Solved Answer Acc._Paper_5 CA Ipcc May.

2010 1

Qn. 1. Answer the following questions : [ 10 x 2 = 20 marks ]

(i) A Company had issued 20,000, 13% Convertible debentures of Rs.100 each on 1st April, 2007. The
debentures are due for redemption on 1st July, 2009. 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. Debentureholders
holding 2,500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to
the Debentureholders exercising the option to the maximum.
(ii) Santosh Ltd. has received a grant of Rs. 8 crores from the Govt. for setting up a factory in a backward area.
Out of this grant, the company distributed Rs. 2 crores as dividend. Also, Santosh Ltd. received land free of
cost from the State Government but it has not recorded it at all in the books as no money has been spent. In
the light of AS 12, examine, whether the treatment of both the grants is correct.
(iii) Rohini Limited has obtained loan from an Institution for Rs. 500 lacs for modernization and renovating its
Plant and Machinery. The installation of plant and machinery was completed on 31.3.2009 amounting to
Rs.320 lacs and Rs. 50 lacs advanced to suppliers of additional assets and the balance of Rs. 130 lacs has
been utilized for working capital requirements. Total interest paid for the above loan amounted to Rs. 65 lacs
during 2008-09 You are required to state how the interest on institutional loan is to be accounted for in the
year 2008-09.
(iv) A Company follows April to March as its Financial Year. The Company recognizes cheques dated 31st March or
before, received from customers after balance sheet date, but before approval of Financial statement by
debiting cheques in hand A/c and crediting Debtors A/c. The cheques in hand is shown in the Balance Sheet
as an item of cash and cash equivalents. All cheques in hand are presented to bank in the month of April and
are also realised in the same month in normal course after deposit in the bank. State with reasons, whether
the collection of cheques bearing date 31st March or before, but received after Balance Sheet date is an
adjusting event and how this fact is to be disclosed by the company ?
(v) What is Piecemeal payments method under Partnership Dissolution ? Briefly explain the two methods followed
for determining the order in which the payments are made ?
(vi) Briefly explain "Reserve for Unexpired Risks" under General Insurance Business. What are the percentages of
such reserve to be created under IRDA Act for various General Insurance ?
(vii) On 31st March, 2010, the following Ledger balances have been extracted from the books of Washington
branch office :
Ledger A/c $
Building 180
Stock as on 1.4.2009 26
Cash and Bank Balances 57
Purchases 96
Sales 110
Commission receipts 28
Debtors 46
Creditors 65

You are required to convert above Ledger balances into Indian Rupees.
Use the following rates of exchange :
Opening Rate $ = 46
Closing Rate $ = 50
Average Rate $ = 48
For Fixed Assets $ = 42
(viii) Mention the condition when a Cash credit overdraft account is treated as 'Out of order'.
(ix) From the following information, calculate the amount of Sundry Debtors as on 31.3.2010 :
Balance as on 1.4.2009 is Rs. 50,000.
Bad debts are 2% and discount to the customers is given @ 1% of the opening balance of Sundry Debtors.
Returns from the customers are Rs. 3,000.
Cash received from Debtors is Rs. 2,30,000.
Cash received from Debtors in transit is Rs. 14,000.
Cash Sales are Rs. 5,00,000.
Credit Sales are Rs. 2,50,000.
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 2
(x) Closing stock for the year ending on 31.3.2010 is Rs. 50,000 which includes stock damaged in a fire in 2008-
09. On 31.3.2009 the estimated net realisable value of the damaged stock was Rs. 12,000. The revised
estimate of net realisable value included in closing stock of 2009-10 is Rs. 4.000.
Find the value of Closing stock to be shown in Profit and Loss account for the year 2009-10.

Ans. 1(i) Total no. of debenture holders = 20000

Less:- Number of debenture
on which option has not been exercised = 2500
17500
Redeemable value = 17500 x 105 = 1837500
Convertible portion(redeemable value x 20%) = 1837500 x 20% = 367500
Value per share = Rs. 15
Number of shares = 367500/15 = 24500 shares

Ans. 1 (ii) As per AS-12, “Government grants” The purpose for which a grant is received it is ought to be utilized for
the same. In the aforesaid case SANTOSH Ltd. received a grant of Rs. 3 crores from the government for setting up a
factory, out of this the company distributed Rs. 2 crores as divided hence the treatment was wrong as per AS-12.
Also, as per AS-12, if an asset is received free of cost it should be recorded in books at a nominal value say Rs.100.
The contention of SANTOSH Ltd. of non-recording such an asset in books is wrong, it should be recorded at a nominal
value i.e. Rs.100.

