SAMVIT ACADEMY IPCC MOCK EXAM Answers Advanced... · design for its product Rs 10 lakhs should be...
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SAMVIT ACADEMY IPCC MOCK EXAM
(1)
SUGGESTED ANSWERS - Group 2 Advanced Accounting (Code EST)
Disclaimer (Read carefully)
The answers given below are prepared by the faculty of Samvit Academy as per their views
and experience. The working notes, notes and assumptions, if any stated, are purely the views
of the respective faculty of Samvit Academy and students are encouraged to go through them
and apply the same in the examination as a good practice. No assurance is given that the
answer keys of the Institute of Chartered Accountants of India used for valuation are the same.
However, utmost care has been taken while designing the below suggested answers. Feedback
is welcome. For the questions, please refer to the question paper.
1.
(a) The treatment of expenditure as per AS-26 is as follows:
Research Expenditure
According to AS 26 ‘Intangible Assets’, the expenditure on research of new process
design for its product Rs 10 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 2016-17. Hence, it should be written off as an expense in this year itself.
Development Expenditure It is given that development phase expenditure amounting Rs 8 lakhs incurred upto 31st
March, 2017 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 Rs 2 lakhs p.a.
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
Present value of net cash flows (Rs 2 lakhs x 3.7908) Rs 7.582 lakhs
The cost of an internally generated intangible asset would be lower of cost value Rs 8
lakhs or present value of future net cash flows Rs 7.582 lakhs.
Hence, cost of an internally generated intangible asset will be Rs 7.582 lakhs.
The difference of Rs 0.418 lakhs (i.e. Rs 8 lakhs – Rs 7.582 lakhs) will be charged as
Impairment loss by Plymouth for the financial year 2016-17.
Amortisation
The company can amortise Rs 7.582 lakhs over a period of five years by charging Rs
1.5164 lakhs per annum as per AS-26.
SAMVIT ACADEMY IPCC MOCK EXAM
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(b)
(i) Determination of nature of lease
Fair value of asset Rs 7,00,000
Unguaranteed residual value Rs 70,000
Present value of residual value at the end of 4th Year = Rs 70,000 x 0.683 Rs 47,810
Present value of lease payment recoverable = Rs 7,00,000 - Rs 47,810 Rs 6,52,190
The percentage of present value of lease payment to fair value of the asset is
(Rs 6,52,190/Rs7,00,000) x 100 = 93.17%
Life of asset = 6 years
Lease period = 4 years
Since the lease term covers a substantial portion of the life of the asset (4 out of 6 years) and
the lease payments cover a substantial part of the fair value of the asset (93.17%), we can
classify this lease as a Finance Lease.
(ii) Calculation of Unearned finance income (UFI)
Annual lease payment = Rs 6,52,190 / 3.169 = Rs 2,05,803 (approx.)
Gross investment = Minimum lease payment (MLP) + Unguaranteed residual value (UGRV)
= (Rs 2,05,803 x 4) + Rs 70000
= Rs 8,23,212 + Rs 70,000
Gross Investment = Rs 8,93,212
Unearned finance income = Gross investment – PV of (MLP and UGRV)
= Rs 8,93,212 – (Rs 6,52,190 + Rs 47,810)
= Rs 1,93,212
(c)
Calculation of Weighted Average Cost of Borrowing for non-specific borrowings
Amount Rate of Interest Total Interest
Loan 1 Rs 3,00,000 12% 36,000
Loan 2 Rs 7,00,000 14% 98,000
Totals Rs 10,00,000 1,34,000
Weighted Average Cost of Borrowing = Total Interest / Total Loans
= 1,34,000/10,00,000 * 100 = 13.4% p.a
SAMVIT ACADEMY IPCC MOCK EXAM
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Calculation of effective interest cost to be capitalised
Date of expense Amount Type of loan used Months Rate Interest
Apr-16 1,60,000 Specific 12 11% 17,600
Aug-16 40,000 Specific 8 11% 2,933
2,30,000 Non-Specific 8 13.4% 20,547
Nov-16 4,20,000 Non-Specific 5 13.4% 23,450
Mar-17 1,50,000 Non-Specific 1 13.4% 1,675
Total interest to be capitalised 66,205
Note: It is assumed that the expenditure is made at the beginning of a month
The journal entry for capitalising the interest is as follows:
Building A/c -Dr 66,205
Interest on Loan A/c 66,205
(Being interest incurred on loan capitalised to the Building as per AS-16)
(d)
Computation of theoretical ex-rights fair value per share
(Fair value of all outstanding shares immediately prior to rights + total amount from rights)
Number of shares outstanding prior to rights + number of right shares issued
( Rs 32 * 10,00,000) ( Rs 25 * 2,00,000)
10,00,000 + 2,00,000
Theoretical ex-rights fair value per share = Rs 30.83
Computation of rights adjustment factor as per AS-20
Fair value per share prior to exercise of rights
Theoretical ex-rights value per share
= 32 / 30.83 = 1.04 (approx.)
