CA Final :: Advanced Accounting : May 2006

Roll No…………………
Total No. of Questions— 6]	[Total No. of Printed Pages—4
Time Allowed : 3 Hours	Maximum Marks : 100
ML
Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.
Answer all Questions.
Working notes should form part of the answer.
Wherever necessary, suitable assumptions may be made by the candidate.

Marks

The following are the Balance Sheets of Arun Ltd., Brown Ltd. and Crown Ltd. as at 31.12.2005:

Liabilities	Arun.Ltd. Rs.	Brown.Ltd. Rs.	Crown Ltd. Rs.
Share Capital (Shares of Rs.100 each) Reserves Profit and Loss Account Sundry Creditors Arun Ltd. Total	6,00,000 80,000 2,00,000 80,000 — 9,60,000	4,00,000 40,000 1,20,000 1,00,000 40,000 7,00,000	2,40,000 30,000 1,00,000 60,000 32,000 4,62,000

Assets	Arun.Ltd. Rs.	Brown.Ltd. Rs.	Crown Ltd. Rs.
Goodwill Fixed Assets Shares in: Brown Ltd. (3,000 Shares) Crown Ltd. (400 Shares) Crown Ltd. (1,400 Shares) Due from: Brown Ltd. Crown Ltd. Current Assets Total	80,000 2,80,000 3,60,000 60,000 — 48,000 32,000 1,00,000 9,60,000	60,000 2,00,000 — — 2,08,000 — — 2,32,000 7,00,000	40,000 2,40,000 — — — — — 1,82,000 4,62,000

(i)

All shares were acquired on 1.7.2005.

(ii)

On 1.1.2005 the balances to the various accounts were as under:

Particulars	Arun.Ltd. Rs.	Brown.Ltd. Rs.	Crown Ltd. Rs.
Reserves Profit and Loss account	40,000 20,000	40,000 (Dr.) 20,000	20,000 12,000

(iii)

During 2005, Profits accrued evenly.

(iv)

In August, 2005, each company paid interim dividend of 10%. Arun Ltd. and Brown Ltd. have credited their profit and loss account with the dividends received.

(v)

During 2005, Crown Ltd. sold an equipment costing Rs.40,000 to Brown Ltd. for Rs.48,000 and Brown Ltd. in turn sold the same to Arun Ltd. for Rs.52,000.

Prepare the consolidated Balance Sheet as at 31.12.2005 of Arun Ltd. and its subsidiaries.

P.T.O.

( 2 )

Marks

The following are the Balance Sheets of Big Ltd. and Small Ltd. as at 31.3.06:

	Big.Ltd. Rs.	Small.Ltd. Rs.		Big.Ltd. Rs.	Small.Ltd. Rs.
Share Capital Profit & Loss A/c Sundry Creditors	40 7.5 12.5 60.0	15 — 12.5 27.5	Sundry Assets (including cost of shares) Goodwill Profit and Loss A/c	56 4 — 60.0	20 5 2.5 27.5

Additional Information:

(i)	The two companies agree to amalgamate and form a new company, Medium Ltd.
(ii)	Big Ltd. holds 10,000 shares in Small Ltd. acquired at a cost of Rs.2,50,000 and Small Ltd. holds 5,000 shares in Big Ltd. acquired at a cost of Rs.7,00,000.
(iii)	The shares of Big Ltd. are of Rs.100 and are fully paid and the shares of Small Ltd. are of Rs.50 each on which Rs.30 has been paid-up.
(iv)	It is agreed that the goodwill of Big Ltd. would be valued at Rs.1,50,000 and that of Small Ltd. at Rs.2,50,000.
(v)	The shares which each company holds in the other are to be valued at book value having regard to the goodwill valuation decided as given in (iv).
(vi)	vi) The new shares are to be of a nominal value of Rs.50 each credited as Rs.25 paid.
You are required to:
(i)	Prepare the Balance Sheet of Medium Ltd., as at 31st March, 2006 after giving effect to the above transactions; and
(ii)	Prepare a statement showing the shareholdings in the new company attributable to the shareholders of the merged companies.

The directors of a public limited company are considering the acquisition of the entire share capital of an existing company X Ltd engaged in a line of business suited to them. The directors feel that acquisition of X will not create any further risk to their business interest.

The following is the Balance Sheet of X Ltd., as at 31st December, 2005:

Liabilities Rs. Assets Rs.

Share Capital:
4,000 equity shares of Rs.100 each
fully paid-up
General reserve
Bank overdraft
Sundry creditors

4,00,000
3,00,000
2,40,000
3,00,000
12,40,000 Fixed assets
Current assets:
Stock
Sundry debtors
Cash and bank balances 6,00,000

2,00,000
3,40,000
1,00,000

12,40,000

ML	Contind...

( 3 )

Marks

X’s financial records for the past five years were as under:

	2005 Rs.	2004 Rs.	2003 Rs.	2002 Rs.	2001 Rs.
Profits Extra ordinary item(s) Dividends	80,000 3,500 83,500 48,000 35,500	74,000 4,000 78,000 40,000 38,000	70,000 (6,000) 64,000 40,000 24,000	60,000 (8,000) 52,000 32,000 20,000	62,000 1,000 61,000 32,000 29,000

Additional Information:

(i)

There were no changes in the issued capital of X during this period.

(ii)

The estimated values of X Ltd.’s assets on 31.12.2005 are:

	Replacement Cost Rs.	Realisable Value Rs.
Fixed assets Stock	8,00,000 3,00,000	5,40,000 3,20,000

(iii)

It is anticipated that 1% of the debtors may prove to be difficult to be realized.

(iv)

The cost of capital to the acquiring company is 10%.

(v)

The current return of an investment of the acquiring company is 10%. Quoted companies with similar businesses and activities as X have a P/E ratio approximating to 8, although these companies tend to be larger than X.

Required:

Estimate the value of the total equity capital of X Ltd., on 31.12.2005 using each of the following bases:

(a)

Balance sheet value

(b)

Replacement cost

(c)

Realisable value

(d)

Gordon’s dividend growth model

(e)

P/E ratio model.

(a)

Global Ltd. has initiated a lease for three years in respect of an equipment costing Rs.1,50,000 with expected useful life of 4 years. The asset would revert to Global Limited under the lease agreement. The other information available in respect of lease agreement is:

(i)	The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at Rs.20,000.
(ii)	The implicit rate of interest is 10%.
(iii)	The annual payments have been determined in such a way that the present value of the lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of Global Ltd.
(i)	The annual lease payment.
(ii)	The unearned finance income.
(iii)	The segregation of finance income, and also,
(iv)	Show how necessary items will appear in its profit and loss account and balance sheet for the various years.

(b)

Briefly describe the method of valuation of human resources as suggested by Jaggi and Lau. Also point out the special merit and demerit of this method.

P.T.O.

( 4 )

Marks

(a)

Swift Ltd. acquired a patent at a cost of Rs.80,00,000 for a period of 5 years and the product life-cycle is also 5 years. The company capitalized the cost and started amortizing the asset at Rs.10,00,000 per annum. After two years it was found that the product life-cycle may continue for another 5 years from then. The net cash flows from the product during these 5 years were expected to be Rs.36,00,000,Rs.46,00,000, Rs.44,00,000, Rs.40,00,000 and Rs.34,00,000. Find out the amortization cost of the patent for each of the years.

(b)

The Chief Accountant of Sports Ltd. gives the following data regarding its six segments:

Rs. in lakhs
Particulars	M	N	O	P	Q	R	Total
Segment Assets Segment Results Segment Revenue	40 50 300	80 –190 620	30 10 80	20 10 60	20 –10 80	10 30 60	200 –100 1,200

The Chief accountant is of the opinion that segments “M” and “N” alone should be reported. Is he justified in his view? Discuss.

(c)

On 24th January, 2006 Chinnaswamy of Chennai sold goods to Watson of Washington, U.S.A. for an invoice price of $40,000 when the spot market rate was Rs.44.20 per US $. Payment was to be received after three months on 24th April, 2006. To mitigate the risk of loss from decline in the exchange-rate on the date of receipt of payment, Chinnnaswamy immediately acquired a forward contract to sell on 24th April, 2006 US $ 40,000 @ Rs.43.70. Chinnaswamy closed his books of account on 31st March, 2006 when the spot rate was Rs.43.20 per US $. On 24th April, 2006, the date of receipt of money by Chinnaswamy, the spot rate was Rs.42.70 per US $.

Pass journal entries in the books of Chinnaswamy to record the effect of all the above mentioned effects.

(a)

Narmada Ltd. sold goods for Rs.90 lakhs to Ganga Ltd. during financial year ended 31-3- 2006. The Managing Director of Narmada Ltd. own 100% of Ganga Ltd. The sales were made to Ganga Ltd. at normal selling prices followed by Narmada Ltd. The Chief accountant of Narmada Ltd contends that these sales need not require a different treatment from the other sales made by the company and hence no disclosure is necessary as per the accounting standard. Is the Chief Accountant correct?

4x4=16

(b)

Milton Ltd. is a full tax free enterprise for the first 10 years of its existence and is in the second year of its operations. Depreciation timing difference resulting in a deferred tax liability in years 1 and 2 is Rs.200 lakhs and 400 lakhs respectively. From the 3rd year onwards, it is expected that the timing difference would reverse each year by Rs.10 lakhs. Assuming tax rate @35%, find out the deferred tax liability at the end of the second year and any charge to the profit and loss account.

(c)

Victory Ltd. purchased goods on credit from Lucky Ltd. for Rs.250 crores for export. The export order was cancelled. Victory Ltd. decided to sell the same goods in the local market with a price discount. Lucky Ltd. was requested to offer a price discount of 15%. The Chief Accountant of Lucky Ltd. wants to adjust the sales figure to the extent of the discount requested by Victory Ltd. Discuss whether this treatment is justified.

(d)

Accountants of Poornima Ltd. show a net profit of Rs.7,20,000 for the third quarter of 2005 after incorporating the following:

(i)	Bad debts of Rs.40,000 incurred during the quarter. 50% of the bad debts have been deferred to the next quarter.
(ii)	Extra ordinary loss of Rs.35,000 incurred during the quarter has been fully recognized in this quarter.
(iii)	Additional depreciation of Rs.45,000 resulting from the change in the method of charge of depreciation.

Ascertain the correct quarterly income.