Ans. 1 (iii) As per AS-16, borrowing costs (interest) should be capitalized if borrowing cost is directly attributable to
the acquisition, construction, or production of a qualifying asset. In other words, asset acquired must be qualifying
asset and borrowing cost should be directly attributable to the acquisition, construction or production of qualifying
asset.

In the question, Rs. 500 lacs borrowed from financial institution was utilized for -
Modernisation and renovation of Plant & Machinery Rs. 320 lacs
Advance to suppliers of additional assets Rs. 50 lacs
Working Capital Rs. 130 lacs

Out of these three payments only modernisation and renovation of Plant & Machinery of Rs. 320 lacs is a qualifying
asset as per AS 16, other two payments are not for the qualifying asset. Therefore, borrowing cost attributable to the
modernisation and renovation of Plant & Machinery should only be capitalized which will be equal to
Rs. 65 lacs x 320/500 = 41.60 lacs.

The balance of Rs. 23.40 lacs (65 – 41.6) should be expensed and debited to Profit & Loss Account.

Ans. 1 (iv) As per AS-4, Contingencies and events occurring after balance sheet date; there are two type of events
(1) Adjusting Events
(2) Non Adjusting Events
Adjusting events are those events which exists on the Balance Sheet and provide additional evidence after balance
sheet date.

In the present question company received cheques dated on or before 31st march, after Balance Sheet date but before
approval of financial statement and the cheques are shown in the Balance Sheet under the head Cash & Cash
equivalents. As per AS 3, meaning of Cash & Cash Equivalents are as follows :
Cash : It consists of cash in hand and demand deposits.
Cash Equivalents : It consists of short term highly liquid investments having maturity less than three months, which
can be readily converted, into cash without decline of its value. In other words, these investments can be converted
into cash without any risk.
Since all cheques are presented to bank in the month of april and realized in the same month in normal course
therefore it may be disclosed as cash equivalents. It is an adjusting events which calls for adjustments and has to be
recognised in Balance Sheet.

DISCLOSURE REQUIREMENTS : The following information should be provided :

(a) the nature of event;
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 3
(b) an estimate of financial effect, or a statement that such an estimate can not be made.

Ans. 1 (v) When firm is dissolved all assets will not be realised immediately. The assets will be realised gradually.
Therefore, either firm should not start payment until all assets have been realised or make the payment in installments
or in piecemeal as and when assets are realised. As soon as decision to dissolve the firm is taken every claimant of the
firm would press for payment. Therefore, second alternative will be adopted by the firm. In this case payment will be
made in the following preferential order: (i) Outside Creditors (ii) Partners' Loan (iii) Partners Capital.
There are two methods for determining the order in which the payments are made :
(i) Highest Relative Capital Method : According to this method, capitals of partners are converted into profit
sharing ratio and excess capital is calculated. For calculating excess capital, capital of the partner whose share is
relatively minimum is taken as base.
(ii) Maximum Loss Method : According to this method, on each realisation it is assumed that there will be no
further realisation. Amount of loss is calculated assuming no further realisation. This loss is called 'maximum loss'.
This maximum loss is divided among the partners in profit sharing ratio and deducted from their capitals. Balance
amount is paid. Similarly, on next realisation again maximum loss is calculated and distributed among the partners.
After deduction of maximum loss from capital if there is a negative balance (debit balance) of a partner, this will be
divided among other partners in the ratio of their capitals. This method is also called conservative method.

Ans. 1 (vi) Reserve for Unexpired Risk: General Insurance policies are normally issued for a period of 12 months.
At the time of closing of books, risk remains unexpired on most of the policies. Therefore, total premium received
cannot be taken as income of the current year. Premium relating to next year is not calculated in proportion to
unexpired period of the policy, because risk, is not reduced with the passage of time. Chances of claim on the last day
of policy are as good as on the first day of policy. A reserve is created to cover this unexpired risk.
As per Schedule II-B "Valuation of Liabilities - General Insurance" of Insurance Regulatory and Development
Authority (Assets, Liabilities and Solvency Margin of Insurers) Regulations - 2000, Reserve for Unexpired Risk is to be
created as under:
(i) Fire Business -- 50%
(ii) Miscellaneous Business -- 50%
(iii) Marine Business other than Marine Hull Business
(i.e. Cargo Insurance) -- 50%
(iv) Marine Hull Business -- 100%
Above percentages will be calculated on net premium.
Reserve for unexpired risk account is shown in Balance Sheet (liabilities side)

