Test Series : October, 2015

MOCK TEST PAPER - 2

INTERMEDIATE (IPC) : GROUP – I
PAPER – 1: ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) As per para 11 of AS 10 “Accounting for Fixed Assets”, fixed asset acquired in
exchange for shares or other securities in the enterprise should be recorded at its
fair market value, or the fair market value of the securities issued, whichever is
more clearly evident. Since, in the given situation, the market value of the shares
exchanged for the asset is more clearly evident, the company should record the
value of machinery at Rs. 7,12,500 (i.e., 7,500 shares x Rs. 95 per share) being the
market price of the shares issued in exchange.
(b) (i) Total Depreciation to be charged in the Profit and Loss Account
Rs.
Depreciation on old machinery in use [10% of (5,60,000-1,60,000)] 40,000
Add: Depreciation on new machine @ 10% for six months
 6
 1,50,000 × 10% × 12  7,500
 
Total depreciation on machinery in use 47,500
Add: Depreciation on machine disposed of (10% for 6 months)
 6
 1,60,000 × 10% × 12  8,000
 
So, total depreciation to be charged in Profit and Loss A/c 55,500
(ii) Loss on Exchange of Machine
Rs.
Book value of machine as on 1.4.2014 1,60,000
Less: Depreciation for 6 months @ 10% (8,000)
Written Down Value as on 30.9.2014 1,52,000
Less: Exchange value (1,35,000)
Loss on exchange of machine 17,000

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 (iii) Book Value of Machinery in the Balance Sheet as on 31.03.2015
Rs.
Balance as per trial balance 5,60,000
Less: Book value of machine sold (1,60,000)
4,00,000
Add: Purchase of new machine 1,50,000
5,50,000
Less: Depreciation on machinery in use (47,500)
5,02,500
(c) An amalgamation should be considered to be an amalgamation in the nature of
merger if the following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares
of the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity
shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of
accounting policies.
(d) Calculation of Average Due Date
(Taking 4th May, 2015 as the base date)
Date of bill Term Due date Amount No. of days from Product
Rs. the base date i.e. Rs.
May 4, 2015
2015 2015
1st March 2 months 4th May 4,000 0 0

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 10th March 3 months 13th June 3,000 40 1,20,000
5th April 2 months 8th June 2,000 35 70,000
20th April 1 month 23rd May 3,750 19 71,250
10th May 2 months 13th July
5,000 70 3,50,000
17,750 6,11,250
Total of products
Average due date=Base date+ Days equal to
Total amount
R` 6,11,250
= 4th May, 2015 + = 4th May, 2015 + 35 days = 8th June, 2015
17,750

2. Books of Amar Limited

Realisation Account
Rs. Rs.
To Building 3,40,000 By Trade payables 3,20,000
To Machinery 6,40,000 By Bhel Ltd. 12,10,000
To Inventory 2,20,000 By Equity Shareholders 76,000
To Trade receivables 2,60,000 (Loss)
To Goodwill 1,30,000
To Bank (Exp.) 16,000
16,06,000 16,06,000
Bank Account
To Balance b/d 1,36,000 By Realisation (Exp.) 16,000
To Bhel Ltd. 6,00,000 By 10% debentures 4,00,000
By Loan from Amar 1,60,000
By Equity shareholders 1,60,000

7,36,000 7,36,000
10% Debentures Account
To Bank 4,00,000 By Balance b/d 4,00,000
4,00,000 4,00,000
Loan from Amar Account
To Bank 1,60,000 By Balance b/d 1,60,000
1,60,000 1,60,000

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 Share issue Expenses Account
To Balance b/d 34,000 By Equity shareholders 34,000
34,000 34,000
General Reserve Account
To Equity shareholders 80,000 By Balance b/d 80,000
80,000 80,000
Bhel Ltd. Account
To Realisation A/c 12,10,000 By Bank 6,00,000
By Equity share in Bhel
Ltd. (4,880 shares at
Rs. 125 each) 6,10,000
12,10,000 12,10,000
Equity Shares in Bhel Ltd. Account
To Bhel Ltd. 6,10,000 By Equity shareholders 6,10,000
6,10,000 6,10,000
Equity Share Holders Account
To Realisation 76,000 By Equity share capital 8,00,000
To Share issue 34,000 By General reserve 80,000
Expenses
To Equity shares in 6,10,000
Bhel Ltd.
To Bank 1,60,000
8,80,000 8,80,000
Bhel Ltd
Balance Sheet as on 1st April, 2015 (An extract) ∗

Particulars Notes Rs.

