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OM SAI RAM

COMPANY ACCOUNTS & AUDITING

PRACTICES

[EXECUTIVE PROGRAMME]

CA. Jitender Singh

get ready to LearN with fUN…..

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A WORD ABOUT BOOK

At the outset, I thank my elders and my students for making the book up to mark, by giving their

valuable suggestions.

All the latest developments have been incorporated in this book and the book is thoroughly

revised and updated strictly according to the new syllabus as applicable for December’17 and

coming attempts. This book meets the requirements of the students preparing for CS-EXE (MOD-

2). It contains analytical and application based questions on pattern of past examinations, study

material, RTPs etc.

This booklet is designed to impart the WORKING LEVEL KNOWLEDGE among the students and

with following objectives:

a) To lay foundation for the preparation and presentation of financial statements,

b) To gain working knowledge of the principles and procedures of accounting and their application

to different practical situations .

Again, My Special thanks to CS. DHEERAJ TYAGI, CS. SIMRANJEET SINGH, CS. PANKAJ KUMAR, CA.

SACHIN GUPTA, CS. URVASHI UPPAL, CS. RUCHI NARANG and whole staff of DTC to come together

as a team and making all this happen.

No efforts have been spared in making this book free of mistakes, errors or omission; but errors are

inherent, specially, in such kind of work. As the road to improvement is never ending, I shall be highly

pleased if any valuable suggestions for improvement of this book is given by the users.

Thanks in Anticipation.

Praying for OUR success,

Jitender Singh.

([email protected])

[GET READY TO PLAY ACCOUNTING GEET]

mailto:[email protected]

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INDEX

COMPANY ACCOUNTS & AUDITING PRACTICES

Ch. No. TOPIC PAGE NO.

1. Corporate Restructuring 4 – 42

2. Liquidation of Company 43 – 59

3. Consolidation of Accounts 60 – 81

4. Valuation of Shares & Intangible Assets 82 – 114

5. Share Capital 115-160

6. Debentures 161-177

7. Financial Statement Of Copanies 178-207

8. Corporate Financial Reporting 208-216

9. Accounting Standards 217-222

Past Examination Question Papers 223 – 245

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CHAPTER 1 CORPORATE RESTRUCTURING

Corporate Restructuring

Corporate Restructuring is a comprehensive process, by which a company can consolidate its business

operations and strengthen its position for achieving its short-term and long-term corporate objectives

and continuing as a competitive and successful entity.

The expression ‘Corporate Restructuring’ implies restructuring or reorganizing a company or its

business (or one of its businesses) or its financial structure, in such a way as to make it operate more

effectively. This is not a legal term and has no precise meaning nor can it be defined with precision.

NEED AND SCOPE OF CORPORATE RESTRUCTURING Corporate Restructuring is concerned to achieve certain predetermined objectives at corporate level.

Such objectives include the following:

orderly redirection of the firm's activities;

deploying surplus cash from one business to finance profitable growth in another;

exploiting inter-dependence among present or prospective businesses within the corporate portfolio;

risk reduction; and

development of core competencies.

Thus restructuring would help bringing an edge over competitors.

The scope of Corporate Restructuring encompasses enhancing economy (cost reduction) and improving

efficiency (profitability). When a company wants to grow or survive in a competitive environment, it

needs to restructure itself and focus on its competitive advantage.

EXAMPLES OF CORPORATE RESTRUCTURING

Assume ABC Limited has surplus funds but it is not able to consider any viable project. Whereas

XYZ Limited has identified viable projects but has no money to fund the cost of the project.

Assume the merger of both the said companies. A viable solution emerges resulting in mutual

help and benefit and in a competitive environment, it offers more benefits than what meets your

eyes.

Thus going by the above simple illustrations, the single common objective in every restructuring exercise

is to eliminate the disadvantages and combine the advantages.

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WHY CORPORATE STRUCTURING EXERCISE IS CARRIED OUT ? The various needs for undertaking a Corporate Restructuring exercise are as follows:

to focus on core strengths, operational synergy and efficient allocation of managerial capabilities

and infrastructure.

consolidation and economies of scale by expansion and diversion to exploit extended domestic

and global markets.

revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.

acquiring constant supply of raw materials and access to scientific research and technological

developments.

capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing

and improve return on capital employed.

Improve corporate performance to bring it at par with competitors by adopting the radical

changes brought out by information technology.

KINDS OF RESTRUCTURING

Restructuring may be of the following kinds:

Financial restructuring which deals with the restructuring of capital base and raising finance

for new projects. This involves decisions relating to acquisitions, mergers, joint ventures and

strategic alliances.

Technological restructuring which involves, inter alia, alliances with other companies to exploit

technological expertise.

Market restructuring which involves decisions with respect to the product market segments,

where the company plans to operate based on its core competencies.

Organizational restructuring which involves establishing internal structures and procedures

for improving the capability of the personnel in the organization to respond to changes. This kind

of restructuring is required in order to facilitate and implement the above three kinds of

restructuring. These changes need to have the cooperation of all levels of employees to ensure

that the restructuring is successful.

The most commonly applied tools of corporate restructuring are amalgamation, merger,

demerger, slump sale, acquisition, joint venture, disinvestment, strategic alliances and franchises.

AMATION OF COMPANIES

MEANING OF AMALGAMATION

Generally, the term ‘amalgamation’ is used when two or more existing companies go into liquidation and

a new company is formed to take over their business.

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The term ‘absorption’ is used when one or more existing companies go into liquidation and one existing

company takes over or purchases the businesses of all companies.

However, the difference between amalgamation and absorption has been dispensed with by the

Accounting Standard (AS-14) - Accounting for Amalgamations issued by the ICAI. Thus the term

amalgamation includes absorption.

Therefore, amalgamation means liquidation of two or more companies to form a new company or

liquidation of one or more company by takeover by one of the existing company.

Accounting Standard (AS) 14 -Accounting for Amalgamations

AS 14 issued by the ICAI, deals with the procedure of accounting for amalgamations and the treatment of

any resultant goodwill or reserves.

As per AS – 14,

Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956

or any other statute which may be applicable to companies.

Transferor Company means the company which is amalgamated into another company. It is also

called Vendor Company.

Transferee Company means the company into which a transferor company is amalgamated. It is

also called Vendee Company.

Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether capital or

revenue) appropriated by the management for a general or a specific purpose other than a provision for

depreciation or diminution in the value of assets or for a known liability.

Types of Amalgamation Generally speaking, there are two basic methods under which companies can unite together.

Types of Amalgamation

Nature of Merger Nature of Purchase

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Amalgamation in the Nature of Merger

The amalgamations where there is a genuine pooling not merely of the assets and liabilities of the

amalgamating companies but also of the shareholders’ interests and of the businesses of these

companies. An amalgamation is classified as an ‘amalgamation in the nature of merger’ when all of the

following five conditions are satisfied:

All the assets and liabilities of the transferor company become, after amalgamation, the assets

and liabilities of the transferee company.

Shareholders holding not less than (atleast) 90% of the face value of the equity shares of the

transferor company become equity shareholders of the transferee company by virtue of the

amalgamation.

The consideration for the amalgamation receivable by those equity shareholders of the

transferor company who agrees to become equity shareholders of the transferee company is

discharged by the transferee company wholly by the issue of equity shares in the transferee

company, except that cash may be paid in respect of any fractional shares.

The same business of the transferor company is intended to be carried on, after the

amalgamation, by the transferee company.

No adjustment is intended to be made to the book values of the assets and liabilities of the

transferor company when they are incorporated in the financial statements of the transferee

company.

Amalgamation in the Nature of Purchase

If any one or more conditions listed in the amalgamation in the nature of merger is not satisfied, it is

amalgamation in the nature of purchase. Methods of Accounting for Amalgamations

Methods of Accounting

Pooling of

The

Purchase

Interests Method

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Pooling Of Interest Method

The Pooling of Interests Method is for an amalgamation in the nature of merger. Following are the

three salient features of this method:

Under the Pooling of Interests Method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts and in the same form as at the date of amalgamation. For example, the machinery of the transferor company should be clubbed with the machinery of

the transferee company and shown at a combined figure. Similarly, general reserve of the

transferor company should be clubbed with the general reserve of the transferee company. The difference between Net Asset Obtained and Purchase Consideration paid is adjusted in the

reserves of the transferee company. Accordingly no goodwill or capital reserve will arise out of

amalgamation by way of merger.

Purchase Method

The object of the purchase method is to account for the amalgamation by applying the same principles

as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in

the nature of purchase. Following rules are adopted in this method:

The assets and liabilities of the transferor company should be incorporated either at their

existing carrying amounts or agreed values at the date of amalgamation in the books of the

transferee company.

Identity of statutory reserves whether capital or revenue or arising on revaluation of the

transferor company is not preserved and hence these reserves should not be included in the

transferee company.

If purchase consideration paid is more than the value of net assets of the transferor

company, it should be treated as GOODWILL arising on amalgamation and should be debited to

Goodwill Account. On the other hand, if the consideration is lower than the value of net

assets acquired, the difference should be credited to CAPITAL RESERVE Account.

The goodwill arising on amalgamation should be amortised to income on a systematic basis over

its useful life. The amortisation period should not exceed five years unless a somewhat longer

period can be justified.

The statutory reserves of the transferor company which are required to be maintained for legal

compliance (e.g, Export Profit Reserve, Shipping Reserve, Foreign Project Reserve, Tea

Development Reserve, Investment Allowance Reserve, Site Restoration Reserve) should be

included in financial statements of the transferee company by crediting the relevant Statutory

Reserve Account and corresponding debit should be given to ‘Amalgamation Adjustment

Reserve Account’.

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DISTINCTION BETWEEN POOLING OF INTERESTS METHOD AND PURCHASE METHOD

S.No. Pooling of Interests Method Purchase Method

1. This method is adopted in the case of

Amalgamation in the nature of Merger.

This method is adopted in the case of

Amalgamation in the Nature of Purchase.

2. All assets, liabilities, reserves and surplus of the

transferor company are incorporated in the

financial statements of the transferee company at

book value.

Only assets and liabilities taken over from the

transferor company are incorporated in the

financial statements of the transferee company

either at book value or agreed value.

3. This method provides investors with less

information.

This method provides investors with more

information.

4. This method ignores the values exchanged in an

amalgamation.

This method reflects the values exchanged in an

amalgamation.

5. This method does not record any required assets

and liabilities that were not previously recorded in

the books of the transferor company.

This method reveals all hidden assets and

liabilities of the transferor company by recording

them at fair value in the books of the transferee

company.

6. The difference between the consideration and

share capital of the transferor company is adjusted

against reserves. No goodwill or capital reserve

account emerges from this difference.

The difference between the purchase consideration

and the net assets taken over of the transferor

company is recorded as goodwill or capital reserve,

as the case may be.

7. All costs associated with amalgamation are not

capitalized but adjusted against reserve.

All costs associated with amalgamation are

capitalized.

8. Under this method, no Amalgamation Adjustment

Reserve Account is opened in the books of the

transferee company.

Under this method Amalgamation Adjustment

Reserve Account must be opened in the books of

the transferee company for carry forward of any

“Statutory Reserve”.

Computation of Purchase consideration i) Lump Sum Method,

ii) Net Assets Mehod

iii) Net Payment Method

iv) Share Exchange Method

Lump Sum Method: The amount to be paid by the transferee company as consideration may be

stated as a lump sum, without valuing the individual asset and liability. In such a case, no

calculation is required.

Net Assets Method: The amount of consideration or the amount of net assets is ascertained

under this method in the following manner:

Assets taken over (at their revalued figures, if any, otherwise at their book figures).

Less: Liabilities taken over (at their agreed values, if any, otherwise at their book figures).

While determining the amount of consideration under this method care should be taken of the

following:

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o The term “Assets” will always include cash in hand and cash at bank, unless otherwise

stated but shall not include any fictitious asset like preliminary expenses, underwriting

commission, discount on issue of shares or debentures, profit and loss account (debit

balance), etc.

o If any particular asset is not taken over by the transferee company, the same should not

be included while computing purchase consideration.

o If there is any goodwill or pre-paid expenses, the same should be included in the assets

taken over unless otherwise stated.

o The term “Liabilities” will mean all liabilities to third parties (the company being the first

party and shareholders being the second party).

o The term “Trade Liabilities” will mean trade creditors and bills payable and shall not

include other liabilities to third parties, such as, bank overdraft, debentures, outstanding

expenses, taxation liability, etc.

o The term “Liabilities” shall not include any past accumulated profits or reserves, such

as general reserve, reserve fund, sinking fund, dividend equalisation fund, capital reserve,

securities premium account, capital redemption reserve account, profit and loss account

etc. as these are payable to the shareholders and not to the third parties.

If any fund or portion of any fund denotes liability to third parties, the same must be included in

liabilities, such as, staff provident fund, workmens’ savings bank account, workmens’ profit

sharing fund, workmens’ compensation fund (up to the amount of claim, if any), etc.

If any liability is not taken over by the transferee company, the same should not be included.

The term “business” will always mean both the assets and the liabilities of the company.

Net Payment Method: The amount of consideration under this method is ascertained by adding

up the total value of shares and other securities issued and the payments made in the form of

cash and other assets by the transferee company to the shareholders of transferor

company in discharge of consideration.

So the consideration constitutes the total payment in whatever form either in shares,

debentures, or in cash to the liquidator (shareholders) of the transferor company.

Significantly, the total payments made by the transferee company to discharge the claims of

preference shareholders and/or equity shareholders of the transferor company may be

construed as consideration.

According to AS-14, any payments made by the transferee company to other than the

shareholders of the transferor company cannot be treated as part of consideration. Hence

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payments made to discharge the liabilities of the transferor company may be excluded from

consideration.

Therefore payments made to the debentureholders should not be considered as part of

consideration and they should treated separately and discharged as per the terms of agreement.

While determining the amount of consideration under this method, care should be taken of the following:

The value of assets and liabilities taken over by the transferee company are not to be

considered in calculating the consideration.

The payments made by the transferee company for shareholders, whether in cash or

in shares or in debentures must be taken into account.

Where the liabilities are taken over by the transferee company and subsequently

discharged such amount should not be added to consideration.

When liabilities are taken over by the transferee company they are neither deducted

nor added to the amount arrived at as consideration.

Any payments made by the transferee company to some other party on behalf of the

transferor company are to be ignored for consideration purpose.

If the liquidation expenses of the transferor company are paid by the transferee

company, the same should not be taken as a part of the consideration.

Shares Exchange Method: In this method, the consideration is ascertained on the basis of the

ratio in which the shares of the transferee company are to be exchanged for the shares of the

transferor company. This exchange ratio is generally determined on the basis of the value of each

company’s shares.

ACQUISITION OF BUSINESS Acquisition Of Business Acquisition of business by a limited company, generally, refers to the purchase of a non-corporate

business like sole- proprietorship or partnership form of business by a company. This does not

necessarily mean that a limited company cannot acquire the business of a corporate body, i.e., another

limited company.

But strictly speaking, the acquisition of business of a limited company by another limited company comes

under the purview of “Amalgamation, Absorption and Reconstruction of Companies”. Such an acquisition of business by a limited company may take any of the following two forms: An existing company may purchase an existing business of a sole-proprietor or a partnership firm, or A new company may be formed to take over an existing business of a sole proprietor or a partnership

firm, i.e., the existing business unit may be converted into a limited company.

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INTERNAL RECONSTRUCTION - INTRODUCTION When a company has been making losses for a number of years and the financial position does not

present a true and fair view of the state of the affairs of the company.

In such a company the assets are overvalued, the assets side of the balance sheet consists of fictitious

assets, useless intangible assets and debit balance in the profit and loss account.

Such a situation does not depict a true picture of financial statements and shows a higher net worth than

what the real net worth ought to be.

In short the company is over capitalized. Such a situation brings the need for reconstruction.

Reconstruction is a process by which affairs of a company are reorganized by revaluation of assets,

reassessment of liabilities and by writing off the losses already suffered by reducing the paid up

value of shares and/or varying the rights attached to different classes of shares. It means reconstruction

of a company’s financial structure. Reconstruction of company’s financial structure can take place either

with or without the liquidation of the company.

Meaning of Internal Reconstruction

When the company reconstructs its financial structure internally without undergoing liquidation, it

is internal reconstruction. Under this scheme company continues its legal existence. A scheme of re-

organisation is prepared in which all parties sacrifice.

It also means the reduction of capital to cancel any paid up share capital which is lost or not represented

by available assets. This is done to write off the losses of the company.

Significance of internal reconstruction

Internal reconstruction is done by the company when:

– there is an overvaluation of assets and undervaluation of liabilities.

– there is a difficulty to meet the financial crisis and there are continuous losses.

Methods of internal reconstruction

There are various steps of internal reconstruction which is defined in financial accounting. For properly

deploying the process of internal reconstruction, following methods are generally employed or used

simultaneously.

Alteration of share capital as per section 61 and 64 of the Companies Act, 2013 According to section 61 (1) of the Companies Act, 2013 a limited company having a share capital may, if

so authorised by its articles, alter its memorandum in its general meeting to –

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Increase its authorised share capital by such amount as it thinks expedient; Consolidate and divide all or any of its share capital into shares of a larger amount than its

existing shares;

Convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up

shares of any denomination;

Sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the

memorandum, so, however, that in the sub-division the proportion between the amount paid and

the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the

share from which the reduced share is derived;

Cancel shares which, at the date of the passing of the resolution in that behalf, have not been

taken or agreed to be taken by any person, and diminish the amount of its share capital by the

amount of the shares so cancelled.

The cancellation of shares shall not be deemed to be a reduction of share capital. Section 64 (1) provides

that a notice is required to be given to the Registrar for alteration for share capital.

Variation of Shareholders’ rights

Where the share capital of a company is divided into different classes of shares, the rights attached to the

shares of any class may be varied with the consent in writing of not less than three- fourths of the issued

shares of that class

or

with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class if provided in the memorandum or articles of the company, or if such variation is not prohibited by the terms of issue of the shares of that class.

Reduction of Share Capital as per Section 66 of the Companies Act, 2013

Capital Reduction refers to the cancellation of that part of paid up capital which is lost in operations

or which is not represented by existing assets. It is generally resorted to write off the past accumulated

loss of the company. It is unlawful except when sanctioned by the TRIBUNAL because conservation of

capital is one of the main principles of the company law.

A company limited by shares or a company limited by guarantee and having a share capital if so

authorised by its articles, by special resolution, can reduce its share capital in any way subject to

confirmation by the TRIBUNAL-

By reducing the uncalled liability of the members.

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By writing off the part of paid up capital which is lost in the operations or which is not represented by

available assets.

By returning the part of capital which is in the excess of the need of the company. A company may reduce its share capital if all of the following conditions are satisfied:

(i) If a company is authorised by its articles to do so. (ii) If special resolution is passed at a general meeting.

(iii) If the TRIBUNAL’s order in confirming the reduction of share capital is obtained.

Procedure for reducing share capital

The company cannot reduce its share capital unless it is authorised by its articles. However, if

the articles do not permit capital reduction, they may be altered by special resolution to enable

the company to reduce its share capital. The company must pass a special resolution for reduction of capital.

The company must apply to the TRIBUNAL for an order confirming the capital reduction. The

TRIBUNAL must look after the interests of creditors and shareholders’ before giving an order

confirming the capital reduction.

The TRIBUNAL may make an order confirming the capital reduction. The TRIBUNAL may make

an order confirming the capital reduction on such terms and conditions as it thinks proper, if it is

satisfied that every creditor of the company entitled to object capital reduction has consented to

the reduction or that his debt has been discharged or secured by the company.

The order of the TRIBUNAL confirming the reduction must be produced before the registrar and a

certified copy of the order and of the minutes of reduction should be filed with the registrar for

registration.

In the following cases, procedure of reduction of capital is not called for: o Where redeemable preference shares are redeemed in accordance with the provisions of section 55

of Companies Act, 2013.

o Where any shares are forfeited for non-payment of calls.

o Where there is surrender of shares or a gift is made to a company of its own shares.

o Where the nominal share capital of a company is reduced by cancelling any shares which have not

been taken or agreed to be taken by any person.

Surrender of Shares The shareholders are made to surrender their shares. The shares are then allotted to debenture holders

and creditors. Unutilized shares are cancelled.

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Accounting Gym – Amalgamation

Q.1. Following is the balance sheet of A Ltd. as on 31st March, 2014:

Particulars Amount (`)

I. EQUITY AND LIABILITIES

1. Shareholders‟ funds

(a) Share Capital

Authorized, Issued subscribed and paid up capital

14% Preference Shares of ` 100 each

Equity Shares of ` 10 each, fully called up and paid up

(b) Reserve and Surplus

General Reserve

2. Non-current liabilities

15% Debentures

3. Current Liabilities

Current Liabilities

II. ASSETS

1. Non-current Assets

(a) Fixed Assets

Tangible Assets & Intangible Assets

(b) Investment

2. Current Assets

Misc Current Assets

TOTAL

7,50,000

15,00,000

22,50,000

9,00,000

7,00,000

5,00,000

43,50,000

32,50,000

6,00,000

5,00,000

43,50,000

X Ltd. agreed to take over the assets and liabilities on the following terms and conditions:

i) When consideration calculated under Net Assets method

(a) Discharge 15% debentures at a premium of 10% by issuing 15% debentures of X Ltd.

(b) Fixed assets 10% above the book value.

(c) Investments at par value.

(d) Current assets at a discount of 10%.

(e) Current liabilities at book value.

ii) When consideration calculated under Net Payment method.

(a) Discharge the debenture holders of A Ltd. at 10% premium by issuing 15% debentures of X Ltd.

(b) Preference shareholders are discharged at a premium of 10% by issuing 15% preference shares of ` 100

each.

(c) Issue 3 equity shares of ` 10 each for every 2 equity shares in X Ltd. and pay cash @ ` 3 per equity

share.

Calculate consideration under:

i) Net assets method; and (ii) Net Payment method respectively.

[Ans. P.C. i) ` 33,55,000 & ii) ` 35,25,000.]

Q.2. The following are the Balance Sheet of A Co. Ltd. and B Co. Ltd. as on 30th

September, 2013:

A Co. Ltd.

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Amount (`) Amount (`)

I. EQUITIES AND LIABILITIES


(a) Share Capital

Authorised , Issued subscribed and paid up capital

50,000 Equity shares of ` 10 each, fully called up

and paid up


General Reserve

Profit and Loss account

2. Non-Current Liabilities

12% Debentures

Employee provident fund


Trade Payables

TOTAL

II. ASSETS

1. Non Current Assets

(a) Fixed Assets

Tangible Assets

Building

Machinery

2. Current Assets

Stock

Trade receivables

Cash

TOTAL

1,50,000

5,50,000

80,000

70,000

15,000

5,00,000

1,70,000

30,000

1,00,000

15,000

50,000

8,65,000

7,00,000

1,65,000

8,65,000

B Co. Ltd.




(a) Share Capital


30,000 Equity shares of ` 10 each, fully called up

and paid up


Trade Payables

TOTAL

II. ASSETS


(b) Fixed Assets

Tangible Assets

Machinery

2. Current Assets

Stock

Trade receivables 50,000

40,000

3,00,000

40,000

3,40,000

2,50,000

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Less: Provision for doubtful debts 5,000

Cash and cash equivalents

TOTAL

45,000

5,000

90,000

3,40,000

The two companies agree to amalgamate and form a new company called C Co. Ltd. which takes over all the

assets and liabilities of both the companies on 1st October, 2013.

The purchase consideration is agreed at ` 6,61,500 and ` 3,15,000 for A Co. Ltd. and B Co. Ltd. respectively.

The entire purchase price is to be paid by C Co. Ltd. in fully paid equity shares of ` 10 each. The debentures of A

Co. Ltd. will be converted into equivalent number of debentures of C Co. Ltd.

Give Journal entries to close the books of A Co. Ltd. and B Co. Ltd. and show the opening entries in the books of

C Co. Ltd. Also prepare the opening Balance Sheet in the books of C Co. Ltd. as on 1st October, 2013. The

authorized capital of C Co. Ltd. is 2,00,000 equity shares of ` 10 each.

[Ans. A Co. Ltd. : P.C. ` 6,61,500; Realisation Loss ` 38,500 and B Co. Ltd. : P.C. ` 3,15,000; Realisation

Profit ` 15,000. B/S Total C Co. Ltd. ` 12,05,000.]

Q.3. Thin & Co. was absorbed by Thick & Co. Ltd., as on 30th

June, 2013 All the assets and liabilities of Thin & Co.

Ltd. were taken over by Thick & Co. Ltd. The consideration was agreed at ` 3,36,600 and was paid in so many

fully paid equity shares of Thick & Co. Ltd. to be distributed to the equity shareholders of Thin & Co. Ltd. The

following are the balance sheets of both the companies as on 30.6.2013:

Thick & Co. Ltd. Thin & Co. Ltd.



(a) Share Capital

Authorised, Issued subscribed and paid

up capital

Equity Shares of ` 10 each, fully called

up and paid up


General Reserve



Workmen compensation fund

Employee provident fund


Trade Payables

Provision for taxation

TOTAL

II. ASSETS

1. Non-Current Assets

(a) Fixed Assets

i) Tangible Assets

Plant & machinery

ii) Intangible Assets

Goodwill

2. Current Assets

Stock

Debtor

Cash and Cash equivalents: Cash in Hand

:Cash at bank

1,50,000

20,502

12,000

10,000

58,567

12,000

3,12,000

2,00,000

2,65,000

2,21,200

869

14,000

7,50,000

1,70,502

22,000

70,567

10,13,069

5,12,000

5,01,069

50,000

12,900

9,000

4,000

30,456

5,000

1,00,000

60,000

80,000

56,000

356

8,300

2,00,000

62,900

13,000

35,456

3,11,356

1,60,000

1,44,656

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Other current Assets

Prepaid Insurance

Income Tax Refund claim

TOTAL

_________

10,13,069

700

6,000

3,11,356

You are required to:

i) Show the necessary ledger accounts in the books of Thin & Co. Ltd.

ii) Show the necessary journal entries in the books of Thick & Co. Ltd.; and

iii) Prepare the Balance Sheet of Thick & Co. Ltd. after the amalgamation.

[Ans. Realisation Profit ` 64,700.]

Q.4. Snow View Ltd. was registered with an authorized capital of 1,00,000 Equity Shares of ` 10 each and it acquired

the business of Mr. Bansal at an agreed price of ` 2,50,000.

The Balance Sheet of Mr. Bansal at the date of acquisition was as follows:

Liabilities Amount ` Assets Amount `

Capital

Reserve

Trade Payables

Bills Payable

2,00,000

20,000

50,000

30,000

Freehold Premises

Plant and Machinery

Stock

Trade Receivables 27,500

Less: Provisions 2,500

Cash at Bank

1,00,000

80,000

20,000

25,000

75,000

3,00,000 3,00,000

The consideration was to be discharged by the issue at 20,000 equity shares of ` 10 each as fully paid-up and the

balance in cash.

You are asked to journalise the transactions in the books of Snow View Ltd. Also prepare the opening balance

sheet of the company.

[Ans. P.C. ` 2,50,000 and B/S Total ` 2,80,000.]

Q.5. Woodlands Ltd., registered with a capital of ` 10,00,000 in equity shares of ` 10 each acquired the business of

M/s A and B, the Balance Sheet of whom at the date of acquisition was as follows:

Liabilities Amount ` Assets Amount `

Bills Payable

Trade Payables

Reserve

Capital Accounts:

A - 70,000

B - 70,000

16,000

30,000

14,000

1,40,000

Cash at Bank

Bills Receivables

Trade Receivables

Stock

Furniture and Fixtures

Plant and Machinery

Land and Buildings

29,000

13,000

48,000

18,000

2,000

40,000

50,000

2,00,000 2,00,000

The assets and liabilities were subject to the following revaluation:

Plant and Machinery to be depreciated by 10%.

Furniture and Fittings to be depreciated by 15%.

Land and Buildings to be appreciated by 20%.

A provision to be made for bad debts on debtors @ 2.5%.

Goodwill of the firm was valued at ` 24,000.

The consideration was to be discharged as follows:

i) Allotment of 10,000 Equity shares of ` 10 each at ` 12 each.

ii) Allotment of 500, 14% Debentures of ` 100 each at a discount of 10%

iii) Balance in cash.

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The cost of acquisition of the company amounted to ` 5,000. You are required to show the journal entries in the

books of the company and prepare the opening balance sheet of the company after the acquisition.

[Ans. P.C. ` 1,82,500 and B/S Total ` 2,11,000.]

Q.6. Following is the balance sheet of BX Ltd. as on 31st March, 2013:

`

I. Equity and Liabilities

1) Shareholder‟s Fund

a) Share Capital

12% preference shares of ` 100

Each fully paid-up 15,00,000

Equity shares of ` 10 each fully

Called-up and paid up 35,00,000

b) Reserves and Surplus

General Reserve 11,00,000

Securities Premium 9,00,000

2) Non-Current Liabilities

13% Debentures

3) Current Liabilities

50,00,000

20,00,000

25,00,000

15,00,000

1,10,00,000

`

II. Assets

1) Non-current Assets

a) Fixed Assets 55,00,000

b) Investments 25,00,000

Current Assets

80,00,000

30,00,000

1,10,00,000

PQR Ltd. agreed to takeover the assets and liabilities of BX Ltd. on the following terms and conditions:

i) Discharge 13% debentures at a premium of 10% by issuing 14% debentures of PQR Ltd.

ii) Revalue – fixed assets at 10% above the book value; investments at par value; current assets at a discount of

10%; and current liabilities at book value.

You are required to calculate the purchase consideration as per the net assets method.

[Ans. P.C. ` 70,00,000 .] [Dec‟13 – 5 marks]

Q.7. Thin Ltd. was registered with an authorized capital of 10,00,000 equity shares of ` 10 each and it acquired the

running business of Ganesh at an agreed price of 25,00,000. The balance sheet of Ganesh on the date of

acquisition was as under:

`


1) Shareholder‟s Fund

a) Share Capital


General Reserve

2) Non-Current and current Liabilities

a) Current liabilities

Trade payables

Bills payable

20,00,000

2,00,000

5,00,000

3,00,000

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Total 30,00,000

`

II. Assets


a) Fixed Assets

Freehold premises

Plant and machinery

2) Current Assets

i) Inventories

ii) Trade Receivables 2,75,000

Less: Provisions 25,000

iii) Bank

10,00,000

8,00,000

2,00,000

2,50,000

7,50,000

Total 30,00,000

The consideration was to be discharged by the issue of 2,00,000 equity shares of ` 10 each as fully paid-up and

the balance in cash.

Journalise the transactions in the books of Thin Ltd. Also prepare the opening balance sheet of the company.

[Ans. P.C. ` 25,00,000; B/S Total ` 28,00,000.] [Dec‟14 – 5 marks]

Q.8. Rashi Ltd. agreed to acquire the business of Dhanu Ltd. as on 31st March, 2006. The summarized balance sheet of

Dhanu ltd. as at the date was as follows:

Liabilities ` Assets `

Share capital in fully paid up shares of `

10 each

General Reserve

Profits and loss account

12% Debentures

Creditors

6,00,000

1,70,000

1,10,000

1,00,000

20,000

Goodwill

Land and Buildings

Plant and Machinery

Stock in trade

Debtors

Cash at bank

1,00,000

2,30,000

4,10,000

1,68,000

36,000

56,000

10,00,000 10,00,000

The consideration payable by Rashi Ltd. was agreed as follows:

i) A cash payment equivalent to ` 2.50 for every share of ` 10 in Dhanu Ltd.

ii) The issue of 90,000 ` 10 equity shares, fully paid in Rashi Ltd. having an agreed value of ` 15 per share.

Rashi Ltd. also agreed to discharge the 12% debentures of Dhanu Ltd. at a premium of 20% by allotment of its

14% debentures at 96%.

While computing the agreed consideration, the directors of Rashi Ltd. valued the following assets at values noted

against them:

`

Land and Buildings 7,50,000

Plant and machinery 4,50,000

Stock in trade 1,42,000

Debtors Subject to an allowance of 5% to cover doubtful debts.

The cost of liquidation of Dhanu Ltd. came to ` 5,000 which was borne by Rashi Ltd.

Prepare the realization account and equity shareholders account in the books of Dhanu Ltd. and draft journal

entries required in the books of Rashi Ltd. assuming if it is in the nature of purchase. [June‟07 – 10 marks]

[Ans. P.C. ` 15,00,000; Realisation Profit ` 6,20,000 .]

Q.9. Rose Ltd. is taking over entire business of Lily Ltd. on the basis of following balance sheets as at 31st March, 2014:

Rose Ltd. Lily Ltd.


(1) Shareholders‟ funds

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(a) Share Capital

Equity Shares of ` 10 each, fully paid

(b) Reserves and surplus

General Reserve

surplus

(2) Current Liabilities

Trade Payables

10,80,000

1,72,000

1,32,000

88,800

8,06,600

1,09,980

87,000

1,16,400

TOTAL 14,72,800 11,19,980

II. ASSETS

(1) Non-Current Assets

(a) Fixed Assets

i) Tangible Assets (Plant)

ii) Intangible Assets (Goodwill)

(2) Current Assets

(a) Inventories

(b) Trade receivables

(c) Cash and Cash equivalents

4,20,000

1,00,000

1,83,000

5,73,800

1,96,000

3,20,000

70,000

1,65,000

3,45,800

2,19,180

TOTAL 14,72,800 11,19,980

Further Information:

(a) Plant of Rose Ltd. and Lily Ltd. is worth ` 3,90,000 and ` 3,50,000 respectively.

(b) Goodwill of Rose Ltd. and Lily Ltd. is to be valued at ` 1,50,000 and ` 1,00,000 respectively.

(c) Stock of Lily Ltd. is over-valued by 10% above its cost.

(d) Rose Ltd. is taking over Lily Ltd. by issue of shares at the intrinsic value.

(e) All the assets and liabilities of Lily Ltd. were incorporated in the books of Rose Ltd. at fair value and

assets and liabilities of Rose Ltd. have been carried at carrying values only.

You are required to prepare post absorption balance sheet of Rose Ltd.

[Ans. P.C. ` 10,48,580; B/S Total ` 26,37,780.] [June‟15 – 7 marks]

Q.10. Alpha Ltd. decided to wind-up with effect from 31st March, 2015 and was to be taken over by Gama Ltd. on

the basis of following balance sheet of Alpha Ltd. as on that date:

(`)



(a) Share Capital

1,20,000 shares of ` 10 each fully paid


Profit prior to incorporation

Surplus


(a) Trade payables

(b) Bill payable

(c) Provision for income tax

12,00,000

42,000

5,22,000

2,26,000

40,000

2,20,000

TOTAL 22,50,000

II. ASSETS


Fixed Assets

(2) Current Assets

(a) Inventories


(c) Bills receivables

(d) Cash and bank

9,64,000

7,75,000

1,52,000

30,000

3,29,000

TOTAL 22,50,000

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Gamma Ltd. took over the assets at following values:

Fixed assets: ` 12,80,000, Inventories : ` 7,70,000; Bills receivable: ` 30,000.

Trade receivables realized ` 1,40,000.

Bills payables and income-tax liabilities were settled at ` 30,000 and ` 2,22,000 respectively. Trade

payables were finally settled with the cash remaining after meeting liquidation expenses of ` 20,000.

Purchase consideration was satisfied by Gama Ltd. as : ` 5,10,000 by allotment of fully paid 10%

preference shares of ` 100 each and the balance in equity shares of ` 10 each at ` 8 per share paid-up.

You are required to prepare necessary accounts in the books of Alpha ltd. [June‟16 – 7 marks]

[Ans. P.C. ` 20,80,000; Realisation Profit ` 3,16,000 & Cash paid to creditors ` 1,97,000.]

Q.11. Corporate restricting is carried out to make a company more effective. Discuss. [Dec‟16 – 5 marks]

Q.12. Tanu Ltd. and Manu Ltd. carrying on business of similar nature agreed to amalgamate. A new company TM

Ltd. is to be formed to which assets and liabilities of the existing companies, with certain exceptions, are to be

transferred. On 31st March, 2016, the balance sheets of the two companies were as under:

Particulars Tanu Ltd.

(`)

Manu Ltd.

(`)

a. Equity And Liabilities

1) Shareholder‟s Funds

(a) Share Capital

(b) Reserves and Surplus

2) Non-Current liabilities

(a) 6% Debentures


(a) Trade payables

3,00,000

2,00,000

---

1,50,000

1,60,000

40,000

---

64,000

Total 6,50,000 3,84,000

b. Assets

i. Non-Current Assets

(a) Fixed Assets

Freehold property

Plant and Machinery

ii. Current Assets

(a) Inventories

(b) Trade Receivables

(c) Cash and Cash Equivalents

2,10,000

50,000

1,40,000

1,64,000

86,000

1,20,000

30,000

1,56,000

42,000

36,000

Total 6,50,000 3,84,000

Assets and liabilities are to be taken at book value with the following exceptions:

Goodwill of Tanu Ltd. and Manu ltd. is to be valued at ` 1,60,000 and ` 60,000 respectively.

Value of Freehold property is to be taken at 120% of the book value in case of both the companies.

Debentures of Manu Ltd. are to be discharged by issue of 5% debentures of TM Ltd. of such value that

earnings of debentureholders are maintained at same level after amalgamation.

Trade receivables of Manu Ltd. were realized fully and the trade payables of Manu Ltd. were paid `

60,000 in full and final settlement of their claims.

You are required to –

i) Compute the basis on which shares in TM Ltd. will be issued to the shareholders of existing companies

assuming nominal value of each share in TM ltd. is ` 10.

Prepare balance sheet of TM ltd. as on 1st April, 2016. [Dec‟16 – 8 marks]

Q13. S Ltd. is absorbed by P Ltd. The balance sheet of S Ltd. is as under:

Particulars Note No `

Equity & Liabilities

Shareholder‟s Funds

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Equity Capital (5,000Shares of ` 100 each fully paid up) 5,00,000

7% Pref. Capital (2,000 Shares `100 each fully paid up) 2,00,000

Reserves & Surplus


Non-Current Liabilities

6% Debentures 2,00,000

Current Liabilities

Trade Creditors 1,00,000

Total 13,00,000

Assets

Sundry Assets 13,00,000

Total 13,00,000

P Ltd. has agreed:

i) To issue 9% preference shares of `100 each, in the ratio of 3 shares of P Ltd. for 4 preference shares in S

ltd.

ii) To issue to the debenture-holders in S Ltd. 8% Mortgage Debentures at ` 96 in lieu of 6% Debentures in S

Ltd. which are to be redeemed at a premium of 20%.

iii) To Pay `20 per share in cash and to issue 6 equity shares of `100 each (market value `125) in lieu of 5

shares held in S Ltd. and

iv) To assume the liability to trade creditors.

Compute the purchase consideration.

[Ans. Purchase consideration: ` 10,00,000.]

Q14. Exe Limited is absorbed by Wye Limited. Given below are the Balance Sheets of the two Companies prepared

after revaluation of their assets on a uniform basis.

Particulars Note No Exe Ltd.(`) Wye Ltd.(`)



Equity Capital (9000 Shares of ` 150 each ` 135 paid up) 12,15,000 -----

Equity Capital (40,000 Shares of ` 75 each fully paid up) ----- 30,00,000

Reserves & Surplus

General Reserves 4,03,500 12,85,000

Profit & Loss Account 15,000 35,000

Current Liabilities

Trade Payables (Sundry Creditors) 55,000 65,000

Total 16,88,500 43,85,000

Assets

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Non-Current Assets

Fixed Assets

Tangible Assets

Sundry Assets 16,85,000 43,57,500

Current Assets

Cash at Bank 3,500 27,500

Total 16,88,500 43,85,000

The holder of every three Shares in Exe Limited was to receive five Shares in the Wye Limited plus as much cash

as is necessary to adjust the rights of shareholders of both the Companies in accordance with the intrinsic values

of the share as per the respective Balance Sheets.

Pass necessary journal entries in the books of Wye Limited and prepare the Balance Sheet giving effect to the

above scheme of absorption. Entries are to be made at par value only.

[Ans. P.C. ` 11,38,500.] [CA - Inter -May‟92 – 16 marks]

Q15. Exe Limited was wound up on 31.3.2004 and its Balance Sheet as on that date was given below:




Equity Capital (1,20,000 Shares of ` 10 each fully paid up) 12,00,000

Reserves & Surplus

Profit Prior to Incorporation 42,000

Contingency Reserve 2,70,000

Profit & Loss Account 2,52,000

Current Liabilities

Bills Payables 40,000

Creditors 2,26,000

Tax Provision 2,20,000

Total 22,50,000

Assets

Non-Current Assets

Fixed Assets 9,64,000

Current Assets

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Inventories 7,75,000

Debtors 1,52,000

Bills Receivable 30,000

Cash 3,29,000

Total 22,50,000

Wye Limited took over the following assets at values shown as under:

Fixed assets ` 12,80,000, Stock ` 7,70,000 and Bills Receivable ` 30,000.

Purchase consideration was settled by Wye Limited as under:

` 5,10,000 of the consideration was satisfied by the allotment of fully paid 10 % preference shares of ` 100 each.

The balance was settled by issuing equity shares of ` 10 each at ` 8 per share paid up.

Sundry debtors realized ` 1,50,000. Bills payable was settled for ` 38,000. Income tax authorities fixed the

taxation liability at ` 2,22,000.

Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to ` 8,000.

You are required to:

(1) Calculate the number of equity shares and preference shares to be allotted by Wye Limited in discharge of

purchase consideration.

(2) Prepare the Realizations account, Cash/ bank account, Equity Shareholders account and Wve Limited

account in the books of Exe Limited.

(3) Pass journal entries in the books of Wye Limited.

[Ans. P.C. ` 20,80,000 & Realisation Profit ` 3,16,000] [CA-May‟05 – 16 marks]

Q16. Following is the Balance Sheets of X Co. Ltd as at 31st March, 2008:




Equity Capital(Shares of ` 100 each fully paid up) 15,00,000

11% Pref. Capital 5,00,000

Reserves & Surplus


Current Liabilities

Trade Payables(Creditors) 2,00,000

Total 25,00,000

Assets

Non-Current Assets

Fixed Assets

Tangible Assets

Land & Buildings 10,00,000

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Plant & Machinery 7,00,000

Furniture & Fittings 2,00,000

Current Assets


Trade Receivables(Debtors) 2,00,000

Cash & Bank 1,00,000

Total 25,00,000

Y Co. Ltd. agreed to take over X Co. Ltd on the following terms:

i. Each equity share in X Co. Ltd for the purpose of absorptions is to be valued at ` 80.

ii. Equity shares will be issued by Y Co. Ltd. by valuing its each equity share of ` 120 per share (Face Value

` 100).

iii. 11% preference shareholder of X Co. Ltd will be given 11% redeemable debenture of Y Co. Ltd. at

equivalent value.

iv. All the Assets and Liabilities of X Co. Ltd will be recorded at the same value in the books of Y Co. Ltd.

a. Calculate Purchase consideration.

b. Pass Journal entries in the books of Y Co. Ltd. for absorbing X Co. Ltd.

[Ans. P.C. ` 17,00,000.] [CA-PE-II Nov.‟08 – 8 marks]

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THEORY MASALA

Q.1. Define the term „Amalgamation‟ as per AS-14.

Ans. As per AS-14, Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 2013 or

any other statute which may be applicable to companies.

Transferor Company means the company which is amalgamated into another company.

Transferee Company means the company into which a transferor company is amalgamated.

Thus, when two or more companies merge and a new company if formed it is known as amalgamation.

When one company merges into another company it is known as absorption.

AS-14 is applicable for amalgamation as well as absorption.

When A Ltd. & B Ltd. merge and new company is

formed AB Ltd. it is known as Amalgamation.

When Y Ltd. merge into X Ltd. It is absorption of Y

Ltd. by X Ltd.

Q.2. Write a short note on: Types of Amalgamation as per AS-14.

Ans. AS-14 recognizes two types of amalgamation:

Amalgamation in the nature of merger (Pooling of Interest Method): An amalgamation will be treated as

amalgamation in the nature of merger if all the following 5 conditions are satisfied:

(1) All the assets and liabilities of the transferor company become the assets and liabilities of the transferee

company.

(2) Shareholders holding 90% of the face value of the equity shares of the transferor company become equity

shareholders of the transferee company.

(3) The consideration for the amalgamation receivable by equity shareholders of the transferor company is

discharged by the transferee company wholly by the issue of equity shares in the transferee company, expect

that cash may be paid in respect of any fractional shares.

(4) The business of the transferee company intended to be carried on by the transferee company.

(5) No adjustment intended to be made to the book value of the assets and liabilities of the transferor company

when they are incorporated in the financial statements of the transferee company except to ensure uniformity

of accounting policies.

Amalgamation in the nature of purchase: An amalgamation will be treated as amalgamation in the nature of

purchase is any of the above 5 conditions is not satisfied.

Q.3. Write a short note on: Consideration on amalgamation of companies.

[CS (Inter) – Dec. 1999 (5 Marks), Dec. 2004 (3Marks)]

Explain various method for calculation of purchase consideration with regard to amalgamation of

companies. [CS (Inter) – June 2003 (4 Marks)]

Ans. The purchase consideration is determined as per the agreement between the companies. As per AS-14, the

expression purchase consideration means “the aggregate of the shares and other securities issued and the payment

made in the form of cash or other assets by the transferee company to the shareholders of the transferor

company.”

Important Points:

(1) Only payment to shareholders is to be taken into consideration.

(2) Consideration for debenture holders will not be included in the purchase consideration.

A Ltd. B Ltd.

AB Ltd.

X Ltd.

Y Ltd.

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(3) Liquidation expenses are not included in the purchase consideration.

Methods for calculation of purchase consideration: Generally following methods are adopted for calculation of

purchase consideration:

(1) Net Assets Method: As per this method purchase consideration is difference between assets taken over and

liabilities taken over as shown below:

Particulars `

Agreed value of assets taken over:

Goodwill

Land & Building

Plant & Machinery

Furniture

Stock

Debtors

Bills Receivable

Agreed value of liabilities taken over:

Debentures

Bank Loan

Sundry Creditors

Bills Payable

Purchase Consideration

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

(XXX)

(XXX)

(XXX)

(XXX)

XXXX

Important Points:

(1) Only agreed value of assets should be added.

(2) Unrecorded assets taken over should be added.

(3) Fictitious assets, preliminary expenses, discount on issue of shares of debenture and debit balance of

profit & loss account appearing on the assets side should not be taken into consideration.

(4) Only agreed value of liabilities should be deducted.

(5) Unrecorded liabilities taken over should be deducted.

(6) Items in the nature of „Reserves‟ are not to be deducted like credit balance in profit & loss account,

general reserve, reserve fund, securities premium, workmen compensation fund, capital reserve,

dividend equalization fund, capital redemption reserve should not be deducted.

(7) Items in the nature of „Provisions‟ are not to be deducted like employees provident fund, provisions

for depreciation, etc.

(2) Net Payment Method: Under this method, purchase consideration is calculated by adding various payments

of shares, preference shares and cash. While calculating issue price of shares premium or discount on issue

should also be considered.

Q.4. Write a short note on: Amalgamation in the nature of purchase.

Ans. An amalgamation will be treated as amalgamation in the nature of purchase is only one or more of the 5

conditions specified for amalgamation in the nature of merger is not satisfied.

Q.5. Distinguish between: Amalgamation in the Merger & Amalgamation in the nature of purchase.

[CS (Inter) – June 2006 (5 Marks)]

Ans. Following are the main points of distinction between Amalgamation in the Nature of Merger & Amalgamation in

the Nature of Purchase:

Points Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase

Meaning An amalgamation will be treated as

amalgamation in the nature of merger if all

the 5 conditions are satisfied.

An amalgamation will be treated as

amalgamation in the nature of purchase if

only one or more of the 5 conditions

specified for amalgamation in the nature of

merger is not satisfied.

Values assigned All assets, liabilities, reserves, and surplus Only assets and liabilities taken over from

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to assets &

liabilities

of the transferor company are incorporated

in the financial statements of the transferee

company at book value.

the transferor company are incorporated in

the financial statements of the transferee

company either at book value or agreed

value.

Information to

investors

This method provides investors with less

information.

This method provides investors with more

information.

Values

Exchanged

This method ignores the values exchanged

in an amalgamation.

This method reflects the values exchanged

in an amalgamation.

Unrecorded

assets & liabilities

This method does not record any

unrecorded assets and liabilities in the

books of the transferor company.

This method records unrecorded assets and

liabilities in the books of the transferee

company.

Difference

between the

consideration &

Share Capital

The difference between the consideration

and share capital of the transferor company

is adjusted against reserves or profit & loss

balance.

The difference between the purchase

consideration and the net assets taken over

of the transferor company is recorded as

goodwill or capital reserve, as the case may

be.

Costs All costs associated with amalgamation are

not capitalized but adjusted against reserve.

All costs associated with amalgamation are

capitalized.

Amalgamation

adjustment

account

Under this method, no amalgamation

adjustment account is opened in the books

of transferee company.

Under this method amalgamation

adjustment account must be opened in the

books of the transferee company for carry

forward of any “Statutory Reserve”.

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Accounting Gym – Internal Reconstruction

Q.1. Under given is the balance sheet of Rajbhasha & Co. as on 31st March, 2014:




(a) Share Capital


10,000, 9% preference shares of `10 each

15,000 equity shares of `10 each




10% Debentures


Trade Payables

Bank overdraft (Secured by Land and Building)

Debentures Interest

TOTAL

II. ASSETS


(a) Fixed Assets

Freehold Land and Building

Plant

Tools and dies

(b) Other non-current expenses

Research and development expenses

2. Current Assets

Stock

Trade receivables

Investment

TOTAL

1,00,000

1,50,000

50,000

20,000

4,200

34,000

96,000

27,300

2,50,000

(98,000)

60,000

74,200

2,86,200

1,57,300

18,000

42,500

53,400

15,000

2,86,200

The Scheme of re-organisation detailed below has been agreed by all the parties approved by the TRIBUNAL.

You are required to prepare:

(a) Journal entries recording the transactions in the books, including cash.

(b) The balance sheet of the company as on 1st April, 2014 after the completion of the scheme.

i) The following assets are to be revalued as shown below: Plant ` 59,000 tools and dies ` 15,000 stock `

30,000 and debtors ` 48,700.

ii) The research and development expenditure and debit balance of profit and loss account are to be written

off.

iii) Price of land recorded in the books at ` 6,000 is valued at ` 14,000 and is to be taken over by the

debenture holders in part repayment of principal. The remaining freehold land and buildings are to be

revalued at ` 40,000.

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iv) A creditor for ` 18,000 has agreed to accept a second mortgage debenture of 11% per annum secured on

plant for ` 15,500 in settlement of his debt. Other creditors totaling ` 10,000 agreed to accept a payment

of ` 0.85 in the rupee for immediate settlement.

v) The investment at a valuation of ` 22,000 is to be taken over by the bank.

vi) The ascertained loss is to be met by writing down the equity shares to ` 1 each and preference shares to `

8 each. The authorized share capital is to be increased immediately to the original amount.

vii) The equity shareholders agree to subscribe for two new ordinary shares at par for every share held. This

cash is all received.

viii) The costs of the scheme are ` 3,500. These have been paid and are to be written off. The debenture

interest has also been paid.

[Ans. B/S Total ` 2,08,500.]

Q.2. A Mills Ltd. decided to have internal reconstruction. The Balance sheet of the Company as on 31st March, 2013

was as follows: A Mills Ltd.

Balance Sheet as at 31st March, 2013

Particulars Note No. Amount `


(1) Share holders‟ Funds

(a) Share Capital

Authorised, Issued and Subscribed

10,000, 10% Cumulative

Preference Shares of ` 10 each

25,000 Equity Shares of ` 10 each


Securities Premium Reserves

General Reserves Nil

Less: P & L A/c Dr. Balance 1,10,000

(2) Share Application Money pending allotment

(3) Non-Current Liabilities

(a) Long Term Borrowing

10% 800 Debentures of ` 100 each

(Secured on freehold property)


Trade Payables

Creditors for Expenses

Interest Accrued on Debentures

Total

II. ASSETS


(a) Fixed Assets

i) Tangible Assets

Freehold Property

Leasehold Property

Plant and Machinery


Goodwill

(b) Non-Current Investments

2) Current Assets

Other Current Assets

1,00,000

2,50,000

25,000

(1,10,000)

0

80,000

30,000

11,000

4,000

3,90,000

75,000

1,00,000

60,000

50,000

25,000

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Share Issue Expenses

Total

60,000

20,000

3,90,000

Preference dividends are in arrears for two years. A scheme for reduction of capital was sanctioned by the

TRIBUNAL as follows:

10% cumulative preference shares of ` 10 each to be reduced to ` 8 per share.

Equity shares of ` 10 each to be reduced to ` 4 per share.

After reduction, both the shares are to be consolidated into shares of ` 10.

The authorized capital to be restored to ` 1,00,000 in 10% cumulative preference shares of ` 10 each and

` 2,50,000 in equity shares of ` 10 each.

One (new) equity share of ` 10 each is to be issued for every ` 40 of gross preference dividend in arrears.

The debenture holders agreed to take over the freehold property at ` 1,30,000 and paid the balance to the

company after satisfying their claim.

Fictitious and intangible assets are to be written off.

The value of assets is to be as follows:

Leasehold Property ` 80,000

Plant and Machinery ` 50,000

Current Assets ` 40,000

Investments realized ` 10,000.

Securities premium reserve balance is allowed to be utilized.

The Scheme as sanctioned by the TRIBUNAL was implemented.

You are required to prepare.

i) Journal entries for reduction of share capital and consolidation of preference shares and equity shares.

ii) Capital Reduction Account

iii) Balance Sheet after reduction.

[Ans. B/S Total ` 2,26,000.]

Q.3. Balance Sheet of SII Ltd.

As on 31st March, 2013 appears as below




(a) Share Capital

1,50,000, Equity shares of ` 10 each fully paid

5,000 11% preference shares of ` 100 each fully paid


Securities Premium Reserves


Less: Debit balance of P & L A/c 16,40,000



11% Debentures

Unsecured loans


Bank Overdraft

Interest Accrued on loans

Interest Accrued and due on debentures

Other current Liabilities

Total

15,00,000

5,00,000

25,000

(16,40,000)

0

5,00,000

5,00,000

6,30,000

1,50,000

1,10,000

5,00,000

27,50,000

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II. ASSETS


(a) Fixed Assets

Tangible Assets 20,00,000

Less: Depreciation Reserve 15,00,000

2) Current Assets

Stock and Stores

Trade Receivables

Other Current Assets

Total

5,00,000

6,00,000

14,50,000

2,00,000

27,50,000

A Scheme of reconstruction has been agreed amongst the shareholders and the creditors with the following salient

features:

(a) Interest due on unsecured loans is waived.

(b) 50% of the interest due on the debentures is waived.

(c) The 11% preference shareholders‟ rights are to be reduced to 50% and converted into 15% Debentures of `

10 each.

(d) Current liabilities would be reduced by ` 50,000 on account of provision (included in Other Current

Liabilities) no longer required.

(e) The banks agree to the arrangement and to increase the cash credit/overdraft limits by ` 1,00,000 upon the

shareholders agreeing to bring in a like amount by way of new equity.

(f) Besides additional subscription as above, the equity shareholders agree to convert the exiting equity shares

into new 10 rupees shares of total value ` 5,00,000.

(g) The debit balance in the Profit & Loss Account is to be wiped out, ` 2,60,000 provided for doubtful debts and

the value of fixed assets increased by ` 4,00,000.

Redraft the Balance Sheet of the company based on the above scheme of reconstruction.

[Ans. B/S Total ` 28,90,000.]

Q.4. Balance Sheet of JAY Co. Ltd.

As on 31st March, 2013 is given below




(a) Share Capital

2,000, 6% Cumulative

Preference Shares of ` 100 each fully paid-up

75,000 Equity Shares of ` 10 each fully paid-up



Less: Debit Balance of P & L A/c 3,50,000



6% Debentures (Secured on freehold property)

Directors loan


Trade Payables

Interest Accrued on Debentures

Total

2,00,000

7,50,000

(3,50,000)

0

3,75,000

2,00,000

12,500

22,500

12,10,000

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II. ASSETS


(a) Fixed Assets

Freehold Property

Plant

(b) Non-Current Investments (At cost)

2) Current Assets

Stock and Stores

Trade Receivables

Deferred Advertising Expenditure

Total

3,50,000

50,000

60,000

2,00,000

4,00,000

1,50,000

12,10,000

The TRIBUNAL approved a scheme of reorganization to take effect on 1.4.2013 where by:

Preference shares to be written down to ` 75 each and equity shares to ` 2 each.

Preference Dividends-in-arrears for 4 years, 75% to be waived and equity shares of ` 2 each to be allotted

for the remaining quarter.

Accrued Debenture interest to be paid in cash.

Debenture holders agreed to take over Freehold Property (Book value ` 1,50,000) at a valuation of `

1,50,000 in part repayment of their holdings and to provide additional cash of ` 1,30,000 secured by a

floating charge on the company‟s assets at an interest rate of 10% p.a.

Deferred Advertising to be written off.

Stock to be written off fully.

` 2,33,000 to be provided as Bad debts.

Investments sold out for ` 1,50,000.

In settlement of their loans, Directors are to accept equity shares of ` 2 each for 90% of their loans, waving

10% of the balance of their loan amount.

Capital commitments contracts totaling ` 3,00,000 are to be cancelled by payment of penalty @ 5% of

Contract Value.

Taxation and Cost of Scheme are to be ignored.

Show Journal Entries, reflecting the effect of the above transactions (including cash transactions) and draw up

the Balance Sheet after affecting the Scheme.

[Ans. B/S Total ` 8,59,500.]

Q.5. Balance Sheet of KING Co. Ltd. As on 31st March, 2013 is given below




(a) Share Capital

2,00,000, Equity Shares of ` 10 each, ` 5 paid up

6,000, 8% Preference shares of ` 100 each



Less: Debit Balance of P & L A/c 4,08,000



9% Debentures


Trade Payables

10,00,000

6,00,000

(4,08,000)

0

6,00,000

69,000

1,08,000

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Interest Accrued and due on Debentures

Bank Overdraft

Interest accrued on bank overdraft

Total

II. ASSETS


(a) Fixed Assets

i) Tangible Assets


Patents and copyrights


2) Current Assets

Stock and Stores

Trade Receivables

Bank

Total

1,50,000

15,000

21,34,000

11,40,000

80,000

65,000

4,00,000

4,39,000

10,000

21,34,000

Preference dividend is in arrear for one year. Preference shareholders to give up their claims, inclusive of

dividends, to the extent of 30% and desire to be paid-off.

Debenture-holders agree to give up their claims to interest in consideration of their interest being enhanced

to 12%.

Bank agrees to give up 50% of its interest outstanding in consideration of its being paid off at once.

Creditors would like to grant a discount of 5% if they are paid immediately.

Balance of Profit & Loss Account, Patents and Copyrights and Debtors of ` 30,000 to be written off.

Fixed Assets to be written down by ` 34,000.

Investments are to reflect their market value ,i.e, ` 55,000.

To the extent not specifically stated, equity shareholders suffer on reduction of their rights. Cost of

reconstruction is ` 3,350.

Draft Journal entries in the books of the company assuming that the scheme has been put through fully with the

equity shareholders bringing in necessary cash to pay off the parties and to leave a working capital of ` 30,000

and prepare the Balance Sheet after reconstruction.

[Ans. B/S Total ` 20,00,000.]

Q.6. The following is the Balance Sheet as at 31st March, 2013 of JINX Prospectus Ltd.




(a) Share Capital

7,500, Equity Shares of ` 100 each fully paid-up

3,000 8% Preference Shares of ` 100 each


Securities Premium

General Reserves




Trade Payables

Total

7,50,000

3,00,000

12,000

80,000

0

0

3,75,000

15,17,000

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II. ASSETS


(a) Fixed Assets

i) Tangible Assets


Goodwill


2) Current Assets

Stock and Stores

Trade Receivables

Bank

Total

9,80,000

1,00,000

20,000

2,00,000

1,54,500

62,500

15,17,000

Contingent Liability:

Preference Dividends in arrears ` 66,000.

The Board of Directors of the company decided upon the following scheme of reconstruction:

The preference shares are to be converted into 13% unsecured debentures of ` 100 each in regard to 80% of

the dues (including arrears of dividend) and for the balance Equity shares of ` 50 paid-up would be issued.

The authorized capital of the company permitted the issue of additional shares.

Equity shares would be reduced to shares of ` 50 each paid-up.

All equity holders agree to pay the balance in cash.

Goodwill has lost its value and is to be written off fully. Investments are to reflect their market value of `

30,000. Obsolete items in stock of ` 50,000 are to be written off. Bad debts to the extent of 5% of the total

debtors would be provided for. Fixed assets to be written down by ` 1,50,000.

The Scheme was duly approved and put into effect.

The Company carried on trading for six months and after writing off depreciation at 20% p.a. on the revised

value of fixed assets, made a net profit of ` 80,000. The half-yearly working resulted in an increase of Sundry

Debtors by ` 60,000, Stock by ` 80,000 and cash by ` 40,000.

Show the journal entries necessary in the Company‟s books to give effect to the scheme and draw the Balance

Sheet as at 30th

September, 2013.

[Ans. Capital Reserve ` 11,275 and B/S Total ` 17,64,475.]

Q.7. M/s Ram & Company promoted a joint stock company in 1985. The working of the company was not

successful. On 31st December, 1990 the company‟s Balance Sheet stood as under:


Authorised Capital: Land & Building 1,00,000

20,000 Share of ` 100 each 20,00,000 Machinery 2,60,000

Subscribed Capital: Furniture 20,000

19,000 Shares of ` 100 each 19,00,000 Stock 3,70,000

Creditors 1,00,000 Debtors 1,80,000

Shyam & Company 1,00,000 Goodwill 2,00,000

Profit and Loss A/c 9,70,000

21,00,000 21,00,000

The company is reconstructed on the basis of the following scheme:

(a) The 19,000 shares of `100 each are to be reduced to an equal number of fully paid shares of ` 40 each.