Ans. 1 (vii)
Particulars Rate Amount
Details Amount $ Rs.
Rs.
Building Rate at the date of
actual purchase 42 180 7560
Stock(1.4.2009) Opening rate 46 26 1196
Cash & Bank Closing rate 50 57 2850
Purchase Average rate 48 96 4608
Sales Average rate 48 110 5280
Commission Receipts Average rate 48 28 1344
Debtors Closing rate 50 46 2300
Creditors Closing rate 50 65 3250

Ans. 1 (viii) A cash credit and overdrafts account will be treated as NPA if the account remains out of order for a
period of 90 days. An account should be treated as out of order, if the outstanding balance remains continuously
in excess of the sanctioned limit/drawing power or, there are no credits in such period or credit is not enough to
cover the interest debited during the same period.

Ans. 1 (ix) Debtors A/c

Particulars Amount Particulars Amount
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 4
To Balance b/d 50,000 By Sales Returns 3,000
To Sales 2,50,000 By Cash (2,30,000 + 14,000) 2,44,000
By Bad debts (50000 x 2%) 1,000
By Discount to customers 500
(50000 x 1%)
By Balance c/d 6,500
2,55,000 2,55,000

Ans. 1 (x) Value of Closing stock as on 31.3.2010 = 50000

Which includes abnormal item of Rs.12000 stock damaged by fire.

Hence Normal value of stock = 50000 – 12000 = 38000

Net Reliasable Value of abnormal stock = Rs.4000 in 2009 – 10.

Hence the Value of Closing stock to be share in Profit and loss A/c for the year 2009-10.

=> Value of Closing stock (normal item) + abnormal item. (NRV).

38000 + 4000 = Rs. 42000
Note : It is assumed that Cost of abnormal item was more than its NRV as on 31.3.2010.

Qn 2. P and Q are partners of P & Co. sharing Profit and Losses in the ratio of 3 : 1 and Q and R are 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 Sheets of two firms on the above date are as under : [ 16 marks ]
Figures in Rs.
Liabilities 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 Plan & 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 and 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 P Q R & Co.
(e) Partners of new firm will bring the necessary cash to pay other partners to adjust their capitals according to the
Profit sharing ratio.
(f) Provisions 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.

Ans. 2 Calculation of Adjustment of Goodwill

Raised in the old Writing off
Profit sharing Ratio In New Profit Sharing Ratio Diff.
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 5
P & Co. Q & Co. Total P Q R & Co.
P 90000 -- 90000 Cr. 90000 Dr. --
Q 30000 40000 70000 Cr. 60000 Dr. 10000 Cr.
R -- 20000 20000 Cr. 30000 Dr. 10000 Dr.
120000 60000 180000 180000

Note : No entry for goodwill in the books of old firms and the above adjustments will be made in new firms.

Balance Sheet of M/s P Q R & Co.

Liabilities Amount Liabilities Amount
Capital A/cs Fixed Assets
P 8,26,500 Building 1,60,000
Q 5,51,000 Plant & Machinery 4,50,000
R 2,75,500 16,53,000 Office Equipment 26,000
Sundry Creditors 2,36,000
Bank O/D 80,000 Current Assets
Provision for Bad & doubtful debts 38,000 Stock in trade 3,12,000
Sundry Debtors 3,60,000
Bank balance 1,20,000
Cash in hand 5,79,500
20,07,000 20,07,000
======= =======

Partner’s Capital A/c in the books of P & Co.

Particulars P Q Particulars P Q
To Balance c/d 3,99,000 2,13,000 By Balance b/d 2,40,000 1,60,000
By Reserves 37,500 12,500
By Revaluation A/c 1,21,500 40,500
3,99,000 2,13,000 3,99,000 2,13,000

Revaluation A/c in the books of P & Co.

Particulars Amount Particulars Amount
To Provision for doubtful debts 12,000 By Building 50,000
To Partners Capital A/c By Plant & Machinery 1,00,000
P 1,21,500 By Stock 24,000
Q 40,500 1,62,000
1,74,000 1,74,000
======= ======

Partners Capital A/c in the books of R & Co.

Particulars Q R Particulars Q R
To Balance c/d 3,28,000 1,64,000 By Balance b/d 2,00,000 1,00,000
By Revaluation A/c 28,000 14,000
By Reserves 1,00,000 50,000
3,28,000 1,64,000 3,28,000 1,64,000

Revaluation A/c in the books of R & Co.