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 4,88,000
b Reserves and Surplus 2 1,07,000
2 Current liabilities
a Trade Payables 3 2,80,000

∗
In the absence of the particulars of assets and liabilities (other than those of Amar Ltd.), the complete Balance Sheet of
Bhel Ltd. after takeover cannot be prepared.

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 b Bank overdraft 6,00,000
Total 14,75,000
Assets
1 Non-current assets
a Fixed assets
Tangible assets 4 8,82,000
Intangible assets 5 2,16,000
2 Current assets
a Inventories 6 1,83,000
b Trade receivables 7 1,94,000
14,75,000
Notes to accounts
Rs.
1 Share Capital
Equity share capital
4,880 Equity shares of Rs. 100 each
(Shares have been issued for consideration
other than cash) 4,88,000
Total 4,88,000
2 Reserves and Surplus (an extract)
Securities Premium 1,22,000
Profit and loss account …..
Less: Unrealised profit (15,000) (15,000)
Total 1,07,000
3 Trade payables
Opening balance 3,20,000
Less: Inter-company transaction cancelled upon
amalgamation (40,000) 2,80,000
4 Tangible assets
Buildings 3,06,000
Machinery 5,76,000
Total 8,82,000
5 Intangible assets

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 Goodwill 2,16,000
6 Inventories
Opening balance 1,98,000
Less: Cancellation of profit upon amalgamation (15,000) 1,83,000
7 Trade receivables
Opening balance 2,60,000
Less: Intercompany transaction cancelled upon (40,000)
amalgamation
Less: Provision for doubtful debts (26,000) 1,94,000
Working Notes:
1. Valuation of Goodwill Rs.
Average profit 1,24,400
Less: 8% of Rs. 8,80,000 (70,400)
Super profit 54,000
Value of Goodwill = 54,000 x 4 2,16,000
2. Net Assets for purchase consideration
Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Inventory 1,98,000
Trade receivables (2,60,000-26,000) 2,34,000
Total Assets 15,30,000
Less: Trade payables (3,20,000)
Net Assets 12,10,000
Out of this Rs. 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 –
6,00,000) Rs. 6,10,000 in shares of Rs. 125. Thus, the number of shares to be
allotted 6,10,000/125 = 4,880 shares.
3. Unrealised Profit on Inventory Rs.
The Inventory of Amar Ltd. includes goods worth Rs. 1,00,000 which
was sold by Bhel Ltd. on profit. Unrealized profit on this Inventory
40,000 25,000
will be ×1,00,000
1,60,000
As Bhel Ltd purchased assets of Amar Ltd. at a price 10% less than

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 the book value, 10% need to be adjusted from the Inventory i.e., (10,000)
10% of Rs. 1,00,000.
Amount of unrealized profit 15,000
3. Journal Entries
Particulars Amount Amount
1. Insurance Company’s A/c Dr. 10,000
To Life Policy A/c 10,000
(Being the policy on the life of C matured on his death)
2. Life Policy A/c Dr. 9,000
To A’s Capital A/c 3,000
To B’s Capital A/c 3,000
To C’s Capital A/c 3,000
(Being the transfer of balance in life policy account to all
partners’ capital accounts)
3. A’s Capital A/c Dr. 12,600
B’s Capital A/c Dr. 12,600
C’s Capital A/c Dr. 12,600
To Advertisement suspense A/c 37,800
(Being Advertisement suspense standing in the books
written off fully)
4. Land & Buildings A/c Dr. 37,000
To Revaluation A/c 37,000
(Being an increase in the value of assets recorded)
5. Investment Fluctuation Reserve A/c Dr. 600
To Investment A/c 600
(Being reduction in the cost of investment adjusted
through Investment Fluctuation Reserve)
6. Revaluation A/c Dr. 3,600
To Stock A/c 1,200
To Provision for Doubtful Debts A/c 2,400
(Being the fall in value of assets recorded)
7. A’s Capital A/c Dr. 3,500
B’s Capital A/c Dr. 3,500

