30,00,000

You are asked to calculate the total Remuneration payable to Liquidator. Calculation shall be made to the
nearest multiple of a rupee

SOLUTION-
Calculation of Total Remuneration payable to Liquidator
Amount in
`
2% on Assets realized (50,00,000 x 2%) 1,00,000
3% on payment made to Preferential creditors (1,50,000 x 3%) 4,500
3% on payment made to Unsecured creditors
(Refer W.N) 78,510
Total Remuneration payable to Liquidator 1,83,010

Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses, payment to
secured creditors, preferential creditors & liquidator’s remuneration
= Rs 50,00,000 – Rs 50,000 – Rs 20,00,000 – Rs 1,50,000 – Rs 1,00,000 – Rs 4,500
= Rs 26,95,500

Since cash balance is available for unsecured creditors, Liquidator’s remuneration on payment to unsecured
creditors = Rs 26,95,500 X 3 /103= Rs 78,510 (rounded off)

18. Full Stop Limited gives you the following ledger balances as on 31st March 20X1, being the date of
voluntary winding up:
(Rs)
Land & building 5,20,000
Plant & machinery 7,80,000
Inventory in trade 3,25,000
Book debts 10,25,000
Profit & loss account (Dr. balance) 5,50,000

Share capital:
5,000, 10% Cumulative Preference shares of Rs100 each, fully paid up 5,00,000
5,000 Equity shares of Rs100 each, Rs 60 per share called and paid up 3,00,000
5,000 Equity shares of Rs100 each, Rs50 per share called and paid up 2,50,000
Securities premium 7,50,000
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10% Debentures 2,10,000

Preferential creditors 1,05,000
Bank overdraft 4,85,000
Trade creditors 6,00,000

Preference dividend is in arrears for three years. By 31-03-20X1, the assets realized were as follows:
Rs
Land & building 6,20,000
Inventory in trade 3,10,000
Plant & machinery 7,10,000
Book debts 6,60,000

Expenses of liquidation are Rs 86,000. The remuneration of the liquidator is 2% of the realization of assets.
Income tax payable on liquidation is Rs 67,000. Assuming that the final payments were made on 31-03-
20X1, prepare the Liquidator’s Statement of Account.

SOLUTION-
Liquidator’s Statement of Account
Receipts ` Payments `
Land & building 6,20,000 Liquidator’s remuneration 46,000
Inventory in trade 3,10,000 Liquidation expenses 86,000
Plant & machinery 7,10,000 Preferential creditors 1,05,000
Book debts 6,60,000 10% Debentures 2,10,000
Income tax payable 67,000
Bank overdraft 4,85,000
Trade creditors 6,00,000
Preference shareholders:
Capital 5,00,000
Arrears of preference dividend
for 3 years 1,50,000
Refund on 5,000 shares of
` 60 paid up @ ` 10.10 per
share (Refer W.N.) 50,500
Refund on 5,000 shares of
` 50 paid up @ ` 0.10 per
share (Refer W.N.) 500
23,00,000 23,00,000

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Working Note:
`
Total equity capital paid up (3,00,000 + 2,50,000) 5,50,000
Less: Balance available after payment to secured, unsecured,
preferential creditors and preference shareholders (51,000)
(23,00,000 – 46,000 – 86,000 – 2,10,000 – 1,05,000 – 67,000
– 4,85,000– 6,00,000 – 5,00,000 – 1,50,000)
Loss to be borne by 10,000 equity shareholders 4,99,000
Loss per share 49.90
Hence, amount of refund on ` 50 per share paid up ( 50 – 49.90) 0.10
Amount of refund on ` 60 per share paid up (60 – 49.90) 10.10

19. A Ltd is to be liquidated. It gives the following ledger balances as at 30th September, 20X1:
Rs
Share capital: 5,00,000 equity shares of Rs100 each 50,00,000
Secured debentures (on Land and Buildings) 20,00,000
Unsecured loans 40,00,000
Trade creditors 70,00,000
Land and buildings 10,00,000
Other Property, plant and Equipment (PPE) 40,00,000
Current assets 90,00,000

Profit and loss account (Dr. balance) 40,00,000

Contingent liabilities are:
For bills discounted 2,00,000
For excise duty demands 3,00,000

On investigation, it is found that the contingent liabilities are certain to devolve and that the assets are
likely to be realised as follows:
Rs
Land and Building 22,00,000
Other PPE 36,00,000
Current assets 70,00,000

Taking the above into account, prepare the statement of affairs.

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SOLUTION-
Statement of Affairs of ‘A’ Ltd. (in Liquidation)
Estimated
Realisable
Value
Assets not specifically pledged (as per List A):
Other Property, plant and Equipment 36,00,000
Current Assets 70,00,000
1,06,00,000
Assets specifically pledged (as per List B):
Estimated Due to Deficiency Surplus carried to
Realizable secured ranking as the last column
value creditors unsecured
` ` ` `
Land and Building 22,00,000 20,00,000 – 2,00,000 2,00,000
Estimated total assets available for preferential creditors, debenture
holders secured by a floating charge and unsecured creditors 1,08,00,000
Summary of Gross Assets:
Gross realizable value of assets specifically pledged 22,00,000
Other Assets 1,06,00,000
Total Assets 1,28,00,000

Gross
Liabilities
Liabilities
20,00,000 Secured creditors (as per List B) to the extent to which
claims are estimated to be covered by assets –
specifically pledged
3,00,000 Preferential creditors (as per List C) – for demand of 3,00,000
excise duty
Balance of assets available for debentureholders
secured by floating charge and unsecured creditors 1,05,00,000
– Debentureholders secured by floating charge (as per –
List D)
Unsecured creditors (as per List E):

40,00,000 Unsecured Loans 40,00,000

70,00,000 Trade creditors 70,00,000
2,00,000 Liability for bills discounted (Contingent) 2,00,000
1,35,00,000 Estimated deficiency as regards creditors (difference 7,00,000
between gross assets and gross liabilities)
Issued and called up capital:
5,00,000 Equity shares of 10 each (as per List G) 50,00,000
Estimated deficiency as regards members/ 57,00,000
contributories

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20. In the winding up of a company, certain Creditors could not receive payments out of the realization
of assets and out of contribution from "A" list contributories. Liquidation started on 1st April, 2020.
The following persons have transferred their holdings before winding up :
Name Date of Transfer No. of shares Amount due to creditors
transferred on the date of transfer

O 4th April, 2019 1,000 42,000

P 2nd Feb, 2019 300 25,000
Q 8th Sep, 2019 200 57,000
R 11th Nov, 2019 1,400 85,000
S 2nd Feb, 2020 800 66,000
T 1st March, 2020 1,400 95,000

The shares were of Rs 100 each, Rs 70 being called up and paid up on the date of transfers.

'X' was the transferee of shares held by S. 'X' paid Rs 30 per share as calls in advance immediately on
becoming a member.

Ignoring Expenses of Liquidation, Remuneration of Liquidator, etc. work out the amount to be realized from
the above contributories.

SOLUTION-
Statement of Liability as Contributories of Former Members
Date Creditors Amount to O Q R T Amount
outstanding be paid to 1,000 200 1,400 1,400 to be
creditors Shares Shares Shares Shares paid to
(Increase in the
creditors) creditors
April 4 42,000 42,000 10,500 2,100 14,700 14,700 42,000
Sep 8 57,000 15,000 - 1,000 7,000 7,000 15,000
Nov 11 85,000 28,000 - - 14,000 14,000 28,000
March 1 95,000 10,000 - - - 10,000 6,300*
Total (A) 10,500 3,100 35,700 45,700
Maximum liability at 30 per shares on 30,000 6,000 42,000 42,000
shares held (B)
Amount paid [Lower of (A) and (B)] 10,500 3,100 35,700 42,000 91,300
*Rs (10,000 – 3,700 = 6,300)

T can be called upon to pay maximum only Rs 42,000. So T will pay only Rs 6,300 (42,000 – 14,700 – 7,000 –
14,000) out of Rs 10,000 above. Hence incremental creditors on 1.03.2020 amounting to Rs 3,700 (10,000 –
6,300) will not be receiving any payment.

Note:
1. P will not be liable to pay any amount as the winding up proceedings commenced after one year from
the date of the transfer.
2. S also will not be liable, as the transferee X has paid the balance Rs 30 per share as call in advance.

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21. Enough Ltd went in for Voluntary Liquidation on 31st March. The Company’s Articles provide that on
liquidation, out of Surplus Assets remaining after payment of Liquidation Costs and outside
Liabilities, it shall be applied firstly towards arrears of Preference Dividend, secondly to Preference
Shareholders with a premium thereon at Rs 10 Per Share and finally any residue shall be paid to the
Equity Shareholders.

The Balance Sheet of the Company as at 31st March is given below -

Equity & Liabilities Amount Assets Amount
Equity Share Capital 10,00,000 Freehold Property 11,85,000
(1,00,000 Shares of Rs 10 Each) Plant 6,03,000
10% Preference Share Capital 12,00,000 Motor Vehicles 1,15,000
(Rs 100 each fully paid) Stock 3,72,000
Securities Premium 1,00,000 Sundry Debtors 1,48,000
5% Debentures 2,00,000 Profit and Loss A/c 4,28,000
Interest on Debentures 5,000
Bank Overdraft 1,16,000
Sundry Creditors 2,30,000

Total 28,51,000 Total 28,51,000

Preference Dividends are in arrears for past two years

The Liquidator realised the Assets as below –

Particulars Rs Particulars Rs
Freehold Property 14,25,000 Stock in Trade 3,00,000
Plant 5,05,000 Sundry Debtors 1,20,000
Motor Vehicles 1,18,000

Creditors were paid less Discount of 5% Debentures with accrued interest upto 30th June
3 months after above (Balance Sheet date) was paid. Liquidators Remuneration is 2% of the Assets realised.
Cost of Liquidation was Rs 7,640.

Prepare the Liquidators’ Statement of Account.

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Chapter 20 FINANCIAL STATEMENTS OF BANKING COMPANIES

Banking: Under Section 5(b) of the said Act “Banking” means,

• Accepting deposits of money from public for the purpose of lending or investing
• These deposits are repayable on demand or otherwise, and can be withdrawn by cheque, draft or
otherwise.