(b) The debt of ` 1,00,000 due to M/s Shyam & Co. was also to be reduced, the remaining 1,000 un-issued

shares being issued to them as fully paid up shares of ` 40 each in full settlement of the amount due to

them.

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(c) The amount thus rendered available by the reduction of capital and by the above arrangement with M/s.

Shyam & Co. is to be utilized in writing off the goodwill and the Profit and Loss Account and writing

down the value of machinery.

Make Journal Entries and prepare Balance Sheet after reconstruction.

[Ans. Balance Sheet ` 9,00,000]

Q.8. The following is the Balance Sheet of Sick Ltd. as on 31.12.1993.

Particulars Note No. Amount

(`)


Shareholders‟ Funds

Equity Capital (` 10 each) 7,00,000

13% Cum. Pref. Capital (`100 each fully paid up) 1,00,000

Reserves & Surplus

Profit & Loss Account (3,00,000)



Current Liabilities 39,00,000

Provision For Tax 3,00,000

Total 50,00,000

Assets

Non-Current Assets

Fixed Assets 15,00,000

Current Assets 35,00,000

Total 50,00,000

The following scheme of reorganization is sanctioned:

(1) Fixed Assets are to be written down by 33 ⅓%.

(2) Current Assets are to be revalued at ` 27,00,000.

(3) Preference Shareholders decide to forego their right to arrears of dividend which are in arrears for three

years.

(4) The taxation liability of the company is settled at ` 4,00,000 and the same is paid immediately.

(5) One of the creditors of the company, to whom the company owes ` 25,00,000, decides to forego 50% of

his claim. He is allotted 1,00,000 equity shares of ` 5 each in part satisfaction of the balance of his claim.

(6) The rate of interest on debentures is increased to 11%. The debenture-holders surrender their existing

debentures of ` 100 each and exchange the same for fresh debentures of ` 75 each.

(7) All existing equity shares are reduced to ` 5 each.

(8) All Preference shares are reduced to ` 75 each.

Pass journal entries and show the Balance Sheet of the Company after giving effect to the above.

[Ans. Balance Sheet ` 33,00,000.]

Q.9. Following is the Balance Sheet of ABC Ltd. as at 31.3.2007

Particulars Note No. Amount

(`)


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Shareholders‟ Funds

Equity Capital(2,00,000 shares of ` 10 each) 20,00,000

8% Pref. Capital (6,000 shares of ` 100 each) 6,00,000

Reserves & Surplus

Profit & Loss Account (4,05,000)



Current Liabilities

Trade Creditors 5,92,000

Bank Overdraft 1,50,000

Total 41,37,000

Assets

Non-Current Assets

Fixed Assets

Tangible Assets

Plant & Machinery 9,00,000

Furniture & Fittings 2,50,000

Intangible Assets

Patents & Copyrights 70,000

Investment (Market Value ` 55,000) 68,000

Current Assets


Trade Receivables(Debtors) 14,39,000

Cash & Bank 10,000

Total 41,37,000

The following scheme of reconstruction was finalized:

i. Preference Shareholders would give up 30% of their Capital in exchange for allotment of 11%

Debentures to them.

ii. Debentures holders having charge on Plant and Machinery would accept Plant and Machinery in full

settlement of their dues.

iii. Stock equal to ` 5,00,000 in book value will be taken over by Sundry creditors in full settlement of their

dues.

iv. Investment value to be deducted to Market price.

v. The company would issue 11% Debentures for ` 3,00,000 and augment its working capital requirement

after settlement of bank overdraft.

Pass necessary journal entries in the books of the company. Prepare Capital reduction account and Balance

Sheet of the company after internal reconstruction.

[Ans. Capital Reserve ` 1,54,000 & Balance Sheet ` 28,74,000.]

Q.10. The Balance Sheet of M/s Ice Ltd. as on 31-3-2011 is given below:


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The Board of Directors of the Company decided upon the following scheme of reconstruction with the consent

of respective stakeholders:

I. Preference shares are to be written down to ` 80 each and equity shares to ` 2 each.

II. Preference dividend in arrear for 3 years to be waived by 2/3rd

and for balance 1/3rd

, equity shares of ` 2

each to be allotted.

III. Debenture holders agreed to take one freehold property at its book value of ` 3,00,000 in part payment

of their holding. Balance debentures to remain as liability of the company.

IV. Arrear debenture interest to be paid in cash.

V. Remaining freehold property to be valued at ` 4,00,000.

VI. Investments sold out for ` 2,50,000.

VII. 75% of Director‟s loan to be waived and for the balance, equity share of ` 2 each to be allotted.

VIII. 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to be written off.

IX. Company‟s contractual commitments amounting to ` 6,00,000 have been settled by paying 5% penalty

of contract value.

Show the Journal Entries for giving effect to the internal re-construction and draw the Balance Sheet of the

company after affecting the scheme.

[Ans. Capital Reserve ` 2,98,000 & Balance Sheet ` 11,26,000.]

Q.11. The balance sheet of Magna ltd as on 31st March, 2015 is given below:

S Ltd. (`)



(a) Share Capital

Equity share of ` 100 each

12% cumulative preference shares of ` 100 each


Surplus

Preliminary expenses


10% debentures of ` 100 each


(a) Trade payables

(b) Tax Provision

50,00,000

25,00,000

(2,00,000)

(1,00,000)

20,00,000

25,00,000

50,000

TOTAL 1,17,50,000

II. ASSETS


(a) Fixed Assets

(b) Investment (market value ` 4,75,000)

(2) Current Assets

62,50,000

5,00,000

50,00,000

1,00,000 equity shares of ` 10 each

fully paid up

4,000, 8% preference shares of `

100 each fully paid

6% Debenture 4,00,000

(secured by freehold

property)

Arrear Interest 24,000

Sundry Creditors

Director‟s Loan

10,00,000

4,00,000

4,24,000

1,01,000

3,00,000

Freehold Property

Plant and Machinery

Trade Investment (at cost)

Sundry Debtors

Stock-in-Trade

Deferred advertisement

Expenses

Profit and Loss Account

5,50,000

2,00,000

2,00,000

4,50,000

3,00,000

50,000

4,75,000

22,25,000 22,25,000

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TOTAL 1,17,50,000

It was decided to reconstruct with the following scheme:

i) All the existing equity shares are reduced to ` 40 each and preference shares to ` 6 0 each.

ii) The debentureholders surrender their existing debentures and exchange the same with fresh 12%

debentures of ` 70 each.

iii) Creditor Prateek to whom the company owes ` 10,00,000 decided to reduce his claim by 40%. He is

allotted 15,000 equity shares of ` 40 each in full satisfaction of the claim.

iv) Tax liability is settled at ` 75,000.

v) Fixed assets are written down by 30%.

vi) Current assets are revalued at ` 22,50,000.

vii) Investments be brought down to its market value.

viii) All fictitious assets be written-off.

Pass Journal entries in the books of the company and prepare capital reduction account.

[Ans. Capital Reserve ` 25,000.] [Dec‟15 – 8 marks]

Q12. The following was the Balance Sheet of Tin Toys Ltd., as on 31.3.1998:


Authorized Capital : Goodwill 10,000

Ordinary Shares of ` 10 each 2,00,000 Buildings 20,500

Issued, Subscribed and Paid-up: Machinery 50,850

12,000 shares of Preliminary expenses 1,500

` 10 each 1,20,000 Stock 10,275

Less: Calls-in-arrears Book Debts 15,000

(` 3 per share) on Cash at Bank 1,500

3,000 Shares: 9,000 1,11,000 Profit and Loss Account 20,800

Sundry Creditors 15,425

Provision for taxes 4,000

1,30,425 1,30,425

The directors find that the machinery is overvalued by ` 10,000. It is now proposed to write down this asset to its

true value and extinguish goodwill account, profit and loss and preliminary expenses accounts by adopting the

following scheme: (a) Forfeit the shares on which the calls are outstanding. (b) Reduce the paid-up capital by ` 3

per share. (c) Re-issue the forfeited shares at ` 5 per share. (d) Utilize the provision for taxes, if necessary. Draft

the journal entries necessary for giving effect to the above scheme and prepare the reconstructed Balance Sheet of

the company.

[Ans. Balance Sheet ` 1,03,125.] [Dec‟07 & Jun‟15 – 5 marks]

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THEORY MASALA

Q.1. What are the provisions of the Companies Act, 2013 relating to reduction of share capital?

Ans. As per Section 66 of the Companies Act, 2013, with the confirmation by the Tribunal, a company limited by

shares or limited by guarantee and having a share capital may, by a special resolution, altering its memorandum

reduce the share capital in following manner:

(a) Extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up or

(b) Either with or without extinguishing or reducing liability on any of its shares:

i) Cancel any paid-up share capital which is lost or is unrepresented by available assets or

ii) Pay off any paid-up share capital which is in excess of the wants of the company.

However, no such reduction shall be made if the company is in arrears in the repayment of any deposits or the

interest payable thereon.

Notice by Tribunal: The Tribunal shall give notice of every application made to it to the Central Government,

Registrar and to the SEBI and the creditors of the company. The company shall take into consideration the

representations made to it by that Government, Registrar, the SEBI and the creditors within a period of 3 months

from the date of receipt of the notice.

If no representation has been received from the Central Government, Registrar, the SEBI or the creditors within 3

months, it shall be presumed that they have no objection to the reduction.

Confirmation by Tribunal: If the Tribunal is satisfied that the debt or claim of every creditor of the company has

been discharged or determined or has been secured or his consent is obtained, make an order confirming the

reduction of share capital on such terms and conditions as it deems fit.

The Tribunal shall not sanction reduction of share capital unless the accounting treatment, proposed by the

company for such reduction is in conformity with the accounting standards and a certificate to that effect by the

company‟s auditors has been filed with the Tribunal.

Publication of order of confirmation: The order of confirmation of the reduction of share capital by the Tribunal

shall be published by the company in such manner as the Tribunal may direct.

The company shall deliver a certified copy of the order of the Tribunal along with the prescribed details to the

Registrar within 30 days of the receipt of the copy of the order registrar shall register the same and issue a

certificate to that effect.

Q.2. State the cases of “Reduction of Share Capital without sanction of the Tribunal”.

Ans. The following are cases which amount to reduction of share capital and where no confirmation by the Tribunal is

necessary:

(a) Surrender of Shares: Surrender of Shares means the surrender to the company on the part of the registered

holder of shares already issued. Where shares are surrendered to the company it will have the same effect as

a transfer in favour of the company and amount to a reduction of capital. But if, under any arrangement, such

shares, instead of being surrendered to the company, are transferred to a nominee of the company then there

will be no reduction of capital. Surrender may be accepted by the company under the same circumstances

where forfeiture is justified. It has effect of releasing the shareholder whose surrender is accepted from

further liability on shares.

The Companies Act contain no provision for surrender of shares. Thus, surrender of shares is valid only

when AOA provide for the same and:

i) Where forfeiture of such shares is justified or

ii) When shares are surrendered in exchange for new shares of same nominal value.

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Both forfeiture and surrender lead to termination of membership. But in the former case, it is at the initiative

of company and in the latter case at the initiative of member or shareholder.

(b) Forfeiture of Shares: A company may if authorized by its articles, forfeit shares for non-payment of calls

and the same will not require confirmation of the TRIBUNAL. Where power is given in the articles, it must

be exercised strictly in accordance with the regulations regarding notice, procedure and manner stated

therein, otherwise the forfeiture will be void. Forfeiture will be effected by means of Board resolution. The

power of forfeiture must be exercised bona fide and in the interest of the company.

(c) Diminution of Capital: Diminution of capital is the cancellation of the unsubscribed part of the issued

capital. It can be effected by an ordinary resolution provided articles of the company authorizes to do so. It

does not need any confirmation of TRIBUNAL.

(d) Redemption of redeemable preference shares.

(e) Buy-Back of shares u/s 68.

Q.3. Distinguish between: Alteration of Share Capital & Reduction of Share Capital.

Ans. Following are the main points of difference between alteration of share capital & reduction of share capital:

Points Alteration of Share Capital Reduction of Share Capital

Meaning Alteration of share capital is governed by the

provisions of Section 64 of the Companies

Act, 2013.

Reduction of share capital is governed by

the provisions of Section 66 of the

Companies Act, 2013.

Resolution Alteration of share capital is required to be

done by ordinary resolution.

Reduction of share capital is required to be

done by special resolution.

Confirmation Alteration of share capital is not required to be

confirmed by the Tribunal.

Reduction of share capital is to be

confirmed by the Tribunal

Examples Alteration of share capital may be done in the

following manner:

(1) Increasing its nominal capital by

issuing new shares.

(2) Consolidating and dividing all or any

of its share capital into shares of large

denomination.

(3) Converting fully paid up shares into

stock or vice versa.

(4) Sub dividing its shares into shares of

smaller amount.

(5) Cancelling shares which have not

been taken up and diminishing the

amount of share capital by the amount of

the shares so cancelled.

Reduction of share capital may be done in

the following manner:

(1) Extinguishing or reducing the

liability of members in respect of the

capital not paid up.

(2) Writing off or cancelling any paid

up capital which is in excess of the

needs of the company.

(3) Paying off any paid up share

capital which is in excess of the needs

of the company.

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CHAPTER 2 LIQUIDATION OF COMPANY

MEANING OF LIQUIDATION Liquidation or winding up is a Legal term and refers to the procedure through which the affairs of the

company are wound up by law. Winding up of a company has been defined in the Companies Act 1956 as “The process whereby its life is

ended and its property is administered for the benefit of its creditors & members”. An Administrator

called the Liquidator is appointed and he takes control of the company, collects its assets, pays its debts &

finally distributes any surplus among the members in accordance with their rights.

MODES OF LIQUDIATION/WINDING-UP

According to section 425 of the Companies Act, 1956, winding-up of a company may be in either of the

three ways:

1. Compulsory Winding-up by the Court

2. Voluntary Winding-up

3. Winding-up subject to the supervision of the court.

CONSEQUENCES OF WINDING-UP

The following are the consequences of winding up:

1. An officer called a liquidator is appointed & he takes over the administration of the company. He may

be appointed by High Court, members or by the creditors as the case may be.

2. The powers of the board of directors will cease & will now vest with the liquidator.

3. Winding-up order or resolution of voluntary winding-up shall operate as a notice of discharge to all

the members of the company. Members of company are called ‘Contributories’.

4. Liquidator of the company will prepare a list of contributories who be made liable to contribute to

the assets of the company n case assets are not sufficient to meet the claims of various claimants. In

case there is a surplus in the assets, the liquidator of the company will prepare a list of those

members, who are entitled to share this surplus.

5. Liquidator of the company will collect & realize its assets & distribute the proceeds among right

claimants as per the procedure of the law.

6. Winding-up ultimately leads to dissolution of the company. The company’s life will come to an end &

it will be no more an artificial person in the eyes of law.

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CONTRIBUTORY

According to section 2(26) of the Companies Act, 2013, a contributory is “every person liable to

contribute to the assets of a company in the event of it being wound up & includes a holder of fully

paid up shares in a company but shall have no liabilities of a contributory under the Act whilst retaining

rights of such a contributory. A contributory can be either a present member or a past member.

FRAUDULENT PREFERENCE

Fraudulent preference takes place when one creditor is preferred to another creditor in the matter of

payment of his dues. It has been made in the provisions of section 531 of the Companies Act, 1956* that

every transfer of property or money made within 6 months before the commencement of winding up

which amounts to fraudulent preference is invalid.

VOLUNTARY TRANSFER

All voluntary transfers made by the company within a period of one year or before the presentation or

petition for winding up or the passing of a resolution for voluntary winding up, are void as against the

liquidator.

ORDER OF PAYMENT

The amount received from the assets not specifically pledged & the amounts contributed by the

contributories must be distributed by the liquidator in the following order:

1. Expenses of winding up including the liquidators remuneration.

2. Creditors secured by the floating charge on the assets of the company.

3. Preferential creditors

4. Unsecured creditors

5. The surplus, if any, amongst the contributories (i.e., preference shareholders & equity shareholders)

according to their respective rights & interests.

PREFERENCE SHAREHOLDER

Preference Shareholders get the priority over the equity shareholders as regards the payment of their

capital & the dividend payable up to the date of winding up. The holders of cumulative preference shares

are entitled to arrears of dividend if there is a surplus after the return of the amount of the equity

shareholders or if the Articles state that arrears of preference dividend are to be paid before anything is

paid to equity shareholders.

EQUITY SHAREHOLDERS

Any surplus left after making payment to preference shareholders is distributed among the equity

shareholders if all the shares are equally paid up. But if the shares are called in unequal proportions, the

liquidator should see that the capital contribution by the shareholders should be the same. It may be

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remembered that calls in advance will have priority in repayment over the paid up share capital of that

class.

PREFRENTIAL CREDITORS

Under Section 327 of the Companies Act, 2013 the following creditors are treated as preferential

creditors:

1. All revenues, taxes, cesses & rates payable to the government or local authority will be treated as

preferential creditors provided that it must become due within 12 months before the date of

winding up.

2. 4 months salary & wages due to the employees of the company will be treated as preferential

provided that it must become due within 12 months before the date of winding up. Maximum of `

20,000 will be treated as preferential creditors.

3. All accrued holiday remuneration payable to an employee due to termination of his employment

is treated as preferential. (No Limit)

4. Any sum payable by the company under the Employees State Insurance Act, 1948 will be treated

as preferential provided that it must become due within 12 months before the date of winding

up. (No Limit)

5. Compensation payable by the company under Workmen Compensation Act, 1923 is treated as

preferential. (No Limit)

6. Any sum payable by the company to its employees from a Provident Fund, Pension Fund,

Gratuity Fund or any other Fund maintained for the welfare of the employees. (No Limit)

7. The expenses of investigation held Under Section 210 of the Companies Act, 2013 will be treated

as preferential.

PREPARATION OF THE STATEMENT OF AFFAIRS (Section 274 of Companies Act)

The officers and directors of a company under liquidation must, according to section 454 read with

section 511A, make out and submit, within 30 days of the Tribunal order (or within such extended

time, not exceeding three months, as the liquidator or the Tribunal may allow), a statement showing the

following:

a) The assets of the company, stating separately the cash balance in hand and at bank, if any, and the

negotiable securities, if any, held by the company;

b) Its debts and liabilities;

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c) The names, residences and occupations of its creditors, stating separately the amount of secured and

unsecured debts and in the case of secured debts, particulars of the securities given, whether by

company or its officers, their value and dates on which they were given;

d) The debt due to the company and the names, residences and occupations of the persons from whom

the amount likely to be realized on account thereof;

e) Such further or other information as may be prescribed, or as the official liquidator may require.

The statement has to be prepare even in case of voluntary winding up. The statement has to be

properly verified by an affidavit. It has to be open for inspection by any person stating himself in writing

to be creditors or contributory of the company, on payment of prescribed fee. The person concerned can

also acquire a copy or extract from it. The form in which it has to be made out has been prescribed by the

Supreme Court.

STATEMENT OF AFFAIRS AND LISTS TO BE ANNEXED

Statement as to the affairs of.... Ltd .• on the ...... day of... 20 , being the date of the winding up order [or

order appointing Provisional Liquidator or the date directed by the Official Liquidator as the case may be]

showing assets at estimated realisable values and liabilities expected to rank .

Lists A to G containing details of assets and liabilities and supplementary schedules are not given. Their

content is as given below:

1. List A gives a complete list of assets which are not in the hands of a pledged in favour of secured

creditors.

2. List B gives the details which are specifically pledged with creditors both fully secured and partly

secured.

3. List C is a list of preferential creditors and the amount due.

4. List D is the details of debentures holders having a floating charge.

5. List E contains names of unsecured creditors and the amount due.

6. List F gives the details and holding of preference shareholders

7. List G is a list of equity shareholders together with the amount of shares held.

8. List H is a statement showing how the surplus or deficiency in the statement of affairs arose as a

result of profits and losses of the given.

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LIQUIDATORS FINAL STATEMENT OF ACCOUNTS The main job of the liquidator is to collect the assets of the company & realise them & distribute the

money realised among right claimants. For this purpose he maintains a cash book for recording the

receipts & payments & is required to submit an abstract of the cash book to the court in case of

compulsory winding up & to the company in case of voluntary winding up. The liquidator is also required

to prepare an account known as the Liquidator’s Final Statement of accounts after the affairs of the

company are fully wound up.

B-List Contributories (M. Imp)

On the appointment of Liquidator, director’s position will stand automatically vacated and the

shareholders will be referred to as contributories.

Shareholders who have transferred that partly paid shares within one year earlier to date of winding

up will be placed in “B” List. Such contributories will be referred to as “B” List of contributories.

Liability of B-List Contributory will crystallize only (i) When the existing assets available with the

liquidator are not sufficient to cover the liabilities; (ii) When the existing shareholders (A-List

Contributory) fails to pay the amount due on the shares to the liquidator.

Liquidator is expected to dispose the assets off to pay off liabilities. In case the disposal of assets was not

sufficient to discharge the liabilities, then the liquidator can claim from “A” List of contributories towards

their unpaid capital towards the company. If “A” List of contributories are not meeting the liabilities,

then liquidator can call upon “B” List of contributories to recover money towards unpaid portion of the

capital.

The liquidator can call upon only against transfer of partly paid shares effected during within one year

earlier to the date of winding up and transmission of shares will not come under this purview. If there

were to be more than one such contributories, then the liability will be fixed against that many

contributories in the ratio in which they are expected to contribute towards the capital.

In no case, such fixation of liabilities can exceed the statutory liability (towards unpaid capital).

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Accounting Gym – Liquidation of Companies

Q.1. The following items were contained in the balance Sheet of a company under liquidation since 31st October, 2012:

`

5% Debentures 26,000

Loan from Bank guaranteed by directors (which was implemented) 39,000

Sundry Trade Creditors (including ` 2,000 for local taxes which became 1,17,000

Due and payable in year 2010)

Income tax for Assessment Year 2009-10 ` 3,250

Income tax for Assessment Year 2010-11 ` 13,650

Income tax for Assessment Year 2011-12 ` 650

` 17,550

Assessment for the year 2009-10 was completed on 30.09.2011 and for 2010-11 and 2011-12 on 31.7.2012.

Salaries and Wages for one month (including ` 1,950 payable to Managing Director) 5,590. Calculate Amount of

Preferential Creditors.

[Ans. ` 17,940.]

Q.2. From the following particulars of General Trading Company Limited prepare the Statement of Affairs and

Deficiency account as at 31st March, 2012, the date of winding-up order:

`

10,000 Equity Shares of ` 10 each ` 5 per share called up

10,000, 6% preference Shares of ` 10 each fully paid

Calls in Arrears on Equity Shares (Estimated to Produce ` 1,000)

5% First Mortgage Debentures secured by a floating charge upon the whole of the assets

of the company exclusive of uncalled capital

Fully secured Creditors (value of securities ` 17,500)

Partly Secured Creditors (value of securities ` 5,000)

Preferential Creditors for Rates, Taxes and Wages etc.

Bills Payable

Unsecured Creditors

Bank Overdraft

Bills Receivable

Bills Discounted (One Bill for ` 5,000 known to be bad)

Book Debts:

Good

Doubtful (estimated to produce 50 paise in a rupee)

Bad

Land and Building (estimate to produce ` 50,000)

Stock in trade (estimate to produce ` 20,000)

Machinery, Tools etc. (estimated to produce ` 1,000)

Cash in hand

Profit and Loss Account (Dr. ) including ` 96,000 loss after 31st March, 2009

50,000

1,00,000

2,000

75,000

15,000

10,000

3,000

50,000

35,000

5,000

7,500

20,000

5,000

3,500

3,000

75,000

25,000

2,500

50

1,96,950

[Ans. Estimated Deficiency ` 2,38,200]

Q.3. The following information is extracted from books of Mehsana Limited on 31st July, 2012 on which date a

winding up order was made.

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Unsecured creditors

Salaries due for five months

Manging directors‟ remuneration

Bills payable

Debtors – good

Doubtful (estimated to produce ` 62,000)

Bad

Bills receivable (good ` 10,000)

Bank Overdraft

Land (estimated to produce ` 5,00,000)

Stock (estimated to produce ` 5,80,000)

Furniture and fixtures

Cash in hand

Estimated liability for bills discounted

Secured creditors holding first mortgage on land

Partly secured creditors holding second mortgage on land

Weekly wages unpaid

Liabilities under workmen‟s compensation Act

Income tax due

5000, 9% Mortgage debentures of 100 each interest payable to 30th

June and 31st

December, paid 30th

June, 2012

Share Capital:

20,000 10% preference shares of ` 10 each

50,000 Equity shares of ` 10 each

General reserve since 31st December, 2004

3,50,000

20,000

30,000

1,06,000

4,30,000

1,30,000

88,000

16,000

40,000

3,60,000

8,20,000

80,000

4,000

60,000

4,00,000

2,00,000

6,000

2,000

8,000

5,00,000

2,00,000

5,00,000

1,00,000

In 2009, the company earned profit of ` 4,50,000 but thereafter it suffered trading losses totaling ` 5,84,000. The

Company also suffered a speculation loss of ` 50,000 during the year 2010. Excise authorities imposed a penalty

of ` 3,50,000 in 2011 for evasion of tax which was paid in 2012.

From the foregoing information, prepare the Statement of Affairs and the Deficiency Account.

[Ans. Estimated Deficiency ` 7,59,750.]

Q.4. The position of Valueless ltd. on its liquidation is as under:

Issued and paid up Capital:

5,000 10% preference shares of ` 100 each fully paid

7,000 Equity shares of ` 100 each fully paid.

6,000 Equity Shares of ` 50 each ` 30 per share paid.

Calls in Arrears are ` 20,000 and Calls received in Advance ` 17,000. Preference Dividends are in arrears for one

year. Amount left with the liquidator after discharging all liabilities is ` 8,27,000. Articles of Association of the

company provide for payment of preference dividend arrears in priority to return of equity capital. You are

required to prepare the Liquidators final statement of account.

[Ans. Final payment to ESHs ` 2,80,000.]

Q.5. Z limited has gone into liquidation on 10th

May, 2012. The details of members, who have ceased to be member

within one year „b‟ contributors, are given below. The debts that could not be paid out of realization of assets and

contribution from present members („A‟ contributors) are also given their date-wise break up. Shares are of ` 10

each and ` 6 are paid-up.

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Shareholders No. of shares

transferred

Date of transfer Proportionate unpaid

debts `

X

Q

R

S

T

1000

1200

1500

800

500

20-04-2011

15-05-2011

18-09-2011

24-12-2011

12-03-2012

3000

5000

9200

10500

11000

Determine the amount realizable from each person.

[Ans. Amount to be paid to Q ` 1,500; R ` 4,125; S ` 3,000 and T 2,000.]

Q.6. Z Ltd. went into voluntary liquidation on 31st December, 2012. Balance sheet of the company as on that date

stood as follows:

`


i) Share Capital

20,000, 10% Cumulative preference

Shares of ` 100 each, fully paid-up

10,000 Equity shares of ` 100 each,

` 75 paid-up

30,000 Equity shares of ` 100 each,

` 60 paid-up

ii) Reserves and surplus

Profit and loss account

iii) Non-current Liabilities

15% Debentures secured by a floating

charge

iv) Current Liabilities

Trade Payables

Outstanding interest on debentures

20,00,000

7,50,000

18,00,000

12,75,000

1,50,000

45,50,000

(11,25,000)

10,00,000

14,25,000

Total 58,50,000

II. Assets `

i) Non-current assets

Land and Building

Plant and Machinery

Furniture and fixtures

ii) Current Assets

Stock

Trade receivables

Cash and bank balance

10,00,000

25,00,000

4,00,000

5,50,000

11,00,000

3,00,000

39,00,000

19,50,000

Total 58,50,000

Other Information:

i) Preference share dividend are in arrears for the last two years.

ii) Trade payables include preferential creditors of ` 1,52,000.

iii) The assets were sold and realized as follows:

Particulars `

Land and building 12,00,000

Plant and Machinery 20,00,000

Furniture and fixtures 3,00,000

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Stock 6,00,000

Trade receivables 8,00,000

iv) Expenses of liquidation were ` 1,09,000.

v) Liquidator is entitled to receive commission of 3% on assets realized except cash.

vi) Preference shareholders have right to dividend at the time of liquidation.

vii) The final payment including those on debentures is made on 30th

June, 2013.

You are required to prepare liquidator‟s final statement of account.

[Ans. Call per Share ` 2.65 and Refund per Share ` 12.35 .]

Q.7. In a liquidation which commenced on April 2, 1997 certain creditors could not receive payments out of the

realization of assets and out of the contributions from “A” list contributories. The following are the details of

certain transfers which took place in 1996 and 1997.

Shareholders No. of Shares

Transferred

Date of Ceasing to be a

member

Creditors Remaining unpaid

and outstanding at the date of

ceasing to be member

X

A

B

C

D

1,500

1,000

1,500

300

200

1st March, 1996

1st May, 1996

1st July., 1996

1st Nov., 1996

1st Feb., 1997

4,000

6,000

7,500

8,000

9,500

All the shares were ` 10 each, ` 6 paid up ignoring expenses of and remuneration to liquidators, etc. show the

amount to be realized from the various persons listed above.

[A : ` 2,000; B : ` 4,125; C : ` 1,125 and D : ` 800]

Q.8. Liquidation of YZ Ltd. commenced on 2nd

April, 2004. Certain creditors could not receive payments out of the

realization of assets and out of the contributions from A list contributions. The following are the details of certain

transfers which took place in 2003 and 2004:


transferred


member

Creditors remaining unpaid

and outstanding on the date of

such transfer (`)

A

P

Q

R

S

2,000

1,500

1,000

500

300

1st

March, 2003

1st

May, 2003

1st

October, 2003

1st

November, 2003

1st

February, 2003

5,000

3,300

4,300

4,600

6,000

All the shares were of ` 10 each, ` 8 per share paid up. Show the amount to be realized from the various persons

listed above ignoring expenses and remuneration to liquidator etc.

[P : ` 1,500; Q : ` 1,555; R : ` 966 and S : ` 600]

Q.9. The position of Valueless ltd. on its liquidation is as under:

Issued and paid up capital

3,000 11% preference shares of ` 100 each fully paid.

3,000 Equity shares of ` 100 each fully paid

1,000 Equity Shares of ` 50 each ` 30 per share paid.

Calls in Arrears are ` 10,000 and Calls received in Advance ` 5,000. Preference Dividends are in arrears for one

year. Amount left with the liquidator after discharging all liabilities is ` 4,13,000. Articles of Association of the

company provide for payment of preference dividend arrears in priority to return of equity capital. You are

required to prepare the liquidators final statement of account.

[Refund Per Share : Equity Share ` 30 (F.V. ` 100) and Call ` 5 (F.V. ` 50)]

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Q.10. From the data relating to a company which went into voluntary liquidation, you are required to prepare the

liquidator‟s Final Statement of Account.

i) Cash with liquidators (after all assets are realized and secured creditors and debentrueholders are (paid) is `

7,50,000.

ii) Preferential creditors to be paid ` 35,000.

iii) Other unsecured creditors ` 2,30,000.

iv) 5,000, 10% preference shares of ` 100 each fully paid.

v) 3,000 equity shares of ` 100 each, ` 75 per share paid up.

vi) 7,000 equity shares of ` 100 each, ` 60 per share paid up.

vii) Liquidator‟s remuneration is 2% on payments to preferential and other unsecured creditors.

[Ans. Call per Share ` 6.53 and Refund per Share ` 8.47 .]

Q.11. A company went into liquidation whose creditors are ` 36,000 includes ` 6,000 on account of wages of 15 men at

` 100 per month for 4 months immediately before the date of winding up; ` 9,000 being the salaries of 5

employees at ` 300 per month for the previous 6 months, Rent for godwon for the last six months amounting to `

3,000; Income tax deducted out of salaries of employees ` 1,000 and Directors fees ` 500; in addition it is

estimated that the company would have to pay ` 5,000 as compensation to an employee for injuries suffered by

him, which was contingent liability not accepted by the company and not included in above said creditors figure.

Find the amount of Preferential Creditors.

[Ans. ` 18,000 .]

Q.12. The summarized Balance Sheet of Full Stop Limited as on 31st March 2011, Being the date of voluntary winding

up is as under:


Share Capital:

5,000 10% Cumulative Preference

share of ` 100 each, fully paid-up

Equity Share Capital:

5,000 Equity shares of ` 100 each `

60 per share called and paid up

5,000 Equity shares of ` 100 each `

50 per share called up and paid up

Security Premium

10% Debentures

Preferential Creditors

Bank Overdraft

Trade Creditors

5,00,000

3,00,000

2,50,000

7,50,000

2,10,000

1,05,000

4,85,000

6,00,000

Land and Buildings

Plant and Machinery

Stock in Trade

Book Debts


5,20,000

7,80,000

3,25,000

10,25,000

5,50,000

32,00,000 32,00,000

Preference Dividend is in arrears for three years. By 31.3.2011 the assets realized were as follows:

`

Land and Building 6,20,000

Stock in trade 3,10,000


Book Debts 6,60,000

Expenses of liquidation are ` 86,000. The remuneration of the liquidator is 2% of the realization of assets. Income

tax payable on liquidation is ` 67,000. Assuming that the final payments were made on 31-3-2011, prepare the

Liquidator‟s Statement of Account.

[Ans. Refund per Share ` 10.10 and ` 0.10 .]

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Q.13. M/s ABC Ltd. has gone into liquidation on 25th

June, 2011. Certain creditors could not receive payments out of

the realization of assets and out of the contributions from A list contributories. The following are the details of

certain transfers which took place in the year ended 31st March, 2011:


transferred


member

Creditors remaining unpaid

and outstanding on the date of

such transfer (`)

P

Q

R

S

T

4000

3000

2400

1600

1000

10.05.2010

22.07.2010

15.09.2010

14.12.2010

09.03.2011

9,000

12,000

13,500

14,000

14,200

All the shares are of ` 10 each, ` 8 per share paid up. Show the amount to be realized from the persons listed

above. Ignore remuneration to liquidator and other expenses.

[Q : ` 4,500; R : ` 4,320; S : ` 3,188 and T : ` 2,000]

Q.14. What is meant by „B-List Contributories‟? State their liability in the case of winding-up of a company.

[Dec‟16 – 3 marks]

Q.15. Following are the details of various balances relaing to Strong Ltd. which went into liquidation on 31st March, 2016:

Liquidator realized ` 5,25,000 from sale of assets and paid-off ` 1,50,000 to secured creditors leaving a

balance of ` 3,75,000 with him

Preferential creditors ` 17,500

Unsecured creditors ` 1,15,000

2,500, 10% Preference Shares of ` 100 each fully paid

3,500 Equity shares of ` 100 each, ` 60 paid-up.


Liquidator is entitled to 2.5% remuneration on payments to preferential and other unsecured creditors.

Prepare liquidator‟s final statement of account. [Dec‟16 – 5 marks]

Q.16. From the following, Calculate Preferential Payments u/s 530 in case of X Ltd. Which went into liquidation on

1.4.2006.

1. Owing to Government for Tax due and payable

For the year 2004 – 2005 ` 22,000.

For the year 2005 – 2006 ` 21,000

2. Owing to Government for Telephone, Electricity and Water (` 20,000) due and payable on 31st March 2006.

3. Wages and Salaries of a supervisor „X‟ for 5 months @ ` 4,000 per month.

4. Wages and Salaries of a supervisor „Y‟ for 4 months @ ` 6,000 per month.

5. Accrued holiday Remuneration payable to a supervisor „Z‟ ` 21,000.

6. Compensation due to a supervisor „W‟ ` 21,000 under the Workmen Compensation Act, 1923.

7. Provident Fund, Pension fund and Gratuity Fund due to a supervisor „P‟ ` 21,000.

[Total Preferential Payments u/s 530 ` 1,20,000.]

Q.17. A company went into liquidation whose creditors are ` 36,000 includes `6,000 on account of wages of 15 men at

` 100 per month for 4 months immediately before the date of winding up; ` 9,000 being the salaries of 5

employees at ` 300 per month for the previous 6 months, Rent for godwon for the last six months amounting to `

3,000; Income-tax deducted out of salaries of employees ` 1,000 and Directors fees ` 500; in addition it is

estimated that the company would have to pay ` 5,000 as compensation to an employee for injuries suffered by

him, which was contingent liability not accepted by the company and not included in above said creditors figure.

Find the amount of Preferential Creditors.

[Total Preferential Payments u/s 530 ` 18,000.]

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Q.18. Calculate Call on shares in following case:

Balance leftover with liquidator ` 5,00,000. Capital structure of Company:

2000 Equity share of ` 100 each ` 90 paid-up

6000 Equity share of ` 150 each ` 120 paid-up

1000 Preference share of ` 50 each ` 40 paid-up.

[Refund Per Share : Preference Share ` 40, Equity Share Capital ` 50 & ` 60]

Q.19. (a) Before paying the creditors totaling ` 3,04,000 the liquidators of a company were left

with ` 1,25,000. The shares of the company were as follows:

i) 3,000 9% preference shares of ` 100 each, ` 80 paid.

ii) 2,000 Equity shares of ` 100 each, ` 60 paid.

iii) 3,000 Equity shares of ` 100 each, ` 75 paid.

[Call Per Share : Preference Share ` 8, Equity Share Capital ` 40 & ` 25]

(b) In a company where the shares are as mentioned above, the liquidator is left with ` 2,20,000 after paying

off creditors.

What will be the call on shares?

[Refund Per Share : Preference Share ` 80, Equity Share Capital ` (13) & ` 2]

Q.20. The Balance Sheet of Asco Limited as on 31st March 1993:

The company went into liquidation on 1st April, 1993. The assets were realized as follows:

Equity and Liabilities `

Shareholders Funds


2,000 Equity Shares of ` 100 each fully paid

2,000 Equity Shares of ` 100 each, ` 75 paid

Profit & Loss A/c

Non Current Liabilities

Loan-Bank (secured on Stock)

Current Liabilities

Creditors

Income Tax payable

1,00,000

2,00,000

1,50,000

-300,000

1,00,000

3,50,000

10,000

6,10,000

Non Current Assets

Machinery

Furniture

Current Assets

Stock

Debtors

Cash at Bank

1,90,000

10,000

1,20,000

2,40,000

50,000

6,10,000

`

Machinery

Furniture

Stock

Debtors

Liquidation expenses amounted to

1,66,000

8,000

1,10,000

2,30,000

4,000

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The liquidators are entitled to a commission at 2% on amount paid to unsecured creditors except preferential

creditors. Calls on partly paid shares were made but the amount due on 200 shares were found to be irrecoverable.

Prepare Liquidator‟s Statement of Account.

[Refund Per Share : Preference Share ` 100, Equity Share ` 10 & ` (15)]

Q21. A company went into liquidation on the 31st December, 1992, when the following Balance Sheet was prepared:

A Liquidator realized the assets as follows:

The expenses of liquidation amounted to ` 1,500 and the liquidators‟ remuneration was agreed at 2% on the all

assets realized (excluding cash) and 2% on the amount paid to the unsecured creditors excluding preferential

creditors.

You are required to prepare the Liquidators Final Account showing the distribution.

[Liquidator‟s Remuneration ` 6,037]

Equity and Liabilities `

Shareholders Funds

Authorized Capital

30,000 shares of ` 10 each

Subscribed and paid up capital

19,500 Shares of ` 10 each

Profit & Loss A/c

Current Liabilities

Sundry Creditors

Preferential 24,200

PartlySecured 55,310

Unsecured 99,790

Bank Overdraft (unsecured)

3,00,000

----------

1,95,000

-,98,580

1,79,300

12,000

287,720

Assets `

Non Current Assets

Goodwill

Leasehold Property

Plant & Machinery

Current Assets

Stock

Sundry Debtors

Cash

50,000

48,000

65,500

56,800

64,820

2,600

287,720

`

Leasehold property which was used in the first

Instance to pay the party secured creditors pro rata

Plant & Machinery

Stock

Sundry Debtors

35,000

51,000

39,000

58,000

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THEORY MASALA

Q.1. State the sequence of payments in winding up of company.

Ans. In case of company liquidation, payments are required to be made in following sequence:

(1) Money and assets held in trust will be paid first as these are not part of the assets of the company.

(2) Next payments is to persons as per the right conferred by the statutes. Right of secured creditors is subject to

any statutory right.

(3) Next comes – payments to secured creditors subject to pari passu charge of workmen‟s dues.

(4) Next priority is given to balance of workmen‟s dues and secured creditors only to the extent they got less

amount on account of payment for workmen‟s dues as per clause (3).

(5) Next priority is cost and expenses of winding up including liquidator‟s remuneration.

(6) Next priority is payment for income tax and central sales tax due as informed under respective Acts by the

prescribed authorities.

(7) After above payments, „preferential payments‟ as per Section 327 are paid.

(8) Next priority is payments to unsecured creditors.

(9) Next priority is payments to preference shareholders.

(10) After making all above payments if still surplus remains then it will be paid to equity shareholder. They got

the amount left over in proportion to their shareholding.

Q.2. Explain how the dues of workmen‟s are protected by ranking pari passu charge with secured creditors?

Ans. As per Section 325 of the Companies Act, 2013, in the winding up of an insolvent company, the same rules shall

prevail and be observed with regard to debts provable, the valuation of annuities and future and contingent

liabilities and the respective rights of secured and unsecured, as are in force for the time being under the law of

insolvency with respect to the states of persons adjudged insolvent.

Further it is provided that the security of every secured creditor shall be deemed to be subject to a pari passu

charge in favour of the workmen to the extent of the workmen‟s portion of dues. If the secured creditors stand

outside the liquidation and enforce his security the following provisions shall apply.

(a) The liquidator shall be entitled to represent the workmen and enforce the pari passu charge in favour of

workmen.

(b) If liquidator realizes any amount by enforcement of the charge. It will be distributed ratably (i.e. in

proportion) for discharge of workmen‟s dues.

Q.3. Explain the „Overriding Preferential Payments‟ as per the Companies Act, 2013.

Ans. As per Section 326 of the Companies Act, 2013, certain dues are to be settled in the case of winding up of a

company even before the payments to other debts. Section 326 states that in the event of winding up of a

company, workmen‟s dues and debts due to secured creditors, to the extent such debts rank pari passu with

workmen‟s dues, shall be paid in priority to all other debts. The workmen‟s dues and debts to secured creditors

shall be paid in full, unless the assets are insufficient to meet them, in which case they shall price in equal

proportions.

Q.4. Explain the „Preferential Payments‟ as per the Companies Act, 2013.

Ans. As per Section 327 of the Companies Act, 2013, the creditors that have to be paid in priority to unsecured

creditors or creditor having a floating charge. Payments to such creditors are known as Preferential Payments.

These are following:

i) All revenues, taxes, cesses and rates, becoming due and payable by the company within 12 months before

„relevant date‟.

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DTC

ii) All wages or salary of any employee (other than workmen) in respect up to 4 months within 12 months

prior to relevant date. The maximum amount that will be given priority will be amount as notified under

this section.

iii) All accrued holiday remuneration becoming payable to any employee on account of winding up. If some

advance was given to employee against holiday remuneration, he will get priority only for the balance

amount.

iv) All contributions payable to ESIC during 12 months previous to relevant date.

v) All sums due as compensation to employees under the Workmen‟s Compensation Act, 1923.

vi) All sums due to any employee from a provident fund, pension fund, gratuity fund or any other fund, for the

welfare of the employees maintained by the company.

vii) Expenses of any investigation ordered by Central Government u/s 2013 & 216.

Q.5. State the provisions relating to appointment of liquidator as per the Companies Act, 2013?

Ans. According to Section 275 of the Companies Act, 2013, for the purposes of winding up, the Tribunal shall appoint

an official liquidator or a liquidator from the panel of the Company Liquidator at the time of the passing of the

order of winding up.

Other important points relating to appointment of liquidator are as follows:

The provisional liquidator or the company liquidator shall be appointed from a panel maintained by the

Central government consisting of the names of Chartered Accountants, Advocates, Company Secretaries,

Cost Accountants or firms or bodies corporate and other professionals notified by the Central Government.

Where a professional liquidator is appointed, the Tribunal may limit an restrict his powers by making

appropriate order.

The Central Government may remove the name from the panel on the grounds of misconduct, fraud,

misfeasance, breach of duties or professional incompetence. Before removing the name of liquidator the

Central Government shall give him a reasonable opportunity of being heard.

The terms and conditions of appointment of a liquidator and the fee payable shall be specified by the Tribunal

on the basis of task, experience, qualification of such liquidator and size of the company.

On appointment the liquidator shall file a declaration within 7 days in the prescribed from disclosing conflict

of interest or lack of independence in respect of his appointment, with the Tribunal and such obligation shall

continue throughout the term of his appointment.

Q.6. Explain the provisions relating to maintenance of books and audit of accounts maintained by liquidator as

per the Companies Act, 2013?

Ans. As per Section 293 of the Companies Act, 2013, the liquidator shall keep proper books in the prescribed manner.

The liquidator shall make entries or minutes of proceedings at meetings and of other prescribed matters.

Any creditor or contributory may inspect any books, personally or through his agent but subject to the control of

the Tribunal.

As per Section 294, the liquidator shall maintain proper and regular books of account including accounts of

receipts and payments made by him in prescribed form.

An amount of the receipts and payments has to be submitted by the liquidator twice in each year to the Tribunal in

prescribed form in duplicate.

The Tribunal shall get the accounts audited and for the purpose of the audit, the Company Liquidator shall furnish

to the Tribunal with such vouchers and information as the Tribunal may require.

One copy of audited books shall be filed by the liquidator with the Tribunal, and the other copy shall be delivered

to the ROC which shall be open to inspection by any creditor, contributory or person interested.

Q.7. How statement of affairs is prepared in case of liquidation of company? Also give the format of statement

of affairs?

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DTC

Ans. The Companies (Court) Rules, 1959, prescribe that the Statement of Affairs should be prepared in Form 57

contained in the Rules.

The broad lines on which the Statement of Affairs is prepared are the following:

(1) Include assets on which there is no specific or fixed charge at the value they are expected to realize. Students

should note to include calls in arrear but not uncalled capital.

(2) Include assets on which there is a fixed charge. The amount expected to be realized would be compared

with the amount due to the creditor concerned. Any surplus is to be extended to the other column. A deficit

(the amount owed to the creditor exceeding the amount realizable from the asset) is to be added to unsecured

creditors.

(3) The total of assets in paragraph (1)and any surplus from assets mentioned in paragraph (2) is available for all

the creditors (except secured creditors already covered by specifically mortgaged assets).

(4) From the total assets available, the following should be deducted one by one and balance struck at each

stage:

- Preferential creditors;

- Debentures having a floating charge; and

- Unsecured creditors.

If a minus balance emerges, there would be deficiency as regards creditors, otherwise there would be a

surplus.

(5) The amount of total paid-up capital (giving details of each class of shares) should be added and the figure

emerging will be deficiency (or surplus) as regards members.

Q.8. Give the lists which should accompany the statement of affairs.

Ans. Statement of affairs should accompany eight lists. These are as follows:

List A: Assets not specifically pledged

List B: Assets specifically pledged

List C: Preferential creditors for rates, taxes, salaries, wages and otherwise

List D: List of debenture holders secured by a floating charge

List E: Unsecured creditors

List F: List of preference shareholders

List G: List of equity shareholders

List H: Deficiency or surplus account

Q.9. Write short notes on: Deficiency account.

Ans. Deficiency Accounts is prepared in the case of a company in liquidation to explain in nutshell how the company

lost money during its existence. This amount explains the deficiency or surplus. It is divided into two parts. The

first part starts with the deficit on the given date (as the liquidator specified, the minimum being three years) and

contains every item that increase the deficiency. The second part starts with the surplus on the given date and

includes all profits. If the total of the first exceeds the second, there would be a deficiency to the extent of the

difference and a surplus vice-versa. This statement is a necessary adjunct to the statement of affairs as regards,

members and the deficiency shown in this account must agree with the one shown by the statement of affairs.

Q.10. What are the contents of “Liquidators Statement of Account”? How frequently does a liquidator have to

submit such statement?

Ans. In case of voluntary winding up, the statement prepared by the liquidator showing receipts and payment of cash is

called “Liquidator‟s Statement of Account” (Form No. 156). In case of compulsory winding up, the statement is

known as Official Liquidator‟s Final Account (Form No. 156).

While preparing the Statement of Account, the following points should be noted:

(1) Assets are included in the prescribed order (liquidity).

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DTC

(2) In case of assets specifically charged in favour of creditors, only the surplus from it, if any is entered as

“Surplus from Securities”.

i) Net result of trading entered on the receipts side, profits being added and losses being deducted.

ii) Payment made to redeem securities and cost of execution, i.e., cost of collecting debts, are deducted

from the total receipts.

iii) Payments are made and shown in the following order:

b) Legal charges

c) Liquidator‟s remuneration

d) Liquidation expenses

e) Debenture holders (including interest up to the date of winding up if the company is insolvent and

to the date of payment if it is solvent)

f) Creditors preferential (in actual practice, preferential creditors are paid before debenture holders

having floating charges) unsecured creditors, shareholders for dividends declared but not yet paid;

g) Preference shareholders and

h) Equity Shareholders.

iv) Arrears of dividends on cumulative preference shares should be paid up to the date of winding up.

v) In case of partly paid shares, it should be seen whether any amount is to be called up on such shares.

Q.11. Define the term „contributory‟ as per the Companies Act, 2013.

Ans. According to Section 2(26) of the Companies Act, 2013, “Contributory” means a person liable to contribute

towards the assets of the company in the event of its being wound up.

Explanation: A person holding fully paid-up shares in a company shall be considered as a contributory but shall

have no liabilities of a contributory under the whilst retaining rights of such a contributory. In respect of liability

of present members they are called as „List A‟ contributories and in respect of liability for past members they are

called as „List B‟ Contributories. Contributories can file a petition for winding up as per Section 272.

Q.12. What are the provisions made for settlement of list of contributes and application of assets of the

Companies Act, 2013?

Ans. As per Section 285 of the Companies Act, 2013, after the passing of a winding up order, the Tribunal shall settle

a list of contributories. While settling the list of contributories, the Tribunal shall include every person who shall

be liable to contribute to the assets of the company, subject to the following conditions namely:

(a) A member shall be liable to contribute if he has cease to be a member for less than 1 year before the

commencement of the winding up.

(b) A member shall be liable to contribute in respect of any debt or liability of the company contracted before he

ceased to be a member.

(c) A member shall be liable to contribute only if it appears to the Tribunal that the present members are unable

to satisfy the contributions required by them.

(d) In the case of a company limited by shares, contribution is limited to amount unpaid on the shares when he

was member.

(e) In the case of a company limited by guarantee, contribution required will be maximum up to amount

guaranteed plus amount unpaid on shares.

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CHAPTER 3 CONSOLIDATION OF ACCOUNTS

MEANING OF HOLDING AND SUBSIDIARY COMPANIES

According to section 2(46) of the Companies Act, 2013, “holding company”, in relation to one or more

other companies, means a company of which such companies are subsidiary companies.

According to section 2(87) of the Companies Act, 2013, “subsidiary company” or “subsidiary”, in relation

to any other company (that is to say the holding company), means a company in which the holding

company—

2. controls the composition of the Board of Directors; or

3. exercises or controls more than one-half of the total share capital either at its own or together

with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of

subsidiaries beyond such numbers as may be prescribed. For the purposes of this clause,—

4. a company shall be deemed to be a subsidiary company of the holding company even if the

control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the

holding company;

5. the composition of a company’s Board of Directors shall be deemed to be controlled by another

company if that other company by exercise of some power exercisable by it at its discretion can

appoint or remove all or a majority of the directors;

6. the expression “company” includes any body corporate;

7. “layer” in relation to a holding company means its subsidiary or subsidiaries. The definition of a subsidiary as per the 2013 Act includes associates and joint ventures. Explanation with Example Suppose, H is holding company of S because 51 % shares are of H in S. S is also of holding Company of R

because S have power to appoint the board of directors of R Company and then H is also holding

Company of R.

PREPARATION OF CFS AS PER COMPANIES ACT, 2013

The Companies Act 1956 Act does not require preparation of consolidated financial statements (‘CFS’).

However, listed entities are required to prepare CFS (as per SEBI regulations) . The Companies Act 2013

has made preparation of consolidated accounts mandatory for companies having one or more

subsidiaries or associates or joint ventures. According to sub section 3 of the section 129 of the

Companies Act, 2013, where a company has one or more subsidiaries or associates or joint ventures, it

shall, in addition to its financial statements for the financial year, prepare a consolidated financial

statement of the company and of all the subsidiaries or associates or joint ventures in the same form and

manner as that of its own which shall also be laid before the annual general meeting of the company

along with the laying of its financial statement.

61

The requirement to prepare CFS is largely consistent with internationally accepted practices. However,

internationally, such requirements apply only to listed companies; and unlisted intermediate entities are

generally exempted. The existing Indian and international accounting practices do not require

preparation of CFS when the Company has investments only in associates and joint ventures (no

subsidiaries). According to the rules, the company shall also attach along with its financial statement, a separate

statement containing the salient features of the financial statement of its subsidiary or subsidiaries or

associates or joint venture in the Form 9.1. The Consolidation of financial statements of the company shall be made in accordance with the

Accounting Standards, subject however, to the requirement that if under such Accounting Standards,

consolidation is not required for the reason that the company has its immediate parent outside India,

then such companies will also be required to prepare Consolidated Financial Statements in the manner

and format as specified under Schedule III to the Act.

SCHEDULE III

GENERAL INSTRUCTIONS FOR THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS

1. Where a company is required to prepare consolidated Financial Statements, i.e., consolidated

balance sheet and consolidated statement of profit and loss, the company shall mutatis mutandis

follow the requirements of Schedule III as applicable to a company in the preparation of balance

Sheet and statement of profit and loss. In addition, the consolidated financial statements shall

disclose the information as per the requirements specified in the applicable Accounting Standards

including the following:

(i) Profit or loss attributable to “minority interest” and to owners of the parent in the statement of

profit and loss shall be presented as allocation for the period.

(ii) “Minority interests” in the balance sheet within equity shall be presented separately from the

equity of the owners of the parent.

2. In Consolidated Financial Statements, the following shall be disclosed by way of additional

information:

Name of the entity In the Net Assets, i.e. total assets minus

total liabilities

Share in profit or loss

As % of

consolidated

net assets

Amount As % of

consolidated

profit or loss

Amount

1 2 3 4 5

Parent Subsidiaries Indian

1.

2.

3.

.

.

Foreign

1.

62

2.

3.

.

.

Minority Interests in all subsidiaries

Associates (Investment as per the

equity method) Indian

1.

2.

3.

.

.

Foreign

1.

2.

3.

.

.

Joint Ventures

(as per proportionate

consolidation/investment as per the

equity method) Indian

1.

2.

3.

.

.

Foreign

1.

2.

3.

.

.

Total

3. All subsidiaries, associates and joint ventures (whether Indian or foreign) will be covered under

consolidated financial statements.

4. An equity shall disclose the list of subsidiaries or associates or joint ventures which have not been

consolidated in the consolidated financial statements along with the reasons of not consolidating.

CONSOLIDATION OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT

Consolidation of Balance Sheet and Profit and Loss Account implies preparation of a single Balance Sheet

and Profit and Loss Account of the holding company and its subsidiaries by aggregating all items of

assets, liabilities, incomes, expenses, etc. of the holding company and its subsidiaries. This is also known

as Group Accounts. Although, the Companies Act, 2013 make it obligatory on the part of the holding

company to prepare group accounts or consolidated accounts in order to have a clear position. The

63

various outside parties concerned with the holding company and its subsidiaries may also be interested

in the consolidated final accounts.

PREPARATION OF CONSOLIDATION BALANCE SHEET

The following are the most important points which reserve special consideration in the preparation of

the consolidated Balance Sheet of the holding company and its subsidiaries:

I : Minority Interest - The claim of outside shareholders in the subsidiary company has to be assessed

and shown as a liability in the consolidated balance sheet. In some cases, minority interest consists only

the face value of the shares held by them. But it may so happen that the subsidiary company may have

some accumulated profits and reserves or accumulated losses. Besides, it may have some profits or losses

on account of revaluation of its assets on the date of acquisition of shares by the holding company. While

calculating the amount of minority interest, all these items have to be taken into account and

proportionate share of all such profits and reserves should be added to the amount of minority interest

while proportionate share of all such losses should be deducted from the minority interest, thus, Minority

Interest = paid-up value of shares held by minority shareholders + proportionate share of the company’s

profits and reserves + proportionate shares of profits on revaluation of assets of the company -

proportionate share of company’s losses – proportionate share of loss on revaluation of assets of the

company.

The company’s profit and reserves or loss will include both pre-acquisition and post-acquisition profits

and reserves or losses. But, if there are some preference shares of the subsidiary company held by outsiders, the minority

interest in respect of the preference share will consist only of the face value of such shares and the

dividend due on such shares if there are profits.

II : Goodwill or Cost of Control - In actual practice, it rarely happens that the cost of acquisition of shares

in the subsidiary company agrees exactly with intrinsic value of the shares (i.e. the net assets of the

subsidiary company) on the date of acquisition. If the price paid by the holding company for the shares

acquired in the subsidiary company is more than the intrinsic value of the shares acquired, the difference

should be treated as Cost of Control or Goodwill. If on the other hand, the price paid by the holding

company for the shares acquired in the subsidiary company is less than the intrinsic value of the shares

acquired, the difference should be treated as capital profits and credited to Capital Reserve. It should be

noted that while computing the intrinsic value of the shares as on the date of acquisition of control, all

profits and losses upto that date, have to be taken into account. While preparing the consolidated balance sheet, such Goodwill or Capital Reserve, whatever may be the

case, must be shown in the Balance Sheet.

III : Preference Shares In Subsidiary Company - Preference share capital in subsidiary company should

be shown alongwith minority interest in the consolidated balance sheet. However, if a part of the nominal

value of non-participating preference share capital of the subsidiary is held by the holding company, it

should be adjusted in cost of control against the cost of investment in preference shares. The balance of

the preference share capital held by the outsiders should be included in minority interest.

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IV : Holding Company consisting of more than One Subsidiary - A holding company may have a

number of subsidiaries without any mutual holding in between the subsidiaries. The following chart will

clearly show the position:

H Ltd.

3/4 4/5 5/8

S1 Ltd. S2 Ltd. S3 Ltd. In this case, holding company H Ltd. acquires shares of 3/4th, 4/5th and 5/8th of S1 Ltd., S2 Ltd. and S3

Ltd. respectively and as such the investment account of holding company will show investment in S1 Ltd.,

S2 Ltd. and S3 Ltd. instead of one in the usual case. The calculation of cost of control, minority interest,

elimination mutual indebtedness, unrealised profits on closing stock etc. of each company should be done

following the usual principles.

Points to Remember:

1. The investment in a subsidiary is replaced by the underlying net assets of the subsidiary.

2. Assets and liabilities are added on a line-by-line basis of he corresponding asset and liability

amounts of the holding company.

3. 100% of each asset and liability is agreement even if the holding company owns a controlling

interest of less than 100%.

4. The minority shareholder’s interest in the net assets not owned by the holding company is

shown as liability of the Group in the Consolidated Balance Sheet.

5. Assets are stated at their cost to the group, rather than at their cost to any individual

company. Thus, inter-company profit arising out of stock and fixed assets transfers are

removed. Thus, inter-company profit arising out of stock and fixed assets transfers are

removed. (They are usually referred to as unrealized profit).

6. Any inter-company debtors/creditors; bills receivable/bills payable are eliminated. So that

the Consolidated Balance Sheet shows the net asset position of the group vis-à-vis third

parties.

7. Degree of control depends upon holding of equity shares only.

65

Accounting Gym – Consolidation of Accounts

Q.1. The following are the summarized Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.12.2001:

Liabilities H Ltd. (`) S Ltd. (`) Assets H Ltd. (`) S Ltd. (`)

5,000 Equity Shares of ` 100

each

10,000 Equity shares of `1 0

each

Profit & Loss Account

Sundry Creditors

5,00,000

--

55,000

20,000

--

1,00,000

40,000

35,000

Land

Buildings

Stock

Sundry Debtors

Investments: 8,000

Shares of S Ltd.

Cash in hand

1,00,000

1,00,000

90,000

40,000

1,25,000

1,20,000

40,000

50,000

30,000

30,000

--

25,000

5,75,000 1,75,000 5,75,000 1,75,000

H Ltd. acquired shares in S Ltd. on 1.1.2001 when S Ltd. had ` 25,000 in Profit and Loss Account. No dividend

has been declared by S Ltd. in 2001. You are required to prepare a Consolidated Balance Sheet of H Ltd. and its

subsidiary S Ltd. as on 31.12.2001.

[Ans. Minority Interest ` 28,000; Goodwill ` 25,000; and B/S Total ` 6,50,000.]

Q.2. From the two Balance Sheets of H Ltd. and S Ltd. prepare a Consolidated Balance Sheet.


Share Capital:

Authorised and issued:

Shares of ` 10 each

General Reserve


Creditors

1,20,000

25,000

12,000

15,000

30,000

6,000

9,000

5,000

Buildings at cost

Plant and Machinery

Cost

Less: Depreciation

Shares in S Ltd.: 2,000

shares of ` 10 each

Stock

Debtors

Bank

72,000

40,000

(10,000)

30,000

25,000

18,000

22,000

5,000

25,000

15,000

(5,000)

10,000

--

3,000

7,000

5,000

1,72,000 50,000 1,72,000 50,000

When H Ltd. acquired 2,000 shares in S Ltd. the latter company had reserves amounting to ` 5,000 – none of

which has been distributed since then.


