CA Final Group I : Advanced Accounting - November 2002

CA Final - Group I • Advanced Accounting • November 2002

This Paper has 13 answerable questions with 0 answered.

Roll No………
Total No. of Questions— 6]	[Total No. of Printed Pages—6
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
Working notes should form part of the answer. Wherever applicable, suitable assumptions should be made by the candidate.
Marks

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 applicable, suitable assumptions should be made by the candidate.

Marks

On 30th September, 1999 Beta Enterprises Ltd. was incorporated with an Authorised Capital of Rs. 50 lakhs. Its first accounts were closed on 31st March, 2000 by which time it had become a listed company with an issued subscribed and paid up Capital of Rs. 40 lakhs in 4,00,000 Equity shares of Rs. 10 each.
The company started off with two lines of business namely ‘Engineering Division’ and ‘Chemicals Division’, with equal asset base with effect from 1st April, 2000. The Ceramics Division was added by the company on 1st April, 2001. The following data is gathered from the books of account of Beta Enterprises Ltd.:

Trial Balance as on 31st March, 2002
	(Rupees in 000’s)
	Dr.	Cr.
Engineering Divisions Sales Cost of Engineering Division sales Chemicals Division Sales Cost of sales of Chemicals Division Ceramics Division sales Cost of sales of Ceramics Division Administration costs Distribution costs Dividend–Interim Fixed Assets at cost Depreciation on Fixed Assets Stock on 31st March, 2002 Trade Debtors Cash at Bank Trade Creditors Equity Share Capital in shares of Rs. 10 each Retained profits	— 2,600 — 4,300 — 900 2,000 1,500 1,200 9,000 — 400 440 160 — — —	6,000 — 8,000 — 1,500 — — — — — 1,500 — — — 500 4,000 1,000
	22,500	22,500

Additional Information:

(a)	Administration costs should be split between the Divisions in the ratio of 5 : 3 : 2.
(b)	Distribution costs shouldbe spread over the Divisions in the ratio of 3 : 1 : 1
(c)	Directors have proposed a Final Dividend of Rs. 8 lakhs.
(d)	Some of the users of Ceramics Division are unhappy with the product and have lodged claims against the company for damagees of Rs. 7.5 lakhs. The claim is hotly contested by the company on legal advice.
(e)	Fixed Assets worth Rs. 30 lakhs were added in the Cermics Divsion on 1.4.2001.
(f)	Fixed Assets are written off over a period of 10 years on straight line basis in the books. However for Income tax purposes depreciation at 20% on written down value of the assets is allowed by Tax Authorities.
(g)	Income tax rate may be assumed at 35%
(h)	During the year Engineering Division has sold to Alpha Ltd. goods having a sales value of Rs. 25 lakhs. Mr. Gamma, the Managing Director of Beta Enterprises Ltd. owns 100% of the issued Equity Shares of Alpha Ltd. the sales made to Alpha Ltd. were at normal selling price of Beta Enterprises Ltd.

You are required to prepare Profit and Loss account for the year ended 31st March, 2002 and the Balance Sheet as at that date. Your answer should include notes and disclosures as per Accounting Standards.

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(a)

Explain the concept of ‘Economic value added’ (EVA for short) and its uses.

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(b)

A company obtained term loan during the year ended 31st March, 2002 in an extent of Rs. 650 lakhs for modernisation and development of its factory. Buildings worth Rs. 120 lakhs were completed and Plant and Machinery worth Rs. 350 lakhs were installed by 31st March, 2002. A sum of Rs. 70 lakhs has been advanced for Assets the installation of which is expected in the following year. Rs. 110 lakhs has been utilised for Working Capital requirements. Interest paid on the loan of Rs. 650 lakhs during the year 2001-2002 amounted to Rs. 58.50 lakhs. How should the interest amount be treated in the Accounts of the Company?

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(c)

For what purposes inspection of records and documents of Merchant Banker is ordered by SEBI?

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The following are the Balance Sheet of A Ltd. and B Ltd. as on 31st December, 2001.

Liabilities	A Ltd. (Rs.)	B Ltd. (Rs.)	Assets	A Ltd. (Rs.)	B Ltd. (Rs.)
Share Capital Equity Shares of Rs. 10 each 10% Pref. shares of Rs. 100 each Reserved and Surplus Secured Loans: 12% Debentures Current Liabilities: Sundry Creditors Bills Payable	6,00,000 2,00,000 3,00,000 2,00,000 2,20,000 30,000	3,00,000 1,00,000 2,00,000 1,50,000 1,25,000 25,000	Fixed Assets Investement: 6,000 Shares in B Ltd. 5,000 Shares in A Ltd. Current Assets Stock Debtors Bills Receivable Cash at Bank	7,00,000 80,000 — 2,40,000 3,60,000 60,000 1,10,000	2,50,000 — 80,000 3,20,000 1,90,000 20,000 40,000
	15,50,000	9,00,000		15,50,000	9,00,000

Fixed Assets of both the companies are to be revalued at 15% above book value. Stock in Trade and Debtors are taken over at 5% lesser than their book value. Both the companies are to pay 10% Equity Dividend, Preference dividend having been already paid.

