ANSWER

Cash flow statement (using direct method) for the year ended 31st March, 2021

Working Note:
Calculation of cash paid to suppliers of goods and services and to employees

(Rs. in crores)
Opening Balance in creditors Account 126
Add: Purchases (330x .8) 264

998
Total 390
Less: Closing balance in Creditors Account 138
Cash paid to suppliers of goods 252
Add: Cash purchases (330x .2) 66
Total cash paid for purchases to suppliers (a) 318
Add: Cash paid to suppliers of other consumables and services (b) 28.5
Add: Payment to employees (c) 30
Total cash paid to suppliers of goods & services and to employees [(a)+ (b) + (c)] 376.5
Profit/Loss prior to Incorporation
4. New Limited was incorporated on 01.08.2020 to take-over the business of a partnership firm
w.e.f. 01.04.2020. It provides you the following information for the year ended 31.03.2021:

Gross profit 9,00,000

Expenses:
Salaries 1,80,000
Rent, Rates & Taxes 1,20,000
Depreciation 37,500
Commission on Sales 31,500
Interest on Debentures 48,000
Director’s Fees 18,000
Advertisement 54,000
Net Profit for the Year 4,11,000

(i) New Limited initiated an advertising campaign which resulted increase in monthly average sales
by 25% post incorporation.

(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-
incorporation periods.

ANSWER

Statement showing the calculation of Profits for the pre-incorporation and post-incorporation
periods

999
Working Notes:

1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2020 to 31.7.2020) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.20 to 31.3.2021) = x + 25% of x= 1.25x
Then, sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4 x :10x i.e. 2:5

2. Gross profit ratio

From 1.4.2020 to 31.7.2020 gross profit is 25% of sales
Then, 25% of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.20 to 31.3.2021) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1:3

3. Time ratio
1st April, 2020 to 31st July, 2020 : 1st August, 2020 to 31st March, 2021
= 4 months: 8 months = 1:2
Thus, time ratio is 1:2.

Accounting for Bonus Issue

5. Raman Ltd. gives the following information as at 31st March, 2021:

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On 1st April, 2021, the Company has made final call @ Rs. 2 each on 4,05,000 equity shares. The
call money was received by 20th April, 2021. Thereafter, the company decided to capitalize its
reserves by way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company.

ANSWER

Journal Entries in the books of Raman Ltd.

Issue of Right Shares

6. Super company offers new shares of Rs. 100 each at 20% premium to existing shareholders on

1001
the basis one for four shares. The cum-right market price of a share is Rs. 190.
You are required to calculate the value of a right share.

ANSWER

Value of right = Cum-right value of the share – Ex-right value of the share (as computed in Working
Note)
= Rs. 190 – Rs. 176 = Rs. 14 per share.
Working Note:

Ex-right value of the shares

= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares + No.
of right shares) = (Rs. 190 X 4 Shares + Rs. 120 X 1 Share) / (4 + 1) Shares

= Rs. 880 / 5 shares = Rs. 176 per share.

Redemption of Preference Shares

7. Neeraj Ltd.’s capital structure consists of 45,000 Equity Shares of Rs. 10 each fully paid up and
3,000 9% Redeemable Preference Shares of Rs. 100 each fully paid up as on 31.03.2021. The other
particulars as at 31.03.2021 are as follows:

Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the
undistributed reserve & surplus, subject to the conditions that a sum of Rs. 60,000 shall be
retained in General Reserve and which should not be utilized. Company also sold investment of
6,750 Equity Shares in Kumar Ltd., costing Rs.67,500 at Rs. 9 per share.

Pass Journal entries to give effect to the above arrangements and also show how the relevant
items will appear in the Balance Sheet as at 31.03.2021 of Neeraj Ltd. after the redemption is

1002
carried out.

ANSWER
Journal Entries

Balance Sheet as at 31.3.2021[Extracts]

1003
Notes to accounts

Working Note:

Number of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed Rs. 3,00,000

Less: Profit available for distribution as dividend:
General Reserve: Rs. (1,80,000-60,000) Rs. 1,20,000

Profit and Loss (90,000 less 30,000 set aside for

adjusting premium payable on redemption of Pref.
shares less 6,750 loss on sale of investments)= Rs. 53,250
Rs. (1,73,250)
Rs. 1,26,750

Therefore, No. of shares to be issued = Rs. 1,26,750/Rs.10 = 12,675 shares

Redemption of Debentures

8. Jeet Limited (listed company) recently made a public issue in respect of which the following

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information is available:

(a) No. of partly convertible debentures issued - 1,00,000; face value and issue price- Rs. 100 per
debenture

(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the
date of closing of issue i.e 31.10.2020.
(c) Date of closure of subscription lists - 1.5.2020, date of allotment- 1.6.2020, rate of interest on
debenture- 15% payable from the date of allotment, value of equity share for the purpose of
conversion- Rs. 60 (Face Value Rs. 10).

(d) Underwriting Commission- 2%.

(e) Number of debentures applied for - 75,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended
31st March, 2021 (including cash and bank entries).

ANSWER

Journal Entries in the books of Jeet Ltd.

Journal Entries

1005
Working Note :

Calculation of Debenture Interest for the half year ended 31st March, 2021

On Rs. 40,00,000 for 6 months @ 15% = Rs. 3,00,000

On Rs. 60,00,000 for 1 months @ 15% = Rs. 75,000
Rs. 3,75,000

Investment Accounts

9. (a) Following transactions of Meeta took place during the financial year 2020-21:

1st April, 2020 Purchased Rs. 4,500 8% bonds of Rs. 100 each at Rs. 80.50
cum-interest. Interest is payable on 1st November and 1st
May.
1st May, 2020 Received half year’s interest on 8% bonds.
10 July, 2020 Purchased 6,000 equity shares of Rs. 10 each in Kamal
Limited for Rs. 44 each through a broker, who charged
brokerage @ 2%.
1st October 2020 Sold 1,125 8% bonds at Rs. 81 Ex-interest.
1st November, Received half year’s interest on 8% bonds.
2020
15th January, Received 18% interim dividend on equity shares of Kamal
2021 Limited.
15th March, 2021 Kamal Limited made a rights issue of one equity share for

1006
every four Equity shares held at Rs. 5 per share. Meeta
exercised the option for 40% of her entitlements and sold
the balance rights in the market at Rs. 2.25 per share.

Prepare separate investment account for 8% bonds and equity shares of Kamal Limited in the
books of Meeta for the year ended on 31st March, 2021. Assume that the average cost method is
followed.

ANSWER
In the books of Meeta
8% Bonds for the year ended 31st March, 2021

Investment in Equity shares of Kamal Ltd. for the year ended 31st March, 2021

1007
Working Notes:

1. Profit on sale of 8% Bonds

Sales price Rs. 91,125
Less: Cost of bonds sold = 3,47,250/4,500x 1,125 (Rs. 86,812.50)
Profit on sale Rs. 4,312.50

2. Closing balance as on 31.3.2021 of 8 % Bonds

3,47,250/4,500x 3,375= Rs. 2,60,437.50

3. Calculation of right shares subscribed by Kamal Ltd.

Right Shares = 6,000/4 x 1= 1,500 shares
Shares subscribed by Meeta = 1,500 x 40%= 600 shares
Value of right shares subscribed = 600 shares @ Rs. 5 per share = Rs. 3,000

4. Calculation of sale of right entitlement by Kamal Ltd.

No. of right shares sold = 1,500 – 600 = 900 rights for 2,025
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.

Insurance Claim for loss of stock or loss of profit

10. On 2.6.2021 the stock of Mr. Heera was destroyed by fire. However, following particulars were
furnished from the records saved:

Stock at cost on 1.4.2020 2,02,500

Stock at 90% of cost on 31.3.2021 2,43,000
Purchases for the year ended 9,67,500
31.3.2021
Sales for the year ended 13,50,000
31.3.2021
Purchases from 1.4.2021 to 3,37,500
2.6.2021
Sales from 1.4.2021 to 2.6.2021 7,20,000

Sales up to 2.6.2021 includes Rs. 1,12,500 being the goods not dispatched to the customers. The
sales (invoice) price is Rs. 1,12,500.
Purchases up to 2.6.2021 includes a machinery acquired for Rs. 22,500.
Purchases up to 2.6.2021 does not include goods worth Rs. 45,000 received from suppliers, as

1008
invoice not received up to the date of fire. These goods have remained in the godown at the time
of fire. The insurance policy is for Rs. 1,80,000 and it is subject to average clause. Ascertain the
amount of claim for loss of stock.

ANSWER

In the books of Mr. Heera

Trading Account for the year ended 31.3.2021 Hire Purchase Transactions
Memorandum Trading A/c
for the period from 1.4.2021 to 02.06.2021

Calculation of Insurance Claim

1009

11. On January 1, 2018 M/s Hello acquired a Machine on hire purchase from M/s Pass. The terms
of the contract were as follows:

(a) The cash price of the Machine was Rs. 2,00,000.

(b) Rs. 80,000 were to be paid on signing of the contract.

(c) The balance was to be paid in annual instalments of Rs. 40,000 plus interest. The first
instalment was to be paid on 31st Dec. 2018.

(d) Interest chargeable on the outstanding balance was 6% p.a.

(e) Depreciation at 10% p.a. is to be written-off using the WDV method.

You are required to give Journal Entries in the books of M/s Hello from January 1, 2018 to
December 31, 2020.

ANSWER

In the books of M/s Hello

Journal Entries

1010
1011
1012
Departmental Accounts

12. M/s. Hero is a Departmental Store having three departments X, Y and Z. The information
regarding three departments for the year ended 31st March, 2021 are given below:

Particulars Dept. X Dept. Y Dept. Z

Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in Sq. ft.) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
Electricity consumed by each Department (in units) 300 200 100

Additional Information:

Carriage inwards 1,500

Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400

Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2021 after

1013
providing provision for Bad Debts at 5%.

ANSWER

In the Books of M/s Hero

Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2021
Working Note:

1014
Accounting for Branches

13. Lal & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The branch
makes both cash & credit sales. Branch expenses are paid direct from Head office and the branch
has to remit all cash received into the bank account of Head office. Branch doesn't maintain any
books of accounts but sends monthly returns to the head office.

