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TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
Solutions
Advance Financial Accounting & Reporting
December 2012
Syllabus 2008
By
CA Abhishek Kaushik
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
Question 1 (a) (i) Value in use is present value of cash inflows, hence Value in use =10 lacs X 2.487+ 3 lacs X .7513=27.124 lacs, Answer A is correct. (ii) Fair value of plan assets as on 31 March, 2009 5,70,000 Less: Fair value of plan assets as on 1 April,2008 4,00,000 Contributions received 140,000 540,000
30,000 Add: Benefits paid 100,000 130,000 Answer is B. Actual return on plan assets iii) Answer is D. R, X & Y are reportable. (iv) Answer is A. Loss for 2012-13 (Rs. 55.50-55.00) X 50,000=Rs. 25,000. (v) Answer is B. Rs.11.88 lacs. 30% of (40lacs-.40 lacs). (vi) Cost 500 Less: CENVAT 10 490 Less: subsidy 25% 122 388 Answer can be given as option D. (Vii) DEPS=10lacs =5.71 1.75 lacs, Answer is C (viii) Carrying amount Cost of investments Rs. 7,50,000 Share in Net Assets on Date of acq. 15,00,000 Capital reserve 7,50,000. Investment including Capital reserve of 7.7 lacs= 15,00,000 + share in post acq. Profits (25% (2,40,000-72,000)) 42,000 Total 15,42,000 Answer is B. Question 1. (b) (i) C (ii)C (iii)A (iv)A (v)D Question 1. (c) (i) Tax expenses to be reported in each of the quarters are: 1st quarter = 500 X 30% = Rs.150.00 lakhs 2nd quarter = 300 X 30% = Rs. 90 lakhs 3rd quarter = (100) X 30% = Rs. (30)lakhs 4th quarter = (400) X 30% = Rs.(120) lakhs
Annual Tax Expense = Rs.90 lakhs
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
(ii) Ans: Rs. 1,00,000 (30% X 200,000 + 10% X 4,00,0000) Question 2 (a) Samrat Ltd. Segmental Report
(Rs.’lacs)
Particulars Divisions Inter
Food Plastic Health Other Segment Eliminations
Total
Segment revenue
Sales: 5650 625 345 162
Inter-segment sales 55 72 21 7
Total revenue 5705 697 366 169 155 6782
Segmental expenses 3335 425 222 200 4182
Segment result 2370 272 144 -31 2600
Head office expenses 562
Operating profit 33 2505
Income from investment 132
Interest expense 65
Profit before tax 2572
Segment assets 7320 1320 1050 665 10355
Unallocated corporate assets 722
Total assets 1777
(b) Fellow subsidiary – a company is considered to be a fellow subsidiary of another company if both are subsidiaries of the same holding company. (c) Prudence: As defined in the statement, prudence means recognising all losses immediately but ignoring anticipated profits. Substance over form: The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. Materiality: Financial statements should disclose all ‘material’ items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements. (d) Financially literate means ability to read and understand financial statements. Question 3 Working Notes: (1) Yield of Y Ltd. Average of Pre Tax Profit = 24 +36 +48= 36 lakhs 3 Yield = 36x 50%= 18 lakhs, value of company=18lacs =120 lacs 15% (2) Purchase consideration for 40% of share capital of Y Ltd.= 40%x 120 Lacs= 48,00,000
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
(3) Calculation of intrinsic value of shares of X Ltd. Total Assets excluding Investments in Y Ltd. 3,28,00,000 Value of Investment 120lacs × 60 % 72,00,000 Less: Secured Loan 40,00,000 Current Liabilities 60,00,000 Net Assets 3,00,00,000 No. of Shares =1,00,000 Intrinsic value per share = 30 per share (4) Discharge of purchase consideration by X Ltd. (i) Payment of Tax (48 Lakh - 8.80 Lakh) x 20% =7,84,000 (ii) Cash Payment [50% of (` 48 Lakh – ` 7.84Lakh) = 20,08,000 (iii)Issue of)shares to foreign company [50% of (48 Lakh – 7.84 Lakh) = 20.08 lakhs No. of shares issued by X Ltd. 20,08,000= 66,933.3333 shares 30 Value of shares capital = 66,933 × 30 = 20,07,990 (iv) Cash for fractional shares = 0.3333 ×` 30 = 10 48,00,000 (5) Unrealized profit included in stock of X Ltd. = ` 3,00,000 x 20/120= 50,000 (i) Journal entries
