CA Inter Advanced Accounting by P S Beniwal

EDU91 | Where Learning Happens 9810113555
CA INTER ADVANCED ACCOUNTING – INDEX
Unit Marks Sr. Chapter Page No.

No.
1 ACCOUNTING FOR EMPLOYEE STOCK OPTION 1.1 to 1.16
PLANS
2 LIQUIDATION OF COMPANIES 2.1 to 2.34
I 33-38 3 INTERNAL RECONSTRUCTION 3.1 to 3.35
4 AMALGAMATION OF COMPANIES 4.1 to 4.83
5 BUYBACK OF SECURITIES & EQUITY SHARES WITH 5.1 to 5.29
DIFFERENTIAL RIGHTS
II 12-16 6 NON-BANKING FINANCIAL COMPANIES 6.1 to 6.10
7 BANKING COMPANIES 7.1 to 7.44
III 25-30 8 PARTNERSHIP ACCOUNTS 8.1 to 8.32
9 CONSOLIDATED FINANCIAL STATEMENTS 9.1 to 9.33
10 AS 4: CONTINGENCIES AND EVENT OCCURRING AS 4.1 to AS
AFTER BALANCE SHEET DATE 4.11
11 AS 5: NET PROFIT OR LOSS FOR THE PERIOD, PRIOR AS 5.1 to AS
PERIOD ITEMS AND CHANGES IN ACCOUNTING 5.11
POLICIES
12 AS 7: CONSTRUCTION CONTRACTS AS 7.1 to AS
7.12
13 AS 9: REVENUE RECOGNITION As 9.1 to AS
9.13
14 AS 17: SEGMENT REPORTING AS 17.1 to
AS 17.6
15 AS 18: RELATED PARTY DISCLOSURES AS 18.1 to
AS 18.5
16 AS 19: LEASES AS 19.1 to
AS 19.10
17 AS 20: EARNINGS PER SHARE AS 20.1 to
AS 20.8
18 AS 22: ACCOUNTING FOR TAXES ON INCOME AS 22.1 to
IV 20- 26 AS 22.7
19 AS 24: DISCONTINUING OPERATIONS AS 24.1 to
AS 24.4
20 AS 26 : INTANGIBLE ASSETS AS 26.1 to
AS 26.11
21 AS 29: PROVISIONS, CONTINGENT LIABILITIES AND AS 29.1 to
CONTINGENT ASSETS AS 29.12
22 INTRODUCTION OF AS, IND AS, IAS AND IFRS 22.1 to 22.14
23 FRAMEWORK FOR PREPARATION AND 23.1 to 23.11
PRESENTATION OF FINANCIAL STATEMENTS
24 SCHEDULE III – DIVISION I 24.1 to 24.16
To get the best out of these notes visit www.edu91.org

Join Us on YouTube www.youtube.com/neerajarora
Join Us on Telegram https://t.me/neerajaroraclasses
These notes are incomplete without our videos. We keep on updating our books, notes and videos. You should always study from updated notes with
our videos available on www.edu91.org . To get the most out of these notes please study from our classes and attend our mock tests.-CA P S Beniwal
For CA Inter& Final Classes, visit www.edu91.org Join Us on YouTube www.youtube.com/neerajarora Join Us on Telegram https://t.me/neerajaroraclasses
ACCOUNTING FOR EMPLOYEE STOCK OPTION PLANS
1. Mehta Ltd. grants 1,500 stock options to its employees on 1.4.2019 at ₹ 50. The vesting period is two and a
half years. The maximum exercise period is one year. Market price on that date is ₹ 80. Fair value per
option is ₹ 30. All the options were exercised on 31.7.2022. Give the necessary journal entries if the face
value of equity share is ₹ 10 per share.
2. The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2016
Number of employees covered 50
Number of options granted per employee 1,000
Fair value of option per share on grant date (Rs.) 9
The options will vest to employees serving continuously for 3 years from vesting date, provided the share
price is Rs. 65 or above at the end of 2018-19.
The estimates of number of employees satisfying the condition of continuous employment were 48 on
31/03/17, 47 on 31/03/18. The number of employees actually satisfying the condition of continuous
employment was 45.
The share price at the end of 2018-19 was Rs. 68.
You are required to compute expenses to be recognised in each year in the books of the company.
3. Ajanta grants 120 share options to each of its 460 employees. Each grant is conditional on the employee
working for Ajanta over the next three years. Ajanta has estimated that the fair value of each share option is
Rs. 12.
Ajanta estimates that 25% of employees will leave during the three-year period and so forfeit their rights to
the share options. Everything turns out exactly as expected.
Required: Calculate the amounts to be recognized as expense during the vesting period.
Grant date April 1,2006
Vesting condition: Continuous employment upto 31/03/09
Nominal value per share (Rs.) 10
Exercise price per share (Rs.) 40
Exercise date July 31, 2009
The number options to vest per employee shall depend on company’s average annual earning after tax
during vesting period as per the table below:
Average annual earning after tax Number of options per employee
Less than Rs. 100 crores Nil
Rs. 100 crores to less than Rs. 120 crores 30
Rs. 120 crores to less than Rs. 150 crores 45
Above Rs. 150 crores 60
Position on 31/03/07
(a) The company expects to earn Rs. 115 crores after tax on average per year during vesting period.
(b) Number of employees expected to be entitled to option = 280
(a) The company expects to earn Rs. 130 crores after tax on average per year during vesting period.
(b) Number of employees expected to be entitled to option = 270
(a) The company earned Rs. 128 crores after tax on average per year during vesting period.
(b) Number of employees entitled to option = 275
For CA Inter& Final Classes, visit www.edu91.org Join Us on YouTube www.youtube.com/neerajarora Join Us on Telegram https://t.me/neerajaroraclasses 1. 1
Position on July 31, 2009
Number of employees exercising option = 265
Compute expenses to recognise in each year and value of option forfeited.
Grant date April 1, 2006
Number options granted per employee 100
Vesting condition: Continuous employment for 3 years
Nominal value per share (Rs.) 100
Exercise price per share (Rs.) 125
Market price per share on grant date (Rs.) 149
Vesting date March 31, 2009
Exercise Date March 31, 2010
(a) Estimated annual rate of departure 2%
(b) Number of employees left = 15
(a) Estimated annual rate of departure 3%
(b) Number of employees left = 10
(a) Number of employees left = 8
(b) Number of employees entitled to exercise option = 492
(a) Number of employees exercising the option = 480
(b) Number of employees not exercising the option = 12
Compute expenses to recognise in each year by (i) fair value method (ii) intrinsic value method
6. X Ltd. offered 15,000 ESOP’S to it’s employees on April 1, 2001. Exercisable on 31 st March, 2004 On 1st
January, 2002, 1000 options were withdrawn from employee X. On 31st March, 2003, 8000 options were
cancelled due to resignation of employees. Rest of the options were availed by employees on due date.
Market price on 1-4-2001 for equity shares of company is Rs. 40 (face value Rs. 10). However, market
price on 31-3-2004 is Rs. 80 per share. Journalize entries.
7. A Company grants 500 options on 1-4-1999 at Rs .40 when the market price is Rs. 160 the vesting period is
two and a half years, the maximum exercise period is one year. Also 150 unvested options lapsed on 1-5-
2001, 300 options are exercised on 30-6-2002 and 50 vested options lapsed at the end of the exercise
period. Journalize.
8. P Ltd. granted option for 8,000 equity shares on 1st October, 2010 at Rs.80 when the market price was
Rs.170. The vesting period is 4-1/2 years, 4,000 unvested options lapsed on 1 st December, 2012, 3,000
option are exercise on 30th September, 2014 (This date should be read as 30th September,2015) and 1,000
vested option lapsed at the end of the exercise period. Pass Journal Entries for above transactions.
9. PQ Ltd. grants 100 stock options to each of its 1,000 employees on 1 -4-2015, conditional upon the
employee remaining in the company for 2 years. The fair value of the option is Rs. 18 on the grant date and
the exercise price is Rs. 55 per share. The other information is given as under:
(i) Number of employees expected to satisfy service conditions are 930 in the 1 st year and 850 in the 2nd year.
(ii) 40 employees left the company in the 1st year of service and 880 employees have actually completed 2
year vesting period.
You are required to calculate ESOP cost to be amortized by PQ Ltd. in the years 2015- 2016 and 2016-2017.
10. Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2008 for Rs. 20, depending upon
the employees at the time of vesting of options. The market price of the share is Rs. 50. These options will
vest at the end of year 1 if the earning of Choice Ltd. is 16%, or it will vest at the end of the year 2 if the
average earning of two years is 13%, or lastly it will vest at the end of the third year if the average earning
of 3 years will be 10%. 5,000 unvested options lapsed on 31.3.2009. 4,000 unvested options lapsed on
31.3.2010 and finally 3,500 unvested options lapsed on 31.3.2011.
Following is the earning of Choice Ltd. :
Year ended on Earning (in %)
31.3.2009 14%
31.3.2010 10%
31.3.2011 7%
850 employees exercised their vested options within a year and remaining options were unexercised at the
end of the contractual life. Pass Journal entries for the above.
Grant date April 1,2006
Number options granted per employee 100
The vesting period shall be determined as below:
(a) If the company earns Rs. 120 crore or above after taxes in 2006-07, the options will vest on 31/03/07.
(b) If condition (a) is not satisfied but the company earns Rs. 250 crores or above after taxes in aggregate in
2006-07 and 2007-08, the options will vest on 31/03/08.
(c) If conditions (a) and (b) are not satisfied but the company earns Rs. 400 crores or above after taxes in
aggregate in 2006-07, 2007-08 and 2008-09, the options will vest on 31/03/09.
(a) The company earned Rs. 115 crore after taxes in 2006-07
(b) The company expects to earn Rs. 140 crores in 2007-08 after taxes
(c) Expected vesting date: March 31, 2008
(d) Number of employees expected to be entitled to option = 474
(b) The company expects to earn Rs. 160 crores in 2008-09 after taxes
(c) Expected vesting date: March 31, 2009
(d) Number of employees expected to be entitled to option = 465
(b) Number of employees on whom the option actually vested = 450
Compute expenses to recognise in each year.
12. Siya Ltd. provides you the following information:
No. of employees 2,500
No. of option to be granted to each employee 500
Vesting period 4 years
No. of employees not expected to fulfil the vesting condition other then Market conditions
1st Year 20%
nd
2 Year 15%
3rd Year 10%
4th Year 10%
Fair value of the option per share Rs. 5
Exercise Price Rs. 50
Face value of each share Rs. 10
At the end of third year it has been re-estimated that all vesting condition have been fulfilled and no other
further condition are required for options to vest and 600 employees exercise their option at the end of 4 th
year, 800 employees exercise their option at the end of 5th year, 100 employees exercise their option at the
end of 6th year. You are required to pass necessary journal entries for first 3 years.
Solution: Journal entries in the book of siya Ltd.
Particulars Dr.(Rs.) Cr.(Rs.)
At the end of 1 year
Employee Compensation- Dr. 8,60,625
Expenses Account
To Employee Stock- 8,60,625
Option Outstanding Account
(Being compensation expense - recognized in respect of-
the ESOP)
Profit and Loss Account Dr. 8,60,625 8,60,625
To Employee Compensation-
Expense Account
(Being employees - expense of the year- transferred to P&L A/c)
At the end of year 2
Employee Compensation- Dr. 8,60,625
Expenses Account
To Employee Stock- 8,60,625
(Being expense respect of the ESOP
recognized for the year 2)
Profit and Loss Account Dr. 8,60,625
To Employee Compensation- 8,60,625
Expense Account
(Being Expense of the year- transferred to P&L A/c)
At the end of year 3
Employees Compensation- Dr. 21,03,750
Expenses Account 21,03,750
To Employee Stock-
(Being expense respect of the ESOP recognized for the year 3)
Profit and Loss Account Dr. 21,03,750
To Employee Compensation- 21,03,750
Expense Account
(Being Expense of the year- transferred to P&L A/c)
Working Notes:
A. No. of employees expected to take options = 2,500 x .80 x .85 x .90 x .90 = 1377
B. No. of Options to be granted to each employee = 500
C. Fair value of each option = Rs.5
D. Total fair value of each options expected to vest (A x B x C) = Rs. 34,42,500
E. Amount of fair value of option to be recognized as an expences 1st year (34,42,500/4) = Rs. 8,60,625
2nd year (34,42,500 x (2/4) - Rs. 8,60,625 = Rs. 8,60,625
3rd year [(1530 employees x 500 option x Rs. 5) – (8,60,625 + 8,60,625)] = Rs.21,03,750
Note: 1,530 = (2,500 X .80 X .85 X .90)
Since vesting period has been revised in 3rd year all the remaining liabilities in respect of employees stock option plan has
been recognized at the year of 3rd year and data for the 4th year has been ignored.
13. A company has its share capital divided into shares of Rs. 10 each. On 1-4-2012, it granted 5,000
employees stock option at Rs. 50, when the market price was Rs. 140. The options were to be exercised
between 1-3-2013 to 31-03-2013. The employees exercised their options for 4,800 shares only; remaining
options lapsed. Pass the necessary journal entries for the year ended 31-3-2013, with regard to employees,
stock option.
14. ABC has recently implemented schemes that awards 6,000 free shares to each of its employees, with no
conditions other than continuous service. Out of total 6,000 shares, 1,000 shares vest after one year, 2,000
shares after two years and the remaining 3,000 shares after three years. Any shares received at the end of
years 1 and 2would vest unconditionally.
The fair value of a share delivered in one year’s time is Rs. 30; in two years, time Rs. 28; and in three years’
time Rs. 25.
In this case, the employee has simultaneously received three awards. The first award comprises of 1,000
shares vesting over one year, second award comprises of 2,000 shares vestige over two years and third
award comprises of 3,000 shares vesting over 3 years. Calculate Expanses p.a. What will be your answer, if
the awards did not have a graded vesting periods. Rather, all 6,000 shares vest in full only at the end of 3
years.
15. At the beginning of the year 1, Harmony Limited grants 600 options to each of its 1000 employees. The
contractual life of option granted is 6 years.
Other relevant information is as follows:
Vesting Period 3 years
Exercise period 3 years
Expected Life 5 years
Exercise Price Rs. 100
Market Price Rs. 100
Expected Forfeitures per year 3%
The option granted vest according to a graded schedule of 25% at the end of the year 1, 25% at the end of
the year 2 and the remaining 50% at the end of the year 3.
You are required to calculate total compensation expenses for the options expected to vest and cost and
cumulative cost to be recognized at the end of all the three years assuming that expected forfeiture rate does
not change during the vesting period when the Intrinsic value of the options at the grant date is Rs. 7 per
option.
16. At the beginning of year 1, an enterprise grants 10,000 stock options to a senior executive, conditional upon
the executive remaining in the employment of the enterprise until the end of year 3. The exercise price is
Rs. 40. However, the exercise price drops to Rs. 30 if the earnings of the enterprise increase by at-least an
average of 10 per cent per year over the three-year period.
On the grant date, the enterprise estimates that the fair value of the stock options, with an exercise price of
Rs. 30, is Rs. 16 per option. If the exercise price is Rs. 40, the enterprise estimates that the stock options
have a fair value of Rs. 12 per option.
During year 1, the earnings of the enterprise increased by 12 per cent, and the enterprise expects that
earnings will continue to increase at this rate over the next two years. The enterprise, therefore, expects that
the earnings target will be achieved, and hence the stock options will have an exercise price of Rs. 30.
During year 2, the earnings of the enterprise increased by 13 per cent, and the enterprise continues to expect
that the earnings target will be achieved.
During year 3, the earnings of the enterprise increased by only 3 per cent, and therefore the earnings target
was not achieved. The executive completes three years’ service, and therefore satisfies the service
condition. Because the earnings target was not achieved, the 10,000 vested stock options have an exercise
price of Rs. 40.
You are required to calculate the amount to be charged to Profit and Loss Account every year on account of
compensation expenses.
Solution: Since the exercise price varies depending on the outcome of a performance condition which is not
a market condition, the effect of that performance condition (i.e. the possibility that the exercise price might
be Rs. 40 and the possibility that the exercise price might be Rs. 30) is not considered when estimating the
fair value of the stock options at the grant date. Instead, the enterprise estimates the fair value of the stock
options at the grant date under each scenario and revises the transaction amount to reflect the outcomes of
that performance condition at the end of every year based on the information available at that point of time.
Calculation of compensation expense to be charged every year
Year Calculation Expense for the year (Rs.) Cumulative expense (Rs.)
1 10,000 x Rs. 16 x 1/3 53,333 53,333
2 10,000 x Rs. 16 x 2/3 53,334 1,06,667
3 10,000 x Rs. 12 x 3/3 13,333 1,20,000
17. At the beginning of year 1, the enterprise grants 1,000 stock options to each member of its sales team,
conditional upon the employees remaining in the employment of the enterprise for three years, and the team
selling more than 50,000 units of a particular product over the three-year period. The fair value of the stock
options is Rs. 15 per option at the date of grant.
During year 2, the enterprise increases the sales target to 1,00,000 units. By the end of year 3, the enterprise
has sold 55,000 units, and the stock options do not vest.
Twelve members of the sales team have remained in service for the three-year period. You are required to
examine and give comment in light of the relevant Guidance Note that whether the company should
recognise the expenses on the base of options granted or not.
Also state will your answer differ if, instead of modifying the performance target, the enterprise had
increased the number of years of service required for the stock options to vest from three years to ten years.
Solution: Paragraph 19 of the Guidance Note on Share Based Payments requires, for a performance condition
that is not a market condition, the enterprise to recognize the services received during the vesting period based
on the best available estimate of the number of shares or stock options expected to vest and to revise that
estimate, if necessary, if subsequent information indicates that the number of shares or stock options expected to
vest differs from previous estimates. On vesting date, the enterprise revises the estimate to equal the number of
instruments that ultimately vested. However, paragraph 24 of the Guidance Note requires, irrespective of any
modifications to the terms and conditions on which the instruments were granted, or a cancellation or
settlement of that grant of instruments, the enterprise to recognize, as a minimum, the services received,
measured at the grant date fair value of the instruments granted, unless those instruments do not vest because of
failure to satisfy a vesting condition (other than a market condition) that was specified at grant date.
Furthermore, paragraph 26(c) of the Guidance Note specifies that, if the enterprise modifies the vesting
conditions in a manner that is not beneficial to the employee, the enterprise does not take the modified vesting
conditions into account when applying the requirements for treatment of vesting conditions as specified in
Guidance Note.
Therefore, because the modification to the performance condition made it less likely that the stock options will
vest, which was not beneficial to the employee, the enterprise takes no account of the modified performance
condition when recognizing the services received. Instead, it continues to recognize the services received over
the three-year period based on the original vesting conditions. Hence, the enterprise ultimately recognizes
cumulative remuneration expense of Rs. 1,80,000 over the three- year period (12 employees × 1,000 options ×
Rs. 15).
The same result would have occurred if, instead of modifying the performance target, the enterprise had
increased the number of years of service required for the stock options to vest from three years to ten years.
Because such a modification would make it less likely that the options will vest, which would not be beneficial
to the employees, the enterprise would take no account of the modified service condition when recognizing the
services received. Instead, it would recognize the services received from the twelve employees who remained in
service over the original three- year vesting period.
18. On 1st April, 2012, a company offered 100 shares to each of its 500 employees at Rs. 50 per share. The
employees are given a year to accept the offer. The shares issued under the plan shall be subject to lock-in
on transfer for three years from the grant date. The market price of shares of the company on the grant date
is Rs. 60 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan
is estimated at Rs. 56 per share.
On 31st March, 2013, 400 employees accepted the offer and paid Rs. 50 per share purchased.
Nominal value of each share is Rs. 10.
Record the issue of share in the books of the company under the aforesaid plan.
19. S Ltd. grants 1,000 options to its employees on 1.4.20X0 at ₹ 60. The vesting period is two and a half years.
The maximum exercise period is one year. Market price on that date is ₹ 90. Fair value per option is ₹ 30.
All the options were exercised on 31.7.20X3. Journalize, if the face value of equity share is ₹ 10 per share.
20. A company grants 2,000 Employees Stock Options on 1st April 2018 at ₹ 60 (Face Value Rs. 10) when the
market price is ₹ 170. The vesting period is 2.5 years, and the maximum exercise period is 1 year. 600
unvested options lapse on 01.05.2020, 1200 options are exercised on 30.06.2021. 200 vested options lapse
at the end of the exercise period. You required to pass necessary journal entries with narrations.
21. Sun Ltd. grants 100 stock options to each of its 1200 employees on 01.04.2016 for Rs. 30, depending upon
the employees at the time of vesting of options. Options would be exercisable within a year it is vested. The
market price of the share is Rs. 60 each. These options will vest at the end of the year 1 if the earning of
Sun Ltd. is 16% or i t will vest at the end of year 2 if the average earning of two years is 13%, or lastly it
will vest at the end of the third year, if the average earning of 3 years is 10%. 6000 unvested options lapsed
on 31.3.2017, 5000 unvested options lapsed on 31.03.2018 and finally 4000 unvested options lapsed on
31.03.2019.
The earnings of Sun Ltd. for the three financial years ended on 31st March, 2017, 2018 and 2019 are 15%,
10% and 6%, respectively.
1000 employees exercised their vested options within a year and remaining options were unexercised at the
end of the contractual life.
You are requested to give the necessary journal entries for the above and prepare the statement showing
compensation expenses to be recognized at the end of each year.
22. Company has its share capital divided into shares of Rs. 10 each. On 1st April, 2005 it granted 10,000
employees’ stock options at Rs. 40, when the market price was Rs. 130. The options were to be exercised
between 16th December, 2005 and 15th March, 2006. The employees exercised their options for 9,500
shares only; the remaining options lapsed. The company closes its books on 31st March every year. Show
Journal Entries.
23. X Co. Ltd. has its share capital divided into equity shares of Rs. 10 each. On 1.4.2012 it granted 20,000
employees, stock option at Rs. 50 per share, when the market price was Rs. 120 per share. The options were
to be exercised between 15th March, 2013 and 31st March, 2013. The employees exercised their options for
16,000 shares only and the remaining options lapsed. The company closes its books on 31st March every
year. Show Journal entries (with narration) as would appear in the books of the company up to 31st March,
2013.
24. On 1st April, 2019, a company offered 100 shares to each of its 400 employees at Rs. 25 per share. The
employees are given a month to accept the shares. The shares issued under the plan shall be subject to lock-
in to transfer for three years from the grant date i.e. 30th, April 2019. The market price of shares of the
company on the grant date is Rs. 30 per share. Due to post-vesting restrictions on transfer, the fair value of
shares issued under the plan is estimated at Rs. 28 per share.
Up to 30th April, 2019, 50% of employees accepted the offer and paid Rs. 25 per share purchased. Nominal
value of each share is Rs. 10. You are required to record the issue of shares in the books of the company
under the aforesaid plan.
25. What is employee stock option plan? Explain the importance of such plans in the modern time.
Answer: Employee Stock Option Plan: It is a plan under which the enterprise grants employee stock
options. Employee stock option is a contract that gives the employees of the enterprise the right, but not the
obligation, for a specified period of time to purchase or subscribe the shares of the company at a fixed or
determinable price. Employee stock option plans encourage employees to have higher participation in the
company.
The importance of these plans is as follows:
(a) Stock options provide an opportunity to employees to contribute in the growth of the company.
(b) Stock option creates long term wealth in the hands of the employees.
(c) They are important means to attract, retain and motivate the best available talent for the company.
(d) It creates a common sense of ownership between the company and its employees.
26. State the conditions of issuance of Sweat Equity Shares by Joint Stock Companies.
Answer: A company may issue sweat equity shares of a class of shares already issued, if the following
conditions are fulfilled-
(i) the issue of sweat equity shares is authorised by a special resolution passed by the company in the
general meeting.
(ii) the resolution specifies the number of shares, current market price, the consideration if any, and the
class or classes of directors or employees to whom such equity shares are to be issued.
(iii) not less than one year has, at the time of the issue, elapsed since the date on which the company was
entitled to commence business.
(iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock exchange,
are issued in accordance with the regulations made by the SEBI.
27. Graded vesting under an employee stock option plan.

Answer: Graded vesting under an employee stock option plan: In case the options/shares granted under an
employee stock option plan do not vest on one date but have graded vesting schedule, total plan should be
segregated into different groups, depending upon the vesting dates. Each of such groups would be having
different vesting period and expected life and, therefore, each vesting date should be considered as a
separate option grant and evaluated and accounted for accordingly. For example, suppose an employee is
granted 100 options which will vest @ 25 options per year at the end of the third, fourth, fifth and sixth
years. In such a case, each tranche of 25 options would be evaluated and accounted for separately.
28. Define the following terms:

(i) Vesting
(ii) Exercise Period
(iii) Grant date
(iv) Exercise Price
Answer:
(i) Vesting: It means the process by which the employee is given the right to apply for the shares of the
company against the option granted to him under the employees’ stock option plan.
(ii) Exercise Period: It is the time period after vesting within which the employee should exercise his right
to apply for shares against the option vested in him in pursuance of the employees’ stock option plan.
(iii) Grant Date: It is the date at which the enterprise and its employees agree to the terms of an employee
share-based payment plan. At grant date, the enterprise confers on the employees the right to cash or
shares of the enterprise, provided the specified vesting conditions, if any, are met.
(iv) Exercise Price: It is the price payable by the employee for exercising the option granted to him in
pursuance of employees’ stock option scheme.
MCQs (ICAI Study Material)
1. For accounting purposes, employee stock option plans are classified as
(a) Equity settled and cash settled.
(b) Liability settled and cash settled.
(c) Equity settled, cash settled and employees stock option plans with cash alternatives.
2. The difference between the fair value of the shares to which the counterparty has the (conditional or
unconditional) right to subscribe or which it has the right to receive, and the price (if any) the counterparty is
(or will be) required to pay for those shares is
(a) Exercise Price
(b) Intrinsic Value
(c) Fair value
3. Which amount would be recognized for employee stock option plans?

(a) Fair value of services received
(b) Amount as per agreement
(c) Fair value of equity instruments issued.
4. In line with the Guidance Note on Accounting for Share based Payments, an enterprise should recognize an
amount for the services received from the employees
(a) during the vesting period based on the best available estimate of the number of stock options expected to
vest.
(b) Immediately.
(c) during the vesting period proportionately.
5. Which method is recommended for valuation of employee stock option plans by the Guidance Note on
Accounting for Share Based Payments?
(a) Intrinsic Value.
(b) Fair value.
(c) Both (a) and (b).
ANSWERS/HINTS
1. (c); 2. (b) 3. (c) 4. (a) 5. (b)
REVISION STRUCTURE
Question Status Copy Revision Important concept in this question (In student words)
no. page no. 1 2 3 to 5 Student can refer copy page number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
SUMMARY NOTES
SUMMARY NOTES
SOLUTIONS
Q19. Books of S Ltd.

Journal Entries
Date Particulars Debit Credit
₹ ₹
31.3.X1 Employees Compensation Expense Account Dr. 12,000
To Employees Stock OptionOutstanding A/c 12,000
(Being compensation expense recognized in
respect of 1,000 options granted to employees at
fair value of ₹ 30 each, amortized on straight
linebasis over 2½ years) (Refer WN)
Profit and Loss Account Dr. 12,000
To Employees Compensation Expense A/c 12,000
(Being employees compensation expense of
the year transferred to P&L A/c)
To Employees Stock Option OutstandingA/c 12,000
respect of 1,000 options granted to employees
at discount of ₹ 30 each, amortized on straight
line basis over 2½ years) (Refer WN)
To Employees Compensation ExpenseA/c 12,000
To Employees Stock Option OutstandingA/c 6,000
(Being balance of compensation expense
amortized ₹ 30,000 less ₹ 24,000) (Refer WN)
To Employees Compensation ExpenseA/c 6,000
31.7.X3 Bank Account (₹ 60 × 1,000) Dr. 60,000
Stock Option Outstanding A/c (₹ 30 x 1,000) Dr. 30,000
To Equity Share Capital Account 10,000
To Securities Premium Account 80,000
(Being exercise of 1,000 options at an exercise
price of ₹ 60)
Working Notes:
1. Total employees compensation expense = 1,000 x ₹ 30 = ₹ 30,000

2. Employees compensation expense has been written off during 2½ years on straight line basis as under:
I year = ₹ 12,000 (for full year)
II year = ₹ 12,000 (for full year)
III year = ₹ 6,000 (for half year)
Q20. Journal Entries in the books of Company

Dr. Cr.
Date Particulars
(₹) (₹)
31.3.2019 Employees compensation expense account Dr. 88,000
To Employee stock option outstanding 88,000
account
(Being compensation expenses recognized in
respect of the employee stock option
Profit and loss account Dr. 88,000
To Employees compensation expenses 88,000
account
(Being expenses transferred to profit and loss
account at year end)
31.3.2020 Employees compensation expenses account Dr. 88,000
To Employee stock option outstanding 88,000
account
respect of the employee stock)
To Employees compensation expenses 88,000
account
(Being expenses transferred to profit and loss
account at year end)
31.3.2021 Employee stock option outstanding account Dr. 22,000
(W.N.2)
To General Reserve account (W.N.2) 22,000
(Being excess of employees compensation
expenses transferred to general reserve
account)
30.6.2021 Bank A/c (1,200 × ₹ 60) Dr. 72,000
Employee stock option outstanding account Dr. 1,32,000
(1,200 × ₹ 110)
To Equity share capital account 12,000
(1,200 × ₹ 10)
To Securities premium account 1,92,000
(1,200 x ₹ 160)
(Being 1,200 employee stock option exercised at
an exercise price of ₹ 60 each)
01.10.2021 Employee stock option outstanding account Dr. 22,000
(W.N.3)
To General reserve account (W.N.3) 22,000
(Being ESOS outstanding A/c on lapse of 200
options at the end of exercise of option period
transferred to General Reserve A/c)
Working Notes:
1. Compensation expenses recognized in respect of the employee stock option:
2,000 options granted to employees at a discount of ₹ 110 each to be amortized on Straight line basis
over 2.5 years i.e. 2,000 stock options x ₹ 110 / 2.5 years = ₹ 88,000
2. On 31.3.2021, company will examine its actual forfeitures and make necessary adjustments, if any, to
reflect expenses for the number of options that actually vested. Considering that 1400 stock options
have completed 2.5 years vesting period, the expense to be recognized during the year is in negative i.e.
No. of options actually vested 1,400 x 110 (170 – 60 = 110) ₹ 1,54,000
Less: Expenses recognized ₹ (88,000 + 88,000) (₹ 1,76,000)
Excess expense transferred to general reserve ₹ 22,000
3. Similarly, on 1.10.2021, Employee Stock Option Outstanding Account will be
No. of options actually vested (1,200 x 110) ₹ 1,32,000
Less: Expenses recognized (₹ 1,54,000)
Excess expense transferred to general reserve ₹ 22,000
Q21
Date Particulars Rs. Rs.
31.3.2017 Employees compensation expense A/c Dr. 17,10,000
To ESOS outstanding A/c 17,10,000
(Being compensation expense
recognized in respect of the ESOP i.e.
100 options each granted to 1,200
employees at a discount of Rs. 30
each, amortized on straight line basis
overvesting years (Refer W.N.)
Profit and Loss A/c Dr. 17,10,000
To Employees compensation 17,10,000
expenses A/c
(Being expenses transferred to P&L A/c)
31.3.2018 Employees compensation expenses A/c Dr. 4,70,000
recognized in respect of the ESOP-
Refer W.N.)
expenses A/c
31.3.2019 Employees compensation Expenses A/c Dr. 9,70,000
recognized in respect of the ESOP-
Refer W.N.)
Profit and Loss A/c 9,70,000
expenses A/c
2019-20 Bank A/c (1,00,000 x Rs. 30) Dr. 30,00,000

ESOS outstanding A/c Dr. 30,00,000
[(31,50,000/1,05,000) x 1,00,000]
To Equity share capital (1,00,000 x 10,00,000
Rs. 10)
To Securities premium A/c 50,00,000
(1,00,000 x Rs. 50)
(Being 1,00,000 options exercised at an
exercise price of Rs. 30 each)
31.3.2020 ESOS outstanding A/c Dr. 1,50,000
To General Reserve A/c 1,50,000
(Being ESOS outstanding A/c on lapse of
5,000 options at the end of exercise of
option period transferred to General
Reserve A/c)
Working Note:
Statement showing compensation expense to be recognized at the end of:
Particulars Year 1 Year 2 Year 3

(31.3.2017) (31.3.2018) (31.3.2019)
Number of options expected tovest 1,14,000 options 1,09,000 options 1,05,000 options
Total compensation expenseaccrued (60-30) Rs. 34,20,000 Rs. 32,70,000 Rs. 31,50,000
Compensation expense of theyear 34,20,000 x 1/2 = 32,70,000 x 2/3
Rs. 17,10,000 = Rs. 21,80,000 Rs. 31,50,000
Compensation expenserecognized previously Nil Rs. 17,10,000 Rs. 21,80,000
Compensation expenses to berecognized for the year Rs. 17,10,000 Rs. 4,70,000 Rs. 9,70,000
Q22. Journal Entries

Particulars Dr. Cr.
₹ ₹
15th Bank A/c (9,500 x 40) Dr. 3,80,000
March Employee compensation expense A/c
20X2 to [9,500 x 90) Dr.
To Equity share capital A/c (9,500 x 10) 8,55,000
31st To Securities premium A/c [9,500 x (130-10)] 95,000
March 11,40,000
(Being allotment to employees of 9,500 equity
20X2 shares of ₹ 10 each at a premium of ₹ 120 per
share in exercise of stock options by employees)
31st Profit and Loss A/c Dr. 8,55,000
March To Employee compensation expense A/c 8,55,000
20X2 (Being transfer of employee compensation expense
to profit and loss account)
Q23. Journal Entries in the books of Arihant Ltd.
₹ ₹
10.12.X1 Bank A/c (16,000 x 50) Dr. 8,00,000
to Employee compensation expense A/c Dr. 11,20,000
31.3.X2 (16,000 x 70) 1,60,000
To Equity share capital A/c (16,000 x 10)
To Securities premium A/c (16,000 x 110) 17,60,000
(Being shares issued to the employees
against the options vested to them in
pursuance of Employee Stock Option Plan)
31.3.X2 Profit and Loss A/c Dr. 11,20,000
To Employee compensation expense A/c 11,20,000
(Being transfer of employee compensation
expenses to Profit and Loss Account)
Q24. Fair value of an option = Rs. 28

Difference between Fair value and Issue Price =Rs. 28 – Rs. 25 = 3.
Number of employees accepting the offer = 400 employees x 50% = 200 employees
Number of shares issued = 200 employees x 100 shares/employee = 20,000 shares
Employee Compensation Expenses recognized in 2019-20 =20,000 shares x Rs. 3 = Rs. 60,000
Securities Premium A/c = Rs. 28 – 10 = Rs. 18 per share = 20,000 x 18 = Rs. 3,60,000
Journal Entry
Date Particulars Rs. Rs.

30.04.2019 Bank (20,000 shares x Rs.25) Dr. 5,00,000
Employees compensation expense A/c Dr. 60,000
To Share Capital 2,00,000
To Securities Premium 3,60,000
(Being stock purchase option accepted by 200
employees for 100 shares each at Rs. 25 per share
on a Fair Value of Rs. 28 per share)
Note: Employees compensation expenses amounting Rs. 60,000 will ultimately be charged to profit & loss
account.
LIQUIDATION OF COMPANIES
1. A company went into liquidation whose creditors are Rs. 36,000. This amount of Rs. 36,000 includes Rs. 6,000
on account of wages of 15 men at Rs. 100 per month for 4 months, immediately before the date of winding up,
Rs. 9,000 being the salaries of 5 employees at Rs. 300 per month for the previous 6 months, Rent for godown for
the last six months amounting to Rs. 3,000; Income-tax deducted out of salaries of employees Rs. 1,000. In
addition it is estimated that the company would have to pay Rs. 3,000 as compensation to an employees for
injuries suffered by him, which was contingent liability not accepted by the company and not included in above
said creditors figure. Find the amount of Preferential Creditors.
2. X Co. Ltd went into voluntary liquidation on 1st April,1992. The following balances are extracted from its books
on that date:
Rs. Rs.
Capital
24,000 equity shares Machinery 90,000
Of Rs.10 each 2,40,000 Leasehold properties 1,20,000
Debentures (secured Stock 3,000
By floating charge) 1,50,000 Debtors 1,50,000
Bank overdraft 54,000 Investment 18,000
Creditors 60,000 Cash in hand 3,000
P&L A/c 1,20,000
5,04,000 5,04,000
The following assets are valued as under: Rs.
Machinery 1,80,000
Leasehold properties 2,18,000
Investments 12,000
Stock 6,000
Debtors 1,40,000
The bank overdraft is secured by deposit of title deeds of leasehold properties. There were preferential creditors
Rs.3000 which were not included in creditors Rs.60,000.
Prepare a statement of affairs to be submitted to the meeting of members/creditors.
3. Insol Ltd. is to be liquidated. Their summarized balance sheet as at 30 th September,1998 appears as under:
Liabilities:
2,50,000 equity shares of Rs.10 each 25,00,000
Secured debentures( on land and Buildings) 10,00,000
Unsecured loans 20,00,000
Trade Creditors 35,00,000
90,00,000
Assets:
Land and Building 5,00,000
Other fixed assets 20,00,000
Current assets 45,00,000
Profit & Loss A/c 20,00,000
90,00,000
Contingent liabilities are:
For bills discounted 1,00,000
For excise duty demands 1,50,000
On investigation, it is found that the contingent liabilities are certain to devolve and the assets are likely to be
realized as follows:
Land & Buildings 11,00,000
Other fixed assets 18,00,000
Taking the above into account, prepare the statement of affairs.
For CA Inter& Final Classes, visit www.edu91.org Join Us on YouTube www.youtube.com/neerajarora Join Us on Telegram https://t.me/neerajaroraclasses 2.1
4. X Ltd was ordered to be wound up on March 31st 1999 on which date is balance sheet was as follows:
Liabilities Rs. Assets Rs.
Subscribed Capital: Goodwill 1,00,000
10,000 shares of Building 3,50,000
Rs.100 each 10,00,000 Plant 5,50,000
5% Debentures 1,60,000 Fixtures 23,000
Interest Accrued 4,000 Stock 38,000
(Secured by floating Debtors 25,000
Charge on all assets) Cash 500
Bank Overdraft 25,000 P&L A/c 1,38,500
(Secured by Hypothecation of stock)
Sundry Creditors 36,000
12,25,000 12,25,000
The amounts estimated to be realized are:
Goodwill Rs. 1000; Building Rs. 3,00,000; Plant Rs.5,25,000; Fixtures Rs.10,000; Stock Rs.31,000; Debtors
Rs.20,000.
Creditors included Rs.6000 on account of wages of 15 men at Rs.100 per month for 4 months immediately
before the date of winding up: Rs.9000 being the salaries of 5 employees at Rs.300 per month for the previous 6
months; Rent for godown for the last six month amounting to Rs. 3,000; Income –tax deducted out of salaries of
employees Rs.1,000 and Directors Fees Rs.500.
Three years ago, the debit balance in the profit and loss account was Rs. 77,925 and since that date the accounts
of the company have shown the following figures:
Year Year Year
31-3-97 31-3-98 31-3-99
Gross Profit 65,000 45,000 40,000
Wages & Salaries 40,500 36,000 34,400
Electricity and water Tax 5,750 6,380 5,260
Debentures interest 8,000 8,000 8,000
Bad debts 8,540 7,600 6,700
Depreciation 6,700
Directors’ Fees 1,000 1,000 1,000
Miscellaneous Expenses 10,500 7,265 7,980
Total 80,990 66,245 63,340
In addition it is estimated that the company would have to pay Rs.5,000 as compensation to an employee for
injuries suffered by him which was contingent liability not accepted by the company.
Prepare the statement of affairs and the deficiency account.
5. From the following particulars, prepare a statement of affairs and the deficiency account for submission to the
official liquidator of the Equipment Ltd., which went into liquidation on December 31, 1998:
Rs. Rs.
3,000 equity shares of 100 each,Rs.80 paid-up 2,40,000
6% 1,000 preference shares of Rs.100 each
Full called-up 1,00,000
Less: Calls in arrear 5,000 95,000
5% Debentures having a floating charge on the
Assets( interest paid upto June 30,1998) 1,00,000
Mortgage on Land & Buildings 80,000
Trade creditors 2,65,500
Owing for wages 20,000
Secretary’s salary @ Rs.500 p.m owing 3,000
Managing Director’s salary (@ Rs.1,500 p.m) 6,000
Assets Estimated to Produce Book value
Land & Building 1,30,000 1,20,000
Plant 1,30,000 2,00,000
Tools 4,000 20,000
Patents 30,000 50,000
Stock 74,000 87,000
Investments in the hand of a
Bank for an overdraft of Rs.1,90,000 1,70,000 1,80,000
Book debts 60,000 90,000
On 31st December,1993 the balance sheet of the company showed a general reserve of Rs.40,000 accompanied
by a debit balance of Rs 25,000 in the profit& loss Account.
In 1994 the company made a profit of Rs.40,000 and declared a dividend of 10% on equity shares. The company
suffered a total loss of Rs.1,09,000 besides loss of stock due to fire of Rs.40,000 during 1995,1996 and 1997.
For 1998 accounts were not made.
The cost of winding up is expected to be Rs.15,000.
6. In which sequence the following payments will be made while preparing the liquidator’s statement of account?
(1) Debenture holders
(2) Unsecured creditors
(3) Legal charges
(4) Equity shareholders.
(5) Preference shareholders.
7.
(a) Before paying the creditors totaling Rs.3,04,000 the liquidators of a company were left with Rs.1,25,000.The
shares of the company were as follows:
(i) 3,000 9% preference shares of Rs.100 each, Rs.80 paid.
(ii) 2,000 Equity shares of Rs.100 each, Rs.60 paid.
(iii) 3,000 Equity shares of 100 each, Rs.75 paid.
(b) In a company where the shares are as mentioned above, the liquidator is left with Rs.2,20,000 after paying
off creditors.
What will be the call in shares?
8. Calculate Call on shares in following cases.

Case-I Balance leftover with liquidator Rs.5, 00,000.Capital structure of Company:
2000 equity share of Rs.100 each 90 paid-up
1000 Preference share of Rs.50 each 40 paid-up
Case-II Balance leftover with liquidator’s Rs.6, 60,000.Capital structure of Company:

9. Break limited went into voluntary liquidation on 31-3-1991.The balance in its books on that dates were:
Rs. Rs.
Share capital
Authorized & Subscribed: Land 50,000
5000 6% preference shares of Building 2,00,000
Rs.100 each fully paid 5,00,000 Plant & machinery 6,25,000
2500 equity shares of Rs. Stock 1,37,500
100 each Rs.75 paid-up 1,87,500 Sundry Debtors 2,75,000
7500 equity shares of Rs. Cash at bank 75,000
100 each Rs.60 paid-up 4,50,000 P&L A/c 4,10,000
5% Debenture (secured by a
Floating charge on all assets) 2,50,000
Interest due on debentures 12,500
Bank overdraft 1,00,000
Unsecured creditors 2,00,000
Taxes due to Govt. within 12 months 12,500
Salaries & wages due for 4 Months
for workers 60,000
17,72,500 17,72,500
The liquidator is entitled to a remuneration of 5% on assets relised except cash and 1% on the amount distributed
to unsecured creditors other than preferential creditors.
Bank overdraft is secured by deposit of title deed of land & Building which realized Rs.3,00,000.Other assets
realized the following sums:
Plant & Machinery Rs.5,00,000
Stock Rs.1,50,000
Sundry Debtors Rs.2,00,000
Expenses of liquidation amounted to Rs. 27,250.
Prepare Liquidator’s final statement of account. Liquidator realized assets on 1-4-1991 and discharged his
obligation on the same date. Dividend on preference shares were in arrears for two years.
10. ABC Limited went into voluntary liquidation. Details are as follows:
1,000 - 10% Preference Shares of ₹ 100 each fully paid up
Class A - 1,200 equity shares of ₹ 100 each (₹ 80 paid up)
Class B - 800 equity shares of ₹ 100 each (₹ 65 paid up)
Assets realized ₹ 3,50,000 and liquidation expenses is ₹ 8,000. Company has secured Bank Loan of ₹ 60,000 and
salary of 3 clerks for 3 months at a rate of ₹ 500 per month are outstanding. Creditors are ₹ 70,000.
Calculate amount receivable from / or returnable to equity shareholders.
11. The balance sheet of Asco Ltd as on 31st March 1993:

Rs. Rs.
Share Capital Fixed Assets
1,000 6% Preference Machinery 1,90,000
Shares of Rs.100 each Furniture 10,000
Fully paid 1,00,000 Current Assets:
2000 Equity shares of Stock 1,20,000
Rs.100 each fully paid 2,00,000 Debtors 2,40,000
2000 Equity Shares of Cash at bank 50,000
Rs.100 each Rs.75 paid 1,50,000 Misc. Expenditure
Loan-Bank(secured on stock) 1,00,000 P&L A/c 3,00,000
Current Liabilities & Provision:
Creditors 3,50,000
Income Tax Payable 10,000
9,10,000 9,10,000
The company went into liquidation on 1st April,1993.
The assets were realized as follows: Rs.
Machinery 1,66,000
Furniture 8,000
Stock 1,10,000
Debtors 2,30,000
Liquidation expenses amounted to 4,000
The Liquidators are entitled to a commission at 2% on amount paid to unsecured creditors except preferential
creditors. Calls on partly paid shares were made but the amount due on 200 shares was found to be irrecoverable.
Prepare Liquidator’s statement of Account.
12. The following is the balance sheet of Y Ltd as at 31st March,1994:
Rs. Rs.
Share Capital: Fixed Assets:
2000 equity shares of Land & Building 4,00,000
Rs.100 each Rs.75 per share Plant & machinery 3,80,000
Paid-up 1,50,000 Current Assets:
6000 equity shares of Stock at cost 1,10,000
Rs.100 each Rs.60 per Sundry Debtors 2,20,000
Share paid-up 3,60,000 Cash at Bank 60,000
2000 10% preference share P&L A/c 2,40,000
Of Rs.100 each fully paid-up 2,00,000
10% Debentures(having a
Floating charge on all assets) 2,00,000
Interest accrued on
Debentures(also secured as Above) 10,000
Sundry Creditors 4,90,000
14,10,000 14,10,000
On the date, the company went into voluntary liquidation. The dividends on preference shares were in arrears for
the last two years. Sundry creditors include a loan of Rs.90,000 on mortgage of Land & Buildings. The assets
realized were as under:
Rs.
Plant & Machinery 3,60,000
Stock 1,20,000
Sundry Debtors 1,60,000
Interest accrued on loan on mortgage of building upto the date of payment amounted to Rs.10,000. The expenses
of liquidation amounted to Rs.4600.The liquidator is entitled to a remuneration of 3% on all the assets
realized(except cash at banks) and 2% on the amounts distributed among equity shareholders. Preferential
creditors includes in sundry creditors amount to Rs.30,000.All payments were made on 30 th june, 1994.Prepare
the liquidator’s final statement of account.
13. A Company went into liquidation on the 31st December,1992,when the following balance sheet was prepared:
Authorized Capital Goodwill 50,000
30,000 shares of Rs.10 each 3,00,000 Leasehold property 48,000
Subscribed & paid up Capital Plant & Machinery 65,500
19500 shares of Rs.10 each 1,95,000 Stock 56,800
Sundry Creditors Sundry Debtors 64,820
Preferential 24,200 Cash 2,600
Partly secured 55,310 Profit & Loss A/c 98,580
Unsecured 99,790 1,79,300
Bank Overdraft 12,000
3,86,300 3,86,300
A Liquidator realized the assets as follows: Rs.
Leasehold property which was used in the first 35,000
Instance to pay the partly secured creditors pro rata
Plant & Machinery 51,000
Stock 39,000
Sundry Debtors 58,000
The Expenses of liquidation amounted to Rs.1500 and the liquidator’s remuneration was agreed at 2% on the all
assets realized(excluding cash) and 2% on the amount paid to the unsecured creditors.
You are required to prepare the liquidator’s Final Account showing the distribution.
14. N Ltd resolved on 31st December 1998 that the company be wound up voluntarily. The following was the trial
balance extracted from its books as on that date:
Rs. Rs.
Equity shares of Rs.10 each 2,00,000
9% Preference shares of Rs.10 each 1,00,000
Plant(less depreciation w/o Rs.85,000) 2,15,000
Stock in trade 2,50,000
Bank Balance 74,000
Preliminary Expenses 6,000
P&L A/c (Balance on 1st Jan 1998) 30,000
Loss for the year 1998 30,000
Outstanding Expenses (including mortgage interest) 25,000
4% Mortgage Loan - 2,00,000
Total 6,30,000 6,30,000
On 1st January,1999 the liquidator sold to M Ltd .Plant for Rs.2,05,000 and stock in trade for Rs.2,00,000.The
sale was completed in January,1999 and the consideration satisfied as to Rs. 2,62,200 in cash and as to the
balance in 6% Debentures of the purchasing company issued to the liquidator at a premium of 2%.
The remaining steps in the liquidation were as follows:
1. The liquidator realized Rs. 52,000 out of the book debts and the cost of collection amounted to Rs.2,000.
2. The loan mortgage was discharged on 31st January, 1999 along with interest from 31st July, 1998. Creditors
were discharged subject to 2% and outstanding expenses excluding mortgage interest were settled for Rs.
2,000.
3. On 30th June 1999 six month’s interest on debentures was received from M.Ltd.
4. Liquidation expenses amounting to Rs.3,000 and liquidator’s remuneration of 3% on disbursements to
members were paid on 30th June,1999 when:
(a) The preference shareholders were paid out in cash; and
(b) The debentures on M Ltd. and the balances of cash were distributed ratably among the equity
shareholders.
Prepare the liquidator’s statement of account showing the distribution
15. The position of Neha Ltd. on its liquidation is as under:

5,000, 10% Preference Shares of ₹ 100 each ₹ 60 paid up
2,000, Equity shares of ₹ 75 each, ₹ 50 paid up
Unsecured Creditors ₹ 99,000
Liquidation Expenses ₹ 1,000
Liquidator is entitled to a commission of 2% on the amount realized from calls made on contributories
You are required to prepare Liquidator’s Final Statement of Account if the total assets realized ₹ 3,80,400.
16. The following particulars relate to a limited company which has gone into voluntary liquidation. You are
required to prepare the liquidator’s statement of account allowing for his remuneration @ 2.5% on all assets
realized excluding call money received and 2% on the amount paid to unsecured creditors including preferential
creditors:
Share Capital issued:
10,000 Preference shares of Rs.100 each fully paid.
50,000 equity shares of Rs.10 each fully paid.
30,000 equity shares of Rs.10 each Rs.8 paid up.
Assets realized Rs. 20,00,000 excluding the amount realized by sale of securities held by partly secured creditors.
Preferential Creditors 50,000
Unsecured Creditors 18,00,000
Partly secured, creditors (Assets realized Rs.3,20,000) 3,50,000
Debenture holders having floating charge on all Asset of the company 6,00,000
Expenses of Liquidation 10,000
A call of Rs.2 per share on the partly paid equity shares was duly received except in case of one shareholder
owning 1,000 shares.
Also calculate the percentage of amount paid to the unsecured creditors to the total unsecured creditors.
Solution: Liquidator’s Statement of Account
Rs. Rs..
To Assets not specifically pledged realised 20,00,000 By Liquidator’s remuneration
To Assets specifically 2.5% on 23,20,000* 58,000
pledged realised 3,20,000 2% on 50,000 1,000
Less: Creditor (3,50,000) 2% on 13,12,745 (W.N.3) 26,255 85,255
(Deficiency Rs. 30,000) By Liquidation Expenses 10,000
To Receipt of call money on 29,000 equity By Preferential creditors 50,000
shares @ 2 per share 58,000 By Debenture holders having
a floating charge on all assets 6,00,000
By Unsecured creditors 13,12,745
20,58,000 20,58,000
(ii) Percentage of amount paid to unsecured creditors to total unsecured creditors =

(13,12,745/18,30,000) × 100=71.73%
Working Notes:
1. Unsecured portion in partly secured creditors=Rs. 3,50,000-Rs. 3,20,000 = Rs. 30,000
* Total assets realised = Rs. 20,00,000 + Rs. 3,20,000 = Rs. 23,20,000
2. Total unsecured creditors = 18,00,000 + 30,000 (W.N.1) = Rs. 18,30,000
3. Liquidator’s remuneration on payment to unsecured creditors
Cash available for unsecured creditors after all payments including payment to preferential creditors &
liquidator’s remuneration on it = Rs. 13,39,000
Liquidator’s remuneration on unsecured creditors = (Rs. 13,39,000*2/102) = Rs. 26,255
17. The position of Bad Luck Limited on its liquidation on 31 March, 2022 is as under:
Issued and paid up capital:
90,000, 10% Preference Shares of ₹ 100 each, fully paid
90,000 Equity Shares of ₹ 100 each, fully paid up
30,000 Equity Shares of ₹ 50 each, 40 paid up
10,000 Equity Shares of ₹ 10 each, 4 paid up
Calls in arrears are ₹ 3,00,000 and calls received in advance ₹ 2,55,000, Preference dividends are in arrears for
two years. Amount left with the liquidator after discharging of all liabilities is ₹ 1,25,15,000. Articles of
Association of the company provide for payment of preference dividend arrears in priority to return of equity
capital. You are required to prepare the Liquidator's Final Statement of Account.
18. From the following Trial Balance of All Rounder Ltd., on 1st January, 2021, prepare liquidator’s final statement
of account:
Particulars Debit (₹) Credit (₹)
9% Preference Share Capital
(2,500 Preference Shares at ₹100 each, fully paid) 2,50,000
Equity Share Capital: 4,000 Equity Shares at ₹100 each, fully paid. 4,00,000
4,000 Equity Shares at ₹100 each, ₹50 paid up 2,00,000
Plant 6,00,000
Stock-in-Trade 7,20,000
Bank Balance 2,40,000
Preliminary Expenses 12,000
6% Mortgage Loan 4,60,000
Outstanding Liabilities for Expenses - 50,000
Profit and Loss A/c (Trading Loss for the previous accounting year) 60,000 -
Total 18,02,000 18,02,000
Following points should be kept in mind:
1. On 21st January, 2021, the Liquidator sold plant for ₹5,90,000 and stock-in-trade at 10% less than the Book
Value. He realized 80% of Sundry Debtors, and incurred cost of collection of ₹3,700 (remaining Debtors are
to be treated as bad).
2. The Loan Mortgage was discharged as on 31st January, 2021, along with interest for 6 months. Creditors
were discharged subject to 5% discount. Outstanding Expenses paid at 20% less.
3. Preference Share Dividend is due for one year and paid with final payment.
4. Liquidation Expenses incurred are ₹3,600, and Liquidator’s Remuneration is settled at 4% on disbursement
to shareholders (preference and equity) excluding preference dividend, subject to minimum of ₹20,000.
Liquidator’s Remuneration to be rounded off to the multiple of ₹10.
19. The Liquidator of a company is entitled to a remuneration of 2% on assets realized and 3% on the amount
distributed to unsecured creditors. The assets realized Rs. 10,00,000. Amount available for distribution to
unsecured creditors before paying liquidator’s remuneration is Rs. 4,12,000. Calculate liquidator’s remuneration
if the surplus is insufficient to pay off unsecured creditors, in toto.
20. A Liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount distributed to
Preferential Creditors and 3% on the payment made to Unsecured Creditor, The assets were realized for Rs.
50,00,000 against which payment was made as follows:
Liquidation Rs. 50,000
Secured Creditors Rs. 20,00,000
Preferential Creditors Rs. 1,50,000
The amount due to Unsecured Creditors was Rs. 30,00,000. You are asked to calculate the total Remuneration
payable to Liquidator.
Calculation shall be made to the nearest multiple of a rupee.
21. The following is the balance sheet of Confidence Builders Ltd.,as at 30 th September,1998.
Share Capital Land and Building 1,20,000
Issued:11% Pref.shares Sundry Current
Of Rs.10 each 1,00,000 Assets 3,95,000
10,000 equity shares of P&L A/c 40,500
Rs.10 each fully paid-up 1,00,000
5,000 equity shares of Rs.10 each,
Rs 7.50 per Share paid up 37,500
13% Debentures 1,50,000
Mortgage Loan 80,000
Bank overdraft 30,000
Creditors for trade 32,000
Income Tax arrears:
(Assessment concluded in July 1998)
Assessment year 96-97 21,000
Assessment year 97-98 5,000 .
5,55,500 5,55,500
Mortgage loan was secured against land and buildings. Debentures were secured by a floating charge on all the
other assets. The company was unable to meet the payments and therefore the debenture holders appointed a
receiver for the Debenture holders. He brought the land and building to auction and realized Rs.1,50,000.He also
took charge of sundry assets of value of Rs.2,40,000 and realized Rs.2,00,000.The Bank Overdraft was secured
by a personal guarantee of two of the Directors of the company and on the Bank raising a demand, the Directors
paid off the due from their personal resources. Costs incurred by the receiver were Rs. 2,000 and by the
Liquidator Rs. 2,800. The receiver was not entitled to any remuneration but the liquidators were to receive 3%
fee on the value of assets realized by him. Preference shareholders had not been paid divided for period after 30 th
September 1996 and interest for the last half year was due to the debenture holders. Rest of the assets were
realized at Rs.1,00,000. Prepare the accounts to be submitted by the receiver and liquidator.
22. In a liquidation which commenced on april2,1997 certain creditors could not receive payments out of the
realization of assets and out of the contributions from “A” list contributories. The following are the details of
certain transfers which took place in 1996 and 1997.
Shareholders No. of share Date of ceasing to Creditors remaining
Transferred be member unpaid and outstanding at the
date of ceasing to be member
X 1,500 1st March 1996 4,000
A 1,000 1st May 1996 6,000
V 1,500 1st July,1996 7,500
st
C 300 1 Nov.1996 8,000
D 200 1st Februrary,1997 9,500
All the shares were Rs.10 each,Rs 6 paid up ignoring expenses of and remuneration to liquidators, etc, show the
amount to be realized from the various persons listed above.
23. Pessimist Ltd has gone into liquidation on 10th May, 2000.The details of members, who have ceased to be
member within the year 31st March,2000 are given below. The debts that could not be paid out of realization of
assets and contribution from present member (‘A’ contributories) are also given with their date-wise break up.
Shares are of Rs.10 each Rs.6 per share paid-up.
You are to determine the amount realizable from each person
Shareholders No. of shares Date of transfer Proportionate
Transferred unpaid debts
P 1,000 20-04-1999 3000
Q 1200 15-05-1999 5000
S 1500 18-09-1999 9200
T 800 24-12-1999 10500
U 500 12-03-2000 11000
24. In a winding up of a company creditor remain unpaid. The following persons had transferred their holdings
before winding up.
Name Date of Transfer No of shares transferred Amt. due to creditors on the transfer (Rs.)
D 1st January, 2019 1000 8,500
E 15th February, 2019 400 13,500
H 15th March, 2019 700 19,000
J 31st March, 2019 900 22,000
K 5th April, 2019 1000 31,000
The shares were of Rs. 100 each, Rs. 80 being called up and paid up on the date of transfers.
(1) A member G, who holds 200 shares died on 28th Feb., 2019 when the amount due to creditors was Rs.
16000. His shares were transmitted to his Son X.
(2) R was the transferee of shares held by J. R paid Rs. 20 per share as calls in advance immediately on
becoming a member.
(3) The liquidation of the Company commenced on 1st February, 2020. Then the liquidator made a call on the
present and past contributories to pay the amount.
You are required to quantify the maximum liability of the transferors of shares mentioned in the above table.
25. In a winding up of a company, certain creditors remained unpaid. The following persons had transferred their
holding sometime before winding up :
Name Date of Transfer No. of Shares transferred Amount due to creditors on
2010 the date of transfer (Rs.)
P January 1 1,000 7,500
Q February 15 400 12,500
S March 15 700 18,000
T March 31 900 21,000
U April 5 1,000 30,000
A member, R, who held 200 shares died on 28th February, 2010 when the amount due to creditors was Rs.
15,000. His shares were transmitted to his son X.
Z was the transferee of shares held by T. Z paid Rs. 20 per share as calls in advance immediately on becoming a
member.
The liquidation of the company commenced on 1st February, 2011 when the liquidator made a call on the
present and the past contributories to pay the amount.
You are asked to quantify the maximum liability of the transferors of shares mentioned in the above table, when
the transferees:
(i) pay the amount due as “present” member contributories;
(ii) do not pay the amount due as “present” member contributories.
Also quantity the liability of X to whom shares were transmitted on the demise of his father R.
Solution:
(i) The transferors are P, Q, S, T and U. When the transferees pay the amount due as “present” member
contributories, there will not be any liability on the transferors.
(ii) It is only when the transferees do not pay as “present” member contributories that the liability would arise in
the case of “Past” members as contributories.
STATEMENT OF LIABILITY OF ‘B’ LIST CONTRIBUTORIES

Credit outstanding on the date of transfer (ceasing Q R/X S U Amount to be
to be member) 400 200 700 1,000 paid to the
Shares Shares Shares Shares creditors
Rs. Rs. Rs. Rs. Rs.
(i) 12,500 2,174 1,087 3,804 5,435 12,500
(ii) 2,500(i.e.15,000-12,500) 263 921 1,316 2,500
(iii) 3,000(i.e.18,000-15,000) 316 1,105 1,579 3,000
(iv) 12,000(i.e.30,000-18,000) 2,000 - 10,000 12,000
Total (a) 30,000 2,174 3,666 5,830 18,330 30,000
Maximum Liability at Rs.20 per shares on held b) 8,000 4,000 14,000 20,000
Lower of (a) and (b) 2,174 3,666 5,830 18,330
(a) X to whom shares were transmitted on demise of his father R would be liable as an existing member contributory. He
steps into the shoes of his deceased father under section 430. His maximum liability would be Rs.20 per share on 200
shares received on transmission i.e. for Rs.4, 000.
(b) P will not be liable to pay amount as the winding up proceedings commenced after one year from the date of the transfer.
(c) T also will not be liable as the transferee Z has paid the balance Rs.20 per share as call in advance.
Q, R/X, S and U will be liable as former members, to the maximum extent as indicated, provided the transferee do not pay the
calls.
26. XYZ Limited is being would up by the tribunal. All the assets of the company have been charged to the
company’s bankers to whom the company owes Rs. 5 crores. The company owes following amounts to others:
 Dues to workers – Rs. 1,25,00,000
 Taxes Payable to Government – Rs. 30,00,000
 Unsecured Creditors – Rs. 60,00,000
You are required to compute with the reference to the provision of the Companies Act, 2013 the amount each
kind of creditors is likely to get if the amount realized by the official liquidator from the secured assets and
available for distribution among creditors is only Rs. 4,00,00,000.
Solution: Section 326 of the Companies Act, 2013 is talks about the overriding preferential payments to be
made from the amount realized from the assets to be distributed to various kind of creditors. According to the
proviso given in the section 326 the security of every secured creditor should be deemed to be subject to a
paripassu change in favor of the workman to the extent of their portion.
𝑊𝑜𝑟𝑘𝑚𝑎𝑛′𝑠 𝑆ℎ𝑎𝑟𝑒 𝑡𝑜 𝑆𝑒𝑐𝑢𝑟𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 =
𝐴𝑚𝑜𝑢𝑛𝑡 𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑋 𝑊𝑜𝑟𝑘𝑚𝑎𝑛′𝑠 𝐷𝑢𝑒𝑠
𝑊𝑜𝑟𝑘𝑚𝑎𝑛′𝑠 𝐷𝑢𝑒𝑠 + 𝑆𝑒𝑐𝑢𝑟𝑒𝑑 𝐿𝑜𝑎𝑛
𝑊𝑜𝑟𝑘𝑚𝑎𝑛′𝑠 𝑆ℎ𝑎𝑟𝑒 𝑡𝑜 𝑆𝑒𝑐𝑢𝑟𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 =
4,00,00,000 𝑋 1,25,00,000
1,25,00,000 + 5,00,00,000
= 4,00,00,000 𝑋 1/ 5
𝑊𝑜𝑟𝑘𝑚𝑎𝑛′𝑠 𝑆ℎ𝑎𝑟𝑒 𝑡𝑜 𝑆𝑒𝑐𝑢𝑟𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 = 80,00,000
Amount available to secured creditor is Rs. 400 Lakhs – 80 Lakhs = 320 Lakhs
Hence, no amount is available for payment of government dues and unsecured creditors.
27. Amounts payable in winding-up of a company are as follows:
- Secured Creditors ₹ 1,25,000
- Workmen's Due ₹ 2,50,000
Show the payments made and treatment of balance in the following two instances:
(i) If the security realized is ₹ 2,00,000 (ii) If the security realized is ₹ 1,00,000
Solution: (i) If the value of the security (realized) is ₹ 2,00,000:
Particulars Secured creditors Workmen compensation Total
Amount payable 1,25,000 2,50,000 3,75,000
Less: security realized and paid in pro rata 1:2 66,667 1,33,333 2,00,000
Balance treated as overriding pref. creditors 58,333 1,16,667 1,75,000
Balance treated as unsecured creditors - - -
(ii) If the value of the security (realized) is ₹ 1,00,000:
Particulars Secured creditors Workmen compensation Total
Amount payable 1,25,000 2,50,000 3,75,000
Less: security realized and paid in pro rata 1:2 33.333 66,667 1,00,000
Balance treated as overriding pref. creditors 66,667 1,83,333 2,50,000
Balance treated as unsecured creditors 25,000 - 25,000
Note: Unsatisfied portion of secured creditors to the extent which could not be paid because of their security being used for
workmen’s dues, is to be treated as overriding preferential payment and the remaining potion is to be treated as unsecured.
28. A liquidator is entitled to receive remuneration at 3% on the assets realized and 4% on the payment made to creditors
and company’s bankers. The assets were realized for ₹ 80,00,000. All the assets of the company have been charged to
the company’s bankers to whom the company owes ₹ 1,00,00,000. The company owes following amounts to others:
Due to workers ₹ 25,00,000
Other Preferential creditors ₹ 20,00,000
Unsecured creditors ₹ 10,50,000
With reference to the provisions of the Companies Act 2013, you are required to calculate the amount payable to:
(1) Workers;
(2) Other Preferential creditors;
(3) Unsecured creditors;
(4) Liquidator for remuneration and
(5) Company’s bankers.
29. M Co.Ltd went into voluntary liquidation on 1st March,1991.The following balances are extracted from its books
on that date:
Capital:50,000 equity Buildings 1,50,000
Shares of Rs.10 each 5,00,000 Plant & Machinery 2,10,000
Debentures(secured by a Stock in trade 95,000
Floating charge) 2,00,000 Book Debts 75,000
Bank overdraft 30,000 Less: Provision 10,000 65,000
Creditors 40,000 Calls in arrear 1,00,000
Cash on hand 10,000
7,70,000 7,70,000
Plant & Machinery and Building are valued at Rs.1,50,000 and Rs. 1,20,000 respectively. On realization, losses
of Rs.15,000 are expected on stock, Book debts will realize Rs.70,000.Calls in arrear are expected to realize
90%.Bank overdraft is secured against Bulidings. Preferential Creditors for taxes and wages are Rs.6,000 and
miscellaneous expenses outstanding Rs.2,000 which were not included in creditors of Rs. 40,000.
Prepare a statement of affairs to be submitted to the meeting of Creditors.
30. From the following particulars, prepare a Statement of Affairs and the Deficiency Account for submission to
official liquidator of Sun City Development Ltd., which went into liquidation on 31st March, 2016.
Liabilities (Rs) (Rs)
6,00,000 Equity shares of Rs.10 each, Rs.8 paid-up 48,00,000
6% 2,00,000 Preference shares of Rs.10 each 20,00,000
Less: call in arrear 1,00,000 19,00,000
5% Debentures having a floating charge on the assets
(interest paid up to 30th September, 2015) 20,00,000
Mortgage on Land & Building 16,00,000
Trade Payable 53,10,000
Wage payable 4,00,000
Secretary’s Salary Payable @ Rs.10,000 p.m. 60,000
Managing Director’s Salary Payable @ Rs.30,000 p.m. 1,20,000
Assets Estimated to Book value (Rs)
produce (Rs)
Land & Building 26,00,000 24,00,000
Plant & Machinery 26,00,000 40,00,000
Tools & Equipments 80,000 4,00,000
Patents & Copyrights 6,00,000 10,00,000
Inventories 14,80,000 17,40,000
Investments in the hand of a Bank
For an Overdraft of Rs.38,00,000 34,00,000 36,00,000
Trade Receivables 12,00,000 18,00,000
On 31st March, 2011 the Balance Sheet of the company showed a General Reserve of Rs.8,00,000 accompanied
by a debit balance of Rs.5,00,000 in the Profit & Loss Account.
In 2012 the company made a profit of Rs.8,00,000 and declared a dividend of 10% on Equity shares.
The Company suffered a total loss of Rs.21,80,000 besides loss of stock due to fire to the tune of Rs.8,00,000
during financial years ending March 2013, 2014 and 2015. For the financial year ended 31 st March,2016,
accounts were not made. The cost of winding-up is expected to be Rs.3,00,000.
31. A winding up order has been issued against M Ltd. The following information is obtained with regards to the
assets and liabilities as on 30th June,1999.
Rs.
Freehold premises(book value Rs.4,50,000)valued at 3,75,000
First Mortgage of freehold premises 3,00,000
Second Mortgage of freehold premises 1,12,500
8% Debenture carrying a floating charges on the
Undertaking, interest due 1st September and 1st April, and
Paid on due dates 1,50,000
Managing Directors emoluments (6 months) 22,500
Staff salary unpaid (one month) 16,050
Trade debtors (good) 31,500
Doubt full(estimated to realize 50% 12,900
Bad 72,750
Plant & Machinery(book value Rs.2,47,500) estimated
To realize 1,74,000
Bank Overdraft Unsecured 58,125
Cash in hand 825
Stock(at cost Rs.50,850)estimated to realize 33,900
Issued Capital:
Equity shares of Rs.10 each, fully called up 1,50,000
Calls on arrears, Rs. 3,000 estimated to realize 15,00
Unsecured Creditors 2,96,250
Contingent liability in respect of a claim for damages
Rs.37,500 estimated to be settled for 18,000
Income-tax Liability (out of which Rs. 3,975 is preferential) 9,225
The Reserve of the company on 1-7-1998 amounted to Rs. 7,500
You are required to prepare:
(i) Statement of Affairs
(ii) Deficiency Account.
32. BT Ltd. went into Voluntary Liquidation on 31st March 2018, when their detailed Balance Sheet read as follows:
Particulars Amount (Rs.)

Equity and Liability
Issued & Subscribed Capital
10,000 12% cumulative preference shares of Rs. 100 each, fully paid 10,00,000
10,000 Equity Shares of Rs. 100 each 75 per share paid up 7,50,000
20,000 Equity Shares of Rs. 100 each 60 per share paid up 12,00,000
Profit & Loss Account (5,25,000)
12% Debentures (Secured by a floating charge) 10,00,000
Interest outstanding on Debentures 1,20,000
Creditors 8,50,000
43,95,000
Assets
Land & Building 17,60,000
Furniture 4,75,000
Patents 1,45,000
Stock 1,80,000
Trade Receivables 5,09,300
Cash at Bank 75,700
43,95,000
Preference dividends were in arrear for 1 year. Creditors include preferential creditors of Rs. 75,000. Balance
creditors are discharged subject to 5% discount.
Assets are realised as under :
In Rs.
Furniture 2,85,000
Patents 90,000
Stock 2,80,000
- Expenses of liquidation amounted to Rs. 45,000.
- The liquidator is entitled to a remuneration of 3% on all assets realised (except cash at bank).
- All payments were made on 30th June, 2018.
You are required to prepare the Liquidator's Final Statement of Account as on 30 th June, 2018. Working Notes
should form part of the answer.
33. The Balance Sheet of Cloud Ltd., as at 31st March, 2021, being the date of voluntary winding up is as under:
Particulars Note Amount (Rs.)
I Equity and Liabilities
1 Shareholders’ Funds:
(a) Share Capital 1 21,00,000
(b) Reserve and Surplus 2 4,00,000
2 Non-Current Liabilities:
(a) Long Term Borrowings 3 4,20,000
3 Current Liabilities:
(a) Short Term Borrowings 4 9,70,000
(b) Trade Payables 12,00,000
(c) Other Current Liabilities 5 2,10,000
Total 53,00,000
II Assets
1 Non-Current Assets:
(a) Property, Plant and Equipment 6 26,00,000
2 Current Assets:
(a) Inventories 6,50,000
(b) Trade Receivables 20,50,000
(c) Cash and Cash Equivalents -
Total 53,00,000
Notes to Accounts:
1. Share Capital
Authorized:
10,000 Equity Shares of Rs. 100 each 10,00,000
10,000 Equity Shares of Rs. 100 each 10,00,000
10,000, 10% Cumulative Preference Shares of Rs. 100 each 10,00,000
Issued, Subscribed & Paid up:
10,000 Equity Shares of Rs. 100 each, Rs. 60 paid up. 6,00,000
10,000 Equity Shares of Rs. 100 each, Rs. 50 paid up. 5,00,000
10,000, 10% Cumulative Preference Shares of
Rs. 100 each, fully paid up. 10,00,000
Total 21,00,000
2. Reserve and Surplus
(a) Securities Premium 15,00,000
(b) Profit & Loss A/c (Dr. balance) (11,00,000)
4,00,000
3. Long Term Borrowings
4. Short Term borrowings
Bank Overdraft (unsecured) 9,70,000
5. Other Current Liabilities
Preferential Creditors 2,10,000
6. Property, Plant and Equipment
(a) Land and Buildings 10,40,000
(b) Plant and Machinery 15,60,000
26,00,000
Preference Dividend is in arrears for three years (upto 31st March, 2021). The assets realized as follows:
Land & Building Rs. 6,20,000 Inventory Rs. 12,40,000
Plant & Machinery Rs. 13,20,000 Trade receivables Rs. 14,20,000
Expenses of Liquidation are Rs.1,72,000. The Remuneration of the Liquidator is 2% of the realization of assets.
Income Tax Payable is Rs.1,34,000. Interest on debentures for the year ended 31st March, 2021 has not been
considered in the given balance sheet and is also to be paid.
Prepare the Liquidator’s Final Statement of Account.
34. The summarized Balance Sheet of Full Stop Limited as on 31st March 2012, being the date of voluntary winding
up is as under:
Liabilities (Rs.) Assets (Rs.)
Share capital: Land & building 5,20,000
5,000, 10% Cumulative Plant & machinery 7,80,000
Preference shares of Rs. 100 Stock in trade 3,25,000
each fully paid up 5,00,000 Book debts 10,25,000
Equity share capital: Profit & loss account 5,50,000
5,000 Equity shares of Rs. 100 each
Rs. 60 per share called and paid up 3,00,000
5,000 Equity shares of Rs. 100 each
Rs. 50 per share called up and paid up 2,50,000
Securities premium 7,50,000
Preferential creditors 1,05,000
32,00,000 32,00,000
Preference dividend is in arrears for three year, By 31-03-2012, the assets realized were as follows (Rs.):
Land & building 6,20,000
Stock in trade 3,10,000
Plant & machinery 7,10,000
Book debts 6,60,000
Expenses of liquidation are Rs. 86,000. The remuneration of the liquidator is 2% of the realization of assets.
Income tax payable on liquidation is Rs. 67,000.
Assuming that the final payments were made on 31-03-2012.
Prepare the Liquidator’s Statement of Account.
35. Prakash processors Ltd. Went into voluntary liquidation on 31 st December,1998 when their balance sheet read as
follows:
Rs.
Liabilities
Issued and subscribed capital:
5000 10% cumulative preference shares
Of Rs.100 each, fully paid 5,00,000
2,500 equity shares of Rs.100 each,Rs.75 paid 1,87,500
7,500 equity shares of Rs.100 each,Rs.60 paid 4,50,000
15% Debentures secured by a floating charges 2,50,000
Interest outstanding on Debentures 37,500
Creditors 3,18,750
17,43,750
Assets:
Machinery & Plant 6,25,000
Patents 1,00,000
Stock 1,37,500
Cash at bank 75,000
P&L A/c 2,81,250
17,43,750
Preference dividends were in arrears for 2 years and the creditors included preferential creditors of Rs.38,000.
The assets realized as follows:
Land & building Rs. 3,00,000; Machinery and Plant Rs. 5,00,000; Patents Rs. 75,000; Stock Rs. 1,50,000;
Sundry debtors Rs. 2,00,000.
The expenses of liquidation amounted to Rs. 27,250.The liquidator is entitled to a commission of 3% on assets
realized except cash. Assuming the final payment including those on debentures is made on 30 th June, 1999
show the liquidator’s Final statement of Account.
36. Given below is the Balance Sheet of OM Limited as on 31.3.2019:
Liabilities ₹ Assets ₹
14%, 1,60,000 cumulative preference Land 1,60,000
shares of ₹100 each fully paid up 16,00,000 Buildings 6,40,000
32,000 equity shares of ₹100 each, Plant and Machinery 21,60,000
₹ 60 per share paid up 19,20,000 Patents 1,60,000
Reserves and Surplus NIL Investments NIL
Secured Loans: Current Assets:
14% debentures 9,20,000 Inventory at cost 4,00,000
(Having a floating charge on all assets) Trade receivables 9,20,000
Interest accrued on above Cash at bank 2,40,000
Debentures 1,28,800 Profit and Loss A/c 9,60,000
(Also having a floating charge as above)
Loan on mortgage of land and building 6,00,000
Unsecured Loan NIL
Current liabilities
Trade payables 4,71,200
56,40,000 56,40,000
On 31.3.2019 the company went into voluntary liquidation. The dividend on 14% preference shares was in
arrears for one year. Trade payables include preferential creditors amounting to ₹1,20,000.
The assets realized the following sums:
Land ₹ 3,20,000; Buildings ₹ 8,00,000; Plant and machinery ₹ 20,00,000; Patent ₹ 2,00,000; Inventory ₹
6,40,000; Trade receivables ₹ 8,00,000.
The expenses of liquidation amounted to ₹ 1,17,736. The liquidator is entitled to a commission of 2% on all
assets realized (except cash at bank) and 2% on amounts among unsecured creditors other than preferential
creditors. All payments were made on 30th June, 2019. Interest on mortgage loan shall be ignored at the time of
payment. Prepare the liquidator’s final statement of account.
37. The position of valueless Ltd. On its liquidation is as under:

Issued and paid up Capital
3000 11% preference shares of Rs.100 each fully paid.
3000 Equity shares of Rs.100 each fully paid.
1000 Equity shares of Rs.50 each Rs.30 per shares called.
Calls in Arrear are Rs. 10,000 and Calls received in advance Rs.5,000. Preference Dividends are in arrear for one
year. Amount left with the liquidator after discharging all liabilities is Rs. 4,13,000.Articles of Association of the
company provide for payment of preference dividend arrears in priority to return of equity capital. You are
required to prepare the liquidators final statement of account.
38. Debit and credit Balances of Blossam Ltd as on 31.12.2021 were as follows:
Dr. Balances Cr. Balances
Share Capital:
Land & Building 1,25,000 8,000 Preference Shares of ₹ 10 each 80,000
Other Fixed Assets 3,00,000 12,000 Equity Shares of ₹ 10 each 1,20,000
Inventory 5,25,000 Bank Loan 4,00,000
Trade receivables 1,00,000 8% Debentures 1,00,000
Surplus a/c (-ve bal.) 58,000 Interest Outstanding on Debentures 8,000
11,08,000 11,08,000
The Company went into Liquidation on that date. Prepare liquidator’s account after taking following:
(a) Liquidation Expenses ₹ 3,000.
(b) Liquidation Remuneration ₹ 10,000.
(c) Bank Loan was secured by pledge of Stock.
(d) Debentures & Interest thereon are secured by floating charge on all assets.
(e) Fixed Assets were realized at book values and Current Assets @ 80% of book values.
39. A liquidator is entitled to receive remuneration at 5% of the assets realized and 8% of the amount distributed
among the unsecured creditors. The assets realized Rs. 13,75,000. Payment was made from realised amount as
follows:
Liquidation expenses 13,000
Preferential creditors (treated as unsecured creditors) 88,500
Secured creditors 1,00,000
You are required to calculate remuneration payable to the liquidator.
40. From the data relating to a company which went into voluntary liquidation, you are required to prepare the
liquidator’s Final Statement of Account.
(1) Cash with liquidators (after all assets are realised and secured creditors and debenture holders are paid) is
Rs.7,50,000.
(2) Preferential creditors to be paid Rs.35,000.
(3) Other unsecured creditors Rs.2,30,000.
(4) 5,000, 10% preference shares of Rs.100 each fully paid.
(5) 3,000 equity shares of Rs.100 each, Rs.75 per share paid up.
(6) 7,000 equity shares of Rs.100 each, Rs.60 per share paid up.
(7) Liquidator’s remuneration is 2% on payments to preferential and other unsecured creditors
41. The summarized Balance Sheet of M/s. X Limited as at 31st March, 2016 are as follows:
Equity & Liabilities Amount (Rs) Assets Amount (Rs)

Shareholders Fund : Non-Current Assets
Share capital Land & Building 6,50,000
50,000 equity shares of Rs.10 each fully paid 5,00,000 Current Assets
75,000; 10% Preference Shares of Rs 10 7,50,000 Sundry Current Assets 21,80,000
fully paid up
25,000 Equity Shares of Rs 10 Each, 2,00,000
Rs 8 per share paid up
Non-Current Liabilities:
Mortgage Loan 3,50,000
Current Liabilities:
Bank Overdraft 1,50,000
Income Tax Arrears (Assessment completed
in February, 2016) 1,25,000
28,30,000 28,30,000
Mortgage loan was secured against Land and Building. Debentures were secured by a floating charge on all
assets. The company was unable to meet the payments and therefore the Debenture Holders appointed a
Receiver for the Debenture Holders. He bought the Land & Building to auction and realized Rs.8,00,000. He
also took charge of Sundry Assets of value of Rs. 11,80,000 and realized Rs 10,00,000. Bank overdraft was
secured by personal guarantee of the Directors of the company and on the Bank raising a demand, the Directors
paid off the due from their personal resources. Cost incurred by the receiver were Rs. 9,750 and by the
Liquidator Rs.15,000. The Receiver was not entitled to any remuneration but the Liquidator was to receive 2%
fee on the value of assets realized by him. Preference Shareholders have not been paid Dividend for period after
31st March, 2014 and interest for the last half year was due to Debenture Holders. Rest of the Assets were
realized at Rs 7,50,000. Prepare the accounts to be submitted by the receiver and liquidator.
42. In the winding up of a company, certain Creditors could not receive payments out of the realization of assets and
out of contribution from "A" list contributories. Liquidation started on 1st April, 2020. The following persons
have transferred their holdings before winding up :
Name Date of Transfer No. of shares Amount due to creditorson
transferred the date of transfer (Rs.)
O 4th April, 2019 1,000 42,000
P 2nd Feb, 2019 300 25,000
Q 8th Sep, 2019 200 57,000
R 11th Nov, 2019 1,400 85,000
S 2nd Feb, 2020 800 66,000
T 1st March, 2020 1,400 95,000
'X' was the transferee of shares held by S. 'X' paid Rs. 30 per share as calls in advance immediately on becoming
a member.
Ignoring Expenses of Liquidation, Remuneration of Liquidator, etc. work out the amount to be realized from the
above contributories.
THEORY
Q 1. Define “B LIST CONTRIBUTORIES”

Ans. The shareholders who transferred partly paid shares (otherwise than by operation of law or by death) within 1
year, prior to the date of winding up may be called upon to pay an amount (not exceeding the amount not called up
when the shares were transferred) to pay off such creditors as existed on the date of transfer of shares.
Conditions: Their liability will crystallize only
(i) when the existing assets available with the liquidator are not sufficient to cover the liabilties;
(ii) when the existing shareholders fail to pay the amount due on the shares to the liquidator.
Q2. What are the contents of “Liquidators’ statement of account”?

Answer: While preparing the liquidator’s statement of account, receipts are shown in the following order:
(a) Amount realised from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from it, if any, is entered as ‘surplus
from securities’.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay necessary amount (not
exceeding the amount of uncalled capital) if creditors’ claims/claims of preference shareholders can’t be satisfied
with the available amount. Preference shareholders would be called upon to contribute (not exceeding the amount
as yet uncalled on the shares) for paying of creditors.
(d) Amounts received from calls to contributories made at the time of winding up are shown on the Receipts side.
(e) Receipts per Trading Account are also included on the Receipts side.
(f) Payments made to redeem securities and cost of execution and payments per Trading Account are deducted from
total receipts.
Payments are made and shown in the following order :
(a) Legal charges;
(b) Liquidator’s expenses;
(c) Debenture holders (including interest up to the date of winding up if the company is insolvent and to the date of
payment if it is solvent);
(d) Creditors:
(i) Preferential (in actual practice, preferential creditors are paid before debenture holders having a floating
charge);
(ii) Unsecured creditors;
(e) Preferential shareholders (Arrears of dividends on cumulative preference shares should be paid up to the date of
commencement of winding up); and
(f) Equity shareholders.
LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT

In case of voluntary winding up, the statement prepared by the Liquidator showing receipts and payment of cash is
called “Liquidator’s Statement of Account”. In case of compulsory winding up, the statement is known as “Official
Liquidator’s Final Account”. While Preparing the Statement of Account, the following points should be noted :
(i) Assets are included in the prescribed order of liquidity.
(ii) In case of assets specifically charged in favour of creditors, only the surplus from it, if any, is recognised as
“Surplus from Securities”.
(iii) Net result of trading entered on the receipts side, profits being added and losses being deducted.
(iv) Payments made to redeem securities and cost of execution, i.e. cost of collecting debts, are deducted from the
total receipts.
(v) Payments are made as shown in the following order:
(a) Legal Charges;
(b) Liquidator’s Remuneration;
(c) Liquidation Expenses;
(d) Debenture holders (including interest up to the date of winding up if the company is insolvent and to the date
of payment if it is solvent);
(e) Creditors; Preferential (in actual practice, preferential creditors are paid before debenture holders having a
floating charge). Unsecured creditors, shareholders for dividends declared but not yet paid;
(f) Preference shareholders; and
(g) Equity shareholders.
(vi) Arrears of dividends on cumulative preference shares should be paid up to the date of winding up.
(vii) In case of partly paid shares, it should be seen whether any amount is to be called up on such shares.
Firstly, the equity shareholders should be called up to pay the necessary amount (not exceeding the amount of
uncalled capital) if creditors’ claims of preference shareholders cannot be satisfied with the amount.
Preference shareholders would be called upon to contribute (not exceeding the amount as yet uncalled on the
shares) for paying off creditors.
(viii) The loss suffered by each class of shareholders, i.e. the amount that cannot be repaid, should be proportionate to
the nominal value of the share. The loss per shares have nominal value of ₹ 100, and one set of shareholders has
paid ₹ 80 per share and other set has paid ₹ 60 per share. Suitable adjustment will have to be made in cash in
such a case; the latter set must contribute ₹ 20 first or the first set must be paid ₹ 20 first.
Q3. STATEMENT OF AFFAIRS

In case of winding up by Tribunal, Section 272(5) of the Companies Act, 2013 provides that a petition presented by
the company for winding up before the Tribunal shall be admitted only if accompanied by a statement of affairs in
such form and in such manner as may be prescribed.
In accordance with Section 274(1), where a petition for winding up is filed before the Tribunal by any person other
than the company, the Tribunal shall, if satisfied that a prima facie case for winding up of the company is made out,
by an order direct the company to file its objections along with a statement of its affairs within thirty days of the order
in such form and in such manner as may be prescribed. The Tribunal may allow a further period of thirty days in a
situation of contingency or special circumstances.
The broad lines on which the Statement of Affairs is prepared are the following —
(1) Include assets on which there is no fixed charge at the value they are expected to realise. Students should note to
include calls in arrear but not uncalled capital.
(2) Include assets on which there is a fixed charge. The amount expected to be realised would be compared with the
amount due to the creditor concerned. Any surplus is to be extended to the other column. A deficit (the amount
owed to the creditor exceeding the amount realisable from the asset) is to be added to unsecured creditors.
(3) The total of assets in point (1) and any surplus from assets mentioned in point (2) is available for all the creditors
(except secured creditors already covered by specifically mortgaged assets).
(4) From the total assets available, the following should be deducted one by one:-
(i) Preferential creditors,
(ii) Debentures having a floating charge, and
(iii) Unsecured creditors.
If a minus balance emerges, there would be deficiency as regards creditors, otherwise there would be a surplus.
(5) The amount of total paid-up capital (giving details of each class of shares) should be added and the figure
emerging will be deficiency (or surplus) as regards members.
Note: Statement of affairs should accompany eight lists:

List A Full particulars of every description of property not specifically pledged and included in any
other list are to be set forth in this list.
List B Assets specifically pledged and creditors fully or partly secured.
List C Preferential creditors for rates, taxes, salaries, wages and otherwise.
List D List of debenture holders secured by a floating charge.
List E Unsecured creditors.
List F List of preference shareholders.
List G List of equity shareholders.
List H Deficiency or surplus account.
Q4. OVERRIDING PREFERENTIAL PAYMENTS

In the winding up of a company, the following debts should be paid in priority to all other debts, as per section 326:
(a) workmen’s dues; and
(b) where a secured creditor has realized a secured asset, so much of the debts due to such secured creditor as could
not be realized by him or the amount of the workmen’s portion in his security (if payable under the law),
whichever is less, pari-passu with the workmen’s dues:
MCQs (ICAI)
1. Liability of B List Contributories will crystallize only When
(a) Existing assets available with the liquidator are not sufficient to cover the liabilities.
(b) Existing shareholders fail to pay the amount due on the shares to the Liquidator.
(c) both (a) and (b).
2. If Shares having Face Value ₹ 100 were paid up ₹ 70, the B List Contributory can be called up to pay
(a) Maximum of ₹ 30 only.
(b) Maximum of ₹ 70 only.
(c) Maximum of 100 only.
3. In case of winding up of company by Tribunal, which statement is prepared to be presented to the Tribunal?
(a) Statement of affairs.
(b) Statement of assets and liabilities.
(c) Statement of deficiency.
4. Which of the following will be treated as preferential creditors?

(a) Govt. taxes.
(b) Trade Creditors.
(c) Unsecured loans.
Answer: 1. (c); 2. (a); 3. (a); 4. (a)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
SUMMARY NOTES
SOLUTIONS
Q30. In the matter of the Companies Act and in the matter of Sun City Development Ltd. (in winding up)
Statement of Affairs on 31st March, 2016, the date of winding up
Estimated realisable value
Assets ₹
Assets not specifically pledged (as per list A)
Trade receivables 12,00,000
Inventory 14,80,000
Plant and Machinery 26,00,000
Tools and Equipment 80,000
Patents and copyrights 6,00,000
Unpaid calls 1,00,000
60,60,000
Assets specifically pledged (as per list B)
Estimated Due to Deficiency Surplus
Realisation Secured Ranking as carried to the
Creditors Unsecured last column
Creditors
₹ ₹ ₹ ₹ ₹
Investments 34,00,000 38,00,000 4,00,000
Land & Building 26,00,000 16,00,000 10,00,000
60,00,000 54,00,000
Estimated surplus from assets specifically pledged 10,00,000
Estimated total assets available for preferential creditors,
debenture holders and unsecured creditors 70,60,000
Summary of Gross Assets:
Gross realisable value of -
assets specifically charged 60,00,000
Others assets 60,60,000
1,20,60,000
Estimated total assets available for preferential creditors,

debenture holders, bank overdraft and unsecured
creditors brought forward 70,60,000
Gross
Liabilities (₹) Liabilities ₹ ₹
50,00,000 Secured creditors (as per List B) to the
(34,00,000 extent to which claims are estimated to be
+16,00,000) covered by assets specifically pledged
4,20,000* Preferential creditors as per list C 4,20,000*
Estimated balance of assets available for
Debenture holders, Bank & unsecured creditors 66,40,00
20,50,000 Debenture holders secured by a floating
(20,00,000 charge as per list D (20,50,000)
+ 50,000)
Surplus as regards debenture holders 45,90,000
Unsecured creditors as per list E
Estimated unsecured balance of claim of
creditors partly secured on
Specific assets 4,00,000
Trade payable 53,10,000
58,70,000 Outstanding expenses (40,000 + 1,20,000) 1,60,000 58,70,000
Estimated deficiency as regards creditors
being the difference between gross liabilities
- and gross assets 12,80,000
1,33,40,000
Issued & Called up Capital:
6,00,000 Equity shares or ₹ 10 each, ₹8 paid 48,00,000
6% 2,00,000 Preference shares of ₹ 10
each fully called 20,00,000 68,00,000
Estimated Deficiency as regards members
as per list H 80,80,000
*Note
(i) The Secretary of a Company, being an officer, is to be included within the definition of employee‘ for the
purpose of computing preferential creditors. The preferential creditor for secretary‘s salary has been
restricted to 4 months salary but maximum pay shall not exceed ₹ 20,000 per claimant as per the
requirement of the law.
(ii) The above is subject to cost of winding up estimated as ₹ 3,00,000 and to any surplus / deficiency on
realisation of assets.
(iii) There are 6,00,000 shares unpaid @ ₹ 2 per share liable to be called up.
List H - Deficiency Account

A. Item contributing to Deficiency ₹
1. Excess of capital & liabilities over assets on 1 -4-2011 NIL
2. Net dividend & bonuses during the period (4,80,000 + 1,14,000) 5,94,000
3. Net trading losses after charging depreciation, taxation, interest on debentures,
etc. during the same period (₹ 21,80,000 + ₹ 26,26,000) 48,06,000
4. Losses other than trading losses written off or for which provision
has been made in the books during the same period - stock loss. 8,00,000
5. Estimated losses now written off or for which provision
has been made for the purpose of preparing the statement:
₹
Tools and equipments 3,20,000
Patents and copyrights 4,00,000
Inventories 2,60,000
Investments 2,00,000
Debtors 6,00,000 31,80,000
6. Other items contributing to deficiency NIL
93,80,000
B. Items reducing Deficiency
7. Excess of assets over capital and liabilities on 1st April, 2011 (8,00,000 – 5,00,000) 3,00,000
8. Net trading profit during the period 8,00,000
9. Profit & Incomes other than trading profit during the same period -
10. Other items - Profit expected on Land & Building (26,00,000 - 24,00,000) 2,00,000
13,00,000
Deficiency as shown by the Statement of Affairs (A) - (B) 80,80,000
Working Notes:
(1) Trial Balance to ascertain the amount of loss for the year ended 31 st March, 2016
Dr. Cr.
Tools and Equipments 4,00,000
Patents and Copyrights 10,00,000
Investment 36,00,000
Equity Capital 48,00,000
6% Preference share capital 19,00,000
Interest Outstanding 50,000
Mortgage on Land & Building 16,00,000
Owing for Wages 4,00,000
Secretary‘s Salary 60,000
Managing Director‘s Salary 1,20,000
Profit & Loss Account on 1.4.2015 24,74,000
1,74,14,000 2,00,40,000
Loss for the year (balancing figure) 26,26,000 -
2,00,40,000 2,00,40,000
2. Reserve & Surplus Account

₹ ₹
1.4.2011 To Profit & Loss 5,00,000 1.4.2011 By Balance 8,00,000
A/c (Transfer) b/d
31.3.2012 To Dividend- Equity 4,80,000 31.3.2012 By Profit for 8,00,000
Preference 1,14,000 the year
1.4.12to To Profit & Loss 21,80,000 31.3.2015 By Balance 24,74,000
31.3.15 A/c (Loss) c/d
To Loss of Stock 8,00,000
40,74,000 40,74,000
Q31. Statement of Affairs

Assets not specifically pledged as per list A; Estimated Realisable Value (Rs.)
Cash in hand 825
Trade debtors 37,900
Unpaid calls 1,500
Stock 33,900
Assets specifically pledged as per list B;
Name of Assets Name of Loan ERV Loan Amount Surplus Deficiency
Freehold Prem. First Mortgage 3,75,000 3,00,000 75,000 ----
Freehold Prem. Second Mortgage 75,000 1,12,500 ----- 37500
Estimated total assets available for Preferential creditors, Debentureholders
Secured by a floating charge and other creditors [carried forward] 2,48,175
Summary of Gross Assets Rs
Assets specifically pledged 3,75,000
Other assets 2,48,175
6,23,175
Estimated total assets available for Preferential creditors, Debentueholders
Secured by a floating charge and unsecured creditors brought forward 2,48,175
Gross Liabilities
Liabilities
Rs Rs.
3,75,000 Secured creditors as per List B to the extent claims -
are covered by assets specifically pledged.
20,025 Preferential creditors as per List C 20,025
Estimated balance of assets available for
Debenture holders
having a floating charge and unsecured creditors 2,28,150
1,53,000 Debentureholders secured by floating charge as per List D. 1,53,000
75,150
Estimated surplus as regards Debentureholders
37,500 Estimated unsecured balance of claims 37,500

of partly secured creditors
2,96,250 Trade creditors 2,96,250
27,750 M.D. emoluments and taxes [22,500 + (9,225-3,975)] 27,750
58,125 Bank overdraft 58,125
18,000 Contingent liability for claim for damages 18,000 4,37,625
Estimated deficiency as regards creditors ,being the
excess of gross liabilities over gross assets 3,62,475
Issued and called up capital.
148,500 Equity shares ,Rs10 each fully called 1,48,500

up less calls in arrears,Rs1,500 [As per List G]
Estimated deficiency as regards contributories 5,10,975
Deficiency Account “List H”
A) Items contributing to Deficiency Rs.

Loss upto date (Net of Reserve, 2,55,825-7,500) 2,48,325
Freehold Premises 75,000
Trade debtors (12900*50%)+72,750 79,200
Plants Machinery 73,500
Stock 16,950
Claim for damages 18,000
Total (A)
B ltems Decrease Deficiency; Nil

Total(B)
C. Deficiency as explained in the Statement ot Affairs(A)-(B) 5,10,975
Balance Sheet
Liability Amount Assets Amount
Capital (Net) 1,47,000 Freehold premises 4,50,000
Reserves 7,500 Plant and Machinery 2,47,500
1st Mortgage 3,00,000 Sundry Dedtors 1,17,150
2nd Mortgage 1,12,500 Stock 50,850
8%Dedentures 1,50,000 Cash 825
Interest for3Months 3,000 Profit and Loss Account 2,55,825
Sundry creditors(including) 3,34,800 (Balancing figure)
Managerial remuneration and salaries)
Provision for taxation 9,225 11,22,150
11,22,150
(ii)Preferential Creditors:
Income tax; 3,975
Staff Salary 16,050
20,025
Q32. BT Ltd.
Liquidator’s Final Statement of Account
Receipt Rs. Payment Rs.
To Balance b/d By Liquidation expenses 45,000
Cash at Bank 75,700 By Liquidator’s remuneration 1,29,600
To Amount realized from Assets not (43,20,000 X 3%)
specifically Pledged By Preferential Creditors 75,000
Land & Building 24,50,000 By amount paid to secured creditor having
Plant & Machinery 9,00,000 floating charges
Furniture 2,85,000 12% Debenture 10,00,000
Patents 90,000 Add: Outstanding Interest
Stock 2,80,000 upto 31/03/18 1,20,000
Trade Receivable 3,15,000 43,20,000 Accrued Interest from
01/04/18 to 30/06/18 30,000 11,50,000
(10,00,000 X 12% X 3/12)
By unsecured creditors 7,36,250
(8,50,000 – 75,000) - 5%
By Amount paid to Preference Shareholders
Preference share capital 10,00,000
Arrears of dividend 1,20,000 11,20,000
(10,00,000 X 12%)
By Amount paid to Equity Shareholders 11,39,850
ESH 1 ( 10,000 X 47.995) 4,79,950
ESH 1 ( 20,000 X 32.995) 6,59,900
43,95,700 43,95,700
Working Note 1: Calculation of call/paid from/to Equity Shareholder
Balance Available 11,39,850
(75,700 + 43,20,000 – 45,000 – 1,29,600 – 75,000 – 11,50,000 – 7,36,250 - 11,20,000)
(+) Notional calls
Shareholders No. of shares X uncalled call Amount(Rs.)
ESH 1 10,000 X 25 2,50,000
ESH 2 20,000 X 40 8,00,000 10,50,000
Balance for Equity Shareholders 21,89,850
÷ Numbers of Equity Shares (10,000 + 20,000) 30,000
Payable per Equity Share 72.995
Net call received/refund per Equity Share:

ESH 1 (72.995 – 25) = Rs. 47.995 Refund
ESH 2 (72.995 – 40) = Rs. 32.995 Refund
Q33. Liquidator’s Final Statement of Account

Receipts Rs. Payments Rs.
To Sundry Assets Realized: By Liquidator’s Remuneration 92,000
Trade receivable 13,20,000 (46,00,000 × 2%)
Inventory 6,20,000 By Liquidation Expenses 1,72,000
Land & Building 12,40,000 By Preferential Creditors:
Plant & Machinery 14,20,000 46,00,000 As given in Balance Sheet 2,10,000
To Calls from shareholders: Income Tax Liability (given) 1,34,000
Call money on 10,000 Equity By Debenture holders:
shares, Rs. 50 paid up 20,000 Face Value of Debentures 4,20,000
at Rs. 2 per Share Debenture Interest 42,000
(for 1 year at 10%)
By Unsecured Creditors:
By Preference Shareholders:
Preference Capital 10,00,000
Arrears of Dividend
(10,00,000 × 10% × 3 years) 3,00,000
By Equity Shareholders:
refund on 10,000 Shares
Rs.60paid up, at Rs.8 per 80,000
Share
Total 46,20,000 Total 46,20,000
Working Note: Calls from Holders of Partly Paid Shares

Particulars Rs.
(a) Total of Receipts before considering Call Money (from the above account Dr. Side) 46,00,000
(b) Total Payments before final payments to Equity Shares (92,000 + 1,72,000 + 4,20,000 +
42,000 + 2,10,000 + 1,34,000 + 9,70,000 + 12,00,000 + 10,00,000 + 3,00,000) 45,40,000
(c) Surplus from above Calls made on Equity Shares (a-b) 60,000
(d) Notional Call on 10,000 Partly Paid Shares at Rs. 10 each (to makeall Shares Rs. 60
Paid up) 1,00,000
(e) Surplus Cash Balance after Notional Call (c + d) 1,60,000
(f) Number of Shares deemed to be paid at Rs. 60 per Share (10,000 +10,000) 20,000
(g) Hence, Refund on every Rs. 60 Paid up Share (e ÷ f) = Rs. 1,60,000 ÷20,000 Shares Rs. 8.00
(h) So, Required Call on Rs. 50 Paid up Share (Rs. 10 Notional Call – Rs. 8 Refund) Rs. 2
Q34. Liquidator’s Statement of Account

Receipts ₹ Payments ₹
Land & building 6,20,000 Liquidator’s remuneration 46,000
Inventory in trade 3,10,000 Liquidation expenses 86,000
Plant & machinery 7,10,000 Preferential creditors 1,05,000
Book debts 6,60,000 10% Debentures 2,10,000
Income tax payable 67,000
Preference shareholders:
Capital 5,00,000
Arrears of preference dividend
for 3 years 1,50,000
Refund on 5,000 shares of
₹ 60 paid up @ ₹ 10.10 per
share (Refer W.N.) 50,500
Refund on 5,000 shares of
₹ 50 paid up @ ₹ 0.10 per
share (Refer W.N.) 500
23,00,000 23,00,000
Working Note:
₹
Total equity capital paid up (3,00,000 + 2,50,000) 5,50,000
Less: Balance available after payment to secured, unsecured,
preferential creditors and preference shareholders (51,000)
(23,00,000 – 46,000 – 86,000 – 2,10,000 – 1,05,000 – 67,000
– 4,85,000– 6,00,000 – 5,00,000 – 1,50,000)
Loss to be borne by 10,000 equity shareholders 4,99,000
Loss per share ₹ 49.90
Hence, amount of refund on ₹ 50 per share paid up (₹ 50 – ₹ 49.90) ₹ 0.10
Amount of refund on ₹ 60 per share paid up (₹ 60 – ₹ 49.90) ₹ 10.10
Q35. Prakash Processors Limited

Liquidator’s Statement of Account
To Assets realised - By Liquidation expenses 27,250
Bank 75,000 By Preferential creditors 38,000
By Liquidator’s Remuneration 36,750
(W.N.1)
Other assets: By Debenture holders:
Land etc. 3,00,000 Debentures 2,50,000
Machinery etc. 5,00,000 Interest payable 37,500
Patents 75,000 Interest 1-1-X2/30-6-X2 18,750 3,06,250
Stock 1,50,000
Trade receivables 2,00,000 12,25,000
To Call on equity 19,875 By Unsecured creditors 2,80,750
shareholders (7,500
× ₹ 2.65)
By Preference shareholders:
Preference capital 5,00,000
Arrear of Dividend 1,00,000 6,00,000
12,89,000
By Equity shareholders -
₹ 12.35 on 2,500 shares 30,875
13,19,875 13,19,875
Working Notes:
(1) Liquidator’s remuneration 12,25,000 × 3/100 =₹ 36,750
(2) As the company is solvent, interest on the debentures will have to be paid for the period 1-1-20X2 to 30-6-
20X2
= 2,50,000 X 15 / 100 X ½
= ₹ 18,750
(3) Total equity capital - paid up ₹ 6,37,500
Less : Balance available after payment to unsecured
and preference shares (13,00,000 — 12,89,000) ₹ (11,000)
Loss to be born by 10,000 equity shares ₹ 6,26,500
Loss per share ₹ 62.65
Hence, amount of call on ₹ 60 paid share ₹ 2.65
Refund to share on ₹ 75 paid ₹ 12.35
Q36. OM Ltd.
Receipts Value Payments Payments
Realised
Assets Realised: Liquidator’s Remuneration
Cash at Bank 2,40,000 (W.N. 1) 1,02,224
Trade receivables 8,00,000 Liquidation Expenses 1,17,736
Inventory 6,40,000 Preferential creditors 1,20,000
Debentureholders:
Plant and Machinery 20,00,000 14% Debentures 9,20,000
Patent 2,00,000 Interest Accrued (W.N. 2) 1,61,000 10,81,000
Surplus from Securities Creditors:
(W.N. 3) 5,20,000 Unsecured 3,51,200
Preference Shareholders:
Preference Share Capital 16,00,000
Arrears of Dividend 2,24,000 18,24,000
Equity Shareholders (W.N.4)
₹ 25.12 per share on 32,000 shares 8,03,840
44,00,000 44,00,000
Working Notes:
₹
1 Liquidator’s remuneration:
2% on assets realised (2% of ₹47,60,000) 95,200
2% on payments to unsecured creditors (2% on ₹3,51,200) 7,024
1,02,224
2 Interest accrued on 14% Debentures:
Interest accrued as on 31.3.2019 1,28,800
Interest accrued upto the date of payment i.e. 30.6.2019 32,200
3 Surplus from Securities: 1,61,000
Amount realised from Land and Buildings (₹3,20,000 + ₹8,00,000) 11,20,000
Less: Mortgage Loan (6,00,000)
5,20,000
4 Amount payable to Equity Shareholders:
Equity share capital (paid up) 19,20,000
Less: Amount available for equity shareholders (8,03,840)
Loss to be borne by equity shareholders 11,16,160
Loss per equity share (₹11,16,160/32,000) 34.88
Amount payable to equity shareholders for each equity share (60-34.88) 25.12
Q37. Liquidators’ Final Statement of Account

Receipts Rs. Payments Rs.
Cash 4,13,000 Return to contributors:
Realisation from: Preference dividend 33,000
Calls in arrears 10,000 Preference shareholders 3,00,000
Final call of Rs. 5 per equity share of Calls in advance 5,000
Rs. 50 each (Rs. 5 ×1,000) 5,000 Equity shareholders of 90,000
Rs. 100 each (3,000 × Rs. 30)
4,38,000 4,38,000
Working Note:
Rs.
Cash account balance 4,13,000
Less: Payment for dividend 33,000
Preference shareholders 3,00,000
Calls in advance 5,000 (3,38,000)
75,000
Add: Calls in arrears 10,000
85,000
Add: Amount to be received from equity shareholders of Rs. 50 each (1,000 × 20) 20,000
Amount disposable 1,05,000
Number of equivalent equity shares:
3,000 shares of Rs. 100 each = 6,000 shares of Rs. 50 each
1,000 shares of Rs. 50 each = 1,000 shares of Rs. 50 each
= 7,000 shares of Rs. 50 each
Final payment to equity shareholders =
Amount left for distribution
Total number of equivalent equity shares
= Rs. 1,05,000 / 7,000 shares
= Rs. 15 per share to equity shareholders of Rs. 50 each.
Therefore for equity shareholders of Rs. 100 each 15 x 100/50

= Rs. 30 per share to equity shareholders of Rs. 100 each.
Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equity shareholders of Rs. 50
each have to pay Rs. 20 and receive Rs. 15 each. As a result, they are required to pay net Rs. 5 per share.
Q38. Liquidator’s Statement of account

₹ ₹ ₹ ₹
Assets Liquidation 3,000
Realized Expenses.
Land & 1,25,000 Liquidator’s 10,000
Building Remuneration
Other Fixed 3,00,000 Debenture holders
Assets
Inventory 4,20,000 8% Debentures 1,00,000
(80% x
5,25,000)
Less: bank (4,00,000) 20,000 Add: Interest 8,000 1,08,000
loan Outstanding
Trade 80,000 Trade payables 4,00,000
receivables
(80% x Pref. Shareholders
1,00,000)
On 8,000 Shares @ 4,000
50 Paise per Share
5,25,000 5,25,000
Working Notes
(a) Value of Debentureholders ₹
8% Debentures = 1,00,000
Add Interest Outstanding = 8,000
= 1,08,000
(b) Value of Preference Shareholders to be paid 8000 Shares @ 50 Paise Per Share = 8000 x 0.50 = ₹ 4,000
Q39. Calculation of Total Remuneration payable to Liquidator Amount in Rs.

