SOUTHERN INDIA REGIONAL COUNCIL OF ICAI – CA INTERMEDIATE

ADVANCED ACCOUNTING
CA. K. SHANMUGANATHAN FCA., ACMA.,

Sl No Particulars Page No
1 Introduction, Frame work and applicability of AS 1
2 AS-1 Accounting Standards 1
3 AS-17 Segment Reporting 2
4 AS-18 Related Party Disclosures 5
5 AS-20 Earnings Per Share 7
6 AS- 24 Discontinuing operations 9
7 AS-25 Interim Financial Reporting 9
8 AS- 10 Consolidated Financial Statement 12
9 As-27 Joint Venture 23
10 Financial Statements for Companies 25
11 Cash Flow statement 34
12 Internal Reconstruction 46
13 Branch Accounting 52
 Chapter 1 - Accounting standards
Applicability of AS
NCE
Level I Level II Level III Level IV*
Listed Listed or in the
process of being
listed
Bank & FI Bank & FI
Turnover More than 250 50 to 250 crores 10 to 50 crores
crores
Borrowings More than 50 10 to 50 crores 2 to 10 crores
(including PD) crores
Group cos H or S of LI H or S of LII H or S of LIII

*NCEs which are not covered under Level I, Level II and Level III are considered as Level IV
entities.

AS-1
1. Explain the fundamental accounting assumptions as per AS 1.

2. F Ltd. is undergoing tight liquidity position, since most of the assets of the company are
blocked in various claim/petitions in a Special Court. F Ltd. has accepted Inter-Corporate
Deposits (ICDs) and is making its best efforts to settle the dues. There were interest claims
from lenders from the due date of ICDs to the date of repayment. The company has provided
interest, as per the terms of the contract till the due date and a note for non provision of interest
from the due date to date of repayment was given in the financial statements.
Comment on the correctness of the treatment for such claims as done by the company.

3. Akshay limited has sold its building for Rs 60 lakhs and the purchaser has paid the full price.
The Company has given possession to the purchaser. The book value of the building is Rs 42
lakhs. As at 31st March 2021, documentation and legal formalities are pending. The company
has not recorded the sale. It has shown the amount received as advance. Do you agree with
this treatment?
What accounting treatment should the buyer give in its financial statements?

4. HIL Ltd. was making provision for non-moving stocks based on no issues having occurred
for the last 12 months upto 31.03.2017. The company now wants to make provision based on
technical evaluation during the year ending 31.03.2018.
Total value of stock ₹120 lakhs
Provision required based on technical evaluation ₹3.00 lakhs.
Provision required based on 12 months no issues ₹4.00 lakhs.

You are requested to discuss the following points in the light of Accounting Standard (AS)-1:
(i) Does this amount to change in accounting policy?
(ii) Can the company change the method of accounting?

Answer
The decision of making provision for non-moving inventories on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a company
may require that provision for non-moving inventories should be made but the basis for making
provision will not constitute accounting policy. The method of estimating the amount of
provision may be changed in case a more prudent estimate can be made.
In the given case, considering the total value of inventory, the change in the amount of required
provision of non-moving inventory from ₹4 lakhs to ₹3 lakhs is also not material. The disclosure
can be made for such change in the following lines by way of notes to the accounts in the
annual accounts of HIL Ltd. for the year 2017-18 in the following manner:
“The company has provided for non-moving inventories on the basis of technical evaluation
unlike preceding years. Had the same method been followed as in the previous year, the profit
for the year and the value of net assets at the end of the year would have been lower by ₹1
lakh.”

5.Jay Ltd. had made a rights issue of shares in 2016. In the offer document to its members, it
had projected a surplus of 40 crores during the accounting year to end on 31st March, 2017.
The draft results for the year, prepared on the hitherto followed accounting policies and
presented for perusal of the board of directors showed a deficit of 10 crores. The board in
consultation with the managing director, decided on the following:
(i) Value year-end inventory at works cost ( 50 crores) instead of the hitherto method of
valuation of inventory at prime cost ( 30 crores).
(ii) Provide for permanent fall in the value of investments - this fall had taken place over the
past five years - the provision being 10 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes
on accounts for inclusion in the annual report for 2016-2017.

Answer
As per AS 1, any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed.
Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
Accordingly, the notes on accounts should properly disclose the change and its effect.
Notes on Accounts:
(i) During the year inventory has been valued at factory cost, against the practice of valuing it
at prime cost as was the practice till last year. As a result of this change, the year-end
inventory has been valued at ₹50 crores and the profit for the year is increased by ₹20
crores.
(ii) The company has decided to provide ₹10 crores for the permanent fall in the value of
investments which has taken place over the period of past five years. The provision so made
has reduced the profit disclosed in the accounts by ₹10 crores.

AS – 17 Segment reporting
Question 1:
The Chief Accountant of ANZ Ltd., gives the following data regarding its six segments:
(in lakhs)
Particulars M N O P Q R Totall
Segment Assets 40 80 30 20 20 10 200
Segment Results 50 -190 10 10 -10 30 -100
Segment Revenue 300 620 80 60 80 60 1200

The Chief Accountant is of the opinion that segments ‘M’ and ‘N’ alone should be reported.
Is he justified in his view? Discuss.

Question 2:
M/s XYZ Ltd. has three segments namely X, Y, Z. The total assets of the Company are
10.00 crs. Segment X has Rs. 2.00 crs., segment Y has 3.00 crs. and segment Z has
5.00 crs. Deferred tax assets included in the assets of each segments are X- 0.50 crs.,
Y— 0.40 crs. and Z— 0.30 crs. The accountant contends that all the three segments are
reportable segments. Comment.
Question 3
Calculate the segment results of a manufacturing organization from the following
information:
Segments A B C Total
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue (allocated in 1,10,000
5:4:2 ratio)
Revenue from transactions with
other segments
Transactions from Segment B 1,00,000 50,000 1,50,000
Transactions from Segment C 10,000 50,000 60,000
Transactions from Segment A 25,000 1,00,000 1,25,000
Other income
Revenue from extra-ordinary items
Dividend income 5,000 10,000 15,000 30,000
Interest earned on Advances & 20,000 15,000 10,000 45,000
loans 30,000 40,000 50,000 1,20,000
Gain on sale of Investments
1,000 5,000 3,000 9,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses (allocated in 77,000
5:4:2 basis)
Expenses on transactions with
other segments
Transactions from Segment B 75,000 30,000
Transactions from Segment C 6,000 40,000
Transactions from Segment A 18,000 82,000
Other expenses
Expenses on extra ordinary items
Interest on Bank overdraft 3,000 7,000 11,000 21,000
Income tax 30,000 28,000 12,000 70,000
60,000 55,000 50,000 1,65,000
You are required to prepare a statement showing financial information about Focus Ltd’s
operations in different industry segments.

Question 4
Whether interest expense relating to overdrafts and other operating liabilities identified to a
particular segment should be included in the segment expense or not?
In case interest is included as a part of the cost of inventories where it is so required as per
AS 16, read with AS 2 and those inventories are part of segment assets of a particular
segment, state whether such interest would be considered as a segment expense.

Question 5 RTP M 19
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?

6.XYZ Ltd. has 5 business segments. Profit / Loss of each of the segments for the year ended
31st March,2022 has been provided below. You are required to identify from the following
whether reportable segments or not reportable segments, on the basis of "profitability test" as
per AS-17.
 Segment Profit / (Loss)
( in lakhs)
A 225
B 25
C (175)
D (20)
E (105)

AS – 18 Related Party Disclosures

Question 1:
P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd.
directly enjoys voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies
goods to P Ltd. The management of R Ltd. has not disclosed its relationship with P Ltd.
How would you assess the situation from the viewpoint of AS -18 on Related Party
Disclosures?

Answer 1:
P Ltd. has direct economic interest in R Ltd to the extent of 14%, and through Q Ltd. in which
it is the majority shareholders; it has further control of 12% in R Ltd. (60% of Q Ltd’s 20%).
These two taken together (14% + 12%) make the total control of 26%.

AS 18 defines related party as one that has at any time during the reporting period, the ability
to control the other party or exercise significant influence over the other party in making
financial and/or operating decisions.
Here, Control is defined as ownership directly or indirectly of more than one-half of the voting
power of an enterprise; and Significant Influence is defined as participation in the financial
and/or operating policy decisions of an enterprise but not control of those policies.
In the present case, control of P Ltd. in R Ltd. directly and through Q Ltd., does not go beyond
26%. However, significant influence may be exercised as an investing party (P Ltd.) holds,
directly or indirectly through intermediaries 20% or more of the voting power of the R Ltd. As
R Ltd. is a listed company and regularly supplies goods to P Ltd. Hence, related party
disclosure, as per AS 18, is required.

Question 2
Narmada Ltd. sold goods for 90 lakhs to Ganga Ltd. During financial year ended 31.03.2021.
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 accounting
standards. Is the Chief Accountant correct?

Answer
As per paragraph 13 of 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
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.

Question 3 (Non-Executive Directors on the Board – Whether related Parties)

1. Mr. Wilson was appointed as non – executive director of M/s Imperial Ltd. Whether a non-
executive director on the board of Directors of a company is a key management person.
2. Also explain as to whether a non-executive director is covered by AS – 18 in case he
participates in the financial and / or operating policy decisions of an enterprise.
Answer
A non-executive director of a company should not be considered as a key management
person under AS -18 by virtue of merely his being a director unless he has the authority
and responsibility for the planning directing and controlling the activities of the reporting
enterprise.

The requirements of AS-18 should not be applied in respect of a non-executive director

even if he participates in the financial and / or operating policy decision of the enterprise,
unless he falls in any of the categories in para 3 AS-18.

Question 4: Alpha Limited has two associates, Beta limited and Omega limited, owns 25% of
voting power of Beta Limited and 30% of voting power of Omega Limited. Would Beta Limited
be considered as a related party in the financial statements of Omega limited?

Solution:
Both Beta Limited and Omega Limited are associates of Alpha Limited. Co-associates cannot
be regarded as related parties only by virtue of this relationship.
Para 3(b) of AS-18 states that “associates and joint ventures of the reporting enterprise and
the investing party or venture in respect of which the reporting enterprise is an associate or a
joint venture”.
As Beta Limited is not an associate of Omega Limited nor is it being controlled, directly or
indirectly, by Omega limited or is not so controlling Omega Limited, it is not a related party of
Omega limited.

Question 5: P Limited owns 70% of the voting power of Q Limited. Q Limited in turn owns
50% of the voting interest in R Ltd. Further, P Limited also directly owns 15% of the voting
interest in R Limited. Would P Ltd., be deemed to have control over R Ltd, or would it only be
considered as exercising significant influence?

Solution: P Ltd would be considered to control R Ltd. The definition of control as per Para 10
of AS-18 includes ownership, directly on indirectly, of more than one-half of the voting power
of another enterprise. As p Ltd is a majority shareholder in Q Ltd it has control over it. Further
P Ltd has indirect control over it. Accordingly, P Ltd has then ability to control R Ltd indirectly,
via the share ownership in Q Ltd, apart from its individual shareholding in R Ltd.

Question 6: Identify the related parties in respect of all the enterprise mentioned under AS-
18, if –
Rivera Ltd holds 51% of Yash Ltd
Yash Ltd holds 51% of Zebronic Ltd
Omega Ltd holds 49% of Zebronic Ltd

Solution: Rivera Ltd, Yash Ltd and Zebronic Ltd are related to each other. Omega Ltd and
Zebronic Ltd are also related to each other by virtue of associate relationship. However,
neither Rivera ltd nor Yash Ltd is related to Omega Ltd and vice versa.

Question 7: A husband and wife are controlling 32% of voting power in Max Limited. They
are having a separate partnership firm, which supplies mainly the raw material to the company.
The management says that the above transaction need not be disclosed.
Solution: In accordance with Para 3(c) & (e) of AS-18, Max Ltd and the partnership firm are
related parties and hence disclosure would be required irrespective of whether they are at
arm’s length or not.

Question 8: Victory Ltd is a wholly owned subsidiary of Zee Ltd and a 50% co-venture in joint
venture V Y. Whether transactions between joint venture V Y and Zee would require
disclosures?

Solution: Under Para 3(a) related party relationship for AS-18 proposes to include enterprise
that directly or indirectly through one or more intermediaries, control or is controlled by, or is
under common control with the reporting enterprise. Control is defined as to include substantial
interest in voting power and the power to direct by statue or agreement the financial and / or
operating policies of the enterprise.

Zee Ltd controls VICTORY Ltd, due to holding subsidiary relationship. VICTORY Ltd is a 50%
venturer and accordingly Zee Ltd has the joint control over the joint venture V Y through
VICTORY Ltd. Hence transactions between Zee Ltd and the joint venture may be considered
as related party transactions under AS-18.
Howeever, some may argue that joint control does not give the power to direct financial and/
or operating policies to any one venturer as all critical decisions are taken jointly. Therefore,
Para 3(a) cannot be said to be applicable.

Question 9: Apple Ltd owns 60% of voting power of Blue wave Ltd, which in turn owns 70%
voting in CMS Ltd. Xtra Ltd owns the remaining voting share in CMS Ltd. During the reporting
period Xtra Ltd enters into transactions in the ordinary course of business with Apple Ltd.
Would Xtra Ltd is a related party of Apple Ltd?

Solution: Xtra Ltd is not related to Apple Ltd as it:

• Neither controls nor is controlled by Apple Ltd.
• Does not exercise significant influence over Apple Ltd on is not influenced by it.

AS-20 Earnings per share

1. From the following information relating to X Ltd., calculate Diluted Earnings Per Share as
per AS 20:
A
Net Profit for the current year 2,00,00,000
Number of equity shares outstanding 40,00,000
Basic earnings per share 5.00
Number of 11% convertible debentures of Rs.100 each 50,000
Each debenture is convertible into 8 equity shares.
Interest expense for the current year 5,50,000
Tax saving relating to interest expense (30%) 1,65,000

2.Explain “Theoretical ex-rights fair value per share” in context of AS 20-Earnings Per Share.

3.From the following information relating to Y Ltd. Calculate Earnings Per Share (EPS):
in crores
Profit before V.R.S. payments but after depreciation 75.00
Depreciation 10.00
VRS payments 32.10
Provision for taxation 15.00
Paid up share capital (shares of 10 each fully paid) 93.00
4. Explain the concept of ‘Weighted average number of equity shares outstanding during the
period”. State how would you compute, based on AS-20 the weighted average number of
equity shares in the following cases:
No. of Shares
1st April, 2021 Balance of Equity Shares 4,80,000
31st August, Equity shares issued for cash 3,60,000
2021
1st February, Equity shares bought back 1,80,000
2022
31st March, Balance of equity shares 6,60,000
2022

(iii) Compute adjusted earnings per share and basic earnings per share based on the
following information:
Net profit 2020-21 11,40,000
Net profit 2021-22 22,50,000
No. of equity shares outstanding until 31st December, 2021= 5,00,000

Bonus issue on 1st January, 2022: 1 equity share for each equity share outstanding as at 31st
December, 2021.

5.The following information is available for R Ltd for the accounting year 2019-20 and 2020-
21:
Net profit for the year
Year 2019-20 25,00,000
Year 2020-21 40,00,000
No of shares outstanding prior to rights issue – 12,00,000
Rights issue : One new share for each three outstanding i.e., 4,00,000 shares
: Rights issue price 22
: Last date for exercise of rights = 30-06-2020
Fair value of one equity share immediately prior to exercise of rights on 30-06-2020 = 28.
You are required to calculate the basic earnings per share for the years 2019-20 and 2020-
21.