Q.3. Following are the Balance Sheets of R Ltd. and S Ltd. as at 31.12.2001:

Liabilities R Ltd. (`) S Ltd. (`) Assets R Ltd. (`) S Ltd. (`)

Share Capital:

Equity Shares of ` 10 each,

fully paid

General Reserve


12% Debentures

Current Liabilities and

Provisions

4,00,000

50,000

30,000

2,00,000

3,20,000

1,50,000

40,000

25,000

--

2,85,000

Fixed Assets

Investments in 15,000

Equity Shares in

S Ltd. on 1.1.2001

Current Assets

(including ` 10,000

Stock-in-trade purchased

from R Ltd.)

5,00,000

2,00,000

3,00,000

2,40,000

--

2,60,000

10,00,000 5,00,000 10,00,000 5,00,000

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Prepare a Consolidated Balance Sheet as at 31.12.2001, assuming that (a) S ltd.‟s General Reserve and Profit and

loss Account stood at ` 25,000 and ` 10,000 respectively on 1.1.2001 and, (b) R Ltd. sells goods at a profit of

25% on cost.

[Ans. Minority Interest Nil; Goodwill ` 15,000; and B/S Total ` 13,13,000.]

Q.4. The following are the Balance Sheets of X Ltd. and Y Ltd. as at 31.12.2001

Liabilities X Ltd. (`) Y Ltd. (`) Assets X Ltd. (`) Y Ltd. (`)

Equity Shares of ` 10 each


External Liabilities

4,00,000

50,000

7,50,000

1,00,000

20,000

4,80,000

Equipments

Investments:

9,000 Equity Shares in Y

Ltd. on 1.1.2001

Current Assets

2,50,000

1,40,000

8,10,000

95,000

--

5,05,000

12,00,000 6,00,000 12,00,00 6,00,000

On January 1,2001, Profit and Loss Account of Y Ltd. showed a credit balance of ` 8,000 and equipment of Y ltd.

was revalued by X Ltd. at 20% above its book value of ` 1,00,000 (but no such adjustment was effected in the

books of Y Ltd.) prepare the Consolidated Balance Sheet as at 31.12.2001.


Q.5. When O Ltd. Purchased 24,000 equity shares in P Ltd. on 1.1.2001, P Ltd. had ` 22,500 in General Reserve and `

37,500 (Dr.) in Profit and Loss Account. From their Balance Sheets on 31.12.2001 as below. Prepare a

Consolidated Balance Sheet:

Liabilities O Ltd. (`) P Ltd. (`) Assets O Ltd. (`) P Ltd. (`)

Equity Capital (F.V. ` 10)

General Reserve


Sundry Creditors

7,50,000

90,000

60,000

1,05,000

3,00,000

7,500

--

31,500

Fixed Assets

Current Assets

Investments in P Ltd.


6,75,000

1,20,000

2,10,000

--

1,50,000

1,21,500

--

67,500

10,05,000 3,39,000 10,05,000 3,39,000

Fixed Assets standing in the books of P ltd. ` 90,000 was considered worth ` 75,000 on the date of purchase of

control. For the purpose of determining the value of shares 20% depreciation has been written-off since

acquisition. Stock of O Ltd. includes ` 30,000 on which P Ltd. made ` 7,500 profit.

[Ans. Minority Interest ` 45,600; Capital Reserve ` 6,000; and B/S Total ` 10,47,000.]

Q.6. A Ltd. acquired 2,000 Equity Shares of ` 100 each in B Ltd. on 31.12.2000. The summarized Balance Sheets of

the two companies as on 31.12.2001 were as follows:

Liabilities A Ltd. (`) B Ltd. (`) Assets A Ltd. (`) B Ltd. (`)

Equity Share Capital:

Shares of ` 100 each

Reserves


Creditors

8,00,000

3,00,000

1,00,000

2,00,000

2,50,000

50,000

1,00,000

50,000

Fixed Assets

Current Assets

2,000 shares in P Ltd at

cost

7,00,000

4,00,000

3,00,000

2,50,000

2,00,000

--

14,00,000 4,50,000 14,00,000 4,50,000

B Ltd. had a credit balance of ` 50,000 in the Reserves and ` 20,000 in the Profit and Loss Account when A Ltd.

acquired shares in B Ltd. B ltd. issued bonus shares in the ratio of one for every five shares held out of the profits

earned during 2001. This is not shown in the above balance sheet of B Ltd. prepare a Consolidated Balance Sheet

of A Ltd. and its subsidiary, as on 31.12.2001, giving all necessary workings.


67

Q.7. H Ltd. purchased control of S Ltd. on 1.1.2001. The following are the Balance Sheets of H Ltd. and S Ltd. as at

31.12.2001:


Share Capital (Shares of ` 10

each)

General Reserve


Creditors

12,00,000

1,20,000

2,00,000

2,00,000

6,00,000

1,00,000

2,00,000

1,60,000

Land and Buildings

Plant and Machinery

45,000 Shares in S Ltd.

at cost

Stock-in-trade

Debtors

Cash at Bank

2,20,000

4,00,000

6,75,000

90,000

1,00,000

2,35,000

2,80,000

3,60,000

--

40,000

1,80,000

2,00,000

17,20,000 10,60,000 17,20,000 10,60,000

On 1.1.2001 S Ltd. had ` 1,00,000 in General Reserve and ` 1,20,000 (Cr.) in Profit and Loss Account. In July

2001, 10% dividend was paid by S Ltd. for 2000. Dividend received from S Ltd. was credited to Profit and Loss

Account by H Ltd. Debtors of S Ltd. includes ` 25,000 due from H Ltd. Prepare Consolidated Balance Sheet as

on 31st December, 2001.

[Ans. Minority Interest ` 2,25,000; Goodwill ` 60,000; and B/S Total ` 21,40,000.]

Q.8. The following are the Balance Sheets of H Ltd. and S Ltd. as at 31st December 2001:


Share Capital (Shares of ` 10

each)

General Reserve


Creditors:

External

H Ltd.

50,000

12,000

10,000

11,000

--

40,000

4,000

6,000

5,000

2,900

Fixed Assets

Debtors

External

S Ltd.

Cash at Bank

Stock

Shares in S Ltd. (3,000

Shares)

Goods-in-Transit

Other Investments

20,000

9,000

3,000

5,500

4,000

32,000

600

8,900

30,000

5,000

--

1,900

9,000

--

--

12,000

83,000 57,900 83,000 57,900

To Credit balance of Profit and Loss Account of S Ltd. at the date H Ltd. bought its shares was ` 2,000 and the

General reserve stood at nil. On 31st December, 2001 there were goods-in-transit from S Ltd. to H Ltd. ` 600 and

Cash-in-transit ` 100 from S Ltd. to H Ltd. This had been entered only in the books of sending company. Prepare

a C o n s o l i d a t e d B a l a n c e S h e e t o f H L t d . a n d i t s s u b s i d i a r y a s a t 3 1s t

D e c e m b e r .

[Ans. Minority Interest ` 12,500; Goodwill ` 500; and B/S Total ` 1,06,500.]

Q.9. Prepare a Consolidated Balance Sheet from the Balance Sheets of H Ltd. and S Ltd.


Share Capital:



Reserve Fund

Creditors

Bills Payable

10,000

4,000

1,000

2,000

--

2,000

1,200

600

1,200

300

Sundry Assets

Stock

Debtors

Bills Receivable

150 Shares in S Ltd. (at

cost)

8,000

6,100

1,300

100

1,500

1,200

2,400

1,700

--

--

17,000 5,300 17,000 5,300

Following other additional information are also given:

(i) Company S Ltd. has earned all the profits only since the above 150 shares were acquired by H Ltd.

(ii) On the date of acquisition of these 150 shares by H Ltd., S Ltd. got reserves of ` 600.

68

(iii) The bills payable of S Ltd. were in favour of H Ltd. which had discounted ` 200 of them.

(iv) Sundry assets of S Ltd. were under valued by ` 200.

(v) Stock of H Ltd. include goods of ` 500 purchased from S Ltd. at a profit of 25% of cost.

[Ans. Minority Interest ` 1,000; Capital Reserve ` 600; and B/S Total ` 20,800.]

Q.10. The summarized Balance Sheets of P Ltd. and S ltd. on 31st December, 2001 were as follows.

Liabilities P Ltd. (`) S Ltd. (`) Assets P Ltd. (`) S Ltd. (`)

Share Capital:



Capital Reserve

General Reserve


Loan from S Ltd.

Bills Payable (including `

500 to P Ltd.)

Creditors

3,00,000

--

--

30,000

38,200

2,100

--

17,900

--

1,00,000

55,000

5,000

18,000

--

1,700

7,000

Fixed Assets

Investments in S Ltd. at

cost

Stock

Loan to P Ltd.

Bills Receivable

(Including ` 200 from S

Ltd.)

Debtors and Cash

Balance

1,50,000

1,70,000

40,000

--

1,200

27,000

1,44,700

--

20,000

2,000

--

20,000

3,88,200 1,86,700 3,88,200 1,86,000

There is a contingent liability of ` 1,000 for bills discounted given by way of a note to Balance Sheet of P Ltd. P

Ltd. acquired 8,000 shares of ` 10 each in S Ltd. on 31st December, 2001.

You are given the following additional information:

(i) S Ltd. made a bonus issue on 31st December, 2001 of one share for every two shares held, reducing capital

reserve by an equivalent amount, but the transaction is not shown in the Balance Sheet.

(ii) Interest receivable amounting to ` 100 in respect of loan due by P Ltd. has not been credited in the accounts

of S Ltd.

(iii) The directors decided that the fixed assets of S Ltd. were over-valued and should be written-down by `

5,000.

Prepare a Consolidated Balance Sheet of the two companies on 31st December, 2001, giving all workings.


Q.11. The Balance Sheet of the H Ltd. and S Ltd. as on 31st March, 2014 are given below:

H Ltd.

Amount (`)

S Ltd.

Amount (`)



(a) Share Capital


Up capital

Equity shares of ` 100 each, fully called up and

paid up


Profit and Loss A/c


Trade Payables

TOTAL

II. ASSETS

6,00,000

80,000

75,000

7,55,000

2,00,000

48,000

2,48,000

69


(a) Fixed Assets

Fixed Assets

(b) Long term investment

Share in S Ltd. (at cost of ` 100 each)

TOTAL

5,55,000

2,00,000

7,55,000

2,48,000

_______

2,48,000

[Ans. B/S Total ` 8,03,000.]


H Ltd.

Amount (`)

S Ltd.

Amount (`)



(a) Share Capital


Up capital


paid up


Surplus A/c


Trade Payables

TOTAL

II. ASSETS


(a) Fixed Assets

Fixed Assets


1,500 Share in S Ltd. (at cost)

TOTAL

6,00,000

80,000

75,000

7,55,000

6,05,000

1,50,000

7,55,000

2,00,000

48,000

2,48,000

2,48,000

_______

2,48,000

Prepare the consolidated balance Sheet of H Ltd. and S Ltd. as on 31st March, 2014.

[Ans. B/S Total ` 8,53,000.]


H Ltd.

Amount (`)

S Ltd.

Amount (`)



(a) Share Capital


Up capital


paid up


General Reserve

Surplus A/c

6,00,000

60,000

80,000

2,00,000

25,000

15,000

70


Trade Payables

II. ASSETS


(a) Fixed Assets

Fixed Assets


1,600, Share in S Ltd. (at cost)

75,000

8,15,000

6,55,000

1,60,000

8,15,000

48,000

2,88,000

2,88,000

_______

2,88,000

H Ltd. acquired shares in S Ltd. on 31st March, 2014. Prepare the Consolidated balance Sheet of H Ltd. and S Ltd.

as on that date.



H Ltd.

Amount (`)

S Ltd.

Amount (`)



(a) Share Capital


Up capital


paid up


General Reserve

Surplus A/c


Trade Payables

TOTAL

II. ASSETS


(a) Fixed Assets

Tangible Fixed Assets


1,600, Share in S Ltd. (at cost)

TOTAL

6,00,000

60,000

80,000

75,000

8,15,000

5,91,000

2,24,000

8,15,000

2,00,000

40,000

30,000

48,000

3,18,000

3,18,000

_______

3,18,000

H Ltd. acquired shares in S Ltd. on 31st March, 2014. The Plant worth book value of ` 60,000 included in sundry

assets of S Ltd. was re-valued at ` 50,000 on this date.

Prepare the Consolidated balance Sheet of H Ltd. and S Ltd. as on that date.


Q.15. From the following balance sheets of H Ltd. and its subsidiary S Ltd. drawn up at 31st March, 2014. Prepare a

consolidated balance Sheet as at that date, having regard to the following:

i) Reserves and Profit and Loss Account (Cr.) of S Ltd. stood at ` 25,000 and ` 15,000 respectively on the date

of acquisition of its 80% shares by H Ltd.

71

ii) Machinery (book-value ` 1,00,000) and Furniture (Book-value ` 20,000) of S Ltd. were revalued at `

1,50,000 and ` 15,000 respectively for the purpose of fixing the price of its shares; book values of other

assets remaining unchanged. These values are to be considered for consolidation purposes.

Balance Sheet of H Ltd. as on 31st March, 2014

H Ltd.

Amount (`)

S Ltd.

Amount (`)

II. EQUITIES AND LIABILITIES


(c) Share Capital


Up capital

Equity shares of ` 100 each, fully called up

and paid up

(d) Reserve and Surplus

General Reserve

Profit and Loss A/c


Trade Payables

TOTAL

III. ASSETS


(c) Fixed Assets

Machinery

Furniture

Other Assets

(d) Long term investment

800, Share at ` 200 each in S Ltd. (at cost)

TOTAL

2,00,000

1,00,000

3,00,000

50,000

4,40,000

5,00,000

3,00,000

1,50,000

9,50,000

7,90,000

1,60,000

9,50,000

75,000

25,000

90,000

17,000

1,43,000

1,00,000

1,00,000

50,000

2,50,000

2,50,000

_______

2,50,000


Q.16. Following are the balance sheets of Asha ltd. and Bipasha Ltd. as on 31st March, 2008:

Liabilities Asha Ltd.

(`)

Bipasha Ltd.

(`)

Capital (` 10 per share)


Loan from Asha Ltd.

Bills payable

10,00,000

4,00,000

--

80,000

8,00,000

2,00,000

80,000

60,000

14,80,000 11,40,000

Assets

Machinery

Furniture

Debtors

Loan to Bipasha Ltd.

Shares in Bipasha ltd.

Bills receivable

3,00,000

50,000

2,50,000

80,000

7,00,000

1,00,000

2,80,000

20,000

8,00,000

--

--

40,000

14,80,000 11,40,000

72

Asha Ltd. purchased 75% shares of Bipasha ltd. for ` 7,00,000 on 31st March, 2008. Bills payable of Bipasha ltd.

include bills of D 20,000 accepted in favour of Asha Ltd. prepare a consolidated balance Sheet.


Q.17. Following are the abridged balance sheet of Harry Ltd. and Say ltd. as on 31st March, 2009:

Liabilities Hary Ltd.

(`)

Say Ltd. (`)

Equity Share Capital (` 100 per share)

General Reserve


Current Liabilities

10,00,000

1,00,000

1,60,000

4,40,000

4,00,000

1,70,000

1,30,000

2,00,000

17,00,000 10,00,000

Assets

Fixed Assets

Investment in shares of Say Ltd.

Current Assets

4,80,000

5,00,000

7,20,000

2,50,000

--

7,50,000

17,00,000 10,00,000

Additional Information:

i) On 1st July, 2008, Hary Ltd. acquired 3,000 shares in Say ltd. The reserves and surplus position of Say Ltd.

as on 1st April, 2008 was as under:

General Reserve ` 2,50,000 & Profit and loss a/c (Cr.) D 1,20,000

ii) On 1st October, 2008, Say Ltd. issued one equity share for every for shares held as bonus shares out of

general reserve. No entry has been made in the books of Say Ltd. for issue of bonus shares.

iii) On 30th

September, 2008, Say Ltd. declared a dividend out of pre-acquisition profits @ 25% on D 4,00,000,

its capital on that date. Hary Ltd. credited the dividend to its profit and loss account.

iv) Say Ltd. owed Hary Ltd. D 50,000 for purchase of stock from Hary Ltd. The entire stock is held by Say ltd.

on 31st March, 2009. Hary Ltd. made a profit of 25% on cost.

Prepare a consolidated balance sheet of Hary Ltd. and its subsidiary Say Ltd. as on 31st March, 2009.

[Ans. Minority Interest ` 2,00,000; Capital Reserve ` 1,01,875; and B/S Total ` 21,40,000.]

Q.18. Following are balance sheets of H Ltd. and S Ltd. as at 31st March, 2009:

Liabilities H Ltd. (`) S Ltd. (`)

Share Capital (Shares of ` 100 each)

General Reserve as on 1st April, 2008


Bills payable

Creditors

5,00,000

1,00,000

1,40,000

--

80,000

2,00,000

60,000

90,000

40,000

50,000

8,20,000 4,40,000

Assets

Goodwill

Other fixed assets

1,500 Shares in S Ltd. at cost

Stock

Debtors

Cash at Bank

40,000

3,60,000

2,40,000

1,00,000

20,000

60,000

30,000

2,20,000

--

90,000

75,000

25,000

8,20,000 4,40,000

The profit and loss account of S Ltd. showed a balance of ` 50,000 on 1st April, 2008. A dividend of 15% was

paid on 15th October, 2008 for the year 2007-08. The dividend was credited by H Ltd. to its profit and loss

73

account. H Ltd. acquired shares on 1st October, 2008. The bills payable of S Ltd. were all issued in favour of H

Ltd. and the same were got discounted by H Ltd. Included in the creditors of S Ltd. are D 20,000 for goods

supplied by H ltd. The stock of S Ltd. Includes goods to the value of ` 8,000 which were supplied by H Ltd. at a

profit of 33.33% on cost. Prepare consolidated balance sheet of H Ltd. and S Ltd. as on 31st March, 2009.


Q.19. On 1st October, 2009, Poddar ltd. acquired 12,000 equity shares of Bhansali Ltd. of the face value of D 10 each at

a price of D 1,70,000. The balance Sheets of two companies as on 31st March, 2010 are as follows:

Liabilities Poddar Ltd.

(`)

Bhansali Ltd.

(`)

Equity Share of ` 10 each

General Reserve (1st April, 2009)

Profit and loss account (1st April, 2009)

Profit for the year

Creditors

Bills Payable

10,00,000

4,20,000

90,000

1,70,000

2,40,000

80,000

2,00,000

1,00,000

40,000

45,000

92,000

60,000

20,00,000 5,37,000

Assets ` `

Goodwill

Land and Building

Plant and Machinery

Stock

Debtors

Investments

Bills Receivable

Bank

Cash

3,00,000

4,00,000

5,00,000

2,00,000

3,00,000

2,00,000

20,000

60,000

20,000

70,000

1,00,000

1,00,000

40,500

1,34,500

--

30,000

50,000

12,000

20,00,000 5,37,000

Out of the debtors and bills receivable of Poddar Ltd. ` 50,000 and ` 16,000 respectively represented those due

from Bhansali Ltd. The stock in the hands of Bhansali Ltd. includes goods purchased from Poddar Ltd. at `

20,000 which includes profit charged by latter company @ 25% at cost. Prepare a consolidated balance Sheet as

on 31st March, 2010 and also show your workings.

[Ans. Minority Interest ` 1,54,000; Goodwill ` 3,22,500; and B/S Total ` 22,49,500.]

Q.20. Following are the balance sheets of H Ltd. and S Ltd. as at 31st December, 2010:


Equity Share of ` 100 each fully paid

General Reserve

Profit and loss account Profit for the year

14% Debentures

Creditors

5,00,000

1,00,000

80,000

--

75,000

2,00,000

--

--

1,00,000

45,000

7,55,000 3,45,000

Assets

Fixed Assets

Stock

Debtors

14% Debentures in S Ltd. (at par)

Equity Shares in S Ltd. @ ` 80 per share

3,50,000

90,000

60,000

60,000

1,20,000

1,50,000

40,000

30,000

--

--

74

Bank


75,000

--

25,000

1,00,000

7,55,000 3,45,000

H Ltd. acquired 1,500 shares in S ltd. on 1st May, 2010. The profit and loss account of S Ltd. showed a debit

balance of ` 1,50,000 on 1st January, 2010. During March, 2010, goods costing ` 6,000 were destroyed by fire,

against which the insurance company paid ` 2,000 only to S Ltd. Creditors of S Ltd. include ` 20,000 for goods

supplied by H Ltd. on which H Ltd. made a profit of ` 2,000. Half of the goods were sold out of this. An item of

Plant (included in Fixed Assets) of S Ltd. had book value of ` 1,50,000; It was to be revalued at ` 20,000 on 1st

January, 2010 (ignore depreciation). Prepare consolidated balance sheet as on 31st December, 2010.


Q.21. The Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March, 2011 are as follows:



General Reserve (1st April, 2010)

Profit and loss account (1st April, 2010)

Net Profit for the year

15% Debentures

Creditors

Bills Payable

30,00,000

8,00,000

2,00,000

6,00,000

10,00,000

4,00,000

60,000

15,00,000

4,00,000

2,50,000

4,00,000

--

2,70,000

30,000

60,60,000 28,50,000

Assets H Ltd. (`) S. Ltd. (`)

Premises

Machinery

Investment in shares of S Ltd.

Inventories

Debtors

Bills Receivable

Cash and Bank

Misc. Expenditure

14,00,000

12,00,000

17,00,000

7,00,000

5,00,000

1,80,000

3,80,000

--

9,00,000

7,00,000

--

4,50,000

4,20,000

80,000

2,00,000

1,00,000

60,60,000 28,50,000

The following are the additional information:

i) H Ltd. acquired 12,000 equity shares in S ltd. on 1st April, 2010.

ii) Bills receivable of H Ltd. include ` 30,000 accepted by S Ltd.

iii) Accounts receivable of H Ltd. include ` 1,00,000 due from S ltd.

iv) Inventories of S Ltd. include goods purchased from H Ltd. for ` 1,25,000 which were invoiced by H Ltd. at

a profit of 25% on cost.

v) Both H Ltd. and S Ltd. have proposed 10% dividend for the year 2010-11 but no effect has been given in the

balance sheets.

Prepare a consolidated balance sheet giving proper working notes.


Q.22. The following are the balance sheet of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2011:

Liabilities X Ltd. (`) Y Ltd. (`)



External Liabilities

4,00,000

50,000

7,50,000

1,00,000

20,000

4,80,000

12,00,000 6,00,000

75

Assets X Ltd. (`) Y Ltd. (`)

Equipments

Investments (9,000 equity shares in Y Ltd. on 1st April, 2010)

Other assets

2,50,000

1,40,000

8,10,000

95,000

--

5,05,000

12,00,000 6,00,000

On 1st April, 2010, profit and loss account of Y Ltd. showed a credit balance of ` 8,000 and equipments of Y Ltd.

were revalued by X Ltd. at 20% above its book value of ` 1,00,000 (but no such adjustment affected in the books

of Y ltd.)

Prepare the consolidated balance sheet as on 31st March, 2011.


Q.23. Following are the balance sheets of H Ltd. and its subsidiary S Ltd. as on 31st March, 2012:


Fully paid-up Equity Shares of ` 10 each

General Reserve

Profit and loss (Surplus)

Trade payables

6,00,000

3,40,000

1,00,000

70,000

2,00,000

80,000

60,000

35,000

11,10,000 3,75,000


Machinery

Furniture

Investment (80% shares in S Ltd. at cost)

Stock

Trade Receivables

Cash at bank

3,90,000

80,000

3,40,000

1,80,000

50,000

70,000

1,35,000

40,000

--

1,20,000

30,000

50,000

11,10,000 3,75,000

The following additional information is provided:

i) Surplus in the profit and loss statement of S Ltd. stood at ` 30,000 on 1st April, 2011 whereas general reserve

has remained unchanged since that date.

ii) H Ltd. acquired 80% shares in S Ltd. on 1st October, 2011 for ` 3,40,000 as mentioned above.

iii) A sum of ` 10,000 due from H Ltd. for goods sold at a profit of 25% on cost price is included in trade

receivables of S ltd. Till 31st March, 2012, only half of the goods had been sold while the remaining goods

were lying in the godowns of H Ltd. as on that date.

You are required to prepare the consolidated balance sheet as on 31st March, 2012. Show all calculations.


Q.24. The following are the balance sheets of H Ltd. and its subsidiary S Ltd. as on 31st March, 2012:


Shareholders‟ funds:

Share Capital

Shares of ` 100 each fully paid

Reserve and Surplus:

General reserve


Non-current liabilities:

6% Debentures

5,00,000

1,00,000

80,000

--

2,00,000

--

(-) 1,00,000

1,00,000

76

Current liabilities:

Trade Payables

75,000

45,000

7,55,000 2,45,000


Non-Current Assets:

Fixed assets

Non-current investments:

6% debentures in S Ltd. (acquired at cost)

1,500 Shares in S ltd. at ` 80 each

Current Assets:

Inventories

Trade Receivables

Cash

3,50,000

60,000

1,20,000

90,000

60,000

75,000

1,50,000

--

--

40,000

30,000

25,000

7,55,000 2,45,000

H Ltd. acquired the shares on 1st August, 2011. The profit and loss account of S ltd. showed a debit balance of `

1,50,000 on 1st April, 2011. During June, 2011 goods of S ltd. Costing ` 6,000 were destroyed by fire against

which insurer paid only ` 2,000. Trade payables of S ltd. include ` 20,000 for goods supplied by H Ltd. on which

H Ltd.. made a profit of ` 2,000. Half of the goods were still in stock on 31st March, 2012.

Prepare a consolidated balance sheet and show the complete working.


Q.25. H Ltd. acquired 4,000 shares on 30th

June, 2012 in S ltd. H Ltd. received 10% dividend for the year 2011 and it is

credited in profit and loss account of H Ltd.

Following are the balance sheets of H Ltd. and S Ltd. as on 31st December, 2012:



Share Capital

Equity Share Capital of ` 10 each

Reserves and Surplus

General Reserve (1.1.2012)

Profit and loss (as on 1.1.2012)

Profit for the year ended 31.12.2012

Current Liabilities

Trade Payables

60,000

12,000

4,000

30,000

10,000

50,000

10,000

8,000

20,000

8,000

Total 1,15,000 96,000


Non-Current Assets

Fixed Assets

Investment

Investment in S Ltd.

Current Assets

44,000

52,000

20,000

60,000

--

36,000

Total 1,16,000 96,000

You are required to prepare consolidated balance sheet for H Ltd. as on 31st December, 2012 from the above

information.


77

Q.26. The balance Sheets of Chanderma Ltd. and its Subsidiary Tara Ltd. as on 31st March, 2014 are as follows:

Chanderma ltd. Tara ltd.

` ` ` `


1) Shareholders‟ funds:

a) Share capital-authorized

Issued, subscribed and paid-up:

Preference share capital Equity share

capital of ` 100 each as fully paid-up

b) Reserves and Surplus:

General Reserve

Surplus

2) Current Liabilities:

a) Trade Payables

b) Bills Payable

10,00,000

50,00,000

34,00,000

36,00,000

10,00,000

--

60,00,000

70,00,000

10,00,000

15,00,000

60,000

10,80,000

4,41,500

2,41,500

15,00,000

11,40,000

6,83,000

1,40,00,000 33,23,000

II. Assets

1) Non-Current assets:

a) Fixed Assets:

Land

Properties

Plant and Machines

b) Long-term investment:

12,000 shares of

Tara Ltd. on 1st April, 2013

2) Current Assets:

a) Inventories

b) Trade receivables and cash

35,60,000

37,60,000

14,00,000

13,60,000

21,20,000

87,20,000

18,00,000

34,80,000

7,00,000

4,00,000

9,13,000

5,06,000

8,04,000

20,13,000

13,10,000

1,40,00,000 33,23,000

The other information are:

i) Surplus of Chanderma Ltd. includes dividend of 10% received from Tara Ltd.

ii) On 1st April, 2013 surplus of Tara Ltd. stood at ` 7,75,000 and general reserve at ` 30,000. Chanderma ltd.

revalued plant and machinery of Tara ltd. at the time of purchase of shares by ` 2,00,000 more than its book

value.

iii) Inventory of Chanderma Ltd. includes ` 80,000 of inventory at cost purchased from Tara Ltd. Further, trade

receivables of Tara Ltd. include ` 2,40,000 for the sale to Chanderma Ltd. on which Tara Ltd. makes a profit

of ` 60,000.

iv) Tara Ltd. made a bonus issue during the year out of pre-acquisition profits for ` 6,00,000. This is not

recorded in the books. Prepare consolidated balance Sheet.

[Ans. Minority Interest ` 5,68,000; Capital Reserve ` 2,04,000; and B/S Total ` 1,54,63,000.]

Q.27. Jai Ltd. acquired 15,000 shares in Hind Ltd. for ` 1,55,000 on 1st July, 2004. The balance sheet of the two

companies as on 31st March, 2005 were as follows:

Liabilities Jai Ltd. (`) Hind Ltd. (`)

Equity Shares of ` 10 each fully paid-up 9,00,000 2,50,000

78

General reserve


Bills payable

Creditors

1,60,000

80,000

40,000

50,000

40,000

25,000

20,000

30,000

12,30,000 3,65,000

Assets

Machinery

Furniture

Investments

Stock

Debtors

Cash at bank

Bills receivable

7,00,000

1,00,000

1,55,000

1,00,000

60,000

90,000

25,000

1,50,000

70,000

--

50,000

35,000

40,000

20,000

12,30,000 3,65,000


i) General reserve appearing in the balance sheet of Hind Ltd. has remained unchanged since 31st March, 2004.

ii) Profit earned by Hind Ltd. for the year ended 31st March, 2005 amounted to ` 20,000.

iii) On 1st February, 2005, Jai Ltd. sold to Hind Ltd. goods costing `8,000 for ` 10,000. There was no unsold

stock with Hind Ltd. on 31st March, 2005, However, creditors of Hind Ltd. include ` 4,000 due to Jai Ltd. on

account of these goods.

iv) Out of Hind ltd.‟s acceptance, ` 7,000 were those which were accepted in favour of Jai Ltd.

You are required to draw a consolidated balance sheet as on 31st March, 2005.

[Ans. Minority Interest ` 1,26,000; Capital Reserve ` 25,000; and B/S Total ` 14,29,000.]

Q.28. The following are the balance sheets of Snow Ltd. and white Ltd. as at 31st March, 2006:


i) All the bills receivable of Snow Ltd. including those discounted accepted by White Ltd.

ii) At the time of acquisition of shares on 1st July, 2005 by Snow Ltd. in White Ltd. the general reserve was `

40,000 and ` 10,000 credit in profit and loss account as on 1st April, 2005.

iii) The Stock of White Ltd. includes ` 40,000 purchased from Snow Ltd., which has made 25% profit on cost.

Liabilities Snow Ltd. (`) White Ltd. (`)

Share Capital of ` 10 each fully paid

General reserve


Sundry Creditors

Bills Payable

Liabilities for expenses

14,00,000

1,00,000

2,00,000

1,80,000

20,000

10,000

2,00,000

60,000

60,000

1,00,000

30,000

30,000

19,10,000 4,80,000

Assets Snow Ltd. (`) White Ltd. (`)

Land and Buildings

Plant and Machinery

14,000 shares in White Ltd.

Stock

Sundry Debtors

Bills receivable

Cash and Bank balances

6,00,000

5,60,000

2,00,000

1,40,000

3,00,000

20,000

90,000

2,00,000

1,00,000

--

1,00,000

40,000

--

40,000

19,10,000 4,80,000

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iv) White Ltd. had declared and paid dividend equivalent to 20% for the period ended 31st March, 2005 and

Snow Ltd. had credited to its profit and loss account.

You are required to prepare the consolidated balance sheet as at 31st March, 2006.


Q.29. Balance Sheets of H Ltd. and S Ltd. as at 31st March, 2006 are given below:


Share Capital of ` 10 each fully paid

General reserve


Creditors

5,00,000

1,00,000

60,000

80,000

2,00,000

50,000

35,000

60,000

7,40,000 3,45,000

Assets H Ltd. (`) S Ltd. (`)

Fixed Assets

60% Shares in S Ltd. at cost

Current Assets


3,00,000

1,62,400

2,77,600

--

1,00,000

--

2,39,000

6,000

7,40,000 3,45,000

H Ltd. acquired the shares on 1st April, 2005 and on that date general reserve and profit and loss account of S Ltd.

showed balances of ` 40,000 and ` 8,000 respectively. No part of preliminary expenses was written off during the

year ended 31st March, 2006. Prepare a consolidated balance sheet of H ltd. and its subsidiary S Ltd. as on 31

st

March, 2006.


Q.30. From the following balance sheets of Exe Ltd. and Wye Ltd. as on 31st March, 2007, workout – 9i) net amount

due to minority interest, and (ii) cost of control:

Balance Sheets of Exe Ltd. and Wye Ltd. as on 31st March, 2007

Liabilities Exe Ltd. (`) Wye Ltd. (`)

Share Capital: Shares of ` 100 each

General reserve


Creditors

15,00,000

1,50,000

2,00,000

1,87,500

5,00,000

1,00,000

75,000

1,20,000

20,37,500 7,95,000

Assets Exe Ltd. (`) Wye Ltd. (`)

Sundry Assets

Investments: 4,000 Shares of ` 100 each

14,77,500

5,60,000

7,95,000

--

20,37,500 7,95,000

These assets of Wye ltd. included equipments worth ` 1,50,000 which was revalued at ` 1,25,000. The

investments of Exe Ltd. were in shares of Wye Ltd. and the same were acquired on 31st March, 2007.

[Ans. Minority Interest ` 1,30,000 and Goodwill ` 40,000.]

Q.31. Following are the balance sheets of H Ltd. ad its subsidiary S Ltd. as at 31st March, 2007:


Equity Share Capital: Shares of ` 10 each fully paid

General reserve


Creditors

6,00,000

3,40,000

1,00,000

70,000

2,00,000

80,000

60,000

35,000

11,10,000 3,75,000

80

Assets H Ltd. (`) S Ltd. (`)

Plant and Machinery

Furniture

80% Shares in S Ltd. (at cost)

Stock

Debtors

Cash at bank

3,90,000

80,000

3,40,000

1,80,000

50,000

70,000

1,35,000

40,000

--

1,20,000

30,000

50,000

11,10,000 3,75,000


i) Profit and loss account of S Ltd. stood at ` 30,000 on 1st April, 2006 whereas general reserve stood at `

80,000 even on this date.

ii) H Ltd. acquired 80% shares in S. Ltd. on 1st October, 2006.

iii) S. ltd. plant and machinery which stood at ` 1,50,000 on 1st April, 2006 was considered worth ` 1,80,000 as

on 1st October, 2006, this figure is to be considered while consolidating the balance sheets.

You are required to prepare consolidated balance sheet as at 31st March, 2007.


Q.32. Orchid Ltd. holds 80% shares in its subsidiary Tulip Ltd. From the following information calculate minority

interest at the end of each year:

Share Capital of Tulip Ltd. was ` 10,00,000 (` 10 each) and reserves ` 2,00,000 on the date of

acquisition on 31st March, 2012.

Fully paid bonus shares were issued by Tulip ltd. on 31st March, 2013 in the ratio of 2 bonus shares for

every 5 shares held.

Profit and loss of Tulip Ltd. for the various years are:

Profit/Loss (`)

31st March, 2013 : 3,00,000

31st March, 2014 : (1,00,000) (loss)

31st March, 2015 : 2,00,000

31st March, 2016 : 2,50,000 (including profit of ` 50,000 on revaluation of

assets) [Dec‟16 - 5 Marks]

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THEORY MASALA

Q.1. Under what circumstances, a company is required to present a „consolidated financial statement‟?

[CS (Inter) – Dec. 2003 (4 Marks)]

Ans. A company is required to present a „consolidated financial statement‟ if it is holding company and other is

subsidiary of earlier company.

As per Section 129 of the Companies Act, 2013, where a company has one or more subsidiaries, it shall, in

addition to financial statements prepare a consolidated financial statement of the company and of all the

subsidiaries in the same form and manner as that of its own which shall also be laid before the AGM of the

company along with the laying of its financial statement. The company shall also attach along with its financial

statement, a separate statement containing the salient features of the financial statement of its subsidiary or

subsidiaries in such form as may be prescribed.

The Central Government may provide for the consolidation of accounts of companies in such manner as may be

prescribed.

Explanation: The word “subsidiary” shall include associate company and joint venture.

Q.2. Write a short note on: Minority Interest. [CS (Inter) – Dec. 1999 (5 Marks)]

Ans. Minority interest represents shares owned by third parties in a consolidated financial statement of holding

company. Minority interest ordinarily appears on the balance sheet between liabilities and shareholders‟ equity. It

is calculated as follows:

Minority Interest `

Share capital held by outsider

Share of profits

- Pre acquisition

- Post acquisition

Xxx

xxx

xxx

Xxx

Q.3. Issue of bonus shares by the subsidiary company does not affect the cost of control. Comment.


Ans. Issue of Bonus shares by the following company does not affect the cost of control. This can be discussed under

following two headings:

(1) Issue of bonus out of pre-acquisition profit: This will not affect cost of control because share of holding

company in pre-acquisition profit is reduced and on the other hand paid up value of the shares held by them

is increased.

(2) Issue of bonus out of post-acquisition profit: This will not affect cost of control because share of holding

company in post-acquisition profit is reduced and on the other hand paid up value of the shares held by them

is increased.

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CHAPTER 4 VALUATION OF SHARES AND

INTANGIBLE ASSETS

NEED FOR VALUATION OF SHARES

The necessity for valuation of shares arises inter alia in the following circumstances: Assessments under the Wealth Tax Act.

Purchase of a block of shares which may or may not give the holder thereof a controlling interest in

the company.

Formulation of schemes of amalgamation, absorption, etc.

Acquisition of interest of dissenting shareholders under a scheme of reconstruction.

Conversion of shares, say, conversion of preference shares into equity.

Advancing a loan on the security of shares.

Resolving a deadlock in the management of a private limited company on the basis of the controlling

block of shares being given to either of the parties.

Normally, the price prevailing on the stock exchange is accepted. However, `valuation by expert is called

for when parties involved in the transaction/deal/scheme, etc., fail to arrive at a mutually acceptable

value or the agreements or articles of association, etc. Thus, valuation by a valuer becomes necessary

when: Shares are unquoted. Shares relate to private limited companies. The Court directs for valuation by an expert. Articles of Association or relevant agreements so provide. Large block of shares is under transfer. The law/applicable statue so requires.

METHODS OF VALUATION OF SHARES

Principally two basic methods are used for share valuation: one on the basis of net assets and the other

on the basis of earning capacity or yield.

1) Net Assets Basis or Intrinsic Value Method

The method relating to net asset basis may take various forms depending upon circumstances:

Break-up value method (or liquidation value method);

Appraised value method; and

Book-value method.

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In all cases of valuation on assets basis, except book value basis, it is important to arrive at current

replacement and realisation value. It is more so in case of assets like patents, trade marks, know-how,

etc., which may possess values substantially more or less than those shown in the books. The mechanism of asset valuation is simple:

Arrive at the current replacement costs of assets for valuation based on appraisal or, in the case

of a firm which is not a going concern, determine the net realisable value for break-up valuation

and deduct therefrom all liabilities in the books of account and such other liabilities which have

not been recorded but are likely to rank for payment, and the amount payable to preference

shareholders. The approach should be conservative. Under provision for taxation, liabilities on

account of gratuities, arrears of preference dividends, etc., are instances, of what may not appear

in books.

If circumstances suggest existence of goodwill from a study of the profit record, particular

advantages, etc., the same should be evaluated with reference to any method appropriate for the

purpose for addition to the result obtained in (i) above. The result, as arrived at, shall represent the asset value for the whole undertaking; to arrive at value per

share, the same should be divided by the number of equity shares in the company provided all shares are

equally paid-up. If the company has equity shares of varying fully paid-up values, the total value should

first be allocated to the different paid-up value groups and each such allocation would be divided by the

number of shares in each of such groups.

2) Yield Basis

Yield basis valuation may take the form of valuation based on rate of return and productivity factor. i) Valuation Based on Rate of Return

Rate of return refers to the returns which a shareholder earns on his investment. It may be classified into (a) Rate of dividend and (b) Rate of earning. a) Valuation based on rate of dividend :This method of valuation is suitable for small blocks of shares

because small shareholders are usually interested in dividends. The value of a share according to this method is ascertained as follows:

Value of share = Possible rate of dividend x Paid up value per share

Normal rate of dividend OR

= Dividend (in rupees) per share x 100 Normal rate of dividend Possible rate of dividend = Total profit available for dividend x 100 Total paid up equity capital

In other words, dividend on equity shares should be calculated by deducting from the maintainable profits:

taxation;

transfers to reserve;

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transfers to debenture redemption fund;

preference dividend, and by dividing the remaining by the number of shares. b) Valuation based on rate of earning: This method of valuation of shares is suitable for valuing large

block of company’s shares because they are more interested in company’s earnings rather than what

the company distributes in the form of dividends. The value of a share on this basis can be calculated

as follows:

Value of share = Rate of earning x Paid-up value per share Normal rate of earning

Rate of earning = Actual profit earned x 100 Capital employed

Rate of earning is calculated by taking into account the total capital employed including long-term

borrowings. Since the total capital is taken into account, the profit figure should be before debenture

interest, preference dividend but after income tax. This is quite appropriate when the dividend is much

more than the rate of earning on capital. c) Valuation based on price earning ratio: This method is suitable for ascertaining the market value

of shares which are quoted on a recognised stock exchange. According to this method, the shares are

valued on the basis of earning per share multiplied by price earning ratio. Thus,

Market value of share = Price earning ratio x Earning per share

Earning per share = Profit available for equity shareholders

Number of equity shares

Price earning ratio = Market value per share

Earning per share Capitalisation factor: The value of a share according to yield basis can also be ascertained by finding out

the capitalisation factor or the multiplier. The capitalisation factor will be ascertained by dividing 100 by

the normal rate of return.

Capitalisation factor = 100_____ Normal rate of return

The profit available is capitalised by multiplying it with the capitalisation factor. The value of equity share is obtained by dividing the capitalised value by the number of equity shares. ii) Valuation Based on Productivity Factor Productivity factor is a concept of relative earning power. It represents the earning power in relation to

the value of assets employed for such earnings. This gives a ratio which is applied to the net worth of

the business as on the valuation date to arrive at the projected earning figure for the company. This

projected earning after necessary adjustments (discussed later) shall be multiplied by the

appropriate capitalisation factor to arrive at the value of the company’s business. The total value is

divided by the number of equity shares to ascertain the value of each share.

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The productivity factor based valuation is really a method for arriving at a reliable figure of future profits.

The steps are the following:

Take a number of years whose results are relevant to the future. Determine net worth of the

business at the commencement and close of each of the accounting years under consideration and

find out the average net worth for each year by adding the opening and closing net worth and

dividing the result by 2; and, in turn, arriving at the average net worth of the business during the

period under study.

Determine the net worth of the business on the valuation date.

Ascertain the average, weighted, if necessary, adjusted profit earned during the years under consideration.

Find out the percentage that (iii) bears to (i); that represents the productivity factor i.e.

Average (weighted) profit x 100

Average (weighted) networth

Apply the productivity factor as obtained in (iv) above to the net worth on the valuation date to

find out the projected income in future.

Adjust the projected taxed income for factors like appropriations for provision for

replacement and rehabilitation of plant and equipment, tax, dividends on preference shares,

under utilisation of productive capacity, effects of restrictions on monopoly, etc.

Determine the normal rate of return for the company, having particular regard to the nature and

size of the undertaking.

Determine the appropriate capitalisation factor or the multiplier based on normal rate of

return in the way discussed earlier.

Apply the multiplier obtained in (viii) above to the adjusted projected taxed income to

arrive at the capitalised value of the undertaking.

Divide the result in (ix) above by the number of equity shares to arrive at the value per share. In this context, it may be noted that very often companies have non-trading assets like investments, and

sometimes idle assets in their balance sheets. The income from non-trading assets does not reflect

the earning power of the company and consequently that part of income should be taken out of

consideration in determining the average maintainable profit. Also, the value of non-trading and idle

assets, after proper determination, should be excluded in the determination of net worth at each

stage. But non-trading assets should be added to the value of undertaking as obtained in (ix) above.

Fair Value of Shares

The fair value of a share is the average of the value of shares obtained by the net assets method and the

one obtained by yield method. Under net assets method, the value of an equity share is arrived at by

valuing the assets of a company and deducting there from all the liabilities and claims of preference

shareholders and dividing the resultant figure by the total number of equity shares with the same paid up

value. Under yield method, the value of an equity share is arrived at by comparing the expected rate of

return with the normal rate of return. If the expected rate of return is more than normal rate of return,

the market value of the share is increased proportionately.

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The fair value of shares can be calculated by using the following formula: Fair value of share = Value by net asset method + Value by yield

method 2 This method is also known as dual method of share valuation. This method attempts to minimise the demerits of both the methods. This is of course, no valuation but a compromised formula for bringing the parties to an agreement. However, it is recognised in Government circles for valuing shares of investment companies for wealth tax purposes.

SUMMARY OF VALUATION OF SHARES

A. Net Asset Value Method

Step 1 : Compute Net Operating Asset (Refer Capital Employed Computation under Valuation of Goodwill). Step 2 : Add Value of Goodwill and Non operating Assets if any (eg. Investments)

Step 3 : Divide the aggregate of Step 1 & 2 by the number of shares outstanding as at Valuation date.

B. Yield based The Various Methods under this are Dividend Capitalisation Method Earnings Capitalisation Method &

Productivity Factor Method.

1. Dividend Capitalisation Method Step 1 : Ascertain Dividend per share.

Step 2 : Ascertain Normal rate of return.

Step 3 : Capitalise the Dividend per share at above normal rate of return to arrive at value per share. Value per share = DPS X 100

NRR (Where DPS = Dividend Per Share

NRR = Normal Rate of Return) 2. Earnings Capitalisation Method Step 1 : Compute Earnings Per Share (EPS). Step 2 : Ascertain Normal Rate of Return (NRR). Step 3 : Value per share is arrived by capitalising at NRR. Value per share = EPS X100

NRR 3. Productivity Factor Method Step 1 : Computation of Productivity factor

8. Compute weighted average net worth of a given period.

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9. Compute weighted average Profit After Tax (PAT) for the same period.

Compute Productivity factor, by

Weighted Average PAT x 100 Weighted Average Net Worth

Step 2 : Ascertain Net worth on the valuation date.

Step 3 : Compute Future Maintainable Profit (FMP). Future Maintenance Profit = Net Worth x Productivity Factor. Step 4 : Ascertain Adjusted FMP ie., Future Maintenance Profit as per Step 3 adjusted for changes in business. (eg. Change of tax rate). Step 5 : Ascertain Normal rate of return. Step 6 : Capitalise Adjusted FMP at NRR to arrive at value of business. Step 7 : Add : Non operating Assets (eg. Investments) to above value of business.

Less : Preference Share Capital (if any)

Step 8 : Value per share = (Step 6 + Step 7) / Number of Shares

4. Market Price Method Step 1 : Ascertain Earnings Per Share. Step 2 : Ascertain from published sources the Price Earnings Multiples for similar size Company

operating in the same industry.

Step 3 : Value per share = EPS X P/E Ratio.TANGIE ASSETS

INTANGIBLE ASSETS

Intangible asset is defined as a capital asset having no physical existence. Intangible assets are

expected to benefit the firm beyond the current operating cycle of the business. It implies that they

are non-current assets. Intangibles are not basically different from other non-monetary assets as they

are expected to benefit the owner beyond the current operating cycle of the business. But like other non-

monetary assets, intangibles asset has no physical existence. Thus, intangibles are assets which cannot

be seen, touched and have no volume like tangibles but have right to future benefits. However, not all

assets which lack physical substance are regarded as intangible assets i.e., account receivables, short-

term pre-payment etc., are of non-physical nature but classified as current assets.

88

Though intangibles provide future benefits, there is a high degree of uncertainty regarding the value of

the future benefits to be received. Some intangibles relate to the development and manufacture of a

product, such as, patents, copyrights, etc. while some others relate to the creation and maintenance of the

demand for the product such as, trade marks.

Accounting Standard (AS) 26 Intangible Assets issued by the Institute of Chartered Accountants of

India deals with meaning and valuation of intangible assets. According to this Accounting Standard, an

intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the

production or supply of goods or services, for rental to others, or for administrative purposes.

To understand this definition, the meaning of non-monetary asset must be clear. An asset is a resource

(a) controlled by an enterprise as a result of past events; and (b) from which future economic benefits are

expected to flow to the enterprise. Monetary assets are money held and assets to be received in fixed or

determinable amounts of money. Non-monetary assets are assets other than monetary assets. Following are the features of intangible assets :

It is non-physical in nature.

It gives the specific rights to the holders over several future years.

It is possible for multiple uses at the same time.

It creates future value.

It is identifiable as non-monetary asset.

It has limited ability to protect property rights.

Investment in intangible assets is basically risky. Approaches for Valuing Intangible Assets

Valuation of intangible assets is a difficult exercise. The physical form of intangible assets makes it

difficult to identify the future economic benefits that the organisation can expect to obtain from the

intangible assets. Many intangible assets do not have alternative use and cannot be divided into

components or parts for resale. Infact, intangible assets normally do not have an active market. Many

times, they are not separable from the business and hence it becomes difficult to value them separately

from the business.

There are three approaches used in valuing intangible assets; (i) cost approach, (ii) market value

approach and (iii) economic value approach. The valuer has to select the approach after considering a

number of factors like credibility, objectivity, relevance and practicality.

In cost approach, expenditure incurred in developing the asset is aggregated. If the asset has been

purchased recently, its purchase price may be taken to be the cost.

In market value approach, valuation is made by reference to transactions involving similar assets that

have taken place recently in similar markets. The approach is possible if there is existence of an active

89

market of comparable intangible assets and adequate information in respect of transactions that have

taken place recently is available. Economic value approach is based on the cash flows or earnings attributable to those assets and the

capitalisaiton thereof, at an appropriate discount rate or multiple. The valuer has to identify the cash

flow-earnings directly associated with the intangible assets like the cash flows arising from the utilization

of a patent or copyright, licensing of an intangible asset, etc. It is possible only if cash flows from the

intangible asset are identifiable from the accounts and budgets, forecasts or plans of the enterprise.

Recognition and Initial Measurement of an Intangible Asset

An intangible asset should be recognised if, and only if:

it is probable that the future economic benefits that are attributable to the asset will flow to the

enterprise; and

the cost of the asset can be measured reliably. An enterprise should assess the probability of future economic benefits using reasonable and

supportable assumptions that represent best estimate of the set of economic conditions that will exist

over the useful life of the asset. An intangible asset should be measured initially at cost.

Internally Generated goodwill

Internally generated goodwill should not be recognised as an asset. To assess whether an internally generated intangible asset meets the criteria for recognition, an

enterprise classifies the generation of the asset into:

a research phase; and

a development phase. If an enterprise cannot distinguish the research phase from the development phase of an internal project

to create an intangible asset, the enterprise treats the expenditure on that project as if it were incurred in

the research phase only.

1. Research Phase No intangible asset arising from research (or from the research phase of an internal project) should be

recognised. Expenditure on research (or on the research phase of an internal project) should be

recognised as an expense when it is incurred. Examples of research activities are:

activities aimed at obtaining new knowledge;

the search for, evaluation and final selection of, applications of research findings or other knowledge;

the search for alternatives for materials, devices, products, processes, systems or services; and

the formulation, design, evaluation and final selection of possible alternatives for new or

improved materials, devices, products, processes, systems or services.

90

2. Development Phase An intangible asset arising from development (or from the development phase of an internal project)

should be recognised if, and only if, an enterprise can demonstrate all of the following:

the technical feasibility of completing the intangible asset so that it will be available for use or sale;

its intention to complete the intangible asset and use or sell it;

its ability to use or sell the intangible asset;

how the intangible asset will generate probable future economic benefits.

Recognition of an Expense on Intangible Asset Expenditure on an intangible item should be recognized as an expense when it is incurred unless:

it forms part of the cost of an intangible asset that meets the recognition criteria;

the item is acquired in an amalgamation in the nature of purchase and cannot be recognized as an

intangible asset. If this is the case, this expenditure (included in the cost of acquisition) should form part of the amount

attributed to goodwill (capital reserve) at the date of acquisition. In some cases, expenditure is incurred to provide future economic benefits to an enterprise, but no

intangible asset or other asset is acquired or created that can be recognised. In these cases, the

expenditure is recognised as an expense when it is incurred. For example, expenditure on research is

always recognised as an expense when it is incurred. Examples of other expenditure that is recognised as

an expense when it is incurred include:

expenditure on start-up activities (start-up costs), unless this expenditure is included in the cost

of an item of fixed asset. Start-up costs may consist of preliminary expenses incurred in

establishing a legal entity;

expenditure on training activities;

expenditure on advertising and promotional activities; and

expenditure on relocating or re-organising part or all of an enterprise. VALUATION OF GOODWILL

Goodwill may be defined as the value of the reputation of a business house in respect of profits expected

in future over and above the normal level of profits earned by undertakings belonging to the same class

of business. In other words, goodwill is the present value of a firm’s anticipated super normal earnings.

The term ‘super normal earnings’ means the excess of earnings attributable to operating tangible and

intangible assets (other than goodwill) over and above the normal rate of return earned by

representative firms in the same industry. Thus, goodwill may be described as the value attaching to a

prosperous business because of factors that other firms do not possess to the same degree. In his “A Dictionary for Accountants”, Kohler defines goodwill as

“the current value of expected future income in excess of a normal return on the investment in net

tangible assets.....”.

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NEED FOR VALUATION OF GOODWILL

In the case of partnership, the necessity of valuing goodwill arises in connection with the following:

When there is a change in the profit-sharing ratio among the partners;

When a new partner is admitted;

When a partner retires or dies; and

When the firm sells its business to a company or is amalgamated with another firm.

In the case of a joint stock company, the need for evaluating goodwill may arise in the following cases:

When the business or company is to be sold to another company or when the company is to be

amalgamated with another company.

When, stock exchange quotations not being available, shares have to be valued for taxation

purposes - gift tax, etc.; When a large block of shares, so as to enable the holder to exercise

control over the company concerned, has to be bought or sold; and

When the company has previously written off goodwill and wants to write it back.

When the company is being taken over by the government.

Methods of Valuing Goodwill

There are basically two methods of valuing goodwill: (i) Simple profit method; (ii) Super profit method. (i) Simple Profit Method Goodwill is sometimes valued on the basis of a certain number of years’ purchase of the average profits of

the past few years. While calculating average profits for the purposes of valuation of goodwill certain

adjustments are made. Some of them are the following:

All actual expenses and losses not likely to occur in the future are added back to profits;

Expenses and losses expected to be borne in future are deducted from such profits;

All profits likely to come in the future are added; and

Even actual profits not likely to recur are deducted. After having adjusted profit in the light of future possibilities, average profits are estimated and then the

value of goodwill is estimated i.e., the average profits are ascertained and then the average is multiplied

by a particular number, representing the number of years’ purchase. If goodwill is to be valued at 3 years’

purchase of the average profits which come to ` 20,000, the goodwill will be ` 60,000, i.e., 3 x ` 20,000. This method has nothing to recommend itself since goodwill is attached to profits over and above what

one can earn by starting a new business and not to total profits. It ignores the amount of capital

employed for earning the profit. However, it is usual to adopt this method for valuing the goodwill of the

practice of a professional person such as a chartered accountant or a doctor. (ii) Super Profit Method

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In this case the future maintainable profits of the firm are compared with the normal profits for the firm.

Normal earnings of a business can be judged only in the light of normal rate of earning and capital

employed in the business. However, this method of valuing goodwill would require the following

informations:

A normal rate of return for representative firms in the industry.

The fair value of capital employed.

Estimated future maintainable profit. Example: In the Illustration No. 1 given above, suppose the investors are satisfied with 12% return, then

normal profit will be ` 7,56,000 i.e. 12% of ` 63,00,000. The future maintainable profit being ` 9,27,500,

super profit will be ` 1,71,500. There are three methods of calculating goodwill based on super profit

which are as under:

(a) (i) Purchase of Super Profit Method Goodwill as per this method is: Super profit x A certain number of years. Under this method, an important

point to note is that the number of years of purchase as goodwill will differ from industry to industry and

from firm to firm. Theoretically, the number of years is to be determined with reference to the

probability of a new business catching up with an old business. Suppose it is estimated that in four years’

time a business, if started de novo, will be earning about the same profits as an old business is earning

now, goodwill will be equivalent to four times the super profits. In the example given above, goodwill will

be ` 6,86,000 i.e., 4 x ` 1,71,500. (ii) Sliding Scale Valuation of Super Profit This method is a variation of the purchase method. This has been advocated by A.E. Cutforth and is based

upon the theory that the greater the amount of super profit, the more difficult it would be to maintain. In

this method the super profit is divided into two or three divisions. Each of these is multiplied by a

different number of years’ purchase, in descending order from the first division. For example, if super

profit is estimated at ` 2,25,000, goodwill be calculated as follows:

`

First ` 75,000 say 5 years 3,75,000

Second ` 75,000 say 4 years 3,00,000

Third `` 75,000 say 3 years 2,25,000

Total goodwill 9,00,000 (b) Annuity Method of Super Profit Goodwill as per this method is: Super profit x Annuity of Re. 1 at the normal rate of return for the stated

number of years. Goodwill in this case is the discounted value of the total amount calculated as per

purchase method. The idea behind super profit method is that the amount paid for goodwill will be

recouped during the coming few years. But in this case, there is a heavy loss of interest. Hence, properly

speaking what should be paid now is only the present value of super profits paid annually at the proper

rate of interest. (c) Capitalisation of Super Profit

93

In this method the amount of super profit is capitalised at the normal rate of return. In other words, this

method tries to find out the amount of capital needed for earning the super profit. The formula is:

Average Annual Super Profit X 100 Normal Rate of Return

SUMMARY OF VALUATION OF GOODWILL Methods of Valuing Goodwill: Average Profits Method, Super Profits Method, Capitalisation Method & Annuity Method. 10. 11. 1) Average Profits Method:

Ascerain Profits of Normal year of the Business Return which shall be adjusted for

Non recurring items eg: Profit on sale of Asset

Non Operating items eg: Income from Investments

Changes in Business Condition eg: Change in Tax rates.

Computation of Average Profits

Note: Simple Average = For Fluctuating Profits

Weighted Average = For Increasing / Decreasing Profits in a trend.

Goodwill is Computed as the number of years purchase of average profits.

Number of years purchase represents the multiplication factor.

12. 2) Super Profits Method: Step 1 : Ascertain Normal Rate of Return (NRR) for the Industry in which the Company whose Goodwill

being valued.

Step 2 : Compute actual profits - operating profits made by the Company. Step 3 : Compute actual capital employed - Either Terminal Capital employed or Average Capital

employed = Opening Capital Employed + Closing Capital 2 (or) = Closing Capital employed - 1/2 the year

profit.

(or) = Opening Capital employed + 1/2 the year profit. Capital employed is calculated under two

approaches as follows:

13. Shareholders Approach :

Capital employed = Share capital + Reserves & Surplus – Miscellaneous Expenditure

14. Longterm funds Approach

Capital employed = Shareholder funds + Longterm borrowings.

94

The Capital employed ascertained as above is referred as Liabilities side approach and is to be adjusted

for the changes in values of OperatingAssets and after excluding non operating Assets. Capital employed

can alternatively be calculated under the Assets side Approach as follows:

15. Value of operating Assets to Business.

16. Less Outside Liabilities Capital Employed = (a) - (b) Step 4 : Compute Normal Profit

Step 5 : Compute super profit ie., excess of actual profits (2) over normal profit (4)

Step 6 : Goodwill = No. of Years purchase x Super Profits (5).

3) Capitalisation Method

Steps 1,2 and 3 same as in Super profit method. Step 4 : Compute Normal Capital employed. Normal Capital employed

= Actual Profit x 100

Normal rate of Return Step 5 : Goodwill = Excess of Normal Capital employed over Actual Capital Employed. 4) Annuity Method

Goodwill under this method calculated by multiplying the Annuity Factor with the Average Profit or

Super Profit.

95

Accounting Gym – Valuation of Goodwill and Shares

Q.1. A Ltd. agreed to purchase business of a sole trader. For that purpose, goodwill is to be valued at 3 year‟s purchase

of the average profits of last 5 years.

Profits for these years are:

1997 - ` 40,000; 1998 - ` 45,000; 1999 - ` 36,000; 2000 - ` 46,000; 2001 - ` 50,000.

[Ans. Goodwill ` 1,30,200.]

Q.2. X Ltd. proposed to purchase the business carried on by Mr. A Goodwill for this purpose is agreed to be valued at

3 years‟ purchase of the weighted average profits of the past four years. The appropriate weights to be used are:

1998 – 1; 1999 – 2; 2000 – 3; 2001 – 4.

Profits for these years are: 1998 - ` 20,200; 1999 - ` 24,800; 2000 - ` 20,000 and 2001 - ` 30,000.

On a scrutiny of the accounts, the following matters are revealed; (a) On 1st September, 2000 a major

repair was made in respect of the plant incurring ` 6,000 which amount was charged to revenue. The said sum is

agreed to be capitalized for Goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing

balance method; (b) The closing stock for the year 1999 was overvalued by ` 2,400; and (c) To cover

management cost an annual charge of ` 4,800 should be made for the purpose of goodwill valuation.

You are required to compute the value of goodwill of the firm.

[Ans. Goodwill ` 65,784.]

Q.3. The following particulars are available in respect of the business carried on by Sucharan.

(i) Capital employed - ` 50,000.

(ii) Trading Profit (after tax):

1998 - ` 12,200;

1999 - ` 15,000;

2000 - ` 2,000 (Loss); and

2001 - ` 21,000

(iii) Market Rate of interest on investment – 8%.

