AccountsNew Suggested Ans CA Inter Jan 21 PDF

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PAPER – 1 : ACCOUNTING
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions may be made and indicated in answer by the
candidates.
Working Notes should form part of the answer.
Question 1
(a) Darshan Ltd. purchased a Machinery on 1 st April, 2016 for ` 130 lakhs (Useful life is
4Years). Government grant received is ` 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs.
Darshan Ltd. decides to treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in
profit & loss account for the year ending 31 st March, 2017,31 st March, 2018, 31 st March,
2019& 31st March, 2020.
Darshan Ltd. follows straight line method for charging depreciation.
(b) Kunal Securities Ltd. wants to reclassify its investments in accordance with AS -13
(Revised). State the values, at which the investments have to be reclassified in the
following cases:
(i) Long term investment in Company A, costing ` 10.5 lakhs is to be re-classified as
current investment. The company had reduced the value of these investments to
` 9 lakhs to recognize a permanent decline in value. The fair value on the date of
reclassification is ` 9.3 lakhs.
(ii) Long term investment in Company B, costing ` 14 lakhs is to be re-classified as
current investment The fair value on the date of reclassification is ` 16 lakhs and
book value is ` 14 lakhs.
(iii) Current investment in Company C, costing `12 lakhs is to be re-classified as long
term investment as the company wants to retain them. The market value on the
date of reclassification is ` 13.5 lakhs.
(iv) Current investment in Company D, costing ` 18 lakhs is to be re-classified as long
term investment. The market value on the date of reclassification is ` 16.5 lakhs.
(c) Mr. Jatin gives the following information relating to the items forming part of the inventory
as on 31.03.2019. His enterprise produces product P using Raw Material X.
(i) 900 units of Raw Material X (purchases @ ` 100 per unit). Replacement cost of
Raw Material X as on 3103.2019 is ` 80 per unit
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2 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021
(ii) 400 units of partly finished goods in the process of producing P. Cost incurred till
date is ` 245 per unit. These units can be finished next year by incurring additional
cost of ` 50 per unit.
(iii) 800 units of Finished goods P and total cost incurred is ` 295 per unit.
Expected selling price of product P is `280 per unit, subject to a payment of 5%
brokerage on selling price.
Determine how each item of inventory will be valued as on 31.03.2019.
Also calculate the value of total Inventory as on 31.03.2019.
(b) Explain briefly the accounting treatment needed in the following cases as per AS 11 as
on 31.03.2020
(i) Debtors include amount due from Mr. S ` 9,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $1 = ` 72.00
US $ 1=`73.50 on 31 st March,2020
US $ 1= ` 72.50 on 1 st April,2019.
(ii) Long term loan taken on 1st April, 2019 from a U.S. company amounting to
` 75,00,000. `5,00,000 was repaid on 31 st December, 2019, recorded at US $ 1 =
` 70.50. interest has been paid as and when debited by the US company.
US $1= ` 73.50 on 31 st March,2020
US $1=1` 72.50 on 1st April, 2019. (4 Parts X 5 Marks = 20 Marks)
Answer
(a) As per 12 “Accounting for government grants”, grants related to depreciable assets, if
treated as deferred income are recognized in the profit and loss statement on a
systematic and rational basis over the useful life of the asset.
Amount of depreciation and grant to be recognized in the profit and loss account
each year
Depreciation per year:
`in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year(70lakhs/4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31 st March, 2017, 31 st
March, 2018, 31 st March, 2019 and 31 st March, 2020.

PAPER – 1 : ACCOUNTING 3
Amount of grant recognized in Profit and Loss account each year:

40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31 st March, 2018,
31st March, 2019 and 31 st March, 2020.
(b) As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer. And where investments are reclassified from current to
long term, transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 9 lakhs in
the books.
(ii) The carrying / book value of the long-term investment is same as cost i.e.,
` 14 lakhs. Hence this long-term investment will be reclassified as current
investment at book value of ` 14 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be
made at ` 12 lakhs as cost are less than its market value of ` 13.5 lakhs.
(iv) Market value of the investment is ` 16.5 lakhs, which is lower than its cost i.e., ` 18
lakhs. Therefore, the transfer to long term investments should be done in the books
at the market value i.e., ` 16.5 lakhs.
(c) As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for
use in the production of inventories are not written down below cost if the finished
products in which they will be incorporated are expected to be sold at cost or above cost.
However, when there has been a decline in the price of materials and it is estimated that
the cost of the finished products will exceed net realizable value, the materials are written
down to net realizable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realizable value. In the given
case, selling price of product P is ` 266 and total cost per unit for production is
` 295.
Hence the valuation will be done as under:
(i) 900 units of raw material X will be written down to replacement cost as market value
of finished product is less than its cost, hence valued at ` 80 per unit.
(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost
(` 245) or Net realizable value ` 216 (Estimated selling price ` 266 per unit less
additional cost of ` 50).
(iii) 800 units of finished product P will be valued at NRV of ` 266 per unit since it is
lower than cost ` 295.