1. Business purchase Dr. 1,20,00,000
To foreign company 1,20,00,000
(Business purchased)
Goodwill (b.f.) 33,60,000
F.A. Dr 32,40,000
Debtors Dr 10,00,000
Inventories Dr 50,00,000
Cash Dr. 4,00,000
To C.L. 5,00,000
To secured loan 5,00,000
To Bus. Purchase 120,00,000
(Assets & liabilities taken)
Foreign Company Dr. 120,00,000
To equity share capital 6,69,330
To Security premium 13,38,660
To Cash (10+20,08,000+784,000) 27,92,010
To Investment in Meek 12,00,000
To General reserve (b.f.) 60,00,000
(P.C. Paid)
G/w Dr 50,0000
To Stock 50,000
(URP Eliminated)
Creditors Dr. 2,00,000
To debtors 2,00,000
Particulars Note Amount
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 10,669,330.00
(b) Reserves and Surplus 2 21,338,660.00
(2) Non-Current Liabilities
Long-term borrowings 3 4,500,000.00
(3) Current Liabilities 4 6,300,000.00
Total 42,807,990.00
II. Assets
(1) Non-current assets
Tangible assets 5 15,240,000.00
Intangibles 6 3,410,000.00
(2) Current assets
(a) Inventories 7 10,950,000.00
(b) Trade receivables 8 7,800,000.00
(c) Cash and cash equivalents 9 5,407,990.00
Total 42,807,990.00
Notes to Accounts
1. Share Capital
10,66,933 shares of `10 each 10,669,330.00
2. Reserves and surplus
General Reserve(100,00,000+60,00,000) 16,000,000.00
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
Paid 2792010 5,407,990.00
Question 4. Consolidated Balance Sheet of H with S & D as on 31.03.2012
Equity & Liabilities
Share capital 20,00,000
Reserve & Surplus 441638
Minority Interest 383912
Trade Payables 140000
2965550
Assets
Tangible 2500000
Intangible 119550
Inventories 276000
Cash & cash equivalents 70000
2965550
1. Consolidated Reserve & Surplus
Reserve Profit & Loss
H 180000 200000
S 9750 15488
D 8000 28400
197750 243888
2. Cost of control
Rs.
Cost of investments 1760000
Capital S -750000
Capital D -550000
Capital Profit D (47850+127600) -175450
Capital Profit S -165000
G/w 119550
3. Minority Interest
Rs.
Share Capital S 250000
Share Capital D 50000
Capital Profit D 15950
Capital Profit S 55000
Revenue D 4550
Revenue S 8412
383912
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
4. Analysis of profit –S Ltd Amount in Rs.
Capital Revenue Total
G/R P&L
Reserve 180000 20000 - 200000
Profit 20000 - 20000 40000
Total 200000 20000 20000
Time Adjustment 20,000 -10,000 -10,000
+transfer - 3000 10650
Total 220000 13000 20650
H-75% 165000 9750 15488
MI-25% 55000 3250 5162
5. Analysis of profit –D Ltd. Amount in Rs.
Capital Revenue Total
G/R P&L
Reserve 120000 24000 - 144000
Profit 16800 - 85200 102000
Time Adjustment 42600 -12000 -42600
Total 191400 12000 12600
H-15/60 47850 3000 10650
S-40/60 127600 8000 28400
MI-5/60 15950 1000 3550
Question 5. a. Gross Value Added Statement for the year ended 31st March, 2012
Rs. in lakhs Rs. in lakhs
Sales 1780
Less: Cost of bought in materials and services:
Production and operational expenses (586 + 118 + 218)
922
Administration expenses (66 – 18) 48
Interest on working capital loan 18
Excise duty (Refer working note) 110 1098
Value added by manufacturing and trading activities 682
Add: Other income 110
Total value added 792
Application of Value Added %
To Employees Salaries, wages, gratuities etc.