1. Basic EPS for 2015-16 (as reported) = Rs 22,00,000 / 10,00,000 = Rs 2.2 per share
2. Adjusted (re-stated) Basic EPS to be reported in 2016-17 because of rights issue
= Rs 22,00,000 / (10,00,000*1.04) = Rs 2.12 per share
SAMVIT ACADEMY IPCC MOCK EXAM
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3. Basic EPS for 2016-17 is calculated as follows
Rs 30,00,000 .
(10,00,000*1.04*4/12) + (12,00,000*8/12)
Basic EPS for 2016-17 = Rs 2.62
2.
(a) Journal Entries in the Books of DFL Ltd
On 1.6.2016
Bank A/c Dr. 2,25,00,000
To Debenture Application and Allotment A/c 2,25,00,000
(Application money received on 2,25,000 debentures at Rs 100 each)
On 1.7.2016
Debenture Application and Allotment A/c Dr. 2,25,00,000
Underwriters A/c Dr. 75,00,000
To 12% Debentures A/c 3,00,00,000
(Allotment of 2,25,000 debentures to applicants and 75,000 debentures to underwriters)
Underwriting Commission Dr. 6,00,000
To Underwriters A/c 6,00,000
(Commission payable to underwriters at 2% on Rs 3,00,00,000)
Bank A/c Dr. 69,00,000
To Underwriters A/c 69,00,000
(Amount received from underwriters in settlement of account)
On 30.09.2016
Debenture Interest A/c Dr. 9,00,000
To Bank A/c 9,00,000
(Interest paid on debentures for 3 months at 12% on Rs 3,00,00,000)
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On 01.12.2016
12% Debentures A/c Dr. 1,50,00,000
To Equity Share Capital A/c 30,00,000
To Securities Premium A/c 1,20,00,000
(Conversion of 50% of debentures into shares of Rs 50 each with a face value of Rs 10)
On 31.3.2017
Debenture Interest A/c Dr. 12,00,000
To Bank A/c 12,00,000
(Interest paid on debentures for the half year)
Profit & loss A/c Dr. 6,00,000
To Underwriting commission 6,00,000
(Being underwriting commission charged to Profit & loss A/c at the year-end)
Profit & Loss A/c Dr. 21,00,000
To Debenture Interest 21,00,000
(Being interest on debenture charged to Profit & loss A/c)
Working Note for calculation of interest:
1. Calculation of Debenture Interest for the first half year
Interest on Rs 3,00,00,000 for 3 months at 12% = Rs 9,00,000
2. Calculation of Debenture Interest for the second half year ended 31st March, 2016
Interest on Rs 1,50,00,000 for 6 months at 12% = Rs 9,00,000
Interest on Rs 1,50,00,000 for 2 months at 12% = Rs 3,00,000
Rs 12,00,000
(Since there was a redemption of debentures by conversion into equity shares on 1st Dec)
(b) Working Note:
Call from partly paid shares
Deficit before call from Equity Shares
= Rs (1,03,300+1,50,000) – Rs (3,000+3,000+68,000+1,80,000) = 700
Notional call on 5,000 shares @ Rs 2 each 10,000
Net balance after notional call (a) 9,300
No. of shares deemed fully paid (b) 15,000
Refund on fully paid shares 9,300/15,000 = Rs 0.62
Calls on partly paid share (Rs 2 — Rs 0.62) = Rs 1.38
SAMVIT ACADEMY IPCC MOCK EXAM
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Receiver’s Receipts and Payments Account
Receipts
Rs Payments Rs
Sundry Assets realised
Costs of the Receiver
Surplus received from
Mortgage loan
2,00,000 Preferential payments: 1,950
Sale Proceeds of land
and building 1,60,000 Income Taxes (raised within 12 months) 25,000
Less: Applied to
discharge of mortgage