6.“While calculating diluted earnings per share, effect is given to all dilutive potential equity
shares that were outstanding during that period.” Explain. Also calculate the diluted earnings
per share from the following information:
Net profit for the current year 85,50,000
Weighted average No. of equity shares outstanding 20,00,000
No. of 8% convertible debentures of 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expenses for the current year 6,00,000
Tax relating to interest expenses 30%
7. A Ltd. had 8,00,000 equity shares outstanding as on 1st April, 2021. The company earned
a profit of 20,00,000 during the year 2022-23. The average fair value per share during 2022-
23 was 40. The company has given share option of 1,00,000 equity shares at the option
price of 20.

Calculate Basic EPS and Diluted EPS.

8. NAT, a listed entity, as on 1st April,2021 had the following capital structure:

₹
10,00,000 Equity Shares having face value of ` 1 each 10,00,000
10,00,000 8% Preference Shares having face value of ` 10 each 1,00,00,000
During the year 2021-2022, the company had profit after tax of ₹90,00,000
On 1st January,2022, NAT made a bonus issue of one equity share for every 2 equity
shares outstanding as at 31st December,2021.
On 1st January,2022, NAT issued 2,00,000 equity shares of ` 1 each at their full market
price of ₹7.60 per share.
NAT's shares were trading at ₹8.05 per share on 31st March,2022.
Further it has been provided that the basic earnings per share for the year ended 31st
March,2021 was previously reported at ₹62.30.
You are required to:
i) Calculate the basic earnings per share to be reported in the financial statements of NAT
for the year ended 31st March,2022 including the comparative figure, in accordance with
AS-20 Earnings Per Share.
ii) Explain why the bonus issue of shares and the shares issue at full market price are
treated differently in the calculation of the basic earnings per share?

AS -24 Discontinuing Operations

Question 1:
Give four 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.

Answer1:
Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination of
discontinuing operations. According to Paragraph 9 of AS 24, examples of activities that do
not necessarily satisfy criterion (a) of paragraph 3, but that might do so in combination with
other circumstances, include:

(i) Gradual or evolutionary phasing out of a product line or class of service;

(ii) Discontinuing, even if relatively abruptly, several products within an ongoing line of
business;
(iii) Shifting of some production or marketing activities for a particular line of business from
one location to another; and
(iv) Closing of a facility to achieve productivity improvements or other cost savings.

An example in relation to consolidated financial statements is selling a subsidiary whose

activities are similar to those of the parent or other subsidiaries.

AS -25 Interim Financial Reporting

Question 1:
An enterprise reports quarterly, estimates an annual income of 10 lakhs. Assume tax rates
on 1st 5,00,000 at 30% and on the balance income at 40%. The estimated quarterly income
are 75,000, 2,50,000, 3,75,000 and 3,00,000.
Calculate the tax expense to be recognized in each quarter.

Answer1:
As per para 29 of AS 25 ‘ Interim Financial Reporting’, income tax expense is recognised in
each interim period based on the best estimate of the weighted average annual income tax
rate expected for the full financial year.
10,00,000
Estimated Annual income
Tax expense : 1,50,000
30% on 5,00,000 2,00,000
40% on remaining 5,00,000 3,50,000

Weighted average annual income tax rate = 3,50,000 = 35%

10,00,000
Tax expense to be recognized in each of the quarterly reports
Quarter I - 75,000 x35% 26,250
Quarter II - 2,50,000 x 35% 87,500
Quarter III - 3,75,000 x 35% 1,31,250
Quarter IV - 3,00,000 x 35% 1,05,000
10,00,000 3,50,000

1b) Company A has reported 60,000 as pre tax profit in first quarter and expects a loss of
15,000 each in the subsequent quarters. It has a corporate tax slab of 20 percent on the first
20,000 of annual earnings and 40 per cent on all additional earnings. Calculate the amount
of tax to be shown in each quarter

Question 2:
To comply with listing requirements and other statutory obligations Quaker Ltd. prepares
interim financial reports at the end of each quarter. The company has brought forward losses
of 700 lakhs under Income Tax Law, of which 90% is eligible for set off as per the recent
verdict of the Court, that has attained finality. No Deferred Tax Asset has been recognized on
such losses in view of the uncertainty over its eligibility for set off. The company has reported
quarterly earnings of 700 lakhs and 300 lakhs respectively for the first two quarters of
Financial year 2023-24 and anticipates a net earning of 800 lakhs in the coming half year
ended March 2024 of which 100 lakhs will be the loss in the quarter ended Dec. 2023. The
tax rate for the company is 30% with a 10% surcharge. You are required to calculate the
amount of Tax Expense to be reported for each quarter of financial year 2023-24.

Question 3:
On 30.6.2023, Asmitha Ltd. Incurred 2,00,000, net loss from disposal of a business segment.
Also, on 30.7.2023, the company paid 60,000 for property taxes assessed for the calendar
year 2023. How the above transactions should be included in determination of net income of
Asmitha Ltd. for the six months interim period ended on 30-09-2023.

Answer 3:
According to Para 10 of AS 25 “Interim Financial Reporting”, if an enterprise prepares and
presents a complete set of financial statements in its interim financial report, the form and
content of those statements should conform to the requirements as applicable to annual
complete set of financial statements. As on 30.9.2023, Asmitha Ltd., would report the entire
2,00,000 loss on the disposal of its business segment since the loss was incurred during
interim period.

A cost charged as an expense in an annual period should be allocated to Interim periods on

accrual basis. Since 60,000 Property Tax payment relates to entire calendar year 2023,
30,000 would be reported as an expense for six months ended on 30th September, 2023 while
remaining 30,000 would be reported as prepaid expenses.

Question 4:
Antarbarti Limited reported a Profit Before Tax (PBT) of 4 lakhs for the third quarter ending
30-09-2023. On enquiry you observe the following, give the treatment required under AS 25:
(i) Dividend income of 4 lakhs received during the quarter has been recognized to the extent
of 1 lakh only.

(ii) 80% of sales promotion expenses 15 lakhs incurred in the third quarter has been deferred
to the fourth quarter as the sales in the last quarter is high.

(iii) In the third quarter, the company changed depreciation method from WDV to SLM, which
resulted in excess depreciation of 12 lakhs. The entire amount has been debited in the third
quarter, though the share of the third quarter is only 3 lakhs.

(iv) 2 lakhs extra-ordinary gain received in third quarter was allocated equally to the third
and fourth quarter.

(v) Cumulative loss resulting from change in method of inventory valuation was recognized in
the third quarter of 3 lakhs. Out of this loss 1 lakh relates to previous quarters.

(vi) Sale of investment in the first quarter resulted in a gain of 20 lakhs. The company had
apportioned this equally to the four quarters.

Prepare the adjusted profit before tax for the third quarter.

Question 5
Intelligent Corporation (I Corp.) is dealing in seasonal products. The quarterly sales pattern of
the product is given below:
Quarter I II III IV
Ending 31st March 30th June 30th September 31st December
20% @20% 50% 10%

For the First quarter ending 31st March, 2023, I Corp. gives you the following
information:

in crores
Sales 50
Salary and other expenses 30
Advertisement expenses (routine) 2
Administrative and selling expenses 8

While preparing interim financial report for the first quarter ‘I Corp.’ wants to defer 21 crores
expenditure to third quarter on the argument that third quarter is having more sales, therefore
third quarter should be debited by higher expenditure, considering the seasonal nature of
business. The expenditures are uniform throughout all quarters.
Calculate the result of first quarter as per AS 25 and comment on the company’s view.
(a) A statement that the same accounting policies are followed in the IFS as those followed
in the most recent annual financial statements. If those policies have been changed, a
description of the nature and effect of the change.

(b) Explanatory comments about the seasonality of interim operations.

(c) The nature and amount of items affecting assets, liabilities, equity, net income, or cash
flows that is unusual because of their nature, size, or incidence as per AS 5.

(d) The nature and amount of changes in estimates of amounts reported in prior interim
periods of the current financial year or changes in estimates of amounts reported in prior
financial years, if those changes have a material effect in the current interim period.

(e) Issuances, buy-backs, repayments and restructuring of debt, equity and potential equity
shares.

(f) Dividends, aggregate or per share (in absolute or percentage terms), separately for equity
shares and other shares.

(g) Segment information

(h) The effect of changes in the composition of the enterprise during the interim period, such
as amalgamations, acquisition or disposal of subsidiaries and long-term investments,
restructurings, and discontinuing operations and

(i) Material changes in contingent liabilities since the last annual balance sheet date.
 10.Consolidation of Financial statements
As per section 129 (3) of Companies Act, where a company has one or more subsidiaries it
shall,( in addition to the standalone financial statements), prepare a consolidated financial
statements.
The consolidated financial statements are prepared by considering the group as a single
entity. The consolidated financial statements are prepared as per the requirements given in
AS 21.
1) The assets and liabilities of the subsidiary company and holding company are added on a
line-by-line basis.
2) The share capital and reserves and surplus of subsidiary company are apportioned
between holding company and minority shareholders.
3) The reserves and profit & loss A/c of subsidiary shall be analysed as-
a) Capital profit
b) Revenue reserve
c) Revenue profit
The above analysis is based on the date of acquisition of controlling interest in subsidiary.
4) The difference between cost of investment in subsidiary and value of investment (share
capital + capital profit) treated as good will or capital reserve.
5) The inter company receivables and payables are eliminated for the purpose of
consolidated Balance sheet.
6) The unrealised profit on inter company stock also to be eliminated. Depending on the
nature of stock transfer it will be classified as upstream and down stream transaction.
7) In the consolidated balance sheet only the share capital of holding company should be
presented.

Pre-acquisition dividend
When parent company receive dividend from out of pre-acquisition profits, it is called as pre-
acquisition dividend.
Such dividend is a capital receipt in the hands of Parent company. Hence it should be
reduced from the cost of Investment.
But if the pre acquisition dividend is wrongly credited to Profit & Loss A/c, a rectification
effect should be given on consolidation.
Correct journal entries Wrong journal entries
1) At the time of receipt of Dividend 1) At the time of receipt of Dividend
Bank Bank
To Dividend To Dividend
2) Trf of pre-acquisition dividend 2) Trf of pre-acquisition dividend
Dividend Dividend
To Investment To Profit & Loss A/c

Rectification effect
Profit & loss A/c
To Investment
# Reduce from consolidated P & l -----> Note 2 to CBS -Reserves & surplus
# Reduce from cost of Inv ----> In WN5 cost of control

Working Notes:
1)Date of acquisition and Share holding pattern
The date of acquisition of controlling interest by parent company in subsidiary co should be
presented. The share holding pattern of subsidiary company has to be presented. ( Number
of shares and percentage of holding separately for parent co and MI)
2) Analysis of Reserves and Profit & loss A/c of subsidiary
The Reserves and Profit & loss A/c of subsidiary co should be analysed as capital profit,
revenue reserve and revenue profit. The analysis will be based on the date of acquisition.
3) Apportionment of Reserves and profit & loss A/c of subsidiary
The analysed Reserves and Profit & loss A/c of subsidiary company shall be tabulated under
the heads capital profit, revenue reserve and revenue profit.
The aggregate value of the above will be distributed to Parent co and MI as per share
holding pattern.
4) Minority interest
The amount payable to share holders of subsidiary company other than holding company
(outsiders of the group) shall be presented under this head.
5) Cost of control
The difference between cost of investment in subsidiary and value of investment (share
capital + capital profit) treated as good will or capital reserve.
6) Inter company adjustments
a) Inter co dues:
The inter co debtors, creditors, Bills receivable and Bills payable will be cancelled while
presenting CFS.
b) Unrealised Profit on inter company stock
The unrealised profit to be removed from aggregate value of stock. The adjustment on the
liabilities side will depend on the nature of transaction. (Up stream or down stream)

Question : 1 (Revaluation on Date of Acquisition )

From the following balance sheet of M Ltd and its subsidiary N Ltd drawn up at 31 st March,
2021. Prepare a consolidated balance sheet as at that date, having regard to the following:

a. Reserves and Profit and loss A/c of N Ltd. Stood at 50,000 and 30,000 respectively
on the date of acquisition of its 80% shares by M Ltd on 1 st April, 2020.
b. Machinery (Book – value 2,00,000) and furniture (Book value 40,000) of N Ltd were
revalued at 3,00,000 and 30,000 respectively on 01-04-2020. (Rates of depreciation
: Machinery 10%, Furniture 15%)

Balance sheet of M Ltd and N Ltd as at 31 st March, 2021

Liabilities M Ltd N Ltd

Share capital:
Shares of 100 each 12,00,000 2,00,000
Reserves 4,00,000 1,50,000
Profit and Loss A/c 2,00,000 50,000
Trade payable 3,00,000 1,14,000
Total 21,00,000 5,14,000
Assets M Ltd N Ltd

Machinery 6,00,000 1,80,000

Furniture 3,00,000 34,000
Shares in N Ltd.(1600 -
shares at 200 each) 3,20,000
Current Assets: 4,00,000 Nil
Inventories 4,00,000
Trade receivable 80,000 1,00,000
Cash at Bank 2,00,000
Total 21,00,000 5,14,000

Question 2a ( Bonus issue on date of acquisition ):

Alpha Ltd. acquired 8,000 shares of 10 each in Omega Ltd. on 31 st December 2020. The
summarised Balance sheet of the two companies as on that date were as follows:
 Liabilities Alpha Ltd. Omega Ltd.

Share capital:
30,000 shares of 10 each 3,00,000 --
10,000 shares of 10 each -- 1,00,000
Capital reserve -- 52,000
General reserve 25,000 5,000
Profit and loss account 38,200 18,000
Loan from Omega Ltd. 2,100 --
Bills payable (including 500 to Alpha Ltd) -- 1,700
Creditors 17,900 5,000
3,83,200 1,81,700
Assets Alpha Ltd. Omega Ltd

Fixed assets 1,50,000 1,44,700

Investments in Omega Ltd. at cost 1,70,000 --
Stock in hand 40,000 20,000
Loan to Alpha Ltd. -- 2,000
Bills receivable (including Rs.200 from Omega Ltd.) 1,200 --
Debtors
Bank 20,000 10,000
2,000 5,000
3,83,200 1,81,700

Note: To the balance sheet of Alpha Ltd there is a contingent liability for bills discounted of
1,000
You are given the following information:
a) Omega Ltd. made a bonus issue on 31 st December, 2020 of one share for every two
shares, by reducing the capital reserve equivalently; but the transaction is not shown
in the above balance sheet.
b) Interest receivable ( 100) in respect of the loan due by Alpha Ltd. to Omega Ltd. has
not been credited in the accounts of Omega Ltd.
c) The directors decided that the fixed assets of Omega Ltd. were over valued and should
be written down by 5,000.

Prepare the consolidated balance sheet as at 31 st December, 2020, showing your workings.
Question 2b)
A Ltd acquired 1,600 ordinary shares of ₹100 each of B Ltd on 1st July, 2020. On 31st
December, 2020, 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, 2020
A Ltd B Ltd
I) Equity & liabilities
1)Share holder’s funds
Share capital 1 10,00,000 2,00,000
Reserves & surplus 2 2,97,200 1,82,000
2)Current liabilities
Short term borrowings 3 80,000
Trade payable 47,100 17,400
14,24,300 3,99,400
II) Assets
1) Non-current assets
Property, plant and equipment 4 8,90,000 3,15,000
Non-current Investment 5 3,40,000 ---
 2) Current assets
Inventories 1,20,000 36,400
Trade receivables 59,800 40,000
Cash & Cash equivalents 6 14,500 8,000
14,24,300 3,99,400

Notes to Balance sheet A Ltd B Ltd

1) Share capital
10,000 equity shares of ₹ 100 each 10,00,000 --
2,000 equity shares of ₹ 100 each -- 2,00,000

2) Reserves & surplus

General Reserve 2,40,000 1,00,000
Profit & loss A/c 57,200 82,000
2,97,200 1,82,000
3) Short term borrowings
Bank OD 80,000 --
4) Property, Plant and Equipment
Land & Building 6,50,000 1,80,000
Plant & Machinery 2,40,000 1,35,000
8,90,000 3,15,000
5) Non-current Investment
Investment in B Ltd 3,40,000
6) Cash & cash equivalents
Bank 14,500 8,000

The Profit & Loss Account of B Ltd. showed a credit balance of 30,000 on 1st January, 2020
out of which a dividend of 10% was paid on 1st August, 2020; A Ltd. credited the dividend
received to its Profit & Loss Account. The balance of General reserves on 1 January 2020
was ₹ 1,00,000.
The Plant & Machinery which stood at 1,50,000 on 1st January, 2020 was considered as
worth 1,80,000 on 1st July, 2020; 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 on 31st December, 2020.