Valuation of Total Inventory as on 31.03.2019:

Units Cost ( `) NRV/Repl Value = units x cost
acement or NRV whichever is
cost less ( `)
Raw material X 900 100 80 72,000
Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 2,12,800
Value of Inventory 3,71,200
(d) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange
differences arising on the settlement of monetary items or on reporting an enterprise’s
monetary items at rates different from those at which they were initially recorded during
the period, or reported in previous financial statements, should be recognized as income
or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long -
term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, in so far
as they relate to the acquisition of a non-depreciable capital asset can be accumulated in
a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s
financial statements and amortized over the balance period of such long-term asset/
liability, by recognition as income or expense in each of such periods.
Foreign `
Currency Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = `72 9,00,000
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Gain US $ 12,500 X (73.50- 18,750
72)
Treatment: Credit Profit and Loss A/c by ` 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 1 US $ = ` 73.50 75,00,000
(75,00,000/72.50)
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Loss after adjustment of
exchange gain on repayment of ` 5,00,000
` 67,987.48 [82,171.88 (US $ 96,356.08 X ` 73.5
less ` 70,00,000) less profit 14,184.40

[US $ 7,092.2 (5,00,000/70.5) X ` 2)] NET LOSS 67,987.48*

Treatment: Credit Loan A/c and
Debit FCMITD A/C or Profit and Loss A/c by
` 67,987.48
Thus, Exchange Difference on Long term loan amounting ` 67,987.48 may either be
charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation
Difference Account but exchange difference on debtors amounting ` 18,750 is required
to be transferred to Profit and Loss A/c.
NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment
of ` 5,00,000) has been calculated in the above solution. Alternative considering
otherwise also possible.
NOTE 2: Date of sales transaction of ` 9 lakhs has not been given in the question and
hence it has been assumed that the transaction took place during the year ended 31
March 2020.
Question 2
(a) XYZ Garage consists of 3 departments: Spares, Service and Repairs, each department
being managed by a departmental manager whose commission was respectively 5%,
10% and 10% of the respective departmental profit subject to a minimum of `5,000 in
each case.
Inter departmental transfers take place at a “loaded” price as follows:
From Spares to Service 5% above cost
From Spares to Repairs 10% above cost
From Spares to Service 10% above cost
In respect of the year ended March 31 st2019 the firm had already prepared and closed
the departmental trading and profit and loss account. Subsequently it was discovered
that the closing stocks of department had included inter-departmentally transferred goods
at “loaded” price instead of the correct cost price.
From the following information, you are required to prepare a statement re-computing the
departmental profit or loss:
Spares Service Repairs
` ` `
Final Net Profit/Loss (after 38,000 50,400 72,000
charging commission) (Loss) (Profit) (Profit)
Inter-departmental transfers 65,000 4,202
Included at “loaded” price in (21,000 from (from Spares)

the departmental stocks Spares and 44,000

from Repairs)
(b) Mr. Prakash furnishes following information for his readymade garments business:
(i) Receipts and Payments during 2019-20:
Receipts Amount ` Payments Amount `
Bank Balance as on Payment to Sundry
1-4-2019 16,250 Creditors 3,43,000
Received from Sundry Salaries 75,000
Debtors 4,81,000
General Expenses 22,500
Cash sales 1,70,800 Rent and Taxes 11,800
Capital brought in the Drawings 96,000
Business during the year 50,000
Cash Purchases 1,22,750
Interest on Investment Balance at Bank on
Received 9,750 31-03-2020 36,600
Cash in hand on
31-03-2020 20,150
7,27,800 7,27,800
(ii) Particulars of other Assets and Liabilities are as follows:
1st April, 2019 31st March, 2020
( `) ( `)
Machinery 85,000 85,000
Furniture 24,500 24,500
Trade Debtors 1,55,000 ?
Trade Creditors 60,200 ?
Stock 38,600 55,700
12% Investment 85,000 85,000
Outstanding Salaries 12,000 14,000
(iii) Additional information:
(1) 20% of Total sales and 20% of total purchases are in cash.
(2) Of the Debtors, a sum of ` 7,200 should be written off as Bad debt and further
a provision for doubtful debts is to be provided @2%.

