Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Gurukripas Guideline Answers to Nov 2014 Exam Questions

CA Final FINANCIAL REPORTING
Question 1 is compulsory (4 5 = 20 Marks)
Answer any five questions from the remaining six questions (16 5 = 80 Marks). [Answer any 4 out of 5 in Q.7]

Question 1 (a): AS 22 DTA / DTL Recognition

5 Marks
From the given information, you are required to compute the Deferred Tax Assets and Deferred Tax Liability for Ramanujam
Limited as on 31st March 2014. The tax rate applicable is 35%.
(i) The Company has charged Depreciation of ` 7,42,900 in its Books of Accounts while as per Income Tax computation, the
Depreciation available to the Company is ` 8,65,400.
(ii) The Company has made Provision for Doubtful Debts for ` 54,300 during the year.
(iii) The Company has debited Share Issue Expenses of ` 6,23,500 which will be available for deduction under the Income Tax
Act from the next year.
(iv) The expenses of ` 7,84,500 has been charged to Profit and Loss Account which are disallowed under the Income Tax Act.
(v) The Company has made Donation of ` 2,00,000 which has been debited to Profit and Loss Account and only 50% thereof
will be allowed as deduction as per Income Tax Law.
Solution:
Similar to Page No.22.6, Q.No.13 of Padhukas Students Referencer on Accounting Standards [N 04, N 05]
Computation of DTA / DTL (`)
Adj. Net Amt Nature of
Treatment
DTA/DTL
Diff.
at 35%
Profit before Tax as per Books
XXX
Add: Depreciation as per Books
7,42,900
Difference originating in the current
(42,875)
Less: Depreciation as per IT
(8,65,400) (1,22,500) Timing year. So, Create DTL.
Add: Provision disallowed in IT
(54,300) Permanent
Ignored
NA
Add: Share Issue Exp. Disallowed
Difference originating in the current
6,23,500 Timing
2,18,225
u/s 35D
year. So, Create DTA.
Add: Expense Disallowed under IT
7,84,500
Permanent
Ignored
NA
(assumed to be permanent diff)
Add: Donation (50% of 2 Lakhs)
1,00,000 Permanent
Ignored
NA
Total Income
XXX
Description

Question 1 (b): AS 17 Segment Reporting

5 Marks
ABC Limited has three segments, viz. A,B, and C. The Total Assets of the Company is ` 15 Crores. The Assets of Segment A is
` 1.85 Crores, Segment B is ` 6.15 Crores and Segment C is ` 7.00 Crores. Assets of each Segments include Deferred Tax
Assets of ` 0.50 Crores in A, ` 0.40 Crores in B and ` 0.30 Crores in C. The accountant of ABC Limited contends that all
segments are reportable segments. Based on Segments Assets Criteria, determine the veracity of the contention of the
Accountant.
Solution:
Same as Page No. 17.9, Q. No. 21 of Padhukas Students Referencer on Accounting Standards [N 08]
1.

Segment Assets do not include Income Tax Assets. Therefore, the Revised Total Assets is [`15 Crores (0.5+0.4+0.3)]
= ` 13.8 Crores, which is analysed as under
A
B
C
Total

Assets excluding DTA

1.85 0.5 = 1.35
6.15 0.4 = 5.75
7.00 0.3 = 6.70
13.80
Nov 2014.1

Percentage of Total
9.78%
41.67%
48.55%
100.00%

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

2.
3.

Segment A holds only less than 10% of Total Assets and hence not a reportable segment.
Segment B and C having more than 10% of Total Assets are reportable segments.
Therefore, contention of the Accountant that all are reportable segments is wrong.

Note: However, if Segment A was a Reportable Segment in the earlier year, it will continue as a Reportable Segment, based
on Continuity Principle [Para 31].

Question 1 (c): AS 26, 28 Intangible Assets

5 Marks
Sunny Limited is developing a new production process. During the financial year ended 31st March 2013, the Company has
incurred total expenditure of ` 40 Lakhs on the process. On 1st December 2012, the process has met the norms to be
recognized as Intangible Assets, and the expenditure incurred till that date is ` 16 Lakhs. During the financial year ending on
31st March 2014, the Company has further incurred ` 70 Lakhs. The Recoverable Amount as on 31st March 2014 of the process
is estimated to be ` 62 Lakhs. You are required to work out:
(i) Expenditure to be charged to Profit and Loss Account for the financial year ending on 31st March 2013 and 31st March 2014
(ignore Depreciation)
(ii) Carrying Amount of the Intangible Assets as at 31st March 2013 and 31st March 2014.
Solution:
Same as Page No. 26.13, Q. No. 35 of Padhukas Students Referencer on Accounting Standards [M 08]
1.

Expenditure charged to P&L for 20122013: ` 16 Lakhs will be recognized as an Expense because the
recognition criteria were not met until 1st December 2012. This expenditure will not form part of the cost of the
Production Process recognized in the Balance Sheet.

2.

Carrying Amount of Intangible Asset as on 31.03.2013: The Production Process will be recognized (i.e.
Carrying Amount) as an Intangible Asset at a cost of ` 24 Lakhs (i.e. expenditure incurred till the date in which
recognition criteria were met, i.e. Total during FY 201213 ` 40 Lakhs less Expenses upto 1st Dec 2012 ` 16 Lakhs).