FUNCTIONS OF A COMMERCIAL BANK-

(a) Receiving of money on deposit and providing facilities to constituents for payments by cheque.
(b) Dealing in securities on its own account and on account of customers.
(c) Lending of money by -
(i) making loans and advances,
(ii) purchasing or discounting of bills.
(d) Transferring money from place to place by -
(i) the issue of demand drafts, telegraphic transfers, traveller’s cheques, etc.,
(ii) collection of bills.
(e) Issuing letters of credit.
(f) Safe custody of securities and valuables.
(g) Issuing guarantees.

RESERVE FUNDS-
Every banking company incorporated in India is required to create a Reserve Fund and to transfer at least
25% of its profit to the reserve fund as per RBI notification (as against 20% prescribed in Banking
Regulation Act).

25% of the profit earned during current year is transferred as Statutory Reserve even if the question is
silent on the issue in the examination question

CASH RESERVE-
For smoothly meeting cash payment requirement, banks have to maintain certain minimum ready cash
balances at all times. This is called as Cash Reserve Ratio (CRR)

DEMAND AND TIME LIABILITIES-

Demand Liabilities of a bank are liabilities which are payable on demand. These include current deposits,
demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees.

LIQUIDITY NORMS-
Banking companies have to maintain sufficient liquid assets in the normal course of business called as
Statutory Liquidity Ratio (SLR). This safeguards the interest of depositors and prevents banks from over-
extending their resources.

Every banking company has to maintain the SLR in the form of:
a. cash
b. gold
c. unencumbered approved securities

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Form ‘A’
Form of Balance Sheet

Balance Sheet of ______________________(here enter name of the Banking company)

Balance Sheet as on 31st March (Year)

Schedule As on 31.3.... As on 31.3......

(Current year) (Previous year)
Capital & Liabilities
Capital 1
Reserve & Surplus 2
Deposits 3
Borrowings 4
Other liabilities and provisions 5
TOTAL

Assets
Cash and balances with Reserve 6
Bank of India
Balance with banks and Money at 7
call and short notice
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
TOTAL

Contingent liabilities - Bills for collection – 12

Form ‘B’
Form of Profit & Loss Account for the year ended 31st March

Schedule As on 31.3.... As on 31.3......

(Current year) (Previous year)
I. Income
Interest earned 13
Other income 14

II. Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
Total

III. Profit/Loss
Net profit/loss (—) for the year
Profit/Loss (—) brought forward

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Total

IV. Appropriations
Transfer to statutory reserves
Transfer to other reserves
Transfer to Proposed dividends
Balance carried over to balance sheet
Total

CAPITAL ADEQUACY NORMS-

Capital adequacy is used to describe adequacy of capital resources of a bank in relation to the risks
associated with its operations.

RBI requires Banks to maintain minimum capital risk adequacy ratio of 9 %

The capital adequacy ratio is worked out as below:

Capital fund X 100

Risk weighted assets + off balance sheet items

Capital Fund consists of Tier I & Tier II Capital

Tier I capital consists mainly of share capital and disclosed reserves and it is a bank’s highest quality capital
because it is fully available to cover losses.

The elements of Tier I capital include - Paid-up capital , statutory reserves, and other disclosed free
reserves, including share premium, Capital Reserve. Deduct Intangible Assets, Accumulated Losses,
Current year losses and DTA.

Tier II capital: comprises elements that are less permanent in nature or are less readily available than those
comprising Tier I capital. The elements comprising Tier II capital are as follows:

(a) Revaluation reserves (Less discount of 55%)

(b) General provisions

WEIGHTS FOR THE PURPOSE OF ASCERTAINMENT OF CAR ARE AS FOLLOWS:-

Cash, balances with RBI – 0%
Balances in current account with other banks – 20%
Investments in Government Securities – 0%
Other Investments -100%
Loans & Advances guaranteed by Government – 0%
Other Loans & Advances – 100%
Bank Premises, Furniture & Fittings etc – 100%
All Off- Balance Sheet Items like LC’s, LG’s, Bills – 100%
Non funded exposure to Real estate – 150%
For ECGC/DICGC – 50% (RTP)

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1. A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I
and Tier II capitals. Find out the risk-adjusted asset and risk weighted assets ratio –
Capital Funds: (Figures in Rs lakhs)
Equity Share Capital 4,80,00
Statutory Reserve 2,80,00
Capital Reserve (of which Rs 280 lakhs were due to revaluation 12,10
of assets and the balance due to sale)

Assets:
Cash Balance with RBI 4,80
Balances with other Bank 12,50
Claims on Banks 28,50
Other Investments 782,50

Loans and Advances:

(i) Guaranteed by government 128,20
(ii) Guaranteed by public sector undertakings of Government of 702,10
India
(iii) Others 52,02,50

Premises, furniture and fixtures 182,00

Other Assets 201,20

Off-Balance Sheet Items:

Acceptances, endorsements and letters of credit 37,02,50

SOLUTION-
(i) Capital Funds - Tier I: in in
lakhs lakhs

Equity Share Capital 480,00

Statutory Reserve 280,00

Capital Reserve (arising out of sale of assets) 9,30

769,30
Capital Funds - Tier II:

Capital Reserve (arising out of revaluation of assets 280

Less: Discount to the extent of 55% (154) 1,26

770,56

(ii) Risk Adjusted Assets

Funded Risk Assets in Lakhs Percentage Amount

weight in lakhs

Cash Balance with RBI 4,80 0 —

Balances with other Banks 12,50 20 2,50

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Claims on banks 28,50 20 5,70

Other Investments 782,50 100 782,50

Loans and Advances:

(i) guaranteed by government 128,20 0 —

(ii) guaranteed by public sector

undertakings of Central Govt. 702,10 0 —

(iii) Others 52,02,50 100 52,02,50

Premises, furniture and fixtures 1,82,00 100 1,82,00

Other Assets 2,01,20 100 2,01,20
63,76,40

Off-Balance Sheet Item

Acceptances, Endorsements and Letters of credit 37,02,50 X 100 % = 37,02,50
100,78,90

Capital Adequacy Ratio = 7,69,30+126

63,76,40+37,02,50

= 7.65%

BULK OF A BANKS’ INCOME IS FROM TWO SOURCES:-

a. Interest earned on Loans & Advances extended to its customers.
b. Discount and commission earned handling Bills of Exchange and Non-Funded

• For Performing assets income is recognised as it is earned i.e. accrued.

• For Non-Performing assets interest income is not considered on accrual basis and it is recognised
only when it is actually received

2. Given below interest on advances of a commercial bank (Rs in lakhs)

Performing Assets NPA

Interest earned Interest received Interest earned Interest
received
Term Loans 120 80 75 5
Cash credits and 750 620 150 12
overdrafts
Bills purchased 150 150 100 20
and discounted

Find out the income to be recognized for the year ended 31st March, 201X1.

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Solution
Interest on performing assets should be recognised on accrual basis, but interest on NPA should be
recognised on cash basis.

Interest on Term Loan : (120 + 5) = 125

Interest on cash credits and overdraft : (750 + 12) = 762
Income from bills purchased and discounted : (150 + 20) = 170
1,057

3. Find out the income to be recognized in the case of SS Bank for the year ended 31st March, 20X1:
(in lakhs)
Performing Assets Non-performing Assets
Interest Interest Interest Interest
accrued received accrued received
Term loans 240 160 150 10
Cash credits and overdrafts 1,500 1,240 300 24

Solution
Calculation of interest income of SS Bank to be recognized for the year ended 31.3.20X1
(Rs in lacs)
Term Loan
Interest accrued on Performing Assets 240
Interest received on Non - Performing Assets 10 250
Cash credit and overdraft
Interest accrued on Performing Assets 1,500
Interest received on Non - Performing Assets 24 1,524
Total interest to be recognized 1,774

IDENTIFICATION OF NPA-
A. Bills purchased and discounted become NPA if interest and / or instalment of principal remain overdue
for a period exceeding 90 days.
B. Term Loans: become NPA if their amount (interest or principal) remain overdue wholly or partly for a
period exceeding 90 days.
C. A cash credit / overdraft account is treated as NPA if it becomes out of order. An account is deemed to
be out of order if the outstanding balance remains continuously in excess of the sanctioned borrowing
power or though the outstanding balance remains below the sanctioned borrowing power, there have been
no credits in the account for a continuous period of more than 90 days.

Example of OUT OF ORDER

Sanctioned limit- Rs 60,00,000
Drawing power – Rs 55,00,000
Amount outstanding continuously from 1.01.20X1 to 31.03.20X1 - Rs 47,00,000
Total interest debited - Rs 3,42,000
Total credits - Rs 1,25,000
Since the credit in the account is not sufficient to cover the interest debited during the period account
will be said as NPA.
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D. Agricultural Advances: Advances granted for agriculture purposes becomes NPA if interest and/or
installment of principal remains overdue for two crop seasons in case of short duration crops (baby corn,
cotton etc) and a loan granted for long duration crops ( Coconut, Millets) etc will be treated as NPA, if the
installment of principal or interest thereon remains overdue for one crop season
E. Advances Guaranteed by EXIM Bank: In the case of advances covered under the guarantee-cum-
refinance programme of EXIM Bank, to the extent payment has been received by the bank from the EXIM
Bank, the advance may not be treated as NPA. The balance should, however, be treated as NPA (if the
conditions for treating it as NPA are satisfied).
F. Consortium Advances: Asset classification of accounts under consortium should be based on the record
of recovery of the individual member banks and other aspects having a bearing on the recoverability of the
advances. Where the remittances by the borrower under consortium lending arrangements are pooled with
one bank and/or where the bank receiving remittances is not parting with the share of other member
banks, the account will be treated as not serviced in the books of the other member banks and therefore,
be treated as NPA.

• Net worth of borrower/guarantor should not be taken into account for the purpose of treating an
advance as NPA or otherwise.
• Determination of NPAs: Borrower-wise, Not Facility-wise

The Banks have to classify their advances into two broad groups:
A. Performing Assets
B. Non-Performing Assets
• Performing assets are also called as Standard Assets.
• The Non-Performing Assets is again classified into three groups and they are
(i) sub-standard Assets (ii) doubtful assets & (iii) Loss Assets

Standard Assets - Standard assets are those which do not disclose any problems and which does not carry
more than normal risk attached to the business.