loan -70,000 90,000 Debentures holders:
Principal amount 1,50,000
Interest for half year 9,750
Surplus transferred to the Liquidator 1,03,300
Total 2,90,000 Total 2,90,000
Liquidator’s Final Statement of Account
Receipts Rs Payments Rs
Surplus received from
Receiver
1,03,300 Cost of Liquidation 3,000
Remuneration to Liquidator (1,50,000 x 2%) 3,000
Assets Realised
1,50,000 Trade Creditors 38,000
Calls on Contributories :
Directors for Bank O/D cleared 30,000
On holder of 5,000
Equity Shares
Preferential Shareholders:
at the rate of Rs 1.38 per
share
6,900 Capital 1,50,000
Arrears of Dividends 30,000
Equity shareholders:
Return of money to holders
10,000 equity shares at 62 paise each 6,200
Total 2,60,200 Total 2,60,200
SAMVIT ACADEMY IPCC MOCK EXAM
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3.
(a) Journal entry in the books of Head Office
Date Particulars Dr. Cr.
30.4.2016 W.B. Branch Account 45,000
To A.P. Branch Account 5,000
To M.P. Branch Account 10,000
To U.P. Branch Account 30,000
(Being adjustment entry passed by head office in respect of inter-branch transactions
for the month of April)
Working Note for the above entry:
Inter – Branch transactions
A.P M.P. W.B. U.P.
A. A.P. Branch
(1) Received goods 55,000 (Dr.) 30,000 (Cr.) 25,000 (Cr.)
(2) Sent goods 50,000 (Cr.) 20,000 (Dr.) 30,000 (Dr.)
(3) Received Bills receivable 10,000 (Dr.) 10,000 (Cr.)
(4) Sent acceptance 30,000 (Cr.) 10,000 (Dr.) 20,000 (Dr.)
B. M.P. Branch
(5) Received goods 10,000 (Cr.) 30,000 (Dr.) 20,000 (Cr.)
(6) Sent cash 20,000 (Dr.) 30,000 (Cr.) 10,000 (Dr.)
C. W.B. Branch
(7) Received goods 40,000 (Dr.) 40,000 (Cr.)
(8) Sent cash and acceptances 25,000 (Cr.) 25,000 (Dr.)
D. U.P. Branch
(9) Sent cash 10,000( Dr.) 20,000 (Dr.) 30,000 (Cr.)
Net Summary 5,000 (Cr.) 10,000 (Cr.) 45,000 (Dr.) 30,000 (Cr.)
SAMVIT ACADEMY IPCC MOCK EXAM
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(b)
Departmental Trading and Loss Account of M/s Division
For the year ended 31st March, 2016
Dept A(Rs) Dept B(Rs)
Dept A(Rs) Dept B(Rs)
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50,000 9,10,000 By Closing stock 1,00,000 2,00,000
To Gross profit 4,00,000 7,50,000 Total 11,00,000 17,00,000 Total 11,00,000 17,00,000
To General Expenses
(in ratio of sales) 50,000 75,000 By Gross profit b/d 4,00,000 7,50,000
To General P&L 3,50,000 6,75,000 Total 4,00,000 7,50,000 Total 4,00,000 7,50,000
General Profit and Loss Account
To Stock reserve
(closing)
By Profit from: In Dept. A (WN 1) 20,000*50% 10000 Dept. A
3,50,000
In Dept. B (WN 2) 30000*40% 12000 Dept. B
6,75,000
By Stock reserve
(opening)
In Dept. A (WN 1) 10,000*50% 5000
To Net Profit
10,14,000 In Dept. B (WN 2) 15000*40% 6000
Total 10,36,000 Total 10,36,000
Working Notes (WN) for calculation of Gross Profit % of each department
1. Stock of department A will be adjusted according to the rate applicable to department B =
GP of B /Sales of B * 100 = [(7,50,000 ÷ 15,00,000) х 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to department A =
GP of A /Sales of A * 100 = [(4,00,000 ÷ 10,00,000) х 100] = 40%
SAMVIT ACADEMY IPCC MOCK EXAM
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4.