5% on Assets realized (13,75,000 x 5%) 68,750
8% on payment made to Unsecured creditors (Refer W.N) 7,080
Total Remuneration payable to Liquidator 75,830
Working Note:
Liquidator’s remuneration on payment to unsecured creditors =
Cash available for unsecured creditors after all payments including liquidation expenses, payment to secured
creditors and liquidator’s remuneration
Total amount realized Rs. 13,75,000
Less: Liquidation expenses paid (13,000)
Payment to secured creditors (1,00,000)
Liquidator’s remuneration on assets realized (68,750) Rs. 1,81,750
Rs. 11,93,250
Sufficient amount is available for preference creditors (treated as unsecured creditors) therefore Liquidator’s
remuneration on payment to unsecured creditors = 8% x Rs. 88,500 = Rs. 7,080
Note: Since the amount of unsecured creditors (other than preferential creditors) is not given in the question, the
above solution is based on the assumption that there are no unsecured creditors (other than preferential
creditors who are treated as unsecured creditors).
Q41. Receiver’s Receipts and Payments Account

Receipts ₹ ₹ Payments ₹ ₹
Sundry Assets realised 10,00,000 Costs of the Receiver 9,750
Surplus received from Preferential payments:
Mortgage loan: - Income Taxes (raised - 1,25,000
Sale Proceeds of land within 12 months)
and building 8,00,000 Debentures holders:
Less: Applied to Principal amount 7,50,000
Discharge mortgage Interest for half year 48,750 7,98,750
loan (3,50,000) 4,50,000 Surplus transferred to
the Liquidator 5,16,500
14,50,000 14,50,000

Surplus received from 5,16,500 Cost of Liquidation: 15,000
Receiver Remuneration to Liquidator
(7,50,0000 x 2%)
Assets Realized 7,50,000 15,000
Calls on Contributories: Unsecured Creditors:
On holder of 25,000 34,500 Trade 1,90,000
Equity Shares at the rate Directors for Bank
of ₹ 1.38 per share O/D cleared 1,50,000 3,40,000
Preferential Shareholders:
Capital 7,50,000
Arrears of Dividends 1,50,000 9,00,000
Equity shareholders:
Return of money to
holders of 50,000 equity
shares at 62 paise each 31,000
13,01,000 13,01,000
Working Note:
Call from partly paid shares
Deficit before call from Equity Shares ₹ ₹
= ₹ (5,16,500+7,50,000) less ₹ (15,000+15,000+3,40,000+9,00,000) = (3,500) (3500)
Notional call on 25,000 shares @ ₹ 2 each 50000
Net balance after notional call (a) 46500
No. of shares deemed fully paid (b) 75000
Refund on fully paid shares = 46,500/ 75,000= ₹ 0.62
Call on partly paid share (2 – 0.62) = ₹ 1.38
Q42. Statement of Liability as Contributories of Former Members

Creditors Amount to O Q R T Amount
outstanding be paid to 1,000 200 1,400 1,400 to be
creditors Shares Shares Shares Shares paid to
(Increase in the
creditors) creditors
Date Rs. Rs. Rs. Rs. Rs. Rs. Rs.
April 4 42,000 42,000 10,500 2,100 14,700 14,700 42,000
Sep 8 57,000 15,000 - 1,000 7,000 7,000 15,000
Nov 11 85,000 28,000 - - 14,000 14,000 28,000
March 1 95,000 10,000 - - - 10,000 6,300*
Total (A) 10,500 3,100 35,700 45,700
Maximum liability at Rs. 30 per shares on 30,000 6,000 42,000 42,000
shares held (B)
Amount paid [Lower of (A) and (B)] 10,500 3,100 35,700 42,000 91,300
*Rs. (10,000 – 3,700 = 6,300)
T can be called upon to pay maximum only Rs. 42,000. So T will pay only Rs. 6,300 (42,000 – 14,700 – 7,000 –
14,000) out of Rs. 10,000 above. Hence incremental creditors on 1.03.2020 amounting to Rs. 3,700 (10,000 –
6,300) will not be receiving any payment.
Notes:
(1) P will not be liable to pay any amount as the winding up proceedings commenced after one year from the
date of the transfer.
(2) S also will not be liable, as the transferee X has paid the balance Rs. 30 per share as call in advance.
INTERNAL RECONSTRUCTION
1. The paid-up capital of Toy Ltd. amounted to Rs. 2,50,000 consisting of 25,000 equity shares of Rs. 10 each.
Due to losses incurred by the company continuously, the directors of the company prepared a scheme for
reconstruction which was duly approved by the court. The terms of reconstruction were, as under:
(i) In lieu of their present holdings, the shareholders are to receive:
(a) Fully paid equity shares equal to 2/5th of their holdings.
(b) 5% preference shares fully paid-up to the extent of 20% of the above new equity shares.
(c) 3,000 6% second debenture of Rs. 10 each.
(ii) An issue of 2,500 5% first debentures of Rs. 10 each was made and fully subscribed in cash.
(iii) The assets were reduced as follows:
(a) Goodwill from Rs. 1,50,000 to Rs. 75,000.
(b) Machinery from Rs. 50,000 to Rs. 37,500.
(c) Leasehold premises form Rs. 75,000 to Rs. 62,500.
Show the journal entries to give effect to the above scheme of reconstruction.
2. Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by the court-
(1) Furniture and Fixtures which stood at the books at Rs. 1,50,000 to be written down to Rs. 95,000. The
freehold premises which was valued at Rs. 7,00,000 showed an appreciation of Rs. 55,000.
(2) Plant and machinery showed fall in value of Rs. 89,000, to be recorded in the books. Investment at Rs.
2,00,000 was brought down to the existing market value at Rs. 1,05,000.
(3) Debenture holders accepted to receive the following in lieu of their present 9% debentures of Rs. 2,50,000-
(a) 1/5th of the total to be paid in cash to them.
(b) To take over the land and buildings of value Rs. 72,000.
(c) To forgo the remaining unpaid portion as a policy of reconstruction.
Write off the profit and loss A/c debit balance at Rs. 70,000 which had been accumulated over the years. In case
of any shortfall, the balance of the General reserve of Rs. 1,50,000 can be utilized to write off the losses under
reconstruction scheme.
Show the necessary journal entries as part of the reconstruction process considering that balance in general
reserve utilized to write off the losses as per reconstruction scheme.
3. Green Limited had decided to reconstruct the Balance Sheet since it had accumulated huge losses. The following
is the Balance Sheet of the Company on 31.3.2000 before reconstruction:
Authorized: Goodwill 20,00,000
1,50,000 Equity Shares Building 10,00,000
of Rs. 50 each 75,00,000 Plant 10,00,000
Subscribed and paid up Computers 25,00,000
Capital: Investments Nil
50,000 Equity Shares Current Assets Nil
of Rs. 50 each 25,00,000 Profit and Loss A/c 20,00,000
1,00,000 Equity Shares
of Rs. 50 each
Rs. 40 per Share paid up 40,00,000
Secured Loans:
12% First Debentures 5,00,000
12% Second Debentures 10,00,000
Current Liabilities
85,00,000 85,00,000
The following is the interest of Mr. X and Mr. Y in Green Limited:
Mr. X Mr. Y
Rs. Rs.
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
Sundry Creditors 2,00,000 1,00,000
12,00,000 6,00,000
Fully paid up Rs. 50 Shares 3,00,000 2,00,000
Partly paid up Shares (Rs. 40 paid up) 5,00,000 5,00,000
The following Scheme of Reconstruction is approved by all parties interested and also by the, Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be converted into
equity shares of Rs. 20 each.
(b) Mr. X is to cancel Rs.7,00,000 of his total debt (other than share amount) and to pay Rs. 2 lakhs to the
company and to receive new 14% First Debentures for the balance amount.
(c) Mr. Y is cancel Rs. 3,00,000 of his total debt (other than equity shares) and to accept new 14% Debentures
for the balance.
(d) The amount thus rendered available by the scheme shall be utilized in writing off of Goodwill, Profit and
Loss A/c and the balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the
reconstructed company.
4. The Balance Sheet of A & Co. Ltd. As on 31-12-1999 is as follows:

Equity and Liabilities
Share Capital:
4,000 6% Cumulative Preference Shares of
Rs. 100 each 4,00,000
75,000 Equity Shares of Rs. 10 each 7,50,000 11,50,000
6% Debentures (Secured on Freehold
Property) 3,75,000
Accrued Interest 22,500 3,97,500
Current Liabilities
Creditors 3,00,000
Directors’ Loans 1,00,000 5,95,000
Total 21,42,500
Assets Rs. Rs.
Fixed Assets:
Freehold Property 4,25,000
Plant 50,000
Patent 37,500
Goodwill 1,30,000 6,42,500
Traded Investments (at cost) 55,000
Current Assets:
Debtors 4,85,000
Stock 4,25,000
Deferred Adverting 1,00,000 10,10,000
Profit and Loss Account 4,35,000
Total 21,42,500
The Court approved a Scheme of re-organization to take effect on 1-1-2000, whereby:

(i) The Preference Share to be written down to Rs. 75 each and Equity Shares to Rs. 2 each.
(ii) Of the Preference Share dividends which are in arrears for four years, three fourths to be waived and Equity
Shares of Rs. 2 each to be allotted for the remaining quarter.
(iii) Accrued interest on debentures to be paid in cash.
(iv) Debenture-holders agreed to take over freehold property, books value Rs. 1,00,000 at a valuation of Rs.
1,20,000 in part repayment of their holding and to provide additional cash of Rs. 1,30,000 secured by a
floating charge on company’s assets at an interest rate of 8% p.a.
(v) Patents, Goodwill and Deferred Advertising to be written off.
(vi) Stock to be written off by Rs. 65,000.
(vii) Amount of Rs. 68,500 to provided for bad debts.
(viii) Remaining freehold property to be re-valued at Rs. 3,87,500.
(ix) Trade Investments be sold for Rs. 1,40,000.
(x) Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares of Rs. 2 each
and as to 5% in cash, and balance 5% being waived.
(xi) There were capital commitment totaling Rs. 2,50,000. These contacts are to be cancelled on payment of 5%
of the contract price as a penalty.
(xii) Ignore taxation and cost of the scheme.
You are requested to show Journal entries reflection the above transaction (including cash transactions) and
prepare the Balance Sheet of the company after completion of the Scheme.
5. Balance Sheet as at 31st March, 1993:

2,00,000 equity shares of Fixed Assets 11,40,000
Rs. 10 each, Rs. 5 paid 10,00,000 Patents and
6,000 8% Preference Copyrights 80,000
Shares of Rs. 100 each 6,00,000 Investment at cost 65,000
9% Debentures 6,00,000 (Market value
Interest accrued on debentures 1,08,000 Rs. 55,000)
Bank of India 1,50,000 Current Assets:
Interest accrued on Bank Stock 4,00,000
Overdraft 15,000 Debtors 4,39,000
Current Liabilities Bank 10,000
Creditors 69,000 Profit and Loss 4,08,000
25,42,000 25,42,000
Preference dividend is in arrear for one year:-
(i) Preference shareholders to give up their claims, inclusive of dividends, to the extent of 30% and desire to be
paid off.
(ii) Debenture-holders agree to give up their claims to interest in consideration of their interest being enhanced
to 12%.
(iii) Bank agrees to give up 50% of its interest outstanding in consideration of its being paid off at once.
(iv) Creditors would like to grant a discount of 5% if they are paid immediately.
(v) Balance of Profit & Loss Account, Patents and Copyrights and Debtors of Rs. 30,000 to be written off.
(vi) Fixed Assets to be written down by Rs. 34,000.
(vii) Investments are to reflect their marked value.
(viii) To the extent not specifically stated, equity shareholders suffer on reduction of their rights. Cost of
reconstruction is Rs. 3,350.
Draft journal entries in the books of the company assuring that the scheme has been put through fully with the
equity shareholders bringing in necessary cash to pay off the parties and to leave a working capital of Rs. 30,000,
and prepare the Balance Sheet after reconstruction.
6. The balance sheet of Overcome Ltd. before reconstruction is:

Liabilities Amount Assets Amount
Authorised and issued capital Building at cost less
15,000 Equity shares of Rs.50 each 7,50,000 Depreciation 4,00,000
12,000 7% Preference shares of 6,00,000 Plant at cost less
Rs. 50 each (Note: Preference dividend Depreciation 2,68,000
is in arrear for five years) Trademarks and goodwill at cost 3,18,000
Loan 5,73,000 Stock 4,00,000
Sundry creditors 2,07,000 Debtors 3,28,000
Other Liabilities 35,000 Preliminary expenses 11,000
Profit and loss account
4,40,000
21,65,000 21,65,000
The Company is now earning profits short of working capital and a scheme of reconstruction has been approved
by both classes of shareholders. A summary of the scheme is as follows:
(a) The equity shareholders have agreed that their Rs. 50 shares should be reduced to Rs. 2.50 by cancellation
of Rs. 47.50 per share. They have also agreed to subscribe for three new equity shares of Rs. 2.50 each for
each equity share held.
(b) The preference shareholders have agreed to cancel the arrears of dividends and to accept for each Rs. 50
share, 4 new 5% preference shares of Rs. 10 each, plus 6 new equity shares of Rs. 2.50 each, all credited as
fully paid.
(c) Lenders to the company for Rs. 1,50,000 have agreed to convert their loan into share and for this purpose
they will be allotted 12,000 new preference shares of Rs. 10 each and 12,000 new equity share of Rs. 2.50
each.
(d) The directors have agreed to subscribe in cash for 40,000 new equity shares of Rs. 2.50 each, in addition to
any shares to be subscribed by them under (a) above.
(e) Of the cash received by the issue of new shares, Rs. 2,00,000 is to be used to reduce the loan due by the
company.
(f) The equity share capital cancelled is to be applied:
(i) to write off the preliminary expenses;
(ii) to write off the debit balance in the Profit and loss A/c; and
(iii) to write off Rs. 35,000 from the value of plant.
Any balance remaining is to be used to write down the value of trademarks and goodwill.
Show by journal entries how the financial books are affected by the scheme and prepare the balance sheet of
company after reconstruction. The nominal capital as reduced is to be increased to the old figures of Rs. 6,50,000
for preference share capital and Rs. 7,50,000 for equity share capital.
7. The following is the Balance Sheet of Rocky Ltd. as at March 31, 2002:
Liabilities Rs. In Lacs
Fully paid equity shares of Rs. 10 each 500
Capital Reserve 6
12% Debentures 400
Debenture Interest Outstanding 48
Trade Creditors 165
Directors’ Remuneration Outstanding 10
Other Outstanding Expenses 11
Provisions 33
1,173
Assets Rs. In Lacs
Goodwill 15
Land and Machinery 184
Plant and Machinery 286
Furniture and Fixtures 41
Stock 142
Debtors 80
Cash at Bank 27
Discount on Issue of Debentures 8
Profit and Loss Account 390
1,173
The following scheme of internal reconstruction was framed, approved by the court, all the concerned parties
and implemented:
(1) All the equity shares be converted into the same number of fully-paid equity shares of Rs. 2.50 Each.
(2) Directors agree to forgo their outstanding remuneration.
(3) The debenture holders also agree to forgo outstanding interest in return of their 12% debentures being
converted into 13% debentures.
(4) The existing shareholders agree to subscribe for cash, fully paid equity shares of Rs. 2.50 each for Rs. 125
lacs.
(5) Trade creditors are given the option of either to accept fully-paid equity shares of Rs. 2.50 each for the
amount due to them or to accept 80% of the amount due in cash. Creditors for Rs. 65 lacs accept equity
shares whereas those for Rs. 100 lacs accept Rs. 80 lacs in cash in fully settlement.
(6) The assets are revalued as under:
Rs. In Lacs
Land and Building 230
Plant and Machinery 220
Stock 120
Debtors 76
Pass Journal Entries for all the above mentioned transaction and draft the company’s Balance Sheet immediately
after the reconstruction.
8. S.P. Construction Co. finds itself in financial difficulty. The following is the balance sheet on 31 st December, 99.
Share Capital Land 1,56,000
20,000 Equity Shares of Building (Net) 27,246
Rs 10 each fully paid 2,00,000 Equipment 10,754
5% cum. Pref. Shares of Goodwill 60,000
Rs. 10 each fully paid 70,000 Investment
8% Debentures 80,000 (Quoted) in shares 27,000
Loan from Directors 16,000 Stock 1,20,247
Trade Creditors 96,247 Sundry Debtors 70,692
Bank Overdraft 36,713 Profit & Loss A/c 39,821
Interest Payable on 12,800
Debentures
5,11,760 5,11,760
The authorized capital of the company is 20,000 Equity shares of Rs. 10 each and 10,000 5% Cum. Preference
Shares of Rs. 10 each.
During a meeting of shareholders and directors, it was decided to carry out a scheme of internal reconstruction.
The following scheme has been agreed:
(1) The equity shareholders are to accept reduction of Rs. 7.50 per share and each equity share of Rs. 2.50 each.
(2) The equity shareholders are to subscribe for a new share on the basis of 1 for 1 at price of Rs. 3 per share.
(3) The existing 7,000 Preference Shares are to be exchanged for a new issue of 3,500 8% Cumulative
Preference Shares of Rs. 10 each and 14,000 Equity Shares of Rs. 2.50 each.
(4) The Debenture holders are to accept 2,000 Equity shares of Rs. 2.50 each in lieu of interest payable.
The interest rate is to be increased to 9½%. Further Rs. 9,000 of this 9½% Debentures are to be issued and
taken up by the existing holders at Rs. 90 for Rs. 100.
(5) Rs. 6,000 of director’s Loan is to be debited. The balance is to be fully settled by issue of 1,000 Equity
Shares of Rs. 2.50 each.
(6) Goodwill and the profit and loss account balance are to be written off.
(7) The investment is shares is to be sold at current market value of Rs. 60,000.
(8) The bank overdraft is to be repaid.
(9) Rs. 46,000 is to be paid to trade creditors now and balance at quarterly intervals.
(10) 10% of the debtors are to be written off.
(11) The remaining assets were professionally valued and should be included in the books of account as follows:
Land 90,000
Building 80,000
Equipment 10,000
Stock 50,000
(12) It is expected that due to changed condition and new management operation profit will be earned at the rate
of RS. 50,000 p.a. after depreciation but before interest and tax. Due to losses brought it is unlikely that any
tax liability will arise until 2002.
You are required to show the necessary journal entries to effect the reconstruction scheme; prepare the balance
sheet of the company immediately after the reconstruction.
9. Following is the Balance Sheet of ABC Ltd. as at 31st March, 2007:

Share capital: Plant and machinery 9,00,000
2,00,000 Equity shares of Furniture and fixtures 2,50,000
Rs 10 each fully paid up 20,00,000 Patents and copyrights 70,000
6,000 8% Preference shares Investments (at cost)
of Rs. 100 each 6,00,000 (Market value Rs. 55,000) 68,000
9% Debentures 12,00,000 Stock 14,00,000
Bank overdraft 1,50,000 Sundry debtors 14,39,000
Sundry creditors 5,92,000 Cash and bank balance 10,000
Profit and Loss A/c 4,05,000
45,42,000 45,42,000
The following scheme of reconstruction was finalised:
a) Preference shareholders would give up 30% of their capital in exchange for allotment of 11% Debentures to
them.
b) Debenture holders having charge on plant and machinery would accept plant and machinery in full
settlement of their dues.
c) Stock equal to Rs.5,00,000 in book value will be taken over by sundry creditors in full settlement of their
dues.
d) Investment value to be reduced to market price.
e) The company would issue 11% Debentures for Rs.3,00,000 and augment its working capital requirement
after settlement of bank overdraft.
Pass necessary Journal Entries in the books of the company. Prepare Capital Reduction account and Balance
Sheet of the company after internal reconstruction.
10. The following is the balance sheet of Pune Estate Ltd. as on 31 March 1996:
Balance Sheet as at 31.3.1996
Authorized: Pune Property 1,60,000
30,000 Equity Shares Bombay Property 1,20,000
of Rs. 10 each 3,00,000 Plant and Machinery 1,50,000
30,000, 7% Pref. Shares Investments:
of Rs. 10 each 6% Government loan
3,00,000 earmarked against
6,00,000 Workmen’s compensation
Subscribed, Issued and fund 30,000
Paid –up: Miscellaneous expenditure
20,000 Equity Shares of and losses:
Rs. 10 each fully paid Profit and Loss Account 40,000
18,000, 7% Pref. Shares of 2,00,000
Rs. 10 fully paid 1,80,000
Workmen’s compensation Fund:
Pune 20,000
Bombay 10,000 30,000
Secured loan:
6% ‘a’ Debentures 30,000
secured on Pune Property
6% ‘B’ Debentures
secured on Bombay 35,000
Property
5,00,000 5,00,000
The following scheme of reconstruction was duly approved:
(i) Equity shares were to be reduced to Rs. one each.
(ii) Preference shares were to be reduced by Rs. Two per shares.
(iii) Debenture holders were to forgo their unpaid interest Rs. 5,200 which is included in sundry creditors.
(iv) ‘B’ Debenture holders agreed to take over the Bombay property at Rs. 50,000 and paid the balance amount
due from them in cash.
(v) Workmen’s compensation fund (Bombay) disclosed the fact that actually there was a liability of Rs. 2,000
only. As a result the relevant fund amount balance was to be brought down to the required amount.
Investments were realized at 10% above the book value.
(vi) The Plant and machinery were to be written down by Rs. 90,000.
(vii) Any balance remaining was to be applied as to 75% in writing down Pune property and 25% transferred to
capital reserve.
Pass the necessary journal entries and prepare a balance sheet as on 1 April 1996 after giving effect to the above
scheme.
11. The Balance Sheet of Munna Ltd. on 31st March, 2005 is as under:
Authorised, issued equity share capital Goodwill 2,00,000
20,000 shares of Rs. 100 each 20,00,000 Plant and machinery 18,00,000
10,000 preference shares (7%) of Stock 3,00,000
Rs. 100 each 10,00,000 Debtors 7,50,000
Sundry creditors 7,00,000 Preliminary expenses 1,00,000
Bank overdraft 3,00,000 Cash 1,50,000
________ Profit and loss account 7,00,000
40,00,000 40,00,000
Two years’ preference dividends are in arrears. The company had bad time during the last two years and hopes
for better business in future, earning profit and paying dividend provided the capital base is reduced.
An internal reconstruction scheme as follows was agreed to by all concerned:
(i) Creditors agreed to forego 50% of the claim.
(ii) Preference shareholders withdrew arrear dividend claim. They also agreed to lower their capital claim by
20% by reducing nominal value in consideration of 9% dividend effective after reorganization in case equity
shareholders’ loss exceed 50% on the application of the scheme.
(iii) Bank agreed to convert overdraft into term loan to the extent required for making current ratio equal to 2:1.
(iv) Revalued figure for plant and machinery was accepted as Rs. 15,00,000.
(v) Debtors to the extent of Rs. 4,00,000 were considered good.
(vi) Equity shares shall be exchanged for the same number of equity shares at a revised denomination as required
after the reorganization.
Show:
(a) Total loss to be borne by the equity and preference shareholders for the reorganization;
(b) Share of loss to the individual classes of shareholders;
(c) New structure of share capital after reorganization;
(d) Working capital of the reorganized Company; and
(e) A proforma balance sheet after reorganization.
12. Repair Ltd. is in the hands of a receiver for debenture holders who holds a charge on all assets except uncalled
capital. The following statement shows the position as regards creditors as on 30th June, 2012:
₹
Property, plant and equipment (Cost₹ 3,90,000) - estimated at 1,50,000
Cash in hand of the receiver 2,70,000
Charged under debentures 4,20,000
Uncalled capital 1,80,000
Deficiency 7,50,000
6,000 shares of ₹ 60 each, ₹ 30 paid up 1,80,000
First debentures 3,00,000
Second debentures 6,00,000
Unsecured trade payables 4,50,000
A holds the first debentures for Rs. 3,00,000 and second debentures for Rs. 3,00,000. He is also an unsecured
creditor for Rs. 90,000. B holds second debentures for Rs. 3,00,000 and is an unsecured creditor for Rs. 60,000.
The following scheme of reconstruction is proposed:
1. A is to cancel Rs. 2,10,000 of the total debt owing to him, to bring Rs. 30,000 in cash and to take first
debentures (in cancellation of those already issued to him) for Rs. 5,10,000 in satisfaction of all his claims.
2. B is to accept Rs. 90,000 in cash in satisfaction of all claims by him.
3. In full settlement of 75% of the claim, unsecured creditors (other than A and B) agreed to accept four shares
of Rs. 7.50 each, fully paid against their claim for each share of Rs. 60. The balance of 25% is to be
postponed and to be payable at the end of three years from the date of Court’s approval of the scheme. The
nominal share capital is to be increased accordingly.
4. Uncalled capital is to be called up in full and Rs. 52.50 per share cancelled, thus making the shares of Rs.
7.50 each.
Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary journal
entries.
13. The Balance Sheet of R Ltd., at March, 2008 was as follows:

Rs. Rs.
Share capital authorised 14,00,000 Intangibles 68,000
Issued: 64,000, 8% Freehold premises at cost 1,40,000
cumulative preference shares Plant and equipment at cost
of Rs. 10 each, fully paid 6,40,000 less depreciation 2,40,000
64,000 Equity shares of Rs. Investments in shares in Q Ltd.
10 each, Rs. 7.5 paid 4,80,000 at cost 3,24,000
Loans from directors 60,000 Stocks 2,48,000
Sundry creditors 4,40,000 Debtors 3,20,000
Bank overdraft 2,08,000 Deferred revenue expenditure 48,000
Profit and loss account 4,40,000
18,28,000 18,28,000
Note: The arrears of preference dividends amount to Rs. 51,200.
A scheme of reconstruction was duly approved with effect from 1st April, 2008 under the conditions stated
below:
(a) The unpaid amount on the equity shares would be called up.
(b) The preference shareholders would forego their arrear dividends. In addition, they would accept a reduction
of Rs. 2.5 per share. The dividend rate would be enhanced to 10%.
(c) The equity shareholders would accept a reduction of Rs. 7.5 per share.
(d) R Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the share capital of that company. Q Ltd. is not
a quoted company. The average net profit (after tax) of the company is Rs. 2,50,000. The shares would be
valued based on 12% capitalization rate.
(e) A bad debt provision at 2% would be created.
(f) The other assets would be valued as under:
Rs.
Intangibles 48,000
Plant 1,40,000
Freehold premises 3,80,000
Stocks 2,50,000
(g) The profit and loss account debit balance and the balance standing to the debit of the deferred revenue
expenditure account would be eliminated.
(h) The directors would have to take equity shares at the new face value of Rs. 2.5 per share in settlement of
their loan.
(i) The equity shareholders, including the directors, who would receive equity shares in settlement of their
loans, would take up two new equity shares for every one held.
(j) The preference shareholders would take up one new preference share for every four held.
(k) The authorised share capital would be restated to Rs. 14,00,000.
(l) The new face values of the shares-preference and equity will be maintained at their reduced levels.
(i) Necessary ledger accounts to effect the above; and
(ii) The Balance Sheet of the company after reconstruction.
Solution: In the books of R Ltd.
Ledger Accounts
Capital Reduction Account
Rs. Rs.
To Intangibles 20,000 By 8% Cumulative preference
(68,000 – 48,000) shares capital account 1,60,000
To Plant and equipment account 1,00,000 By Equity share capital account 4,80,000
(2,40,000 – 1,40,000)
To Deferred revenue expenditure 48,000 By Freehold premises account 2,40,000
Account (3,80,000 – 1,40,000)
To Profit and loss account 4,40,000 By Stock account 2,000
To Investment account (W.N. 2) 11,500 (2,50,000 –2,48,000)
To Provision for doubtful debts 6,400
To Capital reserve account
(Balance Transferred) 2,56,100
8,82,000 8,82,000
Equity Share Capital Account
Rs. Rs.
To Capital reduction account 4,80,000 By Balance b/d 4,80,000
To Balance c/d 6,60,000 By Bank account - final call 1,60,000
(64,000 × Rs.2.5)
By Loan from Directors account 60,000
By Bank account
[(64,000+24,000) ×2 × Rs.2.5] 4,40,000
11,40,000 11,40,000
8% Cumulative Preference Share Capital Account

Rs. Rs.
To 10% Cumulative preference 4,80,000 By Balance b/d 6,40,000
share capital account
To Capital reduction account 1,60,000
6,40,000 6,40,000
Bank Account
Rs. Rs.
To Equity share capital Account 1,60,000 By Balance b/d (overdraft) 2,08,000
To Equity share capital account 4,40,000 By Balance c/d 5,12,000
To 10% Cumulative preference 1,20,000
7,20,000 7,20,000
10% Cumulative Preferences Share Capital Account

Rs. Rs.
To Balance c/d 6,00,000 By 8% Cumulative preference 4,80,000
share capital account
By Bank (16,000 x Rs. 7.5) 1,20,000
6,00,000
Balance Sheet of R. Ltd. (and Reduced) as at 1 April, 2008
Rs. Rs.
I. Equity and Liability
1. Shareholder Fund:-
(a) Share Capital
Authorised: Share capital 14,00,000
Issued: 80,000 10% Cumulative
preference shares of Rs.7.5 each 6,00,000
2,64,000 equity shares of Rs.2.5 each 6,60,000 12,60,000
(b) Reserve and Surplus
Capital reserve 2,56,100
2. Current Liability
Sundry creditors 4,40,000
Total 19,56,100
II. Assets
1. Non-current Assets
(a) Fixed Asstes
Tangible
Freehold premises 3,80,000
Plant and equipment 1,40,000 5,20,000
Intangibles 48,000
(b) Investment in Q Ltd. (W.N.1) 3,12,500
2. Current Assets
Stock 2,50,000
Debtors 3,13,600
Bank 5,12,000
Total 19,56,100
Working Notes:
1. Valuation of investments in shares of Q Ltd. = (2,50,000/.12)*15/100=Rs.3,12,500
2. Reduction in the value of investment in shares of Q Ltd.
Rs.3,24,000 – Rs.3,12,500 = Rs.11,500.
14. The Balance Sheet of X Ltd. as at 31st March.2014 was as follows;

X Limited
Particulars Rs. Rs.
I Equity and Liabilities
1 Shareholders Fund
Share capital
40000equity shares of Rs 100each fully paid 40,00,000
20000,10%preference shares of Rs 100each fully paid 20,00,000
Reserve &Surplus
(a)Securities premium Account 1,50,000
(b)profit& Loss Account (23,00,000)
2. Non Current Liabilities
Long term Borrowing
7%Debentures of Rs 100each 4,00,000
3. Other current Liabilities
(a) Creditors 10,00,000
(b) Loan from Director 2,00,000
Total Liabilities 54,50,000
II Assets
1. Non Current Assets
Property, Plant and Equipment
(a) Land & Building 20,00,000
(b) Plant & machinery 12,00,000 32,00,000
Intangible Assets
Goodwill 4,00,000
2. Current Assets
(a) Debtors 12,00,000
(b) Stock 5,00,000
(c) Cash at Bank 1,50,000 18,50,000
Total assets 54,50,000
No Dividend on preference Shares has been paid for last 5 Years.
The following scheme of reorganisation was duly approved by the court;

(i) Each equity share to be reduced to Rs.25.
(ii) Each existing Preference share to be reduced to Rs. 75 and then exchanged for one new 13%Preference
share of Rs 50 each and one Equity share of 25 each.
(iii) Preference Shareholders have forgone their right for dividend for four years. One years’s dividend at the
old rate is however, payable to them in fully paid equity shares of Rs.25.
(iv) The Debenture Holders be given the option to either accept 90% of their claims in cash or to convert
their claims in full into new 13%Prefernce shares of Rs 50 each issued at par. One-fourth in value of
the Debenture Holders accepted Preference shares for their claims The rest were pained in cash.
(v) Contingent Liability of Rs 2,00,000 is payable which has been created by wrong action of one Director.
He has agreed to compensate this loss out of the loan given by the Director to the Company.
(vi) Goodwill does not have any value in the present. Decrease the value of Plant &Machinery, stock and
Debtors by Rs 3,00,000;Rs 1,00,000,and Rs 2,00,000 respectively. Increase the value of Land &
Building to Rs 25,00,000.
(vii) 50,000 new Equity shares of Rs 25 each are to be issued at par payable in full on application
The issue was underwritten for a commission of 4% Shares were fully taken up.
(viii) Total expenses incurred by the Company in connection with the Scheme excluding Underwriting
Commission amounted to Rs 20,000.
Pass necessary Journal Entries to record the above transactions.
15. The following is the Balance Sheet of Star Ltd. as on 31st March, 2019:
Particulars Rs.
Equity & Liabilities
1. Shareholders’ Fund:
(a) Share Capital:
9,000 7% Preference Shares of Rs 100 each fully paid 9,00,000
10,000 Equity Shares of Rs 100 each fully paid 10,00,000
(b) Reserve & Surplus:
2.Non-current liabilities:
“A” 6% Debentures (Secured on Bombay Works) 3,00,000
“B” 6% Debentures (Secured on Chennai Works) 3,50,000
Current Liabilities and Provisions:
(a)Workmen’s Compensation Fund:
Bombay Works 10,000
Chennai Works 5,000
(b)Trade Payables 1,25,000
Total 24,90,000
Assets:
Non- current Assets:
PPE:
Bombay Works 9,50,000
Chennai Works 7,75,000
Investment:
Investments for Workman’s Compensation Fund 15,000
Current Assets:
(a)Inventories 4,50,000
(b)Trade Receivables 2,50,000
(c)Cash at Bank 50,000
Total 24,90,000
A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as follows:
(1) Paid up value of 7% Preference Share to be reduced to Rs 80, but the rate of dividend being raised to 9%.
(2) Paid up value of Equity Shares to be reduced to Rs 10.
(3) The directors to refund Rs 50,000 of the fees previously received by them.
(4) Debenture holders forego their interest of Rs 26,000 which is included among the trade payables.
(5) The preference shareholders agreed to waive their claims for preference share dividend, which is in arrears
for the last three years.
(6) “B” 6% Debenture holders agreed to take over the Chennai Works at Rs 4,25,000 and to accept an allotment
of 1,500 equity shares of Rs 10 each at par, and upon their forming a company called Zia Ltd. (to take over
the Chennai Works) they allotted 9,000 equity shares of Rs 10 each fully paid at par to Star Ltd.
(7) The Chennai Worksmen’s compensation fund disclosed that there were actual liabilities of Rs 1,000 only. As
a consequence, the investments of the fund were realized to the extent of the balance. Entire investments
were sold at a profit of 10% on book value and the proceeds were utilized for part payment of the creditors.
(8) Inventory was to be written off by Rs 1,90,000 and a provision for doubtful debts is to be made to the extent
of Rs 20,000.
(9) Chennai works completely written off.
(10) Any balance of the Capital Reduction Account is to be applied as two-third to write off the value of
Bombay Works and one-third to Capital Reserve.
Pass necessary Journal Entries in the books of Star Ltd. after the scheme has been carried into effect.
Answer: In the books of Star Ltd.
Journal Entries
Particulars Amount (Rs) Amount(Rs)

(i) 7% Preference share capital (Rs 100) Dr. 9,00,000
To 9% Preference share capital (Rs 80) 7,20,000
To Capital reduction A/c 1,80,000
(Being preference shares reduced to Rs 80 and also rate of
dividend raised from 7% to 9%)
(ii) Equity share capital A/c (Rs 100 each) Dr. 10,00,000
To Equity share capital A/c (Rs 10 each) 1,00,000
(Being reduction of nominal value of one share of Rs 100
each to Rs 10 each)
(iii) Bank A/c Dr. 50,000
To Capital reduction A/c 50,000
(Being directors refunded the fee amount)
(iv) Trade payables A/c (Interest on debentures) Dr. 26,000
(Being interest forgone by the debenture holders)
(v) No entry required
(vi)a ‘B’ 6% Debentures A/c Dr 3,50,000

To Debentures holders A/c 3,50,000
(Being amount due to Debentures holders)
b Debentures holders A/c Dr. 4,40,000
To Chennai Works A/c 4,25,000
To Equity share capital A/c 15,000
(Being Chennai works taken over and equity
shares issued to ‘B’ 6% Debenture holders)
c Equity share of Zia ltd. A/c Dr. 90,000
To Debentures holders A/c 90,000
(Being 9,000 equity shares of Zia Ltd. issued by Debentures
holders)
(vii)a Chennai Works – Workmen Compensation Fund Dr.
(Being difference due to reduced amount of actual liability 4,000
transferred to capital reduction account)
b Bank A/c Dr. 15,400
To Investment for Workmen Compensation Fund 14,000
(Being investment for Workmen Compensation Fund sold
@ 10% profit)
c Trade Payables A/c Dr. 15,400
To Bank A/c 15,400
(Being part payment made to trade payables)
(viii) Capital reduction A/c Dr. 2,10,000
To Provision for Doubtful Debts A/c 20,000
To Inventory A/c 1,90,000
(Being assets revalued)
(ix) Capital reduction A/c Dr. 5,50,000
To Profit & Loss A/c 2,00,000
To PPE – Chennai Works (7,750,000 – 4,25,000) 3,50,000
(Being assets revalued and losses written off)
(x) Capital reduction A/c Dr. 4,01,400
To PPE – Bombay Works 2,67,600
To Capital reserve A/c 1,33,800
(Being assets revalued and remaining amount transferred to
capital reserve account)
16. Balance Sheet of R Ltd. as on 31-12-2000.

Authorized Issued and Goodwill 50,000
Subscribed Capital: Plant 3,00,000
30,000 Equity shares of Loose Tools 10,000
Rs. 10 each 3,00,000 Debtors 2,50,000
2,000 8% Cumulative Stocks 1,50,000
Preference shares of 100 Cash 10,000
Each fully paid 2,00,000 Bank 35,000
Share Premium 90,000 Preliminary Exp. 5,000
Unsecured Loan P & L A/c 2,00,000
(From Director) 50,000
Sundry Creditor 3,00,000
Outstanding Expenses
(including Directors
remuneration – 20,000) 70,000
10,10,000 10,10,000
Note: Dividends on cumulative preference shares are in arrears for 3 years.
The following scheme of reconstruction has been agreed upon and duly approved by the court:
(1) Equity shares to be converted into 1,50,000 shares of Rs. 2 each.
(2) Equity shareholders to surrender to the company 90 per cent of their holding.
(3) Preference shareholders agree to forego their right to arrears to dividend 8 per cent preference shares are to
be converted into 9 per cent preference shares.
(4) Sundry creditors agree to reduce their claim by one-fifth in consideration of their getting shares of Rs.
35,000 out of the surrendered equity shares.
(5) Directors agree to forego loan and remuneration.
(6) Surrendered shares not otherwise utilized to be cancelled.
(7) Assets to be reduced as under.
Goodwill by Rs. 50,000
Plant by Rs. 40,000
Tools by Rs. 8,000
S/Debtors by Rs. 15,000
Stock by Rs. 20,000
(8) Any surplus after meeting the losses should be utilized in writing down the value of the plant further.
(9) Expenses of reconstruction amounted to Rs. 10,000.
(10) Further 50,000 equity shares were issued to the existing members for increasing the working capital. The
issue was fully subscribed and paid up.
(11) Authorized capital was suitably increased.
You are required to pass the journal entries for giving effect to the above arrangement and also to draw up the
resultant balance sheet of the company:
17. The Balance Sheet of Revise Limited as at 31st March, 1999 was as follows:
Authorized and subscribed Capital: Fixed Assets: Machineries 1,00,000
10,000 Equity shares of Current assets:
Rs. 100 each fully paid 10,00,000 Stock 3,20,000
Unsecured Loans: Debtors 2,70,000
12% Debentures 2,00,000 Bank 30,000
Accrued interest 24,000
Current liabilities-creditors 72,000 Profit and Loss A/c 6,00,000
Provision for income tax 24,000
13,20,000 13,20,000
It was decided to reconstruct the company for which necessary resolution was passed and sanctions were
obtained from appropriate authorities. Accordingly, it was decided that:-
(i) Each share be sub-divided into ten fully paid up equity shares of Rs. 10 each.
(ii) After sub-division, each shareholder shall surrender to the company 50% of his holding, for the purpose of
re-issue to debenture holders and creditors as necessary.
(iii) Out of shares surrendered, 10,000 shares of Rs. 10 each shall be converted into 12% preference shares of
Rs. 10 each fully paid up.
(iv) The claims of the debenture-holders shall be reduced by 75 per cent. In consideration of the reduction, the
debenture holders shall receive preference shares of Rs. 1,00,000 which are converted out of shares
surrendered.
(v) Creditors claim shall be reduced to 50 per cent, it is to be settled by the issue of equity shares of Rs. 10
each out of shares surrendered.
(vi) Balance of profit and loss account to be written off.
(vii) The shares surrendered and not re-issued shall be cancelled.
You are required to show the journal entries giving effect to the above and the resultant balance Sheet.
18. Sapra Limited has laid down the following terms upon the sanction of the reconstruction scheme by the
court.
(i) The shareholders to receive in lieu of their present holding at 7,50,000 shares of Rs. 10 each, the following:
- New fully paid Rs. 10 Equity Shares equal to 3/5th of their holding.
- Fully paid Rs. 10, 6% Preference Shares to the extent of 2/5th of the above new equity shares.
- 7% Debentures of Rs. 250,000.
(ii) Goodwill which stood at Rs. 2,70,000 is to be completely written off.
(iii) Plant & Machinery to be reduced by Rs. 1,00,000, Furniture to be reduced by Rs. 88,000 and Building to be
appreciated by Rs. 1,50,000.
(iv) Investment of Rs. 6,00,000 to be brought down to its existing market price of Rs. 1,80,000.
(v) Write off Profit & Loss Account debit balance of Rs. 2,25,000.
In case of any shortfall, the balance of General Reserve of Rs. 42,000 can be utilized to write off the losses under
reconstruction scheme.
You are required to show the necessary Journal Entries in the books of Sapra Limited of the above
reconstruction scheme considering that balance in General Reserve is utilized to write off the losses.
19. M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The
following is the Balance Sheet of the company as on 31st March, 2012 before reconstruction:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Share Capital Goodwill 22,00,000

50,000 shares of Rs. 50 each fully paid up 25,00,000
1,00,000 shares of Rs.50 each Rs.40 paid up 40,00,000 Land and building 42,70,000
Capital Reserve 5,00,000 Machinery 8,50,000
8% Debentures of Rs.100 each 4,00,000 Computers 5,20,000
12% Debentures of Rs.100 each 6,00,000 Stock 3,20,000
Trade Creditors 12,40,000 Trade Debtors 10,90,000
Outstanding expenses 10,60,000 Cash at Bank 2,68,000
Profit and Loss account 7,82,000
Total 1,03,00,000 Total 1,03,00,000
Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Linited:
Mr. Shiv Mr. Ganesh
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved by the court and
concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of Rs. 40 each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of Rs. 40 each for Rs.
12,50,000.
(3) Trade creditors are given option of either to accept fully paid equity shares of Rs. 40 each for the amount due
to them or to accept 70% of the amount due to them in cash in fully settlement of their claim. Tread
Creditors for Rs. 7,50,000 accept equity shares and rest of them opted for cash towards full and final
settlement of their claim.
(4) Mr. Shiv agrees to cancel debenture amounting to Rs.2.00,000 out of total debenture due to him and agree to
15% Debenture for the balance amount due. He also agree to subscribe further 15% Debenture in cash
amounting to Rs.1,00,000.
(5) Mr. Ganesh agree to cancel debenture amounting to Rs. 50,000 out of total debenture due to him and agree
to accept 15% Debenture for the balance amount due.
(6) Land and Building to be revalued at Rs. 51,84,000, Machinery at Rs. 7,20,000, Computers at Rs. 4,00,000,
Stock at Rs. 3,50,000 and Tread Debtors at 10% less to as they are appearing in Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
(8) Goodwill and Profit and Loss A/c will be written off and balance, if any, of Capital Reduction A/c will be
adjusted against Capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and draft the company’s
Balance Sheet immediately after the reconstruction.
20. The Balance sheet of Vaibhav Ltd. as on 31st March 2014 is as follows:
Equity Shares of Rs. 100 each 2,00,00,000 Fixed Assets 2,50,00,000
6% Cumulative Preference Shares of 1,00,00,000 Investments 20,00,000
Rs. 100 Each (Market Value Rs. 19.00,000)
5% Debentures of Rs. 100 each 80,00,000 Current Assets 2,00,00,000
Sundry Creditors 1,00,00,000 P & L A/c 12,00,000
Provision for Taxation 2,00,000
TOTAL 4,82,00,000 TOTAL 4,82,00,000
The following scheme of Internal Reconstruction is sanctioned:
(i) All the existing equity shares are reduced to Rs. 40 each .
(ii) All preference shares are reduced to Rs. 60 each.
(iii) The rate of Interest on Debentures is increased to 6%. The Debenture holders surrender their existing
debentures of Rs. 100 each and exchange the same for fresh debentures of Rs. 70 each for every
debenture held by them.
(iv) Fixed assets are to be written down by 20%
(v) Current assets are to be revalued at Rs. 90,00,000
(vi) Investments are to be brought to their market value.
(vii) Ones of the creditors of the company to whom the company owes Rs. 40,00,000 decides to forgo 40%
of his claim. The Creditor is allotted with 60000 equity shares of Rs. 40 each in full and final settlement
of his claim.
(viii) The taxation liability is to be settled at Rs. 3,00,000.
(ix) It is decided to write off the debit balance of Profit & Loss A/c.
Pass journal entries and show the Balance Sheet of the Company after giving effect to the above.
21. The summarized Balance Sheet of SK Ltd. as on 31st March, 2018 is given below.
Amount
Liabilities
Equity Shares of ₹ 10 each 35,000
8%, Cumulative Preference Shares of ₹ 100 each 17,500
6% Debentures of ₹ 100 each 14,000
Provision for taxation 350
Total 84,350
Assets
Fixed Assets 43,750
Investments (Market value ₹ 3325 thousand) 3,500
Current Assets (Including Bank Balance) 35,000
Profit and Loss Account 2,100
Total 84,350
The following Scheme of Internal Reconstruction is approved and put into effect on 31st March, 2018.
(i) Investments are to be brought to their market value.
(ii) The Taxation Liability is settled at ₹ 5,25,000 out of current Assets.
(iii) The balance of Profit and Loss Account to be written off.
(iv) All the existing equity shares are reduced to ₹ 4 each.
(v) All preference shares are reduced to ₹ 60 each.
(vi) The rate of interest on debentures is increased to 9%. The Debenture holders surrender their existing
debentures of ₹ 100 each and exchange them for fresh debentures of ₹ 80 each. Each old debenture is
exchanged for one new debenture.
(vii) Balance of Current Assets left after settlement of taxation liability are revalued at ₹1,57,50,000.
(viii) Fixed Assets are written down to 80%.
(ix) One of the creditors of the Company for ₹ 70,00,000 gives up 50% of his claim. He is allotted 8,75,000
equity shares of ₹ 4 each in full and final settlement of his claim.
Pass journal entries for the above transactions.
22. The Balance Sheet of Y Limited as on 31st March, 2003 was as follows:
(Rs.) (Rs.)
5,00,000 Equity Shares of 50,00,000 Goodwill 10,00,000
Rs. 10 each fully paid
9% 20,000 Preference shares of 20,00,000 Patent 5,00,000
Rs. 100 each fully paid
10% First debentures 6,00,000 Land and Building 30,00,000
10% Second debentures 10,00,000 Plant and machinery 10,00,000
Debentures interest outstanding 1,60,000 Furniture and Fixtures 2,00,000
Trade creditors 5,00,000 Computers 3,00,000
Directors loan 1,00,000 Trade Investment 5,00,000
Bank O/D 1,00,000 Debtors 5,00,000
Outstanding liabilities 40,000 Stock 10,00,000
Provision for Tax 1,00,000 Discount on issue of 1,00,000
Debentures
(Loss)
96,00,000 96,00,000
Note: preference dividend is arrears for three years.
A holds 10% first debentures for Rs. 4,00,000 and 10% second debentures for Rs. 6,00,000. He is also creditors
for Rs. 1,00,000. B holds 10% first debentures for Rs. 2,00,000 and 10% second debentures for Rs. 4,00,000
and is also creditors for Rs. 50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the court.
(i) All the equity shares be converted into fully paid equity shares of Rs. 5 each.
(ii) The preference shares be reduced to Rs. 50 each and the preference shareholders agree to forego their
arrears of preference dividends in consideration of which 9% preference shares are to be converted into
10% preference shares.
(iii) Mr. ‘A’ is to cancel Rs. 6,00,000 of his total debt including interest on debentures and to pay Rs. 1 lakh to
the company and to receive now 12% debentures for the Balance amount.
(iv) Mr. ‘B’ is to cancel Rs. 3,00,000 of his total debt including interest on debentures and to accept new 12%
debentures for the balance amount.
(v) Trade creditors (other than A and B) agreed to forego 50% of their claim.
(vi) Directors to accept settlement of their loans as to 60% thereof by allotment of equity shares and balance
being waived.
(vii) There were capital commitments totaling Rs. 3,00,000. These contracts are to be cancelled on payment of
5% of the contract price as a penalty.
(viii) The Directors refund Rs. 1,10,000 of the fees preciously received by them.
(ix) Reconstruction expenses paid Rs. 10,000.
(x) The taxation liability of the company is setted at Rs. 80,000 and the same is paid immediately.
(xi) The assets are revalued as under:
Stock 7,00,000
Debtors 3,00,000
Computers 1,80,000
Furniture and Fixtures 1,00,000
Trade Investment 4,00,000
Pass journal entries for all the above mentioned transaction including amounts to be written off of Goodwill,
Patents, Loss in Profit & Loss Account and Discount on issue of debenture. Prepare Bank Account and working
of allocation of Interest on Debentures between A and B.
23. The Balance Sheet of M/s Clean Ltd. as on 31st March. 2015 was summarized as follow :
Liabilities Amount(Rs.) Assets Amount(Rs.)
Share Capital : Equity Shares Land & Building 75,00,000
of Rs.50 Each fully paid up 60,00,000 Plant & Machinery 22,00,000
9% Preference Shares of Trade Investment 16,50,000
Rs.10 each fully paid up 40,00,000 Inventories 9,50,000
7% Debentures (secured by Trade Receivables 18,00,000
plant & machinery) 23,00,000 Cash and Bank Balances 3,60,000
8% Debentures 17,00,000 Profit & Loss Account 2,15,000
Trade Payables 6,00,000
Provision for Tax 75,000
1,46,75,000 1,46,75,000
The Board of Directors of the company decided upon the following scheme of reconstruction duly approved by
all concerned parties:
(1) The equity shareholders agreed to receive in lieu of their present holding of 1,20,000 shares of Rs.50 each as
under:
(a) New fully paid equity shares of Rs.10 each equal to 2/3rd of their holding.
(b) 9% preference shares of Rs.8 each to the extent of 25% of the above new equity share capital.
(c) Rs.2, 80,000, 10% debentures of Rs.80 each.
(2) The preference shareholders agreed that their Rs.10 shares should be reduced to Rs. 8 by cancellation of
Rs.2 per share. They also agreed to subscribe for two new equity shares of Rs.10 each every five preference
shares held.
(3) The taxation liability of the company is settled at Rs. 66,000 and the same is paid immediately.
(4) One of the trade creditors of the company to whom the company owes Rs.1,00,000 decides to forgo 30% of
his claim. He is allotted equity shares of Rs. 10 each in full satisfaction of his balance claim.
(5) Other trade creditors of Rs.5,00,000 are given option of either to accept fully paid 9% preference shares of
Rs 8 each for the amount due to them or to accept 80% of the amount due to them in cash in full settlement
of their claim. Trade creditors for Rs.3,50,000 accepted preference shares option and rest of them opted for
cash towards full settlement of their claim.
(6) Company’s contractual commitments amounting to Rs.6,50,000 have been settled by paying 4% penalty of
contract value.
(7) Debenture holders having charge on plant and machinery accepted plant and machinery in full settlement of
their dues.
(8) The rate of interest on 8% debentures is increased to 10%. The debenture holders surrender their existing
debenture of Rs50 each & agreed to accept 10%debenture of Rs80 each for every 2 debentures held by them.
(9) The land and building to be depreciated by 5%.
(10) The debit balance of profit and loss account is to be eliminated.
(11) 1/4th of trade receivables and 1/5th of inventory to be written off.
Pass journal Entries and prepare Balance Sheet after completion of the reconstruction scheme in the
books of M/s Clean Ltd. as per Schedule III to the Companies Act, 2013.
24. Planet Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is
the balance sheet of the company as on 31 st March, 2022 before reconstruction:
Particulars Note No. Amount (₹ In lakh)
Shareholders' Funds
Share Capital 1 2,100
Reserves & Surplus 2 (783)
Non-Current Liabilities
Long term Borrowings 3 1,050
Current Liabilities
Trade Payables 4 153
Other Liabilities 5 36
Total 2,556
Assets
Non-Current Assets:
PPE 6 1,125
Current Investments 7 300
Inventories 8 450
Trade Receivables 9 675
Cash & Cash Equivalents 10 6
Total 2,556
Notes to Accounts:
₹ In lakh
(1) Share capital
Authorised:
300 lakh Equity shares of ₹ 10 each 3,000
12 lakh, 8% preference Shares of ₹ 100 each 1,200
4,200
Issued, Subscribed and Paid up:
150 Lakh Equity Shares of ₹ 10 each, fully paid up 1,500
6 lakh 8% Preference Shares of ₹ 100 each, fully paid up 600
2,100
(2) Reserves and Surplus
Debit balance of Profit & Loss A/c (783)
(3) Long term borrowings

6% Debentures (Secured by freehold property) 600
Director’s Loan 450
1,050
(4) Trade payables
Trade payables for Goods 153
(5) Other Liabilities

Interest Accrued and Due on 6% Debentures 36
(6) PPE
Freehold Property 825
Plant & machinery 300
1,125
(7) Current Investment
Investment in Equity Instruments 300
(8) Inventories
Finished Goods 450
(9) Trade Receivables
Trade receivables for Goods 675
(10) Cash and Cash equivalents

Balance with bank 6
The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of
respective shareholders:
(1) Preference Shares are to be written down to ₹ 75 each and Equity Shares to ₹ 2 each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3rd, Equity Shares
of ₹ 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of ₹ 450 lakh in part payment of their
holding. Balance Debentures to remain as liability of the company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at ₹ 550 lakh.
(6) All investments sold out for ₹ 425 lakh.
(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of ₹ 2 each to be alloted.
(8) 40% of Trade receivables and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to ₹ 900 lakh have been settled by paying penalty of ₹ 72
lakhs.
You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Capital Reduction Account, Bank Account; and
(c) Prepare Notes to Accounts on Share Capital and PPE, immediately after the implementation of internal
reconstruction.
25. On 31-12-20X1, B Ltd. had 20,000, ₹ 10 Equity Shares as authorized capital and the shares were all issued on
which ₹ 8 was paid up. In June, 20X2 the company in general meeting decided to sub-divide each share into two
shares of ₹ 5 with ₹ 4 paid up. In June, 20X3 the company in general meeting resolved to consolidate 20 shares of
₹ 5, ₹ 4 per share paid up into one share of ₹ 100 each, ₹ 80 paid up.
Pass entries and show how share capital will appear in notes to Balance Sheet as on 31-12-20X1, 31-12-20X2 and
31-12-20X3.
26. C Ltd. had ₹ 5,00,000 authorized capital on 31-12-20X1 divided into shares of ₹ 100 each out of which 4,000
shares were issued and fully paid up. In June 20X2 the Company decided to convert the issued shares into stock.
But in June, 20X3 the Company re-converted the stock into shares of ₹ 10 each, fully paid up.
Pass entries and show how Share Capital will appear in Notes to Balance Sheet as on 31-12-20X1, 31-12-20X2
and 31-12-20X3.
MCQs (ICAI SM)
1. When the object of reconstruction is usually to re-organise capital or to compound with creditors or to effect
economies then such type of reconstruction is called
(a) Internal reconstruction with liquidation
(b) Internal reconstruction without liquidation of the company
(c) External reconstruction
2. The accumulated losses under scheme of internal reconstruction are written off against
(a) Capital Reduction account
(b) Share Capital account
(c) Shareholders’ account
3. A process of reconstruction, which is carried out without liquidating the company and forming a new one is
called
(a) Internal reconstruction.
(b) External reconstruction.
(c) Amalgamation.
4. Reconstruction is a process by which affairs of a company are reorganized by

(a) Revaluation of assets and Reassessment of liabilities.
(b) Writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights
attached to different classes of shares.
5. For reduction of the share capital, the permission has to be sought from
(a) Court.
(b) Controller.
(c) State government.
6. In case of internal reconstruction

(a) Only one company is liquidated.
(b) Two or more companies are liquidated.
(c) No company is liquidated.
Answer: 1. (b), 2. (a), 3. (a), 4. (c), 5. (a), 6. (c)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
SUMMARY NOTES
SOLUTIONS
Rs. Rs.
Equity Share Capital (old) A/c Dr. 75,00,000
To Equity Share Capital (Rs. 10) A/c 45,00,000
To 6% Preference Share Capital (Rs. 10) A/c 18,00,000
To 7% Debentures A/c 2,50,000
To Capital Reduction A/c 9,50,000
(Being new equity shares, 6% Preference Shares, 7%
Debentures issued and the balance transferred to
Reconstruction account as per the Scheme)
Building A/c Dr. 1,50,000
Capital Reduction A/c Dr. 9,53,000
To Goodwill Account 2,70,000
To Plant and Machinery Account 1,00,000
To Furniture Account 88,000
To Investment A/c 4,20,000
To Profit & Loss A/c 2,25,000
(Being Capital Reduction Account utilized for writing off
of Goodwill, Plant and Machinery, furniture, investment
and Profit & Loss as per the scheme)
General reserve A/c Dr. 3,000
To Capital Reduction A/c 3,000
(Being general reserve utilized to write off the
balance in Capital reduction A/c)
Note: In place of Capital Reduction Account, Reconstruction Account or Internal Reconstruction Account may
also be used in the above journal entries.

1. Equity Share final call A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(Being final call made for ₹10 each on
1,00,000 shares)
2. Bank A/c Dr. 10,00,000
To Equity Share final call A/c 10,00,000
(Being money on final call received)
3. Equity share capital (₹ 50) A/c Dr. 75,00,000
To Equity Share Capital (₹40) A/c 60,00,000
(Being conversion of equity share capital of
₹50 each into ₹40 each as per reconstruction
scheme)
4. Bank A/c Dr. 12,50,000

(Being new shares allotted at ₹40 each)
5. Trade Creditors A/c Dr. 12,40,000
To Bank A/c 3,43,000
(Being payment made to creditors in shares or
cash to the extent of 70% as per
reconstruction scheme)
6. 8% Debentures A/c Dr. 3,00,000
12% Debentures A/c Dr. 4,00,000
(Being cancellation of 8% and 12% debentures
of Shiv, & issuance of new 15% debentures
and balance transferred to capital reduction
account as per reconstruction scheme)
7. Bank A/c Dr. 1,00,000
(Being new debentures subscribed by Shiv)

(Being cancellation of 8% and 12% debentures
of Ganesh, & issuance of new 15% debentures
and balance transferred to capital reduction
account as per reconstruction scheme)
9. Land and Building (51,84,000-42,70,000) Dr. 9,14,000
Stock Dr. 30,000
(Being value of assets appreciated)
10. Outstanding expenses A/c Dr. 10,60,000
To Bank A/c 10,60,000
(Being outstanding expenses paid in cash)
11. Capital Reduction A/c Dr. 33,41,000
To Machinery A/c 1,30,000
To Computers A/c 1,20,000
To Trade Debtors A/c 1,09,000
To Goodwill A/c 22,00,000
To Profit and Loss A/c 7,82,000
(Being amount of Capital Reduction utilized in
writing off P & L A/c (Dr.) balance, goodwill
and downfall in value of other assets)
12. Capital Reserve A/c Dr. 5,00,000
(Being debit balance of capital reduction
account adjusted against capital reserve)
Balance Sheet (as reduced) as on 31.3.2012
Particulars Rs.
Shareholders' funds
Share capital
2,00,000 Equity shares of ₹ 40 each 80,00,000
Non-current liabilities
Long-term borrowings
Total 88,50,000
Assets
Non-current assets
Property, plant and equipment
Machinery 7,20,000
Computers 4,00,000
Current assets
Inventory 9,81,000
Trade Receivable 3,50,000
Cash and Bank (WN 1) 12,15,000
Total 88,50,000
Working Notes:
1. Cash at Bank Account
Particulars ₹ Particulars ₹
To Balance b/d 2,68,000 By Trade Creditors A/c 3,43,000
To Equity Share final call 10,00,000 By Outstanding expenses A/c 10,60,000
A/c
To Equity Share Capital A/c 12,50,000 By Balance c/d (bal. fig.) 12,15,000
26,18,000 26,18,000
2. Capital Reduction Account
Particulars ₹ Particulars ₹
To Machinery A/c 1,30,000 By Equity Share Capital A/c 15,00,000
To Computers A/c 1,20,000 By Trade Creditors A/c 1,47,000
To Trade Debtors A/c 1,09,000 By 8% and 12% Debentures A/c 2,00,000
To Goodwill A/c 22,00,000 By 8% and 12% Debentures A/c 50,000
To Profit and Loss A/c 7,82,000 By Land & Building 9,14,000
By Stock 30,000
By Capital Reserve A/c 5,00,000
33,41,000 33,41,000
Q20. Journal Entries in the books of Vaibhav Ltd.

Rs. Rs.
(i) Equity share capital (Rs. 100) A/c Dr. 2,00,00,000
To Capital Reduction A/c 1,20,00,000
(Being conversion of equity share capital of Rs. 100 each
into Rs.40 each as per reconstruction scheme)
(ii) 6% Cumulative Preference Share capital (Rs. 1,00,00,000
100) A/c Dr.
To 6% Cumulative Preference Share 60,00,000
Capital (Rs. 60)A/c
(Being conversion of 6% cumulative preference share
capital of Rs. 100 each into Rs. 60 each as per
(iii) 5% Debentures (Rs. 100) A/c Dr. 80,00,000
To 6% Debentures (Rs. 70) A/c 56,00,000
(Being 6% debentures of Rs. 70 each issued to existing
5% debenture holders. The balance transferred to capital
reduction account as per reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 40,00,000
(Being a creditor of Rs. 40,00,000 agreed to surrender
his claim by 40% and was allotted 60,000 equity shares
of Rs. 40 each in full settlement of his dues as per
(v) Provision for Taxation A/c Dr. 2,00,000
Capital Reduction A/c Dr. 1,00,000
To Liability for Taxation A/c 3,00,000
(Being conversion of the provision for taxation into
liability for taxation for settlement of the amount due)
(vi) Capital Reduction A/c Dr. 199,00,000
To P & L A/c 12,00,000
To Property, Plant and Equipment A/c 50,00,000
To Current Assets A/c 110,00,000
To Investments A/c 1,00,000
To Capital Reserve A/c (Bal. fig.) 26,00,000
(Being amount of Capital Reduction utilized in writing
off P & L A/c (Dr.) Balance, PPE, Current Assets,
Investments and the Balance transferred to Capital
Reserve)
(vii) Liability for Taxation A/c Dr. 3,00,000
To Current Assets (Bank A/c) 3,00,000
(Being the payment of tax liability)
Balance Sheet of Vaibhav Ltd. (and reduced) as at 31st March, 20X1
Particulars Notes Rs.
Shareholders' funds
Share capital 1 164,00,000
Reserves and Surplus 2 26,00,000
Long-term borrowings 3 56,00,000
Current liabilities
Trade Payables (1,00,00,000 less 40,00,000) 60,00,000
Total 3,06,00,000
Assets
Non-current assets
2,00,00,000
Property, plant and equipment 4
Investments 5 19,00,000
Current assets 6 87,00,000
Total 3,06,00,000
Notes to accounts
Rs.
1. Share Capital
Equity share capital
Issued, subscribed and paid up
2,60,000 equity shares of Rs. 40 each
(of the above 60,000 shares have been issued 1,04,00,000
for consideration other than cash)
Preference share capital
1,00,000 6% Cumulative Preference shares of
60,00,000
Rs. 60 each
Total 1,64,00,000
2. Reserves and Surplus
Capital Reserve 26,00,000
3. Long-term borrowings
Secured
Carrying value 2,50,00,000
Adjustment under scheme of reconstruction (50,00,000) 2,00,00,000
5. Investments 20,00,000
Adjustment under scheme of reconstruction (1,00,000) 19,00,000

6. Current assets 2,00,00,000
Adjustment under scheme of reconstruction (1,10,00,000)

90,00,000
(3,00,000) 87,00,000
Taxation liability paid
Working Note: Capital Reduction Account
To Liability for taxation 1,00,000 By Equity share capital 1,20,00,000
A/c
To P & L A/c 12,00,000 By 6% Cumulative
To Property, and preferences
plant 50,00,000
equipment
To Current assets 1,10,00,000 Share capital 40,00,000
To Investment 1,00,000 By 5% Debentures 24,00,000
To Capital
Reserve (Bal. 26,00,000 By Sundry creditors 16,00,000
fig.)
2,00,00,000 2,00,00,000
Q21. Journal Entries in the books of SK Ltd.

₹ ‘000 ₹ ‘000
(i) Equity share capital (₹ 10) A/c Dr. 35,000
To Equity Share Capital (₹ 4) A/c 14,000
(Being conversion of equity share capital of
₹ 10 each into ₹ 4 each as per reconstruction scheme)
(ii) 8% Cumulative Preference Share capital (₹ 100) A/c Dr. 17,500
To 8% Cumulative Preference Share Capital 10,500
(₹ 60) A/c
(Being conversion of 6% cumulative preference shares capital
of ₹ 100 each into ₹ 60 each as per reconstruction scheme)
(iii) 6% Debentures (₹ 100) A/c Dr. 14,000

To 9% Debentures (₹ 80) A/c 11,200
(Being 9% debentures of ₹ 80 each issued to existing 6%
debenture holders. The balance transferred to capital
reduction account as per reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 7,000
To Equity Share Capital (₹ 4) A/c 3,500
(Being a creditor of ₹ 70,00,000 agreed to surrender his
claim by 50% and was allotted 8,75,000 equity shares of
₹ 4 each in full settlement of his dues as per reconstruction
scheme)
(v) Provision for Taxation A/c Dr. 350
Capital Reduction A/c Dr. 175
To Liability for Taxation A/c 525
(Being conversion of the provision for taxation into liability for
taxation for settlement of the amount due)
(vi) Liability for Taxation A/c Dr. 525
To Current Assets (Bank A/c) 525
(Being the payment of tax liability)
(vii) Capital Reduction A/c Dr. 34,125
To P & L A/c 2,100
To Fixed Assets A/c 8,750
To Current Assets A/c 18,725
To Investments A/c 175
To Capital Reserve A/c (Bal. fig.) 4,375
(Being amount of Capital Reduction utilized in writing off P
& L A/c (Dr.) Balance, Fixed Assets, Current Assets,
Investments and the Balance transferred to Capital
Reserve)
Working Note: Capital Reduction Account
To Liability for taxation A/c 175 By Equity share capital 21,000

To P & L A/c 2,100 By 8% Cumulative preferences 7,000
To Fixed Assets 8,750 Share capital
To Current assets 18,725 By 6% Debentures 2,800
To Investment 175 By Sundry creditors 3,500
To Capital Reserve (Bal. 4,375
fig.)
34,300 34,300
Q23.
1. Journal Entries in the books of clean Ltd
S.N. Particulars Dr.(Rs) Cr.(Rs)
1. Equity share Capital Capital (Rs50) A/c Dr. 60,00,000
To Equity share Capital(Rs 10) A/c (1,20,000 X 2/3) X Rs. 10 8,00,000
To 9%Prefernce Share Capital (Rs8) A/C (for 25%of Rs. 8,00,000) 2,00,000
To 10%Debentures (Rs 80)A/c 2,80,000
To Capital Reconstruction A/c (Balancing Figure) 47,20,000
(Being Equity share capital restated)
2. 9%Preference Share Chare Capital (Rs. 10 X 4,00,000) A/c Dr. 40,00,000
To 9%Preference Share Capital (Rs. 8 X 4,00,000)A/c 32,00,000
To Capital Reconstruction A/c (B/F) 8,00,000
(Being 9%Prefernce share capital restated)
3. Bank A/c Dr. 16,00,000
To Equity Share Capital A/c(4,00,000 X 2/5) X Rs. 10 16,00,000
(Being Equity share capital issued)
4. Provision for Tax A/c Dr. 75,000
To Cash & Bank A/c 66,000
To Capital Reconstruction A/c (B/F) 9,000
(Being Taxation Liability of the Company settled at Rs 66,000.)
5. Trade Creditors / payables A/c Dr. 1,00,000
To Equity Share Capital (Rs10) A/c 70,000
To Capital Reconstruction A/c 30,000
(Being trade creditor of Rs. 1,00,000 settled)
6. Trade Creditors /Payables A/c Dr. 5,00,000
To 9%Preference Share Capital (Rs8) A/c 3,50,000
To Cash & Bank A/c (1,50,000 X 80%) 1,20,000
To Capital Reconstruction A/c (1,50,000 X 20%) 30,000
(Being 9% Preference Shares of Rs.8 each issued to Trade Creditors of
Rs.3,50,000 and balance 80% of Claims settled in cash)
7. Capital Reconstruction A/c Dr. 26,000
(Being payment of Penalty for setting Contractual Obligation)
To Plant and Machinery A/c 22,00,000
To Capital Reconstruction A/c 1,00,000
(Being takeover of Plant and Machinery by 7% Debenture holders)
8% Debentures (Rs.50 each) A/c Dr. 17,00,000
9. To 10% Debentures A/c (Rs.80 each) [{(17,00,000)/50}/2] X 80 13,60,000
To Capital Reconstruction A/c (B/F) 3,40,000
(Being 8% Debenture settled)
10. Capital Reconstruction A/c Dr. 12,30,000
To Land and Building A/c (75,00,000 X 5%) 3,75,000
To Profit and loss A/c 2,15,000
To Trade Receivables A/c (1/4 th x Rs.18,00,000) 4,50,000
To inventories A/c (1/5 th x Rs.9,50,000) 1,90,000
(Being sundry assets reduced and losses written off)
11. Capital Reconstruction A/c Dr. 47,73,000
To Capital Reserve A/c 47,73,000
(Being balance in Reconstruction A/c transferred to Capital Reserve WN 1)
II. Balance Sheet of Clean Ltd. and Reduced as at 1st April 2015
Particulars as at 31st March Note Current Year
I Equity AND LIABILITIES:
(1) Shareholders’ Funds:
(b) Reserve and Surplus 47,73,000
Capital Reserve (on Reconstruction) (WN 2)
(2) None-Current Liabilities:
Long Team Borrowings: 10% Debentures (2,80,000 + 13,60,000) 16,40,000
Total 1,26,33,000
II ASSETS
(1) None-Current Assets
(a) Property, Plant and Equipment:
Land and Building (75,00,000 – 5%) 71,25,000
(b) None-Current Investments 16,50,000
(2) Current Assets:

(a) Trade Receivables (18,00,000 – 4,50,000) 13,50,000
(b) Inventories (9,50,000 – 1,90,000) 7,60,000
(c) Cash and Cash Equivalents - (WN 3 17,48,000
Total 1,26,33,000
Note 1: Share Capital
Particulars Amount
Authorised:……Equality Shares of Rs.10 each & …….9% Preference Share of Rs.8 each
Issued, Subscribed & Paid up: 2,47,000 Equity Shares of Rs10each 24,70,000
4,68,750 9% Preference Shares of Rs.8 each 37,50,000
(all the above Shares are issued as per approved scheme of reconstruction)
Total 62,20,000
W.N. 1 Capital Reconstruction A/c
Particulars Rs. Particulars Rs.
To Cash / Bank A/c (Penalty on Contract) 26,000 By Equity Share Capital A/c 47,20,000
To Land and Building A/c 3,75,000 By 9% Preference Share Capital A/c 8,00,000
To Profit and Loss A/c (Debit balance) 2,15,000 By Provision for Tax A/c 9,000
To Trade Receivables 4,50,000 By Trade Creditors A/c (30,000 + 30,000) 60,000
To Inventories 1,90,000 By 7% Debentures A/c 1,00,000
To Capital Reserve (balancing figure) 47,73,000 By 8% Debentures A/c 3,40,000
Total 60,29,000 Total 60,29,000
2. Cash and Bank A/c
Particulars Rs. Particulars Rs.
To balance b/d 3,60,000 By Provision for Tax 66,000
To Equity share capital A/c 16,00,000 By Trade Creditors A/c 1,20,000
By Capital Reconstruction A/c 26,000
By balance c/d (balancing figure) 17,48,000
Total 19,60,000 Total 19,60,000
Note:- Trade Investments are assumed as Long Term. Alternatively, it can be assumed as Investments held for trading
purposes, and classified under Current Investments Category.
Q24.
(a) Journal Entries related to internal reconstruction in the books of Planet Ltd.
(₹ in lakhs)
Particulars Debit Credit

₹ ₹
I 8% Preference share capital A/c (₹ 100 each) Dr. 600
To 8% Preference share capital A/c (₹ 75 each) 450
To Capital reduction A/c 150
(Being the preference shares of ₹ 100 each reduced to
₹ 75 each as per the approved scheme)
ii Equity share capital A/c (₹ 10 each) Dr. 1,500
To Equity share capital A/c (₹ 2 each) 300
(Being the equity shares of ₹ 10 each reduced to ₹ 2 each)
iii Capital reduction A/c Dr. 48
(Being 1/3rd of arrears of preference share dividend of three
years to be satisfied by issue of 24 lakh equity shares of
₹ 2 each)
iv 6% Debentures A/c Dr. 450
To Freehold property A/c 450
(Being claim settled in part by transfer of freehold property)
v Accrued debenture interest A/c Dr. 36
To Bank A/c 36
(Being accrued debenture interest paid)
vi Freehold property A/c Dr. 175
(Being appreciation (550-375) in the value of freehold
property)
vii Bank A/c Dr. 425
To Investment A/c 300
(Being investment sold on profit)
viii Director’s loan A/c Dr. 450
(Being director’s loan waived by 70% and balance being
discharged by issue of 67.5 lakh equity shares of ₹ 2 each)
ix Capital Reduction A/c Dr. 1,485
To Profit and loss A/c 783
To Trade receivables A/c (675 x 40%) 270
To Inventories-in-trade A/c (450 x 80%) 360
To Bank A/c 72
(Being various assets, penalty on cancellation of contract,
profit and loss account debit balance written off through
capital reduction account)
x Capital Reduction A/c Dr. 432
To Capital reserve A/c 432
(Being balance transferred to capital reserve account as
per the scheme)
(b) Capital Reduction Account
(₹ in lakhs)
To Equity Share Capital 48 By 8% Pref. Share Capital 150
To P & L A/c 783 By Equity Share Capital 1,200
To Trade Receivables 270 By Freehold property 175
To Inventories 360 By Bank (profit on sale of 125
investment)
To Bank 72 By Director’s loan 315
To Capital Reserve 432
1,965 1,965
Bank Account
(₹ in lakhs)
To Balance b/d 6 By Accrued debenture interest 36
To Investments 300 By Capital Reduction Account (Penalty 72
on cancellation of contract)
To Capital reduction 125 By Balance c/d 323
431 431
(c) Note to Accounts on Share Capital and PPE after implementation of internal reconstruction
Share Capital (₹ in lakhs)
Authorised:
300 lakh shares of ₹ 2 each 600
12 lakh, 8% Preference shares of ₹ 75 each 900
1,500
Issued, subscribed and paid up:
241.5 lakh Equity shares of ₹ 2 each 483
(out of which 91.5 lakh shares have been issued for consideration other
than cash)
6 lakh, 8% Preference shares of ₹75 each fully paid up 450
Total 933
PPE
Freehold property 825
Less: Utilised to pay Debenture holders (450)
Add: Appreciation 175 550
Plant and machinery 300
Total 850
Working Note: Calculation of number of equity shares issued
To equity shareholders 150 Lakh
To Preference shareholders (in lieu of arrear of preference dividend) 24 Lakh
To Directors 67.5 Lakh
241.5 Lakh

20X2 ₹ ₹
June Equity Share Capital (₹ 10) A/c Dr. 1,60,000
To Equity Share Capital (₹ 5) A/c 1,60,000
(Being the sub-division of 20,000 shares of

₹ 10 each with ₹ 8 paid up into 40,000
shares ₹ 5 each with ₹ 4 paid up by
resolution in general meeting dated )
20X3 Equity Share Capital (₹ 5) A/c Dr. 1,60,000
June To Equity Share Capital (₹ 100) A/c 1,60,000
(Being consolidation of 40,000 shares of
₹ 5 with ₹ 4 paid up into 2,000 ₹ 100
shareswith ₹ 80 paid up)
Notes to Balance Sheet
Liabilities: ₹
As on 31-12-20X1
1. Share Capital
Authorized:
20,000 Equity Shares of ₹ 10 each 2,00,000
20,000 Equity Shares of ₹ 10 each ₹ 8 per share paid up 1,60,000
As on 31-12-20X2
1. Share Capital
Authorized:
As on 31-12-20X3 ₹
1. Share Capital
Authorized:
Note: Some accountants prefer not to make any entry as the amount remains same. Even when an entry is passed
it applies only to the called-up portion, and not to uncalled or unissued portion of share capital.

₹ ₹
20X2
June Equity Share Capital A/c Dr. 4,00,000
To Equity Stock A/c 4,00,000
(Being conversion of 4,000 fully paid Equity
Shares of ₹ 100 into ₹ 4,00,000 Equity Stock
as per resolution in general meeting
dated…)
20X3
June Equity Stock A/c Dr. 4,00,000
(Being re-conversion of ₹ 4,00,000 Equity
Stock into 40,000 shares of ₹ 10 fully paid
Equity Shares as per resolution in General
Meeting dated...)
Notes to Balance Sheet
₹
As on 31-12-20X1
Share Capital
Authorized
Issued and Subscribed
4,000 Equity Shares of ₹ 100 each fully called up 4,00,000
As on 31-12-20X2 ₹
Share Capital
Authorized
Equity Stock- 4,000 Equity Shares of ₹ 100 converted into Stock 4,00,000
As on 31-12-20X3 ₹
Share Capital
Authorized
40,000 Equity Shares of ₹ 10 each fully called up 4,00,000
These notes are incomplete without our videos. We keep on updating our books, notes and videos. You should always study from updated notes with our
videos available on www.edu91.org . To get the most out of these notes please study from our classes and attend our mock tests-CA PS Beniwal
AMALGAMATION OF COMPANIES
1. S. Ltd. is absorbed by P. Ltd. The balance sheet of S. Ltd. is as under:

Balance Sheet
Rs. Rs.
Share Capital: Sundry Assets 13,00,000
2,000 7% Preference
shares of Rs. 100 each
(Fully paid-up) 2,00,000
5,000 Equity shares of Rs.
100 each (Fully paid-up) 5,00,000
Reserves 3,00,000
13,00,000 13,00,000
P Ltd. has agreed:
(a) To issue 9% Preference shares of Rs. 100 each, in the ratio of 3 shares of P. Ltd. for 4 preference
shares in S. Ltd.
(b) To issue to the debenture holders in S. Ltd. 8% Mortgage Debentures at Rs. 96 in lieu of 6%
Debentures in S. Ltd. which are to be redeemed at a premium of 20%
(c) To pay Rs. 20 per share in cash and to issue six equity shares of Rs. 100 each (market value Rs. 125)
in lieu of every five shares held in S. Ltd., and
(d) To assume the liability to trade creditors.
You are required to calculate the purchase consideration.
2. Y Ltd. decides to absorb X Ltd. The balance Sheet of X Ltd. is as follows:

Rs. Rs.
3,000 Equity shares of Sundry Net Assets 2,90,000
Rs. 100 each (Fully paid) 3,00,000 Profit and Loss
Preference shares 60,000 Account 70,000
3,60,000 3,60,000
Y Ltd. agrees to take over the net assets of X Ltd. An equity share in X Ltd., for purposes of absorption, is
valued @ Rs. 70. Y Ltd. agrees to pay Rs. 60,000 in cash for payment to preference shareholders and the
balance in the form of its equity shares valued at Rs. 120 each.
Calculate purchase consideration to be paid by Y Ltd. and how will it be discharged?
3. Sham Ltd. Balance Sheet as on 31st March, 2002 is as follows:

Equity Share Capital of Fixed Assets 1,00,000
Rs. 10 each 1,50,000 Current Assets 2,00,000
9% Debenture 1,00,000
Current Liabilities 50,000
3,00,000 3,00,000
Ram Ltd. agreed to take over Sham Ltd.
(1) New company will issue necessary equity shares to old company’s share holders.
(2) 10,000 11% debentures of Rs. 10 each were issued at Rs. 12 each for 9% Debenture holders.
(3) Current Liabilities were also taken over.
Calculate Purchase Consideration assuming intrinsic value of old & new company are Rs. 20 and 15 per
share respectively.
4. Balance Sheet of Ram Ltd. & Sham Ltd. is given as on 31st Mach 2002.
Ram Sham Ram Sham
Ltd. Ltd. Ltd. Ltd.
Equity Share Fixed Assets 80,000 70,000
Capital of Books Debts 30,000 40,000
Rs. 10 each 1,00,000 50,000 Stock 20,000 10,000
Reserve & Cash in hand 10,000 5,000
Surplus 10,000 20,000
Debentures 20,000 40,000
Creditors 10,000
Share premium 15,000
1,40,000 1,25,000 1,40,000 1,25,000
Ram Ltd. Took over Sham Ltd. On following conditions:
(1) That necessary shares would be issued to old share holders in accordance with intrinsic value of shares.
(2) That fixed assets has market value of Rs. 75,000 and 80,000 respectively, Debtors are good, Stock is
shown at cost price whose gross realizable value Rs. 25,000 and 12,000 respectively.
(3) Debentures of Sham Ltd. were to be issued equivalent Debentures at premium of 10%
Calculate Purchase Consideration
5. Balance Sheet of X Ltd. as on 31st March, 1995:

Liabilities Rs. (000) Assets Rs. (000)
Share Capital: Land & Building 50,00
Equity Shares of Rs. 10 each 75,00 Plant & Machinery 45,00
14% Preference Shares of Furniture 10,50
Rs. 100 each 25,00 Investments 5,00
General Reserve 12,50 Stock 23,00
12% Debentures 40,00 Debtors 24,00
Sundry Creditors and other Cash & bank Balance 15,00
Current liabilities 20,00
172,50 172,50
Other Information:
(i) Y Ltd. takes over X Ltd. on 1st April, 1995.
(ii) Debenture holders of X Ltd. are discharged by Y Ltd. at 10% premium by issuing 15% own
debentures of Y Ltd.
(iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by issuing necessary
number of 15% Preference Shares of Y Ltd. (Face value Rs, 100 each).
(iv) Intrinsic value per share of X Ltd. is Rs. 20 and that of Y Ltd. Rs. 30 Y Ltd. will issue equity shares to
satisfy the equity shareholders of X Ltd. on the basis of intrinsic value. However, the entry should be
made at par value only. The nominal value of each equity share of Y Ltd. is Rs. 10.
Compute the purchase consideration.
6. The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31 st March, 2002 was as under:
Hari Ltd. (Rs.) Vayu Ltd. (Rs.)

Assets:
Goodwill 50,000 25,000
Building 3,00,000 1,00,000
Machinery 5,00,000 1,50,000
Stock 2,50,000 1,75,000
Debtors 2,00,000 1,00,000
Cash at Bank 50,000 20,000
Preliminary Expenses 30,000 10,000
13,80,000 5,80,000
Liabilities:
Share Capital:
Equity Shares of Rs. 10 each 10,00,000 3,00,000
9% Preference Shares of Rs. 100 each 1,00,000 ---
10% Preference Shares of Rs. 100 each --- 1,00,000
General Reserve 1,00,000 80,000
Retirement Gratuity fund 50,000 20,000
Sundry Creditors 1,30,000 80,000
13,80,000 5,80,000
Hari Ltd. absorbs Vayu Ltd. on the following terms:
1. 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of
Hari Ltd.
2. Goodwill of Vayu Ltd. is valued Rs. 50,000, Building are valued at Rs. 1,50,000 and the Machinery at
Rs. 1,60,000.
3. Stock to be taken over at 10% less value and reserve on bad and doubtful debts to the created @ 7.5%.
4. Equity Shareholders of Vayu Ltd. will be issued necessary Equity Shares @ 5% premium.
Prepare necessary Ledger Account to close the books of Vayu Ltd. and show the acquisition entries in the
books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31 st March, 2002.
7. Wye Ltd. acquires the business of Z Ltd. Whose balance sheet on 31 st December, 1996 is as under:
Share Capital divided into Goodwill 2,40,000
Share of Rs. 100 each Land & Building 4,00,000
6% Preference share Plant and Machinery 6,00,000
capital 4,00,000 Patents 50,000
Equity share capital 8,00,000 Stock 1,50,000
Capital Reserve 1,00,000 Books Debts 1,80,000
Profit & Loss A/c 50,000 Cash at Bank 70,000
Interest outstanding on above 12,000
Workmen’s Compensation Reserve
(Expected liability Rs. 5,000) 8,000
16,90,000 16,90,000
Wye Ltd. was to take over all assets (except cash) and liabilities (except for interest due on debentures)
and to pay following amounts:
(i) Rs. 2,00,000 7% Debentures (Rs. 100 each) in Wye Ltd. for the existing debentures in Zed Ltd.; for
the purpose, each debenture of Wye Ltd. is to be treated as worth Rs. 105.
(ii) For each preference in Zed Ltd. Rs. 10 in cash and one 9% preference share of Rs. 100 each Wye Ltd.
(iii) For each equity share in Zed Ltd. Rs. 20 in cash and one equity share in Wye Ltd. Rs. 100 each having
the market value of Rs. 140.
(iv) Expense of liquidation of Zed Ltd. are to be reimbursed by Wye Ltd. to the extent of Rs. 10,000.
Actual expenses amounted to Rs. 12,500.
Wye Ltd. valued Land and Building at Rs. 5,50,000 Plant and Machinery at Rs. 6,50,000 and patents at
Rs. 20,000.
8. Given below are the Balance Sheet of two companies as on 31st December, 2000;
Anand Ltd.
Balance Sheet as at 31st December, 2000
Share Capital: Goodwill 1,50,000
Rs. 10 shares fully paid 15,00,000 Freehold Property 4,00,000
Share Premium Account 4,500 Plant & Machinery 3,50,000
General Reserve 1,00,000 Stock 6,82,000
Profit and Loss Account 1,65,650 Sundry Debtors 2,58,500
8% Debentures 3,50,000 Bank 3,37,500
21,78,000 21,78,000
Bhanu Ltd.
Balance Sheet as at 31st December, 2000
Share Capital Goodwill 50,000
Rs. 10 shares fully paid 3,90,000 Freehold Property 1,80,000
10% Debentures 70,000 Plant & Machinery 1,00,000
Bank Overdraft 6,000 Stock 1,62,000
Sundry Creditors 2,57,000 Sundry Debtors 95,000
7,23,000 7,23,000
The two companies decided to amalgamate, as on 31st December, 2000, and a new company called Anand
Bhanu Ltd. was formed with an authorized capital of Rs. 25,00,000 in shares of Rs. 10 each. The terms of
amalgamation were as follows:
Anand Ltd.:
(i) 6 shares of Rs. 10 each fully paid in the new company in exchange for every 5 shares in Anand Ltd.
and Rs. 10,000 in cash;
(ii) The debenture-holders were to be allotted such debentures in the new company bearing interest at 7%
per annum as would bring the same amount of interest.
Bhanu Ltd.:
(i) 1 share of Rs. 10 each fully paid in the new company in exchange for every 3 shares I Bahnu Ltd., and
Rs. 5,000 in cash;
(ii) Debenture-holders were to be allotted such debentures in the new company bearing interest at 7% per
annum as would bring the same amount of interest.
The new company took over all the assets and liabilities of the two existing companies.
Show Journal entries in the books of Anand Bhanu Ltd., giving effect to the arrangement and prepare its
Opening Balance Sheet.
9. K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two
companies as at the date of amalgamation was as under:
Particulars Notes ₹ K Ltd. ₹ L Ltd.

1 Shareholders’ funds
A Share capital 1 12,00,000 6,00,000
B Reserves and Surplus 2 3,71,375 1,97,175
2 Non-current liabilities
A Long-term borrowings 3 2,00,000 2,00,000
3 Current liabilities
A Trade Payables 1,00,000 2,10,000
Total 18,71,375 12,07,175
Assets
1 Non-current assets
A Property, Plant and Equipment 4 11,30,000 8,20,000
B Intangible assets 5 80,000 -
2 Current assets
A Inventories 2,25,000 1,40,000
B Trade receivables 2,75,000 1,75,000

C Cash and Cash equivalents 6 1,61,375 72,175
Total 18,71,375 12,07,175
Notes to accounts
1 Share Capital K Ltd. L Ltd.
Equity shares of ₹ 100 each 8,00,000 3,00,000
7% Preference Shares of ₹ 100 each 4,00,000 3,00,000
12,00,000 6,00,000
2 Reserves and Surplus
General reserve - 1,00,000
Profit and loss account 3,71,375 97,175
3,71,375 1,97,175
3 Long-term borrowings
5% Debentures 2,00,000 -
Secured loan -_______ 2,00,000
2,00,000 2,00,000
4 Property, plant and Equipment
Land and Building 4,50,000 3,00,000
Plant and machinery 6,20,000 5,00,000
Furniture and fittings 60,000 20,000
11,30,000 8,20,000
5 Intangible assets
Goodwill 80,000 -
80,000 -
6 Cash and Cash Equivalents
Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
1,61,375 72,175
The terms of amalgamation are as under:
(A)
(1) The assumption of liabilities of both the Companies.
(2) Issue of 5 Preference shares of ₹ 20 each in LK Ltd. @ ₹ 18 paid up at premium of ₹ 4 per share for
each preference share held in both the Companies.
(3) Issue of 6 Equity shares of ₹ 20 each in LK Ltd. @ ₹ 18 paid up at a premium of ₹ 4 per share for
each equity share held in both the Companies. In addition, necessary cash should be paid to the
Equity Shareholders of both the Companies as is required to adjust the rights of shareholders of both
the Companies in accordance with the intrinsic value of the shares of both the Companies.
(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5%
debentures in K Ltd. at a discount of 5% after takeover.
(B)
(1) The assets and liabilities are to be taken at book values inventory and trade receivables for which
provisions at 2% and 2 ½ % respectively to be raised.
(2) The trade receivables of K Ltd. include ₹ 20,000 due from L Ltd.
(C) The LK Ltd. is to issue 15,000 new equity shares of ₹ 20 each, ₹ 18 paid up at premium of ₹ 4 per
share so as to have sufficient working capital.
10. Exe Limited is absorbed by Wye Limited. Given below are the Balance Sheet of the two Companies
prepared after revaluation of their assets on a uniform basis.
Balance Sheet of Exe Limited
Authorized Share Capital: Sundry Assets 16,85,000
9,000 Equity Shares of Cash in hand 3,500
Rs. 150 each 13,50,000
Paid-up Share Capital:
9,000 Equity Share of
Rs. 150 each Rs. 135 paid-up 12,15,000
General Reserve 4,03,500
Profit and Loss A/c 15,000
16,88,500 16,88,500
Balance Sheet of Wye Limited

Authorized Share Capital: Sundry Assets 43,57,500
60,000 Equity Shares of Cash in hand 27,500
Rs. 75 each 45,00,000
Paid-up Share Capital:
40,000 Equity Share of
Rs. 75 paid-up 30,00,000
43,85,000 43,85,000
The Holder of every three Shares in Exe Limited was to receive five Shares in the Wye Limited plus as
much cash as is necessary to adjust the rights of shareholders of both the Companies in accordance with
the intrinsic values of the share as per the respective balance Sheets.
Pass necessary journal entries in the books of Wye Limited and prepare the Balance Sheet giving effect to
the above scheme of absorption. Entries are to be made at par value only.
11. X Ltd. is absorbed by Y Ltd. Given below are the Balance Sheets of the two companies taken after
revaluation of their assets on an uniform basis:
X Ltd. (Rs.) Y Ltd. (Rs.)
Authorised Share capital:
9,000 shares of Rs. 300 each 27,00,000
40,000 shares of Rs. 180 each 72,00,000
Paid-up capital:
9,000 shares Rs. 270 per share paid-up 24,30,000
40,000 shares Rs. 150 per shares paid-up 60,00,000
Creditors 1,10,000 1,30,000
General Reserve 8,07,000 25,70,000
Profit and Loss Account 30,000 70,000
33,77,000 87,70,000
Sundry Assets 33,70,000 87,15,000
Cash at Bank 7,000 55,000
33,77,000 87,70,000
The holder of every three shares in X Ltd. were to receive 5 shares in Y ltd. plus as much cash as is
necessary to adjust the rights of shareholders of both the companies in accordance with the intrinsic values
of the shares as per the respective Balance Sheets.
Pass the necessary Journal entries in the books of Y Ltd. and prepare the Balance Sheet giving effect to
the above scheme of absorption.
12. Following balance sheets of X Ltd. and Y Ltd.
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000
Equity Share Capital Land & Building 2,500 1,550
Rs. 10 each) 50,00 30,00 Plant & Machinery 3,250 1,700
14% Pref. Share Furniture & Fittings 575 350
Capital (Rs. 100 each) 22,00 17,00 Investments 700 500
General Reserve 5,00 2,50 Stock 1,250 950
Export Profit Reserve 3,00 2,00 Debtors 900 1,030
Investment Cash & Bank 725 520
Allowance
Reserve --- 1,00
Profit & Loss A/c 7,50 5,00
13% Debentures 5,00 3,50
(Rs. 100 each)
Trade Creditors 4,50 3,50
Other Current
Liabilities 2,00 1,50
99,00 66,00 99,00 66,00
X Ltd. takes over Y Ltd. on 1st April, 1995. X Ltd. discharges the purchase consideration as below:
(ii) Issued 3,50,000 equity shares of Rs. 10 each at par to the equity share holders of Y Ltd.
(iii) Issued 15% preference shares of Rs. 100 each to discharge the preference shareholders of Y Ltd. at
10% premium.
The debentures of Y Ltd. will be converted into equivalent number of debentures of X Ltd. The statutory
reserves of Y Ltd. are to be maintained for 2 more years.
(a) The amalgamation is in the nature of merger.
(b) The amalgamation is in the nature of purchase.
13. Exe Limited was wound up on 31.3.2004 and its Balance Sheet as on that date was given below:
Share Capital : 1,20,000 Equity Fixed assets 9,64,000
Share of Rs. 10 each 12,00,000 Current assets
Reserves and Surplus Stock 7,75,000
Profit prior to Incorporation 42,000 Sundry Debtors 1,60,000
Contingency Reserve 2,70,000 Less: Provision for
Bad and doubtful debts 8,000
Profit and loss Accounts 2,52,000 Bills Receivable 30,000
Current Liabilities Cash at bank 3,29,000 12,86,000
Bills payable 40,000
Sundry creditors 2,26,000
Provisions:
Provision for Income tax 2,20,000
22,50,000 22,50,000
Wye Limited took over the following assets at values shown as under:
Fixed assets Rs. 12,80,000, Stock Rs. 7,70,000 and Bills Receivable Rs. 30,000.
Purchase consideration was settled by Wye Limited as under:
Rs. 5,10,000 of the consideration was satisfied by the allotment of fully paid 10% preference shares of Rs.
100 each. The balance was settled by issuing equity shares of Rs. 10 each at Rs. 8 per share paid up.
Sundry debtors realized Rs. 1,50,000. Bill payable was settled for Rs. 38,000. Income tax authorities fixed
the taxation liability at Rs 2,22,000.
Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to Rs
8,000.
a. Calculate the number of equity shares and preference shares to be allotted by Wye Limited in
discharge of purchase consideration.
b. Prepare the Realizations account, cash/bank account, Equity Shareholders account and Wye Limited.
c. Journal entries in the books of Wye Limited.
14. The Balance Sheet as on 31st March, 2002 of X Ltd. and Y Ltd. are as under:
X Ltd.
Authorized and Subscribed Buildings 20,00,000
60,000 equity shares of Machineries 26,00,000
Rs. 100 each fully paid 60,00,000 Furniture 40,000
Reserve and Surplus: Current Assets:
Profit and Loss Account 4,80,000 Debtors 9,20,000
Current Liabilities & Cash in Hand 2,80,000
Provision: Bank Balance 8,00,000
Creditors 9,60,000
82,40,000 82,40,000
Y Ltd.
Share Capital: Goodwill 4,00,000
Authorized and Subscribed Machineries 16,80,000
20,000 equity shares of Furniture 20,000
Rs. 100 each fully paid 20,00,000 Stock 7,20,000
Reserve and Surplus: Debtors 7,20,000
Capital Reserve 2,00,000 Cash in Hand 20,000
General Reserve 1,00,000 Bank Balance 1,60,000
Profit and Loss Account 1,40,000 Expenditure on
Unsecured Loan: New Project 3,00,000
Current Liabilities & Provision:
Creditors 3,80,000
40,20,000 40,20,000
Y Ltd. was absorbed by X Ltd. on 1st April, 2002, on the following terms:
(i) Fixed Assets other than Goodwill to be valued at Rs. 20,00,000 including Rs. 24,000 for furniture.
(ii) Stock to be reduced by Rs. 80,000 and Debtors by 5 per cent.
(iii) X Ltd. to assume liabilities and to discharge the 12% Debentures by issue of 11% Debentures of the
same value.
(iv) The new project to be valued at Rs. 3,80,000.
(v) The Shareholders of Y Ltd, to receive cash payment of Rs. 30 per share plus four equity shares in X
Ltd. for every five shares held in Y Ltd.
(vi) Both the companies to declare and pay dividend of 6% prior to absorption.
(vii) Expenses of liquidation of Y Ltd. are to be reimbursed by X Ltd. Rs. 24,000.
Draft journal entries recording the scheme in the books of Y Ltd. and prepare the balance Sheet of X Ltd.
after absorption assuming that X Ltd.’s authorized capital has been increased to Rs. 80,00,000.
15. The following are the Balance Sheets of P Ltd. and Q Ltd. as at 31st March, 20X1:
Particulars Notes ₹ P Ltd ₹ Q Ltd
A Share capital 1 8,00,000 4,00,000
B Reserves and Surplus 3,00,000 2,00,000
A Long-term borrowings 2 2,00,000 1,50,000
A Trade Payables 2,50,000 1,50,000
Total 15,50,000 9,00,000
Assets
A Property, Plant and Equipment 7,00,000 2,50,000
B Non-current investments 80,000 80,000
2 Current assets
A Inventories 2,40,000 3,20,000
B Trade receivables 4,20,000 2,10,000
C Cash and Cash equivalents 1,10,000 40,000
Total 15,50,000 9,00,000
Notes to accounts
P Ltd. Q Ltd.
1 Share Capital
10% Preference Shares of ₹ 100 each 2,00,000 1,00,000
8,00,000 4,00,000
2 Long term borrowings
12% Debentures 2,00,000 1,50,000
2,00,000 1,50,000
Details of Trade receivables and trade payables are as under:
P Ltd. (₹) Q Ltd. (₹)
Trade receivables
Debtors 3,60,000 1,90,000
Bills Receivable 60,000 20,000
4,20,000 2,10,000
Trade payables
Bills Payable 30,000 25,000
2,50,000 1,50,000
Property, plant and equipment of both the companies are to be revalued at 15% above book value. Both
the companies are to pay 10% Equity dividend, but Preference dividend having been already paid.
After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the following terms:
(i) 8 Equity Shares of ₹ 10 each will be issued by P Ltd. at par against 6 shares of Q Ltd.
(ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue of 10% Preference
Shares of ₹ 100 each at par in P Ltd.
(iii) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12% Debentures in P Ltd. issued at
a discount of 10%.
(iv) ₹ 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry Creditors of Q Ltd.
include ₹ 10,000 due to P Ltd.
(v) Inventory in Trade and Debtors are taken over at 5% lesser than their book value by P Ltd.
Prepare:
(a) Journal entries in the books of P Ltd.
(b) Statement of consideration payable by P Ltd.
16. The following were the Balance Sheet of P Ltd. and V Ltd. As at 31st March, 2002:
Liabilities P Ltd. V Ltd.
Rs. In lakhs Rs. In lakhs
Equity shares Capital (Fully paid shares
of Rs. 10 each) 15,000 6,000
Securities Premium 3,000
Foreign Project Reserve 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 775
12% Debentures 1,000
Bills Payable 120
Sundry Creditors 1,080 463
Sundry Provisions 1,830 702
33,400 12,450
Assets P Ltd. V Ltd.
Rs. In lakhs Rs. In lakhs
Land and Buildings 6,000
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Stock 7,862 4,041
Debtors 2,120 1,020
Cash at Bank 1,114 609
Bills Receivable 80
33,400 12,450
All the bills receivable held by V Ltd. were P. Ltd.’s acceptances.
On 1st April, 2002 P Ltd. took over V Ltd. in an amalgamation in the nature of merger. It was agreed that
in discharge of consideration for the business. P Ltd. Would allot three fully paid equity shares of Rs. 10
each at par for every two shares held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be
converted into 13% debentures in P Ltd. of the same amount and denomination. Expenses of
amalgamation amounting to Rs. 1 lakh were borne by P Ltd. You are required to:
(i) Pass Journal entries in the books of P Ltd., and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger.
17. A Limited and B Limited are carrying on business of same nature. On 31st March, 2021 their summarized
Balance Sheet was as follows:
A Ltd.(₹) B Ltd. (₹)
Share Capital
- Equity Shares 10 each (Fully Paid) 12,00,000 7,20,000
- 10% Preference Shares of ₹ 100 each 6,00,000 -
- 8% Preference Shares of ₹ 100 each - 5,00,000
Investment Allowance Reserve - 60,000
Security Premium 2,40,000 -
Export Profit Reserve 1,80,000 1,20,000
Profit & Loss Account 2,16,000 1,92,000
9% Debentures (₹ 10 each) 3,00,000 2,00,000
Secured Loan - 3,60,000
Bills Payable 75,000 1,00,000
Other Current Liabilities 50,000 75,000
34,73,000 27,81,000
Plant and Machinery 6,00,000 5,60,000
Office Equipment 3,45,000 2,10,000
Investments 96,000 3,00,000
Stock in Trade 6,30,000 4,20,000
Sundry Debtors 4,90,000 3,20,000
Bills Receivables 60,000 70,000
Cash at Bank 1,72,000 61,000
34,73,000 27,81,000
A Limited take over B Limited on the above date, both companies agreeing on a scheme of Amalgamation
on the following terms:
(a) A Limited will issue 80,000 Equity Shares of ₹ 10 each at par to the Equity Shareholders of B
Limited.
(b) A Limited will issue 10% Preference Shares of ₹ 100 each to discharge the Preference Shareholders of
B Limited at 15% premium in such a way that the existing dividend quantum of the preference
shareholders of B Limited will not get affected.
(c) The Debentures of B Limited will be converted into equivalent number of Debentures of A Limited.
(d) All the Bills Receivable of A Limited were accepted by B Limited.
(e) A contingent liability of B Limited amounting to ₹ 72,000 to be treated as actual liability in trade
payables.
(f) Expenses of Amalgamation amounted to ₹ 12,000 were borne by A Limited.
You are required to pass opening Journal Entries in A Limited and prepare the opening Balance Sheet of
A Limited as on 1st April, 2021 after amalgamation, assuming that the amalgamation is in the nature of
Merger.
18. P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to the
combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and undertakings
of the two companies in exchange for share in PQ Ltd.
The Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date of amalgamation) are given
below:
Summarised balance sheet as at 31-03-2017
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
Equity & liabilities: Assets:
Shareholders Non-current Assets:
Fund
a. Share Capital 6,00,000 8,40,000 Fixed Assets 7,20,000 10,80,000
(excluding Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current Liabilities a. inventories 3,60,000 6,60,000
Bank Overdraft - 5,40,000 b. Trade receivables 4,80,000 7,80,000
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000
The consideration was to be based on the net assets of the companies as shown in the above Balance
Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted
average of net profits for the three years ended 31st March, 2017. The weights for this purpose for the
years 2014 -15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.
The profit had been:
2014-15 ₹ 3,00,000; 2015-16 ₹ 5,25,000 and 2016-17 ₹ 6,30,000.
The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed
net assets value of these companies.
In order to raise working capital, PQ Ltd. increased its authorized capital by ₹ 12,00,000 and proceeded to
issue 72,000 shares of ₹ 10 each at the same rate of premium as issued for discharging purchase
consideration to P Ltd. and Q Ltd. You are required to:
(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording its journal entries.
19. The Summarized Balance Sheets of Sun Ltd. and Light Ltd. as on 31st March, 2021 are given below.
Sun Ltd. (₹) Light Ltd. (₹)
I. Liabilities
Equity Share Capital
(Divided into Shares of ₹ 5 each fully paid up) 1,40,00,000 84,00,000
Trade Payables 42,00,000 25,96,000
Total 2,10,00,000 1,26,00,000
II. Asset
Sundry Assets 2,10,00,000 1,26,00,000
Total 2,10,00,000 1,26,00,000
The following further information is also given:
(i) Sun Ltd. absorbed Light Ltd. on the basis of intrinsic value of shares of Sun Ltd.
(ii) The Purchase Consideration is discharged in fully paid up shares.
(iii) Sun Ltd. owed a sum of ₹ 7,00,000 to Light Ltd.
(iv) Inventory of Sun Ltd. included ₹ 8,40,000 supplied by Light Ltd. at cost plus 25%.
(v) Sundry Assets of Light Ltd. included Land of ₹ 28,00,000 the market value of which is ₹ 35,00,000.
(a) Give journal entries in the books of both Sun Ltd. and Light Ltd., if journal entries are passed at
intrinsic value of shares of Sun Ltd.
(b) Calculate the intrinsic value of shares of Sun Ltd., and
(c) Prepare Balance Sheet of Sun Ltd. after absorption.
20. Star and Moon had been carrying on business independently. They agreed to amalgamate and from a new
company Neptune Ltd. with an authorized share capital of Rs. 2,00,000 divided into 40,000 equity shares
of Rs. 5 each.
On 31st December, 2002, the respective Balance Sheets of Star and Moon were as follows:
Star Rs. Moon Rs.
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
Loss: Current Liabilities 2,98,500 90,125
Representing Capital 1,82,500 1,76,250
Additional information:
(a) Revalued figures of Fixed and Current Assets were as follows:
Star (Rs.) Moon (Rs.)
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
(b) The debtors and creditors – include Rs. 21,675 owed by Star to Moon.
The purchase consideration is satisfied by issue of the following shares and debentures:
(i) 30,000 equity shares of Neptune, Ltd., to star and Moon in the proportion to the profitability of their
respective business based on the average net profit during the last three years which were as follows:
Star (Rs.) Moon (Rs.)
2000 Profit 2,24,788 1,36,950
2001 (Loss) / Profit (1,250) 1,71,050
2002 Profit 1,88,962 1,79,500
(ii) 15% debentures in Neptune Ltd. at par to provide an income equivalent to 8% return on capital
employed in their respective business as on 31st December, 2002 after revaluation of assets.
You are requested to:
(1) Compute the amount of debentures and shares to be issued to star and Moon.
(2) A Balance Sheet of Neptune Ltd., showing the position immediately after amalgamation.
21. Sun Ltd. and Moon Ltd. were amalgamated on and from 1st April, 2009. A new company Star Ltd. was
formed to take over the business of the existing companies. The Balance Sheets ofSun Ltd. and Moon Ltd.
as at 31st March, 2009 are given below:
(Rs. in lakhs)
Liabilities Sun Ltd. Moon Ltd. Assets Sun Ltd. Moon Ltd.
Share capital: Fixed Assets:
Equity shares of Rs.100
Each 400 375 Land & Building 275 200
12% Preference shares of
Rs.100 each 150 100 Plant & Machinery 175 125
Investments 75 25
Reserves and surplus: Current Assets, Loans and
Advances:
Revaluation reserve 75 50 Stock 175 125
General reserve 85 75 Sundry Debtors 125 150
Investment allowance
Reserve 25 25 Bills Receivables 25 25
Profit and Loss Account 25 15 Cash and Bank balances 150 100
Secured loan:
10% Debentures (Rs.100 each) 30 15
Current liabilities and provisions:
Sundry creditors 135 60
Acceptance 75 35
1,000 750 1,000 750
(i) Star Ltd. will issue 5 equity shares for each equity share of Sun Ltd. and 4 equity shares for each
equity share of Moon Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10
per share.
(ii) Preference shareholders of the two companies are issued equivalent number of 15% preference shares
of Star Ltd. at a price of Rs. 150 per share (face value Rs. 100).
(iii) 10% Debentureholders of Sun Ltd. and Moon Ltd. are discharged by Star Ltd., issuing such number of
its 15% Debentures of Rs.100 each so as to maintain the same amount of interest.
(iv) Investment allowance reserve is to be maintained for 4 more years.
(v) Liquidation expenses are:
Sun Ltd. Rs.2,00,000 Moon Ltd. Rs.1,00,000
It was decided that these expenses would be borne by Star Ltd.
(vi) All the assets and liabilities of Sun Ltd. and Moon Ltd. are taken over at book value.
(vii) Authorised equity share capital of Star Ltd. is Rs. 5,00,00,000, divided into equity shares of Rs. 10
each. After issuing required number of shares to the Liquidators of Sun Ltd. and Moon Ltd., Star Ltd.
issued balance shares to Public. The issue was fully subscribed.
Required: Prepare the Balance Sheet of Star Ltd. as at 1st April, 2009 after amalgamation has been
carried out on the basis of Amalgamation in the nature of purchase.
22. System Ltd. and HRD Ltd. decided to amalgamate as on 01.04.2010. Their Balance Sheets as on
31.03.2010 were as follows:
(Rs. ‘000)
Particulars System Ltd. HRD Ltd.
Source of Funds :
Equity share capital (Rs. 10 each) 150 140
9% preference share Capital (Rs. 100 each) 30 20
Investment allowance Reserve 5 2
Profit and Loss Account 34 34
10 % Debentures 50 30
Sundry Creditors 25 15
Tax provision 7 4
Total 301 245
Application of Funds :
Building 60 50
Plant and Machinery 80 70
Investments 40 25
Sundry Debtors 45 35
Stock 36 40
Cash and Bank 40 25
Total 301 245
From the following information, you are to prepare the draft Balance Sheet as on 01.04.2010 of a
new company, Intranet Ltd., which was formed to take over the business of both the companies
and took over all the assets and liabilities:
(i) 50 % Debenture are to be converted into Equity Shares of the New Company. (Assume equity
shares of new company are issued at par value).
(ii) Out of the investments, 20% are non-trade investments.
(iii) Fixed Assets of Systems Ltd. were valued at 10% above cost and that of HRD Ltd. at 5% above
cost.
(iv) 10 % of sundry Debtors were doubtful for both the companies. Stocks to be carried at cost.
(v) Preference shareholders were discharged by issuing equal number of 9% preference shares at
par.
(vi) Equity shareholders of both the transferor companies are to be discharged by issuing Equity
shares of Rs. 10 each of the new company at a premium of Rs. 5 per share. Amalgamation is in
the nature of purchase.
23. The balance sheets of Truth Limited and Myth Limited as at 31.03.2021 is given below. Myth Limited is
to be amalgamated with Truth Limited from 1.04.2021. The amalgamation is to be carried out in the
nature of purchase.
Particulars Note No. Truth Ltd. (₹) Myth Ltd. (₹)

(1) Equity and Liabilities
1. Shareholders’ Funds
(a) Share Capital 1 10,00,000 4,00,000
(b) Reserves and Surplus 2 11,35,000 4,13,000
2. Non -Current Liabilities 3 - 1,50,000
3. Current Liabilities 4 1,40,000 1,82,000
Total 22,75,000 11,45,000
(2) Assets
1. Non -Current Assets
(a) Property, Plant & 15,75,000 6,80,000
Equipment
(b) Investments 1,87,500 1,00,000
2. Current Assets 5 5,12,500 3,65,000
Total 22,75,000 11,45,000
Notes to Accounts
Note Particulars Truth Limited (₹) Myth Limited (₹)
No.
1 Share Capital
2 Reserves & Surplus

Profit & Loss A/c 4,45,000 1,58,000
Export Profit Reserve 1,85,000 25,000
11,35,000 4,13,000
3 Non- Current Liabilities
14% Debentures --- 1,50,000
4 Current Liabilities
Trade Payables 90,000 1,42,000
Other Current Liabilities 50,000 40,000
1,40,000 1,82,000
5 Current Assets
Inventory 2,15,000 85,000
Cash and Cash equivalents 95,000 1,05,000
5,12,500 3,65,000
Truth Limited would issue 12% debentures to discharge the claim of the debenture holders of Myth
Limited so as to maintain their present annual interest income. Non-trade investment, which constitute
80% of their respective total investments yielded income of 20% to Truth Limited and 15% to Myth
Limited. This income is to be deducted from profits while computing average profit for the purpose of
calculating goodwill. Profit before tax of both the companies during the last 3 years were as follows:
Truth Limited (₹) Myth Limited (₹)
2018-2019 8,20,000 2,55,000
2019-2020 7,45,000 2,15,000
2020-2021 6,04,000 2,14,000
Goodwill is to be calculated on the basis of simple average of three years profit by using Capitalization
method taking 18% as normal rate of return. Ignore taxation. Purchase consideration is to be discharged
by Truth Limited on the basis of intrinsic value per share. Prepare Balance Sheet of Truth Limited after
the amalgamation.
24. Ram Limited and Shyam Limited carry on business of a similar nature and it is agreed that they should
amalgamate. A new company, Ram and Shyam Limited, is to be formed to which the assets and liabilities
of the existing companies, with certain exception, are to be transferred. On 31st March 2011 the Balance
Sheets of the two companies were as under:
Ram Limited
Balance Sheet as at 31st March, 2011

Issued and Subscribed Freehold Property, at cost 2,10,000
Share capital: Plant and Machinery, at cost less
30,000 Equity shares of , 10 depreciation 50,000
each, fully paid 3,00,000 Motor Vehicles, at cost
General Reserve 1,60,000 less depreciation 20,000
Profit and Loss Account 40,000 Stock 1,20,000
Sundry Creditors 1,50,000 Debtors 1,64,000
Cash at Bank 86,000
6,50,000 6,50,000
Shyam Limited
Issued and Subscribed Freehold Property, at cost 1,20,000
Share Capital: Plant and Machinery, at cost less
16,000 Equity shares of , 10 depreciation 30,000
each, fully paid 1,60,000 Stock 1,56,000
Profit and Loss Account 40,000 Debtors 42,000
6% Debentures 1,20,000 Cash at Bank 36,000
3,84,000 3,84,000
Assets and Liabilities are to be taken at book-value, with the following exceptions:
(a) Goodwill of Ram Limited and of Shyam Limited is to be valued at Rs. 1,60,000 and Rs. 60,000
respectively.
(b) Motor Vehicles of Ram Limited are to be valued at , 60,000.
(c) The debentures of Shyam Limited are to be discharged by the issue of 6% Debentures of Ram and
Shyam Limited at a premium of 5%.
(d) The debtors of Shyam Ltd. realized fully and bank balance of Shyam Ltd, are to be retained by the
liquidator and the sundry creditors of Shyam Ltd. are to be paid out of the proceeds thereof.
(i) Compute the basis on which shares in Ram and Shyam Limited will be issued to the shareholders of
the existing companies assuming that the nominal value of each share in Ram and Shyam Limited is
Rs. 10.
(ii) Draw up a Balance Sheet of Ram and Shyam Limited as of 1st April, 2011, the date of completion of
amalgamation.
(iii) Write up journal entries, including bank entries, for closing the books of Shyam Limited.
Solution:
Calculation of Purchase consideration
Ram Ltd. Shyam
Ltd.
Purchase Consideration: Rs. Rs
Goodwill 1,60,000 60,000
Freehold property 2,10,000 1,20,000
Motor vehicles 60,000 -
Stock 1,20,000 1,56,000
Debtors 1,64,000 -
Cash at Bank 86,000 -
8,50,000 3,66,000
Less: Liabilities:
6% Debentures (1,20,000 x 105%) - (1,26,000)
Sundry Creditors (1,50,000) -
Net Assets taken over 7,00,000 2,40,000
To be satisfied by issue of shares of Ram and Shyam Ltd. @ Rs. 10 70,000 24,000
Each
Balance Sheet of Ram and Shyam Ltd. as at 1st April, 2011

Equity and Liabilities Rs.
1 Shareholders' funds
a Share capital 1 9,40,000
b Reserves and Surplus 2 2,60,000
a Long-term borrowings 3 1,20,000
a Trade Payables 1,50,000
Total 12,16,000
Assets
i Property, Plant and equipment 4 4,70,000
ii Intangible assets 5 2,20,000
2 Current assets
a Inventories (1,20,000 + 1,56,000) 2,76,000
b Trade receivables 1,64,000
c Cash and cash equivalents 86,000
Total 12,16,000
Notes to accounts:
1. Share Capital
94,000 shares of Rs. 10 each 9,40,000
Securities Premium (W.N.1) 6,000
Secured
6% Debentures (assumed to be secured) 1,20,000
4. Property, Plant and equipment
Free hold property (2,10,000 + 1,20,000) 3,30,000
Plant & Machinery (50,000+30,000) 80,000
Motor vehicles 60,000
Total 4,70,000
5. Intangible assets
Goodwill (1,60,000 + 60,000) 2,20,000
In the books of Shyam Ltd.
Journal Entries
1. Realisation A/c Dr. 3,48,000
To Freehold Property 1,20,000
To Plant and Machinery 30,000
To Stock 1,56,000
To Debtors 42,000
(Being all assets except cash transferred to Realisation
Account)
Sundry Creditors A/c Dr. 64,000
To Realisation A/c 1,84,000
(Being all liabilities transferred to Realisation Account)
3. Equity Share Capital A/c Dr. 1,60,000
Profit and Loss A/c Dr. 40,000
To Realisation A/c 2,20,000
(Being equity transferred to equity shareholders account)
4. Ram and Shyam Ltd. Dr. 2,40,000
To Realization A/c 2,40,000
(Being purchase consideration due)
5. Bank A/c Dr. 42,000
To Realisation A/c 42,000
(Being cash realized from debtors in full)
6. Realization A/c Dr. 64,000
To Bank A/c 64,000
(Being payment made to creditors)
7. Shares in Ram and Shyam Ltd. Dr. 2,40,000
To Ram and Shyam Ltd. 2,40,000
(Being purchase consideration received in the form of
shares of Ram and Shyam Ltd.)
8. Realisation A/c Dr. 54,000
To Equity shareholders A/c 54,000
(Being profit on Realisation account transferred to
shareholders account)
9. Equity shareholders A/c Dr. 2,54,000
To Shares in Ram and Shyam Ltd. 2,40,000
To Bank A/c 14,000
(Being final payment made to shareholders)
Working Note: Calculation of Securities Premium balance
Debentures issued by Ram and Shyam Ltd. to Shyam Ltd. at 5% premium
Therefore, securities premium account will be credited with (Rs. 1, 20,000 x 5%) Rs. 6,000.
25. Galaxy Ltd. and Glory Ltd., are two companies engaged in the same business of chemicals. To mitigate
competition, a new company Glorious Ltd, is to be formed to which the assets and liabilities of the
existing companies, with certain exception, are to be transferred. The summarized Balance Sheet of
Galaxy Ltd. and Glory Ltd. as at 31st March, 2020 are as follows:
Galaxy Ltd. Glory Ltd.
Rs. Rs.
(I) Equity & Liabilities
(1) Shareholders' fund
Share Capital
Equity shares of Rs. 10 8,40,000 4,55,000
eachReserves & Surplus .
Profit & Loss A/c 1,12,000 72,000
(2) Non-current Liabilities
Secured Loan
6% Debentures - 3,30,000
(3) Current Liabilities
Trade Payables 4,20,000 1,83,000
Total 18,20,000 10,80,000
(II) Assets
(1) Non-current assets
Property, Plant & Equipment
Freehold property, at cost 5,88,000 3,36,000
Plant & Machinery, at cost less 1,40,000 84,000
depreciation
Motor vehicles, at cost less 56,000 -
depreciation
(2) Current Assets
Inventories 3,36,000 4,38,000
Cash at Bank 2,38,000 1,04,000
Total 18,20,000 10,80,000
Assets and Liabilities are to be taken at book value, with the following exceptions:
(i) The Debentures of Glory Ltd. are to be discharged, by the issue of 8% Debentures of Glorious Ltd. at
a premium of 10%.
(ii) Plant and Machinery of Galaxy Ltd. are to be valued at Rs. 2,52,000.
(iii) Goodwill is to be valued at : Galaxy Ltd. Rs. 4,48,000 Glory Ltd. Rs. 1,68,000
(iv) Liquidator of Glory Ltd. is appointed for collection from trade debtors and payment to trade creditors.
He retained the cash balance and collected Rs. 1,10,000 from debtors and paid
Rs. 1,80,000 to trade creditors. Liquidator is entitled to receive 5% commission for collection and
2.5% for payments. The balance cash will be taken over by new company.
You are required to :
(1) Compute the number of shares to be issued to the shareholders of Galaxy Ltd. and Glory Ltd,
assuming the nominal value of each share in Glorious Ltd. is Rs. 10.
(2) Prepare Balance Sheet of Glorious Ltd., as on 1st April, 2020 and also prepare notes to the accounts as
per Schedule III of the Companies Act, 2013.
Solution:
(i) Calculation of Purchase consideration (or basis for issue of shares of Glorious Ltd.
Galaxy Ltd. Glory Ltd.

Purchase Consideration: Rs. Rs.
Goodwill 4,48,000 1,68,000
Plant and Machinery 2,52,000 84,000
Motor vehicles 56,000 -
Inventory 3,36,000 4,38,000
Trade receivables 4,62,000 -
Cash at Bank 2,38,000 24,000
23,80,000 10,50,000
Less: Liabilities:
6% Debentures (3,00,000 x 110%) - (3,30,000)
Trade payables (4,20,000) ____
To be satisfied by issue of shares of Glorious. 1,96,000 72,000
Ltd. @ Rs. 10 each
(ii) Balance Sheet of Glorious Ltd. as at 1st April, 2020
Particulars Note No Amount
Rs.
EQUITY AND LIABILITIES
(a) Share capital 1 26,80,000
(b) Reserves and surplus 2 30,000
(a) Long-term borrowings 3 3,00,000
(a) Trade payables 4,20,000
Total 34,30,000
ASSETS
1
Non-current assets
(a)
i 4 13,16,000
Property, plant and equipment
ii 5 6,16,000
Intangible assets
2
Current assets
(a) 6 7,74,000
Inventories
(b) 4,62,000
Trade receivables
(c) 7 2,62,000
Cash and cash equivalents
34,30,000
Total
Notes to accounts:
Rs. Rs.
1. Share Capital
2,68,000 shares of Rs. 10 each 26,80,000
(All the above shares are issued for consideration other
than cash)
2. Reserves and surplus
Securities Premium
(10% premium on debentures of Rs.3,00,000) 30,000
Secured
8% 3,000 Debentures of Rs.100 each 3,00,000
4. Property Plant and Equipment
Freehold property
Galaxy Ltd. 5,88,000
Glory Ltd. 3,36,000 9,24,000
Plant and Machinery
Glory Ltd. 84,000 3,36,000
Motor vehicles - Galaxy Ltd. 56,000
13,16,000
5 Intangible assets
Goodwill
Glory Ltd. 1,68,000 6,16,000
6 Inventories
Glory Ltd. 4,38,000 7,74,000
7 Cash and cash equivalents

Glory Ltd.(As per working note) 24,000 2,62,000
Working note:
Calculation of cash balance of Glory Limited to be taken over by Glorious Limited
Rs.
Cash balance as at 31st March, 2020 1,04,000
Add: Received from debtors 1,10,000
2,14,000
Less: paid to creditors (1,80,000)
34,000
Less: Commission to liquidators
On Debtors @ 5% 5,500
On Creditors @ 2.5% 4,500 (10,000)
24,000
Note:
a. It is assumed that the nominal value of debentures of Glory Ltd. is Rs. 100 each.
b. As per the information given in the question, debentures of Glory Ltd. are to be discharged by the
issue of debentures of Glorious Ltd. at premium of 10%. It is assumed in the above solution that the
debentures are issued at premium of Rs. 10 for discharge of debentures of Rs. 3,30,000. Alternative
answer considering other reasonable assumption is also possible.
26. The following are the Balance Sheets of Andrew Ltd. and Barry Ltd., as at 31.12.2007:
Andrew Ltd.
(in Rs.’000s)
Liabilities Assets
Share capital Fixed assets 3,400
3,00,000 Equity shares of Rs.10 3,000 Stock (pledged with 18,400
Each secured loan creditors)
10,000 Preference shares of Other Current assets 3,600
Rs.100 each 1,000 Profit and Loss account 16,600
General reserve 400
Secured loans (secured against
pledge of stocks) 16,000
Unsecured loans 8,600
42,000 42,000
Barry Ltd.
(in Rs.’000s)
Liabilities Assets
Share capital Fixed assets 6,800
1,00,000 Equity shares of Rs.10 Current assets 9,600
Each 1,000
General reserve 2,800
Secured loans 8,000
16,400 16,400
Both the companies go into liquidation and Charlie Ltd., is formed to take over their businesses.
The following information is given:
(a) All Current assets of two companies, except pledged stock are taken over by Charlie Ltd.
The realisable value of all Current assets are 80% of book values in case of Andrew Ltd.
and 70% for Barry Ltd. Fixed assets are taken over at book value.
(b) The break up of Current liabilities is as follows:

Andrew Ltd. Barry Ltd.
Rs. Rs.
Statutory liabilities (including Rs.22 lakh in case
of Andrew Ltd. in case of a claim not having been
admitted shown as contingent liability) 72,00,000 10,00,000
Liability to employees 30,00,000 18,00,000
The balance of Current liability is miscellaneous creditors.
(c) Secured loans include Rs.16,00,000 accrued interest in case of Barry Ltd.
(d) 2,00,000 equity shares of Rs.10 each are allotted by Charlie Ltd. at par against cash
payment of entire face value to the shareholders of Andrew Ltd. and Barry Ltd. in the
ratio of shares held by them in Andrew Ltd. and Barry Ltd.
(e) Preference shareholders are issued Equity shares worth Rs.2,00,000 in lieu of present
holdings.
(f) Secured loan creditors agree to continue the balance amount of their loans to Charlie Ltd.
after adjusting value of pledged security in case of Andrew Ltd. and after waiving 50% of
interest due in the case of Barry Ltd.
(g) Unsecured loans are taken over by Charlie Ltd. at 25% of Loan amounts.
(h) Employees are issued fully paid Equity shares in Charlie Ltd. in full settlement of their
dues.
(i) Statutory liabilities are taken over by Charlie Ltd. at full values and miscellaneous
creditors are taken over at 80% of the book value.
Show the opening Balance Sheet of Charlie Ltd. Workings should be part of the answer.
Solution: Balance sheet of Charlie Ltd. as at 31st December, 2011
Particulars Note No. (Rs.’000)

I. Equity and Liabilities
(1) Shareholder's Funds
Share Capital 1 7,000
(2) Non-Current Liabilities
Long-term borrowings 2 10,630
(3) Current Liabilities 3 13,640
Total 31,270
II. Assets
i. Property, Plant and Equipment
ii. Intangible assets 4 10,200
(2) Current assets 5 9,470
Total 6 11.600
31,270
Notes to Accounts
(Rs.000)
1. Share Capital
Issued, subscribed & Paid up:
7,00,000 equity shares of Rs. 10 each, fully paid up (W.N.5) 7,000
(of the above 5,00,000 shares have been issued for
consideration other than cash)
Secured loans (Rs. 1,280 +Rs. 7,200) – WN 2 8,480
Unsecured Loans (25% of Rs. 8,600) 2,150 10,630
3. Current Liabilities (Rs. 7,200 +Rs. 1,000 +Rs. 4,000 +Rs.1,440) 13,640
Fixed Assets (Rs. 3,400 +Rs. 6,800) 10,200
Goodwill (W.N.4) 9,470
6. Current Assets
Cash & Cash Equivalent 2,000
Other Current Assets (Rs. 2,880+Rs. 6,720) 9,600 11,600
Working Notes:
1. Value of miscellaneous creditors taken over by Charlie Ltd. (Rs.’000)

Andrew Ltd. Barry Ltd
Given in balance sheet 13,000 4,600
Less: Statutory liabilities [72 lakhs – 22 lakhs] (5,000) (1,000)
Liability to employees (3,000) (1,800)
Miscellaneous creditors 5,000 1,800
80% thereof 4,000 1,440
2. Value of total liabilities taken over by Charlie Ltd. (Rs. ‘000)

Andrew Ltd. Barry Ltd.
Current liabilities
Statutory liabilities 7,200 1,000
Liability to employees 3,000 1,800
Miscellaneous creditors (W.N.1) 4,000 14,200 1,440 4,240
Secured loans
Given in Balance Sheet 16,000 8,000
Interest waived - - 800 7,200
Value of Stock
(80% of Rs. 184 lakhs) 14,720 1,280
Unsecured Loans
(25% of Rs. 86 lakhs) 2,150 -
17,630 11,440
3. Assets taken over by Charlie Ltd. (Rs. ‘000)

Andrew Ltd. Barry Ltd
Fixed Assets (Assumed on book value basis) 3,400 6,800
Current Assets 80% and 70% respectively of book value 2,880 6,720
6,280 13,520
4. Goodwill / Capital Reserve on amalgamation (Rs. ‘000)

Liabilities taken over (W.N. 2) 17,630 11,440
Equity shares to be issued to Preference Shareholders 200 -
A 17,830 11,440
Less: total assets taken over (W.N. 3) B (6,280) (13,520)
A-B 11,550 (2,080)
Goodwill Capital Reserve
Net Goodwill 9,470
5. Equity shares issued by Charlie Ltd.

Number
(i) For Cash 2,00,000
For consideration other than cash
(ii) In Discharge of Liabilities to Employees 4,80,000
(iii) To Preference shareholder 20,000 5,00,000
7,00,000
Value of shares (Rs. 10 x 7,00,000) Rs. 70 lakhs Rs.70 lakhs
27. Mohan Ltd. gives you the following information as on 31st March, 2020:
₹
Share capital:
Equity shares of ₹ 10 each 3,00,000
6,000, 9% cumulative preference shares of ₹ 10 each 60,000
Profit and Loss Account (Dr. balance) 1,70,000
10% Debentures of ₹ 100 each 2,00,000
Interest payable on Debentures 20,000
Property, Plant and Equipment 3,40,000
Goodwill 10,000
Inventory 80,000
Bank Balance 20,000
A new company Ravi Ltd. is formed with authorised share capital of ₹ 4,00,000 divided into 40,000
Equity Shares of ₹ 10 each. The new company will acquire the assets and liabilities of Mohan Ltd. on the
following terms:
(1)
(a) Mohan Ltd.'s debentures are paid by similar debentures in new company and for outstanding accrued
interest on debentures, equity shares of equal amount are issued at par.
(b) The trade payables are paid by issue of 12,000 equity shares at par in full and final settlement of their
claims.
(c) Preference shareholders are to get equal number of equity shares issued at par. Dividend on preference
shares is in arrears for three years. Preference shareholders to forgo dividend for two years. For
balance dividend, equity shares of equal amount are issued at par.
(d) Equity shareholders are issued one share at par for every three shares held in Mohan Ltd.
(2) Current Assets are to be taken at book value (except inventory, which is to be reduced by 10%).
Goodwill is to be eliminated. The Property, plant and equipment is taken over at ₹ 3,08,400.
(3) Remaining equity shares of the new company are issued to public at par fully paid up.
(4) Expenses of ₹ 5,000 to be met from bank balance of Mohan Ltd. This is to be adjusted from the bank
balance of Mohan Ltd. before acquisition by Ravi Ltd.
(a) Realisation account and Equity Shareholders' account in the books of Mohan Ltd.
(b) Bank Account and Balance Sheet with notes to accounts in the books of Ravi Ltd.
Solution:
In the books of Mohan Ltd.
(i) Realisation Account
₹ ₹
To Goodwill 10,000 By 10% Debentures 2,00,000
To Property, plant and 3,40,000 By Interest accrued on 20,000
equipment debentures
To Inventory 80,000 By Trade payables 1,50,000
To Trade receivables 1,10,000 By Ravi Ltd. (Purchase 1,65,400
consideration) (W.N. 1)
To Bank By Equity shareholders A/c
(20,000 - 5,000) 15,000 (loss on realization) (Bal. 25,000
fig.)
To Preference share
holders A/c (W.N.2)
5,400
5,60,400 5,60,400
(ii) Equity shareholders’ Account
₹ ₹
To Profit & loss A/c 1,70,000 By Equity Share capital 3,00,000
To Expenses* 5,000
To Equity shares in Ravi Ltd. 1,00,000
To Realization A/c 25,000
3,00,000 3,00,000
*Alternatively, expenses may be routed through Realization account.
In the books of Ravi Ltd.
(i) Bank Account

₹ ₹
To Business Purchase 15,000 By Balance c/d (Bal. fig.) 1,09,600
To Equity shares
application & allotment
A/c (W.N. 3) 94,600
1,09,600 1,09,600
(ii) Balance Sheet as at 31st March, 2020

Particulars Note No. ₹
Share Capital 1 4,00,000
Total 6,00,000
II. Assets
(a) Property, plant and equipment 3,08,400
(2) Current assets
(a) Inventories 72,000
(b) Trade receivables 1,10,000
(c) Cash and cash equivalents 1,09,600
Total 6,00,000
Notes to Accounts
₹
1. Share Capital
Authorised share capital
40,000 equity shares of ₹ 10 each 4,00,000

40,000 shares of ₹ 10 each fully paid up 4,00,000
(out of the above, 30,540 (W.N.3) shares have been allotted as fully paid-
up pursuant to contract without payment being received in cash)
Working Notes:
1. Calculation of Purchase consideration
₹
Payment to preference shareholders
6,000 equity shares @ ₹ 10 60,000
For arrears of dividend: (6,000 x ₹ 10) x 9% 5,400
Payment to equity shareholders
(30,000 shares x 1/3) @ ₹ 10 1,00,000
Total purchase consideration 1,65,400
2. Preference shareholders’ Account in books of Mohan Ltd.

₹ ₹
To Equity Shares in By Preference Share
Ravi Ltd. 65,400 capital 60,000
By Realization A/c (Bal.
fig.) 5,400
65,400 65,400
3. Calculation of number of Equity shares issued to public

Number of shares
Authorized equity shares 40,000
Less: Equity shares issued for
Interest accrued on debentures 2,000
Trade payables of Mohan Ltd. 12,000
Preference shareholders of Mohan Ltd. 6,000
Arrears of preference dividend 540
Equity shareholders of Mohan Ltd. 10,000 (30,540)
Number of equity shares issued to public at par for cash 9,460
28. The Balance Sheet of Anand Ltd. and Dany Ltd. as at 31st December, 2000 were as follows:
Anand Dany Anand Dany
Ltd. Ltd. Ltd. Ltd.
Equity Fixed Assets
Shares of 3,00,000 2,00,000 (other than
Rs. 10 each goodwill) 2,50,000 1,75,000
Reserves 75,000 50,000 Stock in trade 47,500 37,500
Profit & Debtors 70,000 50,000
Loss A/c 32,500 27,500 Cash and
Sundry Bank 58,750 30,000
Creditors 18,750 15,000
4,26,250 2,92,500 4,26,250 2,92,500
Anand Ltd. took over and absorbed Deny Ltd., as on 1st July, 2001. No Balance Sheet of Dany Ltd., were
prepared on the date of take over. But the following information is made available to you.:
(i) In the six months ended 30th June, 2001, Dany Ltd., made net profits of Rs. 30,000 after providing for
depreciation at 10% per annum on fixed assets.
(ii) Anand Ltd., during that period had made net profits of Rs. 72,500 after providing fir depreciation at
10% per annum on the fixed assets.
(iii) Both the companies had distributed dividends of 10% on 1st April, 2001.
(iv) Goodwill of Dany Ltd., on the date of take over, was estimated at Rs. 12,500 and it was agreed that
the stocks of Dany Ltd., would be appreciated by Rs. 7,500 on the date of take over.
(v) Anand Ltd. to issue shares at par to shareholders of Dany Ltd., on the basis of the intrinsic value of its
shares on the date of take over.
Draft the Balance Sheet of Anand Ltd. after absorption.
29. The summarized Balance Sheets of Black Limited and White Limited as on 31st March, 2020 is as
follows:
Particulars Notes Black Limited White Limited

(Rs. In 000) (Rs. In 000)
Shareholders' Funds
(a) Share Capital 1 6,000 3,600
(b) Reserves and Surplus 2 1,080 660
Current Liabilities
Trade payables 600 360
Total 7,680 4,620
Assets
Non-current assets
Property, Plant and Equipment 3,600 2,400
Current assets
(a) Inventories 960 720
(b) Trade receivables 1,680 1,080
(c) Cash and Cash Equivalents 1,440 420
Total 7,680 4,620
Note Particulars Black Limited White Limited

No. (Rs. in 000) (Rs. in 000)
1.
Share Capital 6,000 3,600
Equity Shares of Rs. 100 each
General Reserve 360 180
Total 1,080 660
Black Limited takes over White Limited on 1st July, 2020.
No Balance Sheet of White Limited is available as on that date. It is, however estimated that White
Limited earned profit of Rs. 2,40,000 after charging proportionate depreciation @ 10% p.a. on Property
Plant and Equipment, during April-June, 2020.
Estimated profit of Black Limited during these 3 months was Rs. 4,80,000 after charging proportionate
depreciation @ 10% p.a. on Property Plant and Equipment.
Both the companies have declared and paid 10% dividend within this 3 months' period.
Goodwill of White Limited is valued at Rs. 2,40,000 and Property Plant and Equipment are valued at Rs.
1,20,000 above the depreciated book value on the date of takeover.
Purchase consideration is to be satisfied by Black Limited by issuing shares at par. Ignore income tax.
(i) Compute No. of shares to be issued by Black Limited to White Limited against purchase
consideration.
(ii) Calculate the balance of Net Current Assets of Black Limited and White Limited as on 1st July, 2020.
(iii) Give balance of Profit or Loss of Black Limited as on 1st July, 2020
(iv) Give balance of Property Plant and Equipment as on 1st July, 2020 after takeover.
Solution: (i) No. of shares issued by Black Ltd. to White Ltd. against purchase consideration
White Ltd. Rs. Rs.

Goodwill 2,40,000
Property, plant and equipment 24,00,000
Less: Depreciation [24,00,000 X 10 % X 3/12] (60,000)
23,40,000
Add: Appreciation 1,20,000 24,60,000
Inventory 7,20,000
Cash and Bank balances 4,20,000
Add: Profit after depreciation 2,40,000
Add: Depreciation (non-cash) 60,000 3,00,000
Less: Dividend [36,00,000 X 10%] (3,60,000) 3,60,000
48,60,000
Less: Trade payables (3,60,000)
Purchase Consideration 45,00,000
Number of shares to be issued by Black Ltd. @ Rs. 100 each 45,000 shares
(ii) Calculation of Net Current Assets as on 01.07.2020
Black Ltd. White Ltd.

Rs.
Rs. Rs.
Current assets:
Inventory 9,60,000 7,20,000
Cash and Bank 14,40,000 4,20,000
Less: Dividend (6,00,000) (3,60,000)
Add: Profit after depreciation 4,80,000 2,40,000
Add: Depreciation being non
cash 90,000 14,10,000 60,000 3,60,000
40,50,000 21,60,000
Less: Trade payables (6,00,000) (3,60,000)
34,50,000 18,00,000
(iii) Profit and Loss Account balance of Black Ltd. as on 1.07.2020
Rs.
P & L A/c balance as on 31.03.2020 7,20,000
Less: Dividend paid (6,00,000)
1,20,000
Add: Estimated profit for 3 months after charging depreciation 4,80,000
6,00,000
(iv) Property, plant and equipment as on 01.07.2020
Property, plant and equipment of Black Ltd. as on 36,00,000

31.03.2020
Less: Depreciation for 3 months [36,00,000 x 10% x 3/12] (90,000)
35,10,000
Property, plant and equipment of White Ltd.
Taken over as on 31.03.2020 24,00,000
Less: Proportionate depreciation for 3 months on fixed (60,000)
assets
23,40,000
Add: Appreciation above the estimated book value 1,20,000 24,60,000
Total Property, plant and equipment as on 1.7.2020 59,70,000
30. The following are the summarized Balance Sheets of A Ltd. and B Ltd. as on 31.3.2012:
(Rs. in thousands)
Liabilities A Ltd. B Ltd.
Share capital:
Equity shares of 100 each fully paid up 2,000 1,000
Reserves and Surplus
General Reserve 1,000 ---
Profit & Loss Account - (800)
10% Debentures 500 ---
Loans from Banks 250 450
Bank overdrafts --- 50
Total 4,050 1,000
Assets
Property, Plant and Equipment 2,700 850
Investments 700 ---
Trade receivables 400 150
Cash at bank 250 ---
Total 4,050 1,000
B Ltd. has acquired the business of A Ltd. The following scheme of merger was approved:
(i) Banks agreed to waive off the loan of Rs. 60 thousands of B Ltd.
(ii) B Ltd. will reduce its shares to Rs. 10 per share and then consolidate 10 such shares into one share of
Rs. 100 each (new share).
(iii) Shareholders of A Ltd. will be given one share (new) of B Ltd. in exchange of every share held in A
Ltd.
(iv) Trade payables of B Ltd. includes Rs. 100 thousands payable to A Ltd.
Pass necessary entries in the books of B Ltd. and prepare Balance Sheet after merger.
Solution: Calculation of purchase consideration
One share of B Ltd. will be issued in exchange of every
share of A Ltd. (i.e. 20,000 equity shares of B Ltd. will be
issued against 20,000 equity shares of A Ltd.) 20,000 shares
Journal Entries in the books of B Ltd.

Date (₹ in thousands)
20X1 Dr. Cr.
March,31 Loan from bank A/c Dr. 60
(Being loan from bank waived off to the extent of ₹ 60 thousand)
Equity share capital A/c (₹ 100) Dr. 1,000

To Equity share capital A/c (₹ 10) 100
(Being equity shares of ₹ 100 each reduced to ₹ 10 each)
Equity share capital A/c (₹ 10) Dr. 100

(Being 10 equity shares of ₹ 10 each
consolidated to one share of ₹ 100 each)
Capital reduction A/c Dr. 960
To Profit and loss A/c 800
To Capital reserve A/c 160
(Being accumulated losses set off against reconstruction A/c
and balance transferred to capital reserve account)
Property, plant and equipment A/c Dr. 2,700
Investment A/c Dr. 700
Trade receivables A/c Dr. 400
Cash at bank A/c Dr. 250
To Trade payables A/c 300
To Loans from bank A/c 250
To 10% Debentures A/c 500
To Liquidator of A Ltd. A/c 2,000
To Reserves A/c 1,000
(Being assets, liabilities and reserves taken over under pooling
of interest method and amount due to Liquidator)
Liquidator of A Ltd. A/c Dr. 2,000

To Equity share capital A/c 2,000
(Being payment made to liquidators of A Ltd.
by allotment of 20,000 new equity shares)
Trade payables A/c Dr. 100
To Trade receivables A/c 100
(Being mutual owing cancelled)
Balance Sheet of B Ltd. after merger as at 31.3.20X1

Particulars Notes ₹ in ‘000
a Share capital 1 2,100
b Reserves and Surplus 2 1,160
a Long term borrowings 3 1,140
a Trade payables 500
b Short term borrowings 4 50
Total 4,950
Assets
a Property, Plant and Equipment 3,550
b Non-current investments 700
2 Current assets
a Trade receivables 450
b Cash and cash equivalents 250
Total 4,950
Notes to accounts
₹ in ‘000
1 Share Capital
21,000, Equity shares of ₹ 100 each fully paid 2,100
(Out of the above, 20,000 shares have been issued for
Capital reserve 160
Total 1,160
3 Long Term Borrowings
10% Debentures 500
Loan from Bank (250+450-60) 640 1,140
4 Short term borrowings
Bank overdraft 50
31. The following are the summarized Balance Sheet of VT Ltd. and MG Ltd. as on 31St March, 2018:
Particulars VT Ltd. (Rs.) MG Ltd. (Rs.)