3.

Expenditure charged to P&L A/c for 20132014:

Particulars
Book Value on 31.3.2014 = Carrying Amt on 31.3.2013 + Expenditure in 20132014 = 24 + 70
Less: Recoverable Amount
Impairment Loss to be charged to P&L A/c

4.

` Lakhs
94
62
32

Carrying Amount of Intangible Asset as on 31.03.2014: The Production Process will be shown at Book Value
` 94 Lakhs, or Recoverable Amount ` 62 Lakhs, whichever is less, hence at ` 62 Lakhs as above.

Question 1 (d): Schedule III Disclosure

5 Marks
XYZ Limited is having the following Fixed Deposit Receipts:
Bank
Date of FDR
Maturity Date
Amount
Axis Bank Limited
01Jan14
30Apr15
10,00,000
Punjab National Bank
01Jan14
30Jun14
15,00,000
State Bank of India
28Feb14
30May14
10,00,000
ICICI Bank
31Jan13
31Jan15
10,00,000
Prepare Notes to Accounts showing the above Deposits in accordance with the requirements of Revised Schedule III.

Solution:
Refer Page No. 1.22 Point 2 (d) of Padhukas Students Guide on Financial Reporting
Note X: Cash & Bank Balances as on 31.03.2014 (Balance Sheet Date)
Particulars
(A) Cash in Hand
(B) Balances with Bank
(i) Less than 12 Months Maturity.
Cash Equivalent as per AS3 (less than 3 Months Maturity)
Other Bank Balances
(ii) More than 12 Months Maturity

Nov 2014.2

(`)
xxx

25,00,000
10,00,000
10,00,000
45,00,000

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Question 2: Amalgamation Purchasing Co. holding in Selling Company

16 Marks
The Summarised Balance Sheet of S Limited and H Limited as on 30th June 2014 were as follows: (` Crores)
Particulars
S Limited
H Limited
Equity and Liabilities
Equity Share Capital
80
25
Reserves and Surplus
400
75

25
10%, 25,00,000 Debentures of ` 100 each
Noncurrent Liabilities: Other Liabilities
120

Current Liabilities
356
200
Total Liabilities
956
325
Assets
Fixed Assets(at cost)
200
75
Less: Depreciation
100
100
50
25
Investment in H Limited
32
2 Crores Equity Shares of ` 10 each at cost
24
56

10% 25,00,000 Debentures of ` 100 each at cost

Current Assets
800
300
Total Assets
956
325
In a duly approved scheme of absorption, S Limited took over the assets of H Limited at an agreed value of ` 330 Crores and
the Liabilities were taken over at Book Value. Other Shareholders of H Limited were allotted Equity Shares in S Limited at a
premium of ` 90 per share in satisfaction of their claim. S Limited valued the Fixed Assets taken over at ` 40 Crores and all
other Assets and Liabilities were recorded at Book Value. The scheme of absorption was completed on 1st July 2014.
You are required to:
(i) Pass necessary Journal entries in the books of S Limited to record the transactions.
(ii) Prepare the Balance Sheet of S Limited after absorption in the Schedule III format along with Notes to accounts.
Solution:
Refer Illustrations in Page No. 2.55 to Page No.2.71 of Padhukas Students Guide on Financial Reporting
Selling Co : H Ltd
Buying Co : S Ltd

1. Basic Information
Date of B/S: 1st July
Nature of Amalgamation:
Purchase (Since Assets are revalued for takeover)
Date of Amg: 1st July
2. Net Assets Taken over
Particulars

Less:

Assets taken over

Liabilities taken over

` Crores

Debentures
Current Liabilities

Net Assets Taken over

Since Purchasing Company S Ltd. Holds (` 20 Crores out of ` 25 Crores) = 80% of H Ltd. Shares, Outsiders
Share of Interest (Minority Interest = 20%=`15 Crores)
Purchase Consideration is paid in the form of Equity Shares of ` 10 each at ` 90 Premium.
Value per Share = ` 100. Hence 15 Lakhs Shares ` 100 = `15 Crores.
3. Journal Entries in the Books of S Ltd (` Crores)
Particulars
1. Business Purchase A/c
Dr.
To Liquidator of H Ltd A/c
(Being Purchase Consideration Due on a scheme of amalgamation pursuant to HC Order
No. ___ dated ___)
2. Liquidator of H Ltd A/c
Dr.
To Equity Share Capital A/c
To Securities Premium A/c
(Being Discharge of Purchase Consideration by issue of 15 Lakhs Equity Shares of ` 10
each at a premium of ` 90)
Nov 2014.3

Debit
15.00

330.00
(25.00)
(200.00)
75.00
15.00

Credit
15.00

15.00
1.50
13.50

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Particulars
3. Fixed Assets A/c (at given value)
Current Assets A/c
To 10% Debentures A/c
To Current Liabilities A/c
To Investments A/c (Cancellation of Investment in Equity Shares of H Ltd.)
To Business Purchase A/c
To Capital Reserve A/c (Bal. Fig)
(Being Assets and Liabilities taken over)
4. 10% Debentures A/c
To Investment in H Ltd (in Debentures)
To Capital Reserve
(Being Cancellation of Debentures on takeover)

I
(1)

(2)
(3)
II
(1)
(2)

Debit
40.00
300.00

Dr.
Dr.