Question 3: ( Bonus & pre acquisition dividend)

On 31st March, 2016, the balance sheets of H Ltd. and S Ltd. stood as follows:
(`in ‘000s)
Liabilities H Ltd. S Ltd.

Equity share capital- authorized 5,000 3,000

Issued and subscribed in equity shares of 10 each 4,000 2,400
fully paid
General reserve 928 690
Profit and loss A/c 1,305 810
Bills payable 124 80
Sundry creditors 487 427
Provision for taxation 220 180
Other provisions 65 17
Total 7,129 4,604
Assets H Ltd. S Ltd.
 Rs. Rs.
Plant and machinery 2,541 2,450
Furniture and fittings 615 298
Investments in the equity shares of S Ltd 1,500 --
Stock 983 786
Debtors 700 683
Bills receivables 120 95
Cash and bank balances 410 102
Sundry advances 260 190
Total 7,129 4,604
Following additional information is available:
a. H Ltd. purchased 90,000 equity shares in S Ltd. on 1 st April, 2015 at which date the
following balances stood in the books of S Ltd.
i. General reserve 1500 thousand;
ii. Profit and loss account 633 thousand

b. On 14th July, 2015 S Ltd. declared a dividend of 20% out of pre-acquisition profits and
paid corporate dividend tax (including surcharge) at 11%. H Ltd credited the dividend
received to its Profit and loss Account.

c. On 1st November, 2015 S Ltd issued 3 fully paid equity shares of 10 each, for every
5 shares held as bonus shares out of pre-acquisition general reserve.

d. On 31st March, 2016, the Stock of S Ltd. including goods purchased for 50 thousand
from H Ltd., which had made a profit of 25% on Cost.

Prepare a consolidated balance sheet as on 31st March, 2016.

Question 4 ( Sale of holding by parent co.,)

The summarized Balance sheet of A Limited and B Limited are as follows:
Balance sheet as at 31st December, 2020
Particulars A Ltd. B Ltd.

Sources of funds:
Share ( 10 each) 2,00,000 50,000
Reserves 20,000 5,000
Profit and loss account as on 1st January,2020 30,000 10,000
Profit for the year 8,000 8,000
Add: Dividends from B Ltd 4,000 --
Less: Dividends paid -- (5,000)
Creditors 30,000 20,000

Total 2,92,000 88,000

Application of funds:
Fixed assets 2,00,000 80,000
Current assets 32,000 8,000
Shares in B Ltd. at cost- 3,000 shares 60,000 --

Total 2,92,000 88,000

A Limited had acquired 4,000 shares in B Limited at Rs.20 each on 1st January,2020 and sold
1,000 of them at the same price on 1st October, 2020. The sale is cum dividend. An interim
dividend of 10% was paid by B Limited on 1st July, 2020.
 Draft the consolidated balance sheet as at 31st December, 2020.

Question 5 ( Bonus issue & pre-acquisition dividend)

The Balance Sheet of Golden and Silver Limited as on 31.3.2015 are given below:
Liabilities Golden Silver Assets Golden Silver
Ltd.( ) Ltd.( ) Ltd.( ) Ltd.( )
Equity share 2,40,000 2,40,000 Fixed assets 88,000 1,68,000
capital
General reserve 40,000 32,000 Investment 1,80,000 10,000
Profit and loss 24,000 39,000 Sundry debtors 12,000 30,000
account
Bills payable 4,000 10,000 Bills receivable 8,000 32,000
Sundry creditors 8,000 15,000 Stock in trade 20,000 80,000
Cash at bank 8,000 16,000
3,16,000 3,36,000 3,16,000 3,36,000
Note: Contingent liability of Golden Ltd.: Bills discounted not yet matured at 5,000.

(i) On 1.10.2012, Golden Ltd. acquired 16,000 shares of 10 each at the rate of 11
per share.

(ii) Balances to General reserve and Profit and Loss account of Silver Ltd. stood on
1.4.2012 at 60,000 and 32,000 respectively.

(iii) Dividends have been paid @ 10% for each of the years 2012-13 and 2013-14.
Dividend for the year 2012-13 was paid out of the pre-acquisition profits. No dividend
has been proposed for the year 2014-15 as yet no provision need to be made in
consolidated Balance Sheet. Golden Ltd. has credited all dividends received to profit
and Loss account.

(iv) On 1.3.2015, bonus shares were issued by Silver Ltd. at the rate of one fully paid share
for every five held and effect has been given to that in the above accounts. The bonus
was declared from general reserves from out of profits earned prior to 1.4.2012.

(v) On 1.10.2012, Fixed assets was revalue at 2,16,000,but no adjustment had been
made in the books.

(vi) Depreciation had been charged @ 10% p.a. on the book value as on 1.4.2012 (on
straight line method),there being no addition or sale since then.

(vii) Out of Current profits 4,000 have been transferred to General reserve every year.

(viii) Bills receivable of Golden Ltd. include 4,000 bills accepted by Silver Ltd. Bills
discounted by Golden Ltd . but not yet matured include 3,000 accepted by silver ltd.

(ix) Sundry creditors of Golden Ltd. include 4,000 due to Silver Ltd. Sundry debtors of
Silver Ltd. include 8,000 due from Golden Ltd.

(x) It is found that Golden Ltd. has remitted a cheque of 4,000,which has not yet been
received by Silver ltd.

Prepare consolidated Balance Sheet as at 31.3.2015 of Golden Ltd. and its subsidiary.

Question 6 ( Consolidated profit & loss A/c )

Given below are the Profit & Loss Account of H Ltd. and its subsidiary S ltd. for the year
ended 31st March, 2021.
Particulars H Ltd S Ltd
( in ( in
lakhs) lakhs)
Incomes:
Sales and other income 5,000 1,000
Increase in stock 1,000 200
6,000 1,200
Expenses:
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
2,400 700
Profit before Tax 3,600 500
Provision for Tax 1,200 200
Profit after Tax 2,400 300
Dividend payable 1,200 150
Balance of Profit 1,200 150
Other information:
H Ltd sold goods to S Ltd of Rs 120 lakhs at cost plus 20%. Stock of S Ltd includes such
goods valuing 24 lacks . Administrative Expenses of S Ltd include 5 lakhs paid to H Ltd
as consultancy fees. Selling and Distribution expenses of H Ltd include 10 lacks paid to S
Ltd as commission.
H Ltd holds 80% of equity share capital of 1,000 lacks in S Ltd. Prepare consolidated profit
& loss A/c for the parent company H ltd and its subsidiary S ltd as per AS 21.

Question 7
The summarised Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31 st March, 2017
are as follows.
Amounts as 31st March,
2017
Particulars X Ltd. Y Ltd.
( in lakhs) ( in
lakhs)
LIABILITIES
Share Capital:
Authorised 20,000 8,000
Issues and Subscribed:
Equity share of 10 each, fully paid up 15,000 6,000
15% preference shares of 10 each, fully paid up 4,000 1,000
General Reserves
Profit & Loss Account 2,500 1,450
Trade Payables 2,750 1,250
1,646 1,027
25,896 10,727
ASSETS
Land & Building 3,550 1,510
Plant & Machinery 5,275 3,600
Furniture & Fittings 1,945 655
 Investment in Y Ltd.:
450 Lakh Equity Share in Y Ltd. purchased on 1st
April, 2016 6,800
Inventory 4,142 2,520
Trade Receivables 3,010 1,882
Cash and Bank Balance 1,174 560
25,896 10,727
The following information is also given to you
a) 10% dividend on Equity shares was declared by Y Ltd. on 1st April, 2016 for the year
ended 31st March, 2016. X Ltd. credited the dividend received to its Profit & Loss Account.

b) Credit Balance of Profit & Loss account of Y Ltd. as on 1st April, 2016 was 650 Lakhs.

c) General Reserve of Y Ltd. stood at same 1,450 Lakhs as on 1st April, 2016.

d) Y Ltd.’s Plant & machinery showed a balance of 4,000 Lakh on 1st April 2016. At the
time of purchase of shares in Y Ltd., X Ltd. revalued Y’s Ltd. Plant & Machinery upward by
1,000 Lakh.

e) Included in Trade Payables of Y Ltd. are 50 Lakh for goods supplied by X Ltd.

f) On 31st March, 2017, Y’s ltd. inventory included goods for 150 lakhs which it had
purchased from X Ltd. X Ltd. sold goods to Y Ltd. at cost plus 25%.

You are required to prepare a Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd.
as on 31st March, 2017 giving working notes. ( ignoring dividend on preference shares ).

Question 8
A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.2010 at cost of 10,00,000 when B Ltd.
had an equity share capital of 10,00,000 and reserves and surplus of 80,000. In the four
consecutive years, B Ltd. fared badly and suffered losses of 2,50,000, 4,00,000, 5,00,000
and 1,20,000 respectively. Thereafter in 2014- 15, B Ltd. experienced turnaround and
registered an annual profit of 50,000. In the next two years i.e. 2015-16 and 2016-17, B Ltd.
recorded annual profits of 1,00,000 and 1,50,000 respectively. Show the minority interests
and cost of control at the end of each year for the purpose of consolidation.

Question 9
H Ltd. acquired 3,000 shares in S Ltd., at a cost of 4,80,000 on 1.8.2016. The capital of S
Ltd. consisted of 5,000 shares of 100 each fully paid. The Profit & Loss Account of this
company for 2016 showed an opening balance of 1,25,000 and profit for the year was
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.

Question 10
From the following data, determine in each case:
(1) Minority interest at the date of acquisition (using proportionate share) and at the date
of consolidation
(2) Goodwill or Capital reserve.
Amount of holding company’s profit in the consolidated Balance Sheet assuming holding
company’s own retained earnings to be 2,00,000 in each.
Case Subsidiar Cost of % of Date of acquisition Date of
y Investment shares consolidation
owned
 Share Profit & Share Profit &
capital loss A/c capital loss A/c
Case 1 A 1,40,000 90% 1,00,000 50,000 1,00,000 70,000
Case 2 B 1,04,000 85% 1,00,000 30,000 1,00,000 20,000
Case 3 C 56,000 80% 50,000 20,000 50,000 20,000
Case 4 D 1,00,000 100% 50,000 40,000 50,000 56,000

The consolidated profit & loss A/c prepared by considering the group (parent &
subsidiary) as a single entity. The items of income and expenses that are similar in
nature are added on a line-by-line basis. The inter co transactions are excluded from
income as well as expenses. Hence, in consolidated P & l the transactions with
outsiders are only presented.
The dividend paid by subsidiary to parent company will be eliminated both from P &
l of parent and subsidiary only for presentation of consolidate P & l.
Dividend (Parent co dividend payable + subsidiary dividend payable to MI).

Question 11
Long Limited acquired 60% stake in Short Limited for a consideration of ₹112 lakhs. On the
date of acquisition Short Limited's Equity Share Capital was ₹100 lakhs, Revenue Reserve
was ₹40 lakhs and balance in Profit & Loss Account was ₹30 lakhs. From the above
information you are required to calculate Goodwill / Capital Reserve in the following
situations:
(i) On consolidation of Balance Sheet.
(ii) If Long Limited showed the investment in subsidiary at a carrying amount of ₹ 104 lakhs.
(iii) If the consideration paid for acquiring the 60% stake was ₹92 lakhs.

Associate
An associate is an enterprise in which the investor has significant influence and which is
neither a subsidiary nor a joint venture of the investor.
Significant influence is the power to participate in the financial and/or operating policy
decisions of the investee but not control over those policies.
Any enterprise having 20% or more of the voting power or any interest directly or indirectly in
any other enterprise will be assumed to have significantly influence unless proved otherwise.
Example
A Ltd. has 70% holding in C Ltd. and B Ltd. also has 28% holding in the same company. So,
A Ltd. with the majority holding i.e. more than 50% is the parent company ( holding company).
Since B Ltd. holds more than 20% but not more than 50% in C Ltd., C Ltd. will be an associate
of B Ltd.
The equity method is a method of accounting whereby the investment is initially recorded at
cost, identifying any goodwill/capital reserve arising at the time of acquisition.

The carrying amount of the investment is adjusted thereafter for the post acquisition changes.
The consolidated statement of profit and loss reflects the investor’s share of the results of
operations of the investee.
Goodwill/capital reserve arising on the acquisition of an associate by an investor should be
included in the carrying amount of investment in the associate but should be disclosed
separately.
From the definition, following broad conclusions can be drawn:
a. In CFS, investment is to be recorded at cost.
b. Any surplus or deficit in cost and net asset to be recorded as goodwill or capital reserve.
c. Distributions received from an investee reduce the carrying amount of the investment.
d. Any subsequent change in share in net asset is adjusted in cost of investment and
goodwill/capital reserve.
e. Consolidated Profit & Loss shows the investor’s share in the results of operations of the
investee.

In case of associate consolidation line by line addition is not applicable. Only the CA of
Investment in associate presented in the consolidated B/s. As there is no line by line
addition, inter company cancellation is not applicable.
The unrealised profit on inter company stock adjusted only to the extent of Investor’s interest
in associate.

Format of Note

CA of Inv in Associate
Share in Net assets of
associate xxx
Add / Less: GW / CR xxx xxx
Add: Share of post acq profits before div xxx
Less: Div out of post acq
profits xxx
Less: URP on inter co stock xxx
Amt for CBS

1. A Ltd. acquire 45% of B Ltd. shares on April 01, 2021, the price paid was ₹15,00,000.
Following are the extracts of balance sheet of B Ltd. as of 1 April 2021:
Paid up Equity Share Capital ₹10,00,000
Securities Premium ₹1,00,000
Reserve & Surplus ₹5,00,000

B Ltd. has reported net profits of ₹3,00,000 and paid dividends of ₹1,00,000 for the year ended
31 March 2022. Calculate the amount at which the investment in B Ltd. should be shown in
the consolidated balance sheet of A Ltd. as on March 31, 2022.

2.A Ltd. acquired 40% share in B Ltd. on April 01, 2021 for ₹10 lacs. On that date B Ltd. had
1,00,000 equity shares of ₹10 each fully paid and accumulated profits of ₹2,00,000. During
the year 2021-2022, B Ltd. suffered a loss of ₹10,00,000; during 2022-2023 loss of ₹12,50,000
and during 2023-2024 again a loss of ₹ 5,00,000.

Show the extract of consolidated balance sheet of A Ltd. on all the four dates recording the
above events.
1)If an investor’s share of losses of an associate equals or exceeds the carrying amount of
the investment, the investor discontinues recognising its share of further losses and the
investment is reported at nil value.

2) Additional losses are provided for to the extent that the investor
- has incurred obligations or
- made payments on behalf of the associate to satisfy obligations of the associate that the
investor has guaranteed or to which the investor is otherwise committed.
 3) If the associate subsequently reports profits, the investor recognise its share of those
profits only after adjusting share of net losses previously not recognised.