Equity Shares of Rs. 10 each 12,00,000 6,00,000
10% Pref. Shares of Rs. 100 each 4,00,000 2,00,000
Reserve and Surplus 6,00,000 4,00,000
12% Debentures 4,00,000 3,00,000
Total 31,00,000 18,00,000
Assets
Fixed Assets 14,00,000 5,00,000
Investment 1,60,000 1,60,000
Inventory 4,80,000 6,40,000
Cash at Bank 2,20,000 80,000
Total 31,00,000 18,00,000
Details of Trade receivables and trade payables are as under :

VT Ltd. (Rs.) MG Ltd. (Rs.)
Trade Receivable
Debtors 7,20,000 3,80,000
Bills Receivable 1,20,000 40,000
8,40,000 4,20,000
Trade Payables
5,00,000 3,00,000
- Fixed Assets of both the companies are to be revalued at 15% above book value.
- Inventory in Trade and Debtors are taken over 5% lesser than their book value.
- Both the companies are to pay 10% equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, VT Ltd. will absorb MG Ltd. on the following terms:
(i) VT Ltd. will issue 16 Equity Shares of Rs. 10 each at par against 12 Shares of MG Ltd.
(ii)10% Preference Shareholders of MG Ltd. will be paid at 10% discount by issue of 10%
Preference Shares of Rs. 100 each at par in VT Ltd.
(iii) 12% Debenture holders of MG Ltd. are to be paid at 8% premium by 12% Debentures in VT Ltd.
issued at a discount of 10%.
(iv) Rs. 60,000 is to be paid by VT Ltd. to MG Ltd. for Liquidation expenses.
(v) Sundry Debtors of MG Ltd. includes Rs. 20,000 due from VT Ltd.
(1) Journal entries in the books of VT Ltd.
(2) Statement of consideration payable by VT Ltd.
32. Summarised Balance Sheets as on 31st March, 2012
Liabilities Gee Ltd. Pee Ltd Assets Gee Ltd. Pee Ltd.
Equity share capital 25,00,000 15,00,000 Buildings 12,50,000 7,75,000
(Rs. 10 per share) Plant and 16,25,000 8,50,000
14% Preference machinery
share capital 11,00,000 8,50,000 Furniture and
(Rs. 100 each) fixtures 2,87,500 1,75,000
Investments 3,50,000 2,50,000
General reserve 2,50,000 2,50,000 Stock 6,25,000 4,75,000
Export profit reserve 1,50,000 1,00,000 Debtors 4,00,000 4,60,000
Investment Bills receivables 50,000 55,000
allowance reserve - 50,000
Profit and loss
Account 3,75,000 1,25,000 Cash at bank 3,62,500 2,60,000
15% Debentures
(Rs. 100 each) 2,50,000 1,75,000
Trade creditors 1,50,000 75,000
Bills payables 75,000 1,00,000
Other current
Liabilities 1,00,000 75,000
49,50,000 33,00,000 49,50,000 33,00,000
All the bills receivables of Pee Ltd. were having Gee Ltd.’s acceptances.
Gee Ltd. takes over Pee Ltd. on 1st April, 2012. The purchase consideration is discharged as follows:
(i) Issued 1,65,000 equity shares of Rs. 10 each at par to the equity shareholders of Pee Ltd.
(ii) Issued 15% preference shares of Rs. 100 each to discharge the preference shareholders of Pee Ltd. at
10% premium.
(iii) The debentures of Pee Ltd. will be converted into equivalent number of debentures of Gee Ltd.
(iv) The statutory reserves of Pee Ltd. are to be maintained for two more years.
(v) Expenses of amalgamation amounting to Rs. 10,000 will be borne by Gee Ltd.
Show the opening Journal entries and the opening balance sheet of Gee Ltd. as at 1st April, 2012 after
amalgamation, on the assumption that the amalgamation is in the nature of the merger.
33. The following was the balance sheet of V Ltd. As on 31st March,2012:
Particulars Note No. Amount(Rs. In lakhs)
1) Shareholders Funds
(a) Share capital 1 1150
(b) Reserve and surplus 2 (87)
2) Non-current Liabilities
(a) Long -term Borrowing 3 630
3) Current Liabilities
Trade Payables 170
__________
Total 1,863
Assets
(1) Non-Current Assets
Tangible Assets 4 1,152
(2) Current Assets
Inventories 380
Trades Receivables 256
Cash and Cash equivalents 5 75
Total 1,863
Notes :
1) Share Capital
Authorised : ?
Issued , Subscribed and Paid up : __________
80 lakh Equity Share of Rs. 10 each, fully paid up 800
35 lakh 12% Cumulative Preference Shares of Rs. 10 each, fully paid up 350
Total 1150
2) Reserve & Surplus
Debit Balance of Profit & Loss Account (87)
Total (87)
3) Long-Term Borrowings
10% Secured Cumulative Debentures of

Rs. 100 each, Fully paid up 600
Outstanding Debenture Interest 30
Total 630
4) Tangible Assets
Land & Buildings 445

Plant & Machinery 593
Furniture, Fixtures & Fittings 114
Total 1,152
5) Cash & Cash Equivalents
Balance at Bank 69
Cash in hand 6
Total 75
On 1st April, 2012 P Ltd. took over the entire business of V Ltd. On the following terms:
V Ltd. Equity shareholders would receive 4 fully paid equity shares of P Ltd. of Rs. 10 each issued at
premium of Rs. 2.5 each for every five shares held by them in V Ltd.
Preference shareholders of V Ltd. Would get 35 lakh 13% cumulative Preference Shares of Rs.10 each
Fully paid up in P Ltd., in Lieu of their present holding.
All the debentures of V Ltd. Would be converted into equal no. of 10.5% Secured Cumulative Debentures
of Rs.100 each, fully paid up after the takeover by P Ltd., which would also pay outstanding debenture
interest in cash.
Expenses of amalgamation would be borne by P Ltd. Expenses came to be Rs. 2 Lakh .
P Ltd. discovered that its creditors included Rs.7 lakh due to V Ltd. for goods purchased.
Also P Ltd. stock included goods of the invoice price of Rs. 5 lakh earlier purchased from V Ltd., which
had charged profit @ 20% of the invoice price.
(i) Prepare Realisation A/c in the books of V Ltd.
(ii) Pass journal entries in the books of P Ltd. Assuming it to be an amalgamation in the nature of merger.
34. The following are the Balance Sheets of Yes Ltd. and No Ltd. as at 31st March, 20X1:
Particulars Notes ₹ Yes Ltd ₹ No Ltd
(in crores) (in crores)
A Share capital 1 12 5
B Reserves and Surplus 88 10
A Long term borrowings 2 -- 10
3 Current liabilities 33 15
Total 133 40
Assets
A Property, Plant and Equipment 3 20 6
B Non-current investments 4 13 --
2 Current assets 100 34

Total 133 40
Notes of accounts
Yes Ltd. No Ltd.
1 Share Capital
Authorized share capital 25 5
Issued and subscribed:
Equity shares of ₹ 10 each fully paid 12 5
12 5
Unsecured loan from Yes Ltd. -- 10
-- 10
3 Property, Plant and Equipment
Gross value 70 30
Depreciation (50) (24)
20 6
4 Non-current investments
30 lakhs equity shares of ₹ 10 each 3 --
Long term loan to No Ltd. 10 --
13 --
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one equity share of Yes Ltd.
issued at a premium of ₹ 2 per share for every five equity shares held by them in No Ltd. The necessary
approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the above if the
amalgamation is in the nature of merger.
35. The summarized Balance Sheet of A Ltd. and B Ltd. as at 31 st March, 2022 are as under:
A Ltd. (in ₹) B Ltd. (in ₹)
Equity shares of ₹10 each, fully paid up 30,00,000 24,00,000
Securities Premium Account 4,00,000
Profit and Loss Account 3,60,000 3,20,000
Retirement Gratuity Fund Account 1,00,000
Unsecured Loan (including loan from A Ltd.) 6,00,000 8,20,000

71,80,000 43,80,000
Land and Buildings 28,00,000 21,00,000
Long term advance to B Ltd. 2,20,000
Inventories 10,40,000 7,00,000
Cash and Bank 3,00,000 3,00,000
71,80,000 43,80,000
B Ltd. is to declare and pay ₹ 1 per equity share as dividend, before the following amalgamation takes
place with Z Ltd.
Z Ltd. was incorporated to take over the business of both A Ltd. and B Ltd.
(a) The authorized share capital of Z Ltd. is ₹ 60 lakhs divided into ₹ 6 lakhs equity shares of ₹ 10 each.
(b) As per Registered Valuer the value of equity shares of A Ltd. is ₹ 18 per share and of B Ltd. is ₹ 12
per share respectively and agreed by respective shareholders of the companies.
(c) 10% Debentures of A Ltd. to be issued 12% Debentures of Z Ltd. at par in consideration of their
holdings.
(d) A contingent liability of A Ltd. of ₹ 2,00,000 is to be treated as actual liability.
(e) Liquidation expenses including Registered Valuer fees of A Ltd.₹ 50,000 and B Ltd. ₹ 30,000
respectively to be borne by Z Ltd.
(f) The shareholders of A Ltd. and B Ltd. is to be paid by issuing sufficient number of fully paid up
equity shares of ₹ 10 each at a premium of ₹ 10 per share.
Assuming amalgamation in the nature of purchase, you are required to pass the necessary journal entries
(narrations not required) in the books of Z Ltd. and Prepare Balance Sheet of Z Ltd. immediately after
amalgamation of both the companies.
36. The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:
Particulars X Ltd. (₹) Y Ltd. (₹)
Equity Shares of ₹ 10 each 30,00,000 9,00,000
9% Preference Shares of ₹ 100 each 3,00,000 -
10% Preference Shares of ₹ 100 each - 3,00,000
Retirement Gratuity Fund (long term) 1,50,000 60,000
Total 40,50,000 17,10,000
Assets
Goodwill 1,50,000 75,000
Land & Buildings 9,00,000 3,00,000
Plant & Machinery 15,00,000 4,50,000
Inventories 7,50,000 5,25,000
Cash and Bank 1,50,000 60,000
Total 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of X
Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of
preceding three financial years (2016-17 : ₹ 90,000; 2015-16 : ₹ 78,000 and 2014-15:₹ 72,000). The
profits of 2014 -15 included credit of an insurance claim of ₹ 25,000 (fire occurred in 2013-14 and
loss by fire ₹ 30,000 was booked in Profit and Loss Account of that year). In the year 2015 -16, there
was an embezzlement of cash by an employee amounting to ₹ 10,000.
(iii) Land & Buildings are valued at ₹ 5,00,000 and the Plant & Machinery at ₹ 4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts is to be created @
2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to ₹ 15,000
and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included ₹ 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to
(1) Prepare Realisation A/c in the books of Y Ltd.
(2) Show journal entries in the books of X Ltd.
(3) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.
37. P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both the
companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorised capital
of Rs 10,00,000 divided into 1,00,000 equity shares of Rs 10 each. The Balance Sheet of the companies as
on 31.03.2014 were as under:
P Limited
Balance sheet as at 31.03.2014
Particulars Amount Rs
I. Equity and liabilities
1.Shareholder’s fund
Share capital 1,40,000
Reserve and surplus
Profit and loss A/c 30,000
2.Non current liabilities
8% secured debentures
3.Current Liabilities 1,10,000
Trade Payables
54,000
Total 3,34,000
II. Assets
1.Non current assets
(a)Fixed assets
Building at cost less depreciation 1,00,000
Plant and machinery at cost less depreciation 25,000
2. Current assets
(a)Inventories 1,35,000
(b)Trade Receivables 44,000
(c) Cash at Bank 30,000
Total 3,34,000
Q Limited
Balance sheet as at 31.03.2014
Particulars Amount
Rs.
I. Equity and liabilities
1.Shareholder’s fund
Share capital 2,50,000
Reserve and surplus
General reserve 1,20,000
Profit and loss A/c 35,000
2.Current Liabilities
II. Assets
1.Non current assets
(a)Fixed assets
Building at cost less depreciation 1,90,000
Plant and machinery at cost less Depreciation 80,000
Furniture & Fixtures at cost less Depreciation 25,000
2. Current assets
(a)Inventories 50,000
(b)Trade Receivables 1,42,000
The assets and liabilities of the existing companies are to be transferred at the book value with the
exception of some items detailed below:
(i) Goodwill of P Ltd. was worth Rs 50,000 and of Q Ltd. was worth Rs 1, 50,000.
(ii) Furniture and fixture of Q Ltd. was valued at Rs 35,000.
(iii) The debtors of P Ltd. are realized fully and bank balance of P Ltd.are to be retained by the liquidator
and the sundry creditors are to be paid out of the proceeds thereof.
(iv) The debentures of P Ltd. are to be discharged by issue of 8% debentures of PQ Ltd. at a premium 10%
You are required to;
(i) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of existing
companies.
(ii) Draw up a balance sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation,
Write up journal entries including bank entries for closing the books of P Ltd.
38. P and Q have been carrying on same business independently. Due to competition in the market, they
decided to amalgamate and form a new company called PQ Ltd.
Following is the Balance Sheet of P and Q as at 31.3.2007:
Liabilities P Q Asstes P Q
Rs. Rs. Rs. Rs.
Capital 7,75,000 8,55,000 Plant & Machinery 4,85,000 6,14,000
Current liabilities 6,23,500 5,57,600 Building 7,50,000 6,40,000
Current assets 1,63,500 1,58,600
13,98,500 14,12,600 13,98,500 14,12,600
Following are the additional information:
(i) The authorised capital of the new company will be Rs. 25,00,000 divided into 1,00,000 equity shares
of Rs. 25 each.
(ii) The assets of P and Q are to be revalued as under:
P Q
Building 7,75,000 6,48,000
(iii) The purchase consideration is to be discharged as under:
(a) Issue 24,000 equity shares of Rs. 25 each fully paid up in the proportion of their profitability in the
preceding 2 year.
(b) Profit for the preceding 2 year are given below:
P Q
Rs. Rs.
1st year 2,62,800 2,75,125
2nd year 2,12,200 2,49,875
Total 4,75,000 5,25,000
(c) Issue12% preference shares of Rs. 10 each fully paid up at par to provide income equivalent to 8%
return on capita employed in the business as on 31.3.2007 after revaluation of assets of P and Q
respectively.
(i) Compute the number of equity and preference shares issued to P and Q.
(ii) Purchase consideration.
39. Dark Ltd. and Fair Ltd. were amalgamated on and from 1st April, 2021. A new company Bright Ltd. was
formed to take over the business of the existing companies. The balance Sheets of Dark Ltd. and Fair Ltd.
as at 31st March, 2021 are given below:
(₹ In Lakhs)
Particulars Note No. Dark Ltd. Fair Ltd.
1 Equity and Liabilities
(1) Shareholders’ Funds
(a) Share Capital 1 1,650 1,425
(b) Reserves and Surplus 2 630 495
Long Term Borrowings:
10% Debentures of 100 ₹ each 90 45
Trade Payables 630 285
Total 3,000 2,250
II Assets
(1) Non Current Assets
(a) Property, Plant and Equipment 1,350 975
(b) Non Current Investments 225 75
(2) Current Assets
(b) Trade Receivables 450 525
(c) Cash and Cash Equivalents 450 300
Total 3,000 2,250
Notes to Accounts
Dark Ltd. Fair Ltd.
(₹ in Lakh) (₹ in Lakh)
1 Share Capital
Equity Shares of ₹ 100 each 1, 200 1,125
14% Preference Shares of ₹ 100 each 450 300
1,650 1,425
Revaluation Reserve 225 150
Investment Allowance Reserve 75 75
630 495
Additional Information:
(i) Bright Limited will issue 5 equity shares for each equity share of Dark Limited and 4 equity shares
for each equity share of Fair Limited. The shares are to be issued @ ₹ 35 each having a face value of ₹
10 per share.
(ii) Preference shareholders of the two companies are issued equivalent number of 16% preference
shares of Bright Limited at a price of ₹ 160 per share (face value ₹ 100).
(iii) 10% Debenture holders of Dark Limited and Fair Limited are discharged by Bright Limited, issuing
such number of its 16% Debentures of ₹ 100 each so as to maintain the same amount of interest.
(iv) Investment allowance reserve is to be maintained for 4 more years.
(v) Liquidation expenses are for Dark Limited ₹ 6,00,000 and for Fair Limited ₹ 3,00,000. It is decided
that these expenses would be borne by Bright Limited.
(vi) All the assets and liabilities of Dark Limited and Fair Limited are taken over at book value.
(vii) Authorized equity share capital of Bright Limited is ₹ 15,00,00,000 divided into equity share of ₹ 10
each. After issuing required number of shares to the liquidators of Dark Limited and Fair Limited,
Bright Limited issued balance shares to public. The issue was fully subscribed.
You are required to prepare Balance Sheet of Bright Limited as at 1st April, 2021 after amalgamation has
been carried out on the basis of Amalgamation in the nature of purchase.
40. The following are the summarized Balance Sheets of X Ltd. and Y Ltd :
X Ltd. Y Ltd.
Rs. Rs.
Liabilities :
Share Capital 1,00,000 50,000
Profit & Loss A/c 10,000 –
Creditors 25,000 5,000
Loan X Ltd. — 15,000
1,35,000 70,000
Assets :
Sundry Assets 1,20,000 60,000
Loan Y Ltd. 15,000 –
Profit & Loss A/c — 10,000
1,35,000 70,000
A new company XY Ltd. is formed to acquire the sundry assets and creditors of X Ltd. and Y Ltd. and for
this purpose, the sundry assets of X Ltd. are revalued at Rs. 1,00,000. The debt due to X Ltd. is also to be
discharged in shares of XY Ltd. Show the Ledger Accounts to close the books of X Ltd.
41. The summarized Balance Sheet of M/s. A Ltd. and M/s. B Ltd. as on 31.03.2014 were as under:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.

Rs. Rs. Rs. Rs.
Share Capital : Freehold Property 3,00,000 2,40,000
40,000 Equity Shares Plant &
of Rs. 10 each, Fully Paid 4,00,000 - Machinery 60,000 40,000
30,000 Equity Shares Motor Vehicle 30,000
of Rs. 10 each, Fully Paid - 3,00,000 Trade 20,000
General Reserve 2,40,000 - Receivables 2,00,000 80,000
Profit & Loss Account 50,000 50,000 Inventory 2,30,000 1,80,000
Trade Payables 2,10,000 1,30,000 Cash at Bank 80,000 40,000
6% Debentures - 1,20,000
9,00,000 6,00,000 9,00,000 6,00,000
M/s. A Ltd. and M/s. B Ltd. carry on business of similar nature and they agreed to amalgamate. A new
Company, M/s. AB Ltd. is formed to take over the Assets and Liabilities of M/s. A Ltd. and M/s. B Ltd.
on the following basis:
Assets and Liabilities are to be taken at Book Value, with the following exceptions:
(a) Goodwill of M/s. A Ltd. and M/s. B Ltd. is to be valued at Rs. 1,40,000 and 40,000 respectively.
(b) Plant & Machinery of M/s. A Ltd. are to be valued at Rs. 1, 00,000.
(c) The Debentures of M/s. B Ltd. are to be discharged by the issue of 6% Debentures of M/s. AB Ltd. at
a premium of 5%.
(i) Compute the basis on which shares in M/s. AB Ltd. will be issued to Shareholders of the existing
Companies assuming nominal value of each share of M/s. AB Ltd. is Rs. 10.
(ii) Draw up a Balance Sheet of M/s. AB Ltd. as on 1st April, 2014, when Amalgamation is completed.
(iii) Pass Journal entries in the Books of M/s. AB Ltd. for acquisition of M/s. A Ltd. & M/s. B Ltd.
42. The summarized Balance Sheet of Srishti Ltd as on 31st March 2014 was as follows:
Liabilities Amount (Rs) Assets Amount (Rs)
Equity Shares of Rs 10 fully paid 30,00,000 Good will 5,00,000
Export profit Reserves 8,50,000 Tangible Fixed Assets 30,00,000
General Reserves 50,000 Stock 10,40,000
Profit and loss Account 5,00,000 Debtors 1,80,000
9%Dedentures 5,00,000 Cash &Bank 2,80,000
50,00,000 50,00,000
st
ANU Ltd. agreed to absorb the business of SRISHTI Ltd. with effect from 1 April, 2014.
a. The purchase consideration settled by ANU Ltd. as agreed:
(i) 4,50,000 equity Shares of Rs 10each issued by ANU Ltd. by valuing its share @Rs15per share.
(ii) Cash payment equivalent to Rs 2.50 for every share in SRISHTI Ltd.
b. The issue of such an amount of paid 8% Debentures in ANU Ltd. at 96% as is sufficient to discharge
9% Debentures in SRISHTI Ltd. at a premium of 20%.
c. ANU Ltd. will take over the tangible Fixed Assets at 100%more than the book value, Stock at Rs
7,10,000 and Debtors at their face value subject to a provision of 5%for doubtful Debts.
d. The actual cost of liquidation of SRISHTI Ltd. was Rs 75,000 Liquidation cost of SRISHTI Ltd. is to
be reimbursed by ANU Ltd. to the extent of Rs 50.000.
e. Statutory Reserves are to be maintained for 1 more year.
(i) Close the books of SRISHIT Ltd. by preparing Realisation Account, ANU Ltd. Account, Shareholders
Account and Debenture Account and
(ii) Pass Journal Entries in the books of ANU Ltd. regarding acquisition of business.
43. The following is the Balance Sheet of A Ltd. as at 31st March, 2006:
8,000 equity shares of Rs.100 each 8,00,000 Building 3,40,000
10% debentures 4,00,000 Machinery 6,40,000
Loan from A 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Misc. Expenses 34,000
Total 17,60,000 Total 17,60,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:
(i) B Ltd. would take over all Assets, except bank balance at their book values less 10%. Goodwill is to
be valued at 4 year’s purchase of superprofits, assuming that the normal rate of return be 8% on the
combined amount of share capital and general reserve.
(ii) B Ltd. is to take over creditors at book value.
(iii) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and the balance in fully
paid equity shares of Rs.100 each at Rs.125 per share. The average profit is Rs.1,24,400. The
liquidation expenses amounted to Rs.16,000. B Ltd. sold prior to 31st March, 2006 goods costing
Rs.1,20,000 to A Ltd. for Rs.1,60,000. Rs.1,00,000 worth of goods are still in stock of A Ltd. on 31st
March, 2006. Creditors of A Ltd. include Rs.40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the Balance Sheet of B Ltd.
as at 1st April, 2006 after the takeover.
Solution: Books of A Limited
Realisation Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders 76,000
(Loss)
To Debtors 2,60,000
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 B Ltd. 6,00,000 By 10% debentures 4,00,000
By Loan from A 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 A Account
To Bank 1,60,000 By Balance b/d 1,60,000
1,60,000 1,60,000
Misc. 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
B Ltd. Account
To Realisation A/c 12,10,000 By Bank 6,00,000
By Equity share in B Ltd.(4,880
shares at Rs.125 each) 6,10,000
12,10,000 12,10,000
Equity Shares in B Ltd. Account
To B 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 Misc. Expenses 34,000 By General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000
B Ltd.
Balance Sheet as at 1st April, 2006
Particulars
I. Equity and Liabilities Rs. Rs.
Shareholder fund:-
a) Share Capital:
4880 Equity shares of Rs.100 4,88,000
Each (Shares have been issued for consideration other than cash)
b) Reserve and Surplus
Security Premium 1,22,000
Current Liability
Creditors (3,20,000 - 40,000) 2,80,000
Total 14,90,000
II. Assets
Non-current Assets
Property, Plant and Equipment
Tangible
Building 3,06,000
Machine 5,76,000
Intangible(2,16,000+15,000) 2,31,000
Current Assets
Stock (1,98,000 -15,000) 1,83,000
Debtors (2,60,000 – 40,000-26,000) 1,94,000
Total 14,90,000
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 = 54000 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
Stock 1,98,000
Debtors 2,60,000
Total Assets 15,56,000
Less: Creditors 3,20,000
Provision for bad debts 26,000 3,46,000
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 Stock Rs.

The stock of A Ltd. includes goods worth Rs.1,00,000 which was sold by
B Ltd. on profit. Unrealized profit on this stock will be
40,000/160,000 x 1,00,000 25,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book
value, 10% need to be adjusted from the stock i.e., 10% of Rs.1,00,000. (-10,000)
Amount of unrealized profit 15,000
44. The following draft Balance Sheets are given as on 31st March, 2012:
(Rs. in lakhs) (Rs. in lakhs)
Best Better Best Better
Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.
Share Capital: Fixed Assets 25 15
Shares of Rs. 100, each Investments 5 –
fully paid 20 10 Current Assets 20 5
Reserve and Surplus 10 8
Other Liabilities 20 2
50 20 50 20
The following further information is given —
(a) Better Limited issued shares on 1st April, 2012, in the ratio of one share for every two held, out of
Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the basis of the latter’s
Balance Sheet, the consideration taking the form of allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be Rs. 150 and the shares in Better Ltd. were
valued at Rs. 100 after the issue of the bonus shares. The allotment of shares is to be made on the
basis of these values.
(d) Liabilities of Better Ltd., included Rs. 1 lakh due to Best Ltd., for purchases from it, on which Best
Ltd., made profit of 25% of the cost. The goods of Rs. 50,000 out of the said purchases, remained in
stock on the date of the above Balance Sheet.
Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best
Ltd., and prepare the Balance Sheet as at 1st April, 2012 after the takeover.
Solution:
LEDGER OF BETTER LIMITED
Fixed Assets Account
Rs. Rs.
To Balance b/d 15,00,000 By Realisation A/c (transfer) 15,00,000
Current Assets Account

Rs. Rs.
To Balance b/d 5,00,000 By Realisation A/c (transfer) 5,00,000
Liabilities Account
Rs. Rs.
To Realisation A/c 2,00,000 By Balance b/d 2,00,000
Realisation Account
Rs. Rs.
To Fixed Assets A/c 15,00,000 By Liabilities A/c 2,00,000
” Current Assets A/c 5,00,000 ” Best Limited 15,00,000
(Purchase consideration)
” Shareholders’ A/c 3,00,000
(Loss on realisation)
20,00,000 20,00,000
Share Capital Account

Rs. Rs.
To Sundry shareholders By Balance b/d 10,00,000
A/c - (transfer) 15,00,000 ” Reserves & Surplus A/c
(Bonus issue) 5,00,000
15,00,000 15,00,000
Reserves & Surplus Account

Rs. Rs.
To Share Capital (Bonus issue) 5,00,000 By Balance b/d 8,00,000
” Sundry Shareholders 3,00,000
8,00,000 8,00,000
Best Ltd.
Rs. Rs.
To Realisation A/c - Purchase By Shares in Best Ltd 15,00,000
Consideration 15,00,000
15,00,000 15,00,000
Shares in Best Ltd.
Rs. Rs.
To Best Ltd. 15,00,000 By Sundry Shareholders A/c 15,00,000
Sundry Shareholders Account
Rs. Rs.
To Realisation A/c 3,00,000 By Share Capital A/c 15,00,000
(Loss) ” Reserves & Surplus A/c 3,00,000
” Share in Best Ltd. 15,00,000
18,00,000 18,00,000
Journal of Best Ltd.
Dr. Cr.
2012 Rs. Rs.
Apr. 1 Fixed Assets A/c Dr. 15,00,000
Current Assets A/c Dr. 5,00,000
To Liabilities A/c 2,00,000
To Liquidator of Better Ltd. 15,00,000
To General Reserve A/c 3,00,000
(Assets & Liabilities of Better Ltd. taken over for an
agreed purchase consideration of Rs. 15,00,000 as per agreement dated....)
Liquidator of Better Ltd. Dr. 15,00,000

To Share Capital A/c 10,00,000
To Securities Premium A/c 5,00,000
(Discharge of Purchase consideration by the issue of
equity shares of Rs. 10,00,000 at a premium of Rs. 50 per
share as per agreement)
Trade payables A/c Dr. 1,00,000

To Trade receivables A/c 1,00,000
(Amount due from Better Ltd., and included in its
creditors taken over, cancelled against own Trade receivables)
Profit and Loss A/c Dr. 10,000

To Current Asset (Stock) A/c 10,000
(Unrealized profit on stock included in current assets of
Better Ltd. written off to Reserve Account)
Working Note :
Calculation of Purchase consideration:
Issued Capital of Better Ltd. (after bonus issue) at Rs. 100 per share Rs. 15,00,000
Purchase consideration has been discharged by Best Ltd. by the issue of shares for Rs. 10,00,000 at a premium of Rs.
5,00,000. This gives the value of Rs. 150 per share.
Balance Sheet of Best Ltd. (After absorption)

Particulars Note Rs.
Equity and Liabilitie
1. Shareholders' funds
2. Current liabilities 21,00,000
Total 68,90,000
Assets
1. Non-current assets
a Property, Plant and Equipment 3 40,00,000
b Non-current investments 5,00,000
2. Current assets 23,90,000
Total 68,90,000
Notes to accounts
Rs.
1 Share Capital
Issued & Subscribed
30,000 shares of Rs. 100
(Of the above 10,000 shares have been issued for consideration other than cash) 30,00,000
Total 30,00,000
Securities Premium 5,00,000
Other reserves and surplus (10,00,000 – 10,000) 9,90,000
Total 17,90,000
Fixed Assets 25,00,000
Acquired during the year 15,00,000
Total 40,00,000
45. On 1st April, 2018, Tina Ltd. take over the business of Rina Ltd. and discharged purchase consideration as
follows:
(a) Issued 50,000 fully paid Equity shares of ₹ 10 each at a premium of ₹ 5 per share to the equity
shareholders of Rina Ltd.
(b) Cash payment of ₹ 50,000 was made to equity shareholders of Rina Ltd.
(c) Issued 2,000 fully paid 12% Preference shares of ₹ 100 each at par to discharge the preference
shareholders of Rina Ltd.
(d) Debentures of Rina Ltd. (₹ 1,20,000) will be converted into equal number and amount of 10%
debentures of Tina Ltd.
Calculate the amount of Purchase consideration as per AS-14 and pass Journal Entry relating to discharge
of purchase consideration in the books of Tina Ltd.
46. P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized balance
sheets of both the companies on the date of amalgamation stood as below:
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd
Rs Rs Rs Rs
Equity Shares 8,20,000 3,20,000 Land & Building 4,50,000 3,40,000
(Rs 100 each) Furniture & Fittings 1,00,000 50,000
9% Pref. Shares 3,80,000 2,80,000 Plant & Machinery 6,20,000 4,50,000
(Rs 100 each) Trade receivables 3,25,000 1,50,000
8% Debentures 2,00,000 1,00,000 Inventory 2,33,000 1,05,000
General Reserve 1,50,000 50,000 Cash at bank 2,08,000 1,75,000
Profit & Loss A/c 3,52,000 2,05,000 Cash in hand 54,000 20,000
Unsecured Loan - 1,75,000
Trade payables 88,000 1,60,000
19,90,000 12,90,000 19,90,000 12,90,000
PQ Ltd. took over the assets and liabilities of both the companies at book value after creating provision @
5% on inventory and trade receivables respectively and depreciating Furniture & Fittings by @ 10%, Plant
and Machinery by @ 10%. The trade receivables of P Ltd. include Rs 25,000 due from Q Ltd.
PQ Ltd. will issue:
(i) 5 Preference shares of Rs 20 each @ Rs 18 paid up at a premium of Rs 4 per share for each pref. share
held in both the companies.
(i) 6 Equity shares of Rs 20 each @ Rs 18 paid up a premium of Rs 4 per share for each equity share held
in both the companies.
(ii) 6% Debentures to discharge the 8% debentures of both the companies.
(iii) 20,000 new equity shares of Rs 20 each for cash @ Rs18 paid up at a premium of Rs 4 per share.
PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per the
intrinsic value of the shares of both the companies.
You are required to prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their books.
47. Moon Limited is absorbed by Sun Limited; the consideration, being the takeover of liabilities, the
payment of cost of absorption not exceeding ₹ 10,000 (actual cost ₹ 9000); the payment of 9% Debentures
of ₹ 50,000 at a premium of 20% through 8% debentures issued at a premium of 25% of face value; the
payment of ₹ 18 per share in cash; allotment of two 11% preference shares of ₹ 10/- each and one equity
share of ₹ 10/- each at a premium of 30% fully paid for every three shares in Moon Limited respectively.
The number of shares of the vendor company is 1,50,000 of ₹ 10/- each fully paid. Calculate purchase
consideration as per AS-14.
48. Astha Ltd. is absorbed by Nistha Ltd.; the consideration being the takeover of liabilities, the payment of
cost of absorption not exceeding ₹ 10,000 (actual cost ₹ 9,000); the payment of the 9% debentures of ₹
50,000 at a premium of 20% through 8% debentures issued at a premium of 25% of face value and the
payment of ₹15 per share in cash and allotment of three 11% preference shares of ₹ 10 each and four
equity shares of ₹10 each at a premium of 20% fully paid for every five shares in Astha Ltd.
The number of shares of the vendor company are 1,50,000 of ₹ 10 each fully paid. Calculate purchase
consideration as per AS 14.
49. Black Limited and White Limited have been carrying their business independently from 01/04/2018.
Because of synergy in business, they amalgamated on and from 1st April, 2020 and formed a new
company Grey Limited to take over the business of Black Limited and White Limited. The summarized
Balance Sheets of Black Limited and White Limited as on 31st March, 2020 are as follows :
Liabilities Black Ltd. (₹) White Ltd. (₹)
Share Capital:
Equity share of ₹ 10 each 15,00,000 14,50,000
10% Preference shares of ₹ 100 each 2,00,000 1,40,000
Revaluation Reserve 1,00,000 2,00,000
Profit & Loss Account:
Opening balance 1,50,000 1,20,000
Profit for the Year 2,00,000 1,30,000
15% Debentures of ₹ 100 each (Secured) 4,00,000 5,00,000
Trade payables 3,10,000 1,20,000
30,25,000 27,45,000
Assets
Investments 1,00,000 60,000
Inventory 2,20,000 1,50,000
Cash at Bank 1,60,000 1,30,000
30,25,000 27,45,000
(i) The authorized capital of the new company will be ₹ 50,00,000 divided into 2,00,000 equity shares of
₹ 25 each.
(ii) Trade payables of Black Limited includes ₹ 15,000 due to White Limited and trade receivables of
White Limited shows ₹ 15,000 receivable from Black Limited.
(iii) Land & Buildings and inventory of Black Limited and White Limited are to be revalued as under:
Black Ltd. (₹) White Ltd. (₹)
Inventory 1,80,000 1,25,000
(iv) The purchase consideration is to be discharged as under:
(a) Issue 1,80,000 equity shares of ₹ 25 each fully paid up in proportion of their profitability in the
preceding two financial years.
(b) Preference shareholders of two companies are issued equivalent number of 12% preference shares
of Grey Limited at a price of ₹ 120 per share (face value ₹ 100).
(c) 15% Debenture holders of Black Limited and White Limited are discharged by Grey Limited
issuing such number of its 18% Debentures of ₹ 100 each so as to maintain the same amount of
interest.
You are required to prepare the Balance Sheet of Grey Limited after amalgamation. The amalgamation
took place in the nature of purchase.
50. The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2019:
14,000 Equity shares of Rs. 100 Sundry assets 18,00,000
each, fully paid up 14,00,000
18,00,000 18,00,000
B Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under Net Assets
method on the basis: Market value of 75% of the sundry assets is estimated to be 12% more than the
book value and that of the remaining 25% at 8% less than the book value. The liabilities are taken over at
book values. There is an unrecorded liability of Rs. 25,000.
51. Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form a new
company named Super Fast Express Ltd. The balance sheets of both the companies were as under:
Particulars Notes Fast
Super Express
Express Ltd. Ltd.
₹ ₹
A Share capital 1 20,00,000 10,00,000
B Reserves and Surplus 2 1,00,000 2,60,000
A Long term provisions 3 1,00,000 --
A Trade Payables 60,000 40,000
Total 22,60,000 13,00,000
Assets
A Property, Plant and 4 14,00,000 11,00,000
Equipment
B Intangible assets 5 -- 1,00,000
2 Current assets
A Inventories 3,00,000 40,000
B Trade receivables 2,40,000 40,000
C Cash and Cash equivalents 6 3,20,000 20,000
Total 22,60,000 13,00,000
Notes to accounts
Super Express Fast Express
Ltd. ₹ Ltd.₹
1 Share Capital

Insurance reserve 1,00,000 --
Employee profit sharing reserve -- 60,000
Reserve account -- 1,00,000
Surplus -- 1,00,000
1,00,000 2,60,000
3 Long term provisions
Provident fund 1,00,000 --
Total 1,00,000 --
14,00,000 11,00,000
5 Intangible assets
Goodwill -- 1,00,000
-- 1,00,000
6. Cash and Cash Equivalents
Cash at Bank 2,20,000 10,000
Cash in hand 1,00,000 10,000
3,20,000 20,000
The assets and liabilities of both the companies were taken over by the new company at their book values.
The companies were allotted equity shares of ₹ 100 each in lieu of purchase consideration amounting to ₹
30,000 (20,000 for Super- Fast Express Ltd and 10,000 for Fast Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd. considering pooling method.
52. Distinguish between Amalgamation, Absorption and External Reconstruction of Company.

Solution:
Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more In this case an In this case, a newly
companies are existing company formed company
Wound up and a Takes over the Takes over the
new company is business of one or business of an
formed to take over More existing existing company.
their business. companies.
Minimum At least three At least two Only two
number of companies are companies are companies are
Companies involved. involved. involved.
involved
Number of Only one resultant No new resultant Only one resultant
New company is formed. company is formed. company is formed.
resultant Two companies are Under this case a
companies wound up to form a Newly formed

Single resultant company takes over
company. the business of an
existing company.
Objective Amalgamation is Absorption is done External
done to cut to cut competition & reconstruction is
competition & reap reap the economies done to reorganize
the economies in in large scale. The financial
large scale. structure of the
company.
Example A Ltd. and B Ltd. A Ltd. takes over the B Ltd. is formed to
amalgamate to business of another Take over the
form C Ltd. existing company B business of an
Ltd. existing company A
Ltd.
MCQs(ICAI Study Material)
1. In case of amalgamation, the entry for elimination of unrealized profit or loss on stock is made
(a)By the vendor company
(b)By the purchasing company
(c)By the third party
2. Under the ‘pooling of interests’ method, the difference between the purchase consideration and share
capital of the transferee company should be adjusted to
(a)General reserve.
(b)Amalgamation adjustment account.
(c)Goodwill or capital reserve.
3. At the time of amalgamation, purchase consideration does not include

(a)The sum which the transferee company will directly pay to the creditors of the transferor company
(b)Payments made in the form of assets by the transferee company to the shareholders of the transferor
company
(c)Preference shares issued by the transferee company to the preference shareholders of the transferor
company
4. As per AS 14, purchase consideration is the amount agreed payable to

(a)Shareholders
(b)Shareholders, debenture holders and creditors
(c)Shareholders and debenture holders
5. If expenses of liquidation of the vendor company are paid by the purchasing company then, in purchasing
company’s book, the account debited is
(a)Goodwill account. (b)Liquidation expense account. (c)Vendor company account
6. Amalgamation adjustment reserve is opened in the books of the amalgamating company to incorporate
(a)Assets of the amalgamating company
(b)Non Statutory reserves of the amalgamating company
(c)Statutory reserves of the amalgamating company
7. Amalgamation Adjustment Reserve is presented in the financial statements of the transferee company as
(a)Other current asset.
(b)Separate line item with a negative sign under the head ‘Reserves and Surplus’.
(c)Other non-current assets.
8. A company into which the vendor company is merged is called

(a) Transferee company. (b) Transferor company. (c) Selling company.
9. If the purchase consideration is more than net assets (at agreed values) of the transferor company, difference
shall be recorded as in the books of the transferee company.
(a) Goodwill. (b) Capital Reserve. (c) Profit/loss.
Answers: [1.(b), 2.(a), 3. (a), 4.(a), 5. (a), 6. (c); 7. (b); 8. (a) ; 9. (a)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
SUMMARY NOTES
SOLUTIONS
Q31. (1) Journal Entries in the Books of VT Ltd.

Dr. Cr.
(i) Fixed Assets Dr. 2,10,000
To Revaluation Reserve 2,10,000
(Being Revaluation of fixed assets at 15% above book value)
(ii) Reserve and Surplus Dr. 1,20,000
To Equity Dividend 1,20,000
(Being Declaration of equity dividend @ 10%)
(iii) Equity Dividend Dr. 1,20,000
To Bank Account 1,20,000
(Being Payment of equity dividend)
(iv) Business Purchase Account Dr. 9,80,000
To Liquidator of MG Ltd. 9,80,000
(Being Consideration payable for the business taken over from MG Ltd.)
(v) Fixed Assets (115% of Rs. 5,00,000) Dr. 5,75,000

Inventory (95% of Rs. 6,40,000) Dr. 6,08,000
Debtors Dr. 3,80,000
Bills Receivable Dr. 40,000
Investment Dr. 1,60,000
Cash at Bank Dr. 20,000
(Rs. 80,000 –Rs. 60,000 dividend paid)
To Provision for Bad Debts (5% of Rs. 3,80,000) 19,000
To Sundry Creditors 2,50,000
To Bills Payable 50,000
To Debentures holder of MG Ltd. 3,24,000
To Business Purchase Account 9,80,000
To Capital Reserve (Balancing figure) 1,60,000
(Being Incorporation of various assets and liabilities taken over from MG Ltd.)
(vi) Liquidator of MG Ltd. Dr. 9,80,000

To Equity Share Capital 8,00,000
To 10% Preference Share Capital 1,80,000
(Being Discharge of consideration for MG Ltd.’s business)
(vii) Debentures holder of MG Ltd. (Rs. 3,00,000 × 108%) Dr. 3,24,000
Discount on Issue of Debentures Dr. 36,000
To 12% Debentures (3,24,000/90%) 3,60,000
(Being allotment of 12% Debentures to debenture holders
of MG Ltd. at a discount of 10%)
(viii) Sundry Creditors A/c Dr. 20,000
To Sundry Debtors A/c 20,000
(Being Cancellation of mutual owing)
(ix) Capital Reserve Dr. 60,000
To Bank 60,000
(Being liquidation expenses reimbursed to MG Ltd.)
(2) Statement of Consideration payable by VT Ltd.
ESH: Shares to be allotted (60,000/12) X 16 = 80,000 shares of VT Ltd.
Issued 80,000 shares of Rs. 10 each i.e. Rs. 8,00,000
PSH:
For 10% preference shares, to be paid at 10% discount
Rs. 2,00,000 X 90 Rs. 1,80,000
100
Consideration amount [(i) + (ii)] Rs. 9,80,000
Q32. In the books of Gee Ltd.

Journal Entries
Particulars Debit Rs. Credit Rs.
Business purchase A/c (W.N.1) Dr. 25,85,000
To Liquidator of Pee Ltd. 25,85,000
(Being business of Pee Ltd. taken over)
Building A/c Dr. 7,75,000
Plant and machinery A/c Dr. 8,50,000
Furniture and fixtures A/c Dr. 1,75,000
Investments A/c Dr. 2,50,000
Stock A/c Dr. 4,75,000
Debtors A/c Dr. 4,60,000
Bills receivables A/c Dr. 55,000
Cash at bank A/c Dr. 2,60,000
To General reserve A/c (W.N.2) 15,000
(2,50,000-2,35,000)
To Export profit reserve A/c 1,00,000
To Investment allowance reserve A/c 50,000
To Profit and loss A/c 1,25,000
To 15% Debentures A/c (Rs. 100 each) 1,75,000
To Trade creditors A/c 75,000
To Bills payables A/c 1,00,000
To Other current liabilities A/c 75,000
To Business purchase A/c 25,85,000
(Being assets and liabilities taken over)
Liquidator of Pee Ltd. Dr. 25,85,000
To Equity share capital A/c 16,50,000
To 15% Preference share capital A/c 9,35,000
(Being purchase consideration discharged)
General Reserve A/c Dr. 10,000
To Cash at bank 10,000
(Being expenses of amalgamation paid)
15% Debentures in Pee Ltd. A/c Dr. 1,75,000
(Being debentures in Pee Ltd. discharged by
issuing own 15% debentures)
Bills payables A/c Dr. 55,000
To Bill receivables A/c 55,000
(Cancellation of mutual owing on account of bills of exchange)
Opening Balance Sheet of Gee Ltd. (after absorption) as on 1st April, 2012
1. Shareholders' funds
2. Non-current liabilities
a Long-term borrowings 3 4,25,000
3. Current liabilities
a Trade Payables 4 3,45,000
b Other current liabilities 5 1,75,000
Total 81,85,000
Assets
1. Non-current assets
a Property, Plant and
Equipment 6 49,62,500
b Investments 7 6,00,000
2. Current assets
a Inventories 8 11,00,000
b Trade receivables 9 9,10,000
c Cash and cash equivalents 10 6,12,500
Total 81,85,000
Notes to accounts
Rs.
1. Share Capital
4,15,000 Equity shares of Rs. 10 each
(Out of above, 1,65,000 shares were issued for consideration other than cash) 41,50,000
9,350 15% Preference shares of Rs. 100 each 9,35,000
(Out of above, 9,350 shares were issued for consideration other than cash)
11,000 14% Preference Shares of Rs. 100 each 11,00,000
Total 61,85,000
General Reserve
Opening balance 2,50,000
Add: Adjustment under scheme of amalgamation 15,000
Less: Amalgamation expense paid (10,000) 2,55,000
Export profit reserve
Add: Adjustment under scheme of amalgamation 1,00,000 2,50,000
Investment allowance reserve 50,000
Profit and loss account
Total 10,55,000
3 Long-term borrowings
Secured 2,50,000
15% Debentures 1,75,000 4,25,000
Add: Adjustment under scheme of amalgamation 4,25,000
Total
4 Trade payables
Creditors: Opening balance 1,50,000
Add: Adjustment under scheme of amalgamation 75,000 2,25,000
Bills Payables: Opening balance 75,000 75,000
Add: Adjustment under scheme of amalgamation 1,00,000
Less: Cancellation of mutual owning upon
amalgamation (55,000) 1,20,000
3,45,000
5 Other current liabilities
Add: Adjustment under scheme of amalgamation 75,0000 1,75,000
Buildings- Opening balance 12,50,000
Plant and machinery- Opening balance 16,25,000
Furniture and fixtures- Opening balance 2,87,500
Total 49,62,500
7 Investments 3,50,000
Add: Adjustment under scheme of amalgamation
8 Inventories 6,25,000
Add: Adjustment under scheme of amalgamation
9 Trade receivables 4,00,000
Debtors: Opening balance 4,60,000 8,60,000
Add: Adjustment under scheme of amalgamation 50,000
Bills Payables: Opening balance 55,000
Add: Adjustment under scheme of amalgamation (55,000) 50,000
Less: Cancellation of mutual owning upon amalgamation 9,10,000
Total
10 Cash and cash equivalents 3,62,000

Add: Adjustment under scheme of amalgamation (10,000) 6,12,500
Less: Amalgamation expense paid
Working Notes:
1. Calculation of purchase consideration
Rs.
Equity shareholders of Pee Ltd. (1,65,000 x Rs.10) 16,50,000
Preference shareholders of Pee Ltd. (8,50,000 x 110%) 9,35,000
Purchase consideration would 25,85,000
2. Amount to be adjusted from general reserve

The difference between the amount recorded as share capital issued and the amount of share capital of Transferor
Company should be adjusted in General Reserve.
Thus, General reserve will be adjusted as follows:
Rs.
Purchase consideration 25,85,000
Less: Share capital issue (Rs.15,00,000 + Rs.8,50,000) (23,50,000)
Amount to be adjusted from general reserve 2,35,000
Q33.
Books of V Ltd.
Realisation Account
Particulars Amount Particulars Amount
To Land & building 445 By 10% debentures 600
To Plant & Machinery 593 By Outstanding debenture int. 30
To furnitures, fixtures & 114 By Trade payables 170
Fittings
To Inventory 380 By P Ltd. (P.C) 1,150
To Trade Receivable 256
To Bank A/c 69
To cash A/c 6
To ESH A/c 87
(Realisation Loss)
1,950 1,950
Books of P Ltd.
Journal Entries (Amount in Rs. lakhs)
S.N. Particulars Debit Credit

1. Business Merger A/c Dr. 1150
To Liquidator of V Ltd.(WN1) 1150
( Being Business Merged)
2. Land & building A/c Dr. 445
Plant & Machinery A/c Dr. 593
Furniture, fixture and Fitting A/c Dr. 114
Inventory A/c Dr. 380
Trade Receivable A/c Dr. 256
Bank A/c Dr. 69
cash A/c Dr. 6
Profit & Loss a/c/General Reserve A/c (b/f) Dr. 87
To Debenture holder of V Ltd. 600
To outstanding debentures interest A/c 30
To Trade payables A/c 170
To Business Merger A/c 1,150
( Being Sundry assets & Liabilities transferred)
3. Liquidator of V Ltd. A/c Dr. 1,150
To Equity Share capital A/c (64*10) 640
To 13% Cumulative Preference share A/c 350
To Security Premium A/c (64*2.5) 160
(Being Payment made to Liquidator of V Ltd.)
4. Creditor A/c Dr. 7
To Debtor A/c 7
(Being Common debt cancelled)
5. Debenture holder of V Ltd. A/c Dr. 600
To 10.5% Debenture A/c 600
(Being 10.5% debenture issued to debenture holder of V Ltd.)
6. Outstanding Debenture interest A/c Dr. 30
To Cash A/c 30
(Being O/s Debenture interest Paid)
7. Profit & Loss A/c Dr. 1
To Stock A/c (WN 2) 1
(Being Reserve eliminated)
8. Profit & Loss a/c/General Reserve A/c Dr. 2
To Bank Account 2
(Being amalgamation expenses Paid)
Working Notes
(1) Calculation of Purchase consideration.
Payment To Payment In Workings Amount(In Rs. lakhs)
Equity Shareholders Equity Shares ( x80)12.50 800
Preference Shareholders 13% Cumulative Pref. shares 35x10 350
Total 1,150
(2) Calculation of Reserve .
Stock Sold to P Ltd. Of Rs. 5 lakhs on 20% invoice Price =Rs. 5,00,000 x 20% = Rs. 1,00,000
Q34. Journal Entries in the books of No Ltd.

(Rupees in crores)
Dr . Cr.
Realization Account Dr. 64.00
To Property, plant and equipment Account 30.00
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. transferred to
Realization Account)
Provision for depreciation Account Dr. 24.00
Current Liabilities Account Dr. 15.00
Unsecured Loan from Yes Ltd. Account Dr. 10.00
To Realization Account 49.00
(Being the transfer of liabilities and provision to
Realization Account)
Yes Ltd. Dr. 1.2
(Being the amount of consideration due from Yes Ltd. credited
to Realization Account)
Equity Shareholders Account Dr. 13.80
(Being the loss on Realization transferred to equity share-
holders account)
Equity Share Capital Account Dr. 5.00
Reserves and Surplus Account Dr. 10.00
To Equity Shareholders Account 15.00
(Being the amount of share capital, reserves and surplus
credited to equity shareholders account)
Equity shares of Yes Ltd. Dr. 1.20
To Yes Ltd. 1.20
(Being the receipt of 10 lakhs equity shares of
₹ 10 each at ₹ 12 per share for allotment to shareholders)
Equity shareholders Account Dr. 1.20
To Equity shares of Yes Ltd. 1.20
(Being the distribution of equity shares received from Yes
Ltd. to shareholders)
Business Purchase Account Dr. 1.2
To Liquidator of No Ltd. Account 1.2
(Being the amount of purchase consideration agreed under
approved scheme of amalgamation- W.N. 1)
Property, plant and equipment Dr. 6.00
Current Assets Dr. 34.00
To Current Liabilities 15.00
To Unsecured Loan (from Yes Ltd.) 10.00
To Business Purchase Account 1.20
To Reserve & Surplus A/c 10.00
To General Reserve A/c 3.80
(Being the assets and liabilities taken over and the surplus transferred to Profit and loss account)
Liquidator of No Ltd. Dr. 1.20
To Equity Share Capital Account 1.00
To Securities Premium Account 0.20
(Being the allotment to shareholders of No Ltd.
10 lakhs equity shares of ₹ 10 each at a premium of ₹ 2 per share)
Unsecured Loan (from Yes Ltd.) Dr. 10.00
To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given to No Ltd.)
Working Note:
Purchase Consideration ₹ in crores
(50lakhs / 5) × ₹ 12 i.e., 10 lakhs equity shares at ₹ 12 per share 1.20
Number of equity shares of ₹ 10 each to be issued [1.20 crores / 12] = 10 lakhs.
[
Q35. Journal Entries in the books of Z Ltd.
₹ ₹
Business Purchase A/c Dr. 54,00,000
54,00,000
To Liquidator of A Ltd. A/c
Land & Building A/c Dr. 28,00,000
Plant & Machinery A/c Dr. 20,00,000
Long term advance to B Ltd. A/c Dr. 2,20,000
Inventories A/c Dr. 10,40,000
Trade Receivables A/c Dr. 8,20,000
Cash and Bank A/c Dr. 3,00,000
Goodwill A/c Dr. 12,20,000
To Retirement Gratuity Fund A/c 1,00,000
To Unsecured Loan A/c 6,00,000
To Trade Payables A/c 1,00,000
To Other liabilities A/c 2,00,000
To Business Purchase A/c 54,00,000
Liquidator of A Ltd. A/c Dr. 54,00,000
To Liquidator of B Ltd. A/c 28,80,000
Land and Building A/c Dr. 21,00,000
Plant & Machinery A/c Dr. 7,60,000
Inventories A/c Dr. 7,00,000

Trade Receivables A/c Dr. 5,20,000
Cash and Bank (less dividend) A/c Dr. 60,000
To Unsecured Loan A/c 8,20,000
To Trade Payables A/c 3,40,000
To Capital Reserve A/c 1,00,000
Liquidators of B Ltd. A/c Dr. 28,80,000
Unsecured Loans A/c Dr. 2,20,000
To Long term Advance to B Ltd. A/c 2,20,000
*Capital Reserve A/c Dr. 1,00,000
To Cash and Bank A/c (Liquidation expenses) 80,000
To Goodwill A/c 20,000
Note:
1. The journal entries for A Ltd. and B Ltd. have been given separately in the above solution.
Alternatively, the entries may be given as combined for both companies.
2. *Alternatively, following set of entries may be given in place of the last entry given in the above
solution.
Goodwill A/c Dr. 50,000
To Cash & Bank A/c (Liquidation expenses of A Ltd.) 50,000
Capital Reserve A/c Dr. 30,000
To Cash and Bank A/c (Liquidation expenses of B Ltd.) 30,000
Capital Reserve A/c Dr. 70,000
To Goodwill A/c 70,000
Balance Sheet of Z Ltd. As at 31st March, 2022

Particulars Note No. (₹)
(b) Reserves and Surplus 2 41,40,000
(b) Long term provisions 4 1,00,000
(a) Short-term borrowings1 5 12,00,000
(b) Trade payables 6 4,40,000
(a) Other liability 2,00,000
Total 1,22,20,000
II. Assets
(a) i. Property, plant and equipment 7 76,60,000
ii. Intangible assets 12,00,000
(Goodwill 12,20,000-20,000)
(2) Current assets
(a) Inventories 8 17,40,000
(b) Trade receivables 9 13,40,000
(c) Cash and cash equivalents 10 2,80,000
Total 1,22,20,000
Notes to Accounts
(₹) (₹)
1. Share Capital
Authorized Share Capital
6,00,000 Equity shares of ₹ 10 each 60,00,000
Issued: 4,14,000 Equity shares of ₹ 10 each 41,40,000
(all these shares were Issued for considerationother than
cash)
Securities Premium Account(4,14,000
41,40,000
shares × ₹ 10)
4 Long term Provisions
Retirement gratuity fund 1,00,000
5. Short-term borrowings
Unsecured loans
A Ltd. 6,00,000
B Ltd. 8,20,000 14,20,000
Less: Mutual (2,20,000) 12,00,000
6. Trade payables
A Ltd. 1,00,000
B Ltd. 3,40,000 4,40,000
7. Property, plant & equipment
Land and Building
A Ltd. 28,00,000
B Ltd. 21,00,000 49,00,000
Plant and Machinery
A Ltd. 20,00,000
B Ltd. 7,60,000 27,60,000

76,60,000
8. Inventories
A Ltd. 10,40,000
B Ltd. 7,00,000 17,40,000
9 Trade receivables
A Ltd. 8,20,000
B Ltd. 5,20,000 13,40,000
10 Cash & cash equivalents
A Ltd. 3,00,000
B Ltd. [3,00,000-2,40,000(dividend)] 60,000
3,60,000
Less: Liquidation Expenses (80,000) 2,80,000
Working Note: Calculation of amount of Purchase Consideration

A Ltd. B Ltd.
Existing shares 3,00,000 2,40,000
Agreed value per share ₹ 18 ₹ 12
Purchase consideration 54,00,000 28,80,000
No. of shares to be issued of ₹ 20 each (including ₹ 10 premium) 2,70,000 1,44,000
Face value of shares at ₹ 10 27,00,000 14,40,000
Premium of shares at ₹ 10 27,00,000 14,40,000
Q36. In the Books of Y Ltd.

Realisation Account
Rs. Rs.
To Sundry Assets: By Retirement 60,000
Gratuity Fund
Goodwill 75,000
Land & Building 3,00,000 By Trade payables 2,40,000
Plant & Machinery 4,50,000 By X Ltd. 15,90,000
(Purchase
Inventory 5,25,000 Consideration
)
Bank 60,000 17,10,000
To Preference 30,000
Shareholders
(Premium on
Redemption)
To Equity
Shareholders
(Profit on
Realisation) 1,50,000 ____ _
18,90,000 18,90,000
In the Books of X Ltd.

Journal Entries
Dr. Cr.
Rs. Rs.
To Liquidators of Y Ltd. Account 15,90,000
(Being business of Y Ltd. taken over)
Goodwill Account Dr. 1,50,000
Land & Building Account Dr. 5,00,000
Plant & Machinery Account Dr. 4,00,000
Inventory Account Dr. 4,72,500
Trade receivables Account Dr. 3,00,000
Bank Account Dr. 60,000
Unrecorded assets Account Dr. 15,000
To Retirement Gratuity Fund Account 60,000
To Trade payables Account 2,40,000
To Provision for Doubtful Debts Account 7,500
(Being Assets and Liabilities taken over as per
agreed valuation).
Liquidators of Y Ltd. A/c Dr. 15,90,000
To 9% Preference Share Capital A/c 3,30,000
To Securities Premium A/c 60,000
(Being Purchase Consideration satisfied as above)
Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018

s
A Share capital 1 48,30,000
B Reserves and Surplus 2 2,70,000
A Long-term provisions 3 2,10,000
A Trade Payables 4 6,10,000
B Short term provision 5 7,500
Total 59,27,500
Assets
Property, Plant and Equipment 6 33,00,000
Intangible assets 7 3,00,000
2 Current assets
A Inventories 8 12,22,500
B Trade receivables 9 8,80,000
C Other current Assets 10 15,000
D Cash and cash equivalents 11 2,10,000
Total 59,27,500
Notes to accounts
Rs.
1 Share Capital
4,20,000 Equity Shares of Rs. 10 each fully paid (Out 42,00,000
of above 1,20,000 Equity Shares were issued at 5%
premium in consideration other than for cash)
6,300 9% Preference Shares of Rs. 100 each (Out of 6,30,000
above 3,300 Preference Shares were issued in
consideration other than for cash)
Total 48,30,000
Total 2,70,000
3 Long-term provisions
Retirement Gratuity fund 2,10,000
4 Trade payables
(3,90,000 + 2,40,000 - 20,000*) 6,10,000
* Mutual Owings eliminated.
5 Short term Provisions
Provision for Doubtful Debts 7,500
Plant & 19,00,000
Machinery
Total 33,00,000
7 Intangible assets
Goodwill (1,50,000 +1,50,000) 3,00,000
8 Inventories (7,50,000 + 4,72,500) 12,22,500
9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000
10 Other current Assets 15,000
11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000
Working Notes:
1. Computation of goodwill Rs.
Profit of 2016-17 90,000
Profit of 2015-16 adjusted (Rs. 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (Rs. 72,000 – 25,000) 47,000
2,25,000
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs. 75,000 x 2 = Rs. 1,50,000
2.
Purchase Consideration: Rs.
Goodwill 1,50,000
Inventory 4,72,500
Unrecorded assets 15,000
Cash at Bank 60,000
18,97,500
Less: Liabilities:
Retirement Gratuity 60,000
Provision for doubtful debts 7,500 (3,07,500)
Net Assets/ Purchase Consideration 15,90,000
To be satisfied as under:
10% Preference Shareholders of Y Ltd. 3,00,000
Add: 10% Premium 30,000
9% Preference Shares of X Ltd. 3,30,000
Equity Shareholders of Y Ltd. to be satisfied by issue of 1,20,000 equity
Shares of X Ltd. at 5% Premium 12,60,000
Total 15,90,000
Q37. Calculation of Purchase Consideration

P Ltd. (Rs.) Q Ltd. (Rs.)
Assets taken over:
Goodwill 50,000 1,50,000
Building 1,00,000 1,90,000
Plant & Machinery 25,000 80,000
Furniture & Fixtures - 35,000
Inventories 1,35,000 50,000
Trade Receivables - 1,42,000
Cash at Bank - 58,000
3,10,000 7,05,000
Less :Liabilities taken over
8% Debentures (1,21,000) -
Trade Payables - (1,40,000)
To be satisfied by issue of shares of PQ Ltd. of Rs. 10 each at par 18,900 56,500
PQ Limited
Balance Sheet as at 1st April, 2014
Particulars Note No. Amount (Rs.)
(1) Shareholder’s Funds
(b) Reserve & Surplus 2 11,000
(a) Long term borrowings 3 1,10,000
(a) Trade Payables 1,40,000
Total 10,15,000
II. Assets
(b) Intangible 5 2,00,000
(2) Current Assets
(a) Inventories 1,85,000
Total 10,15,000
Notes to Accounts:
Rs.
1 Share Capital
Authorized
1,00,000 shares of Rs. 10 each 10,00,000
Issued, Subscribed and Paid up
75,400 shares of Rs. 10 each 7,54,000
(All the above shares are allotted as fully paid up pursuant to scheme of
amalgamation without payments being received in cash)
2 Reserve & Surplus
Securities Premium Account 11,000
3 Long term borrowings -
8 % Debentures 1,10,000
Building
P Ltd. 1,00,000
Q Ltd. 1,90,000 2,90,000
Plant & Machinery
P Ltd. 25,000
Q Ltd. 80,000 1,05,000
Furniture & Fixture
Q Ltd. 35,000
5 Intangible Asset 4,30,000
Goodwill
P Ltd. 50,000
Q Ltd. 1,50,000 2,00,000
Working Note: Computation of Securities Premium
Debentures issued by PQ Ltd. to the existing debenture holders of P Ltd. at 10% premium.
Securities Premium = Rs. 1,10,000 x 10% = Rs. 11,000.
In the books of P Ltd. (Journal Entries)

Rs. Rs.
1 Realization Account Dr. 3,04,000
To Building 1,00,000
To Plant & Machinery 25,000
To Inventories 1,35,000
To Trade Receivables 44,000
(Being all assets except cash transferred to Realization A/c)
2 8% Debentures Account
Trade Payables Dr. 54,000
To Realization Account 1,64,000
(Being all liabilities transferred to Realization Account)
3 Equity Share Capital Dr. 1,40,000
Profit & Loss Account Dr. 30,000
To Equity Shareholder’s Account 1,70,000
(Being Equity transferred to Equity Shareholders’ A/c)
4 PQ Ltd
To Realization Account 1,89,000
(Being Purchase consideration due)
5 Bank Account Dr. 44,000
To Realization Account 44,000
(Being Cash received from trade receivables in full)
6 Realization Account Dr. 54,000
To Bank Account 54,000
(Being payment made to Trade Payables)
7 Shares in PQ Ltd. Dr. 1,89,000
To PQ Ltd. 1,89,000
(Being purchase consideration received in the form of
Equity Shares of PQ Ltd.)
8 Realization Account (balancing figure) Dr. 39,000
To Equity Shareholders’ Account 39,000
(Being profit on realization transferred to Equity
Shareholders’ Account)
9 Equity Shareholders’ Account Dr. 2,09,000
To Shares in PQ Ltd. 1,89,000
To Bank Account 20,000
(Being final payment made to shareholders)
Q38. (i) Calculation of equity shares to be issued to P Ltd. and Q Ltd.

Profits of P Q
I year 2,62,800 2,75,125
II year 2,12,200 2,49,875
Total 4,75,000 5,25,000
The total profits- ₹ 4,75,000+ ₹ 5,25,000= ₹ 10,00,000
No. of shares to be issued = 24,000 equity shares in the proportion of the preceding 2 years’ profits.
P Q
24,000 x 475/1000 11,400 equity shares
12,600 equity shares
24,000 x 525/1000
Calculation of 12% Preference shares to be issued to P Ltd. and Q Ltd.
P Q
Net assets (Refer working note) 8,40,000 9,24,000
8% return on Net assets 67,200 73,920
12% Preference shares to be issued 56,000 shares
 100 
67,200    5,60,000 @ ₹ 10 each
 12 
 100  61,600 shares
73,920    6,16,000 @ ₹ 10 each
 12 
(ii) Total Purchase Consideration

P Q
Equity shares @ of ₹ 25 each 2,85,000 3,15,000
12% Preference shares @ of ₹ 10 each 5,60,000 6,16,000
Total 8,45,000 9,31,000
Working Note: Calculation of Net assets as on 31.3.20X1

P Q
Building 7,75,000 6,48,000
Current assets 1,63,500 1,58,600
Less: Current liabilities (6,23,500) (5,57,600)
8,40,000 9,24,000
Note- Since the income from the preference shares shall be equal to the 8% return on assets, the shares are
computed in such way that 12% dividend on them shall be equal to 8% of the return on Net assets.
Q39. Balance Sheet of Bright Ltd. as at 1st April, 2021

Particulars Note No. (₹ in lakhs)
(a) Share Capital 1 2,250
(b) Reserves and Surplus 2 4,200
Long-term borrowings 3 84.375
Total 7449.375
II. Assets
(a) i. Property, plant and equipment 5 2,325
ii. Intangible assets 6 633.375
(b) Non-current investments 7 300
(2) Current assets
(b) Trade receivables 9 975
(c) Cash and cash equivalents 10 2316
Total 7449.375
Notes to Accounts
(₹ in lakhs) (₹ in lakhs)
1. Share Capital
Authorized Share Capital
1,50,00,000 Equity shares of ₹10 each 1500
7,50,000 16% Preference Share of 100 each 750
Issued: 1,50,00,000 Equity shares of ₹ 10each 1500
(Out of which 1,05,00,000 Shares were Issuedfor
7,50,000 16% Preference Shares of 100 each(Issued

for consideration other than cash) 750 2,250
Securities Premium Account
(1,50,00,000 shares ×₹ 25) 3750
(7,50,000 shares × ₹ 60) 450 4,200
Investment Allowance Reserve 150
Amalgamation Adjustment Reserve (150) 4,200
16% Debentures (56,25,000+28,12,500)
(W.N. 3) 84.375
4. Trade payables
Dark Ltd. 630
Fair Ltd. 285 915
5. Property, plant & equipment
Land and Building 1350
Plant and Machinery 975 2,325
Goodwill [W.N. 2] 624.375
Add: liquidation exp. (6+3) 9.00 633.375
7. Non-current Investments
Investments (225+75) 300
8. Inventories
Dark Ltd. 525
Fair Ltd. 375 900
9 Trade receivables
Dark Ltd. 450
Fair Ltd. 525 975
10 Cash & cash equivalents
Dark Ltd. 450
Fair Ltd. 300
Liquidation Expenses (6+3) (9)
Shares issued for cash (45 lakh shares x ₹35) 1575 2316
Working Notes:
(₹ in lakhs)
Dark Ltd. Fair Ltd.
(1) Computation of Purchase consideration
(a) Preference shareholders:
( 4,50,00,000 )
100 720
i.e. 4,50,000 shares × ₹ 160 each
3,00,00,000
100 480
i.e. 3,00,000 shares × ₹ 160 each
(b) Equity shareholders:
( 12,00,00,000 × 5 )
100
2,100
i.e. 60,00,000 shares x ₹ 35 each
( 11,25,00,000 × 4 )
100
_____ 1,575
i.e. 45,00,000 shares × ₹ 35 each
Amount of Purchase Consideration Net 2,820 2,055
(2) Assets Taken Over
Assets taken over:
1,350 975
Property Plant & Equity
225 75
Non-Current Investments
525 375
Inventory
450 525
Trade receivablesCash
450 300
and bank
3,000 2,250
Less: Liabilities taken over: 28.125

10% Debentures 56.25
Trade payables 630 (686.25) 285 (313.125)
Net assets taken over 2,313.75 1936.875

Purchase consideration 2,820 2055.00
Goodwill 506.25 118.125
Total goodwill 624.375
Issue of Debentures
Debentures ₹ 90,00,000 ₹ 45,00,000
Interest 10% ₹ 9,00,000 ₹ 4,50,000
( 9,00,000 × 100 ) ( 4,50,000 × 100)
16
= 56,25,000 16
= 28,12,500
NOTE: In the above solution ₹ 35 has been considered as the issue price of Equity shares for public issue
also. Alternative considering this as ₹ 10 also possible. In that case, the balance of cash and cash
equivalents will be ₹ 1,191 lakhs and securities premium will be ₹ 3,075 lakhs in place of the balances
given in the balance sheet in the above solution.
Q40.
Books of X Ltd.
Realization Account
₹ ₹
To Sundry Assets 1,20,000 By Trade payables 25,000
By XY Ltd. (Purchase consideration) 75,000
By shareholders ( Loss on realization) 20000
1,20,000 1,20,000
Shareholders Account
₹ ₹
To Realization Account (Loss) 20,000 By Equity Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000
Loan Y Ltd.
₹ ₹
To Balance b/d 15,000 By Shares in XY Ltd. 15,000
Shares in XY Ltd.
₹ ₹
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000
XY Ltd.
₹ ₹
To Realization Account 75,000 By Shares in XY Ltd. 75,000
Q41 Calculation of Purchase consideration (or basis for issue of shares of AB Ltd.)
A Ltd. BLtd.
Purchase Consideration: ₹ ₹
Goodwill 1,40,000 40,000
Plant and Machinery 1,00,000 40,000

Motor vehicles 30,000 20,000
Inventory 2,30,000 1,80,000
Trade receivables 2,00,000 80,000
Cash at Bank 80,000 40,000
Less: Liabilities: 10,80,000 6,40,000
6% Debentures (1,20,000 x 105%) - (1,26,000)
Trade payables (2,10,000) (1,30,000)
To be satisfied by issue of shares of AB Ltd. @ ₹10 each 87,000 38,400
Balance Sheet AB Ltd. as at 1st April,2014
Particulars Note No Amount(₹)

(a)
3 (a) Current liabilities
Trade payables (21,00,000+1,30,000) 3,40,000
Total
17,20,000
ASSETS
Non-current assets
1
Property, Plant and
Equipment 3 7,30,000
2 Current assets
(a) Inventories (2,30,000+1,80,000) 4,10,000
(b) Trade receivables (2,00,000+80,000) 2,80,000
(c) Cash and cash equivalents (80,000+40,000) 1,20,000
Total 17,20,000
Notes to accounts
₹ ₹
1. Share Capital
1,25,400 shares of ₹ 10 each 12,54,000
(All the above shares are issued for consideration other thancash)
Long-term borrowingsSecured
2.
6% Debentures
Property, Plant and
1,26,000
Equipment
3.
Freehold property
A Ltd.
3,00,000
B Ltd.
2,40,000 5,40,000
Plant and Machinery
A Ltd.
1,00,000
B Ltd.
40,000 1,40,000
Motor vehicles
A Ltd.
30,000
B Ltd.
20,000 50,000
Intangible assets 7,30,000
4. Goodwill
A Ltd.
B Ltd. 1,40,000
40,000 1,80,000
Journal Entries
In the books of AB Ltd.
Particulars Amount Amount

(₹) (₹)
Business purchase account Dr. 12,54,000
To Liquidator of A Ltd. account 8,70,000
To Liquidator of B Ltd. Account 3,84,000
(Being the amount of purchase consideration payable to
liquidator of A Ltd. and B Ltd. for assets taken over)
Goodwill Dr. 1,40,000
Freehold property Dr. 3,00,000
Plant and Machinery Dr. 1,00,000
Motor vehicles Dr. 30,000
Trade receivables Dr. 2,00,000
Inventory Dr. 2,30,000
2,10,000
To Trade payables
8,70,000
To Business purchase account
(Being assets and liabilities of A Ltd. taken over)
Goodwill Dr. 40,000
Freehold property Dr. 2,40,000
Plant and Machinery Dr. 40,000
Motor vehicles Dr. 20,000
Trade receivables Dr. 80,000
Inventory Dr. 1,80,000

1,30,000
To Trade payables
1,26,000
To 6% Debentures of B Ltd.
3,84,000
To Business purchase account
(Being assets and liabilities of B Ltd. taken over)
6% Debentures of B Ltd. Dr. 1,26,000 1,26,000
To 6% debentures
(Being issue of 6% debentures to debenture holders of B Ltd.
Liquidator of the A Ltd. account Dr. 8,70,000
Liquidator of the B Ltd. account Dr. 3,84,000
To Equity share capital account 12,54,000
(Being the allotment of equity shares of ₹ 10 each, as per the
agreement for discharge of purchase consideration)
Note:
(1) It is assumed that the nominal value of debentures of B Ltd. is ₹ 100 each.
(2) It has been presumed that 6% Debentures of M/s B Ltd. are discharged at premium of 5% by issue of
6% Debentures of M/s AB Ltd. at par.
Q42.(i) Purchase consideration computation
Cash payment for (3,00,000 x ₹ 2.5) 7,50,000

Equity Shares (4,50,000 x ₹ 15) 67,50,000
75,00,000
In the books of Srishti Ltd.

Realisation Account
₹ ₹
To Goodwill 5,00,000 By 9% Debentures 5,00,000
To Tangible Fixed Assets 30,00,000 By Creditors 1,00,000
To Stock 10,40,000 By By Anu Ltd. 75,00,000
To Debtors 1,80,000 (Purchase consideration)
To Cash & Bank A/c 2,55,000
(2,80,000- 25,000)
(Realization expenses)
To Profit on realization
transfer to shareholders 31,00,000
81,00,000 81,00,000
Equity Shareholders A/c
₹ ₹
By Equity Share Capital 30,00,000
To Equity Shares in Anu 67,50,000 By Export Profit Reserves 8,50,000
Ltd.
To Cash & Bank A/c 7,50,000 By General Reserves 50,000

By P & L A/c 5,00,000
By Realization A/c 31,00,000
75,00,000 75,00,000
9% Debentures Account
₹ ₹
To Realization A/c 5,00,000 By Balance b/d 5,00,000
Anu Ltd.
₹ ₹
To Realization A/c 75,00,000 By Share Capital 67,50,000
By Bank A/c 7,50,000
75,00,000 75,00,000
(ii) Journal Entries in the books of Anu Ltd.

₹ ₹
1 Business Purchase A/c Dr. 75,00,000
To Liquidator of Srishti Ltd 75,00,000
(Being business of Srishti Ltd. taken over)
2 Tangible Fixed Assets Dr 60,00,000
Stock Dr 7,10,000
Debtors Dr 1,80,000
Cash & Bank A/c Dr 2,55,000
Dr 10,64,000
Goodwill A/c (Bal. fig.)
To Liability for 9 % Debentures 6,00,000
To Creditors 1,00,000
To Business Purchase account 75,00,000
(Being assets and liabilities taken over)
3 Amalgamation Adjustment Reserve A/c
To Export Profit Reserves Dr. 8,50,000
(Being statutory Reserves taken over) 8,50,000
4 Goodwill Dr. 50,000
To Bank A/c 50,000
(Liquidation expenses reimbursed))
5 Liquidator of Shristi Ltd. Dr. 75,00,000
To Equity Share Capital 45,00,000
To Securities Premium 22,50,000
7,50,000
To Bank A/c
(Being purchase consideration discharged)
6 Liability for 9% Debentures ( 5,00,000 x 120/100) Dr. 6,00,000
Discount on issue of debentures 25,000
To 8% Debentures (6,00,000 x 100/96) 6,25,000
(Being liability of debenture holders’ discharged)
Q45. I. Calculation of amount of purchase consideration
Particulars ₹
Equity Shares (50,000 x 15) 7,50,000
Cash payment 50,000
12% Preference Share Capital 2,00,000
Purchase Consideration 10,00,000
As per AS 14, consideration for the amalgamation means the aggregate of the shares and other securities issued
and the payment made in the form of cash or other assets by the transferee company to the shareholders of the
transferor company. Thus, payment to debenture holders are not covered by the term ‘consideration’.
II. Journal entry relating to discharge of consideration in the books of Tina Ltd.
Liquidation of Rina Ltd.A/c 10,00,000
To Securities premium A/c 2,50,000
To Bank/Cash A/c 50,000
(Discharge of purchase consideration)
Q46. In the Books of P Ltd.
Realization Account
Rs Rs
To Land & Building 4,50,000 By 8% Debentures 2,00,000
To Plant & Machinery 6,20,000 By Trade Payables 88,000
To Furniture & Fitting 1,00,000 By PQ Ltd. 16,02,100
To Trade receivables 3,25,000 (Purchase consideration)
To Inventory/Stock 2,33,000 By Equity Shareholders A/c 1,37,900
To Cash at Bank 2,08,000 (loss)
To Cash in Hand 54,000
To Preference shareholders 38,000
(excess payment)
20,28,000 20,28,000
Equity Shareholders Account
Rs Rs
To Realization A/c (loss) 1,37,900 By Share capital 8,20,000
To Equity Shares in PQ Ltd. 10,82,400 By Profit & Loss A/c 3,52,000
To Cash 1,01,700 By General Reserve 1,50,000
13,22,000 13,22,000
9% Preference Shareholders Account
To Preference Shares in 4,18,000 By Pref. Share capital 3,80,000
PQ Ltd. By Realization A/c 38,000
4,18,000 4,18,000
PQ Ltd. Account
To Realization A/c 16,02,100 By Shares in PQ Ltd.
For Equity 10,82,400
For Pref. 4,18,000 15,00,400
By Cash 1,01,700
16,02,100 16,02,100
8% Debentures holders Account
To 6% Debentures 2,00,000 By 8% Debentures 2,00,000
Books of Q Ltd.
Realization Account
Rs Rs
To Land & Building 3,40,000 By 8% Debentures 1,00,000
To Plant & Machinery 4,50,000 By Trade payables 1,60,000
To Furniture & Fittings 50,000 By Unsecured loan 1,75,000
To Trade receivables 1,50,000 By PQ Ltd. (Purchase
To Inventory 1,05,000 consideration) 7,92,250
To Cash at bank 1,75,000 By Equity Shareholders A/c 90,750
To Cash in hand 20,000 Loss
To Pref. shareholders 28,000
13,18,000 13,18,000
Equity Shareholders Account
Rs Rs
To Equity shares in PQ Ltd 4,22,400 By Share Capital 3,20,000
To Realization 90,750 By Profit & Loss A/c 2,05,000
To Cash 61,850 By General Reserve 50,000
5,75,000 5,75,000
9% Preference Shareholders Account
Rs Rs
To Preference Shares in PQ Ltd. 3,08,000 By Share capital 2,80,000
By Realization A/c 28,000
3,08,000 3,08,000
PQ Ltd. Account
Rs Rs.
To Realization A/c 7,92,250 By Equity shares in PQ Ltd.
For Equity 4,22,400
Preference 3,08,000 7,30,400
By Cash 61,850
7,92,250 7,92,250
8% Debentures holders Account
Rs Rs
To 6% Debentures 1,00,000 By 8% Debentures 1,00,000
Working Notes:
(i)Purchase consideration
P Ltd. Q Ltd.
Payable to preference shareholders: 4,18,000 3,08,000
Preference shares at Rs 22 per share 10,82,400 4,22,400
Equity Shares at Rs 22 per share 1,01,700 61,850
Cash [See W.N. (ii)] 16,02,100 7,92,250
(ii)Value of Net Assets
P Ltd. Q Ltd.
Land & Building 4,50,000 3,40,000
Plant & Machinery less 10% Depreciation 5,58,000 4,05,000
Furniture & Fittings less 10% Depreciation 90,000 45,000
Trade receivables less 5% 3,08,750 1,42,500
Inventory less 5% 2,21,350 99,750
Cash at Bank 2,08,000 1,75,000
Cash in Hand 54,000 20,000
18,90,100 12,27,250
Less: Debentures 2,00,000 - 1,00,000
Trade payables 88,000 1,60,000
Secured Loans - (2,88,000) 1,75,000 (4,35,000)
16,02,100 7,92,250
Payable in Shares 15,00,400 7,30,400
Payable in cash 1,01,700 (61,850)
(iii)
P Q
Plant &Machinery 6,20,000 4,50,000

Less: Depreciation 10% 62,000 45,000
5,58,000 4,05,000
Furniture & Fixtures 1,00,000 50,000
Less: Depreciation 10% 10,000 5,000
90,000 45,000
*This cash is paid to equity shareholders of both the companies for adjustment of their rights as per
intrinsic value of both companies.
Q47. As per AS 14 “Accounting for Amalgamations”, the term consideration has been defined as the aggregate
of the shares and other securities issued and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company.
Purchase consideration will be:
₹ Form
Equity shareholders:
1,50,000 ×₹ 18 27,00,000 Cash
1,50,000 × 2/3 × ₹ 10 10,00,000 11% Pref. shares
1,50,000 × 1/3 × ₹ 13 6,50,000 Equity shares
43,50,000
Notes:
1. According to AS 14, ‘consideration’ excludes the any amount payable to debentureholders. The
liability in respect of debentures of vendor company will be taken by transferee company, which will then
be settled by issuing new debentures.
2. Liquidation expenses will also not form part of purchase consideration.
Q48.As per AS 14 ‘Accounting for Amalgamations’, the term ‘consideration’ has been defined as the aggregate
of the shares and other securities issued and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company.
The payment made by transferee company to discharge the Debenture holders and outside liabilities and
cost of winding up of transferor company shall not be considered as part of purchase consideration.
Computation of Purchase Consideration

₹
Cash payment ₹15 x 1,50,000 22,50,000
11% Preference Shares of ₹ 10 each [(1,50,000 x 3/5) x ₹ 10] 9,00,000
Equity shares of ₹ 10 each @ 20% premium
[(1,50,000 x 4/5) x ₹ 12] 14,40,000
Total Purchase consideration 45,90,000
Q49. Balance Sheet of Grey Ltd. as at 1st April, 2020
Particulars Note No. (₹ )


Total 61,90,000
II. Assets
(b) Non-current investments 1,60,000
(2) Current assets
(a) Inventory 3,05,000
(b) Trade receivables 6,75,000
(c) Cash and bank balances 2,90,000
Total 61,90,000
Notes to Accounts:
(₹ ) (₹)
1. Share Capital
Authorized:
50,00,000
2,00,000 shares of ₹ 25 each
Issued, subscribed, and paid up Equity share capital:
1,80,000 Equity shares of ₹25 each 45,00,000
3,400 Preference shares of ₹ 100 each 3,40,000
(all the above shares are allotted as fully paid-up pursuant to 48,40,000
contracts without payment being received in cash)
Securities Premium (3,400 x ₹ 20) 68,000
Capital Reserve 1,17,000 1,85,000
4. Property, plant and equipment
Working Notes:
(₹)
Black Ltd. Grey Ltd.
1. Computation of Purchase consideration
(a) Preference shares:
2,40,000 1,68,000
Shares at ₹ 120 each 1,50,000 1,20,000
(b) Equity shares:
Preceding 2 years profitability
Year 1
Year 2 2,00,000 1,30,000
2. 3,50,000 2,50,000
Shares (in ratio 35: 25)
1,05,000 shares at ₹ 25 26,25,000

75,000 shares at ₹ 25 ______ 18,75,000
Amount of purchase consideration (a + b) 28,65,000 20,43,000
Net Assets Taken Over
Assets taken over:
Investments 1,00,000 60,000
Inventory 1,80,000 1, 25,000
Cash and bank 1,60,000 1,30,000
31,85,000 30,05,000
Less: Liabilities taken over:
Debentures 3,33,333 4,16,667

6,28,333 5,36,667
Net assets taken over 25,56,667 24,68,333
Purchase consideration 28,65,000 20,43,000
Goodwill 3,08,333
Capital reserve 4,25,333
Net amount of capital reserve ₹ 1,17,000
3.
Black Limited White Limited
Existing Debentures ₹ 4,00,000 x 15% ₹ 5,00,000 x 15%
= ₹ 60,000 = ₹ 75,000
Debentures to be issued in Grey Limited @ ₹ 60,000 x 100/18 ₹ 75,000x100/18
18% to maintain the same amount of interest = ₹ 3,33,333 = ₹ 4,16,667
Q50. Calculation of Purchase Consideration under Net Assets Method

Rs. Rs.
Sundry assets
112 75
18,00,000   
15,12,000
100 100
25 92
18,00,000  
4,14,000 19,26,000
100 100
Less: Liabilities:

Unrecorded liability 25,000 (4,15,000)
Purchase consideration 15,11,000
Q51. Balance Sheet of Super Fast Express Ltd.
Particulars Notes ₹
a Long-term provisions 3 1,00,000
a Trade Payables 1,00,000
Total 35,60,000
Assets
a Property, Plant and Equipment 4 25,00,000
b Intangible assets 5 1,00,000
2 Current assets
Cash and cash equivalents 6 3,40,000
Total 35,60,000
Notes to Accounts
₹
1 Share Capital
30,000 Equity shares of ₹ 100 each 30,00,000
Total 30,00,000
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
BUYBACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS
1. Kuber Ltd. furnishes you with the following Balance Sheet as at 31 St March, 2000:
(Rs. in crores)
Sources of funds:
Share Capital:
Authorized 100
Issued:
12% redeemable preference share of Rs. 100 each fully paid 75
Equity shares of Rs. 10 each fully paid 25 100
Reserves and surplus:
Capital reserve 15
Share Premium 25
Revenue Reserves 260 300
400
Funds employed in:
Fixed Assets: Cost 100
Less: Provisions for depreciation 100 NIL
Investments at cost (market value Rs. 400 Cr.) 100
Current assets 340
Less: Current Liabilities 40 300
400
The Company redeemed preference shares on 1st April, 2000. It also bought back 50 lakh equity shares of Rs. 10
each at Rs. 50 per share.
The Payments for the above were made out of the huge bank Balance which appeared as part of current assets.
You are asked to:

(i) Pass journal entries to record the above
(ii) Prepare balance sheet
2. On 31st March, 2001, following was the balance sheet of New Era Ltd. :
(Rs. In Lakhs)
Equity Share capital 2,400 Machinery 3,600
10/- Furniture 452
Securities premium 350 Investments 148
General reserve 930 Stock 1,200
Profit & Loss account 340 Debtors 520
12% Deb. 1,500 Bank 740
Sundry creditors 750
Sundry provisions 390
6,660 6,660
On 1st April, 2001 the Company announced the buy-back of 25% of its Equity shares @ 15 per share. For the
purpose, it sold all of its investments for Rs. 150 lakh and issued 2,00,000 14% preference shares of Rs. 100
each at par the entire amount being payable with application. The issue was fully subscribed. The Company
achieved the target of the buy-back.
Later, the Company issued one fully paid up Equity Share of Rs. 10 by way of bonus share for every four Equity
Shares held by the equity shareholders.
Show the journal entries for all the transaction including cash transactions.
3. KG Limited furnishes the following Balance Sheet as at 31st March, 20X1:
A Share capital 1 1,200
Long term borrowings 3 750
A Trade Payables 745
B Other Current Liabilities 195
Total 3,700
Assets
A Property, plant and equipment 4 2,026
B Non-current Investments 74
2 Current assets
A Inventories 600
B Trade receivables 260
C Cash and Cash equivalents 740
Total 3,700
Notes to accounts
No. Particulars ₹
1 Share Capital
Authorized, issued and subscribed capital
Equity share capital (fully paid up shares of ₹ 10 each) 1,200

Securities premium 175
General reserve 265
Capital redemption reserve 200
Profit & loss A/c 170
Total 810
12% Debentures 750
4 Property, plant and equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2,026
On 1st April, 20X1, the company announced the buy-back of 25% of its equity shares @ ₹ 15 per share. For this
purpose, it sold all of its investments for ₹ 75 lakhs.
On 5th April, 20X1, the company achieved the target of buy-back. On 30th April, 20X1 the company issued one
fully paid up equity share of ₹ 10 by way of bonus for every four equity shares held by the equity shareholders.
(1) Pass necessary journal entries for the above transactions.
(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares.
4. From the following information, you are required to prepare Profit and Loss Account of Dee Limited furnishes
the following Balance Sheet as at 31st March, 2008:
Rs.’000 Rs.’000
Liabilities
Share capital:
Authorised capital 30,00
Issued and subscribed capital:
2,50,000 Equity shares of Rs.10 each fully paid up 25,00
2,000, 10% Preference shares of Rs.100 each
(Issued two months back for the purpose of buy back) 2,00 27,00
Reserves and surplus:
Capital reserve 10,00
Revenue reserve 30,00
Securities premium 22,00
Profit and loss account 35,00 97,00
Current liabilities and provisions: 14,00
1,38,00
Assets
Fixed assets 93,00
Investments 30,00
Current assets, loans and advances (including cash and bank balance) 15,00
1,38,00
The company passed a resolution to buy back 20% of its equity capital @ Rs.50 per share. For this purpose, it
sold all of its investment for Rs.22,00,000. You are required to pass necessary journal entries and prepare the
Balance Sheet.
5. Following is the balance sheet of M/s Competent Limited as on 31 st March 2012.

Equity Shares rs.10 each 12,50,000 Fixed Assets 46,50,000
fully paid Current Assets 30,00,000
Revenue Reserve 15,00,000
Profit &Loss Account 1,25,000
Secured Loans:
Unsecured Loans 10,00,000
Current liabilities 16,50,000
Total 76,50,000 Total 76,50,000
st
The company wants to buy back 25,000 equity shares of Rs. 10 each, on 1 April, 2012 at Rs. 20 per share. Buy
back of shares of duly authorized by its articles and necessary resolution passed by the company towards
this.The payment for buy back of shares will be by the company out of sufficient bank balance available as part
of Current Assets.
Comments with your calculations, whether buy back of shares by company within the provisions of the
Companies Act, 2013. If yes, pass necessary journal entries towards buy back of shares and prepare Balance
Sheet after buy back of shares.
6. SMM Ltd. has the following capital structure as on 31st March, 2017:
(₹ in crore)
Particulars Situation I Situation II
(i) Equity share capital (shares of ₹ 10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory 320 320
Reserve)
(iii) Loan Funds 3,200 6,000
The company has offered buy back price of ₹ 30 per equity share. You are required to calculate maximum
permissible number of equity shares that can be bought back in both situations and also required to pass
necessary Journal Entries.
7. Perrotte Ltd. has the following capital structure as on 31-03-09
(Rs. In crores)
ESC(Shares of Rs. 10 each fully paid) 330
Reserve & Surplus
General Reserve 240
Security premium account 90
P&L a/c 90
Infrastructure Development Reserve 180 600
Loan funds 1,800
The shareholders of Perrotte Ltd. have on the recommendation of their Board of Directors approved on 12-9-09 a
proposal to buy back the maximum permissible number of Equity shares considering the large surplus funds
available at the disposal of the company.
The prevailing market value of the company’s shares is Rs. 25 per share and in order to induce the existing
shareholders to offer their shares for buy back, it was decided to offer a price of 20% over market.
You are also informed that the Infrastructure Reserve is created to satisfy Income-Tax requirements.
You are required to compute the maximum number of shares that can be bought back in the light of the above
information and also under a situation where the loan funds of the company were either Rs. 1,200 crores or Rs.
1,500 crores.
Assuming that the entire buy back is completed by 09.12.2009, show the accounting entries in the company’s
books in each situation.
8. Extra Ltd. (a non-listed company) furnishes you with the following Balance Sheet as at 31 st March, 20X1:
(in lakhs ₹)
A Share capital 1 120
A Trade Payables 70
Total 312
Assets
A Property, plant and Equipment 50
B Non-current Investments 120
2 Current assets
A Cash and Cash equivalents 142
Total 312
Notes to accounts
(i) The company redeemed the preference shares at a premium of 10% on 1st April, 20X1.
(ii) It also bought back 3 lakhs equity shares of ₹ 10 each at ₹ 30 per share. The payment for the above was
made out of huge bank balances.
(iii) Included in its investment were “investments in own debentures” costing ₹ 2 lakhs (face value ₹ 2.20 lakhs).
These debentures were cancelled on 1st April, 20X1.
(iv) The company had 1,00,000 equity stock options outstanding on the above- mentioned date, to the employees
at ₹ 20 when the market price was ₹30 (This was included under current liabilities). On 1.04.20X1
employees exercised their options for 50,000 shares.
(A) Pass the journal entries to record the above.
(B) Prepare Balance Sheet as at 01.04.20X1.
9. X Ltd. furnishes, the following summarized Balance Sheet as at 31-03-2018.

Liabilities (in Rs) (in Rs)
Share Capital
Equity Share Capital of Rs 20 each fully paid up 50,00,000
10,000, 10% Preference Share of Rs100 each
fully paid up, 10,00,000 60,00,000
Reserves & Surplus
Security Premium. 12,00,000
Profit and Loss 20,00,000
Dividend Equalization Fund 5,50,000 43,50,000
Non-Current Liabilities
12% Debenture 12,50,000
Current Liabilities and Provisions 5,50,000
Total : 1,21,50,000
Assets
Fixed Assets
Tangible Assets 1,00,75,000
Current Assets 3,00,000
Investment 2,00,000
Inventory 15,75,000
Cash and Bank 20,75,000
Total : 1,21,50,000
The shareholders adopted the resolution on the date of the above mentioned Balance Sheet to :
(1) Buy back 25% of the paid up capital and it was decided to offer a price of 20% over market price. The
prevailing market value of the company's share is Rs 30 per share.
(2) To finance the buyback of share company;
(a) Issue 3000, 14% debenture of Rs 100 each at a premium of 20%.
(b) Issue 2500, 10% preference share of Rs100 each.
(3) Sell investment worth Rs 1,00,000 for Rs 1,50,000.
(4) Maintain a balance of Rs 2,00,000 in Revenue Reserve.
(5) Later the company issue three fully paid up equity share of Rs 20 each by way of bonus share for every 15
equity share held by the equity shareholder.
You are required to pass the necessary journal entries to record the above transactions and prepare Balance Sheet
after buy back.
Solution: In the books of X Limited
Journal Entries
Particulars Dr.(Rs.) Cr. (Rs.)
1. Bank A/c Dr. 3,60,000
To 14 % Debenture A/c 3,00,000
To Securities Premium A/c 60,000
(Being 14 % debentures issued to finance buy back)
2. Bank A/c Dr. 2,50,000
To 10% preference share capital A/c 2,50,000
(Being 10% preference share issued to finance buyback)
3. Bank A/c Dr. 1,50,000
To Profit on sale of investment 50,000
4. Equity share capital A/c (62,500 x Rs.20) Dr. 12,50,000
Securities premium A/c (62,500 x Rs.16) Dr. 10,00,000
To Equity shares buy back A/c (62,500 x Rs.36) 22,50,000
(Being the amount due to equity shareholders onbuy back)
5. Equity shares buy back A/c Dr. 22,50,000
To Bank A/c 22,50,000
(Being the payment made on account of buy back of62,500
Equity Shares as per the Companies Act)
6. Revenue reserve Dr. 3,00,000
Securities premium Dr. 2,60,000
To Capital redemption reserve A/c* 10,00,000
(Being amount equal to nominal value of buy back shares
from free reserves transferred to capital redemption reserve
account as per the law) [12,50,000 less 2,50,000]
7. Capital redemption reserve A/c Dr. 7,50,000
To Bonus shares A/c (W.N.1) 7,50,000
(Being the utilization of capital redemption reserve toissue
37,500 bonus shares)
8. Bonus shares A/c Dr. 7,50,000
(Being issue of 3 bonus equity share for every15equity
shares held)
*Alternatively, entry for combination of different amounts (from Revenue reserve, Securities premium and profit
and Loss account.) may be passed for transferring the required amount to CRR.
Note: It may be noted that as per the provisions of the Companies Act, no buy-back of any kind of shares or other specified
securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified
securities. Issue of debentures has been excluded for the purpose of “specified securities” and the entire amount of Rs.
10,00,000 (after deducting only pref. share capital) has been credited to CRR while solving the question.
Balance Sheet (After buy back and issue of bonus shares)
Particulars Note Amount
No Rs.
(a) Trade payables -
(b) current liabilities & Provisions 5,50,000
Total 1,05,60,000
II. Assets
(a) Property, Plant and Equipment 1,00,75,000
(2) Current assets
(a) Investments 2,00,000
(b) Inventory 2,00,000
(c) Cash and cash equivalents (W.N. 2) 85,000
Total 1,05,60,000
Notes to Accounts
Rs.
1. Share Capital
Equity share capital (Fully paid up shares of Rs. 20
each)
(2,50,000-62,500+37,500 shares) 45,00,000
10% preference shares @ Rs. 100 each
(10,00,000 + 2,50,000) 12,50,000 57,50,000
Revenue reserve 2,00,000
Add: Premium on debenture 60,000
Less: Adjustment for premium paid on buy back
(10,00,000)
Less: Transfer to CRR (2,60,000) Nil
Capital Redemption Reserve
Transfer due to buy-back of shares from P&L
10,00,000
Less: Utilisation for issue of bonus shares
(7,50,000) 2,50,000
Add: Profit on sale of investment 50,000
Less: Transfer to CRR (4,40,000) 16,10,000
Dividend equalization reserve (5,50,000) 5,50,000 27,10,000
3 Long-term borrowings - 12% Debentures 12,50,000
- 14% Debentures 3,00,000 15,50,000
Working Notes:
1. Amount of bonus shares = [(2,50,000 -25%)3/15] x 20 = 37,500 x 20=7,50,000
2. Cash at bank after issue of bonus shares Rs.
Cash balance as on 30.3.2018 15,75,000
Add: Issue of debenture 3,60,000
Add: issue of preference shares 2,50,000
Add: Sale of investments 1,50,000
23,35,000
Less: Payment for buy back of shares (22,50,000)
85,000
10. W, X, Y and Z hold Equity capital is held by in the proportion of 40:30:10:20. A, B, C and D hold preference
share capital in the proportion of 30:40:20:10. If the paid up capital of the company is Rs. 40 Lakh & Preference
share capital is Rs. 20 Lakh, Find their voting rights in case of resolution of winding up of the company.
11. In a limited company, Equity Share Capital is held by X, Y and Z in the proportion of 30:30:40. Also A, B and C
hold preference share capital in the proportion of 50:30:20. The company has not paid the dividend to holders of
preference share capital for more than 3 years. Given that the paid-up equity share capital of the company is ₹ 1
Crore and that of preference share capital is ₹ 50 Lakh
(i) Find out the relative weight in the voting right of equity shareholders and preference shareholders.
(ii) Also the company proposing to issue equity shares with differential voting rights (DVR) to the extent of ₹ 50
lakhs. Assuming the company fulfils other conditions pertaining to the issue of shares with DVR. Can the
company issue the shares with DVR?
Solution: (i) The respective voting right of various shareholders will be
X = 2/3X30/100 = 3/15 OR 20%
Y = 2/3X30/100 = 3/15 OR 20%
Z = 2/3X40/100 = 4/15 OR 26.67%
A = 1/3X50/100 = 1/6 OR 16.67%
B = 1/3X30/100 = 1/10 OR 10%
C = 1/3X20/100 = 2/30 OR 6.67%
Hence their relative weights are 3/15: 3/15: 4/15: 1/6: 1/10 :2/30 or 6:6:8:5:3:2.
(ii) The voting power in respect of shares with differential rights shall not exceed seventy four percent of the
total voting power including voting power in respect of equity shares with differential rights (DVR) issued at
any point of time as per Companies (Share Capital and Debentures) Rules.
Existing Equity Share Capital paid up ₹1,00,00,000.00
Proposed DVR ₹ 50,00,000.00
Post DVR Equity Share Capital paid up ₹1,50,00,000.00
% of shares with DVR to total paid up Equity Share Capital (including
Equity Shares with DVR) (₹ 50,00,000/ ₹ 150,00,000 X 100) 33.33%
In the given case 33.33% of shares with DVR to total post issue paid up Equity Capital (including Equity
Shares with DVR) is not exceeding 74%. Hence, the company can issue such equity shares.
12. M Ltd. furnishes the following Balance Sheet as at 31st March, 20X1:
Particulars Notes ₹ (in 000)

A Share capital 1 5,000
B Reserves and Surplus 2 6,310
A Trade Payables 40
Total 11,750
Assets
A Property, plant and Equipment 4 2,750
B Non-Current Investments (at cost) 5,000
2 Current assets
A Inventories 1,000
B Trade receivables 2,000
C Cash and Cash equivalents 1,000
Total 11,750
Notes to accounts
No. Particulars ₹ in (‘000)
1 Share Capital
Authorized, Issued and Subscribed Capital:
3,00,000 Equity shares of ₹ 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
Total 5,000
Capital reserve 10
Revenue reserve 4,000
Profit and Loss account 1,800
Total 6,310
10% Debentures 400
4 Property, Plant and Equipment (PPE)
PPE: Cost 3,000
Less: Provision for depreciation (250)
Net carrying value 2,750
The company passed a resolution to buy-back 20% of its equity capital @ ₹ 15 per share. For this purpose, it
sold its investments of ₹30 lakhs for ₹ 25 lakhs.
You are required to pass necessary Journal entries.
13. The Directors of Umang Ltd. passed a resolution to buyback 5,00,000 of its fully paid equity shares of Rs. 10 each
at Rs. 15 per share. This buyback is in compliance with the provisions of the Companies Act, 2013.
For this purpose, the company
(i) Sold its investments of Rs. 30,00,000 for Rs. 25,00,000.
(ii) Issued 20,000, 12% preference shares of Rs. 100 each at par, the entire amount being payable with
application.
(iii) Used Rs. 15,00,000 of its Securities Premium Account apart from its adequate balance in General Reserve
to fulfill the legal requirements regarding buy-back.
(iv) The company has necessary cash balance for the payment to shareholders.
You are required to pass necessary Journal Entries (including narration) regarding buy- back of shares in the books
of Umang Ltd.
14. Umesh Ltd. resolves to buy back 4lakhs or its fully paid equity shares of Rs. 10 each at Rs. 22 per share
from the open the market. For the purpose , it issues 1 lakh 11% preference shares of Rs 10each at par, the
entire amount being payable with applications. The company uses Rs 16 lakhs of its balance in Securities
Premium Account apart from its adequate balance in General Reserve to fulfill the legal requirements
regarding buy –back Give necessary journal entries to record to the above transactions.
15. Complicated Ltd. (an unlisted company) gives the following information as on 31.3.2021:
Equity shares of Rs. 10 each, fully paid up 13,50,000
Share option outstanding Account 4,00,000
Profit & Loss Account 1,25,000
Unpaid dividends 1,00,000
12% Debentures (Secured) 18,75,000
Advance from related parties (Long term - Unsecured) 10,00,000
Current maturities of long term borrowings 16,50,000
Application money received for allotment due for refund 2,00,000
The Company wants to buy back 25,000 equity shares of Rs. 10 each, on 1st April, 2021 at Rs. 15 per
share. Buy back of shares is duly authorized by its Articles and necessary resolution has been passed by
the Company for this. The buy-back of shares by the Company is also within the provisions of the
Companies Act, 2013. The payment for buy back of shares was made by the Company out of sufficient
bank balance available shown as part of Current Assets.
You are required to prepare the necessary journal entries towards buy back of shares and prepare the
Balance Sheet of the company after buy back of shares.
Solution: As per the information given in the question, buy-back of 25,000 shares @ Rs. 15, as desired
by the company, is within the provisions of the Companies Act, 2013.
Journal Entries for buy-back of shares
Debit (Rs.) Credit (Rs.)
(a) Equity shares buy-back account Dr. 3,75,000
To Bank account 3,75,000
(Being buy back of 25,000 equity shares of Rs. 10
each @ Rs. 15 per share)
(b) Equity share capital account Dr. 2,50,000

Premium payable on buyback account Dr. 1,25,000
To Equity shares buy-back account 3,75,000
(Being cancellation of shares bought back)
(c) Securities premium account Dr. 1,25,000
To Premium payable on buyback account 1,25,000
(Being Premium payable on buyback adjusted
against securities premium account)
(d) Revenue reserve account Dr. 2,50,000
2,50,000
To Capital redemption reserve account
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal value
of capital bought back through free reserves)
Balance Sheet of Complicated Ltd. as at 1st April, 2021
Rs.
(a) Short-term borrowings 4 16,50,000
(b) Other current liabilities 5 3,00,000
Total 82,75,000
ASSETS
(a) Property, Plant and Equipment 46,50,000
2 Current assets (Rs. 40,00,000 – Rs. 3,75,000) 36,25,000
Total 82,75,000
Notes to Accounts
Rs. Rs.
1. Share Capital
1,10,000 Equity shares of Rs.10 each 11,00,000
Capital Redemption Reserve 2,50,000
Less: Utilization for share buy-back (1,25,000) 1,25,000
Share Option Outstanding Account 4,00,000
Revenue reserves 15,00,000
Surplus i.e. Profit and Loss A/c 1,25,000 23,50,000
Secured
Unsecured loans 10,00,000 28,75,000
Current maturities of long-term borrowings 16,50,000
Unpaid dividend 1,00,000
Application money received for allotment due
for refund 2,00,000 3,00,000
16. Mohan Ltd. furnishes the following summarised Balance Sheet on 31st March 2021.
Amount (₹ in Lakhs)
Equity and Liabilities:
Shareholders’ fund
Share Capital
Equity Shares of ₹ 10 each fully paid up 780
6% Redeemable Preference shares of ₹ 50 each fully Paid up 240
Capital Reserves 58
General Reserve 625
Securities Premium 52
Profit & Loss 148
Revaluation Reserve 34
Infrastructure Development Reserve 16
7% Debentures 268
Unsecured Loans 36
Current Liabilities 395
2652
Assets:
Non-current Assets
Plant and Equipment less depreciation 725
Investment at cost 720
Current Assets 1207
2652
Other Information:
(1) The company redeemed preference shares at a premium of 10% on 1st April, 2021.
(2) It also offered to buy back the maximum permissible number of equity shares of ₹ 10 each at ₹ 30 per share
on 2nd April 2021.
(3) The payment for the above was made out of available bank balance, which appeared as a part of the current
assets.
(4) The company had investment in own debentures costing ₹ 60 lakhs (face value ₹ 75 lakhs). These
debentures were cancelled on 2nd April 2021.
(5) On 4th April 2021 company issued one fully paid-up equity share of ₹ 10 each by way of bonus for every
five equity shares held by the shareholders.
(a) Calculate maximum possible number of equity shares that can be bought back as per the Companies Act,
2013 and
(b) Record the Journal Entries for the above-mentioned information.
17. Pratham Ltd. (a non-listed company) has the following Capital structure as on 31st March, 20X1:
Particulars Rs. Rs.
Equity Share Capital (shares of Rs. 10 each fully paid 30,00,000
Reserves & Surplus
Security Premium Account 6,00,000
Revaluation Reserve 6,20,000 49,00,000
Loan Funds 42,00,000
You are required to compute by Debt Equity Ratio Test, the maximum number of shares that can be bought back
in the light of above information, when the offer price for buy-back is Rs. 30 per share.
Solution
Debt Equity Ratio Test
Particulars Rs.
a) Loan funds 42,00,000
(b) Minimum equity to be maintained after buy-back in the ratio
of 2:1 (Rs. in crores) 21,00,000
(c) Present equity shareholders fund (Rs. in crores) 72,80,000
(d) Future equity shareholder fund (Rs. in crores) (See Note 2) 59,85,000
(72,80,000-12,95,000)
(e) Maximum permitted buy-back of Equity (Rs.in crores) [(d) 38,85,000 (by simultaneous
– (b)] (See Note 2) equation)
(f) Maximum number of shares that can be 1,29,500 (by simultaneous
bought back @ Rs. 30 per share (shares in crores) (See Note 2) equation)
Working Note:
1. Shareholders’ funds
Particulars Rs.
Paid up capital 30,00,000
Free reserves (32,50,000 +6,00,000+4,30,000) 42,80,000
72,80,000
1. As per section 68 of the Companies Act, 2013, amount transferred to CRR and maximum equity to
be bought back will be calculated by simultaneous equation method.
Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is
‘x’ and maximum permitted buy-back of equity is ‘y’.
Equation 1:
(Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity to be maintained
= Maximum permissible buy-back of equity
(72,80,000 –x)-21,00,000 = y (1)
Since 51,80,000 – x = y
Equation 2:
(Maximum buy – back / Offer price for buy – back) X Nominal Value
= Nominal value of the shares bought –back to be transferred to CRR
= (y / 30) X 10 = x
3x = y (2)
x = Rs. 12,95,000 crores and y = Rs. 38,85,000 crores
18. Quick Ltd. has the following capital structure as on 31st March,2021:
₹ in Crores
(1) Share Capital: 462
(Equity Shares of ₹ 10 each, fully paid)
(2) Reserves and Surplus:
General Reserve 336
Securities Premium Account 126
Profit and Loss Account 126
Statutory Reserve 180
Capital Redemption Reserve 87
Plant Revaluation Reserve 33 888
(3) Loan Funds:
Secured 2,200
Unsecured 320 2,520
On the recommendations of the Board of Directors, on 16th September, 2021, the shareholders of the
company have approved a proposal to buy-back of equity shares. The prevailing market value of the
company's share is ₹ 20 per share and in order to induce the existing shareholders to offer their shares
for buy-back, it was decided to offer a price of 50% over market value. The company had sufficient
balance in its bank account for the buy-back of shares.
You are required to compute the maximum number of shares that can be bought back in the light of the
above information and also under a situation where the loan funds of the company were either ₹ 1,680
Crores or ₹ 2,100 Crores.
Assuming that the entire buy-back is completed by 31st December,2021, Pass the necessary accounting
entries (narrations not required) in the books of the company in each situation.
19. Following is the summarized Balance Sheet of Super Ltd. as on 31st March, 2018.
Liabilities In Rs.
Share Capital
Equity Shares of Rs. 10 each fully paid up 17,00,000
Reserves & Surplus
Infrastructure Development Reserve 1,50,000
Secured Loan
Unsecured Loan 8,50,000
Current Maturities of Long term borrowings 15,50,000
93,00,000
Assets
Property, Plant and equipment 58,50,000
93,00,000
Super Limited wants to buy back 35,000 equity shares of Rs. 10 each fully paid up on 1st April, 2018 at Rs. 30
per share. Buy Back of shares is fully authorised by its articles and necessary resolutions have been passed by
the company towards this. The payment for buy back of shares will be made by the company out of sufficient
bank balance available as part of the Current Assets.
Comment with calculations, whether the Buy Back of shares by the company is within the provisions of the
Companies Act, 2013.
20. Alpha Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2017:
₹ In lakhs ₹ In lakhs
Shareholders' Funds
Equity share capital (fully paid up shares of ₹ 10 each) 2,400
General Reserve 530
Profit & Loss Account 340 1,620
Non-current Liabilities
12% Debentures 1,500
Current Liabilities
Trade Payables 1,490
Other Current Liabilities 390 1,880
Total 7,400
Assets
Non-current Assets
Fixed Assets 4,052
Current Assets
Current Investments 148
Inventories 1,200
Trade Receivables 520
Cash and Bank 1,480 3,348
Total 7,400
(i) On 1st April, 2017, the company announced buy-back of 25% of its equity shares @ ₹ 15 per share. For this
purpose, it sold all its investment for ₹ 150 lakhs.
(ii) On 10th April, 2017 the company achieved the target of buy-back.
(iii) On 30th April, 2017, the company issued one fully paid up equity share of₹10 each by way of bonus for
every four equity shares held by the equity shareholders by capitalization of Capital Redemption Reserve.
You are required to pass necessary journal entries and prepare the Balance Sheet of Alpha Ltd. after bonus issue.
21. What are the conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares. Explain in brief.
Answer: As per section 68 of the Companies Act 2013, a joint stock company has to fulfill the following
conditions to buy-back its own equity shares:
(1) A company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out
of:
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities(not being the proceeds of an earlier
issue of the same kind of shares or other specified securities.)
(2) The buy-back is authorised by its articles;
(3) A special resolution has been passed at a general meeting of the company authorising the buy-back.
(4) The buy-back is twenty-five percent or less of the aggregate of paid-up capital and free reserves of the
company.
(5) The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more
than twice the paid-up capital and its free reserves (Provided that the Central Government may, by order,
notify a higher ratio of the debt to capital and free reserves for a class or classes of companies)
(6) All the shares or other specified securities for buy-back are fully paid-up;
(7) Every buy-back shall be completed within a period of one year from the date of passing of the special
resolution.
(8) The buy-back under sub-section (1) may be—
(a) from the existing shareholders or security holders on a proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or
sweat equity.
1. As per section 68(1) of the Companies Act, buy back of own shares by the company, shall not exceed
(a)25% of the total paid-up capital and free reserves of the company.
(b)20% of the total paid-up capital and free reserves of the company.
(c)15% of the total paid-up capital and free reserves of the company.
2. The companies are permitted to buy back their own shares out of
(a) Free reserves and Securities premium
(b)Proceeds of the issue of any shares.
(c)Both (a) and (b)
3. When a company purchases its own shares out of free reserves; a sum equal to nominal value of shares so
purchased shall be transferred to
(a)Revenue redemption reserve.
(b)Capital redemption reserve.
(c)Buyback reserve
4. Of the following, preference shareholders do not have a right to vote on resolutions

(a)Which directly affect the rights attached to his preference shares.
(b)For entering a private equity agreement to raise further capital diluting their overall stake in the company.
(c) For the repayment.
5. Preference shareholders will have a right to vote on all resolutions if the dividend on their share remains unpaid
for
(a)1 year (b)2 year (c)3 year
6. The differential in the class of equity shares can be created for

(a)Dividend. (b)Voting rights. (c)Both (a) and (b).
7. State which of the following statements is true?

(a) Buy-back is for more than twenty-five per cent of the total paid-up capital and free reserves of the company.
(b) Partly paid shares cannot be bought back by a company.
(c) Buy-back of equity shares in any financial year shall exceed twenty-five per cent of its total paid-up equity
capital in that financial year.
8. Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against
(a) Free reserves. (b) Securities premium. (c) Both (a) and (b).
9. Advantages of Buy-back of shares include to

(a) Encourage others to make hostile bid to take over the company.
(b) Decrease promoters holding as the shares which are bought back are cancelled.
(c) Discourage others to make hostile bid to take over the company as the buy-back will increase the promoters
holding.
ANSWERS
1. (a); 2. (c); 3. (b); 4. (b); 5. (b); 6. (c);
7. (b); 8. (c); 9. (c)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
SUMMARY NOTES
SOLUTIONS
Q7. Statement determining the maximum number of shares to be bought back

Number of shares
Particulars When loan fund is (crores)
Rs. 1,800 Rs. 1,200 Rs. 1,500
Shares Outstanding Test (W.N.1) 8.25 8.25 8.25
Resources Test (W.N.2) 6.25 6.25 6.25
Debt Equity Ratio Test (W.N.3) Nil 3.75 Nil
Maximum number of shares that can be
bought back [least of the above] Nil 3.75 Nil
Journal Entries for the Buy Back (applicable only when loan fund is Rs. 1,200 crores)
Rs. in crores
Debit Credit
(a) Equity share buy back account Dr. 112.5
To Bank account 112.5
(Being buy back of 3.75 crores equity shares of Rs. 10 each
@ Rs. 30 per share)
(b) Equity share capital account Dr. 37.5
Securities premium account Dr. 75
To Equity share buy back account 112.5
(c) General reserve account Dr. 37.5
To Capital redemption reserve account 37.5
(Being transfer of free reserves to capital redemption
reserve to the extent of nominal value of share capital
bought back out of redeemed through free reserves)
Working Notes:
1 . Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 33
25% of the shares outstanding 8.25
2. Resources Test
Particulars
Paid up capital (Rs. in crores) 330
Free reserves (Rs. in crores) 420
Shareholders’ funds (Rs. in crores) 750
25% of Shareholders fund (Rs. in crores) Rs. 187.5 crores
Buy back price per share Rs. 30
Number of shares that can be bought back (shares in crores) 6.25 crores shares
3. Debt Equity Ratio Test
Particulars When loan fund is(crores)
Rs. 1,800 Rs. 1,200 Rs. 1,500
(a) Loan funds (Rs. in crores) 1,800 1,200 1,500
(b) Minimum equity to be maintained
after buy back in the ratio of 2:1
(Rs. in crores) 900 600 750
(c) Present equity shareholders fund
(Rs. in crores) 750 750 750
(d) Future equity shareholder fund (Rs. in
crores) (See Note 2)
N.A. 712.5 N.A
(750-37.5)
(e) Maximum permitted buy back of Equity
(Rs. in crores) [(d) – (b)] (See Note 2) Nil 112.5 (by Nil
simultaneous
equation)
(f) Maximum number of shares that can
be bought back @ Rs. 30 per share
(shares in crores) (See Note 2) Nil
3.75 (by Nil
simultaneous
equation)
Note: As per Company Act. 2013, the ratio of debt owed by the company should not be more than twice the capital and its
free reserve after such buy-back. Also as per the section, on buy-back of shares out of free reserves a sum equal to the
nominal value of the share bought back shall be transferred to Capita Redemption Reserve (CRR). As per section 80,
utilization of CRR is restricted to issuance of fully paid-up bonus shares only. It means CRR is not available for distribution
as dividend. Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves,
amount transferred to CRR on buyback has to be excluded from present equity.
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method.
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
(750 –x)-600 = y (1)
(y/30*10) = x
Or 3x=y
by solving the above equation we get
x = Rs. 37.5 crores
y = Rs. 112.5 crores
Q12. Journal Entries in the books of M Ltd.

(₹ in ‘000)
Particulars Dr. Cr.

1. Bank A/c Dr. 2,500
Profit and Loss A/c Dr. 500
To Investment A/c 3,000
(Being investment sold for the purpose of buy-backof
Equity Shares)
2. Equity share capital A/c Dr. 600
Premium payable on buy-back Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back of equity shares)
3. Equity shares buy-back A/c Dr. 900
To Bank A/c 900
(Being payment made for buy-back of equity shares)
4. Securities Premium A/c Dr. 300
To Premium payable on buy-back 300
(Being premium payable on buy-back charged from
Securities premium)
5. Revenue reserve A/c Dr. 600
To Capital Redemption Reserve A/c 600
(Being creation of capital redemption reserve to the
extent of the equity shares bought back)
Q13.
Dr. Cr.
Rs. Rs.
1. Bank A/c Dr. 25,00,000
(Being investment sold for the purpose of buy-back
of Equity Shares)
2. Bank A/c Dr. 20,00,000
To 12% Pref. Share capital A/c 20,00,000
(Being 12% Pref. Shares issued for Rs. 20,00,000)
3. Equity share capital A/c Dr. 50,00,000
Premium payable on buy-back Dr. 25,00,000
To Equity shares buy-back A/c/ Equity 75,00,000
shareholders A/c
(Being the amount due on buy-back of E S )
4. Equity shares buy-back A/c/ Equity shareholders Dr. 75,00,000
A/c
To Bank A/c 75,00,000
(Being payment made for buy-back of E S )
5. Securities Premium A/c Dr. 15,00,000
General Reserve A/c Dr. 10,00,000
To Premium payable on buy-back 25,00,000
(Being premium payable on buy-back charged
from Securities premium)
6. General Reserve A/c Dr. 30,00,000
To Capital Redemption Reserve A/c 30,00,000
(Being creation of capital redemption reserve to
the extent of the equity shares bought back after
deducting fresh pref. shares issued)
Q14. Journal Entries in the books of Umesh Ltd.

₹ ₹
1. Bank A/c Dr. 10,00,000
To 11% Preference share application&
allotment A/c 10,00,000
(Being receipt of application money on
preference shares)
2. 11% Preference share application & allotmentA/c Dr. 10,00,000
3. (Being allotment of 1 lakh preference shares)
General reserve A/c Dr. 30,00,000
To Capital redemption reserve A/c 30,00,000
(Being creation of capital redemption reserve forbuy
back of shares)
4. Equity share capital A/c Dr. 40,00,000
Premium payable on buyback A/c Dr. 48,00,000
To Equity shareholders/Equity sharesbuy
back A/c 88,00,000
(Amount payable to equity shareholder on buy
back)
5. Equity shareholders/ Equity shares buy back A/c Dr. 88,00,000
To Bank A/c 88,00,000
(Being payment made for buy back of shares)
6. Securities Premium A/c Dr. 16,00,000
General reserve A/c 32,00,000
To Premium payable on buyback A/c 48,00,000
(Being premium on buyback charged from
securities premium and general reserve)
Working Notes:
1. Calculation of amount used from General Reserve Account
Amount paid for buy back of shares (4,00,000 shares x ₹ 22) 88,00,000
Less: Proceeds from issue of Preference Shares(1,00,000 (10,00,000)
shares x ₹10)
Less: Utilization of Securities Premium Account (16,00,000)
Balance used from General Reserve Account 62,00,000
* Used under Section 68 for buy back 32,00,000
Used under Section 69 for transfer to CRR (W.N 2) 30,00,000
62,00,000
2. Amount to be transferred to Capital Redemption Reserve account
Nominal value of shares bought back 40,00,000
(4,00,000shares x ₹10)
Less: Nominal value of Preference Shares issued for such buyback
(1,00,000 shares x ₹10) (10,00,000)
Amount transferred to Capital Redemption Reserve Account 30,00,000
Q15. Journal Entries for buy-back of shares

Debit (Rs.) Credit (Rs.)
(a) Equity shares buy-back account Dr. 3,75,000
(Being buy back of 25,000 equity shares of Rs. 10
each @ Rs. 15 per share)
(b) Equity share capital account Dr. 2,50,000
Premium payable on buyback account Dr. 1,25,000
To Equity shares buy-back account 3,75,000
(c) Securities premium account Dr. 1,25,000
To Premium payable on buyback account 1,25,000
(Being Premium payable on buyback adjusted
against securities premium account)
(d) Revenue reserve account Dr. 2,50,000
2,50,000
To Capital redemption reserve account
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal value
of capital bought back through free reserves)
Balance Sheet of Complicated Ltd. as at 1st April, 2021
Rs.
(a) Short-term borrowings 4 16,50,000
(b) Other current liabilities 5 3,00,000
Total 82,75,000
ASSETS
(a) Property, Plant and Equipment 46,50,000
2 Current assets (Rs. 40,00,000 – Rs. 3,75,000) 36,25,000
Total 82,75,000
Notes to Accounts
Rs. Rs.
1. Share Capital
1,10,000 Equity shares of Rs.10 each 11,00,000
Capital Redemption Reserve 2,50,000
Less: Utilization for share buy-back (1,25,000) 1,25,000
Share Option Outstanding Account 4,00,000
Revenue reserves 15,00,000
Surplus i.e. Profit and Loss A/c 1,25,000 23,50,000
Secured
Unsecured loans 10,00,000 28,75,000
Current maturities of long-term borrowings 16,50,000
Unpaid dividend 1,00,000
Application money received for allotment due
for refund 2,00,000 3,00,000
Q17. Debt Equity Ratio Test

Particulars Rs.
a) Loan funds 42,00,000
(b) Minimum equity to be maintained after buy-back in the ratio
of 2:1 (Rs. in crores) 21,00,000
(c) Present equity shareholders fund (Rs. in crores) 72,80,000
(d) Future equity shareholder fund (Rs. in crores) (See Note 2) 59,85,000
(72,80,000-12,95,000)
(e) Maximum permitted buy-back of Equity (Rs.in crores) [(d) 38,85,000 (by simultaneous
– (b)] (See Note 2) equation)
(f) Maximum number of shares that can be 1,29,500 (by simultaneous
bought back @ Rs. 30 per share (shares in crores) (See Note 2) equation)
Working Note:
1. Shareholders’ funds
Particulars Rs.
Free reserves (32,50,000 +6,00,000+4,30,000) 42,80,000
72,80,000
2. As per section 68 of the Companies Act, 2013, amount transferred to CRR and maximum equity to be
bought back will be calculated by simultaneous equation method.
Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is ‘x’ and
maximum permitted buy-back of equity is ‘y’.
Equation 1:
(Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity to be maintained =
Maximum permissible buy-back of equity
(72,80,000 –x)-21,00,000 = y (1)
Since 51,80,000 – x = y
Equation 2:
(Maximum buy – back / Offer price for buy – back) X Nominal Value
= (y / 30) X 10 = x
3x = y (2)
x = Rs. 12,95,000 crores and y = Rs. 38,85,000 crores
Q18. Statement determining the maximum number of shares to be bought back

Number of shares
Particulars When loan fund is
₹ 2,520 crores ₹ 1,680 crores ₹ 2,100 crores
Shares Outstanding Test (W.N.1) 11.55 11.55 11.55
Resources Test (W.N.2) 8.75 8.75 8.75
Debt Equity Ratio Test (W.N.3) Nil 5.25 Nil
Maximum number of shares that can
be bought back [least of the above] Nil 5.25 Nil
Journal Entries for the Buy-Back

(Applicable only when loan fund is ₹ 1,680 crores)
₹ in crores
(a) Equity share buy-back account Dr. 157.5
To Bank account 157.5
(b) Equity share capital account (5.25 x ₹ 10) Dr. 52.5
Securities premium account (5.25 x ₹ 20) Dr. 105
To Equity share buy-back account 157.5
(c) General reserve account Dr. 52.5
To Capital redemption reserve account 52.5
Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 46.2
25% of the shares outstanding 11.55
2. Resources Test
Particulars
Paid up capital (₹ in crores) 462
Free reserves (₹ in crores) (336+126+126) 588
Shareholders’ funds (₹ in crores) 1,050
25% of Shareholders fund (₹ in crores) ₹ 262.5 crores
Buy-back price per share ₹ 30
Number of shares that can be bought back (shares incrores) 8.75 crores shares
3. Debt Equity Ratio Test

Particulars When loan fund is
₹ 2,520 crores ₹ 1,680 crores ₹ 2,100 crores
(a) Loan funds (₹ in 2,520 1,680 2,100
crores)
(b) Minimum equity to be
maintained after buy- 1,260 840 1,050
back in the ratio of 2:1
(₹ in crores)
(c) Present equity 1,050 1,050 1,050
shareholders fund
(₹ in crores)
(d) Future equity N.A. 997.5 N.A.
shareholder fund (1,050-52.5)
(₹ in crores) (See
Note 2)
(e) Maximum permitted Nil 157.5 (by Nil
buy-back of Equity (₹ simultaneous
in crores) [(d) – (b)] equation)
(See Note 2)
(f) Maximum number of 5.25 (by
shares that can be simultaneous
bought back @ Nil equation) Nil
₹ 30 per share
(shares in crores)
(See Note 2)
Note:
1. Under Situations 1 & 3 the company does not qualify for buy-back of shares as per the provisions of the
Companies Act, 2013.
2. As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company should not be more than
twice the capital and its free reserve after such buy-back.
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation
method.
Suppose amount equivalent to nominal value of bought back shares transferred to
CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
Equation 1: (Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity to be
maintained= Maximum permissible buy-back of equity
(1,050 –x)-840 = y
Since 210 – x = y
Equation 2: (Maximum buy-back / Offer price for buy-back) X Nominal Value

= ( y x 10) = x
30
Or 3x = y (2)
by solving the above two equations we get
x = ₹ 52.5 crores
y = ₹ 157.5 crores
3. Statutory reserves, capital redemption reserve and plant revaluation reserves are not free reserves.
4. For calculation of debt -equity ratio both secured and unsecured loans have been considered.
Q19. As per section 68(1) of the Companies Act 2013, maximum buy back of Equity shares by the company, shall be
lower of the following three:
(i) Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding 1,70,000
25% of the shares outstanding 42,500
(ii) Resources Test
Particulars Rs.
Free reserves (23,50,000 + 2,50,000 + 2,00,000) 28,00,000
Shareholders’ funds 45,00,000
25% of Shareholders fund 11,25,000
Buy back price per share 30
Number of shares that can be bought back (shares) 37,500
(iii) Post Buy Back Debt Equity Ratio Test
Particulars Rs.
Total Debt(22,50,000 + 8,50,000 + 15,50,000) 46,50,000
Minimum equity to be maintained
after buy back in the ratio of 2:1 23,25,000
Present equity shareholders fund 45,00,000
Maximum permitted buy back of Equity (W.N. 1) 16,31,250
Maximum number of shares that can
be bought back @ Rs. 30 per share (Rs. 16,31,250 / Rs. 30) 54,375
or
(Rs. 5,43,750 / Rs. 10)
Maximum buy back of equity share is 37,500 Equity Shares.