25.00
200.00
32.00
15.00
68.00
Dr.

25.00
24.00
1.00

4. Balance Sheet of S Ltd as on 1st July (` Crores)

Particulars as at 1st July
Note
EQUITY AND LIABILITIES
Shareholders Funds:
(a) Share Capital
1
(b) Reserves & Surplus
2
NonCurrent Liabilities:
Other Liabilities
Current Liabilities:
(` 356 + ` 200)
Total
ASSETS
NonCurrent Assets:
Fixed Assets (100 + 40)
Current Assets
(` 800 + ` 300)
Total

Notes to the Balance Sheet:

Authorised:

Credit

Note 1: Share Capital (` Crores)

Particulars

This Year

Prev. Yr

81.50
482.50
120.00
556.00
1240.00
140.00
1100.00
1240.00

This Year

Prev. Year

Equity Shares of ` . each

Issued, Subscribed & Paid up: 8.15 Crores Equity Shares of ` 10 each
(Of the above Shares, 75 Lakhs Shares are allotted for consideration other than cash)
Total

81.50
81.50

Note 2: Reserves and Surplus (` Crores)

Particulars
Add:

Free Reserves

Opening Balance
Arising on Amalgamation
Closing Balance
Total

400.00
Nil
400.00

Securities
Premium
Nil
13.50
13.50
482.50

Capital Reserve
Nil
68.00 + 1.00
69.00

Question 3: Consolidation of Financial Statements

16 Marks
HIM Limited is a Company carrying on the business of beauty products and is having a subsidiary SIM Limited. Their
Balance Sheet as on 31st March 2014 were as under:
HIM Limited
SIM Limited
Shareholders Fund
Share Capital
25,00,000
5,80,000
Reserves and Surplus
General Reserves
2,00,000
1,20,000
Profit and Loss Account
3,12,500
2,05,000
Nov 2014.4

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

HIM Limited

SIM Limited

4,55,000

2,35,500

28,000

83,000

34,95,500

12,23,500

21,70,000

6,25,000

5,10,000

Current Liabilities
Trade Payable
Bills Payable
Total Liabilities
Assets
A. NonCurrent Assets
1.

Fixed Assets

2.

Noncurrent Investments (4060 Shares in SIM Limited)

B. Current Assets
Inventories

4,80,000

3,19,200

Trade Payable

1,80,000

1,64,000

Bills Receivable

68,000

1,00,000

Cash and Bank Balances

87,500

15,300

34,95,500

12,23,500

Total Assets

HIM Limited has also given the following information:

(i) HIM Limited has acquired the shares in SIM Limited in two lots on two different dates. The relevant information at the time
of acquisition of shares was as under:
No. of Shares acquired
Balance in General Reserves
Balance in Profit and Loss Account
1st Acquisition 3480
80,000
25,000
nd
2 Acquisition 580
85,000
1,02,000
(ii) Bill Receivable of HIM Limited includes ` 15,000 being acceptance from SIM Limited.
(iii) Both the Companies have declared dividends of 10% for the year ended on 31st March 2014, but it has not been provided in
the books of accounts.
(iv) SIM Limiteds Inventory includes Stock of ` 1,45,000 purchased from HIM Limited. HIM Limited sells goods at Markup of
25% on its cost.
Prepare the Consolidated Balance Sheet of HIM Limited along with Notes to Accounts.
Solution:
Similar to Page No. 3.91 Q.No. 35 of Padhukas Students Guide on Financial Reporting [N 00 (Mod.), N 13 (Mod.)]

Company Status
Holding Company
= HIM Ltd
Subsidiary Company
= SIM Ltd

1. Basic Information
Date of Acquisition: 31.03.2014
1st Acquisition = 3480 Shares
1st Acquisition = 580 Shares

Holding Status
2nd Acquisition
1 Acquisition
60%
10%
st

Date of Consolidation = 31.03.2014

2. Analysis of Reserves (`)
(a) General Reserve Account
Balance as per B/s ` 1,20,000
1st Acquisition = ` 80,000

2nd Acquisition = ` 5,000

PostAcquisition = ` 35,000

(a) HIM:

(a) HIM:

(a) HIM: 70% ` 24,500 Postacqn

60% ` 48,000 Preacqn

10% ` 8,000 Preacquisition
(b) Minority: 30% ` 24,000

60% ` 30,000 Postacqn

10% ` 500 Preacquisition
(c) Minority: 30% ` 1,500

(b) Minority: 30% ` 10,500

Nov 2014.5

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

(b) Profit & Loss Account
Balance as per B/s ` 2,05,000
1st Acquisition = ` 25,000

2nd Acquisition = ` 77,000

(a) HIM:

(a) HIM:

PostAcquisition = ` 1,03,000
(a) HIM: 70% ` 72,100 Postacqn

60% ` 15,000 Preacqn

60% ` 46,200 Postacqn

10% ` 2,500 Preacquisition

(b) Minority: 30% ` 7,500

10% ` 7,700 Preacquisition

(b) Minority: 30% ` 23,100

(b) Minority: 30% ` 30,900

3. Other Adjustments
Particulars
(a) Interunit owings cancelled
Bills Payable A/c
To Bills Receivable A/c
(Being Interunit owings cancelled)
(b) Dividend declared to be provided in Books
Profit & Loss A/c
To Dividend Payable A/c
(Being provision for dividend to be declared)
(c) Unrealised Profit on Downstream Transaction (Note)
Profit & Loss A/c [HIM Ltd]
To Closing Stock
(Being Elimination of Unrealised Profit in Closing Stock)

Debit
Dr.