(iv) Rate of risk return on capital invested in business – 2%.

(v) Remuneration from alternative employment of the proprietor (if not engaged in business) ` 3,600 p.a.

You are required to compute the value of goodwill on the basis of 3 years purchase of super profits of the business

calculated on the basis of average profit of the last four years.


Q.4. From the following information calculate the value of goodwill:

(a) Average capital employed ` 12,00,000.

(b) Company declares 15% dividend on the share of ` 20 each fully paid, which is quoted in the market at ` 25.

(c) Net trading profit of the firm (after tax) for the past 3 years: ` 2,15,200; ` 1,81,400; ` 2,25,000.

You are required to compute the value of goodwill on the basis of 5 years purchase of super profits of the business

calculated on the basis of average profit of the last three years.


Q.5. Following is the Balance Sheet of Navin Traders as on 31.3.2002:


Creditors

Capital

Reserve

1,52,160

6,56,000

1,60,000

Fixed Assets

Current Assets

Investments in shares

3,60,000

4,88,160

1,20,000

9,68,160 9,68,160

96

The following net profits were earned which included a fixed income on investment of ` 8,000 per year. Year

ended 31 March: 1999 ` 1,28,000; 2000 - ` 1,44,000; 2001- ` 1,72,000; 2002 - ` 1,80,000. Standard rate of return

on capital employed in this type business is 8%. Calculate the value of goodwill of the above business at three

years purchase of the average super profits for the years assuming (i) that each years profit is immediately

withdrawn in full by the proprietor and (ii) the weights to be assigned to the profits for the purpose of averaging

are:

Year: 1999 2000 2001 2002

Weight: 1 1.5 2 2.5


Q.6. Negotiation is going on for transfer of X ltd. on the basis of the Balance Sheet and the additional information as

given below: Balance Sheet of X ltd. as on 31st March, 2002


Share Capital (` 10 fully paid-up

shares)


Sundry Creditors

10,00,000

4,00,000

3,00,000

Goodwill

Land and Building

Plant and Machinery

Investments

Stock

Debtors

Cash and Bank

1,00,000

3,00,000

8,00,000

1,00,000

2,00,000

1,50,000

50,000

17,00,000 17,00,000

Profit before tax for 2001-02 amounted to ` 6,00,000 including ` 10,000 as interest on investment. However, an

additional amount of ` 50,000 p.a. shall be required to be spent for smooth running of the business.

Market value of Land and Buildings and Plant and Machinery are estimated at ` 9,00,000 and ` 10,00,000

respectively. In order to match the above figures further depreciation to the extent of ` 40,000 should be taken

into consideration. Income tax rate may be taken at 50%. Return on capital at the rate of 10% before tax will be

considered normal for this business at the present stage.

For the purpose of determining the rate of return, profit for this year after the aforesaid adjustments may be taken

as expected average profit. Similarly, average trading capital employed is also to be considered on the basis of the

position in this year. It has been agreed that four years‟ purchase of super profit shall be taken as the value of

goodwill for the purpose of the deal. You are required to calculate the value of goodwill of the company.


Q.7. From the following information prepare statements showing:

(i) Capital employed;

(ii) Average capital employed;

(iii) Goodwill on the basis of 5 years‟ purchase of the average super profits:

Balance Sheet of Z ltd. as on 31.12.2001



1,000, 9% Preference Shares of `

100 each

Reserve and Provision:

(Provision for taxation ` 20,000)

10% debentures

Creditors

2,00,000

1,00,000

2,00,000

90,000

60,000

Goodwill

Fixed Assets

Investments: 6% Govt. Loan

Current Assets

Share selling Commission

Discount on issue of Debentures

30,000

3,50,000

45,000

2,00,000

10,000

15,000

6,50,000 6,50,000

97

The current market value of the plant included in fixed assets is ` 15,000 more. The average profit of the company

(after deductions for interest on debentures and govt. taxes) is ` 68,000. Expected rate of return is 10%.

[Ans. i) Capital Employed ` 4,85,000; ii) Avg. Capital Employed ` 4,47,850 and Goodwill ` 1,47,575.]

Q.8. Ascertain the value of goodwill (using Capitalisation Method) of Shoenischit Ltd. carrying on business from the

following:

Balance Sheet as at 30th

June, 2002


Paid-up Capital – 2,500 Share of `

100 each fully paid

Bank Overdraft

Sundry Creditors

Provision for Taxation

Profit and Loss Appropriation

Account

25,00,000

4,80,000

8,05,000

4,25,000

6,00,000

Goodwill at cost

Land and Building at cost

Plant and Machinery at cost less

depreciation

Stock-in-trade

Book debts less provision for bad

debts

2,50,000

11,00,000

10,00,000

15,00,000

9,60,000

48,10,000 48,10,000

The company started operations in 1997 with a paid-up capital as aforesaid of ` 25,00,000. Profits earned before

providing for taxation have been as follows:

Year ended 30 June: 1998 ` 6,00,000; 1999: ` 7,50,000; 2000 - ` 8,50,000; 2001: ` 9,50,000; 2002 - ` 8,50,000.

Income tax @ 50% has been payable on these profits. Dividends have been distributed from the profits of the first

three years @ 10% and from those of the next two years @ 15% of the paid-up capital.


Q.9. The net profit of the business after tax for the past five years are: ` 2,00,000; ` 2,12,500; ` 2,30,000; ` 2,62,500;

and ` 2,95,000. The capital employed in the business is ` 20,00,000. The normal rate of return expected in this

type of business is 10%. It is expected that the company will be able to maintain its super profit for the next 5

years. Calculate the value of goodwill on the basis of capitalization of super profit method.


Q.10. The net profit of a company after providing for taxation for the past five years are:

` 40,000; ` 50,000; ` 30,000; ` 70,000; and ` 80,000.

The net tangible assets in the business is ` 4,00,000 on which the normal rate of return is expected to be 10%. It is

also expected that the company will be able to maintain its super profits for next five years.

Calculate the value of goodwill of the business on the basis of an annuity of super profits, taking the present value

of an annuity of one rupee for five years at 10% interest is ` 3.78.


Q.11. The Balance Sheet as at 31st March, 2002 showed the following position:


Share Capital


General Reserve


Current Liabilities:

Bank Overdraft

Creditors

20,00,000

6,00,000

3,50,000

3,00,000

4,00,000

Debtors

Stock-in-hand

Plant

Factory premises

5,00,000

15,00,000

10,00,000

11,50,000

98

Provision for Taxation 5,00,000

41,50,000 41,50,000


(i) Net Profits of the company for the last five years before providing for taxation were as follows: ` 4,10,000; `

6,40,000; ` 7,00,000; ` 8,50,000; ` 9,00,000.

(ii) Managerial remuneration of ` 60,000 has been charged for each year.

(iii) The market value of the assets were as follows: Stock - ` 15,50,000; Plant - ` 10,40,000; Factory premises -

` 12,83,000.

(iv) Taxation may be considered at 50%.

(v) Goodwill should be valued at 5 years‟ purchase of super profits.

(vi) Normal rate of return – 10% p.a.

On the basis of the above information, find out the intrinsic value of shares. Indicate assumptions. If any, clearly.

[Ans. Value per Share ` 166.825]

Q.12. From the following information of P. Merchandise Co. Ltd. compute the value of its equity shares by

(capitalization of) earnings method.

Balance Sheet as on 31st December, 2001


Share Capital:

Equity Shares of ` 10 each fully paid

Reserve and Surplus

12% debentures (Since 1996)

Other Liabilities

2,50,000

1,00,000

2,50,000

2,25,000

Fixed Assets

Current Assets

Preliminary Expenses

5,00,000

3,00,000

25,000

8,25,000 8,25,000

Year Ending 31st December

Particulars 1997 (`) 1998 (`) 1999 (`) 2000 (`) 2001 (`)

Sales

Operating Costs

Interest on Loan from Bank

6,00,000

3,45,000

25,000

7,00,000

3,95,000

25,000

8,00,000

4,45,000

25,000

5,00,000

2,95,000

25,000

9,00,000

4,95,000

25,000

Assume rate of taxation at 60% and the rate of normal earnings at 12½% Also show the workings.

[Ans. Value per Share ` 32.]

Q.13. From the following Balance Sheet of J. Adams Co. Ltd. as on 31.12.2001, compute the value of its equity shares

by capitalization of earnings method:


Share Capital:


Reserve and Surplus

10% Debentures (Issued at par on

1.1.1997, redeemable at par on or

before 2006)

Current Liabilities

5,00,000

1,50,000

3,00,000

2,50,000

Fixed Assets at cost, less depreciation

Current Assets


6,00,000

5,75,000

25,000

12,00,000 12,00,000

Particulars 31.12.1997

(`)

31.12.1998

(`)

31.12.1999

(`)

31.12.2000

(`)

31.12.2001

(`)

99

Sales

Expenses

Interest on Loan

Interest on Debentures

9,00,000

3,50,000

20,000

30,000

11,00,000

5,80,000

40,000

30,000

14,00,000

6,00,000

50,000

30,000

8,00,000

3,10,000

60,000

30,000

16,00,000

8,00,000

20,000

30,000

It is the usual practice of the company to transfer ` 30,000 every year to General Reserve. Assume rate of taxation

at 50% and the rate of normal earnings at 12.5%. Also show the workings.

[Ans. Value per Share ` 45.12]

Q.14. From the following information, calculate the value of an equity share:

(i) The paid-up share capital of a company consists of 1,000, 15% preference shares of ` 100 each and 20,000

Equity Shares of ` 10 each.

(ii) The average annual profits of the company, after providing for depreciation and taxation amounted to `

75,000. It is considered necessary to transfer ` 10,000 to General Reserve before declaring any dividend.

(iii) The normal return expected by investors on equity shares from the type of business carried on by the

company is 10%.


Q.15. From the following information relating to a company, calculate the value of its equity shares.

Issued equity shares capital – 10,000 shares of ` 10 each; Paid-up equity share capital - ` 8 per share. 6%

Preference share capital – 1,00,000 shares of ` 10 each fully paid; Annual transfers to general reserve – 20%. Rate

of tax – 50%; Expected profits before tax - ` 2,00,000. Normal rate of return – 20%.


Q.16. On 31st December, 2001 the Balance Sheet of a Limited Company disclosed the following position:


Issued Capital of ` 10 shares

Reserve


5% debentures

Current Liabilities

4,00,000

90,000

20,000

1,00,000

1,30,000

Goodwill

Fixed Assets

Current Assets

40,000

5,00,000

2,00,000

7,40,000 7,40,000

On 31st December, 2001 the fixed assets were independently valued at ` 5,50,000 and the goodwill at ` 50,000.

The net profits after tax for the three years were:

1999: ` 51,600; 2000: ` 52,000; and 2001: ` 51,650 of which 20% was placed to reserve, this proportion being

considered reasonable in the industry in which the company is engaged and where a fair investment return may be

taken at 10%.

Compute the value of the company‟s shares by (a) the assets backing method and (b) the yield method.

[Ans. Value per Share a) ` 14.25; b) ` 10.35]

Q.17. The following particulars of a company are available:

1) Equity Share Capital: 10,000 equity shares of ` 10 each fully paid.

2) Preference share capital: 1,000, 12% preference shares of ` 100 each fully paid.

3) Reserve and Surplus: ` 15,000.

4) External Liabilities: Creditors - ` 12,000; Bills Payable - ` 6,000.

5) The average normal profit after tax earned each year by the company ` 28,500.

6) Transferred to general reserve – 10%.

Assets of the company include one fictitious item of ` 800. The normal rate of return in respect of the equity share

of this type of company is ascertained at 10% (ignore goodwill).

100

Compute the value of the company‟s share by (a) the asset backing method; and, (b) yield method.

[Ans. Value per Share a) ` 11.42; b) ` 13.65.]

Q.18. The Balance Sheet of Aspi Co. Ltd. as at 31.12.2001 is given below:


Share Capital:


fully paid up

20,000 Equity Shares of ` 100 each `

50 paid-up

Reserve Fund

Depreciation Fund:

On Building 40,000

On Investment 1,80,000

Sundry Creditors

Profit and Loss Account:

Balance on 1.1.2001 15,20,000

Profit for 2001 5,20,000

10,00,000

10,00,000

6,00,000

2,20,000

1,92,000

20,40,000

Building at cost

Furniture at cost

Investment in 5% Govt. securities at

cost

Stock-in-trade (at market price)

Sundry Debtors 13,00,000

Less: Provision for Bad Debts 80,000

Bank

3,20,000

12,000

15,20,000

17,00,000

12,20,000

2,80,000

50,52,000 50,52,000

The following additional information is provided:

(a) It is ascertained that all the customers will pay in full;

(b) Profits for the past three years have shown an increase of ` 80,000 annually;

(c) The prospects for 2002 are equally good for the company;

(d) Buildings are worth ` 3,92,000 and Furniture ` 25,000;

(e) The Companies carrying on similar business show a profit earning capacity of 12% on the market value of

the shares.

You are required to ascertain the fair value of each share giving the details of your calculation.

[Ans. Value per Share a) NET ASSET METHOD ` 194.83; b) EARNING CAPACITY ` 183.33 & c) FAIR

VALUE METHOD ` 189.08 ]

Q.19. From the following figures calculate the value of a share of ` 10 on (i) dividend basis, and (ii) return on capital

employed basis, the market expectation being 12%. (Use Weighted Average Approach)

Year Ended Capital Employed (`) Profit (`) Dividend (%)

2005

2006

2007

2008

5,00,000

8,00,000

10,00,000

15,00,000

80,000

1,60,000

2,20,000

3,75,000

12

15

18

20

[Ans. Value per Share a) DIVIDEND BASIS ` 14.67 & b) CAPITAL EMPLOYED BASIS ` 18.50.]

Q.20.

Year ended 31st March Avg. Net Worth (`) Adjusted Taxed Profits (`)

2011

2012

2013

18,50,000

21,20,000

21,30,000

1,80,000

2,00,000

2,30,000

The aforesaid figures table relate to a company which has ` 10,00,000 on equity shares of ` 100 each and `

3,00,000 in 9% preference shares of ` 100 each. The company has investments worth ` 2,50,000 (at market value)

on the valuation date the yield in respect of which has been excluded in arriving at the adjusted tax profit figures.

101

It is usual for similar type of companies to set aside 25% of the taxed profit for rehabilitation and replacement

purposes.

On the valuation day the net worth (excluding investment) amounts to ` 22,00,000. The normal rate of return

expected is 9%. The company paid dividends consistently within a range of 8 to 10% on equity shares over the

previous seven years and the company expects to maintain the same. Compute the value of each equity share on

the basis of productivity.

[Ans. Value per Share ` 181.63.]

Q.21. Balance Sheet of Mark Ltd. as at 31st March, 2014

Particulars Note No. Amount as at 31st

March, 2014

Amount as at 31st

March, 2013

` `

1 2 3 4


1) Shareholders‟ Funds

(a) Share Capital 1

(b) Reserve and Surplus 2

2) Non-Current Liabilities

10% Debentures


Trade payables

TOTAL

II. ASSETS


(a) Fixed Assets 3

(b) Other non current assets 4

TOTAL

400,000

(5,000)

50,000

95,000

5,40,000

5,33,000

7,000

5,40,000

Note No. 1: `

Share Capital

10,000 12% Preference shares of ` 10 each fully paid 1,00,000

30,000 Equity Shares of ` 10 each fully paid 3,00,000

4,00,000

Note No. 2:

Reserve and Surplus

General Reserve 10,000

Debenture redemption fund 20,000

30,000

Less: Profit & Loss (Dr. Balance) (35,000)

(5,000)

Note No. 3:

Fixed Assets

Sundry Assets 5,48,000

Depreciation On Asset (15,000)

5,33,000

Note No. 4

102

Other non-current assets

Preliminary expenses 5,000

Discount on debentures 2,000

7,000

Further Information

The debenture interest is owing for six months and dividends on preference shares are in arrears for one year.

Assuming the assets are worth their book values, show the approximate value of preference and equity shares if:

i) Preference shares are preferential as to capital and arrears are payable in a winding up; and;

ii) Preference shares are preferential as to capital but arrears of preference dividends are not payable.

[Ans. Value per Share Case i) Preference ` 11.20 and Equity ` 9.12 & Case ii) Preference ` 10 and Equity `

9.52.]

Q.22. EXE LIMITED

Balance Sheet as at 31st March, 2001

Liabilities ` Assets ` `

11% Preference Share

Capital

Equity Share Capital


10% Bank O/D

Current Liabilities and Provisions

5,00,000

20,00,000

25,00,000

27,00,000

15,00,000

Fixed Assets:

Cost

Less: Depreciation

Capital Work-in-Progress

6% Government Securities

Current Assets

Underwriting Commission

50,00,000

30,00,000

20,00,000

40,00,000

5,00,000

25,00,000

2,00,000

92,00,000 92,00,000

The company earned a profit of ` 9,00,000 after tax @ 50% in 2000-01. The capital work in progress represents

additional plant equal to half the capacity of the present plant; it will be immediately operational, there being no

difficulty in sales. With effect from 1st April, 2001, two additional part-time directors are being appointed at `

75,000 p.a. each. Ascertain the future maintainable profit and the capital employed, assuming the present

replacement cost of fixed assets is ` 1,00,00,000 and the annual rate of depreciation is 10% on original cost.

[Ans. FMP ` 9,27,500 & Capital Employed ` 63,00,000.]

Q.23. A Ltd. proposed to purchase the business carried on by M/s X & Co. Goodwill for this purpose is agreed to be

valued at three years‟ purchase of the weighted average profits of the past four years. The approximate weights to

be used are:

2010 -11 1 2012-13 3

2011-12 2 2013-14 4

The profits for these years are: 2010-11: – 1,01,000; 2011-12: ` 1,24,000; 2012-13: ` 1,00,000 and 2013-14: `

1,40,000.

On a scrutiny of the accounts the following matters are revealed:

i) On 1st December, 2012 a major repair was made in respect of the plant incurring ` 30,000 which was

charged to revenue. The said sum is agreed to be capitalized for goodwill calculation subject to adjustment

of depreciation of 10% p.a. on reducing balance method.

ii) The closing stock for the year 2011-12 was overvalued by ` 12,000.

iii) To cover management cost an annual charge of ` 24,000 should be made for the purpose of goodwill

valuation.

Compute the value of goodwill of the firm.


103

Q.24. From the following information ascertain the value to goodwill of X ltd. under super profit method.

Balance Sheet as on 31st March, 2014


Paid up Capital:

5,000, shares of ` 100 each

Fully paid

Bank overdraft

Sundry Creditors


Profit and loss appropriation

Account

5,00,000

1,16,700

1,81,000

39,000

1,13,300

Goodwill at cost

Land and Buildings at cost

Plant and Machinery at cost

Stock in trade

Book debts less

Provision for bad Debts

50,000

2,20,000

2,00,000

3,00,000

1,80,000

9,50,000 9,50,000

The Company commenced operations in 2008 with a paid-up capital of ` 5,00,000. Profits for recent years (after

taxation) have been as follows:

Year ended 31st March `

2010

2011

2012

2013

2014

40,000 (Loss)

88,000

1,03,000

1,16,000

1,30,000

The loss in 2010 occurred due to a prolonged strike.

The income-tax paid so far has been at the average rate of 40%, but is is likely to be 50% from April 2013

onwards. Dividends were distributed at the rate of 10% on the paid up capital in 2011 and 2012 and at the rate of

15% in 2013 and 2014. The market price of shares is ruling at ` 125 at the end of the year ended 31st March, 2013.

Profits till 2013 have been ascertained after debiting ` 40,000 as remuneration to the director. The company has

approved a remuneration of ` 60,000 with effect from 1st April, 2013. The company has been able to secure a

contract at an advantageous price thereby it can save materials worth ` 40,000 per annum for the next five years.

{NYP : 5 Years} [Use Weighted Average Profit and Average Capital Employed.]

[Ans. Goodwill : Normal Rate (12%) ` 1,90,190 and Normal Rate (10%) ` 2,47,520.]

Q.25. Following is the balance sheet of Ramesh Ltd. as on 31st March, 2008:

Liabilities `


12% Preference shares of ` 100 each

General Reserve


15% Debenture

Creditors

10,00,000

10,00,000

6,00,000

4,00,000

10,00,000

8,00,000

48,00,000

Assets `

Goodwill

Building

Plant

Investment in 10% Stock (market value of ` 5,20,000, and

Nominal value ` 5,00,000)

5,00,000

15,00,000

10,00,000

4,80,000

6,00,000

104

Stock

Debtors

Cash


4,00,000

1,00,000

2,20,000

48,00,000


Assets are revalued as follows:

Building: ` 32,00,000; Plant: ` 18,00,000; Stock: ` 4,50,000; and Debtors: ` 3,60,000. Average profit before tax

of the company is ` 12,00,000 and 12.5% of the profit is transferred to general reserve, rate of taxation being

50%. Nominal dividend expected on equity shares is 8% while fair return of capital employed is 10%. Goodwill

may be valued at 3 year‟s purchase of super profits.

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

[Ans. IVPS ` 37.97, Yield Value `37.50 and Fair Value Method ` 37.74] [Dec‟08 - 9 Marks]

Q.26. Abridged balance sheet of Rama ltd. as on 31st March, 2009 is as follows:

Liabilities `

Share Capital


Bank Overdraft

Creditors


6,00,000

1,10,000

10,000

60,000

1,10,000

8,90,000

Assets `

Fixed Assets

Current Assets

3,70,000

5,20,000

8,90,000

The net profits of the company after deducting working expenses but before providing for taxation were as under:

Year `

2006 – 07 3,18,000

2007 – 08 3,40,000

2008 – 09 3,12,000

On 31st March, 2009, Fixed assets were valued at ` 4,50,000. Sundry debtors on the same date included ` 10,000

which is irrecoverable. Having regard to the type of business, a 10% return on average capital employed is

considered as reasonable. Ascertain the value of goodwill on the basis of three years purchase of annual super

profits. Also calculate goodwill by capitalization of average maintainable profits. Depreciation on fixed assets is

charged @ 10% per annum and the rate of tax is 30%. [Jun‟09 - 6 Marks]

[Ans. Goodwill : ` 4,21,200 (Super Profit Method) & ` 14,04,000 (Capitalisation of Avg. Profit).]

Q.27. On the basis of following information, compute the value of an equity share and a preference share of both Chelsi

ltd. and Nensi Ltd. – (i) when only a few shares are sold; and (ii) when controlling shares are to be sold:

Chelsi Ltd. (`) Nensi Ltd. (`)

Profit after tax

12% Preference Share capital

(shares of ` 100 each)

Equity share capital

(Shares of ` 10 each)

10,00,000

10,00,000

50,00,000

10,00,000

20,00,000

40,00,000

105

Assume that market expectation for both companies is 15%; and 80% of the profits are distributed.

[Ans. Chelsi Ltd. : i) ` 9.39 & ii) ` 11.73. Nensi Ltd. : i) ` 10.13 & ii) ` 12.67.] [Dec‟09 - 6 Marks]

Q.28. Balance Sheet of Diamond ltd. as at 30th

June, 2009 is given below:

Liabilities `

Share Capital: 40,000 Shares of ` 10 each

General Reserve


Sundry Creditors

Income-tax reserve (Treat as a Liability)

4,00,000

80,000

64,000

2,56,000

1,20,000

9,20,000

Assets `

Land and buildings

Plant and Machinery

Patents and trade marks


Stock

Debtors

Bank Balance

2,20,000

2,60,000

40,000

24,000

96,000

1,76,000

1,04,000

9,20,000

The expert valuer valued the land and buildings at ` 4,80,000, goodwill at ` 3,20,000 and plant and machinery at

` 2,40,000. Out of the total debtors. It is found that debtors of ` 16,000 are bad. The profits of the company have

been as follows:

31st March, 2007 : ` 1,84,000

31st March, 2008 : ` 1,76,000

31st March, 2009 : ` 1,92,000

The company follows the practice of transferring 25% of profits to general reserve. Similar type of companies

earn at 10% of the value of their shares. Plant and Machinery, and land and buildings have been depreciated at

15% and 10% respectively. Ascertain the value of shares of the company by using –

i) Intrinsic value method;

ii) Yield value method; and

iii) Fair value method. [Jun‟10 - 6 Marks]

[Ans. Intrinsic value method : ` 26.60 ; Yield value method ` 29.06 & Fair value method ` 27.83]

Q.29. Following are the information of two companies for the year ended 31st March, 2010:

Company- A (`) Company -B (`)


10% Preference shares of ` 10 each

Profit after tax

8,00,000

6,00,000

3,00,000

10,00,000

4,00,000

3,00,000

Assuming that the market expectation is 18% and 80% of the profits are distributed, what is the price per share

you would pay for the equity shares of each company – (i) if you are buying a small lot; and (ii) if you are buying

controlling interest shares?

[Ans. A Ltd. : i) ` 13.33 & ii) ` 16.67. B Ltd. : i) ` 11.56 & ii) ` 14.44.] [Dec‟10 - 6 Marks]

Q.30. The following particulars of Jag Apna Ltd. are available:

i) Share Capital:

10,000 Equity shares of ` 10 each fully paid

1,000, 12% Preference shares of ` 100 each fully paid

ii) Reserves and Surplus: ` 15,000

106

iii) External liabilities:

Creditors: ` 12,000

Bills payable: ` 6,000

iv) The average normal profits (after taxation) earned each year by the company: ` 28,500.

v) Assets of the company include one fictitious item of ` 800.

vi) The fair or normal rate of return in respect of the equity shares of this type of company is ascertained at

10%.

Calculate the value of each share by using – (i) assets backing method; (ii) Yield method; and (iii) Fair value

method. [Jun‟11 - 6 Marks]

[Ans. Asset Backing Method : ` 11.42 ; Yield value method ` 16.50 & Fair value method ` 13.96]

Q.31. Following is the summarized balance sheet of Victory ltd. as on 31st March, 2012:

Liabilities `

Share Capital: 30,000 Equity Shares of ` 10 each

General Reserve

Capital Reserve

Profit and Loss (Surplus)

Proposed dividend

Trade payables

Income-tax payable

Provision for tax

3,00,000

1,20,000

40,000

1,20,000

34,000

93,700

11,500

82,500

8,01,700

Assets `

Freehold property

Plant and Machinery

Stock

Trade receivables

Bank Balance

Cash in hand

1,20,000

50,000

3,10,000

2,13,000

1,07,000

1,700

8,01,700

Net profit (before taxation) for the past 3 years ended:

`

31-3-2010 1,38,000

31-3-2011 1,83,000

31-3-2012 1,97,000

On 31st March, 2012 freehold property was valued at ` 1,80,000 and plant and machinery at ` 80,000. Average

yield in this type of business is 15% on capital employed.

Goodwill of the company is ` 1,00,000. The company transfers 20% of net profits to general reserve, rate of tax is

50%.

You are required to find out –

i) Value of each equity share; and

ii) Fair value of each share. [Dec‟12 - 6 Marks]

[Ans. Intrinsic value method : ` 25.67, Yield value method ` 15.34 & Fair value method ` 20.71]

Q.32. Calculate the value of one equity share from the following information:

i) 60,000 equity shares of ` 10 each, ` 7 paid-up.

ii) ` 2,00,000, 10% preference shares of ` 100 each, fully paid-up.

iii) Expected annual profits before tax ` 4,00,000.

107

iv) Tax rate 35%.

v) Transfer to general reserve 20% of profits every year.

vi) Normal rate of return 20%.

[Ans. Value per Equity Share : ` 15.67.]

Q.33. Gaurav holds 5,000 equity shares in Real ltd. The nominal and paid-up capital of the company is as follows:

20,000 equity shares of ` 1 each

10,000, 5% preference shares of ` 1 each (non-participative in further profits).

It is ascertained that:

i) The normal profit of such a company is ` 5,000; and

ii) The normal rate of return by way of dividend on the paid-up value of equity share capital for the type of

business carried out by the company is 8%.

Gaurav requests you to value the yield price for his shareholding based upon the above information.

[Ans. Yield value per Share ` 2.81.]

Q.34. Following is the balance sheet of Dabbu Ltd. as on 31st March, 2014:

Note No. `

i) Equity and Liabilities

1) Shareholder‟s funds

a) Share Capital (` 10 each)



a) Trade payables

b) Workman saving account

c) Provision for income-tax

1

75,000

27,000

36,250

11,250

22,500

Total 1,72,000

Note No. `

ii) Assets

1) Non-current assets

a) Fixed Assets

b) Preliminary Expenses

2) Current Assets

a) Stock

b) Trade receivables

c) Cash at bank

2

97,500

4,500

18,000

33,000

19,000

Total 1,72,000

Note No. 1: `

Reserves and surplus


Surplus 12,000

27,000

Note No. 2: `

Fixed Assets

Land and Building 42,000

Plant and Machinery 48,000

Trade Marks 7,500

108

97,500

The plant is worth ` 45,000 and land and building ` 90,000. Out of the total debtors, ` 3,000 are bad.

The profits of the company have been as follows:

`

31.03.2012 30,000

31.03.2013 33,750

31.03.2014 39,750

It is the company‟s practice to transfer 25% of profits to general reserve. Similar type of companies earn at 10%

of the value of their shares. Goodwill is ` 60,000. Ignore taxation.

Ascertain the value of shares of the company using:

i) Intrinsic value method; and

ii) Yield value method.

[Ans. (i) ` 26.60, (ii) ` 33.50.] [Dec‟14 - 7 Marks]

Q.35. The following is the balance sheet of Best ltd. as at 30th

June, 2004:

Liabilities `

Share Capital:

4,00,000 Equity Shares of ` 10 each, fully paid-up

4,00,000 Equity Shares of ` 10 each, paid-up ` 7.50 per share

4,00,000 Equity Shares of ` 10 each, paid-up ` 5 per share


Provision for bad debts

Sundry Creditors

Dividend equalization fund

40,00,000

30,00,000

20,00,000

56,00,000

1,20,000

20,40,000

6,40,000

1,74,00,000

Assets `

Patent and copyrights

Land and buildings

Plant and Machinery

Stock

Investments at cost

Debtors

Bank


8,00,000

48,00,000

48,00,000

24,00,000

6,00,000

32,00,000

6,40,000

1,60,000

1,74,00,000

Additional information are as follows:

i) The normal average profit (after tax) for the company is estimated to be ` 21,60,000.

ii) The applicable capitalization rate is 12%.

iii) The revised values of –

Patent and copyrights are estimated @ 50% of its value, and

Land and building and plant and machinery are revalued at ` 60,00,000 and ` 52,00,000 respectively.

iv) Investments have a market value of ` 7,20,000.

v) Provision for bad and doubtful debts to b e maintained @ 2%.

vi) The balance sheet as at 30th

June, 2004 does not contain a provision for Income tax, which are estimated at

` 3,00,000.

You are required to calculate the value of fully and partly paid-up equity share (per share) by:

i) The asset backing method (excluding goodwill) on the notional call method; and

ii) The earning capacity method.

109

[Ans. i) Asset Backing Method : ` 15.96 & ii) Earning Capacity Method ` 20. For Fully Paid up share.]

Q.36. Following is the summarized balance sheet of Royal Ltd. as on 31st March, 2005:

Liabilities `

3,000, 6% Preference Shares of

` 100 each fully paid-up

1,30,000 Equity shares of ` 10 each

Fully paid-up


8% Debentures

Sundry Creditors

3,00,000

13,00,000

9,00,000

6,00,00

4,78,500

35,78,500

Assets `

Goodwill

Freehold property

Plant and Machinery less depreciation

Stock

Debtors (net)

Cash and Bank balances

1,00,000

7,50,000

7,00,000

7,40,000

7,98,500

4,90,000

35,78,500

The following are additional information:

i) The profit after tax for the three financial years 2002-03; 2003-04; and 2004-05, after charging debenture

interest, were ` 4,41,000, ` 6,45,000 and ` 4,80,000 respectively.

ii) The normal rate of return is 10% on the net assets attributed.

iii) The value of freehold property is to be ascertained on the basis of 8% return. The current rental value is `

1,00,800.

iv) The rate of tax applicable is 40%.

v) 10% of profits for the financial year 2003-04 referred to above arose from a transaction of non-recurring

nature.

vi) A provision of ` 31,500 on sundry debtors was made in the financial year 2004-05 which is no longer

required; profit for the year 2004-05 is to be adjusted for this item.

vii) A claim of ` 16,500 against the company is to be provided and adjusted against profit for the financial year

ended on 31st March, 2005.

viii) Goodwill may be calculated at 3 times adjusted average profits of the 3 years.

ix) Capital employed may be taken as on 31st March, 2005.

You are required to ascertain the value of goodwill of the company.

[Ans. Value Of Goodwill ` 15,10,500.]

Q.37. On 31st March, 2006 the balance sheet of Himalaya ltd. disclosed the following position:

Liabilities `

Subscribed share capital of ` 10 each, fully paid

General reserve


14% Debentures

Current liabilities

4,00,000

1,90,000

1,20,000

1,00,000

1,30,000

9,40,000

Assets `

Goodwill

Other fixed assets

40,000

5,00,000

110

Current assets 4,00,000

9,40,000

On the above mentioned date, the tangible fixed assets were independently valued at ` 3,50,000 and goodwill at `

50,000. The net profits for three years were – 2003-04: ` 1,03,200; 2004-058 : ` 1,04,000; and 2005-06: `

1,03,300 of which 20% was transferred to general reserve, this proportion being considered reasonable in the

industry in which the company is engaged and where a fair return on investment may be taken at 18%. Compute

the value of the company‟s share by i) the net assets method: and (ii) the yield method. Ignore taxation.

[Ans. Value Per Share : Net Asset Method ` 14.25 & Yield Method ` 11.50.]

Q.38. The average net profit before adjustment(s) is ` 5,14,000. The profit includes interest at 8% on non-trading

investments. The cost of these investments is ` 1,98,200 while the face value is ` 2,00,000. Expenses amounting

to ` 7,000 per annum are likely to be discontinued in future. The provision for income-tax be made at 30%. The

normal rate of return may be taken at 10%. The average capital employed in the business (including investments)

is ` 18,98,200.

Assuming four year‟s purchase of super-profits, what is the value of goodwill?

[Ans. Value Of Goodwill ` 7,34,000.]

Q.39. The subscribed share capital of a company consists of 10,000, 14% preference shares of ` 100 each and 2,00,000

equity shares of ` 10 each. All the shares are fully paid-up.

The average annual profit of the company after providing depreciation but before taxation is ` 25,00,000. It is

considered necessary to transfer ` 1,25,000 to general reserve before declaring any dividend. Rate of taxation is

50%.

The normal return expected by investors on equity shares from the type of business carried on by the company is

20%.

From the above information, calculate the following:

i) Amount available for equity dividend; ii) Rate of dividend; and iii) Value of an equity share.

[Ans. Amount Available for Equity Dividend ` 9,85,000; Rate Of Dividend 49.25% & Value Per Share : `

24.63.]

Q.40. Beta ltd. proposed to purchase the business run by Akram on 31st March, 2007. Goodwill for the purpose is agreed

to be valued at three year‟s purchase of weighted average of past four years‟ profits. The appropriate weights to be

used and profits for these years were:

Year Weight Profit (`)

2003-04 1 20,200

2004-05 2 24,800

2005-06 3 20,000

2006-07 4 30,000

On scrutiny of accounts, the following matters were revealed:

i) On 1st December, 2005, a major overhauling was made in respect of the plant incurring ` 6,000 which was

charged to revenue. The said amount is agreed to be capitalized for goodwill calculation subject to

adjustment of yearly depreciation of 10% per annum on reducing balance method.


iii) To cover the management cost, an annual charge of ` 4,800 should be made for the purpose of valuation of

goodwill.

Compute the value of goodwill of the business of Akram.

[Ans. Value Of Goodwill ` 65,784.]

Q.41. Compute the amount of goodwill based on 3 years‟ purchase of super profit from the following:

111

Future maintainable profit after tax : ` 15,00,000

Normal pre-tax rate of return : 20%

Capital employed : ` 60,000

Tax rate : 30% [Dec‟16 - 3 Marks]

Q.42. From the following details related to Best Ltd., compute the value of each equity share on the basis of productivity:

Year ended 31st March Average net worth (`) Adjusted taxed profit (`)

2013

2014

2015

16,60,000

22,20,000

22,44,000

1,60,000

2,20,000

2,40,000

Best ltd. has ` 10,00,000 equity share capital of the face value of ` 100 per share and ` 3,00,000, 10%

preference share capital with face value of ` 100 per share. The company has investments worth ` 3,00,000

(market value) on the valuation date, the yield in respect of which has been excluded in arriving at adjusted

taxed profit. It is usual in similar type of companies to set aside 25% of the taxed profit for rehabilitation and

replacement purposes.

On the valuation date, the net worth (excluding investments) amounts to ` 24,00,000. The normal rate of

return expected is 10%. The company paid dividend consistently within a range of 10% to 12% on equity

shares over the previous five years and expects to maintain it. [Dec‟16 - 7 Marks]

112

THEORY MASALA

Q.1. What do you understand by goodwill? Describe the various methods for calculation of goodwill.

Write a short note on: Valuation of Goodwill. [CS (Inter) – June 1998 (5 Marks)]

Ans. Goodwill may be described as the aggregate of those intangible attributes of a business which contribute to its

superior earning capacity over a normal return on investment. It may arise from such attributes of a business as good

reception, a favourable location, the ability and skill of its employees and management nature of its products etc.

Goodwill is an intangible asset. The real value is indeterminable for a non purchased goodwill and based on

arbitrary measurement. The valuation of goodwill is often based on the customs of the trade and generally

calculated as number of year‟s purchase of average profits or super-profits.

Valuation of Purchased Goodwill:

(1) Average Profit Method: Under this method average profit is calculated on the basis of the past few year‟s

profits. At the time of calculating average profit abnormal profit or loss will be ignored. After calculating

average profit, it is multiplied by a number (3 or 4 years), as agreed. The product will be the value of the

goodwill.

Goodwill = Average Profit × No. of year purchase

(2) Weighted Average Profit Method: To obtain the average profit, the profit of the year must be multiplied by

its weightage and the grand total should be divided by the aggregate number of weights. After calculating

average profit, it is multiplied by a number (3 or 5), as agreed. The product will be the value of goodwill.

Goodwill = Weighted average profit × No. of year purchase

(3) Super Profit Method: Super profit is the excess of actual profit over the normal profit. Under the method,

super profits are taken as the basis for calculating goodwill in place of average profit. Goodwill is calculated

as follows:

Step 1 Calculate capital employed

Step 2 Calculate normal return

Normal Return = Capital employed × Rate of Normal Return

Step 3 Calculate future maintainable profit

Step 4 Calculate super profit

Future Maintainable profit xxxx

Less: Normal Return (xxx)

Super Profit xxxx

Step 5 Goodwill = Super profit × No. of years purchases

(4) Annuity Method: Under this method super profits should be discounted using apportionate discount factor.

When uniform annual super profit is expected, annuity factor can be used for discounting the future values for

converting into the present value.

Goodwill = Super Profit × Annuity factor

(5) Capitalization of future maintainable method: Under this method, the firm is valued by applying the

following formula:

Goodwill = Future maintainab le profit

Normal rate return× 100 - Capital Employed

(6) Capitalization of super profits method: Under this method, goodwill is calculated by capitalizing super-

profits at agreed rate. The goodwill is calculated directly by applying the following formula:

Goodwill = Super Profit

Capitalization Rate 100 ×

Q.2. Write a short note on: Characteristics of Goodwill.

Ans. Characteristics of goodwill are as follows:

(1) It belongs to the category of intangible assets which includes other items such as patents, trademarks and

copyrights. Goodwill along with these other intangibles are non-physical, fixed assets and are included on the

balance sheet.

113

(2) It is a valuable asset.

(3) It contributes to the earning of excess profits. The existence of goodwill is often key to a business earning

profits over and above the levels for similar businesses in the same industry.

(4) Its value is liable to constant fluctuations.

(5) Its value is only realized when a business is sold or transferred.

(6) It is difficult to place an exact value on goodwill and it will always involve expert judgement.

Q.3. Enumerate the factors affecting goodwill of joint stock company. [CS (Inter) – Dec. 2009 (5 Marks)]

Ans. The key factors affecting goodwill are:

The nature of the business.

Favourable location. If a business is situated in a good location it will generally have a positive effect on the

value of goodwill.

Longevity of the business. If a business has been trading for a long period it may have had more time to

develop a good solid reputation, and more goodwill.

Possession of licenses or technical know-how.

After sales services and general customer care.

Business risk involved.

Future competition and new entrants into a specific business marketplace.

Management‟s attitude towards the fulfillment of commitments.

Q.4. Write a short note on: Valuation of Shares. [CS (Inter) – June 1993 (5 Marks)]

Ans. The valuation of the shares of a company involves use of judgement, experience and knowledge. The accountant

undertaking this work should posses knowledge of the analysis and interpretation of financial statements backed by

a practical appreciation of business affairs and investments. A valuation based on quantitative information alone

will not be adequate for a real valuation. It should also be recognized that the method of valuation of shares would

vary, depending on the purpose for which it is to be used.

The following is an illustrative list of the circumstances which call for a value to be placed upon shares in

companies:

Purposes of share valuation:

(1) Assessments under the Wealth Tax Law.

(2) Purchase of a block of shares for acquiring a controlling interest in the company.

(3) Purchase of shares by employees of the company where the retention of such shares is limited to the period of

their employment.

(4) Formulation of schemes of amalgamation, absorption, etc.

(5) Acquisition of interest of dissenting shareholders under a scheme of reconstruction.

(6) Compensating shareholders, on the acquisition of their shares, by the Government under a scheme of

nationalization.

(7) Conversion of preference into equity shares.

(8) Advancing a loan on the security of shares.

Q.5. Write a short note on: Intrinsic value of shares/ Net asset value of shares. [CS (Inter) – Dec. 1997 (5 Marks)]

Ans. According to this method, value of equity share is determined as follows:

Value per share = (Fully paid up share) = Net assets available for equity shareholder

No. of shares

Value per share = (Partly paid up share) = Value of fully paid up share – Unpaid call

per share

Calculation of Net Asset Value per share:

114

Particulars `

Capital employed (as per shareholders‟ funds approach)

Less:

Preference share capital

Arrear of dividends

Proposed preference dividend

Add:

Notional call on partly paid up equity shares

Goodwill

Share suspense account

Non-trading investment

Net assets available to equity shareholders

xxxx

(xxx)

(xxx)

(xxx)

xxxx

xxxx

xxxx

xxxx

xxxx

Important Notes: If the objective is to determine ex-dividend value of equity shares, proposed dividend on equity

shares is also to be deducted.

Q.6. Write a short note on: Yield based valuation of shares.

Ans. Yield based valuation may take the form of valuation based on rate of return. The rate of return may imply rate of

earning or rate of dividend.

When only a few shares are sold: The rate of dividend basis will be appropriate.

When controlling shares are to be sold: The rate of earning should be the basis

Yield value (based on expected dividend):

`

Profit before interest & tax

(-) Interest

Xxxx

(xxx)

Profit before tax

(-) Tax

Xxxx

(xxx)

Profit after tax

(-) Transfer to general reserve

(-) Preference Dividend

Xxxx

(xxx)

(xxx)

Net Profit available for equity shareholder Xxxx

Calculation of expected dividend

Expected Dividend = Net Profit available for equity shareholder

Paid up equity capital× 100

Value per share = Expected Dividend

Normal rate of return × Paid up value of share

Q.7. Write a short note on: Fair value of shares. [CS (Inter) – June 1994, June 2002 (5 Marks)]

Ans. Fair value is the average of the intrinsic value and yield value. It is argued that average of book value and yield

based value incorporates the advantages of both the methods. That is why such average is called the fair value of

share.

Value Per Share = Intrinsic value + Yield Value

2

115

CHAPTER 5 SHARE CAPITAL

INTRODUCTION

The status of the company as a legal person distinct from its members is the outstanding characteristic

which distinguishes the company from other forms of business organization. The requirement of public

accountability which is a prominent feature of the Companies Act, makes it necessary to pay due

attention to the generally accepted principles of accountancy, at least to the extent they have been given

statutory effect.

BOOKS OF ACCOUNT

The main objective of books of account is to exercise control over revenues and expenditure and assets

and liabilities of the concern and to prepare profit and loss account and balance sheet at the end of the

year.

The provisions in respect of books of account to be maintained by a company are contained in Section

128 of the Companies Act, 2013.

Section 128(1) requires that the books of account should be maintained on accrual basis and according to

the double entry system of accounting to ensure that these represent true and fair view of the affairs of

the company or branch office and all transactions are fully explained.

The Act also requires that the books of account and the relevant vouchers must be preserved for a

minimum of eight years in good order. [Section 128(5)]

SHARES AND SHARE CAPITAL

Section 2(84) of the Companies Act, 2013 defines the term “Share”. As per this, share means share in the

share capital of a company; and includes stock.

Kinds of Shares

There are two types of Shares: Preference Share and Equity Share.

Preference Share: A Preference Share is a share which fulfills the following two conditions:

It carries preferential right in respect of payment of dividend; and

It also carries preferential right in regard to repayment of capital at the time of winding up.

Section 55 of the Companies Act, 2013 provides that company, if so authorized by its articles of

association, may issue redeemable preference shares. However, a company can not issue preference

shares which is redeemable after the expiry of twenty years from the date of its issue. It may be noted

that a company cannot issue irredeemable preference shares.

Equity Shares: Equity share means share which is not preference share. There are two kinds of equity

shares: Equity Shares with equal rights and Equity shares with differential rights.

Equity Shares with equal rights: Here all the shareholders have the same rights in respect of dividend,

voting or otherwise.

116

Equity shares with differential rights: The Companies (Share Capital and debentures rules), 2014

provides that the companies can issue equity share capital with differential rights as to dividend, voting

or otherwise in accordance with such rules and conditions as may be prescribed.

SHARE CAPITAL IN COMPANY’S BALANCE SHEET

Generally ‘Capital’ means a particular amount of money used in business for the purpose of earning

revenue. In the context of the company law, this term is used in the following different senses:

i) Nominal or Authorised Capital: It means the face value of the shares which a company is

authorized to issue by its memorandum. For Example – P Ltd. has been incorporated with an

Authorised Capital of ` 10,00,000 divided into 1,00,000 shares of ` 10 each.

ii) Issued Capital: It is that part of the Authorised Capital which is issued to the public for subscription

and allotment, say 65,000 shares of ` 10 each.

iii) Subscribed Capital: It is that part of the issued capital which has been subscribed by the public, say

60,000 shares of ` 10 each.

iv) Called-up Capital: It is that part of the subscribed capital which the directors have called up in order

to carry on the business of the company, say, ` 5 per share has been called up, i.e., 60,000 × ` 5 = `

3,00,000.

v) Paid-up Capital: It is that part of the called up capital which is actually received in cash by the

company, say, ` 2,90,000 (one shareholder holding 5,000 shares failed to pay the call @ ` 2 per

share)

vi) Uncalled Capital: It is that part of the subscribed capital which has not yet been called up the

directors. The difference between the subscribed capital and called up capital is represented by the

uncalled capital.

ISSUE OF SHARES

Allotment of shares means an act of appropriation by the Board of directors of the company out of the

previously unappropriated capital of a company of a certain number of shares to persons who have made

applications for shares. It is on allotment that shares come into existence.

MINIMUM SUBSCRIPTION

A public limited company cannot issue any security unless minimum subscription stated in the

prospectus has been subscribed; sum payable on applications has been received in cash. Shares allotted

for consideration other than cash are not to be included towards minimum subscription.

The Companies Act, 2013 prescribes that the company must receive the minimum subscription within a

period of 30 days from the date of issue of the prospectus or such other period as may be specified by

SEBI. In case company has not received minimum subscription than application money shall be repaid

within a period of 15 days from closure of issue. In case of failure, the entire amount is to be repaid,

without interest, within 45 days [30 + 15] from the date of issue of the prospectus. Beyond 45 days, the

directors become liable to repay the money with an interest of 15% p.a.

As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, the minimum

subscription to be received in an issue shall not be less than 90% of the other through offer document.

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MINIMUM SHARE APPLICATION MONEY

The amount payable on application on every security shall be minimum 5% of the nominal value of the

security or such other percentage or amount as specified by SEBI by regulations.

ISSUE OF SHARES FOR CASH

Shares of a company may be issued in any of the following three ways:

i) At par;

ii) At premium; and

iii) At discount.

ISSUE OF SHARES AT PAR

Shares are said to be issued at par when the issue price is equal to the face value or nominal value of the

shares i.e. issue price is ` 10 and face value is also ` 10. When the shares are issued at par, the company

may ask the payment of the face value of the shares either payable in one lump sum or in installments.

ISSUE OF SECURITIES AT A PREMIUM

The term ‘premium’ has not been defined in the Companies Act, Price received over the face value of the

shares is treated as premium. Legal provisions [Section 52]

1) Where a company issues securities at a premium, whether for cash or otherwise, a sum equal to the

aggregate amount or value of the premiums on those securities shall be transferred to an account, to

be called the ‘Securities Premium Account’.

2) Securities Premium Account may be applied by the other company:

a) Towards the issue of unissued shares of the company to the members of the company as fully

paid-up bonus shares;

b) In writing off preliminary expenses of the company;

c) In writing off expenses of, or the commission paid or discount allowed on, any issue of shares or

debentures of the company;

d) In providing for the premium payable on redemption of any redeemable preference share or of

any debentures of the company;

e) For purchase of its own shares or other securities under section 68;

3) Securities Premium Account Can’t be applied by such class of companies as may be prescribed

and whose financial statement comply with the accounting standard prescribed for such class of

companies under section 133, for the purposeds (b) and (d) mentioned above.

In Consideration with the issue of securities at a premium, it may also be noted that:

1. Securities premium amount cannot be distributed as dividend cash.

2. The annual Balance Sheet must disclose the amount of securities premium as a separate item.

3. Money in Securities Premium, Account cannot be treated as free reserve, as they are in the nature

of capital reserves.

ISSUE OF SHARES AT A DISCOUNT

A Company cannot issue shares at a discount except sweat equity shares. [Section 53]

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‘Discount on Issue of Shares Account’ appears on the assets side of the Balance Sheet under ‘Other Non

Current Assets’ and is generally written-off against Profit and Loss Account or Securities Premium

Account over a number of years.

UNDER-SUBSCRIPTION OF SHARES

In actual practice, it rarely happens that the number of shares applied for is exactly equal to the number

of shares offered to public for subscription. If the number of shares applied for is less than the number of

shares issued the shares are said to be undersubscribed. When an issue is under subscribed, entries are

made on the basis of number of shares applied for, provided the minimum subscription is raised and the

company proceeds to allot the shares.

OVER-SUBSCRIPTION OF SHARES

When the number of shares applied for exceeds the number of shares issued, the shares are said to be

over-subscribed. In such situation, the directors allot Shares on some reasonable basis because the

company can allot only that number which is actually offered for subscription. In short, the following

procedure is adopted:

i) Total rejection of some applications;

ii) Acceptance of some application in full; and

iii) Allotment to the remaining applicants on pro-rata basis.

In case of pro-rata allotment, no application for shares is refused and no applicant is allotted the shares in

full. Each applicant receives the shares in some proportion.

The company can retain the calls in advance at the must so many amounts as is sufficient to make the

allotted shares fully paid up ultimately.

CALLS-IN-ADVANCE

Calls in advance generally arises when there is an over subscription of shares. Here, the excess

application money received is adjusted against the amount due on allotment or calls. The excess

application money after adjustment for allotment should be transferred to a special account called ‘Calls-

in-Advance Account’, if the prospectus so provides. In such a situation, the advance money in respect of

future call(s) should also be transferred to Calls-in-Advance Account and it is adjusted when calls are

made.

It should be noted that Calls-in-Advance does not form a part of the company’s share capital and no

dividend is payable on such amount. In the Balance Sheet, it should be shown on the liabilities side as

‘Calls-ill-Advance’.

INTEREST ON CALLS-IN-ADVANCE

Interest may be paid on calls-in-advance if Articles of Association so provide. If the company has adopted

‘Table F’, then it is required to pay interest @ 12% p.a. from the date of receipt to the due date.

CALLS IN ARREARS

Calls-in-arrear refer to that portion of the capital, which has been called up but not yet paid by the

shareholders. When a shareholder(s) fails to pay the amount due on allotment and/or calls, the Allotment

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Account and/or Calls Account will show debit balance(s) equal to the total unpaid amounts of each

installment. Generally, such amount is transferred to a special account called ‘Calls-in-Arrear Account’.

INTEREST ON CALLS-IN-ARREAR

Interest on calls-in-arrear may be collected by the directors from the shareholders, if the Articles of

Association so provide. If the company has adopted ‘Table F’, then it can charge interest @ 10% p.a. from

the date to the date of actual payment.

PROVISION OF TABLE “F” FOR CALLS ON SHARES

1. The Board may, from due time to time, make calls upon the members in respect of any moneys

unpaid on their shares (whether on account of the nominal value of the shares or by the way of

premium) and not by the conditions of allotment thereof made payable at fixed times:

Provided That no call shall exceed one-fourth of the nominal value of the share or be payable at less

than one month from the date fixed for the payment of the last preceding call.

2. Each member shall, subject to receiving at least fourteen days’ notice specifying the time or times

and place of payment, pay to the company, at the time or times and place so specified, the amount

called on his shares.

3. A call may be revoked or postponed at the discretion of the board.

4. If a sum called in respect of a share is not paid before or on the day appointed for payment thereof,

the person from whole the sum is due shall pay interest thereon from the day appointed for payment

thereof to the time of actual payment at five per cent per annum or at such lower rate, if any, as the

Board may determine.

5. Board shall be at liberty to wave payment of any such interest wholly or in part.

ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH

A company may purchase assets from the vendors and instead of paying the vendors cash, may settle the

purchase price by issuing fully paid shares of the company. This type of issue of shares to the vendors is

called issue of shares for consideration other than cash.

ISSUE OF SHARES TO PROMOTERS

A company may allot fully paid shares to promoters or any other party for the services rendered by them

by way of furnishing technical information, engineering services, plant layout, drawing and designing, etc.

without payment. This type of issue of shares of promoters is called issue of shares for consideration

other than cash. The accounting entry in such a case will be as follows:

Goodwill A/c Dr. With the nominal value of the shares allotted

To Share Capital A/c

FORFEITURE OF SHARES

If a shareholder fails to pay the allotment money and/or calls made on him, his shares are liable to be

forfeited. Forfeiture of shares may be said to be the compulsory termination of membership by way of

penalty for non-payment of allotment and/or any call money.

The Companies Act does not contain any specific provisions regarding forfeiture. In fact, the power to

forfeit shares must be contained in the Articles of the Company and the directors can forfeit the shares of

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a member only in pursuance of the authority given by the Articles. Table F permits the directors to forfeit

shares for non-payment of calls after giving at least 14 days notice.

RE-ISSUE OF FORFEITED SHARES

A forfeited share is merely a share available to the company for sale and remains vested in the company

for that purpose only. Reissue of forfeited shares is not allotment of shares but only a sale. The share,

after forfeiture. In the hands of the company is subject to an obligation to dispose it of. In practice,

forfeited shares are disposed of by auction. These shares can be re-issued at any price so long as the total

amount received (from the original allottee and the second purchaser) for those shares is not less than

the amount in arrear on those shares.

LIEN ON SHARES

Lien means right to retain anything belonging to another until his claims are satisfied. The articles of a

company invariably provide that the company shall have a first and paramount lien on shares not fully

paid – up or for debts due to the company. In case of fully paid-up shares as well as, the articles may

provide for the company’s first and paramount lien on them. This enables the company to secure and

recover any debts due from a member. Which it has a lien for the recovery of a debt due from a member.

Where such power is given by the articles, the company may sell the shares on which it has a lien for the

recovery of a debt which is presently payable after giving him fourteen days’ notice. Any surplus is to be

paid to the concerned members.

BUY-BACK OF SHARES

A procedure which enables a company to go back to the holder of its shares/specified securities and

other offer to purchase from them the shares/specified securities that they hold.

A company would opt for buy – back for the following reasons: -

(i) To improve shareholder value – Buy back generally results in higher earning per share (E.P.S)

(ii) As a defence mechanism – Buy back provides a safeguard against hostile takeovers by increasing

promoters’ holding.

(iii) To provide an additional exit route to shareholders when shares are undervalued or thinly

traded.

(iv) To return surplus cash to shareholders.

Important Provisions [Section 68]

Following are the important provisions of Section 68:

1. A Company may purchases its own shares or other specified securities out of:

(i) Its free reserves;

(ii) The securities premium account; or

(iii) The proceeds of an earlier issue of shares or other specified securities. However, no buy-back

can be done out of proceeds of an earlier issue of same kind of shares/securities.

2. For Buy back purpose, the following conditions must be fulfilled:

(i) Buyback is authorized by the articles of association of the Company.

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(ii) A company may, by a Board Resolution, buyback up to 10% of the aggregate of paid – up equity

capital and free reserves. This Board resolution must be passed at Board Meeting only and not

by circulation.

If the company wants to buy-back more than 10% of the aggregate of paid – up equity capital

and free reserves but up to 25% of the aggregate of the paid-up capital (equity & preference)

and free reserves, then a Special Resolution in the general meeting is required.

The aforesaid limits are to be applied to the amount required for buy-back of such

shares/securities.

(iii) In the case of buy-back of equity shares only, the buy-back in any financial year shall not exceed

25% of its total paid – up equity capital in that financial year.

The aforesaid limit is to be applied to the number of shares to be bought back.

(iv) After buy-back the debt equity ratio shall be less than or equal to 2 i.e., the debt should not be

more than twice the equity after buy-back. Here ‘debt’ means secured as well as unsecured

debts; and ‘equity’ means share capital and free reserves.

(v) All the shares or other specified securities for buyback are fully paid-up.

3. Every buy-back shall be completed within 1 year from the date of passing the Special Resolution or

Board Resolution, as the case may be. If the company is not able to do so, then the reasons for such

failure shall be disclosed in the Directors’ Report. Further, in order to pursue the same buy-back, a

fresh Board Resolution or Special Resolution as the case may be, will be required.

4. The buy-back may be …….

(i) From the existing holder on a proportionate basis;

(ii) From the open market; or

(iii) From the employees of the company to whom shares/ securities have been issued under a

scheme of stock option or as sweat equity.

A company can implement buy-back by any of the aforesaid methods but, for a single offer of buy-

back, different methods of buy-back cannot be adopted.

5. The company shall not make any issue of same kind of shares/securities (including rights shares)

within a period of 6 months from the date of completion of buyback.

Exceptions are: -

(i) Bonus issue;

(ii) Conversion of warrants;

(iii) Stock option scheme;

(iv) Sweat equity; and

(v) Conversion of Preference shares/debentures into equity shares.

Transfer to Capital Redemption Reserve [Section 69]

Where a company purchases its own shares out of free reserves or securities premium account then a

sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption

reserve account and details of such transfer shall be closed in the balance Sheet.

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REDEMPTION OF PREFERENCE SHARES

Section 55 of the Companies Act provides for the issue and redemption of preference shares. This section

prescribes the following conditions with regard to the redemption of preference shares:

Such shares can be redeemed either out of the profits of the company which would otherwise available

for dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption, unless

the shares are fully paid they cannot be redeemed. If any premium is to be payable on redemption, such

premium has to be provided out of the profits of the company or out of the securities premium account.

Further companies whose financial statement comply with accounting standards prescribed for such

class of companies cannot utilize securities premium account for providing premium payable on

redemption of preference shares or debentures.

Where any such shares are redeemed out of profits, a sum equal to the nominal amount of the shares so

redeemed must be transferred out of the profits of the company which would otherwise to be available

for dividend to a reserve fund called ‘Capital Redemption Reserve Account’. Otherwise, the provisions

relating to the reduction of share capital of a company will apply, as if the Capital Redemption Reserve

Account were paid-up share capital of the company.

The capital redemption reserve account may be applied by the company in paying up unissued shares of

the company to be issued to the members of the company as fully paid bonus shares. Otherwise Capital

Redemption Account must be maintained intact unless otherwise sanctioned by the Court.

The main object of Section 55 of the Companies Act, 2013 is to protect the interests of the creditors of the

company. As such the capital structure of the company will remain unaffected even after the redemption

of the redeemable preference shares.

If the redeemable preference shares are redeemed out of the profits of the company which would

otherwise be available for dividend, the Capital Redemption Reserve Account will take the place of the

Redeemable Preference Share Capital Account after the redemption. Thus, in such a case, Capital

Redemption Reserve Account must be equal to the Redeemable Preference Shares Redeemed. Similarly, if

the redeemable preference shares are redeemed out of the proceeds of fresh issue of shares, the new

Share Capital Account raised by fresh issue will take the place of the Redeemable Preference Share

Capital Account after the redemption. Thus, in such a case, new Share Capital Account (Equity or

Preference) must be equal to the Redeemable Preference Shares redeemed.

Nowhere in the above section, the terms “Proceeds of Fresh issue” has precisely been defined. As such,

there is much scope for confusion as to what should constitute the proceeds of fresh issue in various

circumstances like issue of shares – (i) at par, or (ii) at a premium. This point is particularly important

where preference shares are redeemed partly out of the profits of the company and partly out of the

proceeds of fresh issue of shares to determine the amount not covered by fresh issue for transfer to

Capital Redemption Reserve Account.

For this, the following principles should be followed:

i) When fresh issue of shares is made at par: In such a case, there should not be any confusion. The

nominal value of the shares issued will constitute the proceeds and the same should be considered

for determining the amount to be credited to Capital Redemption Reserve Account.

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ii) When fresh issue of shares is made at a premium: In such a case, the confusion may arise as to

whether the nominal value of the shares issued should constitute the “Proceeds” or both the

nominal value of the shares issued and the premium money received on those shares should

constitute the “proceeds”.