In the given question company can make a buy back of 35,000 Equity shares, as it is within the provisions
of the Companies Act, 2013.
Working Note: As per Section 68 of the Companies Act 2013, the ratio of debt owed by the company should
not be more than twice the capital and its free reserve after such buy-back. Also as per the section, on buy-back
of shares out of free reserves a sum equal to the nominal value of the share bought back shall be transferred to
Capita Redemption Reserve (CRR). As per Company Act. 2013, utilization of CRR is restricted to issuance of
fully paid-up bonus shares only. It means CRR is not available for distribution as dividend. Hence, CRR is not a
free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves, amount transferred to
CRR on buyback has to be excluded from present equity. Amount transferred to CRR and maximum equity to be
bought back will be calculated by simultaneous equation method.
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
(45,00,000 – x) – 23,25,000 = y (1)
(y/buyback price) * Face Value = x
(y/30)*10 = x (2)
Or 3x=y
by solving the above equation we get
x = Rs. 5,43,750
y = Rs. 16,31,250
Q20. In the books of Alpha Limited

Journal Entries
Date Particulars Dr. Cr.
2017 (₹ in lakhs)
April 1 Bank A/c Dr. 150
To Investment A/c 148
To Profit on sale of investment 2
April 10 Equity share capital A/c Dr. 600
Securities premium A/c Dr. 300
To Equity shares buy back A/c 900
(Being the amount due to equity shareholders on
buy back)
Equity shares buy back A/c Dr. 900
To Bank A/c 900
(Being the payment made on account of buy
back of 60 Lakh Equity Shares)
April 10 General reserve A/c Dr. 530
Profit and Loss A/c Dr. 70
To Capital redemption reserve (CRR) A/c 600
(Being amount equal to nominal value of buy back
shares from free reserves transferred to capital
redemption reserve account as per the law)
April 30 Capital redemption reserve A/c Dr. 450
To Bonus shares A/c (W.N.1) 450
(Being the utilization of capital redemption reserve
to issue bonus shares)
Bonus shares A/c Dr. 450
To Equity share capital A/c 450
(Being issue of one bonus equity share for every
four equity shares held)
Profit on sale of Investment Dr. 2
To Profit and Loss A/c 2
(Profit on sale transfer to Profit and Loss A/c)
Note: For transferring amount equal to nominal value of buy back shares from free reserves to capital
redemption reserve account, the amount of ₹ 340 lakhs from P & L A/c and the balance from general reserve
may also be utilized. The combination of different set of amounts (from General Reserve and Profit and Loss
Account) aggregating ₹ 600 lakhs may also be considered for the purpose of transfer to CRR.
Balance Sheet (After buy back and issue of bonus shares)
Particulars Note Amount (₹

No in Lakhs)
(a) Share Capital 1 2,250
(b) Reserves and Surplus 2 872
(a) Long-term borrowings - 12% Debentures 1,500
(a) Trade payables 1,490
(b) Other current liabilities 390
Total 6,502
II. Assets
(a) Fixed assets
(i) Tangible assets 4,052
(2) Current assets
(a) Current investments
(b) Inventory 1,200
(c) Trade receivables 520
(d) Cash and cash equivalents (W.N. 2) 730
Total 6,502
Notes to Accounts
₹ In
lakhs
1. Share Capital
Equity share capital (225 lakh fully paid up shares of
₹ 10 each) 2,250
General Reserve 530
Less: Transfer to CRR (530) -
Add: Transfer due to buy-back of shares from P/L 70
Add: Transfer due to buy-back of shares from Gen. res. 530
Less: Utilisation for issue of bonus shares (450) 550
Less: Adjustment for premium paid on buy back (300) 50
Profit & Loss A/c 340
Add: Profit on sale of investment 2
Less: Transfer to CRR (70) 272 872
Working Notes:
1. Amount of equity share capital = 2,400 - 600 (buyback) + 450 (Bonus shares)
= 2,250
2. Cash at bank after issue of bonus shares
₹ in lakhs
Cash balance as on 1st April, 2017 1480
Add: Sale of investments 150
1630
Less: Payment for buy back of shares (900)
730
NON-BANKING FINANCIAL COMPANIES
1. Anischit Finance Ltd. is a non-banking finance company. It makes available to you the costs and market
price of various investments held by it as on 31.3.2012: (Figures in Rs. lakhs)
Cost Market Price
Scripts: A. Equity Shares-
A 60.00 61.20
B 31.50 24.00
C 60.00 36.00
D 60.00 120.00
E 90.00 105.00
F 75.00 90.00
G 30.00 6.00
Scripts: B. Mutual funds-
MF-1 39.00 24.00
MF-2 30.00 21.00
MF-3 6.00 9.00
Scripts: C. Government securities-
GV-1 60.00 66.00
GV-2 75.00 72.0
(i) Can the company adjust depreciation of a particular item of investment within a category?
(ii) What should be the value of investments as on 31.3.2012?
(iii) Is it possible to off-set depreciation in investment in mutual funds against appreciation of the value of
investment in equity shares and government securities?
2. While closing its books of accounts on 31st March 2018, a Non-Banking Finance Company has its advances
classified as follows:
₹ (in lakhs)
Standard assets 18,400
Sub-standard assets 1,250
Secured Portion of doubtful debts:
Up to one year 300
One year to three years 90
More than three years 30
Unsecured portions of doubtful debts 92
Loss assets 47
Calculate the amount of provision which must be made against the Advances as per -
(i) The Non-banking Financial Company - Non-systematically Important Non-Deposit taking Company
(Reserve Bank) Directions, 2016; and
(ii) Non-banking Financial Company - Systematically Important Non- Deposit taking Company (Reserve
Bank) Directions, 2016.
3. Glory Finance Ltd is Non–Banking Finance Company. The extracts of its Balance Sheet are given below:
Liabilities Rs. in 000s Assets Rs. in 000s

Paid–up Capital 100 Leased out Assets 800
Free Reserve 500 Investments:
Loans 400 In Shares of Subsidiaries 100
Deposits 400 In Debentures of Subsidiaries 100
Cash and Bank Balances 200
Deferred Expenditure 200
Total 1,400 Total 1,400
Compute “Net Owned Fund” of Glory Ltd as per NBFC (Deposit Accepting or Holding) Companies
Prudential Norms (RBI) Directions, 2007.
4. GEM Ltd. is a NBFC providing Hire Purchaser Solutions for acquiring consumer durables. The following
information is extracted from its books for the year ended 31st March 2021.
₹ in Lakhs
Paid up Equity Capital 2520
Compulsory convertible preference shares 1035
Free Reserve 243
Capital Reserve (₹ 220 Lakhs surplus arising out of sale of Building) 319
Deferred revenue expenditure 54
Debenture issued 702
Cash & Bank Balances 243
Investments in debentures of subsidiaries 171
Investments in shares of other NBFC 945
You are required to calculate Owned Fund and Net Owned Fund.
5. ABC Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer durables. The
following information is extracted from its books for the year ending 31st March, 2017:
Assets Funded Interest Overdue Net book value of

but recognized in Profit & Loss Assets outstanding
Paid Overdue Interest (₹ In lakhs) Interest (₹ In lakhs)
Computers Upto 12 months 960.00 40,812.00
Televisions For 20 months 205.00 4,950.00
Washing Machines For 32 months 104.20 2,530.00
Refrigerators For 45 months 53.50 1328.00
Air-conditioners For 52 months 13.85 305.00
You are required to calculate the amount of provision to be made.
6. Samvedan Limited is a non-banking finance company. It accepts public deposit and also deals in hire
purchase business. It provides you with the following information regarding major hire purchase deals as on
31-03-2011. Few machines were sold on hire purchase basis. The hire purchase price was set as Rs. 100
lakhs as against the cash price of Rs. 80 lakhs. The amount was payable as Rs. 20 lakhs down payment and
balance in 5 equal instalments. The hire vendor collected first instalment as on 31-03-2012, but could not
collect the second instalment which was due on 31-03-2013. The company was finalising accounts for the
year ending 31-03-2013. Till 15-05-2013, the date 'on which the' Board of Directors signed the accounts, the
second instalment was not collected. Presume IRR to be 10.42%.
Required:
(i) What should be the principal outstanding on 1-4-2012? Should the company recognize finance charge
for the year 2012-13 as income?
(ii) What should be the net book value of assets as on 31-03-13 so far Samvedan Ltd. is concerned as per
NBFC prudential norms requirement for provisioning?
(iii) What should be the amount of provision to be made as per prudential norms for NBFC laid down by
RBI?
7. XYZ Limited is an NBFC registered with RBI as non-deposit accepting company. Its main activity includes
issuing term loans of different tenures. One of its major customers, ABC Ltd, is engaged in the business of
manufacturing. However, due to fall in demand and non-recovery of existing trade receivables, ABC Ltd. is
facing working capital difficulties. As on 31st March, 20X1 outstanding amount in respect to ABC Ltd. is
as under:
Principle amount outstanding (for more than 8 months): Rs. 250 lakhs
Interest and penalties on the above: Rs. 30 lakhs
XYZ Ltd. is following accrual system for accounting of its income. Following the same, the Company has
accrued Rs. 30 lakhs as interest income in the Financial Statements for the year ended 31st March, 20X1.
You are required to state whether income accrual of Rs. 30 lakhs is in accordance with Non Banking Finance
Company-Systemically Important Non Deposit taking Company Directions, 2016?
Solution: As per the said directions, Non- performing asset shall mean: a term loan inclusive of unpaid
interest, when the instalment is overdue for a period of six months or more or on which interest amount
remained overdue for a period of six months or more. In the present case, dues of ABC Ltd. is outstanding
for more than 6 months. Hence, ABC Ltd. will need to be classified as NPA in the books of XYZ Ltd. as on
31st March, 20X1. Once an asset becomes NPA, any income on the said asset need to be recognized on cash
basis. Also, previous income accrued but not received, need to be reversed. Based on the same, XYZ Ltd.
shall stop accruing further interest accrual on term loan of ABC Ltd. Also, Rs.30 lakhs accrued but not
realized, need to be reversed.
8. Bright Finance Ltd. is a non-banking financial company. It provides you with the following information
regarding its outstanding amount, Rs. 200 lakhs of which installments are overdue on 200 accounts for last
one month (amount overdue Rs. 40 lakhs), on 24 accounts for two months (amount overdue Rs. 24 Iakhs), on
10 accounts for more than 30 months (amount overdue Rs. 20 lakhs) and on 4 accounts for more than two
years (amount over due Rs. 20 lakhs-already identified as sub-standard assets) and one account of Rs. 10
lakhs which has been identified as non-recoverable by the management. Out of 10 accounts overdue for more
than 30 months, 6 accounts are already identified as sub-standard (amount Rs. 6 lakhs) for more than twelve
months and other are identified as sub-standard asset for a period of less than twelve months.
Classify the assets of the company in line with Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
Solution: Statement showing classification as per Non Banking Financing (Deposit, Accepting or
Holding) Companies, Prudential Norms (Reserve Bank) Directions, 2007
(Rs. in lakhs)
Standard Assets
Accounts (Balancing figure) 86.00
200 accounts overdue for a period for 1 month 40.00
24 accounts overdue for a period by 2 months 24.00 150.00
Sub-Standard Assets
4 accounts identified as sub-standard asset for a period less than 12 months 14.00
Doubtful Debts
6 accounts identified as sub-standard for a period more than 12 months 6.00
4 accounts identified as sub-standard for a period more than 2 years 20.00
Loss Assets
1 account identified by management as loss asset 10.00
Total overdue 200.00
9. While closing its books of account on 31st March, 2006 a Non-Banking Finance Company has its advances
classified as follows:
Rs.in lakhs
Standard assets 16,800
Sub-standard assets 1,340
Secured positions of doubtful debts:
- upto one year 320
- one year to three years 90
- more than three years 30
Unsecured portions of doubtful debts 97
Loss assets 48
Calculate the amount of provision, which must be made against the Advances.
Solution: Calculation of provision required on advances as on 31st March, 2006
Amount Percentage of Provision
Rs. in lakhs provision Rs. in lakhs
Standard assets 16,800 .40 67.2

Sub-standard assets 1,340 10 134
Secured portions of doubtful debts-
- upto one year 320 20 64
- one year to three years 90 27 30
- more than three years 30 15 50
Unsecured portions of doubtful debts 97 97 100
Loss assets 48 48 100
452.2
10. Mahindra Finance Ltd. is a non-banking finance company. The extracts of its balance sheet are given below:
Paid up equity share capital 100 Leased out Assets 800
Investment:
Free Reserves 500 In shares of subsidiaries and
Loans 400 group companies 100
Deposit 400 In debentures of subsidiaries
and group companies
100
Cash and Bank balances
200
Deferred Expenditure
200
1,400 1,400
You are required to compute Tier – I Capital of Mahindra Finance Ltd. according to NBFC Prudential
Norms (RBI) Directions 1998.
Solution:
Statement Showing Computation of Tier-I Capital
(Rs. in lakhs)
Paid up Equity Capital 100
Free Reserve 500
(A) 600
Deduct deferred expenditure (B) 200
(C) 400
Investments
In shares of subsidiaries and Group Companies 100
In Debenture of subsidiaries and Group Companies 100
200
10% (C) (D) 40
Excess of Investment over 10% of (C) = (E) 160
Tier-I Capital [(C + E)] 240
11. Peoples Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer durables. The
following information is extracted from its books for the year ended 31st March, 2017:
Interest Overdue but recognized in Net Book Value of
Asset Funded Profit & loss Assets outstanding
Period Overdue Interest Amount
(₹ in crore) (₹ in crore)
LCD Televisions Upto 12 months 480.00 20,123.00

Washing For 24 months 102.00 2,410.00
Machines
Refrigerators For 30 months 50.50 1,280.00
Air For 45 months 26.75 647.00
Conditioners
You are required to calculate the amount of provision to be made.
Solution:
On the basis of the information given, in respect of hire purchase and leased assets, additional provision shall
be made as under:
(Rs. in crore)
(a) Where hire charges are overdue Nil -
upto 12 months
(b) Where hire charges are overdue 10% of the net book value 241
for more than 12 months but upto 10% x 2,410
24 months
(c) Where hire charges are overdue 40 percent of the net book 512
for more than 24 months but upto value
36 months 40% x 1,280
(d) Where hire charges or lease 70 percent of the net book 452.90
rentals are overdue for more than value
36 months but upto 48 months 70% x 647
Total 1,205.90
12. Calculate ‘Owned Fund’ of a NBFC based on the following facts:

Paid up share capital: Rs. 150 lakhs
Free reserves: Rs. 250 lakhs
Compulsory convertible preference shares (CCPS): Rs. 50 lakhs
Revaluation Reserve: Rs. 95 lakhs
Solution: Owned fund calculation:
Total(owned fund): Rs. 450 lakhs
13. LK Finance Ltd. is a non-banking financial company. It provides you with the following information
regarding its outstanding amount, Rs. 400 lakhs of which installments are overdue on 400 accounts for last
two months (amount overdue Rs. 80 lakhs), on 24 accounts for three months (amount overdue Rs. 48 Iakhs),
on 10 accounts for more than 30 months (amount overdue Rs. 40 lakhs) and on 4 accounts for more than
three years (amount over due Rs. 40 lakhs-already identified as sub- standard assets) and one account of Rs.
20 lakhs which has been identified as non- recoverable by the management. Out of 10 accounts overdue for
more than 30 months, 6 accounts are already identified as sub-standard (amount Rs. 12 lakhs) for more than
fourteen months and other are identified as sub-standard asset for a period of less than fourteen months.
Classify the assets of the company in line with Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
Solution:
Statement showing classification as per Non-Banking Financial Company-Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016
(Rs. in lakhs)
Standard Assets
Accounts (Balancing figure) 172.00
400 accounts overdue for a period for 2 months 80.00
24 accounts overdue for a period by 3 months 48.00 300.00
Sub-Standard Assets
4 accounts identified as sub-standard asset for a period less than 14 months 28.00
Doubtful Debts
6 accounts identified as sub-standard for a period more than 14 months 12.00
4 accounts identified as sub-standard for a period more than 3 years 40.00
Loss Assets
1 account identified by management as loss asset 20.00
Total overdue 400.00
14. Universal Financers Ltd. is a Non-Banking Financial Company.
It provides you the following information regarding its advances of Rs. 440 lakhs, of which instalments are
overdue on:
 550 accounts for last 3 months (amount overdue Rs. 105 lakhs)
 75 accounts for 4 months (amount overdue Rs. 64 lakhs)
 25 accounts for more than 30 months (amount overdue Rs. 66 lakhs)
 15 accounts already identified as sub-standard for more than 3 years (unsecured) (amount overdue Rs. 82
lakhs)
 8 accounts of Rs. 33 lakhs have been identified as non-recoverable by the management. (out of 25
accounts overdue for more than 30 months, 17 accounts are already identified as sub standard for more
than 12 months (amount overdue Rs. 19 lakhs) and others are identified as substandard asset for a period
of less than 12 months.
Classify the assets of the company In line with the Non-Banking Financial Company - Systemically
Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
Solution:
Statement showing classification as per Non-Banking Financial Company - Systemically Important
Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016
(Rs. in lakhs)
Standard Assets
Accounts (Balancing figure) 90
550 accounts overdue for a period of 3 months 105
75 accounts overdue for a period of 4 months 64 259
Sub-Standard Assets
8 accounts identified as sub-standard asset for a period less than12 months 47
Doubtful Debts
17 accounts identified as sub-standard for a period more than 12months 19
15 accounts identified as sub-standard for a period more than 3years 82
Loss Assets
8 accounts identified by management as loss asset 33
Total overdue 440
15. Explain the criterion of income recognition in the case of Non Banking Financial Companies.
Solution:
(1) The income recognition shall be based on recognised accounting principles.
(2) Income including interest/ discount or any other charges on NPA shall be recognised only when it is
actually realised. Any such income recognised before the asset became non-performing and remaining
unrealised shall be reversed.
(3) In respect of hire purchase assets, where instalments are overdue for more than 3 months, income shall
be recognised only when hire charges are actually received. Any such income taken to the credit of profit
and loss account before the asset became non performing and remaining unrealized, shall be reversed.
(4) In respect of lease assets, where lease rentals are overdue for more than 3 months, the income shall be
recognised only when lease rentals are actually received. The net lease rentals* taken to the credit of
profit and loss account before the asset became non-performing and remaining unrealised shall be
reversed.
* Net lease rentals’ mean gross lease rentals as adjusted by the lease adjustment account debited/credited to
the profit and loss account and as reduced by depreciation.
16. Calculate ‘Owned Fund’ of an NBFC based on the following information:

Revaluation reserve: Rs. 50 lakhs (created by revaluation of assets)
Securities premium: Rs. 25 lakhs
Book value of intangible assets: Rs. 10 lakhs
Capital reserves (surplus arising out of sale proceeds of assets): Rs. 15 lakhs
Solution: Owned fund calculation:
Securities premium: Rs. 25 lakhs
Capital Reserves: 15 lakhs
Total of all above items : Rs. 440 lakhs
Reduced by the value of intangible assets (Rs. 10 lakhs)
Owned fund is computed as Rs. 430 lakhs
Note: Revaluation reserve to be excluded while computing owned fund.
17. Write short notes on:

(i) “Non-Performing Assets” as per NBFC Prudential Norms (RBI) directions.
(ii) Capital adequacy ratio.
(iii) Earning value (Equity share).
Answer:-
(i) “Non−Performing Asset” as per NBFC Prudential Norms (RBI) directions means:
(a) an asset, in respect of which, interest has remained overdue for a period of Three months or more;
(b) a term loan inclusive of unpaid interest, when the instalment is overdue for a period of Three months or
more or on which interest amount remained overdue for a period of Three months or more;
(c) a demand or call loan, which remained overdue for a period of Three months or more from the date of
demand or call or on which interest amount remained overdue for a period of Three months or more;
(d) a bill which remains overdue for a period of Three months or more;
(e) the interest in respect of a debt or the income on receivables under the head ‘other current assets’ in the
nature of short term loans/advances, which facility remained overdue for a period of Three months or
more;
(f) any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which
remained overdue for a period of Three months or more;
As per Non-Banking Financial Company – Non-Systemically Important Non- Deposit taking

Company (Reserve Bank) Directions, 2016, the criteria is 3 months only in above point (a) to (f) .
(g) the lease rental and hire purchase instalment, which has become overdue for a period of Three months
or more;
As per Non-Banking Financial Company – Non-Systemically Important Non- Deposit taking

Company (Reserve Bank) Directions, 2016, the criteria is 12 months only.
(h) in respect of loans, advances and other credit facilities (including bills purchased and discounted), the
balance outstanding under the credit facilities (including accrued interest) made available to the same
borrower/beneficiary when any of the above credit facilities becomes non-performing asset:
Provided that in the case of lease and hire purchase transactions, a non-banking financial company may
classify each such account on the basis of its record of recovery.
(ii) Non-Banking Financial Companies (NBFC) are required to maintain adequate capital. Every NBFC shall
maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 12%
of its aggregate risk-weighted assets on balance sheet and of risk adjusted value of off-balance sheet
items.
The total of Tier II capital, at any point of time, shall not exceed 100% of Tier I capital.
Capital adequacy is calculated as under:
[(Tier I + Tier II Capital)/Risk Adjusted Assets]* 100
(iii) “Earning value” means the value of an equity share computed by taking the average of profits after tax as
reduced by the preference dividend and adjusted for extra-ordinary and nonrecurring items, for the
immediately preceding three years and further divided by the number of equity shares of the investee
company and capitalised at the following rate:
(1) in case of predominantly manufacturing company, eight per cent;
(2) in case of predominantly trading company, ten per cent; and
(3) in case of any other company, including non-banking financial company, twelve percent;
NOTE: If an investee company is a loss making company, the earning value will be taken at zero.
18. Lease and hire purchase assets

Lease and hire purchase assets
The provisioning requirements in respect of hire purchase and leased assets shall be as under:
Hire purchase assets
(i) In respect of hire purchase assets, the total dues (overdue and future instalments taken together) as reduced by
(a) the finance charges not credited to the profit and loss account and carried forward as unmatured finance charges; and
(b) the depreciated value of the underlying asset, shall be provided for.
Explanation :
For the purpose of this paragraph,
(1) the depreciated value of the asset shall be notionally computed as the original cost of the asset to be reduced by
depreciation at the rate of twenty per cent per annum on a straight line method; and
(2) in the case of second hand asset, the original cost shall be the actual cost incurred for acquisition of such second
hand asset.
Additional provision for hire purchase and leased assets
(ii) In respect of hire purchase and leased assets, additional provision shall be made as under:
(a) Where hire charges or lease rentals are overdue upto 12 months Nil
(b) where hire charges or lease rentals are overdue for more than12 months but upto 24 months 10% of the net book
value
(c) where hire charges or lease rentals are overdue for more 40 percent of the net
than 24 months but upto 36 months book value
(d) where hire charges or lease rentals 70 percent of the net
are overdue for more than 36 months but upto 48 months book value
(e) where hire charges or lease rentals are overdue 100 percent of the net
for more than 48 months book value
(iii) On expiry of a period of 12 months after the due date of the last instalment of hire purchase/leased asset, the entire net
book value shall be fully provided for.
In case of Lease and hire purchase assets provisions amount and Net Book Value shall be calculated as
follows:
19. Differences between NBFC and Bank
S.No. NBFC Bank

1. An NBFC cannot accept demand deposits. A Bank can accept demand deposits
2. An NBFC is not a part of the payment and A Bank is a part of the payment and settlement
settlement system. system
3. An NBFC cannot issue cheques drawn on itself. A Bank can issue cheques drawn on itself.
4. Deposit insurance facility of the Deposit Deposit insurance facility of the Deposit
Insurance and Credit Guarantee Corporation Insurance and Credit Guarantee Corporation
(DICGC) is not available for NBFC depositors. (DICGC) is available for banks.
1. For the purpose of RBI Directions relating to Acceptance of Public Deposits, non-banking financial
company means the non-banking institution which is
(a) Loan company or investment company.
(b) Hire-purchase finance company or equipment leasing company.
2. For Sub-standard assets in the case of NBFC, a general provision of

(a) 5% of total outstanding shall be made.
(b) 10% of total outstanding shall be made.
(c) 15% of total outstanding shall be made.
3. “Owned fund” excludes

(a) paid up capital.
(b) free reserves, balance in share premium account.
(c) reserves created by revaluation of asset.
4. For secured portion of loans (one to three years) under doubtful category, provision will be made at
(a) 20%
(b) 30%
(c) 50%.
5. For hire-purchase and lease assets, doubtful asset would mean an asset that has remained sub-standard for
a period exceeding 12 months
(a) 6 months.
(b) 12 months.
(c) 3 months.
6. For more than three years (unsecured) doubtful advances, provision will be made for
(a) 10%
(b) 40%
(c) 100%
7. For more than three years (secured) doubtful advances, provision will be made for
(a) 50%
(b) 40%
(c) 10%
8. A general provision of total outstanding shall be made in case of sub- standard advances.
(a) 50%
(b) 40%
(c) 10%
9. Lease Rental and Hire-Purchase instalments shall become NPA if they become overdue for
(a) 6 months.
(b) 12 months.
(c) 3 months.
10. Provision towards standard assets

(a) should be netted from gross advances.
(b) shown separately as ‘Contingent provision against standard assets’ in the Balance Sheet.
Answer:
1. (c); 2. (b); 3. (c); 4. (b); 5. (b); 6. (c);
7. (a); 8. (c) 9. (c); 10. (b)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
SUMMARY NOTES
BANKING COMPANIES
Q1. A loan outstanding of Rs. 50,00,000 has DICGC cover. The loan guaranteed by DICGC is assigned a
risk weight of 50%. What is the value of Risk – adjusted asset?
Q2. On 31st March, 1997, Uncertain Bank Ltd. Had a balance of Rs. 9 crores in “rebate on bills discounted”
account. During the year ended 31st March, 1998. Uncertain Bank Ltd. Discounted bills of exchange of
Rs. 4,000 crores charging interest at 18% per annum, the average period of discount being for 73 days.
Of these, bills of exchange of Rs. 600 crores were due for realization from the acceptors/customers after
31st March, 1998, the average period outstanding after 31st March, 1998 being 36.5 days.
Uncertain Bank Ltd. Asks you to pass journal entries and show the ledger accounts pertaining to:
(i) Discounting of bills of exchange and
(ii) Rebate on bills discounted.
Q3. Following are the statements of interest on advances in respect of performing and non-performing assets
of Madura Bank Ltd. Find out the income to be recognized for the year ended 31 st March, 1998.
Rs. in lakhs
Performing Assets Interest Interest
earned received
Cash credit and overdrafts 1,800 1,060
Term loan 480 320
Bills purchased and discounted 700 550
Non-Performing Assets
Cash credit and overdrafts 450 70
Term loan 300 40
Bills purchased and discounted 350 36
Q4. From the following details prepare “Acceptances, Endorsements and other Obligation A/c” as would
appear in the general ledger.
On 1-4-1998 Acceptances not yet satisfied stood at Rs. 22,30,000. Out of which Rs. 20 lacs were
subsequently paid off by clients and bank had to honour the rest. A scrutiny of the Acceptance Register
revealed the following:
Client Acceptances/ Remarks
Guarantees
A 10,00,000 Bank honoured on 10-06-1998
B 12,00,000 Party paid off on 30-09-1998
C 5,00,000 Party failed to pay and bank had to honour on 30-11-1998
D 8,00,000 Not satisfied upto 31-03-1999
E 5,00,000 Not satisfied upto 31-03-1999
F 2,70,000 Not satisfied upto 31-03-1999
Q5. From the following information find out the amount of provisions required to be made in the profit &
Loss Account of a commercial book for the year ended 31st March, 2007:
(i) Packing credit outstanding from Food Processors Rs. 60 lakhs against which the bank holds
securities worth Rs. 15 lakhs. 40% of the above advance is covered by ECGC. The above
advance has remained doubtful for more than 3 years.
(ii) Rs. In lakhs
Asset classification
Standard 3,000
Sub-standard 2,200
Doubtful:
For one year 900
For two years 600
For three years 400
For more three years 300
Loss assets 600
Q6. The following particulars are extracted from the (Trial Balance) Books of the M/s Commercial Bank
Ltd. For the year ending 31st March, 2003.
Rs.
(i) Interest and Discounts 1,96,62,400
(ii) Rebate on Bills Discounted (balance on 1.4.2002) 65,040
(iii) Bills Discounted and purchased 67,45,400
It is ascertained that proportionate discount not yet earned on the Bills Discounted which will mature
during 2003- 2004 amounted to Rs. 92,760.
Pass the necessary Journal entries with narration adjusting the above and show:
(a) Rebate on Bill Discounted Account; and
(b) Interest and Discount Account in the ledger of the Bank.
Q7. A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I and
Tier II capitals, Find out the risk-adjusted asset and risk weighted assets ratio:
Capital Funds: Figures in Rs. Lakhs
Equity Share Capital 4,80,00
Statutory Reserve 2,80,00
Capital Reserve (of which Rs. 280 lakhs were due to 12,10
revaluation of assets and the balance due to sale)
Assets:
Cash Balance with RBI 4,80
Balance with other bank 12,50
Certificate of Deposits with other commercial Bank 28,50
Other investments 78,250
Loans and Advances:
(i) Guaranteed by government 128,20
(ii) Guaranteed by public sector undertakings of
Government of India 702,10
(iii) Others 52,02,50
Premises, furniture and fixtures 182,00
Other Assets 201,20
Off- Balance Sheet Items:
Acceptances, endorsements and letters of credit 3,70,250
Q8. Given below interest on advances of a commercial bank (Rs. In lakhs)

Performing assets NPA
Interest Interest Interest Interest
earned received earned received
Terms Loans 120 80 75 5
Cash credits and overdrafts 750 620 150 12
Bills purchased and discounted 150 150 100 20
st
Find out the income to be recognized for the year ended 31 March, 1993.
Q9. Mohan Bank Ltd. Gives you the following information for the year. 31.03.07
(i) Export Credit given Rs. 50 lakhs
ECGC cover 40%
Securities held Rs. 10 lakhs (realizable value Rs. 12 lakhs)
Period for which the advance has More than 3 years
Remained doubtful
(ii) Terms Loan Rs. 75 lakhs
DICGC cover 50% (maximum limit Rs. 20 lakhs)
Securities held Rs. 20 lakhs (realizable value Rs. 18 lakhs)
Period for which the loan has More than 3 years
Remained doubtful
You are asked to compute the provision required on the above advances.
Q10. From the following information find out the amount of provisions to be shown in the Profit and Loss
Account of a Commercial bank.
Rs. In lakhs
Assets
Standard 5000
Sub-standard 4000
Doubtful : For one year 800
: For three year 600
: For more than three years 200
Loss Assets 1000
Q11. The following is an extract from Trial Balance of Overseas bank Ltd., as at 31 st March, 1991.
Rs. Rs.
Bill discounted 12,64,000
Rebate on bills discounted not due
on March 31st,1990 22,160
Discount received 1,05,708
An analysis of the bills discounted is as follows:
Amount Due Date Rate of
Rs. 1991 Discount (%)
(i) 1,40,000 June 5 14
(ii) 4,36,000 June 12 14
(iii) 2,82,000 June 25 14
(iv) 4,.06,000 July 6 16
Calculate Rebate on Bills Discounted as on 31-3-1991 also show necessary journal entries.
Q.12 On 1-4-1990 Bills for collection were Rs. 7,00,000. During 1990-91 bills received for collection
amounted to Rs. 64,50,000, bills collected were Rs. 47,00,000 and bills dishonored and returned were
Rs. 5,50,500. Prepare Bills for collection (Assets A/c) and bills for collection (Liability A/c).
Q13. On 1-4-1990, Acceptance, Endorsement, etc. not yet satisfied amounted to Rs. 14,50,000. During the
year under question, Acceptances, Endorsements, Guarantees etc., amounted to Rs. 44,00,000. Bank had
to pay Rs. 10,00,000 under guarantee agreement. Guarantee worth Rs. 5 lakhs were paid by clients and 2
lakhs paid by Bank. Prepare the “Acceptances Endorsements and other Obligations A/c” as it would
appear in the General ledger.
Q14. The following balance are extracted from the Trial Balance as on 31-3-92;
Dr. (Rs.) Cr. (Rs.)
Interest and Discount 98,00,000
Rebate for bills discounted 20,000
Bills discounted and purchased 4,00,000
It is ascertained that the proportionate discounts not yet earned for bills to mature in 1992-93 amount to
Rs. 14,000.
Prepare Ledger Accounts.
Q15. From the following information, prepare Profit and Loss A/c of Modern Bank Ltd. as on 31-3-1992.
90-91(‘000 Rs.) Item 1991-92 (‘000 Rs.)
14,27 Interest and Discount 20,45
1,14 Income from investment 1,12
1,15 Interest on Balance with RBI 1,77
7,22 Commission, Exchange and Brokerage 7,12
12 Profit on sale of investments 1,22
6,12 Interest to RBI 8,22
1,27 Payment to and Provision for employees 1,47
7,27 Rent, taxes and lighting 8,55
1,58 Payment for expenses 1,79
1,47 Printing and stationery 2,12
1,12 Advertisement and publicity 98
98 Depreciation 98
1,48 Director’s fees 2,12
1,10 Auditor’s fees 1,10
50 Law Charges 1,52
48 Postage, telegrams and 62
42 Insurance 52
57 Repair & maintenance 66
Also give necessary schedules
Other Information
(i) The following items are already adjusted with Interest and Discount
(Cr.)
Tax Provision (‘000 Rs.) 1,48
Provision for Doubtful Debts (‘000 Rs.) 92
Loss on sale of investments (‘000 Rs.) 12
Rebate on Bills discounted (‘000 Rs.) 55
(ii) Appropriations:
20% of profit is transferred to Statutory Reserves.
5 % of profit is transferred to Revenue Reserve.
Q16. From the following information, prepare Profit and Loss A/c of Hyderabad Bank Ltd. for ended 31/3/93.
Items 000 Rs.
Interest on cash credit 18,20
Interest on overdraft 7,50
Interest on term loans 15,40
Income on investment 8,40
Interest on balance with RBI 1,50
Commission on remittances and transfer 75
Commission on letters of credit 1,18
Commission on government business 82
Profit on sale of land and building 27
Loss on exchange transactions 52
Interest paid on deposit 7,20
Auditor’s fees and allowances 1,20
Director’s fees and allowances 2,50
Advertisements 1,80
Salaries, allowances and bonus to employees 12,40
Payment to Provident Fund 2,80
Printing and Stationery 1,40
Repairs and maintenance 50
Postage, telegrams, telephones 80
Other Information
(i) Interest on NPA Is as follows:
Earned (Rs. ‘000) Collected (Rs. ‘000)
Cash credit 8,20 4,00
Overdraft 450 1,00
Term Loans 750 2,50
(ii) Classification of advances (‘000 Rs.)
Sub-standard 11,20
Doubtful assets not covered by security 2,00
Doubtful assets covered by security for one year 50
Loss Assets 2,00
(iii) Book value of Investments Rs 2750 out of which 25% held for maturity. Market Value of best
investments 75% is Rs. 19,00
Q17. Deluxe Commercial Bank has the following capital funds and assets:
₹ In Crores
Capital Funds and Assets
Capital Funds:
Paid up Equity Share Capital 2,400
Statutory Reserves 480
Capital Reserve (of Which ₹ 128 Crores were due to revaluation of
assets and balance due to sale of assets) 288
Profit and Loss Account (Dr. Balance) 48
Assets:
(i) Cash balance with Reserve Bank of India. 192
(ii) Claims on Banks 544
(iii) Other Investments 7,360
Loans and Advances:
(i) Guaranteed by Government of India and State Governments. 1,280
(ii) Bank Staff Advances -fully covered by superannuation benefit 160
Other loans and advances 544
Other Assets:
(i) Premises, Furniture & Fixtures 12,560
(ii) Intangible Assets 48
Off-Balance Sheet Items:
Acceptance, Endorsements and Letters of Credit 4,800
Guarantee and other obligations 160
(i) Segregate the capital funds into Tier I and Tier II capitals, and
(ii) Find out the risk-adjusted asset and risk weighted assets ratio.
Q18. It is found from the books that a loan of Rs. 6,00,000 was advanced on 30-9-2001 @ 10% per cent p.a.
interest payable half yearly; but the loan was outstanding as on 31-3-2002 without any payment recorded
in the meantime, either towards principal or towards interest. The security for the loan was 10,000 fully
paid shares of Rs. 100 each (the market value was Rs. 98 as per the Stock Exchange information as on
30th Sept., 2001). But due to fluctuations, the price fell to Rs.40 per share in January, 2002. On 31-3-
2002, the price as per Stock Exchange rate was Rs. 82 per share. State how you would classify the loan
as secured/unsecured in the Balance Sheet of the Company.
Q19. From the following information, calculate the amount of provisions and contingencies and prepare profit
& Loss Account of A Bank Ltd. For the year ending 31.3.20X2 (The figure in thousands)
Rs. Rs.
Interest and Discount 8,860 Interest Expended 2,270
Other Income 250 Operating Expenses 2,662
Interest accrued on investments 10 Investment 5000
Additional Information :
(a) Rebate on bills discounted to be provided for Rs. 30
(b) Classify the investments into held to trade & held to maturity. The details of the Investment is as follows
Name of the investment Cost Price Market price
i) RBI 180 216
ii) ICICI Bank 1,050 600
iii) Govt. Deposit 1,520 912
iv) Share 2,250 1,350
(c) Classification of Advances: Rs.
Standard Assets 5,000
Sub-Standard Assets 1,200
Doubtful Assets not covered by Security 200
Doubtful Assets covered by Security
For 1 Year 50
For 2 Year 100
For 3 Year 200
For 4 Year 300
Loss Assets 200
(d) Make Tax provision @ 35%
(e) Profit and loss A/c Rs. 80 opening credit Balance.
Q20. A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I and Tier II
capitals. Find out the risk-adjusted asset and risk weighted assets ratio:
Capital Funds: (Rs. in lakhs)
Equity Share Capital 29,00
Perpetual Non-cumulative Preference Shares 8,00
Perpetual Cumulative Preference Shares (fully paid up) 5,50
Statutory Reserve 13,50
Capital Reserve (of which Rs. 13.5 lakhs were due to
revaluation of assets and the balance due to sale of assets) 45
Assets:
Cash balance with RBI 3,50
Balances with other banks 4,75
Claims on Banks 10,25
Investments in Bonds issued by other banks 78,00
Investments in venture capital funds 17,00
Other investments 121,00
Loan and Advances:
(i) Loans guaranteed by Government 16,10
(ii) Loans guaranteed by public sector undertakings 6,20
(iii) Leased assets 4
(iv) Advances against term deposits 15,00
(v) Educational loans 12
Other Assets:
(i) Premises, Furniture & Fixtures and other assets 150,55
(ii) Intangible assets 18
(iii) Deferred tax asset 0.40
Off Balance Sheet Items :
(i) Acceptances, Endorsements & letter of credit 203,00
(ii) Non funded exposure to real estate 19,00
Q21. The following are the statements of income received and income accrued in respect of Performing and Non-
Performing Assets of a Bank. Ascertain the income to be recognized for the year ended 31 st March, 1993.
Interest Interest
Earned Received
Rs. Lakhs Rs. In lakhs
Performing Assets
Term loans 270 190
Cash Credits and Overdrafts 800 610
Bills Purchased and Discounted 200 175
Non-Performing Assets
Term Loans 100 25
Cash Credits and Overdrafts 170 31
Bills Purchased and Discounted 95 10
Q22. From the following information prepare the Profit & Loss A/c of Indus Bank Ltd. for the year ending
31st March, 2018. Also give necessary schedules.
Particulars Figures in '000
Interest earned on term loans 2,550
Interest earned on term loans classified as NPA 731
Interest received on term loans classified as NPA 238
Interest on cash credits and overdrafts 5,663
Interest earned but not received on cash credit and overdrafts treated as NPA 923
Interest on deposits 4,120
Commission 201
Profit on sale of investments 1,876
Profit on revaluation of investments 342
Income from Investments 2,174
Payments to and provision for employees 2,745
Rent, Taxes and Lighting 385
Printing and Stationery 62
Director's fees, allowances and expenses 313
Repairs and Maintenance 56
Depreciation on Bank's property 99
Insurance 43
Other Information:
Make necessary provision on Risk Assets:
Particulars Figures in '000
Standard 4,700
Sub-Standard 1,900
Doubtful Assets not covered by security 400
Doubtful Assets covered by security for 1 year 40
Loss Assets 300
Investments 3,600
Bank should not keep more than 25% of its investments as 'held for maturity' investment. The market
value of its best 75% investment is ₹ 1,875,000 as on 31st March, 2018.
Q23. Bidisha Bank Ltd. had expended the following credit lines to a Small Scale Industry which had not paid
any interest since March, 1995:
Term Loan Export Credit
Balance outstanding on 31-3-2001 70 lacs 60 lacs
DICGC/ECGC Cover 50% 40%
Securities held 30 lacs 25 lacs
Realizable value of securities 20 lacs 15 lscs
Compute the necessary provisions to be made for the year ended 31st March, 2001.
Q24. Calculate Provision required by Bank.
Asset classification status Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or 75% of the unsecured amount
or Rs. 18.75 lakh, whichever is the least
Realizable value of Security Rs. 1.50 lakh
Balance outstanding Rs. 10 lakhs
Q25. Calculate Provision required by Bank.

Asset classification status Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or 75% of the unsecured amount
or Rs. 18.75 lakh, whichever is the least
Realizable value of Security Rs. 10.00 lakh
Balance outstanding Rs. 40.00 lakhs
Q26. Check and maintain C.R.R. for schedule Bank

Trial Balance Dr. Cr.
Saving deposits 15,000
Term deposits 40,000
Demand deposits 4,000 80,000
R.B.I. non current account 6,000 ---
R.B.I. current account 4,000 ---
Cash in hand 20,000 ---
Q27. Check C.R.R. and S.L.R. for a schedule bank:

Rs.
Deposits (Net) 1,50,000
Debit Deposits 10,000
Gold 1,000
Cash with R.B.I. (Current Account) 3,000
Cash in Hand 12,000
Encumbered securities 20,000
Money at call & short notice 5,000
Balance with other banks 5,000
Q28. Calculate capital for capital adequacy ratio.

Rs.
Share Capital 10,00,000
Statutory Reserve 2,00,000
Capital reserve (40% realize in cash) 5,00,000
Revaluation reserve 40,00,000
Q29. Rajatapeeta Bank Ltd. had extended the following credit lines to a Small Scale Industry, which had not
paid any Interest since March, 1997:
Term Loan Export Credit
Balance Outstanding on 31.3.06 Rs. 35 lakhs Rs. 30 lakhs
DICGGC/ECGC cover 40% 50%
Securities held Rs. 15 lakhs Rs. 10 lakhs
Realizable value of Securities Rs. 10 lakhs Rs. 08 lakhs
Compute necessary Provisions to be made for the year ended 31st March, 2006.
Q30. From the following information, you are required to prepare Profit and Loss Account of Popular Bank for
the year ended 31st March 2021.
Particulars ₹
Interest on cash credit 13,65,000
Interest on overdraft 5,62,500
Interest on term loans 11,55,000
Income on investments 6,30,000
Interest on balance with RBI 1,12,500
Commission on remittances and transfer 56,250
Commission on letters of credit 88,500
Commission on government business 61,500
Profit on sale of land and building 20,250
Loss on exchange transactions 39,000
Interest paid on deposit 20,40,000
Auditor’s fees and allowances 90,000
Directors’s fees and allowances 1,87,500
Advertisements 1,35,000
Salaries, allowances and bonus to employees 9,30,000
Payment to Provident Fund 2,10,000
Printing and stationery 1,05,000
Repairs and maintenance 37,500
Postage, telegrams, telephones 60,000
Other information:
(i) Interest on NPA is as follows:
Earned (₹) Collected (₹)
Cash credit 6,15,000 3,00,000
Overdraft 3,37,500 75,000
Term loans 5,62,500 1,87,500
(ii) Classification of Non-Performing Advances:
₹
Standard 22,50,000
Sub-standard 8,40,000
Doubtful assets not covered by security 1,50,000
Doubtful assets covered by security for one year 37,500
Loss Assets 1,50,000
(iii) Investment ₹ 20,62,500. Bank should not keep more than 25% of its investment as ‘Held-to Maturity’.
The market value of its rest 75% investment is ₹ 14,81,250 as on 31st March, 2021.
Q31. From the following details, prepare bill for collection (Asset) A/c and Bills for collection (Liability) A/c:
Rs.
On 1.4.2005, Bills for Collection were 51,00,000
During the year 2005-06 Bills received for Collection amounted to 75,00,000
Bills collected during the year 2005-06 98,47,000
Bill dishonored and returned during the year 27,10,000
Q32. From the following information, compute the amount of provisions to be made in the Profit and Loss
account of a Commercial bank:
Assets Rs. In lakhs
(i) Standard (Value of security Rs. 6,000 lakhs) 7,000
(ii) Sub-standard 3,000
(iii) Doubtful
a. Doubtful for less than one year 1,000
(Realizable value of security Rs. 500 lakhs)
b. Doubtful for more than one year, but less than 3 years 500
(Realizable value of security Rs. 300 lakhs)
c. Doubtful for more than 3 years (No security) 300
st
Q33. The following is extract from the Trial Balance of Dream Bank Ltd. as at 31 March, 2006.
Rebate on bills discounted as on 1-4-2005 68,259 (Cr.)
Discount received 1,70,156 (Cr.)
An analysis of the bills discounted reveals as follows:
Amount (Rs.) Due date
2,80,000 June 1,2006
8,72,000 June 8,2006
5,64,000 June 21,2006
8,12,000 July 1,2006
6,00,000 July 5,2006
You are required to find out the amount of discount to be credited to Profit and Loss account for the year
ending 31st March, 2006 and pass Journal Entries. The rate of discount may be taken at 10% per annum.
Q34. In X Bank Ltd., the doubtful assets (more than 3 years) as on 31.3.2007 is Rs. 1,000 lakhs. The value of
security (including DICGC 100% cover of Rs. 100 lakhs) is ascertained at Rs. 500 lakhs. How much
provision must be made in the books of the Bank towards doubtful assets? (SM 6 unit 4)
Q35. The following information is available in the books of X Bank Limited as on 31 st March, 2007:
Rs.
Bills discounted 1,37,05,000
Rebate on Bills discounted (as on 1.4.2006) 2,21,600
Discount received 10,56,650
Details of bills discounted are as follows:
Value of bills(Rs.) Due Date Rate of Discount
18,25,000 05.06.2007 12%
50,00,000 12.06.2007 12%
28,20,000 25.06.2007 14%
40,60,000 06.07.2007 16%
Calculate the rebate on bills discounted as on 31.3.2007 and give necessary Journal Entries.
Q36. The following figures are extracted from the books of KLM Bank Limited as on 31.3.2012:
Rs.
Interest and discount received 38,00,160
Interest paid on deposits 22,95,360
Issued and subscribed capital 10,00,000
Salaries and allowances 2,50,000
Directors fee and allowances 35,000
Rent and taxes paid 1,00,000
Postage and telegrams 65,340
Statutory reserve fund 8,00,000
Commission, exchange and brokerage 1,90,000
Rent received 72,000
Profit on sale of investments 2,25,800
Depreciation on assets 40,000
Statutory expenses 38,000
Preliminary expenses 30,000
Auditor’s fee 12,000
The following further information is given:
(a) A customer to whom a sum of Rs.10 lakhs was advanced has become insolvent and it is expected
only 55% can be recovered from his estate.
(b) There were also other debts for which a provision of Rs.2,00,000 was found necessary .
(c) Rebate on bills discounted on 31.3.2012 was Rs.15,000 and on 31.3.2012 was Rs.20,000.
(d) Income-tax of Rs. 2,00,000 is to be provided.
(e) The directors desire to declare 5% dividend.
Prepare the Profit and Loss account of KLM Bank Limited for the year ended 31.3.2012 and also show,
how the Profit and Loss account will appear in the Balance Sheet, if the Profit and Loss account opening
balance was Nil as on 31.3.2011.
Q37. The following informations are also given for SM Bank :
Assets Rs. in Lakhs
Standard 75,00
Sub-Standard 60,00
Doubtful : for 1 Year (fully secured) 12,00
for 1 to 3 Years (fully secured) 9,00
for more than 3 Years 9,00
Loss Assets 15,00
(1) Standard Assets includes Rs. 15,00 Lakhs Advances to Commercial Real Estate (CRE).
(2) Out of Rs. 60,00 Lakhs of Sub-Standard Asset Rs. 20,00 Lakhs are unsecured. Unsecured includes
Rs. 5,00 Lakhs in respect of Infrastructure Loan Accounts with ESCROW safeguard.
(3) Doubtful Asset for more than 3 Years includes Rs. 4,00 Lakhs, which is covered by 50% ECGC,
value of security of which is Rs. 150 Lakhs.
You are required to find out the amount of provision to be shown in the Profit & Loss Account of SM Bank.
Q 38. Following information is furnished to you by Sound Bank Ltd. for the year ended 31st March, 2008:
(Rs. in thousands)
Interest and discount - (Income) 8,860
Interest on public deposits – (Expenditure) 2,720
Operating expenses 2,662
Other incomes 250
Provisions and contingencies (it includes provision in respect of
Non-performing Assets (NPAs) and tax provisions) 2,004
Rebate on bills discounted to be provided for as on 31.3.2008 30
Classification of Advances:
Standard Assets 5,000
Sub-standard Assets 1,120
Doubtful Assets – fully unsecured 200
Doubtful assets – fully secured
Less than 1 year 50
More than 1 year but less than 3 years 300
More than 3 years 300
Loss assets 200
(i) Profit and Loss Account of the Bank for the year ended 31st March, 2008.
(ii) Provision in respect of advances.
Q39. Dee Bank provides you the following information relating to their two cash credit accounts:
Account A Account B
₹ In Lakhs ₹ In Lakhs
Sanctioned limit 4,500 3,200
Drawing power 4,200 2,500
Amount outstanding continuously from 01.01.2021 to 31.03.2021 3,600 2,000
Total Interest debited for the above period 288 315
Total credits for the above period 120 380
State with reason whether the above cash credit accounts are NPA or not?
Q40. State with reason whether the following cash credit account is NPA or not:
₹
Sanctioned limit 50,00,000
Drawing power 44,00,000
Amount outstanding continuously 01-01-20 to 31-03-20 40,00,000
Total interest debited for the above period 3,20,000
Total credits for the above period 1,80,000
Q41. From the following information, compute the amount of provision to be made in the profit and loss
account of A Commercial Bank for the year ending 31-03-2012.
Assets ( Categories of Advances) Rs. in Lakhs

Standard Advances 7,000
Sub-standard Advances 3,500
(include secured exposure Rs. 1,000 lakhs and balances unsecured exposures Rs.
2,500 lakhs includes Rs. 1,500 lakhs in respect of infrastructure loan accounts
where escrow accounts are available)
Doubtful advances- unsecured portion 1,500
Doubtful advances- secured portion :-
For doubtful up to 1 year 500
For doubtful more than 1 year and upto 3 years 600
For doubtful more than 3 years 300
Loss Advances 200
Q42. Classify the following NPA's of the SG Banking Limited:

- Loan Assets overdue for more than 3 months but less than 12 months: ₹ 150 Lakhs, fully secured.
- Loan Assets overdue for more than 12 months: ₹ 90 Lakhs, fully secured
- Loan Assets overdue for more than 36 months and considered uncollectible : ₹ 50 Lakhs. (This
comprise of two assets worth ₹ 25 Lakhs each. One of these has a security value of ₹ 20 Lakhs).
Also, give the amount of provisioning required in each case.
Q43. A loan account remains out of order as on the date of Balance Sheet of a Bank .The account has been
classified as doubtful assets (up to 3 years).Detail of the account is;
Outstanding Rs 7,24,000
ECGC Cover 30% of outstanding
(subject to maximum of
Rs 1,50,000)
Value of security
As per valuation on the date of grant of loan 2,25,000
As per realizable value as on date of Balance Sheet 1,75,000
Compute the necessary provision to be made by Bank as per applicable rate.
Q44. A loan account remains out of order as on the date of Balance Sheet of a Bank. The account has been
classified as doubtful assets (upto 1 year).
Details of the accounts are :
Outstanding Rs. 6,73,000
ECGC coverage 25% (Limited to Rs. 1,00,000)
Value of security held Rs. 1,50,000
Compute the necessary provision to be made by a Bank as per applicable rates.
Q45. State with reason whether the following cash credit accounts are NPA or not:
Case-1 Case-2 Case- 3 Case-4
Sanctioned limit 50,00,000 60,00,000 55,00,000 45,00,000
Drawing power 44,00,000 56,00,000 50,00,000 42,00,000
Amount outstanding continuously
01-01-18 to 31-03-18 40,00,000 48,00,000 56,00,000 30,00,000
Total interest debited for
the above period 3,20,000 3,84,000 4,48,000 2,40,000
Total credits for the above period 1,80,000 Nil 4,48,000 3,20,000
Q46. The following information is furnished by ALFA Bank Ltd.

Rs in Lakhs
Margins held against letter of credit 200
Recurring accounts deposits 100
Current accounts deposits 375
Demand deposit 125
Unclaimed deposit 75
Gold deposit 235
Demand liabilities portion of saving bank deposit 1325
Time liabilities portion of saving bank deposit 722
Explain CRR and you are required to calculate the amount of Cash Reserve Ratio (CRR) as per the
direction of Reserve Bank of India.
Solution: Cash Reserve Ratio (CRR): For smoothly meeting cash payment requirement, banks are
required to maintain certain minimum ready cash balances at all times. This is called as Cash Reserve
Ratio (CRR).
Cash reserve can be maintained by way of either a cash reserve with itself or as balance in a current
account with the Reserve Bank of India or by way of net balance in current accounts or in one or more of
the aforesaid ways. Every Scheduled Commercial Bank has to maintain cash reserve ratio (i.e. CRR) as
per direction of the RBI. The current Cash Reserve Ratio (CRR) is 4.50% of their Net Demand and Time
Liabilities (NDTL).
Margins held against letters of credit Demand Liability 200
Recurring Accounts deposits Time Liability 100
Current deposits Demand Liability 375
Demand deposits Demand Liability 125
Unclaimed deposits, Demand Liability 75
Gold deposits Time Liability 235
Demand liabilities portion of savings bank deposits Demand Liability 1325
Time liabilities portion of savings bank deposits Time Liability 722
Total 3,157
Cash Reserve Ratio = Net (demand + Time) liabilities X 4.50/100
CRR= 3,157 x 4.50/100 = 142.065 Lakhs
Q47. How will you disclose the following Ledger balances in the Final accounts of DVD bank:
Rs. in lacs
Current accounts 700
Saving accounts 500
Fixed deposits 700
Cash credits 600
Term Loans 500
Bills discounted & purchased 800
(i) Included in the current accounts ledger are accounts overdrawn to the extent of Rs. 250 lacs.
(ii) One of the cash credit account of Rs. 10 lacs (including interest Rs. 1 lac) is doubtful.
(iii) 60% of term loans are secured by government guarantees, 20% of cash credits are unsecured, other
portion is secured by tangible assets.
Q48. Calculate Rebate on Bills discounted as on 31 December, 2011 from the following data and show
journal entries:
Date of Bill Rs. Period Rate of Discount
(i) 15.10.11 25,000 5 months 8%
(ii) 10.11.11 15,000 4 months 7%
(iii) 25.11.11 20,000 4 months 7%
(iv) 20.12.11 30,000 3 months 9%
Q49. From the following facts drown from the records of Honest Bank for the year ended 31 st March 2015
prepare the accounts as mentioned below:
I. On 1st April, 2015 Bills for Collection were Rs. 28,00,000. During 2014-2015 bills received for collection
were Rs. 2,58,00,000. Bills collected were Rs. 1,88,00,000. Bills dishonored and returned were Rs.
22,00,000. Prepare Bills for Collection (Assets) Account and Bills for Collection (Liability) Account.
II. On 1st April, 2014, Acceptance, Endorsement etc. not yet satisfied amounted to Rs. 58,00,000. During the
year, Acceptances, Endorsements, Guarantees etc. were Rs. 1,76,00,000. The Bank honoured acceptances
of Rs. 1,00,00,000 and a client paid Rs. 40,00,000 against guaranteed liabilities. The Bank paid Rs.
4,00,000 which clients failed to pay. Prepare “Acceptances, Endorsements and Other Obligations
Account’’ in the General Ledger.
III. A loan of Rs. 24,00,000 Advanced by the Bank on 30st August, 2014 @ 10% per annum, whose interest is
payable half-yearly. The loan was outstanding a on 31st March, 2015 Nothing was paid either towards
Principal or Interest of this loan. The security for the loan was 40,000 fully paid share of Rs 100 each. The
shares were quoted on the stock exchange on 30st September 2014 at Rs. 90 per share. Due to fluctuations,
the price fell to Rs. 50 per share in January, 2015. On 31st March 2015 the share price quoted on the stock
exchange was Rs. 96 per share. State giving reasons, whether the loan would be classified as secured or
unsecured in the Balance Sheet of the company as on 31st March, 2015.
IV. The following balances were taken from the Trial Balance as on 31 st March, 2015
Dr(Rs.) Cr(Rs.)
Interest & Discounts 3,92,00,000
Rebate for Bill Discounted 80,000
Bills Discounted & Purchased 16,00,000
Proportionate discounts not yet earned for Bills to mature in 2014-15 were Rs.56,000
Prepare the following Accounts :
(a) Rebate on Bills Discounted Account
(b) Interest and Discount Account
Q50. ABC bank Ltd. has a balance of Rs.40 crores in “Rebate on bills discounted” account as on 31st March,
2014. The Bank provides you the following information:
i. During the financial year ending 31st March, 2015 ABC Bank Ltd. discounted bills of exchange
of Rs.5,000 crores charging interest @ 14% and the average period of discount being 146 days.
ii. Bills of exchange of Rs.500 crores were due for realization from the acceptors/customers after
31st March, 2015. The average period of outstanding after 31st March, 2015 being 73 days.
These bills of exchange of Rs.500 crores were discounted charging interest @ 14% P.A.
You are requested to pass necessary Journal Entries in the books of ABC Bank Ltd. for the above
transactions.
Q51. Following facts have been taken out from the records of M/s. Sneha Bank Ltd. in respect of the year
ending March 31, 2015:
(i) On 1-4-2014 Bills for collection were Rs. 10, 15,000. During 2014-15 bills received for collection
amounted to Rs. 89, 75,000, bills collected were Rs. 64, 50,000 and bills dishonored and returned
were Rs. 11, 25,000.
Prepare Bill for collection (Assets) Account and bills for Collection (Liability) Account.
(ii) On 1-4-2014, Acceptance, Endorsement, etc. not yet satisfied amounted to Rs. 27, 50,000. During
the year under question, Acceptances, Endorsements, Guarantees etc., amounted to Rs. 67,50,000.
Bank honoured acceptances to the extent of Rs, 44, 50,000 and client paid of Rs. 15, 00,000 against
the guaranteed liability, Clients failed to pay Rs. 4, 00,000 which the Bank had to pay. Prepare the
“Acceptances, Endorsements and other obligations Account” as it would appear in the General
Ledger.
(iii) It is found from the books that a loan of Rs. 50, 00,000 was advanced on 30.09.2014 @ 14% p.a.
Interest payable half yearly; but the loan was outstanding as on 31.3.2015 without any payment
recorded in the meantime, either towards principal or towards interest. The security for the loan was
1, 00,000 fully paid shares of Rs. 100 each (the market value was Rs. 98 per share as per the Stock
Exchange information as on 30th September 2014.) But due to fluctuations, the price fell to Rs. 45
per share in January, 2015. On 31-3-2015, the price as per Stock Exchange rate was Rs. 85 per
share. State how would you classify the loan as secured/unsecured in the Balance Sheet of the
Company.
(iv) The Following balances are extracted from the Trial Balance as on 31.3.2015.
Dr. (Rs.) Cr. (Rs.)

Interest and Discounts 98,00,000
Rebate for bills discounted 45,000
Bills discounted and purchased 5,00,000
It is ascertained that the proportionate discounts not yet earned for bills to mature in 2014-15 amount
to Rs. 24,000. Prepare Ledger accounts.
(v) From the following information of M/s. XY Bank Ltd. for the year ended 31 st March, 2014, compute
the provision to be made in the Bank’s Books for Doubtful Assets.
Rs .in lakhs
Doubtful Assets (More than 3 years) 2,000
DICGC 100% Cover 200
Value of Security including DICGC Cover 1,000
Q52. The following are the ledger balances (in Rupees thousands) extracted from the books of Vaishnavi
Bank as on March 31, 2012 :
Dr. Cr.
Share Capital 19,00,00
Current accounts control 9,70,00
Employee security deposits 74,20
Investments in Govt. of India Bonds 9,43,70
Gold Bullion 1,51,30
Silver 20,00
Constituent liabilities for
acceptances and endorsements 5,65,00 5,65,00
Borrowings from banks 7,72,30
Building 6,50,00
Furniture 50,00
Money at call and short notice 2,60,00
Commission & brokerage 2,53,00
Saving accounts 1,50,00
Fixed deposits 2,30,50
Balances with other banks 4,63,50
Other investments 5,56,30
Interest accrued on investments 2,46,20
Reserve Fund 14,00,00
P & L A/c 65,00
Bills for collection 4,35,00 4,35,00
Interest 6,20,00
Loans 18,10,00
Bills discounted 1,25,00
Interest 79,50
Discounts 4,20,00
Rents 6,00
Audit fees 50,00
Depreciation reserve (furniture) 2,00
Salaries 2,12,00
Rent, rates and taxes 1,20,00
Cash in hand and with Reserve Bank 7,50,00
Miscellaneous income 39,00
Depreciation reserve (building) 8,00
Directors fees 10,00
Postage 12,50
Loss on sale of investments 2,00,00
Branch adjustments 2,00,00
79,10,00 79,10,00
Other Information:
The bank’s Profit and Loss Account for the year ended and Balance Sheet as on 31st March, 2012 are
required to be prepared in appropriate form. Further information (in Rupees thousands) available is as
follows —
(a) Rebate on bills discounted to be provided 40,00
(b) Depreciation for the year
Building 50,00
Furniture 5,00
(c) Included in the current accounts ledger are accounts overdrawn to the extent of 25,00.
Q53. From the following information, prepare a Balance Sheet of ADT International Bank as on 31 st March,
20X1 giving the relevant schedules and also specify any four Principal Accounting Polices:
Rs. in lakhs
Dr. Cr.
Share Capital
19,80,000 Shares of Rs. 10 each 198.00
Statutory Reserve 231.00
Net Profit before Appropriation 150.00
Profit and Loss Account 412.00
Fixed Deposit Account 517.00
Savings Deposit Account 450.00
Current Accounts 28.00 520.12
Bills Payable 0.10
Cash credits 812.10
Borrowings from other Banks 110.00
Cash in Hand 160.15
Cash with RBI 37.88
Cash with other Banks 155.87
Money at Call 210.12
Gold 55.23
Government Securities 110.17
Premises 155.70
Furniture 70.12
Term Loan 792.88
2,588.22 2,588.22
Bills for collection 18,10,000
Acceptances and endorsements 14,12,000
Claims against the Bank not acknowledged as debt 55,000
Depreciation- Premises 1,10,000
Depreciation - Furniture 78,000
50% of the Term Loans are secured by Government guarantees. 10% of cash credit (including Debit
balance in Current A/c) is unsecured. Transfer 25% of its profit to the reserve fund.
Theory
Q1. Define Acceptance and Endorsement.
Ans. A bank has more acceptable credit as compared to that of its customer, because of this more often than not the bank is
called to accept or endorse a bill on behalf of its customers. The bank has to honour this acceptance on behalf of its
client only in the event of a client failing to honour the bill on the due date.
As against this liability, the bank has a corresponding claim against the customer on whose behalf it has undertaken to
be a party to the bill, either as an acceptor or as an endorser.
Such Acceptance (Liabilities) which are outstanding at the close of the year and the corresponding asset (security) is
disclosed as Contingent liability. As a safeguard against the customer not being able to meet the demand of the bank in
this respect, usually the bank requires the customer to deposit a security equivalent to the amount of the bill accepted
on his behalf.
If the bill, at the end of its term, has to be retired by the bank and the amount cannot be collected from the customer on
demand, the bank reimburses itself by disposing of the security deposited by the customer.
Q2. Write short note on Non-Performing Assets./Specify the condition when cash credit overdraft account is treated
as “Out of Order”?
Ans. An asset is classified as non-performing asset (NPA) if:-
A) Bills purchased and discounted:- If they remain overdue and unpaid for a period of more than 90 days.
B) A term loan is treated as a NPA if interest and/or instalments of principal remains overdue for a period of more
than 90 days.
C) A cash credit/overdraft account is treated as NPA if it remains out of order for a period of more than 90 days.
An account is treated an ‘out of order’ if any of the following conditions is satisfied:
(a) the outstanding balance remains continuously in excess of the sanctional limit/drawing power.
(b) though the outstanding balance is less than the sanctioned limit/drawing power—
(i) there are credits continuously for more than 90 days as on the date of balance sheet or
(ii) credits during the aforesaid periods are not enough to cover the interest debited during the same period.
[For out of order also Included these two lines
a. If Borrower fails to submit stock statement for continuous period of 6 months
b. If cash credit is not paid on due date fixed by the bank.]
* If any advance or credit facility granted by a bank to a borrower becomes non-performing, then the bank will have to
treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact
that there may still exist certain advances/credit facilities having performing status.
**Income from NPA can only be accounted for as and when it is actually received.
Note:- Necessary provision should be made for non-performing assets after classifying them as sub-standard, doubtful
or loss asset as the case may be.(As discussed in class)
Q3. Write short note on Classification of advances in the case of a Banking Company.
Ans. Banks have to classify their advances into four broad groups:
(i) Standard Assets- Standard assets is one which does not disclose any problems and which does not carry more
than normal risk attached to the business. Such an asset is not a NPA as discussed earlier.
(ii) Sub-standard Assets- Sub-standard asset is one which has been classified as NPA for a period not exceeding 12
months. In other words, such an asset will have well-defined credit weaknesses that jeopardise the liquidation of
the debt and are characterised by the distinct possibility that the bank will sustain some loss, if deficiencies are not
corrected.
(iii) Doubtful Assets-A doubtful asset is one which has remained sub-standard for a period exceeding 12 months. A
loan classified as doubtful has all the weaknesses inherent in that classified as sub-standard with added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts,
conditions and values, highly questionable and improbable.
(iv) Loss Assets-A loss asset is one where loss has been identified by the bank or internal or external auditors or the
RBI inspectors but the amount has not been written off, wholly or partly.
*The classification of advances should be done taking into account :-

(i) Degree of well defined credit worthiness and (ii) Extent of dependence on collateral security.
The above classification is meant for the purpose of computing the amount of provision to be made in respect of
advances and not for the purpose of presentation of advances in the balance sheet.
Formats:-
Form ‘A’
Form of Balance Sheet
Balance Sheet of ______________________ (here enter name of the Banking company)
Balance Sheet as on 31st March (Year) (000’s omitted)
Schedule As on 31.3.... As on 31.3......
(Current year) (Previous year)
Capital & Liabilities
Capital 1
Reserve & Surplus 2
Deposits 3
Borrowings 4
Other liabilities and provisions 5
Total
Assets
Cash and balances with
Reserve Bank of India 6
Balance with banks and Money at call
and short notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent liabilities 12
Bills for collection
Annexure I
Schedules forming part of Balance Sheet
Schedule 1 - Capital
As on 31.3... As on 31.3...
I. For Nationalised Banks
Capital (Fully owned by
Central Government)
II. For Banks Incorporated outside India

Capital
(i) (The amount brought in by banks by way of
start-up capital as prescribed by RBI should
be shown under this head)
(ii) Amount of deposit kept with the RBI under
Section 11(2) of the Banking Regulation Act, 1949
Total
III. For other Banks

Authorised Capital
( ___Shares of Rs. ____ each)
Issued Capital
( ___Shares of Rs. ____each)
Subscribed Capital
( ____Shares of Rs. ___ each)
Called-up Capital
( ____Shares of Rs. ___ each)
Less : Calls unpaid
Add : Forfeited shares
Total
Schedule 2 - Reserves and Surplus
As on 31.3.... As on 31.3....
I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balance
III. Share Premium
Opening Balance
IV. Revenue and other Reserves
Opening Balance
V. Balance in Profit and loss Account
Total : (I, II, III, IV and V)
Schedule 3 - Deposits
As on 31.3... As on 31.3...
A. I. Demand Deposits
(i) From banks
(ii) From others
II. Savings Bank Deposits
III. Term Deposits
(i) From Banks
(ii) From others
Total :(I, II and III)
B. (i) Deposits of branches in India
(ii) Deposits of branches outside India
Total
Schedule 4 - Borrowings
As on 31.3.... As on 31.3....
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other banks
(iii) Other institutions and agencies
II. Borrowings outside India
Total : (I and II)
Secured borrowings included in I & II above - Rs.
Schedule 5 - Other Liabilities and Provisions

As on 31.3.... As on 31.3....
I. Bills payable
II. Inter-office adjustments (net)
III. Interest accrued
IV. Others (including provisions)
Total
Schedule 6 - Cash and Balances with Reserve Bank of India
As on 31.3.... As on 31.3....
I. Cash in hand (including foreign currency notes)
II. Balances with Reserve Bank of India
(i) In Current Account
(ii) In Other Accounts
Total : (I & II)
Schedule 7 - Balances with Banks & Money at Call & Short Notice
As on 31.3.... As on 31.3....
I. In India
(i) Balances with banks
(a) in Current Accounts
(b) in Other Deposit Accounts
(ii) Money at call and short notice
(a) with banks
(b) with other institutions
Total : (i & ii)
II. Outside India
(i) In Current Accounts
(ii) in other Deposits Accounts
(ii) Money at call and short notice
Total
Grand Total (I & II) :
Schedule 8 - Investments
As on 31.3.... As on 31.3....
I. Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
Total
II. Investments outside India in
(i) Government securities
(Including local authorities)
(ii) Subsidiaries and/or joint ventures abroad
(iii) Other investments (to be specified)
Total
Grand Total :(I & II)
Schedule 9 - Advances
As on 31.3.... As on 31.3....
A.
(i) Bills purchased and discounted
(ii) Cash credits, overdrafts
and loans repayable on demand
(iii) Term loans
Total
B.
(i) Secured by tangible assets
(ii) Covered by Bank/Government Guarantees
(iii) Unsecured
Total
C.
I. Advances in India
(i) Priority Sectors
(ii) Public Sector
(iii) Banks
(iv) Others
Total
II.Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated loans
(c) Others
Total
Grand Total :(C. I & II)
Schedule 10 - Fixed Assets

As on 31.3.... As on 31.3....
I. Premises
At cost as on 31st March of the preceding year
Depreciation to date
Other Fixed Assets (including Furniture and Fixtures)
At cost as on 31st March of the preceding year
Depreciation to date
Total : (I & II)
Schedule 11 - Other Assets
As on 31.3.... As on 31.3....
I. Inter-office adjustments (net)
II. Interest accrued
III. Tax paid in advance/tax deducted at source
IV. Stationery and stamps
V. Non-banking assets acquired in satisfaction of claims
VI. Others*
Total
*In case there is any unadjusted balance of loss the same may be shown under this item with appropriate foot-note.
Schedule 12 - Contingent Liabilities

As on 31.3.... As on 31.3....
I. Claims against the bank not acknowledged
as debts
II. Liability for partially paid investments
III. Liability on account of outstanding forward
exchange contracts
IV. Guarantees given on behalf of constituents
(a) In India
(b) Outside India
V. Acceptances, endorsements and other
obligations
VI. Other items for which the bank is contingently
liable
Total
Form ‘B’
Form of Profit & Loss Account for the year ended 31st March
(’000 omitted)
Schedule No. Year ended Year ended
As on 31.3.... As on 31.3....
I. Income
Interest earned 13
Other income 14
Total
II. Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
Total
III. Profit/Loss
Net profit/loss (—) for the year
Profit/Loss (—) brought forward
Total
IV. Appropriations
Transfer to statutory reserves
Transfer to other reserves
Transfer to Government/Proposed dividends
Balance carried over to balance sheet

Total
Annexure II
Schedules forming part of Profit and Loss Account

Schedule 13 - Interest Earned
Year ended Year ended
31.3.... 31.3....
I. Interest/discount on advances/bills
II. Income on investments
III. Interest on balances with Reserve Bank of
India and other inter-bank funds
IV. Others
Total
Schedule 14 - Other Income
31.3.... 31.3....
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less : Loss on sale of investments
III. Profit on revaluation of investments
Less : Loss on revaluation of investments
IV. Profit on sale of land, building and other assets
Less : Loss on sale of land, building and other assets
V. Profit on exchange transactions
Less : Loss on exchange transactions
VI. Income earned by way of dividends etc.
from subsidiaries/companies and/or joint
ventures abroad/in India
VII. Miscellaneous Income
Total
Note : Under items II to V loss figures may be shown in brackets.
Schedule 15 - Interest Expended

31.3.... 31.3....
I. Interest on deposits
II. Interest on Reserve Bank of India/inter-bank
borrowings
III. Others
Total
Schedule 16 - Operating Expenses
31.3.... 31.3....
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on Bank’s property
VI. Director’s fees, allowances and expenses
VII. Auditor’s fees and expenses (including
branch auditor’s fees and expenses)
VIII. Law Charges
IX. Postages, Telegrams, Telephones, etc.
X. Repair and maintenance
XI. Insurance
XII. Other expenditure
Total
In ‘Notes on Accounts’, the following disclosures should be made:
New Guidelines for Calculating CAR
A. Funded Risk Assets

Sr. No. Item of assets Risk Weight %
I Balances
1. Cash, balances with RBI 0
2. Balances in current account with other banks 20
II Investments
1. Investment in Government Securities 0
2. Investments in other approved securities guaranteed by 0
Central/State Government.
3. Investment in other approved securities where payment of interest 20

and repayment of principal are not guaranteed by Central/State
Govt.
4. Claims on Commercial banks and public financial intuitions 20
5. Investments in bonds issued by other banks 20
6. Investments in securities which are guaranteed by banks 20
7. All other investments 100
III Loans & Advances
1. Loans guaranteed by Govt. of India 0
2. Loans granted to public sector undertakings of Govt. of India 100
3. Others 100
4. Leased assets 100
5. Advances covered by DICGC/ECGC 50
IV Other Assets
1. Premises, furniture an fixtures 100
2. (i) Income tax deducted at source (net of provision) 0
(ii) Advance tax paid (net of provision) 0
(iii) Interest due on Government securities 0
(iv) All other assets 100
B. Off- Balance sheet Items
Sr. Instruments Credit Conversion

No. Factor (%)
1. General guarantees of indebtedness (including standby L/Cs 100
2. Forward asset purchases, forward deposits and partly paid shares and 100
securities, which represent commitments with certain drawdown.
Always Remember:
MCQ (ICAI Study Material)
1. A banking company can pay dividend on its shares
(a) After writing off all its capitalized expenses including preliminary expenses.
(b) After charging depreciation on its investments.
(c) After charging bad debts where adequate provisions has been made to the satisfaction of the auditor.
(d) Before charging depreciation on its investments and writing off all its capitalized expenses.
2. On 1.4.20X1 Bills for collection were ₹ 10,000. During 20X1-20X2 bills received for collection amounted to ₹ 1,00,000,
bills collected were ₹ 80,000 and bills dishonoured and returned were ₹ 5,000. What will be the amount of bills for
collection (assets) account as on 31.3.20X2?
(a) 25,000. (b) 30,000. (c) 35,000. (d) None of the above.
3. Rebate on bill discounted is shown in the

(a) Assets side of the balance sheet.
(b) Liabilities side of the balance sheet.
(c) Income side of the income statement.
(d) Expense side of the income statement.
4. Bills for collection are shown

(a) On Assets side of the balance sheet.
(b) On liabilities side of the balance sheet.
(c) On the income side of the income statement.
(d) As note below the balance sheet.
5. What percentage of provision is required on standard assets (other than advances to agricultural, SME and Commercial
Real Estate)?
(a) 10 (b) 40 (c) 0.40 (d) 0.25.
6. In case of direct advances to agricultural and SME, What percentage of provision is required on standard assets?
(a) .25 (b) 40 (c) 0.40 (d) 25.
7. When income is to be recognized on cash basis by Safe Trust Bank, a distinction should be made between
(a) Banking and Non-banking assets. (b) Monetary and Non-banking assets.
(c) Current and Non-current assets. (d) Performing and Non-performing assets.
8. For the year ended 31st March, 20X1 non-performing assets classified as sub- standard in Centura Bank Ltd. will be
classified as doubtful after
(a) 24 months. (b) 18 months. (c) 12 months. (d) 180 days.
9. In case of advances to Commercial Real Estate (CRE) Sector, What percentage of provision is required on standard
assets?
(a) .25 (b) 1.00 (c) 0.40 (d) 25.
10. The provisions on assets should not be reckoned for arriving at net NPAs.
(a) Sub-standard. (b) Standard. (c) Doubtful. (d) Loss.
11. For more than three years (unsecured) doubtful advances, provision will be made for
(a) 10% (b) 40% (c) 100% (d) 25%.
Answer:
1. (a), 2. (a), 3. (b), 4. (d), 5. (c), 6. (a),
7. (d), 8. (c), 9. (b), 10. (b), 11. (c)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
SUMMARY NOTES
SOLUTIONS
Q20.
(in lakhs)
(i) Capital Funds - Tier I:
Equity Share Capital 29,00.00
Securities premium 7,00.00
Perpetual non-cumulative pref. shares 8,00.00
Statutory Reserve 13,50.00
Capital Reserve (arising out of sale of assets) 31.50
57,81.50
Less: Intangible assets (18.00)
Deferred tax assets (0.40) (18.40)
Total 57,63.10
Capital Funds - Tier II:
Perpetual cumulative pref. shares 5,50.00
Capital Reserve (arising out of revaluation of assets) 13.50
Less: Discount to the extent of 55% (7.43)* 6.07
Total 556.07
Total Capital Funds 63,19.17
* 7.425 has been rounded off as 7.43.
(ii) Calculation of Risk Adjusted Assets

Rs. in lakhs Weight in % Amount
(Rs. in lakhs)
Funded Risk Assets
Cash Balance with RBI 3,50 0 0
Balances with other Banks 4,75 20 95
Claims on banks 10,25 20 2,05
Investment in bonds issued by other
Banks 78,00 20 15,60
Investment in venture capital funds 17,00 150 25,50
Other Investments 121,00 100 121,00
Loans and Advances:
(i) guaranteed by government 16,10 0 0
(ii) guaranteed by public sector
undertakings 6,20 0 0
(iii) Leased assets 4 100 4
(iv) Advances against term deposits 15,00 0 0
(v) Educational Loans 12 100 12
Premises, furniture and fixtures 150,55 100 150,55
315,81
Off-Balance Sheet Item Rs. in lakhs Credit Rs. in lakhs
Conversion
Factor
Acceptances, Endorsements andLetters of 203,00 100 203,00
credit
Non-funded exposure to real estatesector 19,00 150 28,50
231,50
(iii) Risk Weighted Assets Ratio:
Capital Adequacy Ratio = (63,19.17/315,81+231,50) X 100

= (63,19.17/547,31) x 100=11.55%
Q22. Indus Bank Limited

Profit & Loss Account for the year ended 31st March, 2018
Schedule ₹ ’000s
I. Income
Interest earned 13 8,971
Other income 14 2,419
Total 11,390
II. Expenditure
Interest expended 15 4,120
Operating expenses 16 3,703
Provisions & contingencies (Refer W.N.) 1,838.8
Total 9,661.8
III. Profit/Loss 1,728.2
Schedule 13 – Interest Earned
₹ ’000s
Interest / discount on advances bills
Interest on term loans [2,550- (731-238)] 2,057
Interest on cash credits and overdrafts (5,663-923) 4,740
Income on investments 2,174
8,971
Note : Interest on non-performing assets is recognized on receipt basis.
Schedule 14 – Other Income
₹ ’000s
Commission, exchange and brokerage 201
Profit on sale of investments 1,876
Profit on revaluation of investments 342
2,419
Schedule 15 – Interest Expended
₹ ’000s
Interest on deposits 4120
Schedule 16 – Operating Expenses
₹ ’000s
Payments to and provision for employees - salaries, bonus and 2,745
allowances
Rent, taxes and lighting 385
Printing & stationery 62
Director’s fee, allowances and expenses 313
Depreciation Charges 99
Repairs & maintenance 56
Insurance 43
3,703
Working Note:
Provisions & Contingencies ₹ ’000s
Provision for standard and non-performing assets
Standard (4,700 x .4%) 18.8
Sub-standard (1900 x 15%) * 285
Doubtful (400 x 100%) 400
Doubtful (40 x25%) 10
Loss assets (300 x 100%) 300
1,013.8
Diminution in the value of current Investments:
Cost of 75% of ₹ 3,600 thousands  2,700
Less: Market value (1875) 825
1,838.8
Q35. Statement showing rebate on bills discounted

Value Due Date Days after 31.3.20X2 Rate of Discount
discount Amount
18,25,000 5.6.20X2 (30+ 31+5) = 66 12% 39,600
50,00,000 12.6.20X2 (30+31+12) = 73 12% 1,20,000
28,20,000 25.6.20X2 (30+31+25) = 86 14% 93,021
40,60,000 6.7.20X2 (30+ 31+ 30+ 6) = 97 16% 1,72,633
1,37,05,000 Rebate on bills discounted on 31.3.20X2 4,25,254
In the books of X Bank Ltd.
Journal Entries
(i) Rebate on bills discounted Account Dr. 2,21,600
To Discount on bills Account 2,21,600
[Being opening balance of rebate on bills
discounted account transferred to discount on bills
account]
(ii) Discount on bills Account Dr. 4,25,254
To Rebate on bills discounted Account 4,25,254
st
[Being provision made on 31 March, 20X2]
(iii) Discount on bills Account Dr. 8,52,996

To Profit and loss Account 8,52,996
[Being transfer of discount on bills, of the year,to
profit and loss account]
Credit to Profit and Loss A/c will be as follows: ₹ (10,56,650 + 2,21,600 – 4,25,254) = ₹ 8,52,996
Q36. KLM Bank Limited

Profit and Loss Account for the year ended 31st March, 20X2
Schedule Year ended
31.03.20X2
I. Income:
Interest earned 13 37,95,160
Other income 14 4,87,800
Total 42,82,960
II. Expenditure
Interest expended 15 22,95,360
Operating expenses 16 5,70,340
Provisions and contingencies
(4,50,000+2,00,000+2,00,000) 8,50,000
Total 37,15,700
III. Profits/Losses
Net profit for the year 5,67,260
Profit brought forward Nil
5,67,260
IV. Appropriations
Transfer to statutory reserve (25% of 5,67,260) 1,41,815
Proposed dividend 50,000
Balance carried over to balance sheet 3,75,445
5,67,260
Profit & Loss Account balance of ₹ 3,75,445 will appear under the head ‘Reserves and Surplus’ in Schedule 2 of
the Balance Sheet.
Year ended 31.3.20X2 (₹)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 37,95,160
37,95,160
Schedule 14 – Other Income
I. Commission, exchange and brokerage 1,90,000
II. Profit on sale of investment 2,25,800
III. Rent received 72,000
4,87,800
Schedule 15 – Interest Expended
I. Interests paid on deposits 22,95,360
22,95,360
Schedule 16 – Operating Expenses

I. Payment to and provisions for employees (salaries & allowances) 2,50,000
II. Rent, taxes paid 1,00,000
III. Depreciation on assets 40,000
IV. Director’s fee, allowances and expenses 35,000
V. Auditor’s fee 12,000
VI. Statutory (law) expenses 38,000
VII. Postage and telegrams 65,340
VIII. Preliminary expenses 30,000
5,70,340
Working Note:
₹
Interest and discount received 38,00,160
Add: Rebate on bills discounted on 31.3. 20X1 15,000
Less: Rebate on bills discounted on 31.3. 20X2 (20,000)
37,95,160
Q39.
Account A Account B
₹ in lakhs ₹ in lakhs
Sanctioned limit 4,500 3,200
Drawing power 4,200 2,500
Amount outstanding continuously from 1.01.2021 to 31.03.2021 3,600 2,000
Total interest debited 288 315
Total credits 120 380
Is credit in the account is sufficient to cover the interest debited during the No Yes
period? Or
Is amount ‘overdue’ for a continuous period of 90 days? Yes No
NPA Not NPA
Q42.
Assets Classification Amount % of Provision
(₹ in lakhs) Provision (₹ in lakhs)
Overdue for more than 3 months Sub-standard 150 15 22.50
but less than 12 months
Overdue for more than 12months Doubtful lessthan 1 year 90 25 22.50
Overdue for more than three Doubtful 1 to 3years 20 40 8
years (fully secured- secured by ₹
20 lakhs)
Overdue for more thanthree Doubtful 1 to 3years 5 100 5
years (unsecured)
Overdue for more than three Loss 25 100 25
years
Total provision 83
Q45. Case 1 Case 2 Case 3 Case 4
Rs. Rs. Rs. Rs.
Sanctioned limit 50,00,000 60,00,000 55,00,000 45,00,000
Drawing power 44,00,000 56,00,000 50,00,000 42,00,000
Amount outstanding continuously
from 1.01.2018 to 31.03.2018 40,00,000 48,00,000 56,00,000 30,00,000
Total interest debited 3,20,000 3,84,000 4,48,000 2,40,000
Total credits 1,80,000 - 4,48,000 3,20,000
Is credit in the account The credit in the Yes
is sufficient to cover the interest debited account is sufficient to
during the period or amount is not cover the interest debited
‘overdue’ for a continuous but the amount outstanding
period of 90 days. No No is continuously in excess of
the sanctioned drawing
power for a continuous
period of 90 days.
NPA NPA NPA NOT NPA
Q47. Relevant Schedules (forming part of the Balance sheet) of DVD Bank
Schedule 3: Deposits
Rs. in lacs
A Demand deposits (700 – 250) 450
B Saving bank deposits 500
C Term deposits 700
1,650
Schedule 9: Advances
Rs. in lacs
A (i) Bills discounted and purchased 800
(ii) Cash credits and overdrafts (600 + 250) 850
(iii) Term loans 500
2,150
B. (i) Secured by tangible assets (bal. fig.) 1,730
(ii) Secured by Bank/Government guarantees (500 x 60%) 300
(iii) Unsecured (600 x 20%) 120
2,150
Schedule 5: Other Liabilities & Provisions
Rs. in lacs
Others (Provision for doubtful debts) 10
Profit and Loss Account (an extract)
Rs. in lacs
Less: Provision for doubtful debts* 10
*Note: It is assumed that the cash credit has been in ,doubtful, category for more than three years
Q48. Calculation of Rebate on Bills Discounted
Rs. Due Date Days after 31 December 2011 Discount Rate Rs.
25,000 18-03-2012 31 + 29 + 18 = 78 8% 426.22
15,000 13-03-2012 3 1 + 29 + 13 = 73 7% 209.42
20,000 28-03-2012 3 1 + 29 + 28 = 88 7% 336.61
30,000 23-03-2012 3 1 + 29 + 23 = 83 9% 612.30
Total 1584.55
Journal Entry
Date Particulars Debit Credit
Dec. 31 Interest and Discount Account Dr. 1584.55
To Rebate on Bills Discounted 1584.55
(Being the provision for unexpired discount required at the end of the year)
Q49.
(i) Bills for Collection (Assets) A/c
₹ ₹
April 1, To Balance b/d 28,00,000 2014-15 By Bills for
2014 Collection
2014-15 (Liabilities) A/c 1,88,00,000
To Bills for By Bills for
Collection collection
(liabilities) A/c 2,58,00,000 (Liabilities) A/c 22,00,000
2015
Mar. 31 By Balance c/d 76,00,000

2,86,00,000 2,86,00,000
Bills for Collection (Liabilities) Account
₹ ₹
2014-15 To Bills for 1,88,00,000 Apr. 1, By Balance b/d 28,00,000
collection 2014
(Assets) A/c
To Bills for 22,00,000 2014-15 By Bills for 2,58,00,000
Collection collection
(Assets) A/c (Assets) A/c
2015
Mar. 31 To Balance c/d 76,00,000

2,86,00,000 2,86,00,000
(ii) In the General Ledger
Acceptances, Endorsement & other Obligations Account
₹ ₹
2014-15 To Constituents’ 1,00,00,000 1.4.2014 By Balance b/d 58,00,000
Liability for
Acceptance,
Endorsement, etc.
To Constituents’ 40,00,000 2014-15 By Constituents, 1,76,00,000
Liability for Liabilities for
Acceptances, Acceptances,
Endorsement etc. Endorsements,
etc.
To Constituents’
Liabilityfor
4,00,000
Acceptances,
Endorsements, etc.
(amount paid on failure
of clients)
To Balance c/d 90,00,000

31.3.2015
2,34,00,000 2,34,00,000
(iii) For classifying loans as fully secured or otherwise, the value of the security as on the last date of the year
is considered. The value of the security is ₹ 38,40,000 (40,000 shares x ₹ 96 per share) covering the loan
and the interest due comfortably. Hence it is to be treated as good and fully secured loan.
(iv) Rebate on Bills Discounted Account
₹ ₹
2014-15 To Interest and 80,000 2014
Discount A/c Apr. 1 By Balance b/d 80,000
2015 To Balance c/d 56,000 2015
Mar. 31 Mar 31 By Interest and 56000
Discount A/c
1,36,000 1,36,000
Interest & Discount Account
2015 ₹ 2014 ₹
Mar. 31 To Rebate on 56,000 Apr. 1 By Rebate on 80,000
Bills Discount A/c Bills Discount A/c
To Profit & Loss 3,92,24000 2014-15 By Bills 3,92,00,000
A/c Purchased &
Discounted/Cash
& sundries
3,92,80,000 3,92,80,000
Q50. In the books of ABC Bank Ltd.

Journal Entries ₹ in crores

Rebate on bills discounted A/c Dr. 40
To Discount on bills A/c 40
(Being the transfer of opening balance in ‘Rebate on bills
discounted A/c’ to ‘Discount on bills A/c’)
Bills purchased and discounted A/c Dr. 5,000
To Discount on bills A/c 280
To Clients A/c 4,720
(Being the discounting of bills of exchange during the year)
Discount on bills A/c Dr. 14
To Rebate on bills discounted A/c 14
(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)
Discount on bills A/c Dr. 306
To Profit and Loss A/c 306
(Being the amount of income for the year from discountingof
bills of exchange transferred to Profit and loss A/c)
Working Notes:
1. Discount received on the bills discounted during the year
₹ 5,000 crores x 14/100 x 146/365 = ₹ 280 crores
2. Calculation of rebate on bill discounted
₹ 500 crores x 14/100 x 73/365 = ₹14 crores
3. Income from bills discounted transferred to Profit and Loss A/c would be calculated by preparing
Discount on bills A/c.
Discount on bills A/c ₹ in crores
Date Particulars Amount Date Particulars Amount

31.3.2015 To Rebate on bills 14 1.4.2014 By Rebate on bills 40
discounted discounted b/d
” To Profit and Loss 2014-15 By Bills purchased
306 280
A/c (Bal. Fig.) and discounted
320 320
Q51.
(i) Bills for Collection (Assets) A/c
₹ ₹
1.4.14 To Balance b/d 10,15,000 2014-15 By Bills for
Collection 64,50,000
2014-15 To Bills for Collection 2014-15 (Liabilities)
(liabilities) A/c 89,75,000 A/c 11,25,000
31.3.15 24,15,000
By Bills for
99,90,000 99,90,000
collection
(Liabilities) A/c
By Balance c/d
Bills for Collection (Liabilities) Account
₹ ₹
2014-15 To Bills for collection 64,50,000 1.4.14 By Balance b/d 10,15,000
2014-15 To Bills for 11,25,000 2014-15 By Bills for collection 89,75,000
Collection (Assets) A/c
31.3.2015 (Assets) A/c 24,15,000
To Balance c/d 99,90,000 99,90,000
(ii) In the general ledger

Acceptances, Endorsement & other Obligation Account
₹ ₹
2014-15 To Constituents’ 44,50,000 1.4.14 By Balance b/d 27,50,000
Liability
for Acceptance,
Endorsement,
etc.
To Constituents’ 15,00,000 2014-15 By Constituents, 67,50,000
Liability 4,00,000 Liabilities for
for Acceptances, Acceptances,
Endorsement etc. Endorsements, etc.
To Constituents’
Liability
for Acceptances,
Endorsements,
etc.
(amount paid on
failure of clients)
31.3.15 To Balance c/d 31,50,000
95,00,000
95,00,000
(iii) For classifying loans as fully secured or otherwise, the value of the security as on the last date of the
year is considered. The value of the security is ₹ 85,00,000 covering the loan and the interest due
comfortably. Hence, it is to be treated as good and fully secured.
(iv) Rebate on Bills Discounted Account

₹ ₹
2014-15 To Interest and 21,000 1.4.14 By Balance b/d 45,000
Discount A/c
31.3.15 To Balance c/d 24,000
45,000 45,000
Interest & Discount Account
₹ ₹
31.3.15 To Profit & Loss 98,21,000 1.4.14 By Balance b/d 98,00,000
A/c
2014-15 By Rebate on Bills 21,000
discounted A/c
98,21,000 98,21,000
(v) Computation of provision in the books of XY Bank Ltd.
(₹ in lakhs)
Doubtful Assets (more than 3 years) 2,000
Less: Value of security (excluding DICGC cover) (800)
1,200
Less: DICGC cover (200)
Unsecured portion 1,000
Provision:
for unsecured portion @100% 1,000 lakhs
for secured portion @ 100% 800 lakhs
Total provision to be made in the books of XY Bank 1,800 lakhs
Q52. Balance Sheet of Vaishnavi Bank as on 31st March, 20X1

Capital and Liabilities Schedule As on As on
31-3-20X1 31-3-20X0
Capital 1 19,00,00
Reserves & Surplus 2 20,24,00
Deposits 3 13,75,50
Borrowings 4 7,72,30
Other liabilities and provisions 5 1,14,20
Total 61,86,00
Assets Schedule As on As on
31-3-20X1 31-3-20X0
Cash and balance with
Reserve Bank of India 6 7,50,00
Balances with bank and Money at calland 7 7,23,50
short notice
Investments 8 16,71,30
Advances 9 19,60,00
Fixed Assets 10 6,35,00
Other Assets 11 4,46,20
Total 61,86,00
Contingent liabilities 12 5,65,00
Bills for collection 4,35,00
Vaishnavi Bank
Profit and Loss Account for the year ended 31-3-20X1
I. Income
Interest & Discount 13 10,00,00
Other income 14 98,00
10,98,00
II. Expenditure
Interest Expended 15 79,50
Operating Expenses 16 4,59,50
Provisions and Contingencies -
5,39,00
III. Profits/Loss
Net profit for the year 5,59,00
Profit b/f 65,00
6,24,00
IV. Appropriations
Transfer to Statutory Reserve 1,39,75
Balance carried over to Balance Sheet 4,84,25
6,24,00
Schedule 1 – Capital
I. For Other Banks
Authorised Capital
Shares of ₹ ... each -
Issued Capital
Subscribed Capital
Called up capital
Shares of ₹ ... each 19,00,00
19,00,00
Schedule 2 - Reserves & Surplus
I. Statutory Reserves
Opening Balance 14,00,00
Additions during the year 1,39,75
15,39,75
II. Balance in Profit and Loss Account 4,84,25
Total 20,24,00
Schedule 3 - Deposits
A. I. Demand Deposits 9,95,00
II. Saving Bank Deposits 1,50,00
III. Term Deposits 2,30,50
13,75,50
Current Accounts Control A/c shows a Credit Balance of ₹ 9,70,000/-. In the additional information it is
mentioned that in the above balance an OD of ₹ 25,000/- is included. Hence for presentation of the Balance
Sheet the entries will be as under:
Current Accounts 9,95,000 to be shown under deposits
ODs in Current Accounts To be shown as Advances along with cash credits & Terms Loans
Schedule 4 – Borrowings
I. Borrowings in India
(ii) Other banks 7,72,30
Total 7,72,30
Schedule 5 - Other liabilities and provisions
I. Other liabilities including provisions:
Rebate on bills discounted 40,00
Employees Security Deposit 74,20
Total 1,14,20
Schedule 6 - Cash and Balances with Reserve Bank of India
I. Cash in hand (including foreign currency notes) 3,50,00
II. Balances with Reserve Bank of India:
(iii) In Current Account 3,20,00
(iv) In Other Account 80,00
Total 7,50,00
Schedule 7 - Balances with Banks & Money at Calls & Short Notice
I. (i) In India Balances with banks
(a) in Current accounts
(b) in Other accounts 2,63,50
(ii) Money at call and short notice 2,00,00
(a) with banks 2,30,00
(b) with other institutions 30,00
Total (i + ii) 7,23,50
Schedule 8 - Investments
I. Investments in India in
(i) Government securities 9,43,70
(ii) Shares (assumed) 5,56,30
(iii) Gold 1,51,30
(iv) Silver 20,00
Total 16,71,30
Schedule 9 - Advances
A. (i) Bills purchased and discounted 1,25,00
(ii) Cash credits, overdrafts and loans repayable
on demand 18,35,00
19,60,00
B. (i) Secured by tangible assets 12,00,00
(ii) Secured by Bank/Govt. Securities 2,00,00
(iii) Unsecured 5,60,00
19,60,00
C. I. Advances in India
(i) Priority sector 8,00,00
(ii) Public sector 1,00,00
(iii) Banks 20,00
(iv) Others 10,40,00
Total 19,60,00
(Details are assumed for explaining disclosures)
Schedule 10 - Fixed Assets
I. Premises
At cost as on 31st March, 20X0 6,42,00
Depreciation to date (50,00) 5,92,00
II. Other fixed articles (including
Furniture and Fixture)
At cost as on 31st March, 20X0 48,00
Depreciation to date (5,00) 43,00
Total (I & II) 6,35,00
Schedule 11 - Other Assets
I. Inter-office adjustments (net) 2,00,00
II. Interest accrued 2,46,20
4,46,20
Schedule 12 - Contingent Liabilities
I. Acceptances, endorsements
5,65,00
and other obligations
Total 5,65,00
Schedule 13 - Interest Earned
I. Interest/discount on
advances, bills (6,20,00 + 4,20,00 –40,00) 10,00,00
Total 10,00,00
Schedule 14 - Other Income
I. Commission, Exchange and Brokerage 2,53,00
II. Profit on sale of investments
Less: Loss on sale on investments (2,00,00) 53,00
III. Miscellaneous Income
Rent and Other Receipts 45,00
Total 98,00
Schedule 15 - Interest Expended
I. Interest on Deposits 79,50
Total 79,50
Schedule 16 - Operating Expenses
I. Payments to and provisions
for employees 2,12,00
II. Rent, Taxes and Lighting 1,20,00
III. Depreciation on Bank’s property 55,00
IV. Director’s fees, allowances and expenses 10,00
V. Auditor’s fees and expenses 50,00
VI. Postage, Telegrams, Telephones etc. 12,50
Total 4,59,50
Q53. Balance Sheet of ADT International Bank As on 31st March, 20X1

(₹ in lacs)
Capital and Liabilities Schedule As on As on

31.3.20X1
31.3.20X0
Share Capital 1 1,98.00
Reserves and Surplus 2 7,93.00
Deposits 3 14,87.12
Borrowings 4 1,10.00
Other liabilities and provisions 5 0.10
25,88.22
Assets
Cash and balances with RBI 6 219.63
Balances with banks and money
at call and short notice 7 344.39
Investments 8 1,65.40
Advances 9 16,32.98
Fixed Assets 10 2,25.82
Other Assets 11 –
25,88.22
Contingent liabilities 12 14.67
Bills for collection 18.10
Schedule 1— Capital
Authorised Capital –
Issued, Subscribed and
Paid up Capital
19,80,000 Shares of ₹ 10 each 1,98.00
Schedule 2— Reserves and Surplus
(1) Statutory Reserve-
Opening balance 2,31.00
Additions during the year 37.50
268.50
(2) Balance in Profit & Loss
Account (W.N. 1) 524.50
7,93.00
Schedule 3— Deposits
(i) Demand deposits from others 5,20.12
(ii) Saving bank deposits 4,50.00
(iii) Fixed Deposits 5,17.00
14,87.12
Schedule 4— Borrowings
Borrowing in India-
Other banks 1,10.00
Schedule 5— Other Liabilities and Provisions
Bills Payable 0.10
Schedule 6— Cash and balances with RBI
(i) Cash in hand 1,60.15
(ii) Balances with RBI
In current account (W.N. 2) 59.48
219.63
Schedule 7—Balances with banks and money at call and short notice
1. In India
(i) Balances with banks
(a) in current accounts (W.N. 3) 1,34.27
(ii) Money at call and short notice 2,10.12
344.39
Schedule 8— Investments
(1) Investment in India in
(i) Government securities 1,10.17
(ii) Others—Gold 55.23
1,65.40
Schedule 9— Advances
A. (i) Cash credits, overdrafts (includes Dr Bal in Current A/c asODs) 8,40.10
(ii) Term Loans 7,92.88
16,32.98
B (i) Secured by tangible assets (balancing fig) 11,52.53
(ii) Secured by bank/government guarantees 3,96.44
(iii) Unsecured 84.01
16,32.98
Schedule 10— Fixed Assets
1. Premises
At cost 156.80
Depreciation to date# 1.10
155.70
2. Other Fixed Assets
Furniture at cost 70.90
Depreciation to date# 0.78
70.12
Total (1 + 2) 2,25.82
#It has been assumed that the balances of Premises and Furniture given in the question are after charging depreciation.
Schedule 11— Other Assets
Nil
Schedule 12— Contingent Liabilities
(i) Claims against bank not acknowledged as debts 0.55
(ii) Acceptances, endorsements 14.12
14.67
Working Note:
(1) Balance in Profit & Loss Account: (₹ in lakhs)
Profit and Loss Account 4,12.00
Add : Net Profit before appropriation(Profit for the year) 1,50.00
5,62.00
Less : Transfer to statutory reserve
(25% of 150.00) (37.50)
524.50
(2) Transfer from Cash with other banks to Cash with RBI
Cash reserve required (14,87.12 x 4%) 59.48
Cash with RBI (37.88)
Transfer needed to maintain cash reserve 21.60
(3) After the transfer, Cash with other Banks = ₹ (in lakhs) (1,55.87 - 21.60) = ₹ (in lakhs) 134.27.
PARTNERSHIP ACCOUNTS
1. P, Q and R are partners sharing profits and losses in the ratio of 2 : 2 : 1. Their Balance Sheet as on 31 st
March, 2009 is as follows:
Capital Accounts: Plant & Machinery 1,08,000
P 1,20,000 Fixtures 24,000
Q 48,000 Stock 60,000
R 24,000 1,92,000 Sundry debtors 48,000
Reserve fund 60,000 Cash 60,000
Creditors 48,000
3,00,000 3,00,000
They decided to dissolve the firm. The following are the amounts realized from the assets:
Rs.
Fixtures 18,000
Stock 84,000
Sundry debtors 44,400
Creditors allowed a discount of 5% and realization expenses amounted to Rs.1,500. A bill for Rs.4,200
due for sales tax was received during the course of realization and this was also paid.
(a) Realization account
(b) Partners’ capital accounts
(c) Cash account.
2. Ram, Rahim and Auntony were in partnership sharing profits and losses in the ratio of 1/2, 1/3 and 1/6
respectively. They decided to dissolve the partnership firm on 31.3.1998, when the Balance Sheet of the
firm appeared as under :
Balance Sheet of the firm as on 31.3.1998
Sundry Creditors 5,67,000 Goodwill A/c 4,56,300
Bank Overdraft 6,06,450 Plant and Machinery 6,07,500
Joint Life Policy Reserve 2,65,500 Furniture 64,650
Loan from Mrs. Ram 1,50,000 Stock 2,36,700
Capital Accounts: Sundry Debtors 5,34,000
Ram 4,20,000 Joint Life Policy 2,65,500
Rahim 2,25,000 Commission Receivable 1,40,550
Auntony 1,20,000 7,65,000 Cash in Hand 48,750
23,53,950 23,53,950
The following details are relevant for dissolution :
(i) The joint life policy was surrendered for Rs. 2,32,500.
(ii) Ram took over goodwill and plant and machinery for Rs. 9,00,000.
(iii) Ram also agreed to discharge bank overdraft and loan from Mrs. Ram.
(iv) Furniture and stocks were divided equally between Ram and Rahim at an agreed valuation of Rs.
3,60,000.
(v) Sundry debtors were assigned to firm’s creditors in full satisfaction of their claims.
(vi) Commission receivable was received in time. A bill discounted was subsequently returned
dishonored and proved valueless Rs. 30,750 (including Rs. 500 noting charges).
(vii) Ram paid the expenses of dissolution amounting to Rs. 18,000.
(viii) Auntony agreed to receive Rs. 1,50,000 in full satisfaction of his rights, title and interest in the firm.
You are required to show accounts relating to closing of books on dissolution of the firm.
3. ‘X’ and ‘Y’ carrying on business in partnership sharing Profits and Losses equally, wished to dissolve the
firm and sell the business to ‘X’ Limited Company on 31-3-2009, when the firm’s position was as
follows:
X’s Capital 1,50,000 Land and Building 1,00,000
Y’s Capital 1,00,000 Furniture 40,000
Sundry Creditors 60,000 Stock 1,00,000
For CA Inter&Final Classes, visit www.edu91.org Join Us on YouTube www.youtube.com/neerajarora Join Us on Telegram https://t.me/neerajaroraclasses 8.1
Debtors 66,000
Cash 4,000
3,10,000 3,10,000
The arrangement with X Limited Company was as follows:
(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and stock were purchased at book values less 15%.
(iii) The goodwill of the firm was valued at Rs.40,000.
(iv) The firm’s debtors, cash and creditors were not to be taken over, but the company agreed to collect
the book debts of the firm and discharge the creditors of the firm as an agent, for which services, the
company was to be paid 5% on all collections from the firm’s debtors and 3% on cash paid to firm’s
creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares of Rs.10 each at
a premium of Rs.2 per share. The company collected all the amounts from debtors. The creditors
were paid off less by Rs.1,000 allowed by them as discount. The company paid the balance due to
the vendors in cash.
Prepare the Realisation account, the Capital accounts of the partners and Cash account in the books of
partnership firm.
4. X, Y and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of 4 : 3 : 2.
Following is the Balance sheet of the firm as at 31st March, 2008:
Partners’ Capitals: Fixed Assets 5,00,000
X 4,00,000 Stock in trade 3,00,000
Y 3,00,000 Sundry debtors 5,00,000
Z 2,00,000 Cash in hand 10,000
General Reserve 90,000
Sundry Creditors 3,20,000 ________
13,10,000 13,10,000
Partners of the firm decided to dissolve the firm on the above said date. It was found that a credit purchase of
Rs. 20,000 in January, 2008 had not been recorded in the books of the firm.
Fixed assets realized Rs. 5,20,000 and book debts Rs. 4,40,000.
Stocks were valued at Rs. 2,50,000 and it was taken over by partner Y.
Creditors allowed discount of 5% and the expenses of realization amounted to Rs. 6,000.
(i) Realisation account;
(ii) Partners capital account; and
(iii) Cash account.
5. Neptune, Jupiter, Venus and Pluto had been carrying on business in partnership sharing profits and losses in
the ratio of 3 : 2 : 1 : 1. They decide to dissolve the partnership on the basis of the following Balance Sheet
as on 30th April, 2003:
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Account: Premises 1,20,000
Neptune 1,00,000 Furniture 40,000
Jupiter 60,000 1,60,000 Stock 1,00,000
General Reserve 56,000 Debtors 40,000
Capital Reserve 14,000 Cash 8,000
Sundry Creditors 20,000 Capital Overdrawn:
Mortgage Loan 80,000 Venus 10,000
Pluto 12,000 22,000
3,30,000 3,30,000
(i) The assets were realised as under: Rs.
Debtors 24,000
Stock 60,000
Furniture 16,000
Premises 90,000
(ii) Expenses of dissolution amounted to Rs. 4,000.
(iii) Further Creditors of Rs. 12,000 had to be met.
(iv) General Reserve unlike Capital Reserve was built up by appropriation of profits.
You are required to draw up the Realisation Account, Partners’ Capital Accounts and the Cash Account
assuming that Venus became insolvent and nothing was realised from his private estate. Apply the
principles laid down in Garner vs Murray.
6. A, B, C & D were partners sharing profits and losses in the ratio of 3:3:2:2. Following was their Balance
Sheet as on 31.12.12:
Capital Accounts: Capital Accounts:
A 60,000 C 48,000
B 45,000 1,05,000 D 18,000 66,000
Creditors 46,500 Furniture 12,000
A’s Loan 30,000 Trademarks 21,000
Stock 30,000
Debtors 48,000
Less: Provision for
doubtful debts (1,500) 46,500
Bank 6,000
1,81,500 1,81,500
On 31.12.2012, the firm was dissolved and B was appointed to realise the assets and to pay off the liabilities.
He was entitled to receive 5% commission on the amount finally paid to other partners as capital. He agreed
to bear the expenses of realisation. The assets were realised as follows:
Debtors Rs. 33,000; Stock Rs. 24,000; Furniture Rs. 3,000; Trademarks Rs. 12,000.
Creditors were paid off in full, in addition, a contingent liability for Bills Receivable discounted materialised
to the extent of Rs. 7,500. Also, there was a joint life policy for Rs. 90,000. This was surrendered for Rs.
9,000. Expenses of realisation amounted to Rs. 1,500. C was insolvent but Rs. 11,100 was recovered from
his estate.
Prepare Realisation Account, Bank Account and Capital Accounts of the partners.
7. The firm of Kapil and Dev has four partners and as of 31st March, 1995, its Balance Sheet stood as follows:
Balance Sheet as on 31st March, 1995

Capital A/cs: Land 50,000
F. Kapil 2,00,000 Building 2,50,000
S. Kapil 2,00,000 Office equipment 1,25,000
R. Dev 1,00,000 Computers 70,000
Current A/cs Debtors 4,00,000
F. Kapil 50,000 Stocks 3,00,000
S. Kapil 1,50,000 Cash at Bank 75,000
R. Dev 1,10,000 Other Current Assets 22,600
Loan from NBFC 5,00,000 Current A/c :
Current Liabilities 70,000 B. Dev 87,400
13,80,000 13,80,000
The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to dissolve the
firm on 1.4.1995 on the basis of the following understanding:
(a) The following assets are to be adjusted to the extent indicated with respect to the book values :
Land 200%
Building 120%
Computers 70%
Debtors 95%
Stocks 90%
(b) In the case of the loan, the lender’s are to be paid at their insistence a prepayment premium of 1%.
(c) B. Dev is insolvent and no amount is recoverable from him. His father, R.Dev, however, agrees to bear
50% of his deficiency. The balance of the deficiency is agreed to be apportioned according to law.
Assuming that the realisation of the assets and discharge of liabilities is carried out immediately, show the
Cash A/c, Realisation Account and the Partners’ Accounts.
8. P, Q and R were partners sharing profits and losses in the ratio of 3 : 2 : 1, no partnership salary or interest
on capital being allowed. Their balance sheet on 30th June, 2012 is as follows:
Fixed Capital Fixed assets :

P 20,000 Trademark 40,000
Q 20,000 Freehold Property 8,000
R 10,000 50,000 Plant and Equipment 12,800
Current Accounts : Motor Vehicle 700
P 500 Current Assets
Q 9,000 9,500 Stock 3,900
Loan from P 8,000 Trade Debtors 2,000
Trade Creditors 12,400 Less : Provision (100) 1,900
Cash at Bank 200
Miscellaneous losses
R's Current Account
400
Profit and Loss Account
12,000
79,900 79,900
On 1st July, 2012 the partnership was dissolved. Motor Vehicle was taken over by Q at a value of Rs. 500
but no cash passed specifically in respect of this transaction. Sale of other assets realised the following
amounts:
Rs.
Trademark nil
Freehold Property 7,000
Plant and Equipment 5,000
Stock 3,000
Trade Debtors 1,600
Trade Creditors were paid Rs. 11,700 in full settlement of their debts. The costs of dissolution amounted to
Rs. 1,500. The loan from P was repaid, P and Q were both fully solvent and able to bring in any cash
required but R was forced into bankruptcy and was only able to bring 1/3 of the amount due.
You are required to show:
(a) Cash and Bank Account,
(b) Realisation Account, and
(c) Partners Fixed Capital Accounts (after transferring Current Accounts’ balances).
9. A, B, C and D sharing profits in the ratio of 4:3:2:1 decided to dissolve their partnership on 31st March 2012
when their balance sheet was as under:
Creditors 15,700 Bank 535
Employees Provident Fund 6,300 Debtors 15,850
Capital Accounts :- Stock 25,200
A 40,000 Prepaid Expenses 800
B 20,000 60,000 Plant & Machinery 20,000
Patents 8,000
C’s Capital A/c 3,200
D’s Capital A/c 8,415
82,000 82,000
Following information is given to you :-
1. One of the creditors took some of the patents whose book value was Rs. 5,000 at a valuation of Rs.
3,200. Balance of the creditors were paid at a discount of Rs. 400.
2. There was a joint life policy of Rs. 20,000 (not mentioned in the balance sheet) and this was surrendered
for Rs. 4,500.
3. The remaining assets were realised at the following values:- Debtors Rs. 10,800; Stock Rs. 15,600; Plant
and Machinery Rs. 12,000; and Patents at 60% of their book-values.
Expenses of realisation amounted Rs. 1,500.
D became insolvent and a dividend of 25 paise in a rupee was received in respect of the firms claim against
his estate. Prepare necessary ledger accounts.
10. M/s X, Y and Z who were in partnership sharing profits and losses in the ratio of 2:2:1 respectively, had the
following Balance Sheet as at December 31, 2012:
Liabilities Rs. Rs. Assets Rs. Rs.
Capital : X 29,200 Fixed Assets 40,000
Y 10,800 Stock 25,000
Z 10,000 50,000 Book Debts 25,000
Z’s Loan 5,000 Less : Provision (5,000) 20,000
Loan from Mrs. X 10,000 Cash 1,000
Sundry Trade Creditors 25,000 Advance to Y 4,000
90,000 90,000
The firm was dissolved on the date mentioned above due to continued losses. After drawing up the balance
sheet given above, it was discovered that goods amounting to Rs. 4,000 have been purchased in November,
2012 and had been received but the purchase was not recorded in books.
Fixed assets realised Rs. 20,000; Stock Rs. 21,000 and Book Debt Rs. 20,500. Similarly, the creditors
allowed a discount of 2% on the average. The expenses of realisation come to Rs. 1,080. X agreed to take
over the loan of Mrs. X. Y is insolvent, and his estate is unable to contribute anything.
Give accounts to close the books; work according to the decision in Garner vs. Murray.
11. Read, Write and Add give you the following Balance Sheet as on 31st March, 2011.
Read,s Loan 15,000 Plant and Machinery at cost 30,000
Capital Accounts: Fixtures and Fittings 2,000
Read 30,000 Stock 10,400
Write 10,000 Debtors 18,400
Add 2,000 42,000 Less: Provision (400) 18,000
Sundry Creditors 17,800 Joint Life Policy 15,000
Loan on Hypothecation of Patents and Trademarks 10,000
Stock 6,200 Cash at Bank 8,000
Joint Life Policy Reserve 12,400
93,400 93,400
The partners shared profits and losses in the ratio of Read 4/9, Write 2/9 and Add 1/3. Firm was dissolved on
31st March, 2011 and you are given the following information:
(a) Add had taken a loan from insurers for Rs. 5,000 on the security of Joint Life Policy.
The policy was surrendered and Insurers paid a sum of Rs. 10,200 after deducting Rs. 5,000 for.
Add,s loan and Rs. 300 as interest thereon.
(b) One of the creditors took some of the patents whose book value was Rs. 6,000 at a valuation of Rs.
4,500. The balance to that creditor was paid in cash.
(c) The firm had previously purchased some shares in a joint stock company and had written them off on
finding them useless. The shares were now found to be worth Rs. 3,000 and the loan creditor agreed
to accept the shares at this value.
(d) The remaining assets realized the following amount: Rs.
Plant and Machinery 17,000
Fixtures and Fittings 1,000
Stock 9,000
Debtors 16,500
Patents 50% of their book value
(e) The liabilities were paid and a total discount of Rs. 500 was allowed by the creditors.
(f) The expenses of realization amounted to Rs. 2,300.
Prepare the Realisation Account, Bank Account and Partners Capital Accounts in columnar form.
12. P and Q were partners sharing profits equally of P & Q Co. Their Balance Sheet as on March 31, 2021 was
as follows:
Equity and Liabilities ₹ Assets ₹

Capitals: Bank 30,000
P 1,00,000 Debtors 25,000
Q 50,000 1,50,000 Stock 35,000
Creditors 20,000 Furniture 40,000
Q’s current account 10,000 Machinery 60,000
Reserves 15,000 P’s current account 10,000
2,00,000 2,00,000
The firm was dissolved on the above date:
P took over 50% of the stock at 10% less on its book value, and the remaining stock was sold at a gain of
15%. Furniture and Machinery realized for ₹ 30,000 and ₹ 50,000 respectively; There was an unrecorded
investment which was sold for ₹ 25,000; Debtors realized 90% only and ₹ 1,245 were recovered for bad
debts written off last year; There was an outstanding bill for repairs which had to be paid for ₹ 2,000.
You are required to prepare Realization Account, Partners’ capital accounts (including transfer of current
account balances) and Bank Account in the books of the firm.
13. Following is the Balance Sheet of Ram & Shyam

Ram’s Capital 40,000 Fixed Assets 1,00,000
Shyam’s Capital 60,000 1,00,000 Current Assets 80,000
Profit & Loss A/c 40,000
1,80,000 1,80,000
A Limited Company took over the business of partnership firm
1. Fixed Assets were valued at Rs. 1,20,000 only. 50% of creditors were taken over.
2. Rest of the creditors were taken over by Ram and Shyam equally.
3. Purchase consideration was settled by issue of Equity shares.
Required:
1. Close Books of old firm.
2. Open Books of New Firm.
3. Prepare B/S of New Company.
4. Prepare B/S of New Company if same set of Books is followed.
14. M and R carrying on business in partnership, sharing profits and losses in the ratio of 3:2 wish to dissolve the
firm and sell the business to a limited company on 31st December, 1991 when the firm’s Balance Sheet
stands as under:

Capital Account Furniture 8,000
M 70,000 Motor Car12,000
R 50,000 Stock 81,000
Reserve 20,000 Debtors 60,000
Sundry Creditors 25,000 Cash 4,000
1,65,000 1,65,000
A limited company with an authorized capital of Rs. 3,00,000 in equity shares of Rs. 10 each is registered to
purchase the above business on the following terms:
(1) Goodwill is valued at Rs. 30,000.
(2) Furniture and stock are revalued at Rs. 6,000 and Rs. 85,000 respectively.
(3) Debtors are subject to 5% provision.
Motor car is not required by the company and M takes over the same at an agreed valuation of Rs. 8,000.
Purchase consideration is satisfied by the issue of equity shares of Rs. 10 each at par.
Show Journal entries and Balance Sheet of the company assuming that the same set of books is continued.
15. Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5:3:2. It was decided that
Robert would retire on 31.03.2005 and in his place Richard would be admitted as a partner with new profit
sharing ratio between Ram, Rahim and Richard at 3:2:1.
Balance Sheet of Ram, Rahim and Robert as at 31.03.2005:

Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash at Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ----------
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
(i) Plant & Machinery to be depreciated by Rs. 30,000
(ii) Land & Building to be valued at Rs. 6,00,000
(iii) Stock to be valued at 95% of book value.
(iv) Provision for doubtful debts @ 10% to be provided on debtors.
(v) General Reserve to be apportioned amongst Ram, Rahim and Robert.
(vi) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3 years. The
relevant figures are:
Year ended 31.03.2002 Profit Rs. 50,000
(vii) Out of the amount due to Robert Rs. 2,00,000 would be retained as loan by the firm and the balance will
be settled immediately.
(viii) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare: (a) Capital accounts of the partners; and (b) Balance Sheet of the reconstituted firm.
16. The following was the Balance Sheet of ‘A’ and ‘B’, who were sharing Profit and Losses in the ratio of 2:1
on 31.12.2006.

Capital Accounts Plant and Machinery 12,00,000
A 10,00,000 Building 9,00,000
B 5,00,000 Sundry Debtors 3,00,000
Reserve Fund 9,00,000 Stock 4,00,000
Sundry Creditors 4,00,000 Cash 1,00,000
Bills payable 1,00,000
29,00,000 29,00,000
They agreed to admit C into the partnership on the following terms:
(i) The Goodwill of the firm was fixed at Rs. 1,05,000
(ii) That the value of Stock and Plant and Machinery were to be reduced by 10%.
(iii) That a provision of 5% was to be created for Doubtful Debts.
(iv) That the Building Account was to be appreciated by 20%.
(v) There was an unrecorded Liability of Rs. 10,000.
(vi) Investment worth Rs. 20,000 (Not mentioned in the Balance Sheet) were taken into account.
(vii) That the value of Reserve fund, the values of Liabilities and the values of Assets other than Cash
are not to be altered.
‘C’ was to be given one-fourth share in the ‘Profit and was to bring capital equal to his share of Profit after
all adjustment.
Prepare Memorandum Revaluation Account, Capital Account of the Partners and the Balance Sheet of the
Newly Reconstituted firm.
17. R, K and C have carried on business as drapers for twenty years and on 30th June, 2001, their Balance Sheet
was as under:

Bank overdraft 20,000 Plant and Machinery 32,000
Creditors for suppliers 30,000 Premises 50,000
Creditors for expenses 18,000 Sundry Debtors 48,000
Capital account: Stock in trade 40,000
(fixed) Cash and Bank
R 30,000 Balance 8,000
K 20,000
C 20,000 70,000
Current Accounts:
R 16,000
C 24,000 40,000
1,78,000 1,78,000
The profits and losses were shared in the ratio of fixed capitals on 30th June, 2001. The partners agreed that
due to old age R would retire from the firm when its goodwill will be valued and proportionate share credited
to R. It was also decided that premises appearing in the books at cost would be valued a their market value of
Rs. 80,000 and allotted to R in satisfaction of his dues. Any excess or deficit would be settled in cash. It was
also agreed that stock-in-trade and debtors would be taken at 90% of the book value and an unrecorded
liability of bonus of Rs. 10,000 to staff brought into books. Goodwill of the firm was to be taken at Rs.
70,000.
After R’s retirement, the business was carried on by K and C sharing profits and losses equally and till 30 th
September 2001 the firm had made a net profit of Rs. 30,000 after crediting each partner’s capital account
with Rs. 500 p.m. as salary. No drawing were made by the partners in the quarter.
K and C now find that they cannot continue the business and decide to sell it to a private limited company as
and from 1st October, 2001. The company is to take over the entire business for a consideration of Rs. 90,000
which the vendors agree to make 40% in 14% secured debentures and the balance in cash. To enable the
company to pay the vendors and also leave it with a working capital of Rs. 20,000, the company makes issue
of equity shares of Rs. 10 each at par.
Show the Balance Sheet of the company after the take over of the business of K and C.All workings should
frompart of your answer.
18. A and B were carrying on business sharing profits and losses equally. The firm’s Balance Sheet as at
31.12.2011 was:
Sundry Creditors 60,000 Stock 60,000
Bank overdraft 35,000 Machinery 1,50,000
Capital A/cs: Debtors 70,000
A 1,40,000 Joint Life Policy 9,000
B 1,30,000 2,70,000 Leasehold Premises 34,000
Drawings Accounts:
A 10,000
B 6,000 16,000
3,65,000 3,65,000
The business was carried on till 30.6.2012. The partners withdrew in equal amounts half the amount of
profits made during the period of six months after charging depreciation at 10% p.a. on machinery and after
writing off 5% on leasehold premises. In the half year, sundry creditors were reduced by Rs. 10,000 and
bank overdraft by Rs. 15,000.
On 30.6.2012, stock was valued at Rs. 75,000 and Debtors at Rs. 60,000; the Joint Life Policy had been
surrendered for Rs. 9,000 before 30.6.2012 and other items remained the same as at 31.12.2011.
On 30.6.2012, the firm sold the business to a Limited Company. The value of goodwill was fixed at Rs.
1,00,000 and the rest of the assets were valued on the basis of the Balance Sheet as at 30.6.2012. The
company paid the purchase consideration in Equity Shares of Rs. 10 each.
You are required to prepare: (a) Balance Sheet of the firm as at 30.6.2012; (b) The Realisation Account; (c)
Partners’ Capital Accounts showing the final settlement between them.
19. A, B and C were in partnership sharing profits and losses 3:2:1. There was no provision in the agreement for
interest on capitals or drawings.
A died on 1.1.2011 and on that date, the partners’ balance were as under:
Capital Account : A – Rs. 60,000; B- Rs. 40,000; C- Rs. 20,000
Current Account: A – Rs. 29,000; B – Rs. 20,000; C – Rs. 5,000 (Dr.).
By the partnership agreement, the sum due to A’s estate was required to be paid within a period of 3 years,
and minimum instalment of Rs. 20,000 each were to be paid, the first such instalment falling due
immediately after death and the subsequent instalments at half-yearly intervals. Interest @ 5% p.a. was to be
credited half-yearly.
In ascertaining his share, goodwill (not recorded in the books) was to be valued at Rs. 60,000 and the assets,
excluding the Joint Endowment Policy (mentioned below), were valued at Rs. 36,000 in excess of the book
values.
No Goodwill Account was raised and no alteration was made to the book values of fixed assets. The Joint
Assurance Policy shown in the books at Rs. 20,000 matured on 1.1.2011, realising Rs. 26,000; payments of
Rs. 20,000 each were made to A’s Executors on 1.1.2011, 30.6.2011 and 31.12.2011. B and C continued
trading on the same terms as previously and the net profit for the year to 31.12.2011 (before charging the
interest due to A’s estate) amounted to Rs. 32,000. During that period, the partners drawings were: B- Rs.
15,000; and C- Rs. 8,000.
On 1.1.2012, the partnership was dissolved and an offer to purchase the business as a going concern for Rs.
1,40,000 was accepted on that day. A cheque for that sum was received on 30.6.2012.
The balance due to A’s estate, including interest, was paid on 30.6.2012 and on that day, B and C received
the sums due to them. You are required to write-up the Partners’ Capital and Current Accounts from
1.1.2011 to 30.6.2012. Show also the account of the executors of A.
20. The following is the Balance Sheet of A, B, C on 31st December, 20X1 when they decided to dissolve the
partnership:

Creditors 2,000 Sundry Assets 48,500
A’s Loan 5,000 Cash 500
Capital Accounts :
A 15,000
B 18,000
C 9,000
49,000 49,000
The assets realised the following sums in instalments:
I 1,000
II 3,000
III 3,900
IV 6,000
V 20,100
34,000
The expenses of realisation were expected to be Rs. 500 but ultimately amounted to Rs. 400 only.
Show how at each stage the cash received should be distributed between partners. They share profits in the
ratio of 2:2:1.
21. Om, Sai and Radhe share profits and losses of a business as to 3:2:1 respectively. Their balance sheet as at
31st March, 2020 was as follows:
Capital Accounts: Land and Building 1,40,000
Om 70,000 Machinery 50,000
Sai 80,000 Motor Car 28,000
Radhe 10,000 Furniture 12,000
General Reserve 22,000 Investments 18,000
Radhe’s Loan 33,000 Stock 18,000
Mrs. Om’s loan 15,000 Bills receivable 20,000
Creditors 96,000 Loose tools 7,000
Bills Payable 14,000 Debtors 38,000
Bank overdraft 60,000 Cash 1,000
Radhe’s current A/c 56,000
4,00,000 4,00,000
The partners decide to convert their firm into a Joint Stock Company. For this purpose ABC Ltd. was formed
with an authorized capital of ₹ 10,00,000 divided into ₹ 100 equity Shares. The business of the firm was sold
to the company as at the date of balance sheet given above on the following terms:
(i) Motor car, furniture, investments, loose tools, debtors and cash are not to be taken over by the
company.
(ii) Liabilities for bills payable and bank overdraft are to be taken over by the company.
(iii) The purchase price is settled at ₹ 1,95,500 payable as to ₹ 75,500 in cash and the balance in company’s
fully paid shares of ₹ 100 each.
(iv) The remaining assets and liabilities of the firm are directly disposed of by the firm as per details given
below:
Investments are taken over by Om for ₹ 13,000; debtors realize in all ₹ 20,000; Motor Car, furniture and
loose tools fetch ₹ 24,000, ₹ 4,000, and ₹ 1,000 respectively. Om agrees to pay his wife’s loan. The
creditors were paid ₹ 94,000 in final settlement of their claims. The realization expenses amount to ₹
500. Radhe’s loan was transferred to his capital account.
(v) The equity share received from the vendor company are to be divided among the partners in profit-
sharing ratio.
You are required to prepare Realization account, Partners’ capital accounts, Cash account, ABC Ltd. account
and Shares in ABC Ltd. account in the books of the partnership firm.
22. A, B and C share profits and losses in the ratio of 5 : 3 : 2. Their firm was dissolved due to misconduct of B
and their balance sheet on that date was as under:

Capital Accounts: Land and Building 2,00,000
A 3,00,000 Plants 2,00,000

B 2,00,000 Sundry Debtors 50,000
C 1,00,000 6,00,000 Stock 1,50,000
Current Accounts: Bills Receivable 50,000
A 50,000 Cash 1,00,000

B 30,000 80,000 Current Account:
Sundry Creditors: 40,000 C 50,000

8,00,000 8,00,000
The whole business of the firm was sold to Govinda Company Ltd. on that day on the following terms:
(i) Govinda Company Limited will issue the following securities in consideration for transfer of business: 10,000
equity shares @Rs.15 each; 15,000 Preference shares @Rs.15 each; and 20,000 debentures @ Rs. 14.725 each.
(ii) The agreed value of assets and liabilities of partnership firm are as follows: Rs.
Plants 1,50,000
Stock 1,40,000
Bills Receivable 50,000
C was admitted to the partnership firm on 1.4.2002 and paid Goodwill premium for her share of Rs. 30,000 based
on 5 years purchase of super profit method. A and B were sharing profits in equal ratio before C admission.
It is mutually decided that preference shares will be distributed in profit sharing ratio and debentures and cash will
be shared equally by all the partners. Prepare the necessary accounts to close the books of the firm.
23. A and B were in partnership sharing profit and losses in the ratio of 2 : 1. Their summarized Balance Sheet
as on 31st March, 2004 was as under:
Capital Accounts: Fixed Assets 1,40,000

A 1,00,000 (including two motor cars
B 80,000 1,80,000 for Rs. 28,000)
Current Accounts: Stock 70,000
A 40,000 Debtors 1,00,000
Less: B 23,000 17,000 Bills Receivable 25,000
Loan from B 63,000 Bank 20,000
Creditors for Goods 1,10,000 Advertisement Suspense Account 15,000
3,70,000 3,70,000
They decided to dissolve the business and accepted the offer of N & Co. Ltd. to acquire stocks and fixed assets
excluding two motor cars at a total price of Rs. 3,35,000. The debtors realized Rs. 97,000, and bills receivable Rs.
24,000. Creditors for goods allowed a discount of 5%.
The purchase consideration was to be discharged by a cash payment of Rs. 83,000, the allotment by the company
to the partners of 8,000 preference shares of Rs. 10 each (valued at Rs. 9 each) and the balance by the allotment of
9,000 ordinary shares of Rs. 10 each. The partners agreed that following should be the basis of distribution on
dissolution of the firm.
(a) A to take over one Motor car at a value of Rs. 25,000, and B, the other car at Rs. 15,000.
(b) B to accept preference shares for her loan to the firm, the remainder to be taken over by A.
(c) The ordinary shares to be taken over by A and B in proportion of their fixed capitals.
(d) The balance to be settled in cash.
Prepare the necessary accounts to close the books of the firm.
24. The firm of LMS was dissolved on 31.3.20X1, at which date its Balance Sheet stood as follows:
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capital:
L 15,00,000
M 10,00,000
S 5,00,000
47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realize the assets and distribute
the cash after discharge of liabilities. Their fees which include all expenses is fixed at ₹ 1,00,000. No loss is
expected on realization since fixed assets include valuable land and building.
Realizations are:
S. No. Amount in ₹
1 5,00,000 (including cash and bank)
2 15,00,000
3 15,00,000
4 30,00,000
5 30,00,000
The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You are
required to prepare a statement showing distribution of cash with necessary workings.
25. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs. 9,600, Rs.
6,000 and Rs. 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
Rs. Rs.
Liability for interest on Investments 1,000

loans from : Furniture 2,000
Spouses of partners 2,000 Machinery 1,200
Partners 1,000 Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when available, applying
maximum possible loss procedure.
26. Ajay Enterprises, a partnership firm in which A, Band C are three partners sharing profit and loss in the ratio
4:3:3 the balance sheet of the firm as on 31st December, 2011 is as below:
Liabilities Rs Assets Rs
A Capital 15,000 Factory Building 24,160
B Capital 7,500 Plant & Machinery 16,275
C Capital 15,000 Debtors 5,400
B Loan A/C 4,500 Stock 12,390
Sundry creditors 16,500 Cash at Bank 275
58,500 58,500
On balance sheet date all the three partners have decided to dissolve their partnership. Since the realization
of assets was prostrated, they decide to distribute amounts as and when feasible and for this purpose they
appoint C who was to get as his remunerations 1%of the value of the assets realized other than cash at bank
and 10% of the amount distributed to the partners.
Assets were piece-meal as under
Rs
First instalment 18,650
Second instalment 17,320
Third instalment 10,000
Last instalment 7,000
Dissolution expenses were provided for estimated amount of 3,000
The Creditors were finally settled for 15,900
Prepare a statement showing distribution of cash amongst the partners by “Highest Relative capital method”.
27. The partners A, B and C have called you to assist them in winding up the affairs of their partnership on 30th
June, 2012. Their Balance Sheet as on that date is given below :
Sundry Creditors 17,000 Cash at Bank 6,000
Capital Accounts : Sundry Debtors 22,000
A 67,000 Stock in trade 14,000
B 45,000 Plant and Equipment 99,000
C 31,500 Loan-A 12,000
Loan-B 7,500
1,60,500 1,60,500
(1) The partners share profit and losses in the ratio of 5:3:2
(2) Cash is distributed to the partners at the end of each month
(3) A summary of liquidation transactions are as follows:
July 2012
Rs. 16,500 – collected from Debtors; balance is uncollectable.
Rs. 10,000 – received from sale of entire stock.
Rs. 1,000 – liquidation expenses paid.
Rs. 8,000 – cash retained in the business at the end of the month.
August 2012
Rs. 1,500 – liquidation expenses paid. As part payment of his Capital, C accepted a piece of equipment for
Rs. 10,000 (book value Rs. 4,000).
Rs. 2,500 – cash retained in the business at the end of the month.
September 2012
Rs. 75,000 – received on sale of remaining plant and equipment.
Rs. 1,000 – liquidation expenses paid. No cash retained in the business.
Required: Prepare a schedule of cash payments as of Sept. 30, showing how the cash was distributed.
28. Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2. The firm Y & Co.
consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.
On 31st March, 2010 it was decided to amalgamate both the firms and form a new firm XY & Co., wherein
A, B and C would be partners sharing Profits and Losses in the ratio of 4:5:1.
Following is the Balance sheet of the firm and that of the company as at 31.3.2010:
Liabilities X & Co. Y & Co. Assets X & Co. Y & Co.
Rs. Rs. Rs. Rs.
Capital: Cash in hand/bank 40,000 30,000

A 1,50,000 ----- Debtors 60,000 80,000
B 1,00,000 75,000 Stock 50,000 20,000
C ---- 50,000 Vehicles ---- 90,000
Reserve 50,000 40,000 Machinery 1,20,000
Creditors 1,20,000 55,000 Building 1,50,000 ------
4,20,000 2,20,000 4,20,000 2,20,000
The following were the terms of amalgamation:
(a) Goodwill of X & Co., was valued at Rs. 75,000. Goodwill of Y & Co., was valued at Rs. 40,000.
Goodwill account not to be opened in the books of the firm of the new firm but adjusted through the
capital accounts of the partners.
(b) Building, machinery and Vehicles are to be taken over at Rs. 2,00,000, Rs. 1,00,000 and Rs. 74,000
respectively.
(c) Provision for doubtful debts at Rs. 5,000 in respect of X & Co. and Rs. 4,000 in respect of Y & Co. are
to be provided.
(d) Required:
(i) Show, how the goodwill value is adjusted among partners.
(ii) Prepare the B/S of XY & Co. as at 31.03.2010 by keeping partners capital in their profit sharing ratio
by taking capital of ‘B’ as the basis. The excess or deficiency to be kept in the respective Partner’s
current account.
29. P & Q are partners of P & Co. sharing Profits and Losses in the ratio of 3 : 1 and Q and Rare partners of R &
Co. sharing Profits and Losses in the ratio of 2 : 1. On 31st March, 2009, they decide to amalgamate and
form a new firm M/s PQR & Co., wherein P, Q and R would be partners sharing Profits and Losses in the
ratio of 3:2:1.
The Balance sheet of two firms of the above date are as under:
Liability P & Co. R & Co. Assets P & Co. R & Co.
Capitals: Fixed Assets:
P 2,40,000 -- Building 50,000 60,000
Q 1,60,000 2,00,000 Plant & Machinery 1,50,000 1,60,000
R -- 1,00,000 Office Equipment 20,000 6,000
Reserves 50,000 1,50,000 Current Assets:
Sundry Creditors 1,20,000 1,16,000 Stock-in-trade 1,20,000 1,40,000
Due to P & Co. -- 1,00,000 Sundry Debtors 1,60,000 2,00,000
Bank Overdraft 80,000 --- Bank Balance 30,000 90,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 ----
6,50,000 6,66,000 6,50,000 6,66,000
The amalgamated firm took over the business on the following terms:
(a) Building of P& Co. was valued at Rs. 1,00,000.