Credit

15,000
15,000

Dr.

2,50,000
2,50,000

Dr.

29,000
29,000

Note: HIM Ltd sold to SIM Ltd = Profit = 25% on Cost = 1/5 on Sale Price = 1/5 on ` 1,45,000 = ` 29,000
4. Minority Interest
Particulars

(` )
1,74,000
97,500
2,71,500

(a) Share Capital [` 5,80,000 30%]

(b) Preacquisition Reserve & Postacquisition Reserve [24,000 + 1,500 + 10,500 + 7,500 + 23,100 + 30,900]
Total
5. Cost of Control
Particulars
Less:

(` )
5,10,000

Cost of Investments
Share in Net Assets
(a) Share Capital (` 5,80,000 70%)
(b) PreAcquisition Profit (48,000 + 15,000 + 12,500 + 7,700 + 8,000 + 500)
Goodwill

(4,06,000)
(81,700)
22,300

6. Consolidated Balance Sheet of HIM Ltd SIM Ltd as at 31.03.2014

Particulars as at 31st March
Note
This Year
I
(1)

EQUITY AND LIABILITIES

Shareholders Funds:
(a) Share Capital

25,00,000

(b) Reserves & Surplus

3,79,300

(2)

Minority Interest

(3)

Current Liabilities
Trade Payables

2,71,500
Creditors (4,55,000 + 2,35,500)
Bills Payable (28,000 + 83,000 15,000)
Dividends Payable

6,90,500
96,000
2,50,000

Total

41,87,300
Nov 2014.6

(`)
Prev. Yr

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Particulars as at 31st March
II

ASSETS

(1)

NonCurrent Assets
Fixed Assets:

Note

(i) Tangible Assets (21,70,000 + 6,25,000)

Prev. Yr

2,79,500

(ii) Intangible Assets Goodwill on Consolidation

(2)

This Year

22,300

Current Assets
(a) Inventories (4,80,000 + 3,19,200 29,000)

7,70,200

(b) Trade Payables (1,80,000 + 1,64,000)

3,44,000

(c) Bills Receivable (68,000 + 1,00,000 15,000)

1,53,000

(d) Cash & Cash Equivalents (87,500 + 15,300)

1,02,800

Total

41,87,300

Working Notes:
1.

Balance Sheet items have been consolidated on linebyline addition basis.

2.

InterCompany Owings (Trading Liabilities and Debentures) have been eliminated in full.
Notes to the Balance Sheet (`)
Note 1: Share Capital
Particulars

This Year

Prev. Year

Authorised: Equity Shares of ` 10 each

25,00,000

Issued, Subscribed & Paid up: 2,50,000 Equity Shares of ` 10 each

Total

Particulars

25,00,000

Note 2: Reserves and Surplus

General Reserve

HIM Ltd
Less:

Proposed Dividend

Add:

PostAcquisition Reserve of SIM Ltd

Less:

Unrealised Profit on Closing Stock

Profit & Loss A/c

2,00,000

3,12,500

(2,50,000)

(3,000 + 24,500) = 27,500

(46,200 + 72,100) = 1,80,800

(29,000)

2,27,500

1,51,800

Total

Question 4(a):Accounting for ESOP

12 Marks
Virtual Limited granted on 1st April 2011, 1,00,000 Employees Stock Option at ` 40, when the Market Price was ` 60. These
options will vest at the end of Year 1, if the earning of Virtual Limited is more than 15% or it will vest at the end of the year 2, if
the average earnings of two years is more than 12% or lastly it will vest at the end of third year, if the average earnings of 3
years will be 9% or more. 6000 unvested options lapsed on 31st March 2012. 5,500 unvested options lapsed on 31st March 2013
and finally 3,000 unvested options lapsed on 31st March 2014.
The earnings of Virtual Limited was as follows:
Year ended on
Earnings in %
31.3.2012

13%

31.3.2013

9%

31.3.2014

7%

Employees exercised for 85,000 Stock Options which vested in them at the first opportunity and the balance options were
lapsed. Pass necessary journal entries and show the necessary working.
Solution:
Similar to Page No. 5.26 Q.No. 17 of Padhukas Students Guide on Financial Reporting

Nov 2014.7

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Journal Entries in the Books of Virtual Ltd
Particulars

Date

31.03.2012 Employees Compensation Expenses A/c

Debit `
Dr.

Credit `

9,40,000

To Employees Stock Options Outstanding A/c

9,40,000

(Being Compensation Expenses recognized in respect of Employee Stock

Option, i.e. 94,000 options at a discount of ` 20 each) [Working Note 1]
31.03.2013 Employees Compensation Expenses A/c

Dr.