(3) Provide depreciation @10% p.a. on Machinery and Furniture.

You are required to prepare Trading and Profit & Loss account for the year ended
31st March, 2020, and Balance Sheet as on that date. (10+10=20 Marks)
Answer
(a) Calculation of correct Departmental Profits or Losses
Department Department Department
Spares (`) Service (`) Repair (`)
Profit after charging Manager’s (38,000) 50,400 72,000
Commission
Add: Manager’s Commission (1/9) 5,000(Minimum) 5,600 8,000
(33,000) 56,000 80,000
Less: Unrealized profit on Stock (WN) (1,382) (4,000)
Profit Before Manager’s Commission (34,382) 56,000 76,000
Less: Manager’s Commission 10% (5,000) (5,600) (7,600)
Correct Profit after Manager’s (39,382) 50,400 68,400
Commission
Working Note:
Department Department Department Repair Total
Spares (`) Service (`) (`) (`)
Unrealized Profit of:
Department Spares 21,000X5/105 4202X10/110 = 382 1,382
= 1,000
Department Repair 44000X10/110 4,000
= 4000
(b) Trading and Profit & Loss Account for the year ended 31-03-2020
` ` `
To Opening Inventory 38,600 By Sales 8,54,000
To Purchases 6,13,750 By Closing Inventory 55,700
To Gross profit c/d (b.f.) 2,57,350
9,09,700 9,09,700
To Salaries 77,000 By Gross Profit b/d 2,57,350
(75,000+14,000-12,000)
To Rent 11,800 By Interest on 10,200
investment

To General expenses 22,500 (9,750+450)

To Depreciation:
Machinery @ 10% 8,500
Furniture @ 10% 2,450 10,950
To Bad Debts 7,200
To Provision for doubtful 7,000 14,200
debts
To Balance being profit
carried to Capital A/c 1,31,100
(b.f.)
2,67,550 2,67,550
Balance Sheet as on 31st March, 2020
Liabilities ` ` Assets ` `
A. Adamjee’s Capital Machinery 85,000
on 1st April, 2019 3,32,150 Less: Depreciation (8,500) 76,500
Add: Fresh Capital 50,000 Furniture 24,500
Add: Profit for the year 1,31,100 Less: Depreciation (2,450) 22,050
5,13,250
Less: Drawings (96,000) 4,17,250 Inventory-in-trade 55,700
Sundry debtors 3,57,200
Sundry creditors 2,08,200 Less: Provision for
Outstanding expenses 14,000 Doubtful debts (14,200) 3,43,000
Investment 85,450
(including accrued
interest ` 450)
Cash at bank 36,600
Cash in hand 20,150
6,39,450 6,39,450
Working Notes:
1. Balance sheet as on 1-4-2019
` `
Sundry creditors 60,200 Machinery 85,000
Capital 3,32,150 Furniture 24,500
(balancing figure) Inventory 38,600

Outstanding salaries 12,000 Sundry debtors 1,55,000

Investments 85,000
Bank balance (from Cash 16,250
statement)
4,04,350 4,04,350
2. Total Debtors Account
` `
1.4.19 To Balance b/d 1,55,000 31.3.20 By Cash 4,81,000
31.3.20 To Credit sales 6,83,200 31.3.20 By Bad debts 7,200
(1,70800/20x80) By Balance c/d 3,50,000
(Bal. Fig.)
8,38,200 8,38,200
3. Total Creditors Account
` `
31.3.20 To Cash 3,43,000 1.4.19 By Balance b/d 60,200
31.3.20 To Balance 2,08,200 31.3.20 By Credit Purchases 4,91,000
c/d (1,22,750/20x80)
(Bal. Fig.)
5,51,200 5,51,200
Question 3
(a) P Ltd. had 8,000 equity shares of K Ltd., at a book value of ` 15 per share (face value of
` 10 each) on 1 st April,2019. On 1 st September, 2019, P Ltd. acquired another 2,000
equity shares of K Ltd. at a premium of ` 4 per share. K Ltd. announced a bonus and
right issue for existing shareholders.
The term of bonus and right issue were:
(i) Bonus was declared at the rate for two equity shares for every five shares held on
30th September, 2019.
(ii) Right shares are to be issued to the existing shareholders on 1 st December, 219.
The Company had issued two right shares for every seven shares held at 25%
premium on face value. No dividend was payable on these shares. The whole sum
being payable by 31 st December, 2019.
(iii) Existing shareholders were entitled to transfer their right to outsiders either wholly
or in part.
(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the
remaining rights for `8 per share.