Adjustment for Goodwill
Particulars A B C D
Capital Balances (Working Note 2 and 4) 2,10,667 1,30,333 1,74,600 1,16,400
Raising Goodwill in Old Ratio
AB and Co (2:1) 50,000 25,000
CD and Co (3:2)
30,000 20,000
Write off of Goodwill (2:1:3:2) -31,250 -15,625 -46,875 -31,250
Final Capitals before adjustment 2,29,417 1,39,708 1,57,725 1,05,150
New Ratio 2 1 3 2
Per unit capital 1,14,709 1,39,708 52,575 52,575
Final Capitals taking D as base 1,05,150 52,575 1,57,725 1,05,150
(Excess)/Deficit (Current A/c) -1,24,267 -87,133 - -
Journal Entries in the books of AD and Co
Takeover of Assets and Liabilities for AB and Co
Building A/c -dr 1,00,000
Machinery A/c -dr 1,25,000
Furniture A/c -dr 15,000
Stock A/c -dr 24,000
Debtors A/c -dr 65,000
Due from CD and Co A/c -dr 47,000
Cash at Bank -dr 18,000
Cash in Hand -dr 4,000
To Creditors A/c
52,000
To Provision for DD A/c
5,000
To A's Capital A/c
2,10,667
To B's Capital A/c
1,30,333
SAMVIT ACADEMY IPCC MOCK EXAM
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Takeover of Assets and Liabilities of CD and Co
Building A/c -dr 1,25,000
Machinery A/c -dr 1,10,000
Furniture A/c -dr 12,000
Stock A/c -dr 36,000
Debtors A/c -dr 78,000
Cash at Bank A/c -dr 15,000
Cash in Hand A/c -dr 5,000
To Due to AB and Co
47,000
To Creditors A/c
35,000
To Provision for DD A/c
8,000
To C's Capital A/c
1,74,600
To D's Capital A/c
1,16,400
Adjustment for Goodwill
C Capital A/c -dr 16,875
D Capital A/c -dr 11,250
To A's Capital A/c
18,750
To B Capital A/c
9,375
Transfer to Current Accounts
A's Capital A/c -dr 1,24,267
B's Capital A/c -dr 87,133
To A's Current A/c
1,24,267
To B's Current A/c
87,133
Elimination of mutual owing
Due to AB and Co -dr 47,000
Due from CD and Co
47,000
SAMVIT ACADEMY IPCC MOCK EXAM
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Working Notes to the Solution
WN 1 - Revaluation Account (AB and Co)
Particulars Rs Particulars Rs
To Provision for DD A/c 5,000 By Building A/c 25,000
By Machinery A/c 5,000
To Partners Capital A/c
A 16,667
B 8,333
Total 30,000 Total 30,000
WN 2 - Partners Capital Accounts (AB and Co)
Particulars A B Particulars A B
To Bal c/d 2,10,667 1,30,333 By bal b/d 1,50,000 1,00,000
By Reserve A/c 44,000 22,000
By Revaluation A/c 16,667 8,333
(WN 1)
Total 2,10,667 1,30,333 Total 2,10,667 1,30,333
WN 3 - Revaluation Account (CD and Co)
Particulars Rs Particulars Rs
To Provision for DD A/c 8,000 By Building A/c 35,000
By Machinery A/c 10,000
To Partners Capital A/c
C 22,200
D 14,800
Total 45,000 Total 45,000
Balance Sheet of AD and Co (after amalgamation)
Liabilities Rs Assets
Rs
Capital Accounts
Fixed Assets
A 1,05,150 Building 2,25,000
B 52,575 Machinery 2,35,000
C 1,57,725 Furniture 27,000
D 1,05,150
Current Accounts
Current Assets
A 1,24,267 Stock 60,000
B 87,133 Debtors 1,43,000
Less: Provision (13,000) 1,30,000
Creditors 87,000 Cash 9,000
Bank 33,000
Total 7,19,000 Total 7,19,000
SAMVIT ACADEMY IPCC MOCK EXAM
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WN 4 - Partners Capital Accounts (CD and Co)
Particulars C D Particulars C D
By bal b/d 1,20,000 80,000
To Bal c/d 1,74,600 1,16,400 By Reserve A/c 32,400 21,600
By Revaluation A/c 22,200 14,800
(WN 3)
Total 1,74,600 1,16,400 Total 1,74,600 1,16,400
5.