2,40,000

To Employees Stock Options Outstanding A/c

2,40,000

(Being Compensation Expenses recognized in ESOP A/c) [Working Note 2]

31.03.2014 Employees Compensation Expenses A/c

Dr.

5,30,000

To Employees Stock Option Outstanding A/c

5,30,000

(Being Compensation Expenses recognized in ESOP) [Working Note 3]

31.12.2014 Bank A/c [85,000 ` 20]
Employee Stock Options Outstanding A/c

Dr.

34,00,000

Dr.

17,00,000

To Equity Share Capital A/c [85,000 ` 10]

8,50,000

To Securities Premium A/c [85,000 ` 50]

42,50,000

(Being 85,000 Options exercised)

Employee Stock Option Outstanding A/c [500 ` 20]

Dr.

During FY
To General Reserve A/c
201415
(Being ESOP outstanding A/c on lapse of 500 options transferred to General
Reserve)

10,000
10,000

Working Notes:
Computation of Expense to be recognized for Liability component
1. Year 201213
Number of Shares expected to vest

94,000

Compensation Expenses accrued at ` 20 (` 60 ` 40)

` 18,80,000

Vesting Period

2 Years

Expense Recognized for 201213 = ` 18,80,000 2 Years

2. Year 201314
Number of Shares expected to vest
Compensation expenses accrued at ` 20 (` 60 ` 40)
Vesting Period
Cumulative Expenses to be recognized upto 2013 14 = ` 17,70,000 3 Years 2 Years
Less: Expense recognized in 201213
Expense Recognized in 201314

` 9,40,000
88,500

` 17,70,000
3 Years

` 11,80,000
` 9,40,000
` 2,40,000

3. Year 201415
Number of Shares vesting at Year End
Compensation Expenses accrued at ` 20 (` 60 ` 40)
Less: Expense recognized in 201213 and 201314

85,500

` 17,10,000
` 11,80,000
` 5,30,000

Expense Recognized in 201415

Question 4(b) AS 30, 31 Financial Instruments

4 Marks
Adventure Limited issued 20,000, 9% Convertible Debentures of ` 100 each at par at the beginning of the year. The Debentures are of 6
years term. The interest will be paid half yearly. The debentureholders have the option to get 50% of the Debentures converted into 2
Ordinary Shares at the end of 3rd year. The Debenture holders who do not opt for conversion will be paid 50% of their Face Value at the
end of the year 3. The balance nonconvertible portion will be repaid at 10% premium at the end of term of the Debentures. At the time of
issue, the prevailing market interest rate for similar Debt without Convertibility Option is 10%.
Nov 2014.8

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Present Value of Annuity is as under

Period
13
46
712
Annuity factor @10%
2.487
1.868
2.459
Annuity factor @ 5%
2.723
2.353
3.787
Present Value of ` 1 at the end of 3 years at 10% and 5% is 0.565 and 0.747 respectively. Present Value of ` 1 at the end of 6
years at 10% and 5% is 0.317 and 0.557 respectively.
Compute the Liability Component and Equity Component and pass necessary Journal Entries recognizing the issue of
Debentures.
Solution:
Similar to Page No. 31.19, Q. No. 35 of Padhukas Students Referencer on Accounting Standards
1.
(a)

(b)
(c)
(d)

2.

Computation of Fair Value of Liability Component: PV of Cash Flows from debentures discounted at market rate
of 10%
Year 1 to 3 Half Yearly cash flow of ` 4.5 (i.e. ` 100 9% 6 )
12
End of year 3 50% redemption ` 50
Year 4 to Year 6 Half Yearly Cash Flow of `2.25 (i.e. ` 50 9% 6 )
12
End of Year 6 Balance + 10% Premium = 50 + 5 = ` 55
Half year
Cash Flow
HYDF @ 5%
DCF
1
4.50
0.9524
4.29
2
4.50
0.9070
4.08
3
4.50
0.8638
3.89
4
4.50
0.8227
3.70
5
4.50
0.7835
3.53
6
54.50
0.7462
40.67
7
2.25
0.7107
1.60
8
2.25
0.6768
1.52
9
2.25
0.6446
1.45
10
2.25
0.6139
1.38
11
2.25
0.5847
1.32
12
57.25
0.5568
31.88
99.30

Value of Option (Equity) = Issue Price of Debenture ` 100 () Liability Component as above ` 99.30 = ` 0.70
3.
Particulars

Journal Entries

Bank A/c

Dr.

To Debenture Liability A/c (20,000 ` 99.30)

To Options Liability A/c (20,000 ` 0.70)
(Being issue of 20,000 9% Debenture of `100 each with a convertible option, accounted)

Debit (`) Credit (`)

20,00,000
19,86,000
14,000

Question 5: Valuation of Shares

16 Marks
The majority Shareholders of MSL Limited desire to sell their holding to influx funds. The following information has been
provided by MSL Limited:
Particulars
2012
2013
2014
Equity and Liabilities
12.00
12.00
12.00
12000 Equity Shares of `100 each
General Reserve
6.85
7.75
9.00
Profit and Loss Account
2.64
5.95
8.25
Current Liabilities
6.80
5.45
3.85
Total
28.29
31.15
33.10
Nov 2014.9