After the above transactions are given effect to, A Ltd., will absorb B Ltd. on the following terms:

(i)	8 Equity Shares of Rs. 10 each will be issued by A Ltd. at par against 6 shares of B Ltd.
(ii)	10% Preference Shareholders of B Ltd. will be paid at 10% discount by issue of 10% Preference Shares of Rs. 100 each at par in A Ltd.
(iii)	12% Debentureholders of B Ltd. are to be paid at 8% premium by 12% Debentures in A Ltd. Issued at a discount of 10%
(iv)	Rs. 30,000 is to be paid by A Ltd. to B Ltd. for Liquidation expenses. Sundry Creditors of B Ltd. include Rs. 10,000 due to A Ltd.

Prepare: (a) Absorption entries in the books of A Ltd. (b) Statement of consideration payable by A Ltd.

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(a)

Following are the information of two companies for the year ended 31st March, 2002:

Particulars	Company A	Company B
Equity Shares of Rs. 10 each	8,00,000	10,00,000
10% Pref. Shares of Rs. 10 each	6,00,000	4,00,000
Profit after tax	3,00,000	3,00,000

Assume the Market expectation is 18% and 80% of the Profits are distributed.

(i)	What is the rate you would pay to the Equity Shares of each Company? (a) If you are buying a small lot (b) If you are buying controlling interest shares.
(ii)	If you plan to invest only in preference shares which company’s preference shares would you prefer?
(iii)	Would your rates to be different for buying small lot, if the company ‘A’ retains 30% and company ‘B’ 10% of the profits?

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(b)

Write a note on recommendations given in the Guidance note on Accounting in respect of Minimum alternate Tax (MAT) issued by INstitute of Chartered Accountants of India.

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On 31st March, 2002 the Balance Sheets of H Ltd. and S Ltd. stood as follows:

	H Ltd.	S Ltd.
	(Rs. in 000’s)
Liabilities: Equity Share capital–Authorised Issued and Subscribed in Equity Shares of Rs. 10 each fully paid General Reserve Profit and Loss Account Bills Payable Sundry Creditors Provision for taxation Other Provisions Assets: Plant and Machinery Furniture and Fittings Investment in the Equity Shares of S Ltd. Stock Debtors Bills Receivables Cash and Bank Balances Sundry Advances	5,000 4,000 928 1,305 124 487 220 65 7,129 2,541 615 1,500 983 700 120 410 260 7,129	3,000 2,400 690 810 80 427 180 17 4,604 2,450 298 ’� 786 683 95 102 190 4,604

Following Additional Information is available:

(a)	H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2001 at which date the following balances stood in the books of S Ltd. General Reserve Rs.1,500 thousand; profit and loss Account Rs.633 thousand.
(b)	On 14th July, 2001 S Ltd. declared a dividend of 20% out of pre–acquisition profits and paid corporate dividend tac (including surcharge) at 11%. H Ltd. credited the dividend received to its profit and Loss Account.
(c)	On 1st November, 2001 S Ltd. issued 3 fully paid Equity shares of Rs.10 each, for every 5 shares held as bonus shares out of pre–acquisiton General Reserve.
(d)	On 31st March,2002,the stock of S Ltd. included goods purchased for Rs.50 thousand from H Ltd., which had made a profit of 25% on cost

Prepare a consolidated Balance Sheet as on 31st March, 2002.

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In the context of relevant Accounting Standards, give your comments on any four of the following matters for the financial year ending on 31.3.2002

4x4=16

(a)

Assets and liabilities and income and expenditure items in respect of foreign branches are translated into Indian rupees at the prevailing rate of exchange at the end of the year. The resultant exchange differences in the case of profit, is carried to other Liabilities Account and the Loss, if any, is charged to revenue.

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(b)

Leave encashment benefit is accounted for as per "Pay–as–you–go" method.

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(c)

Increase in pension liability on account of wage revision in 1999-2000 is being provided for in 5 installments commencing from that year.The remaining liability of Rs. 300 lakhs as re-determined in acturial valuation will be provided for in the next 2 years.

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(d)

A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2002 on a research project to develop a drug to treat "AIDS". Experts are of the view that it may take four years to establish whether the drug will be effective or not and even if found effective it may take two to three more years to produce the medicine, which can be marketed. The company wants to treat the expenditure as deferred revenue expenditure.

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(e)

While preparing its final accounts for the year ended 31st March, 2002 Rainbow Limited created a provision for Bad and Doubtful debts at 2% on trade debtors. A few weeks later the company found that payments from some of the major debtors were not forthcoming. Consequently the company decided to increase the provision by 10% on the debtors as on 31st March, 2002 as the accounts were stil open awaiting approval of the Board of Directors. Is this to be considered as an extra–ordinary item or prior period item?

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