3.A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 of the
same year. Other information is as follows:
Cost of Investment for 10% ₹1,00,000 and for 15% ₹1,55,000
Net asset on April 01 ₹8,50,000 and on October 01 ₹10,00,000.
What is the amount of goodwill or capital reserve arising on significant influence?
(a) Goodwill = ₹10,000.
(b) Goodwill = ₹20,000.
(c) Capital Reserve = ₹10,000.
(d) Capital Reserve = ₹20,000
4.A Ltd. acquired 10% stake of B Ltd. on April 01 and further 15% on October 01 of the
same year. Other information is as follows:
Cost of Investment for 10% ₹1,00,000 and for 15% ₹1,45,000
Net asset on April 01 ₹8,50,000 and on October 01 ₹10,00,000.
What is the amount of goodwill or capital reserve arising on significant influence?
(a) Goodwill = ₹10,000.
(b) Goodwill = ₹20,000.
(c) Capital Reserve = ₹10,000.
(d) Capital Reserve = ₹20,000
AS 27 Joint venture

Joint venture a contractual arrangement whereby two or more parties

undertake an economic activity, which is subject to joint control.

Joint control the contractually agreed sharing of control over an economic

activity. ( unanimous consent of venturers)

Control the power to govern the financial and operating policies of an

economic activity so as to obtain benefits from it.

venturer a party to a joint venture and has joint control over that joint
venture.

Investor a party to a joint venture and does not have joint control over that
joint venture.

1. A Ltd., B Ltd. and C Ltd. decided to jointly construct a pipeline to transport the gas from one
place to another that was manufactured by them. For the purpose following expenditure was
incurred by them:
Buildings ₹12,00,000 to be depreciated @ 5% p.a.,
Pipeline for ₹60,00,000 to be depreciated @ 15% p.a.,
computers and other electronics for ₹3,00,000 to be depreciated @ 40% p.a. and various
vehicles of ₹9,00,000 to be depreciated @ 20% p.a.
They also decided to equally bear the total expenditure incurred on the maintenance of the
pipeline that comes to ₹6,00,000 each year.
You are required to show the consolidated balance sheet and the extract of Statement of Profit
& Loss and Balance Sheet for each venturer.

2.A Ltd. a UK based company entered into a joint venture with B Ltd. in India, wherein B Ltd.
will import the goods manufactured by A Ltd. on account of joint venture and sell them in India.
A Ltd. and B Ltd. agreed to share the expenses & revenues in the ratio of 5:4 respectively
whereas profits are distributed equally. A Ltd. invested 49% of total capital but has equal share
in all the assets and is equally liable for all the liabilities of the joint venture. Following is the
trial balance of the joint venture at the end of the first year:
Particulars Debit Credit
Purchases 9,00,000
Others 3,06,000
Sales 13,05,000
PPE 6,00,000
Current Assets 2,00,000
Unsecured loans 2,00,000
Current liabilities 1,00,000
Capital 4,01,000

Closing inventory was valued at ₹1,00,000. You are required to prepare the Consolidated
Financial Statement.

3.A Ltd. entered into a joint venture with B Ltd. on 1:1 basis and a new company C Ltd. was
formed for the same purpose and following is the balance sheet of all the three companies:

Particulars A ltd B Ltd C ltd

Share capital 10,00,000 7,50,000 5,00,000
Reserves & surplus 18,00,000 16,00,000 12,00,000
Loans 3,00,000 4,00,000 2,00,000
Current liabilities 4,00,000 2,50,000 1,00,000
PPE 30,50,000 26,25,000 19,50,000
Investment in JV 2,50,000 2,50,000 -
Current Assets 2,00,000 1,25,000 50,000
Prepare the balance sheet of A Ltd. and B Ltd. under proportionate consolidation method.
Example for 100% consolidation
Balance sheet of H ltd ( parent company )
Equity & liabilities Assets
Share capital 70 PPE 120
Liabilities 92 Inv in sub B ltd (80% 42
of shares held
162 162
Balance sheet of S ltd ( subsidiary company )
Equity & liabilities Assets
Share capital 40 PPE 100
Liabilities 60
100 100

Consolidated Balance sheet of H ltd with subsidiary S ltd

Equity & liabilities Assets
Share capital 70 PPE (120+100) 220
 Min int 8 GW
Liabilities (92+60) 152 (42 – ( 40 X 80%) 10
230 230

Consolidated Balance sheet of H ltd as per proportionate conso

Equity & liabilities Assets
Share capital 70 PPE 200
Liabilities (120+(100 X 80%)
(92+ (60 X 80%)) 140 GW 10
(42 – ( 40 X 80%)
210 210

Chapter 11 - Financial statements for companies

Dividend
A dividend is a distribution of divisible profit of a company among the members according to
the number of shares held by each of them in the capital of the company.

Under Section 123 (1) of the Companies Act, 2013, no dividend should be declared or paid by
a company for any financial year except-

(a) Out of the profits of the company for that financial year arrived at after providing for
depreciation in accordance with the provisions of section 123(2), or

(b) Out of the profits for any previous financial years arrived at after providing for depreciation
in accordance with the provisions of that sub section and remaining undistributed; or

(c) Out of both the above;

(d) Out of the moneys provided by the Central Government or any State Government for the
payment of dividend by the Company in pursuance of any guarantee given by that government

As per Section 123 of the Companies Act, 2013, dividend including interim dividend during
any financial year can be declared out of the surplus in the profit and loss account.

A company may declare dividend out of the accumulated profits and free reserves, in the event
of inadequacy or absence of profits.

The other conditions relating to payment of dividend out of reserves and accumulated profits
( as per companies dividend declaration rules 2014) are –

(1) The rate of dividend declared should not exceed the average of the rates at which dividend
was declared by it in the three years immediately preceding that year.
This sub-rule should not apply to a company, which has not declared any dividend in each of
the three preceding financial year.

(2) The total amount to be drawn from such accumulated profits should not exceed 1/10 th of
the sum of its paid-up share capital and free reserves as appearing in the latest audited
financial statement.
(3) The amount so drawn should first be utilised to set off the losses incurred in the financial
year in which dividend is declared before any dividend in respect of equity shares is declared.

(4) The balance of reserves after such withdrawal should not fall below 15% of its paid up
share capital as appearing in the latest audited financial statement.

(5) No company should declare dividend unless carried over previous losses and depreciation
not provided in previous year are set off against profit of the company of the current year.

The loss or depreciation, whichever is less, in previous years has to be set off against the
profit of the company for the year for which dividend is declared or paid.

Dividend on preference shares

(a) Holders of preference shares are entitled to receive a dividend at a fixed rate before any
dividend is declared on equity shares.

(b) But such a right can be exercised subject to there being profits and the Directors
recommending payment of the dividend.

Dividend on partly paid shares: 

A company may if so authorised by its Article, pay a dividend in proportion to the amount paid
on each share (Section 51 of the Companies Act, 2013).
Calls in Advance - Calls paid in advance do not rank for payment of dividend.

Preparation of Financial statements

The profit & loss A/c and Balance sheet of companies are prepared as per the requirements
of schedule III to the companies Act.

The following was the Balance Sheet of ---------------- as at -------------

Particulars Note No. Amount

Equity and Liabilities

(1)Shareholder’s Funds
(a) Share Capital 1 Xxxx
(b) Reserves and Surplus 2
(2) Share application money pending Xxxx
allotment
(3)Non-current Liabilities Xxxx
(a) Long-term Borrowings 3 xxxx
(4)Current Liabilities xxxx
Short term borrowings xxxx
Trade Payables xxxx
Total xxxx

Assets
(1)Non-current Assets
Property, Plant and Equipment 4 xxxx

(2)Current Assets xxxx

Inventories xxxx
Trade Receivables xxxx
Cash and Cash equivalents 5 xxxx
 Total xxxx
Notes:
(1)Share Capital
Authorised : ?
Issued, Subscribed and Paid up :
------ Equity Shares of -- each, fully paid up
----- % Preference Shares of -- each, fully paid
Total

(2)Reserves and Surplus

Profit & Loss Account
Total

(3)Long-term Borrowings
--% Debentures of -- each, fully paid up
Outstanding Debenture Interest
Total

(4)PPE (Tangible Assets)

Land and Buildings
Plant and Machinery
Furniture, Fixtures and Fittings
Total

(5)Cash and Cash Equivalents

Balance at Bank
Cash in hand
Total

Classification of current asset / Non-current asset

An asset shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in, the company’s
normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle
a liability for at least twelve months after the reporting date.

All other assets are classified as non-current assets.

1) Classification of current liability / Non-current liability

As per Schedule III, a liability should be classified as current when it satisfies any of the
following criteria:
(i) it is expected to be settled in the company’s normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(i) it is due to be settled within twelve months after the reporting date; or
(ii) the company does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting date.

2) Bonus issue
A company should disclose in notes to accounts for the period of 5 years immediately
preceding the balance sheet date the aggregate number and class of shares allotted as fully
paid-up bonus shares.
Schedule III does not require a company to disclose the source from which bonus shares
have been issued. Therefore, non-disclosure of source from which bonus shares have been
issued does not violate the Schedule III to the Companies Act.

3) Profit & loss balance

A debit balance of Statement of Profit and Loss (after all allocations and appropriations)
should be shown as a negative figure under the head ‘Surplus’. Similarly, the balance of
‘Reserves and Surplus’, after adjusting negative balance of surplus, should be shown under
the head ‘R & S ’ even if the resulting figure is in the negative.

4) Work-in-progress
Schedule III to the companies Act does not require that the amounts of WIP at the beginning
and at the end of the accounting period to be disclosed in the statement of profit and loss.
Only changes in inventories of WIP need to be disclosed in the statement of profit and loss.

Non-disclosure of such change in the statement of profit and loss by the company may not
amount to violation of Schedule III if the differences between opening and closing WIP are
not material.

5) Preliminary expenses

The preliminary expenses which are in the nature of secretarial cost, the amount should be
charged to P & l of the year in which the expenses incurred. ( AS 26)

Question 1a)
State under which head the following accounts should be classified in Balance Sheet, as per
Schedule III of the Companies Act, 2013:
(i) Share application money received in
excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest
accrued thereon.
(iv) Uncalled liability on shares and other
partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Cash equivalents.

Question 1b)
On 31st March, 2018, SR Ltd. provides the following ledger balances after preparing its
Profit & Loss Account for the year ended 31st March, 2018.
Particulars Debit Credit
Equity Share Capital, fully paid shares of ₹50 80,00,000
each
Calls in arrear 15,000
Land 25,00,000
Building 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
 Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured 26,30,000
by Hypothecation of Land)
Other Long term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000
Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
1,76,24,000 1,76,24,000

The following additional information was also provided in respect of the above balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.

(2) The cost of assets were:

Building 32,00,000
Plant and Machinery 30,00,000
Furniture and Fixture 16,50,000

(3) Trade Receivables for 4,86,000 due for more than 6 months.

(4) Balances with banks include 56,000 with the Naya bank, which is not a scheduled
bank.

(5) Loan from Public Finance Corporation repayable after 3 years.

(6) The balance of 26,30,000 in the loan account with Public Finance Corporation is
inclusive of 1,34,000 for interest accrued but not due. The loan is secured by
hypothecation of land.

(7) Other long term loans (unsecured) includes:

Loan taken from Nixes Bank 13,80,000 (Amount repayable within one year 4,80,000)
Loan taken from Directors 8,50,000

(8) Bills Receivable for 1,60,000 maturing on 15th June, 2018 has been discounted.

(9) Short term borrowings includes: Loan from Naya bank 1,16,000 (Secured) Loan from
directors 48,000

(10) Transfer of 35,000 to general reserve has been proposed by the Board of directors out
of the profits for the year.

(11) Inventory of finished goods includes loose tools costing 5 lakhs (which do not meet
definition of property, plant & equipment as per AS-10).
You are required to prepare the Balance Sheet of the Company as on March 31st 2018 as
required under Part - I of Schedule III of the Companies Act, 2013. You are not required to
give previous year figures.

Question 2a)
From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet as
at 31st March, 2019 as required by Schedule III of the Companies Act, 2013 :
Particulars Debit Credit
(₹) (₹)
Equity share capital (face value of Rs. 10 each) 15,00,000
Calls-in-arears 5,000
Land 5,50,000
Building 4,85,000
Plant & Machinery 5,60,000
General reserve 2,70,000
Loan from State Financial Corporation 2,10,000
Inventories 3,15,000
Provision for taxation 72,000
Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800
Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 165,000
Trade payables 2,67,000
Total 25,90,800 25,90,800
The following additional information is also provided :
1) 10,000 equity shares were issued for consideration other than cash.
2) Trade receivables of Rs.55,000 are due for more than six months.
3) The cost of building and plant & machinery is Rs.5,50,000 and Rs.6,25,000
respectively.
4) The loan from State Financial Corporation is secured by hypothecation of plant &
machinery. The balance of Rs.2,10,000 in this account is inclusive of Rs.10,000 for
interest accrued but not due.
5) Balance at Bank included Rs.15,000 with Aakash Bank Ltd., which is not a scheduled
bank.

Question 2b)
In Durga Ltd the following are the balance as per trail balance as on 31-03-2019
Sundry debtors A/c 40,500 Dr
Provision for Bad debts 1,000 Cr
Bad debts A/c 750 Dr

The company wants to maintain a provision for Bad debts at 5% on the closing balance of
debtors.
Calculate the closing balance towards provision for Bad debts and pass journal entry for
giving effect to the provision maintained.

Question 3
Due to inadequacy of profits during the year ended 31st March, 2021, AS Ltd. proposes to
declare 10% dividend out of general reserves. From the following particulars, ascertain the
amount that can be utilized from general reserves, according to the Companies (Declaration
of dividend out of Reserves) Rules, 2014:

30,000 9% Preference shares of 100 each, fully paid up 30,00,000

12,00,000 Equity shares of 10 each, fully paid up 1,20,00,000
General Reserves as on 1.4.2020 37,50,000
Capital Reserves as on 1.4.2020 4,50,000
Revaluation Reserves as on 1.4.2020 5,25,000
Net profit for the year ended 31st March, 2021 4,50,000
Average rate of dividend during the last three year has been 12%.

Question 4
(a) Futura Ltd. had the following items under the head “Reserves and Surplus” in the Balance
Sheet as on 31st March, 2020:
Amount in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90

The company had an accumulated loss of 250 lakhs on the same date, which it has
disclosed under the head “Statement of Profit and Loss” as asset in its Balance Sheet.
Comment on accuracy of this treatment in line with Revised Schedule III to the Companies
Act, 2013.
Answer
Part I of Schedule III to the Companies Act, 2013 provides that debit balance of Statement of
Profit and Loss (after all allocations and appropriations) should be shown as a negative figure
under the head ‘Surplus’. The balance of ‘Reserves and Surplus’, after adjusting negative
balance of surplus, should be shown under the head ‘Reserves and Surplus’ even if the
resulting amount is in the negative.
Amount in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
Profit & loss A/c (250)
Amount presented in B/s (20)
In this case, the debit balance of profit and loss i.e. ₹250 lakhs exceeds the total of all the
reserves i.e. ₹230 lakhs. Therefore, balance of ‘Reserves and Surplus’ after adjusting debit
balance of profit and loss is negative by ₹20 lakhs, which should be disclosed on the face of
the balance sheet. Thus the treatment done by the company is incorrect.

4(b) Sumedha Ltd. took a loan from bank for 10,00,000 to be settled within 5 years in 10
equal half yearly instalments with interest. First instalment is due on 30.09.2020 of 1,00,000.
Determine how the loan will be classified in preparation of Financial Statements of Sumedha
Ltd. for the year ended 31st March, 2020 according to Revised Schedule III.

Answer
As per Schedule III, a liability should be classified as current when it satisfies any of the
following criteria:
(i) it is expected to be settled in the company’s normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the reporting date; or
(iv) the company does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting date. In the given case, instalments due on 30.09.2020
and 31.03.2021 will be shown under the head ‘short term borrowing’ as per criteria
Therefore, in the balance sheet as on 31.3.2020, ₹8,00,000 (₹1,00,000 x 8 instalments) will
be shown under the heading ‘Long term Borrowings’ and ₹2,00,000 (₹1,00,000 x 2
instalments) will be shown under the heading ‘short term borrowing’ as current maturities of
loan from bank.