(i) Sub-standard Assets – A Sub-standard asset is one which has been classified as an NPA for a period not
exceeding 12 months

(ii) Doubtful Assets - An asset would be classified as doubtful if it has remained in the substandard category
for a period of at least 12 months

(iii) Loss Assets - A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspectors but the amount has not been written off, wholly or partly

RATES OF PROVISIONING FOR PERFORMING & NON-PERFORMING ASSETS-

STANDARD ADVANCES/PERFORMING ASSETS-
• Direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent
• advances to Commercial Real Estate (CRE) Sector at 1.00 per cent
• All other loans and advances – 0.40%

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Rates of Provisioning for Sub- standard, Doubtful and Loss Advances are as follows:
Sub- standard Advances
Secured Exposures – 15%
Unsecured Exposures – 25%
Unsecured Exposures in respect of Infrastructure loan accounts where certain safeguards such as escrow
accounts are available - 20%

Doubtful Advances – Unsecured Portion – 100%

Doubtful Advances Secured Portion –

For Doubtful upto 1 year – 25%
For Doubtful > 1 year and upto 3 years - 40%
For Doubtful > 3 years – 100%

Loss Advances – 100%

CLASSIFICATION OF INVESTMENTS –
The entire investment portfolio of a bank (including SLR securities and non- SLR securities) should be
classified under three categories:
• Held-to-Maturity, (HTM): Securities acquired by banks with the intention to hold them up to
maturity should be classified as HTM. Maximum Limit is 25% of the total Investments Currently, the
banks are permitted to exceed the limit of 25 per cent of the total investments under HTM category,
provided the excess comprises of SLR securities and total SLR securities held under HTM category
are not more than 19.5 per cent of NDTL.
• Held-for-Trading.(HFT): Securities acquired by banks with the intention to trade by taking advantage
of short-term price/interest rate movements should be classified as ‘held-for-trading’.
• Available-for-Sale (AFS): Securities which do not fall within the above two categories should be
classified as ‘available-for-sale’.

SHIFTING AMONG CATEGORIES OF INVESTMENTS-

• Banks may shift investments to/from HTM with the approval of the Board of Directors once a year.
Such shifting will normally be allowed at the beginning of the accounting year. No further shifting
to/from HTM will be allowed during the remaining part of that accounting year, except when
explicitly permitted by RBI.
• Shifting of investments from HFT to AFS is generally not allowed. However, it will be permitted only
under exceptional circumstances like not being able to sell the security within 90 days due to tight
liquidity conditions, or extreme volatility, or market becoming unidirectional. Such transfer is
permitted only with the approval of the Board of Directors.
• Transfer of scrips from AFS / HFT category to HTM category should be made at the lower of book
value or market value.

VALUATION OF INVESTMENTS-
• Held-to-Maturity - Investments classified under held-to-maturity category need not be marked to
market. They should be carried at acquisition cost unless it is more than the face value, in which
case the premium should be amortised over the period remaining to maturity.
• Available-for-sale: The individual scrips in the available-for-sale category should be marked to
market quarterly or at more frequent intervals.
• Held-for-trading: The individual scrips in the ‘held-for-trading’ category should be marked to market
at monthly or at more frequent intervals
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4. The outstanding amount (funded as well as unfunded) as on 31st March, 20X1 was: Rs 10,000. The
realizable value of security of the same was Rs 8,000.

Period for which the advance has remained in ‘doubtful’ category as on 31st March, 20X1 was: 2.5 years.

Calculate Provision as on 31/03/20X1 & 31/03/20X2

Solution
Provisioning requirement:
As on… Asset Classification Provisions on Provisions on Total
secured portion unsecured
portion
% Amount % Amount
31 March, 20X1 Doubtful 1 to 3 years 40 3,200 100 2,000 5,200
31 March, 20X2 Doubtful more than 3 100 8,000 100 2,000 10,000
years
Note: The secured portion of the outstanding loan is Rs 8,000 and unsecured portion is Rs 2,000.

5. From the following information, find out the amount of provisions to be shown in the Profit and
Loss Account of AG bank.

Assets Rs In Lacs
Standard 5000
Sub-standard 4000
Doubtful : for one year 800
: for three years 600
: for more than three years 200
Loss Assets 1000

Solution
Computation of provisions for AG Bank
Assets Amount % of Provision
Rs in lakhs provision Rs in lakhs
Standard 50,00 0.4 20
Substandard* 40,00 15 600
Doubtful for one year* 8,00 25 200

Doubtful for three years* 6,00 40 240

Doubtful for more than three years 2,00 100 200
Loss 10,00 100 1,000
Total Provision required 2,260
*All the marked sub-standard and doubtful assets are assumed as fully secured

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6. From the following information of AY Limited, compute the provisions to be made in the Profit and
Loss account:
in lakhs
Assets
Standard 20,000
Substandard 16,000
Doubtful
For one year (secured) 6,000
For two years and three years (secured) 4,000
For more than three years (secured by mortgage of 2,000
plantand machinery 600 lakhs)
Loss Assets 1,500

Solution
Calculation of amount of provision to be made in the Profit and Loss Account
Classification of Assets Amount of % age of Amount of
Advances provision provision
( in lakhs) ( in lakhs)
Standard assets 20,000 0.40 80
Sub-standard assets 16,000 15 2,400
Doubtful assets:
For one year (secured) 6,000 25 1,500
For two to three years (secured) 4,000 40 1,600

For more than three years (unsecured) 1,400 100 1,400

(secured) 600 100 600
Non-recoverable assets (Loss assets) 1,500 100 1,500
Total provision required 9,080

7. You are required to calculate provisions from the following-

Outstanding Balance Rs 4 lakhs
ECGC Cover 50%
Period for which the advance has More than 3 years remained doubtful
remained doubtful (as on March 31, 20X1)
Value of security held Rs 1.50 lakhs

Solution
Provision required to be made as on 31.03.20X1
Outstanding balance Rs4.00 lakhs
Less: Value of security held (Secured Portion) (Rs1.50 lakhs)
Unrealised balance Rs2.50 lakhs

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Less: ECGC Cover (50% of unrealizable (Rs1.25 lakhs)

balance)

Net unsecured balance Rs1.25 lakhs

Provision for unsecured portion of advance Rs1.25 lakhs
(@ 100 % of unsecured portion)
Provision for secured portion of advance Rs1.50 lakhs
(@ 100% of the secured portion as advance
has remained doubtful for over 3 years)

Total provision to be made Rs 2.75 lakhs

8. You are required to calculate provisions from the following-

Outstanding Balance Rs 4 lakhs
ECGC Cover 50%
Period for which the advance has More than 3 years remained
remained doubtful doubtful (as on March 31, 20X1)
Value of security held (realizable value only 1.50 lakhs
80%)

Solution
Provision required to be made as on 31.03.20X1
Outstanding balance Rs 4.00 lakhs
Less: Value of security held (80% of 1.5 lacs) (Rs 1.20 lakhs)
Unrealized balance Rs 2.80 lakhs
Less: ECGC Cover (50% of unrealizable balance) (Rs 1.40 lakhs)
Net unsecured balance Rs 1.40 lakhs
Provision for unsecured portion of advance Rs1.40 lakhs (@ 100% of unsecuredportion)

Provision for secured portion of advance Rs 1.20 lakhs (@ 100% of thesecured portion)

Total provision to be made Rs 2.60 lakhs

9. In KR Bank, the doubtful assets (more than 3 years) as on 31.3.20X1 is Rs 1,000 lakhs. The value of
security (including DICGC 100% cover of Rs 100 lakhs) is ascertained at Rs 500 lakhs. How much
provision must be made in the books of the Bank towards doubtful assets?

Solution
(in lakhs)
Doubtful Assets (more than 3 years) 1,000
Less: Value of security (excluding DICGC cover) (400)
600

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Less: DICGC cover (100)

Unsecured portion 500
Provision:
for unsecured portion @100% 500 lakhs
for secured portion @ 100% 400 lakhs
Total provision to be made in the books of KR Bank 900 lakhs

10. A loan outstanding of Rs 50,00,000 has DICGC cover. The loan guaranteed by DICGC is assigned a risk
weight of 50%. What is the value of Risk-adjusted asset?

Solution
Loan outstanding Rs 50,00,000
Guaranteed by DICGC – Risk weight 50%
Value of risk adjusted asset Rs.50,00,000 × 50% = Rs 25,00,000

11. The following is an extract from Trial Balance of overseas Bank as at 31st March, 20x1

Rs Rs
Bills Discounted 12,64,000
Rebate on bills discounted not due 22,160
on March 31st, 20X0
Discount received 1,05,708

An analysis of the bills discounted is as follows:

Amount Due Date 20X1 Rate of Discount (%)

i 1,40,000 June 5 14
ii 4,36,000 June 12 14
Iii 2,82,000 June 25 14
Iv 4,06,000 July 6 16

Calculate Rebate on Bills Discounted as on 31-3-20X1 and show necessary journal entries.

Solution
In order to determine the amount to be credited to the Profit and Loss A/c it is necessary to first ascertain
the amount attributable to the unexpired portion of the period of the respective bills.

The workings are as given below:

(i) The bill is due on 5th June; hence the number of days after March 31st, is 66. The discount on Rs
1,40,000 for 66 days @ 14% per annum will be
14/100 × 66/365 × Rs 1,40,000 = Rs 3,544.
(ii) Number of days in the unexpired portion of the bill is 73: discount on Rs 4,36,000 for 73 days @ 14% per
annum will be Rs 12,208.

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(iii) Number of days in the unexpired portion of the period of the bill is 86: discount on Rs 2,82,000 for 86
days @ 14% per annum will be Rs 9,302.
(iv) Number of days in the unexpired portion of the period of the bill is 97: discount on Rs 4,06,000 for 97
days @ 16 % p.a. will be Rs 17,263.

The amount of discount to be credited to the Profit and Loss Account will be:

Transfer from Rebate on bills

discount as on 31-3-20X0 22,160
Add: Discount received during
the year ended 31-3-20X1 1,05,708
1,27,868
Less: Rebate on bills discounted
as on 31.3.20X1(3,544 + 12,208 + 9,302+ 17,263) (42,317)
85,551

The journal entries will be as follows :

Dr. Cr.