(v) Dividend for the year ended 31 st March,2019 at the rate of 20% was declared by K
Ltd. and received by P Ltd. on 20 th January, 2020.
(vi) On 1st February, 2020, P Ltd. sold half of its shareholdings at a premium of ` 4 per
share.
(vii) The market price of share on 31 st March,2020 was `13 per share.
You are required to prepare the Investment account of P Ltd. for the year ended
31st March,2020 and determine the value of shares held on that date, assuming the
investment as current investment. Consider average cost basis for ascertainment for
cost for equity shares sold. (10 Marks)
(b) A Fire occurred in the premises of M/S MJ & Co., on 31 st December, 2019. From the
following particulars related to the period from 1st April 2019 to 31 st December 2019, you
are required to ascertain the amount of claim to be filed with the insurance policy for
` 1,00,000 which is subject to average clause. The value of goods salvaged was
estimated at ` 31,000. The average rate of gross profit was 20% throughout the period:
Particulars Amount (`)
(i) Opening stock as on 1 st April,2019 1,50,000
(ii) Purchases during the year 4,20,000
(iii) Goods withdrawn by the proprietor for his self-use at Sales 10,000
Value
(iv) Goods distributed as charity at cost 4,000
(v) Purchases include ` 5,000 of Tools purchased, these tools
should have been capitalized.
(vi) Wages (include wages paid for the installation of machinery 90,000
`6,000)
(vii) Sales during the year 6,10,000
(viii) Cost of goods sent to consignee on 1 st November,2019, lying 25,000
unsold with the consignee.
(ix) Sales Return 10,000
(10 Marks)
Answer
(a) Investment Account-Equity Shares in K Ltd.
Date No. of Dividend Amount Date No. of Dividend Amount
shares shares
` ` ` `
1.4.19 To Bal.b/d 8,000 - 1,20,000 20.1.20 By Bank 16,000 4,000
(dividend)
[8,000 x 10
x 20%] and

[2,000 x 10
x 20%]
1.9.19 To Bank 2,000 - 28,000 1.2.20 By Bank 8,000 1,12,000
30.9.19 To Bonus 4,000 —
Issue
31.12.19 To Bank 2,000 - 25,000 31.3.20 By Balance 8,000 84,500
(Right) c/d (W.N. 3)
(W.N.1)
20.1.20 To Profit & 16,000
Loss A/c
(Dividend
income)
1.2.20 To P& L 27,500
A/c (profit
on sale)
16,000 16,000 2,00,500 16,000 16,000 2,00,500
Working Notes:
1. Right shares
No. of right shares issued = (8,000 + 2,000 + 4,000)/ 7 X 2= 4,000
No. of right shares subscribed = 4,000 x 50% = 2,000 shares
Value of right shares issued = 2,000 x `12.50 = ` 25,000
No. of right shares sold = 2,000 shares
Sale of right shares = 2,000 x ` 8 = ` 16,000 to be credited to statement of profit
and loss
2. Cost of shares sold — Amount paid for 16,000 shares
`
(`1,20,000 + ` 28,000 + ` 25,000) 1,73,000
Less: Dividend on shares purchased on Sept.1 (since the dividend (4,000)
pertains to the year ended 31st March, 2019, i.e., the pre-acquisition
period)
Cost of 16,000 shares 1,69,000
Cost of 8,000 shares (Average cost basis) 84,500
Sale proceeds (8,000 X `14) 1,12,000
Profit on sale 27,500
3. Value of investment at the end of the year
Assuming investment as current investment, closing balance will be valued based
on lower of cost or net realizable value.

Here, Net realizable value is `13 per share i.e., 8,000 shares x ` 13 =
` 1,04,000 and cost = 84,500. Therefore, value of investment at the end of the year
will be ` 84,500.
(b) Memorandum Trading Account for the period 1st April, 2019 to 31 st Dec 2019
` `
To Opening Stock 1,50,000 By Sales 6,00,000
(6,10,000 - 10,000)
To Purchases 4,20,000 By Consignment stock 25,000
Less: Tools purchased (5,000) By Closing Stock (Bal. 1,32,000
fig.)
Goods distributed as (4,000)
Charity
Cost of goods taken
by proprietor (8,000)
4,03,000
To Wages 84,000
(90,000 – 6,000)
To Gross Profit 1,20,000
[20% of Sales)
7,57,000 7,57,000
* For financial statement purposes, this would form part of closing stock (since there is
no sale). However, this has been shown separately for computation of claim for loss of
stock since the goods were physically not with the concern and, hence, there was no loss
of such stock.
Statement of Insurance Claim
`
Value of stock destroyed by fire 1,32,000
Less: Salvaged Stock (31,000)
Loss of stock 1,01,000
Note:
Since policy amount is less than value of stock on date of fire, average clause will apply.
Therefore, claim amount will be computed by applying the formula:
Insured value
Claim = ×Loss suffered
Total cost
Claim amount = ` 1,01,000/1,32,000X1,00,000 = ` 76,515 (Rounded off)