Particulars Amount Particulars Amount
To Provision for doubtful debts 26,000 By Plant & Machinery 40,000
To Partners Capital A/c By Stock in Trade 28,000
P 28,000
Q 14,000 42,000
68,000 68,000
====== =======
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 6
Calculation of Capital of the Partners in new firm
Particulars P Q R
Transferred from P & Co. 3,99,000 2,13,000 --
Transferred from R & Co. -- 3,28,000 1,64,000
------------- ------------ -----------
3,99,000 5,41,000 1,64,000
 Adjustments for Goodwill -- 10,000 (10,000)
------------ ----------- -----------
Capital Balance (A) 3,99,000 5,51,000 1,54,000
Profit Sharing Ratio 3 2 1
Capital Balance / PSR 1,33,000 2,75,500 1,54,000
Taking Q Capital as a Base capital total capital
of the Partners (B) 8,26,500 5,51,000 2,75,500
Cash Brought by the Partners (B – A) 4,27,500 -- 1,21,500

Qn. 3 Following is the Balance Sheet of XYZ Ltd. as on 31st March, 2010 : [ 16 marks ]

Liabilities Rs. Assets Rs.

8000 – 7½% Preference shares @ Rs. Plant and Machinery 8,50,000
100 each fully paid 8,00,000 Furniture and Fittings 1,60,000
1,80,000 Equity shares Patents and Copy right 60,000
@ Rs. 10 each fully paid 18,00,000 Goodwill 35,000
11% Debentures 10,00,000 Investments (at cost) 65,000
Bank overdraft 1,65,000 Sundry debtors 12,00,000
Loan from director 15,000 Stock 13,00,000
Trade creditors 6,20,000 Cash in hand 12,000
Profit & Loss A/c 7,18,000
44,00,000 44,00,000
Due to heavy losses and overvaluation of Assets, the following scheme of reconstruction was finalised :
(i) Preference shareholder will surrender their 20% shares and they have been allotted 9% (new) preference
shares for remaining amount.
(ii) Debentureholders having charge on plant and machinery would accept plant and machinery in full settlement.
(iii) Trade creditors accepted to take over the stock upto the value of Rs. 6,20,000.
(iv) Equity shareholders are to accept reduction of Rs. 4 per share.
(v) Investment is to be valued at market price i.e. Rs. 60,000.
(vi) Sundry debtors and remaining stock is to be valued at 90% of their book value.
(vii) Directors have to forgo their loan in full.
(viii) Patents and Copy Right and Goodwill have no more value.
Pass necessary Journal entries in the books of XYZ Ltd. assuming that all the legal formalities have Been
completed. Prepare Capital reduction account and Balance Sheet of the company after reduction.
Ans. 3 Journal entries in the books of XYZ Ltd.
Date Particulars LF Dr. Cr.
Rs. Rs.
7.5% preference share capital A/c (Rs. 100) Dr. 800000
To capital reduction A/c 160000
To 9% preference share capital A/c (Rs. 100) 640000
(Being 20% holding of preference share hoders surrendered and 9%
preference share capital issued for the rest)
11% debentures A/c Dr. 1000000
To plant and machinery A/c 850000
To capital reduction A/c 150000
(Being debenture holder accepted plant and machinery in full
settlement)
Trade creditors A/c Dr. 620000
To Stock A/c 620000
(Being creditors accepted to take over the stock upto the value of Rs.
620000)
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 7
Equity share capital A/c (Rs. 10) Dr. 1800000
To capital reduction A/c 720000
“ Equity Share Capital (Rs. 6) 1080000
(Being equity shareholders accepted reduction of Rs. 4 per share and
new share of Rs. 6 each fully paid up issued to them)
Capital Reduction A/c Dr. 5000
To investments 5000
(Being investments have been marked to market)

Capital reduction A/c Dr. 188000

To sundry debtors A/c 120000
To stock A/c 68000
(Being sundry debtors and stock valued at 90% of their book value)
Loan from Directors A/c Dr. 15000
To capital reduction A/c 15000
(Being directors forgone their loan in full)
Capital reduction A/c Dr. 813000
To goodwill A/c 35000
To patents A/c 60000
To P/L A/c 718000
(Being goodwill, patents and P/L(dr.) bal. written off)
Capital Reduction Dr 39000
To Capital Reserve a/c 39000

