Suggested Answers of Advanced Accounting Intermediate Examination – December 2001

The Institute of Chartered Accountants of Nepal

Suggested Answers of Advanced Accounting

 

Intermediate Examination – December 2001

 

Answer all questions.

Working notes should form part of the answer.

 

1.       The financial position of two companies Big Ltd. and Small Ltd. as on 31.3.2001 was as under:          20

 

 

Big Ltd. (Rs.)

Small Ltd. (Rs.)

 

Assets:

 

 

Goodwill

40,000

25,000

Building

2,00,000

80,000

Machinery

6,00,000

1,30,000

Investments

70,000

45,000

Stock

2,90,000

1,60,000

Debtors

3,00,000

1,80,000

Cash & Bank

30,000

20,000

Preliminary Expenses

20,000

10,000

 

15,50,000

6,50,000

 

 

 

Liabilities:

 

 

Share Capital:

 

 

Equity Shares of Rs. 10 each

10,00,000

3,00,000

7% Preference shares of Rs. 100 each

2,00,000

8% Preference shares of Rs. 100 each

1,50,000

General Reserve

1,00,000

45,000

Retirement Gratuity Fund

70,000

45,000

Workmen's Compensatin Fund

20,000

Sundry Creditros

1,80,000

90,000

 

15,50,000

6,50,000

 

          Big Ltd. absorbs Small Ltd. on the following terms and conditions:

 

i.               8% Preference shareholders are to be paid at 10% premium by issue of 7% preference shares of Big Ltd.

 

ii.             Goodwill of Small Ltd. is valued at Rs. 60,000, Buildings are valued at Rs. 1,35,000 and Machinery at Rs. 1,45,000. Investments are worth Rs. 46,500.

 

iii.           Stock and book debts of Small Ltd. are valued at 10% below their book values.

 

iv.           Equity shareholders of Small Ltd. will be issued 5 shares of Big Ltd. at 10% premium for every 4 shares held.

 

v.             Rs. 20,000 liquidation expenses will be borne by Big Ltd.

 

Close the books of Small Ltd. and show the acquisition entries in the books of Big Ltd. Also draft the Balance Sheet after absorption.

 

Answer     

In the books of Small Ltd.

Realisation Account

 

Rs.

 

Rs.

 

To Sundry Assets

640000

By Gratuity Fund

45000

          (650000-10000)

 

By Sundry Creditors

90,000

To Preference Shareholders

          (Premium of redemption

15000

By Big Ltd.

          (Purchase Consideration)

597500

To Bank- (Liquidation Exp.)

20000

 

 

To Equity Shareholders

57500

 

 

 

732500

 

732500

 

Shareholders Account

 

Equity (Rs.)

Preference (Rs.)

 

Equity (Rs.)

Preference (Rs.)

 

To Prelim Expenses

10,000

 

By Share capital

3,00,000

1,50,000

To 7% Pref. Shares of Big Ltd.

 

1,65,000

By Realisation A/c

 

15,000

To Equity shares of Big Ltd.

4,12,500

 

(Premium on redemption)

 

 

 

 

 

By Workmen compensation Fund

 

20,000

 

 

 

 

By General Reserve

45,000

 

 

 

 

By Realisation A/c

57,500

 

 

 

 

(Profit on realisation)

 

 

 

4,22,500

1,65,000

 

4,22,500

1,65,000

 

Big Limited Account

 

Rs.

 

Rs.

 

To Realisation Account

5,97,500

By Bank

20,000

 

 

By 7% Preference shares

1,65,000

 

 

By Equity Shares

4,12,500

 

5,97,500

 

5,97,500

 

In the books of Big Ltd.

 

Journal Entries

Rs.

 

Rs.

 

Goodwill A/c (60,000+20,000)                           Dr.

80,000

 

 

Building A/c                                                      Dr.

1,35,000

 

 

Machinery A/c                                                   Dr.

1,45,000

 

 

Investment A/c                                                   Dr.

46,500

 

 

Stock A/c                                                          Dr.

1,44,000

 

 

Debtors A/c Dr.

1,80,000

 

 

Bank A/c                                                           Dr.

20,000

 

 

 

 

 

 

To Gratuity Fund

 

 

45,000

To Sundry Creditors

 

 

90,000

To Provision for Doubtful debts

 

 

18,000

To Liquidators of Small Ltd.

 

 

5,97,500

 

7,50,500

 

7,50,500

 

(Being assets and liabilities taken over as per agreed valuation.)

 

Liquidators of Small Ltd.                                   Dr.

5,97,500

 

 

 

 

To Bank

 

20,000

To 7% Preference shares Capital

 

1,65,000

To Equity Shares Capital

 

3,75,000

To Share Premium

 

37,500

 

5,97,500

5,97,500

 

(Being purchase consideration satisfied as above.)

 

Balance Sheet as at 31st March, 2001

 

Sources

Rs.

 

Share Capital:

 

3,650 7% Preference shares of Rs. 10 each

3,65,000

1,37,500 Equity shares of Rs. 10 each fully paid up

(1650 Preference shares and 37,500 equity shares were issued without payment received in cash)

13,75,000

Reserve & Surplus:

 

Share Premium

37,500

General Reserve

1,00,000

 

18,77,500

 

Application

Rs

 

Rs.

Fixed Assets:

 

 

 

Goodwill                                                           

1,20,000

 

 

Building                                                            

3,35,000

 

 

Machinery                                                         

7,45,000

 

12,00,000

Investments

 

 

1,16,500

Current Assets

 

 

 

Stock

4,34,000

 

 

Debtors                                                 4,80,000

 

 

 

Less: Prov. for doubtful                            18,000

4,62,000

 

 

Cash & Bank

30,000

 

 

 

9,26,000

 

 

Less Current Liabilities

 

 

 

Gratuity Fund                                        1,15,000

 

 

 

Sundry Creditors                                   2,70,000

3,85,000

 

 

Net Current Assets

 

 

5,41,000

Miscellaneous Expenditure to the extent now written off Preliminary expenses

 

 

20,000

 

 

 

18,77,500

 

         

          Working Notes:

                                                                                                                                      Rs.

Purchase Consideration                                                                                                    

Goodwill                                                                                                                 60,000

Building                                                                                                               1,35,000

Machinery                                                                                                            1,45,000

Investments                                                                                                             46,500

Stock                                                                                                                    1,44,000

Debtors                                                                                                                 1,62,000

Cash & Bank                                                                                                           20,000

                                                                                                                             7,12,500

Less: Liabilities:

Gratuity Fund                                          45,000

Sundry Creditors                                     90,000                                                  1,35,000

                                                                                                                             5,77,500

 

To be satisfied as under:

7% Reedamable Preference shares                                                                      1,65,000

Equity shares issued at 10% premium 30000 x 5/4  = 37500

shares of Rs. 10 each at a premium of 10%                                                         4,12,500

                                                                                                                             5,77,500

 

Liquidation Expenses                                                                                              20,000

Total Purchase Consideration                                                                              5,97,500

         

2.       M/s Brown & Co. have their Head Office at New Delhi and a Branch at Jodhpur. The goods are sent to Branch at 20% less than the list price, which is cost plus 100%.               16

 

          From the following particulars, ascertain the Profit made by the Branch as well as Head Office on wholesale basis:

 

 

Head Office (Rs.)

Branch Office (Rs.)

 

Opening stock at cost price

40,000

Opening stock at Invoice price

20,000

Purchases

4,00,000

Expenses

60,000

12,000

Goods destroyed in an accident at Invoice Price

2,000

Sales at list price

3,40,000

1,60,000

Goods sent to Branch/Received by Branch at Invoice price

1,60,000

1,60,000

Branch Manager's salary

12,000

Head Office Manager's salary

30,000

 

          You are asked to prepare Branch Stock Account, Branch Profit and Loss Account, Goods sent to Branch Account and General Trading Profit and Loss Account of Head Office.

         

Answer

 

Branch Stock A/c

 

 

Rs.

 

Rs.

 

To Balance B/d

20,000

By Cash Sales

1,60,000

To Goods Sent to Branch A/c

1,60,000

By P & L A/c (Goods destroyed)

2,000

To Gross Profit C/d

32,000

By Balance C/d (Note i)

50,000

 

2,12,000

 

2,12,000

 

 

Branch Profit and Loss A/c

 

 

 

Rs.

 

Rs.

 

To Goods destroyed

2,000

By Gross Profit B/d

32,000

To Branch expenses

12,000

 

 

To Branch Managers Salary

12,000

 

 

To Net Profit

6,000

 

 

 

32,000

 

32,000

 

 

Goods Sent to Branch A/c

 

 

 

Rs.

 

Rs.

 

To Trading A/c

1,60,000

By Branch Stock A/c

1,60,000

 

 

 

 

 

1,60,000

 

1,60,000

 

 

 

Let the cost price        =       100/- Rs.

List Price                    =       200/- Rs.

Invoice Price               =       20% Less than the List price

                                    =       200 - 40 = Rs. 160/-

 

Note i:

Closing Stock at Branch at Invoice Price

Closing Stock             =          (Opening stock + Goods from H.O. - Cost of Goods sold - Stock Destroyed)

                                    =          20000+160000 - 128000 - 2000 = Rs. 50000/-

                                               160000 x 160/200 = 128000

 

 

 

 

General Trading, Profit and Loss A/c

Head Office

 

 

Rs.

 

Rs.

 

To Opening Stock

40,000

By Sales

3,40,000

To Purchases

4,00,000

By Goods Sent to Branch A/c

1,60,000

To Gross Profit C/d

2,30,000

By Closing Stock (Note ii)

1,70,000

 

6,70,000

 

6,70,000

 

 

 

 

To Expenses

60,000

By Gross Profit B/d

2,30,000

To Manager's Salary

30,000

By Branch P & L A/c

6,000

To Stock Reserve

18,750

By Stock Reserve A/c (Note iii)

7,500

To Net Profit Transferred

1,34,750

 

 

 

2,43,500

 

2,43,500

 

Note ii)  Closing Stock at H.O. at Cost

 

Closing Stock = (Opening Stock + Purchases - Cost of Goods sold - Cost of goods sent to branch)

= 40,000 + 4,00,000 - 1,70,000 - 1,00,000 = Rs. 2,70,000/-

Cost of goods sold = 3,40,000 ´ 100/200 = Rs. 1,70,000/-

Cost of goods sent to Branch = 1,60,000 ´ 100/160 = Rs. 1,00,000/-

Opening & Closing Stock at Branch are appearing at Invoice price. The Head Office will have to make adjustment for unrealised profit.

 

Stock Reserve for opening stock = 20,000 ´ 60/160 = Rs. 7,500/-

Stock Reserve for closing stock = 50,000 ´ 60/160 = Rs. 18,750/-

 

3.       Mr. A and Mr. B have been carrying on business in partnership under the name M/s X & Co. as equal partners for the purpose of sharing profits or losses of the firm. The firm's Balance Sheet is as shown below:                                                                                                            16

 

Balance Sheet of M/s X & Co. as t 31.3.2001

 

Liabilities

 

Rs.

Assets

Rs.

Capital Accounts:

 

Fixed Assets:

 

          Mr. A     68,000

 

          Goodwill

20,000

          Mr. B      56,000

1,24,400

          Freehold premises

41,400

Sundry Creditors

19,600

Current Assets:

 

 

 

          Stock

28,400

 

 

          Sundry Debtors

32,200

 

 

          Cash on hand

22,00

 

1,44,000

 

1,44,000

 

          It is agreed that Mr. A should retire on 1st April, 2001 and his son Mr. C should join the firm on the same day. Mr. C should be entitled to one-third of the firm's profit or loss in future.

 

For the purpose of A's retirement and Mr. C's admission, Goodwill was revalued at Rs. 44,000 and Freehold premises was revalued at Rs. 48,000. Other terms agreed were that enough money was to be introduced to enable Mr. A to be paid out and to leave Rs. 20,000 cash for working capital requirements. Mr. B and Mr. C should bring such sums so as to make their capital proportionate to their future share of profit.

 

Mr. A agreed to make a gift by transfer from his Capital Account one-half of the amount, which Mr. C should bring in as his capital.

 

Mr. B and Mr. C paid in cash the amount due from them and the amount due to Mr. A was paid on the same day.

 

You are asked to draw up the Journal entries to recovered these transactions in the books of the firm and prepare the Balance Sheet after the retirement of Mr. A.

 

Answer     

A's Capital + Increase

Rs. 68,000 + 15,300                                                         =                                    83,300

B's Capital + Increase                                                      

Rs. 56,400 + 15,300                                                         =                                    71,700

                                                                                                                             1,55,000

 

Less: Excess cash (22,000 - 20,000)                                                                    2,000 (-)

          (Working capital)

Total Capital of Mr. B and Mr. C.                                                                       1,53,000

 

Mr. C's Share = 1/3

Mr. B's Share = 1 - 1/3 = 2/3

 

Therefore, Mr. C has to provide = 1,53,000 ´ 1/3              =                                  51,000

Mr. B's Capital should be = 1,53,000 ´ 2/3                        =                               1,02,000

B's Existing capital = Rs. 71,700/-

Excess to be brought in by B   =       1,02,00 - 71,700 = 30,300/-

Gift made by Mr. A to Mr. C   =       1/2 of C's Capital

                                                  =       51,000 ´ 1/2 = 25,500/-

          A's Capital A/c                =      83,300

Less: Gifted to Mr. C               =       25,500

          Balance Due                             57,800

 

 

Journal Entries:

1.4.2001          Goodwill A/c                     Dr.                      24,000

                        Freehold premises A/c      Dr.                        6,600

                                        To Mr. A's Capital A/c                                                    15,300

                                        To Mr. B's Capital A/c                                                    15,300

                        (Being the increase in revaluation of assets transferred to Mr. A and
Mr. B in equal Ratio)

 

2.                     Mr. A's Capital A/c           Dr.                      25,500

                                        To Mr. C's Capital A/c                                                    25,500

 

                        (Being gift of Rs. 25,500 given by Mr. A to Mr. C i.e. half of the capital Amount due from Mr. C.)

 

3.                     Cash A/c                            Dr.                      55,800

                                        To Mr. B's Capital A/c                                                    30,300

                                        To Mr. C's Capital A/c                                                    25,500

 

                        (Being Cash required paid in by Mr. B and Mr. C)

 

4.                     Mr. A's Capital A/c           Dr.                      57,800

                                        To Cash A/c                                                                    57,800

 

                        (Being the amount due to Mr. A paid)

 

Balance Sheet of M/s X and Co. as at 1.4.2001

 

Liabilities

 

Rs.

Assets

Rs.

Capital Accounts:

 

Fixed Assets:

 

Mr. B

1,02,000

Goodwill

44,000

Mr. C

51,000

Freehold premises

48,000

Current Liabilities:

 

Current Assets:

 

Sundry Creditors

19,600

Stock

28,400

 

 

Sundry Debtors

32,200

 

 

Cash

20,000

 

1,72,600

 

1,72,600

 

 

4.       Excellent Life Assurance Company Limited had a paid up capital of Rs. 100 crores divided into 10 lakhs equity shares of Rs. 100 each. Its net liability on all contracts inforce as on 31.3.2001 was Rs. 21 lakhs. From the following figures extracted from its books for the year ended 31.3.2001. you are required to prepare the Revenue Account for the year ended 31.3.2001 and a valuation Balance Sheet as on that date:                                                                                                              16

 

                                                                                                                        Rs. in lakhs

 

Life Assurance Fund on 1.4.2000                                                                                  25

Premiums received during the year ended 31.3.2001                                                    14

Interest, dividends and rents                                                                                            8

Bonus in cash                                                                                                                   2

Fines and fees                                                                                                               0.5

Management expenses                                                                                                     2

Bonus in reduction of premium                                                                                  0.25

Commission                                                                                                                1.20

Surrenders                                                                                                                   1.00

Claims by death                                                                                                             14

Claims by maturity                                                                                                          5

Consideration for Annuities granted                                                                             0.5

Annuities paid                                                                                                                  1

 

          The company has paid interim Bonus of Rs. 0.10 lakh during the valuation period. Ascertain the Surplus and prepare a Statement to allocate such surplus as detailed below:

          25% of such surplus to be allocated to Equity Shareholders, 70% to policyholders and the balance to be carried forward.

 

Answer

Excellent Life Assurance Company Limited

Revenue Account for the year ended 31.3.2001

 

 

 

Rs. in Lakh

 

Rs. In Lakh

To Claims Paid:

 

By Assurance fund at the beginning

25.00

          By Death                14

 

By Premiums

14,00

          By Maturity            5_

19.00

By Consideration for Annuties granted

0.50

To Annuties

1.00

By Interest, Dividends and Rents

8.00

To Surrenders

1.00

By Fines and Fees

0.50

To Bonus in cash

2.00

 

 

To Bonus in reduction of premium

0.25

 

 

To Management expenses

2.00

 

 

To Commission

1.20

 

 

To Life assurance fund at the end

21.55

 

 

 

48.00

 

48.00

 

 

Valuation Balance Sheet as at 31.3.2001

 

 

 

Rs. in Lakh

 

Rs. in Lakh

To Net Liability as per actuary

21.00

By Life Assurance Fund

21.55

To Surplus

0.55

 

 

 

21.55

 

21.55

 

Statement Showing the allocation:

 

 

 

Rs. in Lakh

Surplus as per balance sheet

0.55

Add: Interim Bonus paid

0.10

Net Profit for the period

0.65

 

 

Policy holders will get 70%                   =

0.4550

Equity shareholders will get 25%          =

0.1625

Balance to be carried forward 5%          =

0.0325

 

0.6500

 

Net Amount payable to Policy holders = 0.455 - 0.10 = 0.355 Lakh

 

5.       From the following particulars, prepare the Balance Sheet Green Limited, which has equity shares of Rs. 10 each fully paid up:                                                                                        16

 

i.               Sales for the year Rs. 21,00,000

ii.             Gross profit ratio 33 1/3%

iii.           Stock turnover ratio = 14 (turnover represents cost of goods sold)

iv.           Opening stock was Rs. 90000

v.             Cost of sales to Fixed Assets = 1.4

vi.           Fixed Assets to Net worth = 5/6

vii.         General reserve to Equity Share Capital = 1/3

viii.       Debt collection period = 73 days

ix.           Quick Assets ratio = 1.25

x.             Current Assets ratio = 1.5

xi.           14% Secured (long-term) Debentures = Rs. 20,000

 

Answer     

Given:

Sales                                                                      2,10,000

Less Gross Profit                                  =              7,00,000                  (33 1/3% on sales)

Therefore Cost of goods Sold              =            14,00,000

 

Stock turn over Ratio                                         14

Cost of goods sold / Average Stock                   14

 

Therefore Average Stock       =          Cost of goods sold / 14

                                               =          14,00,000/14

                                               =          Rs. 1,00,000

 

Therefore Total Stock = AV. Stock ´ 2 = Rs. 2,00,000

                                               = Op. Stock + Cl. Stock

Given Op. Stock = 90,000

Therefore, Closing Stock = 2,00,000 - 90,000 = Rs. 1,10,000

 

Fixed Assets to Net worth = 5/6

But Cost of sales to Fixed Assets = 1.4

 

Cost of sales / Fixed Assets = 1.4

14,00,000 / Fixed Assets = 1.4

 

Therefore Fixed Assets = 14,00,000 / 1.4 = Rs. 10,00,000

 

Therefore Net Worth = 10,00,000 / 5 ´ 6 = 12,00,000

Net worth = Equity share capital + general reserve

 

General Reserve to Equity share capital = 1/3 or 1:3

Therefore General reserve = 12,00,000/4 = Rs. 3,00,000

Equity share capital = Rs. 9,00,000

 

Debt Collection period = Debtors / Sales ´ 365 = 73 days

 

Therefore Sundry Debtors = 21,00,000 / 365 ´ 73 = Rs. 4,20,000

 

Current Assets = 1.5 (Stock + S. Drs. + Cash)

Quick assets ratio = 1.25 (Sundry Drs. + Cash)

 

Closing Stock = 0.25 = Rs. 1,10,000

Therefore Current Assets = 110000 / 0.25 ´ 1.50 = 660000

Current Assets / Current Liabilities = 1.5 / 1

Therefore Current Liabilities = 660000 / 1.5 ´ 1 = 440000

C.A. = 660000 = S. Drs. + Stock + Cash

660000 = 420000 + 110000 + Cash

Therefore cash = 130000

 

Balance Sheet of Green Limited as at ...........