NOTE: The average rate of 20% has been given in the question. In the above solution,
Gross Profit is calculated @ 20% on sales. Alternative answer considering Gross Profit of
20% is also possible.
Question 4
(a) During the year 2019-2020, A Limited (a listed company) made a public issue in respect
of which the following information is available:
(i) No. of partly convertible debentures issued-1,00,000; face value and issue price
`100 per debenture. (Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture -60%, date of conversion -on expiry of 6 months
from the date of closing of issue.
(iii) Date of closure of subscription lists -1st May,2019, date of allotment – 1st June,
2019, rate of interest on debenture -15% p.a. payable from the date of allotment,
value of equity share for the purpose of conversion – `60 (face value `10)
(iv) Underwriting Commission –2%
(v) No. of debentures applied for by public –80,000
(vi) Interest is payable on debentures half yearly on 30 th September and 31st March
each year.
Pass relevant journal entries for all transactions arising out of the above during the year
ended 31st March,2020. (including cash and bank entries) (8 Marks)
(b) Following information was extracted from the books of S Ltd. for the year ended
31st March,2020 :
(1) Net profit before talking into account income tax and after talking into account the
following items was `30 lakhs;
(i) Depreciation on Property, Plant & Equipment `7,00,000
(ii) Discount on issue of debentures written off `45,000.
(iii) Interest on debentures paid `4,35,000
(iv) Investment of Book value `3,50,000 sold for `3,75,000.
(v) Interest received on Investments `70,000
(2) Income tax paid during the year ` 12,80,000
(3) Company issued 60,000 Equity Shares of `10 each at a premium of 20% on
10th April,2019.
(4) 20,000,9% Preference Shares of `100 each were redeemed on 31 st March, 2020 at
a premium of 5%

(5) Dividend paid during the year amounted to `11 Lakhs (including dividend
distribution tax)
(6) A new Plant costing `7 Lakhs was purchased in part exchange of an old plant on 1 st
January,2020. The book value of the old plant was `8 Lakhs but the vendor took
over the old plant at a value of `6 Lakhs only. The balance amount was paid to
vendor through cheque on 30 th March,2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to
value inventory at cost less 10%. The inventory according to books on 31.03.2020
was ` 14,76,000.
The inventory on 31.03.2019 was correctly valued at ` 13,50,000.
(8) Current Assets and Current Liabilities in the beginning and at the end of year
2019-2020 were as:
As on 1st April,2019 As on 31st March,2020
(` ) (` )
Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash &Bank Balances 2,40,700 3,70,500
Trade Payables 2,84,700 2,87,300
Outstanding Expenses 97,000 1,01,400
You are required to prepare a Cash Flow Statement for the year ended 31 st March, 2020
as per AS 3 (revised) using the indirect method. (12 Marks)
Answer
(a) Journal Entries in the books of A Ltd.
Date Particulars Amount Dr. Amount Cr.
` `
1.5.2019 Bank A/c Dr. 80,00,000
To Debenture Application A/c 80,00,000
(Application money received on 80,000
debentures @ `100 each)
1.6.2019 Debenture Application A/c Dr. 80,00,000
Underwriters A/c Dr. 20,00,000
To 15% Debentures A/c 1,00,00,000
(Allotment of 80,000 debentures to
applicants and 20,000 debentures to
underwriters)