(a) Well-to-do Bank Ltd. Profit and Loss Account for the year ended 31st March, 2016
Schedule No. (Rs. in 000's)
Income: Interest and Discount (8,860 – 30) 13 8,830
Other income 14 250
Total (A) 9,080
Expenditure: Interest expenses 15 2,720
Operating expenses 16 2,662
Provision and Contingencies 2,004
Total (B) 7,386
Net Profit/Loss for the year (A-B) 1,694
Computation of Provision
Assets Value % of provision Provision (Rs. in 000's)
Standard Assets 5,000 0.40 20.00
Sub-standard Assets 1,120 10 112.00
(assumed to be secured)
Doubtful Assets
100% unsecured 200 100 200.00
Secured:
Less than 1 year 50 20 10.00
1 to 3 years 300 30 90.00
More than 3 years 300 100 300.00
Loss Assets 200 100 200.00
Total Provision 932.00
SAMVIT ACADEMY IPCC MOCK EXAM
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(b) Schedule 1 – Premium Earned (Net)
Particulars Amount
Premiums from Direct Business Written 75,25,000
Add: Premium on Re–Insurance accepted 8,25,000
Less: Premium on Re–Insurance Ceded (4,90,000)
Total Premium Earned (Net) 78,60,000
Less: Adjustment for change in Unexpired Risk Reserve (Note) (3,04,000)
Total Premium Earned (Net) 75,56,000
Note: Adjustment for Changes in Reserve for Unexpired Risks is computed as under
Particulars Reserve
Closing Balance required 40% of 78,60,000 31,44,000
Less: Opening Balance available 28,40,000
Amt to be transferred to Reserve for the year 3,04,000
Schedule 2 – Claims Paid (Net)
Claims Paid Direct
( Paid 49,70,000+ Due at end 7,38,000 (–) Due at beginning 6,85,000) 50,23,000
Add: Claims on Re–Insurance accepted
(Paid 5,10,000 + Due at end 70,000 (–) Due at beginning 95,000) 4,85,000
Less: Claims on Re–Insurance Ceded
(Paid 3,95,000 + Due at end 1,25,000 (–) Due at beginning 75,000) (4,45,000)
Add: Surveyor’s Fees 45,000
Add: Legal Expenses 55,000
Total Claims Incurred 51,63,000
6. In the books of Kanak Ltd (Internal Reconstruction)
1 Equity Share Capital (Rs 100) -dr
45,00,000
To Equity Share Capital (Rs 10)
45,00,000
2 Equity Share Capital (Rs 10) -dr
22,50,000
To Capital Reduction A/c
22,50,000
3 Capital Reduction A/c
-dr
40,500
To Bank A/c
40,500
SAMVIT ACADEMY IPCC MOCK EXAM
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4 Bank A/c (2400*98)
-dr
2,35,200
To Capital Reduction
4,800
To Own Debentures A/c (2400*96)
2,30,400
5 12% Debentures A/c
-dr
3,60,000
To Capital Reduction
14,400
To Own Debentures A/c
3,45,600
6 12% Debentures A/c
-dr
8,40,000
Capital Reduction A/c
-dr
60,000
To Machinery A/c
9,00,000
7 Creditors A/c
-dr
1,95,000
To Capital Reduction
1,95,000
8 Capital Reduction A/c
-dr
45,000
To Bank A/c
45,000
9 Capital Reduction A/c (WN 1)
-dr
23,18,700
To Debtors
1,83,000
To Stock
99,000
To P&L
12,33,000
To Goodwill
60,000
To discount on issue of debentures
6,000
To Capital Reserve (Balance)
7,37,700
SAMVIT ACADEMY IPCC MOCK EXAM
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WN 1- Calculation of capital reduction balance before final adjustments in entry 9
Particulars Rs
Equity Share Capital cancelled 22,50,000
Less: Preference Dividend paid (40,500)
Add: Own Debentures sold 4,800
Add: Own Debentures cancelled 14,400