Following further details are given for the year ended 31st March, 2020:

Goods received from Head office at Invoice Price 4,20,000

Goods returned to Head office at Invoice Price 30,000
Cash sales for the year 2019-20 92,500
Credit Sales for the year 2019-20 3,12,500
Stock at Branch as on 01-04-2019 at Invoice price 36,000
Sundry Debtors at Patna branch as on 01-04-2019 48,000
Cash received from Debtors 2,19,000
Discount allowed to Debtors 3,750
Goods returned by customer at Patna Branch 7,000
Bad debts written off 2,750
Amount recovered from Bad debts previously written off as Bad 500
Rent, Rates & taxes at Branch 12,000
Salaries & wages at Branch 36,000
Office Expenses (at Branch) 4,600
Stock at Branch as on 31-03-2020 at cost price 62,500

1015
Prepare necessary ledger accounts in the books of Head office by following Stock and Debtors
method and ascertain Branch profit.
ANSWER

Branch Stock Account

Branch Debtors Account

Branch Expenses Account

1016
Branch Profit & Loss Account for year ended 31.3.20

Branch Stock Adjustment Account for year ended 31.3.20

Accounts from Incomplete Records

14. From the following details furnished by Mittal ji, prepare Trading and Profit and Loss account
for the year ended 31.3.2021. Also draft his Balance Sheet as at 31.3.2021:

1.4.2020 31.3.2021
Rs. Rs.
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600

1017
Plant and Machinery 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Details of the year’s transactions are as follows:
Cash and discount credited to debtors 12,80,000
Returns from debtors 29,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200
Discount allowed by creditors 14,000
Returns to creditors 8,000
Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into bank after 12,50,000
receiving cash)
Cash purchases 20,600
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400

Note: Mittalji has not sold any machinery during the year.

ANSWER

In the books of Mittal ji

Trading and Profit and Loss Account
for the year ended 31st March, 2021

1018
Balance Sheet as at 31st March, 2021

Working Notes:
(1) Statement of Affairs as at 31st March, 2020

(2) Sundry Debtors Account

1019
(3) Sundry Creditors Account

(4)

(5) Expenses to be shown in profit and loss account

(6) Cash and Bank Account

1020
Framework for Preparation and Presentation of Financial Statements

15. What is meant by ‘Measurement’? What are the bases of measurement of Elements of
Financial Statements? Explain in brief.

ANSWER

Measurement is the process of determining money value at which an element can be recognized in
the balance sheet or statement of profit and loss. The framework recognizes four alternative
measurement bases for the purpose. These bases can be explained as:

Historical cost This is the Acquisition price. According to this, assets are recorded
at an amount of cash and cash equivalent paid or the fair value of
the assets at time of acquisition.
Current Cost Assets are carried out at the amount of cash or cash equivalent that
would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted
amount of cash or cash equivalents that would be required to settle
the obligation currently.
Realisable (Settlement) Value For assets, amount currently realizable on sale of the asset in an
orderly disposal. For liabilities, this is the undiscounted amount
expected to be paid on settlement of liability in the normal course
of business.
Present Value Assets are carried at present value of future net cash flows
generated by the concerned assets in the normal course of
business. Liabilities are carried at present value of future net cash
flows that are expected to be required to settle the liability in the
normal course of business

1021
In preparation of financial statements, all or any of the measurement basis can be used in varying
combinations to assign money values to financial items.
AS 2 Valuation of Inventories

16. On 31st March 2020, a business firm finds that cost of a partly finished unit on that date is Rs.
430. The unit can be finished in 2020-21 by an additional expenditure of Rs. 310. The finished unit
can be sold for Rs. 750 subject to payment of 2% brokerage on selling price. The firm seeks your
advice regarding the amount at which the unfinished unit should be valued as at 31st March, 2020
for preparation of final accounts. Assume that the partly finished unit cannot be sold in semi-
finished form and its NRV is zero without processing it further.

ANSWER

Valuation of unfinished unit

AS 10 Property, Plant and Equipment

17. A property costing Rs. 10,00,000 is bought on 1.4.2020. Its estimated total physical life is 50
years. However, the company considers it likely that it will sell the property after 25 years.
The estimated residual value in 25 years' time, based on current year prices, is:
Case (a) Rs. 10,00,000
Case (b) Rs. 9,00,000
You are required to compute the amount of depreciation charged for the year ended 31.3.2021.

1022
ANSWER

Case (a)
The company considers that the residual value, based on prices prevailing at the balance sheet date,
will equal the cost.
There is, therefore, no depreciable amount and depreciation is zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the balance sheet date,
will be Rs. 9,00,000 and the depreciable amount is, therefore, Rs. 1,00,000.
Annual depreciation (on a straight line basis) will be Rs. 4,000 [{10,00,000 – 9,00,000} ÷ 25].

AS 11 The Effects of Changes in Foreign Exchange Rates

18. Mona Ltd. purchased a plant for US$ 1,00,000 on 01st December 2020, payable after three
months. Company entered into a forward contract for three months @ Rs. 49.15 per dollar.
Exchange rate per dollar on 01st December was Rs. 48.85. How will you recognize the profit or loss
on forward contract in the books of Mona Ltd for the year ended 31st March, 2021?

ANSWER

Forward Rate Rs. 49.15

Less: Spot Rate (Rs. 48.85)
Premium on Contract Rs. 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) Rs. 30,000 to be recognized in year ended 31.3.2021.

AS 12 Accounting for Government Grants

19. (a) D Ltd. acquired a machine on 01-04-2017 for Rs. 20,00,000. The useful life is 5 years. The
company had applied on 01-04-2017, for a subsidy to the tune of 80% of the cost. The sanction
letter for subsidy was received in November 2020. The Company’s Fixed Assets Account for the
financial year 2020-21 shows a credit balance as under:

1023

You are required to explain how should the company deal with this asset in its accounts for 2020-
21?
ANSWER

(a) From the above account, it is inferred that the Company has deducted grant from the book value
of asset for accounting of Government Grants. Accordingly, out of the Rs. 16,00,000 that has been
received, Rs. 8,00,000 (being the balance in Machinery A/c) should be credited to the machinery A/c.
The balance Rs. 8,00,000 may be credited to P&L A/c, since already the cost of the asset to the tune
of Rs. 12,00,000 had been debited to P&L A/c in the earlier years by way of depreciation charge, and
Rs. 8,00,000 transferred to P&L A/c now would be partial recovery of that cost.
There is no need to provide depreciation for 2020-21 or 2021-22 as the depreciable amount is now
Nil.

AS 13 Accounting for Investments

(b) Z Bank has classified its total investment on 31-3-2021 into three categories (a) held to maturity
(b) available for sale (c) held for trading as per the RBI Guidelines.
‘Held to maturity’ investments are carried at acquisition cost less amortised amount. ‘Available for
sale’ investments are carried at marked to market. ‘Held for trading’ investments are valued at
weekly intervals at market rates. Net depreciation, if any, is charged to revenue and net
appreciation, if any, is ignored. Comment whether the policy of the bank is in accordance with AS
13?

ANSWER
(b) As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to Bank,
Insurance Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does not apply to it.
For banks, the RBI has issued guidelines for classification and valuation of its investment and Z Bank
should comply with those RBI Guidelines/Norms. Therefore, though Z Bank has not followed the
provisions of AS 13, yet it would not be said as non-compliance since, it is complying with the norms
stipulated by the RBI.

AS 16 Borrowing Costs
20. In May, 2020, Omega Ltd. took a bank loan from a Bank. This loan was to be used specifically
for the construction of a new factory building. The construction was completed in January, 2021
and the building was put to its use immediately thereafter. Interest on the actual amount used for
construction of the building till its completion was Rs. 18 lakhs, whereas the total interest payable
to the bank on the loan for the period till 31st March, 2021 amounted to Rs. 25 lakhs.
the company wants to treat Rs. 25 lakhs as part of the cost of factory building and thus capitalize it

1024
on the plea that the loan was specifically taken for the construction of factory building? Explain the
treatment in line with the provisions of AS 16.

ANSWER

AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the
activities necessary to prepare the qualifying asset for its intended use are completed. Therefore,
interest on the amount that has been used for the construction of the building up to the date of
completion (January, 2021) i.e. Rs. 18 lakhs alone can be capitalized. It cannot be extended to Rs. 25
lakhs.
PAST PAPER JULY 2021

Question 1
Answer the following questions:
(a) Joy Ltd. purchased 20,000 kilograms of Raw Material @ ` 20 per kilogram during the year 2020-
21. They have furnished you with the following further information for the year ended 31st March,
2021:

The plant has a capacity to produce 30,000 units of finished product per annum. However, the
actual production of finished products during the year 2020-21 was 20,400 units. Due to a fall in
the market demand, the price of the finished goods in which the raw material has been utilized is
expected to be sold @ ` 40 per unit. The replacement cost of the raw material was ` 19 per

1025
kilogram.
You are required to ascertain the value of closing inventory as at 31st March, 2021 as per AS 2.

Answer
(a) Statement Showing the Computation of Value of Closing Inventory
Value of Closing Finished Goods
Since net realizable value is less than cost, closing inventory of Finished Goods will be valued at ` 40 per unit
Value of Closing Raw Materials
As NRV of finished goods is less than its cost, the relevant raw material will be valued at its replacement cost,
which is the best available measure of its NRV i.e. @ ` 19 per kg.
Therefore, value of closing ` 96,000
inventory would be as under:
Finished Goods 2,400 units @ ` 40
per unit
Raw Materials 1,800 kg @ ` 19 per ` 34,200
kg
Total ` 1,30,200

Particulars Unit (Kg)

Opening Inventory 2,200
Purchases 20,000
Less: Closing Inventory (1,800)
Raw Material Consumed 20,400

(b) (i) A Limited has contracted with a supplier to purchase machinery which is to be installed at its
new plant in four months time. Special foundations were required for the machinery which were
to be prepared within this supply lead time. The cost of the site preparation and laying foundations
were ` 2,10,000. These activities were supervised by an Architect during the entire period, who is

1026
employed for this purpose at a salary of ` 35,000 per month. The machinery was purchased for `
1,27,50,000 and a sum of ` 2,12,500 was incurred towards transportation charges to bring the
machinery to the plant site. An Engineer was appointed at a fees of ` 37,500 to supervise the
installation of the machinery at the plant site. You are required to ascertain the amount at which
the machinery should be capitalized in the books of A Limited.

ANSWER
(i) Statement Showing the Computation of the amount at which the Machinery should be capitalized in the
books of A Limited
(ii) B Limited, which operates a major chain of retail stores, has acquired a new store location. The
new location requires substantial renovation expenditure. Management expects that the
renovation will last for 4 months during which the store will be closed. Management has prepared
the budget for this period including expenditure related to construction and re-modelling costs,
salary of staff who shall be preparing the store before its opening and related utilities cost. How
would such expenditure be treated in the books of B Limited ?