Underwriting Commission Dr. 2,00,000

To Underwriters A/c 2,00,000
(Commission payable to underwriters
@ 2% on ` 1,00,00,000)
Bank A/c Dr. 18,00,000
To Underwriters A/c 18,00,000
(Amount received from underwriters in
settlement of account)
01.06.2019 Debenture Redemption Investment A/c Dr. 6,00,000
To Bank A/c
(100,000 X 100 x 15% X 40%) 6,00,000
(Being Investments made for
redemption purpose)
30.9.2019 Debenture Interest A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Interest paid on debentures for 4
months @ 15% on ` 1,00,00,000)
31.10.2019 15% Debentures A/c Dr. 60,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value
of ` 10)
31.3.2020 Debenture Interest A/c Dr. 3,75,000
(Interest paid on debentures for the
half year)
(Refer working note below)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2020
On ` 40,00,000 for 6 months @ 15% = `3,00,000
On ` 60,00,000 for 1 months @ 15% = ` 75,000
`3,75,000

(b) S Ltd.
Cash Flow Statement for the year ended 31st March, 2020
` `
Cash flows from operating activities
Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000
{14,76,000 less 16,40,000(14,76,000/90X100)}
Operating profit before working capital changes 12,49,000
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000(14,76,000/90X100) less 13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Cash generated from operations 39,79,800
Less: Income taxes paid (12,80,000)
Net cash generated from operating activities 26,99,800
Cash flows from investing activities
Sale of investments 3,75,000
Interest received 70,000
Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000)

Issue of shares 7,20,000

Interest paid (4,35,000)
Dividend paid (11,00,000)
Net cash used in financing activities (29,15,000)
Net increase in cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period 3,70,500
*Net profit given in the question is after considering only the items listed as information
point (1) of the question ; hence amount of loss on plant not added back.
Question 5
(a) The Capital structure of a company BK Ltd., consists of 30,000 Equity Shares of ` 10
each fully paid up and 2,000 9% Redeemable Preference Shares of ` 100 each fully paid
up as on 31.03.2020. the other particulars as at 31.03.2020 are as follows:
Amount (`)
General Reserve 1,20,000
Profit &Loss Account 60,000
Investment Allowance Reserve (not free for distribution as 15,000
dividend)
Cash at bank 1,95,000
Preference Shares are to be redeemed at a premium of 10%. For the purpose of

redemption, the directors are empowered to make fresh issue of Equity Shares at per
after utilizing the undistributed reserve &surplus, subject to the conditions that a sum of
` 40,000 shall be retained in General Reserve and which should not be utilized.
Company also sold investment of 4500 Equity Shares in G Ltd., costing `45,000 at ` 9
per share. (12 Marks)
Pass Journal entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet as at 31.03.2020 of BK Ltd., afte r the
redemption is carried out.
(b) Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ` 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, ` 32,433.
(c) 5 annual instalments of `23,100, the first to commence at the end of twelve months
from the date of down payment.

(d) Rate of interest is 10% p.a.

Your are required to calculate the total interest and interest included in each instalment.
Also prepare the Ledger Account of KM Ltd. in the books of Jai Ltd. (8 Marks)
Answer
(a) Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 84,500
To Equity Share Capital A/c 84,500
(Being the issue of 8,450 Equity Shares of
` 10 each as per Board’s Resolution
No…..dated…….)
9% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c Dr. 4,500
To Investment A/c 45,000
(Being investment sold at loss of ` 4,500)
Preference Shareholders A/c Dr. 2,20,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 20,000
To Premium on Redemption of 20,000
Preference Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 35,500
To Capital Redemption Reserve A/c 1,15,500
(Being the amount transferred to Capital
Redemption Reserve Account)

Balance Sheet as on ………[Extracts]

Particulars Notes `
No.
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 3,84,500
b Reserves and Surplus 2 1,70,500
ASSETS
2. Current Assets
Cash and cash equivalents 1,00,000
(1,95,000 + 84,500+ 40,500 – 2,20,000)
Notes to accounts
1. Share Capital
38,450 Equity shares (30,000 + 8,450) of `10 each fully paid up 3,84,500
2. Reserves and Surplus
General Reserve 40,000
Profit and loss account NIL
Capital Redemption Reserve 1,15,500
Investment Allowance Reserve 15,000
1,70,500
Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed `2,00,000
Less: Profit available for distribution as dividend:
General Reserve: ` (1,20,000-40,000) `80,000
Profit and Loss (60,000 less 20,000 set aside for
adjusting premium payable on redemption of Pref.
shares less 4,500 loss on sale of investments) `35,500
` (1,15,500)
` 84,500
Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.