 

Liabilities

 

Rs.

Assets

Rs.

90000 Eq. Sh. of Rs. 10 each

900000

Fixed Assets

1000000

General Reserve

300000

Current Assets:

 

14% Secured Debentures

20000

          Cash

130000

Current Liabilities

440000

          Closing Stock

110000

 

 

          Sundry Drs.

420000

 

1660000

 

1660000

 

6.       Attempt any four of the following:                                                                4 ´ 4 = 16

 

a.             Define 'Contingency' and 'events occurring after the Balance Sheet date' as per AS 4.

 

Under AS 4 a Contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurance, or non - occurance, of one or more uncertain future events.

 

Events occuring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and by the corresponding approving authority in the case of any other entity.

 

b.             Briefly explain the objective and scope of Accounting for the effects of changes in Foreign Exchange rates – AS 11.

 

Under AS 11 objective of accounting for the effects of changes in foreign exchange rates is that an enterprise may have transactions in foreign currencies or it may have foreign branches. Foreign currency transaction should be expressed in the enterprises' reporting currency and the financial statements of foreign branches should be translated into the enterprises reporting currency inorder to include them in the financial statements of the enterprises. The principal issues in accounting for foreign currency transaction and foreign branches are to decide which exchange rate to use and how to recognize in the financial statements the financial effect of changes in exchange rates.

 

Scope: This statement should be applied by an enterprise:

 

i)              In accounting for transactions in foreign currencies; and

ii)            In translating the financial statements of foreign branches for inclusion in the financial statements of the enterprise.

 

c.              List out the differences between Hire-purchase system and Installment Purchase system.

 

i)              Transfer of ownership:

ii)            Recovery of goods

iii)         For feature of installments paid

 

 

Hire Purchases System

 

 

Installment Purchase System

(a)

Ownership in goods will pass to the buyer only on payment of last installment.

 

Ownership in the goods will pass to the buyer immediately at the time of sale

 

(b)

In case if the buyer fails to pay any installment the seller can recover the goods back from buyer.

 

The seller cannot recover the goods. He can only sue for recovery of price and damages.

 

(c)

Default in payment by the buyer the seller can forfeit all moneys paid by the buyers so far.

 

The money paid by the buyer, will be taken as a payment towards part of the selling price and the seller can sue only for the balance.

 

 

d.             Briefly explain about Payment of Firm's Debts and Separate Debts on dissolution of a partnership firm.

 

When there are joint debts due from the partnership and also any separate debts due from any partner, firms property must be first applied in the payment of the debt of the firm and if there is any surplus then the share of each partner in such surplus must be applied in payment of his separate debts or paid to him, if he has no debts. So also separate property of any partner must first be applied in payment of his separate debts, and the surplus, if any, in the payment of the debts of the firm. Where partnership assets are insufficient to meet out the liabilities of the partnership, the creditors of the firm can resort to the partners personal property outside the firm provided their personal and private creditors have already been paid out of it.

 

e.              Claim under Loss of profit policy – Elucidate.

 

Fire results loss of profits to the business on account of its dislocation. Such a loss can be covered by taking a loss of profit policy. The policy specifies both the period as well as the amount it covers. While determining the amount of policy the insured should take into account not only the amount of net profit he earn but also the amount of standing or fixed charges which have been charged against the revenue for determining the amount of net profit. This policy covers profit that would have been earned as if the reduction in sales (short sales) would not have been there. i.e., Had the short sales would not have resulted what would have been earned as normal profit will also be covered under this policy.

 

 

f.Briefly explain "Compilation of Accounts" under Government Accounting.

 

The initial accounts of Government transactions in India are prepared by the authority through whom the transactions occur, such as treasurer, the various departmental offices and other organisations etc. from these initial accounts the Indian Audit and Accounts department as well as the central accounting organisation of the central Government compile, under different heads prescribed for Govt. accounts, and bring out monthly and annually the combined result of all the transactions which occur during that period. From the accounts so complied by the Indian Audit and Accounts department and other agencies the combined finance and revenue accounts of the union and state governments are prepared by the comptroller and Auditor General of India. These accounts incorporate the result of the total Government transactions arising both in Indian and outside India.


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