Suggested Answer - Syl12 - Dec13 - Paper 12 Intermediate Examination

Suggested Answer_Syl12_Dec13_Paper 12
INTERMEDIATE EXAMINATION
GROUP II
SYLLABUS 2012
SUGGESTED ANSWERS TO QUESTION

DECEMBER 2013
Paper 12: COMPANY ACCOUNTS AND AUDIT

Time Allowed: 3 Hours
Full Marks: 100
The figures in the margin on the right side indicate full marks.
The paper is divided in three sections. From Section A, answer to Question No. 1 is compulsory.
From Question No. 2(a), (b) and (c) any two questions to be answered.
From Section B, answer to Question No. 3 is compulsory. From Question No. 4(a), (b) and (c)
any two questions to be answered.
From Section C, answer to Question No. 5 is compulsory. From Question No. 6(a) and (b)
one question to be answered and from Question 7(a), (b) and (c) any two questions to be answered.
SECTION A
1. (Compulsory) Answer the following:

(a) State the disclosure requirements under AS-12.
(b) During the year 2011-12, Pankaj Limited has spent and carried forward in Books an amount
of ` 15,00,000 being costs incurred in developing a product for cure for cancer. During the
year 2012-13, due to adverse test results after field trial, the company decided to abort
the efforts tadevelop the product.
What will be the treatment for the amount spent so far on developing the product in the
financial statements of the Company for the year ending 31st March, 2013?
Answer:
1. (a) Disclosure under AS-12
(a) The accounting policy, method of presentation in the financial statements.
(b) The nature and extent of Govt. grants recognized in the financial statements,
including grants of non-monetary assets given at a concessional rate or fee of cost.
(b) As per AS 26, an intangible asset should be derecognized on disposal or when no
future economic benefits are expected from its use and subsequent disposal. As per AS
26, gains or losses arising from the retirement or disposal of an intangible asset should be
recognised as income or expense in the Statement of Profit and Loss.
In this case, however, the company decided ultimately to discontinue the product due
to adverse test result. As such, the entire amount of 15 lakhs should be treated as an
expense which should be adjusted against current year's P&L A/c.
2. Answer any two questions from (a), (b) and (c):
(a)
(i) What are the disclosure requirements for an enterprise as per AS-11?
(ii) The following details are provided by an Import House:
Particulars
8x2=16
4
Exchange rate
1 US Dollar =
Board of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 1
Goods purchased on 24th August, 2012 Us Dollar 2,00,000
Exchange rate on 31st March, 2013
Exchange rate on date of actual payment on 25th May, 2013
`47.10
`54.20
`56.30
Calculate gain or loss for the financial years 2012-13 and 2013-14 and its accounting
treatment.
4
(b)
Kovid Limited has taken a Machinery on Lease from Krishna Limited.

The following information are provided by Kovid Limited:
Lease Term
5 years
` 20 Lakhs
Fair value at inception of
Lease
` 5 Lakhs per annum payable at the end of the
Lease Rent
year
` 3 Lakhs
Expected Residual value
` 2 Lakhs
Guaranteed Residual value
Implicit Interest rate
15.5% per annum
You are required to prepare Lease Rent Account and Lease Liability Account in the Books
of Kovid Limited.
(The present value of Re. 1 at Discount rate of 15.5% are 0.8658, 0.7496, 0.6490, 0.5619 and
0.4865 for year 1 to year 5 respectively.)
8
(c)
(i) What are the characteristics of a liability?
(ii) How is software acquired for internal use accounted for under AS-26?
Answer:
2. (a)
(i) Disclosure under AS -11: An enterprise should disclose:
a) The amount of exchange difference included in the net profit or loss for the period.
b) The amount of exchange difference adjusted in the carrying amount of fixed
assets during the accounting period.
c) The amount of exchange difference in respect of forward contracts to be
recognized in the profit/ loss for one or more subsequent accounting period.
d) Foreign currency risk management policy
(ii) As per AS-11, all foreign currency transactions should be recorded by applying the
exchange rate at the date of transaction. Therefore, goods purchased on 24th Aug, 2012
and corresponding creditor would be recorded at ` 47.10 = 2,00,000 x 47.10 = ` 94,20,000.
At the balance sheet date (As per AS-11) all monetary items should be reported using
the closing rate. Therefore, the creditor of US $ 2,00,000 outstanding on 313I March, 2013,
will be reported as : 2,00,000 x 54.20 = ` 1,08,40,000.
Exchange loss 1,08,40,000 94,20,000= ` 14,20,000 should be debited to profit and loss
account for the year 2012-13.
Exchange difference on settlement of monetary items (as per AS -11) should be
transferred to profit and loss amount thereof: 2,00,000 x 56.3 = 1,12,60,000 1,08,40,000 = `
4,20,000 should be debited to profit and loss account for the year 2013 -14.
Page 2
(b)
Calculation of Present value of MLP
MLP
Discount Rate 15.5%
(`)
Year
1
2
3
4
5
500000
500000
500000
500000
700000 (5 Lakhs+2 .Lakhs)
2700000
Present Value (`)
0.8658
0.7496
0.6490
0.5619
0.4865
432900
374800
324500
280950
340550
1753700
Present Value of MLP ` 17,53,700 is less than fair value at the inception of lease `
20,00,000 , so the leased asset and liability should be recognized at ` 17,53,700
Apportionment of finance lease:
Year
Liability
(`)
MLP
(`)
Finance Charge
(liability at beginning X
interest rate )
(`)
0
1
2
3
4
5
1753700
1525524
1261980
957587
606013
-
500000
500000
500000
500000
700000
271824
236456
195607
148426
93932
Principal Amount
of reduction
(`)
228176
263544
304393
351574
606068
Books of Kovid Ltd.