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 To C’s Capital A/c 7,000
(Being the share of C’s revalued goodwill adjusted
through capital accounts of the remaining partners)
8. Profit & Loss Suspense Account Dr. 1,500
To C’s Capital A/c 1,500
(Being C’s Share of profit to date of death credited to his
account)
9. Revaluation A/c Dr. 33,400
To A’s Capital A/c 11,133
To B’s Capital A/c 11,133
To C’s Capital A/c 11,134 •
(Being the transfer of profit on revaluation)
10. General Reserve A/c Dr. 8,000
Investment Fluctuation Reserve A/c (Rs. 2,400 - Rs. 600) Dr. 1,800
To A’s Capital A/c 3,267
To B’s Capital A/c 3,267
To C’s Capital A/c 3,266
(Being the transfer of accumulated profits to capital
accounts)
11. C’s Capital A/c Dr. 53,300
To C’s Executor’s A/c 53,300
(Being the transfer of C’s Capital A/c to his Executor’s A/c)
Balance Sheet
as at 31st March, 2015
Liabilities Amount Assets Amount
A’s Capital Account 61,300 Land & Building 1,11,000
B’s Capital Account 41,300 Life Policy: A 2,500
C’s Executor’s Account 53,300 B 2,500 5,000
Sundry Creditors 25,800 Investments 9,400
Stock 18,800
Debtors 20,000

•
Rounded off.

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 Less: Provisions (4,000) 16,000
Insurance Company 10,000
Cash & Bank Balance 10,000
Profit and loss Suspense 1,500
A/c
1,81,700 1,81,700
Working Notes:
(i) Calculation of C’s Share of Profit
Total profit for last three years Rs. 18,000 + Rs. 16,000 + Rs. 20,000
= Rs. 54,000
Average profit 54,000/3 = Rs. 18,000
Profit for 3 months = 18,000 x 3/12 = Rs. 4,500
C’s share of Profit = 4,500 x 1/3 = Rs. 1,500
(ii) Calculation of Goodwill
Total profits for last five years Rs. 1,05,000
Average profit 1,05,000/5 = Rs. 21,000
Goodwill at one year’s purchase Rs. 21,000 x 1 = Rs. 21,000

4. (a) Journal Entries in the Books of Amitabh Ltd.

Dr. Cr.
Rs. Rs.
Securities Premium A/c Dr. 10,000
To Premium on Redemption of Preference shares 10,000
(Being amount of premium payable on redemption of
preference shares)
10% Redeemable Preference Capital Dr. 1,00,000
Premium on redemption of Preference Shares Dr. 10,000
To Preference Shareholders 1,10,000
(Being the amount payable to preference shareholders
on redemption)
General Reserve A/c Dr. 1,00,000
To Capital Redemption Reserve 1,00,000
(Being transfer to the latter account on redemption of

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 shares)
Bank A/c Dr. 90,000
Profit and Loss A/c Dr. 10,000
To Investments 1,00,000
(Being amount realised on sale of Investments and loss
thereon adjusted)
Preference shareholders A/c Dr. 1,10,000
To Bank 1,10,000
(Being payment made to preference shareholders)
Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to Shareholders 1,00,000
(Amount adjusted for issuing bonus share in the ratio of
1 : 1)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Balance on former account transferred to latter)

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 (b) In the books of Good
Happy in Account Current with Good
(interest to 31st march, 2015 @10%p.a.)
Date Due Particulars No., of days Amt. Product Date Due Particulars No. of days Amt. Product
date till 31.3.15 date till 31.3.15
2014 2014 Rs. Rs. 2014 2014 Rs. Rs.
Oct 1, Oct 1, To Balance 182 3,000 5,46,000 Nov Nov 26 By Purchases 125 4,000 5,00,000
b/d 16
Oct Oct 18 To Sales 164 2,500 4,10,000 Dec 7 Dec. By Purchases 104 3,500 3,64,000
18, 17
2015 2015 2015 2015
Jan 3 Apr 6 To Bills (6) 5,000 (30,000) Mar 28 Apr 8 By Purchases (8) 2,700 (21,600)
payable
Feb 4 Feb 4 To Cash 55 1,000 55,000 Mar 31 Mar 31 By Balance of 1,81,600
product
Mar Mar. To Sales 10 4,300 43,000 By Balance c/d 5,650
21 21
Mar Mar 31 To Interest 50 -
31
15,850 10,24,000 15,850 10,24,000
1,81,600 x 10 x 1
Interest for the period = = Rs. 50 (approx.)
100 x 365
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 5. Trading and Profit and Loss Account
for the year ended 31st March, 2015
Particulars Rs. Particulars Rs. Rs.
To Opening Stock 89,500 B Sales:
y
To Purchases (W. N. 3) 4,13,500 Credit (W.N. 1) 2,31,900
To Gross profit c/d (Bal. Fig.) 3,34,100 Cash 5,09,800 7,41,700
By Closing stock 95,400
8,37,100 8,37,100
To Insurance (W.N. 5) 9,900 By Gross profit b/d 3,34,100
To Salaries (W. N. 6) 99,300
To Rent (W.N. 7) 72,000
To Stationery (W.N. 8) 1,450
To Mobile Phone expenses 9,000
To Provision for doubtful 3,250
debts (5% of 65,000)
To Depreciation:
Furniture 4,800
Computer 2,430
Mobile Phone 2,000 9,230
To Net Profit 1,29,970
3,34,100 3,34,100
Balance Sheet as on 31st March, 2015
Liabilities Rs. Rs. Asset Rs. Rs.
Capital A/c: Furniture 96,000
Opening Balance 1,97,430 Less: Depreciation (4,800) 91,200
Less :Drawings (1,20,000) Computer 24,300
77,430 Less: Depreciation (2,430) 21,870
Add: Net Profit 1,29,970 2,07,400 Mobile Phone 8,000
Bills Payable 26,500 Less: Depreciation (2,000) 6,000
Trade Creditors 76,000 Trade Debtors 65,000
Outstanding Less: Provision for (3,250) 61,750
expenses: doubtful debts