Capital reduction A/c

Particulars Amount Particulars Amount
To Investments A/c 5000 By 7.5% Preference share
To Sundry Debtors A/c 120000 capital 160000
To Stock A/c 68000 By 11% Debentures A/c 150000
To Goodwill A/c 35000 By Equity share capital A/c 720000
To Patents A/c 60000 By Loan from directors A/c 15000
To P/L A/c 718000
To Capital Reserve A/c 39000
1685000 1685000

Balance Sheet of XYZ Ltd. as on 31 march, 2010

Liabilities Amount Asset Amount
180000 equity share @ Rs. 6 Furniture and fittings 160000
each fully paid 1080000 Investment(market value) 60000
9% preference share capital 640000 Sundry debtors 1080000
Reserve and surplus:- Stock 612000
Capital Reserve 39000 Cash in hand 12000
Bank o/d 165000
1924000 1924000

Qn 4. (a) Ram Limited of Chennai has a branch at Nagpur to which office, goods are invoiced at cost plus 25%. The
branch makes sales both for cash and on credit. Branch expenses are paid direct from Head Office and the
branch has to remit all cash received into the Head Office Bank Account at Nagpur. [ 8 marks ]
From the following details, relating to the year 2009, prepare the accounts in Head Office Ledger and
ascertain Branch Profit. Branch does not maintain any books of accounts, but sends weekly returns to Head
Office :
Rs.
Goods received from Head Office at invoice price 1,20,000
Returns of Head Office at invoice price 2,400
Stock at Nagpur Branch on 1.1.2009 12,000
Sales during the year — Cash 40,000
Credit 72,000
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 8
Debtors at Nagpur Branch 14,400
Cash received from Debtors 64,000
Discounts allowed to Debtors 1,200
Bad Debts during the year 800
Sales Returns at Nagpur Branch 1,600
Salaries and Wages at Branch 12,000
Rent, Rates and Taxes at Branch 3,600
Office expenses at Nagpur Branch 1,200
Stock at Branch on 31.12.2009 at invoice price 24,000

Ans. 4 (a) In the books of Ram Limited, Chennai

Nagpur Branch A/c
Particulars Amount Particulars Amount
To Balance b/d By Opening Reserve
Stock 12,000 25
Debtors 14,400 12,000 x ----- 2,400
To Goods sent to Branch 1,20,000 125
To Goods sent to Branch 480 By Goods sent to branch
(Loading on return) (2400 x 25/125) (loading amount) (120000 x 25/125) 24,000
To Cash A/c By Goods sent branch
Salaries and wages 12,000 (returns) 2,400
Rent & Rates and Taxes 3,600 By Cash (Sales) 40,000
Office Expenses 1,200 By Cash (collection From debtors) 64,000
To Closing Stock reserve (24000 x 25/125) 4,800 By Balance c/d
To Profit & Loss A/c (Balancing Figure) 7,120 Stock 24,000
Debtors (WN 1) 18,800
Total 1,56,800 Total 1,56,800

W.N. (1)
Debtors A/c
Particulars Amount Particulars Amount
To Balance b/d 14,400 By Cash 64,000
To Sales 72,000 By Discount 1,200
By Bad debts 800
By Sales Return 1,600
By Balance c/d 18,800
(Balance fig.)
86,400 86,400

Qn 4 (b) From the following information furnished to you by Ayushman Insurance Co. Ltd., you are required to pass
Journal entries relating to unexpired risk reserve and show in columnar form "Unexpired Risks Reserve A/c" for 2009.
[ 8 marks ]
(a) On 31.12,2008, it had reserve for unexpired risks amounting to Rs. 40 crores. It comprised of Rs. 15
crores in respect of Marine Insurance business, Rs. 20 crores in respect of Fire Insurance business
and R.s. 5 crores in respect of Miscellaneous Insurance business.
(b) Ayushman Insurance Co. Ltd. creates reserves at 100% of net premium income in respect of Marine
Insurance policies and at 50% of net premium income in respect of Fire and Miscellaneous income
policies.
(c) During 2009, the following Business was conducted :

Marine Fire Miscellaneous

Premium collected from :
(a) Insured in respect of
policies issued 18.00 43.00 12.00
(b) Other insurance companies in
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 9
respect of risks undertaken 7.00 5.00 4.00
Premium paid/payable to other insurance
companies on business ceded 6.70 4.30 7.00

Ans. 4. (b) Journal of Ayushman Insurance Co. Ltd.