Apparently, the question may pose a problem, but a critical analysis of the provisions of the

Companies Act, will reveal that the Act, is very much clear on the point. Section 52 of the Companies

Act, 2013 clearly states that where a company issues shares at a premium, a sum equal to the

aggregate account called “Securities Premium Account” and the provisions relating to the reduction

of capital shall apply if the Securities Premium Account is utilized otherwise than for the purposes

specified therein. But Section 78 does not specify redemption of preference for which Securities

Premium Account can be utilized.

Premium on Redemption: When Preference shares are to be redeemed at a premium the amount of

premium payable on redemption can be provided either out of securities premium account, or from the

profit of the company. It means that capital profit could be utilized for premium, if any, payable on

redemption of preference shares.

i) If the Redeemable Preference Shares are redeemed out of the proceeds of a fresh issue of shares

made for the purpose of redemption.

Note: In such a case, new Share Capital Account (Preference or Equity) replaces the Redeemable

Preference Share Capital Account redeemed.

ii) If the redeemable preference shares are redeemed partly out of the profits of the company which

would otherwise be available for dividend and partly out of the proceeds of a fresh issue of shares

made for the purpose of redemption.

Note: In this case, Capital Redemption Account and the new Capital account will jointly replace the

Redeemable Preference Share Capital Account redeemed.

RIGHTS ISSUE

Section 62 of the Companies Act, 2013, provides that where a company proposes to increase its

subscribed capital at any time.

The company is under legal obligation to other first the further issue of shares to its existing equity

shareholders unless the company has resolved otherwise by a special resolution. But the holders are not

liable to necessarily accept the offer so made. They have the option of rejection or renunciation. This

right is called rights issue; the right itself generally carries a market value in the case of prosperous

companies.

The value of the right is calculated with reference to the market value of shares and following steps may

be taken:

1. The market value of the shares held by a shareholder has to be ascertained.

2. The price of the new share which is required to be paid to the company has to be added with the

market value of the shares held to ascertain the total price of all the shares.

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3. The averages price of one share has to ascertained by dividing the total price of all the shares by the

number of shares.

4. The value of the right will be the difference between the market value and the average price of the

share.

BONUS SHARE

Bonus Shares are shares issued by a company free of charges to its existing shareholders on a pro-rata

basis. A company that has built up substantial reserves sometimes decides to capitalize a part of this

reserve by issuing bonus shares to existing shareholders, without the shareholders having to pay

anything. All successful companies increase their capital base by giving free shares to its existing

shareholders from the reserves when there are large accumulated reserves which cannot, either by law

or as a matter of financial prudence, be distributed as dividend in cash to shareholders. Since bonus

shares are created by the conversion of retained earnings or other reserves into equity share capital,

issue of bonus shares does not represent a source of fund to the company. When Bonus Shares are given,

the size of the company does not change and, in effect, the assets side of the Balance Sheet remains

unaffected. On the liabilities side, the reserves are reduced by the amount of the increase in equity share

capital. Reserves capitalized in this way no longer become available for distribution as dividends. In

principle, shareholders are primarily no better-off as a result of bonus issue, though no cash is paid to

acquire these shares. This is because the total value of the company remains unaffected, although the

number of shares held by a shareholder is increased by a bonus issue.

ESOPS, ESPS, SWEAT EQUITY SHARES

ESOP or employee stock option plan, or employee share ownership plan, ESOS or Employees Stock

Option Scheme, and ESPS, or Employee Stock Purchases Plan refers to a basket of instruments and

incentive schemes that find favor with the new upward mobile salary class and which are used to

motivate, reward, remunerate and hold on to achievers.”

ESOP can take place in many ways. The company may directly allot its shares to employees at market

price, or at a concession. Or, the company may given its employees the option to acquire the shares or

debentures at an agreed price that may be attractive; but the option may be permitted to be exercised

after a waiting period, after which would comes the ‘exercise period’ during when the employee cannot

sell his option, and that may be followed by a ‘lock-in-period’ when the employee cannot sell the shares. A

third type of ESOP is to give ‘stock appreciation rights’; shares are only notionally allotted and at the end

of an agreed period, an employee is paid difference in price.

The phrase ‘sweat equity’ refers to equity shares given to the company’s employees on favourable terms,

in recognition of their work. Sweat equity usually takes the form of giving options to employees to buy

shares of the company, so they become part owners and participate in the profile, apart from earning

salary.

The Companies Act defines ‘sweat equity shares’ as equity shares equity issued by the company to

employees or directors at a discount or for consideration other than cash for providing know-how or

making available rights in the nature of intellectual property rights or value additions, by whatever name

called.

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Accounting Gym – Issue and Forfeiture of Shares

Q.1. Geet Electronics Ltd. Issued 1,00,000 equity shares of ` 10 each to the public at par. The details of the amount

payable on the shares are as follows:

Date Call ` per share

1st April, 1998 Application 2.00

1st June, 1998 Allotment 3.00

1st July, 1998 Final Call 5.00

Application monies were received on 1,20,000 shares. Excess application monies were refunded immediately. All

other amounts, were received excepting final call money on 1,000 shares.

Pass Journal Entries (including cash/bank transactions) to record the above in the books of Geet Electronics Ltd.

Q.2. The authorized capital of a company is 1,00,000 shares of ` 10 each. On April 10, 1997, 50,000 shares are issued

for subscription at a premium of ` 2 per share. The share money is payable as follows: ` 5 (including the premium

of ` 2) with application, ` 3 on allotment, ` 2 on first call, and ` 2 on final call.

The shares are fully subscribed and the application money (including the premium) is received in full. The

allotment money is received, except as regards 500 shares. The first call and the final call money is received on

time, baring the final call money on 200 shares which is not received.

Pass necessary Journal Entries (excluding cash) and show the Cash Book.

Q.3. Nu Look Ltd. Issued, 1,00,000 Equity Shares of ` 10 each payable as follows:

On Application (on 1st March, 2008) ` 4

On Allotment (On 1st April, 2008) ` 1

On First Call (On 1st August, 2008) ` 3

On Final Call (On 1st October, 2008) ` 2

Application were received for 2,60,000 shares. Of these 10,000 shares were in disorder; 40,000 shares in lots of

100 shares; 1,20,000 shares in lots of exceeding 100 but less than 500 shares; 60,000 shares in lots of exceeding

500 but less than 1,000 shares and the balance in lots of exceeding 1,000 shares.

Allotment was made as follows:

Application for the 10,000 shares in disorder were rejected.

Application for 100 shares in full, i.e. 100% 40,000

Application over 100 shares but not exceeding 500 shares – 40% 48,000

Application over 500 shares but not exceeding 1,000 shares – 15% 9,000

Application over 1,000 shares – 10% 3,000

Money received in excess on shares partially allotted were retained to the extent possible. Show the cash book and

journal entries assuming that all the instalments were duly received and interest was paid by the directors on calls-

in-advance @ 6% per annum on 1st October, 2008.

Q.4. X Co. Ltd. was incorporated with an authorized share capital of 1,00,000 equity shares of ` 10 each. The directors

decided to allot 10,000 shares credited as fully paid to the promoters for their services.

The company also purchased with a land and buildings from Y Co. Ltd. For ` 4,00,000 payable in fully paid-up

shares of the company. The balance of the shares were issued to the public, which were fully subscribed and paid

for.

You are required to pass journal entries.

[Ans. Goodwill should be debited by ` 1,00,000.]

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Q.5. JHP Limited is a company with an authorized share capital of 10,00,000 equity shares of ` 10 each, of which

6,00,000 shares had been issued and fully paid on 30th

June, 1997. The company proposed to make a further issue

of 1,00,000 of these ` 10 shares at a price of ` 14 each, the arrangements for payment being:

a) ` 2 per share payable on application, to be received by 1st July, 1997;

b) Allotment to be made on 10th

July, 1997 and a further ` 5 per share (including the premium) to be payable;

c) The final call for the balance to be made, and the money received by 30th

April, 1998.

Applications were received for 3,55,000 shares and were dealt with as follows:

(i) Applicants for 5,000 shares received allotment in full; (ii) Applicants for 30,000 shares received an allotment

of one share for every two applied for; no money was returned to these applicants, the surplus on application

being used to reduce to amount due on allotment; (iii) Applicants for 3,20,000 shares received an allotment of one

share for every four applied for; the money due on allotment was retained by the company, the excess being

returned to the applicants; and (iv) The money due on final call was received on due date. Journalise.

Q.6. B Ltd. Issued 20,000 equity shares of ` 10 each at a premium of ` 2 per share payable as follows: on application `

5; On allotment ` 5 (including premium); on final call ` 2, Applications were received for 24,000 shares. Letters

of regret were issued to applicants for 4,000 shares and remaining shares were allotted to the other applicants. Mr.

A, the holder of 150 shares, failed to pay the allotment money. On his subsequent failure to pay the call money,

the shares were forfeited. Show the Journal Entries and Cash Book in the books of B Ltd.

[Ans. Share Forfeiture Credit by ` 750.]

Q.7. Give separate Journal Entries for the Following:

a) X Ltd. Forfeited 100 equity shares of ` 10 each held by R Ram on 15th

December, 1997 for non-payment of

first call of ` 2 per share and the final call of ` 3 per share. These shares were re-issued to G Ram on 25th

December, 1997 at a discount of ` 3.50 per share.

b) X Ltd. Forfeited 100 equity shares of ` 10 each, issued at a premium of ` 5 per share, held by M Ram on 15th

December, 1997, for non-payment of the final call of ` 3 per share. These shares were re-issued to Loknath

on 25th

December, 1997 at a discount of ` 4 per share.

c) X Ltd. Forfeited 150 equity shares of ` 10 each issued at premium of ` 5 per share, held by K Ram on 15th

December, 1997, for non-payment of allotment money of ` 8 per share (including securities premium of ` 5

per share), the first call of ` 2 per share and the final call of ` 3 per share. Out of these 100 equity shares

were re-issued to Shri Bhagwan at ` 15 per share on 25th

December, 1997.

[Ans. Capital Reserve : a) ` 150; b) ` 300; c) ` 200.]

Q.8. A Ltd. Invited applications for 10,000 shares of ` 100 each at a premium of ` 10 per share. The amount is payable

as follows: On application ` 25; On allotment ` 35 (including Premium), on first call ` 25 and on final call ` 25.

The applicants were received for 9,000 shares and these were accepted in full. All money due were received

except the first and final call money on 200 shares, which were forfeited. Out of these shares, 100 shares were

subsequently re-issued @ ` 90 per share. You are required to pass Journal entries for recording the above

transactions including cash.

[Ans. Capital Reserve ` 4,000.]

Q.9. X Limited made an issue of 10,000 Equity Shares of ` 15 each payable as follows:

(i) ` 4 per share on application;

(ii) ` 7 per share (including ` 2 per share as premium) on allotment; and

(iii) ` 6 per share on first and final call.

Das holding 50 shares failed to pay the allotment and call monies. Pal holding 80 shares failed to pay the call

money. All these shares were forfeited and subsequently re-issued to Roy as fully paid-up at a discount of ` 3 per

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share. Pass Journal Entries (including cash transactions) to record the above issue, forfeiture and re-issue of shares

in the books of the company.

[Ans. Capital Reserve ` 530.]

Q.10. A holds 200 shares of ` 10 each on which he has paid ` 2 as application money. B holds 400 shares of ` 10 each

on which he paid ` 2 per share as application money and ` 3 per share as allotment money. C holds 300 shares of

` 10 each and has paid ` 2 on application, ` 3 allotment and ` 3 for the first call. They all fail to pay their arrears

on the second and final call of ` 2 per share. Directors, therefore, forfeited their shares. The shares are re-issued

subsequently for ` 12 per share fully paid-up. Journalise the transactions relating to the forfeiture and re-issue.


Q.11. A Ltd. Authorized with ` 2,50,000 capital divided into 25,000 shares of ` 10 each, issued 20,000 shares payable

as ` 3 on application, ` 5 on allotment (including ` 2 as premium) and ` 2 on each of two calls. All the 20,000

shares were subscribed. Holders of 1,000 shares failed to pay the allotment money and further on 500 shares there

were arrears of first call. All these shares were declared forfeited. Then the second call was made. This was not

paid on 200 shares. These shares were also forfeited. All the shares on which only application money was paid

and half of the shares on which there was default of first call money were re-issued at ` 9 each as fully paid

shares. Pass Journal Entries in respect of the above transactions.


Q.12. Pooja Ltd. invited applications for 80,000 shares of ` 10 each at a premium of ` 2.50 per share payable as follows:

On application ` 3

On allotment ` 4.50(including premium)

On first call ` 2

On second call ` 3

Application were received for 1,70,000 shares, out of which applications for 10,000 shares were rejected and

money refunded to them. The allotment was made pro-rata to the remaining applicants. Money over-paid on

applications was used against money due.

Anil to whom 2,000 shares were allotted failed to pay the allotment money and on his subsequent failure to pay

the first call, his shares were forfeited.

Sunil, the holder of 1,200 failed to pay the two calls, and his shares were forfeited after the final call. Of the

forfeited shares 2,400 shares were reissued at the rate of ` 8 per share credited as fully paid, including the whole

of Anil‟s forfeited shares.

Show necessary Journal entries.


Q.13. A Ltd company invited applications for 30,000 shares of ` 10 each at a premium of ` 2 per share payable as

follows:

On application ` 2

On allotment ` 5(including premium)

On first call ` 3

On second call ` 2

Applications were received for 45,000 shares and pro rata allotment was made on the applications for 36,000

shares. Money over-paid on applications was used against money due on allotment.

Ramesh to whom 600 shares were allotted, failed to pay the allotment money and on his subsequent failure to pay

the first call, his shares were forfeited. Mohan, the holder of 900 shares failed to pay the two calls, and his shares

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were forfeited after the final call. Of the forfeited shares 1,200 shares were sold to Krishna at the rate of ` 9 per

share credited as fully paid, including the whole of Ramesh‟s forfeited shares.

Show necessary Journal entries, Prepare Cash Book and Balance Sheet.

[Ans. Capital Reserve ` 3,240 and Balance Sheet Total ` 3,60,540 .] [June‟13 – 12 marks]

Q.14. Y Ltd. forfeited 1,000 equity shares of ` 10 each, ` 7 called-up, issued at a premium of 20% (to be paid at the

time of allotment) for non-payment of allotment money of ` 4 per share (including premium) and first call of ` 2

per share. Out of these, 600 shares were re-issued as fully paid-up for ` 8.50 per share.

Pass the Journal entitles for forfeiture and re-issue of shares.

[Ans. Capital Reserve ` 900] [Dec‟13 – 3 marks]

129

THEORY MASALA

Q.1. Discuss the important provisions of Companies Act, 2013 & SEBI Guidelines relating to Issue of shares.

Ans. The important provisions of Companies Act, 2013 & SEBI Guidelines relating to issue and allotment of shares

are as follows:

When a public company desires to raise capital by issuing its shares to the public, it invites the public to

subscribe for its shares. The invitation is made through a document called the “Prospectus”. The prospectus

must mention the exact manner in which the amount of shares is payable by the public.

No allotment of shares can be made in pursuance of a prospectus issued generally, until the beginning of the

5th

day after that on which the prospectus is first so issued.

As per the SEBI Guidelines , the subscription list for public issues should be kept open for at least 3 working

days and not more than 10 working days as disclosed in the prospectus.

No allotment shall be made in the case of first allotment of shares unless the amount stated in the prospectus

as the minimum subscription has been subscribed and the sum payable on application for the stated amount

has been received by the company.

As per SEBI Guidelines, the minimum subscription has been fixed at 90% of the issued amount.

As per Section 39(2), the amount payable on applications is fixed by the directors but it cannot be less than

5% of the nominal value of the shares.

As per the SEBI Guidelines the minimum application money to be paid shall not be less than 25% of the

issue price.

if the shares of a company are listed in a stock exchange, approved of the stock exchange has to be sought as

to the manner of allotment before the shares are allotted.

As per Section 29, every company making public offer and such other class or classes of public companies as

may be prescribed, shall issue the securities only in dematerialized form by complying with the provisions of

the Depositories Act, 1996 and the regulations made thereunder.

Table F of the Companies Act, 2013 imposes the following restrictions:

- Table of one month must elapse before another call is made

- The amount of the call should not exceed 1/4th

of the nominal value of the share, and

- 14 days notice is given to the shareholders to pay the amount.

Q.2. In case of under subscription of shares, question of returning the money does not arise at all.


Ans. As per SEBI Guidelines, the minimum subscription has been fixed at 90% of the issued amount. In the event of

non-receipt of minimum subscription all applications moneys received should be refunded within period stated

below:

(a) For non-underwritten issues: Within 15 days of the closure of the issue.

(b) For underwritten issues: Within 7 days of the closure of the issue.

Thus, in case of under subscription of shares money will have to refunded as per above provisions.

Q.3. Write a short note on: Issue of shares at par.

Ans. When issue price of shares is equal to face value shares is called as issue of shares at par.

Q.4. Write a short note on: Issue of shares at premium.

Ans. When shares are issued at a price higher than the face value, they are said to be issued at a premium. Thus, the

excess of issue price over the face value is the amount of premium. For example, if a share of ` 10 is issued at `

12 ` (12 -10) = ` 2 is the premium.

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The premium on issue of shares must be regarded as capital receipt and must be credited to a separate account

called “Securities Premium Account” There are no restrictions on the issue of shares at a premium, but there are

restrictions on its disposal.

Under Section 52 of Companies Act, 2013, the securities premium account may be used wholly or in part for:

(1) Issuing fully paid bonus shares

(2) Writing off preliminary expenses

(3) Writing off the expenses or commission or discount on issue of shares or debentures.

(4) Providing for the premium on the redemption of preference shares or debentures.

(5) To buy back its own shares or other specified securities as per Section 68.

Securities premium account must be shown in liabilities side of the balance sheet under the head “Reserves &

Surplus” in shareholders funds.

Q.5. Write a short note on: Issue of shares at discount. [CS (Executive) – June 2009 (3 Marks)]

Ans. When shares are issued at a price lower than the face value, they are said to be issued at discount. The Companies

Act, 1956 contained provisions for issue of shares at a discount, but the Companies Act, 2013 totally prohibits the

issue of shares at discount.

Section 53 provides that, a company shall not issue shares at a discount. Any share issued by a company at a

discounted price shall be void.

Penalty: Where a company contravenes the provisions of this section, the company shall be punishable with fine

which shall not be less than ` 1 lakh but which may extend to ` 5 lakh and every officer who is in default shall be

punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than

` 1 lakh but which may extend to ` 5 lakh or with both.

Q.6. Write a short note on: Issue of shares for consideration other than cash.

Ans. A company may also issue shares for consideration other than cash to vendors who sell some assets to the

company or to the promoters for their services. Such issue may one of the following types:

(1) Issue of shares to vendors: A company may purchase assets from the vendors and instead of paying the

vendors cash, may settle the purchase price by issuing fully paid shares of the company. This type of issue of

shares to the vendors is called issue of shares for consideration other than cash.

(2) Issue of shares to promoters: A company may allot fully paid shares to promoters for the services rendered

for incorporation of company. This type of issue of shares to promoters is called issue of shares for

consideration other than cash. As the amount paid to promoters for services rendered is capital expenditure

and debited to Goodwill Account.

Q.7. What is meant by „sweat equity shares‟? What are the conditions which have to be fulfilled for issue of

these shares? [CS (Inter) – Dec. 2001 (5 Marks)]

Ans. As per Section 2(88), “sweat equity shares” means which such equity shares as are issued by a company to its

directors or employees at a discount or for consideration, other than cash, for providing their know-how or

making available rights in the nature of intellectual property rights or value additions by whatever name called.

Section 54 of the Companies Act, 2013, provides that a company may issue sweat equity shares if the following

conditions are fulfilled, namely:

(a) Such shares are of a class of shares already issued. (In simple words first issue of any class of shares cannot

be issue of sweat equity shares);

(b) The issue of authorized by a special resolution passed by the company;

(c) The resolution specifies the number of shares, the current market price, consideration and the class of

directors or employees to whom such equity shares are to be issued.

(d) Such issue is at any time but after 1 year from the date of commencement of business.

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(e) In case of listed company the regulations made by the SEBI are complied with and in case of unlisted

company shares has to issue as per rules made by Central Government.

Important points to be noted:

(1) Such sweat equity shares are issued to employees or directors. (not to public)

(2) Such sweat equity shares are issued at a discount or for consideration other than cash.

(3) Such sweat equity shares are issued for providing know-how or making available right in the nature of

intellectual property rights or value additions.

Q.8. Can a company pay dividend on partly paid-up-shares? [CS (Inter) – Dec. 2001 (5 Marks)]

Ans. As per Section 51 of the Companies Act, 2013, a company may, if so authorized by its articles, pay dividends in

proportion to the amount paid-up on each share. Thus dividend can be paid on partly paid up shares proportion to

the amount paid-up on each share.

Q.9. Write a short note on: Calls-in-Advance.

Ans. A company may receive from a shareholder the amount remaining unpaid on shares. This is know as calls-in-

advance. The Companies Act, 2013, specifically allows companies to accept calls-in-advance. Section 50 provides

that the company may, if so authorized by its articles, accept from any member, the whole or part of the amount

remaining unpaid on any shares held by him, even if no part of that amount has been called up. However, person

paying calls in advance have voting right in respect of amount paid-up on shares only.

Interest on calls-in-advance: Regulation 18 of Table F of the Companies Act, 2013 provides that the Board

may receive from any member calls in advance and may pay interest at such rate not exceeding 12% p.a. The

Company is liable to pay interest on the amount of calls-in-advance from the date of receipt of the amount till the

date when the call is due for payment.

It is noted that the money received on calls-in-advance does not become part of share capital. It is shown under a

separate heading, namely „calls-in-advance‟ on the liabilities side.

Q.10. Write a short note on: Calls-in-Arrear.

Ans. When calls are made upon shares allotted, the shareholders holding the shares are bound to pay the call money

within the date fixed for such payment. If a shareholder makes a default in sending the call money within the

appointed date, the amount thus failed is called calls-in-arrear.

Interest on calls-in-arrear: Regulation 16 of Table F of the Companies Act, 2013 provides that, if a call is not

paid before or on the day appointed for payment, the shareholder shall pay interest from the day appointed for

payment thereof to the time of actual payment at 10% p.a. or at such lower rate, as the Board may determine. The

Board shall be at liberty to waive payment of any such interest.

Q.11. Distinguish Between: Calls-in-Advance & Calls-in-Arrear. [CS (Executive) – Dec. 2008 (3 Marks)]

Ans. Following are the main points of distinction between calls-in-advance & Calls-in-Arrear:

Points Calls-in-Advance Calls-in-Arrear

Meaning A company may receive from a shareholder

the amount remaining unpaid on shares. This

is known as calls-in-advance.

When calls are made upon shares allotted,

the shareholders holding the shares are bond

to pay the call money within the date fixed

for such payment. If a shareholder makes a

default in sending the call money within the

appointed date, the amount thus failed is

called calls-in-arrear.

Interest Regulation 18 of Table F or the Companies

Act, 2013 provides that the Board may receive

Regulation 16 of Table F of the Companies

Act, 2013 provides that, if a call is not paid

132

from any member calls in advance and may

pay interest at such rate not exceeding 12%

p.a. The company is liable to pay interest on

the amount of calls-in-advance from the date

of receipt of the amount till the date when the

call is due for payment.

before or on the day appointed for payment,

the shareholders shall pay interest from the

day appointed for payment to the time of

actual payment at 10% p.a. or at such lower

rate, as the Board may determine.

Nature Interest on calls-in-advance is expenses and

debited to profit & loss account.

Interest on calls-in-arrear is income and

credited to profit & loss account.

Q.12. Write a short note on: Forfeiture of shares. [CS (Inter) – Dec. 1997 (5 Marks)]

Ans. If a shareholder fails to pay the allotment money and/or calls made on him his shares are liable to be forfeited of

shares may be said to be the compulsory termination of membership by way of penalty for non-payment of

allotment and/or any call money.

Table F of the Companies Act, 2013 permits the directors to forfeit share for non-payment of calls. Regulations

28 to 34 contains the following provisions in relation to forfeiture of shares:

(1) Regulation 25: If a member fails to pay any call on the day appointed for payment, the Board may serve a

notice requiring payment of the call, together with any interest which may have accrued.

(2) Regulation 29: The notice shall name a further period of 14 days from the date of service of the notice for

payment of call.

(3) Regulation 30: If amount is not paid even after such notice then shares in respect of which the call was

made shall be liable to be forfeited by passing board resolution.

(4) Regulation 31: A forfeited share may be sold or otherwise disposed of on such terms and in such manner as

the Board thinks fit. At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture

on such terms as it thinks fit.

(5) Regulation 32: A person whose shares have been forfeited shall cease to be a member in but shall remain

liable to pay to the company all monies which were payable by him in respect of the shares. The liability of

such person shall cease if and when the company shall have received payment in full of all such monies in

respect of the shares.

(6) Regulation 33: A duly verified declaration in writing by a director, the manager or the secretary that a share

has been duly forfeited shall be conclusive evidence of the facts of such forfeiture. The company may

receive the consideration, if any, given for the share on any sale or disposal thereof and may execute a

transfer of the share in favour of the person to whom the share is sold or disposed of. The transferee shall

thereupon be registered as the holder of the share.

(7) Regulation 34: The provisions of these regulations shall apply in the same manner in relation to premium on

shares as they apply in relation to payment of nominal value of shares.

Q.13. Write a short note on: Re-issue of forfeited shares.

Ans. Regulation 31 of Table F of the Companies Act, 2013 provides that, forfeited share may be sold or otherwise

disposed of on such terms and in such manner as the Board thinks fit. Thus, even though originally shares cannot

be issued at discount, but forfeited shares can be issued at discount.

The amount receivable on re-issue of such share together with the amount already received from the defaulting

member shall not be less than the face value of the shares.

If forfeited shares are re-issued at a discount, the amount of discount can, in no case, exceed the amount

credited to “shares forfeited account”.

Discount allowed on re-issue should be less than the forfeited amount.

After reissue of forfeited shares amount left in „shares forfeited account‟ which will be transferred to „capital

reserve revenue‟ will appear under the head „Reserves and Surplus‟.

133

Q.14. Write a short note on: Lien on a share.

[CS (Inter) – June 2009 (5 Marks), CS (Executive) – June 2011 (3 Marks)]

Ans. Lien means to withhold the property of another for the lawful debts. A lien, like a mortgage or pledge, is a form of

security. It is equitable charge on the shares to secure any debts due from member of the company. A company

can enforce its lien on shares by the sale of those shares after giving 14 days notice in case the member defaults in

payment of amount due against him. The proceeds of the sale shall be applied in payment of such part of the

amount in respect which the lien exists. The residue, if any, shall be paid to the person entitled to the shares at the

date of the sale.

As per Regulation 9 of the Table F of the Companies Act, 2013, the company shall have a first and paramount lien

on partly paid up shares only. Company cannot exercise lien on fully paid up shares. A company can excise lien

on every partly paid up share for all monies payable in respect of such party paid up shares. However, the Board

of Directors may at any time declare any share to be wholly or in part to time in respect of partly paid up shares.

The company‟s lien on a share shall also extend to all dividends payable and bonuses declared from time to time

in respect of partly paid up shares.

A company cannot enforce its lien by forfeiting the shares. By virtue of this lien, the company has prior right to

the shares over any creditor to whom they are given as security for a loan, unless the company was given prior

notice of an existing mortgage or pledge of these shares.

Q.15. Distinguish between: Lien & Forfeiture.

Ans. The following are the main points of distinction between lien and forfeiture:

Points Lien Forfeiture

Meaning Lien means to withhold the property of

another for the lawful debts. A lien, like a

mortgage or pledge, is a form of security. It is

equitable charge on the shares to secure any

debts due from member o the company.

If a shareholder fails to pay the allotment

money and/or calls made on him/his shares

are liable to be forfeited. Forfeiture of shares

may be said to be the compulsory termination

of membership by way of penalty for non-

payment of allotment and/or any call money.

Nature Lien is a form of security for a debt. Forfeiture is a penal proceeding.

Reduction of

Capital

Lien never involves a reduction of capital

because the shares are sold if the member

makes defaults in payments.

Forfeiture involves reduction of capital if

forfeited shares are not reissued.

Amount of

sale proceeds

of shares

In case of lien, the shareholder is entitled to

receive the excess amount than the amount

due.

In case of forfeiture noting is payable to

share holder.

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Accounting Gym – Buy Back of Shares

Q.1. DIVYA PAINTS LTD.

BALANCE SHEETS AT 31ST

MARCH 2014

Amounts (`)



a) Share Capital

b) Reserve and Surplus


Long Term borrowing

3. Current Liability

Trade payables

1

2

3

30,00,000

12,05,000

14,00,000

4,60,000

Total 60,65,000

II. ASSETS


a) Fixed Assets


b) Investments

2. Current Assets

Stock

Sundry debtors

Cash and cash Equivalent

4

12,00,000

5,90,000

5,75,000

33,30,000

3,70,000

23,65,000

Total 60,65,000

Notes

1. Share Capital

Authorised Share Capital ……….

Issued, subscribed Called up

And paid-up Share Capital

3,00,000 Equity Shares of ` 10 each,

Fully paid up 30,00,000

2. Reserve & Surplus


General Reserve 5,05,000 12,05,000

3. Long Term Borrowings


4. Tangible Fixed Assets

Land and Building 6,30,000

Plant and machinery 23,50,000

Furniture and fitting 3,50,000 33,30,000

On 1st April, 2014 the shareholders of the company have approved the scheme of buy-back of equity shares as

under:

i) 15% of the equity shares would be bought back at ` 18.

ii) General Reserve balance may be utilized for this purpose.

iii) Premium paid on buy back of shares should be met from securities premium account.

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iv) Investments would be sold for ` 4,00,000.

Press Journal entries to record the above transactions and prepare the balance sheet of the company immediately

after the buy-back of shares.

[Ans. Capital Redemption Reserve ` 4,50,000.]

Q.2. Power Link Ltd.

BALANCE SHEET

AS AT 31ST

MARCH 2012

Amounts (`)



a) Share Capital



Long Term borrowing


Trade payables

Short term provisions

1

2

3

4

7,42,000

1,25,000

50,00,000

15,65,000

38,25,000

8,67,000

Total 1,12,57,000

II. ASSETS


a) Fixed Assets

b) Tangible Fixed Assets

2. Current Assets

Inventories

Trade Receivables


66,00,000

18,00,000

11,87,000

9,60,000

7,10,000

84,00,000

28,57,000

Total 1,12,57,000

Notes

1. Share Capital


Issued, subscribed Called up


5,00,000 Equity Shares of ` 10 each,





Profit and Loss Account 3,75,000 15,65,000



Term Loan 13,25,000 38,25,000


Provision for taxation 1,25,000

The shareholders adopted the resolution on the date of the above mentioned balance sheet to:

i) Buy back 20% of the paid up capital @ ` 15 each.

136

ii) Issue 13% debentures of ` 5,00,000 at a premium of 10% to finance the buy back of shares.

iii) Maintain a balance of ` 3,00,000 in general reserve account, and

iv) Sell investments worth ` 8,00,000 for ` 6,50,000.

Pass necessary Journal entries to record the above transactions and prepare the balance sheet immediately after the

buy-back.


Q.3. Adarsh Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2014:

Amount(`‟ 000) Amount(`‟ 000)

Liabilities

Share Capital:

Authorised Capital

Issued and Subscribed capital:

2,00,000 Equity Shares of ` 10 each

2,000, 10% Preference Shares of ` 100 each

(Issued two months back for the purpose of buy-back)

Reserves and surplus:

Capital Reserve

Revenue Reserve

Securities Premium


Current Liabilities and provisions

Assets

Fixed Assets

Investments

Current assets, loans and advances (including cash and bank balance)

2,500

200

1,000

3,000

2,200

3,500

3,000

2,700

9,700

1,400

1,38,00

9,300

3,000

1,500

13,800

The Company passed a resolution to buy-back 20% of its equity share capital @ ` 50 per share. For the purpose, it

sold all of its investment for ` 22,00,000.

You are required to pass necessary journal entries and prepare the Balance Sheet.


137

THEORY MASALA

Q.1. Define books of account as defined in Companies Act, 2013?

Ans. As per Section 2(13) of the Companies Act, 2013 “Books of account” includes records maintained in respect of:

i) All sums of money received and expended by a company and matters in relation to which the receipts and

expenditure take place.

ii) All sale and purchases of goods and services by the company.

iii) The assets and liabilities of the company and

iv) The items of cost as may be prescribed u/s 148 in the case of a company which belongs to any class of

companies specified under that section. (i.e. costing records)

Q.2. What is proper books of account for a company? [CS (Inter) – June 2003 (4 Marks)]

Write short note on: True and Fair view [CS (Inter) – June 1997 (5 Marks)]

Ans. As per Section 128 of the Companies Act, 2013, every company shall prepare and keep at its registered office

books of account and other relevant books and papers and financial statement for every financial year which give a

true and fair view of the state of the affairs of the company, including its branch office(s). Such books shall be kept

on accrual basis and according to the double entry system of accounting. The company may keep such books of

account or other relevant papers in electronic mode in such manner as may be prescribed.

Keeping books of account at place other than registered office: All or any of the books of account and other

relevant papers may be kept at other place in India. On taking such decision the company shall within 7 days file

with the Registrar a notice in writing giving the full address of that other place.

Accounts of branch office: Where a company has a branch office then accounts relating to the transactions of

branch office are required to be kept at that office and proper summarized returns periodically should be sent to the

company at its registered office.

Period for which books of account should be kept: The books of account of every company should be kept for 8

financial years.

Q.3. Write a short note on: Statutory Books.

What are the statutory books prescribed under Companies Act, 2013? [CS (Inter) – June 2004 (4 Marks)]

Ans. As per the provisions of different sections of the Companies Act, 2013 the following are also to be maintained in

addition to the above books of account.

“Register of companies” means the register of companies maintained by the Registrar on paper or in any electronic

mode under this Act.

Section/

Regulation

Name of the Register/ book

Section 85 Register of charges

Section 88 Register & Index of members, register of debenture holders register of any other security

holders

Section 118 Minutes of proceedings of general meeting, meeting of Board of Directors & other meeting

and resolutions passed by postal ballot.

Section 187 Register of investments not held in the company name.

Section 189 Register of contracts or arrangements in which directors are interested

Section 170 Register of directors and key managerial personnel an their shareholding.

Section 186 Register of loans and investment made other body corporate.

Q.4. Write a short note on: Statistical Books.

Ans. In addition to books of account and statutory books, companies usually maintain the certain books which give

details information regarding holding and transfer of shares and debentures, calls made on shareholders and

138

debenture holders, interest paid to debenture holders, interest paid to debenture holders share warrants issued and

surrendered and such other matters not covered by the books of account and statutory books:

Name of the Register/ book

Share application and allotment book

Share call book

Debenture call book

Register of share transfers

Shareholders dividend book

Debenture interest book

Register of certification & balance tickets

Debenture transfer register

Register of share certificates

Register of probates

Register of dividend mandates

Agenda book

Register of dividend mandates

Agenda book

Register of sealed documents

Register of powers of attorney

Q.5. Distinguish between Statutory Books & Statistical Books. [CS (Executive) – June 2011 (3 Marks)]

Ans. Following re the main points of distinction between statutory books & statistical books:

Points Statutory Books Statistical Books

Meaning As per provisions of different sections of the

Companies Act, 2013 the certain books

must be maintained by the company which

are known as statutory books.

In addition to books of account and statutory

books, companies usually maintain the

certain books which are known as Statistical

books.

Place Statutory books must be kept at the register

office of the company.

Statistical books may be kept at any place

other than register office of the company.

Compulsion Keeping of statutory books is compulsory Keeping of Statistical books is optional.

Examples - Register of charges

- Register of index & members,

debenture holders

- Minutes of proceedings of general

meeting, meeting of Board of Directors

- Register of investments not held in the

company name

- Register of contracts or arrangements in

which directors are interested.

- Register of directors and key

managerial personnel and their

shareholding.

- Register of loans and investment made

other body corporate.

- Share application & allotment book

- Share call book

- Debenture all book

- Register of share transfers

- Shareholders dividend book

- Debenture interest book

- Debenture transfer book

- Register of share certificates

- Register of probates

- Register of share warrants

- Register of dividend mandates

- Agenda book

- Register of sealed documents

- Register of powers of attorney

Q.6. State the provision of Companies Act, 2013 relating to financial statements.

139

Ans. Section 129 of the Companies Act, 2013 deals with provisions relating to financial statements. As per said section,

the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply

with the accounting standards notified u/s 133and shall be in the form specified in Schedule III.

The terms contained in such financial statements shall be in accordance with the accounting standards.

Laying of financial statements: At every AGM of a company, the Board of Directors of the company shall lay

before such meeting financial statements for the financial year.

Disclosure for non compliance with the AS: Where the financial statements of a company do not comply with the

accounting standards, the company shall disclose in its financial statements:

- The deviation from the accounting standards.

- The reasons for such deviation and

The financial effects, if any, arising out of such deviation.

Q.7. Write a short note on: Reserves and Provisions.

[CS (Inter) – Dec. 1995, June 1995 (5 Marks)]

Define and distinguish the: Provisions and Reserves. [CS (Inter) – Dec. 1994, Dec. 1996 (10 Marks)]

Differentiate between „provision‟ and „reserve‟. Give any four examples of provisions.


Ans. Provisions: Provision shall mean any amount written off or retained by way of providing for depreciation, renewals

or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot

be determined with substantial accuracy.

Examples:

Provisions for depreciation

Provisions for repair and renewal

Provisions for bad and doubtful debt

Provisions for fluctuation in investment

Provisions for contingent liability

Provisions for taxation etc.

Reserves: The expression reserves shall not include any amount written off or retained by way of providing for

depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of

which the amount cannot be determined with substantial accuracy.

Capital Reserve: The expression „capital reserve‟ shall not include any amount regarded as free for distribution

through the profit and loss account.

The term capital reserve may be defined to mean those profits which arise otherwise than in the normal course of the

business and earned out of capital transactions. The usual sources of capital reserves are:

Profits on sale of fixed assets.

Profits on revaluation of fixed assets.

Premium on issue of shares/debentures/bonds.

Profits on reissue of forfeited account

Capital redemption reserve account

Profit prior to incorporation.

Revenue Reserve: Expression „revenue reserve‟ shall mean reserve other than a capital reserve.

Following are main point of distinction between provision and reserve:

Points Provision Reserve

Purpose It is created for specific purpose. It is created for probable purpose.

Charge It is charge against profit and loss account. It is appropriation of profit.

Distribution as

profit

It cannot be distributed as profit. It can be distributed as profit.

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Investment in

securities

It cannot be invested in securities It can be invested in securities.

Why made It is a matter of financial prudence. It is made because of legal necessity.

How it shown As per Schedule III of the Companies Act,

2013, long term provisions are shown under

the heading “Non-Current Liabilities” while

short term provisions are shown under the

heading “Current Liabilities”.

It is shown under „Reserve & Surplus‟ as part

of “Shareholder‟s Funds” on the liability side

of the balance sheet.

Q.8. Write a short note on: Contingent Liability.

Ans. A possible future liability, which depends on the happenings of certain uncertain event, is called contingent

liability.

Treatment: These liabilities are not shown in the total of liability side, but are shown as a footnote to the balance

sheet.

The following are some examples of contingent liabilities:

(1) Liabilities under guarantee

(2) Claim against the company not acknowledged as debts.

(3) Bonus claim filed worker pending order of Court.

(4) Liabilities on bills receivable discounted but not matured.

Q.9. Distinguish between: Liability & Provisions.

Ans. Following are the main points of distinction between liability and provisions:

Points Liability Provision

Meaning Expenses or amounts which are payable on

the expiry of certain period as agreed

between business parties are known as

liability.

A provision is a charge against profit i.e., it is

debited to profit and loss account.

Type of Account Liabilities are personnel accounts. Provisions are nominal accounts.

Treatment Liabilities are shown on the liability side in

balance sheet.

As per Schedule III of the Companies Act,

2013, long term provisions are shown under

the heading “Non-Current Liabilities” while

short term provisions are shown under the

heading “Current Liabilities”.

Q.10. Give the accounting treatment for advance tax & provisions for taxation in final accounts.

What do you understand by „Provision for valuation‟? What factors are to be considered while estimating the

provision for taxation? [CS (Executive) – Dec. 2009 (6 Marks)]

Ans. Advance Payment of Tax: Each year the company has to pay advance tax on the basis of estimated income of

current previous year. This is based on the logic that „pay as you earn‟. Advance tax paid appears in balance sheet

under the heading “Current Assets”.

Provision for taxation: At the end of each previous year the company has to compute its total income and has to

file return of total income, which is also known as self assessment. Provisions for tax appears in balance sheet under

the heading “Current Liabilities”.

Factors are to be considered while estimating the provision for taxation:

Whether income has correctly computed.

Whether income tax has computed as per applicable law.

Whether capital gain tax is payable or not.

Whether rebates are available for double taxation.

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Q.11. Write short note on: Payment of dividend out of capital profits.

[CS (Inter) – June 1996 , June 1999 (5 Marks)]

Write short notes on: Dividend out of reserves. [CS (Inter) – Dec. 1998 (5 Marks)]

Describe the conditions which have to be satisfied for declaration of dividend out of reserves.


Explain the circumstances under which dividend can be paid out of capital profits of a company.


Ans. A dividend may be defined as a distribution of divisible profit of a company among the shareholders according to

the number of shares held by each of them in the capital of the company. Dividend is the return on the share capital

subscribed for and paid to a company by its shareholders. As per Section 2(35), “dividend includes any interim

dividend.” Thus all the provisions that are applicable to final dividend are also applicable to interim dividend.

Divisible Profits: Divisible profit means the profits which the law allows the company to distribute to the

shareholders by way of dividend. “Profits available for dividend” has been held to mean the profits which the

directors consider should be distributed after making provision for depreciation or past losses, for reserves or for

other purposes.

Proposed Dividend: The dividend recommended by the Board of Directors is termed as proposed dividend. It is

debited to Profit & Loss Appropriation A/c and shown in the Balance Sheet as a provision. When the proposed

dividend is adopted in the AGM by the shareholder, it is termed as “declared dividend” and is shown in the Balance

Sheet as a current liability until paid off. It should be noted that declared dividend must be paid within 30 days of

declaration.

Sources of Dividend: There are three sources from which dividends can be declared, namely:

(1) Out of Current Profits: As per Section 123 of the Companies Act, 2013, dividends may be declared out of

the profits of the company for the current year after providing for depreciation or out of the profits for any

previous financial years arrived at after providing for depreciation and remaining undistributed, or out of

both. However before the declaration of any dividend in any financial year, company should transfer such

percentage of its profits for that financial year as it may consider appropriate to the reserves of the company.

(2) Out of Past Reserves: As per Second Proviso to Section 123, dividends can be declared out of past years

profits transferred to reserve. In this case, the company has to comply with the Companies (Declaration &

Payment of Dividend) Rules, 2014. The Rule 3 lay down the following conditions subject to which a

dividend may be declared by a company in the event of inadequacy or absence of profits in any year out of the

profits earned by it in previous years and transferred to reserves.

The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by

it in the three years immediately preceding that year. However, this will not apply to a company, which

has not declared may dividend in each of the three preceding financial year.

The total amount to be drawn from such accumulated profits shall not exceed 1/10th

of its paid-up share

capital & free reserves as appearing in the latest audited financial statement.

The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which

dividend is declared before any dividend in respect of equity shares is declared.

The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as

appearing in the latest audited financial statement.

(3) Out of moneys provided by the Government [Section 123(1)(b)]: A company can also declare dividends

out of the moneys provided by the Central Government or a State Government for payment of such dividend

in pursuance of guarantees given by the Government.

Q.12. Can a company pay dividend out of current profits without making good past losses?


Ans. Yes, However loss attributable to provision for depreciation has to set off against current profit before dividend is

declared.

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Dividend in case of Inadequacy or absence of profits (Section 123): If due to inadequacy or absence of profits,

any company proposes to declare dividend out of the accumulated profits and transferred to the reserves, such

declaration of dividend shall be declared or paid by a company from its reserves only.

Interim Dividend in case of inadequacy or absence of profits: In case the company has incurred loss during the

current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend,

such interim dividend shall not be declared at a rate higher than the average dividends declared by the company

during the immediately preceding 3 financial years.

Q.13. Enumerate the provisions of Companies Act, 2013 with regard to providing depreciation on the assets of the

company. [CS (Inter) – Dec. 2004 (5 Marks)]

Ans. As per Section 123(2) of the Companies Act, 2013, depreciation shall be provided in accordance with the provisions

of Schedule II.

As per Schedule II, depreciation is the systematic allocation of the depreciable amount of an asset over its useful

life. The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual

value. The term depreciation includes amortization.

Useful life of an Asset: It is the period over which an asset is expected to be available for use by an entity, or the

number of production or similar units expected to be obtained from the asset by the entity.

Hence, as per Companies Act, 2013 depreciation now will be provided as per useful life of asset and not on the

basis of specified percentage.

Q.14. Write a short note on: Interim Dividend. [CS (Inter) – Dec. 1995, 2000 (5 Marks)]

Ans. The dividend declared by the Board of Director between two AGM is termed as interim dividend. Where the articles

authorize, the directors can resolve to pay interim dividend. The board of directors may from time to time pay to the

members such interim dividend as appear to it to be justified by the profits of the company. The interim dividend is

paid during the year and it will appear in the Trial Balance. In the Profit and Loss Account it is shown in the debit

side, as an appropriation of profit.

Q.15. Distinguish between: Interim Dividend & Final Dividend. [CS (Executive) - June 2011 (3 Marks)]

Ans. Following are the main points of distinction between bonus shares & right shares:

Points Interim Dividend Final Dividend

Meaning The dividend declared by the Board of

Director between two AGM is termed as

interim dividend.

The dividend recommended by the Board of

Director and declared and approved members

at the AGM is known as final dividend.

Approval of

Account

In case of interim dividend approval of

members is not required.

In case of final dividend approval of

members is required.

Sources The Board of Directors of a company may

declare interim dividend during any financial

year out of the surplus in the profit & loss

account and out of profits of the financial

year in which such interim dividend is sought

to be declared.

Final dividends can be declared:

- Out of current profits

- Out of past reserves

- Out of moneys provided by the

government

Q.16. Write short note on: Dividend on Preference Share.

Ans. The preference shareholders are entitled to receive a dividend at a fixed rate. If the directors decide to declare a

dividend on equity shares, it is compulsory to make a provision first for the payment of one year‟s dividend to

preference shareholders.

143

Q.17. Write short note on: Unpaid and unclaimed dividends.

Ans. According to Section 124 of the Companies Act, 2013, where a dividend has been declared by a company but has

not been paid or claimed within 30 days from the date of the declaration, the company shall, within 7 days from

the date of expiry of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special

account in any scheduled bank to the called the Unpaid Dividend Account.

The company shall, within a period of 90 days of making any transfer of an amount to the Unpaid Dividend

Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid

to each person and place it on the website of the company and also on any other website approved by the Central

Government, in prescribed manner.

If any default is made in transferring amount to the Unpaid dividend account of the company, it shall pay interest

at the rate of 12% to the Benefit of the members of the company in proportion to the amount remaining unpaid to

them.

Any person claiming to be entitled to any money to the Unpaid Dividend Account of the company may apply to the

Company for payment of the money claimed.

Any money transferred to the Unpaid Dividend Account and which remains unpaid or unclaimed for a period of 7

years from the date of such transfer shall be transferred by the company along with interest to the Investor

Education and Protection Fund established u/s 125 and the company shall send a statement in the prescribed for

m of the details of such transfer to the authority which administers the said Fund and that authority shall issue a

receipt to the company as evidence of such transfer.

Q.18. Write short note on: Corporate Dividend Tax. [CS (Inter) – Dec. 2001 (5 Marks)]

Write short note on: Taxation on distributed profits. [CS (Executive) - June 2009, June 2011 (3 Marks)]

Ans. As per the Taxation Laws, Corporate Dividend Tax is payable in addition to the income tax payable by the

company. It is applicable in case of domestic company only.

The following points are important in this report:

i) Corporate dividend Tax is payable on any amount of interim or final declared, distributed or paid by the

company.

ii) Corporate dividend tax is to be paid even if no income tax is payable by that company.

Accounting for corporate dividend tax: Corporate dividend tax will be shown in the Profit & Loss Appropriation

A/c below the line along with dividend proposed /paid. The liability for CDT will be recognized in the same

accounting year in which the dividend has been recognized.

Q.19. Write short notes on: Remuneration to directors. [CS (Inter) – Dec. 2000 (5 Marks)]

Ans. Summary of different limits based on net profits of the company is given below:

Managerial Personnel % of net profits

Overall (excluding fees for attending meetings)

If there is one managerial personnel

If there are more than one managerial personnel

Remuneration of part-time directors:

(a) If there is no manger or whole-time director

(b) If there is a managing director or whole-time director

11%

5%

10%

3%

1%

Net Profit for the purpose of managerial remuneration has to be calculated as per Section 198.

Q.20. How and why is the net profit required to be reworked for the purposes of determining managerial

remuneration? Illustrate your answer. [CS (Inter) – June 2002 (10 Marks)]

Ans. Calculation of net profit for managerial remuneration:

Managerial remuneration payable to directors, mangers or managing director is based on net profit which is

calculated as per the provision of section 198 of the Companies Act, 2013.

Net profit for this purpose is calculated after making the following four adjustments:

144

(1) Credit shall be given for the following sums: (This means that following should be added when gross

profit is starting point)

Bounties and subsidies received from any Government or any public authority.

(2) Credit shall be given for the following sums: (This means that following should not be added when gross

profit is starting point)

(a) Premium on shares or debentures

(b) Profits on forfeited shares

(c) Profits of a capital nature

(d) Capital profits on sale of immovable property or fixed assets (Note 1)

(3) The following sums shall be deducted: (When gross profit is starting point)

(a) Usual working charges

(b) Directors seating fee

(c) Bonus or commission to employees

(d) Tax on excess or abnormal profits

(e) Tax special reasons or special circumstances notified by the Central Government.

(f) Interest on debentures

(g) Interest on mortgages

(h) Interest on unsecured loans and advances

(i) Expenses on repairs

(j) Contribution made u/s 181

(k) Depreciation u/s 123

(l) Liability arising from a breach of contract

(m) Insurance

(n) Bad Debts written-off (Not provision/ reserve for bad debts)

(4) The following sums shall not be deducted: (When gross profit is starting point)

(a) Income-tax and super-tax on the income of the company.

(b) Voluntarily compensation, damages or payments.

(c) Loss of a capital natures.

Commission after charging such commission: A company may enter into an aggregate to pay commission at a

percentage of profit after charging such commission. In this case commission is calculated as follows:

Commission = Profit as per Section 198 × 𝐑𝐚𝐭𝐞

𝟏𝟎𝟎+𝐑𝐚𝐭𝐞

Q.21. Explain the provisions of Companies Act, 2013 relating to „Buy-back‟?

State the conditions which are required to be satisfied by a company for the purpose of buy-back of shares.


Ans. As per Section 68 of the Companies Act, 2013, a company may buy-back its own shares or other specified

securities out of:

Free Reserves

Securities premium account or

Proceeds of the issue of any shares or other specified securities.

Other important provisions relating to buy back are as follows:

Buy-back of any kind of shares or other specified securities shall not be made out of the proceeds of an earlier

issue of the same kind of shares or same kind of other specified securities.

Company AOA must contain authorization for buy-back is authorized by its articles.

A special resolution has to be passed at a general meeting of the company for buy back above 10% and up to

25% of the total paid-up equity capital and free reserves.

The buy-back of equity shares in any financial year should not exceed 25% of its total paid-up equity capital in

that financial year.

145

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more

than twice the paid-up capital and its free reserves i.e. to say.

Secured +Unsecured Debts

Paidup Capital +Free Reserves ≤ 2

All the shares or other specified securities for buy-back are fully paid-up.

The buy-back of listed securities is in accordance with the regulations made by the SEBI.

The buy-back of unlisted securities in the accordance with prescribed rules.

There should be gap of 1 year between two buy back.

The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an

explanatory statement stating:

a) A full and complete disclosure of all material facts.

b) The necessity for the buy-back.

c) The class of shares or securities intended to be purchased under the buy-back.

d) The amount to be invested under the buy-back.

e) Time limit for completion of buy-back.

Every buy-back shall be completed within 1 year from the date of passing of the special resolution, or board

resolution as the case may be.

Methods of buy-back: The buy-back may be (a) from the existing shareholders or security holders on a

proportionate basis; (b) from the open market; (c) by purchasing the securities issued to employees of the

company of the company pursuant to a scheme of stock option or sweat equity.

Company shall, before making such buy-back, file with the Registrar and the SEBI as declaration of solvency

signed by at least 2 directors of the company, one of whom shall be the managing director, in prescribed form

and verified by the Board of Directors.

A company shall extinguish and physically destroy the shares or securities bought back within 7 days of the

last date of completion of buy-back.

Where a company makes a buy-back then it shall not make right of the same kind of shares within a period of

6 months. However, bonus issue, conversion of warrants, stock option schemes, sweat equity or conversion of

preference shares or debentures into equity shares will be allowed.

Where a company buys back, it shall maintain a register of buy-back containing following details:

- Consideration paid for the shares or securities bought back

- Date of cancellation of shares or securities.

- Date of extinguishing and physically destroying the shares or securities and

- Other prescribed particulars.

After completion of the buy-back company shall file with the Registrar and the SEBI a return of buy-back

within 30 days of completion of buy back.

Explanation I: “Specified securities” includes employee‟s stock option or other securities as may be notified

by the Central Government from time to time.

Explanation II: “Free reserves” includes securities premium account.

Transfer to the Capital redemption reserve account: As per Section 69 of the Companies Act, 2013, where a

company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal

value of the shares so purchased shall be transferred to the Capital Redemption Reserve (CRR) account and details

of such transfer shall be disclosed in the balance sheet. The CRR account may be applied by the company to issue

bonus shares.

Generally, free reserves include the following:

Balance in the profit & loss account.

The subsidy received under the Central Government, outright grants or subsidy scheme, 1971 subject to

fulfillment of prescribed conditions.

General Reserve

Dividend equalization reserve

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Sinking fund

Investment allowance (unutilized) reserve.

The following adjustments should be made against free reserves to arrive at the net amount available for the

purpose of buy-back:

Unamortized miscellaneous revenue expenditure.

Unamortized deferred revenue expenditure.

Purchase goodwill.

Contingent liabilities likely to mature and not provided.

Any diminution of long term investments not provided.

Any impairment in the value of tangible assets not provided.

Q.22. As a matter of prudence, whole of free reserves should not be utilized in the case of buy-back of shares.

[CS (Executive) – Dec. 2008 (3 Marks)]

Ans. As per Section 68 of the Companies Act, 2013, the sources of funds are:

Free reserves,

Securities premium account, or

Proceeds of preference shares or other specified securities.

However, as a matter of purchase, whole of free reserves should not be utilized in the case of buy-back of shares

and the following adjustments should be made against free reserves to arrive at the net amount available for the

purpose of buy back:

Unamortized miscellaneous expenditure.

Unamortized deferred revenue expenditure.

Purchase goodwill.

Contingent liabilities likely to mature and not provided.

Any diminution of long term investments not provided.

Any impairment in the value of tangible assets not provided.

Q.23. Buy-Back may be misused by the corporate entities at the cost of innocent investors. Give your comments.

[CS (Executive) – June 2010 (3 Marks)]

Ans. The buy-back may be misused by the corporate entities at the cost of innocent investor because of the following

reasons:

i) It will provide opportunity for insider trading. The promoters, before the buy-back may understate the

earning by manipulating accounting policies in respect of depreciation, valuation of inventories etc. This

would lead to a fall in the quoted prices of shares and the promoter would buy then at low quotations. In this

way, the insiders would earn extra money when the company buy backs these shares at a highest price.

ii) Buy back lead to artificial manipulation of stock prices.

Q.24. Write a short note on: Objective of buy back of securities.

Ans. Objectives of buy back of securities are as follows:

To increase promoters holding in the company.

To increase EPS.

To achieve or maintain a target capital structure.

To increase the underlying share value.

To prevent or inhibit unwelcome take-over bids.

To pay back surplus cash not required by business.

147

Accounting Gym – Issue and Redemption of Preference Shares

Q.1. Vanities Ltd. had an issue of 1,000 12% Redeemable Preference share of ` 100 each, repayable at a premium of

10%. These shares are to be redeemed now out of the accumulated reserves, which are more than the necessary

sum required for redemption. Show the necessary entries in the books of the company, assuming that the premium

on redemption of shares has to be written off against the company‟s Securities Premium Account.


Q.2. Sure and Fast Ltd. has part of its share capital consists of, 12% Redeemable Preference Shares of ` 100 each,

repayable at a premium of 5%. The Shares have now become ready for redemption. It is decided that the whole

amount will be redeemed out of a fresh issue of 20,000 equity shares of ` 10 each at ` 11 each. The whole amount

is received in cash and the 12% preference shares are redeemed. Show the necessary journal entries in the books

of the company.

Q.3. (When Redeemable Preference Shares are redeemed partly out of the profits of the company and partly out of the

proceeds of fresh issue of shares made for the purpose).

PROCEDURES LTD. BALANCE SHEET AS AT 31ST

MARCH 2014

Amounts (`)



a) Share Capital



Trade payables

Short term provisions

1

2

3

22,500

19,500

3,50,000

64,000

42,000

Total 4,56,000

II. ASSETS


a) Fixed Assets

i) Tangible Fixed Assets

b) Non-Current investments

2. Current Assets

Inventories

Trade Receivables


Other current assets

4

5

1,30,500

49,550

4,950

1,000

2,10,000

60,000

1,86,000

Total 4,56,000

Notes

1. Share Capital


40,000 Equity Shares of ` 10 each,


1000, 8% Preference Shares of ` 100 each 1,00,000

5,00,000

Issued, Subscribed Called up and Paid-up Share Capital

1000, 8% Preference Shares of ` 100 each fully paid-up 1,00,000

148

25,000 Equity Shares of ` 10 each, fully paid up 2,50,000

3,50,000


Securities Premium 9,000

Profit and Loss Account 55,000

64,000

3. Short Term Provisions

Provisions for Taxation 19,500



Furniture and Fixtures 20,000

2,10,000

5. Other Current Assets

Prepaid Expenses 1,000

In order to redeem its preference shares, the company issued 5,000 equity shares of ` 10 each at a premium of

10% and sold its investment of ` 70,800. Preference shares were redeemed at a premium of 10%.

Show the necessary journal entries in the books of the company and prepare the balance sheet of the company

immediately after redemption of preference shares.

[Ans. Capital Redemption Reserve ` 50,000.]

Q.4. KALPATARU CONSTRUCTION LTD. BALANCE SHEET AS ON 31st MARCH, 2014

Amounts (`)



a) Share Capital



Other current liability Calls in advance

(Final call on Equity Shares)

1

2

3

17,22,500

6,50,000

2,500

Total 23,75,000

II. ASSETS


a) Fixed Assets


b) Non-Current assets

2. Current Assets


12,25,000

2,00,000

9,50,000

Total 23,75,000

Notes

1. Share Capital

Authorised Share Capital, Issued, Subscribed Called up and Paid up Share Capital

1,00,000 Equity Shares of ` 10 each,7.50 per share called-up 7,50,000

Less: Calls unpaid 7,500 7,42,500

20,000, 12% Preference Shares of ` 50 each fully called up 10,00,000

Less: Calls unpaid (`10 per share) 20,000 9,80,000

17,22,500


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6,50,000

3. Other Current Liability

Calls in advance (Final call on equity shares) 2,500

On 1st April, 2014 the Board of directors decide that:

a) The fully paid Preference shares are to be redeemed at a premium of 5% in May, 2014 and for that

purpose 50,000 equity shares of ` 10 each are to be issued at par in the month of April, 2014.

b) The 1,000 equity shares owned by A, an existing shareholder, who has failed to pay the allotment money

and the 1st call money @ ` 2.50 each share are to be forfeited in the month of June, 2014.

c) The final call of ` 2.50 per share is to be made in the month of July, 2014.

All the above are duly complied with according to the time schedule. The amount due on the issue of fresh equity

shares and on final call are also duly received except from B who had failed to pay the 1st call money for his 1,000

shares holding, has again failed to pay the final call also. These shares of B have been forfeited, in the month of

August, 2014. Of the Total Shares forfeited 1,500 shares are sold to X in September, 2014 credited as fully paid

for ` 9 per share, the whole of A‟s share being included.

Show the necessary journal entries and prepare the balance sheet of the company as on 30th

September, 2014.


Q.5. OSCAR INDIA LTD. BALANCE SHEET AS AT 31st MARCH, 2012

Amounts (`)



a) Share Capital



Trade payables

1

2

5,48,000

1,65,000

27,000

Total 7,40,000

II. ASSETS


a) Fixed Assets

b) Non-Current investments

2. Current Assets


6,00,000

50,000

6,50,000

90,000

Total 7,40,000

Notes

1. Share Capital


Issued, Subscribed Called Up


2,500 Equity Shares of ` 100 each,


Less: Calls in Arrears 2,000 2,48,000

30,000 Equity Shares of ` 10 each, fully paid up 3,00,000

150



Profit and Loss Account 1,50,000 1,65,000

On 30th

June, 2014, the Board of directors decided to redeem the preference shares at a premium of 10% and to

sell the investments at its market price of ` 40,000. They also decided to issue sufficient number of equity shares

of ` 10 each at premium of ` 1 per share, required after utilizing the profit and loss account leaving a balance of `

50,000. Premium on redemption is required to be set off against securities premium account.

Repayments on redemption were made in full except to one shareholder holding 50 shares only due to his leaving

India for good.

You are required to show the journal entries and the balance sheet of the company after redemption. Assumption

made should be in the working.

[Ans. Capital Redemption Reserve ` 90,000.]