164
20.71%
To Directors Salaries and commission
18
2.27%
To Government Cess and local taxes (196 – 110)
86
Income tax 54 140 17.68%
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
To Providers of capital Interest on debentures
8
Interest on fixed loan 36
Dividends 190 330 29.04%
To Provide for maintenance and expansion of the company Depreciation
34
General reserve 90
Deferred tax 6
Retained profits (130 – 20) 110 240 30.30%
792 100%
Statement showing reconciliation of Gross Value Added with Profits before taxation Rs. in lakhs Profits before taxes 450 Add: Depreciation 34 Directors’ remuneration 18 Salaries, wages & gratuities etc. 164 Cess and local taxes 86 Interest on debentures 4 Interest on fixed loan 36 342 Total value added 792
Working Note: Calculation of Excise Duty Say cost of bought in materials and services is ‘x’ Excise Duty is 10% of x = x/10 x = 922 + 48 + 18 + x/10 x = 988 + x/10 = 1098 (approx.) Excise Duty = 1098 – 988 = Rs. 110 b. Journal Entries in the Books of Investor/Buyer 1. When the option is settled by delivery of the asset
Particulars Debit Rs. Credit Rs.
Initial Margin Dr. 13000
To Bank 13000
(Being initial margin paid)
Equity Stock Option Assets A/c Dr. 2,500
To Bank Account 2,500
(Being Premium Paid on Stock Option purchased at Rs.25 per unit for 100 units constituting one lot)
Investment in Equity Shares A/c Dr. Profit & Loss A/c Dr.(b.f.)
31000 1500
To Bank A/c 30000
To Equity Stock Option Assets A/c Dr. 2500
(Being Call Option exercised and the shares acquired)
Bank Dr. 13000
To Initial Margin 13000
(Being initial margin received)
2. When the option is settled in cash and the Index Price is Rs. 310 per unit
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
Particulars Debit Rs. Credit Rs.
Equity Stock Option Assets A/c Dr. 2,500
To Bank Account 2,500
(Being Premium Paid on Stock Option purchased at Rs.20 per unit for 100 units constituting one lot)
Bank A/c Dr. Profit & Loss A/c Dr.
1,000 1500
To Equity Stock Option Assets 2,500
(Being the profit on exercise of option received.)
Note: The above solution has been prepared as per revised AS-30,31,32. Question 6. Value of goodwill
(Rs. in lakhs)
(1) Average Capital employed 31.3.11 31.3.12
Current cost of fixed assets other than non trade investments 2,200.0 2,532.8
Trade investment Current cost of stock
10.00 670.0
10.00 750.0
Debtors 340.0 222.8
Cash and Bank 92.5 100.0
Less: Term loans 370.0 330.0
Sundry creditors 70.0 96.0
Tax provision 22.5 25.0
Capital Employed 2,850.0 3,164.6
Average Capital Employed at current value 3,007.3
(2) Future maintainable profit
Increase in General Reserve 50
Increase in Profit and Loss Account 55
Proposed Dividend 250
Profit after tax 355
Pre-tax profit =
0.5 - 1
355
710.00
Less: Non-trading income (490X10%) 49.00
Exchange loss on creditors [1.2 lakhs (5)] 6.00
Subsidy 120.00
175.00
535.00
Add: Exchange gain on debtors [0.7 lakhs (4)] 2.80
R & D costs 247.00
Stock adjustment 30.00
279.80
Adjusted pre-tax profit 814.80
Less: Tax @ 35% 285.18
Future maintainable profit 529.633
Value of Goodwill ( 529.633-3007.3 x14%)x 5=543.05 Question 7. (1) Computation of Amount of Debentures and Shares to be issued:
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
(i) Average Net Profit 2,24,788 – 1,250 +1,88,962 = 1,37,500 3 1,36,950 +1,71,050 +1,79,500 = 1,62,500 Ratio 1,375 1,625 3 (ii) Equity Shares Issued (a) Ratio of distribution
S M
No of equity 30,000 13,750 16,250
Amount @ 5 each 68,750 81,250
(iii) Debentures to be issued
S M
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
Less: Current Liabilities 2,98,500 90,125
2,06,250 1,83,750
8% Return on capital employed 16,500 14,700
15% Debentures to be issued to provide equivalent income 1,10,000 98,000
(2) Balance Sheet of N as at 31st December, 2012
Particulars ` Note No
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1,50,000
(b) Reserves and Surplus 32,000
(2) Non-Current Liabilities
(a) Long-term borrowings 2,08,000
(3) Current Liabilities
(a) Other current liabilities 3,66,950
Total 7,56,950
II. Assets
(1) Non-current assets
(a) Fixed assets 5,50,000
(2) Current assets
(a) Other current assets 2,06,950
Total 7,56,950
Question 8.a. Corporate Social reporting Corporate Social Reporting is the information communique with respect to discharge of social responsibilities of corporate entity. The transition in accounting function from historical cost based profitability accounting to social responsibility accounting is a good fit to the present-day data requirement of the “Users of accounts”. The content of Corporate Social Report is essentially based on the social objectives, namely Net Income Contribution, Human Resource Contribution, Public Contribution, Environmental Contribution and Product or Service Contribution. Considering the major socio-economic problems of the country, eight major heads can be identified for social reporting purpose:
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
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(i) Employment Opportunities; (ii) Foreign Exchange Transactions; (iii)Energy Conservation; (iv)Research and Development; (v) Contribution to Government Exchequer; (vi)Social Projects; (vii)Environmental Control; (viii)Consumerism. Initially, it is difficult to express social costs incurred by a corporate enterprise and social benefits generated in money terms. Until suitable methologies are available for conversion of social cost-benefit in money terms, it is desirable to begin with descriptive social report. Further research is necessary in this area either to improve heads of corporate social reporting in the context of dynamic socio-economic environment. b. Structure of the form of Government Accounts (1)Period of Accounts: The annual accounts of the central, state and union territory government shall record transactions, which take place during financial year running from 1st April to 31st March. (2) Cash basis Accounts: With the exception of such book adjustments as may be authorized by these rules on the advice of the Comptroller and Auditor General of India (CAG). The transaction in government accounts shall represents the actual cash receipt and disbursement during a financial year. Form of Accounts: There are mainly three parts i.e. consolidated fund, contingency fund and public account. In consolidated fund there are two divisions i.e. revenue consisting of section for receipts heads and expenditure heads [Revenue Accounts] capital, public debts, loan consisting of section of receipts heads [capital accounts] where as contingency fund accounts shall be recorded to the transactions connected with the government set up under article 267 of the constitution and Public account transactions relating to the debt deposit, advances, remittances and suspense shall be recorded. c. Human resource accounting Human resource accounting can be defined as the process of identifying, measuring and communicating information about human resources in financial statements in order to facilitate effective management. Human resource accounting is a recent phenomenon in India. Leading public sector units like OIL, BHEL, NTPC, MMTC and SAIL etc. have started reporting Human Resources in their annual reports as additional information. The Indian Companies basically adopted the model of human resource valuation as advocated by Lev and Schwartz (1971). Indian Companies focused their attention on the present value of employee earning as a measure of their human capital. However the Indian Companies have suitably modified the Lev and Schwartz model to suit their individual circumstances. Of late there is a growing trend of shift from the traditional focus on financial reporting of quantifiable resources (which can be measured in monetary terms) to a more comprehensive approach of reporting under which human resources are also considered as measurable assets. Having followed the methods of accounting of fixed assets, one can take into account the employee-related costs like cost of recruitment, training and orientation of employees, for the purpose of capitalization and then the appropriate portion thereof can be amortised each year over the estimated years of effect of such costs. d. Impairment of Assets
TAKSHILA LEARNING PVT. LTD.
Patel Nagar Office (Corporate Section): 4/4, East Patel Nagar, New Delhi – 110 008 Ph: 99581 57000 [email protected]
https://twitter.com/#!/TakshilaLearn
Laxmi Nagar Office (Student Section): 1/56 B, First Floor, Lalita Park, Laxmi Nagar
New Delhi – 110 092 Ph: 97176 86000 www.takshilalearning.com
http://www.facebook.com/#!/takshilalearn
Impairment means reduction in value of assets. As per AS 28 on Impairment of Assets, an enterprise should assess at each balance sheet date whether there is any indication that an impairment loss recognised for an asset in prior accounting periods may no longer exist or may have decreased. If any such indication exists, the enterprise should estimate the recoverable amount of that asset. ♦ If carrying amount < = Recoverable amount : Asset is not impaired ♦ If carrying amount > Recoverable amount : Asset is impaired Impairment Loss = Carrying Amount – Recoverable Amount Recoverable amount is the higher of net selling price and its value in use. Accounting standard should be applied in accounting for impairment of all assets except 1. Inventories, since inventories are already valued at lower of cost or recoverable value. 2. Assets arising under construction contracts (AS 7), 3. Financial assets. Therefore, impairment applies to (among other assets): • Land and buildings; • Plant and machinery; • Investment property; • Intangible assets; • Goodwill; • Assets carried at revalued amounts under AS 10.