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 Salaries 8,300 Bills Receivable 20,000
Rent 6,000 Closing Stock 95,400
Unexpired 2,500
Insurance
Stock of Stationery 250
Cash at bank 18,000
Cash in hand 7,230
3,24,200 3,24,200
Working Notes:
1. Trade Debtors Account
Rs. Rs.
To Balance b/d 55,000 By Cash /Bank 1,51,900
To Credit Sales (bal. 2,31,900 By Bills Receivable A/c 70,000
fig.) (W.N.2)
By Balance c/d (given) 65,000
2,86,900 2,86,900
2. Bills Receivable Account
Rs. Rs.
To Balance b/d 15,000 By Cash/Bank 65,000
To Sundry Debtors (bal. fig.) 70,000 By Bal. c/d (given) 20,000
85,000 85,000
3. Trade Creditors Account
Rs. Rs.
To Bank/Cash 3,06,000 By Bal. b/d 52,500
To Bills payable A/c 84,000 By Credit Purchases (bal. fig) 4,13,500
(W.N.4)
To Bal. c/d(given) 76,000
4,66,000 4,66,000
4. Bills Payable Account
Rs. Rs.
To Cash/Bank A/c 80,000 By Bal. b/d 22,500
To Bal. c/d (given) 26,500 By Sundry Creditors (bal. fig.) 84,000
1,06,500 1,06,500

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 5. Insurance expenses for the year 2014-2015
Rs.
Insurance paid during the year 10,000
Add: Unexpired Insurance as on 1.4.2014 2,400
Less: Unexpired insurance as on 31.3.2015 (2,500)
9,900
6. Salaries for the year 2014-2015
Rs.
Salaries paid during the year 99,000
Add: Salaries outstanding as on 31.03.2015 8,300
1,07,300
Less: Salaries outstanding as on 1.4.2014 (8,000)
99,300
7. Rent expenses for the year 2014-2015
Rs.
Rent paid during the year 72,000
Add: Rent outstanding as on 31.03.2015 6,000
78,000
Less: Rent outstanding as on 1.04.2014 (6,000)
72,000
8. Stationery expenses for the year 2014-2015
Rs.
Stock of stationery as on 1.4.2014 200
Add: Stationery purchased during the year 1,500
1,700
Less: Stock of stationery as on 31.3.2015 (250)
1,450
6. (a) Shri Gupta
Trading Account for the year ended on 31st December, 2014
Rs. Rs. Rs.
To Opening Stock 36,750 By Sales A/c 2,43,500
To Purchases 1,99,000 By Closing Stock :

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 To Gross Profit 48,700 As valued 39,800
Add: Amount
written off to 1,150 40,950
restore
stock to full
cost
2,84,450 2,84,450
48,700
The normal rate of gross profit to sales is = × 100 = 20%
2,43,500
Memorandum Trading Account upto 19, May, 2015
Normal Abnormal Total Normal Abnormal Total
items items items items
Rs. Rs. Rs. Rs. Rs. Rs.
To Opening 37,500 3,450* 40,950 By Sales 1,14,000 1,600 1,15,600
Stock
To Purchases 81,000 — 81,000 By Loss — 125 125
To Gross Profit By Closing
(20% on Stock
Rs. 1,14,000) 22,800 — 22,800 (bal. 27,300 1,725 29,025
fig.)
1,41,300 3,450 1,44,750 1,41,300 3,450 1,44,750
* at cost.
Calculation of Insurance Claim
Rs.
Value of Stock on 19th May, 2015 29,025
Less : Salvage (2,900)
Loss of stock 26,125
Therefore, insurance claim will be for Rs. 26,125 only.