Rebate on Bills Discounted A/c Dr. 22,160

To Discount on Bills A/c 22,160
(Being the transfer of Rebate on Bills Discounted on
31-3-20X0 to Discount on Bills Account)
Discount on Bills A/c Dr. 42,317
To Rebate on Bills Discounted A/c 42,317
(Being the transfer of rebate on bills discounted
required on 31-3-20X0 from discount on Bills Account)
Discount on Bills A/c Dr. 85,551
To Profit and Loss A/c 85,551
(Being the amount of discount on Bills transferred to
Profit and Loss Account)

12. On 31st March, 20X1, Uncertain Bank had a balance of Rs 9 crores in “rebate on bills discounted”
account. During the year ended 31st March, 20X2, Uncertain Bank discounted bills of exchange of Rs
4,000 crores charging interest at 18% per annum the average period of discount being for 73 days.
Of these, bills of exchange of Rs 600 crores were due for realisation from the acceptors/customers
after 31st March, 20X2, the average period outstanding after 31st March, 20X2 being 36.5 days.

Uncertain Bank asks you to pass journal entries and show the ledger accounts pertaining to:
(i) discounting of bills of exchange and
(ii) rebate on bills discounted

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Solution
Journal Entries in books of Uncertain Bank (Rupees in crores)
Dr. Cr.
Rebate on bills discounted A/c Dr. 9.00
To Discount on bills A/c 9.00
(Being the transfer of opening balance in rebate
on bills discounted account to discount on bills
account)
Bills purchased and discounted A/c Dr. 4000.00
To Discount on bills A/c 144.00
 18 73 
` 4,000 crores× × 
 100 365 
To Clients A/c 3,856.00
(Being the discounting of bills of exchange during
the year)
Discount on bills A/c Dr. 10.80
To Rebate on bills discounted A/c 10.80
(Being the unexpired portion of discount in
respect of the
discounted bills of exchange carried forward 18%
of 600 crs for average period of 36.5 days)
Discount on bills A/c Dr. 142.20
To Profit and loss A/c 142.20
(Being the amount of income for the year from
discounting of bills of exchange transferred to
Profit and Loss A/c)

Discount on bills Account

20X2 ` 20X1 `
March 31 To Rebate on bills April 1 By Rebate on bills 9.00
discounted A/c 10.80 discounted A/c
To Profit and loss A/c 142.20 20X1-X2 By Bills purchased 144.00
and discounted A/c
153.00 153.00

Rebate on bills discounted Account

20X1 ` 20X1 `
April 1 To Discount on 9.00 April 1 By Balance b/d 9.00
bills A/c
20X2 20X2
March 31 To Balance c/d 10.80 March 31 By Discount on bills A/c 10.80
19.80 19.80

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13. Calculate Rebate on Bills discounted as on 31 December, 20X1 from the following
data and show journal entries:
Date of Bill Period Rate of Discount
15.10.X1 25,000 5 months 8%
(i)
(ii) 10.11.X1 15,000 4 months 7%
(iii) 25.11.X1 20,000 4 months 7%
(iv) 20.12.X1 30,000 3 months 9%

Solution
Calculation of Rebate on Bills Discounted
Due Date Days after 31 Discount Rate
December 20X1
25,000 18-03-20X2 31 + 28 + 18 = 77 8% 421.92
15,000 13-03-20X2 31 + 28 + 13 = 72 7% 207.12
20,000 28-03-20X2 31 + 28 + 28 = 87 7% 333.69
30,000 23-03-20X2 31 + 28 + 23 = 82 9% 606.57
Total 1569.30

Journal Entry
Date Particulars Debit Credit

Dec. 31 Interest and Discount Account Dr. 1569.30

To Rebate on Bills Discounted 1569.30
(Being the provision for unexpired discount
required at the end of the year)

14. On 01.04.20X1 bills for collection was 7 lacs. During 20X1-X2 bills received for collection amounted
to 64.5 lacs. Bills collected were 47 lacs. Bills dishonoured was 5.5 lacs. Prepare Bills for collection
(Assets) and Bills for Collection (Liabilities) Accounts.

Solution
Bills for Collection (Assets) Account
in lacs in lacs
To Balance b/d 7 By Bills for collection 47
To Bills for collection 64.5 By Bills dishonoured 5.5
By Balance c/d 19
71.5 71.5

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Bills for Collection (Liabilities) Account

in lacs in lacs
To Bills for collection 47 By Balance b/d 7
To Bills dishonoured 5.5 By Bills for collection 64.5
To Balance c/d 19
71.5 71.5

15. Following facts have been taken out from the records of Adarsha Bank in respect of
the year ending March 31, 20X2:

(a) On 1-4-20X1 Bills for collection were Rs 7,00,000. During 20X1-20X2 bills received for collection
amounted to Rs 64,50,000, bills collected were Rs 47,00,000 and bills dishonoured and returned
were Rs 5,50,500. Prepare Bills for Collection (Assets) A/c and bills for Collection (Liability) A/c.

(b) On 1-4-20X1, Acceptance, Endorsement, etc. not yet satisfied amounted to Rs 14,50,000. During
the year under question, Acceptances, Endorsements, Guarantees etc., amounted to Rs 44,00,000.
Bank honoured acceptances to the extent of Rs 25,00,000 and client paid off Rs 10,00,000 against
the guaranteed liability. Clients failed to pay Rs 1,00,000 which the Bank had to pay. Prepare the
“Acceptances, Endorsements and other Obligations A/c” as it would appear in the General ledger.

(c) It is found from the books, that a loan of Rs 6,00,000 was advanced on 30-9-20X1 @ 10 per cent
p.a. interest payable half yearly; but the loan was outstanding as on 31-3-20X2 without any payment
recorded in the meantime, either towards principal or towards interest. The security for the loan
was 10,000 fully paid shares of Rs 100 each (the market value was Rs 98 as per the Stock Exchange
information as on 30th Sept., 20X1). But due to fluctuations, the price fell to Rs 40 per share in
January, 20X2. On 31-3-20X2, the price as per Stock Exchange rate was Rs 82 per share. State how
you would classify the loan as secured/unsecured
in the Balance Sheet of the Company.

(a) The following balances are extracted from the Trial Balance as on 31-3-20X2:
Dr (Rs) Cr (Rs)
Interest and Discounts 98,00,000
Rebate for bills discounted 20,000
Bills discounted and purchased 4,00,000
It is ascertained that the proportionate discounts not yet earned for bills to mature in 20X2-20X3 amount to
Rs 14,000. Prepare Ledger Accounts.

Solution
(a) Bills for Collection (Assets) A/c
20X1 20X1-X2
Apr. 1 To Balance b/d 7,00,000 By Bills for
Collection
20X1-X2 (Liabilities) A/c 47,00,000
To Bills for By Bills for
Collection collection
(liabilities) A/c 64,50,000 (Liabilities) A/c 5,50,500
20X2
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Mar. 31 By Balance c/d 18,99,500

71,50,000 71,50,000

Bills for Collection (Liabilities) Account

20X1-X2 20X1
To Bills for collection 47,00,000 Apr. 1 By Balance b/d 7,00,000
(Assets) A/c
To Bills for Collection 5,50,500 20X1-X2 By Bills for collection 64,50,000
(Assets) A/c (Assets) A/c
20X2
Mar. 31 To Balance c/d 18,99,500
71,50,000 71,50,000

(b) Acceptances, Endorsement & other Obligation Account

20X1-X2 20X1
To Constituents’ 25,00,000 Apr. 1 By Balance b/d 14,50,000
Liability for
Acceptance,
Endorsement, etc.
To Constituents’ 10,00,000 20X1-X2 By Constituents, 44,00,000
Liability for Liabilities for
Acceptances, Acceptances,
Endorsement etc. Endorsements, etc.
To Constituents’ 1,00,000
Liability for
Acceptances,
Endorsements, etc.
(amount paid on
failure of clients)
Mar. 31 To Balance c/d 22,50,000
58,50,000 58,50,000

(c) For classifying loans as fully secured or otherwise, the value of the security as on the last date of the year
is considered. The value of the security is Rs 8,20,000 covering the loan and the interest due comfortably.
Hence it is to be treated as good and fully secured.

(d) Rebate on Bills Discounted Account

20X1-X2 To Interest and 6,000 20X1 By Balance b/d 20,000

Discount A/c Apr. 1
20X2 To Balance c/d 14,000
Mar. 31
20,000 20,000

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Interest & Discount Account

20X2 20X1
Mar. 31 To Profit & Loss A/c 98,06,000 Apr. 1 By Balance b/d 98,00,000
20X1-X2 By Rebate on Bills 6,000
discounted A/c
98,06,000 98,06,000

16. From the following information, prepare a Balance Sheet of ADT International Bank as on
31st March, 20X1 giving the relevant schedules (Rs In Lacs)
Dr (Rs) Cr (Rs)
Share Capital 198.00
19,80,000 Shares of Rs 10 each
Statutory Reserve 231.00
Net Profit before Appropriation 150.00
Profit and Loss Account 412.00
Fixed Deposit Account 517.00
Savings Deposit Account 450.00
Current Accounts 28.00 520.12
Bills Payable 0.10
Cash credits 812.10
Borrowings from other Banks 110.00
Cash in Hand 160.15
Cash with RBI 37.88
Cash with other Banks 155.87
Money at Call 210.12
Gold 55.23
Government Securities 110.17
Premises 155.70
Furniture 70.12
Term Loan 792.88
2,588.22 2,588.22
Additional Information:
Bills for collection 18,10,000
Acceptances and endorsements 14,12,000
Claims against the Bank not acknowledged as debt 55,000

Depreciation charges—Premises 1,10,000

Furniture 78,000

50% of the Term Loans are secured by Government guarantees. 10% of cash credit (including Debit balance
in Current A/c) is unsecured. Assume that CRR is required to be maintained at 4% of deposits.
Transfer 25% of its profit to the reserve fund.