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Particulars

2012

2013

2014

12.00

13.00

14.00

6.30

5.30

4.30

6.28
3.71
28.29

7.34
5.51
31.15

8.51
6.29
33.10

Assets
Tangible Assets
Intangible Assets
Goodwill
Current Assets
Inventories
Other Current Assets
Total
(i)

The valuation of the Tangible Assets has been done by a Professional Valuer and increase of 10% in the year 201112 and
201213 and 12.5% in 2014 is estimated over the given book value.
(ii) The inventories have been valued at ` 6.32 Lakhs as on 31st March 2012, ` 8.47 Lakhs as on 31st March 2013 and ` 10.68
Lakhs as on 31st March 2014.
(iii) The Company has been charging depreciation @ 10% p.a.
(iv) The balance of P & L Account and General Reserve on 1st April 2011 was ` 2.18 Lakhs and ` 4.25 Lakhs respectively.
(v) Tax Rate was 30% in all the years.
(vi) The Goodwill shall be revalued based on 4 years purchase of average super profits of last three years.
(vii) The normal expectation in the industry is 10%.
Calculate the Fair Value of Shares of MSL Limited.
Solution:
Similar to Page No. 4.25 Q.No. 9 of Padhukas Students Guide on Financial Reporting [M 11]
1. Valuation of Net Assets (other than Goodwill)
Particulars
2012
1. Value of Assets (other than Goodwill)
Tangible Assets (Fair Value)
13.20
[12+10%]
Inventories [value as given]
6.32
Other Current Assets
3.71
Less: Current Liabilities
(6.80)
Net Assets available for Equity Shareholders / CE
16.43

Less:

Less:

Less:

2. Computation of Profits
Particulars
Closing Bal. as on 31.03.2014
Bal as on 31.03.2013
Profit for the year 201314
Closing Bal. as on 31.03.2013
Bal as on 31.03.2012
Profit for the year 201213
Closing Bal. as on 31.03.2012
Bal as on 31.03.2011
Profit for the year 201112
3. Computation of FMP
Particulars
Profits after Taxes for the year (as per WN 2)

Profit Before Taxes=

Less:

PAT
1 30%

Additional Depreciation @ 10% on increase in value of Tangible Assets

Nov 2014.10

(` Lakhs)
2013

2014

14.30
[13+10%]
8.47
5.51
(5.45)
22.83

15.75
[14+12.5%]
10.68
6.29
(3.85)
28.87

(` Lakhs)
P&L A/c
8.25
5.95
2.3
5.95
2.64
3.31
2.64
2.18
0.46

Gen Res
9
7.75
1.25
7.75
6.85
0.9
6.85
4.25
2.6

2012
3.06

2013
4.21

2014
3.55

4.37

6.01

5.07

0.12
[13.212]

0.13
[14.313]

0.18
[15.7514]

Total
17.25
13.7
3.55
13.7
9.49
4.21
9.49
6.43
3.06

(` Lakhs)

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Add:
Less:
Less:

Particulars
Increase in Value of Closing Stock

2012
0.04
[6.326.28]

4.29
1.29
3.00

Increase in value of Opening Stock

Profit after above adjustments
Tax @ 30%
Future Maintainable Profits

4. Computation of Goodwill
Particulars
Profits for 3 years = FMP as above
Capital Employed
Normal Industry Return @ 10% (Capital Employed 10%)
Super Profit (Future Profit Industry Return)
Average Super Profit =

1.36 + 2.60 + 1.27

= 1.74.
3

Net Assets Value of Company

Goodwill as above
Total Fair Value of Company
No. of Equity Shares
Value per Equity Share =

2014
2.17
[15.7514]
(1.13)
5.94
1.78
4.16

(` Lakhs)
2012
3.00
16.43
1.64
1.36

2013
4.88
22.83
2.28
2.60

2014
4.16
28.87
2.89
1.27

Goodwill at 4 years purchase [1.74 4] = 6.96

5. Value of Shares as at 2014

Particulars
Add:

2013
1.13
[8.477.34]
(0.04)
6.97
2.09
4.88

(` Lakhs)
2014
28.87
6.96
35.83
12,000 Shares

35.83 Lakhs

298.58

12,000 Shares

Question 6(a): EVA

DISA&Co. has provided the following information:
Particulars
Equity Share Capital (` 10 each)
15% Preference Share Capital
Reserves and Surplus
15% Debentures
10% NonTrade Investment (Nominal Value `100 Lakhs)
Land and Building held for Investment
Advance given for purchase of Plant
Capital Work in Progress
Underwriting Commission (not written off)
Earnings per Share
Tax Rate
Beta Factor
Market Rate of Return
Risk Free Rate

8 Marks
` in Lakhs
400
200
220
1600
140
20
10
30
20
16
30%
1.65
16.25%
9.85%

Calculate Economic Value Added by the Company.