ANSWER

(ii) Management should capitalize the costs of construction and remodelling the store, because they are
necessary to bring the store to the condition necessary for it to be capable of operating in the manner
intended by management. The store cannot be opened without incurring the remodelling expenditure, and
thus the expenditure should be considered part of the asset. However, if the cost of salaries, utilities and
storage of goods are in the nature of operating expenditure that would be incurred if the store was open, then
these costs are not necessary to bring the store to the condition necessary for it to be capable of operating in
the manner intended by management and should be expensed.

(c) Alps Limited has received the following Grants from the Government during the year ended

1027
31st March, 2021:
(i) ` 120 Lacs received as Subsidy from the Central Government for setting up an Industrial
undertaking in Medak, a notified backward area.

ANSWER
As per AS 12 ‘Accounting for Government Grants’, where the government grants are in the nature of
promoters’ contribution i.e., they are given with reference to the total investment in an undertaking or by way
of contribution towards its total capital outlay and no repayment is ordinarily expected in respect thereof, the
grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred
income. In the given case, the subsidy received from the Central Government for setting up an industrial
undertaking in Medak is neither in relation to specific fixed asset nor in relation in revenue. Thus, the amount
of ` 120 Lacs should be credited to capital reserve.
(Note: Subsidy for setting up an industrial undertaking is considered to be in the nature of promoter’s
contribution)

(ii) ` 15 Lacs Grant received from the Central Government on installation of Effluent Treatment
Plant.
ANSWER
As per AS 12 ‘Accounting for Government Grants’, two methods of presentation in financial statements of
grants related to specific fixed assets are regarded as acceptable alternatives –
(a) The grant is shown as a deduction from the gross value of the asset concerned in arriving at its book value.
The grant is thus recognised in the profit and loss statement over the useful life of a depreciable asset by way
of a reduced depreciation charge. Where the grant equals the whole, or virtually the whole, of the cost of the
asset, the asset is shown in the balance sheet at a nominal value.
(b) Grants related to depreciable asset are treated as deferred income which is recognised in the profit and
loss statement on a systematic and rational basis over the useful life of the asset.
In the given case, ` 15 Lacs was received as grant from the Central Government for installation of Effluent
Treatment Plant. Since the grant was received for a fixed asset, either of the above methods can be adopted.

(iii) ` 25 Lacs received from State Government for providing Medical facilities to its workmen during
the pandemic.
Advise Alps Limited on the treatment of the above Grants in its books of Account in accordance
with AS-12 "Government Grants".

ANSWER
` 25 lacs received from State Government for providing medical facilities to its workmen during the pandemic
is a grant received in nature of revenue grant. Such grants are generally presented as credit in the profit and
loss statement, either separately or under a general heading such as “Other Income”. Alternatively, ` 25 lacs
may be deducted in reporting the related expense i.e., employee benefit expense.

(d) Prepare cash flow statement of Gama Limited for the year ended 31st March, 2021 in

1028
accordance with AS-3(Revised) from the following cash account summary :
Cash summary Account
ANSWER

Gama Limited
Cash Flow Statement
For the Year Ended 31st March 2021

1029
 1030
Question 2.
Mr. Z has made following transactions during the financial year 2020-21:
Investment 1: 8% Corporate Bonds having face value ` 100.

Date Particulars
01-06-2020 Purchased 36,000 Bonds at ` 86 cum-
interest. Interest is payable on 30th
 September and 31st March every year
15-02-2021 Sold 24,000 Bonds at ` 92 ex-interest

Interest on the bonds is received on 30th September and 31st March.

Investment 2 : Equity Shares of G Ltd having face value ` 10

Date Particulars
01-04-2020 Opening balance 8,000 equity shares at a book value of ` 190 per share
01-05-2020 Purchased 7,000 equity shares@ ` 230 on cum right basis; Brokerage of 1% was paid in
addition.
15-06-2020 The company announced a bonus issue of 2 shares for every 5 shares held
01-08-2020 The company made a rights issue of 1 share for every 7 shares held at ` 230 per share. The
entire money was payable by 31.08.2020
25-08-2020 Rights to the extent of 30% of his entitlements was sold @ ` 75 per share. The remaining
rights were subscribed.
16-09-2020 Dividend @ ` 6 per share for the year ended 31.03.2020 was received on 16.09.2020. No
dividend payable on Right issue and Bonus issue.
01-12-2020 Sold 7,000 shares @ 260 per share. Brokerage of 1% was incurred extra.
25-01-2021 Received interim dividend @ ` 3 per share for the year 2020-21.
31-03-2021 The shares were quoted in the stock exchange @ ` 260.
Both investments have been classified as Current investment in the books of Mr. Z. On 15th May 2021, Mr. Z
decides to reclassify investment in equity shares of Z Ltd. as Long term Investment. On 15th May 2021, the
shares were quoted in the stock exchange @ ` 180.
You are required to:
(i) Prepare Investment Accounts in the books of Mr. Z for the year 2020-21, assuming that the average cost
method is followed.
(ii) Profit and loss Account for the year 2020-21, based on the above information.
(iii) Suggest values at which investment in equity shares should be reclassified in accordance with AS 13.

Answer

In the books of Mr. Z

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Investment in 8% Corporate Bonds Account
For the period 01 April 2020 to 31 March 2021
Note: For computing the interest on the bonds sold on 15 Feb 2021, if number of days (138 days) is taken
instead of months, the interest received on 15.02.2021 should be `72,592 and the total interest transferred to
Profit & Loss Account should be ` 2,16,592.

Investment in Equity Shares of G Ltd

For the period 1st April 2020 to 31 March 2021

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Working Notes
1. Computation of the Interest element in the bonds purchased on 01 June 2020
No of Bonds purchased 36,000
Face value per bond ` 100
Face value of the bonds purchased ` 36,00,000
Interest Rate 8%
Interest Amount 36,00,000 x 8% x 2/12
` 48,000
Cum-interest per bond ` 86
Value of bond excluding interest 36,000 x ` 86 – `48,000
` 30,48,000

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Face value of the bonds sold ` 24,00,000
Interest Rate 8%
Interest Amount ` 24,00,000 x 8% x 4.5/12
` 72,000

3. Computation of Profit on Sale of Bonds on 15 Feb 2021

No of Bonds sold 24,000

Face value per bond ` 100
Ex- interest Rate per bond ` 92
Sales proceeds ` 22,08,000
Average Cost of Bonds (30,48,000/36,000) x 24,000
` 20,32,000
Profit on sale of bonds Sale Proceeds – Average Cost
` 22,08,000 – ` 20,32,000
` 1,76,000

4. Valuation of Bonds as on 31 March 2021

No of Bonds held as on 31 Mar 12,000

2021
Average Cost of Bonds (` 30,48,000/36,000) x 12,000
` 10,16,000

5. Computation of the cost of the equity shares purchased on 01 May 2020

No of shares purchased 7,000

Cum right price per share ` 230
Cost of purchase ` 16,10,000
Brokerage @1% ` 16,100
Cost including brokerage ` 16,26,100

6. Right Shares

No of Right Shares Issued (8,000+7,000+6,000)/7 = 3,000 shares

No of right shares sold 3,000 shares x 30% = 900 shares
Proceeds from sale of right shares to be credited to statement 900 shares x ` 75 = ` 67,500
of profit & loss
No of right shares subscribed 3,000-900 = 2,100 shares
Amount of right shares subscribed 2,100 x 230 = ` 4,83,000

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7. Computation of Dividend Received on 16 Sept 2020

No of shares held during the period of dividend 8,000 shares

Dividend per share `6
Dividend Amount 8,000 x 6 = ` 48,000
No of shares received after the period of dividend (excluding bonus & right shares) 7,000 shares
Dividend per share `6
Dividend Amount 7,000 x ` 6 = ` 42,000
The amount of dividend for the period for which the shares were not held by the investor has been treated as
capital receipt. Thus ` 42,000 shall be treated as capital receipt

8. Sale Proceeds for the shares sold on 1st Dec. 2020

No of shares sold 7,000 Shares

Sale price per share ` 260
Proceeds from sale of share 7,000 x 260 = ` 18,20,000
Less: Brokerage @ 1% ` 18,200
Net Sale Proceeds ` 18,01,800

9. Profit on sale of shares on 1st Dec. 2020

Sales Proceeds ` 18,01,800

Average Cost (15,20,000+16,26,100+4,83,000-
42,000)/23,100x7,000
= ` 10,87,000
Profit on sale of shares Sales Proceeds – Average Cost
= ` 18,01,800 - ` 10,87,000
= ` 7,14,800

10. Computation of Amount of Interim Dividend

No of shares held 8,000+7,000+6,000+2,100-7,000

= 16,100
Dividend per share ` 3 per share
Dividend Received 16,100 shares x ` 3 per share
= ` 48,300

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11. Valuation of Shares as on 31 March 2021

Cost of Shares (15,20,000 + 16,26,100 + 4,83,000 – 42,000) / 23,100 x 16,100

= 25,00,100
Market Value of Shares ` 260 x 16,100 = ` 41,86,000

Closing stock of equity shares has been value at ` 25,00,100 i.e. cost being lower than its market value.

(ii) Profit & Loss Account (Extract)

For the period 01 April 2020 to 31 March 2021

(iii) As per AS 13, when investments are classified from Current Investments to Long term Investments,
transfer is made at Cost and Fair value, whichever is less (as on the date of transfer). So, in the given case
valuation shall be done as follows:
Date of reclassification/transfer – 15 May 2021
Per Unit Cost of 16,100 shares held – ` 25,00,100/16,100 shares – ` 155.29
Market Price/Fair Value per share – ` 180
As the cost per unit is lower than its fair value, the shares are to be transferred at its cost i.e., at ` 155.29 per
share on 15 May 2021
Note:
1. In the eight last line of the question, investment in equity shares of G Ltd. was wrongly printed as Z Ltd. in
the question paper. In the above solution, it has been considered as investment in G Ltd. If considered as
Investment in equity shares in Z Ltd. (some other investment and not investment in G Ltd.), then the cost of
the investment for shares in Z Ltd. will not be available.