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Solution

Balance Sheet of ADT International Bank As on 31st March, 20X1 (Rs in lacs)

Capital and Liabilities Schedule As on 31.3.20x1 As on 31.3.20x0

Share Capital 1 198
Reserves and Surplus 2 793
Deposits 3 14,87.12
Borrowings 4 1,10.00
Other liabilities and provisions 5 0.10
25,88.22

Assets
Cash and balances with RBI 6 219.63
Balances with banks and money 7 344.39
at call and short notice
Investments 8 1,65.40
Advances 9 16,32.98
Fixed Assets 11 2,25.82
Other Assets -
25,88.22

Contingent liabilities 12 14.67

Bills for collection 18.10

Schedule 1— Capital
Authorised Capital -
Issued, Subscribed and Paid up Capital 19,80,000 Shares of Rs 10 each 198

Schedule 2— Reserves and Surplus

Statutory Reserve-
Opening balance 231
Additions during the year 37.5 268.50
Balance in Profit & Loss Account (W.N. 1) 524.50
793

Schedule 3— Deposits

Demand deposits from others 5,20.12

Saving bank deposits 4,50.00
Fixed Deposits 5,17.00
14,87.12
Schedule 4— Borrowings

Borrowing in India-
Other banks 1,10.00

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Schedule 5— Other Liabilities and Provisions

Bills Payable 0.10

Schedule 6— Cash and balances with RBI

Cash in hand 1,60.15

Balances with RBI In current account (W.N. 2) 59.48
219.63

Schedule 7—Balances with banks and money at call and short notice

In India
a. Balances with banks
i. in current accounts (W.N. 3) 1,34.27
b. Money at call and short notice 2,10.12
344.39

Schedule 8— Investments

Investment in India in
Government securities 1,10.17
Others—Gold 55.23
1,65.40

Schedule 9— Advances

Cash credits, overdrafts (includes Dr Bal in Current A/c as ODs 8,40.10

Term Loans 7,92.88
16,32.98

Secured by tangible assets (balancing fig) 11,52.53

Secured by bank/government guarantees 3,96.44
Unsecured 84.01
16,32.98

Schedule 10— Fixed Assets

Premises
At cost 156.80
Depreciation to date 1.10
155.70
Other Fixed Assets
Furniture at cost 70.90
Depreciation to date 0.78
70.12

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TOTAL 2,25.82

Schedule 11— Other Assets – NIL

Schedule 12— Contingent Liabilities

Claims against bank not acknowledged as debts 0.55

Acceptances, endorsements 14.12
14.67

Working Note:

(1) Balance in Profit & Loss Account:

Profit and Loss Account 4,12.00

Add : Net Profit before appropriation (Profit for the year) 1,50.00
5,62.00
Less : Transfer to statutory reserve (25% of 150.00) (37.50)
524.50

(2) Transfer from Cash with other banks to Cash with RBI (when CRR is required to be maintained at 4%
of deposits w.e.f. January 29, 2013)

Cash reserve required (14,87.12 x 4%) 59.48

Cash with RBI (37.88)
Transfer needed to maintain cash reserve 21.60

(3) Liquid Assets:

Cash on hand 1,60.15

Cash with other Banks 1,55.87
Money at call and short notice 2,10.12
Gold 55.23
Government securities 1,10.17
6,91.54
Excess liquidity [6,91.54 – (1487.12 x 23%)] or (6,91.54 – 342.04) 349.50
The excess liquidity enables the transfer as per (2) above.

After the transfer, Cash with other Banks = Rs 134.27 lacs (1,55.87 - 21.60)

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17. From the following information, prepare Profit and Loss A/c of Dimple Bank as on 31-3-20X3
20X1-X2( In ‘000) Particulars 20X2-X3(In ‘000)
14,27 Interest and Discount 2045
1,14 Income from investment 1,12
1,55 Interest on Balances with RBI 1,77
7,22 Commission, Exchange and Brokerage 7,12
12 Profit on sale of investments 1,22
6,12 Interest on Deposits 8,22
1,27 Interest to RBI 1,47
7,27 Payment to and provision for employees 8,55
1,58 Rent, taxes and lighting 1,79
1,47 Printing and stationery 2,12
1,12 Advertisement and publicity 98
98 Depreciation 98
1,48 Director’s fees 2,12
1,10 Auditor’s fees 1,10
50 Law charges 1,52
48 Postage, telegrams and telephones 62
42 Insurance 52
57 Repair & maintenance 66

Other Information:
(i) The following items are already adjusted with Interest and Discount (Cr.):
Tax Provision (’000 Rs) 1,48
Provision for Doubtful Debts (’000 Rs) 92
Loss on sale of investments (’000 Rs) 12
Rebate on Bills discounted (’000 Rs) 55

(ii) Appropriations:
25% of profit is transferred to Statutory Reserves
5% of profit is transferred to Revenue Reserve

Solution

Dimple Bank
Profit and Loss Account for the year ended 31-3-20X3 (Amount in ‘000)
Schedule No Year ended Year ended
31-3-20X3 31-3-20X2
I Income
Interest Earned 13 25,86 16,96
Other Income 14 8,22 7,34
Total 34,08 24,30

II Expenditure
Interest Expended 15 9,69 7,39
Operating Expenses 16 20,96 16,97
Provisions and Contingencies (148+92) 2,40
Total 33,05 24,36

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III Profit/Loss
Net Profit/(Loss) for the year 1,03 (6)
Profit/(Loss) brought forward (6)
Total 97 (6)

IV Appropriations
Transfer to Statutory Reserve (103x25%) 25.75
Transfer to Other Reserve, Proposed Dividend 5.15
Balance carried over to Balance Sheet 66.10
Total 97.00

Schedule 13 - Interest Earned

Particulars Year ended Year ended
31-3-20X3 31-3-20X2
Interest/Discount (2045+148+92+12) 22,97 14,27
Income on Investments 1,12 1,14
Interest on Balances with RBI and other inter-bank fund 1,77 1,55
Others - -
Total 25,86 16,96

Schedule 14 - Other Income

Particulars Year ended Year ended 31-
31-3-20X3 3-20X2
Commission, Exchange and Brokerage 7,12 7,22
Profit on Sale of Investments 1,22 12
Less: Loss on sale of Investments (12) -
Total 8,22 7,34

Schedule 15 - Interest Expended

Particulars Year ended Year ended 31-
31-3-20X3 3-20X2
Interest on Deposits 8,22 6,12
Interest on RBI/inter-bank borrowings 1,47 1,27
Total 9,69 7,39

Schedule 16 - Operating Expenses

Particulars Year ended Year ended
31-3-20X3 31-3-20X2
Payments to and provision for employees 8,55 727
Rent, taxes and lighting 1,79 158
Printing and stationery 2,12 147
Advertisement and Publicity 98 112
Depreciation on the Bank’s Property 98 98
Director’s fees, allowances and expenses 212 148
Auditor’s fees and expenses 110 110
Law charges 152 50
Postage, telegrams, telephones etc 62 48

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Repairs and maintenance 66 57

Insurance 52 42
Other Expenditure - -

Total 2096 1697

18. From the following information, prepare Profit and Loss A/c of KC Bank for the year ended 31st
March, 20X1 (Amount in ‘000)

Interest on cash credit - 18,20

Interest on overdraft - 7,50
Interest on term loans - 15,40
Income on investments - 8,40
Interest on balance with RBI - 1,50
Commission on remittances and transfer - 75
Commission on letters of credit - 1,18
Commission on government business - 82
Profit on sale of land and building - 27
Loss on exchange transactions - 52
Interest paid on deposit - 27,20
Auditors’ fees and allowances - 1,20
Directors’ fees and allowances - 2,50
Advertisements - 1,80
Salaries, allowances and bonus to employees - 12,40
Payment to Provident Fund - 2,80
Printing and stationery - 1,40
Repairs and maintenance - 50
Postage, telegrams, telephones – 80

Other Information:
(i) Interest on NPA is as follows
Earned (Rs ’000) Collected (Rs ’000)
Cash credit 8,20 4,00
Overdraft 450 1,00
Term Loans 750 2,50

(ii) Classification of Non Performing Advances (’000 Rs)

Standard - 30,00
Sub-standard - 11,20
Doubtful assets not covered by security - 2,00
Doubtful assets covered by security for one year - 50
Loss Assets - 2,00

(iii) Investments - 27,50

Bank should not keep more than 25% of its investment as ‘held-for-maturity’ investment. The market value
of its rest 75% investment is Rs 19,75,000 as on 31-3-20X1.

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SOLUTION

KC Bank
Profit and Loss Account For the year ended 31st March, 20X1 (Amount in ‘000)
Particulars Schedule Year ended
31-3-20X1
I Income
Interest earned 13 38,30
Other income 14 250
40,80
II Expenditure
Interest expended 15 27,20
Operating expenses 16 23,40
Provisions and Contingencies 6,80
57,40

III Profit/ (Loss) (16,60)

IV Appropriations NIL

Schedule 13 - Interest Earned

Particulars Year ended 31-3-20X1
Interest/discount on advances/bills
Interest on cash credit ` (18,20-420) 1400
Interest on overdraft ` (750-350) 400
Interest on term loans ` (15,40-500) 1040

Income on investments 840

Interest on Balance with RBI 150

Total 3830

Schedule 14 - Other Income

Particulars Year ended 31-3-20X1
Commission, Exchange and Brokerage
Commission on remittances and transfer 75
Commission on letter of credit 118
Commission on Government business 82
Profit on sale of Land and Building 27
Loss on Exchange Transactions (52)
Total 250

Schedule 15 - Interest Expended

Particulars Year ended 31-3-20X1
Interest on Deposits 27,20

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Schedule 16 - Operating Expenses

Particulars Year ended 31-3-20X1
Payment and provision for employees
Salaries, allowances and bonus 12,40
Provident Fund Contribution 280
Printing and Stationery 140
Advertisement and publicity 180
Directors’ fees, allowances and expenses 250
Auditors’ fees and expenses 120
Postage, telegrams, telephones etc 80
Repairs and maintenance 50
Total 2340

Working Note:
Provisions and contingencies Amount in ‘000
Provision for NPA :
Standard (3,000 × 0.40%) 12
Sub-standard (1,120 × 15%)* 168
Doubtful not covered by security (200 × 100%) 200
Doubtful covered by security for one year (50 × 25%) 12.5
Loss Assets (200 × 100%) 200
592.5
Depreciation on current investments
Cost (75% of 27,50) 2062.5
Less : Market value (1975) 87.5
Total 680
*It is assumed that sub-standard asset is fully secured.