(b) Calculation of interest

Total Interest in each Cash price in
(`) instalment each instalment
(1) (2)
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ` 32,433
Balance due after down payment 87,567
Interest/Cash Price of 1st - ` 87,567x10/100 ` 23,100 –
instalment = ` 8,757 =
8,757 ` 14,343
Less: Cash price of 1st instalment (14,343)
Balance due after 1st instalment 73,224
Interest/cash price of 2 nd instalment - ` 73,224x 10/100 ` 23,100 -
= ` 7,322=
` 7322 ` 15,778
Less: Cash price of 2nd instalment (15,778)
Balance due after 2nd instalment 57,446
Interest/Cash price of 3rd instalment - ` 57,446 x 10/100 ` 23,100 -
= ` 5745=
` 5745 ` 17,355
Less: Cash price of 3rd instalment (17,355)
Balance due after 3rd instalment 40,091
Interest/Cash price of 4th instalment - ` 40,091x10/100= ` 23,100 -
` 4,009 ` 4,009=
` 19,091
Less: Cash price of 4th instalment (19,091)
Balance due after 4th instalment 21,000
Interest/Cash price of 5th instalment - `21,000 x10/100 ` 23,100 –
= ` 2,100 ` 2,100= 21,000
Less: Cash price of 5th instalment (21,000)
Total Nil ` 27,933 `1,20,000
Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 =
` 27,933
KM Ltd. Account in the books of Jai Ltd
Date Particulars ` Date Particulars `
1.1. 2016 To Bank A/c 32,433 1.1.2016 By Machine A/c 1,20,000

31.12.2016 To Bank A/c 23,100 31.12.2016 By Interest A/c 8,757

31.12.2016 To Balance c/d 73,224
1,28,757 1,28,757
31.12.2017 To Bank A/c 23,100 1.1.2017 By Balance b/d 73,224
31.12.2017 To Balance c/d 57,446 31.12.2017 By Interest A/c 7,322
80,546 80,546
63,191 63,191
44,100 44,100
____ 31.12.2020 By Interest A/c 2,100
23,100 23,100
Question 6
Answer any four of the following:
(a) Explain how financial capital is maintained at historical cost?
Kishore started a business on 1st April, 2019 with ` 15,00,000 represented by 75,000
units of `20 each. During the financial year ending on 31 st March, 2020, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the maximum
amount, which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is
maintained at historical cost.
(b) The following is the Draft Profit & Loss A/c of Brown Ltd. the year ended
31st March,2020:
Amount Amount
(` ) (` )
To Administrative expenses 4,99,200 By Balance b/d 6,27,550

To Advertisement 1,18,200 By Balance from
To Commission on sales 95,225 Trading A/c 38,15,890
To Director’s Fees 1,35,940 By Subsidies
To Interest on debentures 28,460 received from Govt. 2,50,000
To Managerial remuneration 2,75,550 By Profit on sale of 20,000
forfeited shares
To Depreciation on fixed assets 4,82,565

To Provision for Taxation 11,50,200

To General Reserve 4,50,000
To Investment Revaluation Reserve 52,800
To Balance c/d 14,25,300
47,13,440 47,13,440
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was
` 5,15,675. You are required to calculate the maximum limit of managerial remuneration
as per Companies Act, 2013.
(c) Give Journal Entries in the books of Branch to rectify or adjust the following:
(1) Branch paid ` 5,000 as salary to H.O supervisor, but the amount paid by branch
has been debited to salary account in the books of branch.
(2) Asset Purchased by branch for ` 25,000, but the Asset account was retained in H.O
Books.
(3) A remittance of `8,000 sent by the branch has not been received by H.O.
(4) H.O collected ` 25,000 directly from the customer of Branch but fails to give the
intimation to branch.
(5) Remittance of funds by H.O to branch `5,000 not entered in branch books.
(d) List the Criteria for classification of non-corporate entities as level I Entities for the
purpose of application of Accounting Standards as per the Institute of Chartered
Accountants of India.
(e) Following items appear in the Trail Balance of Star Ltd. as on 31 st March, 2019:
Particulars `
80,000 Equity shares of `10 each, ` 8 paid-up 6,40,000
Capital Reserve (including `45,000 being profit on sale of Machinery) 1,10,000
Revaluation Reserve 80,000
Capital Redemption Reserve 75,000
Securities Premium 60,000
General Reserve 2,10,000
Profit & Loss Account (Cr. Balance) 1,00,000
On 1st April,2019, the Company has made final call on Equity shares @` 2 per share.
The entire money was received in the month of April, 2019.