2. The entire amount of sale proceeds from rights has been credited to Profit and Loss account in the above
solution. However, the sale proceeds of rights in respect of 7,000 shares (purchased cum right on 1.5.20) can
be applied to reduce the carrying amount of such investments (without crediting it to profit and loss account)

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considering that the value of these shares has reduced after becoming their ex-right. In that case, ` 22,500
(67,500X 7/21) will be applied to reduce the carrying amount of investment and ` 45,000 will be credited to
profit and loss account.

Question 3
(a) Manohar of Mohali has a branch at Noida to which the goods are supplied from Mohali but the
cost thereof is not recorded in the Head Office books. On 31st March, 2020 the Branch Balance
Sheet was as follows:
During the six months ending on 30-09-2020, the following transactions took place at Noida:

Set out the Head Office Account in Noida Books and the Branch Balance Sheet as on 30.09.2020.
Also give journal entries in the Noida books.

ANSWER

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Journal Entries in the Books of Noida Branch
Head Office Account 1038
* Instead of using Sundries (Revenue) A/c, the concerned revenue accounts can be posted in the ledger.
Balance Sheet of Noida Branch
As at 30th Sept 2020

Working Notes
Cash and Bank Account

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Debtors Account

Creditors Account

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Note:
Since the date of payment of fire insurance has not been mentioned in the question, it is assumed that it was
paid on 01 April 2020. Alternative answer considering otherwise also possible.

(b) Mr. Arun runs a business of readymade garments. He closes the books of accounts on 31st
March. The Balance Sheet as on 31st March, 2020 was as follows :

You are furnished with following information :

(1) His sales, for the year ended 31st March, 2021 were 20% higher than the sales of previous year,
out of which 20% sales was cash sales.
Total Sales during the year 2019-20 were ` 6,25,000
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay by cheques only.
(4) Deprecation on furniture is to be charged 10% p.a.
(5) Mr. Arun sent to the bank the collection of the month at the last date of each month after
paying salary of ` 2,500 to the clerk, office expenses ` 1,500 and personal expenses ` 625.

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Analysis of bank pass book for the year ending 31st March, 2021 disclosed the following:
On the evening of 31st March, 2021, the cashier absconded with the available cash in the cash
book.

You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2021
and Balance Sheet as on that date. All the working should form part of the answer.

Answer

In the books of Mr. Arun

Trading and Profit and Loss Account for the Year Ended 31st March 2021

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Balance Sheet
As on 31st March 2021

Working Notes:
(1) Calculation of Purchases

Creditors Account

(2) Calculation of Total Sales

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(3) Calculation of Credit Sales

(4) Calculation of cash collected from debtors
Debtors Account

(5) Calculation of closing balance of cash at bank

Bank Account

(6) Calculation of the amount of cash defalcated by the cashier

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Question 4
The following is the Trial Balance of H Ltd., as on 31st March, 2021:

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Additional Information:
(i) The authorised share capital of the company is : `
5,000, 6% preference shares of ` 100 each 5,00,000
10,000, equity shares of ` 100 each 10,00,000
Issued equity capital as on 1st April 2020 stood at ` 7,20,000, that is 6,000 shares fully paid and
2,000 shares of ` 60 paid. The directors made a call of ` 40 per share on 1st October 2020. A
shareholder could not pay the call on 100 shares and his shares were then forfeited and reissued @
` 90 per share as fully paid.
(ii) On 31st March 2021, the Directors declared a dividend of 5% on equity shares, transferring any
amount that may be required from General Reserve. Ignore Taxation.
(iii) The company on the advice of independent valuer wishes to revalue the land at ` 36,00,000.

(iv) Suspense account of ` 40,000 represents amount received for the sale of some of the
machinery on 1-4-2020. The cost of the machinery was ` 1,00,000 and the accumulated
depreciation thereon being ` 30,000.

(v) Depreciation is to be provided on plant and machinery at 10% on cost.

(vi) Amortize 1/5th of Goodwill.

You are required to prepare H Limited's Balance Sheet as on 31-3-2021 and Statement of Profit and
Loss with notes to accounts for the year ended 31-3-2021 as per Schedule III of the Companies Act,
2013. Ignore previous years' figures & taxation. (20 Marks)

Answer

H Ltd

Balance Sheet as at 31st March 2021

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Statement of Profit and Loss for the year ended 31st March 2021

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1048
1049
Note
1. The inventories (31.3.20) amounting ` 9,50,000 (given in the trial balance of the question) should have been
as closing inventory i.e. as on 31.3.21. In the above solution, this inventory has been considered as closing
inventory i.e. for 31.3.21. If this is considered as inventory of 31.3.20, the closing inventory (as on 31.3.21) will
not be available for the balance sheet as on 31.3.21 and in that case, the balance sheet will not tally without
using suspense account amounting ` 9,50,000.
2. The financial statements given in the above answer include adjustment for dividend declared on 31st
March, 2021, strictly, as per the information given in the question. However, practically dividends are declared
in the annual general meetings which take place after the reporting date.

Question 5
(a) The firm, M/s K Creations has two Departments, Dyed fabric and Readymade garments.
Readymade garments are made by the firm itself. Both dyed fabric and readymade garments have
independent market. Some of readymade garment department's requirement is supplied by Dyed
Fabric Department at its usual Selling Price.
From the following figures, prepare Departmental Trading and Profit & Loss Account for the year
ended 31st March 2021.

Particulars Dyed Fabric Department Readymade garments department

Opening stock as on April 1, 2020 5,40,000 15,20,000
Purchases (excluding inter 20,12,080 1,50,00,000
department transfers)
Sales (excluding inter department 31,06,000 3,12,50,000
transfers)

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Transfer to Readymade garment 5,00,000 -
Direct wages 3,00,000 67,30,000
Direct expenses 1,00,000 19,50,000
Plant and Equipment for 5,00,000 15,00,000
dyeing/stitching readymade
garments (WDV as on April 1,
2020)
Rent and warehousing 4,50,000 12,00,000
Stock as on March 31st 2021 6,00,000 22,50,000
The following further information are available for necessary consideration:
(i) The Stock in Readymade garments department may be considered as consisting of 60% of dyed
fabric and 40% of Other Expenses.
(ii) The Dyed Fabric Department earned a Gross Profit @ 30% in 2019-2020.
(iii) On the plant and equipment, depreciation @ 20% p.a. to be provided.
(iv) The following expenses incurred for both the departments were not apportioned between the
departments:

(a) Salaries 2,70,000

(b) Advertisement expenses 90,000
(c) General expenses 8,00,000

(v) Salaries in 1:2 ratio, Advertisement expenses in the turnover ratio and General expenses in 1:3
ratio are to be apportioned between the Dyed Fabric Department and Readymade Department
respectively. (10 Marks)

ANSWER
(a) M/s K Creations
Departmental Trading and Profit & Loss Account
For the Year Ended 31st March 2021

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Profit and Loss Account (Combined)

Calculation of Stock Reserve

Rate of Gross Profit of Dyed Fabric Department for the year 2020-21
= 11,53,920 / (31,06,000+5,00,000) X 100 = 32%
Closing stock of Dyed Fabric in Readymade Garments Department
= 22,50,000 x 60% = ` 13,50,000
Stock reserve required for unrealized profit @ 32% on closing stock
= 13,50,000 x 32% = ` 4,32,000
Stock reserve for unrealized profit included in opening stock of Readymade Garments Department = `
15,20,000 x 60% x 30% = ` 2,73,600
Additional stock reserve required = ` 4,32,000 - ` 2,73,600 = ` 1,58,400

(b) AB Limited (a listed company) recently made a public issue in respect of which the following
information is available:
(i) No. of partly convertible 8% debentures issued 3,00,000; face value and issue price ` 100 per
debenture.
(ii) Convertible portion per debenture- 60%, date of conversion- on expiry of 7 months from the
date of closing of issue.
(iii) Date of closure of subscription lists 1-5-2020, date of allotment 1-6-2020, rate of interest on
debenture 8% payable from the date of allotment, market value of equity share as on date of
conversion ` 60 (Face Value ` 10).
(iv) Underwriting Commission 1%

(v) No. of debentures applied for 2,50,000.

(vi) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended

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31st March, 2021 (including cash and bank entries). (10 Marks)

Answer
1053
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2021
On ` 1,20,00,000 for 6 months @ 8% = `4,80,000
On ` 1,80,00,000 for 2 months @ 8% = ` 2,40,000
`7,20,000

Question 6
(a) A trader commenced business on April 1, 2020 with ` 1,20,000 represented by 6,000 units of a
certain product at ` 20 per unit. During the year 2020-21 he sold these units at ` 30/- per unit and
had withdrawn ` 60,000. The price of the product at the end of financial year was ` 25/- per unit.
Compute retained profit of the trader under the concept of physical capital maintenance at current
cost. Also state, whether answer would be different if the trader had not withdrawn any amount.

ANSWER
(a) Physical Capital Maintenance at Current Cost
In the given case, the specific price index applicable to the product is 125 (25/20X100).
Current cost of opening stock = (` 1,20,000 / 100) x 125 Or 6,000 units x ` 25 = ` 1,50,000
Current cost of closing cash = ` 1,20,000 (` 1,80,000 – ` 60,000)
Opening equity at closing current costs = ` 1,50,000
Closing equity at closing current costs = ` 1,20,000
Retained Profit = ` 1,20,000 – ` 1,50,000 = (-) ` 30,000
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund of `
1, 20,000 is not sufficient to buy 6,000 units again at increased price of ` 25 per unit. The drawings should have
been restricted to ` 30,000 (` 60,000 – ` 30,000).
If the trader had not withdrawn any amount, then the answer would have been as below:
Current cost of opening stock = ` 1,80,000
Opening equity at closing current costs = ` 1,50,000
Retained Profit = ` 1,80,000 – ` 1,50,000 = ` 30,000
If the trader had not withdrawn any amount, then the retained profit would have been ` 30,000.

(b) On 13th Jan, 2021 fire occurred in the premises of Mr. X, a cloth merchant. The goods were
totally destroyed. From the books of account, for the period 01-04-2020 to the date of fire the
following particulars were available:

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Particulars `
Stock as on 01-04-2020 57,000
Purchases 3,05,000
Manufacturing Expenses 60,000
Selling Expenses 24,200
Sales 4,98,000

At the time of valuing stock as on 31st March, 2020, a sum of ` 7,000 was written off on a particular
item, which was originally purchased for ` 20,000 and was sold during the year for ` 18,000. Barring
the transaction relating to this item, the gross profit earned during the period was 25% on sales.
Mr. X has insured his stock for ` 40,000. Compute the amount of the claim.