Schedule III
Question 5
(a) Alpha Ltd. provides you the following information:
1. Raw material stock holding period: 3 months
2. Work-in-progress holding period: 1 month
3. Finished goods holding period: 5 months
4. Debtors collection period: 5 months
You are required to compute the operating cycle of Alpha Ltd. What would happen if the trade
payables of the Company are paid in 13 months–whether these should be classified as current
or non-current liability?

Answer
Computation of operating cycle period
Particulars Number of
months

Raw material stock holding period 3 months

Work-in-progress holding period 1 month
Finished goods holding period 5 months
Debtors collection period 5 months
Total operating cycle period 14 months

As per Schedule III, a liability should be classified as current when it satisfies any of the
following criteria:
(i) it is expected to be settled in the company’s normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the reporting date; or
(iv) the company does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting date.
Accordingly, the trade payable of the company shall be classified as current liability, as it is
payable within the operating cycle of 14 months.

(b) The management of Loyal Ltd. contends that the work in process is not valued since it is
difficult to ascertain the same in view of the multiple processes involved. They opine that the
value of opening and closing work in process would be more or less the same. Accordingly,
the management had not separately disclosed work in process in its financial statements.
Comment in line with schedule III.
Answer
Schedule III to the companies Act does not require separate disclosure of the amounts of
WIP at the beginning and at the end of the accounting periods in the statement of profit and
loss. Only changes in inventories of WIP need to be disclosed in the statement of profit and
loss. Non-disclosure of such change in the statement of profit and loss by the company may
not amount to violation of Schedule III if the differences between opening and closing WIP
are not material.

Question 6
Kapil ltd has authorized capital of ₹50 lakhs divided into 5,00,000 equity shares of 10 each.
Their books show the following balances as on 31 st March, 2017.
Particulars Amount Particulars Amount
 Inventory 1-4-2016 6,65,000 Bank Current A/c 20,000
Discount & rebates allowed 30,000 Cash in hand 8,000
Carriage Inwards 57,500 Interest (Bank overdraft) 1,11,000
Patterns 3,75,000 Calls in Arrear @ 2 per share 10,000
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
(2,00,000 shares of 10 each)
Furniture & Fixtures 1,50,000 Bank Overdraft 12,67,000
Purchases 12,32,500 Trade Payable (for goods) 2,40,500
Wages 13,68,000 Sales 36,17,000
Freehold land 16,25,000 Rent (Cr) 30,000
Plant and Machinery 7,50,000 Transfer fees received 6,500
Engineering Tools 1,50,000 Profit and loss A/c (Cr) 67,000
Trade receivable 4,00,500 Repairs to Building 56,500
Advertisement 15,000 Bad debts 25,500
Commission & Brokerage 67,500
Business Expenses 56,000

The Inventory (Valued at cost or market value, which is lower) as on 31 st march, 2017 was
7,08,000. Outstanding liabilities of wages ₹25,000 and business expenses ₹36,000. Dividend
declared @12% on Paid-up capital and it was decided to transfer to reserve @ 2.5% of profits.
Charge depreciation on closing written down amount of plant & Machinery @ 5%, Engineering
tools @ 20%; Patterns @10% and Furniture & Fixture @10%. Provide ₹25,000 as doubtful
debts after writing off ₹16,000 as Bad debts. Provide for Income tax @ 30%.
You are required to prepare Statement of profit and Loss for the year ended 31 st March, 2017
and Balance sheet as on the date.

Question 7
Ring Ltd. was registered with a nominal capital of ₹10,00,000 divided into shares of ₹100
each. The following Trial Balance is extracted from the books on 31st March, 2021:
Particulars ₹ Particulars ₹
Buildings 5,80,000 Sales 10,40,000
Machinery 2,00,000 Outstanding expenses 4,000
Closing stock 1,80,000 Provision for BD (1-4-2020) 6,000
Loose tools 46,000 Equity share capital
Purchases (adjusted) 4,20,000 General reserve 4,00,000
Salaries 1,20,000 Profit & loss A/c (op) 80,000
Directors’ fees 20,000 Creditors 50,000
Rent 52,000 Provision for depreciation: 1,84,000
Depreciation 40,000 -On Building
Bad debts 12,000 On Machinery 1,00,000
Investment 2,40,000 14% Debentures 1,10,000
Interest accrued on Interest on Debentures 4,00,000
Investment 4,000 (accrued but not due) 28,000
Debenture Interest 56,000 Interest on Investments
Advance Tax 1,20,000 Unclaimed dividend 24,000
Sundry expenses 36,000 10,000
Debtors 2,50,000
Bank 60,000
24,36,000 24,36,000

You are required to prepare statement of Profit and Loss for the year ending 31st March,
2021 and Balance sheet as at that date after taking into consideration the following
information:
(a) Closing stock is more than opening stock by ₹1,60,000;
(b) Provide to doubtful debts @ 4% on Debtors
(c) Make a provision for income tax @30%.
(d) Depreciation expense included depreciation of ₹16,000 on Building and that of ₹24,000
on Machinery.
(e) The directors declared a dividend @ 25% on 2nd April, 2021 and transfer to General
Reserve @ 10%.
(f) Bills Discounted but not yet matured ₹20,000.

Question 8
Following is the trial balance of Delta limited as on 31.3.2021.
(Figures in ₹ ‘000)
Particulars Debit Particulars Credit
Land at cost 800 Equity share capital ( shares of
10 each) 500
Calls in arrear 5 10% Debentures 300
Cash in hand 2 General reserve 150
Plant & Machinery at cost 824 Profit & loss A/c ( Balance on
01-04-20) 75
Trade receivable 120 Securities premium 40
Inventories ( 31-03-21) 96 Sales 1200
Cash at Bank 28 Trade payable 30
Purchases ( adjusted) 400 Provision for depreciation 150
Factory expenses 80 Suspense A/c 10
Admin expenses 45
Selling expenses 25
Debenture interest 30
Total 2455 Total 2455

Additional Information:
(i) The authorized share capital of the company is 80,000 shares of ₹10 each.
(ii) The company revalued the land at ₹9,60,000.
(iii) Equity share capital includes shares of ₹ 50,000 issued for consideration other than
cash.
(iv) Suspense account of ₹10,000 represents cash received from the sale of some of the
machinery on 1.4.2020. The cost of the machinery was ₹24,000 and the accumulated
depreciation thereon being ₹20,000. The balance of Plant & Machinery given in trial balance
is before adjustment of sale of machinery.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
(vi) Balance at bank includes ₹5,000 with ABC Bank Ltd., which is not a Scheduled Bank.
(vii) Make provision for income tax @30%.
(viii) Trade receivables of ₹50,000 are due for more than six months.
You are required to prepare Delta Limited's Balance Sheet as at 31.3.2021 and Statement of
Profit and Loss with notes to accounts for the year ended 31.3.2021 as per Schedule Ill.
Ignore previous year's figures & taxation.

(b) “Current maturities of long term borrowing are disclosed separately under the head
Other current liabilities in the balance sheet of a company.” You are required to
comment in line with schedule III to the Companies Act 2013.
 Unit II CASH FLOW STATEMENT

The cash flow statement is prepared to provide information about the change in cash & cash
equivalents of an enterprise in a particular accounting period.

The cash flow statement explain the movement of cash between two points of time. AS-3
issued by ICAI deals with the mode of preparation of cash flow statement.
As per AS-3 cash funds include:

(a) Cash in hand

(b) Demand deposits with bank
(c) Cash equivalents

CASH FLOW ACTIVITIES

The cash flow activities are classified as under :
Operating activities:
➢ Indicates net cash generated from their main business operations.
➢ Cash receipts from customers & payments to suppliers / employees/ overheads are
covered under direct method.
➢ From the gross cash flow from operation income tax paid shall be deducted & net cash
flow from operation arrived.

➢ Under indirect method net profit is adjusted for –

a) Increase / decrease in Inventories, Receivables, Payables, Prepaid expenses

and outstanding expenses. (working capital adjustments)
b) Non-cash items such as depreciation and
c) Cash flows relating to Financing and Investing actitivities

Investing activities

➢ Activities related to the acquisition and disposal of long-term assets, non-operating

current assets
➢ Investments which results in outflow of cash and the income from such investments (
result in inflow of cash)
➢ Disposal of aforesaid asset results in inflow of cash.
(Thus, inflows and outflows related to acquisition and disposal of assets, other than those
related to operating activities, are shown under this category.)

Financing activities

➢ Activities related to the changes in capital and long term borrowing of the enterprise
which affect flow of cash
➢ Redemption of shares and repayment of borrowings results in outflow of cash.
➢ The interest on long term loans and dividend on shares are also presented as out flow
under financing activities.
(Thus, inflows and outflows related to the amount of capital and borrowings of the
enterprise are shown under this head.)

FORMAT FOR DIRECT METHOD:

Cash Flow Statement for the year ended 31st March ------
( ‘000)
Cash flow from operating activities:
Cash receipts from customers XXX
Cash payments to suppliers (XXX)
Cash paid to employees (XXX)
Other cash payments ( for overheads) (XXX)
Cash generated from operations XXX
Income taxes paid (XXX)
Net cash from operating activities XXX

Cash flow from investing activities:

Payments for purchase of fixed assets (PPE) (XXX)
Proceeds from sale of fixed assets XXX
Net cash from investing activities XXX

Cash flow from financing activities:

Proceeds from issue of share capital (Eq / pref) XXX
Repayment of Long term borrowing / Bank loan (XXX)
Payment of Interest on Long term loan / Dividend (XXX)
Net cash from financing activities XXX
Net increase or decrease in cash and cash equivalents XXX
Cash and cash equivalents at the beginning of the period XXX
Cash and cash equivalents at the end of the period XXX

FORMAT FOR INDIRECT METHOD:

Cash Flow Statement for the year ended 31st March ------

Cash flows from operating activities :

Net profit before tax provision XXX
Add: Non-cash expenditures
Depreciation XXX
Loss on sale of assets XXX
Interest expense XXX XXX
Less: Non-cash income
Amortisation of capital grant received XXX
Profit on sale of investments XXX
Interest income from investment XXX XXX

Operating profit before working capital changes XXX

Increase in working capital (XXX)
Decrease in accounts receivables XXX
Increase in inventory (XXX)
Decrease in prepaid expenses XXX
Increase in accounts payable XXX
Increase in accrued liability XXX XXX
Cash from operations XXX
Income tax paid (XXX)
Net cash from operating activities XXX
Cash flows from investing activities:
Sale of assets XXX
Sale of investments XXX
Interest income from investments XXX
Purchase of fixed assets (XXX)
Purchase of investments (XXX)
Net cash from investing activities XXX
Cash flows from financing activities:
Proceeds from issuance of share capital XXX
Repayment of bonds (XXX)
Interest paid (XXX)
Dividend paid (XXX)
Net cash from financing activities XXX
Net increase or decrease in cash and cash equivalents XXX
Cash and cash equivalents at the beginning of the period XXX
Cash and cash equivalents at the end of the period XXX

Indirect method
Only the cash flow from operating activities differ between direct and indirect method. The
cash flow from operations will be computed as given below:

Profit before tax xxx

+/- Non cash items included in P & l Xxx
Cash flows relating to Investing &
financing activities Xxx
Working capital adjustment xxx

Cash flow statement – Direct method

Question 1
From the following summarised Cash account of S Ltd., prepare cash flow statement for the
year ended 31st March, 2023 in accordance with AS 3 (revised) using direct method.

Summarised Cash Account ( 000)

Opening balance 50 Payment to suppliers 2,000

Issue of share capital 300 Purchase of fixed assets 200
Received from customers 2,800 Overhead expenses 200
Sale of fixed assets 100 Wages and salaries 100
Tax paid 250
Dividend paid 50
Bank loan 300
Closing balance 150
3250 3250

Question 2
st
The following particulars relate to Bee Ltd., for the year ended 31 March, 2023 :

(i) Furniture of book value of 15,500 was disposed off for 12,000.

(ii) Machinery costing 3,10,000 was purchased and 20,000 were spent on its erection.
(iii) Fully paid 8% preference shares of the face value of 10,00,000 were redeemed at a
premium of 3%. In this connection 60,000 equity shares of 10 each were issued at a
premium of 2 per share. The entire money being received with applications.

(iv) Dividend was paid as follows: On 8% preference shares 40,000 On equity shares for
the year 2022-23 1,10,000
(v) Total sales were 32,00,000 out of which cash sales were 11,50,000.

(vi) Total purchases were 8,00,000 including cash purchase of 60,000.

(vii) Total expenses were 12,40,000 charged to Profit and Loss A/c.

(viii) Taxes paid including dividend distribution tax of 22,500 were 3,30,000.
st
(ix) Cash and cash equivalents as on 31 March, 2023 were 1,25,000.

You are required to prepare cash flow statement for the year ended 31 March 2023 as per AS
– 3 after taking into consideration the following also:
Particualars As on 31-03-2022 As on 31-03-2023
Sundry debtors 1,50,000 1,47,000
Sundry creditors 78,000 83,000
Un paid expenses 63,000 55,000

Question 3
On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2023:
(i) Total sales for the year were 199 crore out of which cash sales amounted to 131 crore.

(ii) Cash collections from credit customers during the year, totalled 67 crore.

(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise
amounted to 159 crore.

(iv) Fully paid preference shares of the face value of 16 crore were redeemed and equity
shares of the face value of 16 crore were allotted as fully paid up at a premium of 25%.

(v) 13 crore were paid by way of income tax.

(vi) Machine of the book value of 21 crore was sold at a loss of 30 lakhs and a new machine
was installed at a total cost of 40 crore.

(vii) Debenture interest amounting 1 crore was paid.

(viii) Dividends totalling 10 crore was paid on equity and preference shares. Corporate
dividend tax @ 17% was also paid.

(ix) On 31st March, 2022 balance with bank and cash on hand totalled 9 crore.

Cash flow statement – Indirect method

Question 4
The balance sheets of Sun Ltd for the years ended 31 st March 2023 and 2022 were
summarized thus:

Particulars 2023 2022

₹ ₹
Equity share capital 60,000 50,000
Reserves:
Profit and Loss Account 5,000 4,000
 Current liabilities:
Creditors 4,000 2,500
Taxation 1,500 1,000
Dividend payable 2,000 1,000
72,500 58,500
Fixed assets ( at W.D.V)
Premises 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Short term investments 2,000 1,000
Current assets
Stock 17,000 14,000
Debtors 8,000 6,000
Bank and cash 6,000 8,500
72,500 58,500

And the profit and loss a/c for the year ended 31st March 2023 disclosed

Profit before tax 4,500

Taxation (1,500)
Profit after tax 3,000
Dividend payable (2,000)
Retained profit 1,000

Further information is available :

Vehicle Fixture

Depreciation for the year 1,000 2,500

Disposals:
Proceeds on disposal --- 1,700
Written down value --- (1,000)
Profit on disposal 700

Prepare a cash flow statement for the year ended 31st March 2023.

Question 5

The summarized Balance sheet of XYZ Ltd as at 31/3/2022 and 2023 are given below:
Liabilities 2022 2023 Assets 2022 2023

Preference Share Plant & Machinery 7,00,000 8,20,000

Capital 4,00,000 2,00,000 Long Term
Equity Share Capital 4,00,000 6,60,000 Investments 3,20,000 4,00,000
Share Premium A/c 40,000 30,000 Goodwill - 30,000
Capital Redemption Current Assets 9,10,000 11,41,000
reserve - 1,00,000 Short term
General Reserve 2,00,000 1,20,000 investment (less 50,000 84,000
P & L A/c 1,30,000 1,75,000 than 2 months)
Current Liabilities 6,40,000 9,00,000 Cash and Bank 1,00,000 80,000
Proposed Dividend 1,60,000 2,10,000 Preliminary
Provision for Tax 1,50,000 1,80,000 Expenses 40,000 20,000
2120000 2575000 2120000 2575000

Additional Information:
During the year 2022-23 the company:
i) Preference Share capital was redeemed at a premium of 10% partly out of proceeds
from issue of 10,000 equity shares of 10 each issued at 10% premium and partly
out of profits otherwise available for dividends.
ii) The company purchased plant and machinery for 95,000. it also acquired another
company stock 25000 and plant and machinery 1,05,000 and paid 1,60,000 in
Equity share capital for the acquisition.
iii) Foreign exchange loss of 1,600 represents loss in value of Short-term investment.
iv) The company paid tax of 1,40,000
You are required to prepare Cash Flow Statement.