On 1st June, 2019, the Company decided to issue to Equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it was decided that
there should be minimum reduction in free reserves.
Pass necessary journal entries in the Books of Star Ltd. (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Financial capital maintenance at historical cost: Under this convention, opening and
closing assets are stated at respective historical costs to ascertain opening and closing
equity. If retained profit is greater than or equals to zero, the capital is said to be
maintained at historical costs. This means the business will have enough funds to
replace its assets at historical costs. This is quite right as long as prices do not rise.
Maximum amount withdrawn by Kishore in year 2019-20 if Financial capital is maintained
at historical cost
Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity (` 30 x 75,000 units) 22,50,000 represented by cash
Opening equity 75,000 units x ` 20 = 15,00,000
Permissible drawings to keep Capital 7,50,000 (22,50,000 – 15,00,000)
intact
Thus ` 7,50,000 is the maximum amount that can be withdrawn by Kishore in year
2019-20 if Financial capital is maintained at historical cost.
(b) Calculation of net profit u/s 198 of the Companies Act, 2013
` `
Balance from Trading A/c 38,15,890
Add: Subsidies received from Government 2,50,000
40,65,890
Less: Administrative, selling and distribution expenses 7,12,625
(4,99,200 + 1,18,200 + 95,225)
Director’s fees 1,35,940
Interest on debentures 28,460
Depreciation on fixed assets as per Schedule II 5,15,675 (13,92,700)
Profit u/s 198 26,73,190
Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 26,73,190
= ` 2,94,051 (rounded off).

Note:
1. Investment Revaluation reserve not to be deducted for calculation of profit under
section 198;
2. Profit on sale of forfeited shares not to added for calculation of profit under section
198.
*Alternative presentation of the above answer also possible by starting from Net
profit as per Profit and Loss Account.
(c) Journal Entries in Books of Branch A
Particulars Dr. Cr.
Amount Amount
` `
(i) Head office account Dr. 5,000
To Salaries account 5,000
(Being the rectification of salary paid on behalf
of H.O.)
(ii) Head office account Dr. 25,000
To Bank / Liability A/c 25,000
(Being Asset purchased by branch but Asset
account retained at head office books)
(iii) No Entry in Branch Books
(iv) Head office account Dr. 25,000
To Debtors account 25,000
(Being the amount of branch debtors collected
by H.O.)
(v) Bank A/c Dr. 5,000
To Head Office 5,000
(Remittance of Funds by H.O. to Branch)
(d) Criteria for classification of non-corporate entities as level 1 entities for purpose of
application of Accounting Standards decided by the Institute of Chartered Accountants of
India is given below:
Non-corporate entities which fall in any one or more of the following categories, at the
end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on
any stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on
insurance business.

(iii) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting
year.
(iv) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees ten crore at any time during the
immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.
(e) Journal Entries in the books of Star Ltd.
2019 Dr. Cr.
` `
April 1 Equity Share Final Call A/c Dr. 1,60,000
(Final call of ` 2 per share on 80,000
equity shares made due)
Bank A/c Dr. 1,60,000
To Equity Share Final Call A/c 1,60,000
(Final call money on 80,000 equity
shares received)
June 1 Capital Redemption Reserve A/c Dr. 75,000
Capital Reserve Dr. 45,000*
Securities Premium A/c Dr. 60,000
General Reserve A/c (b.f.) Dr. 1,40,000**
To Bonus to Shareholders A/c 3,20,000
(Bonus issue of two shares for every
five shares held, by utilizing various
reserves as per Board’s resolution
dated…….)
Bonus to Shareholders A/c Dr. 3,20,000
(Capitalization of profit)
* considering it as free reserve as it has been realized.
** Alternatively, different combination of profit and loss balance and general reserve
may also be used.

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2 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

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Amount of grant recognized in Profit and Loss account each year:

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4 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

Valuation of Total Inventory as on 31.03.2019:

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[US $ 7,092.2 (5,00,000/70.5) X ` 2)] NET LOSS 67,987.48*

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6 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

the departmental stocks Spares and 44,000

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(3) Provide depreciation @10% p.a. on Machinery and Furniture.

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8 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

To General expenses 22,500 (9,750+450)

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Outstanding salaries 12,000 Sundry debtors 1,55,000

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10 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

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12 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

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14 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

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Underwriting Commission Dr. 2,00,000

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16 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

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Issue of shares 7,20,000

Preference Shares are to be redeemed at a premium of 10%. For the purpose of

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18 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

(d) Rate of interest is 10% p.a.

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Balance Sheet as on ………[Extracts]

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20 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

(b) Calculation of interest

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31.12.2016 To Bank A/c 23,100 31.12.2016 By Interest A/c 8,757

To Administrative expenses 4,99,200 By Balance b/d 6,27,550

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22 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021

To Provision for Taxation 11,50,200

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