1997 Particulars Dr. Cr.
Dec. 31 Rs. Rs,
Marine Reserve(or Premium Account) A/c Dr. 3.30
To unexpired risks reserve A/c 3.30
(Being the difference between closing provision of Rs.
18.30 crores (18 + 7 – 6.7) and opening provision of
Rs. 20 crores charged to marine revenue account.)
Fire revenue(or Premium Account) A/c Dr. 1.85
To unexpired risks reserve A/c 1.85
(Being the difference between closing provision of Rs.
21.85 crores [(43 + 5 – 4.3)/2] and opening provision
of Rs. 20 crores charged to fire revenue account.)
Unexpired risks reserve A/c Dr. 0.50
To miscellaneous revenue(or premium) A/c 0.50
(Being the excess of opening balance of Rs. 4.5 crores
over the required closing balance of Rs. 4.5 crores
[(12 + 4 – 7)/2] credited to miscellaneous revenue
account)

Unexpired risks reserve A/c

1997 marine fire Misc. 1997 marine fire Misc.
Dec.31 To Revenue -- -- 0.50 Jan 1 By balance b/d 15.00 20.00 5.00
(or premium) A/c Dec. 31 By Revenue A/c 3.30 1.85 --
Dec. 31 To balance c/d 18.30 21.85 4.50 (or premium)
18.30 21.85 5.00 18.30 21.85 5.00

Qn 5. (a) Given below is an extract from the trial-balance of T.K. Bank Limited as on 31st December, 2009 : [8 m]

Particulars Debit Credit

Rs. Rs.
Bills discounted 12,64,000 --
Rebate on bills discounted (1.1.2009) -- 8,340
Discount received for the year -- 85,912

An analysis of the bills discounted is shown below :

Amount Due date in 2010 Rate of discount
Rs. (% p. a.)
1,40,000 March 6th 5
4,36,000 March 12th 4.5
2,82,000 March 26th 6
4,06,000 April 6th 4
Show the workings, how the relevant items appear in the Bank's Profit and Loss account as on 31st December,
2009 and in Bank's Balance Sheet as on 31st December, 2009.

Ans. 5 (a) Calculation of Bill discounting

Date of Maturity Balance Sheet No. of days after Amount Rate of Total amount
balance sheet date discount of discount
6.3.2010 31.12.2009 65 days 1,40,000 5% 1246.57
12.3.2010 31.12.2009 71 days 4,36,000 4.5% 3816.49
26.3.2010 31.12.2009 85 days 2,82,000 6% 3940.27
6.4.2010 31.12.2009 96 days 4,06,000 4% 4271.34
13,274.64
Or 13275
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 10
Extracts of Balance Sheet of T.K. Bank Ltd.
Particulars Schedule Amount
Capital and liabilities
Other liabilities and Provisions 5 13,275

Extracts of Profit & Loss Statement of T.K. Bank Ltd.

Particulars Schedule Amount

Interest Earned 13 80,977

Working Note :
Opening Rebate on bills discounted 8,340
Add : Discount received for the year 85,912
Less : Closing Rebate on bills discounted 13,275
Interest Earned 80,977

Qn. 5 (b) From the following Trial Balance of PQ Ltd. on 31.12.2009, prepare liquidators Final statement of account :
[ 8 marks ]
Rs. Rs.
9% Preference share capital -- 1,25,000
(1250 Pref. shares @ 100 each fully paid)
Equity share capital :
2,000 Equity shares @ 100 each fully paid -- 2,00,000
2,000 Equity shares @ 100 each Rs. 5U paid up -- 1,00,000
Plant 3,00,000 --
Stock-in-trade 3,60,000 --
Sundry Debtors 85,000 --
Sundry Creditors -- 2,21,000
Bank balance 1,20,000 --
Preliminary expenses 6,000 --
6% Mortgage loan -- 2,30,000
Outstanding liabilities for expenses -- 25,000
Profit and Loss A/c 30,000 --
(Trading loss for the year 2009)
9,01,000 9,01,000
Following points should be kept in mind :
(i) On 21 January, 2010 the liquidator of PQ Ltd. sold plant for Rs. 2.95,000 and stock in trade at 10% less than
the book value. He realised 80% of' Sundry debtors and incurred cost of collection of Rs. 1,850 (remaining
debtors are to be treated as bad).
(ii) The loan mortagage was discharged as 31st January. 2010 alongwith interest for 6 months. Creditors were
discharged subject to 5% discount. Out standing expenses paid at 20%. less.
(iii) Preference share dividend is due for one year and paid with final payment.
(iv) Liquidation expenses incurred are Rs. 1,800 and liquidators . remuneration is settled at 4% on
disbursement, to members, subject to minimum of Rs. 10,000.