Question 6
The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March 2022 and
2023:
Liabilities 31-03-2022 31-03-2023
Equity share capital ( 10 each ) 10,00,000 12,50,000
Capital reserve - 10,000
Profit & loss A/c 4,00,000 4,80,000
Long term loan from the bank 5,00,000 4,00,000
Sundry creditors 5,00,000 4,00,000
Provision for taxation 50,000 60,000
Total 24,50,000 26,00,000
Assets
Land & Building 4,00,000 3,80,000
Machineries 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 3,00,000 2,80,000
Sundry debtors 4,00,000 4,20,000
Cash-in-hand 2,00,000 1,40,000
Cash at bank 3,00,000 4,10,000
Total 24,50,000 26,00,000

Additional information:
(1) Depreciation written off on land and building 20,000.
(2) The company sold some investment at a profit of 10,000, which was credited to Capital
Reserve.
(3) Income-tax provided during the year 55,000.
(4) During the year, the company purchased a machinery for 2,25,000. They paid 1,25,000
in cash and issued 10,000 equity shares of 10 each at par.

You are required to prepare a cash flow statement for the year ended 31st March 2023 as per
AS 3 by using indirect method.

Question 7
Balance Sheet of M/s Hero Ltd as on 31St March,2022 and 2023 are as follows:
( in 000’s)
Liabilities 31-03- 31.03.23 Assets 31.03.22 31.03.23
22
Equity share capital 1,000 1,150 Land & Buildings
 Capital Reserve - 10 Machinery 500 480
General reserve 250 300 Investments 750 820
Profit & Loss A/c 150 180 Stock 100 50
Long term loan from 500 400 Sundry debtors 300 280
bank Cash in hand 400 420
Sundry creditors 500 400 Cash at Bank 200 165
Provision for Taxation 300 410
Proposed dividends 50 60
100 125
2,550 2,625 2,550 2,625
Additional Information :
(1) Dividend of 1,00,000 was paid during the year ended 31st March,2023.
(2) Machinery purchased during the year for 1,25,000
(3) Company sold some investment at a profit of 10,000 which was credited to capital
reserve
(4) Depreciation written off on land and building 20,000
(5) Income tax provided during the year 55,000.

From the above particulars, Prepare a cash flow statement for the year ended 31 st
March,2023 as per AS 3 using indirect method.

Question 8
Bell Co. Ltd. submits the following information pertaining to year 2022-2023. Using the given
data, you are required to prepare Cash Flow Statement for the year ended 31st March, 2023
by indirect method.
in Millions
Opening balance of cash and cash equivalents 1.55
Additional shares issued 6.50
Capital expenditure 9.90
Proceeds from assets sold 1.60
Dividend paid 0.50
Loss from disposal of assets 1.20
Net profit for the year 3.30
Increase in Accounts Receivable 1.50
Redemption of 4.5% debentures 2.50
Depreciation and amortization 0.75

Question 9) Surya Ltd. has provided you the following particulars. Prepare Cash Flow from
Operating Activities by Indirect Method in accordance with AS 3 :

Profit & Loss Account of Surya Ltd. for the year ended 31st March, 2023
Particulars Particulars
To Depreciation 86,700 By Operating profit before
To Patents w/off 35,000 depreciation 11,01,600
To Provision for tax 1,25,000 By profit on sale of Investment 10,000
To Proposed dividend 72,000 By Refund of Income tax 3,000
To Transfer to Reserve 87,000 By Insurance claim settlement ( 1,00,000
for major fire )
To Net profit 8,08,900
12,14,600 12,14,600

Additional information:
31-03-2022 31-03-2023
Stock 1,20,000 1,60,000
 Trade debtors 7,500 75,000
Trade creditors 23,735 87,525
Provision for tax 1,18,775 1,25,000
Prepaid expenses 15,325 12,475
Marketable securities 11,775 29,325
Cash balance 25,325 35,340

Question 10
The following are the changes in the account balances taken from the balance sheets of
Leela Ltd. as at the beginning and end of the year
Dr Cr
8% Debentures 1,50,000
Debenture Discount 3,000
Plant and Machinery at cost 1,80,000
Depreciation on Plant and Machinery 43,200
Trade receivables 1,50,000
Inventory including Work-in-Progress 1,15,500
Trade payables 35,400
Net profit for the year 2,29,500
Dividend paid in respect of earlier years 90,000
Provision for doubtful debts 9,900
Trade Investments at cost 1,41,000
Bank 2,11,500
Total 6,79,500 6,79,500

You are informed that:

• During the year Plant costing 54,000 against which Depreciation Provision of 40,500
was lying was sold for 21,000.
• During the middle of the year, 1,50,000 Debentures were issued for cash at a discount of
3,000.
• The net Profit for the year was after crediting the profit on sale plant and charging
Debenture Interest.
Prepare a Cash Flow Statement which will explain why Bank Borrowing has increased by
₹2,11,500 during the year end, ignore taxation.

Chapter 12. Buy back of shares

1. Anu Ltd. furnishes you with the following balance sheet as at 31 st March 2018:
( in crores)
Sources of funds
Share capital: Authorised 100
Issued:
12% Redeemable preference shares of 100 each
fully paid 75
Equity shares of 10 each fully paid 25 100
Reserves and Surplus:
Capital reserve 15
Securities Premium 25
Revenue reserves 260 300
400
Application of funds:
Fixed assets at cost 100
Less: Provision for depreciation 100 Nil
 Investments at cost ( market value 400 cr ) 100
Current assets 340
Less: Current liabilities 40 300
400
The company redeemed preference shares on 1 st April 2018. It also bought back 50 lakhs
equity shares of 10 each at 50 per share. The payments for the above were made out of
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 1.4.2018
2. Dee Limited (a non-listed company) furnishes the following summarized Balance Sheet as
at 31st March, 2018:
( in 000’s)

Liabilities
Share capital:
Authorised capital 30,00
Issued and subscribed capital:
2,50,000 Equity shares of 10 each fully paid up 25,00
2,000, 10% Preference shares of 100 each
(Issued two months back for the purpose of buy back) 2,00 27,00
Reserves and surplus:
Capital reserve 10,00
Revenue reserve 30,00
Securities premium 22,00
Profit and loss account 35,00 97,00
Current liabilities and provisions 14,00
Total 1,38,00
Assets
Fixed assets 93,00
Investments 30,00
Current assets, loans and advances (including cash and
bank balance) 15,00

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

3.The following was the summarized balance sheet of Gamma (an unlisted company) Ltd. as
on 31st March,2018:
Equity & Liabilities (` In Lakhs) Assets (` In Lakhs)
 Authorised capital: Fixed assets 56,000
Equity shares of Rs.10 each 40,000 Investments 12,000
Issued capital: Cash at Bank 6,600
Equity shares of Rs.10 each 32,000 Trade Receivables 33,000
Fully Paid Up
10% Redeemable Preference
Shares of 10each, Fully paid 10,000
up Reserves & surplus:
Capital Redemption Reserve 4,000
Securities Premium 3,200
General Reserve 24,000
Profit & Loss Account 1,200
9% Debentures 20,000
Trade Payables 13,200

1,07,600 1,07,600
On 1st April, 2018, the company redeemed all its Preference Share at a Premium of 10% and
bought back 25% of its Equity Shares at ₹20 per Share. In order to make cash available, the
company sold all the Investment for ₹12,600 Lakhs and raised a bank Bank Loan amounting
to ₹8,000 Lakhs on the security of company’s Plant.

Give the necessary Journal Entries considering that the buy back is authorized by the articles
of company and necessary resolution is passed by the company for this. The amount of
securities premium will be utilized to the maximum extent as allowed by the law.

Question 4)
P Ltd. (a non-listed company) has the following Capital structure as on 31st March, 2022:

Particulars Amount Amount

Equity shares of 10 each fully paid up 30,00,000
Reserves & surplus
General reserve 32,50,000
Securities premium A/c 6,00,000
Profit & loss A/c 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 ₹30
per share.

Question 5)
Quick Ltd. has the following capital structure as on 31st March,2021:
(₹ in crores)
1) Share capital 452
(Equity shares of ₹10 each fully paid)
2) Reserves & surplus
General Reserve 336
Securities Premium Account 126
Profit and Loss Account 126

Statutory Reserve 180

 Capital Redemption Reserve 87
Plant Revaluation Reserve 33 888
3) Loan funds
Secured 2200
Unsecured 320 2520
On the recommendations of the Board of Directors, on 16th September, 2021, the
shareholders of the company have approved a proposal to buy-back of equity shares. The
prevailing market value of the company's share is ₹20 per share and in order to induce the
existing shareholders to offer their shares for buy-back, it was decided to offer a price of 50%
over market value. The company had sufficient balance in its bank account for the buy-back
of shares.
You are required to compute the maximum number of shares that can be bought back in the
light of the above information and also under a situation where the loan funds of the
company were either ₹1,680 Crores or ₹2,100 Crores.
Assuming that the entire buy-back is completed by 31st December,2021, Pass the necessary
accounting entries (narrations not required) in the books of the company in each situation.
Chapter - 14) Internal Reconstruction

Question 1
The Balance Sheet of R Ltd., as at 31st March, 2021 was as follows:
Liabilities Assets
Share capital authorized 14,00,000 Intangibles 68,000
Freehold premises at cost 1,40,000
Issued: 64,000, 8% Plant and equipment at cost
cumulative preference shares less depreciation 2,40,000
of 10 each, fully paid Investments in shares in Q
6,40,000 Ltd. at cost 3,24,000
Stocks 2,48,000
64,000 Equity shares of 10 Debtors 3,20,000
each, 7.5 paid 4,80,000 Deferred revenue expenditure
48,000
Loans from directors 60,000 Profit and loss account 4,40,000
Sundry creditors 4,40,000
Bank overdraft 2,08,000

18,28,000 18,28,000

Note: The arrear of preference dividends amount to 51,200.

A scheme of reconstruction was duly approved with effect from 1st April, 2021 under the
conditions stated below:
(a) The unpaid amount on the equity shares would be called up
(b) The preference shareholders would forego their arrear dividends. In addition, they would
accept a reduction of 2.5 per share. The dividend rate would be enhanced to 10%.
(c) The equity shareholders would accept a reduction of 7.5 per share.
(d) R Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the share capital of that
company. Q Ltd. is not a quoted company. The average net profit (after tax) of the company
is 2,50,000. The shares would be valued based on 12% capitalization rate.

Average net profit after tax of Q ltd = 2,50,000

Total value of Q ltd = 2,50,000 X 100/12 =20,83,333.3333
Value of Inv in Q ltd = 20,83,333 X 15% = 3,12,500

(e) A bad debt provision at 2% would be created.

(f) The other assets would be valued as under:

Intangibles 48,000
Plant 1,40,000
Freehold premises 3,80,000
Stocks 2,50,000

(g) The profit and loss account debit balance and the balance standing to the debit of the
deferred revenue expenditure account would be eliminated.

(h) The directors would have to take equity shares at the new face value of 2.5 share in
settlement of their loan.

(i) The equity shareholders, including the directors, who would receive equity shares in
settlement of their loans, would take up two new equity shares for every one held.
(j) The preference shareholders would take up one new preference share for every four held.
(k) The authorised share capital would be restated to 14,00,000.

(l) The new face values of the shares-preferences and equity will be maintained at their
reduced levels.

You are required to prepare:

(i) Necessary ledger accounts to effect the above; and
(ii) The Balance Sheet of the company after reconstruction.

Question 2
M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated
huge losses. The following is the Balance Sheet of the company as on 31st March, 2021
before reconstruction
Liabilities Amount Assets Amount
Share capital Good will 22,00,000
50,000 shares of 50 each fully Land & building 42,70,000
paid up 25,00,000 Machinery 8,50,000
1,00,000 shares of 50 each 40 Computers 5,20,000
paid up 40,00,000 Stock 3,20,000
Capital reserve 5,00,000 Total debtors 10,90,000
8% Debentures of 100 each 4,00,000 Cash at Bank 2,68,000
12% Debentures of 100 each 6,00,000 Profit & Loss A/c 7,82,000
Trade creditors 12,40,000
Outstanding expenses 10,60,000
Total 1,03,00,000 Total 1,03,00,000

Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited:

Particulars Mr. Shiv Mr. Ganesh

8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000

The following scheme of internal reconstruction was framed and implemented, as approved
by the court and concerned parties :
(1) Uncalled capital is to be called up in full and then all the shares to be converted into
Equity Shares of 40 each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of
40 each for 12,50,000.
(3) Trade Creditors are given option of either to accept fully paid equity shares of 40
each for the amount due to them or to accept 70% of the amount due to them in cash
in full settlement of their claim. Trade Creditors for 7,50,000 accept equity shares
and rest of them opted for cash towards full and final settlement of their claim.
(4) Mr. Shiv agrees to cancel debenture amounting to 2,00,000 out of total debentures
due to him and agree to accept 15% Debentures for the balance amount due. He also
agree to subscribe further 15% Debentures in cash amounting to 1,00,000.
(5) Mr. Ganesh agrees to cancel debenture amounting to 50,000 out of total debentures
due to him and agree to accept 15% Debentures for the balance amount due.
(6) Land & Building to be revalued at 51,84,000, Machinery at 7,20,000, Computers
at 4,00,000, Stock at 3,50,000 and Trade Debtors at 10% less to as they are
appearing in Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
 (8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital
Reduction A/c will be adjusted against Capital Reserve.

You are required to pass necessary Journal Entries for all the above transactions and draft
the company's Balance Sheet immediately after the reconstruction.

Question 3
The following is the Balance sheet of Rocky Ltd. as at March 31,2021;
Liabilities In lacs
Fully paid equity shares of 10 each 500
Capital Reserve 6
12% Debentures 400
Debenture Interest Outstanding 48
Trade Creditors 165
Directors’ Remuneration Outstanding 10
Other Outstanding Expenses 11
Provisions 33
1,173
Assets
Goodwill 15
Land and Building 184
Plant and Machinery 286
Furniture and Fixtures 41
Stock 142
Debtors 80
Cash at Bank 27
Discount on Issue of Debentures 8
Profits and Loss Account 390
1,173
The following scheme of internal reconstruction was framed, approved by the Court, all the
concerned parties and implemented:
(i) All the equity shares be converted into the same number of fully-paid equity shares of
2.50 each
(ii) Directors agree to forego their outstanding remuneration.
(iii) The debenture holders also agree to forego outstanding interest in return of their
12% debentures being converted into 13% debentures.
(iv) The existing shareholders agree to subscribe for cash, fully paid equity shares of
2.50 each for 125 lacs
(v) Trade creditors are given the option of either to accept fully paid equity shares of
2.50 each for the amount due to them or to accept 80% of the amount due in cash.
Creditors for 65 lacs accept equity shares whereas those for 100 lacs accept
80 lacs in cash in full settlement.
(vi) The Assets are revalued as under;
In lacs
Land and Building 230
Plant and Machinery 220
Stock 120
Debtors 76

Pass journal entries for all the above mentioned transactions and draft the company’s balance
sheet immediately after the reconstruction.

