CA Final Group I : Financial Reporting - June 2009

CA Final - Group I • Financial Reporting • June 2009

This Paper has 17 answerable questions with 0 answered.

Roll No………
Total No. of Questions — 7]	[Total No. of Printed Pages — 4
Time Allowed : 3 Hours	Maximum Marks : 100

Question No. 1 is compulsory. Answer any five out of the remaining questions

Working notes should form part of the answer.

Wherever necessary, suitable assumptions may be made by the candidates.

Marks

Answer any four out of the following:

4x5=20

(a)

From the following details of an asset

(i)

Find out impairment loss

(ii)

Treatment of impairment loss

(iii)

Current year depreciation

Particulars of asset:
Cost of asset Useful life period Salvage value Current carrying value Useful life remaining Recoverable amount Upward revaluation done in last year	Rs.56 lakhs 10 years Nil Rs. 27.30 lakhs 3 years Rs.12 lakhs Rs.14 lakhs

(0)

(b)

Rainbow Limited borrowed an amount of Rs.150 crores on 1.4.2008 for construction of boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. Since the weighted average cost of capital is 13% p.a., the accountant of Rainbow Ltd. capitalized Rs.19.50 crores for the accounting period ending on 31.3.2009. Due to surplus fund, out of Rs.150 crores, an income of Rs.3.50 crores was earned and credited to profit and loss account. Comment on the above treatment of accountant with reference to relevant accounting standard.

(0)

(c)

Suraj Limited wishes to obtain a machine costing Rs.30 lakhs by way of lease. The effective life of the machine is 14 years, but the company requires it only for the first 5 years. It enters into an agreement with Ashok Ltd., for a lease rental for Rs.3 lakhs p.a. payable in arrears and the implicit rate of interest is 15%. The chief accountant of Suraj Limited is not sure about the treatment of these lease rentals and seeks your advise.

(0)

(d)

Omega Limited is working on different projects which are likely to be completed within 3 years period. It recognizes revenue from these contracts on percentage of completion method for financial statements during 2006, 2007 and 2008 for Rs.11,00,000, Rs.16,00,000 and Rs.21,00,000 respectively. However, for income–tax purpose, it has adopted the completed contract method under which it has recognized revenue of Rs.7,00,000, Rs.18,00,000 and Rs.23,00,000 for the years 2006, 2007 and 2008 respectively. Income–tax rate is 35%. Compute the amount of deferred tax asset/liability for the years 2006, 2007 and 2008.

(0)

(e)

While preparing its final accounts for the year ended 31st March, 2009, a company made a provision for bad debts @ 5% of its total debtors. In the last week of February 2009, a debtor for 2 lakhs had suffered heavy loss due to earthquake. The loss was not covered by any insurance policy. In April, 2009, the debtor became bankrupt. Can the company provide for full loss arising out of insolvency of debtor in the final accounts for year ended 31st March, 2009?

(0)

The Balance Sheet of Munna Ltd as on 31st March, 2009 is as follows:

Liabilities	Rs.	Assets	Rs.
Authorised and issued Share capital 20,000 Equity shares of Rs.100 each, fully paid 10,000, 7% Preference shares of Rs.100 each Sundry creditors Bank overdraft	20,00,000 10,00,000 7,00,000 3,00,000	Goodwill Plant & Machinery Stock Debtors Cash Preliminary expenses Profit and Loss A/c	2,00,000 18,00,000 3,00,000 7,50,000 1,50,000 1,00,000 7,00,000
	40,00,000		40,00,000

Additional Information:

Two years’ preference share dividend is in arrears. The company had bad time during the last two years and hopes for better business in future, earning profit and paying dividend, provided the capital base is reduced.

An internal reconstruction scheme, agreed to by all concerned, is as follows:

(i)	Creditors agreed to forego 50% of their claim.
(ii)	Preference shareholders withdrew arrear dividend claim. They also agreed to lower down their capital claim by 20% by reducing nominal value in consideration of 9% dividend effective after reconstruction, in case equity shareholder’s loss exceeded 50% on the application of the scheme.
(iii)	Bank has agreed to convert overdraft into term loan to the extent required for making current ratio to 2:1.
(iv)	Revalued amount for plant and machinery was accepted as Rs.15,00,000.
(v)	Debtors to the extent of Rs.4,00,000 were considered as good.
(vi)	Equity shares shall be exchanged for the same number of equity shares at a revised denomination as required after the reconstruction.