Ans. 5 (b) Liquidator’s Final Statement of Account on 31.12.2009

Particulars Amount Particulars Amount
To Asset realized
Plant 2,95,000 By Liquidation Expenses 1,800
Stock (360000 x 90%) 3,24,000 By Liquidators remuneration (Note 2) 10,000
Debtors By 6% mortgage loan 2,30,000
(85000x 80%) 68,000 Add : interest July-Dec 09 6,900
Less: Realisation Exp. 1,850 66,150 : interest Jan 2010 (Note 1) 1,150 2,38,050
Bank Balance 1,20,000 By Creditors @ 95% 2,09,950
By Outstanding expenses (paid 20% less) 20,000
By 9% preference share Capital 1,25,000
Add : Dividend for one year 11,250 1,36,250
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 11
By Equity Share Capital 1,89,100
(Note 2)
Total = 8,05,150 Total = 8,05,150

Note 1 It is assumed that due date of interest on mortgage loan is 30th june & 31st dec each year. Therefore interest
for the month of Jan 2010 shall also paid.

Note 2
Realization of Assets = 8,05,150
Less : Payment made before Equity Share Capital & before remuneration to liquidator = 6,06,050
Balance left for Equity Share Holders & liquidator remuneration = 1,99,100
Less : Liquidator remuneration [199100 x 4/104 = Rs. 7658 or Rs. 10000 which ever is higher] = 10,000
Balance left for Equity Share Holders = 1,89,100
Less : 2000 equity share of Rs.100 each fully paid up = 2,00,000
2000 ” ” ” Rs.100 each Rs. 50 paid up = 1,00,000
Deficit = (1,10,900)

Equivalent shares = 2,000 (fully paid) + 2000 (Rs. 50 paid up) or 1000 (Rs.100 paid up)
= 3,000
1,10,900
Therefore, deficit per share = ------------ = 36.96
3,000

Amount to be paid to equity shareholders : -

2000 equity share of Rs.100 each fully paid = 2000 (100 – 36.96)
= Rs. 1,26,067
Equivalent 1000 share of Rs.100 each fully paid = 1000 (100 – 36.96)
= Rs. 63,033

Qn 6. Answer the following :

(a) Chaitanya Limited issues 40,000 shares. Issue is underwritten by A, B and 4 C in the ratio of 5:3:2 respectively.
Unmarked applications totalled 2000 whereas marked applications are as follows : [ 4 marks ]
A - 16,000
B - 5,700
C - 8,300
Calculate the Net liability of each one of the underwriters.

(b) How will you disclose the following Ledger balances in the Final accounts of DVD bank : [ 4 marks ]
Rs. in Lacs
Current accounts 700
Saving accounts 500
Fixed deposits 700
Cash credits 600
Term Loans 500
Bills discounted & purchased 800
Additional information :
(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 lacs) 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.

(c) B & P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under : [ 4 marks ]
(i) Lease period is 3 years, in the beginning of the year 2009, for equipment costing Rs. 10,00,000 and has an
expected useful life of 5 years.
(ii) The Fair market value is also Rs. 10,00,000.
(iii) The property reverts back to the lessor on termination of the lease.
(iv) The unguaranteed value is estimated at Rs. 1,00,000 at the end of the year 2011.
(v) 3 equal annual payments are made at the end of each year.
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 12
Consider IRR = 10%
The present value of Re. 1 due at the end of 3rd year at 10% rate of interest is Re. 0.7513.
The present value of annuity of Re. 1 due at the end of 3rd year at 10% IRR is Rs. 2.4868.
State whether the lease constitute finance lease and also calculate unearned Finance income.