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THEORY MASALA

Q.1. Write a short note on: Redemption of Preference Shares. [CS (Inter) - June 1995, June 2002 (5 Marks)]

What are the conditions which must be fulfilled for redemption of preference shares?


Ans. As per Section 55 of the Companies Act, 2013, company limited by shares shall not issue preference shares which

are irredeemable.

A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be

redeemed within a period 20 years from the date of issue.

A company may issue preference shares for a period exceeding 20 years for infrastructure projects, subject to the

redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential

shareholders.

Other important points relating to redemption of preference shares are as follows:

Preference shares shall be redeemed:

Out of the profits available for dividend or

Out of the proceeds of a fresh issue of shares.

Preference shares shall be redeemed unless they are fully paid-up.

Where preference shares are proposed to be redeemed out of the profits a sum equal to the nominal amount of

the shares should be transferred to the Capital Redemption Reserve Account.

The premium payable on redemption shall be provided for out of the profits of the company, before the shares

are redeemed.

Premium payable on redemption of any preference shares shall be provided for:

Out of the profits or

Out of the securities premium account, before such shares are redeemed.

Explanation: The term “infrastructure projects” means the infrastructure projects specified in Schedule VI.

Q.2. As per Section 55 of the Companies Act, 2013 preference shares can be redeemed out of the “Profits of the

company available for dividend”. Comment.

Ans. One of the ways to redeem preference shares is to use the profit available for dividend. Where any preference

shares are redeemed out of profits, a sum equal to the nominal amount of the shares so redeemed must be

transferred out of the profits of the company which would otherwise to be available for dividend to a reserve fund

called „Capital Redemption Reserve Account‟.

Profits available for dividend Profits not available for dividend


General Reserve

Dividend Equalization Fund

Reserve Fund

Workmen‟s Compensation Fund

Securities Premium Account

Capital Reserve

Investment Allowance Reserve

Development Rebate Reserve

Profit Prior to Incorporation

Q.3. As per Section 55 of the Companies Act, 2013 preference shares can be redeemed out of the “proceeds of a

fresh issue of shares”. Comment.

Ans. One of the ways to redeem preference share is to use the proceeds of a fresh issue of shares. Proceeds of a fresh

issue of new issue of equity shares are to be considered as follows:

If equity shares are

issued at par

Entire amount received at par will be treated as proceeds of fresh issue of shares.


issued at premium

Only amount equal to face value of shares will be treated as proceeds of a fresh issue

of shares. Amount equal to securities premium will be excluded.

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issued at discount

Net amount received after deducting discount will be treated as proceeds of a fresh

issue of shares.

Note: The Companies Act, 2013 totally prohibits the issue of shares at discount Section 53 provides that, a

company shall not issue shares at a discount.

Q.4. Write a short note on: Capital Redemption Reserve.

Ans. Where preference shares are redeemed out of profits, a sum equal to the nominal amount of the shares so

redeemed must be transferred out of the profits of the company which would otherwise to be available for

dividend to a reserve fund called „Capital Redemption Reserve Account‟.

Logic behind creation of capital Redemption Reserve:

(1) The main purpose to create CRR is to keep the capital structure of the company intact.

(2) Another purpose to create CRR is to protect the interest of creditors, since CRR cannot be utilized for

payment of dividend.

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Accounting Gym – Bonus Issue & Right Issue

Q1. Anuj Ltd. had an accumulated amount of general reserve of ` 5,00,000. The directors of Anuj Ltd. decided to

declare bonus shares out of the general reserve and to utilize the general reserve in the following manner :

(i) To make 10,000 partly paid shares of ` 10 each paid up at ` 6 each, as fully paid up.

(ii) To distribute 4 fully paid bonus shares of ` 10 each at ` 12 each, for 5 fully paid existing 20,000 shares of ` 10

each.

Show journal entries in the books of Anuj Ltd. to give effect to the above adjustments.

[Ans. General Reserves to be used ` 2,32,000 (40,000 + 1,92,000).] [Dec‟09 – 6 marks]

Q2. Following items appear in the trial balance of Bharat Ltd. as at 31st March, 2012:

Particulars `

40,000 Equity shares of ` 10 each 4,00,000

Capital Reserve (` 30,000 being profit on sale of machinery) 75,000

Capital Redemption Reserve 25,000



Surplus,i.e, Credit balance of Profit and Loss Account 50,000

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 4 shares held

and for this purpose, it decided that there should be the minimum reduction in free reserves. Pass necessary

journal entries.

[Ans. General Reserves to be used ` 15,000]

Q.3. National Textiles Ltd, have an issued capital of 20,000 equity shares of ` 10 each fully called-up.

The following decisions are taken by the company:

a) To forfeit 100 shares on which only ` 5 per share has been paid-up and to re-issue them at ` 15 per share as

fully paid-up.

b) To issue „Right Shares‟ in the ratio of 1 fully paid-up share for every 4 existing shares held, at ` 15 per share.

Assuming that the company has sufficient general reserve, record the above through Journal Entries.

[Ans. Capital Reserve ` 500.]

Q.4. Progressive Corporation is planning to raise funds by making rights issue of equity shares to finance its

expansion. The existing ordinary share capital of the company is ` 1 crore. The par value of its shares is ` 10 and

the market price is ` 40. The alternatives under consideration before the management for making rights issue are

given below:

a) 4 new shares for 5 old shares at par;

b) 3 new shares for 5 old shares at ` 15;

c) 2 new shares for 5 old shares at ` 20; and

d) 1 new share for 5 old shares at ` 25.

You are required to analyse for each alternative:

i) Theoretical market price after rights issue; ii) Value of rights;

Q.5. Fitness Ltd. is planning to raise funds by making rights issue of equity shares to part finance its expansion. The

existing equity share capital of the company is ` 40 lakh and the market value is ` 45 per share. The company

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offered to its shareholders the right to buy 2 shares at `12 each for every 5shares held. You are required to

calculate –

i) Theoretical market price per share after the rights issue;

ii) The value of rights; and

iii) Percentage increase in share capital.

[Ans. i) ` 35.57; (ii) ` 9.43 & (iii) 40%] [Dec‟15 – 5 marks]

Q6. Following is the extract of the Balance Sheet of Preet Ltd. As at 31st March, 2015

Authorised Capital: `

15,000, 12% Preference Shares of ` 10 each

1,50,000 equity shares of ` 10 each

Issued and Subscribed capital:

12,000 12% Preference Shares of ` 10 each fully paid

1,35,000 Equity Shares of ` 10 each, ` 8 paid up

Reserves and surplus:

General Reserve

Capital Reserve (profit realized on sale of Plant)

Securities premium


1,50,000

15,00,000

16,50,000

1,20,000

10,80,000

1,80,000

60,000

37,500

3,00,000

On 1st April, 2015, the Company has made final call @ ` 2 each on 1,35,000 equity shares. The call money was

received by 20th

April, 2015. Thereafter, the company decided to capitalize its reserves by way of bonus at the rate

of one share for every four shares held. Company decides to use Capital Reserve for bonus issue as it has been

realized in cash.

Show necessary journal entries in the books of the company and prepare the extract of the balance sheet as on 30th

April, 2015 after bonus issue.

[Ans. Utilization of Free Reserves (General Reserve + P & L Account) ` 2,40,000.]

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THEORY MASALA

Q.1. Discuss the provisions of Companies Act, 2013 relating to „right issue‟.

Ans. According to Section 62 of the Companies Act, 2013, where at any time, a company having a share capital

proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to:

(1) Existing Shareholder in proportion to the paid-up share capital on those shares by sending a letter of offer.

Such right issue is subject to the following conditions:

The offer shall be made by notice specifying the number of shares offered, time for accepting offer

which may be minimum 15 days and maximum 30 days.

If offer is not accepted within period specified then it shall be deemed to have been declined.

The above offer shall be include a right to renounce the shares offered to him or any of them in favour

of any other person and this fact should be specifically mentioned in the notice.

After the expiry of the time specified in the notice or on receipt of earlier intimation from the person

that he declines to accept the shares offered, the Board of Directors may dispose of them in such

manner which is advantageous to the shareholders and the company.

(2) To employees under a scheme of employee stock option by passing special resolution and complying with

prescribed conditions.

(3) To other persons by passing a special resolution either for cash or for a consideration other than cash. The

price of such shares has to be determined by the valuation report of a registered valuer subject to prescribed

conditions.

The notice shall be dispatched through registered post or speed post or through electronic mode to all the existing

shareholders at least 3 days before the opening of the issue.

Q.2. Discuss how the „value of right‟ is calculated.

Ans. The value of the right is calculated with reference to the market value of the shares and following steps may be

taken:

The market value of the shares held by a shareholder has to be ascertained.

The price of the new share which is required to be paid to the company has to be added with the market

value of the shares held to ascertain the total price of all the shares.

The average price of one share has to ascertained by dividing the total price of all the shares by the number

of shares.

The value of the right will be the difference between the market value and the average price of the share.

Q.3. What do you understand by bonus issue?

Ans. Bonus share are shares issued by a company free of cost to its existing shareholders on a pro rata basis out of free

reserve.

Q.4. What are the provisions of Companies Act, 2013 relating to bonus issue of shares?

Ans. Section 63 of the Companies Act, 2013 makes the following provisions relating to bonus issue:

(2) A company may issue fully paid-up bonus shares to its members out of:

Free reserves

Securities premium

Capital redemption reserve

However, revaluation reserve created by the revaluation of assets cannot be used for the bonus issue.

(3) A company shall comply with following additional condition for bonus shares:

Bonus issue is authorized by its articles.

Bonus issue is made on the recommendation of the Board and authorization from general meeting of

the company.

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Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt

securities issued by it.

Company has not defaulted in payment of statutory dues of the employees like PF contribution,

gratuity and bonus.

Bonus issue can be made only on fully paid up shares.

Company also has to comply with other prescribed conditions.

The bonus shares shall not be issued in lieu of dividend.

Q.5. Write a short note on: Capitalization of profits & reserve. [CS (Inter) – June 2010 (3 Marks)]

Ans. Sometimes companies have large undistributed profits which they want to distribute among their existing

shareholders. Instead of distributing these profits as dividend, they issue fully paid-up shares to them free of

charge in proportion to their existing share holdings. These shares are called Bonus Shares. As a result of this

issue, the company‟s issued capital increases whereas the assets of the company remain intact.

It is for this reason that the issue of bonus shares is called the „Capitalization of the Undistributed Profits” of the

company.

Q.6. Distinguish between: Bonus Shares & Right Shares. [CS(Executive) – June 2011 (3 Marks)]

Ans. Following are the main points of distinction between bonus shares & right shares:

Points Bonus Shares Right Shares

Meaning Bonus shares are shares issued by a

company free of cost to its existing

shareholders on a pro rata basis out of free

reserve.

When a company issues further shares to

existing shareholders in ratio of their holding

such issue is known as right issue.

Cash Flow In case of bonus issue there is no cash flow. In case of right issue there is cash inflow to

the company.

Consideration Company does not receive any

consideration in case of bonus issue.

Company received consideration as shares

are issued against cash.

Authorization Bonus issue is made on the

recommendation of the Board and

authorization from general meeting of the

company.

In case of right issue authorization form

members through ordinary or special

resolution is necessary.

Market Value Issue of bonus shares does not affect the

market value of the company.

Right issue of shares affects the market value

of the company.

Section It is governed by Section 63 of the

Companies Act 2013.

It is governed by Section 64 of the

Companies Act, 2015

157

Accounting Gym – Underwriting Of Shares

Q.1. Sunflow Ltd. issued 50,000 equity shares. The whole of the issue was underwritten as follows:

Red 40%; White 30%; Blue 30%

Applications for 40,000 shares were received in all, out of which applications for 10,000 shares had the stamp of

Red; those for a 5,000 shares that of White and those for 10,000 shares that of Blue. The remaining applications

for 15,000 shares did not bear any stamp.

Determine the liability of the underwriters.

[Ans. Net Liability : Red 4,000 Shares; White 5,500 Shares and Blue 500 Shares.]

Q.2. Monlit Ltd. issued 50,000 equity, shares of which only 60% was underwritten by Green. Applications for 45,000

shares were received in all out of which application for 26,000 were marked.

Determine the liability of Green.

[Ans. Net Liability : 4,000 Shares.]

Q.3. Goods Earths Ltd. issued 30,000, 6% Debentures of ` 100 each. 60% of the issue was underwritten by Black.

Applications for 28,000 debentures were by the company. Determine the liability of Black.

[Ans. Net Liability : 1,200 Debentures.]

Q.4. Satellite Ltd., issued 12% 10,000 Preference Shares of ` 10 each. The issue was underwritten as follows:

Apple 30%, Mango 30%, Orange 20%.

Application for 8,000 shares were received by the company in all. Determine the liability of the respective

underwriters.

[Ans. Net Liability : Apple 600 Shares; Mango 600 Shares and Orange 400 Shares.]

Q.5. Emess Ltd. issued 40,000 shares which were underwritten as:

P: 24,000 shares Q: 10,000 shares and R: 6,000 shares. The underwriters made applications for firm underwriting

as under:

P: 3,200 shares; Q: 1,200 shares; and R: 4,000 shares. The total subscriptions excluding firm underwriting

(including marked applications) were 20,000 shares.

The marked applications were – P: 4,000 shares; Q: 8,000 shares; and R: 2,000 shares

Prepare a statement showing the total liability of underwriters.

[Ans. Net Liability : P 13,280 Shares; Q 1,200 Shares and R 5,520 Shares.]

Q.6. Sam Limited invited applications from public for 1,00,000 equity shares of ` 10 each at a premium of ` 5 per

share. The entire issue was underwritten by the underwriters A, B, C and D to the extent of 30%, 20% and 20%

respectively with the provision of firm underwriting of 3,000, 2,000, 1,000 and 1,000 shares respectively. The

underwriters were entitled to the maximum commission permitted by law.

The company received applications for 70,000 shares from public out of which applications for 19,000, 10,000

21,000 and 8,000 shares were marked in favour of A, B, C and D respectively.

Calculate the liability of each one of the underwriters. Also ascertain the underwriting commission @ 2.5%

payable to the different underwriters.

[Ans. Net Liability : A 5,750 Shares; B 14,750 Shares; C 1,000 and D 8,500 Shares (Assuming Firm

Underwriting separately).]

Q.7. Wye Co. Ltd. invited the public to subscribe to the following:

i) 10,000 equity shares of ` 100 each at a premium of 5% and

ii) 2,50,000 in 14% Debentures of ` 100 @ 96.

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60% of the shares and the whole of the issue of debentures were underwritten by M/s Sure and Fast for the

commission allowable by the Government. The applications from the public totaled 6,000 and 2,000 debentures.

The underwriters fulfilled their obligations. Show the journal entries that would appear in the books of the

company. Underwriting commission is paid at 2.5%.yS45757Gym –

[Ans. Net Liability : For Shares 2,400 and For Debentures 500. Net amount received ` 2,80,170.]

Issue and F

Q.8. Newton Limited incorporated on 1st January, 1999 issued a prospectus inviting applications for 20,000 equity

shares of ` 10 each. The whole issue was fully underwritten by Adams Benzamin and Clayton as follows:

Adams 10,000 Shares

Benzamin 6,000 Shares

Clayton 4,000 Shares

Applications were received for 16,000 shares, of which marked applications were as follows:

Adams 8,000 Shares

Benzamin 2,850 Shares

Clayton 4,150 Shares

You are required to find out the liabilities of individual underwrites.

[Net Liability (shares) A : 1281; B : 2719 and C : Nil]

Q.9. Noman Ltd. issued 80,000 Equity Shares which were underwritten as follows:

Mr. A 48,000 Equity Shares

Messrs B & Co. 20,000 Equity Shares

Messrs C Corp. 12,000 Equity Shares

The above mentioned underwriters made applications for „firm‟ underwriting as follows:




The total applications excluding „firm‟ underwriting, but including marked applications were for 40,000 Equity

Shares.

The marked Applications were as under:




(The underwriting contracts provide that underwriters be given credit for „firm‟ applications and that credit for

unmarked applications be given in proportion to the shares underwritten)

You are required to show the allocation of liability. Workings will be considered as a part of your answer.

[Total Liability (shares) Mr.A : 27,200; M/s B & Co. : 8,000 and M/s C : 4,800]

Q.10. A company made a public issue of 1,25,000 equity shares of ` 100 each, ` 50 payable on application. The entire

issue was underwritten by four parties. A, B, C and D in the proportion of 30%, 25%, 25% and 20% respectively.

Under the terms agreed upon, a commission of 2% was payable on the amounts underwritten.

A, B, C and D also agreed on „firm‟ underwriting of 4,000, 6,000, Nil and 15,000 shares respectively.

The total subscriptions, excluding firm underwriting including marked applications were for 90,000 shares.

Marked applications received were as under:

A 24,000 C 12,000 B 20,000 D 24,000

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Ascertain the liability of the individual underwriter and also show the journal entries that you would make in the

books of the company. All workings should form part of your answer.

[Total Liability (shares) A : 4,000; B : 6,000 and C : 10,000 and D : 15,000]

Q.11. Libra Ltd. came up with an issue of 20,00,000 equity shares of ` 10 each at par. 5,00,000 shares were issued to the

promoters and the balance offered to the public was underwritten by three underwriters Anand, Vijay and Ashok –

equally with firm underwriting of 50,000 shares each. Subscription totalled 12,97,000 shares including the marked

forms which were:

Anand 4,25,000 Shares

Vijay 4,50,000 Shares

Ashok 3,50,000 Shares

The underwriters had applied for the number of shares covered by firm underwriting.

The amounts payable on application and allotment were ` 2.50 and ` 2.00 respectively.

The agreed commission was 5%

Pass Summary journal entries for:

i) The allotment of shares to the underwriter:

ii) The commission due to each of them; and

iii) The net cash paid and or received.

[Total Liability (shares) Anand : 50,000; Vijay : 50,000 and Ashok : 1,03,000. Underwriting Commission :

` 2,50,000 each. Rec. from Ashok ` 7,500 and Paid to Anand & Vijay ` 1,25,000 each.]

Q.12. Scorpio Ltd. came out with an issue of 45,00,000 equity shares of ` 10 each at a premium of ` 2 per share. The

promoters took 20% of the issue and the balance was offered to the public. The issue was equally underwritten by

A & Co; B & Co. and C & Co.

Each underwriter took firm underwriting of 1,00,000 shares each. Subscriptions for 31,00,000 equity shares as

received with marked forms for the underwriters as given below:

A & Co. 7,25,000 shares

B & Co. 8,40,000 shares

C & Co. 13,10,000 shares

Total 28,75,000 shares

The underwriters are eligible for a commission of 5% on face value of shares. The entire amount towards shares

subscription has to be paid along with application. You are required to:

a) Compute the underwriters liability (number of shares)

b) Compute the amounts payable or due to underwriters.

[Total Liability (shares) A & Co. : 2,57,500; B & Co. : 1,42,500 and C & Co. : 1,00,000. Underwriting

Commission : ` 6,00,000 each and Rec. : ` 24,90,000; ` 11,10,000 and ` 6,00,000 from each respectively.]

Q.13. Sun Ltd. issued 1,00,000 equity shares. The whole of the issue was underwritten as follows:

Marigold 35%

Lotus 25%

Tulip 30%

Lily 10%

Applications for 80,000 shares were received in all; out of which applications for 20,000 shares had the stamp of

Marigold; 15,000 that of Lotus; 22,000 that of Tulip and 8,000 of Lily. The remaining 15,000 applications did not

bear any stamp. Determine the liability of each underwriter. [Dec‟14 – 5 marks]

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THEORY MASALA

Q.1. What do you understand by underwriting?

Ans. Underwriting may be defined as a contract entered into by company with persons or institutions, called

underwriters, who undertake to take up the whole or a portion of such of the offered shares or debentures as may

not be subscribed for by the public, in consideration of remuneration called underwriting commission. Thus,

underwriting is an underwriting or guarantee given by the underwriters to the company that the shares or

debentures offered to the public will be subscribed for in full. In case, the public response is poor, the

underwriters will have to take up the balance of the shares or debentures not subscribed for by the public and to

pay for them. Thus, the underwriters take over the risk of uncertainty of a public issue of shares of debentures of a

company and the company is assured of the success of the issue.

Q.2. Write a note on: Underwriting Commission. [CS(Inter) – June 1999 (5 Marks)]

Ans. The amount payable to the underwriters for underwriting the issue of shares or debentures of a company is called

underwriting commission. It is paid at specified rate on the issue price.

Section 76 of the Companies Act, 1956 contained the provisions for the payment of underwriting commission, but

The Companies Act, 2013 do not contain any provision for payment of underwriting commission. Thus, payment

of underwriting commission will regulated by the rules that may be issued and SEBI guidelines.

Q.3. Write a short note on: Firm Underwriting. [CS(Inter) - June 1993, 2001 (5 Marks)]

Ans. Firm underwriting refers to a definite commitment by the underwriter(s) to take up a specified number of shares

or debentures of a company irrespective of the number shares or debentures subscribed for by the public. In such a

case, the underwriters take up the agreed number of shares or debentures. Firm underwriting is in addition to

unsubscribe shares or debentures, if any. While computing the liability of the underwriters, the firm underwriting

can be dealt with in any one of the following manners in the absence of any specific instructions.

Q.4. Differentiate Between: Marked applications & unmarked applications in case of underwriting of shares.

[CS (Inter) – June 2003 (3 Marks), CS (Executive) – Dec. 2008 (3 Marks)]

Ans. Applications bearing the stamp of the respective underwriter are called as marked application, while application

received directly by company. Which do not bare stamp of any underwriter are called as unmarked application.

Q.5. Differentiate Between: Underwriter and Broker. [CS (Executive) – Dec. 2008 (3 Marks)]

Ans. An underwriter guarantees that if the public do not take up all shares the underwriters will purchase the remaining

shares. The company agrees to pay an underwriting commission at prescribed percentage allowed as per law.

A broker undertakes only to find buyers who are willing to buy shares and debentures and does not guarantees the

sale of shares and debentures.

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CHAPTER 6 DEBENTURES

Debentures is the most common form of loan capital which is made available by investor on a long-term

basis. It is a discount containing details of an interest-bearing loan made to a company. Thus, a debenture

is a document which evidences a loan. It is a document which either creates a debt or acknowledges it.

Predetermined fixed rate of interest is payable on debentures (whether the company has earned any

profit or not). Debenture holders are the creditors of the company, not the owners. They have no voting

rights and cannot influence the management for the affairs of the company, but their claims for interest

and for repayment of principal rank ahead of the claims of the shareholders. Section 2(30) of Companies

Act, 2013 provides that “debenture” includes debenture stock, bonds or any other instrument of a

company evidencing a debt, whether constituting a charge on the assets of the company or not.

ADVANTAGES OF THE ISSUE OF DEBENTURS

The main advantage of raising capital by issuing debentures, instead of shares, is that interest paid on

debentures are deductible in determining taxable income of the company. Dividends paid shareholders,

however, are not deductible in computing taxable income of the company. Due to tax advantage, the cost

of capital is lower in case of debenture financing.

TYPES OF DEBENTURES

The following are the types of debentures issued by a company. They can be classified on the basis of:

1. Security

a) Secured Debentures: These debentures are secured by a charge upon some or all assets of the

company. Provided that the company cannot issue secured debentures having a maturity period

more than 10 years.

b) Unsecured or “naked” Debentures: These debentures are not secured by any charge upon any

assets.

2. Convertibility

a) Convertible Debentures: These are debentures which will be converted into equity shares (either

at par or premium or discount) after a certain period of time from the date of its issue.

b) Non-convertible debentures: These are debentures which cannot be converted into shares in

future. As per the terms of issue, these debentures are repaid.

3. Permanence

a) Redeemable Debentures: These debentures are repayable as per the terms of issue, for example.

After 8 years from the date of issue.

b) Irredeemable Debentures: These debentures are not repayable’ during the life time of the

company. These are also called perpetual debentures.

4. Negotiability

a) Registered Debentures: These debentures are payable to a registered holder whose name,

address and particulars of holding recorded in the Register of Debenture holders.

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b) Bearer Debentures: These debentures are transferrable by delivery. These are negotiable

instruments payable to the bearer.

RECORDING THE ISSUE OF DEBENTURES

Just like shares, money payable on debentures may be paid either in full with application or by

installments. Accounting entries will differ to some extent in either case.

Debentures Payable in Full on Application

Where the amount due on debentures are payable in full on application, it is usual to open separate

Debentures Application Account for each class of debentures, such as 10% Debentures Application

Account or 12% Debentures Application Account.

Debentures Issued at Par

The debentures which are issued at par the issued at the same price as their nominal value; that is, if a

debenture with a nominal value of ` 100 is issued at par, the company receives ` 100.

Debentures issued at a premium

Debentures

Secured Unsecured

Floating Charge Fixed Charge

Convertible Non-Convertible

Redeemable Irredeemable

Registered Bearer

First Mortgage

Debenture

Second Mortgage

Debenture

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Debentures are rarely issued at a premium. A company issues debentures at a premium when the market

rate or interest is lower than the debentures interest rate. The debentures, which are issued at a

premium, are issued at a higher price than their nominal value; that is, if a debenture with a nominal

value of ` 100 is issued at 10% premium.

Debentures Issued at a Discount

The Companies Act, 2013 does not impose any restriction on the price at which debentures can be issued.

Unlike shares, there is no maximum limit for discount on issue of debenture. This is why it is very

common for debentures to be issued at a discount. The debentures which are issued at a discount are

issued at a lower price than nominal value, that is if a debenture with a nominal value of ` 100 is issued at

10% discount, the company receives ` 90 only. In fact, the discount on issue of debentures is considered

as incremental interest expense. The true interest expense (net borrowing cost) for a particulars

accounting period is, therefore, the total interest payment plus the discount written-off.

NOTE : Unlike shares, debentures cannot be forfeited for non-payment of calls due. This is because,

under Section 71 of the Companies Act, 2013 a contract with a company to take up and pay for any

debenture of the company may be enforced by a decree for specific performance.

ISSUE OF DEBENTURES AS COLLATERAL SECURITY FOR A LOAN

Collateral security means, secondary or supporting security for a loan, which can be realized by the

lender in the event of the original loan not being repaid on the due date. Under this arrangement, the

borrower agrees that a particular asset or a group of assets will be realized and the proceeds there from

will be applied to repay the loan in the event that the amount due, cannot be paid. Sometimes companies

issue their own debentures as collateral security for a plan or a fluctuating over draft.

When the loan is repaid on the due date, these debentures are at once released with the main security. In

case, the company cannot repay its loan and the interest thereon on the due date, the lender becomes the

debenture holder who can exercise al the rights of a debenture holder. The holder of such debentures is

entitled to interest only on the amount of loan, but not on the debentures.

ISSUE OF DEBENTURES OTHER THAN FOR CASH

Just like shares, debentures can also be issued for consideration other than for cash, such as for purchase

of land, machinery, etc.

DEBENTURE STOCK

Debenture Stock is a document through which a large amount of loan is obtained by a company instead of

issuing a number of debentures. The debenture stock may be repayable at a fixed date, may be secured or

irredeemable depending upon the terms of the deed creating the debenture stock. Where there is a

debenture stock there should be a debenture stock trust deed making provision for appointment of

trustees. Debenture stock can be issued for any amount and may include fractions of a rupee.

DEBENTURE INTEREST

Interest is the amount charged by a lender to a borrower for the use of funds. The interest rate is

typically expressed on any annual basis. Debenture interest is payable at regular intervals at a fixed

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percentage of the face value (known as coupon rate). Debenture interest constitutes a charge against

profit. It is payable to the debenture holders whether profits are earned or not.

REDEMPTION OF DEBENTURES

Many debentures are issued with the notice that they may be redeemed at the option of the company

within a specified period of time and at a price specified. Redemption of debentures may seriously affect

the liquidity of the company. Keeping the date and mode of redemption in mind, every company diverts

some of the profits available to the shareholders towards a special fund (called Sinking Fund). Where the

amount of debentures to be redeemed is small or it is to be redeemed by annual installments, the

company may not create any special fund. The accounting entries will differ according to the situations.

We would like to discuss the accounting entries under two broad headings: a) Where there is no Sinking

Fund; b) Where there is Sinking Fund.

1. Where there is no Sinking Fund

Generally, no sinking Fund is created where the amount of debentures to be redeemed to be

redeemed is small. The debentures may be redeemed:

(i) By payment in a lump sum at the end of the specified period

(ii) By payment in annual installments

(iii) By purchase in the open market

Payment in a Lump Sum at the End of a Specified Period

In this case, all debentures are redeemed at a time at the end of a specified period.

Payment in Annual Installments

In this case, debentures to be redeemed are selected by lottery or drawings.

In fact, premium paid on redemption is a loss, Generally, at the time of issue of debenture, a provision is

made for the premium payable on redemption by debiting “Loss on Issue of Debentures Account” and

crediting “Premium on Redemption Debentures Account”. Till the date of redemption, it is shown on the

liabilities side of the Balance Sheet. However, a portion of “loss on issue of debentures” is written off

every year by debiting Profit and Loss Account.

Where no provision is made, Premium on Redemption of Debentures Account is closed by passing the

following entry:

Securities Premium Account Dr.

Profit and Loss Account Dr.

To Premium on Redemption of Debentures Account

Early Extinguishment of Debentures – Purchase in the Open Market

A company may redeem its debentures prior to maturity. The company may purchase its own debentures

from stock market either: (i) for immediate cancellation, or (ii) as an investment (to be cancelled when

required).

The Principal reason for cancelling debentures before maturity date is to relieve the issuing company of

the obligation to make future interest payments. If the debentures are listed in the stock market, they can

be easily purchased and sold.

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Generally, the company is interested to purchase its own debentures when the interest rate on the

debentures is considerably higher than the current market interest rate.

The advantage of the company is that by issuing new debentures or by arranging loan at a lower interest

rate, it can use the funds to reacquire the original, higher interest debentures.

Purchase of Debentures for Immediate Cancellation-On the Date of Interest

A company may purchase its own debentures at any date for immediate cancellation. If the date of

purchase of debentures and the date for payment of interest on debentures are the same, interest upto

the date of purchase will be paid to the (old) debenture holders.

Purchase of Debentures for Immediate Cancellation –Before the Date of Payment of Interest

When debentures are purchased before the due date of interest, a problem may arise whether the quoted

price includes interest upto the date of purchase or not. Price may be quoted “Ex-interest” or “Cum-

interest”.

Meaning of Cum-Interest and Ex-Interest

‘Cum’ and ‘Ex’ are latin words. ‘Cum’ means with and ‘Ex’ means without. Cum-interest can be expanded

as cumulative or inclusive of interest and Ex-interest can be expanded as exclusive of interest. The

quotation, Cum-interest, not only covers the cost but also includes the interest accrued upto the date of

purchase; when interest becomes due, it would be the right of the buyer to claim that. Conversely, the

quotation, Ex-interest, only covers the cost of the debentures and the buyer is liable to pay additional

amount as interest accrued upto the date of Purchase of debentures. In this connection, the following

points are important: In respect of Government securities and debentures, the price quoted is Ex-

interest unless otherwise stated; and (ii) In respect of Non-Government securities and

debentures, it is Cum-Interest unless otherwise stated. When debentures are purchased Cum-

interest, care must be taken at the time of passing entry for purchase of debentures. In this case,

quotation price consists of cost plus accrued interest. Payment of accrued interest on debenture

reacquisition is separately treated as a debit to debenture interest. Debentures Redemption Account will

be debited with the cost price only and Debenture Interest Account will be debited with the accrued

interest upto the date of purchase from the date of last interest paid. Bank Account will be credited with

the quotation price. For calculating cost and accrued interest, the following steps should be followed:

Step 1: Calculate the period between the date of last interest paid and the date of purchase of debentures.

Step 2: Calculate accrued interest by applying the following formula:

𝐑𝐚𝐭𝐞 𝐨𝐟 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭×𝐩𝐞𝐫𝐢𝐨𝐝 (𝐢𝐧 𝐦𝐨𝐧𝐭𝐡)

𝟏𝟐 × Face value of debentures purchased

Step 3: Calculate cost as follows:

(Quotation Price × No. of debentures purchased) less Accrued interest as calculated in Step 2.

When debentures are purchased Ex-Interest, the Debentures Redemption Account will be debited with

quotation price (which is, in fact nothing but the cost price) and Debenture interest Account will be

debited with accrued interest. Bank Account will be credited with the quotation price plus accrued

interest.

166

We should remember that profit or loss on redemption of debentures arises only on cancellation

or sale.

The Students should note that frequently the expression “Debenture Redemption Fund

Account” is used instead of “Sinking Fund Account”. Likewise, “Debenture Redemption Fund

Investment Account” is used in place of “Sinking Fund Investment Account”. These

expressions are used interchangeably.

Purchase in the Open Market (where there is sinking fund) for Immediate Cancellation

Sometimes a company may purchase its own debentures from stock market for immediate cancellation

even when there is a sinking fund. Generally, the company is interested to purchase its own debentures

when the prevailing price is advantageous to it and loss on sale of sinking fund investment, if any, is

minimum.

In this Connection, the following points are important:

a) Any profit or los on sale of sinking fund investment should be transferred to Sinking Fund Account.

b) The difference between the face value of debentures cancelled and their actual cost (in case of cum-

interest purchase, quotation price less accrued interest; and in case of ex-interest, quotation price)

should be treated as profit or loss on cancellation of debentures. This profit on cancellation should

be transferred to Capital Reserve Account as it is a capital profit.

Purchase in the Open Market (where there is Sinking Fund) as Investment

Sometimes, a company may purchase its own debentures as sinking fund investment. When own

debentures are purchased as investment, an account called “Investment in own Debentures Account” is

debited with actual cost and Bank Account is credited with the total payment.

When own debentures are kept as investment, the interest on such debentures is to be calculated for the

period. It should be credited to Sinking Fund Account and debited to Debenture Interest Account at the

end of the accounting period. Any profit or loss on sale of investment should be transferred to Sinking

Fund account.

In the Balance Sheet, Debentures will be shown at the original figure and investment in Own Debentures

Account will be shown on the assets side.

No Profit or loss is calculated at the time of purchase of own debentures. Only when it is

cancelled, the profit or loss it calculated and transferred to Sinking Fund Account.

Debenture Trust Deed

A trust is a legal arrangement where by assets are owned and managed by one or more persons

(trustees) on behalf of others (beneficiaries). The debenture holders of a company are interested in the

safety of their debentures. To protect the interest of the debenture holders a Trust Deed is drawn up. It is

a legal document defining a trust and regulating the rights and duties of the trustees as well as the

debenture holders.

When debentures are issued to the public, certain persons are appointed as trustees whose main job is to

safeguard the interest of the debenture holders. The trustees are empowered to call for a meeting or the

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debenture holders and also can appoint a Receiver on breach of contract. A Trust Deed may also make a

provision that the trustee, without the aid of the Court can exercise the power to sell the Debenture.

Insurance Policy Method

This is similar to the sinking fund method but, instead of investing the money in securities, the amount is

used in paying premium on a policy taken out with an insurance company. The policy should mature

immediately before the date of redemption debentures. The money that is received from the insurance

company is used for paying the debenture holders.

At the end of each year, Debentures Redemption Fund policy (cumulative premium) will appear on the

assets side of the Balance Sheet, whereas, the debentures Redemption Fund will appear on the Liabilities

side.

Convertible Debentures

Convertible debentures are those which carry on provision of conversion in a number of shares at par or

at a premium on or before a certain date. The dates and terms of the conversion are established at the

time of the issue of debentures. A convertible debentures gives the holder the option to convert it into

shares at a later date and also at a fixed price. In fact, it is a delayed form of equity financing. Convertible

debentures can be partly or fully convertible.

Convertible debenture holders are the secured creditors of the company at the early stage of

development. By the process of conversion, they are given option to enjoy the right of becoming

proprietors, when the solvency, liquidity and managerial efficiency of the company are assured. It should

be noted that there is no prohibition to issue debentures at a discount. Unlike the prohibition

contained in Section 54 of the Companies Act, 2013 for the issue of shares at a discount but, When

the debentures are convertible into equity shares, the conversion should be at par or above the

normal value of equity shares.

Following are the advantages of convertible debentures:

1. The debt is self-liquidating – there will be no cash outflow in the future.

2. There will be no capital gains tax for convertible debenture holders.

3. Capital gearing is reduced, paving the way for new loans.

The disadvantages are:

1. There may be future dilution in earnings per share.

2. There may not be any possibility of a bonus or rights issue in the near future.

3. Valuation techniques for conversion requires additional study.

168

Accounting Gym – Issue and Redemption Of Debentures

Q.1. Simmons Ltd. Issued 10,000 12% Debentures of ` 100 each at par payable in full on application by 1st April, 1998

Applications were received for 11,000 Debentures. Debentures were allotted on 7th

April, 1998. Excess money

were refunded on the same date.

You are required to pass necessary Journal Entries (including cash transactions) in the books of the company and

also show the Ledger Accounts and the Balance Sheet.

Q.2. Kapil Ltd. Issued 10,000 12% Debentures of ` 100 each at a premium of 10% payable in full on application by 1st

March, 1998. The issue was fully subscribed and debentures were allotted on 9th

March 1998. Pass necessary

Journal Entries (including cash transactions).

Q.3. X Ltd. Issued 10,000, 12% Debentures of ` 100 each at a discount of 10% payable in full on application by 31st

May 1998. Applications were received for 12,000 debentures. Debentures were allotted on 9th

June, 1981. Excess

monies were refunded on the same date. Pass necessary Journal Entries.

Q.4. HDC Ltd. Issues 10,000 12% debentures of ` 100 each at ` 94 on 1st January 1998. Under the terms of issue

debentures are redeemable at the end of 8 years from the date of the issue. Calculate the amount of discount to be

written-off in each of the 8 years.

[Ans. ` 60,000 each year.]

Q.5. HDC Ltd. Issue 10,000 12%, debentures of ` 100 each at ` 94 on 1st January 1994, Under the terms of issue 1/5

th

of the debentures are annually by drawings the first redemption occurring on 31st December 1998, Calculate the

amount of discount to be written-on in 1998 to 2002.

[Ans. In the ratio of 5:4:3:2:1]

Q.6. AB Co. Ltd. Issues 500, 12% debentures of ` 100 each at ` 98 on 1st January 1993. Under the terms of issue: (a)

debenture interest is annually payable on 31st December every year; and (b) 1/5

th of the Debentures are annually

redeemable by drawings. The 1st redemption occurring on 31

st December 1994. Calculate the amount of discount

to be written-off each year and also show the Discount on Issue of Debentures Account.

[Ans. In the ratio of 5:5:4:3:2:1]

Q.7. R Ltd. Issued debentures at 94% for ` 1,00,000 on 1st April 1993, repayable by 5 equal annual drawings of `

20,000 each. The company closes its accounts on calendar year basis.

Indicate the amount of discount to be written-off in every accounting year, assuming that the company decides to

write-off the debentures discount during the life of the debenture.


Q.8. Show by means of Journal Entries how will you record the following issues. Also show how they will appear in

the respective Balance Sheets:

a) P Ltd. Issues 5,000, 10% Debentures of ` 100 each at a discount of 5%, redeemable at the end of 5 years at

par.

b) Q Ltd. Issues 5,000, 11% debentures of ` 100 each at par, redeemable at the end of 5 years at a premium of

5%.

c) R Ltd. Issues 5,000, 12% debentures of ` 100 each at a discount of 5%, redeemable at the end of 5 years at a

premium of 5%.

d) S Ltd. Issues 5,000, 13% debentures of ` 100 each at a premium of 5%, redeemable at the end of 5 years at a

premium of 5%.

169

Q.9. Y Ltd. Issued 1,000, 11% debentures of ` 100 each at a discount of 10% on 1st March 1998,payable on the

following terms: On application ` 60; allotment `20 (after adjusting discount); and On call ` 10.

The issue was fully subscribed and all money was received in full. Pass necessary Journal Entries (including cash

transactions) and also show the relevant portion of the Balance Sheet after issue of debentures.

Q.10. Z Ltd. Issued 1,000 14% Debentures of ` 100 each at a premium of 10% on 1st May 1998, payable on the

following terms:

On application ` 40; On allotment ` 40 (including premium); and the balance on the final call. The issue was fully

subscribed and debentures were allotted in full. Pass necessary Journal Entries (including cash transactions).

Q.11. X Company Limited issued 14% Debentures of the nominal value of ` 10,00,000 as follows:

a) To sundry persons for cash at 90% ` 5,00,000 nominal.

b) To a vendor for ` 2,00,000 for purchase of fixed assets - ` 2,50,000 nominal.

c) To the banker as collateral security for a loan of ` 1,00,000 - ` 2,50,000 nominal.

Pass necessary Journal Entries.

Q.12. AB Co. Ltd. Issues 500, 12% debentures of ` 100 each at ` 98 on 1st January 1995, Under the terms of issue: (a)

Debentures interest is annually payable on 31st December every year. And (b) 1/5

th of the debentures are annually

redeemable by drawings, the 1st redemption occurring on 31

st December 1996.

Pass necessary Journal entries for 1995, 1996 and 1997 and also show:

(a) Debentures Account; (b) Debenture holder Account; and (c) Debenture Interest Account for the relevant

period assuming that: (i) the company‟s accounting year ending on 31st December: (ii) All the terms of debenture

issue are fully complied with; and (iii) no sinking fund was created.


Q.13. On 1st January 1997, HP Ltd. Had 10,000, 12% Debentures of ` 100 each. As per the provision of the deed, the

directors acquired in the open market the following debentures for immediate cancellation: June 30, 2,000

debentures @ ` 98: December 31, 4,000 debentures @ ` 96. Debentures interest is payable half-yearly, on 30th

June and 31st December.

Pass necessary Journal Entries (ignore interest and tax).


Q.14. On 1.3.1998, PQR Ltd. Purchases its own 6% debentures, of ` 10,000 @ ` 96 Cum-interest and cancels

immediately, interest on debentures being payable on June 30 and December 31 each year. Pass Journal entries.

[Ans. Profit On Cancellation ` 500.]

Q.15. X Ltd. made an issue of 10,000 12% Debentures of ` 100 each, payable as follows:

` 25 on Application

` 25 on Allotment

` 50 on First and Final Call.

Applications were received for 12,000 debentures and the directors allotted 10,000 debentures rejecting an

applications for 2,000 debentures. The money received on application for 2,000 debentures rejected was duly

refunded. All the calls were made and the moneys duly received.

Show the necessary Cash Book and Journal Entries to record the above transactions and prepare the Balance Sheet

of the Company.

[Ans. Cash Balance `10,00,000.]

Q.16. B Ltd. issued 2,000, 13% Debentures of ` 100 each at ` 110 payable as follows:

On Application I 25

170

On Allotment ` 35 (including premium)

On First and Final Call ` 50

The debentures were fully subscribed and the moneys were duly received.

Show the necessary Cash Book and the Journal entries and prepare the Balance Sheet of the company.

[Ans. Cash Balance ` 2,20,,000.]

Q.17. W Ltd. issued 2,000, 14% Debentures of ` 100 each at discount of 5% the discount being adjustable on allotment.

The debentures were payable as follows:

On Application ` 25

On Allotment ` 20

On First and Final Call ` 50

The debentures were fully subscribed and the moneys were duly received.

Show the cash book and journal entries and prepare the balance sheet of the company.

[Ans. Cash Balance `1,90,000.]

Q.18. Optimist Ltd. purchased building worth ` 1,20,000 and plant and machinery worth ` 1,00,000 from Depressed

Ltd. for an agreed purchase consideration of ` 2,00,000 to be satisfied by the issue of 2,000, 12% Debentures of `

100 each.

Show the necessary Journal entries in the books of Optimist Ltd.


Q.19. Z Ltd. issued and overdraft of ` 50,000 from the Bank by issuing 600, 12% Debentures of ` 100 each as collateral

security. Prepare the Balance Sheet of the Company.

Q.20. ABC Company Ltd. proposes to issue 10,000, 14% debentures of ` 100 each to its shareholders on right basis.

They give you the following terms of issue and ask you to pass the journal entries in every case separately.

i) The debentures were issued at premium of 10% and redeemable at par.

ii) The debentures were issued at premium of 5% and redeemable at premium of 10%.

iii) The debentures were issued at par but redeemable at premium of 10%.

iv) The debentures were issued at premium of 5% but repayable at premium of 10%.

v) The debentures were issued at discount of 5% but redeemable at par.

Q.21. Zed Ltd. had issued ` 2,00,000, 10% debentures on which interest was payable half-yearly on 30th

September and

31st March. Show the necessary journal entries relating to debentures interest for the year ended 31

st March, 2014

assuming that all moneys were duly paid by the company. Tax deducted at source is 10%.

[Ans. Debentures Interest ` 10,000 semi-annually.]

Q.22. Indra Ltd. issued 10,000 debentures of ` 100 each at a discount of 6%. The expenses on issue amounted to `

35,000. The debentures have to be redeemed at the rate of ` 1,00,000 each year commencing with end of fifth

year. How much discount and expenses should be written off each year?

[Ans. In the ratio of 10:10:10:10:10:9:8:7:6:5:4:3:2:1]

Q.23. Sona Ltd. issued 1,000, 12% Debentures of ` 100 each at a discount of 10% redeemable at par after 5 years. Show

the Discount on Issue of Debentures Account for these years if an equal amount of discount is to be written off

every year.

[Ans. ` 2,000 per year.]

Q.24. Bee Ltd. issued 2,000, 12% Debentures ` 100 each at a discount of 6% on 1.4.2009 repayable by equal annual

drawings in four years.

You are required to show the Discount on Issue of Debentures Account over the period.

[Ans. In the ratio of 4:3:2:1]

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Q.25. Venus Ltd. issued 1,000, 12% Debentures of ` 100 each at a discount of 5%. These debentures are redeemable at

a premium of 10% after 5 years.

You are required to show:

i) The journal entry on Issue of the Debentures; and

ii) The Loss on Issue of Debentures Account over the period.

[Ans. Loss on Issue of Debentures ` 15,000 and ` 3,000 to be written off per year.]

Q.26. Strong Ltd. issued 10,000, 14% debentures of ` 100 each on 1st Apirl, 2009 at a discount of 5% repayable at a

premium of 10% after 5 years out of the profits of the company. On 1st April, 2014 balance in the Debenture

Redemption Reserve Account stood at ` 3,40,000.

You are required to give journal entries in the books of the company both at the time of issue and redemption of

debentures.

[Ans. Amount to be transferred to DRR ` 1,60,000.]

Q.27. Steady Ltd. issued 2,000, 9% Debentures of ` 100 each at par on 1st April, 2009 repayable at the end of 5 years at

a premium of 6%. It was decided to institute a Sinking Fund for the purpose, the investments being expected to

yield 8% p.a. Sinking Fund tables show that ` 1 per annum at 8% compound interest amounts to ` 5,867 in 5

years. Investments were made in multiple of rupees ten only.

On 31st March, 2014 the investments realized ` 1,75,000 and the debentures were redeemed. The bank balance

was on that date was ` 54,000.

You are required to show the journal entries relating to the creation of Sinking Fund and to prepare the relevant

ledger accounts in the books of the company. Ignore debenture interest.

[Ans. Annual appropriation ` 36,134.]

Q.28. S.S. Ltd. had ` 1,50,000, 12% debentures outstanding on 1st April, 2014. The Debenture Redemption Fund

Account of the Company stood at ` 78,000 on the same date represented by investment in securities of ` 100

each. The directors of the company decided to sell ` 50,000 worth of the securities at ` 102 and to redeem `

50,000 debentures at a premium of 5%.

You are required to show the journal entries in the books of the company relating to the sale of securities and the

redemption of debentures.

[Ans. General Reserve ` 50,000 and Capital Reserve ` 1,000.]

Q.29. Go Go Ltd. issued 500, 12% Debentures of ` 100 each at par on 1st April, 2011, repayable at par after 3 years on

31st March, 2014. The directors decided to take out an insurance policy to provide necessary cash for the

redemption of the debentures. The annual premium for the policy, payable on 1st April every year was ` 15,705.

You are required to show the journal entries and to prepare the relevant ledger accounts in the books of the

company relating to the issue and redemption of debentures.

[Ans. General Reserve ` 50,000.]

Q.30. The following is the Balance Sheet of Good Luck Ltd. as at 1st April, 2014:

` `


1. Shareholder‟s funds

(a) Share Capital 1

(b) Reserves and Surplus: 2

2. Non-current liability

Long term borrowings 3

3. Current liabilities

Trade payables

TOTAL

5,00,000

50,000

1,00,000

1,50,000

8,00,000

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II. ASSETS


(a) Fixed Assets:

(i) Tangible Fixed Assets 4

2. Current Assets

Inventories

Trade receivables


TOTAL

Notes

1. Share Capital

Authorised Capital

1,00,000 Equity Shares of ` 10 each

Issued Subscribed and paid up capital

50,000 Equity shares of ` 10 each fully paid-up

2. Reserve and Surplus

Profit and Loss A/c


1,000, 12% Debentures of ` 100 each fully paid-up


Land and Building

Plant and Machinery

Furniture and Fixtures

1,70,000

2,00,000

20,000

4,10,000

3,90,000

8,00,000

10,00,000

5,00,000

50,000

1,00,000

2,00,000

2,00,000

10,000

4,10,000

The Debentures Trust Deed provides that the company may redeem the debentures at premium of 5% at any time

before the maturity. In order to exercise this option, the directors decided to issue 10,000 equity shares of 10 each

at 11 on this day and to redeem the debentures. All the shares were duly subscribed and the debentures were

redeemed.

Show the journal entries in the books of the company. Also prepare the Balance Sheet after the redemption of

debentures.

[Ans. Premium on Redemption of Debentures ` 5,000.]

Q.31. Favourite Ltd. had 2,000, 12% debentures of ` 100 each as on 1st April, 2013. As per the terms of issue, the

company purchased the following debentures in the open market for immediate cancellation.

1st May - 400 Debentures at ` 98 cum-interest

1st January - 800 Debentures at ` 100.25 cum-interest

1st March - 200 Debentures at ` 98.50 ex-interest

Assuming that debenture interest was payable half-yearly on 30th

September and 31st March and the Income-tax

was deductible at the rate of 10% at source. Show the journal entries in the books of the company and prepare the

necessary ledger accounts. The company closes its books on 31st March.

[Ans. Profit on Cancellation to be transferred to Capital Reserve ` 3,700.]

Q.32. The following balances appeared in the books of Cheerful Ltd. as on 1st April, 2013:

9% Debentures (face value ` 100) ` 1,50,000

Debentures Redemption Fund - ` 75,000

Debenture Redemption fund investment - ` 75,000

(in 8% Government Bonds of the face value of ` 90,000)

Interest on the Debentures was payable on 30th

September and 31st March and interest on Government Bonds was

receivable on the same dates.

173

On 31st May, 2013 the company purchased for immediate cancellation 250 debentures in the market at ` 95 each

cum-interest. The amount required for this was raised by selling 8% Government Bonds of the face value of `

27,000.

On 31st March, 2013 ` 20,800 was appropriated for the Sinking Fund and on the same date 8% Government

Bonds were acquired for the amount plus the interest on investments. The face value of the Government Bonds

acquired was ` 28,000.

You are required to show the journal entries and ledger accounts in the books of the company. Ignore Income tax.


Q.33. In the books of Joy Ltd. the 12% Debentures Account showed a credit balance of ` 2,00,000 consisting of 2,000

debentures of ` 100 each as on 1st April, 2013.

During the year debentures were purchased in the open market as follows:

1st August, 300 Debentures at ` 95 ex-interest.

1st November, 200 debentures at ` 98 cum-interest.

The Debentures, thus, purchased were retained as investments of the company. Interest on debentures was payable

half-yearly on 30th

September and 31st March every year.

You are required to show the Journal entries and the ledger accounts in the books of the company. Ignore Income-

tax. Also show how the items would appear in the Balance Sheet.

[Ans. Debenture interest to be charged to Statement of P&L ` 24,000.]

Q.34. X Ltd. borrowed ` 25,00,000 from a scheduled bank at an annual interest rate of 12% and deposited 14%

debentures of the face value of ` 40,00,000 as collateral security. Pass the journal entries regarding the issue of

debentures as collateral security and also show the above items in the company‟s balance sheet. [Dec‟13–5 mark]

Q.35. Confident Ltd. had 2,000 12% Debentures of ` 100 each outstanding as on 1st April, 2013. The following other

balances also appeared in the books of the company on this date:

Debentures Redemption Fund Account ` 1,00,000

Debentures Redemption Fund investments:

12% Port Trust Bonds (Face value ` 60,000) ` 55,000

Own Debentures (face value ` 50,000) ` 45,000

Interest on the debentures was payable on 30th

September and 31st March and interest on Port Trust Bonds was

received on the same dates.

On 1st August, 2013 ` 20,000, 12% Port Trust Bonds were sold at ` 95 ex-interest and the amount realized was

invested in Own Debentures at ` 97 cum-interest. During the year a sum of ` 5,800 was appropriated for the

Sinking Fund which together with the interest received on Sinking Fund during the year was invested in Own

Debentures at ` 95 each.

You are required to show the Journal entries and ledger accounts in the books of the Company. Also show how

the items will appear in the Balance Sheet of the Company. Ignore Income-tax.

[Ans. Debenture interest to be charged to Statement of P&L ` 24,000. Capital Reserve ` 667.]

Q.36. Continuing Question No. 45, If own debentures held by the company are cancelled on 31st March, 2014, show the

necessary journal entries on cancellation and the effect of the same in the Balance Sheet of the Company.

[Ans. General Reserve ` 90,000 and Capital Reserve ` 7,667.]

Q.37. On 1st April, 2013, Green Ltd. issued 2500, 12% Debentures of ` 100 each at ` 95. Holders of these debentures

have an option to convert their holdings into 14% Preference Shares of ` 100 each at a premium of ` 25 per share

at any time within three years.

On 31st March, 2014, holders of 500 Debentures notified their intention to exercise the option.

Show the journal entries relating to the issue and conversion of debentures in the books of the company. Also

show how the items affected would appear in the company‟s balance Sheet.

[Ans. No. of 14% Preference Shares to be issued 380.]

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Q.38. Swathi Ltd.

Balance Sheet as at 1st April, 2014

` `


1. Shareholder‟s funds

(a) Share Capital 1

(b) Reserves and Surplus: 2

2. Non-current liability

Long term borrowings 3

3. Current liabilities

Other Current liability

TOTAL

II. ASSETS


(a) Fixed Assets Tangible (net)

(b) Non-current investment 4

2. Current Assets


Other current assets

TOTAL

Notes

1. Share Capital

Share Capital of ` 10 each

2. Reserve and Surplus

General Reserve

Debenture redemption fund


12% convertible debentures

Unsecured Loans

4. Non-current investment

Debentures redemption fund investment

7,50,000

5,00,000

10,00,000

50,000

5,00,000

12,50,000

15,00,000

12,50,000

45,00,000

18,00,000

4,00,000

5,00,000

18,00,000

45,00,000

5,00,000

12,50,000

15,00,000

4,00,000

The Debentures are due for redemption on 1st April, 2014 According to the terms of issue of debentures, they

were redeemable at a premium of 5% and also conferred option to the debentureholders to convert 20% of their

holdings into equity shares at a predetermined price of ` 15.75 per share and the payment in cash.

Assuming that:

(a) Except for 100 debnetureholders holding 2,500 debentures, the rest of them exercised the option for

maximum conversion.

(b) The investments realize ` 4,40,000 on sale and

(c) All transactions are put through, on 1st April, 2014.

You are required to redraft the balance sheet of the company as on 1st April, 2014 after giving effect to the

redemption. Also show the number of equity shares to be allotted and the cash payment necessary.

[Ans. No. of Equity Shares to be issued 1,57,500.]

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THEORY MASALA

Q.1. Distinguish Between: Shares & Debentures. [CS (Executive) –June 2009 (5 Marks)]

Ans. following are the main points of distinction between share & Debentures:

Points Debentures Shares

Status Debenture holders are the creditors of the

company.

Shareholders are the owners of the

company.

Voting rights Debenture holders have no voting rights. Shareholders have voting rights.

Rate of Income Debenture interest is paid at a pre-

determined fixed rate.

Dividend on equity shares is paid at a

variable rate.

Treatment

against profit

Interest on debentures is the charge against

profits.

Dividends are appropriation of profits.

Types There are different kinds of debentures,

such as Secured/Unsecured, Redeemable/

Irredeemable, Registered /Bearer,

Convertible/ Non-Convertible etc.

There are only two kinds of shares-equity

shares and preference shares.

Balance Sheet

presentation

In the company‟s balance sheet, debentures

are shown under “Non-Current

Liabilities”.

In the company‟s balance sheet, shares are

shown under “Shareholders Funds”.

Conversion Debentures can be converted into shares

as per the terms of issue of debenture.

Shares cannot be converted into

debentures in any circumstances.

Forfeiture Debentures cannot be forfeited for non-

payment of call moneys.

Shares can be forfeited for non-payment of

allotment and call moneys.

Liquidation At the time of liquidation, debenture holders

are paid-off before the shareholders.

At the time of liquidation shareholders are

paid at last, after paying debenture holders,

creditors, etc.

Q.2. Write a short note on: Debentures issued as collateral security.

[CS (Inter) – June 1995, Dec. – 1995, CS(Inter) – Dec. 2001 (5 Marks)]

Ans. „Collateral security‟ means additional security given for a loan. Where a company takes a loan from a bank, it

may issue its own debentures to the lender as collateral security against the loan in addition to any other security

that may be offered. In such a case, the lender has the absolute right over the debentures until and unless the loan

is repaid. On repayment of the loan, the lender has to release the debentures. But incase the loan is not repaid by

the company, the lender has the right to retain these debentures and to realize them. The holder of such debentures

is entitled to interest only on the amount of loan, but not on the debentures. Such an issue of debentures is known

as “Debentures issued as Collateral Security”.

Q.3. Write a short note on: Loss on issue of debentures. [CS (Executive) – Dec. 2008 (5 Marks)]

Ans. If a company issued debentures at par or at a discount which are redeemable at a premium, the premium payable

on redemption of the debentures should also be treated as capital loss and as such it should be dealt with in the

same manner as discount on issue of debentures. Redemption of debentures at a premium is a known loss at the

time of issue of debentures as the terms of issue generally contain such provision for redemption. As such, it

would be prudent to write off such loss during the life time of the debentures.

Q.4. Write a short note on: Interest on debentures.

Ans. Interest on debentures is a charge against the profits. Interest is normally payable half-yearly and it is calculated at

the fixed percentage on the nominal value of debentures issued.

A company is liable to deduct TDS at the prescribed rate from the gross amount of interest payable and to pay it

to the Government.

If the debentures are tax-free, the income-tax on such interest will be paid by the company itself on behalf of the

debenture holders. However, the interest paid by the company has to be grossed up for calculating the interest

expense of the company.

176

Q.5. Write a short note on: Redemption of Debentures. [CS (Inter) – June 1998 (5 Marks)]

Ans. Redemption of debentures refers to the discharge of the liability in respect of the debentures issued by a company.

Debentures can be redeemed at any time either at par or at a premium or at a discount without any legal

formalities to be compiled with. The prospectus inviting applications for the debentures generally contains terms

of redemption of the debentures.

Protection of interest of debenture holder [Section 71(4): Where debentures are issued by a company, the

company shall create a Debenture Redemption Reserve Account out of the profits available for payment of

dividend and the amount credited to such Account shall not be utilized by the company except for the redemption

of debentures.

The SEBI has also issued guidelines to protect the interest of the debentures holders in the context of redemption

of debentures. SEBI has made it obligatory for all companies raising resources through debentures to create a

DRR equivalent to 50% of the amount of debenture issued.

When a company has created a sinking fund of the equivalent amount of debenture issue, it means that there is no

need to create debenture redemption reserve. However, no redemption can begin unless sinking fund accumulates

a sum of 50% of the amount of debenture issue. When the debentures are redeemed a sum equivalent to the

amount of debentures redeemed shall be transferred to general reserve account for disclosure to investors because

sinking fund itself substitutes for DRR. DRR is not required in case of convertible debentures i.e., conversion of

debentures into either shares or new debentures.

Q.6. Explain „Cum-interest‟ and „Ex-interest‟ in case of purchase of own debentures.

[CS (Executive) – Dec. 2012 (4 Marks)]

Ans. If the purchase price for the debentures includes interest for the expired period, the quotation is said to be “Cum-

interest”.

If, on the other hand, the purchase price for the debentures excludes the interest for the expired period, the

quotation is said to be “Ex-interest”.

Example: If a company purchases of its 9% Debentures of ` 100 each at ` 95 each on 1st August, 2014 the dates

of payment of Interest being 30th

September and 31st March, the treatment of the same for „Cum-interest” and

“Ex-interest‟ quotations will be as follows:

In case of cum-interest quotation: If the purchase price of ` 95 is taken to be cum-interest price, it implies that

this includes the interest for the expired period of 4 months (i.e., from 1st April, 2014 to 31

st July 2014), which

amounts:

100 × 9% × 𝟒

𝟏𝟐 = 3

Therefore, the price actually paid for the debenture should be taken at (` 95 - ` 3) = ` 92.

In case of Ex-interest quotation: If the purchase price of ` 95 is taken to be the ex-interest price it implies that

this does not include the interest for the expired period of 4 months (i.e., From April, 2014 to 31st July, 2014)

which amount to:

100 × 9% × 𝟒

𝟏𝟐 = 3

In this case the price of ` 95 represents the price actually paid for the debentures and the company is required to

pay ` 3 for every debenture as interest in addition to the purchase price of ` 3 for every debenture as interest in

addition to the purchase price of ` 95. Therefore, the company is required to pay (` 95 + ` 3) = ` 98 for every

debenture in total.

Q.7. Write a short note on: Conversion of Debenture. [CS (Inter) – Dec. 2008 (5 Marks)]

Ans. If the debenture holders find the offer is beneficial to them, they will exercise their right and opt for shares

otherwise they may not exercise their right.