You are required to show the following:

(a)	Total loss to be borne by the equity and preference shareholders for the reconstruction.
(b)	Share of loss to the individual class of shareholders.
(c)	New structure of share capital after reconstruction.
(d)	Working capital of the reconstructed company, and
(e)	A Performa Balance Sheet after reconstruction.

(0)

From the following details, prepare a consolidated Balance Sheet of Sun Limited and its subsidiaries as on 31st March, 2009:

(Rs. in Lakhs)
Assets Fixed assets (net) Investment (at cost)	Sun Ltd. 816	Moon Ltd. 312	Star Ltd. 126
^∗∗ Current ratio shall be 2 : 1, i.e. total current liabilities shall be 50% of Rs. 8,50,000 (i.e. Rs. 3,00,000 + 4,00,000 + 1,50,000) = Rs. 4,25,000. Therefore, Bank overdraft = Rs. 75,000 (Rs. 4,25,000 less creditors Rs. 3,50,000).
7,50,000, equity shares of Moon Ltd 2,40,000 equity shares of Star Ltd. 4,80,000, equity shares of Star Ltd. 30,000 cumulative preference shares of Sun Ltd. 4,500 mortgage debentures of Sun Ltd. Current assets Profit and loss account	75 24 – – – 1,059 288	– – 60 – – 369 108	– – – 30 42 336 63
	2,262	849	597
Liabilities
Equity share capital (Rs.10 each fully paid up) 7.5% Cumulative preference share capital (Rs.100 each fully paid) Capital reserve (revaluation of fixed assets) General reserve 7,500, 8% mortgage debenture bonds of Rs.1,000 each	180 45 360 75 75	144 36 – 45 –	120 30 – 30 –
Secured loans and advances:
From banks Unsecured loans: From Moon Ltd. From Star Ltd. Current liabilities and provisions: Inter–company balances Other liabilities	513 – 45 27 942	249 – – – 375	165 36 – – 216
	2,262	849	597

Other information are as follows:

(a)	Moon Ltd. subscribed for 2,40,000 shares of Star Ltd. at par at the time of first issue and further acquired 2,40,000 shares from the market at Rs.15 each, when the Reserve and Surplus account of Star Ltd. stood at Rs.15 lakhs.
(b)	Sun Ltd. subscribed for shares of Moon Ltd. and Star Ltd. at par at the time of first issue of shares by both the companies.
(c)	Current assets of Moon Ltd. and Star Ltd. includes Rs.12 lakhs and Rs.18 lakhs respectively being current account balance against Sun Ltd.

(0)

(a)

On 1.4.2008, a mutual fund scheme had 18 lakh units of face value of Rs.10 each was outstanding. The scheme earned Rs.162 lakhs in 2008–09, out of which Rs.90 lakhs was earned in the first half of the year. On 30.9.2008, 2 lakh units were sold at a "NAV" of Rs.70.
Pass Journal entries for sale of units and distribution of dividend at the end of 2008–09.

(0)

(b)

Following is the Balance Sheet of Rampal Limited as on 31st March, 2009:

Liabilities	Rs.	Assets	Rs.
1,00,000 equity shares of Rs.10 each 10,000, 12% preference shares of Rs.100 each General reserve Profit and Loss account 15% debentures Creditors	10,00,000 10,00,000 6,00,000 4,00,000 10,00,000 8,00,000	Goodwill Buildings Plant Investment in 10% stock Stock–in–trade Debtors Cash Preliminary Expenses	5,00,000 15,00,000 10,00,000 4,80,000 6,00,000 4,00,000 1,00,000 2,20,000
	48,00,000		48,00,000

Additional information are given below:

(a)

Nominal value of investment is Rs.5,00,000 and its market value is Rs.5,20,000.