(b) Plant & machinery of P & Co. was valued at Rs. 2,50,000, and that of R & Co. at Rs. 2,00,000.
(c) All stock in trade is to be appreciated by 20%.
(d) Goodwill valued of P & Co. at Rs. 1,20,000 and R & Co. at Rs. 60,000, but the same will not appear
in the books of PQR & Co.
(e) Partners of new firm will bring the nessary cash to pay other partners to adjust their capitals
according to the profit sharing ratio.
(f) Provision for doubtful debts has to be carried forward at Rs. 12,000 in respect of debtors of P & Co.
and Rs. 26,000 in respect of debtors of R & Co.
You are required to prepare the Balance Sheet of New Firm and Capital Accounts of the partners in the
books of old firms.
30. A, B and C were equal partners. Their balance sheet on 31.12.2006 stood as under, when the firm was
dissolved:

Sundry creditors 32,000 Machinery 12,000
A’s capital 4,000 Furniture 3,000
B’s capital 3,000 Sundry debtors 5,000
Stock 4,000
Cash at bank 2,800
C’s capital 12,200
39,000 39,000
The assets realised as under:
Machinery Rs.6,000; furniture Rs.1,000; sundry debtors Rs. 4,000 and stock Rs. 3,000. The expenses of
realisation came to Rs. 1,400.
A’s personal properties are not sufficient to pay his personal liabilities, whereas in B’s and C’s private estate
there is a surplus of Rs. 2,400 and Rs. 3,000 respectively.
Show necessary accounts closing the books of the firm.
31. A and B and are partners of AB & Co., sharing Profit and Losses in the ratio of 4: 1 and B and C are partners
of BC & Co., sharing profits and losses in the ratio of 2: 1. On 31st March,2021, they decided to amalgamate
and form a new firm namely M/s ABC & Co., wherein A, B and C would be partners sharing profits and
losses in the ratio of 3:2:1. The Balance Sheets of two firms on the above date are as under:
Liabilities AB & Co. BC & Co. Assets AB & Co. BC & Co.
₹ ₹ ₹ ₹
Partners’ Capital Fixed assets:
accounts:
A 3,50,000 - Building 1,10,000 90,000
B 1,50,000 2,50,000 Plant &
C - 1,20,000 Machinery 1,80,000 1,34,000
Reserves 39,000 1,47,000 Furniture 24,000 26,000
Sundry creditors 90,000 1,15,000 Current assets:
Due to AB & Co. - 75,000 Stock-in-trade 80,000 1,00,000
Loan from Bank 50,000 Sundry debtors 1,40,000 1,80,000
Bank balance 45,000 1,65,000
Cash in hand 25,000 12,000
Due from BC &
Co. 75,000 -
6,79,000 7,07,000 6,79,000 7,07,000
The amalgamate firm took over the business on the following terms:
(i) The assets and liabilities of AB & Co. and BC & Co. are to be valued as under:
Particulars AB & Co. ₹ BC & Co. ₹
Building No change 1,50,000
Plant & machinery 2,40,000 1,90,000
Stock-in trade to be appreciated by 10 % to be appreciated by 10%
Goodwill (Note (a))–to be 5 year’s purchase of 6 year’s purchase of
valued super profit super profit
Provision for doubtful 14,000 30,000
debts to be created
Note the followings:

(a) Goodwill should not appear in the books of ABC & Co. For the purpose of goodwill valuation, actual
profit to be considered are ₹ 1,20,000 and ₹ 81,600 for AB & Co. and BC & Co. and BC & Co.
respectively and normal rate of return for both firms is 18% per annum of Fixed Capital.
(b) All other assets and liabilities, appearing in the balance sheet of AB & Co. and BC & Co. are taken over
by ABC & Co. at book value just before amalgamation.
(c) An unrecorded liability of ₹ 15,300 of AB & Co. must also be taken over by ABC & Co. The sundry
creditors of AB & Co. do not include this unrecorded liability.
(ii) Partner of new firm will bring the necessary cash to pay other partners to adjust their capitals according
to the profit -sharing ratio.
You are required to prepare the Balance Sheet of new firm and capital accounts of the partners in the books
of old firms. Ignore taxation.
32. P, Q and R are partners sharing profits and losses as to 2:2:1. Their Balance Sheet as on 31st March, 2009 is
as follows:
Capital accounts Plant and Machinery 1,08,000

P 1,20,000 Fixtures 24,000
Q 48,000 Stock 60,000
R 24,000 1,92,000 Sundry debtors 48,000
Reserve Fund 60,000 Cash 60,000
Creditors 48,000
3,00,000 3,00,000
They decided to dissolve the business. The following are the amounts realized:
Fixtures 18,000
Stock 84,000
Sundry debtors 44,000
Creditors allowed a discount of 5% and realization expenses amounted to Rs.1,500. There was an unrecorded
assets of Rs.6,000 which was taken over by Q at Rs.4,800. A bill for Rs.4,200 due for sales tax was received
during the course of realization and this was also paid
(i) Realisation account (ii) Partner’s capital account. (iii) Cash account
33. TJM & Sons is a partnership firm consisting of T, J and M who share profits and loses in the ratio of 2:2:1
and JEK Limited is another company doing similar business.
The firm (TJM & Sons) and the company (JEK Ltd) provide you the following ledger balances as on
31.03.2021:
TJM Sons (₹) JEK Ltd. (₹)

Debit Balances:
Plant & Machinery 7,50,000 24,00,000
Furniture & Fixtures 75,000 3,37,500
Inventories 3,00,000 12,75,000
Cash at Bank 15,000 6,00,000
Cash in hand 60,000 1,50,000
Credit Balances
Equity share capital: Equity shares of ₹ 10 each 30,00,000
Partners Capitals
T 3,00,000
J 4,50,000
M 1,50,000
Trade Payables 4,50,000 19,50,000
On the balance sheet date, it was decided that the firm TJM & Sons be dissolved and all the assets (except
cash in hand and cash at bank) and all the liabilities of the firm be taken over by JEK Limited by issuing
75,000 shares of ₹ 10/- each at a premium of ₹ 4/- per share. Plant & Machinery and Furniture & Fixtures are
to be revalued at ₹ 8,50,000 and ₹ 1,00,000.
Partners of TJM & Sons agreed to divide the shares issued by JEK Limited in the profit - sharing ratio and
bring necessary cash for settlement of their capital.
The trade payables of TJM & Sons include ₹ 1,50,000 payables to JEK Limited. An unrecorded liability of ₹
37,500 of TJM & Sons must also be taken over by JEK Ltd.
(i) Realization account, Partners’ capital accounts and cash in hand/Bank account in the books of TJM &
Sons.
(ii) Pass journal entries in the books of JEK Limited for acquisition of TJM & Sons.
34. X, Y and Z are partners. X became insolvent on 15.4.2009. The Capital account balance of partner Y is on
the debit side. Partner Y is solvent. Should partner Y bear the loss arising on account of the insolvency of
partner X?
35. The following is the Balance Sheet of M/s Red and Black as on 31 st March,2018:
Liabilities (Rs) Assets (Rs)

Red’s Capital 80,000 Building 1,00,000
Black’s Capital 1,00,000 1,80,000 Closing Stock 60,000
Red’s Loan 20,000 Sundry Debtors 40,000
General Reserve 20,000 Investment
Sundry Creditors 40,000 6%Debentures in Cool Ltd. 40,000
Cash 20,000
2,60,000 2,60,000
It was agreed that Mr. White is to be admitted for a fifth share in the future profits from 1st April, 2018. He is
required to contribute cash towards goodwill and Rs. 20,000 towards capital.
(a) The following further information in furnished:
(i) The Partners Red and Black shared the profits in the ratio of 3:2.
(ii) Mr. Red was receiving a salary of Rs. 1000p.m. from the very inception of the firm in addition to the
share of profit.
(iii) The future profit ratio between Red, Black and White will be 3:1:1. Mr. Red will not get any salary after
the admission of Mr. White.
(iv) The goodwill of the firm should be determined on the basis of 2 years purchase of the average profits
from business of the last 5 years. The particulars of profits/losses are as under:
Year Ended Rs Profit/Loss
31.3.2014 40,000 Profit
31.3.2015 20,000 Loss
31.3.2016 40,000 Profit
31.3.2017 50,000 Profit
31.3.2018 60,000 Profit
The above profits and losses are after charging the salary of Mr. Red. The profit of the year ended 31 st
March, 2014 included an extraneous profit of Rs. 60,000 and the loss of year ended 31 st March, 2015 was
on account of loss by strike to the extent of Rs. 40,000.
(v) It was agreed that the value the goodwill should not appear in the books of the firm..
(b) Trading profit for the year ended 31st March, 2019 was Rs. 80,000 (Before charging depreciation).
(c) Each partner has drawn Rs. 2,000 per month as drawing during the year 2018-19.
(d) On 31st March, 2019 the following balances appeared in the books:
Building (Before Depreciation) Rs 1,20,000
Closing Stock Rs. 80,000
Sundry Debtors NIL
Sundry Creditors NIL
Investment Rs. 40,000
(e) Interest @6%per annum on Red’s loan was not paid during the year.
(f) Interest on Debenture received during the year.
(g) Depreciation is to be provided @5% on Closing Balance of Building.
(h) Partners applied for conversion of the firm into a private Limited Company. i.e. RBW Private Limited.
Certificate received on 1.4.2019.They decided to convert Capital accounts of the partners into share capital, in
the ratio of 3:1:1 (on the basis of total Capital as on 31.3.2019). If necessary, Partners have to subscribe to
fresh capital or withdraw.
(1) Profit &Loss Account for the year ended 31st March, 2019 in the books of M/s Red and Black.
(2) Balance Sheet as on 1st April, 2019 in the books of RBW Private Limited.
36. A partnership firm was dissolved on 30th June, 2020. Its Balance Sheet on the date of dissolution was as follows:
Equity & Liabilities ₹ ₹ Assets ₹
Capitals: Cash 10,800
A 76,000 Sundry Assets 1,89,200
B 48,000
C 36,000 1,60,000
Loan A/c – B 10,000
2,00,000 2,00,000
The assets were realized in instalments and the payments were made on the proportionate capital basis.
Creditors were paid ₹ 29,000 in full settlement of their account. Expenses of realization were estimated to be
₹ 5,400 but actual amount spent was ₹ 4,000. This amount was paid on 15th September. Draw up a statement
showing distribution of cash, which was realized as follows:
₹
On 5th July, 2020 25,200
On 30th August, 2020 60,000
On 15th September, 2020 80,000
The partners shared profits and losses in the ratio of 2 : 2 : 1. Prepare a statement showing distribution of
cash amongst the partners by ‘Highest Relative Capital’ method.
37. ‘S’ and ‘T’ were carrying on business as equal partners. Their Balance Sheet as on 31st March, 2008 stood as
follows:
Capital accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint life policy 47,500
Bank overdraft 1,50,000 Plant 1,72,500
Bills payable 62,500 Building 9,10,000
18,40,000 18,40,000
The operations of the business were carried on till 30th September, 2008. S and T both withdrew in equal
amounts, half the amount of profits made during the current period of 6 months after 10% per annum had
been written off on building and plant and 5% per annum written off on furniture. During the current period
of 6 months, creditors were reduced by Rs. 50,000, Bills payable by Rs. 11,500 and Bank overdraft by Rs.
75,000. The Joint Life policy was surrendered for Rs. 47,500 on 30th September, 2008. Stock was valued at
Rs. 3,17,000 and debtors at Rs. 3,25,000 on 30th September, 2008. The other items remained the same as on
31st March, 2008.
On 30th September, 2008 the firm sold its business to ST Ltd. The value of goodwill was estimated at
Rs.5,40,000 and the remaining assets were valued on the basis of the Balance Sheet as on 30th September,
2008. The ST Ltd. paid the purchase consideration in equity shares of Rs.10 each. You are required to
prepare a Realization Account and Capital accounts of the partners.
38. Prabhu & Co. is a partnership firm consisting of Mr. Prabhu, Mr. Bhola and Mr. Shiv who share profits and
losses in the ratio of 2:2:1 and Bhagwan Ltd. is a company doing similar business.
Following is the Balance sheet of the firm and that of the company as at 31.3.2012:
Liabilities Prabhu Bhagwan Prabhu Bhagwan
& Co. Ltd. & Co. Ltd.
Rs. Rs. Rs. Rs.
Equity share Capital: Plant & machinery 2,50,000 8,00,000
Equity shares of
Rs. 10 each 10,00,000 Furniture & fixture 25,000 1,12,500
Stock in trade 1,00,000 4,25,000
Partners’ capital: Sundry debtors 1,00,000 4,12,500
Prabhu 1,00,000 Cash at bank 5,000 2,00,000
Bhola 1,50,000 Cash in hand 20,000 50,000
Shiv 50,000
General reserve 50,000 3,50,000
Sundry creditors 1,50,000 6,50,000
5,00,000 20,00,000 5,00,000 20,00,000
It was decided that the firm Prabhu & Co. be dissolved and all the assets (except cash in hand and cash at
bank) and all the liabilities of the firm be taken over by Bhagwan Ltd. by issuing 25,000 shares of Rs. 10
each at a premium of Rs. 2 per share.
Partners of Prabhu & Co. agreed to divide the shares issued by Bhagwan Ltd. in the profit sharing ratio and
bring necessary cash for settlement of their capital.
The creditors of Prabhu & Co. includes Rs. 50,000 payable to Bhagwan Ltd. An unrecorded liability of Rs.
12,500 of Prabhu & Co. must also be taken over by Bhagwan Ltd.
Prepare:
(1) Realisation account, Partners’ capital accounts and Cash in hand/Bank account in the books of Prabhu &
Co.
(2) Pass journal entries in the books of Bhagwan Ltd. for acquisition of Prabhu & Co.
39. Ramesh, Roshan and Rohan were partners of the firm ,3R Enterprises, sharing profits and losses in the ratio
of 3:2:1 respectively. On 31st March, 2011 their Balance Sheet stood as follows:

Ramesh,s Capital A/c 16,80,000 Land and Buildings
14,00,000
Roshan,s Capital A/c 11,60,000 Machinery11,00,000
Rohan,s Capital A/c 6,70,000 Furniture 6,10,000
Creditors 6,00,000 Debtors 6,00,000
Cash at Bank
1,90,000
47,40,000 47,40,000
On the above-mentioned date, the partners decided to convert their firm into a private limited company and
named it,3REnterprises (Private) Ltd.,. The company took over all the assets including cash at bank and all
the creditors for Rs. 42,00,000 payable in the form of fully paid equity shares of Rs. 10 each. It recorded in
its books, land and buildings at Rs. 16,40,000, machinery at Rs. 9,90,000 and created a provision for bad
debts @ 5% on debtor, The expenses of the take-over came to Rs. 23,000 which were paid and borne by the
company.
The expenses of getting the company incorporated were Rs. 57,000.
The partners distributed the company,s shares amongst themselves in their profit sharing ratio. They settled
their accounts by paying or receiving cash.
Prepare Realization Account and all the partners, capital accounts in the firm,s ledger and pass journal
entries in the books of the company for all of its transactions mentioned above.
40. ‘Thin’, ‘Short’ and ‘Fat’ were in partnership sharing profits and losses in the ratio of 2:2:1. On 30th
September, 2012 their Balance Sheet was as follows :
Capital Accounts : Premises 50,000
Thin 80,000 Fixtures 1,25,000
Short 50,000 Plant 32,500
Fat 20,000 1,50,000 Stock 43,200
Current Accounts : Debtors 54,780
Thin 29,700
Short 11,300
Fat (Dr.) (14,500) 26,500
Bank Overdraft 44,330
3,05,480 3,05,480
‘Thin’ decides to retire on 30th September, 2012 and as ‘Fat’ appears to be short of private assets, ‘Short’
decides that he does not wish to take over Thin’s share of partnership, so all three partners decide to dissolve
the partnership with effect from 30th September, 2012. It then transpires that ‘Fat’ has no private assets
whatsoever.
The premises are sold for Rs. 60,000 and the plant for Rs. 1,07,500. The fixtures realize Rs. 20,000 and the
stock is acquired by another firm at book value less 5%. Debtors realise Rs. 45,900. Realisation expenses
amount to Rs. 4,500.
The bank overdraft is discharged and the creditors are also paid in full.
You are required to write up the following ledger accounts in the partnership books following the rules in
Garner vs. Murray:
(i) Realisation Account;
(ii) Partners’ Current Accounts;
(iii) Partners’ Capital Accounts showing the closing of the firm’s books.
41. A and V, sharing profits and losses equally, desired to convert their business into a limited company on 31st
December, 2021 when their balance sheet stood as follows:
Equity & Liabilities ₹ ₹ Assets ₹

Sundry creditors 1,92,000 Sundry debtors 2,40,000
Loan creditors 1,60,000 Bills receivable 40,000
Bank overdraft 64,000 Stock in trade 1,44,000
Reserve fund 24,000 Patents 32,000
Capital accounts: Plant and machinery 64,000
A 1,60,000 Land and building 2,40,000
V 1,60,000 3,20,000
7,60,000 7,60,000
(a) The goodwill of the firm was to be valued at two years' purchase of the profits average of the previous
three years.
(b) The loan creditor agreed to accept 7½% redeemable preference shares in settlement of his claim.
(c) Land and buildings and plant and machinery were to be valued at ₹ 4,00,000 and ₹ 96,000 respectively.
(d) The vendors were to be allotted equity shares.
(e) The past working results of the firm showed that they had made profits of ₹ 1,20,000 in 2019, ₹ 1,44,000
in 2020 and ₹ 1,68,000 in 2021 after setting aside ₹ 8,000 to reserve fund each year.
You are required to show realisation account and partners’ capital accounts in the books of the firm assuming
that all the transactions are duly completed.
42. Yash, Tanish and Ruchika were partners sharing Profit & Loss in ratio of 3:2:1. Balance Sheet of the firm is
as follows:
Liabilities Amount(Rs) Assets Amount(Rs)

Fixed Capital: Yash 50,000 Fixed Assets 45,000
- Tanish 20,000 Investments 15,000
- Ruchika 10,000 Current Assets:
Current Account: Yash 6,000 - Stock 10,000
- Ruchika 4,000 - Debtors 27,500
Unsecured Loans 15,000 - Cash & Bank 12,500
Current Liabilities 15,000 Current Account: Tanish 10,000
1,20,000 1,20,000
On 1st April, 2014 all the partners agreed to form a new company YTR Pvt. Ltd. which shall take over the
firm as going concern including goodwill, but excluding cash and bank balance.
The following matters were also agreed upon:
(i) Goodwill shall be valued at 3 years’ purchase of super profits.

(ii) Actual profit for the purpose of goodwill valuation will be Rs.20,000.
(iii) The normal rate of return will be 17,50% per annum of Fixed Capital.
(iv) All other Assets and Liabilities will be taken over at book value.
(v) The purchase consideration will be paid party in share of Rs.1 each and partly in cash. Yash and
Tanish to acquire interest in new company in the ratio of 3:2 at face value. Ruchika agreed to retire
after taking her share in cash.
(vi) Realisation expenses amounted to Rs.5,000.
Prepare Realisation Account, Cash and Bank Account, YTR Private Limited Account and Capital Account
of the partners.
43. The partners P, Q & R have called you to assist them in winding up the affairs of their partnership on
31.12.2020. Their balance sheet as on that date is given below:
Equity & Liabilities Amount ₹

Assets Amount ₹
Capital Accounts: Land & Building 50,000
P 65,000 Plant & Machinery 46,000
Q 50,500 Furniture & Fixture 10,000
R 32,000 Stock 14,500
Creditors 16,000 Debtors 14,000
Cash at Bank 9,000
Loan- P 13,000
Loan- Q 7,000
Total 1,63,500 Total 1,63,500
(a) The partners share profit and losses in the ratio of 4:3:2.
(b) Cash is distributed to the partners at the end of each month.
(c) A summary of liquidation transactions are as follows:
January 2021
 ₹ 9,000 - collected from debtors; balance is uncollectable.
 ₹ 8,000 - received from the sale of entire furniture
 ₹ 1,000 - Liquidation expenses paid.
 ₹ 6,000 - Cash retained in the business at the end of month
February 2021
 As part payment of his capital, R accepted a machinery for ₹ 9,000 (book value ₹ 3,500)
 ₹ 2,000 - Cash retained in the business at the end of month
March 2021
 ₹ 38,000 - received on the sale of remaining plant and machinery.
 ₹ 10,000 - received from the sale of entire stock.
 ₹ 41,000 - Received on sale of land & building.
 No Cash is retained in the business.
You are required to prepare a schedule of cash payments amongst the partners by "Higher Relative Capital
Method"
44. Daksh Associates is a reputed firm. On account of certain misunderstanding between the partners, it was
decided to dissolve the firm as on 31st December, 2011. Their Balance Sheet as on 31st December, 2011 was
follows:
Capitals: Land and Buildings 7,00,000
Daksh 3,00,000 Other Fixed Assets 3,00,000
Yash 2,00,000 Stock in Trade 2,00,000
Siddhart (Minor) 1,00,000 Debtors 4,00,000
Bills Receivable 1,50,000
Trade Loans 3,00,000 Goodwill 30,000
Bank Overdraft 3,00,000 Cash 20,000
Other Loans 2,00,000
Creditors 2,00,000
Siddhart’s Loan 2,00,000
18,00,000 18,00,000
It was decided that Mr. Daksh shall be in-charge of Realisation. He shall set apart Rs. 10,000 towards
expenses. He shall be paid a remuneration of 5 percent on the amounts distributed to the partners towards
their contribution other than loans. Assets realized are as under:
Rs.
1-1-2012 Debtors 3,50,000
15-1-2012 Fixed Assets 4,00,000
1-2-2012 Debtors 50,000
15-2-2012 Bills Receivable 1,40,000
1-3-2012 Fixed Assets 50,000
15-3-2012 Land and Buildings 8,00,000
Prepare a statement showing how the money received on various dates will be distributed assuming:
(a) The actual expenses of realization amounted to Rs. 20,005.
(b) The firm is solvent.
(c) The profit sharing ratio was as under:
Profit Loss
Daksh 2 1
Yash 2 1
Siddhart 1 Nil
5 2
(d) The final dissolution is made on 15th March, 2010.
45. On 31st March 2012, Sri Raman acquires on payment of Rs. 80,000 the business of M/s Gupta and Singh
taking over at book value the following assets and liabilities :
Rs.
Debtors 35,000
Furniture 3,000
Stock 46,000
Creditors 10,000
There was no change between 1st January, 2012 and 31st March, 2012 in the book value of the assets and
liabilities not taken over.
The same set of books has been continued after the acquisition and no entries of the acquisition have been
passed except for the payment of Rs. 80,000 made by Sri Raman.
From the following balance sheet and trial balance prepare Business Purchase Account, Profit and Loss
Account for the year ended 31st December, 2012 and Balance Sheet at that date.
Balance Sheet as at December, 2011

Capital Accounts Furniture 3,000
Sri Gupta 30,000 Investments 5,000
Sri Singh 20,000 50,000 Insurance Policy 2,000
Bank Loan 18,000 Stock 40,000
Creditors 12,000 Debtors 30,000
80,000 80,000
On 31st December 2012 the trial balance is:
Rs. Rs.
Stock 40,000
Furniture 3,000
Investment 5,000
Insurance Policy 2,000
Business Purchase Account 80,000
Bank Loan 18,000
Capital :
Gupta 30,000
Singh 20,000
Raman 30,000
Bank 3,000
Debtors 48,000
Creditors 15,000
Purchases 3,20,000
Expenses 12,000
Sales 4,00,000
5,13,000 5,13,000
Closing Stock Rs. 50,000 (SM U II 2)
46. Hari, Lal and Jay have been in partnership for a number of years, sharing profits/losses in the ratio of 2:2:1
as wholesale stationers trading under the name ‘Hari Brothers’. They decide to convert their partnership into
a limited company (with effect from 1st January, 2013) to be known as Hari Ltd.
Immediately prior to this conversion the balance sheet of partnership as at 31st December 2012 was as
follows:
Balance Sheet As on 31st December 2012
Liabilities Rs. Rs. Assets Rs.

Capital accounts Fixed assets
Hari 70,000 (at written down value)
Lal 30,000 Land & Buildings 50,000
Jay 20,000 1,20,000 Plant & Machinery 30,000
Current accounts Motor vehicles 20,000
Hari 7,000 Current Assets:
Lal 5,000 Inventories 60,000
Jay 3,000 15,000 Debtors 25,000
Current liabilities Axis Bank account 5,000
Creditors 25,000
Dena Bank
Account 20,000 45,000
Long-term liabilities
Loan-Hari 3,000
Loan-Gopi Ltd. 7,000 10,000
1,90,000 1,90,000
The terms of conversion are that Hari Ltd. is to take over the assets and liabilities of Hari Brothers as
follows:
Valuation for take-over (Rs.)
Land and Building 96,000
Plant and Machinery 28,000
Motor vehicles 15,000
Inventories 60,000
Debtors 24,000
Creditors 25,000
Goodwill 10,000
The closing balance in Axis Bank account is to be transferred to Dena Bank account before all the other
dissolution entries are effected in the partnership ledgers.
Lal took over one of the motor vehicles at an agreed amount of Rs. 2,000. All other liabilities were paid from
the Dena Bank account.
The purchase consideration is discharged by an issue at par of Rs. 60,000 10%
Debentures (fully paid) to the partners in their capital account proportions as shown in the above balance
sheet plus equity shares in Hari Ltd. of Rs. 1 each (fully paid to make up the balance due to each partner).
You are required to: (i) Prepare (a) Realisation Account (b) Partners’ Capital Accounts (c) Bank account of
Axis Bank and Dena Bank in the books of Hari Brothers;
(ii) ‘Business purchase account’ and ‘Hari Brothers’ account in Hari Ltd.'s books.
47. Mohit, Neel and Om were Partners sharing Profits and Losses in the ratio of 5:3:2 respectively. The Trial
Balance of the Firm on 31st March, 2019 was the following:
Particulars Rs Rs
Machinery at Cost 2,00,000
Inventory 1,37,400
Capital A/cs:
Mohit 1,36,000
Neel 90,000
Om 46,000
Drawing A/cs:
Mohit 50,000
Neel 46,000
Om 34,000
Depreciation on Machinery 80,000
Profit for the year ended 31st March 2,48,600
Cash at Bank 1,78,600
7,70,000 7,70,000
Interest on Capital Accounts at 10% p.a. on the amount standing to the credit of Partners' Capital Account at
the beginning of the year, was not provided before preparing the above Trial Balance. On the above date,
they formed a MNO Private Limited Company with an Authorized Share Capital of 2,00,000 shares of Rs 10
each to be divided in different classes to take over the business of Partnership firm.
You are provided the following information:
(1) Machinery is to be transferred at Rs. 1,40,000.

(2) Shares in the Company are to be issued to the partners, at par, in such numbers, and in such classes as
will give the partners, by reason of their shareholdings alone, the same rights as regards interest on
capital and the sharing of profit and losses as they had in the partnership.
(3) Before transferring the business, the partners wish to draw from the partnership profits to such an extent
that the bank balance is reduced to Rs 1,00,000. For this purpose, sufficient profits of the year are to be
retained in profit -sharing ratio.
(4) Assets and liabilities except Machinery and Bank, are to be transferred at their book value as on the
above date.
(a) Statement showing the workings of the Number of Shares of each class to be issued by the company, to
each partner.
(b) Capital Accounts showing all adjustments required to dissolve the Partnership.
(c) Balance Sheet of the Company immediately after acquiring the business of the Partnership and Issuing of
Shares.
48. Amit, Sumit, and Kumar are partners sharing profit and losses in the ratio 2:2:1. The partners decided to
dissolve the partnership on 31st March 20X1 when their Balance Sheet was as under:

Capital Accounts: Land & Building 1,35,000
Amit 55,200 Plant & Machinery 45,000
Sumit 55,200 Furniture 25,500
General Reserve 61,500 Investments 15,000
Kumar's Loan A/c 15,000 Book Debts 60,000
Loan from D 1,20,000 Less: Prov. for bad debts (6,000) 54,000
Trade Creditors 30,000 Stock 36,000
Bills Payable 12,000 Bank 13,500
Outstanding Salary 7,500 Capital Withdrawn:
_____ Kumar 32,400
3,56,400 3,56,400
The following information is given to you:
(i) Realization expenses amounted to Rs. 18,000 out of which Rs. 3,000 was borne by Amit.
(ii) A creditor agreed to takeover furniture of book value Rs. 12,000 at Rs. 10,800. The rest of the
creditors were paid off at a discount of 6.25%.
(iii)The other assets realized as follows:
Furniture - Remaining taken over by Kumar at 90% of book value
Stock - Realized 120% of book value
Book Debts - Rs. 12,000 of debts proved bad, remaining were fully realized
Land & Building - Realized Rs. 1,65,000
Investments - Taken over by Amit at 15% discount
(iv) For half of his loan, D accepted Plant & Machinery and Rs. 7,500 cash. The remaining amount
was paid at a discount of 10%.
(v) Bills payable were due on an average basis of one month after 31st March 20X1, but they were
paid immediately on 31st March @ 6% discount "per annum".
Prepare the Realization Account, Bank Account and Partners’ Capital
Accounts in the books of Partnership firm.
49. P and Q were carrying on business sharing profits and losses equally. The firm’s Balance Sheet as on
31.12.20X1 was:
Capital Accounts: Plant 1,60,000
P 1,50,000 2,80,000 Building 48,000
Q 1,30,000 80,000 Debtors 75,000
Bank Overdraft Joint Life Policy 6,000
Drawings Account:
P 9,000
Q 7,000 16,000
4,05,000 4,05,000
The operations of the business were carried on till 30.06.20X2. P and Q both withdrew in equal amount half
the amount of profit made during the current period of six months after charging depreciation at 10% per
annum on plant and after writing off 5% on building.
During the current period of six months, creditors were reduced by ₹ 20,000 and bank overdraft by ₹ 5,000.
The joint-life policy was surrendered for ₹ 6,000 before 30th June 20X2. Stock was valued at ₹ 84,000 and
debtors at ₹ 68,000 on 30th June 20X2. The other items remained the same as at 31.12.20X1.
On 30.06.20X2, the firm sold its business to PQ Ltd. The value of goodwill was estimated at ₹ 1,30,000 and
the remaining assets were valued on the basis of the balance sheet as on 30.06.20X2.
PQ Ltd. paid the purchase consideration in equity shares of ₹ 10 each. You are required to prepare:
(a) Balance sheet of the firm as at 30.06.20X2,
(b) Realization account,
(c) Partners' Capital Accounts showing the final settlement between them.
50. U and V were in partnership with sharing of profit and loss equally. The firm's Balance sheet as at
31/12/2021 (for 9 months) was:
Equity and Liabilities Assets

Partners’ Capital Accounts: Plant 1,85,000
U 1,50,000 Building 1,00,000
V 1,80,000 3,30,000 Debtors 85,000
Bank Overdraft 83,000 Profit & Loss A/c (Dr. balance) 60,000
Partners’ Drawings Accounts:
U 8,000
V 9,000 17,000
Total 5,03,000 Total 5,03,000
The operations of the business were carried on till 31/03/2022. U and V both withdrew in equal amount half
the amount of profit made during the current period of three months after charging depreciation of Rs. 5,000
on plant and after writing off 5% of building. During the current period of three months, creditors were
reduced by Rs. 50,000 and bank overdraft by
Rs. 50,000. The stock was valued at Rs. 24,000 and debtors at Rs. 40,500 on 31st March, 2022. The other
items remained the same as at 31/12/2021.
On 31/03/2022, the firm sold its business to UV Limited. The value of goodwill was estimated at Rs.
1,84,000 and the remaining assets were valued on the basis of the balance sheet as on 31/03/2022 except
building and stock, which were valued as below:
Building Rs. 1,20,000
Stock Rs. 36,000
UV Limited paid the purchase consideration in equity shares of Rs. 10 each. You are required to prepare
(with necessary working notes):
(i) Balance sheet of the firm as at 31/03/2022.

(ii) Realization account and
(iii) Partners' capital accounts showing the final settlement between them.
51. Ajay, Vijay and Sanjay have been in partnership for a number of years, sharing profits and losses in the ratio
7:7: 4 as a wholesale stationer running business under the name "AVS Traders". On 31st March,2021, it was
found that some frauds were committed by Sanjay during the year 2020-2021. So, it was decided to dissolve
the partnership business on 31st March, 2021 when their Balance sheet stood as under:
Balance Sheet as at 31st March,2021
Liabilities Amount (₹) Assets Amount (₹)
Capital accounts: Building 1,90,000
Ajay 1,80,000 Inventory 1,30,000
Vijay 1,80,000 3,60,000 Investments 50,000
General Reserve 36,000 Trade Debtors 70,000
Trade Creditors 80,000 Cash & Bank 26,000
Bills payables 30,000 Sanjay's Capital (overdrawn) 40,000
5,06,000 5,06,000
(i) Following frauds were committed by Sanjay:
(1) Investments costing ₹8,000 were sold by Sanjay at ₹ 11,000 and the funds were transferred to his
personal account. This sale was omitted from firm's books.
(2) A cheque for ₹ 7,000 received from trade debtors was not recorded in the books and was
misappropriated by Sanjay.
(ii) A trade creditor agreed to take over investments of the book value of ₹ 9,000 at ₹ 13,000. The rest of the
trade creditors were paid off at a discount of 10%.
(iii) Other assets were realized as follows:
Inventory ₹ 1,20,000
Building 110% of book value
Investments The rest of the investments were sold at a profit of ₹ 7,000
Trade Debtors The rest of the trade debtors were realised at a discount of 10%
(iv) The Bills payables were settled at a discount of, ₹500.
(v) The expenses of dissolution amounted to ₹8,060.
(vi) It was found out, that realisation from Sanjay's private assets would be ₹ 7,000.
You are required to prepare
(1) Realisation Account
(2) Cash & Bank Account
(3) Partners’ Capital Accounts.
(All workings should form part of your answer)
52. Amal and Bimal are in equal partnership. Their Balance Sheet stood as under on 31st March, 20X1 when the
firm was dissolved:
Creditors A/c 4,800 Plant & Machinery 2,500
Amal's Capital A/c 750 Furniture 500
Debtors 1,000
Stock 800
Cash 200
Bimal's drawings 550
5,550 5,550
The assets realized as under:
Particulars ₹
Plant & Machinery 1,250
Furniture 150
Debtors 400
Stock 500
The expenses of realization amounted to ₹ 175. Amal's private estate is not sufficient even to pay his private
debts, whereas Bimal's private estate has a surplus of ₹ 200 only.
Show necessary ledger accounts to close the books of the firm.
53. Dark and Light are partners in Global Enterprises sharing profit in the ratio of 2 : 1.
They admit Bright as a partner on 1st April, 2017. Bright paid a premium of ₹ 50,000 each to Dark & Light
at the time of his admission to the firm, with a condition that the firm will not be dissolved before expiry of 5
years. New Profit & Loss sharing ratio is 2 : 1 : 1.
The firm was dissolved on 31st March, 2020. Bright claims refund of the premium. You are required to :
(i) List the criteria for the calculation of refund.
Also list any 2 conditions when no claim in this respect will arise.
Solution: If the firm is dissolved before the term expires, as is the case, Bright being a partner who has paid
a premium on admission will have to be repaid/refunded.
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence.
No claim for refund will arise if:
(iv) The firm is dissolved due to the death of a partner,
(v) If the dissolution of the firm is basically because of misconduct of Bright,
(vi) If the dissolution is through an agreement and such an agreement does not have a stipulation for a
refund of premium.
54. Explain Garner V/S Murrary rule applicable in the case of partnership firms. State, when is this rule not
applicable.
Answer:-
(a) Garner vs. Murray rule : When a partner is unable to pay his debt due to the firm, he is said to be
insolvent and the share of loss is to be borne by other solvent partners in accordance with the decision
held in the English case of Garner vs. Murray. According to this decision, normal loss on realisation of
assets is to be brought in cash by all partners (including insolvent partner) in the profit sharing ratio but
a loss due to insolvency of a partner has to be borne by the solvent partners in their capital ratio. In
order to calculate the capital ratio, no adjustment will be made in case of fixed capitals. However, in
case of fluctuating capitals, ratio should be calculated on the basis of adjusted capital before
considering profit or loss on realization at the time of dissolution.
(b) Non-Applicability of Garner V/S Murray rule:

(i) When the solvent partner has a debit balance in the capital account. Only solvent partners will
bear the loss of capital deficiency of insolvent partner in their capital ratio. If incidentally a
solvent partner has a debit balance in his capital account, he will escape the liability to bear the
loss due to insolvency of another partner.
(ii) When the firm has only two partners.
(iii) When there is an agreement between the partners to share the deficiency in capital account of
insolvent partner.
(iv) When all the partners of the firm are insolvent.
LIMITED LIABILITY PARTNERSHIP
1. The Limited Liability Partnerships (LLPs) in India were introduced by Limited Liability Partnership Act,
2008 which lay down the law for the formation and regulation of Limited Liability Partnerships.
2. Definitions: Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines the following terms as:
(a) "Limited Liability Partnership" means a partnership formed and registered under this Act;
(b) "Limited Liability Partnership Agreement" means any written agreement between the partners of the
limited liability partnership or between the limited liability partnership and its partners which determines
the mutual rights and duties of the partners and their rights and duties in relation to that limited liability
partnership;
(c) "Foreign Limited Liability Partnership" means a limited liability partnership formed, incorporated or
registered outside India which establishes a place of business within India.
(d) "business" includes every trade, profession, service and occupation;
(e) " designated partner" means any partner designated as such pursuant to section 7 of the Act;
(f) "partner", in relation to a limited liability partnership, means any person who becomes a partner in the
limited liability partnership in accordance with the limited liability partnership agreement;
3. Nature of Limited Liability Partnership

a) A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal
entity separate from that of its partners.
b) A limited liability partnership shall have perpetual succession.
c) Any change in the partners of a limited liability partnership shall not affect the existence, rights or
liabilities of the limited liability partnership.
4. Non-applicability of the lndian Partnership Act, 1932 :

Save as otherwise provided, the provisions of the Indian Partnership Act, 1932 shall not apply to a LLP.
5. Minimum number of partners

As per section 5 of the LLP Act, any individual or body corporate may be a partner in a LLP:
Provided that an individual shall not be capable of becoming a partner of a limited liability partnership, if-
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending
As per section 6 of the LLP Act, every limited liability partnership shall have at least two partners.
If at any time the number of partners of a limited liability partnership is reduced below two and the limited
liability partnership carries on business for more than six months while the number is so reduced, the person,
who is the only partner of the limited liability partnership during the time that it so carries on business after
those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be
liable personally for the obligations of the limited liability partnership incurred during that period.
6. Designated partners
As per Section 7 of the LLP Act, every limited liability partnership shall have at least two designated partners
who are individuals and at least one of them shall be a resident in India: Provided that in case of a limited
liability partnership in which all the partners are bodies corporate or in which one or more partners are
individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership
or nominees of such bodies corporate shall act as designated partners.
Explanation.- For the purposes of this section, the term "resident in India" means a person who has stayed in
India for a period of not less 182 days during the immediately preceding one year.
Subject to the provisions of sub-section (1),
(1) if the incorporation document-
(a) specifies who are to be designated partners, such persons shall be designated partners on
incorporation; or
(b) states that each of the partners from time to time of limited liability partnership is to be designated
partner, every such partner shall be a designated partner;
(2) any partner may become a designated partner by and in accordance with the limited liability partnership
agreement and a partner may cease to be a designated partner in accordance with limited liability
partnership agreement.
(3) An individual shall not become a designated partner in any limited liability partnership unless he has
given his prior consent to act as such to the limited liability partnership in such form and manner as may
be prescribed.
(4) Every limited liability partnership shall file with the registrar the particulars of every individual who has
given his consent to act as designated partner in such form and manner as may be prescribed within
thirty days of his appointment.
(5) An individual eligible to be a designated partner shall satisfy such conditions and requirements as may
be prescribed.
7. Liabilities of designated partners:-

As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a designated partner shall be-
(a) responsible for the doing of all acts, matters and things as are required to be done by the limited liability
partnership in respect of compliance of the provisions of this Act including filing of any document,
return, statement and the like report pursuant to the provisions of this Act and as may be specified in the
limited liability partnership agreement; and .
(b) liable to all penalties imposed on the limited liability partnership for any contravention of those
provisions.
8. Changes in designated partners

A limited liability partnership may appoint a designated partner within thirty days of a vacancy arising for any
reason and provisions of sub-section (4) and sub-section (5) of section 7 shall apply in respect of such new
designated partner: Provided that if no designated partner is appointed, or if at any time there is only one
designated partner, each partner shall be deemed to be a designated partner.
9. Distinction between an ordinary partnership firm and an LLP

SN Key Elements Partnerships LLPs
1 Applicable Law Indian Partnership Act 1932 Partnerships Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Agreement Created by Law
4 Body Corporate No Yes
5 Separate Legal No Yes
Entity
6 Perpetual Partnerships do not have It has perpetual succession and individual
Succession perpetual succession partners may come and go.
7 Number of Partners Minimum 2 and Maximum 20 Minimum 2 but no maximum limit
(subject to 10 for banks)
8 Ownership of Firm cannot own any assets. The The LLP is an independent entity can of the
Assets partners own the assets firm own assets
9 Liability of Unlimited: Partners are severally Limited to the extent of their contribution
Partners / Members and jointly liable for actions of towards LLP except in case of intentional fraud
other partners and the firm and or extends to personal assets wrongful act of
their liability omission or commission by a partner.
10 Principal Agent Partners are the agents of the Partners are agents of the firm only and not of
Relationship firm and of each other other partners.
10. Formation of LLP: Two or more persons associated for the purpose of carrying on a lawful business with a
view to earn profits may subscribe their names to an incorporation document and file the same with the
Registrar of the state in which the Registered Office of the LLP is to be situated, in such manner with such
fees as may be prescribed along with a statement in the prescribed form made by an advocate, a company
secretary or a chartered accountant or a cost accountant that all the requirements of the LLP Act 2008 and the
rules made there under have been complied with.
11. Limitation of Liability of an LLP and its partners

(i) Under section 27 (3) of the LLP Act, 2008 an obligation of an LLP arising out of a contract or otherwise,
shall be solely the obligation of the LLP;
(ii) The Liabilities of an LLP shall be met out of the properties of the LLP;
(iii) Under section 28 (1) a partner is not personally liable, directly or indirectly, for an obligation referred to
in Section 27 (3) above, solely by reason of being a partner in the LLP;
(iv) Section 27 (1) states that an LLP is not bound by anything done by a partner in dealing with a person, if:
• The partner does not have the authority to act on behalf of the LLP in doing a particular act; and
• The other person knows that the partner has no authority or does not know or believe him to be a partner
in the LLP
(v) Under section 30 (1) the liability of the LLP and the partners perpetrating fraudulent dealings shall be
unlimited for all or any of the debts or other liabilities of the LLP.
12. Financial Disclosures & Returns

(i) Maintain such proper books of accounts as may be prescribed relating to its affairs for each year of its
existence on cash basis or accrual basis and according to the double entry system of accounting and shall
maintain the same at its registered office for such period as may be prescribed;
(ii) LLP shall within six months of the end of each financial year prepare a Statement of Account and
Solvency for the said financial year as at the last day of the said financial year, in such form as may be
prescribed, and such statement shall be signed by the designated partners of the LLP;
(iii) Every LLP shall file within the prescribed time, the Statement of Account and Solvency with the
Registrar every year in such form and manner and accompanied by such fee as may be prescribed;
(iv) The accounts of an LLP must be audited in accordance with such rules as may be prescribed.
(v) Every LLP is required to file an Annual Return which is duly authenticated with the registrar within sixty
days of the closure of its financial year in such form and manner and with such fees as may be prescribed.
13. Assignment and Transfer of Partnership Rights

(i) The rights of a partner to the share of profits and losses of an LLP and to receive distribution in
accordance with the LLP Agreement are transferable wholly or in part;
(ii) The transfer of any right by a partner as above does not by itself cause the disassociation of the partner or
a dissolution or winding up of the LLP;
(iii) Similarly the transfer of the right as above does not entitle the transferee to participate in the management
or the conduct of activities of the LLP, or give access to any information concerning the transactions of
the LLP.
14. Conversion of firm into Limited Liability Partnership

(i) Section 55 of LLP Act: A firm may convert into a LLP in accordance with the provisions of the Act and
the Second Schedule to the Act.
(ii) Section 56 of LLP Act: A private limited company may convert into an LLP in accordance with the
provisions of the Act and the Third Schedule to the Act.
(iii) Section 57 of LLP Act: An unlisted public limited company may convert into an LLP in accordance with
the provisions of the Act and the Fourth Schedule to the Act.
15. Can a partner be called upon to pay the liability of the LLP? If yes, under what circumstances?
Solution: Under section 27 (3) LLP Act, 2008, any obligation of the LLP arising out of a contract or otherwise
shall be the sole obligation of the LLP. The partners of an LLP in the normal course of business are not liable
for the debts of the LLP. The liabilities o f an LLP shall be met out of the assets / properties of the LLP.
However, a partner shall be liable for his own wrongful acts or commissions, but shall not be liable for the
wrongful acts or commission ns of other partners of the LLP. Wrongful acts will include acts of fraud and
wilful omissions. Hence, the liability may fall only on that partner, who is guilty of any wrongful acts or
commissions in respect of debts or liabilities acquired by such acts.
16. Winding up and Dissolution

(i) Under section 63 of the LLP Act, 2008 an LLP may be wound up voluntarily or by the Tribunal and such
LLP so wound up may be dissolved
(ii) Under section 64 and LLP may be wound up by the Tribunal:
a) If the LLP decides that it should be wound up by the Tribunal;
b) If for a period of more than six months, the number of partners of the LLP is reduced below two;
c) If the LLP is unable to pay its debts;
d) If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the
state or public order;
e) If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar for
five consecutive financial years;
f) If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
1. Partnership could be dissolved because of
(a) Death of a partner. (b) Insolvency of a partner. (c) Either (a) or (b).
2. On the dissolution of partnership, profit or loss on realization of assets and liabilities should be divided
among partners
(a) In the ratio of their capitals.
(b) In the same ratio in which they share profits.
(c) Equally.
3. An unrecorded asset realized at the time of dissolution is credited to

(a) Realization account. (b) Revaluation account. (c) Capital accounts.
4. A liability taken over by a partner at the time of dissolution is credited to

(a) Profit and loss account. (b) Partners’ capital accounts. (c) Realization account.
5. Realization account is a
(a) Nominal account. (b) Real account. (c) Personal account.
6. Which of the following method/methods is adopted to ensure that distribution of cash among partners is in
proportion to their interest in partnership?
(a) Maximum loss method.
(b) Highest relative capital method.
(c) Either (a) or (b).
7. Amalgamation of partnership firms includes

(a) Closing the old books of Amalgamating firms.
(b) Opening the new books of Amalgamated firm.
8. When one firm is merged with another existing firm, entries will be made for
(a) Winding up in the books of firm which will cease to exist.
(b) Business purchase in the books of another firm.
9. In case of amalgamation of firms, profit/ loss on the sale of the firm is ascertained by
(a) Realization account.
(b) Revaluation account.
(c) New firm’s account.
10. Liabilities not taken over by the new firm (at the time of amalgamation) will be transferred to
(a) Capital accounts.
(b) Revaluation account.
(c) New firm’s account.
11. While closing the books of the old firm, a.ssets and liabilities not taken over by the new firm should be
transferred to
(a) Revaluation account.
(b) Partners’ capital accounts.
(c) Realization account.
Answers:
1. (c) 2. (b) 3. (a) 4. (b) 5. (a) 6. (c)
7. (c) 8. (c) 9. (a) 10. (a) 11. (b)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
SUMMARY NOTES
CONSOLIDATED FINANCIAL STATEMENTS
1. Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31 March, 20X1 from the following
information:
H Ltd. S Ltd.
PPE 5,00,000 3,00,000
Investments
(2,000 equity shares of S Ltd.) 2,20,000
Current Assets 1,55,000 1,00,000
Share capital (Fully paid equity shares of ₹ 10 each) 5,00,000 2,50,000
Profit and loss account 2,00,000 1,00,000
Trade Payables 1,75,000 50,000
H Ltd. acquired the shares of S Ltd. on 31st March, 20X1.
2. H Ltd. and S Ltd. provide the following information as at 31st March,20X2:
H Ltd. S Ltd.
PPE 1,00,000 1,30,000
Investments (8,000 equity shares of S Ltd.) 1,26,000
Current Assets 74,000 70,000
Share capital (Fully paid equity shares of ₹10 each) 1,50,000 1,00,000
Profit and loss account 50,000 40,000
Additional information
H Ltd. acquired the shares of S Ltd. on 1-7-20X1 and Balance of profit and loss account of S Ltd. on 1-4-
20X1 was 30,000. Prepare consolidated balance sheet of H Ltd. and its subsidiary as at 31st March, 20X2.
3. On 31st March, 2004 the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
H Ltd. S Ltd.
Liabilities Rs. in lakhs Rs. in lakhs
Share Capital:
Authorised 15,000 6,000
Issued and Subscribed:
Equity Shares of Rs. 10 each, fully paid up 12,000 4,800
Profit and Loss Account 2,715 1,620
Bills Payable 372 160
Sundry Creditors 1,461 854
Provision for Taxation 855 394
Dividend Payable 1,200 -------
21,387 9,208
H Ltd. S Ltd.
Assets Rs. in lakhs Rs. in lakhs
Land and Buildings 2,718 -----
Furniture and Fittings 1,845 586
Investments in shares in S Ltd. 3,000 -----
Stock 3,949 1,956
Debtors 2,600 1,363
Cash and Bank Balances 1,490 204
Bills Receivable 360 199
Sundry Advances 520 -------
21,387 9,208
The following information is also provided to you:
(a) H Ltd. purchased 180 lakh shares in S Ltd. on 1st April, 2003 when the balances to General Reserve
and Profit and Loss Account of S Ltd. stood at Rs. 3,000 lakh and 1,200 lakh respectively.
(b) On 4th July, 2003 S Ltd. declared a dividend @ 20% for the year ended 31st March, 2003. H Ltd.
credited the dividend received by it to its Profit and Loss Account.
(c) On 1st January, 2004 S Ltd. issued 3 fully paid-up shares for every 5 shares held as bonus shares out of
balances to its general reserve as on 31st March, 2003.
(d) On 31st March, 2004 all the bills payable in S Ltd.’s balance sheet were acceptances in favour of H Ltd.
But on that date, H Ltd. held only Rs. 45 lakh of these acceptances in hand, the rest having been
endorsed in favour of its creditors.
(e) On 31st March, 2004 S Ltd.’s stock included goods which it had purchased for Rs. 100 lakh from H Ltd.
which made a profit @ 25% on cost.
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 2004 bearing in
mind the requirements of AS 21.
4. The Balance Sheets of Sun Ltd. and Moon Ltd. as on 31.3.2000 are given below:
Liability Sun Ltd. Moon Ltd. Assets Sun Ltd. Moon Ltd.
Share Capital (Rs. 10) 1,20,000 1,00,000 Fixed Assets 44,000 84,000
General Reserve 20,000 36,000 Investment in Moon Ltd.
Profit and Loss Account 12,000 20,000 8,000 shares @ Rs. 11 88,000
Sundry Creditors 4,000 7,000 Sundry Debtors 6,000 15,000
Contingent Liability Bills Receivable 4,000 16,000
Sun Ltd.: Bills Stock in Trade 10,000 40,000
Discounted not yet Cash at Bank 6,000 13,000
matured Rs. 2,500
1,58,000 1,68,000 1,58,000 1,68,000
Shares were purchased on 1.4.1997. When the shares were purchased General Reserve andProfit and Loss
Account of Moon Ltd. stood at Rs. 30,000 and Rs. 16,000 respectively. Dividends have been paid @
10% every year after acquisition of shares, first dividend being paid out of pre-acquisition profits. No
dividend has been proposed for 1999-2000 as yet and no provision need be made in consolidated Balance
Sheet. Sun Ltd. has credited all dividends received to Profit and Loss Account.
On 31.3.2000, Bonus shares has been declared by Moon Ltd. @ 1 fully paid share for 5 held, but no effect
has been given to that in the above accounts. The Bonus was declared out of profits earned prior to
1.4.1997 from General Reserve.
When the shares were purchased, agreed valuations of Fixed Assets of Moon Ltd. Was Rs. 1,08,000 although
no effect has been given thereto in accounts.
Depreciation has been charged @ 10% p.a. on the book value as on 1.4.1997, (on straight line method),
there being no addition or sale since then.
Out of Current Profits, Rs. 2,000 has been transferred to general reserve every year. Bills receivable of Sun
Ltd. include Rs. 2,000 bills accepted by Moon Ltd. and bills discounted by Sun Ltd., but not yet matured
include Rs. 1,500 accepted by Moon Ltd. Sundry creditors of Sun Ltd. include Rs. 2,000 due to Moon
Ltd. whereas Sundry Debtors of Moon Ltd. include Rs. 4,000 due from Sun Ltd. It is found that Sun Ltd.
has remitted a cheque of Rs. 2,000, which has not yet been received by Moon Ltd.
Prepare consolidated Balance Sheet as at 31.3.2000 of Sun Ltd. and its Subsidiary.
5. The Balance Sheet of Golden and Silver Limited as on 31.3.2006 are given below:
Liability Golden Silver Assets Golden Silver
Ltd. Ltd. Ltd. Ltd.
Equity share Capital 2,40,000 2,40,000 Fixed Assets 88,000 1,68,000
General reserve 40,000 32,000 Investment 1,80,000 10,000
Profit and Loss Account 24,000 39,000 Sundry debtors 12,000 30,000
Bills payable 4,000 10,000 Bills receivable 8,000 32,000
Sundry creditors 8,000 15,000 Stock in trade 20,000 80,000
Cash at bank 8,000 16,000
3,16,000 3,36,000 3,16,000 3,36,000
Note:- Contingent liability of Golden Ltd.: Bills discounted not yet matured at Rs.5,000.
(i) On 1.10.2003, Golden Ltd. acquired 16,000 shares of Rs.10 each at the rate of Rs.11 per share.
(ii) Balances to General reserve and Profit and Loss account of Silver Ltd. stood on 1.4.2003 at Rs.60,000
and Rs.32,000 respectively.
(iii) Dividends have been paid @ 10% for each of the years 2003-04 and 2004-05. Dividend for the year
2003-04 was paid out of the pre-acquisition profits. No dividend has been proposed for the year 2005-
06 as yet and no provision need to be made in consolidated Balance Sheet. Golden Ltd. has credited
all dividends received to profit and Loss account.
(iv) On 1.3.2006, bonus shares were issued by Silver Ltd. at the rate of one fully paid share for every five
held and effect has been given to that in the above accounts. The bonus was declared from general
reserves from out of profits earned prior to 1.4.2003.
(v) On 1.10.2003, Fixed assets was revalued at Rs.2,16,000, but no adjustment had been made in the books.
(vi) Depreciation had been charged @ 10% p.a. on the book value as on 1.4.2003 (on straight line
method), there being no addition or sale since then.
(vii) Out of Current profits Rs.4,000 have been transferred to General reserve every year.
(viii) Bills receivable of Golden Ltd. include Rs.4,000 bills accepted by Silver Ltd. Bills discounted by
Golden Ltd., but not yet matured include Rs.3,000 accepted by Silver Ltd.
(ix) Sundry creditors of Golden Ltd. include Rs.4,000 due to Silver Ltd. Sundry debtors of Silver Ltd.
include Rs.8,000 due from Golden Ltd.
(x) It is found that Golden Ltd. has remitted a cheque of Rs.4,000, which has not yet been received by
Silver Ltd.
Prepare consolidated Balance Sheet as at 31.3.2006 of Golden Ltd. and its Subsidiary.
6. On 31st March, 1989, the Balance Sheets of H Ltd. and S Ltd. stood as follows:
H Ltd. S Ltd.
(Rs. in 000’s)
Liabilities
Equity Share of Rs. 100 each fully paid 1,000 800
Reserve and Surplus
Other Liability 200 200
1,800 1,500
Assets:
Fixed Assets 500 400
Investment in S Ltd. 500 ---
Current Assets 800 1100
1,800 1,500
The following further information is furnished:-
(1) H Ltd. acquired 3,000 shares in S Ltd. on 1-4-88 when the Reserves and Surplus of S Ltd. was as under:
(a) General Reserve Rs. 5,00,000
(b) Profit & Loss Account- Credit Balance Rs. 2,00,000
(2) On 1-10-88 S Ltd. issued 3 fully paid up shares for every 5 shares held, as bonus shares out of pre-
acquisition General Reserve. No entry is made in the books of H Ltd. for the receipt of these bonus
shares.
(3) On 30-6-88 S Ltd. declared 20% dividend, out of pre-acquisition profit and H Ltd. credited the receipt of
Dividend to its Profit & Loss Account.
(4) S Ltd. owed H Ltd. on 31-3-89 Rs. 1,00,000 for purchase of stock from H Ltd. The entire stock is held
by S Ltd. on 31-3-89. H Ltd. made a profit of 25% on cost.
(5) H Ltd. transferred for cash payment a machine to S Ltd. for Rs. 80,000. The book value of the machine
to H Ltd. was Rs. 60,000.
Prepare Consolidated Balance Sheet as at 31st March, 1989. Adjustment for depreciation on machine
transferred by H Ltd. to S Ltd. is to be ignored.
7. Exe Ltd. acquires 70% of equity shares of Zed Ltd. as on 31st March, 2010 at a cost of Rs. 70 lakhs. The
following information is available from the balance sheet of Zed Ltd. as on 31st March, 2010:
Rs. in lakhs
Fixed Assets 120
Investments 55
Current Assets 70
Loans & Advances 15
15% Debentures 90
The following revaluations have been agreed upon (not included in the above figures):
Fixed Assets Up by 20%
Investments Down by 10%
Zed Ltd. declared and paid dividend @ 20% on its equity shares as on 31st March, 2010. Exe Ltd. purchased
the shares of Zed Ltd. @ Rs. 20 per share.
Calculate the amount of goodwill/capital reserve on acquisition of shares of Zed Ltd.
8. On 31st March, 2015, P Ltd. acquired 1,05,000 shares of Q Ltd. for ₹ 12,00,000. The position of Q Ltd. on
that date was as under:
₹

1,50,000 equity shares of ₹ 10 each fully paid 15,00,000
Pre-incorporation profits 30,000
P Ltd. and Q Ltd. give the following information on 31st March, 2021:
P Ltd. (₹) Q Ltd. (₹)
Equity shares of ₹ 10 each fully paid (before bonus issue) 45,00,000 15,00,000
Securities Premium 9,00,000 –
Pre-incorporation profits – 30,000
Profit and Loss Account 15,75,000 4,20,000
Property, plant and equipment 79,20,000 23,10,000
Investment: 1,05,000 Equity shares in Q Ltd. at cost 12,00,000 –
Current Assets 44,10,000 17,55,000
Directors of Q Ltd. made bonus issue on 31.3.2021 in the ratio of one equity share of ₹ 10 each fully paid for
every two equity shares held on that date. Bonus shares were issued out of post-acquisition profits by using
General Reserve.
Calculate as on 31st March, 2021 (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii)
Consolidated Profit and Loss Account in each of the following cases:
(a) Before issue of bonus shares.
(b) Immediately after issue of bonus shares.
9. Given below are the Profit & Loss Account of H Ltd. and its subsidiary Ltd. for the year ended 31st March, 2010.
H Ltd. S Ltd.
(Rs. in lacs) (Rs. in lacs)
Incomes:
Sales and other income 5,000 1,000
Increase in stock 1,000 200
Expenses:
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50
Other Information:
(1) H Ltd. sold goods to S Ltd. of Rs. 120 lacs at cost plus 20%. Stock of S Ltd. includes such goods
valuing Rs. 24 lacs. Administrative Expenses of S Ltd. include Rs. 5 lacs paid to H Ltd. as consultancy
fees. Selling and Distribution expenses of H Ltd. include Rs.10 lacs paid to S Ltd. as commission.
(2) H Ltd. holds 80% of equity share capital of Rs. 1,000 lacs in S Ltd. prior to 2008-09.
H Ltd. took credit to its Profit and Loss Account, the proportionate amount of dividend declared and
paid by S Ltd. for the year 2008-2009. Prepare a consolidated profit and loss account.
10. The Profit and Loss Accounts of A Ltd. and its subsidiary B Ltd. for the year ended 31st March, 2018 are
given below : (Rs ,000)
Incomes A Ltd. B Ltd.
Sales and other income 7,500 1,500
Increase in Inventory 1,500 300
Total 9,000 1,800
Expenses
Raw material consumed 1,200 300
Wages and Salaries 1,200 225
Production expenses 300 150
Administrative expenses 300 150
Selling and distribution expenses 300 75
Interest 150 75
Depreciation 150 75
Total 3,600 1,050
Profit before tax 5,400 750
Provision for tax 1,800 300
Profit after tax 3,600 450
Dividend paid 1,800 225
Balance of Profit 1,800 225
The following information is also given:
(i) A Ltd sold goods of ₹ 180 Lakhs to B Ltd at cost plus 25%. (1/6 of such goods were still in inventory
of B Ltd at the end of the year)
(ii) Administrative expenses of B Ltd include ₹ 8 Lakhs paid to A Ltd as consultancy fees.
(iii) Selling and distribution expenses of A Ltd include ₹15 Lakhs paid to B Ltd as commission.
(iv) A Ltd holds 72% of the Equity Capital of B Ltd. The Equity Capital of B Ltd prior to 2016-17 is
₹1,500 Lakhs
Prepare a consolidated Profit and Loss Account for the year ended 31st March, 2018.
11. Moon Ltd. and its subsidiary Star Ltd. provided the following information for the year ended 31 st March,
2021:
Particulars Moon Ltd (₹) Star Ltd. (₹)

Equity Share Capital 20,000,000 6,000,000
Finished Goods Inventory as on 01.04.2020 4,200,000 3,010,000
Finished Goods Inventory as on 31.03.2021 8,575,000 3,762,500
Dividend Income 1,680,000 437,500
Other non-operating Income 350,000 105,000
Raw material consumed 13,930,000 4,725,000
Selling and Distribution Expenses 3,325,000 1,575,000
Production Expenses 3,150,000 1,400,000
Loss on sale of investments 262,500 Nil
Sales and other operating income 33,250,000 19,075,000
Wages and Salaries 13,300,000 2,450,000
General and Administrative Expenses 2,800,000 1,225,000
Royalty paid Nil 50,000
Depreciation 315,000 140,000
Interest expense 175,000 52,500
Other information:
 On 1st September 2018 Moon Ltd., acquired 50,000 equity shares of ₹ 100 each fully paid up in Star Ltd.
 Star Ltd. paid a dividend of 10% for the year ended 31st March 2020. The dividend was correctly
accounted for by Moon Ltd.
 Moon Ltd. sold goods of ₹ 17,50,000 to Star Ltd. at a profit of 20% on selling price. Inventory of Star
Ltd. includes goods of ₹ 7,00,000 received from Moon Ltd.
 Selling and Distribution expenses of Star Ltd. include ₹ 2,12,500 paid to Moon Ltd. as brokerage fees.
 General and Administrative expenses of Moon Ltd. include ₹ 2,80,000 paid to Star Ltd. as consultancy
fees.
 Star Ltd. used some resources of Moon Ltd., and Star Ltd. paid ₹ 50,000 to Moon Ltd. as royalty.
Prepare Consolidated Statement of Profit and Loss of Moon Ltd. and its subsidiary Star Ltd. for the year
ended 31st March, 2021 as per Schedule III to the Companies Act, 2013.
12. The Trial Balances of X Limited and Y Limited as on 31st March, 2021 were as under:
X Limited Y Limited
(Rs. In 000) (Rs. In 000)
Dr. Cr. Dr. Cr.
Equity Share capital (Share of Rs. 100 each) 2,000 400
7% Preference share capital - 400
Reserves 600 200
6% Debentures 400 400
Trade Receivables/Trade Payables 160 180 100 120
Profit & Loss A/c balance 40 30
Purchases /Sales 1,000 1,800 1,200 1,900
Wages and Salaries 200 300
Debenture Interest 24 24
General Expenses 160 120
7
Preference share dividend up to 30.09.2020 14
Inventory (as on 31.03.2021) 200 100
Cash at Bank 27 12
Investment in Y Limited 1,056 -
Fixed Assets 2,200 1,580
Total 5,027 5,027 3,450 3,450
Investment in Y Limited was acquired on 1st July, 2020 and consisted of 80% of Equity Share Capital and
50% of Preference Share Capital.
- After acquiring control over Y Limited, X Limited supplied to Y Limited goods at cost plus 25%, the
total invoice value of such goods being Rs. 1,20,000, one fourth of such goods were still lying in
inventory at the end of the year.
- Depreciation to be charged @ 10% in X Limited and @ 15% in Y Limited on Fixed Assets.
You are required to prepare the Consolidated Statement of Profit and Loss for the year ended on 31st March,
2021.
Solution:
Consolidated Statement of Profit & Loss Account of X Ltd. and Y Ltd. for the year ended 31 st March, 2021
Particulars Note No. Rs.

I. Revenue from operations 1 35,80,000
II. Total revenue 35,80,000
III. Expenses
Cost of Material purchased/Consumed 2 20,80,000
Changes of Inventories of finished goods -
Employee benefit expense 3 5,00,000
Finance cost 4 48,000
Depreciation and amortization expense 5 4,57,000
Other expenses 6 2,80,000
Total expenses 33,65,000
IV. Profit before Tax (II-III) 2,15,000
Profit transferred to Consolidated Balance Sheet
Profit After Tax 2,15,000
Preference dividend 7,000
Preference dividend payable 7,000 (14,000)
2,01,000
Share in pre-acquisition loss (WN 3) 1,800
Share of Minority interest in losses (WN 1) 1,800
Less: Investment Account- dividend for 3 months (prior toacquisition) (3,500)
Inventory reserve (WN 2) (6,000)
Profit to be transferred to consolidated balance sheet 1,95,100
Notes to Accounts
Rs. Rs.
1 Revenue from Operations
X Ltd. 18,00,000
Y Ltd. 19,00,000
Total 37,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 35,80,000
2 Cost of Materials Purchased/Consumed
X Ltd. 10,00,000
Y Ltd. 12,00,000
Total 22,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 20,80,000
3 Employee benefit and expenses
Wages and salaries
H Ltd. 2,00,000
S Ltd. 3,00,000 5,00,000

4 Finance cost
Interest
H Ltd. 24,000
S Ltd. 24,000 48,000
5 Depreciation
H Ltd. 2,20,000
S Ltd. 2,37,000 4,57,000
6 Other expenses
H Ltd. 1,60,000
S Ltd. 1,20,000 2,80,000
Working Notes:
1. Profit of Subsidiary
Revenue from Operations 19,00,000

Less: Expenses
Cost of Material purchased/Consumed 12,00,000
Changes of Inventories of finished goods -
Employee benefit expense 3,00,000
Finance cost 24,000
Depreciation and amortization expense 2,37,000
Other expenses 1,20,000
Total expenses (18,81,000)
Profit Before Tax 19,000
Less: Preference Dividend 14,000
Less: Preference Dividend Payable 14,000 (28,000)
Profit available for shareholders (9,000)
Minority Share (20% of loss Rs. 9,000) (1,800)
2. Inventory reserve = [ 120,000 / 4 × 25/125 ] = Rs. 6,000
3. Pre-acquisition loss = 80% of 3 month’s profit up to 30th June,2020 i.e. 80 % of ¼ of loss Rs. 9,000.
Hence, pre-acquisition loss = Rs. 1,800
4. Investment account includes Preference dividend for 3 months prior to acquisition i.e. Rs. 4,00,000 x
50% x 7% x 1/4 = Rs. 3,500
13. Ram Ltd. Holds 80% share in Shyam Ltd its subsidiary. Share Capital of shyam Ltd is Rs 25,00,000 and
reserves being Rs 5,00,000 on the date of acquisition 31.3.2012.
Following is the results of Shyam Ltd :
Year Ended Profit /(Loss) Net Worth (Rs. In Lakhs)
31.3.2013 (15,00,000) +15.00
31.3.2014 (20,00,000) (5.00)
31.3.2015 4,00,000 (1.00)
31.3.2016 5,00,000 +4.00
Calculate Minority interest for the period from 2011-12 to 2015-16 as per AS -21.
14. H Ltd. acquired 3,000 shares in S Ltd., at a cost of ₹4,80,000 on 31.7.20X1. The capital of S Ltd. consisted
of 5,000 shares of ₹ 100 each fully paid. The Profit & Loss Account of this company for 20X1 showed an
opening balance of ₹1,25,000 and profit for the year was ₹ 3,00,000. At the end of the year, it declared a
dividend of 40%. Record the entry in the books of H Ltd., in respect of the dividend. Assume calendar year
as financial year.
Solution: The profits of S Ltd., have to be divided between capital and revenue profits from the point of
view of the holding company:
Capital Profit (₹) Revenue Profit (₹)
Balance on 1.1.20X1 1,25,000 —
Profit for 20X1 (3,00,000 × 7/12) 1,75,000 (3,00,000×5/12) 1,25,000
Total 3,00,000 1,25,000
Proportionate share of H Ltd. (3/5) 1,80,000 75,000
Total dividend declared = ₹5,00,000 X 40 % = ₹ 2,00,000
H Ltd.’s share in the dividend = ₹ 2,00,000 X 3/5 = ₹ 1,20,000
There can be two situations as regards the treatment of dividend of ₹ 1,20,000:
(1) The profit for 20X1 has been utilised to pay the dividend.
The share of H Ltd in profit for the first seven months of S Ltd = ₹ 1,05,000 (i.e. ₹ 1,75,000 × 3/5)
Profit for the remaining five months = ₹ 75,000 (i.e.₹ 1,25,000 × 3/5).
The dividend of ₹ 1,20,000 will be adjusted in this ratio of 1,05,000: 75,000
=₹ 70,000 out of profits up to 31.7.20X1 and ₹ 50,000 out of profits after that date.
The dividend out of profits subsequent to 31.7.20X1 will be revenue income and that out of earlier profits
will be capital receipt.
Hence the entry will be:

₹ ₹
Bank Dr. 1,20,000
To Investment Account 70,000
To Profit and Loss Account 50,000
(2) Later profits have been utilised first and then pre-acquisition profits.
In such a case, the whole of ₹ 75,000 (share of H Ltd. in profits of S Ltd., after 31.7.20X1) would be
received and treated as revenue income; the remaining dividend, ₹45,000 (₹1,20,000 less ₹ 75,000) would be
capital receipt.
The entry would be:
₹ ₹
Bank Dr. 1,20,000
To Investment Account 45,000
To Profit and Loss Account 75,000
Note: Point (2) discussed above can arise only if there is definite information about the profits utilized. In
practice, such treatment is rare.
15. A Ltd. acquired 70% of equity shares of B Ltd. as on 1st January, 2005 at a cost of Rs. 10,00,000 when B
Ltd. had an equity share capital of Rs. 10,00,000 and reserves and surplus of Rs. 80,000. Both the companies
follow calendar year as the accounting year. In the four consecutive years B Ltd. fared badly and suffered
losses of Rs. 2,50,000, 4,00,000, Rs. 5,00,000 and Rs. 1,20,000 respectively. Thereafter in 2009, B Ltd.
experienced turnaround and registered an annual profit of Rs. 50,000. In the next two years i.e. 2010 and
2011, B Ltd. recorded annual profits of Rs. 1,00,000 and Rs. 1,50,000 respectively.
Show the minority interests and cost of control at the end of each year for the purpose of consolidation.
16. H Ltd. acquires 70% of the equity shares of S Ltd. on 1st January, 2012. On that date, paid up capital of S
Ltd. was 10,000 equity shares of Rs. 10 each; accumulated reserve balance was Rs. 1,00,000. H Ltd. paid Rs.
1,60,000 to acquire 70% interest in the S Ltd. Assets of S Ltd. were revalued on 1.1.2012 and a revaluation
loss of Rs. 20,000 was ascertained. Calculate Goodwill/Capital Reserve.
17. Consider the following balance sheets of subsidiary B Ltd.:

2008 2009 2008 2009
Rs. Rs. Rs. Rs.
Share-Capital Fixed Assets
Issued & subscribed Cost 3,20,000 3,20,000
5,000 equity shares Less: Accumulated
of Rs. 100 each 5,00,000 5,00,000 depreciation 48,000 96,000
Reserves & Surplus 2,72,000 2,24,000
Revenue reserves 2,86,000 7,14,000 Investments
Current Liabilities & at cost — 4,00,000
Provisions: Current Assets:
Sundry Creditors 4,90,000 4,94,000 Stock 5,97,000 7,42,000
Bank overdraft — 1,70,000 Sundry Debtors 5,94,000 8,91,000
Provision for taxation 3,10,000 4,30,000 Prepaid Expenses 72,000 48,000
Cash at Bank 51,000 3,000
15,86,000 23,08,000 15,86,000 23,08,000
Consider also the following information:

(a) B Ltd. is a subsidiary of A Ltd. Both the companies follow calendar year as the accounting year.
(b) A Ltd. values stocks on LIFO basis while B Ltd. used FIFO basis. To bring B Ltd.’s values in line with
those of A Ltd. its value of stock is required to be reduced by Rs. 12,000 at the end of 2008 and Rs.
34,000 at the end of 2009.
(c) Both the companies use straight-line method of depreciation. However A Ltd. charges depreciation @
10%.
(d) B Ltd. deducts 1% from sundry debtors as a general provision against doubtful debts.
(e) Prepaid expenses in B Ltd. include advertising expenditure carried forward of Rs. 60,000 in 2008 and
Rs. 30,000 in 2009, being part of initial advertising expenditure of Rs. 90,000 in 2008 which is being
written off over three years. Similar amount of advertising expenditure of A Ltd. has been fully written
off in 2008.
Restate the balance sheet of B Ltd. as on 31st December, 2009 after considering the above information for
the purpose of consolidation. Such restatement is necessary to make the accounting policies adopted by A
Ltd. and B Ltd. uniform.
18. From the following balance sheets of H Ltd. and its subsidiary S Ltd. drawn up at 31st March, 2010, prepare
a consolidated balance sheet as at that date, having regard to the following :
(i) Reserves and Profit and Loss Account of S Ltd. stood at Rs. 25,000 and Rs. 15,000 respectively on the
date of acquisition of its 80% shares by H Ltd. on 1st April, 2009.
(ii) Machinery (Book-value Rs. 1,00,000) and Furniture (Book value Rs. 20,000) of S Ltd. were revalued at
Rs. 1,50,000 and Rs. 15,000 respectively on 1.4.2009 for the purpose of fixing the price of its shares.
[Rates of depreciation: Machinery 10%, Furniture 15%.]
Balance Sheet of H Ltd. as on 31st March, 2010
Liabilities H Ltd. S. Ltd. Assets H Ltd. S Ltd.

Rs. Rs. Rs. Rs.
Share Capital Machinery 3,00,000 90,000
Shares of Furniture 1,50,000 17,000
Rs. 100 each 6,00,000 1,00,000 Other assets 4,40,000 1,50,000
Reserves 2,00,000 75,000 Shares in
Profit and Loss S Ltd.:
Account 1,00,000 Rs. 25,000 800 shares at
Creditors 1,50,000 57,000 Rs. 200 each 1,60,000 —
10,50,000 2,57,000 10,50,000 2,57,000
19. A Ltd. acquired 1,600 ordinary shares of Rs.100 each of B Ltd. on 1st July 2009. On December 31, 2009 the
Balance Sheets of the two companies were as given below:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Rs. Rs. Rs. Rs.
Capital (Shares of Land & Buildings 1,50,000 1,80,000
Rs. 100 each Plant & Machinery 2,40,000 1,35,000
fully paid) 5,00,000 2,00,000 Investment in B Ltd.
Reserves 2,40,000 1,00,000 at cost 3,40,000 —
Profit & Loss A/c 57,200 82,000 Stock 1,20,000 36,400
Bank Overdraft 80,000 — Sundry Debtors 44,000 40,000
Bills Payable — 8,400 Bills Receivable 15,800 —
Creditors 47,100 9,000 Cash 14,500 8,000
9,24,300 3,99,400 9,24,300 3,99,400
The Profit & Loss Account of B Ltd. showed a credit balance of Rs. 30,000 on 1st January, 2009 out of
which a dividend of 10% was paid on 1st August; A Ltd. has credited the dividend received to its Profit &
Loss Account. The Plant & Machinery which stood at Rs. l,50,000 on 1st January, 2009 was considered as
worth Rs. 1,80,000 on 1st July, 2009; this figure is to be considered while consolidating the Balance Sheets.
Prepare consolidated Balance Sheet as on December 31, 2009.
20. From the following data, determine in each case:

(1) Minority interest at the date of acquisition and the date of consolidation.
(2) Goodwill or Capital Reserve.
(3) Amount of holding company’s profit in the consolidated Balance Sheet assuming holding company’s
own Profit & Loss Account to be Rs. 2,00,000 in each case.
Subsidiary Company
Company Cost Date of acquisition Consolidation Date
& % shares owned 1.1.2010 31.12.2010
Share Profit & Share Profit &
Capital Loss Capital Loss
Account Account
Rs. Rs. Rs. Rs. Rs.
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 55,000
21. From the following data, determine Minority Interest on the date of acquisition and on the date of
consolidation in each case:
.Case Subsidiary % of Cost Date of Acquisition Consolidation date

Company Share
Owned
01-01-2018 31-12-2018
Share Profit and Share Profit and
Capital Loss A/c Capital Loss A/c
Rs. Rs. Rs. Rs. Rs.
Case-A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
Case-B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Case-C Z 70% 98,000 40,000 20,000 40,000 20,000
Case-D M 95% 75,000 60,000 35,000 60,000 55,000
Case-E N 100% 1,00,000 40,000 40,000 40,000 65,000
22. XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 20X1 for ₹ 1,40,000. The issued capital of
ABC Ltd., on 1st January, 20X1 was ₹1,00,000 and the balance in the Profit & Loss Account was ₹ 60,000.
During the year ended 31st December, 20X1, ABC Ltd. earned a profit of ₹20,000 and at year end, declared and
paid a dividend of ₹15,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
What is the amount of minority interest as on 1st January, 20X1 and 31st December, 20X1? Also please check
whether there should be any goodwill/ capital reserve at the date of acquisition.
Solution: Total dividend paid is₹15,000 (out of post-acquisition profits), hence dividend received by XYZ will
be credited to P & L.
XYZ Ltd.’s share of dividend = ₹15,000 X 80% = ₹12,000
In the books of XYZ Ltd.
₹ ₹
Bank A/c Dr. 12,000
To Profit & Loss A/c 12,000
(Dividend received from ABC Ltd credited to P&L A/c
being out of post-acquisition profits-as explained above)
Goodwill on consolidation (at the date of acquisition): ₹ ₹

Cost of shares 1,40,000
Less: Face value of capital i.e. 80% of capital 80,000
Add: Share of capital profits [60,000X 80 %] 48,000 (1,28,000)
Goodwill 12,000
Minority interest on:
- 1st January, 20X1:
20% of ₹ 1,60,000 [1,00,000 + 60,000] 32,000
- 31st December, 20X1:
20% of ₹1,65,000 [1,00,000 + 60,000 + 20,000 – 15,000] 33,000
23.
(a) A Ltd holds 80% of the equity capital and voting power in B Ltd. A Ltd sells inventories costing Rs. 180 lacs
to B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with B Ltd at the financial year end
i.e. 31 March 2019.
(b) A Ltd holds 75% of the equity capital and voting power in B Ltd. A Ltd purchases inventories costing Rs. 150
lacs from B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with A Ltd at the financial
year end i.e. 31 March 2019.
Suggest the accounting treatment for the above mentioned transactions in the consolidated financial statements of
A Ltd giving reference of the relevant guidance/standard.
Solution: As per para 16 and 17 of AS 21: Intragroup balances and intragroup transactions and resulting
unrealised profits should be eliminated in full. Unrealised losses resulting from intragroup transactions should also
be eliminated unless cost cannot be recovered.
Intragroup balances and intragroup transactions, including sales, expenses and dividends, are eliminated in full.
Unrealised profits resulting from intragroup transactions that are included in the carrying amount of assets, such
as inventory and fixed assets, are eliminated in full. Unrealised losses resulting from intragroup transactions that
are deducted in arriving at the carrying amount of assets are also eliminated unless cost cannot be recovered.
One also needs to see whether the intragroup transaction is “upstream” or “downstream”. Upstream transaction
is a transaction in which the subsidiary company sells goods to holding company. While in the downstream
transaction, holding company is the seller and subsidiary company is the buyer.
In the case of upstream transaction, since the goods are sold by the subsidiary to holding company; profit is made
by the subsidiary company, which is ultimately shared by the holding company and the minority shareholders. In
such a transaction, if some goods remain unsold at the balance sheet date, the unrealized profit on such goods
should be eliminated from minority interest as well as from consolidated profit on the basis of their share-holding
besides deducting the same from unsold inventory.
But in the case of downstream transaction, the whole profit is earned by the holding company, therefore, whole
unrealized profit should be adjusted from unsold inventory and consolidated profit and loss account only
irrespective of the percentage of the shares held by the parent.
Using above mentioned guidance, following adjustments would be required:
(a) This would be the case of downstream transaction. In the consolidated profit and loss account for the year
ended 31 March 2019, entire transaction of sale and purchase of Rs. 130 lacs each, would be eliminated by
reducing both sales and purchases (cost of sales).
Further, the unrealized profits of Rs. 20 lacs (i.e. Rs. 200 lacs – Rs. 180 lacs), would be eliminated from the
consolidated financial statements for financial year ended 31 March 2019, by reducing the consolidated
profits/ increasing the consolidated losses, and reducing the value of closing inventories as of 31 March 2019.
(b) This would be the case of upstream transaction. In the consolidated profit and loss account for the year ended
31 March 2019, entire transaction of sale and purchase of Rs. 200 lacs each, would be eliminated by reducing
both sales and purchases (cost of sales).
Further, the unrealized profits of Rs. 50 lacs (i.e. Rs. 200 lacs - Rs. 150 lacs), would be eliminated in the
consolidated financial statements for financial year ended 31 March 2019, by reducing the value of closing
inventories by Rs. 50 lacs as of 31 March 2019. In the consolidated balance sheet as of 31 March 2019, A
Ltd’s share of profit from B Ltd will be reduced by Rs. 37.50 lacs (being 75% of Rs. 50 lacs) and the
minority’s share of the profits of B Ltd would be reduced by Rs. 12.50 lacs (being 25% of Rs. 50 lacs).
24. Consider the following summarized Balance Sheets of subsidiary MNT Ltd.
Liabilities 2017-18 2018-19
Amount in Rs Amount in Rs
Share Capital
Issued and subscribed
7,500 Equity Shares of Rs100 each 7,50,000 7,50,000
Reserve and Surplus
Revenue Reserve 2,14,000 5,05,000
Securities Premium 72,000 2,07,000
Current Liabilities and Provisions
Bank Overdraft - 1,70,000
Provision for Taxation 2,62,000 4,30,000
15,88,000 23,08,000
Assets
Fixed Assets (Cost) 9,20,000 9,20,000
Less : Accumulated Depreciation (1,70,000) (2,82,500)
7,50,000 6,37,500
Investment at Cost - 5,30,000
Current Assets
Inventory 4,12,300 6,90,000
Trade Receivable 2,95,000 3,43,000
Prepaid expenses 78,000 65,000
Cash at Bank 52,700 42,500
15,88,000 23,08,000
Other Information:
(1) MNT Ltd. is a subsidiary of LTC Ltd.

(2) LTC Ltd. values inventory on FIFO basis, while MNT Ltd. used LIFO basis. To bring MNT Ltd.’s
inventories values in line with those of LTC Ltd., its value of inventory is required to be reduced by Rs
5,000 at the end of 2017-2018 and increased by Rs 12,000 at the end of 2018-2019. (Inventory of 2017-
18 has been sold out during the year 2018-19)
(3) MNT Ltd. deducts 2% from Trade Receivables as a general provision against doubtful debts.
(4) Prepaid expenses in MNT Ltd. include Sales Promotion expenditure carried forward of Rs 25,000 in
2017-18 and 12,500 in 2018-19 being part of initial Sales Promotion expenditure of Rs 37,500 in 2017-
18, which is being written off over three years. Similar nature of Sales Promotion expenditure of LTC
Ltd. has been fully written off in 2017-18.
Restate the balance sheet of MNT Ltd, as on 31st March, 2019 after considering the above information for the
purpose of consolidation. Such restatement is necessary to make the accounting policies adopted by LTC
Ltd. and MNT Ltd. uniform.
25. The following summarised Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepared as on 31st
March, 2017:
H Ltd. (₹) S Ltd. (₹)
Shareholders, Funds
Equity Share Capital (fully paid up shares of ₹ 10 each) 12,00,000 2,00,000
Profit and Loss Account 2,80,000 65,000
Current Liabilities
Total 22,37,000 5,43,000
Assets
Non-Current Assets
Fixed Assets
Machinery 6,40,000 1,80,000
Furniture 3,75,000 34,000
Non-Current Investments
Shares in S Ltd. - 16,000 shares @ ₹ 20 each 3,20,000 -
Current Assets
Inventories 2,68,000 62,000
Cash and Bank 1,64,000 32,000
Total 22,37,000 5,43,000
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2016. On the date of acquisition, General Reserve and
Profit Loss Account of S Ltd. stood at ₹ 50,000 and ₹ 30,000 respectively.
Machinery (book value ₹ 2,00,000) and Furniture (book value ₹ 40,000) of S Ltd. were revalued at ₹ 3,00,000 and
₹ 30,000 respectively on 1st April,2016 for the purpose of fixing the price of its shares (rates of depreciation
computed on the basis of useful lives : Machinery 10% and Furniture 15%). Trade Payables of H Ltd. include ₹
35,000 due to S Ltd. for goods supplied since the acquisition of the shares. These goods are charged at 10% above
cost. The inventories of H Ltd. includes goods costing ₹ 55,000 purchased from S Ltd.
You are required to prepare the Consolidated Balance Sheet as at 31 st March, 2017
26. Long Limited acquired 60% stake in Short Limited for a consideration of Rs. 112 lakhs. On the date of
acquisition Short Limited's Equity Share Capital was Rs. 100 lakhs, Revenue Reserve was Rs. 40 lakhs and
balance in Profit & Loss Account was Rs. 30 lakhs. From the above information you are required to calculate
Goodwill / Capital Reserve in the following situations:
(i) On consolidation of Balance Sheet.
(ii) If Long Limited showed the investment in subsidiary at a carrying amount of Rs. 104 lakhs.
(iii) If the consideration paid for acquiring the 60% stake was Rs. 92 lakhs.
Solution: (Rs. in lakhs)
60% of the Equity Share Capital Rs. 100 Lakhs 60

60% of Accumulated Reserve Rs. 70 Lakhs (40+30) Lakhs 42
Book value of shares of Short Ltd. 102
(i) Goodwill / Capital Reserve computation on consolidation of balance sheet:
Long Ltd. paid a positive differential of Rs. 10 Lakhs (112 - 102). This differential Rs. 10 Lakhs is
called goodwill and is shown in the balance sheet under the head intangibles.
(ii) If Long Ltd. showed the investment in Short Ltd. at carrying amount of Rs. 104 Lakhs, then the
goodwill will be Rs. 2 Lakhs.
(iii) If the consideration paid is Rs. 92 lakhs, then there would have been capital reserve amounting Rs. 10
Lakhs (102- 92).
27. From the Balance Sheets and information given below, prepare Consolidated Balance Sheet of Virat Ltd. and
Anushka Ltd. as at 31st March. Virat Ltd. holds 80% of Equity Shares in Anushka Ltd. since its (Anushka
Ltd.’s) incorporation.
Balance Sheet of Virat Ltd. and Anushka Ltd. as at 31st March, 20X1
Particulars Note Virat Ltd. Anushka Ltd.

No. (Rs.) (Rs.)

(a) Share Capital
1 6,00,000 4,00,000
(b) Reserves and Surplus
2 1,00,000 1,00,000

Long Term Borrowings 2,00,000 1,00,000

(a) Trade Payables 1,00,000 1,00,000
Total 10,00,000 7,00,000
II. Assets
(1) Non-current assets 3
(a) Property, Plant and Equipment 4,00,000 3,00,000
(b) Non-current investments 3,20,000 -
(2) Current Assets
1,60,000 2,00,000
(a) Inventories
(b) Trade Receivables 80,000 1,40,000
(c) Cash & Cash Equivalents 40,000 60,000
Total 10,00,000 7,00,000
Notes to Accounts
Note Particulars Virat Ltd. Anushka Ltd.

No. (Rs.) (Rs.)
1. Share capital
60,000 equity shares of Rs. 10 fully paid up 6,00,000 -

40,000 equity shares of R.s10 each fully paid up - 4,00,000
Total 6,00,000 4,00,000

Total 1,00,000 1,00,000
3. Non-current investments
Shares in Anushka Ltd 3,20,000

28. On 31st March, 2020 the summarised Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
H Ltd. S Ltd.
Rs. Rs.
Shareholders' Fund
Issued and subscribed
Equity shares of Rs. 10 each 13,40,000 2,40,000
Reserves and Surplus 4,80,000 1,80,000
Profit & Loss Account 2,40,000 60,000
Secured Loans
12% Debentures 1,00,000 -
Current Liabilities
Bank Overdraft 1,00,000 -
Total 25,20,000 6,16,800
Assets
Non-Current Assets •
(a) Property, Plant & Equipment .
Machinery 7,20,000 2,16,000
Furniture 3,60,000 40,800
(b) Investments
Investments in S Ltd. 3,84,000 -
(19,200 shares at Rs. 20 each)
Current Assets
Inventories 6,00,000 2,00,000
Trade Receivables 3,00,000 90,000
Bill Receivables 1,00,000 30,000
Cash at Bank 56,000 40,000
Total 25,20,000 6,16,800
The following information is also provided to you:
(a) H Ltd. purchased 19,200 shares of S Ltd. on 1st April, 2019, when the balances of Reserves & Surplus
and Profit & Loss Account of S Ltd. stood at Rs. 60,000 and Rs. 36,000 respectively.
(b) Machinery (Book value Rs. 2,40,000) and Furniture (Book value Rs. 48,000) of S Ltd were revalued at
Rs. 3,60,000 and Rs. 36,000 respectively on 1st April, 2019, for the purpose of fixing the price of its
shares. (Rates of depreciation computed on the basis of useful lives: Machinery 10%, Furniture 15%).
(c) On 31st March, 2020, Bills payable of Rs. 12,000 shown in S Ltd.'s Balance Sheet had been accepted in
favour of H Ltd.
29. H Limited acquired 64000 Equity Shares of Rs. 10 each in S Ltd. as on 1st October, 2019. The Balance
Sheets of the two companies as on 31st March, 2020 were as under:
Particulars H Ltd. (Rs.) S Ltd. (Rs.)

Equities and Liabilities:
Equity Share Capital: Shares of Rs. 10 each 20,00,000 8,00,000
General Reserve (1st April, 2019) 9,60,000 4,20,000
Profit & Loss Account 2,28,800 3,28,000
Preliminary Expenses (1st April, 2019) - (20,000)
Bank Overdraft 3,00,000 -
Bills Payable - 52,000
Total 36,55,200 16,60,000
Assets:
Plant & Machinery 9,60,000 5,40,000
Investment in Equity Shares of S Ltd. 12,27,200 -
Inventories 4,56,000 1,68,000
Bills Receivable 59,200 -
Cash in Hand 56,800 32,000
Total 36,55,200 16,60,000
(1) The Profit & Loss Account of S Ltd. showed credit balance of Rs. 1,20,000 on 1st April, 2019. S Ltd.
paid a dividend of 10% out of the same on 1st November, 2019 for the year 2018-19. The dividend was
correctly accounted for by H Ltd.
(2) The Plant & Machinery of S Ltd. which stood at Rs. 6,00,000 on 1st April, 2019 was considered worth
Rs. 5,20,000 on the date of acquisition by H Ltd. S Ltd. charges depreciation @ 10% per annum on
Plant & Machinery.
Prepare consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March, 2020 as per
Schedule III of the Companies Act, 2013.
30. On 31st March, 2022, H Ltd. and S Ltd. give the following information:
H Ltd. S Ltd.
(₹ in 000’s) (₹ in 000’s)
Equity Share Capital – Authorised 5,000 3,000
Issued and subscribed in Equity Shares of 4,000 2,400
₹ 10 each fully paid
Profit and Loss Account (Cr. Balance) 1,305 810
Provision for Taxation 220 180
Other Provisions 65 17
Furniture and Fittings 615 298
Investment in the Equity Shares of S Ltd. 1,500 
Inventory 983 786
Trade receivables 820 778
Cash and Bank Balances 410 102
Sundry Advances (Dr. balances) 260 190
Following Additional Information is available:
(a) H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2021 at which date the following
balances stood in the books of S Ltd.:
General Reserve ₹ 1,500 thousand; Profit and Loss Account ₹ 633 thousand.
(b) On 14th July, 2021 S Ltd. declared a dividend of 20% out of pre-acquisition profits. H Ltd. credited the
dividend received to its Profit and Loss Account.
(c) On 1st November, 2021, S Ltd. issued 3 fully paid Equity Shares of ₹ 10 each, for every 5 shares held as
bonus shares out of pre-acquisition General Reserve.
(d) On 31st March, 2021, the Inventory of S Ltd. included goods purchased for ₹ 50 thousand from H Ltd.,
which had made a profit of 25% on cost.
(e) Details of Trade payables and Trade receivables:
H Ltd. (₹ in 000’s) S Ltd. (₹ in 000’s)
Trade payables
Bills Payable 124 80
Sundry creditors 487 427
611 507
Trade receivables
Debtors 700 683
Bills Receivables 120 95
820 778
Prepare a consolidated Balance Sheet as on 31st March, 2022.
31. White Ltd. acquired 2,250 shares of Black Ltd. on 1st October,.2020. The summarized balance sheets of both
the companies as on 31st March, 2021 are given below:
White Ltd. (₹) Black Ltd. (₹)

(I) Equity and Liabilities
(1) Shareholder's fund
Share capital (Equity shares of ₹ 100 6,50,000 3,00,000
each fully paid up)
Profit and loss account 1,50,000 90,000
Trade payables 1,15,000 75,000
Due to White Ltd. - 30,000
Total 9,75,000 5,25,000
(II) Assets:
Non-current assets
Property, Plant and Equipment 5,80,000 3,51,000
Investments
Shares in Black Ltd. (2,250 shares) 2,70,000
Current assets
Inventories 50,000 1,20,000
Due from Black Ltd. 36,000
Cash and Cash equivalents 39,000 54,000
Total 9,75,000 5,25,000
Other information:
(i) During the year, Black Limited fabricated a machine, which is sold to White Ltd. for ₹ 39,000, the
transaction being completed on 30th March,2021.
(ii) Cash in transit from Black Ltd. to White Ltd. was ₹ 6,000 on 31st March,2021.
(iii) Profits during the year 2020-2021 were earned evenly.
(iv) The balances of Reserve and Profit and Loss account as on 1st April,2020 were as follows:
Reserves Profit and Loss A/c
White Ltd. 30,000 15,000 Profit
Black Ltd. 30,000 10,000 Loss
You are required to prepare consolidated Balance Sheet of the group as on 31st March, 2021 as per the
requirement of Schedule III of the Companies Act, 2013.
32. King Ltd. acquires 70% of equity shares of Queen Ltd. as on 31st March, 20X1 at a cost of ₹ 140 lakhs. The
following information is available from the balance sheet of Queen Ltd. as on 31st March, 20X1:
₹ in lakhs
Investments 110
Current Assets 140
Loans & Advances 30
15% Debentures 180
The following revaluations have been agreed upon (not included in the above figures):
Property, plant and equipment- up by 20% and Investments- down by 10%.
King Ltd. purchased the shares of Queen Ltd. @ ₹20 per share (Face value - ₹10).
Calculate the amount of goodwill/capital reserve on acquisition of shares of Queen Ltd.
33. A Ltd. acquired 70% equity shares of B Ltd. @ ₹20 per share (Face value - ₹10) on 31st March, 2021 at a
cost of ₹ 140 lakhs. Calculate the amount of share of A Ltd. and minority interest in the net assets of B Ltd.
on this date. Also compute goodwill/capital reserve for A Ltd. on acquisition of shares of B Ltd. from the
following information available from the balance sheet of B Ltd. as on 31st March, 2021:
₹ in lakhs
Investments 90
Current Assets 140
Loans & Advances 30
15% Debentures 180
34. A Ltd. had acquired 80% shares of B Ltd. for ₹ 15 lakhs at the beginning of year. During the year, A Ltd.
sold the investment for ₹ 30 lakhs and net assets of B Ltd. on the date of disposal was ₹ 35 lakhs. Calculate
the profit or loss on disposal of this investment to be recognized in the Financial Statements of A Ltd.
35. Hemant Ltd. purchased 80% shares of Power Ltd. on 1st January, 20X1 for ₹ 2,10,000. The issued capital of
Power Ltd., on 1st January, 20X1 was ₹ 1,50,000 and the balance in the Profit & Loss Account was ₹
90,000. During the year ended 31st December, 20X1, Power Ltd. earned a profit of ₹ 30,000 and at year end,
declared and paid a dividend of ₹ 22,500. What is the amount of minority interest as on 1st January, 20X1
and 31st December, 20X1? Also compute goodwill/ capital reserve at the date of acquisition.
1. Minority interest should be presented in the consolidated balance sheet

(a)As a part of liabilities
(b)As a part of equity of the parent’s shareholders
(c)Separately from liabilities and the equity of the parent’s shareholders
2. Minority of the subsidiary is entitled to

(a)Capital profits of the subsidiary company
(b)Revenue profits of the subsidiary company
(c)Both capital and revenue profits of the subsidiary company
3. In consolidation of accounts of holding and subsidiary company _________ is eliminated in full.

(a)Current liabilities of subsidiary company
(b)Reserves and surplus of both holding and subsidiary company
(c)Mutual indebtedness
4. In consolidated balance sheet, the share of the outsiders in the net assets of the subsidiary must be shown as
(a)Minority interest (b)Capital reserve (c)Current liability
5. Taxation provision made by the subsidiary company will appear in the consolidated balance sheet as an item
of
(a)Current liability. (b)Revenue profit. (c)Capital profit.
6. Issue of bonus shares by the subsidiary company out of capital profits will
(a)Decrease cost of control.
(b)Increase cost of control.
(c)Have no effect on cost of control
7. Dividend paid by subsidiary to its parent, out of capital profits, should be credited by the parent company in
its
(a)Profit and loss account. (b)Dividend account. (c)Shares invested in subsidiary account.
8. Goodwill is equal to
(a) Cost of Investment less Parent’s share in the equity of the subsidiary on date of investment.
(b) Cost of investment less Parent’s share in the debentures of subsidiary on date of investment.
(c) Parent’s share in the equity of subsidiary on date of investment less Cost of investment.
9. If the subsidiary company follows weighted average method for valuation of inventories and the holding
company follows FIFO method, then while consolidating,
(a) Financial statements of subsidiary company should be restated by adjusting the value of inventories to
bring the same in line with the valuation procedure adopted by the holding company.
(b) Financial statements of holding company should be restated by adjusting the value of inventories to
bring the same in line with the valuation procedure adopted by the subsidiary company.
(c) Financial statements of both companies may continue as per the basis followed by them.
10. If there remains any unrealized profit in the inventory, of any of the Group Company,
(a) Unrealized profit is added to value of inventory to compute consolidated profit.
(b) Unrealized profit is reduced from value of inventory to compute consolidated profit.
(c) No adjustment needs to be done.
11. Sahil Ltd acquired 45% of Rahil Ltd shares of ₹ 5,00,000 on 1.06.2019. By such an acquisition, Sahil Ltd
can exercise significant influence over Rahil Ltd. During the financial year ending on 31.03.2019, Rahil Ltd
earned profits ₹ 100,000 and declared a dividend of ₹ 75,000 on 13.09.2019. What is the carrying amount of
investment in separate financial statements of Sahil Ltd as on 31.03.2020?
(a) ₹ 4,66,250. (b) ₹ 7,81,250. (c) ₹ 4,28,000.
Answers: 1. (c); 2. (c); 3. (c); 4. (a); 5. (a); 6. (c); 7. (c) 8. (a) ; 9. (a); 10. (b); 11. (a).
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
SUMMARY NOTES
SOLUTIONS
Q25. Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2017
(a) Share Capital 12,00,000
(1,20,000 equity shares of ₹ 10 each)
(2) Minority Interest (W.N.4) 99,300
(a) Trade Payables 2 4,10,000
Total 25,25,500
II. Assets
(i) Property, plant and equipment 3 13,10,500
(ii) Intangible assets 4 24,000
(2) Current assets
(i) Inventories 5 3,25,000
(ii) Trade Receivables 6 6,70,000
(iii) Cash at Bank 7 1,96,000
Total 25,25,500
Notes to Accounts
₹
General Reserves 4,35,000
Add: 80% share of S Ltd.’s post-acquisition reserves (W.N.3)
84,000 5,19,000
Add: 80% share of S Ltd.’s post-acquisition profits (W.N.3) 21,200
Less: Unrealised gain (4,000) 17,200 2,97,200

8,16,200
2. Trade Payables
H Ltd. 3,22,000
S Ltd. 1,23,000
Less: Mutual transaction (35,000) 4,10,000
Machinery
H Ltd. 6,40,000
S Ltd. 2,00,000
Add: Appreciation 1,00,000
3,00,000
Less: Depreciation (30,000) 2,70,000 9,10,000
Furniture
H. Ltd. 3,75,000
S Ltd. 40,000
Less: Decrease in value (10,000)
30,000
Less: Depreciation (4,500) 25,500 4,00,500
13,10,500
Goodwill [WN 5] 24,000
5. Inventories
H Ltd. 2,68,000
S Ltd. 62,000 3,30,000
Less: Inventory reserve (5,000)
3,25,000
6. Trade Receivables
H Ltd. 4,70,000
S Ltd. 2,35,000
7,05,000
Less: Mutual transaction (35,000)
6,70,000
7. Cash and Bank
H Ltd. 1,64,000
S Ltd. 32,000 1,96,000
Working Notes:
1. Profit or loss on revaluation of assets in the books of S Ltd. and their book values as on 1.4.2016
Machinery
Revaluation as on 1.4.2020 3,00,000
Less: Book value as on 1.4.2020 (2,00,000)
Profit on revaluation 1,00,000
Furniture
Revaluation as on 1.4.2020 30,000
Less: Book value as on 1.4.2020 (40,000)
Loss on revaluation (10,000)
2. Calculation of short/excess depreciation
Machinery Furniture
Upward/ (Downward) Revaluation 1,00,000 (10,000)
Rate of depreciation 10% p.a. 15% p.a.
Difference [(short)/excess] (10,000) 1,500
3. Analysis of reserves and profits of S Ltd. as on 31.03.2021
Pre-acquisition Post-acquisition profits
profit upto 1.4.2016 (1.4.2016 – 31.3.2017)
(Capital General Profit and loss
profits) Reserve account
General reserve as on 31.3.2021 50,000 1,05,000
Profit and loss account as on 31.3.2021 30,000 35,000
Upward Revaluation of machinery as on 1.4.2020 1,00,000

Downward Revaluation of Furniture as on 1.4.2020 (10,000)
Short depreciation on machinery (10,000)
Excess depreciation on furniture 1,500
Total 1,70,000 1,05,000 26,500

4. Minority Interest
Paid-up value of (2,00,000 x 20%) 40,000

Add: 20% share of pre-acquisition profits and reserves [(20% of (50,000 + 30,000)] 16,000
20% share of profit on revaluation 18,000
20% share of post-acquisition reserves 21,000
20% share of post-acquisition profit 5,300
1,00,300
Less: Unrealised Profit on Inventory (55,000 x 10/110) x 20%
(1,000)
99,300
5. Cost of Control or Goodwill
Cost of Investment 3,20,000
Less: Paid-up value of 80% shares 1,60,000
80% share of pre-acquisition profits and reserves (₹ 64,000 + ₹72,000) 1,36,000 (2,96,000)
Cost of control or Goodwill 24,000
Q27. Consolidated balance Sheet of Virat Ltd. and its Subsidiary Anushka Ltd. as at 31st March, 20X1
Particulars Note Amount (Rs.)
I EQUITY AND LIABILITIES:
(1) Shareholders’ Funds:
(b) Reserve and Surplus 2 1,80,000
(2) Minority Interest 3 1,00,000
(3) Non-Current Liabilities:
Long Term Borrowings 4 3,00,000
(4) Current Liabilities:
Trade Payables 5 2,00,000
Total 13,80,000
II ASSETS:
(1) Non-Current Assets
Property, Plant & Equipment 6 7,00,000
(2) Current Assets:
(c) Cash and Cash Equivalents 9 1,00,000
Total 13,80,000
Notes to Accounts
Particulars Rs. Rs.
1. Share capital
60,000 equity shares of Rs.10 each fully paid up 6,00,000
Add: General reserve of Anushka Ltd (80%) 80,000

Total 1,80,000
3. Minority interest
20% share in Anushka Ltd (WN 3) 1,00,000
Long term borrowings of Virat 2,00,000
Add: Long term borrowings of Anushka 1,00,000
Total 3,00,000
5. Trade payables
Trade payables of Virat 1,00,000
Add: Trade payables of Anushka 1,00,000
Total 2,00,000
6. Property, Plant and Equipment (PPE)
PPE of Virat Ltd 4,00,000
Add: PPE of Anushka Ltd 3,00,000
Total 7,00,000
7. Inventories
Inventories of Virat Ltd 1,60,000
Add: Inventories of Anushka Ltd 2,00,000
Total 3,60,000
8. Trade receivables
Trade receivables of Virat Ltd 80,000
Add: Trade receivables of Anushka Ltd 1,40,000
Total 2,20,000
Cash and cash equivalents of Virat Ltd 40,000
Add: Cash and cash equivalents of Anushka Ltd 60,000
Total 1,00,000
Working Notes:
(1) Basic Information
Company Status Dates Holding Status

Holding Co. = Virat Ltd. Acquisition: Anushka’s Incorporation Holding Company = 80%
Subsidiary = Anushka Ltd. Consolidation: 31st March, 20X1 Minority Interest = 20%
(2) Analysis of General Reserves of Anushka Ltd: Since Virat holds shares in Anushka since its
incorporation, the entire Reserve balance of Rs.1,00,000 will be Revenue.
(3) Consolidation of Balances
Holding- 80%, Total Minority Holding Company

Minority - 20% Interest
Equity Capital 4,00,000 80,000 3,20,000 -
General Reserves 1,00,000 20,000 Nil (pre-acq) 80,000
(post-acq)
Total 1,00,000 3,20,000 80,000
Cost of Investment (3,20,000) -
Goodwill/capital reserve NIL
Parent’s Balance 1,00,000
Amount for CBS 1,80,000
Q28. Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2020
Particulars NoteNo. (Rs.)
II. Equity and Liabilities
(2) Minority Interest 1,15,560
(3) Non- Current Liabilities
(a) 12% Debentures 1,00,000
(a) Trade Payables
(b) Short term Borrowings (Bank overdraft) 3 3,84,800
1,00,000
III. Assets Total 28,67,400
(a)
(i) Property, Plant and Equipment 4 14,34,600
(ii) Intangible assets 5 28,800
(2) Current assets
(a) Inventory (6,00,000+2,00,000) 8,00,000
(c) Cash and Cash equivalents 6 96,000
Total 28,67,400
Notes to Accounts
Rs.
1. Share Capital
Equity share capital 13,40,000
1,34,000 shares of Rs. 10 each fully paid
up
Reserves 4,80,000
Add: 4/5th share of S Ltd.’s post-
acquisition reserves (W.N.3) 96,000 5,76,000
Add: 4/5th share of S Ltd.’s post- 2,40,000
acquisition profits (W.N.4) 11,040 2,51,040
8,27,040
3. Trade Payables
H Ltd. 2,00,000
S Ltd. 1,22,000 3,22,000
Bills Payables
H Ltd. 60,000
S Ltd. 14,800 74,800
3,96,800
Less: Mutual Owings (12,000) 3,84,800
4. Property Plant and Equipment
Machinery
H. Ltd. 7,20,000
S Ltd. 2,40,000
Add: Appreciation 1,20,000
3,60,000
(36,000) 3,24,000
Less: Depreciation (3,60,000 X 10%)
Furniture
H. Ltd. 3,60,000
S Ltd. 48,000
Less: Decrease in value (12,000)
36,000
Less: Depreciation (36,000 X 15%) 5,400 30,600 14,34,600
Goodwill [WN 6] 28,800
Trade receivables
6.
H Ltd.
3,00,000
S Ltd.
Bills Receivables 90,000 3,90,000
H Ltd.
S Ltd. 1,00,000
30,000 1,30,000
5,20,000
Less: Mutual Owings
(12,000) 5,08,000
Working Notes:
1. Pre-acquisition profits and reserves of S Ltd. Rs.

Reserves 60,000
96,000
H Ltd.’s = 4/5 (or 80%) × 96,000 76,800
Minority Interest= 1/5 (or 20%) × 96,000 19,200
2. Profit on revaluation of assets of S Ltd.
Profit on Machinery Rs. (3,60,000 – 2,40,000) 1,20,000
Less: Loss on Furniture Rs.(48,000 –36,000) (12,000)
Net Profit on revaluation 1,08,000
H Ltd.’s share 4/5 × 1,08,000 86,400
Minority Interest 1/5 × 1,08,000 21,600
3. Post-acquisition reserves of S Ltd.
Total reserves 1,80,000
Less: Pre- acquisition reserves (60,000)
1,20,000
Post-acquisition reserves 96,000
H Ltd.’s share 4/5 × 1,20,000 24,000
Minority interest 1/5 × 1,20,000
4. Post -acquisition profits of S Ltd. 24,000
Post-acquisition profits (Profit & loss account balance less
pre-acquisition profits = Rs. 60,000 – 36,000)
Add: Excess depreciation charged on furniture @ 15% 1,800
on Rs. 12,000 i.e. (48,000 – 36,000) 25,800
Less: Under depreciation on machinery @ 10% (12,000)

on Rs. 1,20,000 i.e. (3,60,000 – 2,40,000) 13,800
Adjusted post-acquisition profits 11,040
H Ltd.’s share 4/5 × 13,800 2,760
Minority Interest 1/5 × 13,800
Paid-up value of (24,000 – 19,200) = 4,800 shares 48,000
held by outsiders i.e. 2,40,000 X 20%
Add: 1/5th share of pre-acquisition profits and reserves 19,200
1/5th share of profit on revaluation 21,600
1/5th share of post-acquisition reserves 24,000
1/5th share of post-acquisition profit 2,760

1,15,560
6. Cost of Control or Goodwill

Price paid by H Ltd. for 19,200 shares (A)
3,84,000
Less: Intrinsic value of the shares
Paid-up value of shares held by H Ltd. i.e. 2,40,000 X 80% 1,92,000
Add: 4/5th share of pre-acquisition profits and reserves 76,800
4/5th share of profit on the revaluation 86,400
Intrinsic value of shares on the date of acquisition (B) 3,55,200

Cost of control or Goodwill (A – B) 28,800
Q29. Consolidated Balance Sheet of H Ltd. and its subsidiary, S Ltd. as at 31st March, 2020
Particulars Note No. (Rs.)