Question 4
The summarised balance sheet of X Limited as on 31 st March 2012 was as follows:
Liabilities Amount Assets Amount

Fixed Assets:
Authorised and subscribed Machinery 3,50,000
capital: Current Assets:
10,000 Equity share of 100 each Stock 2,53,000
fully paid 10,00,000 Debtors 2,30,000
Unsecured loans: Bank 20,000
15% Debentures 3,00,000 Profit and Loss A/c 5,80,000
Accrued Interest 45,000
Current Liabilities:
Creditors 52,000
Provision for income tax 36,000

14,33,000 14,33,000

It was decided to reconstruct the company for which necessary resolution was passed and
sanctions were obtained from the appropriate authorities.
Accordingly, it was decided that:

a) Each share subdivided into 10 fully paid up equity share of 10 each.

b) After sub-division, each shareholder shall surrender to the company 50% of his
holdings for the purpose of reissue to debenture holders and creditors as necessary.
c) Out of shares surrendered 10,000 shares of 10 each shall be converted into 10,
10% Preference shares of 10 each fully paid up.
d) The claims of the debenture holders shall be reduced to50%. In the consideration of
the reduction, the debenture holders shall receive Preference Shares of 1,00,000.
e) Creditors claim shall be reduced by 25%. Remaining creditors are to be settled by the
issue of equity share of 10 each of out of shares surrendered.
f) Balance of Profit and Loss account to be written off.
g) The Shares surrendered and not re-issued cancelled
Pass the journal entries and prepare the resultant Balance sheet.

Question 6
The shareholders of Sunrise Ltd. decided on a corporate restructuring exercise necessitated
due to economic recession and a slump in business. From the audited statements as on 31-
03-2023 and the information supplied, you are requested to prepare:
(i) Balance Sheet after the completion of the restructuring exercise,
(ii) The capital reduction account,
(iii) The cash account of the entity
The balance sheet of Sunrise Ltd as on 31-03-2023
Liabilities Amount Assets Amount
( ) ( )
Share capital – 30,000 equity 3,00,000 Fixed Assets:
shares of 10 each Trade marks & patents 1,10,000
40,000 8% Cumulative 4,00,000 Good will at cost 36,100
preference shares of 10
each
Reserves & surplus: Free hold Land 1,20,000
Securities premium 10,000 Free hold premises 2,44,000
Profit & Loss A/c (1,38,400) Plant and equipment 3,20,000
 Secured Borrowings: Investment ( Marked to 64,000
9% Debentures of market)
100 each 1,20,000
Accrued Interest 5,400 1,25,400
Creditors 1,20,000 Current Assets
Deferred VAT payable 50,000 Inventories:
Temporary Bank overdraft 2,23,100 Raw materials and
Packing materials 60,000
Finished goods 16,000 76,000
Trade receivable 1,20,000
10,90,100 10,90,100
Note: Preference dividends are in arrears for 4 years.

The scheme of reconstruction that received the permission of the Court was on the following
lines:
(1) The authorized capital of the Company to be re-fixed at 10 lakhs (preference capital 3
lakhs and equity capital 7 lakhs both 10 shares each).

(2) The preference shares are to be reduced to 5 each and equity shares reduced by 3
per share. Post reduction, both classes of shares to be re-consolidated into 10 shares.

(3) Trade Investments are to be liquidated in open market.

(4) One fresh equity shares of 10 to be issued for every 40 of preference dividends in
arrears (ignore taxation).

(5) The securities premium is to be fully utilized to meet the reconstruction programme.

(6) The debenture holders took over freehold land at 2,10,000 and settled the balance after
adjusting their dues.

(7) Un provided contingent liabilities were settled at 54,000 and a pending insurance claim
receivable settled at 12,500 on condition that claim will be immediately settled.

(8) The intangible assets were all to be written off along with 10,000 worth obsolete packing
material and 10% of the receivables.

(9) Expenses for the scheme were 10,000.

(10) Remaining cash available as a result of the above transactions is to be utilized to pay off
the bank overdraft to that extent.

(11) The Equity shareholders agree that they will bring in cash to liquidate the balance
outstanding on the overdraft account and also agree that sufficient funds will be brought in to
bring up the net working capital, after completing the re-structuring exercise, to 2 lakhs. The
equity shares will be issued at par for this purpose.

Question 7
The Summarized Balance Sheet of Luck Ltd.as on 31st March, 2023 was as follows:
Note Amount Amount
 A. Equity and Liabilities
1. Shareholders’ Fund
a) Share Capital 1 7,50,000
b) Reserves and Surplus 2 (10,00,000) (2,50,000)
2. Non-current Liabilities
a)Long Term borrowings
3. Current Liabilities 3 5,00,000
a)Short Term Borrowings 4 5,00,000
b)trade Payables 2,50,000 7,50,000
Total
10,00,000
B. Assets
1. Non-current assets
a)Fixed Assets
i)Tangible Assets5h 5
5,50,000
ii)Intangible Assets 6
1,50,000 7,00,000
2. Current Assets
a) Inventories 1,50,000
b) Trade Receivable 1,25,000
c) Deferred revenue expenditure 25,000 3,00,000

10,00,000

Notes to Accounts
Amount Amount

1. Share Capital
Authorised, issued & fully paid
5,000 equity shares of 100 each 5,00,000
2,500 8% Preference Shares of 100 each 2,50,000 7,50,000
2. Reserves and Surplus
Profit and Loss Account (10,00,000)
3. Long Term borrowings
8% Debentures 5,00,000
4. Short Term borrowings
Loans from Directors
3,00,000
Bank overdraft 5,00,000
2,00,000
5. Tangible Assets
Freehold property
4,00,000
Plant 5,50,000
1,50,000
6. Intangible Assets
Goodwill
1,00,000
Trademark 1,50,000
50,000

The following scheme of internal reconstruction was framed, approved by the Court, all the
concerned parties and implemented:
i) The preference shares to be written down to 25 each and the equity shares to
20 each. Each class of shares then to be converted into shares of 100 each.
ii) The debenture holders to take over freehold property (book value 2,00,000) at
a valuation of 2,50,000 in part repayment of their holdings. Remaining freehold
property to be revalued at 6,00,000.
 iii) Loan from directors to be waived off in full.
iv) Inventory of 50,000 to be written off , 12,500 to be provided the Bad debts.
v) Profit and Loss account balance, Trademark goodwill and deferred revenue
expenditure to be written off.

Pass Journal Entries for all the above mentioned transactions. Also Prepare Capital
Reduction account and company’s Balance Sheet immediately after reconstruction.

CHAPTER15.
ACCOUNTING FOR BRANCHES INCLUDING FOREIGN BRANCHES
Branch Accounts
A branch is an extension of head office. It is an establishment carrying on either the same or
substantially the same activities as that carried on by Head Office (HO) of the business entity.
The existence of HO is a prerequisite for Branch. The HO is considered as the principal place
of Business.

For accounting purposes, the branches are clarified as given below:

Classification of Branch

Domestic Branches Foreign Branches

Dependent Branches. Independent Branches.

• Debtors method. (Complete set of financial
• Stock and debtors method. Statements prepared)
• Trading, profit and loss method.
• Wholesale margin method.

Dependent Branches:
A dependent branch does not maintain complete set of books of accounts. The branch shall
be under the control of HO. The branch accounts are maintained at HO based on information
received from branch. The goods may be invoiced to branches on any of the following basis:

✓ at cost
✓ at selling price
✓ at arbitrary price
✓ at wholesale price

Accounting for Dependent Branches:

1. Debtors Method
i) When goods are sent at cost:
A separate Branch A/c is maintained for each branch to compute profit or loss from
operations. The branch A/c shall be prepared in a manner similar to Debtors A/c

1) The opening balances of Fixed Assets, stock, Debtors, cash &other assets of
the Branch are debited to Branch A/C
2) The cost of goods sent to Branch are posted on the debit side of Branch A/c
3) The remittance made by HO to Branch for meeting Branch expenses are
debited to Branch A/c
 4) The return of goods by Branch to HO are credited in the Branch A/c
5) The cash remitted by Branch will also be credited
6) The closing balances Fixed Assets, stock, Debtors, cash &other assets of the
Branch are credited to Branch A/c
7) The resulting difference can be either profit or loss
Format of Branch Account when goods are sent at cost

To Balance b/d By Bank A/c (Cash Remitted)

Cash By Goods sent to Branch
Stock (op) (Return to H.O)
Debtors By Balance c/d
Petty cash Cash
Fixed assets Stock (cl)
Prepaid expenses Debtors
To Goods sent to branch Petty cash
To Bank A/c (exp) Fixed assets
Salary Prepaid expenses
Rent By General Profit and loss A/c- Loss
Sundry expenses (If debit side is larger)
To General Profit and loss A/c- profit
(If credit side is larger)

II) When goods are sent to the Branch at Invoice Price

Apart from the above the following entries are to be passed
1) The opening stock is to be presented at IP. Hence a stock reserve is presented on the
credit side
2) The goods sent to branch are to be debited based on IP. Hence the loading is credited
in Branch account
3) The closing stock is presented on the credit side of branch at IP with a stock reserve
on the debit side.
Format of Branch Account (when goods are sent at I.P)

To Balance b/d By Balance b/d

Cash Branch Liabilities
Stock (IP) Stock reserve (opening)
Debtors By Bank A/c (Cash Remitted) 120
Petty cash By Goods sent to Branch
Fixed assets (Loading on goods sent) 20
Prepaid expenses By Goods sent to branch (I.P)
To Goods sent to branch (I.P) 120 (return of goods at I.P)
To Bank A/c (expenses) By Balance c/d
Salary Cash
Rent Stock (IP)
Sundry expenses Debtors
To Goods sent to branch Petty cash
(Loading on return) Fixed assets
To stock reserve (closing) Prepaid expenses
To Profit and loss A/c- profit By Profit and loss A/c- Loss
(If credit side is larger) (If debit side is larger)

2. Stock & Debtors method:

 This methods enable a more detailed control over branch operations. If the Head office
desire to examine a control over day to day operations of the Branch this method is
adopted. The Ledger Accounts to be opened under this method are,
a) Branch stock account
b) Branch Adjustment account (when goods are sent at IP)
c) Goods sent to branch account
d) Branch Expenses
e) Branch cash A/c
f) Branch Debtors A/c
g) Branch Profit & Loss A/c

Journal Entries
1) When goods are sent at cost to branch
Branch Stock A/c Dr
To Goods sent to branch A/c

2) Return of goods sent at cost by branch to HO

Goods sent to branch A/c Dr
To Branch Stock A/c

3) When goods are sent at IP to branch

Branch Stock (IP) A/c Dr
To Goods send to branch (cost) A/c
To Branch Adjustment (Loading) A/c

4) Return of goods sent to branch at Invoice Price from branch to HO

Goods sent to Branch (cost)A/c Dr
Branch Adjustment (loading ) A/c Dr
To Branch Stock (IP) A/c

5) Remittance of cash for expenses

Branch Cash
To Bank / Cash

6) Branch Expenses directly paid by HO

Branch expenses A/c
To Bank /Cash A/c

7) Branch expenses paid by branch

Branch expenses A/c Dr
To Branch Cash A/c

8) Cash sales made by branch

Branch Cash A/c Dr
To Branch Stock A/c

9) Credit sales made by branch

Branch Debtors A/c Dr
To Branch Stock A/c

10) Collection from branch debtors by branch

Branch cash A/c Dr
To Branch Debtors A/c

11) Sales return by branch debtors to branch

 Branch stock A/c Dr
To Branch Debtors A/c

12) Collection from branch debtors by Head Office

Bank / Cash
To Branch Debtors A/c

13) Discount / Bad debts on branch debtors

Branch Expenses A/c Dr
To Branch Debtors A/c

14) Opening stock reserve for Unrealized Profit

Stock reserve A/c Dr
To Branch Adjustment A/c

15) Closing stock reserve

Branch Adjustment A/c Dr
To Stock Reserve A/c

16) Abnormal Loss in branch stock (Good sent at IP)

Abnormal Loss A/c Dr
Branch Adjustment A/c Dr
To Branch stock A/c
Note: The abnormal loss account will be transferred to Branch P&L

17) Transfer of Branch Expenses to branch P&L

Branch Profit & Loss A/c Dr
To Branch Expenses

18) Transfer of Branch Adjustment A/c

Branch Adjustment A/c Dr
To Branch Profit & Loss A/c

19) Transfer of Branch Profit

Branch Profit & Loss A/c Dr
To General Profit & Loss A/c

3. Branch Trading Profit and loss account method

The trading profit and loss account are prepared for each branch separately. This method
gives complete financial information about branch operations.
The account is prepared only on a memorandum basis. Hence the entries made in trading
profit and loss account will not have double entry effect.
While preparing branch trading profit and loss account the following are accounted based on
cost price;
1) Opening stock
2) Goods sent branch
3) Goods returned by branch
4) Closing stock

ACCOUNTING FOR INDEPENDENT BRANCHES

When the size of the business is large, the branch maintains complete records of its
transactions. These branches are called independent branches. Each independent branch
maintains comprehensive account books for recording their transactions; therefore, a separate
trial balance of each branch can be prepared. The head office maintains one ledger account
for each such branch, wherein all transactions between the head office and the branches are
recorded.
Journal entries
1) Goods sent to Branch by the Head office
Books of HO Books of Branch
Branch A/c Dr Goods from HO A/c Dr
To Goods sent to Branch A/c To Head office A/c

2) Return of goods from Branch to HO

Books of HO Books of Branch
Goods sent to Branch A/c Dr Head office A/c Dr
To Branch A/c To Goods from H O A/c

3) Remittance of cash by HO to Branch

Books of HO Books of Branch
Branch A/c Dr Bank A/c Dr
To Bank A/c To Head office A/c

4) Branch expenses paid by HO

Books of HO Books of Branch
Branch A/c Dr Expense A/c Dr
To Bank A/c To Head Office A/c

5) Branch expenses paid by Branch

Books of HO Books of Branch
No entry Expense A/c Dr
To Bank A/c

6) Cash sales or credit sales made by the Branch

Books of HO Books of Branch
No entry Bank A/c or Cash A/c or Debtors A/c Dr
To Sales A/c

7) Collection from Branch debtors by the Branch

Books of HO Books of Branch
No entry Bank A/c or Cash A/c Dr
To Debtors A/c

8) Collection from Branch debtors by HO

Books of HO Books of Branch
Bank or Cash A/c Dr Head office A/c Dr
To Branch A/c To Debtors A/c

9) Payment made by HO for Purchases of Branch

Books of HO Books of Branch
Branch A/c Dr Purchases A/c Dr
To Bank A/c To Head office A/c

10) Asset purchased by Branch

Books of HO Books of Branch
No entry Assets A/c Dr
To Bank or Vendor A/c
 11) Asset purchased by Branch but records maintained at HO
Books of HO Books of Branch
Branch Asset A/c Dr Head office A/c Dr
To Branch To Bank or Vendor A/c

12) Depreciation on Asset purchased by Branch but records maintained at HO

Books of HO Books of Branch
Branch A/c Dr Depreciation A/c Dr
To Branch Asset To Head office A/c

13) Remittance of cash by Branch to HO

Books of HO Books of Branch
Bank A/c Dr Head office A/c Dr
To Branch A/c To Bank A/c

14) Remittance of cash by Branch A to Branch B

Books of HO Books of Branch A
Branch B A/c Dr Head office A/c Dr
To Branch A A/c To Bank A/c
Books of Branch B
Bank A/c Dr
To Head office A/c

Foreign Branch:
The branches located outside the country of reporting enterprise (HO) maintain accounts in
foreign currency. The foreign branches generally maintain complete set of books of accounts.
Hence the given foreign trial balance of the branch is converted to the currency of the reporting
enterprise.
There after the financial statements are prepared as in the case of domestic branches. For
the purpose of translation of foreign currency based trial balance AS-11 will apply in case of
an Indian entity.
As per AS-11, the foreign operations are divided as integral foreign operation and non-integral
foreign operation.