Solution:
Similar to Page No. 7.31 Q.No. 3 of Padhukas Students Guide on Financial Reporting [M 10]

Nov 2014.11

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Component
Equity Share Capital

Preference Shares
Reserves & Surplus
Debt
Total
WACC =

1. Computation of WACC
Amount
Return
9.85 + 1.65 (16.25 9.85) = 20.41%
` 400 Lakhs

Product
81.64

15.00%

30.00

` 200 Lakhs
` 220 Lakhs
` 1600 Lakhs
` 2,420 Lakhs

As above = 20.41%

44.90

[15% (130%)] = 10.50%

168.00
324.54

324.54
= 13.41%
2,420

2. Computation of EBIT (by reverse working)

Particulars
Less:

Less:
Less:

EBIT
Interest [1600 15%]
670
EBT (
)
70%
Taxes [957.14 30%]
EAT
Preference Dividend [200 15%]
Equity Earnings [40 Lakhs ` 16]
No. of Shares
EPS

1197.14
(240.00)
957.14
(287.14)
670.00
(30.00)
640.00
40.00
16.00

3. Computation of Capital Employed

Particulars

Less:

` Lakhs

Equity
Preference
Reserves & Surplus
Debentures
Underwriting Commission not written off
Total

` Lakhs
400
200
220
1600
(20)
2400

4. Computation of EVA

(a) NOPAT = EBIT (1 Tax rate) = 1,197.14 x (130%) = ` 838

(b) EVA = Net Operating Profit After Tax [Capital Employed WACC] = 838 [2,400 13.41%] = 516.16
Note/ Assumption:
1. NOPAT exclude income from Non Trade investments & Investment Properties. Hence, the same has to be reduced from
NOPAT.
2. However, in this case, NonTrade investment & Land & Building (held as Investments) need not be reduced from
Capital Employed, since given Beta is Beta of the Company as a whole after considering all types of income.
3. Alternatively, Investment Income can be reduced from NOPAT & Investments can be reduced from Capital Employed to
find EVA.

Question 6(b): Human Resource Accounting

8 Marks
From the following details, compute the Total Value of Human Resources of skilled and unskilled group of employees
according to Lev and Schwartz (1971) Model:
Skilled
Unskilled
Annual average earning of an employee till the retirement age
75,000
50,000
Age of retirement
68 years
65 years
Discount Rate
15%
15%
No. of employees in the group
40
50
Average age
65
63
Nov 2014.12

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Solution:
Similar to Page No. 7.42 Q.No. 2 of Padhukas Students Guide on Financial Reporting [N 12]
Particulars

Skilled

Unskilled

1.

Average Age

65 years

63 years

2.

Age of Retirement

68 years

65 years

3.

Remaining Period of employment

3 years

2 years

4.

Annual Earnings Per Employee

75,000

50,000

5.

Annuity Factor at 15% for 3 / 2 Years

6.

Value of Employees = Present Value of Future Earnings of Employees =

Annual Earnings Annuity Factor (4) (5)

7.

No of Employees

8.

So, Total Value of Human Resources (6) (7)

2.2832

1.6257

1,71,240

81,285

40

50

` 68,49,600

` 40,64,250

` 1,09,13,850
Question 7(a): AS 13 Investments
4 Marks
JVR Limited has made investment of ` 97.84 Crores in Equity Shares of QSR Limited in pursuance of Joint Venture agreement
in 200102. The investment has been made at par. QSR Limited has been in continuous losses for the last 2 years. JVR Limited
is willing to reassess the carrying amount of its investment in QSR Limited and wish to provide for diminution in value of
investment. However, QSR Limited has futuristic and profitable business plans and projection for the coming years. Discuss
whether the connection of JVR Limited to bring down the Carrying Amount of Investment in QSR Limited is in accordance with
Accounting Standards
Solution:
Refer to Page No. 30.2, Q. No. 21 of Padhukas Students Referencer on Accounting Standards

(a) The question is on accounting in the books of Stand Alone Financial Statements of JVR Ltd. Hence AS27 is not
applicable. AS13 is applicable.
(b) Provisions of AS13:

Carrying Amount: LongTerm Investments are usually carried at Cost.

Basis: LongTerm Investments are of individual importance to an enterprise. So, the Carrying Amount is
determined on an individual basis.

Decline in Value:

(a) When there is a permanent decline in the value of a longterm investment, the Carrying Amount is reduced
in order to recognise the decline. The reduction in value shall be determined and made for each investment
individually.
(b) Temporary Fall in the value of longterm investments need not be provided for.
(c) Conclusion: If QSR Ltd has demonstrative future maintainable profits, then the present losses can be considered as
Temporary in nature. Hence as there is no permanent decline in the value, there is no need for creating any provision
for loss on value of investments.

Question 7(b): AS 30 Derivative

What is a Derivative? Define with reference to AS30, Financial Instruments: Recognition and Measurement.

4 Marks

Solution:
Refer to Page No. 30.2, Q. No. 3 of Padhukas Students Referencer on Accounting Standards

1.

Meaning and Features [Para 8.1]: A Derivative is a Financial Instrument or other contract within the scope of
AS 30, with all three of the following characteristics

Nov 2014.13

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Feature

(a) Change in Value

based on
underlying

Description

(b) No or Low Initial

Investment

(c) Future Settlement

2.

Value of a Derivative changes in response to the change in the underlying.