ANSWER
Computation of claim for loss of stock
Memorandum Trading Account as on 13.01.2021

Insurance policy was for ` 40,000 as such goods are under-insured. The amount of claim should be restricted
to the policy amount, ie. ` 40,000.

(c) An Engineer purchased a compressing machine on hire purchase system. As per the terms he is
required to pay ` 1,40,000 down, ` 1,06,000 at the end of first year, ` 98,000 at the end of the
second year ` 87,000 at the end of the third year and ` 55,000 at the end of fourth year. Interest
charged @ 12% p.a. You are required to calculate total cash price of the machine and the interest
paid with each installment.

ANSWER

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Total Cash Price = ` 1,40,000 + ` 2,69,646 = ` 4,09,646

(d) S. Ltd. was incorporated on 30th November 2020 to take over the running business of
proprietorship firm of Mr. S. The various expenses debited to the profit and loss Account for the
year 2020-21 included:
(i) Directors fees
(ii) Preliminary expenses written off
(iii) Salaries and general expenses
(iv) Statutory Audit fees
(v) Tax Audit fees u/s 44 AB of the Income Tax Act, 1961
(vi) Commission to travelling agents
(vii) Sale promotion expenses
(viii) Advertisement expenses
(ix) Rent expenses
(x) Bad debts
You are required to determine the basis of apportionment of above expenses between pre
incorporation and post incorporation periods.

ANSWER
No. Particulars Basis of apportionment
(i) Directors Fees Charge to Post incorporation period
(ii) Preliminary Expenses written off Charge to Post incorporation period
(iii) Salaries and general expenses Time ratio
(iv) Statutory Audit Fees Charge to Post incorporation period
(v) Tax Audit Fees u/s 44 AB of the Income Tax Act, On the basis of sales /turnover ratio in the
1961 respective periods
(vi) Commission to travel agents On the basis of sales / turnover ratio in the
respective periods
(vii) Sales Promotion expenses On the basis of sales / turnover ratio in the
respective periods
(viii) Advertisement Expenses On the basis of sales / turnover ratio in the
respective periods
(ix) Rent Expenses Time Ratio
(x) Bad Debts On the basis of sales / turnover ratio in the

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respective periods

(e) Following is the extract of the Balance Sheet of K Ltd (listed company) as at 31st March, 2020
On 1st April, 2020, the Company has made final call @ ` 2 each on 2,00,000 equity shares. The call
money was received by 25th April, 2020. Thereafter, the company decided to capitalize its reserves
by way of bonus at the rate of one share for every four shares held.
Show necessary entries in the books of the company and prepare the extract of the Balance Sheet
immediately after bonus issue. (4 Parts x 5 Marks = 20 Marks)

Answer
Journal Entries

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*Any other logical method for utilization of reserves may be followed as per the Companies Act, 2013.

Extract of Balance Sheet

Note: As per SEBI regulations, securities premium should be realized in cash, whereas under the Companies
Act, 2013 there is no such requirement. In accordance with Section 52, securities premium may arise on
account of issue of shares other than by way of cash. Thus, for unlisted companies, securities premium (not
realized in cash) may be used for issue of bonus shares, whereas the same cannot be used in case of listed
companies.

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MTP-I- NOV 2021
1. (a) Om Ltd. purchased an item of property, plant and equipment for US $ 50 lakh on 01.04.2020
and the same was fully financed by the foreign currency loan [US $] repayable in five equal
instalments annually. (Exchange rate at the time of purchase was 1 US $ = ` 60]. As on 31.03.2021
the first instalment was paid when 1 US $ fetched ` 62.00. The entire loss on exchange was
included in cost of goods sold by the accountant. Om Ltd. provides depreciation on an item of
property, plant and equipment at 20% on WDV basis and wants to exercise the option to adjust the
cost of asset for exchange difference arising out of loan restatement and payment.
You are required to calculate the amount of exchange loss, its treatment and depreciation on this
item of property, plant and equipment.
ANSWER

Exchange differences arising on restatement or repayment of liabilities incurred for the purpose of acquiring
an item of property, plant and equipment should be adjusted in the carrying amount of the respective item of
property, plant and equipment as Om Ltd. has exercised the option and it is long term foreign currency
monetary item. Thus, the entire exchange loss due to variation of ` 20 lakh on 31.03.2021 on payment of US $
10 lakh, should be added to the carrying amount of an item of property, plant and equipment and not to the
cost of goods sold. Further, depreciation on the unamortized depreciable amount should also be provided.
Calculation of Exchange loss:
Foreign currency loan (in `) = (50 lakh $ x ` 60) = ` 3,000 lakh
Exchange loss on outstanding loan on 31.03.2021 = ` 40 lakh US $ x (62.00-60.00) = ` 80 lakh.
So, ` 80 lakh should also be added to cost of an item of property, plant and equipment with corresponding
credit to outstanding loan in addition to ` 20 lakh on account of exchange loss on payment of instalment. The
total cost of an item of property, plant and equipment to be increased by ` 100 lakh. Total depreciation to be
provided for the year 2020 - 2021 = 20% of (` 3,000 Iakh + 100 lakh) = ` 620 lakh.

(b) From the following information provided by XYZ Limited you are required to compute the
closing inventory:

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 Total fixed overhead for the year was ` 3,00,000 on a normal capacity of 30,000 units while actual
production has been of 25,000 units.
Calculate the value of closing stock, when
(i) Net realizable value of the finished good Q is ` 450 per unit.
(ii) Net Realizable value of the Finished Good Q is ` 340 per unit.

ANSWER

(i) When Net Realizable Value of the Finished Good Q is ` 450 per unit
Value of Closing Stock:

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(ii) When Net Realizable Value of the Finished Good Q is ` 340 per unit
Since NRV of finished goods Q is less than its cost i.e. ` 360 (Refer W.N.), raw material P is to be valued at
replacement cost and finished goods is to be valued at NRV.
Value of Closing Stock:
Working Note:
Statement showing calculation of cost of raw material P and finished good Q

(c) U Limited has obtained a term loan of ` 620 lacs for a complete renovation and modernization
of its Factory on 1st April, 2020. Plant and Machinery was acquired under the modernization
scheme and installation was completed on 30th April, 2021. An expenditure of ` 564 lacs was
incurred on this Plant and Machinery and the balance loan of ` 56 lacs has been used for working
capital purposes. The company has paid total interest of ` 68.20 lacs during financial year 2020-
2021 on the above loan. The accountant seeks your advice how to account for the interest paid in

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the books of accounts. Will your answer be different, if the whole process of renovation and
modernization gets completed by 28th February, 2021?

ANSWER
Borrowing Cost: As per AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that
asset. Other borrowing costs should be recognized as an expense in the period in which they are incurred.
Borrowing costs should be expensed except where they are directly attributable to acquisition, construction or
production of qualifying asset.
Qualifying Asset: A qualifying asset is an asset that necessarily takes a substantial period of time (ordinarily, a
period of twelve months unless a shorter or longer period can be justified on the basis of the facts and
circumstances of the case) to get ready for its intended use or sale.
(i) When construction of asset completed on 30th April, 2021
The treatment for total borrowing cost of ` 68.20 lakhs will be as follows:

(ii) When construction of assets is completed by 28th February, 2019

In this scenario, when the process of renovation gets completed in less than 12 months, the plant and
machinery will not be considered as qualifying assets (until and unless the entity specifically considers that the
asset took substantial period of time for completing their construction) and the whole of interest will be
required to be charged off / expensed off to Profit and loss account.

(d) From the following information, prepare the Cash Flow from Financing activities as per AS 3
‘Cash Flow Statements’ as the accountant of XYZ Limited is not able to decide and seeks your
advice:
(i) Received ` 4,00,000 as redemption of short-term deposit
(ii) Proceeds of ` 20,00,000 from issuance of equity share capital
(iii) Received interest of ` 70,000 on Govt. bonds.
(iv) An amount of ` 13,00,000 incurred for purchase of goodwill

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(v) Proceeds of ` 5,00,000 from sale of patent.
(vi) Proceeds of ` 12,00,000 from long term borrowing.
(vii) Amount paid for redemption of debentures of ` 22,00,000
(viii) Underwriting commission of ` 40,000 paid on issue of equity share capital
(ix) Interest of ` 1,44,000 paid on long-term borrowing.

ANSWER
Statement showing Cash Flow from Financing Activities
2. (a) On 31st March, 2021, Morya Ltd. provides the following ledger balances:

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The following additional information was also provided in respect of the above balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.
(2) The cost of assets were:

Building ` 32,00,000
Plant and Machinery ` 30,00,000
Furniture and Fixture ` 16,50,000

3) Trade Receivables for ` 4,86,000 due for more than 6 months.

(4) Balances with banks include ` 56,000, the Naya bank, which is not a scheduled bank.
(5) Loan from Public Finance Corporation repayable after 3 years.
(6) The balance of ` 26,30,000 in the loan account with Public Finance Corporation is inclusive of `
1,34,000 for interest accrued but not due. The loan is secured by hypothecation of land.
(7) Other long-term loans (unsecured) include:

Loan taken from Nixes Bank ` 13,80,000

(Amount repayable within one year ` 4,80,000)
Loan taken from Directors ` 8,50,000

1064
(8) Bills Receivable for ` 1,60,000 maturing on 15th June, 2021 has been discounted.
(9) Short term borrowings include:
Loan from Naya bank ` 1,16,000 (Secured)
Loan from directors ` 48,000

(10) Transfer of ` 35,000 to general reserve has been proposed by the Board of directors out of the
profits for the year.
(11) Inventory of finished goods includes loose tools costing ` 5 lakhs (which do not meet definition
of property, plant & equipment as per AS 10)
You are required to prepare the Balance Sheet of the Company as at March 31st 2021 as required
under Schedule III of the Companies Act, 2013. Ignore previous year figures.