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ADDITIONAL QUESTIONS ON FINANCIAL STATEMENT OF BANKS

19. The following information are also given for SM Bank :

Assets Rs in Lakhs
Standard 75,00
Sub-Standard 60,00
Doubtful:
for 1 Year (fully secured) 12,00
for 1 to 3 Year (fully secured) 9,00
for more than 3 Years 9,00
Loss Assets 15,00

Additional Information:
• Standard Assets includes Rs 15,00 Lakhs Advances to Commercial Real Estate (CRE).
• Out of Rs 60,00 Lakhs of Sub-Standard Asset Rs 20,00 Lakhs are unsecured. Unsecured amount
includes Rs 5,00 Lakhs in respect of Infrastructure Loan Accounts with ESCROW safeguard.
• Doubtful Asset for more than 3 Years includes Rs 4,00 Lakhs, which is covered by 50% ECGC, value of
security of which is Rs 150 Lakhs.

You are required to find out the amount of provision to be shown in the Profit & Loss Account of SM Bank.

SOLUTION
(Amount in Lacs)
Assets Amount Provision % Provision
Amount
Standard:
Advances to CRE 15,00 1% 15
Others 60,00 0.4% 24

Sub-standard:
Secured 40,00 15% 6,00
Unsecured- Others 15,00 25% 3,75
Unsecured infrastructure 5,00 20% 1,00

Doubtful Secured:
up to one year 12,00 25% 300
For more than 1 year up to 3 years 9,00 40% 360
More than 3 years 4,00 WN1 275
Doubtful unsecured (more than 3 years) 5,00 100% 500
Loss 1500 100% 1500
TOTAL PROVISION REQUIRED 4049

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Working Note 1 –

Provision required where assets are ECGC covered

PARTICULARS Amount ( In lacs)

Outstanding balance (ECGC Covered) 400
Less: Value of security (150)
Unrealised balance 250
Less: ECGC Cover @ 50% 125
Net Unsecured Balance 125
Provision for unsecured portion @100% 125
Provision for secured portion @100% 150
TOTAL PROVISION REQUIRED 275

20. Calculate Provision for tax at 35% with the following information-
Interest Income = 766 Lacs
Other Income = 50 lacs
Interest Expended = 54 lacs
Operating Expense= 468 lacs
Provision for Standard & NPA advances = 86.24

Solution –

Provision for Tax = {(766+50) – (54+468+86.24)} * 35%

Provision for Tax = (816 – 608.24) * 35%
Provision for Tax = 72.716

21. From the following information, calculate the amount of Provisions and Contingencies and
prepare Profit and Loss Account of ‘Supreme Bank Limited’ for the year ending 31st March,
2018:

Income Rs in Expenditure Rs in lakhs

lakhs
Interest and discount 1,835 Interest expended 1,136
Interest accrued on 8 Printing & stationery 18
Investments
Commission, exchange and 12 Repair & maintenance 2
brokerage
Profit on sale of investments 1 Payment to and provision For 80
employees(salaries,bonus etc.)

Rent received 2 Other Operating Expenses 5

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Additional Information:
Rs in
lakhs
(i) Rebate on bills discounted to be provided for 3
(ii) Classifications of Advances:
Standard Assets 4,100
Sub-Standard Assets (fully secured) 380
Doubtful Assets not covered by security 155
Doubtful Assets covered by security
For 1 year 10
More than 1 year, but less than 2 years 18
More than 2 year, but less than 3 years 35
More than 3 year 22
Loss Assets 50

iii) Make tax Provision @ 35%

iv) Profit and loss (Cr) brought forward from the previous year 65

Solution

(a)Calculation of Provisions and Contingencies

Provision on Non-Performing Assets

Rs in lakhs
Particulars Amount % of Provision
Provision
Standard Assets 4,100 0.4 16.40
Sub-standard Assets 380 15 57
Doubtful Assets not covered by security 155 100 155
Doubtful Assets covered by security:
For 1 year 10 25 2.50
More than 1 year, but less than 2 years 18 40 7.20
More than 2 years & but less than 3 years 35 40 14
More than 3 years 22 100 22
Loss Assets 50 100 50
TOTAL 4,770 324.10

(i) Calculation of Provision for tax = 35% of [Total Income – Total Expenditure (excluding
tax)]
= 35% of [(1,840 +15) – (1,136+105+324.10)] = Rs 101.47 lakhs
Total Provisions and contingencies = Provisions on NPAs + Provisions for tax
= 324.10 + 101.47 = Rs 425.57 lakhs

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(b) Supreme Bank Limited

Profit and Loss Account for the year ended 31st March, 2018

Particulars Schedule Rs in lakhs

No.
I Income
Interest Earned 13 1,840
Other Income 14 15
1,855
II Expenditures
Interest Expended 1,136
Operating Expenses 16 1,05
Provisions & Contingencies 425.57
1,666.57
III Profit/Loss
Net Profit/Loss for the year 188.43
Profit/Loss brought forward 65
253.43
IV Appropriations
Transfer to Statutory Reserve @ 25% of 188.43 47.10
Transfer to Other Reserves -
Balance carried over to Balance Sheet 206.33
253.43
Schedule 13 – Interest
earned
I Interest & Discount 1,832
(1,835 – 3)
II Interest on Investments 8
1,840
Schedule 14- other income
Commission, exchange and brokerage 12
Profit on sale of investments 1
Rent received 2
15
Schedule 16- Operating Expenses
Printing & stationery 18
Repair & maintenance 2
Payment to and provision for employees (salaries, 80
bonus etc.)
Other Operating Expenses 5
105

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22. The following are the figures extracted from the books of TOP Bank Limited as on 31.3.2017.
Rs
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank’s properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000

The following further information is given:

(i) A customer to whom a sum of Rs 16 lakhs has been advanced has become insolvent and it
is expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs 2,10,000 was found necessary by
the auditors.
(iii) Rebate on bills discounted on 31.3.2016 was Rs 19,000 and on 31.3.2017 was Rs 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide Rs 9,00,000 for Income-tax.
(vi) Profit and Loss account opening balance was Nil as on 31.3.2016.

Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3.2017.

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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

Solution

TOP Bank Limited

Profit and Loss Account for the year ended 31st March, 2017

Schedule Year ended

31.03.2017
(Rs in ‘000s)
I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6,651.18
II. Expenditure
Interest expended 15 3259.92
Operating expenses 16 768.46
Provisions and contingencies 2,070.00
(960+210+900)
Total 6,098.38
IIII. Profits/Losses
Net profit for the year 552.80
Profit brought forward Nil
552.80
IV. Appropriations
Transfer to statutory reserve 138.2
(552.8 x25%)
Balance carried over to balance sheet 414.6
552.80

Year ended 31.3. 2017

(Rs in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5923.18
5923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304
II. Profit on sale of investments 320
III. Rent received 104
728
Schedule 15 – Interest Expended
I. Interests paid on deposits 3259.92
Schedule 16 – Operating Expenses
I. Payment to and provisions for employees 320
II. Rent and taxes 144
III. Depreciation on bank’s properties 48
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IV. Director’s fee, allowances and expenses 48

V. Auditors’ fee 28
VI. Law (statutory) charges 44
VII. Postage and telegrams 96.46
VIII. Preliminary expenses 40
768.46

Working Note:
(Rs in ‘000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2016 19.00
Less: Rebate on bills discounted on 31.3. 2017 ( 25.00)
5,923.18

23. Calculate Tier 1 & Tier 2 capital from the following data

Particulars Amount in crores

Equity Share capital 600
Statutory reserve 470
P&L A/c (Dr) 30
Capital Reserve ( out of which 25 crores is 130
due to revaluation of assets)

Solution-

Tier I capital
Equity Share capital = 600
Statutory reserve = 470
P&L A/c (Dr) = (30)
Capital Reserve ( 130-25) = 105
TOTAL = 1,145 CRORES

Tier II capital = Revaluation Reserve ( 25crores – 55%) = 11.25 crores

(For loans & advances guaranteed by DICGC/ECGC , Then Risk Weights = 50%)

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24. From the following information find out the amount of provisions required to be made in the Profit
& Loss Account of a commercial bank for the year ended 31st March, 20X1:
(i) Packing credit outstanding from Food Processors Rs60 lakhs against which the bank holds securities
worth Rs 15 lakhs. 40% of the above advance is covered by ECGC. The above advance has remained
doubtful for more than 3 years.
(ii) Other advances:
Assets classification Rs in lakhs
Standard 3,000
Sub-standard 2,200
Doubtful :
For one year 900
For two years 600
For three years 400
For more than 3 years 300
Loss assets 600

SOLUTION-
(i) Packing Credit
( in lakhs)
Amount outstanding (packing credit) 60
Less: Realisable value of securities (15)
45
Less: ECGC cover (40%) (18)
Balance being unsecured portion of packing credits 27
Required provision :
Provision for unsecured portion (100%) 27.0
Provision for secured portion (100%) 15.0
42.0

(ii) Other advances: (Rs in lakhs)

Assets Amount % of provision Provision

Standard 3,000 0.40 12
Sub-standard 2,200 15 330
Doubtful :
For one year 900 25 225
For two years 600 40 240
For three years 400 40 160

For more than three years 300 100 300

Loss 600 100 600
Required provision 1,867
Note: Sub-standard and Doubtful advances have been assumed as fully secured. However, in case it is
assumed that no security cover is available for these advances, provision will be made for @ 25% for sub-
standard and 100% for doubtful advances

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25. State with reason whether the following cash credit accounts are NPA or not:
Case-1 Case-2
Sanctioned limit 60,00,000 45,00,000
Drawing power 56,00,000 42,00,000
Amount outstanding continuously 01-01-X1 48,00,000 30,00,000
to 31-03-X1
Total interest debited for the above period 3,84,000 2,40,000
Total credits for the above period Nil 3,20,000

SOLUTION-
Case 1 Case 2
Sanctioned limit 60,00,000 45,00,000
Drawing power 56,00,000 42,00,000
Amount outstanding continuously from 48,00,000 30,00,000
1.01.20X1 to 31.03.20X1
Total interest debited 3,84,000 2,40,000
Total credits - 320,000
Is credit in the account is sufficient to cover the No Yes
interest debited during the period
NPA NOT NPA

26. The following figures are extracted from the books of KLM Bank Ltd. as on 31-03-20X2:

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 Rs 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 provisions of Rs 2,00,000 was found necessary.
(3) Rebate on bill discounted on 31-03-20X1 was Rs 15,000 and on 31-03-20X2 was Rs 20,000.

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(4) Income tax of Rs 2,00,000 is to be provided.