Such underlying can be a specified (i) Interest Rate, (ii) Financial Instrument
Price, (iii) Commodity Price, (iv) Foreign Exchange Rate, (v) Index of Prices or Rates,
(vi) Credit Rating or Credit Index, or (vii) Other Variable.
If the underlying is a NonFinancial Variable, that Variable should not be specific to a
party to the contract.
The Derivative requires no Initial Net Investment or an Initial Net Investment that is
smaller than would be required for other types of contracts that would be expected to
have a similar response to changes in market factors.
An Option Contract is thus a Derivative, because the Premium is less than the
investment that would be required to obtain the underlying Financial Instrument to
which the option is linked. [Para A.30]
A Currency Swap that requires an initial exchange of different currencies of equal Fair
Values is a Derivative because it has a zero Initial Net Investment. [Para A.30]

The Derivative is settled at a future date.

Examples [Para A.28]: Typical examples of Derivatives are Futures and Forwards, Swap and Option Contracts.

Question 7(c): AS 5 Prior Period / Revision in Estimate

4 Marks
Finished Goods costing ` 10 Lakhs were damaged due to flood in July 2013. These goods were included in Closing Stock as
on March 31,2014 at an estimated realizable value of ` 4.00 Lakhs.
These goods could be ultimately sold for ` 3 Lakhs only in August 2014. The difference of ` 1 Lakh was debited as Prior Period
expenditure in financial year 201415. As an auditor, please comment in the light of provisions of Accounting Standards.
Solution:
Same as Page No. 5.8, Q. No. 26 of Padhukas Students Referencer on Accounting Standards [P (Aud) M 07]

1.

Prior Period Item: Writeback of provision made in respect of inventories in the earlier year does not constitute
Prior Period Adjustment since it is not an error or omission relating to prior period Financial Statements. It merely
involves making estimates based on prevailing circumstances when these Financial Statements were being prepared.

2.

Revision of Estimate: An estimate may have to be revised (a) if changes occur in the circumstances on which
the estimate was based, (b) or as a result of new information, more experience or subsequent developments. The
revision of the estimate, by its nature, does not bring the adjustment within the definitions of an ExtraOrdinary Item or
a Prior Period Item.

3.

Analysis: There is no error or omission in the Prior Period, in this case. It is a case of change in accounting estimates
as to the estimated NRV of damaged item, which have changed when the damaged goods have been finally sold.

4.

Conclusion: The difference of ` 1 Lakh is not a Prior Period Item. Hence, debiting it to Prior Period Expenditure in the
accounting year 201314 is a wrong accounting treatment.

Question 7(d): AS 16 Borrowing Costs

4 Marks
XYZ Limited acquired a Bank Loan of ` 40 Lakhs on interest rate of 20% per annum on 1 July 2013. The said loan was utilized
by the Company for three transaction as under:
(i) Construction of Factory Shed ` 10,00,000
(ii) Purchase of Plant and Machinery ` 25,00,000
(iii) Balance Loan was unallocated and used generally for the purpose of business.
The Accountant of the Company has charged the total interest to the Profit and Loss Account. Comment in view of provisions
of AS16.

Nov 2014.14

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

Solution:
Similar to Page No. 16.4, Q. No. 11 & 12 of Padhukas Students Referencer on Accounting Standards
[M 11, N 11 (Mod.), F (A/c) RTP, M 99, N 02, F (Aud) M 96, P (A/c) RTP, N 04, M 10 (Mod.)]

Purpose / Utilisation

Construction of Factory Shed

Purchase of Machinery

Other Purposes
Total

The treatment for the Total Interest is as under

Loan Amt.
Interest Amount
Accounting Treatment

` 10 Lakhs

` 25 Lakhs

` 5 Lakhs
` 40 Lakhs

9
12 Added to Cost of Factory Shed as per AS16.
= ` 1,50,000

` 10 Lakhs 20%

9
12 Added to Plant & Machinery as per AS16.
= ` 3,75,000

` 25 Lakhs 20%

9
12 Written off to P&L A/c as Expense, as per AS16.
= ` 75,000

` 5 Lakhs 20%

` 52.20 Lakhs

Question 7(e): AS 12 Government Grants

4 Marks
Samrat Limited has set up its business in a designated backward area which entitles the Company for subsidy of 25% of the
total investment from Government of India. The Company has invested ` 80 Crores in the eligible investments. The Company
is eligible for the Subsidy and has received ` 20 Crores from the Government in February 2014. The Company wants to
recognize the said Subsidy as its Income to improve the bottom line of the Company. Do you approve the action of the
Company in accordance with the Accounting Standards?
Solution:
Similar to Page No. 12.9, Q. No. 26 of Padhukas Students Referencer on Accounting Standards

[F (A/c)

N 92, N 95, F (Aud) RTP, P (A/c) RTP, M 08

1.

The Government Grants may be in the nature of Promoters Contribution, i.e.

(a) they are given with reference to the Total Investment in an undertaking, or
(b) by way of contribution towards its Total Capital Outlay, (e.g. Central Investment Subsidy Scheme)

2.

They cannot be shown as income in the Profit and Loss Account . Such Grants are not ordinarily expected to be repaid.
Hence they are treated as Capital Reserve, and as part of Shareholders Funds which cannot be distributed as
dividend or considered as Deferred Income.

3.

Only Grants which are not revenue in nature can be capitalized. The correct treatment is to credit the Subsidy to
Capital Reserve.

Nov 2014.15

Gurukripas Guideline Answers for Nov 2014 CA Final Financial Reporting

STUDENTS NOTES

Nov 2014.16