Less: Loss on transfer of machinery to debenture holders (60,000)
Add: Profit on cancellation of creditors 1,95,000
Less: Payment of penalty (45,000)
Balance before final adjustments in entry 9 23,18,700
In the Books of Kanak Ltd (Amalgamation in the nature of Merger)
1 Business Purchase A/c
-dr
39,60,000
To Liquidator of Ronak Ltd
39,60,000
2 Fixed Assets A/c
-dr
22,80,000
Debtors A/c
-dr
13,20,000
Stock A/c
-dr
20,40,000
Cash at Bank A/c
-dr
3,90,000
To Business Purchase A/c
39,60,000
To Creditors A/c
6,75,000
To Debenture Holders A/c
6,00,000
To P&L
45,000
To General Reserve (510000+240000)
7,50,000
3 Debenture Holders A/c
-dr
6,00,000
To 12% Debentures
6,00,000
4 Liquidator of Ronak Ltd
-dr
39,60,000
To 9% P. Share Capital
9,60,000
To Equity Share Capital
30,00,000
SAMVIT ACADEMY IPCC MOCK EXAM
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Net Assets Taken Over of Ronak Ltd
Since all assets and liabilities have been taken over at Book Values, it can be accounted as an
amalgamation in the nature of Merger and therefore, the net assets taken over = share capital
Equity Share Capital + Preference Share Capital = Rs 30,00,000 + Rs 12,00,000 = Rs 42,00,000
Purchase Consideration issued to shareholders of Ronak Ltd
Equity share capital issued 30,000 x 50/5 x 10 = Rs 30,00,000
9% Preference share capital 12,000 x 4/5 x 100 = Rs 9,60,000
Total = Rs 39,60,000
Since Purchase Consideration is lesser than the Net Assets taken over, there is Capital Reserve of
Rs 42,00,000 - 39,60,000 = Rs 2,40,000
The same will be added to General Reserve on takeover. Hence final general reserve on takeover
is Rs 5,10,000 + 2,40,000 = Rs 7,50,000
Balance Sheet of Kanak Ltd (and Reduced) - Pooling of Interest
Liabilities Schedule Rs
Shareholder funds
A. Share Capital
1 77,10,000
B. Reserves and Surplus 2 20,72,700
Non Current Liability 3 12,00,000
Current Liability
4 17,25,000
Total
1,27,07,700
Assets Schedule Rs
Non Current Asset
5 58,80,000
Current Asset
6 68,27,700
Total
1,27,07,700
Schedule 1 - Share Capital
Equity Share Capital
Rs
5,25,000 shares of Rs 10 fully paid up
52,50,000
(Of the above, 2,25,000 shares have been issued in a scheme
of internal reconstruction and 3,00,000 shares have been
issued in a scheme of amalgamation)
Preference Share Capital
24,600 9% Preference shares of Rs 100 each fully paid up 24,60,000
(Of the above, 9,600 shares have been issued in a scheme of
amalgamation)
Total Share Capital
77,10,000
SAMVIT ACADEMY IPCC MOCK EXAM
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Schedule 2 - Reserves and Surplus
Profit & Loss Account
45,000
Capital Reserve 12,77,700
General Reserve
7,50,000
Total Reserves and Surplus
20,72,700
Schedule 3 - Non Current Liability
12% Debentures
12,00,000
Total Non Current Liabilities
12,00,000
Schedule 4 - Current Liability
Sundry Creditors
17,25,000
Total Current Liabilities
17,25,000
Schedule 5 - Non Current Asset
Other fixed assets
58,80,000
Total Non Current Asset
58,80,000
Schedule 6 - Current Assets
Stock
31,20,000
Debtors
30,90,000
Cash at Bank
6,17,700
Total Non Current Asset
68,27,700
7.