Lease Rent Account
Dr.
Particulars
1sl year
(`)
Cr.
(`)
Particulars
By Finance Charge A/c

5,00,000 By Lease Liability A/c
271824
228176
500000
By Finance Charge A/c By

Lease Liability A/c
500000
236456
263544
By Finance Charge A/c By

Lease Liability A/c
500000
195607
304393
To Bank A/c
2nd year
500000
To Bank A/c
3rdyear
To Bank A/c
4tn year
500000
500000
500000
500000
To Bank A/c
5 th year
To Bank A/c
500000
700000
700000
500000
By Lease Liability A/c

By Lease Liability A/c
148426
351574
500000
93932
606068
700000
Page 3
Lease Liability Account
Dr.
Cr.
Particulars
(`)
1SI year
To Lease Rent A/c
To Balance c/d
228176
1525524
2na year
To Lease Rent A/c
To Balance c/d
By Balance b/d
1753700
By Balance b/d
4tn year
To Lease Rent A/c
To Balance c/d
5 th year
To Lease Rent A/c
1753700
1753700
1525524
263544
1261980
1525524
3rd year
To Lease Rent A/c
To Balance c/d
(`)
Particulars
304393
957587
1261980
1525524
By Balance b/d
1261980
By Balance b/d
1261980
957587
351574
606013
957587
606013
606013
957587
By Balance b/d
606013
606013
(c) (i) Characteristics of a Liability:

i. Normally liability arises from present obligation. But future obligation may also
create liability if they are irrevocable. A forward contract to buy goods is
irrevocable; therefore, gain or loss on such contract is evaluated and
recognized as an asset or a liability.
ii. Liabilities result from past transactions or other past events. Even an
irrevocable future obligation arises from past transactions or commitment
(events) only.
iii. Normally liabilities are measurable in money terms. Sometimes liabilities are
estimated which are termed as provisions. Framework defines the term liability
broadly that includes provisions.
iv. Settlement of liability means giving up resources embodying economic
benefits.
Liabilities are settled in any of the following ways- payment cash or transfer of other assets ;
- provision of services (services are rendered or to be rendered)
- replacement by a new obligation;
- conversion of an obligation into equity;
- extinguished by way of waiver from the creditors
(c) (ii) As per AS 26, the cost of a software acquired for internal use should be
recognized as an asset if it meets the recognition criteria prescribed in
paragraphs 20 and 21 of the Statement.
The cost of a software purchased for internal use comprises its purchase price,
including any import duties and other taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities) and any directly
Page 4
attributable expenditure on making the software ready for its use. Any trade
discounts and rebates are deducted in arriving at the cost. In the determination
of cost, matters stated in paragraphs 24 to 34 of the Statement need to be
considered, as appropriate.
Recognition criteria as per paras 20 and 21:
An intangible assets should be recognized if, and only if:
(a) It is probable that the future economic benefits that are attributable to the
asset will flow to the enterprise, and
(b) The cost of the assets can be measured reliably."
An enterprise should assess the probability of future economic benefits using
reasonable and supportable assumptions that represent best estimate of the set
of economic conditions that will exist over its useful life of the asset.
SECTION B
3. (Compulsory) Answer the following:
2x4=8
(a) What is the meaning of the expression 'cash equivalent'?
(b) What are the maximum limit of Managerial remuneration payable for a Company
earning sufficient Profit as per Section 198 of Companies Act?
(c) What are the sources available for buy-back of shares for a Company as per Section 77A
of Companies Act?
(d) Chandu Limited was incorporated on August 1, 2012. It had acquired a running business
from April 1, 2012. During the year 2012-13 the total sales of the business were ` 63,00,000.
The Sales per month in the first half year were of what they were in the second half.
Calculate the ratio of Sales for the period prior to and post incorporation.
Answer:
3. (a) Cash equivalent means bank balance and other risk free short-term investments and
advances which are readily encashable. Cash equivalents means short-term highly
liquid investments that are readily convertible into known amounts of cash and which
are subject to an insignificant risk of changes in value.
(b) Maximum Limit of Managerial Remuneration on the basis of Net ProfitSituation I
If company having only one Whole Time Director,
Managing Director or Managers
Situation II
If company having more than one Whole Time Director
or Managing Director or Managers
Situation III
Other than Director (not being Whole Time
Director/Managing Director)- where there is a Whole
Time Director/Managing Director/Manager
Situation IV
Other than Director (not being Whole Time
Director/Managing Director)- any other case
Situation V
Overall Maximum Remuneration to Director and
Manager
5% of Net Profit
10% of Net Profit
1% of Net Profit
3% of Net Profit
11% of Net Profit
Page 5
(c) Sources for buy back of shares
(i) Free reserves
(ii) Securities premium account
(iii) The proceeds of any shares or other specified securities
(d) Let, the monthly sales for second half year was ` 1
Then the monthly sales for first half year was `
Sales for the period of prior to incorporation April, May, June & July = x 4 = ` 2
Sales for the period of post Incorporation i.e. Aug, Sep, Oct, Nov., Dec.(2012).
Jan, Feb & March (2013)
Aug & Sept 2012 = x 2
= `1
Oct 2012 to March 2013 = 1 x 6 = `6
`7
Hence, Sales Ratio = 2 : 7
16x2=32
(a)
(i) The following is the Balance Sheet of Superstar Ltd. as at 31.03.2013:
Amount (` in Lakhs)
Liabilities
10% Redeemable Pref. Shares of ` 10 each, fully paid
2,500
Equity Shares of ` 10 each, fully paid
8,000
Capital Redemption Reserve
1,000
Securities Premium
800
General Reserve
6,000
Profit and Loss A/c
300
9% Debentures
5,000
Sundry Creditors
2,300
Sundry Provisions
1,000
26,900
Assets
Fixed Assets
Investments
Cash at Bank
Other Current Assets
Amount (` in Lakhs)
14,000
3,000
1,650
8,250
26,900
On 1st April, 2013 the company redeemed all of its preference shares at a premium of
10% and bought back 25% of its equity shares @ ` 20 per share. In order to make cash
available, the company sold all the investments for ` 3,150 lakh and raised a bank loan
amounting to ` 2,000 lakhs on the security of the company's plant.
Pass Journal Entries for all the above mentioned transactions including Cash transactions.
The amount of securities premium has been utilised to the maximum extent allowed by
law.
8
(ii)
The following relevant items from the Balance Sheet of LM Limited are provided:
Goodwill
Profit and Loss A/c
General Reserve
Balance Sheet figures