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 (b) Investment A/c of Mr. Lion
for the year ending on 31-3-2015
(Scrip: 8% Debentures of P Limited)
(Interest Payable on 30th September and 31st March)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
Rs. Rs. Rs. Rs.
1.4.2014 To Balance b/d 1,20,000 - 1,18,000 30.9.2014 By Bank - 5,200 -
1.7.2014 To Bank (ex-Interest) 10,000 200 9,898 1.10.2014 By Bank 20,000 - 19,800
1.10.2014 To Profit & Loss A/c 133 1.2.2015 By Bank (ex- 20,000 533 19,602
Interest)
1.1.2015 To Bank (cum-Interest) 5,000 100 4,849 1.2.2015 By Profit & Loss 64
A/c
31.3.2015 To Profit & Loss - 9,233 31.3.2015 By Bank - 3,800 -
A/c(Bal.fig.)
31.3.2015 By Balance c/d 95,000 - 93,414
1,35,000 9,533 1,32,880 1,35,000 9,533 1,32,880

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 Working Notes:
1. Valuation of closing balance as on 31.3.2015:
Market value of 950 Debentures at Rs. 99 = Rs. 94,050
Cost price of
 1,18,000 
800 Debentures cost =  x80,000  = 78,667
 1,20,000 
100 Debentures cost = 9,898
50 Debentures Cost = 4,849
93,414
Value at the end = Rs. 93,414 i.e. whichever is less
2. Profit on sale of debentures as on 1.10.2014
Rs.
Sales price of debentures (200 x Rs. 100) 20,000
Less: Brokerage @ 1% (200)
19,800
 1,18,000 
Less: Cost price of Debentures  x 20,000  = (19,667)
 1,20,000 
Profit on sale 133
3. Loss on sale of debentures as on 1.2.2015
Rs.
Sales price of debentures (200 x Rs. 99) 19,800
Less: Brokerage @ 1% (198)
19,602
 1,18,000 
Less: Cost price of Debentures  x 20,000  = (19,666)
 1,20,000 
Loss on sale 64
7. (a) In modern time, computerized accounting systems are used in various areas. The
significance of the computerized accounting system is as follows:
(1) Increase speed, accuracy and security - In computerized accounting system, the
speed with which accounts can be maintained is several fold higher. Besides
speed, level of accuracy is also high in computerized accounting system.

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 (2) Reduce errors - In computerized accounting, the possibilities of errors are also
very less unless some mistake is made while recording the data.
(3) Immediate information - In this system, with an entry of a transaction,
corresponding ledger posting is done automatically. Hence, trial balance will
also be automatically tallied and the user will get the information immediately.
(4) Avoid duplication of work - Computerized accounting systems also remove the
duplication of the work.
(b) As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of
the inventories and are recognised as expenses in the period in which incurred.
Examples of such costs are:
(a) abnormal amount of wasted materials, labour, or other production costs;
(b) storage costs, unless those costs are necessary in the production process
prior to a further production stage;
(c) administrative overheads that do not contribute to bringing the inventories to
their present location and condition; and
(d) selling and distribution costs.
(c) As per para 10 of AS 9 ‘Revenue Recognition’, the additional revenue on account of
increase in sales price with retrospective effect, as decided by Board of Directors of
X Ltd., of Rs. 5 lakhs to be recognised as income for financial year 2014-15, only if
the company is able to assess the ultimate collection with reasonable certainty. If at
the time of raising of any claim it is unreasonable to expect ultimate collection,
revenue recognition should be postponed.
(d) According to paragraphs 38, 39 and 41 of AS 7, an enterprise should disclose:
(a) the amount of contract revenue recognized as revenue in the period;
(b) the methods used to determine the contract revenue recognized in the period;
and
(c) the methods used to determine the stage of completion of contracts in
progress.
In case of contract still in progress the following disclosures are required at the
reporting date:
(a) the aggregate amount of costs incurred and recognised profits (less
recognised losses) upto the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
An enterprise should also present:

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 (a) the gross amount due from customers for contract work as an asset; and
(b) the gross amount due to customers for contract work as a liability.
(e) (i) Loans and advances given and interest earned
to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow
(iii) Dividend paid for the year
Financing Cash Outflow
(iv) TDS on interest earned on advance given to suppliers
Operating Cash Outflow
(v) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow from
Operating activities’.

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