(a) As per AS 4, events occurring after the balance sheet date but before the date of approval of
financial statements by the approving authority which
(i) Provide evidence to a condition which existed on the Balance Sheet date; or
(ii) Which affect the going concern of the enterprise
must be adjusted for in the previous year.
In the given case, Raj Ltd. was sued by a competitor for infringement of a trademark during the
year 2015-16 for which the provision was also made by it to the extent of Rs 10 lakh on
31/3/2016. The decision of the Court on 18th May, 2016, will be treated as an adjusting event
because it provides evidence to a condition existing on 31st March 2016.
Therefore, Raj Ltd. should adjust the provision upward by Rs. 4 lakhs on 31st March 2016 to
reflect the correct amount as per the order of the Court.
(b)
(i) If it is certain at the inception of lease itself that the option will be exercised by the lessee, it
can be considered as a Finance Lease.
SAMVIT ACADEMY IPCC MOCK EXAM
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(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 of a special nature and is procured only for the use of lessee, it is better to
classify it as a finance lease.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y. In any other case, it
is an Operating Lease.
(c) As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’, monetary
items denominated in a foreign currency should be reported using the closing rate at each
balance sheet date. The effect of exchange difference should be taken into profit and loss
account.
Sundry creditors is a monetary item, hence should be valued at the closing rate i.e, Rs.48 at 31st
March, 2016 irrespective of the payment for the same subsequently at lower rate in the next
financial year.
The difference of Rs.5 (48-43) per US dollar should be shown as an exchange loss in the profit
and loss account for the year ended 31st March, 2016 and is not to be adjusted against the cost of
raw- materials. In the subsequent year, the company would record an exchange gain of Re.1 per
US dollar, i.e., the difference between Rs.48 and Rs.47 per Us dollar.
Hence, the accounting treatment adopted by the company is incorrect as per AS-11 (revised).
(d) (i) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called
indemnifier and the insured is the indemnified. In a contract of indemnity, only those who suffer
loss are compensated to the extent of actual loss suffered by them. One cannot make profit by
insuring his risks.
(ii) Insurable interest: All cannot enter into contract of insurance. For example, A cannot insure
the life of B who is a total stranger. But if B. happens to be his wife or his debtor or business
manager, A has insurable interest i.e. vested interest and therefore he can insure the life of B. For
every type of policy insurable interest is insisted upon. In the absence of such interest the
contract will amount to a wagering contract.
(iii) Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive
duty to tell the whole truth in relation to the subject-matter of the contract. There is only the
negative obligation to tell nothing but the truth. In a contract of insurance, however there is an
implied condition that each party must disclose every material fact known to him. All contracts
of insurance are contracts of uberrima fidei, i.e., contracts of utmost good faith. This is because
the assessment of the risk and the determination of the premium by the insurer depend on the full
and frank disclosure of all material facts in the proposal form.
(iv) Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes severe
consequences such as bankruptcy to a family, organization, or insurer.
SAMVIT ACADEMY IPCC MOCK EXAM
(19)
(e)
Computation of Risk Weighted Assets
Particulars (%) Weight Rs Crores Rs Crores
Cash Balance with RBI 0 12.00 0
Balance with Other Banks 20 20.00 4.00
Other Investments 100 40.00 40.00
Loans and Advances:
(i) Guaranteed by the Government 0 14.50 0
(ii) Others 100 5,465.00 5,465.00
Premises, Furniture and Fixtures 100 74.00 74.00
Off–Balance Sheet Items:
(i) Guarantees and other Obligations 100 700.00 700.00
(ii) Acceptance, Endorsements and LoC 100 4,900.00 4,900.00
Total 11,183.00
Capital to Risk–Weighted Assets Ratio (CRAR)
= Capital Fund × 100 = 726.1*100 = 6.49%
Risk Adjusted Assets 11,183