Integral foreign operation

The activities of foreign operation form an integral part of operations of reporting enterprise.
The business operations are carried on as if it were an extension of the reporting enterprise’s
operations.
Eg: Sale of goods received from HO and remittance of proceeds.
The foreign Trail Balance of branch shall be converted using the following exchange rates:
Particulars Exchange Rate
Opening stock and others Opening Balances Opening exchange Rate
Exchange rate on the date of
Purchase, Sales, Expenses and Income
transaction or Average Rate
Closing Balances Closing Rate
Exchange rate on date of
Fixed Asset and Depreciation
Acquisition
Head office A/c and Goods received from Head
Amount as per Head office books
office
The resulting exchange difference will be transferred to Profit & Loss
 Non – integral foreign operation
Accounts of non-integral foreign operation are translated using the following principles:

• Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary – apply
closing exchange rate.

• Items of income and expenses – At actual exchange rates on the date of transactions.
However, accounting standard allows average rate subject to materiality.

• The resulting exchange rate difference should be accumulated in a “foreign currency

translation reserve” until the disposal of “net investment in non - integral foreign operation

1. BV Bros, Mumbai have a branch at Chennai. They send goods at cost to their branch at Chennai.
However, direct purchases are also made by the branch for which payments are made at head office.
All the daily collections are transferred from the branch to the head office.
From the following, prepare Chennai branch account in the books of head office by Debtors method:

Opening balance 1-1-2020

Imprest Cash 4,000
Bad Debts 2,000
Sundry Debtors 50,000
Discount to Customers 4,000
Stock: Transferred from H.O. 48,000
Remittances to H.O.
Direct Purchases 32,000
(received by H.O.) 3,30,000
Cash Sales 90,000
Remittances to H.O.
Credit Sales 2,60,000
(not received by H.O. so far) 10,000
Direct Purchases 90,000
Branch Expenses Directly paid 30,000
Returns from Customers 6,000
by H.O.
Goods Sent to branch From H.O. 1,20,000
Closing Balance (31-12-2020)
Transfer From H.O. for petty 8,000
Stock: (From)Direct Purchase 20,000
Cash Exp. Transfer from H.O. 30,000
Debtors ?
Imprest Cash ?
Note: The imprest cash balance at the branch should be assumed as same at the end of the
accounting year.

2. KDK Ltd., Chennai has a branch at Kochi to which goods are sent @20% above cost. The
branch makes both Cash and credit sales. Branch expenses are met partly from H.O. and partly
by the branch. The statement of expenses incurred by the branch every month is sent to head
office for recording.
Following further details are given for the year ended 31st December, 2020.

Cost of goods sent to Branch at cost 3,00,000

Goods received by Branch till 31-12-2020 at invoice price 3,30,000
Credit Sales for the year @ invoice price 2,47,500
Cash Sales for the year @ invoice price 88,500
Cash Remitted to head office 3,33,750
Expenses paid by H.O. 18,000
Bad Debts written off 1,125
Balance as on 01-01-2020 31-12-2020

Stock 37,500 (Cost) 42,000(IP)

Debtors 49,125 39,000
Cash in Hand 5,000 3,750
Prepare Branch A/c in the books of the head office and determine the Profit and Loss of the Branch
for the year ended 31st December, 2020.

3. M/s SW Enterprises who carried on a retail business opened a branch in Jaipur on 1st January
2021 where all the sales were on credit basis. All goods required by the branch were supplied
from the head office and were invoiced to the branch at 10% above cost.
JAN 2021 FEB 2021 MAR 2021

Goods send to branch (purchase 1,20,000 1,50,000 1,80,000

price)
Sales as shown by branch 1,14,000 1,26,000 1,65,000
monthly report
Cash received from debtors and 60,000 1,53,000 1,05,000
remitted to head office
Returns to H.O(Invoice price to 3,600 1,800 7,200
branch)

The stock of goods held by the branch on 31 st March 2021 amounted to 1,60,200 at invoice
to branch. Record these transactions in the books of head office, showing balance as on 31 st
March 2021 and the branch gross profit for the three months ended on that date.
All workings should form part of your solution.

4) Patel & Co. of Delhi has a branch at Ludhiyana. Goods are invoiced to the branch at cost
plus 25%. The branch is instructed to deposit the receipts every day in the head office account
with the bank. All the expenses are paid through cheque by the head office except petty cash
expenses which are paid by the Branch.
From the following information, you are required to prepare Branch Account for the year 2020-
21 in the books of Head office:
Particulars Balance as on Balance as on
01-04-2020 31-03-2021
Branch stock at Invoice price 3,28,000 3,84,000
Debtors 1,26,800 1,68,600

Furniture & fixtures as on 01-04-2020 93,600

Cash sales 16,05,200
Credit sales 14,88,400
Goods invoiced to branch by head office 25,12,000
Expenses paid by head office 5,28,000
Petty expenses paid by the branch 41,800
Furniture acquired by the branch on 01-10-2020 10,000
(payment was made by the branch from cash sales and
collection from debtors)

Depreciation is to be provided on branch furniture & fixtures @ 10% p.a. on WDV basis.

5. Hindustan Industries Mumbai has a branch in Cochin to which office goods are invoiced at cost
plus 25%. The branch sells both for cash and on credit, Branch Expenses are paid direct from head
office and the Branch has to remit all cash received into the Head Office Bank Account.
From the following details, relating to calendar year 2013, prepare the accounts in the Head Office
Ledger and ascertain the Branch Profit. Branch does not maintain any books of account, but sends
weekly returns to the Head Office:
 Goods received from Head Office at invoice price 6,00,000
Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st Jan., 2013 60,000
Sales in the year-Cash 2,00,000
Credit 3,60,000
Sundry Debtors at Cochin as on 1st Jan. 2013 72,000
Cash received from Debtors 3,20,000
Discount allowed to Debtors 6,000
Bad Debts in the year 4,000
Sales returns at Cochin Branch 8,000
Rent, Rates, Taxes at Branch 18,000
Salaries, Wages, Bonus at Branch 60,000
Office Expenses 6,000
Stock at Branch on 31st Dec. 2013 at invoice price 1,20,000

6. Ram Limited of Chennai has a branch at Nagpur to which office goods are invoice at cost
plus 25%. The branch makes sales both for cash and on credit. Branch expenses are paid
direct from Head Office and the branch has to remit all cash received into the Head Office
Bank Account at Nagpur.
From the following details relating to the year 2015 prepare the accounts in Head Office
Ledger and ascertain Branch Profit as per stock and debtors method. Branch does not
maintain any books of accounts but sends weekly return to head office

Goods received from head office at invoice price 1,20,000

Returns to head office at invoice price 2,400
Stock at Nagpur branch on 1.1.2015 at invoice price 12,000
Cash Sales during the year 40,000
Credit Sales during the year 72,000
Debtors at Nagpur branch as on 1.1.2015 14,400
Cash received from debtors 64,000
Discounts allowed to debtors 1,200
Bad debts during the year 800
Sales returns at Nagpur branch 1,600
Salaries and wages at branch 12,000
Rent, rates and taxes at branch 3,600
Office expenses at Nagpur branch 1,200
Stock at branch on 31.12.2015 at invoice price 24,000

7.Using the stock and debtors system find out the profit or loss made at Kolkata branch in
2020
Stock (1st January ) invoice price 72,000
Branch debtors (1st January ) 37,200
Goods sent to the branch (invoice price ) 2,10,000
Goods returned by the branch (invoice price ) 6,000
Sales :
Credit 1,26,000
Cash 1,20,000
Goods returned by customers 3,600
Cash received from debtors 1,18,800
Discount allowed to them 1,800
Cash send for expenses at the branch 36,600
Shortage of goods at the branch (invoice price ) 2,400
Goods are invoiced to the branch at a selling price so as to show a profit of 30% on invoice
price.

8. Positive Ltd. having head office at Mumbai has a branch at Chennai. The Head Office does
wholesale trade only at cost plus 80%. The goods are sent to branch at the wholesale price viz.,
Cost plus 80%. The branch at Nagpur is wholly engaged in retail trade and the goods are sold at
cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 2021:
Head Office Branch

Opening Stock (as on 1.4.2020) 4,50,000 ---

Purchases 51,00,000 ---
Goods sent to Branch 19,08,000 ---
(Cost to Head office plus 80%)
Sales 55,62,000 19,00,000
Office expenses 1,80,000 17,000
Selling expenses 1,44,000 12,600
Staff Salary 1,30,000 24,000

You are required to prepare Trading and Profit and Loss Account of the Head Office and Branch
for the year ended 31st March, 2021.

9) Following is the information of the Amirstar branch of AJS ltd, New Delhi for the year ending 31
st March 2021
1) Goods are invoiced to the branch at cost plus 20%
2) The sale price is cost plus 50%
Other information

Stock on 01-04-2020 3,08,000

Goods sent during the year 15,40,000
Sales during the year 16,80,000
Expenses incurred at the branch 63,000
Ascertain:
i) The profit earned by the branch during the year
ii) Branch stock reserve in respect of unrealized profit

10. Bismi Enterprises Delhi has a branch in London. London branch is an integral foreign
operation of Bismi Enterprises. At the end of the year 31st March, 2020 the branch furnishes
the following trial balance in U.K. Pound:
Particulars £ £
Dr. Cr.
Fixed assets (Acquired on 1st April, 2016) 24,000
Stock as on 1st April, 2019 11,200
Goods from head office 64,000
Expenses 4,800
Debtors 4,800
Creditors 9,200
Cash at bank 1,200
Head office account 22,800
Purchases 18,000
 Sales 96,000
Total 1,28,000 1,28,000

In head office books, the branch account stood as shown below:

London Branch A/c
Particulars Amount Particulars Amount

To Balance b/d 20,10,000 By Bank A/c 52,16,000

To Goods sent to branch 49,26,000 By Balance c/d 17,20,000
Total 69,36,000 69,36,000

The following further information are given:

(a) Fixed assets are to be depreciated @ 10% p.a on written down value basis.
(b) On 31st March, 2020 :
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange:
1st April, 2016 - 70 to £ 1
1st April, 2019 - 78 to £ 1
31st March, 2020 - ₹ 93 to £ 1
Average - 85 to £ 1
You are required to prepare:
(i) Trial balance, incorporating adjustments of outstanding and prepaid expenses, converting
U.K. pound into Indian rupees.

(ii) Trading and profit and loss account for the year ended 31st March, 2020 and the Balance
Sheet as on that date of London branch as would appear in the books of Delhi head office of
Bismi Enterprises.

11. M/s Heera & Co. has head office at U.S.A. and branch in Patna (India). Patna branch is
an integral foreign operation of Heera & Co.
Patna branch furnishes you with its trial balance as on 31st March, 2016 and the additional
information given thereafter:
Particulars Dr. Cr.
in in
thousands thousands
Stock on 1st April, 2015 300 ----
Purchases and sales 800 1200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560 ----
Rent, rates and taxes 360 ----
Sundry charges 160 ----
Computers 240 ----
Bank balance 420 ----
New York office a/c ---- 1,620
3,360 3,360

Additional information:
(a) The computer was acquired from a remittance of US $ 6,000 received from USA head
office and paid to the suppliers. Depreciate computer at 60% for the year.

(b) Unsold stock of Patna branch was worth 4,20,000 on 31st March, 2016.
(c) The rates of exchange may be taken as follows:

- On 01.04.2015 @ 55 per US $

- On 31.03.2016 @ 60 per US $

- Average exchange rate for the year @ 58 per US $

- Conversion in $ shall be made up to two decimal accuracy.

You are asked to prepare in US dollars the revenue statement for the year ended 31st March,
2016 and the balance sheet as on that date of Patna branch as would appear in the books of
USA head office of Heera & Co. You are informed that Patna branch account showed a debit
balance of US $ 29,845.35 on 31.3.2016 in USA books and there were no items pending
reconciliation.

12) ABCD Ltd., Delhi has a branch in New York, USA, which is an integral foreign operation of
the company. At the end of 31st March, 2013, the following ledger balances have been extracted
from the books of the Delhi office and the New York Branch:
Delhi New York
Particulars ( in thousands) ($ thousands)
Debit Credit Debit Credit
Share Capital 1,250
Reserves and Surplus 940
Land 475
Building (cost) 1,000
Buildings Depreciation Reserve 200
Plant & Machinery (cost) 2,000 100
Plant & Machinery Depreciation Reserve 500 20
Trade receivables/payables 500 270 60 20
Stock (01-04-2012) 250 25
Branch Stock Reserve 65
Cash & Bank Balances 125 4
Purchases/Sales 275 600 25 125
Goods sent to Branch 1,500 30
Managing Director’s salary 50
Wages & Salaries 100 18
Rent 6
Office expenses 25 12
Commission receipts 275 100
Branch/ H.O current A/c 800 15
Total
5,600 5,600 280 280
The following information is also available:
(1) Stock as at 31-03-2013
Delhi – 2,00,000
New York - $ 10 (all stock received from Delhi)
(2) Head Office always sent goods to the Branch at cost plus 25%.
(3) Provision is to be made for doubtful debts at 5%.
(4) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20% on
written down values.
 You are required:
(a) To convert the branch Trial Balance into rupees, using the following rates of
exchange:
Opening rate 1 $ = 50
Closing rate 1 $ = 55
Average rate 1 $ = 52
For fixed assets 1 $ = 45

(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March, 2013,
showing to the extent possible, Head Office results and Branch results separately.

13.
Artis Limited has a branch at Seattle USA. Its Trial Balance as on 31thDecember 2022 is as
follows:
Particulars Dr. Cr.
Amount in $ Amount in
$
Stock on 1st January 2022 22,000 ----
Purchases and sales 1,00,000 1,30,500
Goods from HO 30,000
Wages and salaries 4,000 ----
Head office A/c 27,000
Sundry Debtors 2,200 ----
Sundry Creditors 1,500
Bank balance 800 ----
1,59,000 1,59,000

The following information is given:

(i) Salaries outstanding are $ 500.
(ii) The Head Office sent goods to Branch for ₹24,00,000.
The exchange rates were as below:
On 1st January 2022 - ₹79 to 1$
On 31st December 2022- ₹83 to 1 $
Average rate during the year was ₹79.50 to 1 $

(iii) The Head Office shows an amount of ₹21,90,000 due from Branch.

You are required to prepare the Seattle Branch Trial Balance incorporating adjustments
given above, converting dollars into rupees.

14. Give journal Entries in the books of Amirstar Branch to rectify or adjust the following:
i. Head Office expenses 20,500 allocated to the Branch, but not recorded in the Branch
Books.

ii. Depreciation of branch assets, whose accounts are kept by the Head Office not provided
for 15,000

iii. Branch paid 25,000 as salary to a H.O. Inspector, but the amount paid has been debited
by the Branch to Salaries Account

iv. H.O. collected 40,000 directly from a customer on behalf of the branch, but no intimation
to this effect has been received by the Branch
 v. A remittance of 15,000 sent by the Branch has not yet been received by the Head office.

vi. Amirstar Branch incurred advertisement expenses of 9,500 on behalf of branch Bikaner.

15. Kisan ltd has four branches in Delhi, Mumbai, Chennai and Kolkata. Show adjustment journal
entry in the books of head office at the end of April 2020 for incorporation of inter branch transactions
assuming that only Head office maintains different branch accounts in its books.

A. Delhi branch:
1) Received goods from Mumbai branch 70,000 and 30,000 from Kolkata.
2) Sent goods to Chennai 50,000, Kolkata 40,000
3)Bills receivable received 40,000 from Chennai.
4) Acceptances sent to Mumbai 50,000, Kolkata 20,000

B. Mumbai branch ( apart from the above )

5) Received goods from Kolkata 30,000, Delhi 40,000
6) Cash sent to Delhi 30,000, Kolkata 14,000

C. Chennai branch ( apart from the above )

7) Received goods from Kolkata 60,000
8) Acceptances and cash sent to Kolkata – 40,000 and 20,000 respectively

D. Kolkata branch ( apart from the above)

9) Sent goods to Chennai 70,000
10) Paid cash to Chennai 30,000
11)Acceptances sent to Chennai 30,000

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