The directors desire to declare 5% dividend and transfer 25% of its profit to the reserve fund.

Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-20X2 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 31-03-20X1. Assume that the preliminary expenses had been fully written off during the year.

SOLUTION-
KLM Bank Limited
Profit and Loss Account for the year ended 31st March, 20X2
Schedule Year ended
31.03.20X2
I. Income:
Interest earned 13 37,95,160
Other income 14 4,87,800
Total 42,82,960
II. Expenditure
Interest expended 15 22,95,360
Operating expenses 16 5,70,340
Provisions and contingencies
(4,50,000+2,00,000+2,00,000) 8,50,000
Total 37,15,700
III. Profits/Losses
Net profit for the year 5,67,260
Profit brought forward Nil
5,67,260
IV. Appropriations
Transfer to statutory reserve (25% of 5,67,260) 1,41,815
Proposed dividend 50,000
Balance carried over to balance sheet 3,75,445
5,67,260

Profit & Loss Account balance of Rs 3,75,445 will appear under the head ‘Reserves and Surplus’ in
Schedule 2 of the Balance Sheet.
Year ended 31.3.20X2
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 37,95,160
37,95,160
Schedule 14 – Other Income
I. Commission, exchange and brokerage 1,90,000
II. Profit on sale of investment 2,25,800
III. Rent received 72,000
4,87,800
Schedule 15 – Interest Expended
I. Interests paid on deposits 22,95,360
22,95,360

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Schedule 16 – Operating Expenses

I. Payment to and provisions for employees (salaries & allowances) 2,50,000
II. Rent, taxes paid 1,00,000
III. Depreciation on assets 40,000
IV. Director’s fee, allowances and expenses 35,000
V. Auditor’s fee 12,000
VI. Statutory (law) expenses 38,000
VII. Postage and telegrams 65,340
VIII. Preliminary expenses 30,000
5,70,340

Working Note:

Interest and discount received 38,00,160

Add: Rebate on bills discounted on 31.3. 20X1 15,000
Less: Rebate on bills discounted on 31.3. 20X2 (20,000)
37,95,160

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Chapter 21 NON BANKING FINANCIAL COMPANIES

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act 1956/
2013, engaged in the business of loans and advances, acquisition of shares, debentures and other
securities, leasing, hire-purchase, insurance business and chit business.

DISTINCTION BETWEEN AN NBFC AND A BANK

S.No. NBFC Bank
1. An NBFC cannot accept demand A Bank can accept demand
deposits. deposits.
2. An NBFC is not a part of the A Bank is a part of the payment
payment and settlement system. and settlement system.
3. An NBFC cannot issue cheques A Bank can issue cheques drawn
drawn on itself. on itself.

DIFFERENT TYPES OF NBFCS ARE AS FOLLOWS-

• Systemically Important Core Investment Company-
✓ It holds not less than 90% of its net assets in the form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies.

• Infrastructure Debt Fund - Non- Banking Financial Company-

✓ Net owned funds of 300 crore or more; and which invests only in Public Private Partnerships
(PPP)

• Infrastructure Finance Company (IFC): An IFC is defined as non-deposit taking NBFC that fulfils the
criteria mentioned below:
✓ a minimum of 75 per cent of its total assets should be deployed in infrastructure loans
✓ has a net owned funds of Rs 300 crore or above
✓ has obtained a minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA,
Brickwork Ratings India Pvt. Ltd. or equivalent rating by any other crediting rating agency
accredited by RBI
✓ has a Capital to Risk Asset Ratio (CRAR) of 15 percent (with a minimum Tier I capital of 10
percent).

REGISTRATION AND REGULATION OF NBFC –

• Under Section 45–IA of the Reserve Bank of India (Amendment) Act, 1997, no nonbanking financial
company is allowed to commence or carry on the business of a non-banking financial institution
without obtaining a certificate of registration issued by the Reserve Bank of India &
• It should have a minimum net owned fund of ₹ 200 lakh.

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FOLLOWING NBFCS HAVE BEEN EXEMPTED FROM THE REQUIREMENT OF REGISTRATION

• Housing Finance Institutions (regulated by National Housing Bank)
• stock-brokers/sub-brokers (regulated by Securities and Exchange Board of India);
• Insurance companies (regulated by Insurance Regulatory and Development Authority of India)

MINIMUM NET OWNED FUND

OWNED FUND = Aggregate of the paid-up equity capital, preference shares which are compulsorily
convertible into equity, free reserves, balance in share premium account and capital reserves representing
surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after
deducting there from accumulated balance of loss, deferred revenue expenditure and other intangible
assets.

NET OWNED FUND (NOF) =

Owned Fund – Investments in shares of subsidiaries/ companies in same group/Other NBFC – Book value
of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made
to and deposits with subsidiaries and companies in the same group (to the extent such sum exceeds 10%
of owned fund).

SYSTEMICALLY IMPORTANT NON-DEPOSIT TAKING COMPANY –

Means a non-banking financial company not accepting / holding public deposits and having total assets of
Rs 500 crore and above as shown in the last audited balance sheet.

1. Calculate ‘Owned Fund’ of a NBFC based on the following facts:

Paid up share capital: Rs 150 lakhs

Free reserves: Rs 250 lakhs
Compulsory convertible preference shares (CCPS): Rs 50 lakhs
Revaluation Reserve: Rs 95 lakhs

Solution
Owned fund calculation:
Paid up share capital: Rs 150 lakhs
Free reserves: Rs 250 lakhs
Compulsory convertible preference shares (CCPS): Rs 50 lakhs
Total: Rs 450 lakhs (owned fund)

LIQUID ASSET REQUIREMENTS-

• In terms of Section 45-IB of the RBI Act, 1934 the minimum level of liquid asset to be maintained by
NBFCs is 15 per cent of public deposits outstanding
• Of the 15%,NBFCs are required to invest not less than 10% in approved securities and the remaining
5% can be in unencumbered term deposits with any scheduled commercial bank

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INCOME RECOGNITION-
• Income including interest/ discount or any other charges on NPA shall be recognised only when it is
actually realized

INCOME FROM INVESTMENT-

• Income from dividend on shares of corporate bodies and units of mutual funds shall be taken into
account on cash basis.
• Income from bonds and debentures of corporate bodies and from Government securities/bonds
shall be taken into account on accrual basis

ACCOUNTING FOR INVESTMENTS-

• Investments in securities shall be classified into current and long term, at the time of making each
investment.
• The investments shall be transferred scrip-wise, from current to long- term or vice-versa, at book
value or market value, whichever is lower.
• The depreciation, if any, in each scrip shall be fully provided for and appreciation, if any, shall be
ignored.
• The depreciation in one scrip shall not be set off against appreciation in another scrip, at the time
of such inter-class transfer, even in respect of the scrips of the same category.

Quoted current investments shall, for the purposes of valuation, be grouped into the
following categories, viz.,
(a) equity shares,
(b) preference shares,
(c) debentures and bonds,
(d) Government securities including treasury bills,
(e) units of mutual fund, and
(f) others

Quoted current investments for each category shall be valued at cost or market value whichever is
lower
• If the aggregate market value for the category is less than the aggregate cost for that category,
the net depreciation shall be provided for or charged to the profit and loss account.
• If the aggregate market value for the category exceeds the aggregate cost for the category, the
net appreciation shall be ignored.
• Depreciation in one category of investments shall not be set off against appreciation in another
category

Unquoted equity shares in the nature of current investments shall be valued at cost or break-up value,
whichever is lower. However, non-banking financial companies may substitute fair value for the
break-up value of the shares, if considered necessary.

Unquoted preference shares in the nature of current investments shall be valued at cost or face value,
whichever is lower

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Investments in unquoted Government securities or Government guaranteed bonds shall be valued at

carrying cost

Unquoted investments in the units of mutual funds in the nature of current investments shall be valued
at the net asset value declared by the mutual fund in respect of each particular scheme

Commercial papers shall be valued at carrying cost & A long term investment shall be valued in
accordance with the Accounting Standard issued by ICAI.

ASSET CLASSIFICATION-
(a) Standard assets- An asset in respect of which, no default in repayment of principal or payment of
interest is perceived and which does not disclose any problem nor carry more than normal risk attached to
the business.

(b) Sub-standard assets - An asset which has been classified as non-performing asset for a period not
exceeding 12 months for Systemically Important Non-Deposit taking Company and Deposit taking Company
& 18 months for Non-Systemically Important Non-Deposit taking Company

(c) Doubtful assets - Any other asset, which remains a sub-standard asset for a period exceeding 12 months
for Systemically Important Non-Deposit taking Company and Deposit taking Company & 18 months for
Non-Systemically Important Non-Deposit taking Company.

(d) Loss assets- An asset which has been identified as loss asset by the NBFC or its internal or external
auditor or by the Reserve Bank

NON-PERFORMING ASSET (NPA)-

‘Non-performing asset’ means:
(a) an asset, in respect of which, interest has remained overdue for a period of six months or more;
(b) a term loan inclusive of unpaid interest, when the installment is overdue for a period of six months or
more or on which interest amount remained overdue for a period of six months or more;
(c) a demand or call loan, which remained overdue for a period of six months or more from the date of
demand or call or on which interest amount remained overdue for a period of six months or more;
(d) a bill which remains overdue for a period of six months or more;
(e) the interest in respect of a debt or the income on receivables under the head ‘other current assets’ in
the nature of short term loans/advances, which facility remained overdue for a period of six months or
more;
(f) any dues on account of sale of assets or services rendered or reimbursement of expenses incurred,
which remained overdue for a period of six months or more;

Note : As per Non-Banking Financial Company - Systemically Important Non- Deposit taking Company and
Deposit taking Company (Reserve Bank) Directions,2016, the above six months criteria for the assets
covered under (a) to (f) is 3 months.

It implies that as per Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016, the criteria is 6 months only.

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(g) the lease rental and hire purchase installment, which has become overdue for a period of 3 months or
more;

Note- As per Non-Banking Financial Company – Non-Systemically Important Non- Deposit taking
Company (Reserve Bank) Directions, 2016, the criteria is 12 months only.

