CWA/ICWA Final :: Advanced Financial Accounting : June 2005

*I—10(AFA)* *Revised Syllabus*
Time Allowed : 3 Hours		Full Marks : 100
The figures in the margin on the right side indicate full marks.
Attempt Question No. 1 which is compulsory and any five from the rest.
Marks

(a)	What is the primary reason for non-acceptability of International Accounting Standards (IAS) throughout the world?
(b)	What are the two alternative approaches for business valuation?
(c)	State how 'fixed assets' when discarded and sold are recognised in the Accounts of Electricity Companies.
(d)	Certain risks are not covered in loss of profit policy. — Mention any two of them.
(e)	How are 'donations' treated in Income and Expenditure Account and Balance Sheet?
(f)	What is the legal status of accounting standards issued by the Institute of Chartered Accountants of India?
(g)	What is meant of "non-banking assets"?
(h)	What do you mean by "fundamental accounting assumptions"?
(i)	Can share premium be distributed as dividends?
(j)	How the term "Treasury" defined in the context of Government accounting?

2x10

Wind Mill Ltd. supplying electricity maintains its accounts on double account basis. It incurred an expenditure of Rs. 25,00,000 to renovate its works. The relevant part of old works had costed Rs. 10,00,000. This capacity of new works will be double the capacity of old works. A sum of Rs. 5,00,000 is realised by the sale of old materials. Old materials of the value of Rs. 2,00,000 are used in the new works. Cost escalation (since old works were built) is as follows:

material
Labour

20%
25%

The cost constitutes

th for materials and

th for labour.

Show

(a)	The amount of improvement to be capitalised.
(b)	The amount to be written off to revenue.
(c)	Journal Entries to record the transactions.

4+4+8

On the eve of proposed absorption of A Ltd. by B Ltd., following summarised details are given:

	A Ltd. Rs.	A Ltd. Rs.
Net assets Number of equity shares of Rs. 200 each Reserves	33,30,000 9,000 15,30,000	41,25,000 15,000 11,25,000

Terms of absorption are proposed as follows:
The holders of every three shares in A Ltd. were to receive four shares in B Ltd. plus as much cash as is necessary to adjust the rights of shareholders of both the companies in accordance with intrinsic value of their respective shares.

You are required to:

(a)	Compute the purchase consideration, and
(b)	Present the projected balance sheet of B Ltd. as if the proposed absorption is put through.

8+8

Please turn over

( 2 )
I—10(AFA) Revised syllabus
Marks

(a)

Distinguish between purchased goodwill and self-generated goodwill. How is each type of goodwill treated in company accounts?

6+10

(b)

The balance sheet (summarised) of Tinker Ltd. as on 31 March 2005 was as follows:

	Rs.		Rs.
Equity shares of Rs. 10 each, fully paid General reserve Dividend equalisation reserve Share premium Profit and loss account Sundry creditors	50,00,000 10,00,000 5,00,000 3,00,000 2,00,000 15,00,000	Goodwill Plant & machinery Investments Stocks Debtors Cash and bank	5,00,000 55,00,000 5,00,000 8,00,000 9,50,000 2,50,000
	85,00,000		85,00,000

The company's profit and loss account for the year ended 31 March 2005 showed a net profit (before tax) of Rs. 25,00,000. The profit includes interest on investment of Rs. 50,000. Goodwill is being written off Rs. 50,000 per annum. The applicable income tax rate is 40 per cent. It is expected that the company will be able to maintain its present level of performance. Plant and machinery is revalued at Rs. 70,00,000. Future depreciation charge is to go up by Rs. 1,00,000. Normal return on capital employed may be taken at 10 per cent. Compute the value of goodwill of the company based on 4 years' purchase of maintainable super profit. The capital employed figure is to be calculated on the basis of the last year-end position.

Puskar Enterprise has its head office in Ranchi and a branch in Imphal. The following trial balance has been extracted from the books of account as at 31 March 2005:

5+5+6

	Head Office		Branch
	Dr. Rs.	Cr. Rs.	Dr. Rs.	Cr. Rs.
Capital Debtors Creditors Purchases Sales Goods sent to branch at invoice price Fixed assets (net) Stock (1 April 2004) Stock adjustment (unrealised profit) Head office/branch current a/c Administrative and selling expenses Cash and bank Provision for bad debts	3,00,000 27,42,000 10,50,000 24,000 5,25,000 8,41,5000 46,500	16,50,000 1,50,000 25,50,000 11,40,000 12,000 27,000	1,80,000 11,25,000 2,00,0000 60,0000 74,500 39,000	13,11,000 3,60,000 7,500
	55,29,0000	55,29,000	16,78,500	16,78,5000

Other relevant information:

(1)

All goods are purchased by the head office. Goods are sent to branch at cost plus 25 per cent.

(2)

Stocks at 31 March 2005 were valued at:

H.O.
Branch

Rs. 36,000
Rs. 45,000 (invoice price)

(3)

Depreciation is to be provided on fixed assets at 10% on book value.

(4)

Bad debt provision is to be maintained at 5% on debtors as at the end of the year.

(5)

Cash in transit from branch to head office at 31st March 2005 at invoice price was Rs. 15,000.

Prepare, in columner form, the branch and head office trading and profit and loss accounts for the year ended 31 March 2005 and a combined balance sheet for Puskar Enterprise as on that date.

The balance sheet of Bomex Ltd. as at 31 March 2005 was as follows:

Liabilities	Rs.	Assets	Rs.
Equity shares (Rs. 10) General reserves Profit and loss account 12% debentures Provision for depreciation on equipment Staff welfare fund Proposed dividend Sundry creditors	10,00,000 5,00,000 2,00,000 6,00,000 3,00,000 80,000 1,50,000 3,70,000	Goodwill Equipment (at cost) Stocks Debtors Cash and bank Advertisement suspense account	2,00,000 18,00,000 7,00,000 3,00,000 1,50,000 50,000
	32,00,000		32,00,000

You are required to calculate the value of each equity share on assets basis.

The following further information is available:

(1)

A fair after tax return on capital employed for this type of business is 18%.

(2)

Equipment is to be revalued at Rs. 16,00,000.

(3)

Stocks are considered to have a net realisable value of Rs. 6,60,000.

(4)

Goodwill in this type of business is normally valued at 3 years' super profits.

(5)

Included in the debtors is a balance of Rs. 20,000 which may prove irrecoverable.

(6)

Profits for the last three years (before interest and taxes) are

2004-05
2003-04
2002-03

Rs.
10,80,000
10,20,000
11,00,000

(7)

Company profits are taxed at 40%.

( 3 )
I—10(AFA) Revised syllabus
Marks

Nabipur Ltd. owns certain patent rights. It has granted a licence to Asoke Ltd. to use such rights on royalty basis. The royalty is payable at Rs. 50 per unit produced. asoke Ltd. has issued a sub-license to Kaniska Ltd. on the basis of a royalty of Rs. 60 per unit sold. The minimum royalty payable by Kaniska Ltd. is fixed at Rs. 75,000 per annum. Short workings can be recouped within one year from the last date of the year in which they occur.
The following particulars are available for the first three years of working.

	Asoke Ltd.		Kaniska Ltd.
Year	Sales (units)	Closing stock (units)	Production (units)	Closing stock (units)
1 2 3	6,000 7,500 4,500	1,500 3,000 4,500	600 3,000 4,500	300 600 1,350

You are required to

(a)	Prepare in the books of Asoke Ltd., a statement showing analysis of royalties receivable and royalties payable, and
(b)	Show royalty receivable account and royalty payable account in the books Asoke Ltd.

4+6+6

Write Short notes:-

(a)	Supplementary Grant;
(b)	Local Government Accounting;
(c)	Public Accounts Committee;
(d)	Structure of Government Accounts.

4x4=16

__________

CWA/ICWA Inter :: Advanced Financial Accounting : June 2005