ANSWER

Morya Ltd.
Balance Sheet as at 31st March, 2021

1065
Notes to accounts
1066
Note: There is a Contingent Liability amounting ` 1,60,000

(b) A Ltd. gives the following information the year ended 31st March, 2021:

`
Gross profit 42,00,000
Administrative, Selling and distribution expenses 8,22,540
Directors’ fees 1,34,780
Interest on debentures 31,240

1067
Managerial remuneration 2,85,350
Depreciation on Property, plant and equipment (PPE) 5,22,540
Depreciation on PPE as per Schedule II of the Companies Act, 2013 was ` 5,75,345. You are required
to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013. (16 +
4 = 20 Marks)

ANSWER
Calculation of net profit u/s 198 of the Companies Act, 2013

Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 26,36,095= ` 2,89,970

3. (a) M/s Shyam, a proprietorship firm runs a business of stationary items. It provides you the
following information relating to assets and liabilities:
Assets & Liabilities As on 01.04.2019 As on 31.03.2020
Creditors 20,000 15,000
Outstanding Expenses 600 800
Fixed Assets 12,000 13,000
Stock 10,000 12,000
Cash in hand 7,500 2,000
Cash at Bank 2,500 10,000
Debtors ? 18,000

Details of the year’s transactions are as follows:

(1) Discounts allowed to Debtor 4,000

(2) Returns from debtors 1,450

1068
(3) Bad debts 500
(4) Total sales (Cash and Credit) 72,000
(5) Discount allowed by creditors 700
(6) Returns to creditors 400
(7) Receipts from debtors paid into Bank 76,000
(8) Cash purchases 1,000
(9) Expenses paid by cash 9,000
(10) Drawings by cheque 500
(11) Purchase of Fixed Assets by cheque 4,000
(12) Cash deposited into bank 5,000
(13) Cash withdrawn from bank 9,000
(14) Payments to creditors by cheque 60,000

No fixed assets were sold during the year. Any difference in cash account to be considered as cash
sales.
You are required to prepare Trading and Profit & Loss Account for the year ended 31.03.2020 and
the Balance Sheet as at 31.03.2020 from the given information.

ANSWER
In the books of M/s Shyam
Trading and Profit and Loss Account
for the year ended 31st March, 2020

Balance Sheet as at 31st March, 2020

1069
Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19

(2) Sundry Debtors Account

1070

3) Sundry Creditors Account

(4) Depreciation on Fixed Assets

(5) Expenses to be shown in profit and loss account

(6) Cash and Bank Account

1071
(b) From the following details of Western Branch Office of M/s. Alpha for the year ending 31st
March, 2020, ascertain branch stock reserve in respect of unrealized profit in opening stock and
closing stock:
(i) Goods are sent to the branch at invoice price and branch also maintains stock at the same price.
(ii) Sale price is cost plus 40%.
(iii) Invoice price is cost plus 15%.
(iv) Other information from accounts of branch:
Opening Stock as on 01-04-2019 3,45,000
Goods sent during the year by Head Office to Branch 16,10,000
Sales during the year 21,00,000
Expenses incurred at the branch 45,000

ANSWER
Branch Stock Reserve in respect of unrealized profit
on opening stock = ` 3,45,000 x (15/115) = ` 45,000
on closing stock = ` 2,30,000 x (15/115) = ` 30,000
Working Note:

1072

4. (a) Ram, Sham and Mahaan sons of Prabhu Dyal are running Punya Hotel in Chennai. Ram is
heading Room division (A), Sham is heading banquet division (B) and Mahaan is heading
Restaurant division (C). Each of the three brothers would receive 60% of the profits, if any, of the
department of which he was incharge and remaining combined profits would be shared in 2:2:1
ratio. The following is the Trading and Profit and Loss Account of the firm for the year ended March
31,2021:

Prepare: (I) Departmental Trading and Profit and Loss Account alongwith combined Profit & Loss
account and (II) Profit and Loss Appropriation Account after incorporating the following
information:
(i) Closing stock of Dept. B includes goods amounting ` 3,500 being transferred from Dept. A
(ii) Stock value ` 9,300 and other goods of the value of ` 1,500 were transferred at selling price by
Departments A and C respectively to Department B.
(iii) The details of salaries were as follows:
(1) Admin Office 60%, Pantry 40%

1073
(2) Allocate Admin Office in the proportion of 3: 2:1 among the Departments A, B, C
(3) Distribute Pantry expenses equally among the Department A and B.
(iv) The parking fee is ` 500 per month which is to be divided equally between Departments A, B &
C.
(v) All other expenses are to be allocated in ratio of 2:2:1.
(vi) Discounts received are to be credited to the three Departments as follows:
A : ` 650; B : ` 600; C : ` 400.
(vii) The opening stock of Department B does not include any goods transferred from other
departments and closing stock of Department B does not include any stock transferred from
Department C.
ANSWER

Ram, Sham and Mahaan

Departmental Trading and Profit & Loss Account for the year ended 31-3-2021

Note: Gross profit of Department A is 26.48% (approx.) of Sales price (including transfer to Department C) 1074
73,950/(2,70,000+9,300).There is some unrealized profit only on inter departmental stock 26.48% of ` 3,500 is
as stock reserve i.e. ` 927. This will be debited to Profit and Loss (combined) Account.
Profit and Loss Account (combined)
Profit and Loss Appropriation Account

Working Note:
Calculation of combined profit

1075
(b) The capital structure of Beta Ltd. consists of 20,000 Equity Shares of `10 each fully paid up and
1,000 8% Redeemable Preference Shares of `100 each fully paid up (issued on 1.4.2019).
Undistributed reserve and surplus stood on 31.3.21 as: General Reserve ` 80,000; Profit and Loss
Account ` 20,000; Investment Allowance Reserve is ` 10,000 out of which ` 5,000 is not ascertained
as free reserve; Cash at bank amounted to ` 98,000.
Preference shares are redeemed at a Premium of 10% on 31.3.21 and for the purpose of
redemption, the directors make fresh issue of Equity Shares at par after utilising the undistributed
reserve and surplus, subject to the conditions that a sum of ` 20,000 shall be retained in general
reserve and which should not be utilised.
You are required to give Journal Entries to give effect to the above arrangements and show how
the relevant items will appear in the Balance Sheet of the company after the redemption is carried
out. (12 + 8 =20 Marks)

ANSWER
In the books of Beta Ltd.
Journal Entries

1076
Balance Sheet as on ………[Extracts]

Notes to accounts

Working Note:

1077

5. (a) On 27th July, 2021, a fire occurred in the godown of M/s. Vijay Exports and most of the
stocks were destroyed. However goods costing ` 5,000 could be salvaged. Their fire fighting
expenses were amounting to ` 1,300.
From the salvaged accounting records, the following information is available relating to the period
from 1.4.2021 to 27.7.2021:

1. Stock as per balance sheet as on 31.3.2021 ` 63,000

2. Purchases (including purchase of machinery costing ` 10,000 ` 2,92,000
3. Wages (including wages paid for installation of machinery ` 3,000) ` 53,000
4. Sales (including goods sold on approval basis amounting to ` 40,000. No ` 4,12,300
approval has been received in respect of 1/4th of the goods sold on approval)
5. Cost of goods distributed as free sample ` 2,000

Other Information:
(i) While valuing the stock on 31.3.2021, ` 1,000 had been written off in respect of certain slow
moving items costing ` 4,000. A portion of these goods were sold in June, 2021 at a loss of ` 700 on
original cost of ` 3,000. The remainder of these stocks is now estimated to be worth its original
cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted fire fighting expenses as part of insurance policy. The
Company had taken the fire insurance policy of ` 55,000 with the average clause.
Compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance Company.
Also prepare Memorandum Trading Account for the period 1.4.2021 to 27.7.2021 for normal and
abnormal items.

ANSWER
Memorandum Trading Account for the period 1st April, 2021 to 27th July, 2021

1078

Statement of Claim for Loss of Stock

Amount of claim to be lodged with insurance company

Working Notes:
1. Calculation of Adjusted Purchases

2. Calculation of Goods with Customers

Approval for sale has not been received = ` 40,000 X 1/4 = ` 10,000.
Hence, these should be valued at cost i.e. (` 10,000 – 20% of ` 10,000) = ` 8,000

1079
5. Value of Opening Stock
Original cost of stock as on 31st March,2021
= ` 63,000 + 1,000 (Amount written off)
= ` 64,000.

(b) On 1st April, 2019, Mr. Vijay had 30,000 Equity shares in X Ltd. (the company) at a book value of
` 4,50,000 (Face Value ` 10 per share). On 22nd June, 2019, he purchased another 5000 shares of
the same company for ` 80,000. The Directors of X Ltd. announced a bonus of equity shares in the
ratio of one share for seven shares held on 10th August, 2019.
On 31st August, 2019 the Company made a right issue in the ratio of three shares for every eight
shares held, on payment of ` 15 per share. Due date for the payment was 30th September, 2019,
Mr. Vijay subscribed to 2/3rd of the right shares and sold the remaining of his entitlement to Viru
for a consideration of ` 2 per share.
On 31stOctober,2019, Vijay received dividends from X Ltd. @ 20% for the year ended 31st March,
2019. Dividend for the shares acquired by him on 22ndJune,2019 to be adjusted against the cost of
purchase.
On 15th November, 2019 Vijay sold 20,000 Equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the year ended 31st
March, 2020 assuming the shares are being valued at average cost.

ANSWER
Books of Vijay
Investment Account
(Scrip: Equity Shares in X Ltd.)

1080

Working Notes:
(1) Bonus Shares = (30,000 + 5,000) / 7 = 5,000 shares
(3) Rights shares sold = 15,000×1/3 = 5,000 shares
(4) Dividend received = 30,000×10×20% = `60,000 will be taken to P&L statement
(5) Dividend on shares purchased on 22.6.2019= 5,000×10×20% = ` 10,000 is adjusted to Investment A/c
(6) Profit on sale of 20,000 shares
= Sales proceeds – Average cost
Sales proceeds = ` 3,00,000

Profit = ` 3,00,000– `2,68,000= `32,000.

(7) Cost of shares on 31.3.2020

(8) Sale of rights amounting ` 10,000 (` 2 x 5,000 shares) will not be shown in investment A/c but will directly
be taken to P & L statement.

(c) Nidhi Ltd. invested in the shares of another company on 1st May 2019 at a cost of ` 3,00,000
with the intention of holding for more than a year. The published accounts of Nidhi Ltd. received in
March, 2021 reveals that the company has incurred cash losses with decline in market share and
investment of Nidhi Ltd. may not fetch more than ` 45,000. How you will deal with the above in the
financial statements of the Paridhi Electronics Ltd. as on 31.3.21 with reference to AS-13? (8 + 8 + 4
= 20 Marks)

ANSWER
As per AS 13, “Accounting for Investments” Investments classified as long term investments should be carried
in the financial statements at cost. However, provision for diminution shall be made to recognise a decline,
other than temporary, in the value of the investments, such reduction being determined and made for each
investment individually. The standard also states that indicators of the value of an investment are obtained by

1081
reference to its market value, the investee's assets and results and the expected cash flows from the
investment.
On this basis, the facts of the case given in the question clearly suggest that the provision for diminution
should be made to reduce the carrying amount of shares to ` 45,000 in the financial statements for the year
ended 31st March, 2021 and charge the difference of loss of ` 2,55,000 to profit and loss account.

