CA INTER NEW COURSE

ACCOUNTING

TEST-1 Chapters- 4, 5, 6

Solution

A-1 Max Ltd. Cash Flow Statement for the year ended 31st March, 2022

Rs Rs
Cash flows from operating activities
Net Profit before taxation 8,000
Adjustments for:
Depreciation Rs (1,000 + 2,000 +5,000) 8,000
Profit on sale of Investment (8,000)
Profit on sale of car (1,400)
Operating profit before working capital changes 6,600
Increase in Trade receivables (2,000)
Increase in inventories (6,000)
Increase in Trade payables 3,000
Cash generated from operations 1,600
Income taxes paid (4,000)
Net cash generated from operating activities (A) (2,400)
Cash flows from investing activities
Sale of car 3,400
Purchase of car (16,000)
Sale of Investment 10,000
Purchase of Investment (6,000)
Purchase of Furniture & fixtures (14,000)
Net cash used in investing activities (B) (22,600)

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Cash flows from financing activities
Issue of shares for cash 20,000
Net cash from financing activities(C) 20,000
Net decrease in cash and cash equivalents (A + B +C) (5,000)
Cash and cash equivalents at beginning of period 17,000
Cash and cash equivalents at end of period 12,000

Working Notes:
1. Calculation of Income taxes paid

Rs
Income tax expense for the year 7,000
Add: Income tax liability at the beginning of the year 4,000
11,000
Less: Income tax liability at the end of the year (7,000)
4,000

2. Calculation of Fixed assets acquisitions

Furniture & Fixtures Car

W.D.V. at 31.3.2022 34,000 25,000
Add back: Depreciation for the year 2,000 5,000
Disposals - 2,000
36,000 32,000
Less: W.D.V. at 31.3.2021 (22,000) (16,000)
Acquisitions during 2021-2022 14,000 16,000
(8 marks)

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A-2 Statement showing the calculation of Profits for the pre-incorporation and post
incorporation periods
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation

Rs Rs Rs
Gross Profit (20% of Rs 4,80,000 Sales 1,20,000 3,60,000
24,00,000)
Less: Salaries 75,000 Time 25,000 50,000
Rent, rates and Insurance 30,000 Time 10,000 20,000
Sundry office expenses 72,000 Time 24,000 48,000
Travellers’ commission 20,000 Sales 5,000 15,000
Discount allowed 16,000 Sales 4,000, 12,000
Bad debts 8,000 Sales 2,000 6,000
Directors’ fee 30,000 Post - 30,000
Tax Audit Fees* 16,000 Sales 4,000 12,000
Depreciation on PPE 15,000 Time 5,000 10,000
Debenture interest 14,000 Post - 14,000
Net profit 184,000 41,000 1,43,000

* Tax Audit Fees allocated in the ratio of sales.

Thus, pre-incorporation profits is Rs 41,000 and post- incorporation profit is Rs 1,43,000.

Working Notes:
1. Sales ratio
Rs
Sales for the whole year 24,00,000
Sales up to 31st July, 2021 6,00,000
Therefore, sales for the period from 1st August, 2021 to 31st March, 2022 18,00,000

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Thus, sale ratio = 600:1800 = 1:3
2. Time ratio
1st April, 2021 to 31st July, 2021: 1st August, 2021 to 31st March, 2022
= 4 months: 8 months = 1:2, Thus, time ratio is 1:2.
(7 marks)

A-3 Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares x Issue
Price) / (Existing Number of shares + No. of right shares)
= (Rs 360 x 2 Shares + Rs 180 x 1 Share) / (2 + 1) Shares
= Rs 900 / 3 shares = Rs 300 per share.