PROVISIONING REQUIREMENTS-
Advance Systemically Important Non- Non-Systemically Important
Deposit taking Company and Non Deposit taking Company
Deposit taking Company
Standard 0.4% 0.25%
Sub Standard 10% 10%
Doubtful Assets (Secured
Portion)
Upto one year 20% 20%
One to three years 30% 30%
More than three years 50% 50%
Doubtful Assets (Un Secured 100% 100%
Portion)
Loss Assets 100% 100%

ADDITIONAL PROVISION FOR HIRE PURCHASE AND LEASED ASSETS-

In respect of hire purchase and leased assets, additional provision shall be made as under:

(a) Where hire charges or lease rentals are overdue

upto 12 months Nil
(b) where hire charges or lease rentals are 10 percent of the net book
overdue for more than 12 months but upto 24 value
months
(c) where hire charges or lease rentals are 40 percent of the net book
overdue for more than 24 months but upto 36 value
months
(d) where hire charges or lease rentals are 70 percent of the net book
overdue for more than 36 months but upto 48 value
months
(e) where hire charges or lease rentals are overdue 100 percent of the net book
for more than 48 months value

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2. Templeton Finance Ltd. is a non-banking finance company. The extracts of its balance sheet are
given below:

Liabilities Amount Assets Amount

Rs in 000 Rs in 000
Paid-up equity capital 100 Leased out assets 800
Free reserves 500 Investment:
Loans 400 In shares of subsidiaries 100
And group companies
Deposits 400 In debentures of 100
subsidiaries and group
Companies.
Cash and bank balances 200
Deferred expenditure 200
1,400 1,400
You are required to compute 'Net owned Fund' of Templeton Finance Ltd. as per Non-Banking Financial
Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve
Bank) Directions, 2016.

Solution -
Statement showing computation of 'Net Owned Fund'

Rs in 000
Paid up Equity Capital 100
Free Reserves 500
600
Less: Deferred expenditure (200)
A 400
Investments
In shares of subsidiaries and group companies 100
In debentures of subsidiaries and group companies 100
B 200
10% of A 40
Excess of Investment over 10% of A (200-40) C 160
Net Owned Fund [(A) - (C)] (400-160) 240

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3. Bright Finance Ltd. is a non-banking financial company. It provides you with the following
information regarding its outstanding amount, Rs 200 lakhs of which installments are overdue on
200 accounts for last one month (amount overdue Rs 40 lakhs), on 24 accounts for two months
(amount overdue Rs 24 Iakhs), on 10 accounts for more than 30 months (amount overdue Rs 20
lakhs) and on 4 accounts for more than two years (amount over due Rs 20 lakhs-already identified
as sub-standard assets) and one account of Rs 10 lakhs which has been identified as non-
recoverable by the management. Out of 10 accounts overdue for more than 30 months, 6 accounts
are already identified as sub-standard (amount Rs 6 lakhs) for more than twelve months and other
are identified as sub-standard asset for a period of less than twelve months.

Classify the assets of the company in line with Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

Solution
Statement showing classification as per Non-Banking Financial Company - Systemically
Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank)
Directions, 2016

(Rs in lakhs)
Standard Assets
Accounts (Balancing figure) 86.00
200 accounts overdue for a period for 1 months 40.00
24 accounts overdue for a period by 2 months 24.00 150.00
Sub-Standard Assets
4 accounts identified as sub-standard asset for a period less 14.00
than 12 months
Doubtful Debts
6 accounts identified as sub-standard for a period more than 12 6.00
months
4 accounts identified as sub-standard for a period more than 2 20.00
years
Loss Assets
1 account identified by management as loss asset 10.00
Total overdue 200.00

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4. While closing its books of account on 31st March, 2017 a Non-Banking Finance Company has its
advances classified as follows:

Rs in lakhs
Standard assets 16,800
Sub-standard assets 1,340
Secured portions of doubtful debts:
− upto one year 320
− one year to three years 90
− more than three years 30
Unsecured portions of doubtful debts 97
Loss assets 48

Calculate the amount of provision, which must be made against the Advances as per
(i) the Non-Banking Financial Company – Non-Systemically Important Non- Deposit
taking Company (Reserve Bank) Directions, 2016; and
(ii) Non-Banking Financial Company - Systemically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions,
2016.

Solution -

Calculation of provision required on advances as on 31st March, 2017 as per the Non Banking Financial
Company – Non-Systemically Important Non- Deposit taking Company (Reserve Bank) Directions, 2016

Amount Percentage Provision

Rs in lakhs of provision Rs in lakhs
Standard assets 16,800 0.25 42.00
Sub-standard assets 1,340 10 134.00
Secured portions of doubtful debts
− upto one year 320 20 64.00
− one year to three years 90 30 27.00
− more than three years 30 50 15.00
Unsecured portions of doubtful 97 100 97.00
debts
Loss assets 48 100 48.00
TOTAL 427.00

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Calculation of provision required on advances as on 31st March, 2017 as per the Non-Banking Financial
Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve
Bank) Directions, 2016

Amount Percentage Provision

Rs in lakhs of provision Rs in lakhs
Standard assets 16,800 0.40 67.20
Sub-standard assets 1,340 10 134.00
Secured portions of doubtful debts
− upto one year 320 20 64.00
− one year to three years 90 30 27.00
− more than three years 30 50 15.00
Unsecured portions of doubtful 97 100 97.00
debts
Loss assets 48 100 48.00
TOTAL 452.20

5. Peoples Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer
durables. The following information is extracted from its books for the year ended 31 st March, 2017

Interest Overdue but recognized in

Asset Funded Profit & loss Net Book Value of
Assets outstanding
Period Overdue Interest Amount
(in crore) (in crore)
LCD Televisions Upto 12 months 480.00 20,123.00
Washing For 24 months 102.00 2,410.00
Machines
Refrigerators For 30 months 50.50 1,280.00
Air For 45 months 26.75 647.00
Conditioners
Mobile Phones For 60 Months 10.00 100

You are required to calculate the amount of provision to be made

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Solution-
On the basis of the information given, in respect of hire purchase and leased assets, additional provision
shall be made as under:
( in crore)
(a) Where hire charges are overdue upto 12 Nil -
months
(b) Where hire charges are overdue for more 10% of the net book value 241
than 12 months but upto 24 months 10% x 2,410

(c) Where hire charges are overdue for more 40 percent of the net book 512
than 24 months but upto 36 months value
40% x 1,280
(d) Where hire charges or lease rentals are 70 percent of the net book 452.90
overdue for more than 36 months but upto value
48 months 70% x 647
(e) Where hire charges or lease rentals are 100% of net book value 100
overdue for more than 48 months (100% x 100)

Total 1,305.90

6. XYZ Limited is an NBFC registered with RBI as non-deposit accepting company. Its main activity
includes issuing term loans of different tenures. One of its major customers, ABC Ltd, is engaged in
the business of manufacturing. However, due to fall in demand and non-recovery of existing trade
receivables, ABC Ltd. is facing working capital difficulties. As on 31st March, 20X1 outstanding
amount in respect to ABC Ltd. is as under:

Principle amount outstanding (for more than 8 months): Rs 250 lakhs

Interest and penalties on the above : Rs 30 lakhs

XYZ Ltd. is following accrual system for accounting of its income. Following the same, the Company has
accrued Rs 30 lakhs as interest income in the Financial Statements for the year ended 31st March, 20X1.

You are required to state whether income accrual of Rs 30 lakhs is in accordance with Non Banking Finance
Company – Non Systemically Important Non Deposit taking Company Directions, 2016?

Solution
As per the said directions, Non- performing asset shall mean: a term loan inclusive of unpaid interest, when
the installment is overdue for a period of six months or more or on which interest amount remained
overdue for a period of six months or more. In the present case, dues of ABC Ltd. is outstanding for more
than 6 months.

Hence, ABC Ltd. will need to be classified as NPA in the books of XYZ Ltd. as on 31 st March, 20X1. Once an
asset becomes NPA, any income on the said asset need to be recognized on cash basis. Also, previous
income accrued but not received, need to be reversed. Based on the same, XYZ Ltd. shall stop accruing
further interest accrual on term loan of ABC Ltd. Also, Rs 30 lakhs accrued but not realized, need to be
reversed.
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ADVANCED ACCOUNTING ARIVUPRO ACADEMY

7. GEM Ltd. is a NBFC providing Hire Purchaser Solutions for acquiring consumer durables. The
following information is extracted from its books for the year ended 31st March 2021

Rs in Lakhs
Paid up Equity Capital 2520
Compulsory convertible preference shares 1035
Free Reserve 243
Securities premium 56
Capital Reserve 319
(Rs 220 Lakhs surplus arising out of sale of Building)
Deferred revenue expenditure 54
Debenture issued 702
Cash & Bank Balances 243
Investments in debentures of subsidiaries 171
Investments in shares of other NBFC 945
You are required to calculate Owned Fund and Net Owned Fund. ( DEC 2021 : 5 Marks)

SOLUTION-
Statement showing computation of ‘Owned Fund’ and 'Net Owned Fund'
Rs in lakhs
Paid up Equity Capital 2,520
Free Reserves 243
Compulsory convertible preference shares 1035
Securities Premium 56
Capital Reserve (arising out of sale of building) 220
4074
Less: Deferred revenue expenditure (54)
Owned Fund A 4020
Investments
In shares of other NBFC 945
In debentures of subsidiaries and group companies 171
B 1116

10% of A 402
Excess of Investment over 10% of A (1116-402) C 714
Net Owned Fund [(A) - (C)] (4020-714) 3306

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8. Calculate ‘Owned Fund’ of an NBFC based on the following information:

Paid up share capital: Rs 200 lakhs

Free reserves: Rs 150 lakhs
Compulsory convertible preference shares (CCPS): Rs 50 lakhs
Revaluation reserve: Rs 50 lakhs (created by revaluation of assets)
Securities premium: Rs 25 lakhs
Book value of intangible assets: Rs 10 lakhs
Capital reserves (surplus arising out of sale proceeds of assets): Rs 15 lakhs (RTP MAY 2022)

SOLUTION-
Owned fund calculation:
Paid up share capital: Rs 200 lakhs
Free reserves: Rs 150 lakhs
Compulsory convertible preference shares (CCPS): Rs 50 lakhs
Securities premium: Rs 25 lakhs
Capital Reserves : 15 lakhs

Total of all above items : Rs 440 lakhs reduced by the value of intangible assets Rs 10 lakhs ie. owned fund
is computed as Rs 430 lakhs.

Note: Revaluation reserve to be excluded while computing owned fund.

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