6. (a) Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ` 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, ` 32,433.

(c) 5 annual instalments of ` 23,100, the first to commence at the end of twelve months from the
date of down payment.
(d) Rate of interest is 10% p.a.
Your are required to calculate the total interest and interest included in each instalment.

ANSWER
Calculation of interest

1082
Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 = ` 27,933

(b) Aman Ltd. has issued 2,000, 12% convertible debentures of ` 100 each redeemable after a
period of five years. According to the terms & conditions of the issue, these debentures were
redeemable at a premium of 5%. The debenture holders also had the option at the time of
redemption to convert 20% of their holdings into equity shares of ` 10 each at a price of ` 20 per
share and balance in cash. Debenture holders amounting ` 40,000 opted to get their debentures
converted into equity shares as per terms of the issue.
You are required to calculate the number of shares issued and cash paid for redemption of ` 40,000
debenture holders and also pass journal entry for conversion and redemption of debentures.

ANSWER
Calculation of number of shares issued

Redemption value of 80 debentures at a premium of 5% [80 x (100+5)] ` 8,400

Equity shares of ` 10 each issued on conversion
[` 8,400/ ` 20 ] 420 shares

Journal Entry

1083
OR
Following is the extract of the Balance Sheet of ABC Ltd. as at 31st March, 2021:

On 1st April, 2021, the Company has made final call @ ` 2 each on 4,05,000 equity shares. The call
money was received by 20th April, 2021. Thereafter, the company decided to capitalize its reserves
by way of bonus at the rate of one share for every four shares held.
You are required to give necessary journal entries in the books of the ABC Ltd. and prepare the
relevant extract of the balance sheet as on 30th April, 2021 after bonus issue.

ANSWER
Journal Entries in the books of ABC Ltd.

1084
Extract of Balance Sheet as at 30th April, 2021 (after bonus issue)

1085
(c) Darshan Ltd. purchased a Machinery on 1st April, 2016 for ` 130 lakhs (Useful life is 4 years).
Government grant received is ` 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs.
Darshan Ltd. decides to treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in profit &
loss account for the year ending 31st March, 2017,31st March, 2018, 31st March, 2019 & 31st
March, 2020.
Darshan Ltd. follows straight line method for charging depreciation.

ANSWER
As per 12 “Accounting for government grants”, grants related to depreciable assets, if treated as deferred
income are recognized in the profit and loss statement on a systematic and rational basis over the useful life
of the asset.
Amount of depreciation and grant to be recognized in the profit and loss account each year
Depreciation per year:

` 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017, 31st March, 2018, 31st
March, 2019 and 31st March, 2020.
Amount of grant recognized in Profit and Loss account each year:
40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31st March, 2018, 31st March, 2019 and
31st March, 2020.

(d) Lotus Ltd. was incorporated on 1st July, 2019 to acquire a running business of Feel goods with
effect from 1st April, 2019. During the year 2019-20, the total sales were ` 48,00,000 of which `
9,60,000 were for the first six months. The Gross profit of the company ` 7,81,600. The expenses
debited to the Profit & Loss statement included:
(i) Director's fees ` 60,000

1086
(ii) Bad debts ` 14,400
(iii) Advertising ` 48,000 (under a contract amounting to ` 4,000 per month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended
31st March, 2020.
ANSWER
Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.2019 (9,60,000 x 3/6) 4,80,000
Sales for period from 01.07.2019 to 31.03.2020 (48,00,000 – 4,80,000) 43,20,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2019 to 30 June, 2019: 1st July, 2019 to 31st March, 2020
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

1087
MTP- II NOV 2021
1. (a) ABC Limited has started construction of an asset on 1st December, 2020, which continues till
31st March, 2021 (and is expected to go beyond a year). The entity has not taken any specific
borrowings to finance the construction of the asset but has incurred finance costs on its general
borrowings during the construction period. The directly attributable expenditure at the beginning
of the month on this asset was ` 10 lakh in December 2020 and ` 4 lakh in each of the months of
January to March 2021. At the beginning of the year, the entity had taken Inter Corporate Deposits
of ` 20 lakh at 9% rate of interest and had an overdraft of ` 4 lakh, which increased to ` 8 lakh on 1st
March, 2021. Interest was paid on the overdraft at 10% until 1st January, 2021 and then the rate
was increased to 12%. You are required to calculate the annual capitalization rate for computation
of borrowing cost in accordance with AS 16 'Borrowing Costs'.

ANSWER

Calculation of capitalization rate on borrowings other than specific borrowings

Weighted average cost of borrowings 1088

= {20,00,000 x(12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12)} = 24,33,334
Capitalisation rate = [(Weighted average amount of interest / Weighted average of general borrowings) x 100]
= [(2,26,000 / 24,33,334) x 100] = 9.29% p.a.

(b) In the books of Rani Ltd., closing inventory as on 31.03.2020 amounts to ` 1,75,000 (valued on
the basis of FIFO method). The Company decides to change from FIFO method to weighted average
method for ascertaining the costs of inventory from the year 2019-20. On the basis of weighted
average method, closing inventory as on 31.03.2020 amounts to ` 1,59,000. Realizable value of the
inventory as on 31.03.2020 amounts to ` 2,07 ,000. Discuss disclosure requirements of change in
accounting policy as per AS 1.

ANSWER

As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy which has a material effect
should be disclosed in the financial statements. The amount by which any item in the financial statements is
affected by such change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Thus Rani Ltd. should disclose the change in
valuation method of inventory and its effect on financial statements. The company may disclose the change in
accounting policy in the following manner:
“The company values its inventory at lower of cost and net realizable value. Since net realizable value of all
items of inventory in the current year was greater than respective costs, the company valued its inventory at
cost. In the present year i.e. 2019-20, the company has changed to weighted average method, which better
reflects the consumption pattern of inventory, for ascertaining inventory costs from the earlier practice of
using FIFO for the purpose. The change in policy has reduced current profit and value of inventory by ` 16,000
(1,75,000 – 1,59,000).”

(c) Caseworker Limited received a specific grant of ` 6 crore for acquiring the plant of ` 30 crore
during financial year 2015-2016 having useful life of 10 years. During the financial year 2020-2021,
due to non-compliance of conditions laid down for the grant of ` 6 crore, the company had to
refund the grant to the Government. What should be the treatment of the refund if grant was
deducted from the cost of the plant during financial year 2015-2016? Assume depreciation is
charged on fixed assets as per Straight Line Method.

ANSWER

As per AS 12, the amount refundable in respect of grant related to specific fixed assets should be recorded by
increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as
appropriate, by the amount refundable. Where the book value of the asset is increased, depreciation on the

1089
revised book value should be provided prospectively over the residual useful life of the asset.
Where grant was deducted from the cost of the asset, initial value of the plant after deduction of grant
amount of ` 6 crore would have been = ` 30 crore – ` 6 crore = ` 24 crore.
Carrying value of the plant after 5 years on 1.4.2020 = [(` 24 crore / 10 years) x 5 years] = ` 12 crore.

Annual depreciation charge would be ` 2.4 crore.

On refund of grant to the Government, the book value of the plant shall be increased by ` 6 crore i.e. ` 12 crore
+ ` 6 crore = ` 18 crore. The increased cost of ` 18 crore of the plant should be amortised prospectively over
remaining 5 years of useful residual life. Depreciation charge in the year 2020-2021 would be ` 18 crore / 5
years = ` 3.6 crore instead of earlier ` 2.4 crore.
(d) Arush Ltd. is installing a new plant in its factory. It provides you the following information:

Cost of the plant (cost as per supplier's invoice) ` 31,25,000

Estimated dismantling costs to be incurred ` 2,50,000
after 5 years
Initial delivery and handling costs ` 1,85,000
Cost of site preparation ` 4,50,000
Consultants used for advice on the acquisition ` 6,50,000
of the plant

You are required to advise Arush Ltd. on the costs that can be capitalised for plant in accordance
with AS 10 ‘Property, Plant and Equipment’. (4 Parts x 5 Marks= 20 Marks)

ANSWER

According to AS 10 ‘Property, Plant and Equipment’, following costs will be capitalized by Arush Ltd.:

1090
2. (a) The following figures have been extracted from the books of Manan Limited for the year
ended on 31.3.2020. You are required to prepare the Cash Flow statement as per AS 3 using
indirect method.

(i) Net profit before taking into account income tax and income from law suits but after taking into
account the following items was ` 30 lakhs :
(a) Depreciation on Property, Plant & Equipment ` 7.50 lakhs.
(b) Discount on issue of Debentures written off ` 45,000.
(c) Interest on Debentures paid ` 5,25,000.
(d) Book value of investments ` 4.50 lakhs (Sale of Investments for ` 4,80,000).
(e) Interest received on investments ` 90,000.
(ii) Compensation received `1,35,000 by the company in a suit filed.
(iii) lncome tax paid during the year ` 15,75,000.
(iv) 22,500, 10% preference shares of ` 100 each were redeemed on 02-04-2019 at a premium of
5%.
(v) Further the company issued 75,000 equity shares of `10 each at a premium of 20% on 30.3.2020
(Out of 75,000 equity shares, 25,000 equity shares were issued to a supplier of machinery)
(vi) Dividend for FY 2018-19 on preference shares were paid at the time of redemption.
(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 ` 7.50 lakhs and interim
dividend paid ` 2.50 lakhs for the year 2019-2020.
(viii) Land was purchased on 02.4.2019 for `3,00,000 for which the company issued 22,000 equity
shares of ` 10 each at a premium of 20% to the land owner and balance in cash as consideration.
(ix) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:

ANSWER

Manan Ltd.
Cash Flow Statement
for the year ended 31st March, 2020

1091
1092
(b) From the following information, prepare extract of Balance Sheet of A Limited along with notes
making necessary compliance of Schedule III to the Companies Act, 2013:

There was no interest accrued / due as at the end of the year. Current maturities of long-term
loans amounting ` 2,09,000 is included in the value of secured loans of ` 18,12,000.