(2) Minority Interest (W.N 4) 2,96,400
(b) Short term borrowings 3,00,000
Total 42,02,000
II. Assets
(i) Property, Plant and Equipment 4 29,34,000
(ii) Intangible assets (W.N.5) 1,60,000
(2) Current assets
(c) Cash & Cash equivalents (Cash) 7 88,800
Total 42,02,000
Notes to Accounts
Rs. Rs.
1. Share Capital
2,00,000 equity shares of Rs. 10 each 20,00,000
Reserves 9,60,000
Profit & loss
H Ltd. 2,28,800
S Ltd. (As per W.N. 3) 1,18,400 3,47,200 13,07,200
3. Trade Payables
H Ltd. 1,66,400
S Ltd. (80,000+52,000) 1,32,000 2,98,400
Land and building
H Ltd. 7,20,000
S Ltd. 7,60,000 14,80,000
Plant & Machinery
H Ltd. 9,60,000
S Ltd. (As per W.N. 7) 4,94,000
14,54,000 29,34,000
5. Inventories
H Ltd. 4,56,000
S Ltd. 1,68,000 6,24,000
6. Trade Receivables
H Ltd. 1,76,000
S Ltd. 1,60,000 3,36,000
Bills receivable: H Ltd. 59,200 3,95,200
7. Cash & Cash equivalents
Cash
H Ltd. 56,800
S Ltd. 32,000 88,800
Working Notes:
(1) Share holding pattern
Total Shares of S Ltd 80,000 shares
Shares held by H Ltd 64,000 shares i.e. 80 %;
Minority Shareholding 16,000 shares i.e. 20 %
(2) Capital profits of S Ltd.
Rs. Rs.
Reserve on 1st October, 2019 (Assumed there is no movement 4,20,000
in reserves during the year and hence balance as on 1st
October, 2019 is same as of 31st March 2020)
Profit & Loss Account Balance on 1st April, 2019 1,20,000
Less: Dividend paid (80,000) 40,000
Profit for year:
Total Rs. 3,28,000
Less: Rs. 40,000 (opening balance)
Rs. 2,88,000
Proportionate up to 1st October, 2019 on time basis 1,44,000
(Rs. 2,88,000/2)
Reduction in value of Plant & Machinery (WN 6) (50,000)
5,54,000
Less: Preliminary expenses written off (20,000)
Total Capital Profit 5,34,000
Holding company’s share (5,34,000 X 80%) 4,27,200
Minority Interest (5,34,000 X 20%) 1,06,800
Note: Preliminary expenses as on 1st April, 2019 amounting Rs. 20,000 have been written off.
(3) Revenue profits of S Ltd.
Profit after 1st October, 2019 (3,28,000 - 40,000)/2 1,44,000
Less 10% depreciation on Rs.5,20,000 for 6 months (26,000)
Add: Depreciation already charged for 2nd half year on 6,00,000 30,000 4,000
1,48,000
Holding company’s share (1,48,000 X 80%) 1,18,400
Minority Interest (1,48,000 X 20%) 29,600
(4) Minority interest
Par value of 16,000 shares (8,00,000 X 20%) 1,60,000

Add: 1/5 Capital Profits [WN 2] 1,06,800
1/5 Revenue Profits [WN 3] 29,600
2,96,400
(5) Cost of Control
Amount paid for 64,000 shares 12,27,200

Less:
Par value of shares (8,00,000 X 80%) 6,40,000
Capital Profits – share of H Ltd. [WN 2] 4,27,200 (10,67,200)
Cost of Control or Goodwill 1,60,000
(6) Calculation of revaluation loss on Plant and Machinery of S Ltd. on 1st October, 2019
Rs.
Value of plant and machinery as on 1st April,2019 6,00,000
Less: Depreciation for the six months (30,000)
Value of plant and machinery as on 1st October, 2019 5,70,000
Less: Plant and machinery valued by H Ltd. on 1st October,2019 (5,20,000)
Revaluation Loss 50,000
(7) Value of plant & Machinery of S Ltd. On 31st March,2020
Value of machinery on 1st October, 2019 5,20,000

Less: depreciation for next six month (26,000)
4,94,000
Q31. Consolidated Balance Sheet of White Ltd. and its Subsidiary Black Ltd. as at 31st March, 2021
(2) Minority Interest 3 1,05,000
Total 12,00,000
II. Assets
(2) Current assets
(i) Inventory 6 1,70,000
(ii) Cash & cash equivalent 7 99,000
Total 12,00,000
Notes to Accounts
₹
1. Share capital
6,50,000
6,500 equity shares of ₹ 100 each, fully paid up
Total 6,50,000
General Reserves 60,000
Add: 75% share of Black Ltd.’s post-acquisition profits (W.N.1)
37,500 1,87,500
Capital reserve (W.N. 5) 7,500
Total 2,55,000
3. Minority interest in Black Ltd. (WN 4) 1,05,000
4. Trade payables
White Ltd. 1,15,000
Black Ltd. 75,000 1,90,000
White Ltd. 5,80,000
Black Ltd. 3,51,000 9,31,000
6 Inventory
White Ltd. 50,000
Black Ltd. 1,20,000 1,70,000
7 Cash & cash equivalent
White Ltd. 39,000
Black Ltd. 54,000
Cash in transit 6,000 99,000
Working Notes:
1. Post-acquisition profits of Black Ltd. ₹

profits earned during the year = ₹ 90,000 + ₹10,000 1,00,000
Pre-acquisition profits (1.4.20 to 30.9.20) 50,000
Post-acquisition profits (1.10.20 to 31.3.21) 50,000
White Ltd.’s share 75% of 50,000 37,500
Minority Interest 25% of 50,000 12,500
2. Pre-acquisition profits and reserves of Black Ltd.
Reserves as on 1.4.2020 30,000
[10,000 (loss as on 1.4.20) +50,000 (6 month Adjusted pre-acquisition profits)]
70,000
White Ltd.’s = (75%) × 70,000 52,500
Minority Interest= (25%) × 70,000 17,500
3. Post-acquisition reserves of Black Ltd.
Post-acquisition reserves (Total reserves reserves = ₹ 30,000 – 30,000) less pre-acquisition nil
Paid-up value of (3,000 – 2,250) = 750 shares
held by outsiders i.e. 750 × ₹ 100 75,000
Add: 25% share of pre-acquisition reserves & Profit 17,500
25% share of post-acquisition profit 12,500
1,05,000
5. Capital Reserve
Price paid by White Ltd. for 2,250 shares (A) 2,70,000

Intrinsic value of the shares-
Paid-up value of 2,250 shares held by White Ltd. i.e. 2,250 × ₹ 100 2,25,000
Add 75% share of pre-acquisition reserves & profit

(70,000 x 75%) 52,500 (B) 2,77,500
Capital reserve (A – B) 7,500
Q32. Revalued net assets of Queen Ltd. as on 31st March, 20X1
PPE [240 X 120%] 288
Investments [110 X 90%] 99
Current Assets 140
Loans and Advances 30
Total Assets after revaluation 557
Less: 15% Debentures 180.0
Current Liabilities 100.0 (280)
Equity / Net Worth 277
King Ltd.’s share of net assets (70% of 277) 193.9
King Ltd.’s cost of acquisition of shares of Queen Ltd. (₹140 lakhs) (140)
Capital reserve 53.9
Q 33. Net assets of B Ltd. as on 31st March, 2021

Investments 90
Current Assets 140
Loans and Advances 30
Total Assets 620
Less: 15% Debentures 180.0
Current Liabilities 100.0 (280)
Equity / Net Worth 340
Share of Minority Interest in net assets (30% of 340) 102
A Ltd.’s share in net assets (70% of 340) 238
A Ltd.’s cost of acquisition of shares of B Ltd.
(₹140 lakhs) (140)
Capital reserve 98
Q34. Calculation of Profit/Loss on disposal of investment in subsidiary

Particulars ₹
Proceeds from the sale of Investment 30,00,000
Less: A Ltd.'s share in net assets of B Ltd. (28,00,000)
2,00,000
Working Note: A Ltd.’s share in net assets of B Ltd. ₹

Net Assets of B Ltd. on the date of disposal 35,00,000
Less: Minority Interest (20% of ₹ 35 lakhs) (7,00,000)
A Ltd.'s share in the net assets of B Ltd. 28,00,000
Q35. Total dividend paid is ₹ 22,500 (out of post-acquisition profits), hence dividend received by Hemant will be
credited to P & L account. Hemant Ltd.’s share of dividend = ₹ 22,500 X 80% = ₹ 18,000
Goodwill on consolidation (at the date of acquisition): ₹ ₹
Cost of shares 2,10,000
Less: Face value of capital i.e. 80% of capital 1,20,000
Add: Share of capital profits [90,000 X 80 %] 72,000 (1,92,000)
Goodwill 18,000
Minority interest on:
- 1st January, 20X1:
20% of ₹ 2,40,000 [1,50,000 + 90,000] 48,000
- 31st December, 20X1:

20% of ₹2,47,500 [1,50,000 + 90,000 + 30,000 – 22,500] 49,500
AS 4 - CONTINGENCIES AND EVENT OCCURRING AFTER BALANCE SHEET DATE
1. Meaning:- Contingency is a condition or Situation, the ultimate outcome of which Gain/ loss which will be
determine or known only on the occurrence or Non-occurrence of certain events which are not-within the
control of entity. Contingency are of two types
(A) Contingency which do not give any outflow resources:- Such Contingency are covered under AS-4.
For example provision for doubtful/B/R
(B) Contingency which Give outflow of resources in future:- There contingency are covered under AS-29
2. Event occurring after Balance sheet date:- There are those events which
(A) Are occurred after B/S date but before approval date of financial statement and
(B) Such event may be favourable or unfavourable. and
(C) Such event should be significant
Two types of events can be identified:
(a) those which provide further evidence of conditions that existed at the balance sheet date; and
(b) those which are indicative of conditions that arose subsequent to the balance sheet date.
3. Para 13,”Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide
additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or
that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or
substratum of the enterprise) is not appropriate.”
4. Treatment of proposed dividend:- There are events which, although they take place after the balance sheet
date, are sometimes reflected in the financial statements because of statutory requirements or because of their
special nature. For example, if dividends are declared after the balance sheet date but before the financial
statements are approved for issue, the dividend are not recognised as a liability at the balance sheet date because
no obligation exist at that time unless a statute requires otherwise. Such dividends are disclosed in notes.
5. Para 14 : - If an enterprise declares dividends to shareholders after the balance sheet date, the enterprise should
not recognise those dividends as a liability at the balance sheet date unless a statute requires otherwise. Such
dividends should be disclosed in notes.
For CA Inter& Final Classes, visit www.edu91.org Join Us on YouTube www.youtube.com/neerajarora Join Us on Telegram https://t.me/neerajaroraclasses AS 4.1
Practical Questions
1. A major fire has damaged the assets in a factory of a limited company on 2nd April-two days after the year
end closure of account. The loss is estimated at Rs. 20 crores out of which Rs. 12 crores will be recoverable
from the insurers. Explain briefly how the loss should be treated in the final accounts for the previous year.
Answer:- The loss due to break out of fire is an example of event occurring after the balance sheet date. The
event does not relate to conditions existing at the balance sheet date. It has not affected the financial position
as on the date of balance sheet and therefore requires no specific adjustments in the financial statements.
However, paragraph 8.6 of AS 4 states that disclosure is generally made of events occurring after balance
sheet date i.e. in subsequent periods that represent unusual changes affecting the existence or substratum of
the enterprise after the balance sheet date. In the given case, the amount of loss of assets in a factory is
material and may be considered as an event affecting the substratum of the enterprise. Hence, as
recommended in paragraph 15 of AS 4, disclosure of the event should be made.
2. A Limited Company closed its accounting year on 30.6.98 and the accounts for that period were
considered and approved by the board of directors on 20th August, 1998. The company was engaged
in laying pipe line for an oil company deep beneath the earth. While doing the boring work on
1.9.1998 it had met a rocky surface for which it was estimated that there would be an extra cost to the
tune of Rs. 80 lakhs. You are required to state with reasons, how the event would be dealt with in the
financial statements for the year ended 30.6.
Answer: Para 3.2 of AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet
Date defines 'events occurring after the balance sheet date' as 'significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which financial statements are
approved by the Board of Directors in the case of a company'. The given case is discussed in the light
of the above mentioned definition and requirements given in paras 13-15 of the said AS 4 (Revised).
In this case the incidence, which was expected to push up cost became evident after the date of
approval of the accounts. So that was not an 'event occurring after the balance sheet date'. However,
this may be mentioned in the Directors’ Report.
3. Bottom Ltd. entered into a sale deed for its immovable property before the end of the year. But
registration was done with registrar subsequent to Balance Sheet date. But before finalisation, is it
possible to recognise the sale and the gain at the Balance Sheet date? Give your view with reasons.
Answer: Yes, both sales and gain of Bottom Ltd. should be recognized. In accordance with AS 9 at
the Balance Sheet date and what was pending was merely a formality to register the deed. It is clear
that significant risk and rewards of ownership had passed before the balance sheet date. Further the
registration post the balance sheet date confirms the condition of sale at the balance sheet date as per
AS 4.
4. Pure Oil Ltd. closed the books of accounts on March 31, 2012 for which financial statement was finalized by
the Board of Directors on September 04, 2012. During the month of December 2011, company undertook the
project of laying a pipeline across the country and during May 2012 engineers realized that due to
unexpected heavy rain, the total cost of the project will be inflated by Rs. 50 lakhs. How this should be
provided for in the balance sheet of 2011-12 in accordance to AS 4?
Answer: This event occurred after March 31, 2012 but before September 04, 2012 is an event occurring after
the balance sheet date. But this event is not affecting financial position on the date of balance sheet therefore
it should be disclosed in the directors report.
5. A company deals in petroleum products. The sale price of petrol is fixed by the government. After the Balance
Sheet date, but before the finalisation of the company’s accounts, the government unexpectedly increased the
price retrospectively. Can the company account for additional revenue at the close of the year? Discuss.
Answer: According to para 8 of AS 4 (Revised 1995), the unexpected increase in sale price of petrol by the
government after the balance sheet date cannot be regarded as an event occurring after the Balance Sheet
date, which requires an adjustment at the Balance Sheet date, since it does not represent a condition present
at the balance sheet date. The revenue should be recognized only in the subsequent year with proper
disclosures. The retrospective increase in the petrol price should not be considered as a prior period item, as
per AS 5, because there was no error in the preparation of previous period’s financial statements.
6. In preparing the financial statements of R Ltd. for the year ended 31st March, 2012, you come across the
following information. State with reasons, how you would deal with this in the financial statements:
The company invested 100 lakhs in April, 2012 in the acquisition of another company doing similar
business, the negotiations for which had started during the year.
Answer: Para 3.2 of AS 4 (Revised) defines "Events occurring after the balance sheet date" as those
significant events, both favourable and unfavourable, that occur between the balance sheet date and the
date on which the financial statements are approved by the Board of Directors in the case of a company.
Accordingly, the acquisition of another company is an event occurring after the balance sheet date.
However no adjustment to assets and liabilities is required as the event does not affect the determination
and the condition of the amounts stated in the financial statements for the year ended 31st March, 1998.
Applying para 15 which clearly states that/disclosure should be made in the report of the approving
authority of those events occurring after the balance sheet date that represent material changes and
commitments affecting the financial position of the enterprise, the investment of Rs. 100 lakhs in April,
1998 in the acquisition of another company should be disclosed in the report of the Board of Directors
to enable users of financial statements to make proper evaluations and decisions.
7. During the year 2012-2013, Raj Ltd. was sued by a competitor for Rs. 15 lakhs for infringement of a
trademark. Based on the advice of the company's legal counsel, Raj Ltd. provided for a sum of Rs. 10lakhs in
its financial statements for the year ended 31st March, 2013. On 18th May, 2013, the Court decided in favour
of the party alleging infringement of the trademark and ordered Raj Ltd. to pay the aggrieved party a sum of
Rs. 14 lakhs. The financial statements were prepared by the company's management on 30th April, 2013, and
approved by the board on 30th May, 2013.
Solution: As per para 8 of AS 4 “Contingencies and Events Occurring After the Balance Sheet Date,
adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide
additional information material y affecting the determination of the amounts relating to conditions existing at
the balance sheet date.
In the given case, since Raj Ltd. was sued by a competitor for infringement of a trademark during the year
2012-13 for which the provision was also made by it, the decision of the Court on 18th May, 2013, for
payment of the penalty will constitute as an adjusting event because it is an event occurred before approval
of the financial statements. Therefore, Raj Ltd. should adjust the provision upward by Rs. 4 lakhs to reflect
the award decreed by the Court to be paid by them to its competitor.
Had the judgment of the Court been delivered on 1st June, 2013, it would be considered as post reporting
period i.e. event occurred after the approval of the financial statements. In that case, no adjustment in the
financial statements of 2012-13 would have been required.
8. While preparing its final accounts for the year ended 31st March, 2003 a company made a provision for bad debts
@ 5% of its total debtors. In the last week of February, 2003 a debtor for Rs. 2 lakhs had suffered heavy loss due
to an earthquake; the loss was not covered by any insurance policy. In April, 2003 the debtor became a bankrupt.
Can the company provide for the full loss arising out of insolvency of the debtor in the final accounts for
the year ended 31st March, 2003?
Answer: As per paras 8.2 and 13 of Accounting Standard 4 on Contingencies and Events Occurring
after the Balance Sheet Date, Assets and Liabilities should be adjusted for events occurring after the balance
sheet date that provide additional evidence to assist estimation of amounts relating to conditions existing at
the balance sheet date. So full provision for bad debt amounting to Rs. 2 lakhs should be made to cover the
loss arising due to the insolvency in the Final Accounts for the year ended 31st March, 2003. It is because
earthquake took place before the balance sheet date. Had the earthquake taken place after 31st March, 2003,
then mere disclosure required as per para 15, would have been sufficient.
9. A company has filed a legal suit against the debtor from whom Rs. 15 lakh is recoverable as on 31.3.2012. The
chances of recovery by way of legal suit are not good as per legal opinion given by the counsel in April, 2012.
Can the company provide for full amount of Rs. 15 lakhs as provision for doubtful debts? Discuss in detail.
Answer:- As per para 13 of AS 4 “Contingencies and Events Occurring After the Balance Sheet Date”,
assets and liabilities should be adjusted for events occurring after the balance sheet date that provide
additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet
date. In the given case, company should make the provision for doubtful debts, as legal suit has been filed on
31st March, 2012 and the chances of recovery from the suit are not good. Though, the actual result of legal
suit will be known in future yet situation of non-recovery from the debtors exists before finalisation of
financial statements. Therefore, provision for doubtful debts should be made for the year ended on 31st
March, 2012.
10. In X Co. Ltd., theft of cash of Rs. 5 lakhs by the cashier in January, 2013 was detected only in May, 2013.
The accounts of the company were not yet approved by the Board of Directors of the company.
Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31.3.2013.
Decide.
Answer:- As per paragraph 13 of AS 4 (revised) ‘Contingencies and Events occurring after the Balance
Sheet Date’, an event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes.
If a fraud of the accounting period is detected after the balance sheet date but before approval of the financial
statements, it is necessary to recognize the loss amounting Rs. 5,00,000 and adjust the accounts of the
company for the year ended 31st March, 2013.
11. AS 4 prescribes that adjustments to assets and liabilities are required for events occurring after the Balance
Sheet date that provide additional information materially affecting the determination of the amount relating
to conditions existing at the Balance sheet date-generally called adjusting events. “Proposed Dividend” is
shown and adjusted in the Balance Sheet even if it is not an adjusting event as per AS 4 because it is
proposed by the Board of Directors of the company after the Balance sheet date.
Keeping this in view, is it not a violation of AS 4 to show proposed dividends as current liabilities and
provisions? Comment.
Answer: As per para 8.5 of AS-4, There are events which, although they take place after the balance sheet
date, are sometimes reflected in the financial statements because of statutory requirements or because of their
special nature. For example, if dividends are declared after the balance sheet date but before the financial
statements are approved for issue, the dividend are not recognised as a liability at the balance sheet date
because no obligation exist at that time unless a statute requires otherwise. Such dividends are disclosed in
notes.
Further as per Para 14 of AS-4 If an enterprise declares dividends to shareholders after the balance sheet
date, the enterprise should not recognise those dividends as a liability at the balance sheet date unless a
statute requires otherwise. Such dividends should be disclosed in notes.
So in the given question proposed dividend shall be disclosed into notes to account.
12. Neel Limited has its corporate office in Mumbai and sells its products to stockists all over India. On 31 st
March, 2013 the company want to recognize receipt of cheques bearing date 31st March, 2013 or before, as
“Cheques in Hand” by reducing “Trade Receivables”. The “Cheques in Hand” is shown in the Balance Sheet
as an item of cash and cash equivalents. All cheques are presented to the bank in the month of April 2013
and are also realized in the same month in normal course after deposit in the bank. State with reasons,
whether each of the following is an adjusting event and how this fact is to be disclosed by the company, with
reference to the relevant accounting standard
(i) Cheques collected by the marketing personnel of the company from the stockists on or before 31st
March, 2013.
(ii) Cheques sent by the stockists through Courier on or before 31st March 2013.
Answer:
(i) Cheques collected by the marketing personnel of the company is an adjusting event as the marketing
personnel are employees of the company and therefore, are representatives of the company. Handing
over of cheques by the stockist to the marketing employees discharges the liability of the stockist.
Therefore, cheques collected by the marketing personnel of the company on or before 31st March, 2013
require adjustment from the stockists’ accounts i.e. from ‘Trade Receivables A/c’ even though these
cheques (dated on or before 31st March, 2013) are presented in the bank in the month of April, 2013 in
the normal course. Hence, collection of cheques by the marketing personnel is an adjusting event as per
AS 4 ‘Contingencies and Events Occurring after the Balance Sheet Date’. Such ‘cheques in hand’ will be
shown in the Balance Sheet as ‘Cash and Cash equivalents’ with a disclosure in the Notes to accounts
about the accounting policy followed by the company for such cheques.
(ii) Even if the cheques bear the date 31st March or before and are sent by the stockists through courier on or
before 31st March, 2013, it is presumed that the cheques will be received after 31st March. Collection of
cheques after 31st March, 2013 does not represent any condition existing on the balance sheet date i.e.
31st March. Thus, the collection of cheques after balance sheet date is not an adjusting event. Cheques
that are received after the balance sheet date should be accounted for in the period in which they are
received even though the same may be dated 31st March or before as per AS 4. Moreover, the collection
of cheques after balance sheet date does not represent any material change affecting financial position
of the enterprise, so no disclosure in the Director’s Report is necessary.
13. State with reasons, how the following events would be dealt with in the financial statements of Pradeep Ltd.
for the year ended 31st March, 2013:
(i) An agreement to sell a land for ₹ 30 lakh to another company was entered into on 1st March, 2013. The
value of land is shown at ₹ 20 lakh in the Balance Sheet as on 31st March, 2012. However, the Sale
Deed was registered on15th April, 2013.
(ii) The negotiation with another company for acquisition of its business was started on 2nd February, 2013.
Pradeep Ltd. invested ₹ 40 lakh on 12th April, 2013.
Answer:
(i) According to AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, assets and
liabilities should be adjusted for events occurring after the balance sheet date that provide
additional evidence to assist the estimation of amounts relating to conditions existing at the balance
sheet date.
In the given case, sale of immovable property was carried out before the closure of the books of
accounts. This is clearly an event occurring after the balance sheet date but agreement to sell was
effected on 1st March, 2013 i.e. before the balance sheet date. Registration of the sale deed on 15th April,
2013, simply provides additional information relating to the conditions existing at the balance sheet date.
Therefore, adjustment to assets for sale of land is necessary in the financial statements of Pradeep Ltd.
for the year ended 31st March, 2013.
(ii) AS 4 (Revised) defines "Events occurring after the balance sheet date" as those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Board of Directors in the case of a company. Accordingly, the
acquisition of another company is an event occurring after the balance sheet date. However, no
adjustment to assets and liabilities is required as the event does not affect the determination and the
condition of the amounts stated in the financial statements for the year ended 31st March, 2013.
Applying provisions of the standard which clearly state that/disclosure should be made in the report of
the approving authority of those events occurring after the balance sheet date that represent material
changes and commitments affecting the financial position of the enterprise, the investment of ₹ 40 lakhs
in April, 2013 in the acquisition of another company should be disclosed in the report of the Board of
Directors to enable users of financial statements to make proper evaluations and decisions.
14. In its Final Accounts for the year ended 31st March, 2014, Z Ltd. made a provision of 3% of its total debtors.
On 10th March, 2014, a debtor of ₹ 5 lakhs suffered a heavy loss and became insolvent in April 2014. The
loss was not insured. State giving reasons, if the company may provide for the full loss in its accounts for the
year ended 31st March, 2014.
Answer: According to para 8.2 of Accounting Standard 4 “Contingencies and Events Occurring after the
Balance Sheet Date”, adjustments to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the determination of the amounts relating
to conditions existing at the balance sheet date.
In the given case, though the debtor became insolvent after balance sheet date, yet he had suffered heavy loss
(not covered by the insurance), before the balance sheet date and this loss was the cause of the insolvency of
the debtor.
Therefore the company must make full provision for bad debts amounting ₹ 5 lakhs in its final accounts for
the year ended 31st March, 2014.
15. With reference to AS 4 "Contingencies and events occurring after the balance sheet date", state whether the
following events will be treated as contingencies, adjusting events or non-adjusting events occurring after
balance sheet date in case of a company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5 th April, 5 days after the year end. However, the
assets are fully insured and the books have not been approved by the Directors.
(ii) A suit against the company's advertisement was filed by a party on 10 th April, 10 days after the year end
claiming damages of ₹ 20 lakhs.
(iii) It sends a proposal to sell an immovable property for ₹ 30 lakhs in March. The book value of the
property is ₹ 20 lakhs as on year end date. However, the deed was registered as on 15th April.
(iv) The terms and conditions for acquisition of business of another company have been decided by March
end. But the financial resources were arranged in April and amount invested was ₹ 40 lakhs.
(v) Theft of cash of ₹ 2 lakhs by the cashier on 31st March but was detected the next day after the financial
statements have been approved by the Directors.
Answer: According to AS 4 on ‘Contingencies and Events Occurring after the Balance Sheet Date‘,
adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide
additional information materially affecting the determination of the amounts relating to conditions existing at
the balance sheet date. However, adjustments to assets and liabilities are not appropriate for events occurring
after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date.
―Contingencies used in the Standard is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur.
(i) Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore, the event
becomes immaterial and the event is non-adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date. However, in the given
case, suit was filed against the co mpany‘s advertisement by a party on 10th April for amount of ₹ 20
lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event.
(iii) In the given case, proposal for deal of immovable property was sent before the closure of the books of
accounts. This is a non-adjusting event as only the proposal was sent and no agreement was effected in
the month of March i.e. before the balance sheet date.
(iv) As the term and conditions of acquisition of business of another company had been decided by the end
of March, acquisition of business is an adjusting event occurring after the balance sheet date.
Adjustment to assets and liabilities is required since the event affects the determination and the
condition of the amounts stated in the financial statements for the financial year ended on 31st March.
(v) Since the financial statements have been approved before detection of theft by the cashier of ₹ 2,00,000,
it becomes a non-adjusting event and no disclosure is required in the report of the Approving Authority.
16. The Board of Directors of M/s. New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered
and approved the Audited Financial results along with Auditors Report for the Financial Year ended 31st
March, 2017 and recommended a dividend of ₹ 2 per equity share (on 2 crore fully paid up equity shares of ₹
10 each) for the year ended 31st March, 2017 and if approved by the members at the forthcoming Annual
General Meeting of the company on 18th June, 2017, the same will be paid to all the eligible shareholders.
Answer:- As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet
Date” vide Companies (Accounting Standards) Amendments Rules, 2016 dated 30 th March, 2016, the
events which take place after the balance sheet date, are sometimes reflected in the financial statements
because of statutory requirements or because of their special nature.
However, dividends declared after the balance sheet date but before approval of financial statements are not
recognized as a liability at the balance sheet date because no statutory obligation exists at that time. Hence
such dividends are disclosed in the notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends are to be
disclosed in the notes to financial statements. Accordingly, the dividend of ₹ 4 crores recommended by New
Graphics Ltd. in its Board meeting on 18 th April, 2017 shall not be accounted for in the books for the year
2016 -17 irrespective of the fact that it pertains to the year 2016-17 and will be paid after approval in the
Annual General Meeting of the members / shareholders.
17. For six companies whose financial year ended on 31st March, 2014, the financial statements were approved
by their approving authority on 15th June, 2014. During 2014-15, the following material events took place:
a. A Ltd. sold a major property which was included in the balance sheet at Rs. 1,00,000 and for which
contracts had been exchanged on 15th March, 2014. The sale was completed on 15th May, 2014 at a
price of Rs. 2,50,000.
b. On 31st May, 2014, the mail order activities of C Ltd. (a retail trading group) were shut down with
closure costs amounting to Rs. 2.5 million.
c. On 1st July, 2014 the discovery of sand under D Ltd.'s major civil engineering contract site causes the
cost of the contract to increase by 25% for .which there would be no corresponding recovery from the
customer.
d. A fire, on 2nd April, 2014, completely destroyed a manufacturing plant of E Ltd. It was expected that the
loss of Rs. 10 million would be fully covered by the insurance company.
e. A claim for damage amounting to Rs. 8 million for breach of patent had been received by F Ltd. prior to
the year-end. It is the director's opinion, backed by legal advice that the claim will ultimately prove to be
baseless. But it is still estimated that it would involve a considerable expenditure on legal fees.
f. The change in foreign exchange rate of 8% between 1st April, 2014 and 1st June, 2014 has resulted in G
Ltd.'s foreign assets being reduced by Rs. 1.3 million.
You are required to state with reasons, how each of the above items numbered (a) to (g) should be dealt with
in the financial statement of the various companies for the year ended 31st March, 2014.
Answer:-Treatment as per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’
a. A Ltd. The sale of property should be treated as an adjusting event since contracts had been exchanged
prior to the year-end. The effect of the sale would be reflected in the financial statements ended on
31.3.2014 and the profit on sale of property Rs. 1,50,000 would be treated as an extraordinary item.
b. C Ltd. A closure not anticipated at the year-end would be treated as a non-adjusting event.
Memorandum disclosure would be required for closure of mail order activities since non disclosure
would affect user's understanding of the financial statements.
c. D Ltd. The event took place after the financial statements were approved by the approving authority and
is thus outside the purview of AS 4. However, in view of its significance of the transaction, the directors
may consider publishing a separate financial statement/additional statement for the attention of the
members in general meeting.
d. E Ltd. The event is a non adjusting event since it occurred after the year-end and does not relate to the
conditions existing at the year-end. However, it is necessary to consider the validity of the going concern
assumption having regard to the extent of insurance cover. Also, since it is said that the loss would be
fully recovered by the insurance company, the fact should be disclosed by way of a note to the financial
statements.
e. F Ltd. On the basis of evidence provided, the claim against the company will not succeed. Thus, Rs. 8
million should not be provided in the account, but should be disclosed by means of a contingent liability
with full details of the facts as per AS 9. Provision should be made for legal fee expected to be incurred
to the extent that they are not expected to be recovered.
f. G Ltd. The change in exchange rates is a non adjusting event since it does not relate to the conditions
existing at the balance sheet date. However, they may be of such significance that they may require a
disclosure in the report of the approving authority to enable users of financial statements to make proper
evaluations and decisions.
18. As per the provision of AS 4, you are required to state with reason whether the following transactions are
adjusting event or non-adjusting event for the year ended 31.03.2021 in the books of NEW Ltd. (accounts of
the company were approved by board of directors on 10.07.2021):
1. Equity Dividend for the year 2020-21 was declared at the rate of 7% on 15.05.2021.
2. On 05.03.2021, ₹ 53,000 cash was collected from a customer but not deposited by the cashier. This fraud
was detected on 22.06.2021.
3. One building got damaged due to occurrence of fire on 23.05.221. Loss was estimated to be ₹ 81,00,000.
Solution:
(i) If dividends are declared after the balance sheet date but before the financial statements are approved,
the dividends are not recognized as a liability at the balance sheet date because no obligation exists at
that time unless a statute requires otherwise. Such dividends are disclosed in the notes. Thus, no liability
for dividends needs to be recognized in financial statements for financial year ended 31 st March, 2021
and declaration of dividend is non-adjusting event.
(ii) As per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’ an event occurring after
the balance sheet date may require adjustment to the reported values of assets, liabilities, expenses or
incomes if such events relate to conditions existing at the balance sheet date. In the given case, fraud of
the accounting period is detected after the balance sheet date but before approval of the financial
statements, it is necessary to recognize the loss. Thus loss amounting ₹ 53,000 should be adjusted in the
accounts of the company for the year ended 31st March, 2021 as it is adjusting event.
(iii) AS 4 states that adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet date. The
damage of one building due to fire did not exist on the balance sheet date i.e. 31.3.2021. Therefore, loss
occurred due to fire is not to be recognized in the financial year 2020-2021 as it is non-adjusting event.
However, according to the standard, unusual changes affecting the existence or substratum of the enterprise
after the balance sheet date may indicate a need to consider the use of fundamental accounting assumption of
going concern in the preparation of the financial statements. As per the information given in the question, the
fire has caused major destruction; therefore, fundamental accounting assumption of going concern would
have to be evaluated. Considering that the going concern assumption is still valid, the fact of fire together
with an estimated loss of ₹ 81 lakhs should be disclosed in the report of the approving authority for financial
year 2020 -21 to enable users of financial statements to make proper evaluations and decisions.
19.
(i) A Ltd. entered into an agreement to sell its Plot, which is included in the Balance Sheet at ₹ 15 Lakhs,
to B Ltd. for ₹ 50 Lakhs. The agreement to sell was concluded on 15th March, 2021 and the Sale deed
was registered on 4th May, 2021.
(ii) Cheque Collected by Company’s employee from Company’s Trade Receivables on or before 31st
March,2021 were presented for payment on 02.04.2021.
(iii) The company declared a dividend of 15% on its share capital of ₹ 20 crores for the F.Y. 2020-21 on
10.05.2021 .
(iv) A Major fire broke out in the factory premises on 05.04.2021 and destroyed machinery worth about ₹ 5
crores.
The financial statement for the F.Y. 2020-2021 were approved by the board on 15th June, 2021. How will
you treat the above in the Balance Sheet of A Ltd. as on 31st March, 2021 in accordance with AS-4?
Solution:
(i) According to AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, assets and
liabilities should be adjusted for events occurring after the balance sheet date that provide additional
evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date. In
the given case, sale of immovable property was carried out before the closure of the books of accounts.
This is clearly an event occurring after the balance sheet date but agreement to sell was effected on 15th
March, 2021 i.e. before the balance sheet date. Registration of the sale deed on 4th May, simply provides
additional information relating to the conditions existing at the balance sheet date. Therefore, adjustment
to assets for sale of immovable property is necessary in the financial statements for the year ended 31st
March, 2021.
(ii) Cheques that are received before the balance sheet date should be accounted for in the period in which
they are received even though the same may be collected in the next financial year. Moreover, the
collection of cheques after balance sheet date does not represent any material change affecting financial
position of the enterprise on the balance sheet date, so no disclosure is necessary. The Cheque in hand is
shown in balance sheet as an item of cash and cash equivalents and the same will be deducted from trade
receivables.
(iii) If dividends are declared after the balance sheet date but before the financial statements are approved,
the dividends are not recognized as a liability at the balance sheet date because no obligation exists at
that time unless a statute requires otherwise. Such dividends are disclosed in the notes. Thus, no liability
for dividends needs to be recognized in financial statements for financial year ended 31st March, 2021
and declaration of dividend is non-adjusting event.
(iv) AS 4 states that adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet date. The
damage of factory premises due to fire did not exist on the balance sheet date i.e. 31.3.2021. Therefore,
loss occurred due to fire is not to be recognized in the financial year 2020-2021. However, according to
the standard, unusual changes affecting the existence or substratum of the enterprise after the balance
sheet date may indicate a need to consider the use of fundamental accounting assumption of going
concern in the preparation of the financial statements. As per the information given in the question, the
fire has caused major destruction; therefore, fundamental accounting assumption of going concern would
have to be evaluated. Considering that the going concern assumption is still valid, the fact of fire
together with an estimated loss of ₹ 5 crores should be disclosed in the report of the approving authority
for financial year 2020 - 21 to enable users of financial statements to make proper evaluations and
decisions. Otherwise the loss will have to be treated as adjusting event.
20. A case is going on between ABC Ltd. and Tax department on claiming the exemption for certain items, for
the year 2019-2020. The court has issued the order on 15th April and rejected the claim of the company.
Accordingly, company is liable to pay the additional tax. The financial statements were approved on 31st
May, 2020. Shall company account for such tax in the year 2019-2020 or shall it account for in the year
2020-2021?
Solution: To decide whether, the event is adjusting or not adjusting two conditions need to be satisfied,
(a) There has to be evidence
(b) The event must have been related to period ending on reporting date.
Here both the conditions are satisfied. Court order is a conclusive evidence which has been received before
approval of the financial statements since the liability is related to earlier year. The event will be considered
as an adjusting event and accordingly the amount will be adjusted in accounts of 2019-2020.
21. Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the year ended
31st March 2020 are to be approved by the approving authority on 30th June 2020. During the first quarter of
2020-2021, the following events / transactions has taken place. The accountant of the company seeks your
guidance for the following:
(i) Tee Ltd. has an inventory of 50 stitching machines costing at Rs. 5,500 per machine as on 31st March
2020. The company is expecting a heavy decline in the demand in next year. The inventories are valued
at cost or net realizable value, whichever is lower. During the month of April 2020, due to fall in
demand, the prices have gone down drastically. The company has sold 5 machines during April, 2020 at
a price of Rs. 4,000 per machine.
(ii) A fire has broken out in the company's godown on 15th April 2020. The company has estimated a loss of
Rs. 25 lakhs of which 75% is recoverable from the Insurance company.
(iii) A suit against the company's advertisement was filed by a party on 10 th April, 2020 10 days after the
year end claiming damages of Rs. 20 lakhs.
You are required to state with reasons, how the above transactions will be dealt with in the financial
statements for the year ended 31 March 2020.
Solution: Events occurring after the balance sheet date are those significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which the financial statements are
approved by the Board of Directors in the case of a company, and, by the corresponding approving authority
in the case of any other entity. Assets and liabilities should be adjusted for events occurring after the balance
sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing
at the balance sheet date or that indicate that the fundamental accounting assumption of going concern is not
appropriate. In the given case, financial statements are approved by the approving authority on 30 June 2020.
On the basis of above principles, following will be the accounting treatment in the financial statements for
the year ended at 31 March 2020:
(i) Since on 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the stitching
machine. Therefore, decline in the value during April, 2020 will be considered as an adjusting event.
Hence, Tee Ltd. needs to adjust the amounts recognized in its financial statements w.r.t. net realizable
value at the end of the reporting period. Accordingly, inventory should be written down to Rs. 4,000 per
machine. Total value of inventory in the books will be 50 machines x Rs. 4,000 = Rs. 2,00,000.
(ii) A fire took place after the balance sheet date i.e. during 2020-2021 financial year. Hence, the financial
statements for the year 2019-2020 should not be adjusted for loss occurred due to fire. However, in this
circumstance, the going concern assumption will be evaluated. In case the going concern assumption is
considered to be appropriate even after the occurrence of fire, no disclosure of the same is required in
the financial statements.
(iii) The contingency is restricted to conditions existing at the balance sheet date. However, in the given
case, suit was filed against the company’s advertisement by a party on 10th April for amount of Rs. 20
lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
SUMMARY NOTES
AS - 5: NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN
ACCOUNTING POLICIES
The objective of this accounting standard is special disclosure of some specific items into P&L A/c. These
items are of following types
(A) Ordinary activity:

(i) Meaning: Ordinary activities are principal revenue generating activity and ancillary to it.
(ii)Disclosure: These activity should be disclosed separately if either these size or nature or both all material.
(iii) Example of ordinary activities which nature is material
(a) Decline in the value of inventory to NRV as well as reversal.
(b) Any Profit or loss on sale of fixed assets/Long term investments.
(c) legislative changes having retrospective application;
(d) litigation settlements;
(e) Creation of provision.
(f) Reversal of provision.
(B) Extra-ordinary Activity:

(i) Meaning: Extra ordinary Activity are those activity which not ordinary Activity.
(ii) Disclosure: All extra ordinary activity should be disclosed separately.
(iii) Examples of extra ordinary activities:
(a) Any loss due to failure of commitment
(b) Any loss due to fraud.
(c) Loss due to enemy attack, flood, fire etc.
(d) Refund of Govt. Grant.
(e) Attachment of property of the enterprise by government
(C) Prior Period items:

(i) Meaning: Prior period item are those income or expenses which are recorded in current year but pertain
to earlier years but not recorded in the earlier years due to any error or omission whether intentionally or
unintentionally.
(ii) Disclosure: Prior period item should be disclosed always separately.
(iii) Example of items which are considered as prior period item
(a) Wrong calculation of deprecation.
(b) Wrong recording of Inventory i.e. any item of inventory is recorded twice or any item of inventory is
not included while calculating inventory.
(c) Not recording/excess recording/ less recording/ double recording of any income or expenses in
earlier year.
(d) Wrong valuation of Inventory etc.
(iv) Example of items which are not considered as prior period items
(a) Increase in salary with retrospective effect
(b) Retrospective raising demand of VAT by Delhi Govt.
(D) Change in Accounting Estimate: In case there is any change in accounting estimate due to new
information, the effect of such change will be taken on prospective Basis. In case there is any change in
accounting estimate but amount is not quantify then such change will be disclosed into Notes to A/c and
mentioned that amount is not quantified.
Examples of change in accounting estimate.
(a) Estimate Life of assets is change
(b) Change into rate of provision
(c) Provision for Doubtful Debts
(d) Change in valuation technique of inventory etc.
(E) Change in Accounting policy:-

(i) Meaning: Accounting policy are accounting principal and methods of applying those principal,
Accounting principal means solution of accounting problem. (AS-1)
(ii) When Accounting policy can be changed: Accounting policy can be changed in the following cases:-
(a) Any change in law or accounting standard
(b) For true & fair view of financial statement
(c) For better presentation of financial standard
(iii) In case accounting policy is changed then following disclose are required:-
(a) Old policy
(b) New policy
(c) Reason of change in policy
(d) Impact of such change on P & L A/c.
(iv) Example: Change in cost formula in measuring the cost of inventories.
Note:-In case it is not possible to identify whether change in accounting estimate or policy assume change in
accounting estimate.
Practical Questions
1. A company signed an agreement with the Employees Union on 1.9.2007 for revision of wages with
retrospective effect from 30.9.2006. This would cost the company an additional liability of Rs. 5,00,000 per
annum. Is a disclosure necessary for the amount paid in 2007-08?
Answer:- It is given that revision of wages took place on 1st September, 2007 with retrospective effect from
30.9.2006. Therefore wages payable for the half year from 1.10.2006 to 31.3.2007 cannot be taken as an
error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a
prior period item. Additional wages liability of Rs. 7,50,000 (for 1½ years @ Rs. 5,00,000 per annum)
should be included in current year’s wages.
It may be mentioned that additional wages is an expense arising from the ordinary activities of the company.
Although abnormal in amount, such an expense does not qualify as an extraordinary item. However, as per
para 12 of AS 5 (Revised), when items of income and expense within profit or loss from ordinary activities
are of such size, nature or incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed separately.
2. A limited company created a provision for bad and doubtful debts at 2.5% on debtors in preparing the
financial statements for the year 2008-2009. Subsequently on a review of the credit period allowed and
financial capacity of the customers, the company decided to increase the provision to 8% on debtors as on
31.3.2009. The accounts were not approved by the Board of Directors till the date of decision. While
applying the relevant accounting standard can this revision be considered as an extraordinary item or prior
period item?
Answer: This change in estimate is neither a prior period item nor an extraordinary item. However, as per
para 27 of AS 5 (Revised), a change in accounting estimate which has material effect in the current period,
should be disclosed and quantified. Any change in the accounting estimate which is expected to have a
material effect in later periods should also be disclosed.
3. M/s Dinesh & Company signed an agreement with workers for increase in wages with retrospective effect.
The outflow on account of arrears was for 2008-09 —Rs. 10.00 lakhs, for 2009-10 — Rs. 12.00 lakhs and
for 2010-11 — Rs. 12.00 lakhs. This amount is payable in September, 2011. The accountant wants to
chargers Rs. 22.00 lakhs as prior period charges in financial statement for 2011-12. Discuss.
Answer:- According to AS 5 (Revised) “Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies”, the term prior period item refers only to income or expenses which arise in the current
period as a result of errors or omission in the preparation of the financial statements of one or more prior
periods. The term does not include other adjustments necessitated by circumstances, which though related to
prior periods are determined in the current period. The full amount of wage arrears paid to workers will be
treated as an expense of current year and it will be charged to profit and loss account as current expenses and
not as prior period expenses.
It may be mentioned that additional wages is an expense arising from the ordinary activities of the company.
Although abnormal in amount, such an expense does not qualify as an extraordinary item. However, as per
Para 12 of AS 5 (Revised), when items of income and expense within profit or loss from ordinary activities
are of such size, nature or incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed separately.
4. During the year 2001-2002, a medium size manufacturing company wrote down its inventories to net
realizable value by Rs. 5, 00,000. Is a separate disclosure necessary?
Answer:- Although the case under consideration does not relate to extraordinary item, but the
nature and amount of such item may be relevant to users of financial statements in understanding
the financial position and performance of an enterprise and in making projections about financial
position and performance. Para 12 of AS 5 (Revised in 1997) on Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies states that:
“When items of income and expense within profit or loss from ordinary activities are of such size,
nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the
period, the nature and amount of such items should be disclosed separately.”
Circumstances which may give to separate disclosure of items of income and expense in accordance with
para 12 of AS 5 include the write-down of inventories to net realisable value as well as the reversal of
such write-downs.
5. A Limited Company finds that the stock sheets as on 31.3.97 had included twice an item the cost of
which was Rs. 20,000. You are asked to suggest, how the error would be dealt with in the accounts of
the year ended 31.3.98
Answer: The error in the recording of closing stock of the year ended 31st March, 1997 must have also
resulted in overstatement of profits of previous year, b rought forward to the current year ended 31st
March, 1998. Vide para 4 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies, the rectifications as required in the current year are 'Prior
Period Items '. Accordingly, Rs. 20,000 should be deducted from opening stock in the profit and loss
account. And Rs. 20,000 should be charged as prior period adjustment in the profit and loss account for
the year ended 31st March 1998 in accordance with para 15 of AS 5 (Revised) which requires that the
nature and amount of prior period items should be separately disclosed in the statement of profit and loss
in a manner that their impact on the current profit or loss can be perceived.
6. State, how you will deal with the following matters in the accounts of U Ltd. for the year ended 31st March,
2012 with reference to Accounting Standard:
The company finds that the stock sheets of 31.3.2011 did not include two pages containing details of
inventory worth Rs. 14.5 lakhs.
Answer:- Paragraph 4 of Accounting Standard 5 on “Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies”, defines Prior Period items as "income or expenses which arise in the
current period as a result of errors or omissions in the preparation of the financial statements of one or more
prior periods”.
Rectification of error in stock valuation is a prior period item vide Para 4 of AS 5.
Rs. 14.5 lakhs must be added to the opening stock of 1/4/2011. It is also necessary to show Rs. 14.5 lakhs as
a prior period adjustment in the Profit and loss Account below the line.
Separate disclosure of this item as a prior period item is required as per Para 15 of AS 5.
7. S.T.B. Ltd. makes provision for expenses worth Rs. 7,00,000 for the year ending March 31, 2009, but the
actual expenses during the year ending March 31, 2010 comes to Rs. 9,00,000 against provision made during
the last year. State with reasons whether difference of Rs. 2,00,000 is to be treated as prior period item as per
AS-5.
Answer:- As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies’, as a result of the uncertainties inherent in business activities, many financial statement items
cannot be measured with precision but can only be estimated. The estimation process involves judgments
based on the latest information available. The use of reasonable estimates is an essential part of the
preparation of financial statements and does not undermine their reliability.
Estimates may have to be revised, if changes occur regarding the circumstances on which the estimate was
based, or as a result of new information, more experience or subsequent developments.
As per the standard, the effect of a change in an accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. Prior period items
are income or expenses which arise in the current period as a result of errors or omissions in the preparation
of the financial statements of one or more prior periods. Thus, revision of an estimate by its nature i.e. the
difference of Rs. 2 lakhs, is not a prior period item.
Therefore, in the given case expenses amounting Rs. 2,00,000 (i.e. Rs. 9,00,000 – Rs. 7,00,000) relating to
the previous year recorded in the current year, should not be regarded as prior period item.
8. Goods of Rs.5,00,000 were destroyed due to flood in September, 2006. A Claim was lodged with insurance
company. But no entry was passed in the books for insurance claim. In March, 2009, the claim was passed
and the company received a payment of Rs.3,50,000 against the claim. Explain the treatment of such receipt
in final accounts for the year ended 31st March, 2009.
Answer. As per provisions of AS 5 “Net Profit or Loss for the period, prior period items and
changes in accounting policies”, prior period items are income or expenses, which arise, in the current
period as a result of error or omissions in the preparation of financial statements of one or more
prior periods. Further, the nature and amount of prior period items should be separately disclosed in
the statement of profit and loss in a manner that their impact on current profit or loss can be perceived.
In the given example, it is clearly a case of error in preparation of financial statement for financial year
2006-07. Hence, claim received in financial year 2008-09 is a prior period items and should be separately
disclosed in the statement of Profit and Loss.
9. Briefly explain, as per relevant Accounting Standard:
ABC Ltd. was making provision for non-moving stocks based on no issues for the last 12 months upto
31.3.2002.
The company wants to provide during the year ending 31.3.2003 based on technical evaluation:
Total value of stock Rs. 100 lakhs
Provision required based on 12 months issue Rs. 3.5 lakhs
Provision required based on technical evaluation Rs. 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of provision?
OR
XY Ltd. was marking provisions for non-moving stocks based on no issues for the last 12 months upto
31.3.08. Based on technical evaluation the company wants to make previsions during the year 31.3.09.
Total value of stock – Rs. 150 lakhs.
Provisions required based on 12 months issue Rs. 4.0 lakhs.
Provisions required based on technical evaluation Rs. 3.20 lakhs.
Does this amount to change in accounting policy? Can the company change the method of provision?
Answer:- The decision of making provision for non-moving stocks on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a company may
require that provision for non-moving stocks should be made. The method of estimating the amount of
provision may be changed in case a more prudent estimate can be made.
In the given case, considering the total value of stock, the change in the amount of required provision of
non-moving stock from Rs.3.5 lakhs to Rs.2.5 lakhs is also not material. The disclosure can be made for
such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for
the year 2002 -03:
“The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding
years. Had the same method been followed as in the previous year, the profit for the year and the
corresponding effect on the year end net assets would have been higher by Rs.1 lakh.”
10. Closing stock for the year ending on 31.03.2010 is Rs. 50,000 which includes stock damaged in a fire in
2008-09. On 31.3.2009, the estimated NRV of the damaged stock was Rs. 12,000. The revised estimate of
NRV of damaged goods amounting Rs. 4,000 has been included in closing stock of Rs. 50,000 as on
31.03.2010.
Find the value of closing stock to be shown in the profit & loss account.
Answer: The fall in estimated net realisable value of damaged stock ₹ 8,000 is the effect of change in
accounting estimate. As per para 25 of AS 5 ‘Net Profit or Loss the Period, Prior Period Items and Changes
in Accounting Policies’, the effect of a change in accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. It is presumed that
the loss by fire in the year ended 31.3.2009, i.e. difference of cost and NRV was shown in the profit and loss
account as an extra-ordinary item. Therefore, in the year 2009-10, revision in accounting estimate should
also be classified as extra-ordinary item in the profit and loss account and closing stock should be shown
excluding the value of damaged stock.
Value of closing stock for the year 2009-10 will be as follows:
₹
Closing Stock (including damaged goods) 50,000

Less: Revised value of damaged goods (4,000)
Closing stock (excluding damaged goods) 46,000
11. In preparing the Financial Statements of Santhanam Ltd. for the year ended 31st March, 2009, you come
across the following features. State with reasons, how you would deal with them in the Financial Statements:
There was a major theft of stores valued at Rs.46 lakhs in the preceding year which was detected only during
the current financial year.
Answer: Due to major theft of stores in the preceding year (2007-08) which was detected only during the
current financial year (2008-09), there was overstatement of closing stock of stores in the preceding year.
This must have also resulted in the overstatement of profits of previous year, brought forward to the current
year. The adjustments are required to be made in the current year as 'Prior Period Items' as per AS 5
(Revised) “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.
Accordingly, the adjustments relating to both opening stock of the current year and profit brought forward
from the previous year should be separately disclosed in the statement of profit and loss together with their
nature and amount in a manner that their impact on the current profit or loss can be perceived. The disclosure
as to the theft and the resulting loss is required in the notes to the accounts for the current year i.e, year ended
31st March, 2009.
12. Shama was working with ABC Ltd. drawing monthly salary of Rs. 25,000 per month. She went on
maternity leave with pay for 7 months i.e. from 1-01-2017 to 31-7-17. Her salary for 3 months was not
provided for in financial statements for F.Y. 2016-17 due to omission. When she joined after leave
period, the whole salary for 7 months was paid to her. You are required to:
(i) Pass the necessary journal entries in F.Y. 2017-18 to record the above transaction as per accounting
standard-5 and state reason for the same.
(ii) Would the treatment have been different, if Shama was terminated on 01-01-2017 and was
reinstated in service by the court w.e.f. 01-08-2017 with instruction to pay Shama salary for the
intervening period i.e. 1-01- 2017 to 31-07-2017.
Solution: As per AS 5 “Net Profit or Loss for the Period”, Prior Period Items and Changes in Accounting
Policies, the term ‘prior period items’, refers to income or expenses which arise in the current period as a
result of errors or omissions in the preparation of the financial statements of one or more prior periods. The
nature and amount of prior period items should be separately disclosed in the statement of profit and loss so
that their impact on the current profit or loss can be perceived. Hence, in this case salary paid to Shama for 3
months i.e 1.1.2017 to 31.3.2017 Rs. 75,000 will be classified as prior period item in FY 2017-18 and
following journal entry shall be passed:
(i) Journal entry in FY 2017-18
Salary A/c (Rs 25,000 x 4) Dr. 1,00,000
Prior period item (Rs 25,000 x 3) Dr. 75,000
(Salary related to 7 months paid out of which 3’months’ salary is prior period item)
Alternative Entry
Salary A/c (prior period item) Dr. 75,000
To Bank A/c 75,000
(Salary related to 3 months i.e. January, 2017 to March 2017 paid in 2017-2018)
Salary A/c Dr. 1,00,000

(Salary related to 4 months paid on 1.8.2017 for April to July, 2017)
(ii) AS 5 inter alia states that the term ‘prior period items’ does not include other adjustments
necessitated by circumstances, which though related to prior periods, are determined in the current
period. Accordingly, in the second case though Shama was terminated on 1.1.2017 i.e. in 2016-
2017, yet she was reinstated due to court’s order in 2017-2018, with the instruction by the court to
pay the salary for the intervening period i.e. with retrospective effect from January, 2017. The
adjustment of salary of Rs. 75,000 (for January 2017 to March, 2017) would not be considered as
prior period item and will be accounted for in the books as current year expense. Thus the entire
amount of Salary of Rs. 1,75,000 for January, 2017 to July, 2017 is a current year expense only.
Salary A/c (Rs 25,000 x 7) Dr. 1,75,000
(Salary related to 7 months paid i.e. for the period 1.1.2017 to 31.7.2017)
13. A company created a provision of Rs. 75,000 for staff welfare while preparing the financial statements for
the year 2007-08. On 31st March, in a meeting with staff welfare association, itwas decided to increase the
amount of provision for staff welfare to Rs. 1,00,000. The accounts were approved by Board of Directors on
15th April, 2008.
Explain the treatment of such revision in financial statements for the year ended 31st March, 2008.
Answer:- As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies”, the change in amount of staff welfare provision amounting Rs. 25,000 is neither a prior period
item nor an extraordinary item. It is a change in estimate, which has been occurred in the year 2007-2008.
As per the provisions of the standard, normally, all items of income and expense which are recognised in a
period are included in the determination of the net profit or loss for the period. This includes extraordinary
items and the effects of changes in accounting estimates. However, the effect of such change in accounting
estimate should be classified using the same classification in the statement of profit and loss, as was used
previously, for the estimate.
14. An extract from the statement profit and loss of a company for 2012-13 is given below:
Rs. 000 Rs. 000
Sales 3,000
Opening stock 500
Production cost 2,800
3,300
Less: Closing Stock (600) (2,700)
Gross Profit 300

Expenses (250)
Profit before tax 50
Tax 20
Profit after tax 30
The closing stock includes stock damaged in a fire in 2011-12. On 31/03/12, the estimated net realisable
value of this stock was Rs. 15,000. The revised estimate of net realisable value included in closing stock of
2012-13 is Rs. 5,000. Rewrite the statement of profit and loss if necessary to comply with requirements of
AS 5.
Answer:- The fall in estimated net realisable value of damaged stock Rs. 10,000 is the effect of change in
accounting estimate. As per paragraph 25 of the standard, the effect of a change in accounting estimate
should be classified using the same classification in the statement of profit and loss as was used previously
for the estimate.
The difference between cost of the stock and its net realisable value after fire was presumably classified as
loss on fire in 2011-12. The loss on fire is an extraordinary item. Since paragraph 25 does not permit change
in classification, the fall in net realisable value of damaged stock Rs. 10,000 should be classified as extra
ordinary item in 2011-12 as well.
Paragraph 8 of the standard requires the extraordinary items to be disclosed in such manner that their impact
on current profit or loss can be perceived. To comply with this requirement, enterprises should present
profit/loss before and after extraordinary items.
Rs. 000
Rs. 000
Sales 3,000
Opening stock (500 – 15) 485
Production cost 2,800
3,285
Less: Closing Stock (600 – 5) (595) (2,690)
Gross Profit 310
Expenses 250
Profit before loss on fire 60
Less: Loss on fire (10)
Profit before tax 50
Tax 20
Profit after tax 30
15. How would you deal with the following in the annual accounts of a company for the year ended.
(a) The company has to pay delayed cotton clearing charges over and above the negotiated price for
taking delayed delivery of cotton from the Suppliers' Godown. Upto 1994 -95, the company has
regularly included such charges in the valuation of closing stock. This being in the nature of
interest the company has decided to exclude it from closing stock valuation for the year 1995-96.
This would result into decrease in profit by Rs. 7.60 lakhs.
Answer: Para 29 of AS 5 (Revised) ‘Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies” states that a change in an accounting policy should be made only if
the adoption of a different accounting policy is required by statute or for compliance with an
accounting standard or if it is considered that the change would result in a more appropriate presentation
of the financial statements of an enterprise. Therefore the change in the method of stock valuation is
justified in view of the fact that the change is in line with the recommendations of AS 2 (Revised)
‘Valuation of Inventories’ and would result in more appropriate preparation of the financial
statements. As per AS 2, this accounting policy adopted for valuation of inventories including the co
st formulae used should be disclosed in the financial statements.
Also, appropriate disclosure of the change and the amount by which any item in the financial
statements is affected by such change is necessary as per AS 1, AS 2 and AS 5. Therefore, the under
mentioned note should be given in the annual accounts.
"In compliance with the Accounting Standards issued by the ICAl, delayed cotton clearing charges
which are in the nature of interest have been excluded from the valuation of closing stock unlike
preceding years. Had the company continued the accounting practice followed earlier, the value
of closing stock as well as profit before tax for the year would have been higher by Rs. 7.60 lakhs."
(b) Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuel
surcharge of Rs. 5.30 lakhs for the period October, 1990 to September, 1994 has been received
and paid in February, 1995.
Answer: The final bill having been paid in February, 1995 should have been accounted for in the
annual accounts of the company for the year ended 31st March, 1995. How ever it seems that as a result
of error or omission in the preparation of the financial statements of prior period i.e., for the year
ended 31st March 1995, this material charge has arisen in the current period i.e., year ended 31st
March, 1996. Therefore it should be treated as 'Prior period item' as per para 16 of AS 5. As per para
19 of AS 5 (Revised), prior period items are normally included in the determination of net profit or loss
for the current period. An alternative approach is to show such items in the statement of profit
and loss after determination of current net profit or loss. In either case, the objective is to indicate the
effect of such items on the current profit or loss.
It may be mentioned that it is an expense arising from the ordinary course of business. Although
abnormal in amount or infrequent in occurrence, such an expense does not qualify an extraordinary
item as per Para 10 of AS 5 (Revised). For better understanding, the fact that power bill is accounted
for at provisional rates billed by the state electricity board and final adjustment thereof is made as
and when final bill is received may be mentioned as an accounting policy.
16. Closing Stock for the year ending on 31st March, 2013 is ₹ 1,50,000 which includes stock damaged in a fire
in 2011 -12. On 31 st March, 2012, the estimated net realizable value of the damaged stock was ₹ 12,000.
The revised estimate of net realizable value of damaged stock included in closing stock at 2012-13 is ₹
4,000. Find the value of closing stock to be shown in Profit and Loss Account for the year 2012-13, using
provisions of Accounting Standard 5.
Answer: The fall in estimated net realisable value of damaged stock ₹ 8,000 is the effect of change in
accounting estimate. As per para 25 of AS 5 ‘Net Profit or Loss the Period, Prior Period Items and Changes
in Accounting Policies’, the effect of a change in accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. It is presumed that
the loss by fire in the year ended 31.3.2012, i.e. difference of cost and NRV was shown in the profit and loss
account as an extra-ordinary item. Therefore, in the year 2012-13, revision in accounting estimate should
also be classified as extra-ordinary item in the profit and loss account and closing stock should be shown
excluding the value of damaged stock.
Value of closing stock for the year 2012-13 will be as follows:
₹
Closing Stock (including damaged goods) 1,50,000
Less: Revised value of damaged goods (4,000)
Closing stock (excluding damaged goods) 1,46,000
17. During the course of the last three years, a company owning and operating Helicopters lost four
Helicopters. The company Accountant felt that after the crash, the maintenance provision created in respect
of the respective helicopters was no longer required, and proposed to write back to the Profit and Loss
account as a prior period item. Is the Company’s proposed accounting treatment correct? Discuss.
Answer: The balance amount of maintenance provision written back to profit and loss account, no longer
required due to crash of the helicopters, is not a prior period item because there was no error in the
preparation of previous periods’ financial statements. The term ‘prior period items’, as defined in AS 5
(revised) “Net Profit or Loss for the Period, Prior Period Items and Changes In Accounting Policies”, refer
only to income or expenses which arise in the current period as a result of errors or omissions in the
preparation of the financial statements of one or more prior periods. As per paragraph 8 of AS 5,
extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for
the period. The nature and the amount of each extraordinary item should be separately disclosed in the
statement of profit and loss in a manner that its impact on current profit or loss can be perceived. The
amount so written-back (If material) should be disclosed as an extraordinary item as per AS 5.
18. Explain whether the following will constitute a change in accounting policy or not as per AS 5.
(i) Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia
payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired after completing 5 years of
service in the organistaion. Such employees will get pension of Rs. 20,000 per month.
Earlier there was no such scheme of pension in the organization.
(iii) Till the previous year the machinery was depreciated on straight line basis over a period of 5 years.
From current year, the useful life of furniture has been changed to 3 years.
Answer: As per para 31 of AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies’, the adoption of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions, will not be considered as a change in accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-
gratia payments to employees on retirement is not a change in an accounting policy
(ii) Similarly, the adoption of a new accounting policy for events or transactions which did not occur
previously or that were immaterial wil not be treated as a change in an accounting policy.
(iii) Change in useful life of machinery from 5 years to 3 years is a change in estimate and is not a change
in accounting policy.
19. State whether the following items are examples of change in Accounting Policy / Change in Accounting
Estimates / Extraordinary items / Prior period items / Ordinary Activity :
(i) Actual bad debts turning out to be more than provisions.
(ii) Change from Cost model to Revaluation model for measurement of carrying amount of PPE.
(iii) Government grant receivable as compensation for expenses incurred in previous accounting period.
(iv) Treating operating lease as finance lease.
(v) Capitalisation of borrowing cost on working capital.
(vi) Legislative changes having long term retrospective application.
(vii) Change in the method of depreciation from straight line to WDV.
(viii) Government grant becoming refundable.
(ix) Applying 10% depreciation instead of 15% on furniture.
(x) Change in useful life of fixed assets.
Solution: Classification of given items is as follows:
Sr. No. Particulars Remarks
(i) Actual bad debts turning out to be more than Change in Accounting Estimates
provisions
(ii) Change from Cost model to Revaluation model for Change in Accounting Policy
measurement of carrying amount of PPE
(iii) Government grant receivable as compensation for Extra -ordinary Items
expenses incurred in previous accounting period
(iv) Treating operating lease as finance lease. Prior- period Items
(v) Capitalisation of borrowing cost on working capital Prior-period Items (as interest on
working capital loans is not eligible for
capitalization)
(vi) Legislative changes having long term retrospective Ordinary Activity
application
(vii) Change in the method of depreciation from straight line Change in Accounting Estimates
to WDV
(viii) Government grant becoming refundable Extra -ordinary Items
(ix) Applying 10% depreciation instead of 15% on furniture Prior- period Items
(x) Change in useful life of fixed assets Change in Accounting Estimates
20. The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the following
transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2021.
Please advise him in the following situations in accordance with the provisions of relevant Accounting
Standard;
(i) Provision for doubtful debts was created @ 2% till 31st March, 2020. From the Financial year 2020-
2021, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2021, the management has introduced a formal gratuity scheme in
place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a period of 5 years. From
current year, the useful life of furniture has been changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after completing 5 years of
service in the organization. Such employees will get pension of Rs. 20,000 per month. Earlier there was
no such scheme of pension in the organization.
(v) During the year ended 31st March, 2021, there was change in cost formula in measuring the cost of
inventories.
Solution:
(i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March, 2020.
Subsequently in 2020-21, the company revised the estimates based on the changed circumstances and
wants to create 3% provision. Thus change in rate of provision of doubtful debt is change in accounting
estimate and is not a change in accounting policy. This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions, will not be considered as a change in accounting
policy. Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia
payments to employees on retirement is a transaction which is substantially different from the previous
policy, will not be treated as change in accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in accounting estimate and is not a
change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur previously should
not be treated as a change in an accounting policy. Hence the introduction of new pension scheme is not
a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in accounting policy.
21. XYZ Ltd. is in the process of finalizing its account for the year ended 31st March, 2020. The company seeks
your advice on the following:
The company's tax assessment for assessment year 2017-18 has been completed on 14th February, 2020 with
a demand of ₹5.40 crore. The company paid the entire due under protest without prejudice to its right of
appeal. The company files its appeal before the appellate authority wherein the grounds of appeal cover tax
on additions made in the assessment order for a sum of ₹3.70 crore.
Solution: Since the company is not appealing against the addition of ₹ 1.70 crore (₹ 5.40 crore less ₹ 3.70
crore), therefore, the same should be provided/ expensed off in its accounts for the year ended on 31st
March, 2020. However, the amount paid under protest can be kept under the heading ‘Long-term Loans &
Advances / Short-term Loans and Advances’ as the case may be alongwith disclosure as contingent liability
of ₹ 3.70 crore.
22. Bela Ltd. has a vacant land measuring 20,000 sq. mts, which it had no intention to use in the future. The
company decided to sell the land to tide over its liquidity problems and made a profit of ₹10 Lakhs by selling
the said land. Moreover, there was a fire in the factory and a part of the unused factory shed valued at ₹ 8
Lakhs was destroyed. The loss from fire was set off against the profit from sale of land and profit of ₹2 lakhs
was disclosed as net profit from sale of assets. Do you agree with the treatment and disclosure? If not, state
your views.
Solution: As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies” Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or
loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in
the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
In the given case the selling of land to tide over liquidation problems as well as fire in the factory does not
constitute ordinary activities of the Company. These items are distinct from the ordinary activities of the
business. Both the events are material in nature and expected not to recur frequently or regularly. Thus, these
are Extraordinary Items.
Therefore, in the given case, disclosing net profits by setting off fire losses against profit from sale of land is
not correct. The profit on sale of land, and loss due to fire should be disclosed separately in the statement of
profit and loss.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
SUMMARY NOTES
AS 7: CONSTRUCTION CONTRACTS
1. Atul and Rahul procured a Rs. 5,00,000 contract that required 3 years to complete and incurred a total
cost of Rs. 4,05,000. The following data pertain to the construction period:
Year I Year II Year III
Cumulative costs incurred to date 1,50,000 3,60,000 4,05,000

Estimated cost yet to be incurred at year end 3,00,000 40,000 -
Calculate profit/(loss) on contract for each year as per AS-7 (using percentage completion basis).
2. SC (P.) Ltd. has undertaken a bridge construction contract, in respect of which details has been given below:
(i) Initial amount of revenue, 9,000 crore
(ii) Initial estimate of contract costs 8,000 crore
(iii) Contract duration – 3 years
Amount in crore
Years
1st 2nd 3rd
Estimated contract costs 8,050
Increase in contract revenue 200
Estimated additional contract costs 150
Cost incurred upto the reporting date 2,093 6,168 8,200
At the end of year 2, cost incurred include 100 for standard material stored at the site to be used in year
3 to complete the project. You are required to calculate the profit/loss to be recognised in the Profit and
Loss Account at the end of three year.
3. A construction contractor has a fixed price contract for ₹ 9,000 lacs to build a bridge in 3 years time frame. A
summary of some of the financial data is as under:
(Amount ₹ in lacs)
Year 1 Year 2 Year 3
Initial Amount for revenue agreed in contract 9,000 9,000 9,000

Variation in Revenue (+) - 200 200
Contracts costs incurred up to the reporting date 2,093 6,168* 8,100**
Estimated profit for whole contract 950 1,000 1,000
*Includes ₹ 100 lacs for standard materials stored at the site to be used in year 3 to complete the work.
**Excludes ₹ 100 lacs for standard material brought forward from year 2. The variation in cost and revenue
in year 2 has been approved by customer.
Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss to be
recognized in the Statement of Profit and Loss as per AS-7 (revised).
Solution:
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in three
years are computed below: (Amount in ₹ lakhs)
Up to the Recognizedin Recognized in
reporting date previous years current year
Year 1
Revenue (9,000 x 26%) 2,340 - 2,340
Expenses (8,050 x 26%) 2,093 - 2,093
Profit 247 - 247
Year 2
Revenue (9,200 x 74%) 6,808 2,340 4,468
Expenses (8,200 x 74%) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200 x 100%) 9,200 6,808 2,392
Expenses (8,200 x 100%) 8,200 6,068 2,132
Profit 1,000 740 260
Working Note:
Year 1 Year 2 Year 3
Revenue after considering variations 9,000 9,200 9,200
Less: Estimated profit for wholecontract 950 1,000 1,000
Estimated total cost of the contract(A) 8,050 8,200 8,200
Actual cost incurred upto the 2,093 6,068 8,200
reporting date (B) (6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%
4. A Construction Contractor has a fixed price contract for Rs. 13,500 Lakhs to build a Railway Tunnel.
The Contractor’s initial estimate of Contract Costs is Rs. 12,000 Lakhs. It will take 3 years to build the
Tunnel. By the end of Year 1, the Contractor’s estimate of Contract Costs has increased to Rs. 12,075
Lakhs. In Year 2, the Railway Authority approves a variation resulting in an increase in Contract
Revenue of Rs. 300 Lakhs and estimated Additional Contract Costs of Rs. 225 Lakhs. At the end of the
Year 2, costs incurred include Rs. 200 Lakhs for Materials at Site to be used fully in Year 3, to complete
the work. Contract Costs incurred up to the reporting date of
Year 1 Rs. 3,139 Lakhs
Year 2 Rs. 9,102 Lakhs
Year 3 Rs. 12,300 Lakhs.
Find the amount of Revenue, Expenses and Profit to be recognized in the statement of Profit and Loss in
all the three years.
5. Rajendra undertook a contract Rs. 20,00,000 on an arrangement that 80% of the value of work done, as
certified by the architect of the contractee should be paid immediately and that the remaining 20% be
retained until the Contract was completed.
In Year 1, the amounts expended were Rs. 8,60,000, the work was certified for Rs. 8,00,000 and 80% of
this was paid as agreed. It was estimated that future expenditure to complete the Contract would be Rs.
10,00,000.
In Year 2, the amounts expended were Rs. 4,75,000. Three-fourth of the work under contract was
certified as done by December 31st and 80% of this was received accordingly. It was estimated that
future expenditure to complete the Contract would be Rs. 4,00,000.
In Year 3, the amounts expended were Rs. 3,10,000 and on June 30th, the whole Contract was
completed.
Show how Contract revenue would be recognized in the P & L A/c of Mr. Rajendra each year.
6. Jain Construction Co. Ltd. undertook a contract on 1st January, 2012 to construct a building for Rs. 80
lakhs. The company found on 31st March, 2012 that it had already spent Rs. 58,50,000 on the
construction. Prudent estimate of additional cost for completion was Rs.31,50,000. What amount should
be charged to revenue and what amount of contract value to be recognized as turnover in the final
accounts for the year ended 31st March 2012 as per provisions of AS 7 (revised)?
7. Grace Ltd., a firm of contractors provided the following information in respect of a contract for the year
ended on 31st March,2022:
Particulars (₹ in ‘000)
Fixed Price Contract with an escalation clause 35,000
Work Certified 17,500
Work not Certified (includes ₹ 26,25,000 for materials issued, out of 3,815
which material lying unused at the end of the period is ₹ 1,40,000)
Estimated further cost to completion 17,325
Progress Payment Received 14,000
Payment to be Received 4,900
Escalation in cost is by 8% and accordingly the contract price is increased by 8%
From the above information, you are required to:
(i) Compute the contract revenue to be recognized.
(ii) Calculate Profit /Loss for the year ended 31st March, 2022 and additional provision for loss to be made,
if any, for the year ended 31st March, 2022.
8. PRZ & Sons Ltd. are Heavy Engineering contractors specializing in construction of dams. From the
records of the company, the following data is available pertaining to year ended 31st March, 2012.
Using this data and applying the relevant Accounting Standard you are required to:
(i) Compute the amount of profit/loss for the year ended 31st March, 2012.
(ii) Arrive at the contract work in progress as at the end of financial year 2011-12.
(iii) Determine the amount of revenue to be recognized out of the total contract value.
(iv) Work out the amount due from/to customers as at year end.
(v) List down relevant disclosures with figures as per relevant Account Standard
(Rs. crore)
Total Contract Price 2,400

Work pending certification 250
Stage wise payments received 1,100
Progress payments in pipe line 300
9. Uday Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The
construction commenced during the financial year ending 31.03.2016 and is likely to be completed by
the next year. The contract is for a fixed price of Rs. 12 crores with an escalation clause. The costs to
complete the whole contract are estimated at Rs.9.50 crores of rupees. You are given the following
information for the year ended 31.03.2016.
Cost incurred upto 31.03.2016 Rs. 4 crores
Cost estimated to the contract Rs. 6 crores
Escalation in cost by 5% and accordingly the contract price is increased by 5%.
You are required to ascertain the state of completion and state the revenue and profit to be recognised
for the year as per AS-7.
Answer: As per AS 7 ‘Construction Contracts’ the amount of revenue agreed in a fixed price contract may increase as
a result of cost. So in the given question:
Contact price will be Rs. 12 crores plus 5%= Rs. 12.60 Crores
Percentage of completion method = (Actual cost/Total estimated cost) x100
= 4 crores/10 crores = 40%
Revenue to be recognised= (12crores+5%) =12.60crores X 40% = 5.04 Crores
Less:- Actual cost has been incurred (4.00) Crores
Profit recognised. 1.04 crores
10. Akar Ltd. Signed on 01/04/16, a construction contract for Rs 1,50,00,000.

Following particulars are extracted in respect of contract, for the period ending 31/03/17.
- Materials issued Rs. 75, 00,000
- Labour charges paid Rs. 36, 00,000
- Hire charges of plant Rs. 10,00,000
- Other contract cost incurred Rs.15,00,000
- Out of material issued, material lying unused at the end of period is Rs. 4,00,000
- Labour charges of Rs. 2,00,000 are still outstanding on 31.3.17.
- It is estimated that by spending further Rs. 33,50,000 the work can be completed in all respect.
You are required to compute profit/loss to be taken to profit & Loss Account and additional provision for
foreseeable loss as per AS-7.
Answer:- As per AS-7, “Construction Contracts” profit/loss to be taken to profit & Loss Account and
additional provision for foreseeable loss is calculated as follows:-
(i) Calculation of % of Completion:-
x100
, ,
, , ,
x100 = 80%
(1) Calculation the Total Cost Incurred upto date:

Material : Issued 75,00,000
Less:- Closing (4,00,000) 71,00,000
Labour : Paid 36,00,000
+O/S 2,00,000 38,00,000
Hire Charges 10,00,000
Other cost incurred 15,00,000
1,34,00,000
(2) Total Estimated Cost :-
Cost incurred upto date: 1,34,00,000
+Further estimated cost to be incurred 33,50,000
1,67,50,000
(ii) Calculation of revenue to be recognized
Contract Price X % of Stage of completion = 80% x 1,50,00,000 = 1,20,00,000
(iii) Calculation of loss recognised on contract

Contract Revenue recognised 1,20,00,000
Less:- Total cost incurred (1,34,00,000)
14,00,000
(iv) Calculation of total expected loss on contract
Contract Price 1,50,00,000
Less:- Total estimated cost to be incurred (1,67,50,000)
Total Expected loss on contract 17,50,000
(v) Calculation of provision for expected loss:-
Less: Total loss recognised on contract 14,00,000
Provision for expected loss 3,50,000
(vi) Loss of 17,50,000 (14,00,000 + 3,50,000) is be to recognized immediately by debiting into profit & loss account.
11. GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of “Retail Petrol &
Diesel Stations”. Based on proposals submitted to different Regional Offices of BOCL, the final
approval for one outlet each in Region X, Region Y, Region Z, is awarded to GTI Ltd. A single
agreement is entered into between two. The agreement lays down values for each of the three outlets i.e.
Rs.102 lacs, Rs.150 lacs, Rs.130 lacs for Region X, Region Y, Region Z respectively. Agreement also
lays down completion time for each Region. Comment whether GTI Ltd. will treat it as single contract
or three separate contracts with reference to AS-7?
Answer: As per AS 7‘Construction Contracts’, two or more contracts can be combined if all
following conditions are fulfilled:-
a. If negotiation has been taken place in combined manner AND
b. Such contracts are interrelated AND
c. performed in sequence order
As per the information given in question, contract prices are quoted different for each contract by the
contractor and completion time is also different for each contract due to which the contracts are considered as
separate contracts even if a single agreement is entered into between the parties.
12. Mr. Shyam, a construction contractor undertakes the construction of an industrial complex. He has
separate proposals raised for each unit to be constructed in the industrial complex. Since each unit is
subject to separate negotiation, he is able to identify the costs and revenues attributable to each unit.
Should Mr. Shyam treat construction of each unit as a separate construction contract according to AS 7?
Answer: As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the
construction of each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and customer have been able
to accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
13. M/s Highway. Constructions undertook the construction of a highway on 01.04.2013. The contract was to be
completed in 2 years. The contract price was estimated at Rs. 150 crores. Up to 31.03.2014 the company
incurred Rs. 120 croses on the construction. The engineers involved in the project estimated that a future Rs.
45 crores would be incurred for completing the work.
What amount should be charged to revenue for the year 2013-14 as per the provisions of Accounting
Standard 7 “Construction Contracts”? Show the extract of the profit & Loss A/c in the books of M/s.
Highway Constructions.
Solution: Statement showing the amount to be charged to Revenue as per AS 7
₹ in crores
Cost of construction incurred upto 31.03.2014 120
Add: Estimated future cost 45
Total estimated cost of construction 165
Degree of completion (120/165 x 100) 72.73%
Revenue recognized (72.73% of 150) 109 (approx)
Total foreseeable loss (165 – 150) 15
Less: Loss for the current year (120 – 109) 11
Loss to be provided for 4
Profit and Loss Account (Extract)
₹ in crores ₹ in crores
To Construction Costs 120 By Contract Price 109
To Provision for loss 4 By Net loss 15
124 124
14. X Ltd. commenced a construction contract on 01/04/20X1. The fixed contract price agreed was ₹ 2,00,000.
The company incurred ₹ 81,000 in 20X1-20X2 for 45% work and received ₹ 79,000 as progress payment
from the customer. The cost incurred in 20X2-20X3 was ₹ 89,000 to complete the rest of work. Prepare P&L
and customer Account.
Solution: Profit & Loss Account
Year ₹ 000 Year ₹ 000

20X1-X2 To Construction Costs 81 20X1-X2 By Contract Price 90
(for 45%work) (45% of ContractPrice)
To Net profit (for 9
45% work)
90 90
20X2-X3 To Construction 89 20X2-X3 By Contract Price 110
costs (for 55% work) (55% of ContractPrice)
To Net Profit (for 21
55% work)
110 110
Customer Account
Year ₹ 000 Year ₹ 000

20X1-X2 To Contract Price 90 20X1-X2 By Bank 79
By Balance c/d 11
90 90
20X2-X3 To Balance b/d 11 20X2-X3
121
To Contract Price 110 By Bank
121 121
15. X Ltd. commenced a construction contract on 01/04/X1. The contract price agreed was reimbursable
cost plus 10%. The company incurred ₹ 1,00,000 in 20X1-X2, of which cost of ₹ 90,000 is
reimbursable. The further non-reimbursable costs to be incurred to complete the contract are estimated
at ₹ 5,000. The other costs to complete the contract could not be estimated reliably. Prepare Profit &
Loss A/c extract of X Ltd. for 20X1-X2.
Solution: Profit & Loss Account
₹ 000 ₹ 000
To Construction Costs 100 By Contract Price (90+9) 99
To Provision for loss 5 By Net loss 6
105 105
16. Show Profit & Loss A/c (Extract) in books of a contractor in respect of the following data.
₹ 000
Contract price (Fixed) 600
Cost incurred to date 390
Estimated cost to complete 260
Solution:
₹ 000
A. Cost incurred to date 390
B. Estimate of cost to completion 260
C. Estimated total cost 650
D. Degree of completion (A/C) 60%
E. Revenue Recognised (60% of 600) 360
Total foreseeable loss (650 – 600) 50
Less: Loss for current year (E – A) (30)
Expected loss to be recognised immediately 20
Profit & Loss A/c
₹ ₹
To Construction costs 390 By Contract Price 360
To Provision for loss 20 By Net Loss 50
410 410
17. Lucky ltd. had signed at 31st Dec. 2012 ,the balance sheet dates, the contract where the total revenue is
estimated at Rs 15 crores and total cost is estimated at Rs 20 crores no work began contract. Is
contractor required to give any accounting effect for the year ended 31st dec.2012, in his accounts?
Solution: There is an expected loss of Rs. 5 Crors (Rs. 20 – Rs.15) Crores. Such loss should be
recognised in the Profit and Loss Statement as per AS - 7, even though work has not commenced.
18. M/s Excellent Construction Company Limited undertook a Contract to construct a building for
Rs. 3crore on 1st September, 2011. On 31st March, 2012 the co. found that it had already
spent Rs. 1crore 80lakhs on the construction . Prudent estimate of additional cost for completion
was Rs. 1crore 40lakhs. What amount should be charged, to revenue in the final accounts for the
year ended on 31st March, 2012, as per the provisions of accounting standard 7 “construction
contract (revised)”?
Solution: Calculation of Estimated Cost of Construction ₹ in crores
Cost of construction incurred till date 1.80
Add: Estimated future cost 1.40
Total estimated cost of construction 3.20
Percentage of completion of contract till date to total estimated cost of construction
= ₹ (1.80/3.20) X 100 = 56.25%
Proportion of total contract value recognised as revenue as per AS 7 (Revised)
= Contract price x percentage of completion
= ₹ 3 crores x 56.25% = ₹ 1.6875 crores
19. On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a building for 45
lakhs. On 31st March, 2018, the company found that it had already spent Rs. 32.50 lakhs on the
construction. Additional cost of completion is estimated at Rs. 15.10 lakhs. What amount should be
charged to revenue in the final accounts for the year ended 31" March, 2018 as per provisions of AS-7?
Solution: As per AS-7, “Construction Contracts” profit/loss to be taken to profit & Loss Account and
additional provision for foreseeable loss is calculated as follows:-
(i) Calculation of % of Completion:-
x100
, ,
, , , ,
X 100 = 68.28%
(ii) Calculation of revenue to be recognized

Contract Price X % of Stage of completion
= 45,00,000 X 68.28 %
= 30,72,600
(iii) Calculation of loss recognised on contract
Contract Revenue recognised 30,72,600
Less:- Total cost incurred (32,50,000)
1,77,400
(iv) Calculation of total expected loss on contract
Contract Price 45,00,000
Less:- Total estimated cost to be incurred (47,60,000)
(v) Calculation of provision for expected loss:-
Less: Total loss recognised on contract (1,77,400)
Provision for expected loss 82,600
(vi) Loss of Rs. 2,60,000(1,77,400+82,600) is be to recognized immediately by debiting into P & L account.
20. Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building a
flyover. As per the contract terms, ‘X’ will receive an additional Rs.2 crore if the construction of the
flyover were to be finished within a period of two years of the commencement of the contract. Mr. X
wants to recognize this revenue since in the past he has been able to meet similar targets very easily. Is
X correct in his proposal? Discuss.
Answer: According to para 14 of AS 7 (Revised) ‘Construction Contracts’, incentive payments are
additional amounts payable to the contractor if specified performance standards are met or exceeded.
For example, a contract may allow for an incentive payment to the contractor for early
completion of the contract.
Incentive payments are included in contract revenue when:
(i) the contract is sufficiently advanced that it is probable that the specified performance standards will
be met or exceeded; and
(ii) the amount of the incentive payment can be measured reliably.
In the given problem, the contract has not even begun and hence the contractor (Mr. X) should not recognize
any revenue of this contract.
21. A firm of contractors obtained a contract for construction of bridges across river Revathi. The following
details are available in the records kept for the year ended 31st March, 1997.
(Rs. in lakhs)

Work Certified 500
Work not Certified 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140
The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements
of AS 7 (Revised) issued by your institute.
Answer:-
(a) Amount of foreseeable loss (Rs in lakhs)

Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price 1,000
Total foreseeable loss to be recognized as expense 100
According to para 35 of AS 7 (Revised 2002), when it is probable that total contract costs will exceed
total contract revenue, the expected loss should be recognized as an expense immediately.
(b) Contract work-in-progress i.e. cost incurred to date are Rs. 605 lakhs (Rs in lakhs)
Work certified 500
Work not certified 105
605
This is 55% (605/1,100 * 100) of total costs of construction.
(c) Proportion of total contract value recognised as revenue as per para 21 of AS 7 (Revised).
55% of Rs. 1,000 lakhs = Rs. 550 lakhs
(d) Amount due from/to customers = Contract costs + Recognised profits – Recognised losses – (Progress
payments received + Progress payments to be received)
= [605 + Nil – 100 – (400 + 140)] Rs. in lakhs
= [605 – 100 – 540] Rs. in lakhs
Amount due to customers = Rs. 35 lakhs
The amount of Rs. 35 lakhs will be shown in the balance sheet as liability.
(e) The relevant disclosures under AS 7 (Revised) are given below: Rs. in lakhs
Contract revenue 550
Contract expenses 605
Recognised profits less recognized losses (100)
Progress billings (400 + 140) 540
Retentions (billed but not received from contractee) 140
Gross amount due to customers 35
22. On 1st December, 2002, Vishwakarma Construction Co. Ltd. undertook a contract to construct a building for
Rs. 85 lakhs. On 31st March, 2003 the company found that it had already spent Rs. 64,99,000 on the
construction. Prudent estimate of additional cost for completion was Rs. 32,01,000. What amount should be
charged to revenue in the final accounts for the year ended 31st March, 2003 as per provisions of Accounting
Standard 7 (Revised)?
Answer: Rs.
Cost incurred till 31st March, 2003 64,99,000
Prudent estimate of additional cost for completion 32,01,000
Total cost of construction 97,00,000
Less: Contract price 85,00,000
Total foreseeable loss 12,00,000
According to para 35 of AS 7, the amount of Rs. 12,00,000 is required to be recognized as an expense.
Contract work in progress= (Rs. 64,99,000/Rs. 97,00,000) = 67%
Proportion of total contract value recognized as turnover as per para 21 of AS 7 (Revised) on
Construction Contracts. = 67% of Rs.85,00,000 = Rs.56,95,000.
23. Sarita Construction Co. obtained a contract for construction of a dam. The following details are available in
records of company for the year ended 31st March, 2018:
₹ In Lakhs
Work not certified 1,250
Progress payment received 5,500
Progress payment to be received 1,500
Applying the provisions of Accounting Standard 7 "Accounting for Construction Contracts" you are required
to compute:
(i) Profit/Loss for the year ended 31st March, 2018.
(ii) Contract work in progress as at end of financial year 2017-18.
(iii) Revenue to be recognized out of the total contract value.
(iv) Amount due from/to customers as at the year end.
Solution:
(i) Loss for the year ended, 31st March, 2018 (₹ in lakhs)
Amount of foreseeable loss
Total cost of construction (6,250 + 1,250 + 8,750) 16,250
Less: Total contract price (12,000)
Total foreseeable loss to be recognised as expense 4,250
According to AS 7, when it is probable that total contract costs will exceed total contract revenue, the
expected loss should be recognised as an expense immediately.
Loss for the year ended, 31st March, 2018 amounting ₹ 4,250 will be recognized.
(ii) Contract work-in-progress as on 31.3.18(₹ in lakhs): Contract work-in-progress i.e. cost incurred to
date are ₹ 7,500 lakhs:
Work certified 6,250
Work not certified 1,250
7,500
(iii) Proportion of total contract value recognised as revenue
Cost incurred till 31.3.18 is 46.15% (7,500/16,250 X 100) of total costs of construction.
Proportion of total contract value recognised as revenue: 46.15% of ₹ 12,000 lakhs = ₹ 5,538 lakhs
(iv) Amount due from/to customers at year end

(Contract costs + Recognised profits – Recognised Losses) – (Progress payments received + Progress
payments to be received)
= (7,500 + Nil – 4,250) – (5,500 + 1,500) ₹ in lakhs
= [3,250 – 7,000] ₹ in lakhs Amount due to customers
= ₹ 3,750 lakhs
24. AP Ltd., a construction contractor, undertakes the construction of commercial complex for Kay Ltd. AP Ltd.
submitted separate proposals for each of 3 units of commercial complex. A single agreement is entered into
between the two parties. The agreement lays down the value of each of the 3 units, i.e. Rs. 50 Lakh, Rs. 60
Lakh and Rs. 75 Lakh respectively. Agreement also lays down the completion time for each unit.
Comment, with reference to AS-7, whether AP Ltd., should treat it as a single contract or three separate
contracts.
Solution:
Provision of Accounting Standard(AS) – 7 As per AS 7 ‘Construction Contracts’, when a contract covers a
number of assets, the construction of each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and customer have been able to
accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
In the given case, each unit is submitted as a separate proposal, which can be separately negotiated, and
costs and revenues thereof can be separately identified. Hence, each asset will be treated as a “single
contract” even if there is one single agreement for contracts.
Therefore, three separate contract accounts must be recorded and maintained in the books of AP Ltd. For
each contract, principles of revenue and cost recognition must be applied separately and net income will be
determined for each asset as per AS 7.
25. The following data is provided for M/s. Raj Construction Co.
(i) Contract Price - Rs. 85 lakhs
(ii) Materials issued - Rs. 21 Lakhs out of which Materials costing Rs. 4 Lakhs is still lying unused at the
end of the period.
(iii) Labour Expenses for workers engaged at site - Rs. 16 Lakhs (out of which Rs. 1 Lakh is still unpaid)
(iv) Specific Contract Costs - Rs. 5 Lakhs
(v) Sub-Contract Costs for work executed - Rs. 7 Lakhs, Advances paid to sub-contractors - Rs. 4 Lakhs
(vi) Further Cost estimated to be incurred to complete the contract - Rs. 35 Lakhs
You are required to compute the Percentage of Completion, the Contract Revenue and Cost to be recognized
as per AS-7.
Solution: Computation of contract cost
Rs. Lakh Rs. Lakh
Material cost incurred on the contract (net of closing stock) 21-4 17
Add: Labour cost incurred on the contract (including outstanding amount) 16
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7
Cost incurred (till date) 45
Add: further cost to be incurred 35
Total contract cost 80
Percentage of completion = Cost incurred till date/Estimated total cost
= Rs. 45,00,000/Rs. 80,00,000
= 56.25%
Contract revenue and costs to be recognized
Contract revenue (Rs. 85,00,000 X 56.25%) = Rs. 47,81,250
Contract costs = Rs. 45,00,000
26. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably only
when certain conditions prescribed under AS 7 are satisfied. You are required to describe these conditions
mentioned in the standard.
Solution: In the case of a fixed price contract, the outcome of a construction contract can be estimated
reliably when all the following conditions are satisfied:
(i) total contract revenue can be measured reliably;
(ii) it is probable that the economic benefits associated with the contract will flow to the enterprise;
(iii) both the contract costs to complete the contract and the stage of contract completion at the reporting date
can be measured reliably; and
(iv) the contract costs attributable to the contract can be clearly identified and measured reliably so that
actual contract costs incurred can be compared with prior estimates.
27. Sagar Limited belongs to the engineering industry. The Chief Accountant has prepared the draft
accounts for the year ended 31.03.2012. You are required to advise the company on the following items
from the viewpoint of finalization of accounts, taking note of the mandatory accounting standards.
The company undertook a contract for building a crane for Rs. 10 lakhs. As on 31.03.2012 it incurred a
cost of Rs. 1.5 lakhs and expects that there will be Rs. 9 lakhs more for completing the crane. It has
received so far Rs. 1 lakh as progress payment.
Answer: Para 21 of AS 7 (Revised) ‘Construction Contracts’ provides that when the outcome of a
construction contract can be estimated reliably, contract revenue and contract costs associated with the
construction contract should be recognized as revenue and expenses respectively with reference to the
stage of completion of the contract activity at the reporting date. Para 35 of AS 7 states that when it is
probable that total contract cost will exceed total contract revenue, the expected losses should be
recognized as an expense irrespective of :
a. Whether or not work has commenced
b. Stage of completion of contract
c. The amount of profit on other contracts which are not treated as a single contract
Thus, when Estimated Contract Costs > Total Contract Revenue

Expected Loss = Work Certified + Work uncertified + estimated cost to complete the project - Total
value of contract
Thus, in the given case, the foreseeable loss of Rs. 50,000 (expected cost Rs. 10.5 lakhs less contract
revenue Rs. 10 lakhs) should be recognized as an expense in the year ended 31st March, 2012.
The following disclosures should also be given in the financial statements:
a. the amount of contract revenue recognized as revenue in the period;

b. the aggregate amount of costs incurred and loss recognized upto the reporting date;
c. amount of advances received;
d. amount of retentions; and
e. gross amount due from/due to customers Amount∗
* Amount due from/to customers = contract costs + Recognised profits – Recognised losses – Progress
billings = Rs. 1.5 + Nil – Rs. 0.5 – Rs. 1.0 = Nil.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
SUMMARY NOTES
AS 9: REVENUE RECOGNITION
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary
activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others
of enterprise resources yielding interest, royalties and dividends. In an agency relationship, the revenue is the
amount of commission and not the gross inflow of cash, receivables or other consideration.
1. Deals in revenue arising from ordinary course of business:

A) Sale of goods B) Rendering of services C) Income as interest, royalty & dividend.
2. Does not deal with revenue arising from :

a) Construction contract b) Hire purchase, Lease agreements
c) Government grants & subsidies d) Insurance contracts
Examples of items not included within the definition of “revenue” for the purpose of this Statement are:
(i) Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of,
non-current assets e.g. appreciation in the value of fixed assets;
(ii) Unrealised holding gains resulting from the change in value of current assets, and the natural
increases in herds and agricultural and forest products;
(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments
arising on the translation of foreign currency financial statements;
(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;
(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.
3. Revenue recognition :
A) From sale of goods :A transaction involving the sale of goods is that the seller has transferred the
property in the goods to the buyer for a consideration. The transfer of property in goods, in most cases,
results in or coincides with the transfer of significant risks and rewards of ownership to the buyer.
B) From rendering of services:- Revenue from service transactions is usually recognised as the service
is performed, either by the proportionate completion method or by the completed service contract
method.
a) Proportionate completion method is a method of accounting which recognises revenue in the
statement of profit and loss proportionately with the degree of completion of services under a
contract. Here performance consists of the execution of more than one act. Revenue is recognised
proportionately by reference to the performance of each act.
b) Completed service contract method is a method of accounting which recognises revenue in the
statement of profit and loss only when the rendering of services under a contract is completed or
substantially completed. In this method performance consists of the execution of a single act.
Alternatively, services are performed in more than a single act, and the services yet to be
performed are so significant in relation to the transaction taken as a whole that performance cannot
be deemed to have been completed until the execution of those acts. The completed service
contract method is relevant to these patterns of performance and accordingly revenue is recognised
when the sole or final act takes place and the service becomes chargeable
C) From resources :
a) Interest:- Revenue is recognized on a time proportion basis taking into account the amount
outstanding and the rate applicable.
b) Royalty:-Revenue is recognized on an accrual basis in accordance with the terms of the
relevant agreement. If agreement is signed for royalty payable on the basis of the number of
copies of the book published, it will be recognised on that basis only.
c) Dividend - Upon declaring basis.
Note:-There should be reasonable certainty of collection & consideration before booking any of the
all types of above recognised income.
4. Disclosure Requirement:
(a) Revenue recognised policy should be disclosed.
(b) If any amount is not booked due to uncertainty of collection or consideration, then notes to be
disclosed the Fact.
(c) The amount of turnover should be disclosed in the following manner on the face of the statement of
profit and loss:
Turnover (Gross) XXXXX

Less: Excise Duty XXXXX
Turnover (Net) XXXXX
Note:- The amount of excise duty to be shown as deduction from turnover should be the total excise duty for
the year except the excise duty related to the difference between the closing inventory and opening
inventory.
Practical Questions
1. X Limited has recognized Rs. 10 lakhs on accrual basis income from dividend on units of mutual funds
of the face value of Rs. 50 lakhs held by it as at the end of the financial year 31st March, 2003. The
dividends on mutual funds were declared at the rate of 20% on 15th June, 2003. The dividend was
proposed on 10th April, 2003 by the declaring company. Whether the treatment is as per the relevant
Accounting Standard? You are asked to answer with reference to provisions of Accounting Standard.
2. How would you deal with the following in the annual accounts of a company for the year ended 31st March,
1996?
The Board of Directors decided on 31.3.1996 to increase the sale price of certain items retrospectively from
1st January, 1996. In view of this price revision with effect from 1st January, 1996, the company has to
receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 1996 to 31st March, 1996
and the Accountant cannot make up his mind whether to include Rs. 15 lakhs in the sales for 1995-96.
Answer: Price revision was effected during the current accounting period 1995 -1996. As a result, the
company stands to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 1996
to 31st March, 1996. If the company is able to assess the ultimate collection with reasonable
certainty, then additional revenue arising out of the said price revision may be recognised in 1995-96 vide
Para 10 of AS 9.
3. Briefly explain, as per relevant Accounting Standard:

(a) TVSM company has taken a Transit Insurance Policy. Suddenly in the year 2002 -2003 the percentage
of accident has gone up to 7% and the company wants to recognise insurance claim as revenue in
2002-2003 in accordance with relevant Accounting Standards. Do you agree?
(b) SCL Ltd., sells agriculture products to dealers. One of the condition of sale is that interest is payable
at the rate of 2% p.m., for delayed payments. Percentage of interest recovery is only 10% on such
overdue outstanding due to various reasons. During the year 2002-2003 the company wants to
recognise the entire interest receivable. Do you agree?
Answer:
(a) AS 9 on Revenue Recognition defines revenue as ‘gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of the enterprise from the sale of goods,
from the rendering of services and from the use by others of enterprise resources yielding interest,
royalties and dividends’.
To recognise revenue AS 9 requires that revenue arises from ordinary activities and that it is
measurable and there should be no uncertainty. As per para 9.2 of the Standard, where the ability to
assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim,
revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be
appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be
made.
In the given case, TVSM company wants to suddenly recognise Insurance claim because it has
increased over the previous year. But, there are uncertainties involved in the settlement of the claim.
Also, the claim does not seem to be in the course of ordinary activity of the company.
Hence, TVSM company is not advised to recognise the Insurance claim as revenue.
(b) As per para 9.2 of AS 9 on Revenue Recognition, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export
incentives, interest etc, revenue recognition is postponed to the extent of uncertainty involved. In such
cases, it may be appropriate to re cognise revenue only when it is reasonably certain that the ultimate
collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised
at the time of sale or rendering of service even though payments are made by instalments.
Thus, SCL Ltd. cannot recognise the interest amount unless the company actually receives it.
10% rate of recovery on overdue outstandings is also an estimate and is not certain. Hence, the
company is advised to recognise interest receivable only on receipt basis.
4. M/s Prima Co. Ltd. sold goods worth Rs. 50,000 to M/s Y and Company. M/s Y and Co. asked for discount
of Rs. 8,000 which was agreed by M/s Prima Co. Ltd. the sale was affected and goods were dispatched. After
receiving goods worth Rs. 7,000 was found defective which they returned immediately. They made the
payment of Rs. 35,000 to M/s Prima Co. Ltd. Accountant booked the sales for Rs. 35,000. Please discuss.
Answer: As per Para 4.1 of AS 9 “Revenue Recognition”, revenue is the gross inflow of cash, receivables or
other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods,
from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties
and dividends. In the given case, M/s Prima Co. Ltd. should record the sales at gross value of Rs. 50,000.
Discount of Rs. 8,000 in price and goods returned worth Rs. 7,000 are to be adjusted by suitable provisions.
M/s Prime Co. Ltd. might have sent the credit note of Rs. 15,000 to M/s Y & Co. to account for these
adjustments. The contention of the accountant to book the sales for Rs. 35,000 is not correct.
5. Victory Ltd. purchased goods on credit from Lucky Ltd. for Rs. 250 crores for export. The export order was
cancelled. Victory Ltd. decided to sell the same goods in the local market with a price discount. Lucky Ltd.
was requested to offer a price discount of 15%. The Chief Accountant of Lucky Ltd. wants to adjust the sales
figure to the extent of the discount requested by Victory Ltd. Discuss whether this treatment is justified.
Answer: Lucky Ltd. had sold goods to Victory Ltd on credit worth for Rs. 250 crores and the sale was
completed in all respects. Victory Ltd’s decision to sell the same in the domestic market at a discount does
not affect the amount recorded as sales by Lucky Ltd. The price discount of 15% offered by Lucky Ltd. after
request of Victory Ltd. was not in the nature of a discount given during the ordinary course of trade because
otherwise the same would have been given at the time of sale itself. Now, as far Lucky Ltd is concerned,
there appears to be an uncertainty relating to the collectability of the debt, which has arisen subsequent to the
time of sale therefore, it would be appropriate to make a separate provision to reflect the uncertainty relating
to collectability rather than to adjust the amount of revenue originally recorded.
Therefore, such discount should be written off to the profit and loss account and not shown as deduction
from the sales figure.
6. Bottom Ltd. entered into a sale deed for its immovable property before the end of the year. But registration
was done with registrar subsequent to Balance Sheet date. But before finalization, is it possible to recognize
the sale and the gain at the Balance Sheet date? Give your view with reasons.
Answer: Yes, both sales and gain of Bottom Ltd. should be recognized. In accordance with AS 9, at the
Balance Sheet date and what was pending was merely a formality to register the deed. It is clear that
significant risk and rewards of ownership had passed before the balance sheet date. Further the registration
post the balance sheet date confirms the condition of sale at the balance sheet date as per AS 4.
7. The stages of production and sale of a producer are as follows (all in Rupees):
Stage Activity Costs to date Net Realisable Value

A Raw Materials 10,000 8,000
B WIP 1 12,000 13,000
C WIP 2 15,000 19,000
D Finished Product 17,000 30,000
E Ready for Sale 17,000 30,000
F Sale Agreed 17,000 30,000
G Delivered 18,000 30,000
H Paid For 18,000 30,000
State and explain the stage at which you think revenue will be recognized and how much would be gross
profit and net profit on a unit of this product?
Answer: According to AS 9, sales will be recognized only following two conditions are satisfied:
(i) The sale value is fixed and determinable.
(ii) Property of the goods is transferred to the customer.
Both these conditions are satisfied only at Stage F when sales are agreed upon at a price and goods allocated
for delivery purpose.
Gross Profit will be determined at Stage E, when goods are ready for sale after all necessary process for
production is over i.e. Rs. 13,000 (30,000 – 17,000).
Net Profit will be determined at Stage H, when goods are delivered and payment collected i.e. Rs.12,000
(30,000-18,000).
8. Moon Ltd. entered into agreement with Sun Ltd. for sale of goods of Rs. 8 lakhs at a profit of 20% on cost.
The sale transaction took place on 1st February, 2011. On the same day Sun Ltd. entered into another
agreement with Moon Ltd. to resell the same goods at Rs. 10.80 lakhs on 1st August, 2011. State the
treatment of this transaction in the financial statements of Moon Ltd. as on 31.03.11. The pre-determined re-
selling price covers the holding cost of Sun Ltd.
Give the Journal Entries as on 31.03.11 in the books of Moon Ltd.
Answer: In the given case, Moon Ltd. concurrently agreed to repurchase the same goods from Sun Ltd. on
1st Feb., 2011. Also the re-selling price is pre-determined and covers purchasing and holding costs of Sun
Ltd. Hence, the transaction between Moon Ltd. and Sun Ltd. on 1st Feb., 2011 should be accounted for as
financing rather than sale. The resulting cash flow of Rs. 9.60 lakhs received by Moon Ltd., cannot be
considered as revenue as per AS 9 “Revenue Recognition”.
Journal Entries in the books of Moon Ltd.

(Rs. in lakhs)
1.02.11 Bank Account Dr. 9.60
To Advance from Sun Ltd*. 9.60
(Being advance received from Sun Ltd amounting [Rs. 8 lakhs + 20% of
Rs. 8 lakhs= 9.60 lakhs] under sale and re-purchase agreement)
31.03.11 Financing Charges Account Dr. 0.40
To Sun Ltd. 0.40
(Financing charges for 2 months at Rs. 1.20 lakhs [10.80
– 9.60] i.e. 1.2 lakhs x 2/6 )
31.03.11 Profit and Loss Account Dr. 0.40
To Financing Charges Account 0.40
(Being amount of finance charges transferred to P& L Account)
* The balance of Sun Ltd. account will be disclosed as an advance under the heading liabilities in the balance sheet
of Moon Ltd. as on 31st March, 2011.
9. Media Advertisers obtained advertisement rights for One Day World Cup Cricket Tournament to be held in
May/June, 2011 for Rs. 250 lakhs.
By 31st March, 2011, they have paid Rs. 150 lakhs to secure these advertisement rights. The balance Rs. 100
lakhs was paid in April, 2011.
By 31st March, 2011, they procured advertisement for 70% of the available time for Rs. 350 lakhs. The
advertisers paid 60% of the amount by that date. The balance 40% was received in April, 2011.
Advertisements for the balance 30% time were procured in April, 2011 for Rs. 150 lakhs. The advertisers
paid the full amount while booking the advertisement.
25% of the advertisement time is expected to be available in May, 2011 and the balance 75% in June, 2011.
You are asked to: Pass journal entries in relation to the above.
Answer:- In the books of Media Advertisers
Journal Entries
Dr. Cr.
Rs. in lakhs Rs. in lakhs
2011 March Advance for advertisement rights (purchase) A/c Dr. 150.00
To Bank A/c 150.00
(Being advance paid for obtaining advertisement rights)
Bank A/c Dr. 210.00

To Advance for advertisement time (sale) A/c 210.00
(Being advance received from advertisers amounting
to 60% of Rs. 350 lakhs for booking 70% advertisement time)
April Advance for advertisement rights (purchase) A/c Dr. 100.00
To Bank A/c 100.00
(Being balance advance i.e., Rs. 250 lakhs less Rs. 150 lakhs paid)
Bank A/c Dr. 140.00

(Being balance advance i.e., Rs. 350 lakhs less
Rs. 210 lakhs received from advertisers)
Bank A/c Dr. 150.00

(Being advance received from advertisers in respect
of booking of balance 30% time)
May Advertisement rights (purchase) A/c Dr. 62.50

To Advance for advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights used in May i.e.,
25% of Rs. 250 lakhs, adjusted against advance paid)
Advance for advertisement time (sale) A/c Dr. 125.00

To Advertisement time (sale) A/c 125.00
(Being sale price of advertisement time in May i.e.,
25% of Rs. 500 lakhs adjusted, against advance
received from advertisers)
Profit and Loss A/c Dr. 62.50

To Advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights debited to Profit
and Loss Account in May)
Advertisement time (sale) A/c Dr. 125.00

To Profit and Loss A/c 125.00
(Being revenue recognised in Profit and Loss Account in May)
June Advertisement rights (purchase) A/c Dr. 187.50

To Advance for advertisement rights (purchase) A/c 187.50
(Being cost of advertisement rights used in June, i.e.,
75% of Rs. 250 lakhs, adjusted against advance paid)
Advance for advertisement time (sale) A/c Dr. 375.00

To Advertisement time (sale) A/c 375.00
(Being sale price of advertisement time availed in
June i.e., 75% of Rs. 500 lakhs, adjusted against
advance received from advertisers)
June Profit and Loss A/c Dr. 187.50

To Advertisement rights (purchase) A/c 187.50
(Being cost of advertisement rights used in June,
debited to Profit and Loss Account in June)
Advertisement time (sale) A/c Dr. 375.00

To Profit and Loss Account 375.00
(Being revenue recognised in June)
10. A Ltd. entered into a contract with B Ltd. to dispatch goods valuing Rs. 25,000 every month for 4 months
upon receipt of entire payment. B Ltd. accordingly made the payment of Rs. 1,00,000 and A Ltd. started
dispatching the goods. In the third month, due to a natural calamity, B Ltd. requested A Ltd. not to dispatch
goods until further notice though A Ltd. is holding the remaining goods worth Rs. 50,000 ready for dispatch.
A Ltd. accounted Rs. 50,000 as sales and transferred the balance to Advance Received against Sales.
Comment upon the treatment of balance amount with reference to the provisions of Accounting Standard 9.
Answer: As per para 6 of AS-9, Revenue Recognition, Revenue from sale of goods should be recognized
when performance has been achieved and
(i) The seller has transfer all risk & rewards to buyers and
(ii) No significant uncertainly exists regarding the amount of consideration and collection.
So in the given case A Ltd. should recognized sale of Rs. 1,00,000.
11. Given the following information of M/s. paper Products Ltd.
(i) Goods of Rs 60,000 were sold on 20-3-2015 but at the request of the buyer these were delivered on10-4-
2015.
(ii) On 15-1-2015 goods of Rs 1,50,000 were sent on consignment basis of which 20%of the goods unsold
are lying with the consignee as on 31-3-2015.
(iii) Rs 1,20,00 worth of goods were sold on approval basis on 1-12-2014 The period of approval was 3
months after which they were considered sold Buyer sent approval for 75%goods up to 31-1-2015 and
no approval or disapproval received for the remaining goods till 31-3-2015.
(iv) Apart from the above, the company has made cash sales of Rs. 7,80,000(Gross) Trade discount of
5%was allowed on the cash sales.
You are required to advise the accountant of M/s. Paper products Ltd. with valid reasons the amount to be
recognized as revenue in above cases in the context of As 9 and also determine the total revenue to be
recognized for the year ending 31-3-2015.
Answer:- Calculation of total revenue Recognised as Per AS-9
Particulars Amount(Rs.)
Case I:- Sale is recorded because Risk and Rewards has been transferred. 60,000
Case II:- Sale should be recorded upto 80% (1,50,000*80%) 1,20.000
Case III:- Since period of approval has expired so whole sale should be 1,20,000
recorded.
Case IV:- Trade Discount shall be adjusted in cash sale (Rs. 7,80,000-5%) 7,41,000
Total Revenue to be recognized Rs.10,41,000
12. Sarita Publications publishes a monthly magazine on the 15 th of every month. It sells advertising space in the
magazine to advertisers on the terms of 80% sale value payable in advance and the balance within 30 days of
the release of the publication. The sale of space for the March 2014 issue was made in February 2014. The
magazine was published on its scheduled date. It received Rs. 2,40,000 on 10.3.2014 and Rs. 60,000 on
10.4.2014 for the March 2014 issue. Discuss in the context of AS 9 the amount of revenue to be recognized
and the treatment of the amount received from advertisers for the year ending 31.03.2014. What will be the
treatment if the publication is delayed till 02.04.2014.
Answer:-As per AS – 9 ,”Revenue Recognition” Revenue from a transaction involving the sale of
goods is recorded when the transfer of significant risks and rewards of ownership with ownership is
transferred to the buyer . Further there should be certainty of collection and consideration.
In the given case Sarita Publications recorded the sale of Rs. 3,00,000 in the year ended 31/03/2014.
And advance received Rs. 2,40,000 is adjusted with sale value and balance due Rs. 60,000 is shown as
trade receivable.
If the publication is continued or delayed till 02/04/2014 then revenue should not be recognised and
advance of Rs. 2,40,000 should be shown as advance from customer as current liability.
13. M/s Umang Ltd. sold goods through its agent. As per terms of sales, consideration is payable within one
month. In the event of delay in payment, interest is chargeable @ 12% p.a. from the agent. The company has
not realized interest from the agent in the past. For the year ended 31st March, 2015 interest due from agent
(because of delay in payment) amounts to Rs.1, 72,000. The accountant of M/s Umang Ltd. booked Rs.1,
72,000 as interest income in the year ended 31st March, 2015. Discuss the contention of the accountant with
reference to Accounting Standard-9.
Answer:-
1. AS Provision:- As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, the revenue recognition is postponed
to the extent of uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably
certain that the ultimate collection will be made.
2. In the given case:-The company never realized interest for the delayed payments make by the dealers.
Hence, it has to recognize the interest only if the ultimate collection is certain. The interest income of Rs.
1,72,000 hence is not to be recognized.
3. Conclusion:-The Company should not recognize the entire interest Receivable .it should be recognized
only as and when received.
14. Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods- valuing Rs 5, 00,000 every month for
next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire payment of Rs.
30,00,000 and Raj Ltd. started dispatching the goods. In fourth month, due to fire in premise of Heena Ltd.,
Henna Ltd. requested to Raj Ltd. not to dispatch goods untill further notice. Due to this, Raj Ltd. is holding
the remaining goods worth Rs 15, 00,000 ready for dispatch. Raj Ltd. accounted Rs 15, 00,000 as sales and
transferred the balance to Advance received against Sales account. Comment upon the above treatment by
Raj Ltd. with reference to the provision of AS -9.
Answer:- As per AS-9, “Revenue recognition” In a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks
and rewards of ownership have been transferred to the buyer and the seller retains no effective control of
the goods transferred to a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the
sale of the goods.
Further as per Point 1 of Appendix of AS-9 Revenue should be recognised notwithstanding that physical
delivery has not been completed so long as there is every expectation that delivery will be made. However,
the item must be on hand, identified and ready for delivery to the buyer at the time the sale is recognised
rather than there being simply an intention to acquire or manufacture the goods in time for delivery.
In the given case, transfer of property in goods results in or coincides with the transfer of significant risk and
rewards of ownership to the buyer. Also, the sale price has been recovered by the seller. Hence, the sale is
complete but delivery has been postponed at buyer’s request. A Ltd. should be recognized the entire sale of
Rs. 30,00,000 (Rs.5,00,000 x6) and no part of the same is to be treated as Advance Receipt against Sales.
15. A claim lodged with the Railways in March, 2015 for loss of goods of ₹ 2,00,000 had been passed for
payment in March, 2017 for ₹ 1,50,000. No entry was passed in the books of the Company, when the claim
was lodged. Advise P Co. Ltd. about the treatment of the following in the Final Statement of Accounts for
Answer: AS 9 on ‘Revenue Recognition’ states that where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent
of uncertainty involved. When recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is properly recognised. In this case it may be assumed that
collectability of claim was not certain in the earlier periods. This is supposed from the fact that only ₹
1,50,000 were collected against a claim of ₹ 2,00,000. So this transaction cannot be taken as a Prior Period
Item.
In the light of AS 5, it will not be treated as extraordinary item. However, AS 5 states that when items of
income and expense within profit or loss from ordinary activities are of such size, nature, or incidence that
their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount
of such items should be disclosed separately. Accordingly, the nature and amount of this item should be
disclosed separately.
16. Perfect Ltd. manufactures machinery used in power plants. In response to the tender issued by power plant,
Perfect Ltd. quotes its price. As per terms of contract, full price of machinery is not released by the power
plants, but 10% thereof, is retained and paid after one year if there is satisfactory performance of the
machinery supplied. From the past experience, it is observed that Perfect Ltd. normally performs
satisfactorily and fulfil the expectation of power plants. Perfect Ltd. accounts for only 90% of the invoice
value as sales revenue and book the balance amount in the year of receipt to the extent of actual receipts
only.
Comment on the treatment done by the company.
Answer:- As per para11of AS 9, Revenue Recognition revenue from sale of goods should be recognises
when
(i) the seller has transferred the property in the goods to the buyer for a consideration and the transfer of
transfer of property in goods results in or coincides with the transfer of significant risks and rewards of
ownership to the buyer and the seller retains no effective control of the goods transferred and
(ii) no significant uncertain exists regarding the amount consideration that will be derived from the sale of
the goods In the present case the goods ,as well as risks and rewards of ownership have been transferred
to the power plants since the invoice raised by perfect Ltd is for the full price though it receives only
90%of the invoice value in the yeas of sale and 10%is kept as Retention Money perfect Ltd should
recognise revenue at the full invoice price i.e 100%of the sales price The company should make a
separate provision for the balance 10%amount to reflect the uncertainty rather than to adjust the amount
of revenue originally recorded Therefore the practice adopted of recognising only 90%of sales as
revenue by perfect Ltd .is not in consonance with AS 9.
17. Given below are the following information's of M/s B.S. Ltd.
(i) Goods of Z Rs. 50,000 were sold on 18-03-2018 but at the request of the buyer these were delivered on
15-04-2018.
(ii) On 13-01-2018 goods of Rs. 1,25,000 were sent on consignment basis of which 20% of the goods unsold
are lying with the consignee as on 31-03-2018.
(iii) Rs. 1,00,000 worth of goods were sold on approval basis 01-12-2017. The period of approval was 3
months after which they were considered sold. Buyer sent approval for 75% goods up to 31-01-2018 and
no approval or disapproval received for the remaining goods till 31-03-2018.
You are required to advise the accountant of M/s B.S. Ltd., with valid 'reasons, the amount to be recognized
as revenue for the year ended 31st March, 2018 in above cases in the context of AS-9.
Solution:
(i) Provision of Accounting Standard(AS) – 9: As per AS-9, “Revenue recognition” In a transaction
involving the sale of goods, performance should be regarded as being achieved when the following
conditions have been fulfilled:
(a) the seller of goods has transferred to the buyer the property in the goods for a price or all significant
risks and rewards of ownership have been transferred to the buyer and the seller retains no effective
control of the goods transferred to a degree usually associated with ownership; and
(b) no significant uncertainty exists regarding the amount of the consideration that will be derived from
the sale of the goods.
Further as per Point 1 of Appendix of AS-9 Revenue should be recognised notwithstanding that
physical delivery has not been completed so long as there is every expectation that delivery will be
made. However, the item must be on hand, identified and ready for delivery to the buyer at the time the
sale is recognised rather than there being simply an intention to acquire or manufacture the goods in time
for delivery.
(ii) In the given question treatment will be as follows:-
Particulars Amount(Rs.)
Case I:- Sale is recorded because Risk and Rewards has been transferred. 50,000
Case II:- Sale should be recorded upto 80% (1,25,000*80%) 1,00,000
Case III:- Since period of approval has expired so whole sale should be recorded. 1,00,000
Total Revenue to be recognized 2,50,000
18. Indicate in each case whether revenue can be recognized and when it will be recognized as per AS-9.
(1) Trade discount and volume rebate received.
(2) Where goods are sold to distributor or others for resale.
(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-03-2019 cloths worth Rs 50,000 were sold to X mart, but due to refurbishing of their showroom
being underway, on their request cloths were delivered on 12-04-2019.
Solution:
(1) Trade discounts and volume rebates received are not encompassed within the definition of revenue, since
they represent a reduction of cost. Trade discounts and volume rebates given should be deducted in
determining revenue.
(2) When goods are sold to distributor or others, revenue from such sales can generally be recognized if
significant risks of ownership have passed; however, in some situations the buyer may in substance be an
agent and in such cases the sale should be treated as a consignment sale.
(3) For transactions, where seller concurrently agrees to repurchase the same goods at a later date that are in
substance a financing agreement, the resulting cash inflow is not revenue as defined and should not be
recognized as revenue.
(4) Insurance agency commissions should be recognized on the effective commencement or renewal dates of
the related policies.
(5) On 11.03.2019, if X mart takes title and accepts billing for the goods then it is implied that the sale is
complete and all risk and reward on ownership has been transferred to the buyers.
Revenue should be recognized for year ended 31st March, 2019 notwithstanding that physical delivery has
not been completed so long as there is every expectation that delivery will be made and items were ready for
delivery to the buyer at the time.
19. In the year 20X1-X2, XYZ supplied goods on Consignment basis to ABC- a retail outlet worth Rs.10,00,000.
As per the terms, ABC will only pay XYZ for the goods which are sold by them to the third party. Rest of
the goods can be returned back to XYZ and ABC will not have any further liability for these goods.
During the year 20X1-X2, ABC has sold goods worth Rs. 5,50,000 only and rest of the goods are still lying
in its store which may get sold by next year. Advise XYZ, how much revenue it can recognize in its books
for period 20X1-X2.
Solution: As per AS 9, For consignment risk and rewards are not transferred to the customer on just delivery
of the goods and no revenue should be recognized until the goods are sold to a third party. Therefore, XYZ
can recognize revenue of Rs. 5,50,000 only.
20. A Limited sells goods with unlimited right of return from its customers. The following pattern has been
observed in the Return of Sales:
Time frame of Return from date of purchase % of Cumulative Sales
Between 0-1 month 6%
Between 1-2 months 7%
Between 2-3 months 8%
The Company has made Sales of Rs. 36 Lakhs in the month of January, Rs. 48 Lakhs in the month of
February and of Rs. 60 Lakhs in the month of March. The Total Sales for the Financial Year have been Rs.
400 Lakhs and the Cost of Sales was Rs. 320 Lakhs. You are required to determine the amount of Provision
to be made and Revenue to be recognized for the year ended 31st March.
Solution:
Amount of provision: The goods are sold with a right to return. The existence of such right gives rise to a
present obligation on the company as per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets'.
According to the standard, a provision should be created on the Balance sheet date, for sales returns after the
Balance Sheet date, at the best estimate of the loss expected, along with any estimated incremental cost that
would be necessary to resell the goods expected to be returned.
Sales during Sales value Sales value (cumulative) Likely Likely returs Provision @ 20% (Rs.
(Rs. in lacs) (Rs. in lacs) returs (%) (Rs. in lacs) in lacs) (Refer W.N.)
March 60 60 6% 3.60 0.720
February 48 108 7% 7.56 1.512
January 36 144 8% 11.52 2.304
Total 22.68 4.536
Revenue to be recognized: Revenue in respect of sale of goods is recognized fully at the time of sale itself
assuming that the company has complied with the conditions stated in AS 9 relating to recognition of
revenue in the case of sale of goods. As per AS 9, in a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions have been fulfilled:
(i) Seller of goods has transferred to the buyer the property in the goods for a price or all significant risks
and rewards of ownership have been transferred to the buyer and the seller retains no effective control of
the goods transferred to a degree usually associated with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the
sale of the goods. AS 9 also provides that in case of retail sales offering a guarantee of ‘money back, if
not completely satisfied, it may be appropriate to recognize the sale but to make a suitable provision for
returns based on previous experiences.
Therefore, sale of Rs. 36 lakhs, Rs. 48 lakhs and Rs. 60 lakhs made in the months of January, February and
March will be recognized at full value. Thus, total revenue to be recognized for Rs. 400 lacs for the year.
Working Note:
Calculation of Profit % on sales (Rs. in lacs)
Sales for the year 400
Less: Cost of sales (320)
Profit 80
Profit mark up on sales (80/400) x 100 = 20%
21. How will you recognize revenue in the following cases:
(1) Installation Fees;
(2) Advertising and insurance agency commissions;
(3) Subscriptions for publications.
Solution: Installation Fees: In cases where installation fees are other than incidental to the sale of a product,
they should be recognized as revenue only when the equipment is installed and accepted by the customer.
Advertising and insurance agency commissions: Revenue should be recognized when the service is
completed. For advertising agencies, media commissions will normally be recognized when the related
advertisement or commercial appears before the public and the necessary intimation is received by the
agency, as opposed to production commission, which will be recognized when the project is completed.
Insurance agency commissions should be recognized on the effective commencement or renewal dates of the
related policies.
Subscription for publications: Revenue received or billed should be deferred and recognized either on a
straight-line basis over time or, where the items delivered vary in value from period to period, revenue
should be based on the sales value of the item delivered in relation to the total sales value of all items
covered by the subscription.
22. Shipra Ltd., has been successful jewellers for the past 100 years and sales are against cash only (returns are
negligible). The company also diversified into apparels. A young senior executive was put in charge of
Apparels business and sales increased 5 times. One of the conditions for sales is that dealers can return the
unsold stocks within one month of the end of season. Sales return for the year was 25% of sales. Suggest a
suitable Revenue Recognition Policy, with reference to AS 9.
Solution: As per AS 9 “Revenue recognition”, revenue recognition is mainly concerned with the timing of
recognition of revenue in statement of profit and loss of an enterprise. The amount of revenue arising on a
transaction is usually determined by the agreement between the parties involved in the transaction. When
uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may
influence the timing of revenue recognition.
Effect of Uncertainty- In the case of the jewellery business the company is selling for cash and returns are
negligible. Hence, revenue can be recognized on sales. On the other hand, in Apparels Industry, the dealers
have a right to return the unsold goods within one month of the end of the season. In this case, the company
is bearing the risk of sales return and therefore, the company should not recognize the revenue to the extent
of 25% of its sales. The company may disclose suitable revenue recognition policy in its financial statements
separately for both Jewellery and Apparels business.
23. An infrastructure company has constructed a mall and entered into agreement with tenants towards license
fee (monthly rental) and variable license fee, a percentage on the turnover of the tenant (on an annual basis).
Chief Financial Officer of the company wants to account/recognize license fee as income for 12 months
during current year and variable license fee as income during next year, since invoice is raised in the
subsequent year. Comment whether the treatment desired by the CFO is correct or not.
Solution: AS 9 on Revenue Recognition, is mainly concerned with the timing of recognition of revenue in
the Statement of Profit and Loss of an enterprise. The amount of revenue arising on a transaction is usually
determined by agreement between the parties involved in the transaction. However, when uncertainties exist
regarding the determination of the amount, or its associated costs, these uncertainties may influence the
timing of revenue recognition. Further, as per accrual concept, revenue should be recognized as and when it
is accrued i.e. recorded in the financial statements of the periods to which they relate. In the present case,
monthly rental towards license fee and variable license fee as a percentage on the turnover of the tenant
(though on annual basis) is the income related to common financial year.
Therefore, recognizing the fee as revenue cannot be deferred simply because the invoice is raised in
subsequent period. Hence it should be recognized in the financial year of accrual. Therefore, the contention
of the Chief Financial Officer is not in accordance with AS 9.
24. When revenue will be recognized in the following situation:

(i) Where the purchaser makes a series of installment payments to the seller and the seller deliver the goods
only when the final payment is received.
(ii) Where seller concurrently agrees to repurchase the same goods at a later date.
(iii) Where goods are sold to distributors, dealers or others for resale.
(iv) Commissions on service rendered as agent on insurance business.
Solution:
(i) Revenue from sales where the purchaser makes a series of instalment payments to the seller, and the
seller delivers the goods only when the final payment is received, should not be recognised until goods
are delivered. However, when experience indicates that most such sales have been consummated,
revenue may be recognised when a significant deposit is received.
(ii) For sale where seller concurrently agrees to repurchase the same goods at a later date, such transactions
are in substance a financing agreement. In such a situation, the resulting cash inflow should not be
recognised as revenue.
(iii) Revenue from sales of goods to distributors, dealers or others for resale can generally be recognised if
significant risks of ownership have passed. However, in some situations the buyer may in substance be
an agent and in such cases the sale should be treated as a consignment sale.
(iv) Commissions on service rendered as agent on insurance business should be recognised as revenue when
the service is completed. Insurance agency commissions should be recognised on the effective
commencement or renewal dates of the related policies.
25. Given the following information of Rainbow Ltd.
(i) On 15th November, goods worth ₹ 5,00,000 were sold on approval basis. The period of approval was 4
months after which they were considered sold. Buyer sent approval for 75% goods sold upto 31st
January and no approval or disapproval received for the remaining goods till 31st March.
(ii) On 31st March, goods worth ₹ 2,40,000 were sold to Bright Ltd. but due to refurnishing of their show-
room being underway, on their request, goods were delivered on 10th April.
(iii) Rainbow Ltd. supplied goods worth ₹ 6,00,000 to Shyam Ltd. and concurrently agrees to re-purchase the
same goods on 14th April.
(iv) Dew Ltd, used certain assets of Rainbow Ltd. Rainbow Ltd. received ₹ 7.5 lakhs and ₹ 12 as interest and
royalties respectively from Dew Ltd. during the year 2020 -21.
(v) On 25th December, goods of ₹ 4,00,000 were sent on consignment basis of which 40% of the goods
unsold are lying with the consignee at the year-end on 31st March.
In each of the above cases, you are required to advise, with valid reasons, the amount to be recognized as
revenue under the provisions of AS-9.
Solution:
(i) As per AS 9 “Revenue Recognition”, in case of goods sold on approval basis, revenue should not be
recognized until the goods have been formally accepted by the buyer or the buyer has done an act
adopting the transaction or the time period for rejection has elapsed or where no time has been fixed, a
reasonable time has elapsed. Therefore, revenue should be recognized for the total sales amounting ₹
5,00,000 as the time period for rejecting the goods had expired.
(ii) The sale is complete but delivery has been postponed at buyer’s request. The entity should recognize the
entire sale of ₹ 2,40,000 for the year ended 31st March.
(iii) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same goods at a later
date, such transactions that are in substance a financing agreement, the resulting cash inflow is not
revenue as defined and should not be recognized as revenue. Hence no revenue to be recognized in the
given case.
(iv) Revenue arising from the use by others of enterprise resources yielding interest and royalty should be
recognized when no significant uncertainty as to measurability or collectability exists. The interest
should be recognized on time proportion basis taking into account the amount outstanding and rate
applicable. The royalty should be recognized on accrual basis in accordance with the terms of relevant
agreement.
(v) 40% goods lying unsold with consignee should be treated as closing inventory and sales should be
recognized for ₹ 2,40,000 (60% of ₹ 4,00,000). In case of consignment sale revenue should not be
recognized until the goods are sold to a third party.
26. A Ltd. has sold its building for Rs. 50 lakhs to B Ltd. and has also given the possession to B Ltd. The book
value of the building is Rs. 30 lakhs. As on 31st March, 2012, the documentation and legal formalities are
pending. The company has not recorded the sale and has shown the amount received as advance. Do you
agree with this treatment?
Answer: As per AS …….., “The economic reality and substance of the transaction is that the rights and
beneficial interest in the property has been transferred although legal title has not been transferred.” A Ltd.
should record the sale and recognize the profit of Rs. 20 lakhs in its profit and loss account. The building
should be eliminated from the balance sheet.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
SUMMARY NOTES
AS 17: SEGMENT REPORTING

1. Microtech Ltd. produces batteries for scooters, cars, trucks, and specialised batteries for invertors and UPS.
How many segments should it have and why?
Solution: In case of Microtech Ltd., the basic product is the batteries, but the risks and returns of the batteries
for automobiles (scooters, cars and trucks) and batteries for invertors and UPS are affected by different set of
factors. In case of automobile batteries, the risks and returns are affected by the Government policy, road
conditions, quality of automobiles, etc. whereas in case of batteries for invertors and UPS, the risks and returns
are affected by power condition, standard of living, etc. Therefore, it can be said that Microtech Ltd. has two
business segments viz- ‘Automobile batteries’ and ‘batteries for Invertors and UPS’.
2. Company A is engaged in the manufacture of chemicals. The company manufactures five types of chemicals
that have different applications. Can this company include more than one type of chemical in a single business
segment? Comment.
Solution: As per AS 17, “A business segment is a distinguishable component of an enterprise that is engaged
in providing an individual product or service or a group of related products of services and that is subject to
risks and returns that are different from those of other business segments. Factors that should be considered in
determining whether products or services are related include:
(a) the nature of the products of services;
(b) the nature of the productions processes;
(c) the type of class of customers for the products or services;
(d) the methods use to distribute the products or provide the services; and
(e) if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.”
As per provisions of the standard, a single business segment does not include products and services with
significantly differing risks and returns. Products and services included in a single business segment may be
dissimilar with respect to one or several factors listed above but are expected to be similar with respect to
majority of the factors.
In the present case, the Company should consider whether the chemicals with different applications, have
similar risks end returns. For this purpose, the Company should ascertain whether one or more types of
chemicals are related keeping in view the relevant factors including those given in the definition of business
segment. Chemicals having different applications can be included in a single business segment if majority of
the relevant factors including those listed above are similar. This would ensure that the chemicals having
significantly different risks and returns are not included in a single business segment.
3. XYZ Ltd. has 5 business segments. Profit / Loss of each of the segments for the year ended 31st March,2022
has been provided below. You are required to identify from the following whether reportable segments or not
reportable segments, on the basis of "profitability test" as per AS-17.
Segment Profit (Loss) ₹ in lakhs
A 225
B 25
C (175)
D (20)
E (105)
4. The Chief Accountant of Cotton Garments Limited gives the following data regarding its five segments:
(Rs Crore)
Particulars A B C D E Total
Segment Assets 40 15 10 10 5 80
Segment Results (95) 5 5 (5) 15 (75)
Segment Revenue 310 40 30 40 30 450
The Chief Accountant is of the opinion that segment A alone should be reported. Is he justified in his view?
Examine his opinion in the light of provisions of AS 17 ‘Segment Reporting’.
5. ABC Limited has three segments viz. A, B, and C. The total assets of the company is Rs. 15 crores. The assets
of Segment A is Rs. 1.85 crores, Segment B is Rs 6.15 crores and Segment C is Rs 7.00crores. Assets of each
segment include deferred tax assets of Rs. 0.50 crores in A, Rs 0.40 crores in B and Rs 0.30 crores in C. The
accountant of ABC Limited contends that all segments are reportable segments. Based on segment assets
criteria determine the veracity of the contention of the accountant.
6. The Chief Accountant of Sports Ltd. gives the following data regarding its six segments:
Rs. In lakhs
Particulars M N O P Q R Total
Segment Assets 40 80 30 20 20 10 200
Segment Results 50 -190 10 10 -10 30 -100
Segment Revenue 300 620 80 60 80 60 1,200
The Chief accountant is of the opinion that segments “M” and “N” alone should be reported. Is he justified in
his view? Discuss.
Answer: As per para 27 of AS 17 ‘Segment Reporting’, a business segment or geographical segment should
be identified as a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with other segments is 10% or
more of the total revenue- external and internal of all segments; or
(ii) Its segment result whether profit or loss is 10% or more of:
(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss,
whichever is greater in absolute amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less than 75% of total enterprise
revenue, additional segments should be identified as reportable segments even if they do not meet the 10%
thresholds until atleast 75% of total enterprise revenue is included in reportable segments.
(a) On the basis of turnover criteria segments M and N are reportable segments.
(b) On the basis of the result criteria, segments M, N and R are reportable segments (since their results
in absolute amount is 10% or more of Rs.200 lakhs).
(c) On the basis of asset criteria, all segments except R are reportable segments.
Since all the segments are covered in atleast one of the above criteria all segments have to be reported upon in
accordance with Accounting Standard (AS) 17. Hence, the opinion of chief accountant is wrong.
7. Prepare a segmental report for publication in Diversifiers Ltd. from the following details of the company’s
three divisions and the head office:
Rs.(’000)
Forging Shop Division
Sales to Bright Bar Division 4,575
Other Domestic Sales 90
Export Sales 6,135
10,800
Bright Bar Division
Sales to Fitting Division 45
Export Sales to Rwanda 300
345
Fitting Division
Export Sales to Maldives 270
Particulars Head Office Forging Shop Bright Bar Fitting
Division Division Division
Rs. (‘000) Rs. (‘000) Rs. (‘000) Rs. (‘000)
Pre-tax operating result 240 30 (12)
Head office cost
Reallocated 72 36 36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180
8. A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market prices are
generally 25% above cost. Is the policy adopted by the company correct?
Answer: AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis
that the enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and
any change therein should be disclosed in the financial statements. Hence, the enterprise can have its
own policy for pricing inter -segment transfers and hence, inter-segment transfers may be based on cost,
below cost or market price. However, whichever policy is followed, the same should be disclosed and
applied consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by the
company is correct if, followed consistently.
9. Following details are given for Omega Textiles Ltd. for the year ended 31st March, 2004.
(Rs. ‘000)
Sales:
Cotton textiles 5,650
Silk fabrics 625
Woolen clothes 345
Others 162 6,782
Expenses:-
Cotton 3,335
Silk fabrics 425
Woolen clothes 222
Others 200 4,182
Other Items:
General Corporate Expenses 562
Income from investments 132
Interest expenses 65
Identifiable assets:
Cotton textiles 7,320
Silk fabrics 1,320
Woolen clothes 1,050
Others 665 10,355
General Corporate Assets 722
Other information:
(a) Inter segment sales are as below:
(Rs. ‘000)
Cotton textiles 55
Silk fabrics 72
Woolen clothes 21
Others 7
(b) Operating Profit includes Rs. 33 (‘000) on inter segment sales.
(c) Information about inter segment expenses are not available.
You are required to prepare a statement showing financial information about Omega Textiles Ltd.’s
operations in different industry segments.
Answer:- Information about Omega Textiles Ltd.s’ operations in different industry segments is furnished
in the following table:
(Amount/Rs.000)
Cotton Silk Woolen Others Inter Consolidated
textiles fabric clothes Segment
Elimination
External Sales 5,595 553 324 155 − 6,627
Inter Segment 55 72 21 7 155 −
Total 5,650 625 345 162 155 6,627
Segment expenses 3,335 425 222 200 122 4,060
Operating Profit 2,315 200 123 (38) 33 2,567
General corporate expenses (562)
Income from investment 132
Interest (65)
Income from continuing 2072
operations
Identifiable assets 7,320 1,320 1,050 665 10,355
Corporate assets − − − − − 722
Total assets 11,077
10. Is an enterprise required to disclose changes in the basis of allocation of revenue and expenses to segments?
Explain.
Solution: As per AS 17, “Changes in accounting policies adopted for segment reporting that have a material
effect on segment information should be disclosed. Such disclosure should include a description of the nature
of the change, and the financial effect of the change if it is reasonably determinable.” It also states that “some
changes in accounting policies relate specifically to segment reporting. Examples include changes in
identification of segments and changes in the basis for allocating revenues and expenses to segments. Such
changes can have a significant impact on the segment information reported but will not change aggregate
financial information reported for the enterprise. To enable users to understand and impact of such changes,
this Statement requires the disclosure of the nature of change and t he financial effect of the change, if
reasonably determinable”.
In view of the above, a change in the basis of allocation of revenue and expenses to segments is a change in
the accounting policy adopted for segment reporting. Accordingly, if the change has a material financial
effect on the segment information, a description of the nature of the change, and the financial effect of the
change, if it is reasonably determinable, should be disclosed.
11. Company A is engaged in the manufacture and sale of products, which constitute two distinct business
segments. The products of the Company are sold in the domestic market only. The management information
system of the Company is organized to reflect operating information by two broad market segments, rural
and urban. Besides the two business segments, how should Company A identify geographical segments? Do
geographical segments exist within the same country? Explain in line with the provisions of AS 17.
Solution: AS 17 explains that, “a single geographical segment does not include operations in economic
environments with significantly differing risks and returns. A geographical segment may be a single country,
a group of two or more countries, or a region within a country”. Accordingly, to identity geographical
segments, Company A needs to evaluate whether the segments reflected in the management information
system function in environments that are subject to significantly differing risks and returns irrespective of the
fact whether they are within the same country.
The Standard recognizes that, “Determining the composition of a business or geographical segment involves
a certain amount of judgement…”. Accordingly, while the management information system of the Company
provides segment information for rural and urban geographical segments for the purpose of internal
reporting, judgement is required to determine whether these segments are subject to significantly differing
risks and returns based on the definition of geographical segment. In making such a judgement, aspect like
different pricing and other policies, e.g., credit policies, deployment of resources between different regions
etc., may be considered for the purpose identifying ‘urban and ‘rural’ as separate geographical segment.
Company A, in making judgment for identifying geographical segments, should also consider the relevance,
reliability and comparability over time of segment information that will be reported. The Standard, explains
that, “In making that judgement, enterprise management takes into account the objective of reporting
financial information by segment as set forth in the standard and the qualitative characteristics of financial
statements. The qualitative characteristics include the relevance, reliability and comparability over time of
financial information that is reported about the different groups of products and services of an enterprise and
about its operations in particular geographical areas, and the usefulness of that information for assessing the
risks and returns of the enterprise.”
12. State the possible objections to segmental reporting.