It has to be carefully noted that the provisions of Section 53 of the Companies Act, 2013 are not violated in

process of conversion. In such a case, the actual proceeds of the issue of debentures should be considered in

determining the number of shares to be issued in exchange of the debentures to be converted. Even the debentures

originally issued at a discount can be converted in determining the number of shares to be issued. Thus, the issue

price of the shares must be equal to the amount actually received from the debenture holders at the time of issue of

177

those debentures. Otherwise the provisions of Section 53 would be violated, because shares cannot be issued at a

discount as provided in Section 53.

Q.8. Distinguish between: Sinking fund for redemption of a liability & Sinking fund for replacement of an asset.

[CS (Inter) – June 1994, June 1997 (5 Marks)]

Ans. Sinking fund is created to provide cash to meet the liability or to replacement of an asset. Under sinking fund

method each year a specific amount is charged against profit and sinking fund is created. Out of sinking fund

created specific assets are purchased and sold after some years to make available funds for redemption of liability

or purchase the new asset. Though in both situation it is operated in similar manner there are some differences as

follows:

Points Sinking Fund for redemption of a

liability

Sinking Fund for replacement of an asset

Annual

Contribution

Annual contribution set aside for sinking

fund for redemption of a liability is

appropriation of profit.

Annual contribution set aside for sinking

fund for replacement of an asset is really

depreciation.

Debit Sinking fund account is debited to profit &

loss appropriation account.

Sinking fund account is debited to profit &

Loss appropriation.

Treatment At the time of redemption of liability

balance in sinking fund account is

transferred to general reserve and it can

used for distribution of profit as dividend.

At the end of the useful life of assets

balance in sinking fund account is

transferred to assets account.

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CHAPTER 7 FINANCIAL STATEMENT OF COMPANIES

INTRODUCTION

One of the norms of modern business dictates all business entitles to prepare a set of financial statements

with a two-fold purpose – for assessing periodically profits earned and for getting conversant with the

financial position of the business of he business concern in question on a specified date. Financial

Statement of a company mainly consist of the following two statements:

1. Balance Sheet as at the end of the accounting period disclosing the financial position of the company;

and

2. Statement of Profit and Loss for that period disclosing the results of the operations of the company.

FINANCIAL STATEMENT [Sec. 2(40)]

“Financial Statement” in relation to a company, includes –

(i) A Balance Sheet as at the end of the financial year;

(ii) A profit and loss account, or in the case of a company carrying on any activity not for profit, an

income and expenditure account for the financial year;

(iii) Cash flow statement for the financial year of companies other than One Person Company, small

company and dormant company;

(iv) A statement of changes in equity, if applicable; and

(v) Any Explanatory note annexed to, or forming part of, any document referred to in above a to d)

points.

FINANCIAL YEAR [Sec 2(41)]

“Financial year” in relation to any company or body corporate, means the period ending on the 31st day of

March every year, and where it has been incorporated on or after the 1st day of January of a year, the

period ending on the 31st day of March of the following year, in respect where of financial statement of

the company or body corporate is made up:

Provided that on an application made by a company or body corporate, which is a holding company or a

subsidiary of a company incorporated outside India and is required to follow a different financial year for

consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its

financial year, whether or not that period is a year:

Provided further, that a company or body corporate, existing on the commencement of this Act, shall,

within a period of two years from such commencement, align its financial year as per the provisions of

this clause;

ADOPTION OF FINANCIAL STATEMENT [Sec. 129]

Section 129(2) requires that at every annual general meeting of the company, the Board of directors shall

lay before the annual general meeting, financial statements for the financial year. It may be noted that the

financial statements are required to be placed only at an annual general meeting and not at any other

general meeting.

179

FORM & CONTENTS OF FINANCIAL STATEMENT [Sec. 129(1)]

The financial statements shall give a true and fair view of the state of affairs of the company or

companies, comply with the accounting standards and shall be in the form of forms as provided for in

Schedule III of Companies Act, 2013.

REQUIREMENT OF TRUE AND FAIR [Sec. 128(1)]

The Companies Act requires that the financial statement must exhibit a true and fair view of the profit

earned or loss suffered by the company during the period for which the account has been prepared. The

term true and fair has not been defined not had it been the subject of any judicial decision. But, on the

whole, one may say that if on studying the profit and loss account properly, one should not be misled

about the size of the profit or loss and the significant factors that have contributed to the profit situation.

If the user is misled on either of these points, the profit and loss account cannot be treated as true and

fair.

TREATMENT OF SPECIAL ITEMS WHILE PREPARING FINANCIAL STATEMENT

Although, the general principles for preparing the final statement of a company are the same as

partnership firms and sole proprietorship concerns, some special points relating to the items peculiar to

a company are worth nothing. Those special points are:

Distinction Between Provisions and Reserves can be put as follows:

Provision Reserve

1. It is created for specific purpose. It is created for probable losses.

2. It is a charge to profit and loss account. It is an appropriation of profit.

3. It cannot be distributed as profit. It can be distributed as profit.

4. It cannot be invested in securities. It can be invested in securities.

5. It is made because of legal necessity It is a matter of financial prudence.

6. Provision is shown by way of deduction from

the amount of the items for which it is created.

It is shown separately under Reserves and

Surplus on the liabilities side of the balance

Sheet.

Reserve may be of various types which may be classified as follows:

Reserves

(1) Revenue Reserves (2) Capital Reserves

Reserves created out of revenue profits by

debiting profit and loss appropriation account are

called Revenue Reserves

Reserves created out of capital profits (i.e., profits

earned not in the usual course of the business)

are called Capital Reserves.

Revenue reserves are profits retained to

strengthen the financial position of the company

or to retain funds (generated by operations) for a

particular purpose.

Capital Reserves are created out of the following

capital profits:

1) Profits prior to incorporation.

2) Profits on redemption of debentures.

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3) Profit on forfeiture of shares.

4) Profit on sale of fixed assets.

5) Profit on revaluation of fixed assets or

liabilities.

Revenue Reserves

(a) General Reserves (b) Specific Reserves

If the purpose of creating the reserve by setting

aside a portion of the profits every year is to meet

any unforeseen contingency in future or to utilize

the same for expansion of the business, the

reserve thus created, is called General Reserve.

If the purpose of creating the reserve by setting

aside a portion of the profits every year is specific

or definite, the reserve thus created is called

Specific Reserve, for Example, Dividend

Equalisation Reserve.

MANAGERIAL REMUNERATION

Remuneration in whatsoever form to managerial personnel, i.e., directors, managing director or manager

of a company is a charge against profit and is shown on the debit side of the Profit and Loss Account

proper.

OVERALL MAXIMUM MANAGERIAL REMUNERATION [Sec. 197]

Section 197 of the Companies Act, 2013 provides that the total managerial remuneration payable by a

public company, to its directors and its manager in respect of any financial year shall not exceed 11% of

the net profits of that company for that financial year computed in the manner laid down in Sections 198.

Such percentage, however, shall be exclusive of any sitting fees payable to directors.

Section 2(78) provides that “remuneration” means any money or its equivalent given or passed to any

person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961.

To sum up the discussion on managerial remuneration, the following statutory rates should be

remembered:

Maximum Limit

1. Overall managerial remuneration (exclusive of fee for

attending meetings)

11% of the Net Profit

2. If the company has one managing director or whole-time

director


3. If the company has more than one Managing director or

whole-time director (for all of them)


4. Remuneration of Part-time directors where the company

has no managing director (for all of them)


5. Remuneration of Part-time director where the company

has one or more managing director (for all of them)


6. Remuneration to the Manager 5% of the Net Profit.

181

It is important to note that the Companies Act, 2013, prescribes the maximum limit of overall managerial

remuneration and of remuneration payable to various managerial personnel. But a company is at liberty

to fix up the managerial remuneration at a rate within those prescribed limits. The company is, also at

liberty to calculate the managerial remuneration either (i) on the net profits of the company before

charging such remuneration, or (ii) on the net profits of the company after charging such commission.

Calculation of Net Profit for Managerial Remuneration [Sec. 198]

Managerial remuneration payable to directors, managers or managing director is based on net profit

which is calculated as per the provision of Section 198. This net profit slightly differs from the normal

profit as disclosed by the published Profit and Loss Account.

Net Profit for this purpose is calculated after making the following four adjustments:

In making the computation aforesaid, credit shall be given for

Any bounties and subsidies received from any Government, or any public authority constituted or

authorized in this behalf, by any Government, unless and except in so far as the Central Government

otherwise directs.

In making the computation aforesaid, credit shall not be given for the following sums, namely: -

a) Profits, by way of premium on shares or debentures of the company, which are issued or sold by the

company;

b) Profits on sales by the company of forfeited shares;

c) Profits of a capital nature including profits from the sale of the undertaking or any of the

undertakings of the company or of any part thereof;

d) Profits from the sale of any immovable property or fixed assets of a capital nature comprised in the

undertaking or any of the undertakings of the company, unless the business of the company consists,

whether wholly or partly, of buying and selling any such property or assets:

Provided that where the amount for which any fixed asset is sold exceeds the written-down value

thereof, credit shall be given for so much of the excess as is not higher than the difference between

the original cost of that fixed asset and its written down value;

e) Any change in carrying amount of an asset or of a liability recognized in equity reserves including

surplus in profit and loss account on measurement of the asset or the liability at fair value.

In making the computation aforesaid, the following sums shall be deducted, namely: -

a) All the usual working charges;

b) Directors’ remuneration;

c) Bonus or commission paid or payable to any member of the company’s staff, or to any engineer,

technician or person employed or engaged by the company, whether on a whole-time or on a part-

time basis:

d) Any tax notified by the Central Government as being in the nature of a tax on excess or abnormal

profits;

e) Any tax on business profits imposed for special reasons or in special circumstances and notified by

the Central Government in this behalf;

f) Interest on debentures issued by the company;

182

g) Interest on mortgages executed by the company and on loans and advances secured by a charge on

its fixed or floating assets;

h) Interest on unsecured loans and advances;

i) Expenses on repairs, whether to immovable or to movable property, provided the repairs are not of

a capital nature;

j) Outgoings inclusive of contributions made under section 181;

k) Depreciation to the extent specified in section 123;

l) The excess of expenditure over income, which had arisen in computing the net profits in accordance

with this section in any year which begins at or after the commencement of his Act, in so far as such

excess has not been deducted in any subsequent year preceding the year in respect of which the net

profits have to be ascertained;

m) Any compensation or damages to be paid in virtue of any legal liability including a liability arising

from a breach of contract;

n) Any sum paid by way of insurance against the risk of meeting any liability such as is referred to in

clause (m);

o) Debts considered bad and written off or adjusted during the year of account.

In making the computation aforesaid, the following sums shall not be deducted, namely: -

a) Income-tax and super-tax payable by the company under the Income-tax Act, 1961 (43 of 1961), or

any other tax on the income of the company not falling under clauses (d) and (e) of sub-section (4);

b) Any compensation, damages or payments made voluntarily, that is to say otherwise than in virtue of

a liability such as is referred to in clause (m) of sub-section (4);

c) Loss of a capital nature including loss on sale of the understaking or any of the undertakings of the

company or of any part thereof not including any excess of the written-down value of any asset

which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value;

d) Any change in carrying amount of an asset or of a liability recognized in equity reserves including

surplus in profit and loss account on measurement of the asset or the liability at fair value.

DECALARTION AND PAYMENT OF DIVIDEND

DEFINITION AND MEANING OF DIVIDEND

Section 2(35) of Companies Act, 2013 provides that “dividend” includes any interim dividend. Dividends

are sums of money to be paid to the members of the company out of the profits made by the company. It

is a share of profits of the company. It may be noted that dividend is paid to shareholders in proportion to

the amount paid-up on the share held by them. Preference shareholders are always paid the dividend in

preference to the equity shareholders.

TYPE OF DIVIDEND

a) Final Dividend

Shareholder invest money in company and company do business from that money and earn profits.

Out of earned profits at Annual General Meeting, the board of directors of the company recommend

dividend and shareholders declare dividend recommended by the board if they thinks fit.

183

b) Interim Dividend

The Board of Directors of a company may declare interim dividend during any financial year out of

the surplus in the profit and loss account and out of profits of the financial year in which such

interim dividend is sought to be declared. The interim dividend is both recommended and declared

by the Board of Director at any time in financial year.

Declaration of Dividend [Sec. 123]

No dividend shall be declared or paid by a company for any financial year except –

(a) Out of the profits of the company for that year arrived at after providing for depreciation in

accordance with the provisions of sub-section (2), or out of the profits of the company for any

previous financial year or years arrived at after providing for depreciation in accordance with the

provisions of that sub-section and remaining undistributed, or out of both; or

(b) Out of money provided by the central Government or a State Government for the payment of

dividend by the Company in pursuance of a guarantee given by that Government.

Payment of Dividend

Dividend shall be declared or paid by a company from its free reserves only. Dividend shall be paid by a

company in respect of any share therein only to the registered shareholder of such share or to his order

or to his banker and shall be payable only in cash. Any dividend payable in cash may be paid by cheque or

warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.

Transfer to Reserve

Company may transfer such percentage of its profits for that financial year as it may consider appropriate

to the reserves of the company before the declaration of any dividend in any financial year.

Deposit in Separate bank Account

The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a

separate account within five days from the date of declaration of such dividend.

Prohibition on Payment of Dividend

A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such

failure continues, declare any dividend on its equity shares.

PAYMENT OF DIVIDEND OUT OF RESERVES IN CASE OF INDADEQUACY OF PROFITS

In the event of adequacy or absence of profits in any year, a company may declare dividend out of surplus

subject to the fulfillment of the following conditions, namely: -

Rate of Dividend

The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by

it in the three years immediately preceding that year. Provided that this shall not apply to a company,

which has not declared any dividend in each of the three preceding financial year.

184

Total Amount to be drawn

The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its

paid-up share capital and free reserves as appearing in the latest audited financial statement.

The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which

dividend is declared before any dividend in respect of equity shares is declared.

Balance in Reserves

The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share

capital as appearing in the latest audited financial statement.

No company shall declared dividend unless carried over previous losses and depreciation not provided in

previous year are set off against profit of the company of the current year the loss or depreciation,

whichever is less, in previous years is set off against the profit of the company for the year for which

dividend is declared or paid.

SCHEDULE III

(See Section 129)

GENERAL INSTRUCTIONS FOR PREAPARTION OF BALANCE SHEET AND STATEMENT OF PROFIT

AND LOSS OF A COMPANY

1. Where compliance with the requirements of the Act including Accounting Standards including

addition, amendment, substitution or deletion in the head or sub-head or any changes, inter se, in

the financial statements or statements forming part thereof, the same shall be made and the

requirements of this Schedule shall stand modified accordingly.

2. The disclosure requirements specified in this Schedule are in addition to an not in substitution of the

disclosure requirements specified in the Accounting Standards prescribed under the Companies Act,

2013. Additional disclosures specified in the Accounting Standards shall be made in the notes to

accounts or by way of additional statement unless required to be disclosed on the face of the

Financial Statements. Similarly, all other disclosures as required by the Companies Act shall be made

in the notes to accounts in addition to the requirements set out in this Schedule.

3. (i) Notes to accounts shall contain information in addition to that presented in the Financial

Statements and shall

provide where required (a) narrative descriptions or disaggregation’s of items recognized in

those statements; and (b) Information about items that do not qualify for recognition in those

statements.

(ii) Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-

referenced to any related information in the notes to accounts. In preparing the Financial

Statements including the notes to accounts, a balance shall be maintained between providing

excessive detail that may not assist users of financial statements and not providing information

as a result of too much aggregation.

4. (i) Depending upon the turnover of the company, the figures appearing in the Financial Statements

may be rounded

off as given below –

Turnover Rounding Off

a) Less than one Hundred crore rupees To the nearest hundreds, thousands, lakhs or

185

b) One hundred crore rupees

millions or decimals thereof.

To the nearest lakhs, millions or crores, or

decimals or more thereof.

(ii) Once a unit of measurement is used, it shall be used uniformly in the Financial Statements.

5. Except in the case of the first Financial Statements laid before the Company (after its incorporation)

the corresponding amounts (comparatives) for the immediately preceding reporting period for all

items shown in the Financial Statements including notes shall also be given.

6. For the purpose of this Schedule, the terms used herein shall be as per the applicable Accounting

Standards.

Note: This part of Schedule sets out the minimum requirements for disclosure on the face of the Balance

Sheet, and the Statement of Profit and Loss (hereinafter referred to as “Financial Statements” for the

purpose of this Schedule) and Notes. Line items, sub-line items and sub-totals shall be presented as an

addition or substitution on the face of the Financial Statements when such presentation is relevant to an

understanding of the company’s financial position or performance or to cater to industry/sector-specific

disclosure requirements or when required for compliance with the amendments to the Companies Act or

under the Accounting Standards.

PART – I

BALANCE SHEET

Name of the Company ……………..

Balance Sheet as at ………………..

Particulars Note No. Figures as at

the end of

current

reporting

period

Figures as at

the end of

previous

reporting

period

1 2 3 4

I.

(1)

(2)

(3)

EQUITY AND LIABILITIES

Shareholder’s Funds

(a) Share Capital


(c) Money received against share warrants

(d) Non-Controlling Interest (minority

Interest)

Share application money pending

Allotment

Non-Current Liabilities’

186

(4)

II.

(1)

(2)

(

1

)

(a) Long-term borrowings

(b) Deffered Tax Liabilities (Net)

(c) Other Long Term Liabilities

(d) Long-term Provisions

Current Liabilities

(a) Short-term borrowings

(b) Trade Payables

(c) Other current liabilities

(d) Short-term Provisions

Total

ASSETS

Non-Current Assets

(a) Fixed Assets

i) Tangible Assets


iii) Capital Work-in Progress

iv) Intangible Assets underdevelopment

(b) Non-Current Investments

(c) Deferred Tax Assets (Net)

(d) Long Term Loans and Advances

(e) Other Non-Current Assets

Current Assets

(a) Current investments

(b) Inventories

(c) Trade Receivables

(d) Cash and Cash equivalents

(e) Short-term loans and advances

(f) Other Current Assets

Total

C. General Instructions for Preparation of Balance Sheet

1. An asset shall be classified as current when it satisfies any of the following criteria:

(a) It is expected to be realized in, or is intended for sale or consumption in, the company’s

normal operating cycle;

(b) It is held primarily for the purpose of being traded;

(c) It is expected to be realized within twelve months after the reporting date; or

187

(d) It is cash or cash equivalent unless it is restricted from being exchanged or used to settle

a liability for at least twelve after the reporting date. All other assets shall be classified as

non-current.

2. An operating cycle is the time between the acquisition of assets for processing and their

realization in cash or cash equivalents. Where the normal operating cycle cannot be

identified, it is assumed to have duration of 12 months.

3. A liability shall be classified as current when it satisfies any of the following criteria:

(a) it is expected to be settled in the company’s normal operating cycle;

(b) it is held primarily for the purpose of being traded;

(c) it is due to be settled within twelve months after the reporting date; or

(d) the company does not have an unconditional right to defer settlement of the liability for

at least twelve months after the reporting date. Terms of a liability that could, at the

option of the counterpartly, result in its settlement by the issue of equity instruments do

not affect its classification. All other liabilities shall be classified as non-current.

4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on

account of goods sold or services rendered in the normal course of business.

5. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on

account of goods purchased or services received in the normal course of business.

6. A company shall disclose the following in notes to accounts.

6A. Share Capital

Clauses (a) to (I) of Notes 6 A deal with disclosures for Share Capital and such disclosures are

required for each class of share capital (different classes of preference shares to be treated

separately).

a) The number and amount of shares authorized.

b) The number of shares issued, subscribed and fully paid, and subscribed but not fully paid

c) Par value per share

d) A reconciliation of the number of shares outstanding at the beginning and at the end of the

reporting period.

e) The rights, preferences and restrictions attaching to each class of shares including restrictions

on the distribution of dividends and the repayment of capital

f) Shares in respect of each class in the company held by its holding capacity or its ultimate

holding company including shares held by or by subsidiaries or associates of the holding

company or the ultimate holding company in aggregate Shares in the Company held by each.

g) Shareholder holding more than 5 per cent shares specifying the number of shares held

h) Shares reserved for issue under options and contracts/commitments for the sale of

shares/disinvestment, including the terms and amounts.

i) For the period of five years immediately preceding the date as at which the balance sheet is

prepared:

(i) Aggregate number and class of shares allotted as fully paid up pursuant to contract(s)

without payment being received in cash.

(ii) Aggregate number and class of shares allotted as fully paid up by way of bonus shares.

(iii) Aggregate number and class of shares bought back.

188

j) Terms of any securities convertible into equity/preference shares issued along with the

earliest date of conversion in descending order starting from the farthest such date.

k) Calls unpaid (showing aggregate value of calls unpaid by directors and officers)

l) Forfeited shares (amount originally paid-up)

6B. Reserves and Surplus

(i) Reserve and Surplus shall classified as follows

a) Capital Reserves

b) Capital Redemption Reserve

c) Securities Premium Reserve

d) Debenture Redemption Reserve

e) Revaluation Reserve

f) Share Option Outstanding Account

g) Other Reserves (Specify the nature and purpose of reserve and the amount in respect

thereof)

h) Surplus i.e., balance in Statement of Profit & Loss disclosing allocations and

appropriations such as dividend, bonus shares and transfer to/from reserves, etc.

(Additions and deductions since the last Balance Sheet to be shown under each of the

specified head)

(ii) A reserve specifically represented by earmarked investments shall be termed as a ‘fund’.

(iii) Debit balance of statement of profit and loss shall be shown as a negative figure under the

head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative

balance of surplus, if any, shall be shown under the head ‘Reserves and Surplus’ even if the

resulting figure in the negative.

6C. Non-Current Liabilities

i) Long Term Borrowings: *Long-term borrowings shall be classified as:

a) Bonds/debentures;

b) Terms Loans;

From banks;

From other parties;

c) Deferred payment liabilities;

d) Deposits;

e) Loans and advances from related parties;

f) Long term maturities of finance lease obligations;

g) Other loans and advances (specify nature).

Borrowings shall further be sub-classified as secured and unsecured. Nature of

security shall be specified separately in each case.

Where loans have been guaranteed by directors or others, the aggregate amount of

such loans under each head shall be disclosed. The word “others” used in the phrase

“directors or others” would mean any person or entity other than a director.

Bonds/debentures (along with the rate of interest and particulars of redemption or

conversion, as the case may be) shall be stated in descending order of maturity or

189

conversion, starting from farthest redemption or conversion date, as the case may

be. Where bonds/debentures are redeemable by installments, the date of maturity

for this purpose must be reckoned as the date on which the first installment

becomes due.

Particulars of any redeemed bonds/debentures which the company has power to

reissue shall be disclosed.

Period and amount of continuing default as on the Balance Sheet date in repayment

of loans and interest shall be specified separately in each case.

ii) Other Long-Term Liabilities

This should be classified into:

a) Trade Payables; and

b) Others.

iii) Long-Term Provisions

This should be classified into

a) Provision for employee benefits and

b) Others specifying the nature.

6D. Current Liabilities

(i) Short –Term Borrowings; i) a) Loans repayable on demand

b) Loans and advances from related parties;

c) Deposits;

d) Other Loans and advances (specify nature).

ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of security

shall be specified separately in each case.

iii) Where loans have been guaranteed by directors or others, the aggregate amount of such

loans under each head shall be disclosed.

iv) Period and amount of default as on the Balance Sheet date in repayment of loans and

Interest, shall be specified separately in each case.

(ii) Other Current Liabilities

The amounts shall be classified as:

a) Current maturities of long-term debt;

b) Current maturities of finance lease obligations;

c) Interest accrued but not due on borrowings;

d) Interest accrued and due on borrowings;

e) Income received in advance;

f) Unpaid dividends;

g) Application money received for allotment of securities and due for refund and interest

accrued thereon;

h) Unpaid matured deposits and interest accrued thereon;

i) Unpaid matured debentures and interest accrued thereon;

j) Other payables (specify nature).

The portion of long term debts/lease obligations, which is due for payments within twelve

months of the reporting date is required to be classified under “other Current liabilities”

190

while the balance amount should be classified under Long-term Borrowings. Other Payables

would include amounts in the nature of statutory dues such as Withholding taxes, Service

Tax, VAT, Excise Duty etc.

(iii) Short-Term Provisions

The amounts shall be classified as:

a) Provision for employee benefits;

b) Others (specify nature).

6E. Non-Current Assets

(a) Tangible Assets

(i) Classification shall be given as:

a) Land;

b) Buildings;

c) Plant and Equipments;

d) Furniture and Fixtures;

e) Vehicles;

f) Office Equipment.

g) Others (specify nature).

(ii) Assets under lease shall be separately specified under each class of asset.

(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the

beginning and end of the gross and net carrying amounts of each class of assets at the

beginning and end of the reporting period showing additions, disposals, acquisitions

through business combinations and other adjustments and the related depreciation and

impairment losses/reversals shall be disclosed separately.

(iv) Where sums have been written off on a reduction of capital or revaluation of assets or

where sums have been added on revaluation of assets, every balance sheet subsequent

to date of such write-off, or addition shall show the reduced or increased figures as

applicable and shall by way of a note also show the amount of the reduction or increase

as applicable together with the date thereof for the first five years subsequent to the

date of such reduction or increase.

(b) Intangible Assets

(i) Classification shall be given as:

a) Goodwill;

b) Brands/Trademarks;

c) Computer Software;

d) Mastheads and publishing titles;

e) Mining Rights;

f) Copyrights, and patents and other intellectual property rights, services and

operating rights.

g) Recipes, formulae, models, designs and prototypes.

h) Licenses and franchise;

i) Other s (Specify nature).

191

(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the

beginning and end of the reporting period showing additions, disposals, acquisitions

through business combinations and other adjustments and the related amortization and

impairment losses/reversals shall be disclosed separately.

(iii) Where sums have been written off on a reduction of capital or revaluation of assets or

where sums have been added on revaluation of assets, every balance sheet subsequent

to date of such write-off, or addition shall show the reduced or increased figures as

applicable and shall by way of a note also show the amount of the reduction or increases

as applicable together with the date thereof for the first five years subsequent to the

date of such reduction or increase.

(c) Non-Current Investments

(i) Non-Current investments shall be classified as trade investments and other investments

and further classified as:

i) Investment property;

ii) Investments in Equity Instruments;

iii) Investments in Preference Shares;

iv) Investments in Government or trust securities;

v) Investments in debentures or bonds;

vi) Investments in Mutual Funds;

vii) Investments in Partnership Firms

viii) Other non-current Investments (specify nature).

Under each classification, details shall be given of names of the bodies corporate

(indicating separately whether such bodies are (i) Subsidiaries, (ii) Associates, (iii) Joint

Ventures, or (iv) Controlled Special purpose entities) in whom investments have been

made and the nature and extent of the investment so made in each such body corporate

(showing separately investments which are partly paid).

In regard to investments in the capital of partnership firms, the names of the firms (with

the names of all their partners, total capital and the shares of each partner) shall be

given.

(ii) Investments carried at other than at cost should be separately stated specifying the

basis for valuation thereof.

(iii) The following shall also be disclosed:

a) Aggregate amount of quoted investments and market value thereof;

b) Aggregate amount of unquoted investments;

c) Aggregate provision for diminution in value of investments.

d) Long-Term Loans and Advances

(i) Long-Term loans and advances shall be classified as:

a) Capital Advances;

b) Security Deposits;

c) Loans and advances to related parties (giving details thereof);

d) Other loans and advances (specify nature);

(ii) The above shall also be separately sub-classified as:

a) Secured, considered good;

192

b) Unsecured, considered good;

c) Doubtful.

(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the

relevant heads separately.

(iv) Loans and advances due by directors or other officers of the company or any of them

either severally or jointly with any other persons or amounts due by firms or private

companies respectively in which any director is a partner or a director or a member

should be separately stated.

e) Other Non-Current Assets

Other Non-Current Assets shall be classified as:

(i) Long Term Trade Receivables (including trade receivables on deferred credit terms);

(ii) Others (Specify nature);

(iii) Long Term Trade Receivables , shall be sub-classified as:

i) (a) Secured, considered good;

(b) Unsecured considered good;

(c) Doubtful

ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads

separately.

iii) Debts due by directors or other officers of the company or any of them either

severally or jointly with any other person or debts due by firms or private

companies respectively in which any director is a partner or a director or a

member should be separately stated.

6F. Current Investment

(a) Current Investments

(i) Current investments shall be classified as:

a) Investments in Equity Instruments;

b) Investments in Preference Shares

c) Investments in Government or trust securities;

d) Investments in debentures or bonds;

e) Investments in Mutual Funds;

f) Investments in Partnership Firms;

g) Other Investments (specify nature).

Under each classification, details shall be given of names of the bodies corporate

(indicating separately whether such bodies are (i) Subsidiaries, (ii) Associates, (iii) Joint

Ventures, or (iv) controlled special purpose entities) in whom investments have been

made and the nature and extent of the investment so made in each such body corporate

(showing separately investments which are partly paid).

In regard to investments in the capital of partnership firms, the names of the firms (with

the names of all their partners, total capital and the shares of each partner) shall be

given.

(ii) The following shall also be disclosed:

193

a) The basis of valuation of individual investments.

b) Aggregate amount of quoted investments and market value thereof;

c) Aggregate amount of unquoted investments;

d) Aggregate provision made for diminution in value of investments

(b) Inventories

(i) Inventories shall be classified as:

a) Raw Materials;

b) Work-in-progress;

c) Finished goods;

d) Stock-in-trade (in respect of goods acquired for trading);

e) Stores and spares;

f) Loose tools;

g) Others (specify nature).

(ii) Goods-in-Transit shall be disclosed under the relevant sub-head of inventories. Mode of

valuation shall be stated.

(c) Trade Receivables

(i) Aggregate amount of Trade Receivables outstanding for a period exceeding six months

from the date they are due for payment should be separately stated.

(ii) Trade receivables shall be sub-Classified as:

a) Secured, considered goods;

b) Unsecured considered good;

c) Doubtful;

(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads

separately.

(iv) Debts due by directors or other officers of the company or any of them either

severally or jointly with any other person or debts due by firms or private companies

respectively in which any director is a partner or a director or a member should be

separately stated.

(d) Cash and Cash equivalents

(i) Cash and Cash equivalents shall be classified as:

a) Balances with Banks;

b) Cheques, drafts on hand;

c) Cash on hand;

d) Others (Specify nature).

(ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately

stated.

(iii) Balances with banks to the extent held as margin money or security against the

borrowings, guarantees, other commitments shall be disclosed separately.

(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be

separately stated.

194

(v) Bank deposits with more than 12 months maturity shall be disclosed separately.

(e) Short-Term Loans and Advances

(i) Short-Term loans and advances shall be classified as:

a) Loans and advances to related parties (giving details thereof);

b) Others (Specify nature);

(ii) The above shall also be sub-classified as:

a) Secured, Considered good;

b) Unsecured, considered good;

c) Doubtful.

(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the

relevant heads separately.

(iv) Loans and advances due by directors or other officers of the company or any of

them either severally or jointly with any other person or amounts due by firms or private

companies respectively in which any director is a partner or a director or a member shall

be separately stated.

(f) Other Current Assets (specify nature)

This is an all-inclusive heading, which incorporates current assets that do not fit into any

other asset categories.

6G. Contingent Liabilities and Commitments (to the extent not provided for)

(i) Contingent liabilities shall be classified as:

a) Claims against the company not acknowledged as debt;

b) Guarantees;

c) Other money for which the company is contingently liable

(ii) Commitments shall be classified as:

a) Estimated amount of contracts remaining to be executed on capital account and not

provided for;

b) Uncalled liability on shares and other investments partly paid;

c) Other commitments (specify nature).

6H. The amount of dividends proposed to be distributed to equity and preference shareholders for

the period and the related amount per share shall be disclosed separately. Arrears of fixed

cumulative dividends on preference shares shall also be disclosed separately.

6I. Where in respect of an issue of securities made for a specific purpose, the whole or part of the

amount has not been used for the specific purpose at the balance sheet date, there shall be

indicated by way of note how such unutilized amounts have been used or invested.

6J. If, in the opinion of the Board, any of the assets other than fixed assets and non-current

investments do not have a value on realization in the ordinary course of business at least equal to

the amount at which they are stated, the fact that the Board is of that opinion, shall be stated.

PART – II

195

STATEMENT OF PROFIT AND LOSS

Name of the Company ………………..

Profit and loss statement for the year ended …………………

Particulars Note

No.

Figures

for the

current

reporting

period

Figures for

the

previous

reporting

period

I. Revenue from operations XXX XXX

II. Other income XXX XXX

III. Total Revenue (I + II) XXX XXX

IV. Expenses:

Cost of materials consumed

Purchases of Stock-in-Trade

Changes in inventories of finished

Goods work-in-progress and Stock-in-

Trade

Employees benefits expense

Finance costs

Depreciation and amortization

Expense

Other Expenses

XXX

XXX

XXX

XXX

XXX

XXX

Total Expenses XXX XXX

V. Profit before exceptional and

extraordinary items and tax (III – IV)

XXX XXX

VI. Exceptional Items XXX XXX

VII. Profit before extraordinary items and

tax (V – VI)

XXX XXX

VIII. Extraordinary Items XXX XXX

IX. Profit Before tax (VII – VIII) XXX XXX

X. Tax Expense:

(1) Current Tax

(2) Deferred Tax

XXX

XXX

XXX

XXX

XI. Profit (Loss) for the period from

continuing operations (IX – X)

XXX XXX

XII. Profit/(Loss) from discontinuing

operations

XXX XXX

XIII. Tax expense of discontinuing operations XXX XXX

XIV. Profit/(Loss) from Discontinuing

operations after (XI + XIII)

XXX XXX

XV. Profit/(Loss) for the period (XI + XIV) XXX XXX

XVI. Earnings per equity share:

(1) Basic

XXX

XXX

196

(2) Diluted XXX XXX

E. General Instructions for Preparation of Statement of Profit and Loss

2. The provisions of this Part shall apply to the income and expenditure account referred to in sub-

section (2) of Section 210 of the Act, in like manner as they apply to a statement of profit and loss.

3. (A) In respect of a company other than finance company revenue from operations shall disclose

separately in the notes revenue from

a) Sale of Products;

b) Sale of Services;

c) Other operating revenues;

Less:

d) Excise duty;

(B) In respect of a finance company, revenue from operations shall include revenue from

a) Interest; and

b) Other financial services.

Revenue under each of the above heads shall be disclosed separately by way of notes to accounts

to the extent applicable.

4. Finance Costs: Finance costs shall be classified as:

(a) Interest expense;

(b) Other borrowing costs;

(c) Applicable net gain/loss on foreign currency transactions and translation.

5. Other Incomes: Other incomes shall be classified as:

(a) Interest Income (in case of a company other than a finance company);

(b) Dividend income;

(c) Net gain/loss on sale of Investments;

(d) Other non-operating income (net of expenses directly attributable to such income).

EXCEPTIONAL ITEMS

The term refers to items of income and expense within profit or loss from ordinary activities which are of

such size, nature or incidence that their disclosure is relevant to explain the performance of the

enterprise for the period, the nature and amount of such items should be disclosed separately, Examples

of such items requiring special disclosure are:

(a) The write-down of inventories to net realizable value as well as the reversal of such write-downs;

(b) A restricting of the activities of an enterprise and the reversal of any provisions for the cost of

restructuring;

(c) Disposals of items of fixed assets;

(d) Disposals of long-term investments;

(e) Legislative changes having retrospective application;

(f) Litigation settlements; and

(g) Other reversals of provisions.

The guidance Note further clarifies that if the company has more than one such item of income/expense

of the above nature, the company should disclose these items as under:

Disclose the aggregate of such items on the face of the Statement of Profit and Loss’ and

197

Disclose details of all the individual items in the Notes to account.

EXTRAORDINARY ITEMS

According to AS 5, Extraordinary items are items of profit or loss that arise from events and transactions

distinct from ordinary activities of business. Whether an event or transaction is clearly distinct from the

ordinary activities of the enterprise is determined by the nature of the event or transaction in relation to

the business ordinarily carried on by the enterprise rather by the frequency with which such events are

expected to occur. Therefore, an event or transaction may be extraordinary for one enterprise but not so

for another enterprise because of the differences between their respective ordinary activity. For example,

losses sustained as a result of earthquake may qualify as an extraordinary item for many enterprises.

However, claims for policyholders arising from an earthquake do not qualify as an extraordinary item for

an insurance enterprise that insures against such risks. AS provides that extraordinary items should be

disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and

the amount of each extraordinary item should be separately disclosed in the statement of profit and loss

in a manner that its impact on current profit or loss can be perceived.

Examples of extraordinary items

Loss due to:

Time-barred liability related to purchase of plan and machinery (capital expenditure) credited to

profit and loss account

Write back of self-insurance reserve no longer required.

Profit arising on insurance claim received in respect of crashed helicopter.

Write-back of maintenance cost reserve no longer required due to crash of helicopter.

Examples-items which are not “extraordinary items”

Interest paid under Sections 234B and 234C of the Income Tax Act 1961 for shortfall in payment of

advance tax cannot be regarded as “extraordinary item”.

Credit (gain) arising on premature repayment of accumulated sales tax liability.

198

Accounting Gym – Managerial Remuneration

Q.1. The following is the Profit and Loss Account of S.S. Ltd. For the year ended 31st March, 2008:

` `

To Salaries and wages

To Repairs to Fixed assets

To General Expenses

To Compensation for breach of

contract

To Depreciation

To Loss on sale of investment

Expenditure on scientific

To Research (cost of setting up a new

Laboratory

To Debenture interest

To Interest on unsecured loans

To Provision for income-tax

To proposed dividends

To Balance c/d

1,50,000

50,000

40,000

25,000

2,40,000

35,000

2,50,000

75,000

15,000

16,00,000

10,00,000

10,70,000

By Gross Profit

Profit on sale of machinery

(Cost ` 8,00,000 and written down

value ` 4,00,000)

By subsidy from the Government

40,00,000

4,50,000

1,00,000

45,50,000 45,50,000

Calculate the overall managerial remuneration under Section 197.

[Ans. Profit for calculation of Managerial Remuneration ` 39,05,000.]

Q.2. (Calculation of maximum remuneration where there is a managing director)

From the following particulars of G.G. Ltd. Calculate the maximum remuneration payable to the managing

director and other part-time directors of the company:

`

Net Profit before provision for income-tax and managerial remuneration, but after 86,84,100

Depreciation and provision for repairs.

Depreciation provided in the books 32,00,000

Repairs for machinery provided for during the year 2,50,000

Actual expenditure incurred on repairs during the year 1,50,000


Q.3. Slow and Steady Ltd. has a manager who is entitled to get a monthly salary of ` 25,000 per month and in addition

to receive a commission of 1% of the net profits of the company before such salary or commission. The following

is the Profit and Loss Account of the Company for the year ended 30th

June, 2008:

` `

To Staff Salaries

To General Expenses

To Depreciation

To Manager Salary

To Commission to the Manager

(on account)

To Provision for Bad-debts

To Provision for income-tax

To proposed dividends

1,920

885

820

300

60

75

1,800

1,600

By Gross Profit b/d

By subsidy from the Government

By Profit on sale on land

By Profit on sale of machinery

(Cost ` 2,50,000 and written down

value ` 1,80,000)

9,650

600

200

50

199

To Balance c/d 3,040

10,500 10,500

Calculate the maximum remuneration payable to the Manager.


Q.4. (Calculation of managerial remuneration on net profits after charging such remuneration) Taking Q. No. 4 above,

suppose the manager is entitled to receive a commission of 1% of the net profits of the company after charging his

salary and commission. Calculate the maximum remuneration payable to the manger.

[Ans. Profit after charging salary but before charging commission ` 63,75,000.]

Q.5. From the following particulars of Ganga Limited, You are required to calculate the managerial remuneration in

the following situations:

(i) There is only one whole time director;

(ii) There are two whole time directors;

(iii) There are two whole time directors, a part time director and a manager.

Net Profit before provision for income tax and managerial remuneration, but after

depreciation and provision for repairs: 8,70,410

Depreciation provided in the books 3,10,000

Depreciation allowed under Schedule II 2,60,000

Actual expenditure incurred on repairs during the year 15,000

Provision for Repairs 25,000


Q.6. Calculate the managerial remuneration from the following particulars of Ankit and Company Ltd. due to the

managing director of the company at the rate of 5% of the profits. Also determine the excess remuneration paid, if

any:

`

Net Profit

Net Profit is calculated after considering the following:

Depreciation


Tax Provision

Director‟s fees

Bonus

Profit on sale of fixed assets

(Original cost: ` 20,000, written down value: ` 11,000)

Provision for doubtful debts

Scientific research expenditure (for setting up new machinery)

Managing Director‟s remuneration paid

Other Information:

Depreciation allowable under Schedule II of the Companies Act

Bonus Liability as per Payment of Bonus Act, 1965

2,00,000

40,000

10,000

3,10,000

8,000

15,000

15,500

9,000

20,000

30,000

35,000

18,000


Q.7. H.P Ltd. employs a managing director who is entitled to a salary of ` 5,000 per month and, in addition, to a

commission of 1% of the net profits before charging such salary and commission. The following profit and loss

account is presented by H.P. Ltd. for the year ended 31st March, 2002.

200

` `

To Staff Salaries & bonus

To General Expenses

To Repairs to Buildings

To Directors‟ Fees

To R&D expenses (cost of an

apparatus)

To Ex-gratia payment to an employee

To Depreciation

To Bad Debt

To Compensation for breach of

contract

To Donations to Ramkrishna Mission

To Managing Director‟s salary

To Interest on debentures

To debenture trustee remuneration

To Income-tax

To Net Profit c/d

3,00,000

1,50,000

30,000

10,000

25,000

5,000

1,50,000

30,000

20,000

30,000

60,000

20,000

5,000

3,32,500

3,32,500

By Gross Profit b/d

By Profit on sale on Plant (Cost price

` 2,50,000; W.D.V ` 1,80,000)

By Subsidy from Central

Government

10,00,000

1,00,000

4,00,000

15,00,000 15,00,000

You are required to calculate the commission payable to managing director. You may assume the depreciation

appearing in the Profit and Loss Account has been calculated in accordance with Schedule II to the Companies

Act, 2013.


Q.8. The Managing Director of Desi Manufacturing Ltd. is entitled to a commission of 5% on the Profits before

charging such commission.

The following details are available for the year ending 31st March, 2002.

(i) Net Profits before charging the commission - ` 35,00,000.

(ii) The following had been charged off against the profits as determined in (1) above

a) Depreciation on fixed assets ` 14,50,000;

b) Provision for bad and doubtful debts ` 16,000.

(iii) Other relevant information:

a) Bad debts during the year ` 57,000;

b) Depreciation for calculation of managerial remuneration ` 17,80,000.

The commission payable to the managing director is: (a) ` 1,75,000; (b) ` 1,56,450; (c) ` 1,58,500; (d) `

1,93,550; (e) None of the above.

[Ans. Profit for calculation of Commission ` 31,29,000.]

Q.9. The following is the Trial Balance of Bee Ltd. as on 31st March, 1998:

Debits ` Credits `

Stock as on 1.4.1997

Purchases

Wages

Carriage

Furniture

Salaries

Rent

Sundry Trade Expenses

75,000

2,45,000

30,000

950

17,000

7,500

4,000

7,050

Purchase Returns

Sales

Discount


Share Capital

Creditors

General Reserve

Bills Payable

10,000

3,40,000

3,000

15,000

1,00,000

17,500

15,500

7,000

201

Dividend paid

Debtors

Plant and Machinery

Cash at Bank

Patents

Bills Receivable

9,000

27,500

29,000

46,200

4,800

5,000

5,08,000 5,08,000

Prepare the Profit and Loss Account for the year ended 31st March, 1998 and a Balance Sheet as on that date after

considering the following adjustments:

(i) Stock as on 31st March, 1998: ` 88,000.

(ii) Provide for income tax at 50%.

(iii) Depreciate plant and machinery at 15%; Furniture at 10%; and patents at 5%.

(iv) On 31st March, 1998 outstanding rent amounted to ` 800 and salaries ` 900.

(v) The Board recommends payment of a dividend @ 15% per annum. Transfer the minimum required amount

to General Reserve.

(vi) Provide ` 510 for doubtful debts.

(vii) Provide for managerial remuneration at 10% on profit before tax.

[Ans. Profit/Loss for the period ` 28,325.]

202

Accounting Gym – Profit Or Loss Prior to Incorporation

Q.1. Inder and Vishnu working in partnership registered a joint stock company under the name of Fellow Travellers

Ltd. on May 31, 2000 to take over their existing business. It was agreed that they would take over the assets of

the partnership for a sum of ` 3,00,000 as from January 1st, 2000 and that until the amount was discharged

they would pay interest on the amount at the rate of 6% per annum. The amount was paid on June 30, 2000.

20,000 equity shares of ` 10 each at a premium of ` 1 each and allotted 7% Debenture of the face value of `

1,50,000 to the vendors at par.

The profit and Loss Account of the “Fellow Travellers Ltd.” For the year ended 31st December, 2000 was as

follows:

Particulars ` Particulars `

To Purchase, including stock 1,40,000 By Sales:

To Freight and carriage 5,000 1st January to 31

st May,2000 60,000

To Gross Profit c/d 60,000 1st June to 31

st Dec. 2000 1,20,000

By Stock in hand 25,000

2,05,000 2,05,000

To Salaries and Wages 10,000 By Gross profit B/d 60,000

To Debenture Interest 5,250

To Depreciation 1,000

To Interest on Purchase Consideration

(up to 30-6-2000) 9,000

To Selling Commission 9,000

To Directors‟ Fees 600

To Preliminary Expenses 900

To Provision for taxes 6,000

To Dividend on equity share @ 5% 5,000

To Balance c/d 13,250

60,000 60,000

Prepare statement apportioning the balance between the „post‟ and „pre-incorporation‟ periods and also show

how these figures would appear in the Balance Sheet of the company.

[Ans: Pre-profit ` 4,916 and Post profit ` 8,334]

Q.2. The partners of Maitri Agencies decided to convert the partnership into a private limited company called MA

(P) Ltd. with effect from 1st January, 1988. The consideration was agreed at ` 1,17,00,000 based on the firm‟s

Balance Sheet as at 31st December, 1987. However, due to some procedural difficulties, the company could be

incorporated only on 1st April, 1988. Meanwhile the business was continued on behalf of the company and the

consideration was settled on that day with interest at 12% per annum. The same books of accounts were

continued by the company which closed its account for the first time on 31st March, 1989 and prepared the

following summarized profit and loss account.

`

Sales 2,34,00,000

Cost of goods sold 1,63,80,000

Salaries 11,70,000

Depreciation 1,80,000

Advertisement 7,02,000

Discounts 11,70,000

Managing Directors‟ remuneration 90,000

Miscellaneous office expenses 1,20,000

Office-cum-show room rent 7,20,000

Interest 9,51,000 2,14,83,000

Profit 19,17,000

203

The company‟s only borrowing was a loan of ` 50,00,000 at 12% p.a. to pay the purchase consideration due to

the firm and for working capital requirements.

The company was able to double the average monthly sales of the firm, from 1st April, 1988 but the salaries

trebled from that date. It had to occupy additional space from 1st July, 1988 for which rent was ` 30,000 per

month.

Prepare a profit and loss account in a columnar form apportioning cost and revenue between pre-incorporation

and post-incorporation periods. Also, suggest how the pre-incorporation profits are to be dealt with.

[Ans. Pre loss ` 19,000 and Post profit `19,36,000]

Q.3. ABC Ltd. was incorporated on 1.5.2006 to take over the business of DEF and Co. from 1.1.2006. The Profits

and Loss Account as given by ABC Ltd. for the year ending 31.12.2006 is as under:

Profits and Loss Account


To Rent and Taxes 90,000 By Gross Profit 10,64,000

To Salaries (including manger‟s By Interest on Investments 36,000

Salary of Rs. 85,000) 3,31,000

To Carriage Outwards 14,000

To Printing and Stationery 18,000

To Interest on Debentures 25,000

To Sales Commission 30,800

To Bad Debts (related to sales) 91,000

To Underwriting Commission 26,000

To Preliminary Expenses 28,000

To Audit Fees 45,000

To Loss on Sale of Investments 11,200

To Net Profit 3,90,000

11,00,000 11,00,000

Prepare a Statement showing allocation of pre-incorporation and post-incorporation Profits after considering

the following information:

(i) G.P. ratio was constant throughout the year.

(ii) Sales for January and October were 1½ times the average monthly sales while sales for December were

twice the average monthly sales.

(iii) Bad Debts are shown after adjusting a recovery of ` 7,000 of Bad Debt for a sale made in July, 2003.

(iv) Manager‟s Salary was increased by ` 2,000 p.m. from 1.5.2006.

(v) All investments were sold in April, 2006.

[Ans. Pre Profit ` 1,71,900 and Post profit ` 2,18,100]

Q.4. BK Ltd. was incorporated on 1st August, 2006 and received its certificate of commencement of business on 1

st

Dec, 2006. The company bought the business of M/S BK & Co. with effect from 1st April, 2006. From the

following figures relating to the year ending March 31, 2007. Find out the profits available for dividends:

(a) Sales for the year were ` 6,00,000 out of which sales up to 1st August were ` 2,50,000.

(b) Gross profit for the year was ` 1,80,000.

(c) The expenses debited to the profit and loss account were:

Expenses ` Expenses `

To Rent 9,000 To Advertising 18,000

To Salaries 15,000 To Stationery and Printing 3,600

To Director‟s Fees 4,800 To Commission on Sales 6,000

204

To Interest on debentures 5,000 To Bad debts (500 relate to

To Audit Fees 1,500 debts created prior to

To Discount on sales 3,600 incorporation) 1,500

To Depreciation 24,000 To Interest to vendor on

To General expenses 4,800 purchase consideration (up

to incorporation date ` 2,000) 3,000

[Ans. Capital Reserve ` 41,700 and Net profit ` 38,500]

Q.5. A firm M/s Alag, which was carrying on business from 1st July, 2010 gets itself incorporated as a company on

1st November, 2010. The first accounts are drawn upto March 31, 2011. The gross profit for the period is `

56,000. The general expenses are ` 14,220; Director‟s fees ` 12,000 p.a.; incorporation expenses ` 1,500. Rent

upto 31st December 2010 was ` 1,200 p.a., after which it is increased to ` 3,000 p.a. Salary of the manager,

who upon incorporation of the company was made a director, is ` 6,000 p.a, His remuneration thereafter is

included in the above figure of fees to the directors.

Give Profit and Loss Account showing pre and post incorporation profit. The net sales are ` 8,20,000, the

monthly average of which for the first four months is one-half of that of the remaining period. The company

earned a uniform profit. Interest and tax may be ignored.

[Ans. Pre Profit ` 7,280 and Post Profit ` 24,650.]

Q.6. The promoters of proposed Horizon Ltd. purchased a running business on 1.1.2009 from Mr. Ultra Modern.

Horizen Ltd. was incorporated on 1st May, 2009. The combined Profit and Loss Account of the company prior

to and after the date of incorporation is as under:

Profit & Loss Account for the year ended on 31.12.2009


To Rent, rates, insurance, By Gross profit 15,00,000

electricity & salaries 1,20,000 By Discount received from

To Directors sitting fees 36,000 Creditors 60,000

To Preliminary expenses 49,000

To Carriage outwards and

Selling expenses 55,000

To Interest paid to Vendors 1,00,000

To Profit 12,00,000

15,60,000 15,60,000

Following further information is available:

(1) Sales up to 30.4.2009 were ` 30,00,000 out of total sales of ` 1,50,00,000 of the year.

(2) Purchase up to 30.4.2009 were ` 30,00,000 out of total purchase of ` 90,00,000 of the year.

(3) Interest paid to Vendors on 1.11.2009 @ 12% p.a. on ` 10,00,000 being purchase consideration.

From the above information, prepare Profit and loss Account for the year ended 31.12.2009, showing

the profit earned prior to and after incorporation and also show the transfer of the same to the

appropriate accounts.

[Ans. Pre Profit ` 2,29,000 and Post profit ` 9,71,000.]

Q.7. Smart Ltd. was incorporated on 1st August, 2011 with an authorized capital of 5,00,000 equity shares of ` 10 each

to acquire the business of Mr. Smart with effect from 1st April, 2011.

205

The purchase consideration was agreed at ` 7,00,000 to be satisfied by the issue of 40,000 equity shares of `

10 each as fully paid-up and 3,000, 9% debentures of ` 100 each as fully paid-up.

The entries relating to the transfer were not made in the books which were carried on without a break until 31st

March, 2012. On 31st March, 2012 the trial balance extracted from the books showed the following:

` `

Sales

Purchases

Advertising

Postage and Telegram

Rent and Rates

Packing Expenses

Office Expenses

Opening Stock as on 1.4.2010

Directors‟ fees

Debenture Interest

Land and Buildings

Plant and Machinery

Furniture and Fixture

Sundry Debtors

Cash at Bank

Cash-in-Hand

Bills Payable

Sundry Creditors


Smart‟s Capital Account

Smart‟s Drawings Account

7,76,580

37,800

8,820

18,420

16,800

12,540

1,05,220

20,000

18,000

3,00,000

1,80,000

20,000

1,39,500

40,000

4,900

7,360

10,000

10,43,700

30,000

53,240

5,89,000

17,15,940 17,15,940

You are also given the following additional information:

(i) Stock on 31st March, 2012 amounted to ` 98,920.

(ii) The average monthly sales for April, May and June were one half of those of the remaining months of

the year and the gross profit margin was constant throughout the year.

You are required to calculate the profit prior and post incorporation as on 31st March, 2012.

[Ans. Capital Reserve ` 35,840 and Net Profit ` 85,240.]

Q.8. A company, incorporated on 1st May, 2012 acquired a business as a going concern with effect from 1

st January,

2012. The first accounts were drawn up to September 30, 2012.

The gross profit is ` 2,24,000. The general expenses are ` 56,880, directors remuneration ` 4,000 p.m.; formation

expenses amounted to ` 6,000, rent which will June, 30 2012 was ` 400 p.m. was increased to ` 12,000 per

annum from July 1, 2012.

The manager of the earlier firm whose salary was ` 2,000 p.m. was made as director upon the incorporation and

his remuneration thereafter is included in the figure of Directors‟ remuneration given earlier.

Prepare Profit and Loss Account for the period and find out the profits available for dividends and the profit prior

to incorporation.

[Ans. Capital Reserve ` 64,676 and Net Profit ` 63,044.]

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THEORY MASALA

Q.1. What is meant by profit prior to Incorporation? How is this Profit treated in the books of account of a

company? [CS (Inter) – Dec. 1998 (5 Marks)]

Write a short note on: Loss prior to Incorporation. [CS (Inter) – June 1999 (5 Marks)]

How is loss prior to Incorporation treated in the books of account? [CS (Inter) – Dec. 2002 (2 Marks)]

Ans. When a newly formed company takes over existing business as a going concern then profit before the date of the

incorporation of company is known as profit prior to incorporation. Unless the agreement with the vendor

provides, otherwise, such a profit belongs to the company. Such profit should not be regarded as trading profit

since the company cannot earn profit before it comes into existence and a company comes into existence only on

obtaining the certificate of incorporation. Thus, all profits prior to the date of incorporation of business are capital

profits and must be credited to capital reserve or adjusted against goodwill. They are not variable for dividend and

appear in the balance sheet along with other capital reserves or deducted from goodwill.

Q.2. Write a short note on: Preliminary Expenses. [CS (Inter) – Dec. 1998, June 2002 (5 Marks)]

What is meant by Preliminary expenses? Mention the items that are included in preliminary expenses.


Ans. Preliminary expenses refer to those expenses which are incurred in forming a joint stock company. These

comprise the expenses incidental to the creation and floatation of accompany.

The following items are usually included in preliminary expenses:

Stamp Duty and fees payable on registration of the company and stamp papers purchased for preliminary

contracts of the company.

The legal charged for preparing the prospectus. Memorandum and articles of association for contracts and of

the registration of the company.

Accountant‟s and valuer‟s fees for reports, certificates etc.

Cost of printing the memorandum and articles of association, printing, advertising and issuing the

prospectus.

Cost of preparing, printing and stamping letters of allotment and share certificate.

Cost of preparing, printing and stamping debenture trust deed, if any.

Cost of company‟s seal and books of account, statutory books and statistical books.

Accounting treatment of Preliminary expenses: They should be shown in balance sheet under the head “Non-

Current Assets”. It is prudent to write of gradually over a number of years.

Q.3. Mention the basis of apportionment which you will adopt for each one of the following expenses, while

calculating profit prior to incorporation and profit after incorporation.

Ans.

Nature of Item Ratio

Gross profit or loss and all variable expenses directly varying with sales such as commission,

discount, brokerage, salesman‟s salaries , advertisement, carriage outward etc.

Sales Ratio

All fixed or standing charges such as rent, rates, insurance, salaries, printing & stationary,

postage & telegram, depreciation, audit fee.

Time Ratio

All expenses like vendors salary, interest on vendors capital, interest on purchase

consideration up to date of incorporation.

Pre-

incorporation

All expenses like directors fee, debentures interest, discount on issue of debenture or shares,

preliminary expenses.

Post-

incorporation

Q.4. Mention the basis of apportionment which you will adopt for each one of the following expenses, while

calculating profit prior to incorporation and profit after incorporation:

(1) Salaries

207

(2) Depreciation on fixed assets

(3) Discount on sales

(4) Bad debts

(5) Audit fee

(6) Interest to vendors

(7) Interest on debentures

(8) Preliminary expenses

Also briefly state you reason in each case. [CS (Inter) – June 2001 (8 Marks)]

Mention the basis of apportionment which you will adopt for each one of the following expenses, while

calculating profit prior to incorporation and profit after incorporation:

1. Printing & Stationery

2. Carriage Outwards

3. Directors Fee

4. Rent, Rates & Taxes [CS (Inter) – June 2002 (4 Marks)]

What are the different bases of apportionment of pre-incorporation and post-incorporation profits?


Ans.

Nature of Item Basis of

Apportionment

Reasons

Salaries Time Ratio As salaries are paid on time basis, hence apportionment will be on

time ratio.

Depreciation on

Fixed Assets

Time Ratio Depreciation is calculated on time basis hence apportionment will be

on time ratio.

Discount on sales Sales Ratio Discount allowed depends on sales. Hence, apportionment will be

made in the ratio of credit sales for the two periods.

Bad Debts Sales Ratio Bad debts are caused due to credit sales. Hence, apportionment will

be made in the ratio of credit sales for the two periods.

Audit fee Time Ratio Audit fee may be apportioned in the ratio of time as the audit will be

conducted for pre as well post-incorporation period.

Interest to vendors Time Ratio Interest to vendors will be apportioned in the ratio of time prior to

incorporation and between date of incorporation and the date of

actual payment of amount date.

Interest on

Debentures

Post-

Incorporation

Debentures are issued only after the incorporation of the company.

Hence interest on debentures is exclusively post-incorporation

expense.

Preliminary

Expenses

Post-

Incorporation

Preliminary expenses represent capital expense and belong entirely

to the post-incorporation period.

Printing &

Stationery

Time Ratio A printing & stationery cost is related to time basis, hence

apportionment will be on time ratio.

Carriage Outwards Sales Ratio Carriage outwards is related to sales hence sales ratio will be used.

Directors Fee Post-

Incorporation

Directors are appointed after incorporation of company hence

directors fee is exclusively post-incorporation expense.

Rent, Rate & Taxes Time Ratio As rent, rates & taxes are paid on time basis, hence apportionment

will be on time ratio.

208

CHAPTER 8 CORPORATE FINANCIAL REPORTING

Financial reporting may be defined as communication of published financial statement and related

information from a business enterprise to all users. It is the reporting of accounting information of an

entity to a user or group of users. It contains both qualitative and quantitative information. The Financial

report made to the management is generally known as internal reporting made to the shareholder

investors/management is known as external reporting.

The instruments of corporate financial reporting are:

1. Balance Sheet: A corporate balance sheet is also known as a statement of financial condition or

statement of financial position.

2. Statement of Profit and Loss: This statement provides data on a firm’s expenses and revenues,

indicating whether the firm is profitable or not.

3. Cash Flow Statement: This report gives the details of the company’s cash payments and receipts

over a period of time.

4. Director’s Report: The report of the Board of Directors must be attached to every balance sheet

presented at the annual general meeting. The report must contain he extract of the annual return,

number of meetings of the Board, Directors’ Responsibility Statement, a statement on declaration

given by independent directors, company’s policy on directors’ appointment and remuneration,

independence of a director, explanations or comments by the Board on every qualification, Etc.

5. Significant Accounting Policies: To ensure proper understanding of financial statements, Such

disclosure should from part of the financial statements. It would be helpful to the reader of financial

statements if they are all disclosed as such in one place instead of being scattered over several

statements, schedules and notes.

6. Notes on Accounts: The notes to the accounts mean it series of notes that are referred to in the

main body of the financial statements. These are the additional information given at the end of

financial statements.

DEVELOPMENT IN CORPORATE FINANCIAL REPORTING

Investors, world over, are currently demanding more shareholder value than just high returns,

Maximising shareholders value has always been the ultimate aim of every company. But, in the recent

years, value based measures which measure performance in terms of change in value has received a lot of

attention. There are several value based measures such as shareholder Value Added (SVA), Economic

Value Added (EVA), Market Value Added (MVA).

CHARATERISTICS OF CORPORATE FINANCIAL REPORTING

1. Relevance: Information is relevant when it influences the economic decisions of users by helping

them to evaluate past, present, and future events to confirm/correct their past evaluations.

2. Reliability: Information should be free from material errors and bias. The key aspects of reliability

are faithful representation, priority of substance over form, neutrality, prudence, and completeness.

3. Comparability: Information should be presented in a consistent manner over time and consistent

between entitles to enable users to make significant comparisons.