(b)

Following assets are revalued:

(i)	Building	Rs.32,00,000
(ii)	Plant	Rs.18,00,000
(iii)	Stock–in–trade	Rs.4,50,000
(iv)	Debtors	Rs.3,60,000

(c)

Average profit before tax of the company is Rs.12,00,000 and 12.50% of the profit is transferred to general reserve, rate of taxation being 50%.

(d)

Normal dividend expected on equity shares is 8% while fair return on closing capital employed is 10%.

(e)

Goodwill may be valued at three year’s purchase of super profits.

Ascertain the value of each equity share under fair value method.

(0)

The Balance Sheet of R Ltd. for the year ended on 31st March, 2006, 2007 and 2008 are as follows:

(Rs. in thousands)
Liabilities	31.3.2006	31.3.2007	31.3.2008
3,20,000 equity shares of Rs.10 each, fully paid General reserve Profit and Loss account Creditors	3,200 2,400 280 1,200 7,080	3,200 2,800 320 1,600 7,920	3,200 3,200 480 2,000 8,880
Assets:
Goodwill Building and Machinery less, depreciation Stock Debtors Bank balance	2,000 2,800 2,000 40 240 7,080	1,600 3,200 2,400 320 400 7,920	1,200 3,200 2,800 880 800 8,880

Additional information:

(a)

Actual valuations were as under

Building and machinery less, depreciation
Stock
Net profit (including opening balance after
writing off depreciation, goodwill, tax provision
and transferred to general reserve)

3,600
2,400

840

4,000
2,800

1,240

4,400
3,200

1,640

(b)

Capital employed in the business at market value at the beginning of 2005–06 was Rs.73,20,000 which included the cost of goodwill. The normal annual return on average capital employed in the line of business engaged by R Ltd. is 12½%.

(c)

The balance in the general reserve on 1st April, 2005 was Rs.20 lakhs.

(d)

The goodwill shown on 31.3.2006 was purchased on 1.4.2005 for Rs.20 lakhs on which date the balance in the Profit and Loss account was Rs.2,40,000. Find out the average capital employed in each year.

(e)

Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average method). Find out the total value of the business as on 31.3.2008.

(0)

(a)

Rajkumar Ltd. is adopting historical cost system. From the following details furnished, prepare current cost Profit and Loss account for the year ended on 31.3.2009:

Statement of Profit and Loss:		(Rs.)
Sales		24,00,000
Cost of sales:
Opening stock Purchases Less: Closing stock Gross Profit Operating expenses Depreciation Interest on loan Provision for tax Net profit Dividend (proposed) Retained profit	1,80,000 15,60,000 2,40,000	15,00,000 9,00,000 3,60,000 1,20,000 1,80,000 90,000 1,50,000 30,000 1,20,000

The chief finance officer of Rajkumar Ltd. furnished the additional information as below:

(a)
(b)
(c)
(d)

Gearing adjustment for the year
Cost of sales adjustment for the year
Depreciation adjustment for the year
Monetary working capital adjustment for the year

Rs.20,232
Rs.37,998
Rs.18,000
Rs.13,500

(0)

(b)

From the following information of Vinod Ltd., compute the economic value added:

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)

Share capital
Reserve and surplus
Long–term debt
Tax rate
Risk free rate
Market rate of return
Interest
Beta factor
Profit before interest and tax

Rs.2,000 lakhs
Rs.4,000 lakhs
Rs.400 lakhs
30%
9%
16%
Rs.40 lakhs
1.05
Rs.2,000 lakhs

(0)

Write short notes on any four from the following:

4x4=16

(a)

What are the objectives of financial reporting?

(0)

(b)

What do you mean by "Net asset value" (NAV) in case of mutual fund units?

(0)

(c)

State the treatment of the following items with reference to Indian Accounting Standards and IFRS:

(i)	Discontinued operations – definition and measurement
(ii)	Acquired intangible assets.

(0)

(d)

Non–performing asset in the context of NBFC.

(0)

(e)

Forward contract.

(0)

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