Answer: Objections to segmental reporting: The possible objections to segmental reporting can be
enumerated as below:
(i) It is generally felt that segmental revenues and expenses are not distinguishable objectively in many
cases. Revenues of a weak product line may be derived only because of the existence of a strong
product line. Also many joint costs are only separable arbitrarily.
(ii) Much of segmental results depend on the inter-departmental transfer pricings which are not always
logically established.
(iii) Various segments of an enterprise may use common resources which makes it difficult to arrive at a
segment wise performance ratio.
(iv) Since the users are in no position to know the proper base for cost allocation, the segment results
would be less than meaningful.
(v) The last objection consists of the competitive implications to the firm. Some academics contend
that company secrets will be disclosed while others referred to the competitive hardship suffered
by some firms if segmented data is required. Suppose that Company X, a small company, has a
segment identical to one in Company Y, a huge conglomerate. Company X would have to
disclose the segment while Company Y would not because the segment is not considered material to
Y's operations.
However, considering the problems of joint cost allocation, often it is suggested to follow a contribution
margin approach for reporting segmental results. By this only identifiable costs are deducted from
segment revenues and gross segment margins may only be indicated. But for all practical purposes, this
becomes a useless exercise when proportion of identifiable cost is insignificant.
13. M/s XYZ Ltd. has three segments namely X, Y, Z. The total Assets of the Company are ₹ 10.00 crores.
Segment X has ₹ 2.00 crores, segment Y has ₹ 3.00 crores and segment Z has ₹ 5.00 crores. Deferred tax assets
included in the assets of each segments are X- ₹ 0.50 crores, Y— ₹ 0.40 crores and Z— ₹ 0.30 crores. The
accountant contends that all the three segments are reportable segments. Comment.
Solution According to AS 17 “Segment Reporting”, segment assets do not include income tax assets.
Therefore, the revised total assets are ₹ 8.8 crores [₹ 10 crores – (₹ 0.5 + ₹ 0.4 + ₹ 0.3)]. Segment X holds total
assets of ₹ 1.5 crores (₹ 2 crores – ₹ 0.5 crores).
Segment Y holds ₹ 2.6 crores (₹ 3 crores – ₹ 0.4 crores); and Segment Z holds ₹ 4.7 crores (₹ 5 crores – ₹ 0.3
crores). Thus all the three segments hold more than 10% of the total assets, all segments are reportable
segments.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
SUMMARY NOTES
AS 18: RELATED PARTY DISCLOSURES
1. Who are related parties under AS 18? What are the related party disclosure requirements?
Answer:- Parties are considered to be related if at any time during the reporting period one party has the
ability to control the other party or exercise significant influence over the other party in making financial
and/or operating decisions.
If there have been transactions between related parties, during the existence of a related party relationship, the
reporting enterprise should disclose the following:
(i) the name of the transacting related party;
(ii) a description of the relationship between the parties;
(iii) a description of the nature of transactions;
(iv) volume of the transactions either as an amount or as an appropriate proportion;
(v) any other elements of the related party transactions necessary for an understanding of the financial
statements;
(vi) the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance
sheet date and provisions for doubtful debts due from such parties at that date; and
(vii) amounts written off or written back in the period in respect of debts due from or to related parties.
2. Narmada Ltd. sold goods for Rs.90 lakhs to Ganga Ltd. during financial year ended 31-3- 2006. The
Managing Director of Narmada Ltd. own 100% of Ganga Ltd. The sales were made to Ganga Ltd. at normal
selling prices followed by Narmada Ltd. The Chief accountant of Narmada Ltd contends that these sales need
not require a different treatment from the other sales made by the company and hence no disclosure is
necessary as per the accounting standard. Is the Chief Accountant correct?
Answer: As per paragraph 13 of AS 18 ‘Related Party Disclosures’, Enterprises over which a key
management personnel is able to exercise significant influence are related parties. This includes enterprises
owned by directors or major shareholders of the reporting enterprise that have a member of key management
in common with the reporting enterprise.
In the given case, Narmada Ltd. and Ganga Ltd are related parties and hence disclosure of transaction between
them is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Narmada Ltd is wrong.
3. P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly enjoys
voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P Ltd. The
management of R Ltd. has not disclosed its relationship with P Ltd.
How would you assess the situation from the viewpoint of AS 18 on Related Party Disclosures?
Answer: P Ltd. has direct economic interest in R Ltd to the extent of 14%, and through Q Ltd. in which it is
the majority shareholders, it has further control of 12% in R Ltd. (60% of Q Ltd’s 20%). These two taken
together (14% + 12%) make the total control of 26%. Para 10 of AS 18 ‘Related Party Disclosures’, defines
related party as one that has at any time during the reporting period, the ability to control the other party or
exercise significant influence over the other party in making financial and/or operating decisions.
Here, Control is defined as ownership directly or indirectly of more than one-half of the voting power of an
enterprise; and Significant Influence is defined as participation in the financial and/or operating policy
decisions of an enterprise but not control of those policies.
In the present case, control of P Ltd. in R Ltd. directly and through Q Ltd., does not go beyond 26%. However,
as per para 12 of AS 18, significant influence may be exercised as an investing party (P Ltd.) holds, directly or
indirectly through intermediaries 20% or more of the voting power of the R Ltd. As R Ltd. is a listed company
and regularly supplies goods to P Ltd. therefore, related party disclosure, as per AS 18, is required.
4. Identify the related parties in the following cases as per AS 18

A Ltd. holds 51% of B Ltd.
B Ltd holds 51% of O Ltd.
Z Ltd holds 49% of O Ltd.
5. Mr. Raj a relative of key Management personnel received remuneration of Rs. 2,50,000 for his services in the
company for the period from 1.4.2011 to 30.6.2011. On 1.7.2011 he left the service.
Should the relative be identified as at the closing date i.e. on 31.3.2010 for the purposes of AS 18?
6. X Ltd. sold goods to its associate Company for the 1st quarter ending 30.6.2012. After that, the related party
relationship ceased to exist. However, goods were supplied as was supplied to any other ordinary customer.
Decide whether transactions of the entire year have to be disclosed as related party transaction.
Solution: As per AS 18, transactions of company with its associate company for the first quarter ending
30.06.2020 only are required to be disclosed as related party transactions. The transactions for the period in
which related party relationship did not exist need not be reported.
7. SP hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return payable to the
later every year. The contract involves the day-to-day management of the hotel, while all financial and
operating policy decisions are taken by the Board of Directors of the company. Mr. A does not own any
voting power in SP Hotels Limited. Would he be considered as a related party of SP Hotels Limited”?
Solution: Mr. A will not be considered as a related party of SP Hotels Limited in view of paragraph 3(c) of
AS 18 which states, “individuals owning, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any
such individual”. In the given case, in the absence of share ownership, Mr. A would not be considered to
exercise significant influence on SP Hotels Limited, even though there is an agreement giving him the power
to manage the company. Further, the fact that Mr. A does not have the ability to direct or instruct the board of
directors does not qualify him as a key management personnel.
8. Following transactions are disclosed as on 31st March, 2018:
(i) Mr. Sumit, a relative of Managing Director, received remuneration of ₹ 2,10,000 for his services in the
company for the period from 1st April, 2017 to 30th June, 2017. He left the service on 1st July, 2017.
Should the relative be identified as a related party as on closing date i.e. on 31-3-2018 for the purpose of
AS-18.
(ii) Goods sold amounting to ₹ 50 lakhs to associate company during the 1st quarter ended on 30th June, 2017.
After that related party relationship ceased to exist. However, goods were supplied as was supplied to any
other ordinary customer.
Decide whether transactions of the entire year have to be disclosed as related party transactions.
9. Sun Ltd. sold goods for Rs. 50 lakhs to Moon Ltd. during financial year ended 31st March 2017 at normal
selling price followed by Sun Ltd. The Managing Director of Sun Ltd. holds 75% shares of Moon Ltd. The
Chief accountant of Sun Ltd contends that these sales need not require a different treatment from the other
sales made by the company and hence no disclosure is necessary as per the accounting standard. You are
required to examine and advise whether the contention of the Chief Accountant is correct?
Solution: As per AS 18 ‘Related Party Disclosures’, Enterprises over which a key management personnel is
able to exercise significant influence are related parties. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprise that have a member of key management in common
with the reporting enterprise.
In the given case, Sun Ltd. and Moon Ltd are related parties and hence disclosure of transaction between them
is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Sun Ltd is wrong.
10. Is remuneration paid to Board of Directors a related party transaction? Explain.

Solution: In case of a Company, the Managing Director, whole time director, manager and any person in
accordance with whose directions or instructions the board of directors of the company is accustomed to act,
are usually considered Key Managerial Personnel (KMP).
Persons who do not have the authority and responsibility for planning, directing and controlling the activities
of the enterprise would not be KMP. Conversely, persons without any formal titles may be considered to be
KMP, if they plan, direct and control the activities of the enterprise.
Further, as per Sec 2(76) of Companies Act, 2013, a related party includes a director or his relative. Sec 2(34)
defines a director as a director appointed to the Board of a Company.
Hence, remuneration paid to Board of Directors will be considered as related party transaction.
11. Identify the related parties in the following cases as per AS-18
(i) Maya Ltd. holds 61% shares of Sheetal Ltd.
Sheetal Ltd. holds 51% shares of Fair Ltd.
Care Ltd. holds 49% shares of Fair Ltd.
(Give your answer Reporting Entity wise for Maya Ltd., She etal Ltd., Care Ltd. and Fair Ltd.)
(ii) Mr. Subhash Kumar is Managing Director of A Ltd. and also holds 72% capital of B Ltd.(B Ltd. is
subsidiary of A Ltd.)
Solution:
(i) As Per AS-18, “Related Party Disclosure”
Reporting entity - Maya Ltd.

 Sheetal Ltd. (subsidiary) is a related party
 Fair Ltd.(subsidiary) is a related party
Reporting entity- Sheetal Ltd.
 Maya Ltd. (holding company) is a related party
 Fair Ltd. (subsidiary) is a related party
Reporting entity- Fair Ltd.
 Maya Ltd. (holding company) is a related party
 Sheetal Ltd. (holding company) is a related party
 Care Ltd. (investor/ investing party) is a related party
Reporting entity- Care Ltd.
 Fair Ltd. (associate) is a related party
(ii) As per Para 3e of AS- 18, ““Related Party Disclosure” Enterprises over which any person described in
(c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a member of key management in common
with the reporting enterprise.
In the given all parties are related to each other.
12. Arohi Ltd. sold goods for Rs. 90 lakhs to Anya Ltd. during financial year ended 31-3-20X1. The Managing
Director of Arohi Ltd. own 100% of Anya Ltd. The sales were made to Anya Ltd. at normal selling prices
followed by Arohi Ltd. The Chief accountant of Arohi Ltd contends that these sales need not require a
different treatment from the other sales made by the company and hence no disclosure is necessary as per the
accounting standard. Is the Chief Accountant correct? Comment in accordance with AS 18.
Solution: As per AS 18 ‘Related Party Disclosures’, Enterprises over which the key management personnel
is able to exercise significant influence are related parties. This includes enterprises owned by directors or
major shareholders of the reporting enterprise that have a member of key management in common with the
reporting enterprise. In the given case, Arohi Ltd. and Anya Ltd. are related parties and hence disclosure of
transaction between them is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Arohi Ltd. is wrong.
13. In respect of a key supplier who is dependent on the company for its existence and the company enjoys
influence over the prices of this supplier (which may not be formally demonstrable), can the supplier and the
company be considered as related parties?
Solution: The supplier and the company cannot be considered to be related parties merely because the latter
is able to influence the transaction price between the parties. Paragraph 3 of AS 18 states that “enterprises
that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under
common control with, the reporting enterprise” are considered to be related party relationships. However, the
conditions which define the existence of control, as follows, are not satisfied in the given example.
 ‘ownership, directly or indirectly, of more than one-half of the voting power of an enterprise, or
 Control of the composition of the board of directors in the case of a company or of the composition of
the corresponding governing body in case of any other enterprise, or
 a substantial interest in voting power and the power to direct, by statue or agreement, the financial
and/or operating policies of the enterprise”.
Paragraph 10 of the standard defines significant influence as “participation in the financial and/or operating
policy decisions of an enterprise, but not control of those policies”. In the given example, although the
supplier and the company have entered into a commercial transaction, the terms of which are influenced by
the latter because of its better bargaining power in the specific market for such goods, it cannot be concluded
that there is participation in the financial and/or operating policy decisions. Therefore, as the conditions
specified by the Standard for being classified as a related party are not satisfied in the given example, the
company cannot be said to be related to the supplier. This view is supported by paragraph 4 (b) of the
Standard which states that “a single customer, supplier, franchiser, distributor, or general agent with whom
an enterprise transacts a significant volume of business merely by virtue of the resulting economic
dependence” would not be deemed to be related parties.
14. Omega Bank Limited holds 25 per cent of the voting power of B Limited. Omega Bank Limited also
provides finance by way of a loan to B Limited at market rates of interest, on account of which, Omega Bank
Limited would have the power to nominate one person to the board of directors of B Limited. Any major
transactions proposed to be entered into by B Limited would need the consent of Omega Bank Limited.
Would Omega Bank Limited be considered as related party for B Ltd. ( reporting enterprise)?
Solution: Omega Bank Limited would be a related party of B Limited. As per AS 18 “associates and joint
ventures of the reporting enterprise and the investing party of venture in respect of which the reporting enterprise
is an associate or a joint venturer” are related party relationship. Further, an associate has been defined as “an
enterprise in which an investing reporting party has significant influence and which is neither a subsidiary nor a
joint venture of the party”. Significant influence has been defined to be “participation in the financial and /or
operating policy decisions of an enterprise, but not control of those policies”. Further, it is given in the standard
that significant influence may be gained by share ownership, agreement or statute. As regards share ownership,
there is a presumption that ownership of 20 per cent or more of the voting power enables the enterprise to exercise
significant influence, unless it could be clearly demonstrated otherwise. In the given example, Omega Bank
Limited exercises significant influence over B Limited by virtue of ownership of 25 per cent of the voting power.
Omega Bank Limited is also a provider of finance for B Limited (as it has provided a loan to B Limited), and as
per the standard, a provider of finance is deemed not to be a related party during its normal dealings with the
enterprise by virtue only of those dealing. However, in this case, the exemption would not be available to Omega
Bank Limited as the exercise of significant influence of Omega Bank Limited over B Limited has been
demonstrated on account of ownership of more than 20 per cent of voting power. Accordingly, Omega Bank
Limited would be construed to be a related party in the financial statements of B Limited and consequently, the
latter would be required to disclose the transactions with Omega Bank Limited in its financial statements.
15. A Ltd has two Associates, B Ltd and C Ltd, and owns 25% of the voting power of B Ltd and 30% of the voting
power of C Ltd. Would B Ltd be considered a related party for the purpose of financial statements of C Ltd?
Solution: Both B Ltd. and C Ltd. are ‘associates’ of A Ltd. Follow-associates cannot be regarded as a related
parties only by virtue of the relationship. AS 18 states that “enterprise that directly, or indirectly through one
or more intermediaries, control, or are controlled by, or are under common control with, the reporting
enterprise” are related parties. Further, it is given that “associates and joint ventures of the reporting
enterprise and the investing party or venture in respect of which the reporting enterprise is an associate or a
joint venturer” are also related parties. As B Limited is not an associate of C Ltd., nor is it being controlled,
directly or indirectly, by C Limited or is not so controlling C Limited, it is not a related party of C Ltd.
16. Himalaya Limited sold goods for ₹ 40 Lakhs to Aravalli Limited during financial year ended on March 31,
2019. The Managing Director of Himalaya Limited owns 80% shares of Aravalli Limited. The sales were
made to Aravalli Limited at normal selling prices followed by Himalaya Limited. The chief accountant of
Himalaya Limited contends that these sales need not require a different treatment from the other sales made
by the company and hence no disclosure is necessary as per AS 18. You are required to comment on this.
Solution: Himalaya Ltd. and Aravalli Ltd are related parties since key management personnel of Himalaya
Ltd. i.e. its managing director holds 80% in Aravalli Ltd. and hence disclosure of transaction between them
is required irrespective of whether the transaction was done at normal selling price. Hence the contention of
Chief Accountant of Himalaya Ltd that these sales require no disclosure under related party transactions, is
wrong.
17. SP hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return payable to the
later every year. The contract involves the day-to-day management of the hotel, while all financial and
operating policy decisions are taken by the Board of Directors of the company. Mr. A does not own any
voting power in SP Hotels Limited. Would he be considered as a related party of SP Hotels Limited?
Solution: Mr. A will not be considered as a related party of SP Hotels Limited in view of AS 18 which
states, “individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise
that gives them control or significant influence over the enterprise, and relatives of any such individual”. In
the given case, in the absence of share ownership, Mr. A would not be considered to exercise significant
influence on SP Hotels Limited, even though there is an agreement giving him the power to manage the
company. Further, the fact that Mr. A does not have the ability to direct or instruct the board of directors
does not qualify him as a key management personnel.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
SUMMARY NOTES
AS-19: LEASES
1. Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being Rs.7,00,000. The economic life of
the machine as well as the lease term is 3 years. At the end of each year Lessee Ltd. pays Rs.3,00,000.
Guaranteed Residual Value (GRV) is Rs.22,000 on expiry of the lease. However Lessor Ltd., estimates that
the residual value of the machinery will be only Rs. 15,000. Implicit Rate of Return (IRR) is 15% p.a. and
present value factors at 15% are 0.869, 0.756 and 0.657 at the end of first, second and third years
respectively. Calculate the value of machine to be considered by Lessee Ltd. and the interest (Finance
charges) in each year.
2. A Ltd. Leased a machinery to B Ltd. on the following terms:

(Rs. in Lakhs)
Fair value of the machinery 20.00

Lease term 5 years
Lease Rental per annum 5.00
Guaranteed Residual value 1.00
Expected Residual value 2.00
Internal Rate of Return 15%
Depreciation is provided on straight line method @ 10% per annum. Ascertain unearned financial income
and necessary entries may be passed in the books of the Lessee in the First year.
3. On 1st April 20X2 ABC ltd. leases equipment for 4 years to XYZ ltd. The cost of the equipment is Rs.
1,500,000 and has a useful life of 10 years (assume straight line method of depreciation). The lease payments
to be made are as follows;
Year Amount
1 100,000
2 150,000
3 175,000
4 200,000
625,000
The lease is classified as an operating lease. How would this lease be accounted for in the books of account
of the lessee and the lessor?
4. An equipment is leased for 3 years and its useful life is 5 years. Both the cost and the fair value of
the equipment are Rs. 3,00,000. The amount will be paid in 3 instalments and at the termination of
lease lessor will get back the equipment. The unguaranteed residual value at the end of 3 years is Rs.
40,000. The (internal rate of return) IRR of the investment is 10%. The present value of annuity factor
of Re. 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of Re. 1 due at the end of
3rd year at 10% rate of interest is 0.7513.
(i) State with reason whether the lease constitutes finance lease.
(ii) Calculate unearned finance income.
5. Global Ltd. has initiated a lease for three years in respect of an equipment costing Rs.1,50,000 with
expected useful life of 4 years. The asset would revert to Global Limited under the lease agreement. The
other information available in respect of lease agreement is:
(1) The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at
Rs.20,000.
(2) The implicit rate of interest is 10%.
(3) The annual payments have been determined in such a way that the present value of the lease payment
plus the residual value is equal to the cost of asset.
(4) Ascertain in the hands of Global Ltd.
a. The annual lease payment.
b. The unearned finance income.
6. Jaya Ltd. took a machine on lease from Deluxe Ltd., the fair value being ₹ 11,50,000. Economic life of the
machine as well as lease term is 4 years. At the end of each year, lessee pays ₹ 3,50,000 to lessor. Jaya Ltd.
has guaranteed a residual value of ₹ 70,000 on expiry of the lease to Deluxe Ltd., however Deluxe Ltd.
estimates that residual value will be only ₹ 25,000. The implicit rate of return is 10% p.a. and present value
factors at 10% are : 0.909, 0.826, 0.751 and 0.683 at the end of 1st, 2nd, 3rd and 4th year respectively.
Calculate the value of machinery to be considered by Jaya Ltd. and the value of the lease liability as per AS-
19.
Solution: According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset and a
liability at an amount equal to the fair value of the leased asset at the inception of the finance lease.
However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from
the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the
minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit
in the lease. Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Payment (₹) Internal rate of return Present value (₹)
(Discount rate @10%)
1 3,50,000 0.909
3,18,150
2 3,50,000 0.826
2,89,100
3 3,50,000 0.751
2,62,850
4 (3,50,000 + 70,000) 4,20,000 0.683
2,86,860
Total 14,70,000 11,56,960
Present value of minimum lease payments ₹ 11,56,960 is more than fair value at the inception of lease i.e. ₹
11,50,000, therefore, the lease liability and machinery should be recognized in the books at ₹ 11,50,000 as
per AS 19.
7. WIN Ltd. has entered into a three year lease arrangements with Tanya sports club in respect of Fitness
Equipments costing Rs. 16,99,999.50. The annual lease payments to be made at the end each year are
structured in such way that the sum of the Present Values of the lease payments and that of the residual value
together equal the cost of the equipments leased out. The unguaranteed residual value of the equipment at the
expiry of the lease is estimated to be Rs. 1, 33,500. The assets would revert to the lessor at the end of the
lease. Given that the implicit rate of interest is 10% you are required to compute the amount of the annual
lease and the unearned finance income. Discounting Factor at 10% for years 1,2, and 3 are 0.909, 0.826 and
0.751 respectively.
8. A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease rentals to
yield 30% profit margin on cost Rs. 1,50,000. Economic life of the machine is 5 years and output from the
machine are estimated as 40,000 units, 50,000 units, 60,000 units, 80,000 units and 70,000 units
consecutively for 5 years. Straight line depreciation in proportion of output is considered appropriate.
Compute the following:
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease.
Solution:
(i) Annual lease rent
Total lease rent
= 130% of Rs. 1,50,000 X (Output during lease period / Total output)
= 130% of Rs. 1,50,000 x (40,000 +50,000+ 60,000)/(40,000 + 50,000 + 60,000 + 80,000 + 70,000)
= 1,95,000 x 1,50,000 units/3,00,000 units = Rs. 97,500
Annual lease rent = Rs. 97,500 / 3 = Rs. 32,500
(ii) Lease rent Income to be recognized in each operating year

Total lease rent should be recognised as income in proportion of output during lease period, i.e. in the
proportion of 40 : 50 : 60.
Hence income recognised in years 1, 2 and 3 will be as:
Year 1 Rs. 26,000,
Year 2 Rs. 32,500 and
Year 3 Rs. 39,000.
(iii) Depreciation for three years of lease: Since depreciation in proportion of output is considered
appropriate, the depreciable amount Rs. 1,50,000 should be allocated over useful life 5 years in
proportion of output, i.e. in proportion of 40 : 50 : 60 : 80 : 70 .
Depreciation for year 1 is Rs. 20,000, year 2 = 25,000 and year 3 = 30,000.
9. X Ltd. sold JCB Machine having WDV of Rs. 50 Lakhs to Y Ltd for Rs. 60 Lakhs and the same JCB was
leased back by Y Ltd to X Ltd. The lease is operating lease
Comment according to relevant Accounting Standard if
(i) Sale price of Rs. 60 Lakhs is equal to fair value.
(ii) Fair Value is Rs. 50 Lakhs and sale price is Rs.45 Lakhs.
(iii) Fair value is Rs. 55 Lakhs and sale price isRs. 62 lakhs
(iv) Fair value is Rs. 45 Lakhs and sale price is Rs. 48 Lakhs.
Answer:- According to AS 19, following will be the treatment in the given situations:
(i) When sales price of Rs. 60 lakhs is equal to fair value, X Ltd. should immediately recognize the profit
of Rs.10 lakhs (i.e. 60 – 50) in its books.
(ii) When fair value of leased JCB machine is Rs. 50 lakhs & sales price is Rs. 45 lakhs, then loss of Rs. 5
lakhs (50 – 45) to be immediately recognized by X Ltd. in its books provided loss is not compensated
by future lease payments.
(iii) When fair value is Rs. 55 lakhs & sales price is Rs. 62 lakhs, profit of Rs. 5 lakhs (55 - 50) to be
immediately recognized by X Ltd. in its books and balance profit of Rs. 7 lakhs (62-55) is to be
amortised/deferred over lease period.
(iv) When fair value is Rs. 45 lakhs & sales price is Rs. 48 lakhs, then the loss of Rs. 5 lakhs (50- 45) to be
immediately recognized by X Ltd. in its books and profit of Rs. 3 lakhs (48-45) should be
amortised/deferred over lease period.
10. A Ltd. sold machinery having WDV of Rs. 40 lakhs to B Ltd. for Rs. 50 lakhs and the same machinery was
leased back by B Ltd. to A Ltd. The lease back is operating lease. Comment if –
(a) Sale price of Rs.50 lakhs is equal to fair value.
(b) Fair value is Rs. 60 lakhs.
(c) Fair value is Rs. 45 lakhs and sale price is Rs. 38 lakhs.
(d) Fair value is Rs. 40 lakhs and sale price is Rs.50 lakhs.
(e) Fair value is Rs.46 lakhs and sale price is Rs. 50 lakhs
(f) Fair value is Rs.35 lakhs and sale price is Rs.39 lakhs.
Answer:- Following will be the treatment in the given cases:
(a) When sales price of Rs. 50 lakhs is equal to fair value, A Ltd. should immediately recognize the profit of
Rs.10 lakhs (i.e. 50 – 40) in its books.
(b) When fair value is Rs. 60 lakhs then also profit of Rs.10 lakhs should be immediately recognized by A
Ltd.
(c) When fair value of leased machinery is Rs. 45 lakhs & sales price is Rs. 38 lakhs, then loss of Rs. 2 lakhs
(40 – 38) to be immediately recognized by A Ltd. in its books provided loss is not compensated by future
lease payment.
(d) When fair value is Rs. 40 lakhs & sales price is Rs. 50 lakhs then, profit of Rs. 10 lakhs is to be deferred
and amortized over the lease period.
(e) When fair value is Rs. 46 lakhs & sales price is Rs. 50 lakhs, profit of Rs. 6 lakhs (46 - 40) to be
immediately recognized in its books and balance profit of Rs.4 lakhs (50-46) is to be amortised/deferred
over lease period.
(f) When fair value is Rs. 35 lakhs & sales price is Rs. 39 lakhs, then the loss of Rs. 5 lakhs (40- 35) to be
immediately recognized by A Ltd. in its books and profit of Rs. 4 lakhs (39-35) should be
amortised/deferred over lease period
11. AS Ltd. Leased a machine to SB Ltd. on the following terms:

(Rs. In lakhs)
Fair value of the machine 4.00

Lease term 5 years
Lease Rental Per annum 1.00
Guaranteed Residual value 0.20
Expected Residual value 0.40
Internal Rate of Return 15%
Depreciation is provided on straight line method at 10 per cent per annum. Ascertain Unearned
Financial Income. Necessary Journal entries in the books of the Lessee in first year may be shown.
Solution: As per AS 19 on Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance lease from the
standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate
implicit in the lease.
Where:
(a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point of the
lessor and (ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value(GRV)] + Unguaranteed residual value (URV)
= [(₹ 1,00,000 X 5 years) + ₹ 20,000] + ₹ 20,000 = ₹ 5,40,000 (a)
(b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value
(URV).
Year M.L.P. inclusive of URV Internal rate of return Present Value

₹ (Discount factor @ 15%) ₹
1 1,00,000 86,9600.8696
2 1,00,000 75,6100.7561
3 1,00,000 65,7500.6575
4 1,00,000 57,1800.5718
5 1,00,000 49,7200.4972
20,000(GRV) 9,9440.4972
5,20,000 3,45,164 (i)
20,000 (URV) 0.4972 9,944 (ii)
5,40,000 (i) + (ii) 3,55,108 (b)
Unearned Finance Income = (a) – (b) = ₹ 5,40,000 – ₹ 3,55,108 = ₹ 1,84,892
Journal Entries in the books of SB Ltd.
₹ ₹
At the inception of lease
Machinery account Dr. 3,45,164
To AS Ltd.’s account 3,45,164*
(Being lease of machinery recorded at present
value of minimum lease payments)
At the end of the first year of lease
Finance charges account Dr. 51,775
(Refer Working Note)
To AS Ltd.’s account 51,775
(Being the finance charges for first year due)
AS Ltd.’s account Dr. 1,00,000
(Being the lease rent paid to the lessor which
includes outstanding liability of ₹ 48,225 and
finance charge of ₹ 51,775)
Depreciation account£ Dr. 34,516
To Machinery account 34,516
(Being the depreciation provided @ 10% p.a. on
straight line method)

To Depreciation account 34,516
To Finance charges account 51,775
(Being the depreciation and finance charges
transferred to profit and loss account)
Working Note: Table showing apportionment of lease payments by SB Ltd. between the finance charges
and the reduction of outstanding liability
Year Outstanding liability Minimum lease Finance Reduction in Outstanding

(opening balance) payments charges principal liability (closing
(a) (b) (c = a x 15%) amount balance
(d= b-c) (e = a-d)
₹ ₹ ₹ ₹ ₹
1 3,45,164 1,00,000 51,775 48,225 2,96,939
2 2,96,939 1,00,000 44,541 55,459 2,41,480
3 2,41,480 1,00,000 36,222 63,778 1,77,702
4 1,77,702 1,00,000 26,655 73,345 1,04,357
5 1,04,357 1,00,000 15,654 84,346 20,011
12. Suraj Limited wishes to obtain a machine costing Rs.30 lakhs by way of lease. The effective life of the
machine is 14 years, but the company requires it only for the first 5 years. It enters into an agreement with
Ashok Ltd., for a lease rental for Rs.3 lakhs p.a. payable in arrears and the implicit rate of interest is 15%.
The chief accountant of Suraj Limited is not sure about the treatment of these lease rentals and seeks your
advise.
Answer: As per AS 19 ‘Leases’, a lease will be classified as finance lease if at the inception of the lease, the
present value of minimum lease payment amounts to at least substantially all of the fair value of leased asset.
In the given case, the implicit rate of interest is given at 15%. The present value of minimum lease payments
at 15% using PV - Annuity Factor can be computed as follows:
Annuity Factor (Year 1 to Year 5) 3.36 (approx.)
Present value of minimum lease payments (for Rs.3 lakhs each year) Rs.10.08 lakhs (approx.)
Thus, present value of minimum lease payments is Rs.10.08 lakhs and the fair value of the machine is Rs.30
lakhs. In a finance lease, lease term should be for the major part of the economic life of the asset even if title
is not transferred. However, in the given case, the effective useful life of the machine is 14 years while the
lease is only for five years. Therefore, lease agreement is an operating lease. Lease payments under an
operating lease should be recognized as an expense in the statement of profit and loss on a straight line
basis over the lease term unless another systematic basis is more representative of the time pattern of
the user’s benefit.
13. Classify the following into either operating or finance leases:
(i) Ownership of an assets gets vested to the leases at the end of lease term.
(ii) Lease has option to purchase the asset at lower than fair value , at the end of lease term.
(iii) Economic life of the asset is 5 years , lease term is 4-2 years, but asset is not acquired at the end of lease
term.
(iv) Present value (PV) of Minimum lease payments (MLP) = “X”, Fair value of the asset is Y.
(v) Economic life is 5 years lease term is 2 years, but the asset is of a special nature, and has been procured
only for use of leasee.
Answer.
(i) Finance Lease.
(ii) If it become certain at the inception of lease itself that the option will be exercise by the leases, it is a
Finance lease.
(iii) It will still be classified as a finance lease, since a substantial portion of the life of the asset is covered
by lease term.
(iv) Where X=Y , or where X substantailly equals Y, it is a finance lease.
(v) Since the asset is procured only for the use of lessee, it is a finance lease.
14. Classify the following into either operating or finance lease:
(i) Lessee has option to purchase the asset at lower than fair value, at the end of lease term;
(ii) Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the end of the lease
term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature and has been
procured only for use of the lessee;
(iv) Present value (PV) of Minimum lease payment (MLP) = "X". Fair value of the asset is "Y". (Q4)
Answer:
(i) If it becomes certain at the inception of lease itself that the option will be exercised by the lessee, it is a
Finance Lease.
(ii) The lease will be classified as a finance lease, since a substantial portion of the life of the asset is
covered by the lease term.
(iii) Since the asset is procured only for the use of lessee, it is a finance lease.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
15. What do you understand by the term "Interest rate implicit on lease"? Calculate the interest rate implicit on
lease from the following details:
Annual Lease Rent ₹ 80,000 at the end of each year

Lease Period 5 Years
Guaranteed Residual Value ₹ 40,000
Unguaranteed Residual Value ₹ 24,000
Fair Value at the inception of the lease ₹ 3,20,000
Discounted rates for the first 5 years are as below:
At 10% 0.909, 0.826, 0.751, 0.683, 0621
At 14% 0.877, 0.769, 0.675, 0.592, 0.519
Answer:- As per para 3 of AS 19 ‘ Leases’ the interest rate implicit in the lease is the discount rate that, at
the inception of the lease, causes the aggregate present value of
(a) the minimum lease payments under a finance lease from the standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor,
to be equal to the fair value of the leased asset.

Present value at discount rate of 10% and 14%
Year Lease Payments (₹) Disc. Factor (10%) Present Value (₹) Disc. Factor (14%) PV (₹)
1 80,000 0.909 72,720 0.877 70,160
2 80,000 0.826 66,080 0.769 61,520
3 80,000 0.751 60,080 0.675 54,000
4 80,000 0.683 54,640 0.592 47,360
5 80,000 0.621 49,680 0.519 41,520
5 40,000 0.621 24,840 0.519 20,760
5 24,000 0.621 14,904 0.519 12,456
Total 3,42,944 3,07,776
Interest Rate Implicit on Lease = 10% +[{(14% −10%)×(3,42,944 − 3,20,000)}/(3,42,944 − 3,07,776)]
= 10% + 2.609%
= 12.609% or say 12.61%
16. A machine having expected useful life of 6 years, is leased for 4 years. Both the cost and the fair value of the
machinery are ₹ 7,00,000. The amount will be paid in 4 equal instalments and at the termination of lease,
lessor will get back the machinery. The unguaranteed residual value at the end of the 4th year is ₹ 70,000.
The IRR of the investment is 10%. The present value of annuity factor of ₹ 1 due at the end of 4th year at
10% IRR is 3.169. The present value of ₹ 1 due at the end of 4th year at 10% rate of interest is 0.683.
State with reasons whether the lease constitutes finance lease and also compute the unearned finance income.
Answer:
(i) Determination of nature of lease
Fair value of asset ₹ 7,00,000 Unguaranteed residual value ₹ 70,000
Present value of residual value at the end of 4th Year = ₹ 70,000 x 0.683 = ₹ 47,810
Present value of lease payment recoverable = ₹ 7,00,000 - ₹ 47,810
= ₹ 6,52,190
The percentage of present value of lease payment to fair value of the asset is
= (₹ 6,52,190/₹7,00,000)x100
= 93.17%
Since it substantially covers the major portion of lease payment and life of the asset, the lease
constitutes a finance lease.
(ii) Calculation of Unearned finance income

Annual lease payment = ₹ 6,52,190 / 3.169
= ₹ 2,05,803 (approx.)
Gross investment in the lease = Total minimum lease payment + unguaranteed residual value.
= (₹ 2,05,803 x 4) + ₹70000
= ₹ 8,23,212 + ₹70,000
= ₹ 8,93,212
Unearned finance income = Gross investment – Present value of minimum lease payment and
unguaranteed residual value.
= ₹ 8,93,212 – ₹ 7,00,000 (₹ 6,52,190 + ₹ 47,810)
= ₹ 1,93,212
17. An Equipment having expected useful life of 5 Years, is leased for 3 years. Both the cost and the fair value
of the equipment are Rs. 6,00,000. The amount will be paid in 3 equal installments and at the termination of
lease, lessor will get back the equipment. The unguaranteed residual value at the end of 3rd year is Rs.
60,000. The IRR of the investment is 10%. The Present Value of annuity factor of Re. 1 due at the end of 3rd
year at 10% IRR is 2.4868. The Present Value of Re. 1 due at the end of 3rd year at 10% rate of interest is
0.7513. State with reason whether the lease constitutes finance lease and also compute the unearned finance
income.
Solution:
(i) Determination of Nature of Lease: It is assumed that the fair value of the leased equipments is equal
to the present value of minimum lease payments.
Present value of residual value at the end of 3rd year = ₹ 60,000 x 0.7513 = ₹ 45,078
Present value of lease payments = ₹ 6,00,000 – ₹ 45,078 = ₹ 5,54,922
The percentage of present value of lease payments to fair value of the equipment is
= (₹ 5,54,922 / ₹ 6,00,000) x 100 = 92.487%.
Since, it substantially covers the major portion of the lease payments, the lease constitutes a finance
lease.
(ii) Calculation of Unearned Finance Income

Annual lease payment = ₹ 5,54,922 / 2.4868 =₹ 2,23,147 (approx)
Gross investment in the lease = Total minimum lease payment + unguaranteed residual value
= (₹ 2,23,147 × 3) + ₹ 60,000 = ₹ 6,69,441 + ₹ 60,000 = ₹ 7,29,441
Unearned finance income = Gross investment - Present value of minimum lease payments and
unguaranteed residual value
= ₹ 7,29,441 – ₹ 6,00,000 = ₹ 1,29,441
18. ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being Rs. 10,00,000. The economic life
of the machine as well as the lease term is 4 years. At the end of each year, ABC Ltd. pays Rs.
3,50,000. The lessee has guaranteed a residual value of Rs. 50,000 on expiry of the lease to the lessor.
However, XYZ Ltd. estimates that the residential value of the machinery will be Rs. 35,000 only.
The implicit rate of return is 16% and PV factors at 16% for year 1, year 2, year 3 and year 4 are 0.8621,
0.7432, 0.6407 and 0.5523 respectively. You are required to calculate the value of machinery to be
considered by ABC Ltd.
Solution: As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability at the
inception of a finance lease. Such recognition should be at an amount equal to the fair value of the leased
asset at the inception of lease. However, if the fair value of the leased asset exceeds the present value of
minimum lease payment from the standpoint of the lessee, the amount recorded as an asset and liability
should be the present value of minimum lease payments from the standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is Rs. 10, 00,000 and the net present value of minimum lease
payments is Rs. 10, 07,020 (Refer working Note). As the present value of the machine is more than the fair
value of the machine, the machine and the corresponding liability will be recorded at value of Rs.10,00,000.
Working Note:
Present value of minimum lease payments
Annual lease rental x PV factor
= Rs. 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) Rs. 9,79 ,405
Present value of guaranteed residual value Rs. 50,000 x (0.5523) Rs. 27,615
Rs. 10,07,020
19. Prakash Limited leased a machine to Badal Limited on the following terms: (Rs. In lakhs)
(i) Fair value of the machine 48.00

(ii) Lease term 5 years
(iii) Lease rental per annum 8.00
(iv) Guaranteed residual value 1.60
(v) Expected residual value 3.00
(vi) Internal rate of return 15%
Discounted rates for 1st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718, and 0.4972 respectively.
Ascertain Unearned Finance Income.
Solution: As per AS 19 on Leases, unearned finance income is the difference between (a) the gross
investment in the lease and (b) the present value of minimum lease payments under a finance lease from the
standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate
implicit in the lease.
Where:
(a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point of the
lessor and (ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV)
= [(₹ 8,00,000 X 5 years) + ₹ 1,60,000] + ₹ 1,40,000 = ₹ 43,00,000 (a)
(b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value
(URV).
Year MLP inclusive of URV Internal rate of return Present Value
₹ (Discount factor @ 15%) ₹
1 8,00,000 0.8696 6,95,680
2 8,00,000 0.7561 6,04,880
3 8,00,000 0.6575 5,26,000
4 8,00,000 0.5718 4,57,440
5 8,00,000 0.4972 3,97,760
1,60,000 (GRV) 0.4972 79,552
41,60,000 27,61,312 (i)
1,40,000 (URV) 0.4972 69,608 (ii)
43,00,000 (i)+ (ii) 28,30,920(b)
Unearned Finance Income (a) - (b) = ₹ 43,00,000 – ₹ 28,30,920= ₹ 14,69,080.
20. Write short note on Sale and Lease Back Transactions as per Accounting Standard 19.
21. S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as under:
Lease term = 4 years
Fair value at inception of lease = Rs. 20,00,000
Lease rent = Rs. 6,25,000 p.a. at the end of year
Guaranteed residual value = Rs. 1,25,000
Expected residual value = Rs. 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718
respectively. Calculate the value of the lease liability as per AS-19.
Solution: According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset and a
liability at an amount equal to the lower of the fair value of the leased asset at the inception of the finance
lease and the present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit
in the lease. Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Payment Implicit interest rate Present

₹ (Discount rate @15%) value ₹
1 6,25,000 0.8696 5,43,500
2 6,25,000 0.7561 4,72,563
3 6,25,000 0.6575 4,10,937
4 7,50,000 0.5718 4,28,850
Total 26,25,000 18,55,850
Present value of minimum lease payments ₹ 18,55,850 is less than fair value at the inception of lease i.e. ₹
20,00,000, therefore, the asset and corresponding lease liability should be recognised at ₹ 18,55,850 as per
AS 19.
22. Applicability of AS 19: The standard applies to all leases other than:
(a) lease agreements to explore for or use of natural resources, such as oil, gas, timber metals and
other mineral rights; and
(b) licensing agreements for items such as motion picture films, video recordings, plays,
manuscripts, patents and copyrights; and
(c) lease agreements to use lands
23. Disclosure requirements:
(i) Both lessee and lessor shall be disclose lease rental under finance lease as well as under
operating lease as follows:
Periods Absolute amount PV
0-12months XXX XXX
12-60 months XXX XXX
More than 60 months XXX XXX
(ii) In case of finance lease, lessee shall disclose asset under lease separately.
(iii)Interest income and interest expenses shall be shown separately in P&L statement.
(iv) Under operating lease both lessor and lessees lease rental shall be shown separately in P&L
statement.
(v) Unearned finance income shall be disclosed into notes to account by the lessor.
(vi) In case any contingent rent then it shall be disposed separately.
(vii) U.G.R.V. shall be shown in notes to account by lessor.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
SUMMARY NOTES
AS 20: Earnings Per Share

1. From the following information relating to Y ltd. Calculate Earnings Per Share (EPS)
Rs. In crore
Profit before V.R.S. Payments but after depreciation 75.00
Depreciation 10.00
VRS payments 32.10
Provision for taxation 15.00
Paid up Share Capital (Shares of Rs. 10 each fully Paid) 93.00
2. Date Particulars No. of Share Face Value Paid up Value
1st January Balance at beginning of year 1,800 Rs. 10 Rs. 10
31st October Issue of Shares 600 Rs. 10 Rs. 5
Calculate Weighted Number of Shares.
3. Computed adjusted earning per share and basic earning per share based on the following Information:
Net Profit 2010- 2011 Rs. 11,40,000
Net Profit 2011-2012 Rs. 22,50,000
No of equity shares outstanding Rs. 5,00,000
Until 31st December, 2011

Bonus issue on 1st January, 2012
1 equity share for each equity share Outstanding as at 31st December, 2011
4. Net profit for the year 20X1 ₹ 18,00,000

Net profit for the year 20X2 ₹ 60,00,000
No. of equity shares outstanding until 30th September 20X2 20,00,000
Bonus issue 1st October 20X2 was 2 equity shares for each equity share outstanding at 30th September,
20X2. Calculate Basic Earnings Per Share.
5. NAT, a listed entity, as on 1st April,2021 had the following capital structure:
₹
10,00,000 Equity Shares having face value of ₹ 1 each 10,00,000
10,00,000 8% Preference Shares having face value of ₹ 10 each 1,00,00,000
During the year 2021-2022, the company had profit after tax of ₹ 90,00,000
On 1st January,2022, NAT made a bonus issue of one equity share for every 2 equity shares outstanding as at
31st December,2021.
On 1st January, 2022, NAT issued 2,00,000 equity shares of ₹ 1 each at their full market price of ₹ 7.60 per
share.
NAT's shares were trading at ₹ 8.05 per share on 31st March,2022.
Further it has been provided that the basic earnings per share for the year ended 31st March,2021 was
previously reported at ₹ 62.30.
(i) Calculate the basic earnings per share to be reported in the financial statements of NAT for the year
ended 31st March, 2022 including the comparative figure, in accordance with AS-20 Earnings Per
Share.
(ii) Explain why the bonus issue of shares and the shares issue at full market price are treated differently in
the calculation of the basic earnings per share?
6. The following information is available for Raja Ltd. for the accounting year 2009-10 and 2010-11:
Net Profit for Rs.
Year 2009-10 25,00,000
Year 2010-11 40,00,000
No. of shares outstanding prior to right issue 12,00,000 shares.
Right issue : One new share for each three outstanding i.e. 4,00,000 share.
: Right issue price Rs. 22
: Last date to exercise rights 30-6-2010
Fair value of one equity share immediately prior to exercise of rights on 30-06-2010=Rs. 28
You are required to compute BEPS for the years 09-10 & 10-11.
7. Net profit for the year 2005 Rs. 11,00,000
Net profit for the year 2006 Rs. 15,00,000
No. of shares outstanding prior to rights issue 5,00,000 shares
Rights issue price Rs. 15.00
Last date to exercise rights 1st March 2006
Rights issue is one new share for each five outstanding (i.e. 1,00,000 new shares)
Fair value of one equity share immediately prior to exercise of rights on 1st March 2006 was Rs. 21.00.
Compute Basic Earnings Per Share.
8. In April, 2004 a Limited Company issued 1,20,000 equity shares of Rs. 100 each. Rs. 50 per share was
called up on that date which was paid by all shareholders. The remaining Rs. 50 was called up on
1.9.2004. All shareholders paid the sum in September, 2004, except one shareholder having 24,000
shares. The net profit for the year ended 31.3.2005 is Rs. 2,64,000 after dividend on preference shares
and dividend distribution tax of Rs. 64,000. Compute basic EPS for the year ended 31.3.2005 as per
Accounting Standard 20.
9. Explain the concept of “ Weighted average number of equity shares outstanding during the period” State
how would you compute, based on AS-20 the weighted average number of equity shares in the following
cases:
No of Shares
1st April, 2011 Balance of equity Shares 4,80,000

31st August, 2011 Equity Shares issued for cash 3,60,000
1st February,2012 Equity Shares bought back 1,80,000
31st March, 2012 Balance of equity shares 6,60,000
10. Compute Basic Earnings per share from the following information:
Date Particulars No. of shares
1st April, 2008 Balance at the beginning of the year 1,500
1st August, 2008 Issue of shares for cash 600
31st March, 2009 Buy back of shares 500
Net profit for the year ended 31st March, 2009 was Rs. 2,75,000.
11. Compute EPS from the given information relating to equity shares of A Ltd. and B Ltd. Two companies
amalgamated w.e.f. 1.10.2003. A Ltd. issued the required no. of shares on the basis of the agreed valuation.
A Ltd. B Ltd.
No. of outstanding Equity Shares as on 1.4.2003 (No. in lakhs) 500 200
Agreed value per share for acquisition 120 30
Date of acquisition 1.10.2003
Profit after tax (Rs. in lakhs) for the whole year. 1200 350
Profit after tax of B Ltd. during 1.10.2003 – 31.3.2004 (Rs. in lakhs) 200
Answer:
Amalgamation in the nature of purchase No. of shares Period Weighted
Outstanding average
Equity shares as on 1.4.2003 – upto 30.09.2003 5,00,00,000 6 2,50,00,000
Post acquisition equity shares 50,00,000
From 1.10.2003 – 31.03.2004 5,50,00,000 6 2,75,00,000
Weighted average no. of equity shares 5,25,00,000
Profit available to equity shareholders (Rs.) 14,00,00,000
EPS (Rs.) 2.67
Amalgamation in the nature of merger
Equity shares as on 1.4.2003 – upto 30.09.2003 5,00,00,000
Post acquisition equity shares 50,00,000
Total equity shares 5,50,00,000 12 5,50,00,000
Profit available to equity shareholders (Rs.) 15,50,00,000
EPS (Rs.) 2.82
In the above-mentioned solution, the numerator for computing EPS in the amalgamation in the nature of
purchase is profit of A Ltd. plus post merger profit of B Ltd., which is now a division of A Ltd., i.e. Rs.1,400
lakhs. Whereas in the case amalgamation in the nature of merger, the numerator should be the entire profit
of A Ltd. and B Ltd. including post-merger profit of B Ltd.
12. Net profit for the current year Rs. 1,00,00,000

No. of equity shares outstanding Rs. 50,00,000
Interest expense for the current year Rs. 12,00,000
Rate of income tax 30%
No. of 12% debentures of Rs. 100 each 1,00,000
Each debentures is convertible into 10 equity shares
Calculate Basic EPS and Diluted EPS.
13. A Ltd. had 6,00,000 equity shares on April 1, 2007. The company earned a profit of Rs.15,00,000 during the
year 2007-08. The average fair value per share during 2007-08 was Rs.25. The company has given share
option to its employees of 1,00,000 equity shares at option price of Rs.15. Calculate basic EPS and diluted
EPS.
14. “While calculating diluted earning per share, effect is given to all dilutive potential equity shares that were
outstanding during that period.” Explain. Also calculate the diluted earnings per share from the following
information:
Net profit for the current year Rs. 85,50,000
No. of equity shares outstanding 20,00,000
No. of 8% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expenses for the current year Rs. 6,00,000
Tax relating to interest expenses 30%
Solution:- “In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that
were outstanding during the period.” As per para 26 of AS 20 ‘Earnings per Share’, the net profit or loss for
the period attributable to equity shareholders and the weighted average number of shares outstanding during
the period should be adjusted for the effects of all dilutive potential equity shares for the purpose of
calculation of diluted earnings per share.
15. “At the time calculating diluted earnings per share, effect is given to all dilutive potential equity shares that
are outstanding during the period”. Comment and also calculate the basic and diluted earnings per share for
the year 2020-21 from the following information:
(i) Net profit after tax for the year ₹ 64,12,500
(ii) No. of equity shares outstanding 15,00,000
(iii) No. of 9% convertible debentures of ₹ 100 issued on 1st July, 2020 75,000
(iv) Each debenture is convertible into 8 Equity Shares
(v) Tax relating to interest expenses 35%
Solution: In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that
were outstanding during the period.” As per AS 20 ‘Earnings per Share’, the net profit or loss for the period
attributable to equity shareholders and the weighted average number of shares outstanding during the period
should be adjusted for the effects of all dilutive potential equity shares for the purpose of calculation of
diluted earnings per share.
Basic EPS for the year 2020-21= 64,12,500/15,00,000 = ₹ 4.275 or ₹ 4.28
Computation of diluted earnings per share for year 2020-21
Adjusted net profit for the current year Weighted average number of equity shares
Adjusted net profit for the current year will be (64,12,500 + 5,06,250 – 1,77,188) = ₹ 67,41,562
No. of equity shares resulting from conversion of debentures:
6,00,000 Shares (75,000 × 8)
Weighted average no. of equity shares used to compute diluted EPS:
= (15,00,000 X12/12+ 6,00,000X9/12)
= 19,50,000 Shares
Diluted earnings per share: (67,41,562/19,50,000) = ₹ 3.46
Working Note:
Interest expense for 9 months = 75,00,000×9%×9/12 =₹ 5,06,250
Tax expense 35 % on interest is ₹1,77,188 (5,06,250 x 35%)
16. XYZ Ltd. had issued 30,000, 15% convertible debentures of Rs. 100 each on 1st April, 2008. The debentures
are due for redemption on 1st March, 2011. The terms of issue of debentures provided that they were
redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their
holding into equity shares (Nominal Value Rs. 10) at a price of Rs. 15 per share. Debenture holders holding
2500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the
Debenture holders exercising the option to the maximum.
17. Net profit for the current year Rs. 1,00,00,000

No. of equity shares outstanding 50,00,000
Basic earnings per share Rs. 2.00
No. of 12% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expense for the current year Rs. 12,00,000
Tax relating to interest expense (30%) Rs. 3,60,000
Compute Diluted Earnings Per Share.
Solution:
Adjusted net profit for the current year (1,00,00,000 + 12,00,000 – 3,60,000) = ₹ 1,08,40,000
No. of equity shares resulting from conversion of debentures: 10,00,000 Shares
No. of equity shares used to compute diluted EPS: (50,00,000 + 10,00,000) = 60,00,000 Shares
Diluted earnings per share: (1,08,40,000/60,00,000) = ₹ 1.81
18. Net profit for the year 2012 Rs. 12,00,000
Weighted average number of equity shares outstanding during the year 2012 5,00,000 shares
Average fair value of one equity share during the year 2012 Rs. 20.00
Weighted average number of shares under option during the year 2012 1,00,000 shares
Exercise price for shares under option during the year 2012 Rs. 15.00
Compute Basic and Diluted Earnings Per Share.
Solution: Computation of earnings per share
Earnings Shares Earnings/Share
₹ ₹
Net profit for the year 20X1 12,00,000
Weighted average no. of shares during 5,00,000
year 20X1
Basic earnings per share 2.40
Number of shares under option 1,00,000
Number of shares that would have
been issued at
fair value (100,000 x 15.00)/20.00 (75,000)
Diluted earnings per share 12,00,000 5,25,000 2.29

Note: The earnings have not been increased as the total number of shares has been increased only by the
number of shares (25,000) deemed for the purpose of the computation to have been issued for no
consideration.
19. What do you mean by 'Weighted Average number of Equity Shares outstanding during the period' and why
is it to be calculated?
In the following list of shares issued, for the purpose of calculation of weighted average number of shares,
from which date weight is to be considered:
(i) Equity Shares issued in exchange of cash,
(ii) Equity Shares issued as a result of conversion of a debt instrument,
(iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise,
(iv) Equity Shares issued for rendering of services to the enterprise,
(v) Equity Shares issued in lieu of interest and/or principal of an other financial instrument,
(vi) Equity Shares issued as consideration for the acquisition of an asset other than in cash.
Also define Potential Equity Share.
Answer: As per AS 20, “Earnings Per Share”, the weighted average number of equity shares outstanding
during the period reflects the fact that the amount of shareholders’ capital may have varied during the period
as a result of a larger or lesser number of shares outstanding at any time.
For the purpose of calculating basic earnings per share, the number of equity shares should be the weighted
average number of equity shares outstanding during the period.
The following dates should be considered for consideration of weights for calculation of weighted average
number of shares in the given situations:
(i) Date of Cash receivable
(ii) Date of conversion
(iii) Date on which settlement becomes effective
(iv) When the services are rendered
(v) Date when interest ceases to accrue
(vi) Date on which the acquisition is recognised.
A Potential Equity Share is a financial instrument or other contract that entitles, or may entitle its holder to
equity shares.
20. “While calculating diluted EPS, effect is given to all dilutive potential equity shares that were outstanding
during the period.” Explain this statement in the light of relevant AS.
Also calculate the diluted EPS from the following information:
Net Profit for the current year (After Tax) ₹ 1,00,00,000
No. of Equity shares outstanding 10,00,000
No. of 10% Fully Convertible Debentures of ₹ 100 each 1,00,000
(Each Debenture is compulsorily & fully convertible into 10 equity shares)
Debenture interest expense for the current year ₹ 5,00,000
Assume applicable Income Tax rate @ 30%.
Answer: As per AS 20 ‘Earnings per Share’, the net profit or loss for the period attributable to equity
shareholders and the weighted average number of shares outstanding during the period should be adjusted for
the effects of all dilutive potential equity shares for calculation of diluted earnings per share. Hence, “in
calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were
outstanding during the period.”
Computation of diluted earnings per share =
Adjusted net profit for the current year / Weighted average number of equity shares
Adjusted net profit for the current year ₹

Net profit for the current year (after tax) 1,00,00,000
Add: Interest expense for the current year 5,00,000
Less: Tax relating to interest expense (30% of ₹5,00,000) (1,50,000)
Adjusted net profit for the current year 1,03,50,000
Weighted average number of equity shares
Number of equity shares resulting from conversion of debentures
= (1,00,000 X 100) / 10 = 10,00,000 Equity shares
Weighted average number of equity shares used to compute diluted earnings per share
= [(10,00,000 x 12) + (10,00,000 x 6)]/12 = 15,00,000 equity shares
Diluted earnings per share
= ₹ 1,03,50,000 / 15,00,000 shares = ₹ 6.90 per share.
Note: Interest on debentures for full year amounts to ₹ 10,00,000 (i.e. 10% of ₹ 1,00,00,000). However,
interest expense amounting ₹ 5,00,000 has been given in the question. It may be concluded that debentures
have been issued at the mid of the year and interest has been provided for 6 months.
21. If Potential Equity Shares were not considered in the previous year because they were antidilutive, can these
be considered in the current period if they are dilutive? If yes, is the prior period EPS required to be restated?
Answer:
(1) AS-20 Principle: As per Para 41, “Potential Equity Shares are anti-dilutive when their conversion to
equity shares would increase EPS from continuing ordinary activities or decrease loss per share from
continuing ordinary activities. The effects of anti-dilutive Potential Equity shares are ignored in
calculating Diluted EPS”.
(2) Analysis: The above assessment of dilutive/anti-dilutive effect should be performed in each reporting
period and accordingly, the same Potential Equity Shares may in the subsequent year become dilutive in
nature and would need to be considered in calculating Dilutive EPS.
(3) Conclusion: Potential Equity Shares that were not considered in previous year because they were anti -
dilutive, can be considered in the current period if they are dilutive. If Potential Equity Shares that were
not considered in previous year because they were anti-dilutive are considered in the current period, prior
period EPS does not require to be restated.
22. Date Particulars Purchased Sold Balance

1st January Balance at beginning of year 1,800 - 1,800
31st May Issue of shares for cash 600 - 2,400
1st November Buy Back of shares - 300 2,100
Calculate Weighted Number of Shares.
Solution:
Computation of Weighted Average:
(1,800 x 5/12) + (2,400 x 5/12) + (2,100 x 2/12) = 2,100 shares.
The weighted average number of shares can alternatively be computed as follows:
(1,800 x12/12) + (600 x 7/12) - (300 x 2/12) = 2,100 shares
23. Stock options have been granted by AB Limited to its employees and they vest equally over 5 years, i.e., 20
per cent at the end of each year from the date of grant. The options will vest only if the employee is still
employed with the company at the end of the year. If the employee leaves the company during the vesting
period, the options that have vested can be exercised, while the others would lapse. Currently, AB Limited
includes only the vested options for calculating Diluted EPS. Should only completely vested options be
included for computation of Diluted EPS? Is this in accordance with the provisions of AS 20? Explain.
Solution: The current method of calculating Diluted EPS adopted by AB limited is not in accordance with
AS 20. The calculation of Diluted EPS should include all potential equity shares, i.e., all the stock options
granted at the balance sheet date, which are dilutive in nature, irrespective of the vesting pattern. The options
that have lapsed during the year should be included for the portion of the period the same were outstanding,
pursuant to the requirement of the standard.
AS 20 states that “A potential equity share is a financial instrument or other contract that entitles, or may
entitle, its holder to equity shares”. Options including employee stock option plans under which employees
of an enterprise are entitled to receive equity shares as part of their remuneration and other similar plans are
examples of potential equity shares. Further, for the purpose of calculating diluted earnings per share, the net
profit or loss for the period attributable to equity shareholders and the weighted average number of shares
outstanding during the period should be adjusted for the effects of all dilutive potential equity shares.
24. X Limited, as at March 31, 2021, has income from continuing ordinary operations of Rs. 2,40,000, a loss
from discontinuing operations of Rs. 3,60,000 and accordingly a net loss of Rs. 1,20,000. The Company has
1,000 equity shares and 200 potential equity shares outstanding as at March 31, 2021. You are required to
compute Basic and Diluted EPS?
Solution: As per AS 20 “Potential equity shares should be treated as dilutive when, and only when, their
conversion to equity shares would decrease net profit per share from continuing ordinary operations”. As
income from continuing ordinary operations, Rs. 2,40,000 would be considered and not Rs. (1,20,000), for
ascertaining whether 200 potential equity shares are dilutive or anti-dilutive. Accordingly, 200 potential
equity shares would be dilutive potential equity shares since their inclusion would decrease the net profit per
share from continuing ordinary operations from Rs. 240 to Rs. 200. Thus the basic E.P.S would be Rs. (120)
and diluted E.P.S. would be Rs. (100).
25. AB Limited is a company engaged in manufacturing industrial packaging equipment. As per the terms of an
agreement entered with its debenture holders, the company is required to appropriate adequate portion of its
profits to a specific reserve over the period of maturity of the debentures such that, at the redemption date,
the reserve constitutes at least half the value of such debentures. As such appropriations are not available for
distribution to the equity shareholders, AB Limited has excluded this from the numerator in the computation
of Basic EPS. Is this treatment correct as per provisions of AS 20?
Solution: The appropriation made to such a mandatory reserve created for the redemption of debentures
would be included in the net profit attributable to equity shareholders for the computation of Basic EPS. AS
20 states that “For the purpose of calculating basic earnings per share, the net profit or loss for the period
attributable to equity shareholders should be the net profit or loss for the period after deducting preference
dividends and any attributable tax thereto for the period”. With an emphasis on the phrase attributable to
equity shareholders, it may be construed that such amounts appropriated to mandatory reserves, though not
available for distribution as dividend, are still attributable to equity shareholders. Accordingly, these amounts
should be included in the computation of Basic EPS. In view of this, the treatment made by the company is
not correct.
26. ABC Ltd. has 1,000,000 Rs 1 ordinary shares and 1,000 Rs 100 10% convertible debentures (issued
at par), each convertible into 20 Equity shares, all of which have been in issue for the whole of the
year. Earnings for the year are Rs 500,000. The tax rate applicable to the entity is 21%.
Calculate Basic and Diluted earnings per share.
Solution:
Basic Earnings per Share
= Earnings attributable for Equity shareholder / Weighted Average of Equity Share
= 500,000/1,000,000
= Rs. 0.50 per share
Diluted Earnings per Share = Earnings attributable for Equity shareholder after taking effect of earning of
potential equity share / Weighted Average of Equity Share after taking effect of potential equity share
= (Rs 500,000 + Rs 7,900) / (1,000,000 + 20,000)
= Rs 0.498 per share.
Working Note:
Calculation of Earnings effect of potential equity share.
= No. of debentures x nominal value x interest cost - tax deduction @ 21%
= 1,000 x 100 x 10% x (1- 0.21)
= Rs 7,900.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
SUMMARY NOTES
AS 22: ACCOUNTING FOR TAXES ON INCOME
1. A company, ABC Ltd., prepares its accounts annually on 31st March. On 1st April, 20X1, it purchases a
machine at a cost of Rs. 1,50,000. The machine has a useful life of three years and an expected scrap value of
zero. Although it is eligible for a 100% first year depreciation allowance for tax purposes, the straight-line
method is considered appropriate for accounting purposes. ABC Ltd. has profits before depreciation and
taxes of Rs. 2,00,000 each year and the corporate tax rate for X2,X3 and X4 are 40%, 35% and 38%
respectively. Show the profit and loss account and pass the journal entries as per Accounting Standard-22.
2. 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 Rs 7,42,900 in its books of accounts while as per income-tax
computation, the depreciation available to the company is Rs. 8,65,400.
(ii) The company has made provision for doubtful debts for Rs. 54,300 during the year.
(iii) The company has debited share issue expenses of Rs 6, 23,500 which will be available for deduction
under the income-tax Act from the next year.
(iv) The expense of Rs 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 Rs 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.
3. Omega Limited is working on different projects which are likely to be completed within 3 years
period. It recognizes revenue from these contracts on percentage of completion method for financial
statements during 2006, 2007 and 2008 for Rs.11,00,000, Rs.16,00,000 and Rs.21,00,000 respectively.
However, for Income - tax purpose, it has adopted the completed contract method under which it
has recognized revenue of Rs.7,00,000, Rs.18,00,000 and Rs.23,00,000 for the years 2006, 2007 and
2008 respectively. Income-tax rate is 35%. Compute the amount of deferred tax asset/liability for the
years 2006, 2007 and 2008.
4. PQR Ltd.'s accounting year ends on 31st March. The company made a loss of Rs. 2,00,000 for the year
ending 31.3.2001. For the years ending 31.3.2002 and 31.3.2003, it made profits of Rs. 1,00,000 and Rs.
1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight years and tax rate
is 40%. By the end of 31.3.2001, the company feels that there will be sufficient taxable income in the future
years against which carry forward loss can be set off. There is no difference between taxable income and
accounting income except that the carry forward loss is allowed in the years ending 2002 and 2003 for
tax purposes. Prepare a statement of Profit and Loss for the years ending 2001, 2002 and 2003.
Answer: Statement of Profit and Loss (Rs.)
31.03.01 31.03.02 31.03.03
Profit (Loss) (2,00,000) 1,00,000 1,20,000

Less: Current tax (8,000)
Deferred tax:
Tax effect of timing differences originating during the year 80,000
Tax effect of timing differences reversed/adjusted during the
Year (40,000) (40,000)
Profit(loss) after tax effect (1,20,000) 60,000 72,000
5. The following particulars are stated in the Balance Sheet of PQR Ltd. as on 31.03.2018:
(Rs in lakh)
Deferred Tax Liability (Cr.) 30.00
Deferred Tax Assets (Dr.) 15.00
The following transactions were reported during the year 2018 -2019:
i. Tax Rate 30%
(Rs in lakh)
ii. Depreciation as per books 80.00
Depreciation for tax purposes 70.00
iii. Items disallowed in 2017-2018 and allowed for tax purposes in 2018-2019. 10.00
iv. Donations to Private Trust made in 2018-2019. 10.00
There were no additions to Fixed Assets during the year.
You are required to show the impact of various items on Deferred Tax Assets and Deferred Tax Liability as
on 31.03.2019
6. The following information is furnished in respect of Slate Ltd. for the year ending 31-3-2019:
(i) Depreciation as per books ₹ 2,80,000
Depreciation for tax purpose ₹ 1,90,000
The above depreciation does not include depreciation on new additions.
(ii) A new machinery purchased on 1.4.18 costing ₹ 1,20,000 on which 100% depreciation is allowed in the
1st year for tax purpose whereas Straight-line method is considered appropriate for accounting purpose
with a life estimation of 4 years.
(iii) The company has made a profit of ₹ 6,40,000 before depreciation and taxes.
(iv) Corporate tax rate of 40%.
Prepare relevant extract of statement of Profit and Loss for the year ending 31-3-2019 and also show the
effect of above items on deferred tax liability/asset as per AS 22.
7. The following particulars are stated in the Balance Sheet of HS Ltd. as on 31 -3-2019 :
Particulars (Rs. in lakhs)
The following transactions were reported during the year 2019-20 :
Depreciation as per accounting records 160.00
Depreciation as per income tax records 140.00
Items disallowed for tax purposes in 2018-19 but allowed in 2019-20 20.00
Donation to Private Trust 20.00
Tax rate 30%
There were no additions to fixed assets during the year. You are required to show the impact of various items
on Deferred Tax Assets and Deferred Tax Liability as on 31-3-2020 as per AS-22.
Solution: Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
(1) Difference in Depreciation- Generally, written down value method of depreciation is adopted under
income Tax Act which leads to higher depreciation in earlier years of useful life of the asset in
comparison to later years. It is timing difference for which reversal of Deferred tax liability is required.
Reversal of DTL= Rs. (160 – 140) Lakhs X 30% = Rs.6 Lakhs
(2) Disallowances, as per IT Act of earlier years- Due to disallowance tax payable for the earlier years was
higher on this account. It is responding timing difference which required Reversal of Deferred tax assets.
Reversal of Deferred tax assets = Rs.20 Lakhs X 30% = Rs. 6 Lakhs
(3) Donations to private trusts is not an allowable expenditure under IT Act. It is permanent difference.
Hence, no reversal of tax is required.
8. The following particulars are stated in the Balance Sheet of Deep Limited as on 31st March, 2020:
(Rs. In Lakhs)
The following transactions were reported during the year 2020 -2021:
(i) Depreciation as per books was Rs. 70 Lakhs whereas Depreciation for Tax purposes was Rs. 42 Lakhs.
There were no additions to Fixed Assets during the year.
(ii) Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were Rs. 14 Lakhs.
(iii) Share issue expenses allowed under section 35(D) of the Income Tax Act, 1961 for the year 2020-21
(1/10th of Rs. 70.00 lakhs incurred in 2019-20).
(iv) Repairs to Plant and Machinery were made during the year for Rs. 140.00 Lakhs and was spread over
the period 2020-21 and 2021-22 equally in the books. However, the entire expenditure was allowed for
income-tax purposes in the year 2020-21.
Tax Rate to be taken at 40%.
You are required to show the impact of above items on Deferred Tax Assets and Deferred Tax Liability as on
31st March, 2021.
Solution: Impact of various items in terms of deferred tax liability/deferred tax asset on 31.3.21
Transactions Analysis Nature of Effect Amount
difference (Rs.)
Difference in Generally, written down Responding Reversal of 28 lakhs X 40%
depreciation value method of timing DTL = Rs. 11.20 lakhs
depreciation is adopted difference
under IT Act which leads
to higher depreciation in
earlier years of
useful life of the
asset in comparison to
later years.
Disallowances, as Tax payable for the Responding Reversal of 14 lakhs X 40%
per IT Act, of earlier year was higher on timing DTA = 5.6 lakhs
earlier years this account. difference
Share issue Due to disallowance of Responding Reversal of 7 lakhs X 40%
expenses full expenditure under IT timing DTA = Rs. 2.8 lakhs
Act, tax payable in the difference
earlier years was higher.
Repairs to plant Due to allowance of full Originating Increase in 70 lakhs X 40%
and machinery expenditure under IT Act, timing DTL =28 lakhs
tax payable of the current difference
year will be less.
9. Milton Ltd. is a full tax free enterprise for the first 10 years of its existence and is in the second year of
its operations. Depreciation timing difference resulting in a deferred tax liability in years 1 and 2 is
Rs.200 lakhs and 400 lakhs respectively. From the 3 rd year onwards, it is expected that the timing
difference would reverse each year by Rs.10 lakhs. Assuming tax rate @35%, find out the deferred tax
liability at the end of the second year and any charge to the profit and loss account.
Answer: In the case of tax free companies, no deferred tax liability is recognized, in respect of timing
differences that originate and reverse in the tax holiday period. Deferred tax liability or asset is created in
respect of timing differences that originate in a tax holiday period but are expected to reverse after the
tax holiday period. For this purpose, adjustments are done in accordance with the FIFO method.
Of Rs. 200 lakhs, Rs.80 lakhs will reverse in the tax holiday period. Therefore, Deferred Tax Liability will
be created on Rs.120 lakhs @ 35% (i.e.) Rs.42 lakhs.
In the second year, the entire Rs.400 lakhs will reverse only after the tax holiday period.
Therefore, deferred tax charge in the Profit and Loss Account will be Rs.400 x 35% = 140 lakhs and
deferred tax liability in the Balance Sheet will be (42+140) = Rs.182 lakhs.
10. XYZ is an export oriented unit and was enjoying tax holiday upto 31.3.2016. No provision for deferred tax
liability was made in accounts for the year ended 31.3.2016. While finalising the accounts for the year ended
31.3.2017, the Accountant says that the entire deferred tax liability upto 31.3.2016 and current year deferred
tax liability should be routed through Profit and Loss Account as the relevant Accounting Standard has
already become mandatory from 1.4.2001. Do you agree?
Answer: Paragraph 33 of AS 22 on “Accounting For Taxes on Income” relates to the transitional provisions.
It says, “On the first occasion that the taxes on income are accounted for in accordance with this statement,
the enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated
prior to the adoption of this statement as deferred tax asset/liability with a corresponding credit/charge to the
revenue reserves, subject to the consideration of prudence in case of deferred tax assets.
Further Paragraph 34 lays down, “For the purpose of determining accumulated deferred tax in the period in which
this statement is applied for the first time, the opening balances of assets and liabilities for accounting purposes
and for tax purposes are compared and the differences, if any, are determined. The tax effects of these differences,
if any, should be recognised as deferred tax assets or liabilities, if these differences are timing differences.”
Therefore, in the case of XYZ, even though AS 22 has come into effect from 1.4.2001, the transitional provisions
permit adjustment of deferred tax liability/asset upto the previous year to be adjusted from opening reserve. In
other words, the deferred taxes not provided for alone can be adjusted against opening reserves.
Provision for deferred tax asset/liability for the current year should be routed through profit and loss account
like normal provision.
11. Under the Income Tax Act, depreciation is allowed to the extent of 100% of the cost of asset on WDV basis.
However, under the Companies Act, 1956, a company has the option to provide depreciation for such an
amount as is arrived at by dividing 95% of the original cost of the asset by the specified period. Is the
difference of 5% a permanent difference?
12. Compute the DTA/DTL with the following information if Tax Rate 40%
Profit before tax as per books = Rs.100 lakhs

Add back: Goodwill written off in books = Rs. 10 lakhs
Depreciation as per books = Rs. 60 lakhs
Less: Depreciation under Income Tax Act = Rs.(30) lakhs
Taxable income as per Income Tax Act = Rs.140 lakhs
13. Ultra Ltd. has provided the following information.

Depreciation as per accounting records = Rs. 2,00,000
Depreciation as per tax records = Rs . 5,00,000
Unamortized preliminary expenses as per tax record = Rs. 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability should be
recognized as transition adjustment? Tax rate 50%
Answer:- Calculation of difference between taxable income and accounting income
Excess depreciation as per tax (5,00,000 – 2,00,000) 3,00,000
Less: Expenses provided in taxable income 30,000
Timing difference 2,70,000
Tax expense is more than the current tax due to timing difference.
Therefore deferred tax liability = 50% x 2,70,000 = Rs. 1,35,000
14. From the following details of Jubilee Ltd for the year ended 31.03.2016, calculate the Deferred Tax Asset /
Liability as per AS–22and amount of tax to be debited to Profit & Loss A/c for the year ended 31.03.2016.
Particulars Rs.
Accounting Profit 15 Lakhs
Profit as per MAT 8.75 Lakhs
Profit as per Income Tax Act. 1.50 Lakhs
Tax Rate 30%
MAT Rate 7.50%.
15. From the following details of A Ltd. for the year ended 31-03-2010, calculate the deferred tax asset/liability
as per AS-22
Particulars Rs.
Accounting Profit 6,00,000
Book Profit as per MAT 3,50,000
Profit as per Income Tax Act 60,000
Tax rate 20%
MAT rate 7.50%
Solution:
Tax as per accounting profit 6,00,000 X 20%= Rs. 1,20,000
Tax as per Income-tax Profit 60,000 X 20% =Rs. 12,000
Tax as per MAT 3,50,000 X 7.50%= Rs. 26,250
Tax expense= Current Tax +Deferred Tax
Rs. 1,20,000 = Rs. 12,000+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-201
= Rs. 1,20,000 – Rs. 12,000 = Rs. 1,08,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2017
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= Rs. 12,000 + Rs. 1,08,000 + Rs. 14,250 (26,250 – 12,000)
= Rs. 1,34,250
16. Classify the following as “Timing Difference” and “Permanent Difference”
(i) Interest on loans payable to Scheduled Banks not paid during current year but accounted as expenditure
in the books.
(ii) Difference in Depreciation rates as per income tax and as per books.
(iii) Unabsorbed losses.
(iv) Revaluation Reserve.
Answer:-The following is classified as “Timing Difference” and “Permanent Difference”
(i) Interest paid to bank is a timing difference.
(ii) Difference in depreciation rates is a timing difference.
(iii) Unabsorbed loss is a timing difference.
(iv) Revaluation Reserve is a permanent difference.
17. Distinguish between “Timing differences” and “Permanent differences” referred to in AS 22 on Accounting
for Taxes, giving 2 examples of each.
Answer: Timing Differences:- are the differences between taxable income and accounting income for a
period that originate in one period and are capable of reversal in one or more subsequent periods.
Examples:
(i) Unabsorbed depreciation and, carry forward of losses which can be set -off against future taxable
income.
(ii) Statutory dues deferred for payment under Section 43B of the Income -Tax Act.
Permanent Differences:- are the differences between taxable income and accounting income for a
period that originate in one period but do not reverse subsequently.
Examples:
(i) Agricultural income.
(ii) Donations/contributions disallowed for tax purposes
Difference between timing difference and permanent difference (Nov., 2008 & 2005)
Permanent Difference Timing Difference
(i) Difference which originate (i) Originate in one period and are capable of reverse in one or more
in one period and do not subsequent periods.
reverse subsequently
(ii) There is no effect on (ii) The timing difference may lead to
Deffered tax. It means no (a) Tax of initial year being higher and subsequent year being
deferred tax asset or lower.
liabilities emerges.
Taxable Income is more than Accounting Income = DTA. For
For Example :-
(a) Payment of Example:-
remuneration to  Expenditure of nature mentioned in Sec. 43B like taxes, duty,
partners in excess of cess, fees etc. accrued but allowed for tax purposes on payment
amount allowed by the basis.
partnership deed.  Payment accrued and recorded in the books, but disallowed for
(b) Goodwill written off tax purposes u/s 40(a)(i) and allowed when relevant tax is
not allowed as
deducted or paid subsequently.
deductible expenses.
(c) Contribution to  Provisions made in anticipation of liabilities, where the relevant
unapproved provident liabilities are allowed in subsequent year when they crystallize.
fund / employee  Unabsorbed depreciation and carried forward losses. (Subject to
welfare fund. Para 17)
(b) Tax of initial year being lower and subsequent year being
higher.
Taxable income is lower than Accounting income = DTL
For example:-
 Excess of depreciation charged as per Section 32 in comparison
to books of accounts.
 100% capital expenditure incurred on scientific research
claimed under income tax Act. 1961.
18. What are the disclosure requirements for deferred tax assets and deferred tax liabilities in the balance sheet
as per AS 22?
Solution: The break-up of deferred tax assets and deferred tax liabilities into major components of the
respective balance should be disclosed in the notes to accounts. Deferred tax assets and liabilities should be
distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and
liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from
current assets and current liabilities. The nature of the evidence supporting the recognition of deferred tax
assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax
laws.
19. Can an enterprise offset deferred tax assets and deferred tax liabilities? If yes, prescribe the conditions
required for such offset as per provisions of AS 22.
Solution: Yes. It can offset deferred tax assets and deferred tax liabilities.
As per AS 22, an enterprise should offset deferred tax assets and deferred tax liabilities if:
(i) the enterprise has a legally enforceable right to set off assets against liabilities representing current tax;
and
(ii) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same
governing taxation laws.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
SUMMARY NOTES
AS 24: DISCONTINUING OPERATIONS
1. A discontinuing operation is a component of an enterprise:

a. that the enterprise, pursuant to a single plan, is:
(i) disposing of substantially in its entirety, such as by selling the component in a single transaction or
by demerger or spin-off of ownership of the component to the enterprise's shareholders; or
(ii) disposing of piecemeal, such as by selling off the component's assets and settling its liabilities
individually; or
(iii) terminating through abandonment; and
b. that represents a separate major line of business or geographical area of operations; and
c. that can be distinguished operationally and for financial reporting purposes.
Following are not D.C.O:-

(a) Gradual or evolutionary phasing out of a product line or class of service.
(b) Reducing activity to save in cost.
(c) Changes in the scope of work
(d) Change in the Product Mix
(e) Decline in the production
(f) Shifting of location
(g) Improvement in machine
(h) Outsourcing of a process
(i) Sale of a subsidiary
2. Initial Disclosure Events: It means any event which trigger disclosure of A.S 24. Any Event from following
is called Initial Disclosure Event-:
a. The enterprise has entered into a binding sale agreement for substantially all of the assets attributable to
the discontinuing operation or
b. The enterprise's board of directors or similar governing body has both
(i) approved a detailed, formal plan for the discontinuance and
(ii) made an announcement of the plan.
Note: - Detail plan includes following features:
(i) identification of the major assets to be disposed of;
(ii) the expected method of disposal;
(iii) the period expected to be required for completion of the disposal;
(iv) the principal locations affected;
(v) the location, function, and approximate number or employees who will be compensated for terminating
their services; and
(vi) the estimated proceeds or salvage to be realised by disposal.
3. Disclosure Requirements: Refer question 4
Note: Disclosure will begin from year in which IDE occurs, it will continue till the year in which DCO has
been discontinued. Every year above disclosure will update.
Note:- If DCO again becomes C.O. due to change in management plan then above disclosure will not be
given, rather reason of again making it C.O will be given in that year.
4. Disclosures in an interim financial report in respect of a discontinuing operation should be made in

accordance with AS 25, ‘Interim Financial Reporting’, including:
(a) Any significant activities or events since the end of the most recent annual reporting period relating to a
discontinuing operation and
(b) Any significant changes in the amount or timing of cash flows relating to the assets to be disposed or
liabilities to be settled.
PRACTICAL QUESTIONS
1. A Cosmetic articles producing company provides the following information:

Cold Cream Vanishing Cream
January, 2006 – September, 2006 per month 2,00,000 2,00,000
October, 2006 – December, 2006 per month 1,00,000 3,00,000
January, 2007- March, 2007 per month 0 4,00,000
The company has enforced a gradual change in product-line on the basis of an overall plan. The Board of
Directors of the company has passed a resolution in March, 2006 to this effect. The company follows
calendar year as its accounting year. Should this be treated as a discontinuing operation? Give reasons in
support of your answer.
Answer: In response to the market forces, business enterprises often abandon products or even product lines
and reduce the size of their work-force. These actions are not in themselves discontinuing operations
unless they satisfy the definition criteria.
In the instant case the company has been gradually reducing operation in the product line of cold creams,
simultaneously increasing operation in the product line of vanishing creams. The company was not disposing
of any of its components. Phasing out a product line as undertaken by the company does not meet definition
criteria in paragraph 3 of AS 24, namely, disposing of substantially in its entirety a component of the
enterprise. Therefore, this change over is not a discontinuing operation.
2. Qu Ltd. in the business of manufacture of Passenger cars and commercial vehicles. The company is working
on a strategic plan to shift from the passenger car segment over the coming 5 years However no specific plans
have been drawn up for sale of neither the division nor its assets. As part of its plan it will reduce the
production of passenger cars by 20% annually. It also plans to commence another new factory for the
manufacture of commercial vehicles and transfer plus employees in a phased manner.
(i) You are required to comment if mere gradual phasing out in itself can be considered as a ‘Discounting
Operation’ within the meaning of AS 24.
(ii) If the company passes a resolution to sell some of the assets in the passenger car division and also to
transfer few other of the passenger car division to the new factory. Does this trigger the application or
AS 24?
(iii) Would your answer to the above be different if the company resolves to sell the assets of the Passenger
Car Division in phased but time manner?
Solution: Mere gradual phasing is not considered as discontinuing operation as defined under para 3 of AS 24, ‘
Discontinuing Operation’.
Examples of activities that do not necessarily satisfy criterion of the definition, but that might do so in combination with
other circumstances, include:
(1) Gradual or evolutionary phasing out of a product line or class of service.

(2) Shifting of some production or marketing activities for a particular line of business from one location to another
and
(3) Closing of a facility to achieve productivity improvements or other cost savings.
A Reportable business segment or geographical segment as defined in AS-17, would normally satisfy criteria (b) of the
definition.
In view of the above the answers are:
(i) No. The companys’ strategic plan has no final approval from the board through a resolution and no specific time
bound activities like shifting of Assets and employees and above all the new segment commercial vehicle
production line and factory has started.
(ii) No. The resolution is salient about stoppage of the Car segment in definite time period. Though, some assets sales
and transfer proposal was passed through a resolution to the new factory, closure road map and new segment
starting road map is missing. Hence, AS-24 will not be applicable.
(iii) Yes. Phased and time bound programme resolved in the board clearly indicates the closure of the passenger car
segment in a definite time frame and clear road map. Hence, this action will attract AS-24 compliance.
3. A healthcare goods producer has changed the product line as follow :
Washing soap Bathing soap
January 2007 –september 2007 per month 2,00,000 2,00,000
October 2007 –december 2007 per month 1,00,000 3,00,000
January 2007- March 2008 per month 0 4,00,000
The company has enforced a gradual enforcement of change in product line on the basis of an overall plant
capacity . The board of Directors of the company has passed a resolution in March 2007 to this effect. The
companies follow calendar year as its accounting year. Should it be treated as discontinuing operation?
Answer:- Business enterprises frequently close facilities, abandon products, or even product line, and reduce
the size of their work force in response to market force. These kinds of terminations, generally are not in
themselves discontinuing operations unless they satisfy the definition criteria. By gradually reducing the size
of operation in product line of washing soap, the company has increased its scale of operation in bathing soap.
Such a change is gradual or evolutionary, phasing out of a product line or class of services does not meet
definition criteria in paragraph 3(a) of AS 24 –namely , disposing substantially in its entirely a component of
enterprise. Hence changeover is not a discontinuing operation.
4.
(i) What are the disclosure and presentation requirements of AS 24 for discontinuing operations?
(ii) Give four examples of activities that do not necessarily satisfy criterion (a) of paragraph 3 of AS 24, but that
might do so in combination with other circumstances.
Answer:-
(i) An enterprise should include the following information relating to a discontinuing operation in its financial
statements beginning with the financial statements for the period in which the initial disclosure event (as
defined in paragraph 15) occurs:
a) a description of the discontinuing operation(s);
b) the business or geographical segment(s) in which it is reported as per AS 17, Segment Reporting;
c) the date and nature of the initial disclosure event;
d) the date or period in which the discontinuance is expected to be completed if known or determinable;
e) the carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total
liabilities to be settled;
f) the amounts of revenue and expenses in respect of the ordinary activities attributable to the discontinuing
operation during the current financial reporting period;
g) the amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation
during the current financial reporting period, and the income tax expense related thereto; and
h) the amounts of net cash flows attributable to the operating, investing, and financing activities of the
discontinuing operation during the current financial reporting period.
(ii) Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination of discontinuing
operations. According to Paragraph 9 of AS 24, examples of activities that do not necessarily satisfy criterion
(a) of paragraph 3, but that might do so in combination with other circumstances, include:
a) Gradual or evolutionary phasing out of a product line or class of service;

b) Discontinuing, even if relatively abruptly, several products within an ongoing line of business;
c) Shifting of some production or marketing activities for a particular line of business from one location to
another; and
d) Closing of a facility to achieve productivity improvements or other cost savings.
An example in relation to consolidated financial statements is selling a subsidiary whose activities are similar
to those of the parent or other subsidiaries.
REVISION STRUCTURE
1
2
3
4
SUMMARY NOTES
AS 26 : INTANGIBLE ASSETS
1. A Company acquired for its internal use a software on 01.03.2020 from U.K. for £ 1,50,000. The
exchange rate on the date was as Rs. 100 per £. The seller allowed trade discount @ 2.5%. The other
expenditures were:
(i) Import Duty 10%
(ii) Additional Import Duty 5%
(iii) Entry Tax 2% (Recoverable later from tax department).
(iv) Installation expenses Rs. 1,50,000.
(v) Professional fees for clearance from customs Rs. 50,000.
Compute the cost of software to be Capitalized as per relevant AS.
2. Honey Ltd. is in the process of developing a new production method. During the financial year ended 31st
March, 2018, total expenditure incurred on development of this production method was ₹ 98,00,000. On
1st Jan, 2018, the production method met the criteria as an intangible asset and expenditure incurred till
this date was ₹ 68,00,000. Further expenditure incurred on the new method was ₹ 72,00,000 for the year
ended 31st March, 2019 and recoverable amount of the know how embodied in the new method for this
financial year is ₹ 52,00,000.
You are required to calculate:
(1) The carrying amount of the Intangible asset on 31st March, 2018.
(2) The expenditure to be shown in Statement of Profit and Loss Account for the year ended 31 st March,
2019.
(3) The carrying amount of the Intangible asset on 31st March, 2019.
3. Dell International Ltd. is developing a new production process. During the financial year 31st March,
2012, the total expenditure incurred on this process was Rs. 40 lakhs. The production process met the
criteria for recognition as an intangible asset on 1st December, 2011. Expenditure incurred till this date
was Rs. 16 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March 2013, was Rs. 70
lakhs. As at 31-3-2013, the recoverable amount of know-how embodied in the process is estimated to be
Rs. 62 lakhs. This includes estimates of future cash outflows as well as inflows.
You are required to work out:
(a) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st
March 2012? (Ignore depreciation for this purpose).
(b) What is the carrying amount of the intangible asset as at 31st March 2012?
(c) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st
March 2013? (Ignore depreciation for this purpose)
(d) What is the carrying amount of the intangible asset as at 31st March 2013?
4. A Company had deferred research and development cost of Rs. 150 lakhs. Sales expected in the
subsequent years are as under:
Years Sales (Rs. in lakhs)
I 400
II 300
III 200
IV 100
You are asked to suggest how should Research and Development cost be charged to Profit and Loss
account. If at the end of the III year, it is felt that no further benefit will accrue in the IV year, how the
unamortised expenditure would be dealt with in the accounts of the Company?
5. An enterprises acquired patent right for Rs. 400 Lakhs. The product life cycle has been estimated to be 5
year and the amortization was decided in the ratio of estimated future cash flows which are as under:
Year Estimate Future Cash Flows (Rs. In Lakhs)
1 200
2 200
3 200
4 100
5 100
After 3rd Year, it was ascertained that the patent would have an estimated balance future life of 3 years the
estimated cash flow after 5th year is expected to be Rs. 50 Lakhs. Determine the amortization under
Accounting Standard 26.
Solution :-Amortization of cost patent of as per AS 26. (Rs. in lakhs)
Year Estimated future cash flow Amortization Ratio

Amortized Amount
1 200 .25 100
2 200 .25 100
3 200 .25 100
4 100 .40(Revised)
40
5 100 .40(Revised)
40
6 50 .20(Revised)
20
400
In the first three years, the patent cost will be amortised in the ratio of estimated future cash flows i.e.
(200: 200: 200: 100: 100).
The unamortized amount of the patent after third year will bè 100 (400-300) which will be amortised in
the ratio of revised estimated future cash flows (100:100:50) in the fourth, fifth and sixth year.
6. Swift Ltd. acquired a patent at a cost of ₹ 80,00,000 for a period of 5 years and the product life-cycle is
also 5 years. The company capitalized the cost and started amortizing the asset at ₹ 10,00,000 per annum.
The company had amortized the patent at 10,00,000 per annum in first two years on the basis of economic
benefits derived from the product manufactured under the patent. After two years it was found that the
product life-cycle may continue for another 5 years from then. The patent was renewable and Swift Ltd.
got it renewed after expiry of five years. The net cash flows from the product during these 5 years were
expected to be ₹ 36,00,000, ₹ 46,00,000, ₹ 44,00,000, ₹ 40,00,000 and ₹ 34,00,000. Find out the
amortization cost of the patent for each of the years.
Solution: Swift Limited amortised ₹ 10,00,000 per annum for the first two years i.e. ₹ 20,00,000. The
remaining carrying cost can be amortised during next 5 years on the basis of net cash flows arising from
the sale of the product. The amortisation may be found as follows:
Year Net cash flows (₹) Amortisation Ratio Amortisation Amount (₹)
I - 0.125 10,00,000
II - 0.125 10,00,000
III 36,00,000 0.180 10,80,000
IV 46,00,000 0.230 13,80,000
V 44,00,000 0.220 13,20,000
VI 40,00,000 0.200 12,00,000
VII 34,00,000 0.170 10,20,000
Total 2,00,00,000 1.000 80,00,000
It may be seen from above that from third year onwards, the balance of carrying amount i.e., ₹ 60,00,000 has
been amortised in the ratio of net cash flows arising from the product of Swift Ltd.
7. Hera Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of Rs. 200
lakhs. Given below is the pattern of expected production and expected operating cash inflow:
Year Production in bottles (in lakhs) Net operating cash flow (Rs. in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory management and
handling method. Suggest the amortization method.
Solution:- As per para 72 of AS 26 ‘Intangibles Assets’, the amortization method used should reflect the
pattern in which economic benefits are consumed by the enterprise. If pattern cannot be determined
reliably, then straight-line method should be used.
In the instant case, the pattern of economic benefit in the form of net operating cash flow is determined
reliably.
Hera Ltd. should amortize the license fee of Rs. 200 lakhs as under:
Year Net Operating Cash Inflow (NOCI) Ratio Amortize amount (Rs. in lakhs)
1 900 0.03 6
2 1,800 0.06 12
3 2,300 0.08 16
4 3,200 0.12 24
5 3,200 0.12 24
6 3,200 0.12 24
7 3,200 0.12 24
8 3,200 0.12 24
9 3,200 0.12 24
10 3,200 0.11 (bal.) 22
27,400 1.00 200
8. NDA Corporation is engaged in research on a new process design for its product. It had incurred an
expenditure of Rs.a 530 lakhs on research upto 31st March, 2010.
The development of the process began on 1st April, 2010 and Development phase expenditure was Rs.
360 lakhs upto 31st March, 2011 which meets assets recognition criteria.
From 1st April, 2011, the company will implement the new process design which will result in after tax
saving of Rs. 80 lakhs per annum for the next five years.
The cost of capital of company is 10%.
Explain:
(1) Accounting treatment for research expenses.
(2) The cost of internally generated intangible asset as per AS 26.
(3) The amount of amortization of the assets. (The present value of annuity factor of Rs. 1 for 5 years @
10% = 3.7908)
Answer:
(i) Research Expenditure - According to para 41 of AS 26 ‘Intangible Assets’, the expenditure on
research of new process design for its product Rs. 530 lakhs should be charged to Profit and Loss
Account in the year in which it is incurred. It is presumed that the entire expenditure is incurred in
the financial year 2009-10. Hence, it should be written off as an expense in that year itself.
(ii) Cost of internally generated intangible asset - The question states that the development phase
expenditure amounting Rs. 360lakhs incurred upto 31st March, 2011 meets asset recognition criteria.
As per AS 26 for measurement of such internally generated intangible asset, fair value can be
estimated by discounting estimated future net cash flows.
Savings (after tax) from implementation of new design for next 5 years 80 lakhs p.a.
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
Present value of net cash flows (Rs. 80 lakhs x 3.7908) 303.26 lakhs
The cost of an internally generated intangible asset would be lower of cost value Rs.360 lakhs or
present value of future net cash flows Rs.303.26lakhs. Hence, cost of an internally generated
intangible asset will be Rs.303.26 lakhs.
The difference of Rs. 56.74 lakhs (i.e. Rs. 360 lakhs – Rs. 303.26 lakhs) will be amortized by the
enterprise for the financial year 2010-11.
(iii) Amortisation - The company can amortise Rs. 303.26 lakhs over a period of five years by charging
Rs. 60.65 lakhs per annum from the financial year 2011-12 onwards.
9. A company with a turnover of Rs.250 crores and an annual advertising budget of Rs.2 crore had taken up
the marketing of a new product. It was estimated that the company would have a turnover of Rs. 25 crores
from the new product. The company had debited to its Profit and Loss account the total expenditure of
Rs.2 crore incurred on extensive special initial advertisement campaign for the new product. Is the
procedure adopted by the company correct?
Answer: According to paras 55 and 56 of AS 26 ‘Intangible Assets’, “expenditure on an intangible item
should be recognised as an expense when it is incurret unless it forms part of the cost of an intangible
asset”.
In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the marketing of a new
product which may provide future economic benefits to an enterpris e by having a turnover of Rs.25
crores. Here, no intangible asset or other asset is acquired or created that can be recognised. Therefore,
the accounting treatment by the company of debiting the entire advertising expenditure of Rs.2 crores to
the Profit and Loss account of the year is correct.
10. A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2002 on a research
project to develop a drug to treat “AIDS”. Experts are of the view that it may take four years to establish
whether the drug will be effective or not and even if found effective it may take two to three more years
to produce the medicine, which can be marketed. The company wants to treat the expenditure as
deferred revenue expenditure. Comment.
Answer: As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research (or from
the research phase of an internal project) should be recognized. Expenditure on research (or on the
research phase of an internal project) should be recognized as an expense when it is incurred. Thus the
company cannot treat the expenditure as deferred revenue expenditure. The entire amount of Rs. 33 lakhs
spent on research project should be charged as an expense in the year ended 31st March, 2002.
11. Himalaya Ltd. in the past three years spent Rs. 75,00,000 to develop a Drug to treat Cancer,
which was charged to Profit and Loss Account since they did not meet AS 26 criteria for
capitalization. In the current year approval of the concerned Government Authority has been
received. The Company wishes to capitalize Rs. 75,00,000 and disclose it as a prior period item. Is
it correct? Give reason for your views.
Answer: As per AS 26 ‘Intangible Assets’ the condition for recognition of a research and
development asset has to be fulfilled when the expenditure was incurred. If the recognition conditions
are not fulfilled the amount has to be charged to the profit and loss account. Once the amount is
charged to the Profit and Loss account, such amount cannot be restated later as a Research and
Development Asset when the condition for recognition get fulfilled. The Company therefore cannot
capitalize Rs. 75,00,000 even as a prior period item.
12. State, how you will deal with the following matters in the accounts of U Ltd. for the year ended 31st
March, 2012 with reference to Accounting Standards:-
The company had spent Rs. 45 lakhs for publicity and research expenses on one of its new consumer
product, which was marketed in the accounting year 2011-2012, but proved to be a failure.
Answer:- In the given case, the company spent Rs. 45 lakhs for publicity and research of a new product
which was marketed but proved to be a failure. It is clear that in future there will be no related further
revenue/benefit because of the failure of the product. Thus according to paras 41 to 43 of AS 26
‘Intangible Assets’, the company should charge the total amount of Rs. 45 lakhs as an expense in the
profit and loss account.
13. X Ltd. is engaged in the business of newspaper and radio broadcasting. It operates through different brand
names. During the year ended 31st March, 2021, it incurred substantial amount on business
communication and branding expenses by participation in various corporate social responsibility
initiatives. The company expects to benefit by this expenditure by attracting new customers over a period
of time and accordingly it has capitalized the same under brand development expenses and intends to
amortize the same over the period in which it expects the benefits to flow. As the accountant of the
company do you concur with these views? You are required to explain in line with provisions of
Accounting Standards.
Solution: As per AS 26 on Intangible Assets, expenditure on an intangible item should be recognized as
on expense when it is incurred unless it forms part of the cost of an intangible asset that meets the
recognition criteria. An intangible asset should be recognized if, and only if: (i) it is probable that the
future economic benefits that are attributable to the asset will flow to the enterprise; and (ii) the cost of
the asset can be measured reliably. In the given case, no intangible assets or other asset is acquired or
created that can be recognized, the accounting treatment by the company to amortize the entire
expenditure over the period in which it expects the benefits to flow is not correct and the same should be
debited to the profit and loss statement during the year ended 31st March, 2021.
14. AB Ltd. launched a project for producing product X in October, 2004. The Company incurred Rs.20 lakhs
towards Research and Development expenses upto 31st March, 2006. Due to prevailing market conditions, the
Management came to conclusion that the product cannot be manufactured and sold in the market for the next
10 years. The Management hence wants to defer the expenditure write off to future years.
Answer:- As per Para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized as
an expense when it is incurred. An intangible asset arising from development (or from the development
phase of an internal project) should be recognized if, and only if, an enterprise can demonstrate all of the
conditions specified in para 44 of the standard. An intangible asset (arising from development) should be
derecognised when no future economic benefits are expected from its use according to para 87 of the
standard. Therefore, the manager cannot defer the expenditure write off to future years. Hence, the
expenses amounting Rs. 20 lakhs incurred on the research and development project has to be written off
in the current year ending 31st March, 2006.
15. ABC Ltd. developed know-how by incurring expenditure of Rs. 20 lakhs, The know-how was used by the
company from 1.4.2005. The useful life of the asset is 10 years from the year of commencement of its
use. The company has not amortised the asset till 31.3.2012. Pass Journal entry to give effect to the value
of know-how as per Accounting Standard-26 for the year ended 31.3.2012.
Answer:- Journal Entry
Rs. Rs.
Profit and Loss A/c (Prior period item) Dr. 12,00,000
Depreciation A/c Dr. 2,00,000
To Know-how A/c 14,00,000
[Being depreciation of 7 years (out of which depreciation of 6 years charged as PPI)]
16. Base Limited is showing an intangible asset at Rs. 85 lakhs as on 1-4-2011. This asset was acquired for
Rs. 112 lakhs on 1-4-2008 and the same was available for use from that date. The company has been
following the policy of amortization of the intangible asset over a period of 12 years on straight line basis.
Comment on the accounting treatment of the above with reference to the relevant accounting standard.
Answer:- As per para 63 of AS 26 “Intangible Assets,” the depreciable amount of an intangible asset
should be allocated on a systematic basis over the best estimates of its useful life. There is a rebuttable
presumption that the useful life of an intangible asset will not exceed ten years from the date when the
asset is available for use. Amortization should commence when the asset is available for use.
Base Limited has been following the policy of amortization of the intangible asset over a period of 12
years on straight line basis. The period of 12 years is more than the maximum period of 10 years specified
as per AS 26.
Accordingly, Base Limited would be required to restate the carrying amount of intangible asset as on
1.4.2011 at Rs. 112 lakhs less Rs. 33.6 lakhs (112 lakhs ×3 years/10 years) = Rs. 78.4 lakhs.
The difference of Rs. 6.6 lakhs i.e. (Rs. 85 lakhs – Rs. 78.4 lakhs) will be adjusted against the opening
balance of revenue reserve.
The necessary journal entry (for rectification) will be
Revenue Reserves Dr. Rs. 6.6 Lakhs
To Intangible Assets Rs. 6.6 Lakhs
(Adjustment to reserves due to restatement of the
carrying amount of intangible asset)
The carrying amount of Rs. 78.4 lakhs would be amortized over remaining 7 years by Rs. 11.2 lakhs per year.
17. U.K. International Ltd. is developing a new production process. During the financial year ending 31st
March, 2011, the total expenditure incurred was Rs. 50 lakhs. This process met the criteria for recognition
as an intangible asset on 1st December, 2010. Expenditure incurred till this date was Rs. 22 lakhs. Further
expenditure incurred on the process for the financial year ending 31st March, 2012 was Rs. 80 lakhs. As
at 31st March, 2012, the recoverable amount of know-how embodied in the process is estimated to be Rs.
72 lakhs. This includes estimates of future cash outflows as well as inflows.
You are required to calculate:
(i) Amount to be charged to Profit and Loss A/c for the year ending 31st March, 2011 and carrying value
of intangible as on that date.
(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31 st March, 2012.
Ignore depreciation.
Answer:- As per AS 26 ‘Intangible Assets’
(i) For the year ending 31.03.2011
(1) Carrying value of intangible as on 31.03.2011: At the end of financial year 31st March 2011, the
production process will be recognized (i.e. carrying amount) as an intangible asset at a cost of Rs. 28
lakhs (expenditure incurred since the date the recognition criteria were met, i.e. from 1 st December 2010).
(2) Expenditure to be charged to Profit and Loss account: The Rs. 22 lakhs is recognized as an
expense because the recognition criteria were not met until 1st December 2011. This expenditure will not
form part of the cost of the production process recognized in the balance sheet.
(ii) For the year ending 31.03.2012
(1) Expenditure to be charged to Profit and Loss account: (Rs. in lakhs)
Carrying Amount as on 31.03.2011 28
Expenditure during 2011 – 2012 80
Total book cost 108
Recoverable Amount (72)
Impairment loss 36
Rs. 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2012.
(2) Carrying value of intangible as on 31.03.2012: (Rs. in lakhs)
Total Book Cost 108
Less: Impairment loss (36)
Carrying amount as on 31.03.2012 72
18. Nirman Solutions incurred costs to develop and produce a routine, low risk Computer Software Product,
as follows, as on 31.03.2016
Completion of Detailed Program Design Rs. 15,00,000
Costs incurred for Coding and Testing to establish technological feasibility Rs. 8,00,000
Other Coding and Testing Costs after establishment of technological feasibility Rs. 6,50,000
Cost of producing Product Masters for Training Materials Rs. 4,20,000
Duplication of Computer Software and Training Materials from
Product Master (5,000 Units) Rs. 2,50,000
Packaging Product (2,500 Units) Rs. 1,50,000
Required:
(i) What amount should be capitalized as Software Cost, subject to amortization of Nirman Solutions as
on 31st March 2016?
(ii) What amount should be reported in Inventory of Nirman Solutions as on 31st March 2016?
Solution:
(i) As per AS 26, costs incurred in creating a computer software product should be charged to research
and development expense when incurred until technological feasibility has been established for the
product. Technological feasibility has been established upon completion of detailed program design
or working model. In this case, Rs. 23,00,000 would be recorded as an expense (Rs. 15,00,000 for
completion of detailed program design and Rs. 8,00,000 for coding and testing to establish
technological feasibility). Cost incurred from the point of technological feasibility until the time
when products costs are incurred are capitalized as software cost. In this situation, Rs. 10,70,000 (i.e.
Rs. 6,50,000 + Rs. 4,20,000) will be capitalized as the cost of the software.
(ii) The cost of duplication of computer software and training materials from product masters (5,000
units) amounting Rs. 2,50,000 and packaging product (2,500 units) amounting Rs. 1,50,000 should
be reported as inventory cost as on 31st March, 2016 i.e. inventory value is total of Rs. 4,00,000.
19. X Ltd. carried on business of manufacturing of Bakery products. The company has two trademarks
"Sun" and "Surya''. One month before, the company comes to know through one of the marketing
managers that both trademarks have allegedly been infringed by other competitors engaged in the same
field. After investigation, legal department of the company informed that it had weak case on trademark
“Sun” and strong case in regard to trademark “Surya”'. X Ltd. incurred additional legal fees to stop
infringement on both trademarks. Both trademarks have a remaining legal life of 10 years. How should
X Ltd. account for these legal costs incurred relating to the two trademarks?
Solution: As per AS 26, subsequent expenditure on an intangible asset after its purchase or its
completion should be recognized as an expense. However, if the subsequent expenditure enables the
asset to generate future economic benefits in excess of its originally assessed standard of performance or
can be measured and attributed to the asset reliably, then such subsequent expenditure should be added
to the cost of the intangible asset.
The legal costs incurred for both the trademarks do not enable them to generate future economic
benefits in excess of its originally assessed standard of performance. They only ensure to maintain them
if the case is decided in favour of the company. Therefore, such legal costs incurred for both trademarks
must be recognized as an expense.
20. As per provisions of AS-26, how would you deal to the following situations:
(1) Rs. 23,00,000 paid by a manufacturing company to the legal advisor for defending the patent of a
product is treated as a capital expenditure.
(2) During the year 2018-19, a company spent Rs. 7,00,000 for publicity and research expenses on one of its
new consumer product which was marketed in the same accounting year but proved to be a failure.
(3) A company spent Rs. 25,00,000 in the past three years to develop a product, these expenses were
charged to profit and loss account since they did not meet AS-26 criteria for capitalization. In the current
year approval of the concerned authority has been received. The company wishes to capitalize Rs.
25,00,000 by disclosing it as a prior period item.
(4) A company with a turnover of Rs. 200 crores and an annual advertising budget of Rs. 50,00,000 had
taken up for the marketing of a new product by a company. It was estimated that the company would
have a turnover of Rs. 20 crore from the new product.
The company had debited to its Profit & Loss Account the total expenditure of Rs. 50,00,000 incurred on
extensive special initial advertisement campaign for the new product.
Solution: As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after it purchase
or its completion should be recognized as an expense when it is incurred unless
(a) It is probable that the expenditure will enable the asset to generate future economic benefits in excess of
its originally assessed standard of performance; and
(b) expenditure can be measured and attributed to the asset reliably. If these conditions are met, the
subsequent expenditure should be added to the cost of the intangible asset.
(i) In the given case, the legal expenses to defend the patent of a product amounting Rs. 23,00,000 should
not be capitalized and be charged to Profit and Loss Statement.
(ii) The company is required to expense the entire amount of Rs. 7,00,000 in the Profit and Loss account for
the year ended 31st March, 2019 because no benefit will arise in the future.
(iii) As per AS 26, expenditure on an intangible item that was initially recognized as an expense by a
reporting enterprise in previous annual financial statements should not be recognized as part of the cost
of an intangible asset at a later date. Thus the company cannot capitalize the amount of Rs. 25,00,000
and it should be recognized as expense
(iv) Expenditure of Rs. 50,00,000 on advertising and promotional activities should always be charged to
Profit and Loss Statement. Hence, the company has done the correct treatment by debiting the sum of 50
lakhs to Profit and Loss Account.
21. PQR Ltd. has acquired a Brand from another company for Rs. 100 lakhs. PQR Ltd. contends that since
the said brand is a very popular and famous brand, no amortization needs to be provided. Comment on
this in line with the Accounting Standards.
Solution: AS 26 ‘Intangible Assets” provides that an intangible asset should be measured initially at
cost. After initial recognition, an intangible asset should be carried at cost less any accumulated
amortization and any accumulated impairment losses. The amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life for computing amortization. There
is a rebuttable presumption that the useful life of an intangible asset will not exceed 10 years from the
date when the asset is available for use. It must be ensured that the value of brand is amortized in
accordance with AS 26, as brand is considered to be intangible asset. The contention of PQR Ltd. that
Brand is very popular and famous, hence no amortization needs to be provided is not correct as there is
no persuasive evidence that the useful life of the intangible asset will exceed 10 years.
22. Surya Ltd. had the following transactions during the year ended 31st March, 2021.
(i) It acquired the business of Gomati Limited on a going concern basis for ₹ 25,00,000 on 1st
June,2020. The fair value of the Net Assets of Gomati Limited was ₹ 18,75,000. Surya Ltd. believes
that due to popularity of the products of Gomati Limited in the market, its goodwill exists.
(ii) On 20th August, 2020, Surya Ltd. incurred cost of ₹ 6,00,000 to register the patent for its product.
Surya Ltd. expects the Patent’s economic life to be 8 years.
(iii) On 1st October, 2020, Surya Ltd. has taken a franchise to operate an ice cream parlour from Volga
Ltd. for ₹ 4,50,000 and at an Annual Fee of 10% of Net Revenues (after deducting expenditure).
The franchise expires after six years. Net Revenue for the year ended 31 st March, 2021 amounted to
₹ 1,50,000.
Surya Ltd. follows an accounting policy to amortize all Intangibles on Staright Line basis (SLM) over
the maximum period permitted by the Accounting Standards taking a full year amortization in the year
of acquisition. Goodwill on acquisition of business is to be amortized over 5 years (SLM).
Prepare an extract showing the Intangible Assets section in the Balance Sheet of Surya Ltd. as at 31st
March, 2021.
Solution: Surya Ltd.
Balance Sheet (Extract relating to intangible asset) as on 31 st March 2021
Note No. ₹
Assets
Notes to Accounts (Extract)

₹ ₹
Goodwill (Refer to note 1) 5,00,000
Patents (Refer to Note 2) 5,25,000
14,00,000
Franchise (Refer to Note 3) 3,75,000
Working Notes:
₹
(1) Goodwill on acquisition of business
Cash paid for acquiring the business (purchase 25,00,000
consideration)
Less: Fair value of net assets acquired (18,75,000)
Goodwill 6,25,000
Less: Amortization. over 5 years (as per SLM) (1,25,000)
Balance to be shown in the balance sheet 5,00,000
(2) Patent 6,00,000
Less: Amortization (over 8 years as per SLM) (75,000)
(3) Franchise 4,50,000
Less: Amortization (over 6 years) (75,000)
23. A company acquired for its internal use a software on 28.01.2012 from the USA for US $ 1,00,000. The
exchange rate on that date was Rs. 52 per USD. The seller allowed trade discount @ 5 %. The other
expenditure were:
(i) Import Duty : 20%
(ii) Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
(iv) Installation expenses : Rs. 25,000
(v) Profession fees for Clearance from Customs: Rs. 20,000
Compute the cost of Software to be capitalized.
Answer:- Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software $ 1,00,000
Less: Trade discount @ 5% ($ 5,000)
$ 95,000
Cost in Rs. (US $ 95,000 x Rs. 52) 49,40,000
Add: Import duty on cost @ 20% (Rs.) 9,88,000
59,28,000
Purchase tax @ 10% (Rs.) 5,92,800
Installation expenses (Rs. ) 25,000
Profession fee for clearance from customs (Rs.) 20,000
Cost of the software to be capitalized (Rs.) 65,65,800
Note: Since entry tax has been mentioned as a recoverable/refundable tax, it is not included as part of the
cost of the asset.
24. Sunrise Ltd. acquired a copyright on 1st April, 2017 for ₹ 364 Lakhs. The copyright was available for
use from 1st April, 2017 itself. The company amortizes the copyright over a period of 13 years on straight
line basis. Accordingly Sunrise Ltd. is showing the copyright at ₹ 252 Lakhs as on 1st April, 2021.
You are required to comment on the accounting treatment of copyright with reference to the requirement
of relevant Accounting Standard.
Solution: As per AS 26 'Intangible Assets', the depreciable amount of an intangible asset should be
allocated on systematic basis over the best estimate of its useful life. There is a rebuttable presumption
that the useful life of an intangible asset will not exceed ten years from the date when the asset is
available for use.
Company has been following the policy of amortization of the copyright over a period of 13 years on
straight line basis. The period of 13 years is more than the maximum period of 10 years specified as per
AS 26.
Accordingly, the company would be required to restate the carrying amount of intangible asset as on
01.04.2021 at ₹ 218.40 lakhs i.e. ₹ 364 lakhs less ₹ 145.60 lakhs [ 36.4 (364/10 years) x 4].
The difference of ₹ 33.60 Lakhs (252 lakhs – 218.40 lakhs) will be adjusted against the opening balance
of revenue reserve. The carrying amount of ₹ 218.40 lakhs will be amortized over remaining 6 years by
amortizing ₹ 36.40 lakhs per year.
25. During 2019-20, an enterprise incurred costs to develop and produce a routine low risk computer
software product, as follows:
Particular Rs.
Completion of detailed program and design (Phase 1) 50,000
Coding and Testing (Phase 2) 40,000
Other coding costs (Phase 3 & 4) 63,000
Testing costs (Phase 3 & 4) 18,000
Product masters for training materials (Phase 5) 19,500
Packing the products (1,500 units) (Phase 6) 16,500
After completion of phase 2, it was established that the product is technically feasible for the market.
You are required to state how the above referred cost to be recognized in the books of accounts.
Solution: As per AS 26, costs incurred in creating a computer software product should be charged to
research and development expense when incurred until technological feasibility/asset recognition criteria
has been established for the product. Technological feasibility/asset recognition criteria have been
established upon completion of detailed program design or working model.
In this case, Rs. 90,000 would be recorded as an expense (Rs. 50,000 for completion of detailed program
design and Rs. 40,000 for coding and testing to establish technological feasibility/asset recognition
criteria).
Cost incurred from the point of technological feasibility/asset recognition criteria until the time when
products costs are incurred are capitalized as software cost (63,000+ 18,000+ 19,500) = Rs. 1,00,500.
Packing cost Rs. 16,500 should be recognized as expenses and charged to Profit & Loss A/c.
26. K Ltd. launched a project for producing product X in October, 2021. The Company incurred ₹ 40 lakhs
towards Research and Development expenses upto 31st March, 2022. Due to prevailing market
conditions, the Management came to conclusion that the product cannot be manufactured and sold in the
market for the next 10 years. The Management hence wants to defer the expenditure write off to future
years. Advise the Company as per the applicable Accounting Standard.
Solution: As per AS 26 “Intangible Assets”, expenditure on research should be recognized as an expense
when it is incurred. An intangible asset arising from development (or from the development phase of an
internal project) should be recognized if, and only if, an enterprise can demonstrate all of the conditions
specified in the standard. An intangible asset (arising from development) should be derecognised when
no future economic benefits are expected from its use according to the standard. Thus, the manager
cannot defer the expenditure write off to future years in the given case.
Hence, the expenses amounting ₹ 40 lakhs incurred on the research and development project has to be
written off in the current year ending 31 st March, 2022.
REVISION STRUCTURE
Questio Statu Copy Revisions Important concept in this question (In student
n no. s page 1 2 3 to 5 words) Student can refer copy page number
no.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
SUMMARY NOTES
AS 29: PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
1. Scope: This Standard should be applied in accounting for provisions and contingent liabilities and in dealing
with contingent assets, other than
a. Those resulting from financial instruments that are carried at fair value;
b. Those resulting from executory contracts;
c. Those arising in insurance enterprises from contracts with policy-holders; and
d. Those covered by another Accounting Standard.
Where another Accounting Standard like 7; 9; 15; 19; 22 & 24 deals with a specific type of provision,
contingent liability or contingent asset, an enterprise applies that Standard instead of this Standard.
2. Definitions and accounting treatment:

A) Executory contracts are contracts under which neither party has performed any of its obligations or
both parties have partially performed their obligations to an equal extent.
Examples of executory contracts include:
a. Employee contracts in respect of continuing employment;
b. Contracts for future delivery of services such as gas and electricity;
c. Obligations to pay local authority charges and similar levies; and
d. Most purchase orders.
B) A Provision is a liability which can be measured only by using a substantial degree of estimation.
 A provision should be recognised when:
(a) An enterprise has a present obligation as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
 Disclosure Requirement:- For each class of provision, an enterprise should disclose:

(a) The carrying amount at the beginning and end of the period;
(b) Additional provisions made in the period, including increases to existing provisions;
(c) Amounts used (i.e. incurred and charged against the provision) during the period; and
(d) Unused amounts reversed during the period.
C) A Liability is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits.
D) An Obligating event is an event that creates an obligation that results in an enterprise having no
realistic alternative to settling that obligation.
E) A Contingent liability is:

a. A possible obligation that arises from past events and the existence of which will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise; or
b. A present obligation that arises from past events but is not recognised because:
(i) It is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; or
(ii) A reliable estimate of the amount of the obligation cannot be made.
Note:- An enterprise should not recognise a contingent liability but should be disclosed.
F) A Contingent asset: Contingent assets usually arise from unplanned or other unexpected events that
give rise to the possibility of an inflow of economic benefits to the enterprise.
An enterprise should not recognise a contingent asset, since this may result in the recognition of income
that may never be realised. However, when the realisation of income is virtually certain, then the related
asset is not a contingent asset and its recognition is appropriate. A contingent asset is not disclosed in
the financial statements. It is usually disclosed in the report of the approving authority.
G) Present obligation – An enterprise determines whether a present obligation exists at the balance sheet
date by taking account of all available evidence. On the basis of such evidence:
(a) Where it is more likely than not that a present obligation exists at the balance sheet date, the
enterprise recognises a provision (if the recognition criteria are met); and
(b) Where it is more likely that no present obligation exists at the balance sheet date, the enterprise
discloses a contingent liability, unless the possibility of an outflow of resources embodying
economic benefits is remote.
H) Possible obligation - an obligation is a possible obligation if, based on the evidence available, its
existence at the balance sheet date is considered not probable.
3. Reimbursements
An, enterprise with a present obligation may be able to seek reimbursement of part or all of the expenditure
from another party, for example via:
 An insurance contract arranged to cover a risk;
 An indemnity clause in a contract; or
 A warranty provided by a supplier.
The basis underlying the recognition of a reimbursement is that any asset arising is separate from the related
obligation. Consequently, such a reimbursement should be recognised only when it is virtually certain that it
will be received consequent upon the settlement of the obligation.
In most cases, the enterprise will remain liable for the whole of the amount in question so that the enterprise
would have to settle the full amount if the third party failed to pay for any reason. In this situation, a
provision is recognised for the full amount of the liability, and a separate asset for the expected
reimbursement is recognised when it is virtually certain that reimbursement will be received if the enterprise
settles the liability.
In some cases, the enterprise will not be liable for the costs in question if the third party fails to pay. In such
a case, the enterprise has no liability for those costs and they are not included in the provision.
4. An ‘onerous contract’ is a contract in which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it.
The unavoidable costs under a contract reflect the least of
(a) net cost of execution the contract or
(b) any compensation or penalties arising from failure to fulfill it.
Recognition Criteria will be same as of recognition provision.
5. Restructuring: A Restructuring is a programme that is planned and controlled by management, and

materially changes either:
(a) The scope of a business undertaken by an enterprise; or
(b) The manner in which that business is conducted.
The following are examples of events that may fall under the definition of restructuring:
(a) Sale or termination of a line of business;

(b) The closure of business locations in a country or region or the relocation of business activities from
one country or region to another;
(c) Changes in management structure, for example, eliminating a layer of management; and
(d) Fundamental re-organisations that have a material effect on the nature and focus of the enterprise's
operations.
A provision for restructuring costs is recognised only when the recognition criteria for provisions. No
obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e., there is a
binding sale agreement. Until there is a binding sale agreement, the enterprise will be able to change its mind
and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms.
PRACTICAL QUESTIONS
1. There is a sales tax demand of Rs. 2.50 crores against a company relating to prior years against which the
company has gone on appeal to the appellate authority in the department. The grounds of appeal deal with
points covering Rs. 2 crores of the demand. State how the matter will have to be dealt with in the final
accounts for the year.
2. At the end of the financial year ending on 31st December, 2005, a company finds that there are twenty law
suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors.
The possible outcome as estimated by the Board is as follows:
Probability Loss (Rs.)
In respect of five cases (Win) 100% -
Next ten cases (Win) 60% -
Lose (Low damages) 30% 1,20,000
Lose (High damages) 10% 2,00,000
Remaining five cases
Win 50% -
Lose (Low damages) 30% 1,00,000
Lose (High damages) 20% 2,10,000
Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent loss and the
accounting treatment in respect thereof.
Answer: For the purpose of the disclosure of contingent liability by way of note, amount may be calculated
as under:
Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000
= Rs. 36,000 + Rs. 20,000
= Rs. 56,000
Expected loss in remaining five cases = 30% of Rs. 1,00,000 + 20% of Rs. 2,10,000
= Rs. 30,000 + Rs. 42,000
= Rs. 72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic.
Therefore, the better approach will be to disclose the overall expected loss of Rs. 9,20,000 (Rs. 56,000 *10 +
Rs. 72,000 * 5) as contingent liability.
3. There is a sales tax demand of Rs.3 crores against X Ltd. relating to prior years against which the company
has gone in appeal.
Answer:-According to AS – 29 “Provisions, Contingent Liabilities and Contingent Assets”, provision should
be made only if there is a present obligation that probably requires an outflow of resources. In the given
situation, since the enterprise has gone on appeal against the sales tax demand, the company should have
estimated that there is no present obligation, but it can be a possible obligation. Therefore, the sales tax
demand of Rs.3 crores should be disclosed as a contingent liability.
4. Shyam Ltd. (a Public Sector Company) provides consultancy and engineering services to its clients. In the
year 2012-13, the Government has set up a commission to decide about the pay revision. The pay will be
revised with effect from 1-1-2006 based on recommendations of the commission. The company makes the
provision of Rs. 680 lakhs for pay revision in the financial year 2012-13 on the estimated basis as the report
of the commission is yet to come. As per the contracts with the client on cost plus job, the billing is done on
the actual payment made to the employees on each job.
The company gives the following disclosures in its notes to accounts:
“Salaries and benefits include the provision of Rs. 680 lakhs in respect of pay revision. The amount
chargeable from reimbursable jobs will be billed as per the contract. When the actual payments is made”
Comment.
The accountant feels that the company should also recognise the income by Rs. 680 lakhs in Profit and Loss
Account as per the terms of the contract. Otherwise it will be the violation of matching concept and will to
understatement of profit.
Answer: As per para 46 of AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, when some or
all of the expenditure required to settle a provision is expected to be reimbursement by another party, the
reimbursement should be recognised when , and only when, it is virtually certain that reimbursement should
not exceed the amount of the provision.
Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent liability is
matched by a related counter – claim or claim against a third party. In such cases, the amount of the
provision is determined after taking into account the probable recovery under the claim if no significant
uncertainly as to its measurability or collectability exists.
5. A company is in a dispute involving allegation of infringement of patents by a competitor company who is

seeking damages of a huge sum of Rs. 900 lakhs. The directors are of the opinion that the claim can be
successfully resisted by the company.
How would you deal the same in the annual accounts of the company?
Answer:- As per para 14 of AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision
should be recognised when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no
provision should be recognised.
If these conditions are not met, no provision should be recognised.
In the given situation, since, the directors of the company are of the opinion that the claim can be
successfully resisted by the company, therefore there will be no outflow of the resources. The company will
disclose the same as contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor who alleges that the
company has infringed patents and is seeking damages of Rs. 900 lakhs. However, the directors are of the
opinion that the claim can be successfully resisted by the company.”
6. An airline is required by law to overhaul its aircraft once in every five years. The pacific Airlines which
operate aircrafts does not provide any provision as required by law in its final accounts. Discuss with
reference to relevant Accounting Standard 29.
Answer:- A provision should be recognised only when an enterprise has a present obligation as a result of a
past event. In the given case, there is no present obligation, therefore no provision is recognized as per AS
29.
The cost of overhauling aircraft is not recognized as a provision because it is a future obligation and the
incurring of the expenditure depends on the company’s decision to continue operating the aircrafts. Even a
legal requirement to overhaul does not require the company to make a provision for the cost of overhaul
because there is no present obligation to overhaul the aircrafts.
Further, the enterprise can avoid the future expenditure by its future action, for example by selling the
aircraft. However, an obligation might arise to pay fines or penalties under the legislation after completion of
five years. Assessment of probability of incurring fines and penalties depends upon the provisions of the
legislation and the stringency of the enforcement regime. A provision should be recognized for the best
estimate of any fines and penalties if airline continues to operate aircrafts for more than five years.
7. The difference between actual expense or income and the estimated expense or income as accounted for in
earlier years’ accounts, does not necessarily constitute the item to be a prior period item comment.
Ans. The statement given in the question is correct.
8. A Company dealing in software provides after sales warranty for 2 years to its customer. Based on past
experience, the company has been following policy for making provision for warranties on the invoice
amount, on the remaining balance warranty period:
Less than 1 year: 3% provision
More than 1 year: 4% provision
The company has raised invoices as under:
Invoice Date Amount (₹)
19th January, 2019 1,20,000
29th January, 2020 75,000
15th October, 2020 2,70,000
You are required to calculate the provision to be made for warranty under Accounting Standard 29 as at 31st
March, 2020 and 31st March, 2021. Also compute the amount to be debited to Profit and Loss Account for
9. An Engineering goods company provides after sales warranty for 2 years to its customers. Based on past
experience, the company has been following policy for making provision for warranties on the invoice
amount, on the remaining balance warranty period:
Less than 1 year: 2% provision
More than 1 year: 3% provision
The Company has raised invoices as under:
Invoice Date Amount (Rs.)