ANSWER

Extract of Balance Sheet of A Ltd.

1093
Notes to Accounts

(c) The following information of Gaurav Ltd. was obtained on 31st March, 2021:

1094
Share suspense account represents application money received on shares, the allotment of which
is not yet made. You are required to compute effective capital as per the provisions of Schedule V
if Gaurav Ltd.is a non-investment company? (10+5+5 = 20 Marks)
ANSWER
Computation of effective capital: Where Gaurav Ltd.is a non-investment
company

Paid-up share capital —

67,500, 14% Preference shares 67,50,000
5,40,000 Equity shares 4,32,00,000
Capital reserves 2,02,500
Securities premium 2,25,000
15% Debentures 2,92,50,000
Public Deposits 16,65,000
(A) 8,12,92,500
Investments 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
(B) 4,06,12,500
Effective capital (A–B) 4,06,80,000

3. (a) The following is the Balance Sheet of Manish and Suresh as on 1st April, 2020:

1095
They give you the following additional information:
(i) Creditors' Velocity 1.5 month & Debtors' Velocity 2 months. Here velocity indicates the no. of
times the creditors and debtors are turned over a year.
(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current
year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will
increase by 25% in volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are ` 50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
(viii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading, Profit and Loss Account, Trade Debtors Account and Trade
Creditors Account for the year ending 31.03.2021.

ANSWER
Trading and Profit and Loss account for the year ending 31st March, 2021

1096
Trade Creditors Account
Working Note:

(b) Pass necessary Journal entries in the books of an independent Branch of a Company, wherever
required, to rectify or adjust the following:
(i) Branch incurred travelling expenses of ` 4,000 on behalf of other Branches, but not recorded in
the books of Branch.
(ii) Goods dispatched by the Head office amounting to ` 8,000, but not received by the Branch till
date of reconciliation. The Goods have been received subsequently.
(iii) Provision for doubtful debts, whose accounts are kept by the Head Office, not provided earlier
for ` 2,000.
(iv) Branch paid ` 2,000 as salary to a Head Office Manager, but the amount paid has been debited
by the Branch to Salaries Account.

ANSWER

1097
Journal Entries in Books of Branch
4. (a) Following is the Trial Balance of Mr. Mohan as on 31.03.2021:

1098
You are required to prepare Department Trading, Profit and Loss Account and the Balance Sheet
taking into account the following adjustments:
(a) Outstanding Wages: Department B- ` 150, Department C – ` 50.

1099
(b) Depreciate Plant and Machinery and Motor Vehicles at the rate of 10%.
(c) Each Department shall share all expenses in proportion to their sales.
(d) Closing Stock: Department A - ` 3,500, Department B - ` 2,000, Department C - ` 1,500.

ANSWER

Trading and Profit and Loss Account

for the year ended on 31st Match, 2021
Balance Sheet as at 31.03.2021

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(b) The Capital structure of a company BK Ltd. consists of 30,000 Equity Shares of ` 10 each fully
paid up and 2,000 9% Redeemable Preference Shares of ` 100 each fully paid up as on 31.03.2020.
the other particulars as at 31.03.2020 are as follows:

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Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the
undistributed reserve & surplus, subject to the conditions that a sum of ` 40,000 shall be retained
in General Reserve and which should not be utilized. Company also sold investment of 4500 Equity
Shares in G Ltd., costing `45,000 at ` 9 per share.
You are required to pass Journal entries to give effect to the above arrangements.
ANSWER

Journal Entries

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Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed `2,00,000
Less: Profit available for distribution as dividend:
General Reserve: ` (1,20,000-40,000) `80,000
Profit and Loss (60,000 less 20,000 set aside for
adjusting premium payable on redemption of
Pref. shares less 4,500 loss on sale of investments) `35,500 (1,15,500)
` 84,500.
Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.

5. (a) A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had taken
an insurance policy for ` 1,20,000 which was subject to an average clause. Following particulars
were ascertained from the available records for the period from 1st April, 2018 to 30th September,
2019:

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While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a slow moving
item, cost of which was ` 12,000. A portion of these goods was sold at a loss of ` 4,000 on the
original cost of ` 9,000. The remainder of the stock is estimated to be worth the original cost. The
value of Goods salvaged was estimated at ` 35,000.

You are required to ascertain the amount of claim to be lodged with the Insurance Company for
the loss of stock.

ANSWER
Memorandum Trading Account
for the period 1st April, 2019 to 30th September, 2019

Statement of Claim for Loss of Stock

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Amount of claim to be lodged with insurance company

Working Notes:
1. Rate of gross profit for the year ended 31st March, 2019
Trading Account for the year ended 31st March, 2019
Rate of Gross Profit in 2018-19

2. Calculation of Adjusted Purchases

(b) Alpha Ltd. purchased 5,000, 13.5% Debentures of Face Value of ` 100 each of Pergot Ltd. on 1st
May 2020 @ ` 105 on cum interest basis. The interest on these instruments is payable on 31st &
30th of March & September respectively. On August 1st 2020 the company again purchased 2,500
of such debentures @ ` 102.50 each on cum interest basis. On October 1st, 2020 the company sold
2,000 Debentures @ ` 103 each on ex- interest basis. The market value of the debentures as at the
close of the year was ` 106. You are required to prepare the Investment in Debentures Account in
the books of Alpha Ltd. for the year ended 31st Dec. 2020 on Average Cost Basis. (12 + 8 = 20
Marks)

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ANSWER
Investment in 13.5% Debentures in Pergot Ltd. Account
(Interest payable on 31st March & 30th September)
Note: Cost being lower than Market Value the debentures are carried forward at Cost.
Working Notes:
1. Interest paid on ` 5,00,000 purchased on May 1st, 2020 for the month of April 2020, as part of purchase
price: 5,00,000 x 13.5% x 1/12 = ` 5,625
2. Interest received on 30th Sept. 2020
On ` 5,00,000 = 5,00,000 x 13.5% x ½ = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
Total ` 50,625
3. Interest paid on ` 2,50,000 purchased on Aug. 1st 2020 for April 2020 to July 2020 as part of purchase price:
` 2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of Debentures
Cost of acquisition
(` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2,000 x `103) = 2,06,000
Profit on sale = ` 2,167
5. Cost of Balance Debentures
(` 5,19,375 + ` 2,45,000) x ` 5,50,000/` 7,50,000 = ` 5,60,542
6. Interest on Closing Debentures for period Oct.-Dec. 2020 carried forward (accrued interest)
` 5,50,000 x 13.5% x 3/12 = ` 18,563 (rounded off)

6. (a) "Accounting Standards standardize diverse accounting policies with a view to eliminate the
non-comparability of financial statements and improve the reliability of financial statements."
Discuss and explain the benefits of Accounting Standards.

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ANSWER
Accounting Standards standardize diverse accounting policies with a view to eliminate the non-comparability
of financial statements and improve the reliability of financial statements. Accounting Standards provide a set
of standard accounting policies, valuation norms and disclosure requirements. Accounting standards aim at
improving the quality of financial reporting by promoting comparability, consistency and transparency, in the
interests of users of financial statements.
The following are the benefits of Accounting Standards:
(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a reasonable extent
confusing variations in the accounting treatment followed for the purpose of preparation of financial
statements.
(ii) Requirements for additional disclosures: There are certain areas where important is not statutorily
required to be disclosed. Standards may call for disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting standards would facilitate
comparison of financial statements of different companies situated in India and facilitate comparison, to a
limited extent, of financial statements of companies situated in different parts of the world. However, it
should be noted in this respect that differences in the institutions, traditions and legal systems from one
country to another give rise to differences in Accounting Standards adopted in different countries.

OR

“Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary
items to be recognized at each Balance Sheet date? Classify the following as monetary or non-
monetary item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investments
(iv) Fixed Assets.

ANSWER
As per AS 11‘ The Effects of Changes in Foreign Exchange Rates’, Monetary items are money held and assets
and liabilities to be received or paid in fixed or determinable amounts of money.
Foreign currency monetary items should be reported using the closing rate at each balance sheet date.
However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in
reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item
at the balance sheet date. In such circumstances, the relevant monetary item should be reported in the
reporting currency at the amount which is likely to be realised from or required to disburse, such item at the
balance sheet date.
Share capital Non-monetary
Trade receivables Monetary
Investments Non-monetary
Fixed assets Non-monetary

(b) The following particulars relate to hire purchase transactions:

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(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being `
2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the
second year. The hire vendor valued the two cars at cash price less 30% depreciation charged
under it diminishing balance method.
(d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total amount of `
1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor.

ANSWER

(c) The Business carried on by Kamal under the name "K" was taken over as a running business
with effect from 1st April, 2020 by Sanjana Ltd., which was incorporated on 1st July, 2020. The

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same set of books was continued since there was no change in the type of business and the
following particulars of profits for the year ended 31st March, 2021 were available.
The purchase price (including carriage inwards) for the post-incorporation period had increased by
10 percent as compared to pre-incorporation period. No stocks were carried either at the
beginning or at the end.
You are required to prepare a statement showing the amount of pre and post incorporation period
profits stating the basis of allocation of expenses.

ANSWER
Statement showing the calculation of profits/losses for pre incorporation and Post incorporation period
profits of Sanjana Ltd. for year ended 31.3.2021

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Working Notes:
1: Sales Ratio = 10,000 : 40,000 = 1 :4
2: Time Ratio = 3:9 = 1:3
3: Purchase Price Ratio Ratio is 3 : 9 ∴
But purchase price was 10% higher in the company period
Ratio is 3 : 9 + 10% = 3:9.9 = 1:3.3. ∴

(d) Z Bank has classified its total investment on 31-3-2021 into three categories (a) held to maturity
(b) available for sale (c) held for trading as per the RBI Guidelines. ‘Held to maturity’ investments
are carried at acquisition cost less amortized amount. ‘Available for sale’ investments are carried at
marked to market. ‘Held for trading’ investments are valued at weekly intervals at market rates.
Net depreciation, if any, is charged to revenue and net appreciation, if any, is ignored. You are
required to comment whether the policy of the bank is in accordance with AS 13?

ANSWER

As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to Bank, Insurance
Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does not apply to it. For banks, the RBI
has issued separate guidelines for classification and valuation of its investment and Z Bank should comply with
those RBI Guidelines/Norms. Therefore, though Z Bank has not followed the provisions of AS 13, yet it would
not be said as non-compliance since, it is complying with the norms stipulated by the RBI.

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