As at 31.3.2012
As at 31.3.2013
`
`
90,000
75,000
4,15,000
6,25,000
3,25,000
3,75,000
Page 6
Inventories
Debtors
Prepaid Expenses
Creditors
Provision for Taxation
Provision for Doubtful Debts
4,15,000
3,45,000
18,000
2,35,000
1,05,000
17,250
5,10,000
3,22,000
15,000
2,70,000
1,55,000
15,000
Depreciation amounting to ` 1,42,000 and Profit on sale of Machinery amounting to ` 21,000

appeared in the Profit and Loss A/c for the year ending 31.3.2013. During the year 2012-13
` 1,00,000 was paid as Income Tax.
You are required to calculate Net Cash Flow from operating activity for the year ending
31st March,2013.
4
(iii) ABC Ltd. issued 40,000 Equity shares. Three Underwriters were appointed to underwrite the
shares and the shares were underwritten as under:
Underwriter
No. of Shares Underwritten
X
24,000
Y
10,000
Z
6,000
The above Underwriters made application for 'firm' underwriting as under:
Underwriter X for 3,200 nos. shares, Underwriter Y for 4,000 nos. shares and underwriter Z
for 1,200 nos. shares.
The Company received application for 20,000 nos. shares, excluding 'firm' underwriting
but including marked applications which were as under:
Underwriter
Marked application for No. of Shares
X
4,000
Y
5,000
Z
2,000
You are required to calculate the allocation of liability of the respective Underwriters.
(As per contract, the Underwriters are to be given credit for 'firm' applications and that credit
for unmarked applications be given in proportion to the shares underwritten.)
4
(b)
(i) Tree Ltd. agreed to acquire all the assets of Plant Ltd. except its investments, as on 31st
March, 2013:
Balance Sheet of Plant Ltd. as on 31st March, 2013
`
`
Liabilities
Assets
Share Capital (` 10 each)
Reserves
8% Debentures
Creditors
5,00,000
75,000
2,25,000
3,00,000
Goodwill
Land & Building
Plant
Investments
Stock
Debtors
Bank
11,00,000
70,000
1,50,000
2,50,000
50,000
1,00,000
3,50,000
1,30,000
11,00,000
Tree Ltd. will:

(1) Discharge the debentures at 8% premium by issue of 7% debentures in Tree Ltd. at
10% discount;
(2) Issue of 3 shares of Tree Ltd. (face value ` 10 each) for every 2 shares in Plant Ltd.;
(3) Pay ` 2 in cash for each share of Plant Ltd.; and
(4) Pay absorption expenses of ` 5,000.
Page 7
Plant Ltd. sold its investments for ` 55,000. Shares received from Tree Ltd. are sold at ` 11
each. Before the absorption, Plant Ltd. declared and paid 10% dividend to its
shareholders.
You are required to give the required Journal entries and Ledger accounts in the books
of the vendor company i.e. Plant Ltd. .
10
(ii) A company went into voluntary liquidation on 31.3.2013 when the following Balance Sheet
was prepared:
`
Liabilities
Authorised Capital:
40,000 shares of ` 10 each
Issued Capital:
25,000 shares of ` 10 each
Unsecured Creditors
Partly Secured Creditors
Preferential Creditors
Bank
Overdraft
(Unsecured)
Assets
Goodwill
4,00,000 Freehold Property
Machinery
2,50,000 Stock
50,000 Debtors
1,20,000 Cash
3,000 Profit & Loss A/c
500
4,23,500
1,70,000
20,000
75,000
25,000
35,000
500
98,000
4,23,500
The liquidator realized the assets as follows:

Freehold property which was sold to pay the partly secured creditors and it fetched `
15,000;
Other assets realized as Machinery ` 50,000; Stock ` 20,000; Debtors ` 25,000.
The expenses of liquidation amounted to ` 1,000 and the liquidator's remuneration was
agreed at 2.5% on the amount realized and 2% on the amount paid to unsecured
creditors.
Prepare liquidator's final statement of account.
6
(c)
(i) Following are the summarised Balance Sheets of Y Ltd. and Z Ltd. as on 31st March, 2013:
(` in ,000)
Z. Ltd.
Assets
Y. Ltd.
Z. Ltd.
6,000 Fixed Assets
11,000
5,000
Shares in Y Ltd.
2,000
2,000
1,100 (2,00,000 nos.)
3,000
1,900 Stock
1,800
1,100
Debtors
1,890
750
Cash at Bank
310
150
15,000
9,000
15,000
9,000
Y Ltd. acquired the business of Z Ltd. on the basis of intrinsic value of shares. The purchase
consideration is to be discharged in the form of fully paid equity shares. On the
Balance Sheet date a sum of ` 5,00,000 is owed by Y Ltd. to Z Ltd. Amount of stock of Y
Ltd. include goods worth ` 5,50,000 supplied by Z Ltd. at cost plus 25%.
You are required to:
(1) Calculate the purchase consideration and compute the number of Equity shares
to be issued by Y Ltd. to eligible outsiders.
(2) Show the necessary Journal entries in books of Y Ltd., if the entries are made at
intrinsic value.
(3) Prepare Balance Sheet of Y Ltd. after absorption.
10
Liabilites
Equity Share Capital
(Shares of ` 10 each)
Reserves
Creditors
Y. Ltd.
10,000
(ii) Explain what is Segment Revenue and what are the disclosure requirements of reportable
segment.
6
Page 8
Answer:
4. (a)
(i)
In the books of Superstar Ltd.
Journal Entries
Particulars
Amount
Bank A/c
Dr. 3,150
To, Investments
To, Profit and Loss A/c
(Being sale of investments and profit thereon)
Bank A/c
Dr. 2,000
To, Bank Loan A/c
(Being loan taken from bank)
10% Redeemable Pref. Share Cap A/c
Dr. 2,500
Premium on Redemption of Pref. Shareholder A/c Dr. 250
To, Preference Shareholder A/c
(Being redemption of Preference shares)
Preference Shareholders A/c
Dr. 2,750
To, Bank A/c
(Being payment of amount due to Pref.
Shareholders)
Securities Premium A/c
Dr. 250
To, Premium on Red. of Pref. Shares A/c
(Being use of Securities premium to provide
premium on red. of preference shares)
Equity Share Capital A/c
Dr. 2,000
Securities Premium (800 - 250) A/c
Dr. 550
General Reserve A/c
Dr. 1,420
To, Equity Shareholders
(Being buy back of Equity Shares)
Note: General Reserve Balance (6,000- 1450) = `
4,550
General Reserve A/c
Dr. 4,500
To, Capital Redemption Reserve A/c
(Being creation of capital redemption reserve to
the extent of the face value of preference share
redeemed and equity shares bought back)
Equity Shareholders A/c
Dr. 4,000
To, Bank A/c
(Being payment of amount due to Equity
Shareholders)
Note: Cash at Bank = (1,650 + 3,150 + 2,000 2,750 4,000) = ` 50
` in Lakhs
Amount
3,000
150
2,000
2,750
2,750
250
4,000
4,500
4,000
(ii)
Cash flow from operating Activities
for the year ending 31st March,2013
Net Profit before taxation and extra ordinary items:
625000-415000=210000+150000
Adjustment for:
`
3,60,000
Page 9
Depreciation
1,42,000
Goodwill written off
15,000
Transfer to General Reserve
50,000
Profit on sale of machinery
(21,000)
Operating profit before working capital Adj.
5,46,000
Increase in Inventories
(95,000)
Decrease in Debtors
23,000
Decrease in prepaid Expenses
3,000
Increase in Creditors
35,000
Decrease in provision for Doubtful debts
(2,250)
5,09,750
Cash generated from operations

Income tax paid
(1,00,000)
Net cash from operating Activities
To Bank A/c(Tax paid)

To Balance c/d
4,09,750
Provision for Taxation A/c

`
1,00,000 By Balance b/d
By P.&.L. A/c
1,55,000
2,55,000
`
1,05,000
1,50,000
2,55,000
(iii)
Statement showing liability of Underwriters
Particulars
Underwriter Underwriter Underwriter
X
Y
Z
Gross Liability
24,000
10,000
6,000
Unmarked application (24:10:6)
5,400
2,250
1,350
18,600
7,750
4,650
Marked Application
4,000
5,000
2,000
14,600
2,750
2,650
Firm underwriting
3,200
4,000
1,200
Balance
11,400
(1,250)
1,450
Credit for excess (24 :6)
1,000
1,250
250
Net Liability
10,400
Nil
1,200
Add: Firm underwriting
3,200
4,000
1,200
Total Liability
13,600
4,000
2,400
Total
40,000
9,000
31,000
11,000
20,000
8,400
11,600
11,600
8,400
20,000
(b)
(i)
Books of Plant Ltd (Vendor Company)
Journal entries
Debit
Dividend A/c
To Bank A/c
(Being dividend at 10% paid to the shareholders)
Reserves A/c
To Dividend A/c
(Being dividend paid adjusted out of revenue profits)
Dr.
Credit
50,000
50,000
Dr.
50,000
50,000
Page 10
Realisation A/c
Dr. 10,50,000
To Goodwill A/c
To Land & Buildings A/c
To Plant A/c
To Investments A/c
To Stock A/c
To Debtors A/c
To Bank A/c (1,30,000 - 50,000)
[Being transfer of assets to realization]
8% Debentures A/c
Dr.
2,25,000
To Realisation A/c
[Being transfer]
Tree Ltd A/c
Dr.
8,50,000
To Realisation A/c
[being purchase
consideration receivable
as
per
agreement]
Shares in Tree Ltd A/c
Dr.
7,50,000
Cash/ Bank A/C
Dr.
1,00,000
To Tree Ltd
(being purchase consideration received in par agreement)
Bank A/c
Dr.
55,000
To Realisation A/c
(Being realization of investments which were not taken over)
Tree Ltd A/c
Dr.
To Bank A/c
[Being payment of expenses of absorption on behalf of Tree
Ltd]
Bank A/c
Dr.
To Tree Ltd
(Being reimbursement of expenses by Tree Ltd)
Bank A/c
Dr.
To Shares in Tree Ltd
To Realisation A/c
(being sale of 75,000 equity shares @ ` 11 per share)
Share capital A/c
Dr.
Realisation A/c
Dr.
General Reserve A/c
Dr.
To Shareholders A/c
(being equity share capital, general reserve and realization
profit transferred to shareholders A/c)
Creditors A/c
To Bank
(being settlement of creditors)
Shareholders A/c
To Bank
(being settlement of amount to equity shareholders)
Dr.
70,000
1,50,000
2,50,000
50,000
1,00,000
3,50,000
80,000
2,25,000
8,50,000
8,50,000
55,000
5,000
5,000
5,000
5,000
8,25,000
7,50,000
75,000
5,00,000
1,55,000
25,000
6,80,000
3,00,000
3,00,000
Dr.
5,80,000
5,80,000
Realization Account
Dr.
Particulars
To, Goodwill A/c
To, Land & Building A/c
To, Plant A/c
Amount(`)
70,000
1,50,000
2,50,000
Particulars
By, 8% Debentures A/c
By, Tree Ltd. A/c
By, Bank A/c (Sale of
Cr.
Amount(`)
2,25,000
8,50,000
Page 11
To, Stock A/c
1,00,000
To, Debtors A/c

To, Bank A/c (1,30,0000
50,000)
To, Shareholders A/c
3,50,000
80,000
Investment)
By, Bank (Profit on sale of
Shares)
55,000
75,000
1,55,000
12,05,000
12,05,000
Tree Ltd. Account

Dr.
Particulars
Amount(`)
To, Realization A/c
8,50,000
8,50,000
Particulars
By, Equity shares in Tree Ltd.
A/c
By, Cash A/c
Cr.
Amount(`)
7,50,000
1,00,000
8,50,000
Bank Account
Dr.
Particulars
To, Balance b/d
To, Tree Ltd. A/c
To, Sale of Investment A/c
To, Sale of shares in Tree Ltd
A/c
Amount(`)
1,30,000
1,00,000
55,000
8,25,000
Cr.
Amount(`)
3,00,000
50,000
80,000
6,80,000
Particulars
By, Creditors A/c
By, Dividend A/c
By, Realization A/c
By, Shareholders A/c
11,10,000
11,10,000
Shareholders Account
Dr.
Particulars
To, Bank A/c
Amount(`)
6,80,000
Cr.
Amount(`)
1,55,000
5,00,000
25,000
6,80,000
Particulars
By, Realization A/c
By, Shareholder A/c
By, Reserves A/c
6,80,000
(b)
(ii)
Liquidators Final Statement Account
Dr.
Cr.
Receipts
To Assets realized
Cash
Debtors
Stock
Machinery
500
25,000
20,000
50,000
Payments
By Liquidator's
Remuneration:
(workings)
By Liquidation expenses
By Preferential creditors
By Unsecured creditors
(Balance in figure)
By Equity shareholders
4,490
1,000
3,000
87,010
Nil
95,500
95,500
Page 12
Workings:
Calculation of Liquidators Remuneration:
- 2.5% of amount realized
2.5% of (25,000+20,000+50,000+15,000) = 2.5% of 1,10,000 =
- 2% on the amount paid to Unsecured Creditors
95,500-(2,750+1,000+3,000) x 2/102 =
2,750
1,740
4,490
Note: Balance Partly Secured creditors are treated as Unsecured Creditors.

(c)
(i)
(1) Calculation of Purchase Consideration
Intrinsic value of Y Ltds share =
=
1, 20, 00, 000

10, 00, 000
1, 50, 00, 000 - 30, 00, 000

10, 00, 000
= ` 12 per share
Net Assets of Z Ltd or Gross Purchase Consideration

Fixed Assets
Current Assets
` 50,00,000
` 20,00,000
Value of shares in Y ltd. (2,00,000 x12)
24,00,000
94,00,000
19,00,000
75,00,000
Less : creditors
Net Assets or Gross Purchase Consideration
No. of shares to be issued for Net Assets
= Net Assets / Intrinsic value for Y Ltd. =
75, 00, 000

12
Less: shares already held by Y Ltd.

Shares to be issued at value of ` 12
= 6,25,000 shares
2,00,000
4,25,000
Hence, Purchase Consideration for accounting purpose

= 4,25,000 shares x ` 12 = ` 51,00,000 in-which ` 42,50,000 is share capital and `
8,50,000 is securities premium .
(2)
Journal of Y Ltd.
Debit
Business Purchase A/c
To Liquidator of Z Ltd A/c
Fixed Assets A/c
Stock A/c
Debtors A/c
Cash & Bank A/c
To Creditors A/c
To Business Purchase A/c
Liquidator of Z Ltd. A/c
To E. S. Capital A/c
To Securities Premium A/c
Dr.
51,00,000
Dr.
Dr.
Dr.
Dr.
50,00,000
11,00,000
7,50,000
1,50,000
Credit
51,00,000
19,00,000
51,00,000
Dr.
51,00,000
42,50,000
8,50,000
Page 13
Creditors A/c
Dr.
To Debtors (of Z Ltd.)A/c
Goodwill A/c
Dr.
To Stock A/c
[Eliminate of unrealized profit on stock = 5,50,000 x 25/125 =
1,10,000]
5,00,000
5,00,000
1,10,000
1,10,000
(3)
Name of the Company: Y Ltd.
Balance Sheet as at 31.03.2013
Ref
No.
Particulars
Note
No.
As at 31st
March, 2013
`
I.
Equity and Liabilities
Shareholders funds
(a) Share capital
1,42,50,000
(b) Reserves and surplus
28,50,000
Share application money pending allotment
Non-current liabilities
Current Liabilities
(b) Trade payables
Total
II.
Assets
Non-current assets
44,00,000
2,15,00,000
(a) Fixed assets
(i) Tangible assets
1,60,00,000
(ii) Intangible assets
1,10,000
(b) Inventories
27,90,000
(c) Trade receivables
21,40,000
(d) Cash and cash equivalents
4,60,000
Current assets
Page 14
Total
2,15,00,000
ANNEXURE
Note 1.Share Capital
As at 31st March, 2013
Equity Share Capital
1,42,50,000
Total
1,42,50,000
Reconciliation of Equity Shares

FOR EQUITY SHARE (`10 per share) :-
31.3.2013
Nos
Opening Balance of `10 each

Add: Fresh Issue (Incld Bonus shares , Right shares,
split shares, shares issued other than cash)
Less: Buy Back of shares
Note 2. Reserves and Surplus
Amount (`)
10,00,000
100,00,000
4,25,000
42,50,000
14,25,000
145,20,000
NIL
NIL
14,25,000
145,20,000
As at 31st March,
2013
Reserve and Surplus
20,00,000
Securities Premium
8,50,000
Total
Note 3. Trade Payables
28,50,000
As at 31st March,
2013
Sundry creditors (30,00,000 + 19,00,000 5,00,000)
44,00,000
Total
44,00,000
Note 4. Tangible Assets
As at 31st March,
2013
Fixed Assets (1,10,00,000+50,00,000)
1,60,00,000
Total
1,60,00,000
Page 15
Note 5. Intangible Assets
As at 31st March,
2013
Goodwill
1,10,000
Total
1,10,000
Note 6. Inventories
As at 31st March,
2013
Stock-in trade (18,00,000 +11,00,000 1,10,000)
27,90,000
Total
27,90,000
Note 7. Trade receivables
As at 31st March,
2013
Debtors ( 18,90,000 + 7,50,000 5,00,000)
21,40,000
Total
21,40,000
8. Cash and Cash Equivalents
As at 31st March,
2013
Cash at Bank (3,10,000 + 1,50,000)
4,60,000
Total
4,60,000
(ii)
Segment revenue is the aggregate of
(i) the portion of enterprise revenue that is directly attributable to a segment,
(ii) the relevant portion of enterprise revenue that can be allocated on a reasonable
basis to a segment, and
(iii) revenue from transactions with other segments of the enterprise,
Segment revenue does not include:
(a) extraordinary items as defined in AS 5, Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies;
(b) interest or dividend income, including interest earned on advances or loans to
other segments unless the operations of the segment are primarily of a financial
nature; and
(c) gains on sales of investments or on extinguishment of debt unless the operations
of the segment are primarily of a financial nature.
Disclosure Requirements
An enterprise should disclose the following for each reportable segment:
(a) segment revenue, classified into segment revenue from sales to external
customers and segment revenue from transactions with other segments;
(b) segment result;
Page 16
(c) total carrying amount of segment assets;
(d) total amount of segment liabilities;
(e) total cost incurred during the period to acquire segment assets that are expected
to be used during more than one period (tangible and intangible fixed assets);
(f) total amount of expense included in the segment result for depreciation and
amortization in respect of segment assets for the period; and
(g) total amount of significant non-cash expenses, other than depreciation and
amortisation in respect of segment assets, that were included in segment expense
and, therefore, deducted in measuring segment result.
SECTION C
5.
(Compulsory) Answer the following:

(a) What do you understand by audit evidence?
(b) What is Tax audit?
(c) Describe 'Voucher' and 'Vouching'.
(d) What are the disqualifications for appointment of Statutory Auditor of a Company?
2x4=8
Answer:
5. (a) While auditing the auditor come across various assertions of the management The
auditor has to evaluate these assertions so that he would be able to express his
opinion on the financial statements This evaluation can be made in the light of some
facts and reasons. These facts and reasons are called Audit Evidence'.
The auditor should evaluate whether he has obtained sufficient appropriate audit
evidence so that reasonable conclusions can be drawn there from. It is to be noted
that sufficiency an appropriateness are interrelated and apply to evidence obtained
from both substantive and compliance procedures.
(b) The main Purpose of the tax audit is to compute the taxable income according to
the law and for maintaining transparency in the financial statements filed by the
assesses with the Income tax department.
"A systematic and independent examination of data, statements, records, operations
and performances (financial or otherwise) of an enterprise for a stated purpose. In
any auditing situation, the auditor perceives and recognizes the propositions before
him for examination, collects evidence, evaluates the same and on this basis
formulates his judgment which is communicated through his audit report'.
Under the existing provisions of section 44AB, every person carrying on business is
required to get his accounts audited if the total sales, turnover or gross receipts in the
previous year exceeds one crore rupees.
(c) A voucher is a piece of substantiating evidence, in the form of a written record of
expenditure disbursement, or completed transaction
Examples of types of vouchers: Cash Memo, Sale Invoice. Purchase Requisition Slip,
Purchase Invoice Gate Keeper's Note, Bank Paying Slip, Bank Statements. Minutes
Book, etc
The act of examining all documentary evidences (vouchers) is referred to as
vouching Its basic objective is to establish the authenticity of the transactions
Page 17
recorded in the primary books of account.
Vouching is said to be 'the essence of auditing" or may be termed as the 'backbone
of auditing"
Importance of Vouching
(i) Serves as evidence, (ii) Assurance, (iii) Preliminary for Verification, (iv) Establishes
Authenticity.
( d ) Section 226 (3) provides that none of the following persons shall be qualified for
appointment as auditor of a company
i) A body corporate
ii) An office; or employee of the company
iii) A person who is a partner or who is in the employment of an officer or employee
of the company
iv) A person who is indebted to the company or has given any guarantee or
provided any security connection with the indebtedness of any third person to
the company for amount exceeding ` 1,000.
v) A person holding any security of that company after a period of one year w.e.f.
13.12.2000.
It may be notes that if an auditor already holds appointment as auditor in the
specified number or more of companies as per section 224(1B), he will be disqualified
for being appointed as an auditor of any other company.
6. Answer either (a) or (b):
(a)
(i) State the basic features and necessity of continuous Audit.
(ii)
State the scope and advantages of Operational Audit.
4+4
Or
(b)
(i) State the advantages of Cost Audit to Management and Shareholders.
(ii) What are the limitations of Internal Control?
4+4
Answer:
6. (a)
(i) Basic features and scope of continuous audit.
Basic features are:
(1) It is a process conducted throughout the year.
(2) It is conducted at regular or irregular intervals.
(3) It focuses on testing 100% of transactions.
(4) Technology is important to enabling it.
(5) It provides advance notice about errors and irregularities detected.
(6) Surprise visits by the auditor are involved.
Necessity of continuous audit:
Continuous audit is necessary where:
1) Internal controls are inadequate.
2) The transactions run in large numbers.
3) The management is interested in getting statements of accounts audited
periodically for enabling better management of resources.
(ii) Scope of Operational audit:
Operational audit, in its initial stages, was developed as a branch of internal auditing,
Page 18
Internal audit focuses on accounting operations of the entity But operational audit
has a wider scope of working and covers all other operations, such as production
and marketing too.
Advantage of operational audit:
Operational audit is one of the management tools to get first hand information. It is
more useful in an entity where the management is at a distance from actual
operation due to layers of delegation of responsibility. The management information
system has various tools like routine performance report from department heads,
internal audit reports, surprise checks, periodic inspections add investigation to
control managers responsible for their departments. The operational audit is also one
of the tools used in large or geographically vast entities to control the operation at
first stage and to fill up the gaps of information provided by department heads
through periodic reports.
(b)
(i) Advantages of cost audit to the Management:
1) Management gets reliable data for its day-to-day operations like" price fixing,
control, decision making.
2) A close and continuous check on al l wastages will be kept through a proper
system of reporting to management.
3) Inefficiencies in the working of the company will be brought to light to facilitate
corrective action.
4) Management by exception becomes possible through allocation of
responsibilities to individual managers.
5) System of budgetary control and standard costing will be greatly facilitated.
6) Reliable check on valuation of closing stock and work-in-progress can be
established.
7) Helps in detection of frauds and errors.
Advantages to the shareholders:
Cost audit ensures that proper records are kept as to purchases and utilisation of
material and expenses incurred on wages, etc. It also makes sure that the valuation
of closing stock and work-in-progress is on a fair basis. Thus, the shareholders are
assured of a fair return on their investments.
(ii) Limitations of Internal control:
(i) Organizational structures: Deficiencies in organizational structure make internal
control ineffective.
(ii) Size of the organization: Small organizations have very low levels of internal
control, which are almost negligible due to more interference by owners and
management.
(iii) Unusual transactions: The internal control procedures normally fail to keep a
check on unusual transactions.
(iv) Costly: The implementation of internal control procedures and processes involves
incurring costs in terms of time, effort and resources.
(v) Abuse of power: Members at the top level management may override/ interfere
with control.
(v) Conclusion of two or more people.
(vii) Obsolence
(viii) Potential for human error.
(ix) Frequent follow-up measures.
Page 19
12x2=24
(a)
(i) Mr. Jaggu, Auditor of Baiju Limited is of the opinion that 'Standards on Auditing' are
meant only for reference purpose and it is not necessary to follow such standards while
auditing. Give your comments.
4
(ii) Discuss the role of C & AG in the Audit of Government Company.
4
(iii) Distinguish between 'Qualified Report' and 'Adverse Report' of an Auditor.
4
(b)
(i) State the parameters to be satisfied for issuing an unqualified audit report?
4
(ii) Explain the significance of audit working papers.
4
(iii) A Company disclosed ` 15 Lakhs as outstanding from Bihar Ltd. as on 31.3.2013. Bihar Ltd.
declared itself sick and filed for bankruptcy in May, 2013. As the Auditor of the Company
how will you approach the issue?
4
(c)
(i) State the areas of operations of Internal Audit and its features.
8
(ii) What is cut off procedure? Explain its significance in the context of Auditing.
4
Answer:
7. (a)
(i) Contention of Mr. Jaggu is totally wrong and is against the fundamental assumptions
and guidelines governing auditing and assurance standards.
As per ICAl, while discharging their attest function, it will be the duty of the members
of the Institute to ensure that the Auditing Standards are followed. The Auditing
Standards will apply whenever an independent financial audit is carried out to
express an opinion thereon.
The member of the Institute must follow the Auditing Standards. The auditors must
draw attention to the material departures from Auditing Standards in their audit
report along with the reasons for such departure.
Auditors in their report have to mention that audit was conducted in accordance
with "Generally accepted auditing standards" in Indian context. Hence Mr. Jaggu is
duty bound to follow the Auditing Standards.
(ii) Role of C&AG in the Audit of a Government company: The auditor of a government
company is appointed by the C&AG. The C&AG have powers under section 619(3)
of the Companies Act, 1956 as follows:
A. to direct the manner in which the company's accounts shall be audited by the
auditor and to give such auditor instructions in regard to any matter relating to
the performance of his functions as such;
B. to conduct a supplementary or test audit of the company's accounts by such
person or persons as he may authorize in this behalf; and for the purposes of such
audit, to require information or additional information to be furnished to person
or persons so authorized, on such matters, by such person or persons, and in such
form, as the Comptroller and Auditor-General may by general or special order;
direct.
In addition, the C&AG has a right to comment upon or supplement the audit
report in such manner as he thinks fit.
(iii)
Distinguish Between Qualified Report and Adverse Report

Qualified Report
Adverse Report
Page 20
i. A Qualified Audit Report is one an An Adverse Report is given when the
Auditor gives an opinion subject to auditor concludes that based on his
certain reservations.
examination, he does not agree with the
affirmations made in the Financial
Statements / Financial Report,
ii. The Auditor's reservation is generally
Stated as: "Subject to the above, we
report that the Balance Sheet shows a
true and fair view."
The Auditor states that the Financial