19th January, 2011 40,000
29th January, 2012 25,000
15th October, 2012 90,000
Calculated the provision to be made for warranty under Accounting Standard 29 as at 31st March, 2012 and 31st
March 2013 Also compute amount to be debited to Profit and Loss Account for the year ended 31 st March, 2013
Answer: Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities & Contingent Assets’
As at 31st March, 2012 = ₹ 40,000 x .02 + ₹ 25,000 x .03
= ₹ 800 + ₹ 750
= ₹ 1,550
As at 31st March, 2013 = ₹ 25,000 x .02 + ₹ 90,000 x .03 = ₹ 500 + ₹ 2,700 = ₹ 3,200
Amount debited to Profit and Loss Account for year ended 31st March, 2013
₹
Balance of provision required as on 31.03.2013 3,200
Less: Opening Balance as on 1.4.2012 (1,550)
Amount debited to profit and loss account 1,650
Note: No provision will be made on 31st March, 2013 in respect of sales amounting ₹ 40,000 made on 19th
January, 2011 as the warranty period of 2 years has already expired.
8. AB Ltd. is in the process of finalizing its account for the year ended 31st March, 2015. The company seeks
your advice on the following:
(i) The company's sale tax assessment for assessment year 2012 -13 has been completed on 14th February,
2015 with a demand of ₹ 5.40 crore. The company paid the entire due under protest without prejudice to
its right of appeal. The company files its appeal before the appellate authority wherein the grounds of
appeal cover tax on additions made in the assessment order for a sum of ₹ 3.70 crore.
(ii) The company has entered into a wage agreement in May 2015 whereby the labour union has accepted a
revision in wage from June 2014. The agreement provides that the hike till May 2015 will not be paid to
the employees but will be settled to them at the time of retirement. The company agrees to deposit the
arrears in Government Bonds by September 2015.
Answer:
(i) Since the company is not appealing against the addition of ₹ 1.70 crore (₹ 5.40 crore less ₹ 3.70 crore),
therefore, the same should be provided/ expensed off in its accounts for the year ended on 31st March,
2015. However, the amount paid under protest can be kept under the heading ‗Long -term Loans &
Advances / Short-term Loans and Advances‘ as the case may be alongwith disclosure as contingent
liability of ₹ 3.70 crore.
(ii) The arrears for the period from June, 2014 to March, 2015 are required to be provided for in the accounts
of the company for the year ended on 31 st March, 2015 assuming that negotiations for hike in wages
had already started in the year 2014 - 15 i.e. before the balance sheet date though the agreement was
entered in May, 2015.
9. With reference to AS 29 "Provisions, Contingent Liabilities and Contingent Assets", define:

(i) A Provision
(ii) A Liability
(iii) A Contingent Asset
(iv) Present Obligation
Answer:
(i) A Provision is a liability which can be measured only by using a substantial degree of estimation.
(ii) A Liability is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits.
(iii) A Contingent asset is a possible asset that arises from past events the existence of which will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the enterprise.
(iv) Present obligation - An obligation is a present obligation if, based on the evidence available, its
existence at the balance sheet date is considered probable, i.e., more likely than not.
10. Mini Ltd. took a factory premises on lease on 1.4.07 for Rs.2,00,000 per month. The lease is operating
lease. During March, 2008, Mini Ltd. relocates its operation to a new factory building. The lease on the old
factory premises continues to be live upto 31.12.2010. The lease cannot be cancelled and cannot be sub-let to
another user. The auditor insists that lease rent of balance 33months upto 31.12.2010 should be provided in
the accounts for the year ending 31.3.2008. Mini Ltd. seeks your advice.
Answer: In accordance with AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’ and ASI
30 ‘Applicability of AS 29 to Onerous Contracts’, if an enterprise has a contract that is onerous, the
present obligation under the contract should be recognized and measured as a provision. In the given
case, the operating lease contract has become onerous as the economic benefit of lease contract for
next 33 months up to 31.12.2010 will be nil. However, the lessee, Mini Ltd., has to pay lease rent of
Rs. 66,00,000 (i.e.2,00,000 p.m. for next 33 months).
For a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligation under the
contract should exceed the economic benefits expected to be received under it.
Therefore, provision on account of Rs.66,00,000 is to be provided in the accounts for the year ending
31.03.08. Hence auditor is right.
11. XYZ Ltd. has not made provision for warrantee in respect of certain goods due to the fact that the company can
claim the warranty cost from the original supplier. Hence the accountant of the company says that the company is
not having any liability for warrantees on a particular date as the amount gets reimbursed. You are required to
comment on the accounting treatment done by the XYZ Ltd. in line with the provisions of AS 29.
Solution: As per para 46 of AS 29 "Provisions, Contingent Liabilities and Contingent Assets", where some
or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be
received if the enterprise settles the obligation. The reimbursement should be treated as a separate asset. The
amount recognised for the reimbursement should not exceed the amount of the provision.
It is apparent from the question that the company had not made provision for warranty in respect of certain
goods considering that the company can claim the warranty cost from the original supplier. However, the
provision for warranty should have been made as per AS 29 and the amount claimable as reimbursement
should be treated as a separate asset in the financial statements of the company rather than omitting the
disclosure of such liability. Accordingly, it is viewed that the accounting treatment adopted by the company
with respect to warranty is not correct.
12. Sun Ltd. Has entered into a sale contract of Rs.5 crores with X Ltd. During 2009-10 financial year. The profit on
this transaction is Rs.1 crore. The delivery of goods to take place during the first month of 2010-11 financial year.
In case of failure of Sun Ltd. to deliver within the schedule a compensation of Rs.1.5 crore is to be paid to X Ltd.
Sun Ltd. Planned to manufacture the goods during the last month of the 2009-10 financial year. As on Balance
Sheet date (31.3.2010), the goods were not manufactured and it was unlikely that Sun Ltd. Will be in a position to
meet the contractual obligation.
(i) Should Sun Ltd. Provide for contingency as per AS-29?
(ii) Should provision is measured as the excess of compensation to be paid over the profit?
Answer:-
(i) Yes, the contingency should be provided for. As on 31st March 2010, it is unlikely that the contractual
obligation will be met. Therefore, it is probable that the compensation of Rs.1.5 crore will have to be paid
under the binding contract, resulting in outflow of economic resources. Therefore, according to AS-29
“Provisions, Contingent liabilities and contingent assets”, the amount should be provided for.
(ii) No, According to para41 of AS – 29, future events should be taken into account in the measurement of
provisions only if there is sufficient objective evidence that such future events will occur. In the absence of
such evidences, anticipated profits should not be deducted from the compensation amount. The entire
compensation amount should be provided for.
13. With reference to AS-29, how would you deal with the following in the annual accounts of the company at the
Balance Sheet dates:
(i) An organization operates an offshore oilfield where its licensing agreement requires it to remove the oil
rig at the end of production and restore the seabed. Ninety percent of the eventual costs relate to the
removal of the oil rig and restoration of damage caused by building it, and ten percent arise through the
extraction of oil. At the balance sheet date, the rig has been constructed but no oil has been extracted.
(ii) During 2018-19 Ace Ltd. gives a guarantee of certain borrowings of Brew Ltd., whose financial condition
at that time is sound. During 2019-20, the financial condition of Brew Ltd. deteriorates and at 31st Dec. 2019
it goes into Liquidation. (Balance Sheet date 31-3-19)
Solution:
(i) The construction of the oil rig creates an obligation under the terms of the license to remove the rig and
restore the seabed and is thus an obligating event. At the balance sheet date, however, there is no obligation to
rectify the damage that will be caused by extraction of the oil. An outflow of resources embodying economic
benefits in settlement is probable. Thus, a provision is recognized for the best estimate of ninety per cent of
the eventual costs that relate to the removal of the oil rig and restoration of damage caused by building it.
These costs are included as part of the cost of the oil rig. However, there is no obligation to rectify the
damage that will be caused by extraction of oil, as no oil has been extracted at the balance sheet date. So, no
provision is required for the cost of extraction of oil at balance sheet date.
10% of costs that arise through the extraction of oil are recognized as a liability when the oil is extracted.
(ii) As per AS 29, for a liability to qualify for recognition there must be not only a present obligation but
also the probability of an outflow of resources embodying economic benefits to settle that obligation.
The obligating event is the giving of the guarantee by Ace Ltd. for certain borrowings of Brew Ltd.,
which gives rise to an obligation. No outflow of benefits is probable at 31 March 2019.Thus no
provision is recognized. The guarantee is disclosed as a contingent liability unless the probability of any
outflow is regarded as remote.
During 2019-20, the financial condition of Brew Ltd. deteriorates and finally goes into liquidation. The
obligating event is the giving of the guarantee, which gives rise to a legal obligation. At 31 March 2020,
it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation. Thus, provision is recognized for the best estimate of the obligation.
14. EXOX Ltd. is in the process of finalising its accounts for the year ended 31st March, 20X2. The company
seeks your advice on the following:
(i) The Company’s sales tax assessment for assessment year 20X1-X2 has been completed on 14th
February, 20X4 with a demand of Rs. 2.76 crore. The company paid the entire due under protest without
prejudice to its right of appeal. The Company files its appeal before the appellate authority wherein the
grounds of appeal cover tax on additions made in the assessment order for a sum of 2.10 crore.
(ii) The Company has entered into a wage agreement in May, 20X2 whereby the labour union has accepted a
revision in wage from June, 20X1. The agreement provided that the hike till May, 20X2 will not be paid
to the employees but will be settled to them at the time of retirement. The company agrees to deposit the
arrears in Government Bonds by September, 20X2.
Solution:
(i) Since the company is not appealing against the addition of Rs. 0.66 crore the same should be provided
for in its accounts for the year ended on 31st March, 20X4. The amount paid under protest can be kept
under the heading ‘Loans & Advances’ and also disclosed as a contingent liability of Rs. 2.10 crore.
(ii) The arrears for the period from June, 20X1 to March, 20X2 are required to be provided for in the
accounts of the company for the year ended on 31st March, 20X2.
15. With reference to AS 29, how would you deal with the following in the Annual Accounts of the company at
the Balance Sheet date:
The Government introduces a number of changes to the taxation laws. As a result of these changes, the company
will need to train a large proportion of its accounting and legal workforce in order to ensure continued
compliances with tax law regulations. At the balance sheet date, no retraining of staff has taken place.
Solution: As per AS 29, a provision for restructuring costs is recognized only when the recognition criteria
for provisions are met. A restructuring provision does not include costs as of retraining or relocating
continuing staff.
The expenditures of training the staff related to the future conduct of the business and are not liabilities for
restructuring at the balance sheet date. Such expenditures are recognized on the same basis as if they arose
independently of a restructuring. At the balance sheet date, no such expenditure has been incurred hence no
provision is required.
16. Chaos Limited is in the process of finalizing its accounts for the year ended 31st March, 2020. It seeks your
advice in the following cases:
(i) Chaos Limited has filed a court case in 2014-2015 against its competitors. It became evident to its
lawyers during the year ended 31st March, 2020 that Chaos Limited may lose the case and would have to
pay Rs. 3,00,000 being the cost of litigation. No entries/provisions have been made in the books.
(ii) A new regulation has been passed in 2019-2020 by the healthcare ministry to upgrade facilities. Deadline
set by the government is 31.03.2021. The company estimates an expenditure of Rs. 10,00,000 for the
said upgrade.
(iii) The company gives one year warranty for its healthcare equipment under the contract of sale that it will
make good any manufacturing defect by repair or replacement. As per past experience, it is probable that
there will be 1% such cases and estimated cost of repair / replacement is estimated at 10% of such sale
value. During the year, the company has made a sale of Rs. 5 crores.
Kindly give your answer for each of above with proper reasoning according to the relevant Accounting
Standard. Also state the principles for recognition of provision, as per AS 29.
Solution: Principles for recognition of provisions: As per AS 29, “a provision shall be recognised when:
(i) an entity has a present obligation (legal or constructive) as a result of a past event;
(ii) it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
(iii) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no
provision shall be recognised.”
Accounting treatment under the given scenarios:
(i) On 31st March, 2020, since it is evident to the lawyer that Chaos Limited may lose the case and also a
reliable estimate of the outflow can be made as Rs. 3,00,000, there is a present obligation. Hence,
provision should be recognised for Rs. 3,00,000 for the amount which may be required to settle the
obligation.
(ii) Under new regulation, an entity is required to upgrade its facilities by 31 st March, 2021. However, on
31st March, 2020, i.e. at the end of the reporting period, there is no obligation because there is no
obligating event either for the costs of upgrading the facilities or for fines under the regulations. Hence,
no provision should be recognized on 31st March, 2020 for upgrading the facilities by 31st March, 2021.
(iii) The obligating event is the sale of health care equipment with a warranty, which gives rise to a legal
obligation. Here, an outflow of resources embodying economic benefits in settlement is probable for the
warranties as a whole. Hence, a provision is recognized for the best estimate of the costs of making good
under the warranty products sold before the end of the reporting period as follows:
Probability of warranty cases for the entity where repair/replacement may be required as per past
experience = 1% of Rs. 5,00,00,000 = Rs. 5,00,000
Estimated cost of repair / replacement = Rs. 5,00,000 x 10% = Rs. 50,000.
17. Chaos Limited is in the process of finalizing its accounts for the year ended 31st March, 2022. It seeks your
advice in the following cases:
(i) Chaos Limited entered into an agreement to supply 1 lac face masks to D Limited by 30th April, 2022 failing
which it will have to pay a penalty of ₹ 10 per item not supplied. On 31st March, 2022 Chaos Limited
assessed that it could only supply 50,000 face masks to D Limited by 30th April, 2022.
(ii) Chaos Limited has filed a court case in 2014-2015 against its competitors. It is evident to its lawyers that
Chaos Limited may lose the case and would have to pay ₹ 3,00,000 being the cost of litigation. No
entries/provisions have been made in the books.
(iii) A new regulation has been passed in 2021-22 by the healthcare ministry to upgrade facilities. Deadline set by
the government is 31.03.2023. The company estimates an expenditure of ₹ 10,00,000 for the said upgrade.
Kindly give your answer for each of above with proper reasoning according to the relevant Accounting Standard.
Also state the principles for recognition of provision, as per AS 29.
Solution: Principles for recognition of provisions: As per AS 29, “a provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision
shall be recognised.”
Accounting treatment under the given scenarios:
(i) In this case, there is no present obligation arising out of a past event as the goods are scheduled for delivery
on 30th April, 2022 and there is no delay as at 31 st March, 2022. Hence, there is no present obligation to pay
the penalty in the current year. Therefore, no provision can be recognized in the instant case.
(ii) On 31st March, 2022, since it is evident to the lawyer that Chaos Limited may lose the case and also a reliable
estimate of the outflow can be made as ₹3,00,000, there is a present obligation. Hence, provision should be
recognised for ₹ 3,00,000 for the amount which may be required to settle the obligation.
(iii) Under new regulation, an entity is required to upgrade its facilities by 31st March, 2023. However, on 31st
March, 2022, i.e. at the end of the reporting period, there is no obligation because there is no obligating event
either for the costs of upgrading the facilities or for fines under the regulations. Hence, no provision should be
recognised on 31st March, 2022 for upgrading the facilities by 31st March, 2023.
18. Alloy Fabrication Limited is engaged in manufacturing of iron and steel rods. The company is in the process
of finalisation of the accounts for the year ended 31 st March,2022 and needs your advice on the following
issues in line with the provisions of AS-29:
(i) On 1stApril, 2019, the company installed a huge furnace in their plant. The furnace has a lining that
needs to be replaced every five years for technical reasons. At the Balance Sheet date 31st March, 2022,
the company does not provide any provision for replacement of lining of the furnace.
(ii) A case has been filed against the company in the consumer court and a notice for levy of a penalty of ₹
50 Lakhs has been received. The company has appointed a lawyer to defend the case for a fee of ₹ 5
Lakhs. 60% of the fees have been paid in advance and rest 40% will be paid after finalization of the
case. There are 70% chances that the penalty may not be levied.
(iii) The company had committed to supply a consignment worth ₹ 1 crore to one of its dealers by the year-end.
As per the contract, if delivery is not made on time, a compensation of 15% is to be paid on the value of
delayed/lost consignment. While the consignment was in transit, one of the trucks carrying goods worth ₹ 30
lakhs met with an accident. It was however covered by Insurance. According to the surveyor's report, the
policy amount is collectable, subject to 10% deduction. Before closing the books of accounts, the company
has received the information that the policy amount has been processed and the dealer has also claimed the
compensation for the consignment of goods worth ₹ 30 lakhs which was in transit.
Solution:
(i) A provision should be recognized only when an enterprise has a present obligation arising from a past
event or obligation. In the given case, there is no present obligation but a future one, therefore no
provision is recognized as per AS 29. The cost of replacement of lining of furnace is not recognized as
a provision because it is a future obligation. Even a legal requirement does not require the company to
make a provision for the cost of replacement because there is no present obligation. Even the intention
to incur the expenditure depends on the company deciding to continue operating the furnace or to
replace the lining.
(ii) As per AS 29, an obligation is a present obligation if, based on the evidence available, its existence at
the balance sheet date is considered probable, i.e., more likely than not. Liability is a present obligation
of the enterprise arising from past events, the settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic benefits.
In the given case, there are 70% chances that the penalty may not be levied. Accordingly, Alloy
Fabrication Ltd. should not make the provision for penalty. The matter is disclosed as a contingent
liability unless the probability of any outflow is regarded as remote.
However, a provision should be made for remaining 40% fees of the lawyer amounting ₹ 2,00,000 in
the financial statements of financial year 2021-2022.
(iii) Loss due to accident ₹ 30,00,000
Insurance claim receivable by company = ₹ 30,00,000 x 90% = ₹ 27,00,000
Loss to be recognised in the books for 2019-2020 ₹ 3,00,000
Insurance claim receivable to be recorded in the books ₹ 27,00,000
Compensation claim by dealer against company to be provided for in the books = ₹ 30,00,000 x 15% =
₹ 4,50,000
19. A company, incorporated as NPO under the Companies Act, is having main objective to promote the trade by
organizing trade fairs/exhibitions. While organizing the trade fair and exhibitions, it decided to charge 5%
contingency charges for the participants/outside agencies on the income received from them by the company,
while in the case of fairs organized by outside agencies, 5% contingency charges are levied separately in the
invoice, the contingency charges in respect of fairs organized by the company itself are inbuilt in the space rent
charged from the participants. Both are credited to Income and Expenditure Account of the company.
The intention of levying these charges is to meet any unforeseen liability, which may arise in future. The instances
of such unforeseen liabilities could be on account of injury/loss of life to visitors/ exhibitors, etc., due to fire,
terrorist attack, stampede, natural calamities and other public and third party liability. The chances of occurrence
of these events are high because of large crowds visiting the fair. The decision to levy 5% contingency charges
was based on assessment only as actual liability on this account cannot be estimated.
The accounting treatment and disclosure was made by the company in its financial statements as: (i) 5%
contingency charges are treated as income and matching provision for the same is also being made in accounts
and (ii) suitable disclosure to this effect is also made in the notes forming part of accounts.
You are required to comment whether creation of provision for contingencies considering the facts and
circumstances of the case is required in line with AS 29.
Solution: As per AS 29 "Provisions, Contingent Liabilities and Contingent Assets", a provision should be
recognized when (a) An enterprise has a present obligation as a result of a past event and (b) It is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and (c) A reliable
estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be
recognized.
From the above, it is clear that for the contingencies considered by the company, neither a present obligation
exists because of past event, nor a reliable estimate can be made of the amount of the obligation. Accordingly, a
provision cannot be recognized for such contingencies under the facts and circumstances of the case.
20. An oil company has been contaminating land for several years. It does not clean up because there is no
legislation requiring cleaning up. On 31st March 2021, it is virtually certain that a law requiring a clean-up
of land already contaminated will be enacted shortly after the year end. Is provisioning presently necessary
considering the circumstances in line with provisions of AS 29?
Solution: Yes. It can offset deferred tax assets and deferred tax liabilities.
As per AS 22, an enterprise should offset deferred tax assets and deferred tax liabilities if:
(i) the enterprise has a legally enforceable right to set off assets against liabilities representing current tax; and
(ii) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same
governing taxation laws.
21. Sweet and Sour Limited deals in Catering Service. In a wedding in 2018 -19, ten people died in which Sweet
and Sour Limited has given their Catering Services, possibly as a result of food poisoning. Legal proceedings
were started seeking compensation of ₹ 10,00,000 from the Company but it disputes liability. Up to the date
of approval of the financial statements for the year 31st March, 2019, the Company's lawyers advised that it
is probable that the Company will not be found liable for any amount. However, when the Company prepares
the financial statements for the year 31st March 2020, its lawyers advice that, owing to developments in the
case, it is probable that the Company may be found liable and compensation of ₹ 10,00,000 may be payable.
How would you deal with the above as at 31st March, 2019 and at 31st March, 2020 in context with AS 29?
Solution: As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision should be
recognized when
(a) an enterprise has a present obligation as a result of a past event;
obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no
provision should be recognized.
On 31st March, 2019, since, the directors of the company are of the opinion that the claim can be successfully
resisted by the company and there will be no outflow of the resources. Therefore, the company should disclose the
same as contingent liability by way of a note. However, on 31st March, 2020, provision is required to be made for
the amount of ₹ 10 lakhs as it probable that the company may be required to pay the compensation.
22. Explain whether provision is required in the following situations in line with AS 29:
(i) There is a present obligation that probably requires an outflow of resources and a reliable estimate can be
made of the amount of obligation;
(ii) There is a possible obligation or a present obligation that may, but probably will not, require an outflow
of resources.
(iii) There is a possible obligation or a present obligation where the likelihood of an outflow of resources is
remote.
Solution:
(i) There is a present obligation that probably requires an outflow of resources and a reliable estimate can be
made of the amount of obligation – Provision is recognised. Disclosures are required for the provision.
(ii) There is a possible obligation or a present obligation that may, but probably will not, require an outflow
of resources – No provision is recognised. Disclosures are required for the contingent liability.
(iii) There is a possible obligation or a present obligation where the likelihood of an outflow of resources is
remote – No provision is recognised. No disclosure is required.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
SUMMARY NOTES
1. AB Company Ltd. had 1,00,000 shares of common stock outstanding on January 1. Additional 50,000
shares were issued on July 1, and 25,000 shares were re-acquired on September 1. The weighted average
number of shares outstanding during the year on Dec. 31 is
(a) 1,40,000 shares. (b) 1,25,000 shares. (c) 1,16,667 shares.
2. A Ltd. sold machinery having WDV of ₹ 40 lakhs to B Ltd. for ₹ 50 lakhs (Fair value ₹ 50 lakhs) and
same machinery was leased back by B Ltd. to A Ltd. The lease back is in nature of operating lease. The
treatment will be
(a) A Ltd. should amortise the profit of ₹ 10 lakhs over lease term.
(b) A Ltd. should recognise the profit of ₹ 10 lakhs immediately.
(c) A Ltd. should defer the profit of ₹ 10 lakhs.
3. A Ltd. sold its building for ₹ 50 lakhs to B Ltd. and has also given the possession to B Ltd. The book
value of the building is ₹ 30 lakhs. As on 31st March, 20X1, the documentation and legal formalities are
pending. For the financial year ended 31st March, 20X1
(a) The company should record the sale.
(b) The company should recognise the profit of ₹ 20 lakhs in its profit and loss account.
4. As per AS 20, potential equity shares should be treated as dilutive when, and only when, their conversion
to equity shares would
(a) Decrease net profit per share from continuing ordinary operations.
(b) Increase net profit per share from continuing ordinary operations.
(c) Make no change in net profit per share from continuing ordinary operations.
5. Internally generated goodwill is

(a) Recorded at cost of generating goodwill. (b) Recorded at valuation done by experts. (c) Not recorded.
6. As per AS 22 on ‘Accounting for Taxes on Income’, tax expense is
(a) Current tax + deferred tax charged to profit and loss account
(b) Current tax-deferred tax credited to profit and loss account
(c) Either (a) or (b)
7. As per AS 17, reportable segments are those whose total revenue from external sales and inter-segment
sales is
(a) 10% or more of the total revenue of all segments (b) 15% or more of the total revenue of all segments
(c) 20% or more of the total revenue of all segments
8. As per AS 20, equity shares which are issuable upon the satisfaction of certain conditions resulting from
contractual arrangements are
(a) Dilutive potential equity shares (b) Contingently issuable shares (c) Contractual issued shares
9. Hexa Ltd developed a technology to enhance the battery life of mobile devices. Hexa has capitalised
development expenditure of ₹ 5,00,000. Hexa estimates the life of the technology developed to be 3 years
but the company has forecast that 50% of sales will be in year 1, 35% in year 2 and 15% in year 3. What
should be the amortisation charge in the second year of the product’s life?
(a) ₹ 2,50,000 (b) ₹ 1,75,000 (c) ₹ 1,66,667
10. As per AS 26 there is a rebuttable presumption that the useful life of an intangible asset will not exceed
(a) 2 years. (b) 5 years (c) 10 years
11. A company receives the membership fee which entitles the members to services or publications to be
provided during the year. It should be
(a) capitalized. (b) recognised on a systematic and rational basis having regard to the timing and
nature of all services provided. (c) recognized over period of 5 years.
ANSWERS
1. (c), 2. (b), 3. (c), 4 (a), 5. (c), 6. (c)
7. (a) 8. (b) 9. (b) 10. (c) 11. (b)
videos available on www.edu91.org . To get the most out of these notes please study from our classes and attend our mock tests.-CA P S Beniwal
Generally accepted accounting principles (GAAP): refer to a common set of accepted accounting
principles, standards, and procedures that business reporting entity must follow when it prepares and
presents its financial statements.
GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted
ways of recording and reporting accounting information. At international level, such authoritative
standards are known as IFRS at many places and in India we have authoritative standards named as
Accounting Standards (ASs) and Indian Accounting Standard (Ind AS).
Part I:- ACCOUNTING STANDARDS

1. Meaning:- Accounting Standards (ASs) are written policy documents issued by expert accounting body
or by government or other regulatory body covering the aspects
 recognition,
 measurement,
 presentation and
 disclosure
of accounting transactions in the financial statements.
Accounting Standards are “Principle Based” and not ruled based.
2. ACCOUNTING STANDARDS SETTING PROCESS: The (ICAI), being a premier accounting body
in the country, took upon itself the leadership role by constituting the Accounting Standards Board
(ASB) in 1977(Set up on 21st April, 1977). The composition of ASB includes, representatives of
industries (namely, ASSOCHAM, CII, FICCI), regulators, academicians, government departments etc.
3. Preparation of Accounting Standard: The standard-setting procedure of ASB can be briefly outlined
as follows:
Identification of broad areas
Study groups by ASB to prepare preliminary drafts
preliminary draft prepared by the study group of ASB and revision
Circulation of draft of accounting standard to the Council members of the ICAI

and specified outside bodies such as DCA, SEBI, C&AG, CBDT, SCOPE.
Meeting with the representatives of the specified outside bodies
Finalisation of the exposure draft & its issuance inviting public comments.
Consideration of comments on exposure draft and finalisation
After approval of council accounting standards are issued
4. Regulatory Framework of Accounting Standards in India

A) Company AS Rule 2006:- Companies are classified into only two levels, viz., (i) Non-SMC
Companies and (ii) Small and Medium Companies, for brevity referred to as SMCs.
(i) Small and Medium Companies (SMC’s)
a) The equity or debt securities of the company are not listed or not in the process of listing on any
stock exchange, whether in India or outside India.
b) The company is not a bank or financial institution or insurance company.
c) The company’s turnover (excluding other income) does not exceed Rs. 250 crores in the
immediately preceding accounting year.
d) The company does not have borrowing (including public deposits) exceeding Rs. 50 crores at
any time during the immediately preceding accounting year, and
e) The company is not a holding company or subsidiary of a non-SMC company.
(ii) Non- SMC’s:- Company other than SMC’s
GENERAL INSTRUCTIONS
SMCs shall follow the following instructions while complying with ASs under these Rules:-
a. The SMC which does not disclose certain information pursuant to the exemptions or relaxations given
to it shall disclose (by way of a note to its financial statements) the fact that it is an SMC and has
complied with the Accounting Standards insofar as they are applicable to an SMC on the following
lines:
“The Company is a SMC as defined in the General Instructions in respect of Accounting Standards
notified under the Companies Act, 2013. Accordingly, the Company has complied with the
Accounting Standards as applicable to a Small and Medium Sized Company.”
b. Where a company, being an SMC, has qualified for any exemption or relaxation previously but no
longer qualifies for the relevant exemption or relaxation in the current accounting period, the relevant
standards or requirements become applicable from the current period and the figures for the
corresponding period of the previous accounting period need not be revised merely by reason of its
having ceased to be an SMC. The fact that the company was an SMC in the previous period and it had
availed of the exemptions or relaxations available to SMCs shall be disclosed in the notes to the
financial statements.
c. If an SMC opts not to avail of the exemptions or relaxations available to an SMC in respect of any but
not all of the Accounting Standards, it shall disclose the standard(s) in respect of which it has availed
the exemption or relaxation.
d. If an SMC desires to disclose the information not required to be disclosed pursuant to the exemptions
or relaxations available to the SMCs, it shall disclose that information in compliance with the relevant
accounting standard.
e. The SMC may opt for availing certain exemptions or relaxations from compliance with the
requirements prescribed in an Accounting Standard: Provided that such a partial exemption or
relaxation and disclosure shall not be permitted to mislead any person or public.
Note: An existing company, which was previously not a SMC and subsequently becomes an SMC, shall
not be qualified for exemption or relaxation in respect of Accounting Standards available to an SMC until
the company remains an SMC for two consecutive accounting periods.”
B) Accounting Standard pronouncements by ICAI

Level I: Enterprise
(a) Entities whose securities are listed or are in the process of listing on any stock exchange, whether in
India or outside India.
(b) Banks (including co-operative banks), financial institutions or entities carrying on insurance
business.
(c) All entities engaged in commercial, industrial or business activities, whose turnover (excluding
other income) exceeds rupees Rs. 250 crore in the immediately preceding accounting year.
(d) All entities engaged in commercial, industrial or business activities having borrowings (including
public deposits) in excess of Rs. 50 crore at any time during the immediately preceding accounting
year.
(e) Holding and subsidiary entities of any one of the above.
Level II : Enterprises
a) All entities engaged in commercial, industrial or business activities, whose turnover (excluding
other income) exceeds Rs. 50 crore but does not exceed Rs. 250 crore in the immediately preceding
accounting year.
b) All entities engaged in commercial, industrial or business activities having borrowings (including
public deposits) in excess of Rs. 10 crore but not in excess of Rs. 50 crore at any time during the
c) Holding and subsidiary entities of any one of the above.
Level III Entities:

(a) All entities engaged in commercial, industrial or business activities, whose turnover (excluding
other income) exceeds rupees 10 crore but does not exceed rupees 50 crore in the immediately
preceding accounting year.
(b) All entities engaged in commercial, industrial or business activities having borrowings (including
public deposits) in excess of rupees 2 crore but does not exceed rupees 10 crore at any time during
the immediately preceding accounting year.
(c) Holding and subsidiary entities of any one of the above.
Level IV: Enterprises: Other than Level I Enterprise, Level II Enterprise and Level III Enterprise.
5. Applicability of Accounting Standards on some specific organisations:-
As per the “preface to the statements of accountings
i) Trust standards” (Revised 2004), accounting standards apply to
ii) Co-operative Society enterprises engaged in commercial, industrial or business
iii) Mutual Fund
activities irrespective of whether it is profit oriented or
iv) Partnership and Proprietorship
established purely for charitable or religious purposes.
Therefore they do not apply to enterprises that do not carry
out any commercial industrial or business activity.
6. Impact of Non-compliance of Accounting Standards:-
A. Companies Act. 2013, Section 129
1. Every profit and loss account and balance sheet of the company shall comply with the accounting
standards.
2. Where the profit and loss account and the balance sheet of the company do not comply with the
accounting standards, such companies shall disclose in its profit and loss account and balance sheet,
the following, namely:-
(a) the deviation from the accounting standards ;
(b) the reasons for such deviation ; and
(c) the financial effect, if any, arising due to such deviation.
3. For the purposes of this section, the expression "accounting standards" means the standards of
accounting recommended by the Institute of Chartered Accountants of India constituted under the
Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in
consultation with the National Financial Reporting Authority (NFRA) on Accounting Standards
established:
Provided that the standards of accounting specified by the Institute of Chartered Accountants of
India shall be deemed to be the Accounting Standards until the accounting standards are prescribed
by the Central Government.
B. The ‘Preface to the Statements of Accounting Standards’ issued by the Institute in 2004
states(paragraphs 6.1 and 6.3):
“6.1 While discharging their attest function, it will be the duty of the members of the Institute to
examine whether the Accounting Standard is complied with in the presentation of financial
statements covered by their audit. In the event of any deviation from the Accounting Standard, it
will be their duty to make adequate disclosures in their reports so that the users of such statements
may be aware of financial deviations.”
“6.3 Financial Statements cannot be described as complying with the Accounting Standards unless
they comply with all the requirements of each applicable standard.”
7. Benefits of Accounting standards: Accounting Standards standardize diverse accounting policies with
a view to eliminate the non-comparability of financial statements and improve the reliability of financial
statements. Accounting Standards provide a set of standard accounting policies, valuation norms and
disclosure requirements. Accounting standards aim at improving the quality of financial reporting by
promoting comparability, consistency and transparency, in the interests of users of financial statements.
(i) Standardisation of alternative accounting treatments: Accounting Standards reduce to a
reasonable extent or eliminate altogether confusing variations in the accounting treatment followed
for the purpose of preparation of financial statements.
(ii) To improve the credibility and reliability of financial statements: The accounting standards
create an environment of confidence amongst the users of the accounting information by providing a
uniform structure of uniform guidelines which provide credibility and reliability to the accounting
information. In this way the financial statements present a true and fair view of the financial position
and operating results (profit or loss) of a business organisation.
(iii) Comparability: The value of accounting information is enhanced (increased) if it can be compared
easily in the same line of business activity. The comparability is possible only when same
accounting standards are used in the preparation of the financial statements of different firms in the
same industry. It is a positive step to protect the interests of the users of the accounting information.
(iv) Benefits to accountants and auditors: The accounting standards provide a basis for uniform
accounting practices. In this way there is a less possibility of frauds to be committed by accountants.
There is more transparency in the accounting information. Since the accounting profession follows
the accounting standards without any exception, they are helpful not only to an accounting entity but
to the accountants and auditors too.
(v) Additional disclosures: There are certain areas where important information is not required to be
disclosed by law. Standards require such additional disclosure such as the methods of depreciation
used, change of method of depreciation etc. which help the users of financial statements such as
investors, bankers, creditors etc. to take important financial decisions.
(vi) Evaluation of managerial ability: Accounting standards are useful in measuring the efficiency of
management regarding the profitability, liquidity, solvency and general progress of the enterprise. In
the absence of accounting standards, it would be difficult to evaluate the managerial efficiency,
because there is no basis of comparing the financial results of one enterprise with that of another.
Each enterprise would evolve its own rules or standards to suit its purpose and users of accounting
information would fail to get a true and fair view of the functioning of an enterprise.
(vii) Helpful to Government: The government officials will find the financial information more useful
for purposes of economic planning, market analysis and tax collections if it is based on established
accounting standards.
(viii) Reform in accounting theory: The development of accounting standards has been very helpful in
reforming accounting theory and practice in respect of accounting measurements and financial
Information.
8. Limitations of setting of accounting standards:-
(i) Difficult choice: Alternative solutions to certain accounting problems may each have arguments to
recommend them. Therefore, the choice between different alternative accounting treatments may
become difficult.
(ii) Mechanical approach: There may be a trend towards rigidity and away from flexibility in
applying the accounting standards.
(iii) Different from law: Accounting standards cannot override the statute. The standards are required
to be framed within the ambit of prevailing statutes.
9. Accounting Standards and Income tax Act, 1961:- Accounting standards intend to reduce diversity in
application of accounting principles. They improve comparability of financial statements and promote
transparency and fairness in their presentation. Deductions and exemptions allowed in computation of
taxable income on the other hand, is a matter of fiscal policy of the government.
Thus, an expense required to be charged against revenue by an accounting standard does not imply that
the same is always deductible for income tax purposes. For example, depreciation on assets taken on
finance lease is charged in the books of lessee as per AS 19 but depreciation for tax purpose is allowed
to lessor, being legal owner of the asset, rather than to lessee. Likewise, recognition of revenue in the
financial statements cannot be avoided simply because it is exempted under section 10 of the Income
Tax Act, 1961.
Income Computation and Disclosure Standards:- Section 145(2) empowers the Central Government
to notify in the Official Gazette from time to time, income computation and disclosure standards to be
followed by any class of assessees or in respect of any class of income. Accordingly, the Central
Government has, in exercise of the powers conferred under section 145(2), notified ten income
computation and disclosure standards (ICDSs) to be followed by all assessees (other than an individual
or a Hindu undivided family who is not required to get his accounts of the previous year audited in
accordance with the provisions of section 44AB) following the mercantile system of accounting, for the
purposes of computation of income chargeable to income-tax under the head “Profit and gains of
business or profession” or “ Income from other sources”, from A.Y. 2017-18. The 10 notified ICDSs
are:
ICDS I : Accounting Policies
ICDS II : Valuation of Inventories
ICDS III : Construction Contracts
ICDS IV : Revenue Recognition
ICDS V : Tangible Fixed Assets
ICDS VI : The Effects of Changes in Foreign Exchange Rates
ICDS VII : Government Grants
ICDS VIII : Securities
ICDS IX : Borrowing Costs
ICDS X : Provisions, Contingent Liabilities and Contingent Assets
10. Accounting Standards with date of applicability.

AS Name of Accounting Standard Date of
Applicability
1 Disclosure of Accounting Policies 01/04/1993
2 Valuation of Inventories (Revised) 01/04/1999
3 Cash Flow Statement (Revised) 01/04/2001
4 Contingencies and Events Occurring after the Balance Sheet Date 01/04/1998
5 Net Profit or Loss for the Period, Prior Period Items and Changes in 01/04/1996
Accounting Policies (Revised)
6 Depreciation Accounting (Revised) 01/04/1995
7 Construction Contracts (Revised) 01/04/2002
9 Revenue Recognition 01/04/1993
10 Accounting for Fixed Assets 01/04/1993
11 The Effects of Changes in Foreign Exchange Rates (Revised) 01/04/2004
12 Accounting for Government Grants 01/04/1994
13 Accounting for Investments 01/04/1995
14 Accounting for Amalgamations 01/04/1995
15 Employee Benefits 01/04/2006
16 Borrowing Costs 01/04/2000
17 Segment Reporting 01/04/2001
18 Related Party Disclosures 01/04/2001
19 Leases 01/04/2001
20 Earning Per Shares 01/04/2001
21 Consolidated Financial Statement 01/04/2001
22 Accounting for Taxes on Income
23 Accounting for Investment in Associates in Consolidated Financial 01/04/2002
Statements
24 Discontinuing Operations 01/04/2004
25 Interim Financial Statement 01/04/2002
26 Intangible Assets 01/04/2003
27 Financial Reporting of Interests in Joint Ventures 01/04/2002
28 Impairment of Assets 01/04/2008
29 Provisions, Contingent Liabilities and Contingent Assets 01/04/2004
30 Financial Instruments: Recognition and Measurement- 01/04/2009
(Recommendatory)
31 Financial Instruments: Presentation - (Recommendatory) 01/04/2009
32 Financial Instruments: Disclosure - (Recommendatory) 01/04/2009
11. Exemptions or Relaxations from Accounting Standards:

(i) For SMCs as defined in the Notification
Full Exemption (Not applicable on AS) 3,17
Partial Exemption on AS 15
Disclosure Exemption on AS 19,20,28,29
Applicable AS only when any transaction taken place or reporting is required 21,23,27 and 25
(ii) For Level II, III and IV Entities

Particulars Level II Entities Level III Entities Level IV Entities
Full Exemption 3,17,20 3,17,18,20,24 3, 17, 18, 20, 24, 28
(Not applicable on AS)
Partial Exemption on AS 15 15 15, 22
Disclosure Exemption on AS 19,28,29 10,11,19,28,29 10,11,13,19,26,29
Applicable AS only when any 21,23,27 and 25 21,23,27 and 25 14, 21,23,27 and 25
transaction taken place or
reporting is required
PRACTICAL QUESTIONS
1. M/s Omega & Co. (a partnership firm), had a turnover of Rs. 1.25 crores (excluding other income) and
borrowings of Rs. 0.95 crores in the previous year. It wants to avail the exemptions available in
application of Accounting Standards to non-corporate entities for the year ended 31.3.20X1. Advise the
management of M/s Omega & Co in respect of the exemptions of provisions of ASs, as per the directive
issued by the ICAI.
Solution: The question deals with the issue of Applicability of Accounting Standards to a non-
corporate entity. For availment of the exemptions, first of all, it has to be seen that M/s Omega & Co.
falls in which level of the non-corporate entities. Its classification will be done on the basis of the
classification of non-corporate entities as prescribed by the ICAI. According to the ICAI, non-corporate
entities can be classified under 4 levels viz Level I, Level II, Level III and Level IV entities.
Non-corporate entities which meet following criteria are classified as Level IV entities:
(i) All entities engaged in commercial, industrial or business activities, whose turnover (excluding
other income) does not exceed rupees ten crores in the immediately preceding accounting year.
(ii) All entities engaged in commercial, industrial or business activities having borrowings (including
public deposits) does not exceed rupees two crores at any time during the immediately preceding
accounting year.
(iii) Holding and subsidiary entities of any one of the above.
As the turnover of M/s Omega & Co. is less than Rs. 10 crores and borrowings less than Rs. 2 crores, it
falls under Level IV non-corporate entities.
In this case, AS 3, AS 14, AS 17, AS 18, AS 20, AS 21, AS 23, AS 24, AS 25, AS 27 and AS 28 will
not be applicable to M/s Omega & Co.
Relaxations from certain requirements in respect of AS 10, AS 11, AS 13, AS 15, AS 19, AS 22, AS 26
and AS 29 are also available to M/s Omega & Co.
2. XYZ Ltd., with a turnover of Rs. 50 crores during previous year and borrowings of Rs. 1 crore during
any time in the previous year, wants to avail the exemptions available in adoption of Accounting
Standards applicable to companies for the year ended 31.3.20X1. Advise the management on the
exemptions that are available as per the Companies (Accounting Standards) Rules, 2021.
Solution: The question deals with the issue of Applicability of Accounting Standards for corporate
entities.
The companies can be classified under two categories viz SMCs and Non SMCs under the Companies
(Accounting Standards) Rules, 2021.
As per the Companies (Accounting Standards) Rules, 2021, criteria for above classification as SMCs, are:
“Small and Medium Sized Company” (SMC) means, a company-
 whose equity or debt securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India;
 which is not a bank, financial institution or an insurance company;
 whose turnover (excluding other income) does not exceed rupees two-fifty crores in the immediately
preceding accounting year;
 which does not have borrowings (including public deposits) in excess of rupees fifty crores at any
time during the immediately preceding accounting year; and
 which is not a holding or subsidiary company of a company which is not a small and medium-sized
company.
Since, XYZ Ltd.’s turnover was Rs. 50 crores which does not exceed Rs. 250 crores and borrowings of
Rs. 1 crore are less than Rs. 50 crores, it is a small and medium sized company (SMC).
3. A company with a turnover of Rs. 225 crores and borrowings of Rs. 51 crore during the year ended 31st
March, 2021, wants to avail the exemptions available in adoption of Accounting Standards applicable to
companies for the year ended 31.3. 2021. Advise the management on the exemptions that are available
as per the Companies (Accounting Standards) Rules, 2021.
Solution: The question deals with the issue of Applicability of Accounting Standards for corporate
entities. The companies can be classified under two categories viz SMCs and Non-SMCs under the
Companies (Accounting Standards) Rules, 2021. As per the Companies (Accounting Standards) Rules,
2021, criteria for above classification as SMCs, are:
“Small and Medium Sized Company” (SMC) means, a company-
(i) whose equity or debt securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees two-fifty crores in the
immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of rupees fifty crores at any
time during the immediately preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which is not a small and medium-
sized company.
Since, XYZ Ltd.’s turnover was Rs. 225 crores which does not exceed Rs. 250 crores but borrowings of
Rs. 51 crore are more than Rs. 50 crores, it is not a small and medium sized company (SMC). The
exemptions available to SMC are not available to this company.
4. An organization whose objects are charitable or religious, believes that the Accounting Standards are
not applicable to it since only a very small proportion of its activities are business in nature. Comment.
Solution: Accounting Standards apply in respect of any enterprise (whether organized in corporate, co-
operative or other forms) engaged in commercial, industrial or business activities, whether or not profit
oriented and even if established for charitable or religious purposes. Accounting Standards however, do
not apply to enterprises solely carrying on the activities, which are not of commercial, industrial or
business nature, (e.g., an activity of collecting donations and giving them to flood affected people).
Exclusion of an enterprise from the applicability of the Accounting Standards would be permissible only
if no part of the activity of such enterprise is commercial, industrial or business in nature. Even if a very
small proportion of the activities of an enterprise were considered to be commercial, industrial or
business in nature, the Accounting Standards would apply to all its activities including those, which are
not commercial, industrial or business in nature.
5. As an Auditor, state your opinion on the following situation: A public charitable institution registered
u/s 8 of the Companies Act, 2013 is running a printing press and a transport system as feeder of funds to
carry on charitable activities. The accounting policies by way of notes to accounts are stated as follows:
(i) Accounts are maintained on cash basis.
(ii) Accounting standards are not being followed as they are considered to be inapplicable to charitable
entities.
Answer.
(i) Since it is registered under companies act hence it is a company. Section 128(1) of Company Act.
2013 accounts books are to be maintained at accrual basis. Hence maintaining account on cash basis
and hence auditor should qualify his audit report.
(ii) Since it is registered under companies act hence it is a company, it is mandatory to follow
accounting standards which is not followed by the trust hence auditor should qualify audit report.
6. A company was classified as Non-SMC in 20X1-X2. In 20X2-X3, it has been classified as SMC. The
management desires to avail the exemptions or relaxations available for SMCs in 20X2-X3. However,
the accountant of the company does not agree with the same. Comment.
Solution: As per Companies (Accounting Standards) Rules, 2021, an existing company, which was
previously not a SMC and subsequently becomes a SMC, should not be qualified for exemption or
relaxation in respect of accounting standards available to a SMC until the company remains a SMC for
two consecutive accounting periods. Therefore, the management of the company cannot avail the
exemptions/ relaxations available to the SMCs for the FY 20X2-X3.
7. Summarized Balance sheet of Cloth Trader as on 31.03.2017 is given below:
Proprietor, s Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows:
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net
realizable value of fixed assets on 31.03.2018 was Rs. 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to Rs. 22,50,000 and Rs. 27,50,000 respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were Rs. 2,00,000 and Rs. 2,50,000
respectively.
(4) Expenses for the year amounted to Rs. 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2018 are Rs. 1,50,000 of which Rs. 5,000 is doubtful. Collection of
another Rs. 25,000 depends on successful re-installation of certain supplied to the customer.
(7) Closing Sundry creditors are Rs. 75,000, likely to be settled at 10%discount.
(8) Cash balance as on 31.03.2018 is Rs. 4,22,000.
(9) There is an early repayment penalty for loan Rs. 25,000.
You are required to prepare: (Not assuming going concern)
(1) Profit &Loss Account for the year 2017-18
(2) Balance Sheet as on 31st March, 2018.
Solution:
(1) Profit and Loss Account of Cloth Trader for the year ended 31st March, 2018
(Assuming business is not a going concern)
To Opening Stock 1,50,000 By Sales 27,50,000

To Purchases 22,50,000 By Trade payables 7,500
To Expenses 78,000 (75,000 X 10%)
To Depreciation (3,60,000-3,25,000) 35,000 By Closing Stock 2,50,000

To provision for doubtful debts 30,000
(5,000 + 25,000)
To Deferred expenditure 50,000
To Loan penalty 25,000
To Net profit 3,89,500
30,07,500 30,07,500
(2) Balance Sheet as at 31.03.2018

Proprietor, s Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss Account 5,14,500 Closing Stock 2,50,000
(1,25,000 + 3,89,500)
10% Loan Account 2,35,000 Sundry Debtors 1,20,000
(2,10,000 + 25,000) (1,50,000-30,000)
Sundry Creditors (75,000 – 7,500) 67,500 Cash & Bank 4,22,000
11,17,000 11,17,000
PART II:- INTERNATIONAL ACCOUNTING STANDARDS (IAS)

1. Meaning: Standards for the preparation and presentation of financial statements created by the
International Accounting Standards Committee (IASC). They were first written in 1973, and stopped
when the International Accounting Standards Board (IASB) took over their creation in 2001.
IAS originated in the European Union with the intention of making business affairs and accounts
accessible across the continent. It was quickly adopted as a common accounting language as IFRS.
The International Accounting Standards Committee (IASC) was established in 1973 by accountancy
bodies representing ten countries. IASC devised and published International Accounting Standards,
interpretations and a conceptual framework.
In 2021 on the occasion of Convention on Climate Change in Glasgow the IFRS Foundation
announced the formation of the new International Sustainability Standards Board (ISSB), consolidation
with Climate Disclosure Standards Board (CDSB) and Value Reporting Foundation (VRF) and
publication of prototype disclosure requirements.
2. List of International Accounting Standards (IAS)

IAS 1: Presentation of Financial Statements
IAS 2: Inventories
IAS 7: Statement of Cash Flows
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10: Events after the Reporting Period
IAS 12: Income Taxes
IAS 16: Property, Plant and Equipment
IAS 19: Employee Benefits
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
IAS 21: The Effects of Changes in Foreign Exchange Rates
IAS 23: Borrowing Costs
IAS 24: Related Party Disclosures
IAS 27: Separate Financial Statements
IAS 28: Investments in Associates and JV
IAS 29: Financial Reporting in Hyperinflationary Economies
IAS 32: Financial Instruments: Presentations

IAS 33: Earnings per Share
IAS 34: Interim Financial Reporting
IAS 36: Impairment of Assets
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
IAS 38: Intangible Assets
IAS 40: Investment Property
IAS 41: Agriculture
PART III:INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

1. International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by
the IFRS Foundation and the International Accounting Standards Board (IASB).
They constitute a standardised way of describing the company’s financial performance, position and
cash flow so that company financial statements are understandable and comparable across international
boundaries. They are particularly relevant for companies with shares or securities listed on a public
stock exchange.
IFRS have replaced many different national accounting standards around the world but have not
replaced the separate accounting standards in the United States where US GAAP is applied.
2. Meaning of IFRS: The term IFRS issued by International Accounting Standard Board (IASB) with the
objective of providing globally a common accounting language to increase transparency in the
presentation of financial information.
IFRS is a set of international accounting standards stating how particular types of transactions and other
events should be reported in financial statements. It includes
 International accounting standards (IAS)

 International Financial Reporting Standards (IFRSs)
 International Financial Reporting Interpretation (IFRI)
 Standing Interpretation (SI)
 Other pronouncements.
Note: IFRSs are considered a "principles-based" set of standards. In fact, they establish broad rules
rather than dictating specific treatments.
3. List of IFRS:-
IFRS 1: First time Adoption of International Financial Reporting Standards

IFRS 2: Share-based Payment
IFRS 3: Business Combinations
IFRS 4: Insurance Contracts
IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
IFRS 6: Exploration for and Evaluation of Mineral Resources
IFRS 7: Financial Instruments: Disclosures
IFRS 8: Operating Segments
IFRS 9: Financial Instruments
IFRS 10: Consolidated Financial Statements
IFRS 11: Joint Arrangements
IFRS 12: Disclosure of Interests in Other Entities
IFRS 13: Fair Value Measurement
IFRS 14: Regulatory Deferral Accounts
IFRS 15: Revenue from Contracts with Customers
IFRS 16: Leases
Part IV:- INDIAN ACCOUNTING STANDARDS (IND AS)

1. Meaning:- Indian Accounting Standards (abbreviated as Ind AS) are a set of accounting standards
notified by the Ministry of Corporate Affairs which are converged with International Financial
Reporting Standards (IFRS) (IND AS is notified by NACAS on 25th Feb 2011.) (NFRA= National
Financial Reporting Authority U/s 132)
2. OBJECTIVE The basic objective of Accounting Standards is to remove variations in the treatment of
several accounting aspects and to bring about standardization in presentation. They intent to harmonize
the diverse accounting policies followed in the preparation and presentation of financial statements by
different reporting enterprises so as to facilitate intra-firm and inter-firm comparison.
3. Applicability of IND AS:- The Ind AS shall be applicable to the companies as follows: As notified by
MCA as on 16/02/15 in Companies (Indian Accounting Standards) Rules, 2015.
Obligation to comply with Indian Accounting Standards (Ind AS). - (1) The Companies and their
auditors shall comply with the Indian Accounting Standards (Ind AS) specified in Annexure to these
rules in preparation of their financial statements and audit respectively, in the following manner.
(i) On On mandatory basis

voluntary (ii) Accounting periods beginning on or (iii) Accounting periods beginning on
basis after 1/4/16(For 31/3/17) with the or after 01/04/17(For 31/3/18), with the
comparatives for the periods ending on comparatives for the periods ending on
31st March, 2016 31st March, 2017
Accounting (a) Companies whose equity and/or debt (a) Companies whose equity and/or debt
periods securities are listed or are in the process securities are listed or are in the process
beginning on of listing on any stock exchange in India of being listed on any stock exchange in
or after April or outside India and having net worth* of India or outside India and having net
1, 2015, with Rs. 500 Crore or more. worth* of less than rupees five hundred
the (b) Companies other than those covered Crore.
comparatives in (ii) (a) above, having net worth of Rs. (b) Companies other than those covered
for the periods 500 Crore or more. in paragraph (ii) and paragraph (iii)(a)
ending 31st (c) Holding, subsidiary, joint venture or above that is unlisted companies having
March, 2015 or associate companies of companies net worth of two hundred and fifty
thereafter; covered under (ii) (a) and (ii) (b) above. crore or more but less than rupees five
hundred Crore.
(c) Holding, subsidiary, joint venture or
associate companies of companies
covered under paragraph (iii) (a) and (iii)
(b) above.
* NET WORTH: “net worth” shall have the meaning assigned to it in clause (57) of section 2 of the
Act.: “NET WORTH” means the aggregate value of the paid-up share capital and all reserves created
out of the profits and securities premium account, after deducting the aggregate value of the
accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation.
Applicability Position of IND ASs as on date
5. CARVE OUTS/INS IN IND AS.

(i) The Government of India in consultation with the ICAI decided to converge and not to adopt IFRS
issued by the IASB. The decision of convergence rather than adoption was taken after the detailed
analysis of IFRS requirements and extensive discussion with various stakeholders.
(ii) Accordingly, while formulating IFRS-converged Indian Accounting Standards (Ind AS), efforts
have been made to keep these Standards, as far as possible, in line with the corresponding IAS/IFRS
and departures have been made where considered absolutely essential.
(iii) Certain changes have been made considering the economic environment of the country, which is
different as compared to the economic environment presumed to be in existence by IFRS. These
differences are due to differences in application of accounting principles and practices and
economic conditions prevailing in India. These differences which are in deviation to the accounting
principles and practices stated in IFRS, are commonly known as ‘Carve-outs’.
Various terminologies related changes have been made to make it consistent with the
terminology used in law, e.g., ‘statement of profit and loss’ in place of ‘statement of
comprehensive income’ and ‘balance sheet’ in place of ‘statement of financial position’.
However, these changes will not result into carve outs.
Note: In Ind AS 103 “Business Combination”, an additional guidance on “Accounting of Business

Combinations of Entities under Common Control” is given which is over and above what is given in
IFRS. This is termed as ‘Carve-in’.
6. Government of India-Commitment to IFRS Converged Ind AS: Consistent, comparable and

understandable financial reporting is essential to develop a robust economy. With a view to achieve
international benchmarks of financial reporting, ICAI, as a proactive role in accounting, set out to
introduce Ind AS converged with the IFRS. This endeavour of the ICAI is supported by the Government
of India.
Initially Ind AS were expected to be implemented from the year 2011. However, keeping in view the
fact that certain issues including tax issues were still to be addressed, the Ministry of Corporate Affairs
decided to postpone the date of implementation of Ind AS.
In July 2014, the Finance Minister of India at that time, Shri Arun Jaitely ji, in his Budget Speech,
announced an urgency to converge the existing accounting standards with the IFRS through adoption of
the new Indian Accounting Standards (Ind AS) by the Indian companies from the financial year 2015-16
voluntarily and from the financial year 2016-17 on a mandatory basis.
Pursuant to the above announcement, various steps have been taken to facilitate the implementation of
IFRS-converged Indian Accounting Standards (Ind AS). Moving in this direction, the Ministry of
Corporate Affairs (MCA) has issued the Companies (Indian Accounting Standards) Rules, 2015 vide
Notification dated February 16, 2015 covering the revised roadmap of implementation of Ind AS for
companies other than Banking companies, Insurance Companies and NBFCs and Indian Accounting
Standards (Ind AS). As per the Notification, Indian Accounting Standards (Ind AS) converged with
International Financial Reporting Standards (IFRS) shall be implemented on voluntary basis from 1st
April, 2015 and mandatorily from 1st April, 2016.
Initially, India decided to adopt Ind AS 115 corresponding to IFRS 15 two years ahead of the world.
However, after the same were notified by the MCA, many representations were being received from
various organisations, industry associations etc. for deferring the applicability of Ind AS 115.
Considering the difficulties being faced by various industries, it was decided to defer the applicability of
Ind AS 115 and to bring Ind AS 11 and Ind AS 18 in its place. Further, there were certain amendments
that were made in IFRS/IAS issued by the IASB. The Institute of Chartered Accountants of India (ICAI)
to keep up the pace with the global developments, revised the notified Ind AS in line with the
amendments made in IFRS/IAS issued by the IASB. MCA had notified the amendments to the Ind AS
vide notification dated March 30, 2016, as Companies (Indian Accounting Standards) Amendment
Rules, 2016.
7. List of IND AS:-

1. Ind AS 101 First-time Adoption of Indian Accounting Standards
2. Ind AS 102 Share based Payment
3. Ind AS 103 Business Combinations
4. Ind AS 104 Insurance Contracts
5. Ind AS 105 Non current Assets Held for Sale and Discontinued Operations
6. Ind AS 106 Exploration for and Evaluation of Mineral Resources
7. Ind AS 107 Financial Instruments: Disclosures
8. Ind AS 108 Operating Segments
9. Ind AS 109 Financial Instruments: Recognition and Measurement issued.
10. Ind AS 110 Consolidated Financial.
11. Ind AS 111 Joint Arrangements.
12. Ind AS 112 Disclosure of Interest in Other.
13. Ind AS 113 Fair Value Measurement.
14. Ind AS 114 Regulatory Deferral Accounts.
15. Ind AS 115: Revenue from Contracts.
16. Ind AS 116: Lease
17. Ind AS 1 Presentation of Financial Statements
18. Ind AS 2 Inventories
19. Ind AS 7 Statement of Cash Flows
20 Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
21. Ind AS 10 Events after the Reporting Period
22. Ind AS 12 Income Taxes
23 Ind AS 16 Property, Plant and Equipment
24 Ind AS 19 Employee Benefits
25. Ind AS 20 Accounting for Government Grants & Disclosure of Government Assistance
26. Ind AS 21 The Effects of Changes in Foreign Exchange Rates
27. Ind AS 23 Borrowing Costs
28. Ind AS 24 Related Party Disclosures
29. Ind AS 27 Separate Financial Statements
30. Ind AS 28 Investments in Associates and JV
31. Ind AS 29 Financial Reporting in Hyperinflationary Economies
32. Ind AS 31 Interests in Joint Ventures
33. Ind AS 32 Financial Instruments: Presentation
34. Ind AS 33 Earnings per Share
35. Ind AS 34 Interim Financial Reporting
36. Ind AS 36 Impairment of Assets
37. Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
38. Ind AS 38 Intangible Assets
39. Ind AS 39 Financial Instruments: Recognition and Measurement
40. Ind AS 40 Investment Property
41. Ind AS 41 Agriculture.
MCQs
1. Accounting Standards for non-corporate entities in India are issued by
(a) Central Govt. (b) State Govt. (c) Institute of Chartered Accountants of India.
2. Accounting Standards
(a) Harmonise accounting policies and eliminate the non-comparability of financial statements.
(b) Improve the reliability of financial statements. (c) Both (a) and (b).
3. It is essential to standardize the accounting principles and policies in order to ensure
(a) Transparency. (b) Consistency. (c) Both (a) and (b).
4. Which committee is responsible for approval of accounting standards and their modification for the purpose of
applicability to companies?
(a) NFRA. (b) MCA. (c) Central Government Advisory Committee.
5. Global Standards facilitate
(a) Cross border flow of money. (b) Comparability of financial statements. (c) Both (a) and (b).
6. Additional guidance given in Ind AS over and above what is given in IFRS are called
(a) Carve-outs. (b) Carve-ins. (c) Carve clarifications.
7. IASB stands for
(a) International Accounting Standards Bureau (b) International Advisory Standards Board
(c) International Accounting Standard Board.
8. IFRS stands for
(a) International Financial Reporting System (b) International Finance Reporting Standard
(c) International Financial Reporting Standard.
9. Phase I of Ind AS was applicable to:
(a) All listed companies in India or outside India (b) Companies with turnover INR 500 crores or more
(c) Companies with net worth INR 500 crores or more.
10. Non-corporate entities which are not Level I entities whose turnover (excluding other income) exceeds rupees
___________ but does not exceed rupees two-fifty crores in the immediately preceding accounting year are
classified as Level II entities.
(a) five crores. (b) two crores. (c) fifty crores.
11. The following Accounting Standard is not applicable to Non-corporate Entities falling in Level II in its entirety
(a) AS 10. (b) AS 17. (c) AS 2.
12. All non-corporate entities engaged in commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees 250 crores in the immediately preceding accounting year, are classified as
(a) Level II entities. (b) Level I entities. (c) Level III entities.
13. All non-corporate entities engaged in commercial, industrial or business activities having borrowings (including
public deposits) in excess of rupees two crores but does not exceed rupees ten crores at any time during the
(a) Level II entities. (b) Level IV entities. (c) Level III entities.
14. “Small and Medium Sized Company” (SMC) means, a company-
(a) which may be a bank, financial institution or an insurance company.
(b) whose turnover (excluding other income) does not exceed rupees two- fifty crores in the immediately preceding
accounting year;
(c) whose turnover (excluding other income) does not exceed rupees fifty crores in the immediately preceding
accounting year;
Answer: 1. (c) 2. (c) 3. (c) 4. (b) 5. (c) 6. (b) 7. (c)
8. (c) 9. (c) 10. (c) 11. (b) 12. (b) 13. (c) 14. (b)
1. Introduction: Framework provides the fundamental basis for development of new standards as also for review
of existing standards. The principal areas covered by the framework are as follows:
(a) Components of financial statements;
(b) Objectives of financial statements;
(c) Assumptions underlying financial statements;
(d) Qualitative characteristics of financial statements;
(e) Elements of financial statements;
(f) Criteria for recognition of elements in financial statements;
(g) Principles for measurement of financial elements;
(h) Concepts of Capital and Capital Maintenance.
2. Purpose of the framework: The framework sets out the concepts underlying the preparation and presentation
of general-purpose financial statements prepared by enterprises for external users.
The main purpose of the framework is to assist:
(a) Enterprises: in preparation of their financial statements in compliance with Accounting Standards and in
dealing with the topics not yet covered by any Accounting Standard,
(b) ASB: in its task of development and review of Accounting Standards, and in promoting harmonisation of
regulations, Accounting Standards and procedures relating to the preparation and presentation of financial
statements by providing a basis for reducing the number of alternative accounting treatments permitted by
Accounting Standards,
(c) Auditors: in forming an opinion as to whether financial statements conform to the Accounting Standards,
(d) Users: in interpretation of financial statements,
(e) Those who are interested in the work of ASB with information about its approach to the formulation of
Accounting Standards.
3. What are the qualitative characteristics of the financial statements (FS) which improve the usefulness of the
information furnished therein?
Answer: The framework suggests that the financial statements (FS) should observe and maintain the following
qualitative characteristics as far as possible within limits of reasonable cost/ benefit.
(1) Understandability: FS should present information in a manner as to be readily understandable by the users
with reasonable knowledge of business and economic activities.
(2) Relevance: Information, which is likely to influence the economic decisions by the users. is said to be
relevant. Such information may help the users to evaluate past, present or future events.
(3) Materiality: Information is material if its omission or misstatement could influence the economic decisions
of users taken on the basis of the financial statements.
(4) Reliability: To be useful, the information must be reliable; that is to say, they must be free from material
error and bias. The information provided are not likely to be reliable unless: Transactions and events
reported (a) are faithfully represented; (b) reported in terms of their substance and economic reality not
merely on the basis of their legal form; (c) neutral, i.e. free from bias; (d) Prudence is exercised in reporting
and (e) Completeness.
(5) Comparability: The financial statements should permit both inter-firm and intra-firm comparison. One
essential requirement of comparability is disclosure of financial effect of change in accounting policies.
(6) True and Fair View: Financial statements are required to show a true and fair view of the performance,
financial position and cash flows of an enterprise.
4. “One of the characteristics of financial statements is neutrality”- Do you agree with this statement?
Answer: Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information
contained in financial statement must be neutral, that is free from bias. Financial Statements are not neutral if by
the selection or presentation of information, they influence the making of a decision or judgement in order to
achieve a pre-determined result or outcome. Financial statements are said to depict the true and fair view of the
business of the organization by virtue of neutrality.
5. Write short note on main elements of Financial Statements.

Ans. Items of financial statements can be classified in five broad groups depending on their economic
characteristics:
Asset: Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise.
Liability: Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Equity: Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain: Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity
other than those relating to contributions from equity participants
Expense/loss: Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other
than those relating to distributions to equity participants.
6. Explain in brief, the alternative measurement bases, for determining the value at which an element can be
recognized in the Balance Sheet or Statement of Profit and Loss.
Answer: A brief explanation of each measurement basis is as follows:
(1) Historical Cost: Historical cost means acquisition price.
E.g. Mr. X purchased a machine on 1st January, 20X1 at Rs. 7,00,000. As per historical cost basis, he has to
record it at Rs. 7,00,000 i.e. the acquisition price. As on 1.1.20X6, Mr. X found that it would cost Rs.
25,00,000 to purchase that machine. Mr. X also took loan from a bank as on 20X1 for Rs. 5,00,000 @ 18%
p.a. repayable at the end of 15th year together with interest.
As per historical cost, the liability is recorded atRs. 5,00,000 at the amount of proceeds received in exchange
for obligation and asset is recorded at Rs. 7,00,000.
(2) Current Cost: It gives an alternative measurement basis. Assets/Liabilities are carried out at the amount of
cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired/settle the
obligation currently.
E.g. A machine was acquired for ₹ 10,000 on deferred payment basis. The rate of exchange on the date of
acquisition was Rs. 49 per ₹. The payments are to be made in 5 equal annual instalments together with 10%
interest per year. The current market value of similar machine in India is Rs. 5 lakhs.
Current cost of the machine = Current market price = Rs. 5,00,000.
By historical cost convention, the machine would have been recorded at Rs. 4,90,000.
To settle the deferred payment on current date one must buy dollars at Rs. 49/₹. The liability is therefore
recognised at Rs. 4,90,000 (₹ 10,000 × Rs. 49). Note that the amount of liability recognised is not the
present value of future payments. This is because, in current cost convention, liabilities are recognised at
undiscounted amount.
(3) Realisable (Settlement) Value: As per realisable value, assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the assets in an orderly disposal. Liabilities are
carried at their settlement values; i.e. the undiscounted amount of cash or cash equivalents paid to satisfy the
liabilities in the normal course of business.
(4) Present Value: Under PV convention, assets/ Liabilities are carried at present value of future net cash flows
generated/ expected to be required to settle by the concerned assets/liabilities respectively in the normal
course of business.
E.g. Carrying amount of a machine is Rs. 40,000 (Historical cost less depreciation). The machine is
expected to generate Rs. 10,000 net cash inflow. The net realisable value (or net selling price) of the
machine on current date is Rs. 35,000. The enterprise’s required earning rate is 10% per year.
The enterprise can either use the machine to earn Rs. 10,000 for 5 years. This is equivalent of receiving
present value of Rs. 10,000 for 5 years at discounting rate 10% on current date. The value realised by use of
the asset is called value in use. The value in use is the value of asset by present value convention.
Value in use = Rs. 10,000 (0.909 + 0.826 + 0.751 + 0.683 + 0.621) = Rs. 37,900
Net selling price = Rs. 35,000
The present value of the asset is Rs. 37,900, which is called its recoverable value. It is obviously not
appropriate to carry any asset at a value higher than its recoverable value. Thus the asset is currently
overstated by Rs. 2,100 (Rs. 40,000 – Rs. 37,900).
7.
(a) With regard to financial statements name any four.
(1) Users
(2) Qualitative characteristics
(3) Elements
(b) What are fundamental accounting assumptions?
Solution:
(a)
(1) Users of financial statements:
Investors, Employees, Lenders, Supplies/Creditors, Customers, Government & Public
(2) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss
(b) Fundamental Accounting Assumptions:

(1) Going Concern: assumption means it is assumed that entity will continue its operation forever; there is
no necessity to liquidate its operation.
(2) Consistency: means accounting policy are forever and there is no necessity to change such policy.
(3) Accrual assumption: Accrual means charging of income & expenditure on periodic basis.
Note: These assumptions should not disclose if followed. In case they are not being followed these should be
disclosed.
8. Explain the components of financial statements.

Answer: A complete set of financial statements normally consists of a Balance Sheet, a Statement of Profit and
Loss and a Cash Flow Statement together with notes, statements and other explanatory materials that form
integral parts of the financial statements.
All parts of financial statements are interrelated because they reflect different aspects of same transactions or
other events.
The major information contents of different components of financial statements are explained as below:
A) Balance Sheet portrays value of economic resources controlled by an enterprise. It also provides
information about liquidity and solvency of an enterprise.
B) Statement of Profit and Loss presents the result of operations of an enterprise for an accounting period,
i.e., it depicts the performance of an enterprise, in particular its profitability.
C) Cash Flow Statement shows the way an enterprise has generated cash and the way they have been used in
an accounting period and helps in evaluating the investing, financing and operating activities during the
reporting period.
D) Notes and other statements present supplementary information explaining different items of financial
statements.
9. Capital maintenance: is a theoretical concept which tries to ensure that excessive dividends are not paid to
shareholders in times of changing prices. This concept can be classified as follows:
A. Physical capital maintenance (PCM): (Also known as Operating capital maintenance) It sets aside
profits in order to allow the business to continue to operate at current levels of activity. In practice, this
tends to mean adjusting opening capital by specific price changes hitting the business, rather than general.
Example 1: Business starts on 1 Jan 2023 with contribution of ₹ 50,000 from owners. This is used to
purchase 500 units at ₹100 each, which are sold for ₹ 56,000 cash. So profit is usually measured as ₹6,000.
(Closing capital is ₹ 56,000 as reduced by opening capital ₹ 50,000)
However, over the year, the price of the units has increased to ₹110. (Price increase 10%).
Therefore increase opening capital by 10% × 50,000 = ₹ 55,000.
Profit is therefore ₹ 56,000 – ₹ 55,000 = ₹ 1,000.
This is enough to buy 500 more units at ₹ 110 each. In other words, the productive capacity of the business,
or physical capital, has been maintained.
Example 2: If price rises were 20% (₹ 120), then the adjusted opening capital=120% × ₹50,000=₹60,000. So
the loss of the business is ₹ 56,000–₹ 60,000=₹ 4,000 loss. It means business has cash of ₹ 56,0000 as there
are no profits to pay out and can only purchase 466.67 units at ₹120 i.e. productive capacity has declined.
B. Financial capital maintenance (FCM): It sets aside profits in order to preserve the value of shareholders’
funds in either
(i) At historical cost/Monetary terms: We can measure the increase in monetary terms
Example 3: Business starts on 1 Jan 2023 with contribution of ₹ 50,000 from owners. This is used to
purchase 500 units at ₹100 each, which are sold for ₹ 56,000 cash. So profit is measured as ₹6,000. (Closing
capital is ₹ 56,000 as reduced by opening capital ₹ 50,000)
OR
(ii) Constant purchasing power (real financial capital): Inflation over time makes comparisons difficult so
constant purchasing power adjusts for general indices of inflation – e.g. retail prices index (RPI).
Example 4: If increase in RPI is 7%
– Increased opening capital by 7% × 50,000 = ₹ 53,500
– So profit is only ₹ 56,000 – ₹ 53,500 = ₹ 2,500.
Practical questions
1. Balance sheet of a trader on 31st March, 20X1 is given below:
Capital 60,000 Property, Plant and Equipment 65,000
Profit and Loss Account 25,000 Stock 30,000
10% Loan 35,000 Trade receivables 20,000
Trade payables 10,000 Deferred costs 10,000
Bank 5,000
1,30,000 1,30,000
(a) The remaining life of Property, Plant and Equipment is 5 years. The pattern of use of the asset is even. The
net realisable value of Property, Plant and Equipment on 31.03.X2 was ₹ 60,000.
(b) The trader’s purchases and sales in 20X1-X2 amounted to ₹ 4 lakh and ₹ 4.5 lakh respectively.
(c) The cost and net realisable value of stock on 31.03.X2 were ₹ 32,000 and ₹ 40,000 respectively.
(d) Expenses (including interest on 10% Loan of ₹ 3,500 for the year) amounted to ₹ 14,900.
(e) Deferred cost is amortised equally over 4 years.
(f) Trade receivables on 31.03.X2 is ₹ 25,000, of which ₹ 2,000 is doubtful. Collection of another ₹ 4,000
depends on successful re-installation of certain product supplied to the customer.
(g) Closing trade payable is ₹ 12,000, which is likely to be settled at 5% discount.
(h) Cash balance on 31.03.X2 is ₹ 37,100.
(i) There is an early repayment penalty for the loan ₹ 2,500.
You are required to prepare Profit and Loss Accounts and Balance Sheets of the trader in both cases (i)
assuming going concern (ii) not assuming going concern.
Solution: Profit and Loss Account for the year ended 31st March, 20X2
Case (i) Case (ii) Case (i) Case (ii)
To Opening Stock 30,000 30,000 By Sales 4,50,000 4,50,000
To Purchases 4,00,000 4,00,000 By Closing Stock 32,000 40,000
To Expenses 14,900 14,900 By Trade payables - 600
To Depreciation 13,000 5,000
To Provision for doubtful debts 2,000 6,000
To Deferred cost 2,500 10,000
To Loan penalty - 2,500
To Net Profit (b.f.) 19,600 22,200
4,82,000 4,90,600 4,82,000 4,90,600
Balance Sheet as at 31st March, 20X2
Liabilities Case (i) Case (ii) Assets Case (i) Case (ii)
Capital 60,000 60,000 Property, Plant & Equipment 52,000 60,000
Profit & Loss A/c 44,600 47,200 Stock 32,000 40,000
10% Loan 35,000 37,500 Trade receivables (less
Trade payables 12,000 11,400 provision) 23,000 19,000
Deferred costs 7,500 Nil
Bank 37,100 37,100
1,51,600 1,56,100 1,51,600 1,56,100
2. Balance Sheet of Anurag Trading Co. on 31st March, 20X1 is given below:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Capital 50,000 Fixed Assets 69,000
Profit and Loss A/c 22,000 Stock in Trade 36,000
10% Loan 43,000 Trade Receivables 10,000
Trade Payables 18,000 Deferred Expenditure 15,000
Bank 3,000
1,33,000 1,33,000
(i) Remaining life of fixed assets is 5 years with even use. The net realisable value of fixed assets as on 31st
March, 20X2 was Rs. 64,000.
(ii) Firm’s sales and purchases for the year 20X1-X2 amounted to Rs. 5 lacs and Rs. 4.50 lacs respectively.
(iii) The cost and net realisable value of the stock were Rs. 34,000 and Rs. 38,000 respectively.
(iv) General Expenses for the year 20X1-X2 were Rs.16,500.
(v) Deferred Expenditure is normally amortised equally over 4 years starting from F.Y. 20X0-X1 i.e. Rs.5,000
per year.
(vi) Out of Debtors worth Rs. 10,000, collection of Rs. 4,000 depends on successful re-design of certain product
already supplied to the customer.
(vii) Closing trade payable is Rs. 10,000, which is likely to be settled at 95%.
(viii) There is pre-payment penalty of Rs. 2,000 for Bank loan outstanding.
Prepare Profit & loss Account for the year ended 31st March X2 by assuming it is not a Going Concern.
Solution: Profit and Loss Account of Anurag Trading Co. for the year ended 31st March, 20X2
Rs. Rs.
To Opening Stock 36,000 By Sales 5,00,000
To Purchases 4,50,000 By Trade payables 500
To General expenses 16,500 By Closing Stock 38,000
To Depreciation (69,000-64,000) 5,000
To Deferred expenditure 15,000
To Loan penalty 2,000
To Net Profit (b.f.) 10,000

5,38,500 5,38,500
3. A trader commenced business on 01/01/20X1 with Rs. 12,000 represented by 6,000 units of a certain product at
Rs. 2 per unit. During the year 20X1 he sold these units at Rs. 3 per unit and had withdrawn Rs. 6,000. Let us
assume that the price of the product at the end of year is Rs. 2.50 per unit. In other words, the specific price
index applicable to the product is 125.
Current cost of opening stock = (Rs. 12,000 / 100) x 125 = 6,000 x Rs. 2.50 = Rs. 15,000
Current cost of closing cash = Rs. 12,000 (Rs. 18,000 – Rs. 6,000)
Opening equity at closing current costs = Rs. 15,000
Closing equity at closing current costs = Rs. 12,000
Retained Profit = Rs. 12,000 – Rs. 15,000 = (-) Rs. 3,000
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund of Rs.
12,000 is not sufficient to buy 6,000 units again at increased price of Rs. 2.50 per unit. The drawings should
have been restricted to Rs. 3,000 (Rs. 6,000 – Rs. 3,000). Had the trader withdrawn Rs. 3,000 instead of Rs.
6,000, he would have left with Rs.15,000, the fund required to buy 6,000 units at Rs. 2.50 per unit.
You are required to compute the Capital maintenance under all three bases ie.
(i) Historical costs,
(ii) Current purchasing power and
(iii) Physical capital maintenance.
Solution: Financial Capital Maintenance at historical costs
Rs. Rs.
Closing capital (At historical cost) 12,000
Less: Capital to be maintained 12,000
Opening capital (At historical cost)
Introduction (At historical cost) Nil (12,000)
Retained profit Nil
Financial Capital Maintenance at current purchasing power

Rs. Rs.
Closing capital (At closing price) 12,000
Less: Capital to be maintained 14,400
Opening capital (At closing price) (14,400)
Nil
Introduction (At closing price)
Retained profit/(loss) (2,400)
Physical Capital Maintenance
Rs. Rs.
Closing capital (At current cost) ( 4,800 units) 12,000
Less: Capital to be maintained
Opening capital (At current cost) (6,000 units) 15,000
Introduction (At current cost) Nil
Loss resulting in non-maintenances of capital (15,000)
(3,000)
4. Aman started a business on 1st April 20X1 with Rs. 24,00,000 represented by 1,20,000 units of Rs. 20 each.
During the financial year ending on 31st March, 20X2, he sold the entire stock for Rs. 30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Aman in the year 20X1-
X2 if Financial Capital is maintained at historical cost.
Solution:
Particulars Financial Capital Maintenance at
Historical Cost (Rs.)
Closing equity
36,00,000 represented by cash
(Rs. 30 x 1,20,000 units)
Opening equity 1,20,000 units x Rs. 20 = 24,00,000
Permissible drawings to keep Capital intact 12,00,000 (36,00,000 – 24,00,000)
5. A trader commenced business on April 1, 2020 with ₹ 1,20,000 represented by 6,000 units of a certain product
at ₹ 20 per unit. During the year 2020-21 he sold these units at ₹ 30/- per unit and had withdrawn ₹ 60,000. The
price of the product at the end of financial year was ₹ 25/- per unit. Compute retained profit of the trader under
the concept of physical capital maintenance at current cost. Also state, whether answer would be different if the
trader had not withdrawn any amount.
Solution: Physical Capital Maintenance at Current Cost
In the given case, the specific price index applicable to the product is 125 (25/20X100).
Current cost of opening stock = (₹ 1,20,000 / 100) x 125 Or 6,000 units x ₹ 25 = ₹ 1,50,000
Current cost of closing cash = ₹ 1,20,000 (₹ 1,80,000 – ₹ 60,000)
Opening equity at closing current costs = ₹ 1,50,000
Closing equity at closing current costs = ₹ 1,20,000
Retained Profit = ₹ 1,20,000 – ₹ 1,50,000 = (-) ₹ 30,000
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund of ₹ 1,
20,000 is not sufficient to buy 6,000 units again at increased price of ₹ 25 per unit. The drawings should have
been restricted to ₹ 30,000 (₹ 60,000 – ₹ 30,000).
If the trader had not withdrawn any amount, then the answer would have been as below:
Current cost of opening stock = ₹ 1,80,000
Opening equity at closing current costs = ₹ 1,50,000
Retained Profit = ₹ 1,80,000 – ₹ 1,50,000 = ₹ 30,000
If the trader had not withdrawn any amount, then the retained profit would have been ₹ 30,000.
6. Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs. 8 lakh, Rs. 3
lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has the following transactions:
(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
(3) Rent of the premises is outstanding Rs. 10,000
(4) Mr. A withdrew Rs. 9,000 for his personal use.
You are required to show the effect of above transactions on Balance Sheet in the form of Assets - Liabilities =
Equity after each transaction.
Solution: Effects of each transaction on Balance sheet of the trader is shown below:
Assets Liabilities Equity
Transactions – =
Rs. lakh Rs. lakh Rs. lakh
Opening 8.00 – 3.00 = 5.00
(1) Dividend earned 8.20 – 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 – 2.40 = 5.30
(4) Drawings 7.61 – 2.40 = 5.21
7. Aman started a business on 1st April 2020 with Rs. 24,00,000 represented by 1,20,000 units of Rs. 20 each.
During the financial year ending on 31st March, 2021, he sold the entire stock for Rs. 30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Aman in the year 2020-
21 if Financial Capital is maintained at historical cost.
Solution:
Particulars Financial Capital Maintenance at Historical Cost (Rs.)
Closing equity (Rs. 30 x 1,20,000 units)
36,00,000 represented by cash
Opening equity 1,20,000 units x Rs. 20 = 24,00,000
Permissible drawings to keep Capitalintact 12,00,000 (36,00,000 – 24,00,000)
8. Mrs. A is showing the consolidated aggregate opening balance of equity, liabilities and assets of ₹ 6 lakh, 4 lakh
and 10 lakh respectively. During the current year Mrs. A has the following transactions:
(1) Received 20% dividend on 10,000 equity shares of ₹ 10 each held as investment.
(2) The amount of ₹ 70,000 is paid to creditors for settlement of ₹ 90,000.
(3) Salary is pending by ₹ 20,000.
(4) Mrs. A’s drawing ₹ 20,000 for her personal use.
You are required to prepare the statement of the effect of aforesaid each transaction on closing balance sheet in
the form of Assets – Liabilities = Equity after each transaction.
Solution: Effect of each transaction on Balance sheet of Mrs. A is shown below:
Transactions Assets – Liabilities = Equity

₹ lakh ₹ lakh ₹ lakh
Opening 10.00 – 4.00 = 6.00
(1) Dividend earned 10.20 – 4.00 = 6.20
[10.00+0.20] [6.00+0.20]
(2) Settlement of Creditors 9.50 - 3.10 = 6.40
[10.20-0.70] [4.00-0.90] [6.20+0.20]
(3) Salary Outstanding 9.50 – 3.30 = 6.20
[3.10+0.20] [6.40-0.20]
(4) Drawings 9.30 – 3.30 = 6.00
[9.50-0.20] [6.20-0.20]
9. A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine Rs. 1,00,000. At
the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production. The new
method will not require the machine ordered and it will be scrapped after delivery. The expected scrap value is
nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-X2.
Answer. A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should recognise a
liability of Rs. 1,00,000 to Gamma Ltd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable,
the expenditure incurred is recognised as an expense rather than as an asset. In the present case, flow of future
economic benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the
machine should be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
(Loss transferred to profit and loss account)
10.
(a) A trader purchased article A on credit in period 1 for Rs. 50,000.
(b) He also purchased article B in period 1 for Rs. 2,000 cash.
(c) The trader sold article A in period 1 for Rs. 60,000 in cash.
(d) He also sold article B in period 1 for Rs. 2,500 on credit.
Prepare Profit and Loss Account of the trader by two basis of accounting
Solution: Case I: Cash basis of accounting: Cash purchase of article B and cash sale of article A is recognised
in period 1 while purchase of article A on payment and sale of article B on receipt is recognised in period 2.
Rs. Rs.
Period 1 To Purchase 2,000 Period 1 By Sale 60,000
To Net Profit 58,000
60,000 60,000
By Net Loss 47,500
50,000 50,000
Case II: Accrual basis of accounting: Credit purchase of article A and cash purchase of article B and cash sale
of article A and credit sale of article B is recognised in period 1 only.
Rs. Rs.
To Net Profit 52,000
62,500 62,500
Examples
1. Suppose at the beginning of an accounting period, aggregate values of assets, liabilities and equity of a trader are
Rs. 5 lakh, Rs. 2 lakh and Rs. 3 lakh respectively.
Also suppose that the trader had the following transactions during the accounting period.
(a) Introduced capital Rs. 20,000.
(b) Earned income from investment Rs. 8,000.
(c) A liability of Rs. 31,000 was finally settled on payment of Rs. 30,000. Balance sheets of the trader after
each transaction are shown below:

Transactions – =
Opening 5.00 – 2.00 = 3.00
(a) Capital introduced 5.20 – 2.00 = 3.20
(b) Income from investments 5.28 – 2.00 = 3.28
(c) Settlement of liability 4.98 – 1.69 = 3.29
The example given above explains the definition of income. The equity increased by Rs. 29,000 during the
accounting period, due to
(i) Capital introduction Rs. 20,000 and
(ii) Income earned Rs. 9,000 (Income from investment + Discount earned). Incomes therefore result in
increase in equity without introduction of capital.
Also note that income earned is accompanied by either increase of asset (Cash received as investment income)
or by decrease of liability (Discount earned).
2. Continuing with the example 1 given earlier, suppose the trader had the following further transactions during the
period:
(a) Wages paid Rs. 2,000.
(b) Rent outstanding Rs. 1,000.
(c) Drawings Rs. 4,000.
Balance sheets of the trader after each transaction are shown below:

Transactions – =
Opening 5.00 – 2.00 = 3.00
(a) Capital introduced 5.20 – 2.00 = 3.20
(b) Income from investments 5.28 – 2.00 = 3.28
(c) Settlement of liability 4.98 – 1.69 = 3.29
(d) Wages paid 4.96 – 1.69 = 3.27
(e) Rent Outstanding 4.96 – 1.70 = 3.26
(f) Drawings 4.92 – 1.70 = 3.22
The example given above explains the definition of expense. The equity decreased by Rs. 7,000 from Rs. 3.29
lakh to Rs. 3.22 lakh due to
(i) Drawings Rs. 4,000 and
(ii) Expenses incurred Rs. 3,000 (Wages paid + Rent).
Expenses therefore result in decrease of equity without drawings. Also note that expenses incurred is
accompanied by either decrease of asset (Cash paid for wages) or by increase in liability (Rent outstanding).
3. A trader commenced business on 01/01/20X1 with Rs. 12,000 represented by 6,000 units of a certain product at
Rs. 2 per unit. During the year 20X1 he sold these units at Rs. 3 per unit and had withdrawn Rs. 6,000.
Thus:
Opening Equity = Rs. 12,000 represented by 6,000 units at Rs. 2 per unit. Closing Equity = Rs. 12,000 (Rs.
18,000 – Rs. 6,000) represented entirely by cash. Retained Profit = Rs. 12,000 – Rs. 12,000 = Nil
The trader can start year 20X2 by purchasing 6,000 units at Rs. 2 per unit once again for selling them at Rs. 3
per unit. The whole process can repeat endlessly if there is no change in purchase price of the product.
4. In the previous Example (Example 3), suppose that the average price indices at the beginning and at the end of
year are 100 and 120 respectively.
Opening Equity = Rs. 12,000 represented by 6,000 units at Rs. 2 per unit.
Opening equity at closing price = (Rs. 12,000 / 100) x 120 = Rs. 14,400 (6,000 x Rs. 2.40)
Closing Equity at closing price = Rs. 12,000 (Rs. 18,000 – Rs. 6,000) represented entirely by cash.
Retained Profit = Rs. 12,000 – Rs. 14,400=(–) Rs. 2,400
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund of Rs.
12,000 is not sufficient to buy 6,000 units again at increased price Rs. 2.40 per unit. In fact, he should have
restricted his drawings to Rs. 3,600 (Rs. 6,000 – Rs. 2,400).
Had the trader withdrawn Rs. 3,600 instead of Rs. 6,000, he would have left with Rs. 14,400, the fund required
to buy 6,000 units at Rs. 2.40 per unit.
MCQs(ICAI Material)
1. The 'going concern' concept assumes that
(a) The business can continue in operational existence for the foreseeable future.
(b) The business cannot continue in operational existence for the foreseeable future.
(c) The business is continuing to be profitable.
2. Two principal qualitative characteristics of financial statements are

(a) Understandability and materiality
(b) Relevance and reliability
(c) Relevance and materiality
3. All of the following are components of financial statements except

(a) Balance sheet
(b) Statement of Profit and loss
(c) Human responsibility report
4. An accounting policy can be changed if the change is required

(a) By statute or accounting standard
(b) For more appropriate presentation of financial statements
(c) Both (a) and (b)
5. Value of equity may change due to

(a) Contribution from or Distribution to equity participants
(b) Income earned/expenses incurred
6. An item that meets the definition of an element of financial statements should be recognised in the financial
statements if:
(a) It is probable that any future economic benefit associated with the item will flow to the enterprise
(b) Item has a cost or value that can be measured with reliability
7. A machine was acquired in exchange of an old machine and ₹ 20,000 paid in cash. The carrying amount of old
machine was ₹ 2,00,000 whereas its fair value was ₹ 1,50,000 on the date of exchange. The historical cost of the
new machine will be taken as
(a) ₹ 2,00,000
(b) ₹ 1,70,000
(c) ₹ 2,20,000
8. Which of the assumption is not considered as fundamental accounting assumption?

(a) Going Concern
(b) Accrual
(c) Reliability.
9. Liabilities are recorded at the undiscounted amount of cash expected to be paid on settlement of liability in the
normal course of business under:
(a) Present value.
(b) Realizable value.
(c) Current cost.
Answer: 1. (a), 2. (b), 3. (c), 4. (c), 5. (c), 6. (c),

7. (b), 8. (c), 9. (b)
Schedule III - Division I (Section 129)
FORMAT: PART I- BALANCE SHEET
Balance Sheet as at 31st March, 20XX

Figures as at the Figures as at the
Note
Particulars end of current end of previous
No
reporting period reporting period
I. EQUITY AND LIABILITIES
(a) Share Capital
(b) Reserves and Surplus
(c) Money received against share warrants
(2) Share application money pending allotment
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total
II.Assets
(a) Property, Plant and Equipment and Intangible Assets
(i) Property, Plant and Equipment
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other non-current assets
(2) Current assets

(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
Total
FORMAT: Part II- STATEMENT OF PROFIT AND LOSS
Profit and Loss statement for the year ended 31st March, 20XX.
Figures as at the Figures as at the
Note
Particulars No
end of current end of previous
reporting period reporting period
I. Revenue from operations
II. Other Income
III. Total Income (I +II)
IV. Expenses:
Cost of materials consumed
Purchase of Stock-in-Trade
Changes in inventories of finished goods, work-in-
progress and Stock-in-Trade
Employee benefit expense
Financial costs
Depreciation and amortization expense
Other expenses
Total Expenses
V. Profit before exceptional and extraordinary

items and tax (III - IV)
VI. Exceptional Items
VII Profit before extraordinary items and tax(V-VI)

VIII. Extraordinary Items
IX. Profit before tax (VII - VIII)
X. Tax expense:
(1) Current tax
(2) Deferred tax
XI. Profit(Loss)from continuing operations(VII-VIII)
XII. Profit/(Loss) from discontinuing operations
XIII. Tax expense of discounting operations
XIV. Profit/(Loss) from Discontinuing operations

(XII - XIII)
XV. Profit/(Loss) for the period (XI + XIV)
XVI. Earning per equity share:

(1) Basic
(2) Diluted
A) General instruction:-
1. Compliance with the requirements of the Companies Act including Accounting Standards to have
precedence over the requirements of the Schedule III to the Companies Act, 2013.
2. Disclosure requirements specified in Part I and Part II of this Schedule are in addition to the disclosure
requirements of the Companies Act including Accounting Standards.
3. Notes to accounts to contain information in addition to that presented in the Financial Statements and shall
provide where required (a) narrative descriptions or disaggregations of items recognized in those statements
and (b) information about items that do not qualify for recognition in those statements.
4. Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross referenced to any
related information in the notes to accounts.
5. The corresponding amounts for the immediately preceding year to be shown for all items in financial
statements including notes except for first financial statements.
6. Round off: Depending upon the Total Income of the company, the figures appearing in the Financial
Statements shall be rounded off as given below:
a) Total income < Rs. 100 Crores – Round off to the nearest hundreds, thousands, lakhs or millions or
decimal thereof.
b) Total income > Rs. 100 Crores - Round off to the nearest lakhs, millions or crores, or decimal thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial Statements.
7. A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company's normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting date. Terms of a liability that could at the option of the counterparty, result in
its settlement by the issue of equity instruments do not affect its classification.
All other liabilities shall be classified as non- current.
8. An asset shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal
operating cycle;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at
least twelve months after the reporting date.
All other assets shall be classified as non-current.
9. An operating cycle is the time between the acquisition of assets for processing and their realization in Cash
or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration
of 12 months.
10. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of
goods sold or services rendered in the normal course of business.
11. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods
purchased or services received in the normal course of business.
12. “Broad heads” shall be decided taking into account the concept of materiality and presentation of true and
fair view of financial statements.
B) Explanation of Notes:
Part I: Balance Sheet.
SHARE CAPITAL: for each class of share capital (different classes of preference shares to be treated
separately)
(a) the number and amount of shares authorized;
(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully paid;
(c) par value per share;
(d) a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period;
(e) the rights, preferences and restrictions attaching to each class of shares including restrictions on the
distribution of dividends and the repayment of capital;
(f) shares in respect of each class in the company held by its holding company or its ultimate holding company
including shares held by or by subsidiaries or associates of the holding company or the ultimate holding
company in aggregate;
(g) shares in the company held by each shareholder holding more than 5 percent shares specifying the number of
shares held;
(h) For the period of five years immediately preceding the date as at which the Balance Sheet is prepared:
 Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment
being received in cash.
 Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
 Aggregate number and class of shares bought back.
(i) Calls unpaid (showing aggregate value of calls unpaid by directors and officers)
(j) Forfeited shares (amount originally paid up)
(k) A company shall disclose Shareholding of Promoters as below:
Shares held by promoters at the end of the year % Change during
the year**
S. No Promoter name No. of Shares* %of total shares*
Total
* Details shall be given separately for each class of shares
** % change shall be computed with respect to the number at the beginning of the year or if issued
during the year for the first time then with respect to the date of issue. ”
RESERVES AND SURPLUS
1. Classification of Reserves and Surplus into
- Capital reserves
- Capital Redemption Reserves
- Securities premium reserves
- Debenture Redemption Reserve
- Revaluation Reserve
- Share Option Outstanding Account
- Other reserves – (specifying nature, purpose and amount of each reserve)
- Surplus, showing allocations and appropriations such as dividend, bonus shares and transfer to / from
reserves
2. Additions and Deductions since last Balance Sheet date to be shown under each of the specified heads
3. The word ‘fund' in connection with reserve is to be used only where such Reserve is specifically represented
by earmarked investments.
4. Negative balance of Profit & Loss account, if any, to be shown under the "Surplus" head as a negative figure.
NON-CURRENT LIABILITIES
(a) Long-term Borrowings
(i) Classification of Long term Borrowings into-
a) Bonds / Debentures
b) Term Loans:
 From Banks
 From Other Parties
c) Deferred Payment liabilities
d) Deposits shown
e) Loans and advances from related parties
f) Long Term maturities of finance lease obligations
g) Other Loans and advances, specifying nature, shown
(ii) Long term Borrowings to be sub-classified as:
- Secured(nature of the security to be specified)
- Unsecured
(iii) Aggregate of loans guaranteed by the following should be disclosed
- Directors - Others
(iv) Rate of interest and terms of redemption / conversion of bonds / debentures (to be stated in descending order
of maturity of redemption / conversion)
(v) Period and amount of continuing default in the repayment of loans and interest shown separately in each case
(b) Other Long-term Liabilities: Classification as:-
- Trade payables - Others
(c) Long-Term Provisions: Classification of Provisions as:
- Provision for employee benefits - Others (Specifying nature)
CURRENT LIABILITIES
(a) Short-Term Borrowings
(i) Classification of borrowings as:
(a) Loans repayable on demand
- From banks - From other parties
(b) Loans and Advances from related parties
(c) Deposits
(d) Other Loans and Advances, specifying nature
(ii) Further sub-classification of the borrowings into:
- Secured(nature of the security to be specified) - Unsecured
(iii) Aggregate of loans guaranteed by the following should be disclosed:
- Directors - Others
(iv) Period and amount of continuing default in the Repayment of Loans and Interest shown separately in each case
(v) Current maturities of Long term borrowings shall be disclosed separately
(b) Trade Payable: The following ageing schedule shall be given for Trade payables due for payment:
Trade Payables ageing schedule (Amount in Rs.)
Particulars Outstanding for following periods from due date of payment#
Less than 1 year 1-2 years 2-3 years More than 3 years Total
(i) MSME
(ii) Others
(iii) Disputed dues – MSME
(iv) Disputed dues – Other
# similar information shall be given where no due date of payment is specified in that case disclosure shall be
from the date of the transaction.
Unbilled dues shall be disclosed separately;
(c) Other Current Liabilities: Classification of other current liabilities into:
- Current maturities of finance lease obligations
- Interest accrued but not due on borrowings
- Interest accrued and due on borrowings
- Income received in advance
- Application money received for allotment of securities and due for refund and interest accrued thereon.
- Unpaid matured deposits and interests accrued thereon
- Unpaid matured debentures and interest accrued thereon
- Other payables, specifying nature
(d) Short- term Provisions:- Classification of short term provisions into:
- Provision for employee benefits - Others, specifying nature
NON-CURRENT ASSETS
(i) Property, Plant and Equipment:
1. Classification of Tangible Assets into:
- Land
- Buildings
- Plant and Equipment
- Furniture and fixtures
- Vehicles
- Office Equipments
- Others (specifying nature)
2. Asset under lease shall be shown separately under each class of asset
3. Reconciliation of gross and net carrying amounts of each class of assets at the beginning and end of the
reporting period showing:
- Additions
- Disposals
- Acquisitions through business combinations
- amount of change due to revaluation (if change is 10% or more in the aggregate of the net carrying
value of each class of Property, Plant and Equipment)
- Other Adjustments
- Depreciation
- Impairment losses/reversals
4. Where a capital reduction scheme or a revaluation of assets has taken place, every balance sheet subsequent
to the reduction or revaluation shall show the reduced/increased figures, the date of the reduction/increase
and the amount of reduction / increase for the first 5 years subsequent to the reduction /revaluation.
(ii) Intangible Assets
1. Classification of Intangible Assets into:
- Goodwill
- Brands/trademarks
- Computer software
- Mastheads and publishing titles
- Mining rights
- Copyrights and patents and other Intellectual property rights, services and operating rights
- Recipes, formulae, models, designs and prototypes
- Licenses and franchises
2. Reconciliation of gross and net carrying amounts of each class of assets at the beginning and end of the
reporting period showing:
- Additions
- Disposals
- Acquisitions through business combinations
- amount of change due to revaluation (if change is 10% or more in the aggregate of the net carrying
value of each class of Intangible Asset)
- Other Adjustments
- Amortization
- Impairment losses/reversals
3. Where a capital reduction scheme or a revaluation of assets has taken place, every balance sheet subsequent
to the reduction or revaluation shall show the reduced/increased figures, the date of the reduction/increase
and the amount of reduction/increase for the first 5 years subsequent to the reduction / revaluation.
(iii) Capital Work In Progress
(iv) Intangible Assets Under Development
(b) Non-Current Investments
1. Non-current Investments are classified into Trade investments & Other Investments and further classified into
a) Investments in Property
b) Investments in Equity instruments
c) Investments in Preference shares
d) Investments in Government or trust securities
e) Investments in Debentures or Bonds
f) Investments in Mutual funds
g) Investments in Partnership firms
h) Others (specifying nature)
2. In case of investments in bodies corporate the following additional disclosures shall be made under each
classification:
- Names of the body corporate (indicating whether they are associates, joint ventures, subsidiaries or
controlled special purpose entities)
- Nature and extent of the investments
- Partly paid investments to be separately shown.
3. Investments carried at other than costs to be separately shown specifying basis of valuation
4. Following shall be additionally disclosed:
- Aggregate book value of Quoted Investments and market value thereof
- Aggregate amount of unquoted investments
- Aggregate provision for diminution in value of investments
(d) Long Term Loans and Advances
1. Loans and advances classified into:
a) Capital Advances
b) Loans and advances to related parties (giving details thereof)
c) Other loans and advances (specifying nature)
2. Sub-classification of above as:
- Secured, considered good
- Unsecured, considered good
- Doubtful
3. Allowance for bad and doubtful loans and advances disclosed under relevant heads.
4. Loans and Advances due from:
- Directors or other officers of the company
- Amounts due by firms in which any director is a partner
- Amounts due by private companies in which any director is a director or member.
(e) Other Non-Current Assets
1. Other non-current assets classified into:
- Long term trade receivables (including deferred credits)
- Security deposits
2. Long term trade receivables, shall be sub-classified as:
a) Secured, considered good
Unsecured, considered good
Doubtful
b) Allowance for bad and doubtful loans and advances disclosed under relevant heads.
c) Loans and Advances due from:
- Amounts due by private companies in which any director is a director or member.
d) For trade receivables outstanding, following ageing schedule shall be given:
Trade Receivables ageing schedule (Amount in Rs.)
Outstanding for following periods from due date of
payment#
Less than 6 months 1-2 2-3 More than Total
Particulars 6 months - 1 year Years Years 3 years
(i) Undisputed Trade receivables – considered good
(ii) Undisputed Trade Receivables – considered doubtful
(iii) Disputed Trade Receivables considered good
(iv)Disputed Trade Receivables considered doubtful
# similar information shall be given where no due date of payment is specified, in that case disclosure shall be
Unbilled dues shall be disclosed separately.
CURRENT ASSETS
(a) Current Investments
1. Current Investments are classified as follows
a) Investments in Property
b) Investments in Equity instruments
c) Investments in Preference shares
d) Investments in Government or trust securities
e) Investments in Debentures or Bonds
f) Investments in Mutual funds
g) Investments in Partnership firms
h) Others (specifying nature)
2. In case of investments in bodies corporate the following additional disclosures shall be made under each
classification:
- Names of the body corporate (indicating whether they are associates, joint ventures, subsidiaries or
controlled special purpose entities)
- Nature and extent of the investments
- Partly paid investments to be separately shown
3. Following shall be additionally disclosed:
- The basis of valuation of individual investments
- Aggregate book value of Quoted Investments and market value thereof
- Aggregate amount of unquoted investments
- Aggregate provision for diminution in value of investments
(b) Inventories
1. Classification of Inventories into:
a) Raw materials
b) Work in progress
c) Finished goods
d) Stock in trade (in respect of goods acquired for trading )
e) Stores and spares
f) Loose tools
g) Others (specifying nature)
2. Goods-in-transit to be disclosed under relevant sub-head.
3. Mode of Valuation to be stated
(c) Trade Receivables
1. For trade receivables outstanding, following ageing schedule shall be given:
Trade Receivables ageing schedule (Amount in Rs.)
Particulars Outstanding for following periods from due date of
payment#
Less than 6 months 1-2 2-3 More than Total
6 months - 1 year Years Years 3 years
(i) Undisputed Trade receivables – considered good
(ii) Undisputed Trade Receivables – considered doubtful
(iii) Disputed Trade Receivables considered good
(iv)Disputed Trade Receivables considered doubtful
# similar information shall be given where no due date of payment is specified, in that case disclosure shall be
Unbilled dues shall be disclosed separately.
2. Sub-classification of Trade Receivables:
- Secured, considered good
- Unsecured, considered good
- Doubtful
3. Allowance for bad and doubtful debts disclosed under relevant heads:
4. Debts due from:
- Amounts due by private companies in which any director is a director or member
(d) Cash and Cash Equivalents
1. Classification of Cash and Cash Equivalents into:
a) Balances with Bank
b) Cheques, Drafts on hand
c) Cash on hand
d) Others (specifying nature)
2. The following shall be shown separately :
a) Earmarked balances with bank.
b) Balances with bank held as margin money or security against borrowing, guarantees & other commitments.
c) Repatriation restrictions, if any, in respect of cash and bank balances.
d) Bank deposits with more than 12 months maturity.
(e) Short Term Loans And Advances
1. Classification of Loans and Advances :
a) Loans and Advances to Related parties (giving details thereof)
b) Others (specifying nature)
2. Sub-classification of Loans and Advances :

a) Secured, considered good
b) Unsecured, considered good
c) Doubtful
3. Allowance for bad and doubtful debts disclosed under relevant heads
4. Debts due from:
- Amounts due by private companies in which any director is a director or member
(f) Other Current Assets:
All inclusive heading which incorporates current assets that do not fit in other asset categories.
CONTINGENT LIABILITIES AND COMMITMENTS: The following shall be disclosed to the extent not
provided for:
1. Classification of Contingent liabilities:
a) Claims against the company not acknowledged as debts.
b) Guarantees.
c) Other money for which the company is contingently liable.
2. Commitments shall be classified as:
a) Estimated amount of contracts remaining to be executed on capital account and not provided for;
b) Uncalled liability on shares and other investments partly paid
c) Other commitments (specify nature).
3. Bills discounted/endorsed.
Additional Regulatory Information
(1) Capital-Work-in Progress (CWIP): Following ageing schedule shall be given

CWIP aging schedule
(Amount in Rs.)
CWIP Amount in CWIP for a period of Total*
Less than 1 1-2 2-3 More than 3
year Years Years years
Projects in progress
Projects temporarily suspended
* Total shall tally with CWIP amount in the balance sheet.
(2) Intangible assets under development: Following ageing schedule shall be given:
Intangible assets under development aging schedule
(Amount in Rs.)
Intangible assets under development Amount in CWIP for a period of Total*
Less than 1 1-2 2-3 More than 3
year Years Years years
Projects in progress
Projects temporarily suspended
* Total shall tally with the amount of Intangible assets under development in the balance sheet.
(3) Details of Benami Property held
(4) Following Ratios to be disclosed:
(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
(i) Net profit ratio,
(j) Return on Capital employed,
(k) Return on investment.
The company shall explain the items included in numerator and denominator for computing the above ratios.
Further explanation shall be provided for any change in the ratio by more than 25% as compared to the
preceding year.
(5) Utilisation of Borrowed funds and share premium.
PROFIT AND LOSS ACCOUNT:
The following shall be disclosed separately by way of notes to accounts:

I. REVENUE FROM OPERATIONS
1. In respect of Company other than Finance Company, revenue shall be disclosed separately in notes from:
- Sale of products
- Sale of services
- Grants or donations received (relevant in case of section 8 companies only)
- Other Operating revenues
- Less: Excise Duty
2. In respect of Finance Company, revenue shall be disclosed separately in notes from:
- Interest
- Other Financial Services
3. Gross Income / Sales to be shown under broad heads.
II. OTHER INCOME: Classification of Other Income into:
- Interest Income (except for a finance company)
- Dividend Income
- Net gain / loss on sale of Investments
- Net gain from foreign currency transactions & translations other than those considered as Finance Costs
III. EXPENSES:
a) Employee Benefits Expense: The following shall be shown separately:
- Salaries and Wages
- Contribution to Provident and Other Funds
- Expenses on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP)
- Staff Welfare Expenses
b) Finance Costs: Classification of Finance Cost into:
- Interest Expense
- Other Borrowing Cost
- Net gain / loss from foreign currency transactions and translations
c) Other Expenses
(1) Any item of expenditure which exceed 1 % of revenue from operations or Rs.1 lakh, whichever is
higher
(2) Adjustments to the carrying amount of investments
(3) Net loss from foreign currency transactions and translations other than those considered as Finance
Costs
d) Payment to the Auditors:
- As Auditors
- For Taxation matters
- For Company Law matters
- For Management services
- For other services
- For Reimbursement of expenses
e) Prior Period Items
f) Following expenditures to be shown separately:

- Consumption of stores and spare parts
- Power and Fuel
- Rent
- Repairs to Buildings
- Repairs to Machinery
- Insurance
- Rates and Taxes, excluding Tax on Income
- Miscellaneous Expenses
IV. Undisclosed income: The Company shall give details of any transaction not recorded in the books of
accounts that has been surrendered or disclosed as income during the year in the tax assessments under the
Income Tax Act, 1961.
V. Corporate Social Responsibility (CSR): Where the company covered under section 135 of the companies
act, the following shall be disclosed with regard to CSR activities:-
(i) amount required to be spent by the company during the year,

(ii) amount of expenditure incurred,
(iii) shortfall at the end of the year,
(iv) total of previous years shortfall,
(v) reason for shortfall,
(vi) nature of CSR activities,
(vii) details of related party transactions, e.g., contribution to a trust controlled by the company in relation
to CSR expenditure as per relevant Accounting Standard,
(viii) where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year should be shown separately.
VI. Details of Crypto Currency or Virtual Currency: Where the Company has traded or invested in Crypto
currency or Virtual Currency during the financial year, the following shall be disclosed:-
(i) profit or loss on transactions involving Crypto currency or Virtual Currency

(ii) amount of currency held as at the reporting date, deposits or advances from any person for the
purpose of trading or investing in Crypto Currency/ virtual currency.
PRACTICAL QUESTIONS OF SCHEDULE III
1. In the financial statements of the financial year 2011-12, Alpha Ltd. has mentioned in the notes to accounts
that during financial year, 24,000 equity shares of Rs. 10 each were issued as fully paid bonus shares.
However, the source from which these bonus shares were issued has not been disclosed. Is such non-
disclosure a violation of the Schedule III to the Companies Act, 2013 to the Companies Act? Comment.
Answer: Schedule III to the Companies Act, 2013 has come into force for the Balance Sheet and Profit
and Loss Account prepared for the financial year commencing on or after 1st April, 2011. As per Part I
of the Schedule III to the Companies Act, 2013, a company shall, inter alia, disclose in notes to
accounts for the period of 5 years immediately preceding the balance sheet date (31st March, 2012 in the
instant case) the aggregate number and class of shares allotted as fully paid-up bonus shares. Schedule
III to the Companies Act, 2013 does not require a company to disclose the source from which bonus
shares have been issued. Therefore, nondisclosure of source from which bonus shares have been issued
does not violate the Schedule III to the Companies Act, 2013.
2. The management of Loyal Ltd. contends that the work in process is not valued since it is difficult to
ascertain the same in view of the multiple processes involved. They opine that the value of opening and
closing work in process would be more or less the same. Accordingly, the management had not
separately disclosed work in process in its financial statements. Comment in line with Schedule III to
the Companies Act, 2013.
Answer: Schedule III to the Companies Act, 2013 to the companies Act does not require that the
amounts for which WIP have been completed at the beginning and at the end of the accounting period
should be disclosed in the statement of profit and loss. Therefore, the nondisclosure in the financial
statements by the company may not amount to violation of Schedule III to the Companies Act, 2013 if
the differences between opening and closing WIP are not material.
3.
(a) Futura ltd. had the following items under the head ‘’reserve & surplus’’ in the balance sheet as on
31st March, 2013;
Amount Rs in lakhs
Securities premium account 80
Capital reserve 60
General reserve 90
The company had an accumulated loss of Rs 250 lakhs on the same date, which it has disclosed
under the head ‘’statement of profit & loss’’ as asset in its balance sheet. Comment on accuracy of
this treatment in the line with scheduled III to the companies Act, 2013.
(b) Sumedha ltd. took a loan from bank for Rs 10,00,000 to be settled within year in 10 equal half
yearly instalments with interest. First instalment is due 30.09.2013 of Rs 1,00,000. Determine how
the loan will be classified in preparation of financial statement of Sumedha ltd for the year ended
31st march, 2013 according to scheduled III.
Answer:
(a) Note 6 (B) given under part I of Schedule III to the Companies Act, 2013 provides that the balance of
statement of profit & loss (after all allocation and appropriation) shall be shown as a negative figure
under the head ‘surplus’. Similarly , the balance of reserve and surplus ,after adjusting negative balance
of surplus ,shall be shown under the head ‘’ reserve and surplus’’ even if the resulting figure is in the
negative . in this case , the negative balance of profit and loss that is Rs 250 lakhs . Exceed the total of
all the reserves i.e Rs 230 lakhs. Therefore the balance ‘reserve and surplus ‘ after adjusting the debit
balance of profit and loss is negative by Rs 20 lakhs , which should be disclosed on the face of balance
sheet .
(b) As per Schedule III to the Companies Act, 2013 a liability shall be classified as current when it
satisfies any of the following criteria:
(i) it is expected to be settled in the company's normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the reporting date; or
(iv) the company does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting date.
In the given case, instalment due on 30.9. 2013 and 31.3.2014 will be shown under the head “other
current liabilities” as per criteria (c).
Therefore ,in the balance sheet as on 31.3.2013 ,Rs 8,00,000 will be shown under the heading “long
term borrowing” and Rs 2,00,000 will be shown under the heading “short term borrowing” as
current maturities of loan from bank.
4. Alpha Ltd. provides you the following information :

(1) Raw material stock holding period : 3 months
(2) Work – in- progress holding period : 1 month
(3) Finished goods holding period : 5 months
(4) Debtors collection period : 5 months
You are required to compute the operating cycle of Alpha Ltd. What would happen if the trade is
payables of the company are paid in 13 months – whether these should be classified as current or non-
current liability?
Answer: According to Schedule III to the Companies Act, 2013 “An operating cycle is the time
between the acquisition of assets for processing and their realization in cash or cash equivalents”.
Therefore, operating cycle of Alpha Ltd. will be computed as under:
Raw material stock holding period + Work – in – progress holding period + Finished goods holding
period + Debtors collection period
= 3 + 1+ 5 + 5 = 14 months
A Liability shall be classified as current when it is expected to be settled in the Company’s normal
operating cycle.
Since the operating cycle of Alpha Ltd. is 14 months, trade payables expected to be paid in 13 months
should be treated as current liability.
5. X Ltd is a company engaged in the business of manufacturing white & rose wine. The process of
manufacturing white & rose wine takes around 2 years. Due to this reason X Ltd has prepared its
financial statements considering its operating cycle as 2 years, and accordingly classified the raw
material purchased & held in stock for less than 2 years as current asset. Comment on the accuracy of
the decision and the treatment of asset by X Ltd as per Schedule III to the Companies Act, 2013?
Solution:- As per Schedule III to the Companies Act, 2013, one of the criteria for classification of an
asset as a current asset is that the asset is expected to be realised in the company’s’ operating cycle or is
intended for sale or consumption in the company’s normal operating cycle.
Further, Schedule III to the Companies Act, 2013 defines that an operating cycle is the time between the
acquisition of assets for processing and their realization in cash or cash equivalents. However, when the
normal operating cycle cannot be identified, it is assumed to have duration of 12 months.
As per the facts given in the question, the process of manufacturing of lotus wine takes around 18
months; therefore, its realisation into cash and cash equivalents will be done only when it is ready for
sale i.e. after 18 months. This means that normal operating cycle of the product is 18 months. Therefore,
the contention of the company's management that the operating cycle of the product lotus wine is 18
months & not 12 months is correct.
6. “Current maturities of long term borrowing are disclosed separately under the head Other current liabilities in the
balance sheet of a company.” You are required to comment in line with schedule III to the Companies Act 2013.
Solution: Current maturities of loan term borrowing are shown under ‘short term borrowings’ and not under
‘Other current liabilities’ as per the amendment to Schedule III vide MCA notification dated 24th March, 2021.
Hence the statement given in the question is not valid.
7. From the following information, prepare extract of Balance Sheet of A Limited along with notes making
necessary compliance of Schedule III to the Companies Act, 2013:
Amount (₹ )
Loan Funds
(a) Secured Loans 18,12,000
(b) Unsecured Loan - Short term from bank 2,25,000
Other information is as under:
Secured Loans
Term Loans from:
Banks 8,95,000
Others 9,17,000
18,12,000
Current Maturities of long-term loan from Bank 1,24,000
Current Maturities of long- term loan from Others 85,000
There was no interest accrued / due as at the end of the year. Current maturities of long-term loans
amounting ₹ 2,09,000 is included in the value of secured loans of ₹ 18,12,000.
Solution: Extract of Balance Sheet of A Ltd.
Non - Current Liabilities
Long term borrowings 1 16,03,000
Current Liabilities
Short term borrowings 2 4,34,000
Notes to Accounts
1. Long-Term Borrowings
Term loans – Secured
- From banks 8,95,000
Less: Current maturities of long-term debt (Refer Note 2) (1,24,000) 7,71,000
- From other parties 9,17,000

Less: Current maturities of long-term debt (Refer Note 2) (85,000) 8,32,000
16,03,000
2. Short-Term Borrowings
Current maturities of long-term debt-Secured
- From banks 1,24,000
- From others 85,000
(Unsecured loan)
- from bank 2,25,000
4,34,000
8. State under which head these accounts should be classified in Balance Sheet, as per Schedule III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital. (ii)Share option outstanding account.
(iii) Unpaid matured debenture & interest accrued thereon. (iv) Uncalled liability on shares & other partly paid investments.
(v) Calls unpaid. (vi) Money received against share warrant.
Solution: (i) Current Liabilities/ Other Current Liabilities (ii) Shareholders’ Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities (iv) Contingent Liabilities and Commitments
(v) Shareholders’ Fund / Share Capital (vi) Shareholders’ Fund/Money received against share warrants
9. Sagar Ltd. has issued convertible bonds for ₹ 65 crores which are due to mature on 30th September, 2018.
While preparing financial statements for the year ending 31st March, 2018, company expects that bond
holders will not exercise their option of converting bonds to equity shares. How should the company
classify the convertible bonds as per the requirements of Schedule-Ill to the Companies Act, 2013 as on
31st March, 2018?
Also state, whether classification of convertible Bonds as per Schedule-III to the Companies Act will
change if the company expects that convertible bond holders will convert their holdings into equity shares
of Sagar Ltd.
Solution: Schedule III to the companies Act, 2013 provides that:
“A liability should be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting date. Terms of a liability that could, at the option of the counterparty, result
in its settlement by the issue of equity instruments and do not affect its classification.”
In the present situation, Sagar Ltd. does not have an unconditional right to defer settlement of the liability
for at least 12 months after the reporting date, hence Sagar Ltd. should classify the FCCBs as current
liabilities as on 31st March 2018.
The position will be same even when the bond holders are expected to convert their holdings into equity
shares of Sagar Ltd. Expectations cannot be called as unconditional rights. Thus, in this situation also, Sagar
Ltd. should classify the FCCBs as current liabilities as on 31st March 2018.
10. X Ltd. is a company engaged in manufacture and sale of industrial and FMCG products. One of their
division also deals in Leasing of properties - Mobile Towers. The accountant showed the rent arising from
the leasing of such properties as other income in the Statement of Profit and Loss.
Comment whether the classification of the rent income made by the accountant is correct or not in light of
Schedule III to the Companies Act, 2013.
Solution: As per para 4 of the ‘General Instructions for preparation of Statement of Profit and Loss’ given
in the Schedule III to the Companies Act, 2013, ‘other income’ does not include operating income.
The term “Revenue from operations” has not been defined under Schedule III to t he Companies Act 2013.
However, as per Guidance Note on Schedule III to the Companies Act 2013 this would include revenue
arising from a company’s operating activities i.e. either its principal or ancillary revenue-generating
activities. Whether a particular income constitutes “Revenue from operations” or “other income” is to be
decided based on the facts of each case and detailed understanding of the company’s activities. The
classification of income would also depend on the purpose for which the particular asset is acquired or held.
As per the information given in the question, X Ltd is a group engaged in manufacture and sale of industrial
and FMCG products and its one of the division deals in leasing of properties- Mobile Towers. Since its one
division is continuously engaged in leasing of properties, it shall be considered as its principal or ancillary
revenue-generating activities. Therefore, the rent arising from such leasing shall be shown under the head
“Revenue from operations” and not as “Other Income”.
Hence the presentation of rent arising from the leasing of such properties as “other income” in the statement
of Profit and Loss is not correct. It should be shown under the head “Revenue from operations”.

CA Inter Advanced Accounting by P S Beniwal

Uploaded by

Copyright:

Available Formats

CA Inter Advanced Accounting by P S Beniwal

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CA Inter Advanced Accounting by P S Beniwal

Uploaded by

Copyright:

Available Formats

EDU91 | Where Learning Happens 9810113555

CA INTER ADVANCED ACCOUNTING – INDEX

Unit Marks Sr. Chapter Page No.

To get the best out of these notes visit www.edu91.org

ACCOUNTING FOR EMPLOYEE STOCK OPTION PLANS

27. Graded vesting under an employee stock option plan.

28. Define the following terms:

3. Which amount would be recognized for employee stock option plans?

Q19. Books of S Ltd.

1. Total employees compensation expense = 1,000 x ₹ 30 = ₹ 30,000

Q20. Journal Entries in the books of Company

2019-20 Bank A/c (1,00,000 x Rs. 30) Dr. 30,00,000

Particulars Year 1 Year 2 Year 3

Q22. Journal Entries

Q24. Fair value of an option = Rs. 28

Date Particulars Rs. Rs.

What will be the call in shares?

8. Calculate Call on shares in following cases.

Case-II Balance leftover with liquidator’s Rs.6, 60,000.Capital structure of Company:

11. The balance sheet of Asco Ltd as on 31st March 1993:

15. The position of Neha Ltd. on its liquidation is as under:

(ii) Percentage of amount paid to unsecured creditors to total unsecured creditors =

STATEMENT OF LIABILITY OF ‘B’ LIST CONTRIBUTORIES

Total (a) 30,000 2,174 3,666 5,830 18,330 30,000

Particulars Amount (Rs.)

37. The position of valueless Ltd. On its liquidation is as under:

Equity & Liabilities Amount (Rs) Assets Amount (Rs)

Q 1. Define “B LIST CONTRIBUTORIES”

Q2. What are the contents of “Liquidators’ statement of account”?

LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT

Q3. STATEMENT OF AFFAIRS

Note: Statement of affairs should accompany eight lists:

Q4. OVERRIDING PREFERENTIAL PAYMENTS

4. Which of the following will be treated as preferential creditors?

Answer: 1. (c); 2. (a); 3. (a); 4. (a)

Estimated total assets available for preferential creditors,

List H - Deficiency Account

2. Reserve & Surplus Account

Q31. Statement of Affairs

37,500 Estimated unsecured balance of claims 37,500

148,500 Equity shares ,Rs10 each fully called 1,48,500

Deficiency Account “List H”

A) Items contributing to Deficiency Rs.

B ltems Decrease Deficiency; Nil

C. Deficiency as explained in the Statement ot Affairs(A)-(B) 5,10,975

Payable per Equity Share 72.995

Net call received/refund per Equity Share:

Q33. Liquidator’s Final Statement of Account

Working Note: Calls from Holders of Partly Paid Shares

Q34. Liquidator’s Statement of Account

Q35. Prakash Processors Limited

Q37. Liquidators’ Final Statement of Account

Therefore for equity shareholders of Rs. 100 each 15 x 100/50

Q38. Liquidator’s Statement of account

Q39. Calculation of Total Remuneration payable to Liquidator Amount in Rs.

Q41. Receiver’s Receipts and Payments Account

Liquidator’s Final Statement of Account

Q42. Statement of Liability as Contributories of Former Members

4. The Balance Sheet of A & Co. Ltd. As on 31-12-1999 is as follows:

The Court approved a Scheme of re-organization to take effect on 1-1-2000, whereby: