CA Final Group I : Advanced Accounting - June 2009

CA Final - Group I • Advanced Accounting • June 2009

This Paper has 14 answerable questions with 0 answered.

Roll No………
Total No. of Questions — 6]	[Total No. of Printed Pages — 5
Time Allowed : 3 Hours	Maximum Marks : 100

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

Wherever appropriate suitable assumptions should be made by the candidate.

Working notes should form part of the answer.

Marks

(a)

Following is the information of two companies for the year ended 31^st March, 2009:

	Aikya Ltd. Rs.	Bakya Ltd. Rs.
Equity shares of Rs.10 each 10 per cent Preference shares of Rs.10 each Profit after tax	8,00,000 6,00,000 3,00,000	10,00,000 4,00,000 3,00,000

Assume that the market expectation is 18 percent and 80 percent of the profits are distributed as dividends.

(i)	What is the rate you would pay to the equity shares – (a)If you are buying a small lot? (b) If you are buying a controlling interest in shares?
(ii)	If you plan to invest only in Preference shares, which company’s preference share would you choose?

(0)

(b)

From the following particulars of three companies, ascertain the value of goodwill. Terms and conditions are as follows:

(i)

Assets are to be revalued.

(ii)

Goodwill is to be valued at four years’ purchase of average super profits for three years. Such average is to be calculated after adjustment of depreciation at ten per cent on the amount of increase/decrease on revaluation of fixed assets. Income tax is to be ignored.

(iii)

Normal profit on capital employed is to be taken at 10 per cent, capital employed being considered on the basis of net revalued amounts of tangible assets.
The summarized Balance Sheets and relevant information are given below:

(Rs. in Lakhs)
Liabilities	P Ltd.	Q Ltd.	R Ltd.	Assets	P Ltd.	Q Ltd.	R Ltd.
Equity shares of Rs.10 each Reserves 10 percent debentures Trade and expenses creditors	12.00 2.00 4.00 4.00	14.00 1.00 – 3.00	6.00 2.00 2.00 2.00	Goodwill Net tangible block	– 16.00	100 12.00	– 10.00
	22.00	18.00	12.00		22.00	18.00	12.00

	P Ltd. Rs.	Q Ltd. Rs.	R Ltd. Rs.
Revaluation of tangible block Revaluation of current assets Average annual profit for three years before charging debenture interest	20,00,000 7,00,000 3,60,000	10,00,000 2,80,000 2,88,000	12,00,000 1,60,000 1,56,000

(0)

Agni Ltd. and Bayu Ltd. both engaged in similar merchanting activities since 2006, decide to amalgamate their businesses. A holding company, Chandrama Ltd. would be formed on 1^st January, 2008 to acquire the entire shares in both the companies.
From the information given below you are required to prepare:

(a)

A statement of purchase consideration, supported by requisite working notes.

(b)

Balance Sheet of Chandrama Ltd. after the transactions have been completed.

(i)

The terms of the offer were:

•	Rs.100, 15 per cent debentures for every Rs.100 of net assets owned by each company on 31^st December, 2007.
•	Rs.100 equity shares based on two years purchase of profit before taxation. The profit is to be determined by taking weighted average profits of 2006 and 2007, weights being 1 and 2 respectively.

(ii)

It was agreed that the accounts of Bayu Ltd. for the two years ended 31^st December, 2007 be adjusted, where necessary, to conform to the accounting policies followed by Agni Ltd.

(iii)

The Pre–tax profits, including investment income, of the two companies were as follows:

	2006 Rs.	2007 Rs.
Agni Ltd. Bayu Ltd.	16,38,000 17,88,300	18,36,000 25,74,000

(iv)

Agni Ltd. values its stock on FIFO basis while Bayu Ltd. used a different basis. To bring Bayu Ltd.’s values in line with those of Agni Ltd, value of its stock will require to be reduced by Rs.36,000 at the end of 2006 and Rs.1,02,000 at the end of 2007.

(v)

Both the companies use straight line method of depreciation.

(vi)

Bayu Ltd. deducts 1 per cent from trade debtors as a general provision against doubtful debts.

(vii)

Prepaid expenses in Bayu Ltd. include advertisement expenditure carried forward of Rs.1,80,000 in 2006 and Rs.90,000 in 2007, being part of initial advertising in 2006, which is being written off over three years. Similar expenditure in Agni Ltd. has been fully written off in 2006.

(viii)

To bring Director’s remuneration on to a comparative basis, the profits of Bayu Ltd. are to be reduced by Rs.1,20,000 in 2006 and Rs.1,80,000 in 2007 and the net assets are also to be adjusted accordingly.
Balance Sheets as at 31^st December, 2006 and 2007 were as follows:

Agni Ltd.
Liabilities	2006 Rs.	2007 Rs.	Assets	2006 Rs.	2007 Rs.
Share capital issued and subscribed: 12,000 shares of Rs.100 each, fully paid Reserves and Surplus: Capital reserve Revenue reserve Current Liabilities and provisions: Sundry creditors Provision for taxation	12,00,000 – 7,98,300 15,02,700 8,40,000	12,00,000 2,10,000 16,74,000 18,21,000 9,60,000	Fixed assets: Furniture and Fixtures: at cost Less: depreciation Investments: Quoted investments at market value Current assets: Stock at cost Sundry debtors Prepaid expenses Cash at bank	6,90,000 (69,000) — 18,30,000 18,00,000 30,000 60,000	6,90,000 (1,38,000) 7,80,000 21,75,000 22,20,000 42,000 96,000
	43,41,000	58,65,000		43,41,000	58,65,000
Bayu Ltd.
Liabilities	2006 Rs.	2007 Rs.	Assets	2006 Rs.	2007 Rs.
Share capital: Issued and subscribed 15,000 Equity shares of Rs.100 each, fully paid Reserves and surplus: Revenue reserve Current liabilities and provisions: Sundry creditors Bank overdraft Provision for taxation	15,00,000 8,58,000 14,70,000 – 9,30,000	15,00,000 21,42,000 14,82,000 5,10,000 12,90,000	Fixed assets: Furniture and fixture at cost Less: Depreciation Investments: Quoted investments (Market value Rs.14,70,000 ) Current assets: Stock at cost Sundry debtors Less: provision Prepaid expenses Cash at bank	9,60,000 (1,44,000) – 17,91,000 17,82,000 2,16,000 1,53,000	9,60,000 (2,88,000) 12,00,000 22,26,000 26,73,000 1,44,000 9,000
	47,58,000	69,24,000		47,58,000	69,24,000

(0)

(a)

Parikshit Ltd. holds Rs.1,00,000 of loans yielding 18 per cent interest per annum for their estimated lives of 9 years. The fair value of these loans, after considering the interest yield, is estimated at Rs.1,10,000.

The company securitises the principal component of the loan plus the right to receive interest at 14% to Susovana Corporation, a special purpose vehicle, for Rs.1,00,000.

Out of the balance interest of 4 percent, it is stipulated that half of such balance interest, namely 2 per cent, will be due to Parikshit Ltd. as fees for continuing to service the loans. The fair value of the servicing asset so created is estimated at Rs.3,500. The remaining half of the interest is due to Parikshit Ltd. as an interest strip receivable, the fair value of which is estimated at Rs.6,500.

Give the accounting treatment of the above transactions in the form of journal entries in the books of originator.

(0)

(b)

The Annuity fund of Patiala University accepts an annuity – based gift from an alumnus who specifies that he receives a monthly payment of Rs.25,000 for the remainder of his life. The gift consists of cash of Rs.20 lakh and securities having a market value of Rs.15 lakh at the time of the gift. The investment income of annuity fund for a particular month comes to Rs.38,500.
Draft journal entries in the University’s books.

(0)

(c)

From the following information taken from the books of Sunagarik Ltd. relating to staff and community benefits, you are required to prepare a statement classifying the various items under the appropriate heads, required under corporate social reporting:

Particulars

Rs. in lakhs

Environmental improvements
Medical facilities
Training programmes
Generation of job opportunities
Municipal taxes
Increase in cost of living in the vicinity due to company’s operations
Concessional transport, water–supply etc.
Generation of business
Leave encashment and leave travel benefits
Education facilities for children of staff members
Subsidised canteen facilities
Extra work put in by staff and officers for drought relief

36.18
9.00
18.45
109.35
19.26
29.79
20.25
45.00
93.60
38.88
25.92
33.30

(0)

(a)

The borrowings profile of Santra Pharmaceuticals Ltd. set up for the manufacture of antibiotics at Navi Mumbai is as under:

Date	Nature of borrowings	Amount borrowed Rs.	Purpose of borrowings	Incidental expenses
1^st January, 2008 1^st July, 2008 1^st October, 2008	15% demand loan 14.5% Term loan 14% bonds	60 lakhs 40 lakhs 50 lakhs	Acquisition of Fixed assets Acquisition of plant and machinery Acquisition of fixed assets	8.33% 5% 8%

The incidental expenses consist of commission and service charges for arranging the loans and are paid after rounding off to the nearest lakh.
Fixed assets considered as qualifying assets are as under:

	Rs.
Sterile Manufacturing shed Plant and machinery (total) Other fixed assets	10,00,000 90,00,000 10,00,000

The Project is completed on 1^st January, 2009 and is ready for commercial production. Show the capitalization of the borrowing costs.

(0)

(b)

A company is engaged in the business of ship building and ship repair. On completion of the repair work, a work completion certificate is prepared and countersigned by ship owner (customer). Subsequently, invoice is prepared based on the work completion certificate describing the nature of work done together with the rate and the amount.

Customer scrutinizes the invoice and any variation is informed to the company. Negotiations take place between the company and the customer. Negotiations may result in a deduction being allowed from the invoiced amount either as a lumpsum or as a percentage of the invoiced amount. The accounting treatment followed by the company is as follows:

(i)	When the invoice is raised, the customer’s account is debited and ship repair income account is credited with the invoiced amount.
(ii)	Deduction, if any, arrived after negotiation is treated as trade discount by debiting the ship repair income account.
(iii)	At the close of the year, negotiation in respect of certain invoices had not been completed. In such cases, based on past experience, a provision for anticipated loss is created by debiting the Profit and Loss account. The provision is disclosed in Balance Sheet.