Value of right = Cum-right value of the share – Ex-right value of the share
= Rs 360 – Rs 300 = Rs 60 per share.
(5 marks)

A-4
(a) Number of Bonus shares to be issued:
Existing paid up Capital = 60,000 Shares
Number of Bonus Shares = (60,000 × 1) ÷ 5 = 12,000 Shares (i.e. for Rs 1,20,000)

(b) Bonus out of General Reserve:

It is a usual practice to utilize specific reserve (available for specific purpose). Therefore, if CRR
and Securities Premium are available, then company should utilize these reserves in priority
over other free reserves. It is clear that company should not use General Reserve, in the given
example, as Capital Redemption Reserve and Securities Premium are sufficiently available

(c) Journal Entries in the Books of Mobile Ltd.

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 Particulars Dr. Rs Cr. Rs
Capital Redemption Reserve A/c Dr. 80,000
Securities Premium A/c Dr. 40,000
To Bonus to Shareholders A/c 1,20,000
(Being issue of 1 Share for every 5 Shares held, by utilizing various
reserves as per Board’s Resolution dated …..)
Bonus to Shareholders A/c Dr. 1,20,000
To Equity Share Capital A/c 1,20,000
(Capitalization of profits)

Extracts of the Balance-Sheet after Bonus issue

Particulars Note No. Amount
1 EQUITY AND LIABILITIES
Shareholder’s funds
(a) Share Capital 1 7,20,000
(b) Reserves and Surplus 2 2,05,000

Notes to Accounts
111 1. Share capital
Authorised Capital
1,00,000 Equity Shares @ Rs 10 each 10,00,000
Issued, Called up & Paid up Capital
72,000 Equity Shares @ Rs 10 each 7,20,000
(Out of above, 12,000 shares have been issued
as bonus shares).
2. Reserve and Surplus
Plant Revaluation Reserve 25,000
Securities Premium A/c 20,000
General Reserve 1,60,000 2,05,000

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(d) Fully Paid up bonus shares only

As per section 63 of the Companies Act, 2013, only fully paid up bonus shares can be issued.
Therefore, it is not possible for the company to issue partly paid-up bonus shares.
(5 marks)

A-5 Balance sheet of Om Ltd. as at 31st March, 2021

I Equity and Liabilities
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 1,14,150
(2) Non-current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 11,250
Total 24,88,950
II ASSETS
(1) Non- Current Assets:
(a) Property, plant and equipment 6 11,49,900
(b) Intangible assets 7 4,05,000
(c) Non-current investments (Shares at cost) 1,50,000
(2) Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550

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 (c) Cash and Cash equivalents – Cash on hand 84,000
Total 24,88,950
Note: There is a Contingent liability for Bills receivable discounted with Bank Rs 6000.

Statement of Profit and Loss of Om Ltd. for the year ended 31st March, 2021
Particulars Note Rs
I Revenue from Operations 20,11,050
II Other income (Dividend income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases of Inventory (14,71,500 – Advertisement 14,56,500
Expenses 15,000)
(b) Changes in Inventories of finished Goods / Work in 8,100
progress & inventory (4,35,600 – 4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses 11 56,100
(f) Other Expenses 12 3,02,550
Total Expenses 19,95,150
V Profit before exceptional, extraordinary items and tax 28,650
VI Exceptional items -
VII Profit before extra-ordinary items and tax 28,650
VIII Extraordinary items -
IX Profit before tax 28,650

Notes to accounts
Rs
1. Share Capital

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 Authorized capital:
90,000 Equity Shares of Rs10 each. 9,00,000
6,000 6% Preference shares of Rs 100 each 6,00,000
Issued, subscribed & called up:
60,000, Equity Shares of Rs10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100 each 6,00,000 12,00,000
2. Reserves and Surplus
Balance as on 1st April, 2020 85,500
Add: Surplus for current year 28,650
Balance as on 31st March, 2021 1,14,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold 4,50,000
Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand Overdraft 4,50,000
from Banks (Secured by Hypothecation of Stocks &
Receivables)
5. Other Current liabilities
Interest due on Borrowings (5% Debentures) 11,250
6. Property, plant and equipment
Furniture
Furniture at Cost Less depreciation Rs 45,000 (as given in 1,05,000
Trial Balance
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
included under the heading Salaries and Wages 6,000
Total Gross block of Furniture A/c 1,56,000

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 Accumulated Depreciation Account: Opening Balance given
in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e.
(10% x 1,05,000) 10,500
On additional purchase during the year
at 10% i.e. (10% x 6,000) 600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
7 Intangible Assets
Technical knowhow 4,50,000
Less: Written off 45,000 4,05,000
8 Trade Receivables
Sundry Debtors (a) Debt outstanding due more than six 18,000
months
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 - 4,500) 1,20,000 2,72,550
9 Employee benefit expenses
Salaries & Wages 1,56,000
Less: Wages incurred for installation of electrical fittings to 6,000
be capitalized
Less: Directors’ Remuneration shown separately 30,000
Balance amount 1,20,000
10 Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500
51,900

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11 Depreciation & Amortisation Expenses
Depreciation [10% of (1,05,000 + 6,000)] 11,100
Technical knowhow written of (4,50,000/10) 45,000 56,100
12 Other Expenses
Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x 50%) 2,250 3,02,550

Working Note:

Calculation of Sundry Debtors-Other Debts

Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% Rs 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 months 1,34,550
(7 marks)

A-6 Statement of Profit & Loss of Cool Limited for the year ended 31 st March, 2022 showing
the allocation of profits between pre and post incorporation periods
Particulars Note Pre- Post-
incorporation incorporation
Revenue from Operations (W.N 2) 4,80,000 14,40,000
Other Income

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 Total Income 4,80,000 14,40,000
Expenses:
Costs of Goods sold (W.N. 3) 4,20,000 11,34,000
Employee Benefits Expense 1 8,400 41,800
Finance Costs 2 2,800 4,400
Depreciation and Amortization Expense 3 3,000 6,600
Other Expenses 4 44,200 1,54,600
Total Expenses 4,78,400 13,41,400
Profit for the Period (I-II) 1,600 98,600

Notes relating to apportionment of expenses for pre and post incorporation periods for the
year ended 31.3.2022
Particulars Ratio Total Pre Post
Incorporation Incorporation
Rs Rs
1 Employee benefit expenses:
Salaries (W.N.5) 1:4 42,000 8,400 33,600
Managing director’s post 8,200 - 8,200
remuneration
2 Finance cost: 8,400 41,800
Debenture interest (post- post 3,000 - 3,000
incorporation)
Interest paid to vendor (2:1) 4,200 2,800 1,400
(W.N.7)
3 Other expenses: 2,800 4,400
Rent (office building) (W.N.4) 80,000 14,000 66,000
Travelling expenses (W.N.6) 1:2 12,000 4,000 8,000
Carriage outward 1:3 800 200 6,00

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 Printing & Stationery 1:2 4,800 1,600 3,200
Advertisement 1:3 16,000 4,000 12,000
Misc. expenses 1:2 25,200 8,400 16,800
Sales promotion expenses (W.N.6) 4,800 1,200 3,600
Commission & brokerage 1:3 16,000 4,000 12,000
Selling & distribution expenses 1:3 24,000 6,000 18,000
Audit fee* post 6,000 6,000
Director’s fee (post- incorporation) post 1,200 - 1,200
Bad debts 1:3 3,200 800 2400
Preliminary expenses post 3,000 3,000
Underwriting commission post 1,800 1,800
44,200 1,54,600
4 Depreciation on fixed assets 9,600 3,000 6,600
(W.N.8)

*Audit fee considered to be relating with company audit. If considered as related with tax audit,
it will be divided in pre and post incorporation periods on the basis of turnover.
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 2021 to 31st July, 2021
i.e. 4 months
Post incorporation period is 8 months Time ratio is 1: 2.
2. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.2021 to 30.09. 2021) be x Then, sales for 6
months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.21 to 31.3.2022) = x +3 x =3 x
5
Then, sales for next 6 months =) = x + 3 x * 6 = 10x

Total sales for the year = 6x + 10x = 16x

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Monthly sales in the pre incorporation period = Rs 19, 20,000/16 = Rs 1, 20,000 Total sales for
pre-incorporation period = Rs 1,20,000 x 4 = Rs 4,80,000
Total sales for post incorporation period = Rs 19,20,000 – Rs 4,80,000 = Rs 14,40,000 Sales Ratio
= 4,80,000 : 14,40,000
Sales Ratio = 1: 3
3. Cost of goods sold
Cost of goods ratio between pre and post incorporation periods can be calculated as follows:
Let cost of goods sold in the pre-incorporation period be Rs 100 Then cost of goods sold in the
Post-incorporation period is Rs 90 Sales Ratio (as calculated above) = 1:3
Then, cost of goods sold ratio = (100 x 1): (90 x 3) = 100: 270= 10:27
4. Apportionment of Rent Rs
Total Rent 80,000
Less: additional rent from 1.7.2021 to 31.3.2022 54,000 Rent of old premises for 12 months
26,000
Let monthly rent for old building is x pm.
Rent for April to July will be 4x and rent from Aug to March will be: 9x i.e. (x + x + x + 1.2x + 1.2x
+ 1.2x + 1.2x + 1.2x)
Pre Post
Apportionment of rent for old space (Rs 26,000 in 4:9 ratio) 8,000 18,000
Add: Rent for new space 6,000 48,000
Total 14,000 66,000

5. Apportionment of Salary
Let the salary per month from 01.04.2021 to 30.06.2021 is x Salary per month from 01.7.2021
to 31.03.2022 will be 3x Hence, pre incorporation salary (01.04.2021 to 31.07.2021) = 6x
Post incorporation salary from 01.08.2021 to 31.03.2022 = (3x X 8) i.e.24x Ratio for division 6x:
24x or 1: 4
i.e. pre = Rs 8,400 and for post = Rs 33,600
6. Travelling expenses and sales promotion expenses

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 Pre Post
Traveling expenses Rs 12,000 (i.e. Rs 16,800- Rs 4,800) distributed in 4,000 8,000
Time ratio (1:2)
Sales promotion expenses Rs 4,800 distributed in Sales ratio (1:3) 1,200 3,600

7. Interest paid to vendor till 30th September, 2021

Pre Post
4200
Interest for pre-incorporation period x4 2,800
6

Interest for post incorporation period i.e. for

4200 1,400
August, 2021 & September, 2021 = x2
6

8. Depreciation
Pre Post
Total depreciation 9,600
Less: Depreciation exclusively for post incorporation period 600 600
Remaining (for pre and post incorporation period) 9,000
4
Depreciation for pre-incorporation period 9x 3,000
12
8
Depreciation for post incorporation period 9x 6,000
12

3,000 6,600
(8 marks)

A-7 Calculation of net profit u/s 198 of the Companies Act, 2013
Rs Rs
Net profit before income tax and managerial remuneration 9,40,000
but after depreciation and provision for repairs
Add: Depreciation provided 4,05,000
Provision for repairs 35,000 4,40,000

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Less: Repairs 25,000 13,80,000
Depreciation as per schedule III 3,40,000 3,65,000
Profit u/s 198 10,15,000

Maximum Managerial remuneration under Companies Act, 2013

(i) When there is only one Whole time director: The remuneration payable to any one
managing director; or whole-time director or manager should not exceed 5% of the net
profits of the company. Therefore Managerial remuneration will be Rs 50,750 i.e. 5% of
Rs10, 15,000.
(ii) When there are two Whole time directors: if there are more than one such director,
remuneration should not exceed 10% of the net profits to all such directors and manager
taken together. Therefore Managerial remuneration will be Rs 1, 01,500 i.e. 10% of Rs 10,
15,000.
(iii) When there are two whole time directors, a part time director and a manager, then 11% of
the net profits of the company. Therefore Managerial remuneration will be Rs 1, 11,650 i.e.
11% of Rs 10, 15,000.
(5 marks)

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