Statements do not present a true and fair
view of the state of affairs and working
results of the organisation.
iii. The accounts present a true and fair The accounts do not present a true and fair
view subject to certain reservations.
view on the whole.
iv. A Qualification is made In the Audit An Adverse Report is given when the
Report when the Auditor has reservation Auditor has his reservations on the true
on specific item(s) of material nature
and fair view presented by the Financial
Statements
(b)
(i) An unqualified audit report could be issued when the following parameters are met:
(i) Evidence: Reasonable evidence is obtained in support of transactions recorded
in the books of account.
(ii) Standards: Accounting entries passed in the books of account are in conformity
with the generally applicable accounting principles and Accounting standards
followed consistently.
(iii) True and Fair: The financial statements prepared represent a true and fair
summary of the transactions that took place during the year.
(iv) Classification: The process of classification and aggregation followed in the
preparation of the financial statements is fair and it does not hide a material fact
nor does it highlight something, which may distort the real state of affairs.
(v) Format: The form of financial statement is in accordance with the form
prescribed by law, if any.
(vi) Free of misstatements: There are no material misstatements in the financial
statements. No material transaction recorded in the books of account is illegal or
beyond the legal competence of the company.
(ii)
Working Papers are necessary to (a) Aid in planning and performance of the audit,
(b) Aid in the supervision and review of the audit work,
(c) Provide evidence of the audit work performed to support the Auditor's opinion,
(d) Record and demonstrate the audit work from one year to another,
(e) Plan the timing and extent of audit procedures to be performed,
(f) Draw conclusions from the evidence obtained,
(g) Standardize the Working Papers and audit procedures to improve the efficiency
of the audit,
(h) Facilitate the delegation of work as a means to control quality of work performed,
(i) Provide guidance to the audit staff with regard to the manner of checking the
schedules,
(j) Fix responsibility on the staff member who signs each schedule checked by him,
and
Page 21
(k) Act as evidence in a Court of law when a charge of negligence is brought
against the auditor.
(iii) AS-4 requires all significant events occurring after the balance sheet date and before
the date of approval of accounts by the Board of directors should be adjusted, if
additional evidence is available in respect of conditions that existed on the balance
sheet date.
In the given case, debtors should be suitable adjusted in the financial statements, to
show their realizable amount, since the conditions existed on the balance sheet date in
respect of which additional evidence has been provided by the insolvency of Bihar
Ltd.
So the auditor should examine the company's compliance with AS-4 and report
accordingly.
(C)
(i) Internal audit involves five areas of operations (i) Reliability and integrity of financial and operative information: Internal auditors
should review the reliability and integrity of financial and operation information
and the means used to identify measures classify and report of such information.
(ii) Compliance with laws, policies, plans, procedures and regulations: Internal
auditor should review the systems established to ensure compliance with those
policies, plans and procedures. Law and regulations which could have a
significant impact on operations and it should determine whether the
organization is in compliance thereof.
(iii) Safeguarding of assets: Internal auditors should verify the existence of assets and
should review the means of safeguarding assets.
(iv) Economic and efficient use of resources: Internal auditor should ensure the
economic and efficient use of resources available.
(v) Accomplishing of established objectives and goals for operations: Internal auditor
should review operations or programmes to ascertain whether results are
consistent with established objectives and goals and whether the operations or
programmes are being carried out as planned.
Features of internal audit:
(i) It is an independent appraisal activity within the organization or through an
external source.
(ii) It can also be conducted by the staff of the entity or by an independent
professional appointed for that purpose.
(iii) It is conducted for review of accounting, financial and other operations and
controls established within an organization.
(iv) It is conducted as a service to the organization and is not a part of the
organization.
(v) It intends to furnish the analysis, appraisals, suggestions and information
concerning the activities to be reviewed by the management.
(vi) Internal auditing functions as a continuous effort for promoting effective control
at reasonable cost.
(ii) Cut off procedure would mean a procedure adopted to give a delink between two
time periods prompted by accounting procedure or a legal requirement.
Example: Date of accounting closing to ascertain the profit or loss - for accounting
procedure.
Ascertain the profits between pre and post incorporation periods - legal requirement.
Possible areas were cut off procedure has significant impact is given below:
(a) Accounts receivable and accounts payable these are the most susceptible to
Page 22
recording of transactions in the inappropriate accounting period.
(b) Purchase bills or rising of sales invoice which requires to be linked to the
accounting period for determining the profit or loss of the period.
It is the auditor's duty to examine cut off points and ensure that the transactions are
recorded in the relevant period in which the commercial transactions relate to or take
place.
Page 23

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Suggested Answer_Syl12_Dec13_Paper 12

SUGGESTED ANSWERS TO QUESTION

Paper 12: COMPANY ACCOUNTS AND AUDIT

Full Marks: 100

1. (Compulsory) Answer the following:

Kovid Limited has taken a Machinery on Lease from Krishna Limited.

Present Value (`)

Books of Kovid Ltd.

By Finance Charge A/c

By Finance Charge A/c By

By Finance Charge A/c By

By Finance Charge A/c

(c) (i) Characteristics of a Liability:

10% of Net Profit

11% of Net Profit

Balance Sheet figures

Depreciation amounting to ` 1,42,000 and Profit on sale of Machinery amounting to ` 21,000

Tree Ltd. will:

The liquidator realized the assets as follows:

Goodwill written off

Transfer to General Reserve

Profit on sale of machinery

Operating profit before working capital Adj.

Decrease in prepaid Expenses

Decrease in provision for Doubtful debts

Cash generated from operations

Net cash from operating Activities

To Bank A/c(Tax paid)

Provision for Taxation A/c

To, Debtors A/c

Tree Ltd. Account

To, Realization A/c

Note: Balance Partly Secured creditors are treated as Unsecured Creditors.

1, 20, 00, 000

1, 50, 00, 000 - 30, 00, 000

Net Assets of Z Ltd or Gross Purchase Consideration

Value of shares in Y ltd. (2,00,000 x12)

75, 00, 000

Less: shares already held by Y Ltd.

Hence, Purchase Consideration for accounting purpose

Equity and Liabilities

(b) Reserves and surplus

Share application money pending allotment

(a) Fixed assets

(i) Tangible assets

(ii) Intangible assets

(c) Trade receivables

(d) Cash and cash equivalents

As at 31st March, 2013

Equity Share Capital

Reconciliation of Equity Shares

Opening Balance of `10 each

Less: Buy Back of shares

Note 2. Reserves and Surplus

Reserve and Surplus

Sundry creditors (30,00,000 + 19,00,000 5,00,000)

Note 4. Tangible Assets

Fixed Assets (1,10,00,000+50,00,000)