(d) ABC Electricity Company laid down a main at a cost of Rs. 24,00,000. Some years later the company replaced
by improving the plant 2/3 portion of the main at a cost of Rs. 40,00,000. The cost of material and labour
having gone up by 25%. Sale of old material realised Rs. 95.000. Old material value Rs. 1,05,000 were used
in renewal (included in above).
Calculate the amount to be Capitalised and show the Journal entries for recording the transaction. [ 4 marks ]

Ans. 6 (a) Statement showing net liability of underwriters : -

Particulars A B C
Gross Liability 20,000 12,000 8,000
(in the ratio of 5:3:2)
Less : firm application NIL NIL NIL
20,000 12,000 8,000
Less : Marked application 16,000 5,700 8,300
4,000 6,300 (300)
Less : Unmarked application 1,000 600 400
(in the ratio of 5:3:2) 3,000 5,700 (700)

Less : Surplus of C to be distributed in the ratio of gross 438 262 (+) 700
liability
Net Liability 2,562 5,438 NIL

Ans. 6 (b) Balance Sheet of DVD Bank as on 31.03

Liabilities Schedule Amount (in Lacs)
Capital 1 Nil
Reserve & Surplus 2 Nil
Deposits 3 2150
Borrowings 4 Nil
Other liabilities & premium 5 Nil
Total = 2150

Assets
Cash in hand and balance with RBI 6 NIL
Balance with bank and money 7 NIL
at call on short notice
Investments 8 NIL
Advances 9 2150
Fixed Assets 10 NIL
Other Assets 11 NIL
Total = 2150
Contingent Liabilities 12 NIL
Bills for collection NIL

Schedule 3 : -
Current account (700 + 250) 950
Saving account 500
Fixed deposits 700
2150
Schedule 9 : -
A. Cash credit (600 + 250) 850
Term Loan 500
Bills discounted & purchased 800
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 13
2150
B. Second by Tangible Assets (balance) 1680
Secured by govt. securities (500 x 60%) 300
Unsecured (850 x 20%) 170

Note : Interest on doubtful cash credit will be deducted from Schedule 13 and provision for bad debts shall be created
on doubtful cash credit of Rs. 10 lacs.

Ans. 6 (c) (i) In following situations, the lease transactions are called finance lease:
1. The lessee will get the ownership of leased asset at the end of the lease term.
2. The lessee has an option to buy the leased asset at the end of term at price, which is lower than its expected
fair value on the date on which option will be exercised.
3. The lease term covers the major part of the life of asset.
4. At the beginning of lease term, present value of minimum lease rental covers substantially the initial fair value
of the leased asset.
5. The asset given on lease to lessee is of specialized nature and can only be used by the lessee without major modification.

Since the cost of equipment is Rs. 10,00,000 and it will be recovered in 3 equal annual payments at the end of each
year. Therefore it fulfils condition 4 above. In addition to that condition no. 3 is also fulfilled. Hence the above lease is
a finance lease.

Calculation of Annual lease Payment

Cost of equipment 10,00,000
Unguaranteed residual value 1,00,000
P.v of residual value for 3 years (@ 1,00,000 x .7513) 75,130
Fair market value 10,00,000
10,00,000
Annual lease payment ------------- 4,02,123
2.4868 -------------

(ii) Unearned Finance income

Total Lease Payment (402123 x 2.4868) 10,00,000
Add : Residual value 1,00,000
Gross investment 11,00,000
Less : P. v of investment (10,00,000 + 75130) 10,75,130
Unearned finance income 24,870
======

Ans. 6 (d)
W.N. (1) Calculation of Total Cost of New Plant
Total cost of new plant 40,00,000
W.N. (2) Calculation of current cost of old plant
Cost of old plant 24,00,000 x 2/3 = 16,00,000
Add : Increase in cost of material & labour = 4,00,000
(16,00,000 x 25%) 20,00,000

W.N. (3) Amount to be transferred to revenue account

Current cost of old plant (WN 2) 20,00,000
Less : Old Material sold 95,000
Less : Old Material used 1,05,000
18,00,000

Solution (i) : Amount to be capitaliged

Cost of new plant 40,00,000
Less : Current Cost of old plant (WN 2) 20,00,000
20,00,000
 Solved Answer Acc._Paper_5 CA Ipcc May. 2010 14
Solution (ii) : Journal Entries : -
Date Particulars LF Amount Amount
Cash cost of new plant
New plant A/c - Dr. 18,95,000
Replacement A/c – Dr. 20,00,000
To Cash A/c 38,95,000
(Being Csot of new plant partly capitalized excluding cost of old material used Rs. 105000)

Old material used

New plant A/c - Dr. 1,05,000
To Replacement A/c 1,05,000
(Being Capitalisation of old material used in the new plant)

Old material sold

Bank A/c - Dr. 95,000
To Replacement A/c 95,000
(Being proceeds realized on sale of old material transferred to Revenue Account)

Balance of Replacement A/c Transferred to Revenue A/c

Revenue A/c - Dr. 18,00,000
To Replacement A/c 18,00,000
(Being balance in Replacement Account transferred to Revenue Account)