Following two aspects are settled in the negotiations:

(i)	Errors in billing arising on account of variation between the quantities as per work completion certificate and invoice and other clerical errors in preparing the invoice.
(ii)	Disagreement between the company and customer about the rate/cost on which prior agreement has not been reached between them.
Comment:
(i)	Whether the accounting treatment of deduction as trade discount is correct? If not, state the correct accounting treatment.
(ii)	Whether the disclosure of the provision for anticipated loss in Balance Sheet is correct; if not, state the correct accounting treatment.

(0)

(a)

Santhosh Ltd. granted 500 options to each of its 2,500 employees in 2003 at an exercise price of Rs.50 when the market price was the same. The contractual life (vesting and exercise period) of the options granted is 6 years with the vesting period and exercise period being 3 years each. The expected life is 5 years and the expected annual forfeitures are estimated at 3 per cent. The fair value per option is arrived at Rs.15. Actual forfeitures in 2003 were 5 per cent. However at the end of 2003 the management of Santhosh Ltd. still expects that the actual forfeitures would average only 3 per cent over the entire vesting period. During 2004 the management revises its estimated forfeiture rate to 10 per cent per annum. Of the 2,500 employees, 1,900 employees have completed the 3 year vesting period. 1,000 employees exercise their right to obtain shares vested in them in pursuance of ESOP at the end of 2007 and 500 employees exercise their right at the end of 2008. The rights of the remaining employees expire unexercised at the end of 2008. The face value per share is Rs.10. Show the necessary journal entries with suitable narrations. Workings should form part of the answer.

(0)

(b)

On 1st February, 2008, an Indian Company sold goods to an American Company at an invoice price of US $20,000 when the spot market rate was Rs.48.10 to a U.S. dollar.
Payment was to be made in three months time, namely, by 1st May, 2008.

To avoid the risk of foreign exchange fluctuations the Indian exporter acquired a forward contract to sell U.S. $20,000 at Rs.47.90 per U.S. dollar on 1st May, 2008.

The Indian company’s accounting year ended on 31st March, 2008 and the spot rate on this date was Rs.47.20 per U.S. dollar. The spot rate on 1st May, 2008, the date by which the money was due from the American buyer, was Rs.50 per dollar.

Show what accounting entries will have to be made in the books of the Indian exporter at the relevant period of time.

(0)

(a)

Pilot Ltd. supplies the following information using which you are required to calculate the economic value added.

•	Financial Leverage	1.4 times
•	Capital (equity and debt)	Equity shares of Rs.1,000 each Accumulated profit 10 percent Debentures of Rs.10 each	34,000 (number) Rs. 260 lakhs 80 lakhs (number)
•	Dividend expectations of equity shareholders	17.50%
•	Prevailing Corporate Tax rate	30%

(0)

(b)

Amigo Mutual Fund Ltd. is a SEBI Registered mutual fund. The Company follows the practice of valuing its investments on "mark to market basis". For the financial year ended March, 2009 the investments which were acquired at a cost of Rs.109 crores were reflected in the Balance Sheet at Rs.89 crore. The company insists that the depreciation in value of the investments need not be disclosed separately in its financial statements since its investment valuation policy is disclosed as part of its accounting policies. Discuss the validity of this argument.

(0)

(c)

Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 2007 for Rs.60 lakhs. The machine was expected to have a productive life of 6 years. At the end of financial year 2007-08 the carrying amount was Rs.41 lakhs. A short circuit occurred in this financial year but luckily the machine did not get badly damageed and was still in working order at the close of the financial year. The machine was expected to fetch Rs.36 lakhs, if sold in the market. The machine by itself is not capable of generating cash flows. However, the smallest group of assets comprising of this machine also, is capable of generating cash flows of Rs.54 crore per annum and has a carrying amount of Rs.3.46 crore. All such machines put together could fetch a sum of Rs.4.44 crore if disposed. Discuss the applicability of Impairment loss.

(0)

(d)

EXOX Ltd. is in the process of finalizing its accounts for the year ended 31^st March, 2008. The company seeks your advice on the following:

(i)	The Company’s sales tax assessment for assessment year 2005–06 has been completed on 14^th February, 2008 with a demand of Rs.2.76 crore. The company paid the entire due under protest with out prejudice to its right of appeal. The Company files its appeal before the appellate authority where in the grounds of appeal cover tax on additions made in the assessment order for a sum of 2.10 crore.
(ii)	The Company has entered into a wage agreement in May, 2008 whereby the labour union has accepted a revision in wage from June, 2007. The agreement provided that the hike till May, 2008 will not be paid to the employees but will be settled to them at the time of retirement. The company agrees to deposit the arrears in Government Bonds by September, 2008.

(0)

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