209

4. Understandability: Information should be readily understandable by users who are expected to

have a reasonable knowledge of business, economics and accounting and a willingness to study the

information with reasonable diligence.

OBJECTIVES OF CORPORATE FINANCIAL REPORTING

The objectives of financial reporting given by Financial Accounting Standard Board (FASB) are

summarized as follows:

1. Financial reporting should provide information that is useful to investors and creditors and other

users in making rational investment, credit and similar decisions.

2. Financial reporting should provide information about the economic resources of an enterprise the

claims to those resources (obligations of the enterprise to transfer resources to other entitles and

owners equity) and the effects of transactions event, and circumstances that changes resources and

claims to those resources.

3. Financial reporting should provide information about the enterprise’s financial performance during

a period.

4. Financial reporting should provide information about how management of an enterprise obtains and

spends cash, its borrowing and repayment, capital transactions including cash dividends and other

distributions of enterprise resources to owners, and other factors that may affect an enterprise’s

liquidity or solvency.

VALUE ADDED STATEMENT

Value Added can be defined as the value created by the activities of a firm and its employees, that is, sales

less the cost of bought in goods and services. The value added statement (VAS) reports on the calculation

of value added and its allocation among the stakeholders in the company.

Value added can be defined as wealth generated by the entity through the collective efforts of capital

providers, management and employees.

A value added statement calculates total output by adding sales, changes in stock, and other incomes,

then subtracting depreciation, interest, taxation, dividends, and the amounts paid to suppliers and

employees.

Such value added can be taken to represent in monetary terms the net output of enterprise. This is the

difference between the total value of its output and the value of the inputs of materials and services

obtained from other enterprises.

Advantages of Value Added Statement

1. It is an alternative performance measure to profit and therefore helps in the comparison of the

performance of the company. Value Added is superior performance measure because it pays

attention on inputs which are under the control of the management.

2. It helps in judging the productivity of the company.

3. Resource allocation decisions are normally based on the concept of maximizing profit but value

added statement provides a better alternative by focusing on other factors rather than just profit.

4. It also helps in devising the incentives schemes for the employees of the company in a better way.

5. It reflects a broader view of the company’s objectives and responsibilities rather than just focusing

only on the small aspects about the company.

210

ECONOMIC VALUE ADDED (EVA)

Economic value added (EVA) is a financial measure of what economists sometimes refer to as economic

profit or economic rent. The difference between economic profit and accounting profit is essentially the

cost of equity capital – an accountant does not subtract a cost of equity capital in the computation of

profit, so in fact an accountant’s measure of income or profit is in essence the residual return to that

equity capital since all other costs have been deducted from the revenue stream. In contrast, an

economist charges for all resources in his computation of profit – including an opportunity cost for the

equity capital invested in the business – so an economist’s definition and computation of the profit is net

above the cost of all resources.

Calculation of Economic Value Added

The traditional computation of earnings, interest on debt capital is subtracted from operating earnings

(earning before interest and taxes (EBIT) to obtain net income then, an opportunity cost on equity capital

is subtracted to obtain EVA. The opportunity cost on equity capital is computed as the equity or net

worth of the business times a rate of return that reflects the rate required by investors in the business.

The required rate is in reality an opportunity cost measured by the rate of return that could be obtained

on equity funds if they were invested elsewhere. A positive EVA means the firm is generating a return to

invested capital that exceeds the direct (i.e. interest) and opportunity cost of that invested capital; a

negative EVA means that the firm did not generate a sufficient return to cover the cost of its debt and

equity capital.

The under given tables gives a view for how to calculate ‘Economic Value Added (EVA)’

Earnings before interest and Taxes (EBIT) XXX

Less: Interest XXX

Net Income XXX

Less: Cost of Equity Capital XXX

Economic Value Added (EVA) XXX

Expressed as a formula:

EVA = “Net Operating Profit after Taxes” – (Equity Capital X % Cost of Equity Capital).

MARKET VALUE ADDED (MVA)

Market value added is the difference between the Company’s market and book value of shares, According

to Stern Stewart, if the total market value of a company is more than the amount of capital invested in it,

the company has managed to create shareholder value. If the market value is less than capital invested,

the company has destroyed shareholder value.

Market Value Added = Company’s total Market Value – Capital Invested

With the simplifying assumption that market and book value of debt are equal, this is the same as Market

Value Added = Market value of equity – Book value of equity

Book value of equity refers to all equity equivalent items like reserves, retained earnings and provisions.

In other words, in this context, all the items that are not debt (interest bearing or noninterest bearing)

are classified as equity.

Whether a company succeeds in creating MVA or not, depends on its rate of return. If a company’s rate of

return exceeds its cost of capital, the company will sell on the stock market with premium compared to

the original capital. On the other hand, companies that have rate of return smaller than their cost of

211

capital sell with discount compared to the original capital invested in company. Whether a company has

positive or negative MVA depends on the rate of return compared to the cost of capital.

SHAREHOLDER VALUE ADDED (SVA)

Shareholder Value Added (SVA) represents the economic profits generated by a business above and

beyond the minimum return required by all providers of capital. “Value” is added when the overall net

economic cash flow of the business exceeds the economic cost of all the capital employed to produce the

operating profit Therefore, SVA integrates financial statements of the business (profit and loss, balance

sheet and cash flow) into one meaningful measure. The SVA approach is a methodology which recognizes

that equity holders as well as debt financiers need to be compensated for the bearing of investment risk.

Benefits of Adopting Shareholder Value Added (SVA)

The benefits of moving towards SVA include:

1. Overall, value based performance measures will result in greater accountability for the investment of

new capital, as well as for the use of existing investments.

2. Organization will have the opportunity to apply a meaningful private sector benchmark to evaluate

performance.

3. Managers will be provided with an improved focus on maximizing shareholder value.

Drawbacks of Adopting Shareholder Value Added (SVA)

1. A limitation in the use of SVA as a performance measure is that, by nature, it is an aggregate

measure.

2. There may be certain enterprises which are subject to any degree of price regulation then it may not

be possible for management to adjust output prices to achieve a commercial return in response to

upward movements in input prices.

3. Combined with the use of traditional accounting measures, a through knowledge of the value drivers

of the business will assist in determining the underlying causes of fluctuations in the value added

measure.

4. Again, the use of SVA is not a substitute for detailed analysis of business drivers, rather it is an

additional measurement tool with an economic foundation.

212

Accounting Gym – Economic Value Added

Q.1. Balance Sheet of ABC Limited as at 31st March, 2012

`

I

EQUITY AND LIABILITIES

a) Shareholder‟s funds

Equity

b) Non-Current Liabilities

Long Term Debt

c) Current Liabilities

(i) Account Payables

(ii) Bank Overdrafts

40,00,000

60,00,000

2,08,000

4,84,000

Total 1,06,92,000

II

ASSETS

Non-Current Assets

a) Fixed Assets:

Current Assets

a) Inventories

i) Raw Material

ii) Finished Goods

b) Account Receivables

c) Cash

1,00,00,000

86,400

1,71,360

4,29,300

4,940

Total 1,06,92,000

Statement of Profit of ABC Limited

Sales 28,62,000

Less: Operating Expenses 11,48,400

EBIT 17,13,600

Less: Tax Expenses 6,85,440

NOPAT 10,28,160

The average rate of return on similar types of companies is 20% while risk free return is 12.5%. Rate of return as

charged by bank is 18% and the tax rate is 40%.

Calculate Economic Value Added.

[Ans. ` (2,74,112).]

Q.2. The following information is available of a concern; Calculate E.V.A:

Debt Capital 12% D 2,000 crores

Equity Capital D 500 crores

Reserve and surplus ` 7,500 crores

Capital Employed ` 10,000 crores

Risk-free rate 9%

Beta Factor 1.05

Market rate of return 19%

Equity (Market) risk premium 10%

Operating profit after tax ` 2,100 crores

Tax rate 30%

213

Q.3. Prosperous Bank has a criterion that it will give loans to companies that have an economic value added (EVA)

greater than zero for the past three years on an average. The bank is considering lending money to a small company

that has the economic value characteristics shown below:

i) Average operating income after tax equals to ` 25,00,000 per year for the last 3 years.

ii) Average total assets over the last 3 years equal ` 75,00,000.

iii) Weighted average cost of capital appropriate for the company is 10%, applicable for all 3 years.

iv) The company‟s average current liabilities over the past 3 years are ` 15,00,000. Does the company meet

the bank‟s criterion for a positive EVA? Show your workings?

[Ans. ` 19,00,000; Since Company has Positive EVA, Bank can grant the loan .]

214

THEORY MASALA

Q.1. What do you understand by „Corporate Financial Reporting‟? State the various requirements of corporate

reporting in India?

Ans. Corporate Financial Reporting may be defined as communication of published financial statement and related

information from a business enterprise to all users. It is the reporting of accounting information of an entity to a

user or group of users. It contains both qualitative and quantitative information.

Various Requirements of corporate reporting in India:

(1) Balance Sheet: A corporate balance sheet is also known as a statement of financial condition. It provides

information about a company‟s assets, liabilities and equity capital.

(2) Profit & Loss Account (Income Statement): This statement provides data on expenses and revenues,

indicating whether the firm is profitable or not.

(3) Cash Flow Statement: A cash flow statement indicates liquidity movements. This report gives the details of

cash payments and receipts. The statement indicates:

- Cash Flows from operating activities.

- Cash Flows from investing activities.

- Cash Flows from financing activities.

(4) Director‟s Report: The report of the Board of Directors must be attached to every balance sheet presented

at the AGM. The report must contain information regarding matters specified in Section 129 & 134 of the

Companies Act, 2013.

(5) Management Discussion & Analysis Report: Management Discussion and Analysis provides a

explanation, of how and entity has performed in the past, its financial condition, and its future prospectus.

The following elements should be covered in such report.

Industry structure and Developments

Opportunities and threats

Segment wise or Product wise performance

Outlook

Risks and concerns

Internal Control Systems and their adequacy

Discussions on financial performance vis-à-vis operational performance

Material developments in human resources/ industrial relations front including number of people

employed.

(6) Auditor‟s Report: In the audit report, auditor express his opinion whether the financial statement of the

company gives true &fair view in conformity with the accounting principles. The auditor of a company is

required to give his report in accordance with the provisions of Section 143 of the Companies Act, 2013.

(7) Disclosure of Significant Accounting Policies: To ensure proper understanding of financial statements, it is

necessary that all significant accounting policies adopted in the preparation and presentation of financial

statements should be disclosed. Such disclosure should form part of the financial statements.

(8) Disclosure of Notes on Accounts: Notes to financial statements help in explaining specific items in the

financial statements as well as provide a more comprehensive assessment of a company‟s financial

condition.

Q.2. Discuss the provisions relating to „Corporate Social Responsibility‟ as contained in the Companies Act,

2013.

Ans. As per Section 135 of the Companies Act, 2013, make following provisions in this respect:

(1) Every Company having

- Net worth of ` 500 crore or more; or

- Turnover of ` 1,000 crore or more; or

215

- Net profit of ` 5 crore or more.

During any financial year shall constitute a Corporate Social Responsibility (CSR) Committee of the Board

consisting of 3 or more directors, out of which at least one director shall be an independent director.

(2) The Boards report shall disclose the composition of the CSR Committee.

(3) The CSR Committee shall:

(a) Formulate and recommend to the Board, a CSR policy to be undertaken by the company as specified in

Schedule VII.

(b) Recommend the amount of expenditure to be incurred on the activities covered under CSR Policy of

the company from time to time.

(4) The Board shall disclose contents of policy in its report and also place it on the company‟s website in

prescribed manner.

(5) The Board shall ensure that the company spends, in every financial year, at least 2% of the average net

profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR

Policy.

(6) The company shall give preference to the local area for spending the amount earmarked for CSR activities.

(7) If the company fails to spend such amount, the Board shall in its report specify the reasons for not spending

the amount.

Explanation: “Average net profit” shall be calculated as per Section 198.

Q.3. Write a short note on: Objectives of Financial reporting.

Ans. The objectives of financial reporting given by Financial Accounting Standard Board (FASB) are summarized as

follows:

(1) Financial reporting should provide information that is useful to present/potential investors and creditors and

other users in making rational decisions.

(2) It should provide information about the economic resources of an enterprise the claims to those resources

and the effects of transactions event, and circumstances that change resources and claims to those resources.

(3) It should provide information about the enterprise‟s financial performance during a period.

(4) It should provide information about how management of an enterprise obtains and spends cash, its

borrowing and repayment of borrowing, capital transactions including cash dividends and other

distributions of enterprise resources to owners, and other factors that may affect an enterprise‟s liquidity or

solvency.

(5) It should provide information about how management of an enterprise has discharged its stewardship

responsibilities to shareholders for the use of enterprise resource entrusted to it.

(6) It should provide information that is useful to management and directors in making decisions in the interest

of owners.

Q.4. What do you understand by „Value Added Statement‟?

Ans. Valued added can be defined as the value created by the activities of a firm, that is, sales less the cost of bought in

goods and services. The Value added statement reports on the calculation of value added and its allocation among

the stakeholders. In other words, valued added can be defined as wealth generated by the entity through the

collective efforts of capital providers, management and employees.

Advantages of Valued Added Statement:

(1) It helps in the comparison of the performance of the company.

(2) It helps in the judging the productivity of the company.

(3) It provides a better alternative by focusing on other factors rather than just profit.

(4) It also helps in devising the incentives scheme for the employees.

(5) It reflects a broader view of the company‟s objectives and responsibilities.

216

Limitations of Valued Added Statement: Many inconsistencies are found in practice in both the calculation and

presentation of value added in the VAS. These inconsistencies make the statement confusing, non-comparable and

unverifiable. The main areas of inconsistencies include the following:

(a) The treatments of depreciation resulting in gross and net value added.

(b) The treatment of taxes like pay-as-you-earn, fringe benefits and other benefits in the employee‟s share of

valued added.

(c) The timing of recognition of valued added-production or sales.

(d) The treatment of taxes such as VAT/GST and deferred tax and.

(e) The treatment of non-operating items.

Q.5. What do you understand by „Economic Valued Added‟?

Ans. The New York based financial advisory Stern Stewart & Co. postulated a concept of economic value added.

Economic valued added measures the excess returns over cost of capital. EVA measures whether the operating

profit is sufficient enough to cover a post of capital. If a company‟s EVA is negative it is destroying shareholders

wealth even though it may be reporting positive and growing EPS or return on capital employed.

Expressed as a formula: EVA = NOPAT – (Capital Employed × WACC)

Q.6. Write a short note on: Advantages of EVA Analysis.

Ans. Advantages of EVA analysis are as follows:

(1) In some cases, company pay bonuses to the employees on the basis of EVA generated. Thus, it promotes the

employees for working hard for generating higher revenue.

(2) Using EVA, company can evaluate the projects and hence decide on whether to execute the project or not.

(3) It helps the company in monitoring the problem areas and hence taking corrective action to resolve those

problems.

(4) EVA presents a better and true picture of the company to the owners, creditors, employees, shareholders and

all other interested parties.

However, there are some disadvantages of EVA like it is difficult to compute and also it does not take into

account inflation into its calculation. Therefore, company should take into account above advantages and

disadvantages before deciding whether to implement EVA or not.

Q.7. Write a short note on: Market Value Added.

Ans. Market value added is the difference between the Company‟s market and book value of shares According to

Stern Stewart, if the total market value of a company is more than the amount of capital invested, the company

has managed to create shareholder value. If the market value is less than capital invested, the company has

destroyed shareholder value.

Market Value Added = Company‟s Market Value – Capital Invested

With the simplifying assumption that market and book value of debt are equal, this is the same as Market Value

added = Market Value of equity – Book value of equity.

Book value of equity refers to all equity equivalent items like reserves, retained earnings and provisions. In other

words, in this context, all the items that are not debt (interest bearing or non-interest bearing) are classified as

equity.

Q.8. Write a short note on: Shareholder Value Added.

Ans. Shareholder Value Added (SVA) represents the economic profits generated by a business above and beyond the

minimum return required by all providers of capital. “Value” is added when the overall net economic cash flow of

the business exceeds the economic cost of all the capital employed to produce the operating profit. Therefore,

SVA integrates financial statements of the business (profit and loss, balance sheet and cash flow) into one

meaningful measure.The SVA approach is a methodology which recognize that equity holders as well as debt

financiers need to be compensated for the bearing of investment risk.

217

CHAPTER 9 ACCOUNTING STANDARDS

OVERVIEW OF ACCOUNTING STANDARDS

Q.1. What do you understand by „accounting standard‟? State the legal provisions relating to compliance with

accounting standards.

What do you understand by „Accounting Standard‟? [CS (Inter) – June 2004 (3 Marks)]

Ans. Accounting Standards are written, policy documents issued by expert accounting body or by Government or

regulatory authorities covering in the financial statement:

Recognition

Measurement

Treatment

Presentation and

Disclosure

In India accounting standards are issued by Accounting Standards Board (ASB) which is formed by Institute of

Chartered Accountants of India (ICAI). ICAI is a statutory body constituted by an act of Parliament. The ICAI being

a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to

harmonise the diverse accounting policies and practices in use in India.

Q.2. “Accounting Standards are mandatory for all companies”. Comment. [CS (Executive) - Dec. 2003 (3 Marks)]

“Accounting Standards are formulated in conformity with the provisions of the applicable laws, customs,

usages and business environment of a country‟. Comment. [CS (Executive) - June 2008 (5 Marks)]

Ans. Accounting Standards issued by the ICAI have legal recognition through the Companies Act, 2013. The Companies

Act, 2013, makes following provisions relating to compliance of AS:

(1) Section 129(1): The financial statements of every company shall comply with the accounting standards.

(2) Section 129(5): Where the P & LA/c and the balance sheet do not comply with the accounting standards

such companies shall disclose, the following, namely:

(a) The deviation from the IAS.

(b) The reasons for such deviation, and

(c) The financial effect due to such deviation.

(3) Section 134(5): The Board‟s report shall also include a Director‟s Responsibility Statement indicating therein

that in preparation of annual accounts, the applicable AS had been followed along with proper explanation

relating to material departure.

(4) The auditor‟s report shall also state whether, in his opinion, the P & L A/c and the balance sheet comply with

accounting standards. Where answer to above is negative or with qualification, it shall also state the reasons

thereof.

Note: The council of ICAI has so far issued 32 accounting standards. However, AS -8 and AS-6 has been

withdrawn. Thus effectively there are 30 accounting standards.

Q.3. How should disclosures be made where a Court/Tribunal makes an order sanctioning an accounting standard

treatment which is different from that prescribed by an accounting standard?

Ans. The AS by their very nature cannot and do not override the local regulations which govern the preparation and

presentation of financial statements in the country.

However, in the case of companies, Section 129(5) of the Companies Act, 2013, provides that “Where the profit and

loss account and the balance sheet of the company do not comply with the accounting standards, such companies

shall disclose in its profit and loss account and balance sheet, the following namely:

218

(a) The deviation from the AS

(b) The reasons for such deviation, and

(c) The financial effect, if any, arising due to such deviation.”

In view of the above, if an item in the financial statements of a Company is treated differently pursuant to an order

made by the Court/Tribunal, as compared to the treatment required by an AS, following disclosures should be

made in the financial Statements of the year in which different treatment has been given:

A description of the accounting standards treatment made along with the reason that the same has been adopted

because of the Court/Tribunal order.

Description of the difference between the accounting treatment prescribed in the AS and that followed by the

company.

The financial impact, if any, arising due to such difference.

Q.4. Write a short note on: Objectives of accounting standards. [CS (Executive) – Dec 2008 (3 Marks)]

Write a short note on: Significance of Accounting Standards.

[CS (Inter) – Dec. 1998, June 2002 (5 Marks), June 2005 (4 Marks)]

Write a short note on: Importance of Accounting Standards. [CS (Inter) - June 2002 (5 Marks)]

“Compliance of the accounting standards by all concerned will improve the quality of presentation of

financial statements.” Comment. [CS (Inter) – June 2003 (3 Marks)]

Ans. Objectives of Accounting standards are as follows:

To harmonize different accounting policies and practices use in a country.

To standardize accounting methods and procedures.

To reduce the accounting alternatives in the preparation of financial statements.

To lay down principles for preparation and presentation.

To establish benchmark for evaluating the quality of financial statements.

To ensure the users of financial statements get creditable financial information.

To attain international levels in related areas.

Accounting Standards reduce a considerable extent or eliminate altogether wide variation in the accounting

treatments used to prepare and present financial statements . Thus, the basic objective of an Accounting standard is

to harmonize the diverse practices followed in the preparation and presentation of financial statements so as to

facilitate intra firm comparison.

Q.5. Write a short note on: Generally Accepted Accounting Principles (GAAP). [CS (Inter) - Dec. 2005 (4 Marks)]

Ans. GAAP refer to the standard framework of guidelines for financial accounting used in any given jurisdiction;

generally known as accounting standards. GAAP includes the standards, conventions, and rules accountants follow

in recording and summarizing, and in the preparation of financial statements. Indian GAAP is nothing but a set of

accounting standards that every company operating in India has to follow when reporting its financial results.

Generally Acceptable Accounting Standards differ for each country as they incorporate policies and procedures that

have to be followed for financial disclosures as per the standards set in each country. ICAI is the body in India that

has set the Accounting Standards that need to be followed while financial reporting, all CAs, its members are an

integral part of the corporate in India have the responsibility to report and furnish the financial results as per the set

standards.

So Indian Accounting Standards are termed as Indian GAAP. While US has its own set of Accounting Standard

termed as US GAAP; a non-US Company when presenting financial results in US has to follow US GAAP.

This helps in that all companies follow an uniform procedure in financial disclosures which are widely acceptable

and followed in the country.

Q.6. What is the status of Accounting Standards issued by ICAI?

Ans. For the applicability of accounting standards they are divided into three levels i.e. Levels I, II & III enterprises.

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Level I Enterprises: Enterprises which fall in any one or more of the following categories, at any time during the

accounting period, are classified as Level I enterprises:

(1) Listed enterprises whether in India or outside India

(2) Enterprises proposing to list their equity or debt securities.

(3) Bank Including co-operative banks.

(4) Financial institutions.

(5) Enterprises carrying on insurance business.

(6) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding

accounting period exceeds ` 50 crore.

(7) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in

excess of 10 crore.

(8) Holding and subsidiary of any one of the above.

Level II Enterprises: Enterprises following categories are classified as Level II enterprises:

(1) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding

accounting period exceeds ` 10 crore but does not exceed ` 50 crore.

(2) Holding and subsidiary enterprises of anyone of the above at any time during the accounting period.

Level III Enterprises: Enterprises which are not covered under Level I and Level II are considered as Level

III enterprises.

Q.7. What is the procedure for issue of Accounting Standard in India by ICAI?

[CS (Inter) – June 2000 (6 Marks), Dec. 2006 (5 Marks)]

Ans. Procedure for issue of AS in India by ICAI:

Determination of board areas, by ASB, in which AS are required

Preparation of preliminary draft by Study Groups

Consideration of preliminary draft by ASB & making revision if required

Circulation of Draft to Council, member of ICAI & other bodies such as

DCA, C & AG, CBDT, ICWAI, ICSI, RBI, SEBI, etc.

Meeting with the representative of specified bodies to ascertain their views,

finalization of exposure drafts

Issue of exposure drafts, for comments, to members of ICAI specified bodies, stock

exchanges, etc.

Preparation of final draft by ASB in the light of comments received.

Submission to Council of ICAI, consideration of the same by Council,

modifications carried out (if required)

Issue of accounting standard by ICAI

220

Q.8. Mention the various Accounting Standards formulated by the Accounting Standard Board of the ICAI.


Ans.

No. Name of AS

AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies & Events Occurring after the B/S Date

AS 5 Net Profit or Loss, Prior Period Items & Changes in Accounting policies

AS 6 (Withdrawn)

AS 7 Construction Contracts

AS 8 Accounting for Research & Development

(Withdrawn pursuant to AS 26 becoming mandatory)

AS 9 Revenue Recognition

AS 10 Property, Plant & Equipments

AS 11 The Effects of Changes in Foreign Exchange Rates

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamation

AS 15 Employee Benefits

AS 16 Borrowing Costs

AS 17 Segment Reporting

AS 18 Related Party Disclosures

AS 19 Leases

AS 20 Earnings Per Share (EPS)

AS 21 Consolidated Financial Statements (CFS)

AS 22 Accounting for Taxes on Income

AS 23 Accounting for Investments in Associates in CFS

AS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint Ventures

AS 28 Impairment of Assets

AS 29 Provisions, Contingent Liabilities & Contingent Assets

AS 30 Financial Instruments; Recognition & Measurement

AS 31 Financial Instrument Presentation

AS 32 Financial Instrument Disclosures & limited revision to AS 19

Q.9. Write a short note on: Objective of International Accounting Standards.

[CS (Executive) – Dec.2008 (3 Marks)]

Ans. The objective of international accounting standards are to improve and harmonic company reporting around the

world.

The IAS has following objectives:

(1) To formulate and publish international accounting standards.

(2) To promote their worldwide acceptance and observation.

(3) To develop in public interest understandable and enforceable global accounting standards that require high

quality, transparent and comparable information in financial statements.

(4) To promote the use and rigorous application of those standards.

(5) To bring about convergence of national accounting standards and international accounting standards.

221

Q.10. Write a short note on: Non-acceptability of International Accounting Standards.

[CS (Executive) – Dec.2010 (3 Marks)]

Ans. Accounting practices in different countries are different due to their different legislative requirements, social and

economic condition long standing practices, tax structure and organized professional accounting whenever

multinational company have different way working than national company. Worldwide contradictions of views

have been noticed in the national standard setting bodies and international bodies. There is a glaring diversity in

accounting practices in different countries which require harmonization for evolving uniform accounting standard

for worldwide application.

The above discussed factors are the basic reason for non-acceptability of International Accounting Standard

throughout the world.

Q.11. Give the list of International Financial Reporting Standards (IFRS) & International Accounting Standards

(IAS).

Ans. The following IFRS statements are currently issued by International Accounting Standards Board:

No. Name of the IFRS

IFRS 1 First time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS 7 Financial Instruments Disclosures

IFRS 8 Operating Segments

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

No. Name of the IFRS

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 3 Consolidated Financial Statements Originally issued 1976, effective 1 Jan 1977. Superseded in

1989 by IAS 27 and IAS 28

IAS 4 Depreciation Accounting withdrawn in 1999, replaced by IAS 16, 22, and 38, all of which were

issued or revised in 1998

IAS 5 Information to Be Disclosed in Financial Statements Originally issued October 1976, effective 1

January, 1977. Superseded by IAS 1 in 1997.

IAS 6 Accounting Responses to Changing Prices Superseded by IAS 15, which was withdrawn

December 2003.

IAS 7 Cash Flow Statements

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

IAS 9 Accounting for Research and Development Activities – Superseded by IAS 38 effective 1.7.99

IAS 10 Events After the Balance Sheet Date

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 13 Presentation of Current Assets and Current Liabilities – Superseded by IAS 1.

IAS 14 Segment Reporting (superseded by IFRS 8 on 1 January 2008)

IAS 15 Information Reflecting the Effects of Changing Prices – Withdrawn December 2003

IAS 16 Property, Plant and Equipment

222

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 22 Business Combinations – Superseded by IFRS 3 effective 31 March, 2004

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 25 Accounting for Investments – Superseded by IAS 39 and IAS 40 effective 2001

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Consolidated Financial statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economics

IAS 30 Disclosure in the Financial Statements of Bank and Similar Financial Institutions - Superseded by

IFRS 7 effective 2007

IAS 31 Interests in Joint Ventures

IAS 32 Financial Instruments - Presentation (Financial instruments disclosures are in IFRS 7 Financial

Instruments: Disclosures, and no longer in IAS 32)

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations – Superseded by IFRS 5 effective 2005

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments : Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture

223

Past Examination Question Papers

PAST EXAMINATIONS QUESTION PAPERS

JUNE 2017 EXAMINATION QUESTION PAPER

NOTE: 1. Answer All Questions.

2. All working notes should be shown distinctly.

PART – A

[5 marks each]

Q.1. (a) Explain the conditions for an amalgamation in the nature of merger.

(b) What are the disclosure requirements with regard to „Significant Accounting Policies‟?

(c) Balance Sheet as on March 31, 2016 of M/s Rajvansh Ltd.:

Note. No. `

I. EQUITY & LIABILITIES

(1) Shareholders‟ Fund

(a) Share Capital

(b) Reserves & Surpluses


1

2

3

2,99,500

48,000

1,72,500

Total 5,20,000

II. ASSETS


(2) Current Assets (including Bank Balance of J 1,00,000)

3,00,000

2,20,000

Total 5,20,000

Note 1: Share Capital: `

2,00,000 Equity Shares of J 10 each 2,00,000

1,000 9% Redeemable Preference Share Shares of ` 100 each 1,00,000

Less: Calls in Arrears ` 20 per share 500 99,500

2,99,500

Note 2: Reserves & Surplus



Total 48,000

Note 3: Current Liabilities:

Suppliers 1,22,500

Bills payable 50,000

Total 1,72,500

The Directors forfeited the Preference Shares for non-payment of calls after giving notice to the shareholders

and thereafter redeemed the Preference shares at a premium of 10%. For the purpose, the company made a

fresh issue of equity shares of ` 100 each at a premium of 5% for such amount as was necessary, after taking

into account the utilization of available sources to the maximum extent. All the shares were subscribed and

money received in full.

Pass necessary Journal entries for the above transactions.

224


(d) ABC Ltd. had ` 10,00,000, 6% Debentures of ` 100 each as on 31st March, 2015. The Company purchased in

the open market following debentures for immediate cancellation:

On 01-07-2015 1,000 Debentures @ ` 97/ (cum-interest)

On 29-02-2016 1,800 Debentures @ ` 99/ (e-interest)

Debenture interest due dates are 30th

September and 31st March, i.e. twice in a year. Provide Journal entries in

the books of the company for the year ended 31st March, 2016.

(e) M Limited issued 30,00,000 equity shares of J 10 each at par. Out of these 12,00,000 shares were issued to

the promoters and the balance offered to the public were underwriter by three underwriters A, B and C in the

Ratio of 2 : 3 : 4 with a firm underwriting of 60,000, 50,000 and 70,000 shares respectively. Total

subscription received 15,38,000 shares including marked applications and excluding the firm underwriting.

Marked applications were as followed:

A 3,00,000

B 3,50,000

C 5,00,000

Unmarked and surplus applications are to be distributed in the gross liability ratio. Ascertain the liability of

each underwriter.

Q.2. (a) On 1st April, 2014 Kapil Ltd. had made an issue of 2,000, 6% debentures of J 100 each. The Company during

the year 2015-16 purchased for cancellation 500 of these debentures. The company paid ` 95 per debenture

for 400 debentures and ` 98 per debenture for the rest. The expenses on purchase amounted to ` 200. Pass

Journal entries in the books of the company.

(b) A Ltd. forfeited 360 shares of ` 10 each, ` 8 called-up, issued at a premium of ` 2 per share to Sanjay for

non-payment of allotment money of ` 5 per share (including premium). Out of these, 320 shares were re-

issued to Amit ` 8 called up for ` 10 per share fully paid up. Pass necessary Journal entries.

(c) Write a short note on valuation of shares based on Price Earning Ratio.

(d) On March 31, 2016; the Balance Sheet of Better Feel Ltd. was as follows:

Note. No. `

I. EQUITY & LIABILITIES

(1) Shareholders‟ Fund

(a) Share Capital


(2) Non-Current Liabilities 5% Debentures


1

2

5,00,000

1,10,000

1,00,000

1,30,000

Total 8,40,000

II. ASSETS


(a) Tangible Assets

(b) Intangible Assets - Goodwill

(2) Current Assets

6,00,000

40,000

2,00,000

Total 8,40,000

Note 1: Share Capital `

Equity Share Capital (Shares of ` 100 each) 4,00,000

Preference Share Capital (Shares of ` 10 each) 1,00,000

Total 5,00,000

Note 2: Reserve & Surplus:

Profit & Loss Account 50,000


225



Total 1,10,000

On the above date, Fixed Assets were independently valued at ` 3,50,000 and the goodwill at ` 50,000.

Find the Intrinsic Value of Equity Shares.

(e) Explain the disclosure requirement as per Schedule III of the Companies Act, 2013, with regard to „Reserves

and Surpluses‟. [3 Mark each]

OR

Q.2A. (i) Your Company intends to buy back its own shares. What are the restrictions on buy back of own shares under

the Companies Act, 2013? [5 marks]

(ii) Delhi Chemicals ltd. was registered with an authorized capital of ` 15,00,000; consisting of 1,50,000 Equity

Shares of ` 10 each. The company issued a prospectus inviting applications for 60,000 shares at a premium of

` 2 per share, payable as under:

On application ` 2

On allotment ` 5 (Including premium)

On First & final Call ` 5

Applications were received for 80,000 shares. Letters of regret were sent with the refund orders to the

applicants of 12,000 shares. Pro rata allotment was made on the balance. Excess money received on

applications were utilized towards the allotment money.

Pass the necessary entries in the Journal of the company and also prepare the required note of „Share Capital‟

in accordance with the provisions of Schedule –III of Companies Act, 2013. [5 marks]

(iii) X Ltd. was incorporated on 1st July, 2015 to acquire a running business of Barsha & Co. with effect from 1

st

April, 2015. During the year 2015-16, the total sales were ` 36,00,000 of which ` 7,20,000 were for the first

six months. The gross profit of the company was ` 5,86,000. The expenses debited to the profit and loss

account included:

(a) Directors fee ` 50,000

(b) Bad Debts ` 7,200

(c) Advertising ` 36,000 (under a contract amounting to ` 3,000 per month)

(d) Salaries and General Expenses ` 2,40,000

(e) Preliminary Expenses written off ` 10,000.

Prepare a Statement showing pre-incorporation and post-incorporation profit for the year ended 31st March,

2016. [5 Marks]

Q.3. (a) The following are the summarized Balance Sheets of X ltd. and Y Ltd. as at 31-03-2016:

Particulars X Ltd. Y Ltd.

Share Capital : Equity Shares ` 10 each (fully paid up)

Securities Premium

General Reserve


8% Debentures

Unsecured loans

Sundry Creditors

10,00,000

3,00,000

1,80,000

2,00,000

5,00,000

--

2,60,000

6,00,000

--

2,50,000

1,60,000

--

3,00,000

1,70,000

24,40,000 14,80,000

Building

Plant and Machinery

Investment (5,000 shares of Y ltd.)

Stock

Sundry Debtors

Cash at Bank

9,00,000

5,00,000

80,000

5,20,000

4,10,000

30,000

4,50,000

3,80,000

--

3,50,000

2,60,000

40,000

24,40,000 14,80,000

226


The companies agree on a scheme of amalgamation on the following terms:

i) A new company is to be formed by the name XY Ltd. with the face value of ` 10 each.

ii) Y Ltd. to take over all assts and liabilities of the existing companies.

iii) For the purpose of amalgamation, the shares of the existing companies are to be valued as under –

X Ltd. ` 18 per share

Y Ltd. ` 20 per share

iv) A Contingent Liability of X Ltd. of ` 60,000 is to be treated as actual liability.

v) The Shareholders of X Ltd. and Y Ltd. are to be paid by issuing sufficient number of shares of XY Ltd.

at a Premium of ` 5 per share.

You are required to calculate the Purchase consideration (Number of shares to be issued to X Ltd. and Y

Ltd.) [5 Marks]

(b) Z Ltd. proposed to purchase the business carried on by M/s Ajay & Co. Goodwill for this purpose is agreed to

be valued at three years‟ purchase of weighted average profit of the past four years. The appropriate weights

to be used as:

Year Weight

2012-13 1

2013-14 2

2014-15 3

2015-16 4

The profits for these years are : 2012-13 - ` 60,600; 2013-14 - ` 74,400; 2014-15 - ` 60,000 and 2015-16 - `

84,000.

On a scrutiny of the accounts the following matters are revealed:

i) On 1st December, 2014 a major repair was carried out in respect of the plant incurring ` 20,000 which

was charged to revenue. The said sum is agreed to be capitalized for goodwill calculation subject to the

adjustment of depreciation of 10% on reducing balance method.


iii) To cover management cost an annual charge of ` 25,000 should be made for the purpose of goodwill

valuation.

Compute the value of goodwill of the firm. [5 Marks]

(c) On June 30, 2016; following balances stood in the books of SP ltd.:

7% Second Mortgage Debentures of ` 1 each 4,00,000

Income received on Sinking Fund Investments 14,500

Discount on issue of Debentures 25,000

Sinking Fund 3,65,500

Sinking Fund Investments:

(a) ` 2,00,000 5% State Development Loans 1,90,000

(b) ` 1,80,000 % National Defence Bonds 2,00,000

On the same day, the investments were sold as follows:

(a) The 5% State Development Loans at 90% and

(b) 69% National Defence Bonds at par.

On July 1, 2016, all the Debentures were redeemed at a premium of 2.5%. Annual contribution for

redemption was ` 50,000. Ignore Interest.

Prepare 7% Mortgage Debentures Sinking Fund & Sinking Fund Investment Accounts. [5 Marks]

Q.4. (a) From the following balance sheets of a holding company (H Ltd.) and its subsidiary (S Ltd.) on 31-3-2016,

227


prepare a consolidated balance sheet:

Liabilities H Ltd. ` S ltd. ` Assets H Ltd. ` S ltd. `

Share Capital (` 10)

General Reserve

Profit & Loss A/c

Sundry Creditors

Outstanding Expenses

5,00,000

80,000

90,000

50,000

20,000

2,00,000

60,000

70,000

40,000

10,000

Goodwill

Machinery

Stock

Debtors

Cash at Bank

Investments: 16,000 share in

S Ltd.

30,000

3,00,000

80,000

1,20,000

20,000

1,90,000

10,000

1,50,000

50,000

1,60,000

10,000

--

Total 7,40,000 3,80,000 Total 7,40,000 3,80,000

When control was acquired, S Ltd. had ` 40,000 in general reserve and ` 30,000 in profit and loss account.

Immediately on purchase of shares. H Ltd. received ` 16,000 as dividend from S Ltd. which was credited to

profit and Loss account. Debtors of H Ltd. include ` 20,000 due from S Ltd. whereas creditors S ltd. include

` 15,000 due to H Ltd. the difference being accounted for by a cheque-in-transmit. [8 Marks]

(b) ZED ltd. has the following position as on March 31, 2016:

` `

I. EQUITY & LIABLITIES

(1) Shareholders‟ Fund (a) Share Capital

1,00,000 Equity share of ` 10 each fully paid




4,000 10% Debentures of ` 100 each

(3) Current Liabilities Interest on 10% debentures

Sundry Creditors

10,00,000

(5,00,000)

40,000

1,60,000

5,00,000

4,00,000

2,00,000

Total 11,00,000

II. ASSETS


i) Tangible Assets

ii) Intangible Assets - Goodwill

9,00,000

2,00,000

11,00,000

Total 11,00,000

On the above date the Company has decided to reconstruct and the following resolutions are passed:

i) The equity shares are to be subdivided into shares of ` 1 each and after subdivision each shareholder

shall surrender 60% of his holding, which shall be immediately cancelled by the company.

ii) Debenture holders will reduce their claims by ` 1,40,000 and are settled by issue of 12% Debentures of `

100 each.

iii) Creditors claims are to be reduced to ` 1,00,000 and are settled by issue of Equity Shares of ` 1 each.

iv) Goodwill and Profit & Loss account debit balances are to be written off fully.

Pass the necessary Journal Entries to record the above and also prepare Balance Sheet of the company after

reconstruction. [7 Marks]

PART – B

Q.5. (a) As per SA 200, explain any five basic principles governing an audit?

(b) Distinguish between Audit and Investigation.

(c) What constitute „True and Fair‟ is not defined under any law. In order to show a true and fair view what is to

be ensured by an auditor? [5 marks each]

Q.6. (a) What are the disqualifications as per the Companies Act, 2013 for appointment of auditor?

(b) Write short notes on techniques of internal control system.

(c) Explain the need of audit working papers. (OR)

Q.6A. (a) What steps are to be involved in verification of assets?

(b) Explain the relationship between Internal Auditor and Statutory Auditor.

(c) With respect to up keep and custody of inventory after its purchase, certain controls are required for its

security. Comment. [5 marks each]

228


DECEMBER 2016 EXAMINATION QUESTION PAPER



PART – A

Q.1. (a) Enumerate disclosure requirements in the financial statements in respect of impairment of assets.

(b) On 1st January, 2016, Tulip Ltd. offered 100 shares of ` 10 each to each of its 500 employees at ` 30 per

share. The employees were given up to 31st March, 2016 to accept the offer. The shares issued under ESOP

shall be subject to lock-in-period of two years from the grant date. Other details provided are as under:

i) The market price of shares of the company on the grant date is ` 50 per share.

ii) Due to post vesting restriction on transfer of shares, the fair market value of shares is estimated at ` 40

per share.

iii) On 31st March, 2016, 400 employees accepted the offer and aid ` 30 per share.

You are required to pass necessary journal entries to record the allotment of shares in the books of the

company.

(c) State the conditions to be fulfilled for issue of bonus shares by a company.

(d) Mars Ltd. obtained an overdraft of ` 5,00,000 on 31st March, 2016 from a bank by issuing and securing

6,000, 12% debentures of ` 100 each as collateral security. Show necessary journal entries and the entry in

the balance sheet as on 31st March, 2016.

(e) From the following information in respect of Sun Ltd. prepare value added statement and its distribution for

the period ended 31st March, 2016:

` in lakh

Gross Sales

Discount allowed

Depreciation on plant and machinery

Dividend to equity shareholders

Raw material consumed

Salary and wages

Interest on term loan

Retained profit for the year

Office expenses

1,250

50

70

40

780

160

60

30

30

Rate of Income-Tax be assumed @ 30%. (5 Marks each)

Q.2. (a) Jupiter Ltd. issued 10,000 equity share at ` 20 per share for cash and 20,000 equity shares to suppliers of

plant costing ` 4,50,000. Assuming face value of shares at ` 10 each. Show the resultant disclosure in the

notes to accounts attached to balance sheet as per Schedule III of the Companies Act, 2013.

(b) Josh Ltd. issued 2,000, 10% debentures of ` 100 each at a discount of 10%. These debentures are redeemable

at a premium of 10% after 8 years.


i) Show Journal entries on issue of debentures.

ii) Compute the loss on issue of debentures to be accounted over this period.

(c) What is meant by „B-List Contributories‟? State their liability in the case of winding-up of a company.

(d) Distinguish between „equity shares‟ and „Preference shares‟.

(e) Compute the amount of goodwill based on 3 years‟ purchase of super profit from the following:

Future maintainable profit after tax : ` 15,00,000

Normal pre-tax rate of return : 20%

Capital employed : ` 60,000

Tax rate : 30% (3 Marks Each)

229


Or

(h) Beta Ltd. has following balances as on 1st April, 2015:

`


Sinking fund (represented by 10% bonds, face value: ` 7,20,000) 6,00,000

Bank Balance 3,28,000

Other information –

Annual contribution to sinking fund ` 1,28,000 and interest on investments are credited on 31st March

each year.

On 31st March, 2016, the company paid-off the debentures by selling the investment at 80%.

Debentures were redeemed at 10% premium.

Prepare necessary ledger accounts for the year 2015-16. Payment of interest on debentures shall be ignored.

(5 Marks)

(ii) Orchid Ltd. holds 80% shares in its subsidiary Tulip Ltd. From the following information calculate minority

interest at the end of each year:

Share Capital of Tulip Ltd. was ` 10,00,000 (` 10 each) and reserves ` 2,00,000 on the date of

acquisition on 31st March, 2012.

Fully paid bonus shares were issued by Tulip ltd. on 31st March, 2013 in the ratio of 2 bonus shares for

every 5 shares held.

Profit and loss of Tulip Ltd. for the various years are:

Profit/Loss (`)

31st March, 2013 : 3,00,000

31st March, 2014 : (1,00,000) (loss)

31st March, 2015 : 2,00,000

31st March, 2016 : 2,50,000 (including profit of ` 50,000 on revaluation of

assets) (5 Marks)

(iii) Lily Ltd. having sufficient balance to the credit of general reserve and ` 1,00,000 balance in securities

premium account, decides to:

Redeem 5,000, 10% redeemable preference shares of ` 100 each fully paid-up at a premium of 5%; and

Capital redemption reserve arising as a result of redemption be utilised in allotting the un-issued shares

of the company as fully paid equity shares of ` 10 each by way of bonus to its members.

Show Journal entries for redemption of preference shares and issue of bonus shares. (5 Marks)

Q.3. (a) Metal Ltd. issued 1,25,000 shares of ` 10 each to public. The issue was underwritten by Gold Silver, Bronze

and Copper as under:

Gold 30%, Silver 25%, Bronze 25% and Copper 20%.

The issue was firm underwritten by the underwriters as under:

Gold: 4,000 shares; Silver: 6,000 shares; Bronze : Nil; Copper : 15,000 shares.

Public subscription excluding firm underwriting but including marked applications were 90,000 shares. The

applications were marked as under:

Gold : 24,000 shares

Silver : 20,000 shares

Bronze : 12,000 shares

Copper : 24,000 shares

Ascertain the liability of each underwriter assuming firm underwriting shares be treated as un-marked

applications. (5 Marks)

230


(b) Following are the details of various balances relaing to Strong Ltd. which went into liquidation on 31st

March, 2016:

Liquidator realized ` 5,25,000 from sale of assets and paid-off ` 1,50,000 to secured creditors leaving a

balance of ` 3,75,000 with him

Preferential creditors ` 17,500

Unsecured creditors ` 1,15,000




Liquidator is entitled to 2.5% remuneration on payments to preferential and other unsecured creditors.

Prepare liquidator‟s final statement of account. (5 Marks)

(c) Corporate restricting is carried out to make a company more effective. Discuss. (5 Marks)

Q.4. (a) Tanu Ltd. and Manu Ltd. carrying on business of similar nature agreed to amalgamate. A new company TM

Ltd. is to be formed to which assets and liabilities of the existing companies, with certain exceptions, are to

be transferred. On 31st March, 2016, the balance sheets of the two companies were as under:

Particulars Tanu Ltd.

(`)

Manu Ltd.

(`)

b. Equity And Liabilities

4) Shareholder‟s Funds

(c) Share Capital

(d) Reserves and Surplus

5) Non-Current liabilities

(b) 6% Debentures


(b) Trade payables

3,00,000

2,00,000

---

1,50,000

1,60,000

40,000

---

64,000

Total 6,50,000 3,84,000

c. Assets

i. Non-Current Assets

(b) Fixed Assets

Freehold property

Plant and Machinery

ii. Current Assets

(d) Inventories

(e) Trade Receivables

(f) Cash and Cash Equivalents

2,10,000

50,000

1,40,000

1,64,000

86,000

1,20,000

30,000

1,56,000

42,000

36,000

Total 6,50,000 3,84,000

Assets and liabilities are to be taken at book value with the following exceptions:

Goodwill of Tanu Ltd. and Manu ltd. is to be valued at ` 1,60,000 and ` 60,000 respectively.

Value of Freehold property is to be taken at 120% of the book value in case of both the companies.

Debentures of Manu Ltd. are to be discharged by issue of 5% debentures of TM Ltd. of such value that

earnings of debentureholders are maintained at same level after amalgamation.

Trade receivables of Manu Ltd. were realized fully and the trade payables of Manu Ltd. were paid `

60,000 in full and final settlement of their claims.


ii) Compute the basis on which shares in TM Ltd. will be issued to the shareholders of existing companies

assuming nominal value of each share in TM ltd. is ` 10.

iii) Prepare balance sheet of TM ltd. as on 1st April, 2016. (8 Marks)

231


(b) From the following details related to Best Ltd., compute the value of each equity share on the basis of

productivity:

Year ended 31st March Average net worth (`) Adjusted taxed profit (`)

2013

2014

2015

16,60,000

22,20,000

22,44,000

1,60,000

2,20,000

2,40,000

Best ltd. has ` 10,00,000 equity share capital of the face value of ` 100 per share and ` 3,00,000, 10%

preference share capital with face value of ` 100 per share. The company has investments worth ` 3,00,000

(market value) on the valuation date, the yield in respect of which has been excluded in arriving at adjusted

taxed profit. It is usual in similar type of companies to set aside 25% of the taxed profit for rehabilitation and

replacement purposes.

On the valuation date, the net worth (excluding investments) amounts to ` 24,00,000. The normal rate of

return expected is 10%. The company paid dividend consistently within a range of 10% to 12% on equity

shares over the previous five years and expects to maintain it. (7 Marks)

PART - B

Q.5. (a) “Audit is advantageous even to those enterprises and organizations where it is not compulsory.” Discuss.

(b) As an auditor of a company, how will you instruct and guide your assistants about special considerations to

be borne in mind in the course of vouching?

(c) Directors of Secure Ltd. are of the opinion that section 138 of the Companies Act, 2013 regarding

appointment of internal auditor is not applicable to them. State the provisions of the section regarding

requirement for appointment of internal auditor. (5 Marks Each)

Q.6. (a) You are the auditor of a company covered under the Companies (Auditor‟s Report) order, 2015. Describe the

matters you will cover in report in respect of:

i) Inventory

ii) Maintenance of cost records.

(b) What do you mean by „materiality‟ in auditing? As an auditor of a company, how will you comply with

materiality concept in auditing?

(c) An auditor is required to maintain audit working papers in shape of permanent audit file and current audit

file. List out any ten documents finding place in the current audit file. (5 Marks Each)

Or

(i) Distinguish between „internal check‟ and „internal audit‟. (5 Marks)

(ii) List out five factors that influence the reliability of audit evidence as per SA 500. (5 Marks)

(iii) An auditor appointed under the Companies Act, 2013 shall provide only such other services as are approved

by the Board of Directors or audit committee but shall not include some services. Specify the services which

cannot be rendered by an auditor of a company. (5 Marks)

232





PART – A

Q.1. (a) State how would you present „cash and cash equivalents‟ under the current assets in the balance sheet as per

Schedule III of the Companies Act, 2013.

(b) Explain amortization period in relation to intangible assets. When this period needs to be reviewed and

changed?

(c) Board of directors of Mahua Ltd. wants to attach Directors‟ report to the balance sheet to be presented at the

annual general meeting and seeks your help in preparing the same. Enumerate any ten matters on which

information is required to be given in such report.

(d) Moon Ltd. issued 5,000 debentures of ` 100 each at a discount of 10%. The expenses on issue amounted to

` 20,000. The company wants to redeem the debentures at the rate of ` 1,00,000 each year commencing with

the end of fifth year. How much discount and expenses should be written off in each year?

(e) Following is the extract of balance sheet of Sunrise Ltd. as on 31st March, 2015:

`

Issued and subscribed capital:

40,000, 10% Preference Shares of ` 10 each fully paid 4,00,000

1,80,000 Equity shares of ` 10 each, ` 7.50 paid-up 13,50,000

Reserves and Surplus:

Capital Reserve 1,60,000


Securities premium 40,000

Surplus 3,20,000

The company made the final call of ` 2.50 per share from equity shareholders and duly received it.

Thereafter, it was decided to captilise its reserves by issuing bonus shares at the rate of 1 share for every 3

shares held. Capital reserve includes ` 80,000 being profit on exchange of machinery.

Pass Journal entries with necessary assumptions. (5 marks each)

Attempt all parts of either Q. No. 2 or Q. No. 2A

Q.2. (a) A company purchased 200, 12% debentures of ` 100 each at ` 97 on cum interest basis on

1st July, 2015 for immediate cancellation. Interest is payable on 30

th September and 31

st March each year.

Pass Journal entries in the books of company.

(b) State the functions of National Financial Reporting Authority to provide for matters relating to accounting

and auditing standards.

(c) What are the provisions regarding creation and adequacy of debenture redemption reserve (DRR) in each of

the following cases:

i) All India public financial institutions regulated by Reserve Bank of India and banking company.

ii) Non-Banking financial institutions registered with the Reserve Bank of India.

iii) Other companies including manufacturing and infrastructure companies.

(d) State the purposes for which balance in securities premium account can be utilized.

(e) State how would you present short-term loans and advances under current assets in the balance sheet of a

company as per Schedule III of the Companies Act, 2013?

233


(3 marks each)

OR

Q.2A. (i) From the following information, calculate the value of Shares of ` 10.

(a) On dividend basis; and

(b) On return on capital employed basis.

Year Capital Employed

(`)

Profit (`) Dividend Weight

2011

2012

2013

2014

10,00,000

16,00,000

20,00,000

25,00,000

80,000

1,60,000

2,20,000

3,75,000

12%

14%

16%

18%

1

2

3

4

The market expectation being 10%. Use weighted average for calculation. (5 marks)

(ii) Vibgyor Ltd. is unware of the manner and details of presentation of long-term loans and advances to be

given in the balance sheet as per Schedule III of the Companies Act, 2013. Advise the company with the

contents and manner of its disclosure. (5 marks)

(iii) Following balances appeared in the books of Bahubali Ltd. as on 1st April, 2014:

14% Debentures ` 15,00,000

Balance of sinking fund ` 12,00,000

Sinking fund investment ` 12,00,000

Following further information is provided:

Sinking fund investment is represented by 10%, ` 13,00,000 secured government bonds.

Annual contribution to sinking fund is ` 2,40,000 on st March each year.

Balance at bank on 31st March, 2015 is ` 6,00,000 before receipt of interest.

Investment was sold at 90% on 31st March, 2015.

Debentures were redeemed at 10% premium on 31st March, 2015.

Prepare necessary ledger accounts for the year ended 31st March, 2015. (5 marks)

Q.3. (a) Extract of ledger balances of Kalpana Ltd. as on 31st March, 2015 includes the following:

`

2,000, 12% Preference shares of ` 100 each, fully paid 2,00,000

Surplus 40,000


Under the terms of issue, the preference shares are redeemable on 31st March, 2015 at a premium of 10%.

The directors desire to make a minimum fresh issue of equity shares of ` 10 each at a premium of 5% for

redemption purpose.

You are required to ascertain the amount of fresh issue to the made and pass necessary journal entries in the

books of the company. (5 marks)

(b) Following are the details of various outstanding liabilities of Inefficient Ltd. which went into liquidation of

on 1st April, 2015:

i) Government taxes payable:

2013-14 : ` 22,000

2014-15 : ` 21,000

ii) Electricity an water charges payable to government on 31st March, 2015: ` 20,000.

iii) Wages of Staff „A‟ for 5 months @ ` 4,000 per month.

iv) Wages of Staff „B‟ for 4 monthss @ ` 6,000 per month.

v) Accured holiday remuneration of Staff „C‟ : ` 21,000.

234


vi) Compensation payable to Staff „D‟ under the Employees‟ Compensation Act, 1923 : ` 25,000.

vii) Provident fund and gratuity payable to Staff „E‟ : ` 30,000.

Calculate the amount of preferential creditors. (5 marks)

(c) Balance sheet of Zupiter Ltd. as on 31st March, 2015 is as under:

(`)


(1) Shareholders‟funds

Equity Share Capital


Long-term debts


(a) Trade payables

(b) Bank Overdraft

10,00,000

15,00,000

52,000

1,21,000

TOTAL 26,73,000

II. ASSETS


Fixed Assets

(2) Current Assets

(a) Inventories


(c) Cash and Bank

25,00,000

64,440

1,07,325

1,235

TOTAL 26,73,000

Statement of Profit and Loss

Particulars (`)

Sales 15,62,000

Less: Operating Expenses 9,48,000

EBIT 6,14,000

Less: Tax 2,45,600

Net operating profit after tax 3,68,400

The average rate of return of similar type of companies is 20% and risk-free of return is 15%. Rate of

interest charged by bank is 18% and tax rate is 40%.

Calculate economic valued added (EVA) (5 marks)

Q.4. (a) Prepare the consolidated balance sheet from the following balance sheets of Happy Ltd. and Joy Ltd. as on

31st March, 2015:

Happy Ltd. (`) Joy Ltd. (`)



(a) Share Capital



General Reserve

Surplus


Trade payables

4,00,000

2,10,000

1,50,000

40,000

1,50,000

13,000

80,000

59,450

TOTAL 8,00,000 3,02,450

II. ASSETS

235



(1) Fixed Assets

Tangible assets

(2) Current Assets

(a) Inventories


(c) Investments (in shares of Joy Ltd.)

(d) Cash and bank

3,96,000

1,02,000

97,000

1,80,000

25,000

1,45,000

62,050

82,200

---

13,200

TOTAL 8,00,000 3,02,450

Following additional information is also given:

i) Happy Ltd acquired shares of Joy Ltd. on 1st April, 2014 when Joy Ltd. had surplus of ` 66,000 and

general reserve of ` 9,000.

ii) Trade Payables of Happy Ltd. included a sum of ` 24,000 payable to Joy Ltd. for purchases made from

Joy Ltd. on which it charged a profit of ` 6,000.

iii) Joy Ltd. declared and paid interim dividend @ 8% on 2nd

June, 2014.

iv) Inventories of ` 1,02,000 of Happy Ltd. included unsold goods purchased from Joy Ltd. at a cost of `

18,000. (8 marks)

(b) Alpha Ltd. decided to wind-up with effect from 31st March, 2015 and was to be taken over by Gama Ltd. on

the basis of following balance sheet of Alpha Ltd. as on that date:

(`)

III. EQUITY AND LIABILITIES


(c) Share Capital

1,20,000 shares of ` 10 each fully paid

(d) Reserves and surplus

Profit prior to incorporation

Surplus


(d) Trade payables

(e) Bill payable

(f) Provision for income tax

12,00,000

42,000

5,22,000

2,26,000

40,000

2,20,000

TOTAL 22,50,000

IV. ASSETS


Fixed Assets

(3) Current Assets

(e) Inventories

(f) Trade receivables

(g) Bills receivables

(h) Cash and bank

9,64,000

7,75,000

1,52,000

30,000

3,29,000

TOTAL 22,50,000

Gamma Ltd. took over the assets at following values:

Fixed assets: ` 12,80,000, Inventories : ` 7,70,000; Bills receivable: ` 30,000.

Trade receivables realized ` 1,40,000.

Bills payables and income-tax liabilities were settled at ` 30,000 and ` 2,22,000 respectively. Trade

payables were finally settled with the cash remaining after meeting liquidation expenses of ` 20,000.

236


Purchase consideration was satisfied by Gama Ltd. as : ` 5,10,000 by allotment of fully paid 10%

preference shares of ` 100 each and the balance in equity shares of ` 10 each at ` 8 per share paid-up.

You are required to prepare necessary accounts in the books of Alpha ltd. (7 marks)

PART - B

Q.5. (a) Mention the areas in which all the joint auditors are jointly and severally responsible.

(b) What is the process of issuing audit standards by Auditing and Assurance Standards Board (AASB)?

(c) Differentiate between „internal audit‟ and „statutory audit‟. (5 marks)

Attempt all parts of either Q. No. 6 or Q. No. 6A

Q.6. (a) Despite numerous benefits, internal audit has got some limitations. Discuss.

(b) Distinguish between „internal control system‟ and „internal check system‟.

(c) What are the objective of review of management information system (MIS) of an organization?

(5 marks each)

OR

Q.6A. (a) Explain the objectives of investigation and also list out business situations where investigation may be

considered necessary.

(b) Explain the provisions of section 139(1) of the Companies Act, 2013 regarding appointment of auditors.

(c) What are the important points to be considered while reviewing the „process of taking insurance during

transit‟? (5 marks each)

237


DECEMBER 2015 EXAMINATION QUESTION PAPER



PART – A

Q.1. (a) A listed company intends to issue sweat shares to its directors and a class of employees. Advise the

company about the conditions to be fulfilled for such an issue.

(b) What are the objectives of sound corporate financial reporting?

(c) Zenith Ltd. has inadequacy or absence of profits in the financial year 2014-15 but it wants to declare

dividend. What are the conditions to be fulfilled to declare dividend out of free reserves?

(d) Fitness Ltd. is planning to raise funds by making rights issue of equity shares to part finance its expansion.

The existing equity share capital of the company is ` 40 lakh and the market value is ` 45 per share. The

company offered to its shareholders the right to buy 2 shares at `12 each for every 5shares held. You are

required to calculate –

iv) Theoretical market price per share after the rights issue;

v) The value of rights; and

vi) Percentage increase in share capital.

(d) A company has its share capital into shares of D 10 each. On 1st April, 2014, it granted 5,000 shares as

employees stock options at ` 40 per share, when the market price was ` 130 per share. The options were to

be exercised between 16th

December, 2014 and 15th

March, 2015. The employees exercised their options for

4,500 shares only; the remaining options lapsed. The company closes its books on 31st March every year.

Show journal entries in the books of the company. [5 Marks each]

Q.2. (a) Base Ltd. is not satisfied with its economic value added and wants to improve it further. What corrective

action should it take to improve the same? [3 Marks]

(b) State three salient features of „pooling of interest‟ method of amalgamation. [3 Marks]

(c) When dividend is declared and paid by a subsidiary company out of pre-acquisition and post-acquisition

profits, how will the same be dealt with in the books of a holding company? [3 Marks]

(d) When are diluted earnings per share (EPS) calculated? From the following information, calculate diluted

earnings per share (EPS) of the company: [3 Marks]

Net profit for the current year (after tax) ` 83,00,000

Number of equity shares outstanding 20,00,000

Number of 10% convertible debentures of ` 100 each

(each debenture is convertible into 10 equity shares) 1,00,000

Interest expenses for the current year ` 10,00,000

Tax relating to interest expenses

(e) Explain the method of valuation of equity shares based on price-earnings ratio. [3 Marks]

OR

2A. (i) Explain with examples interest accrued and due‟ and „interest accrued but not due‟. How are these items

shown in the balance sheet? [5 Marks]

(ii) Cheer ltd. is interested in issuing 10,000, 12% debentures of ` 100 each. You are required to pass necessary

journal entries in each of the following situations:

(a) Issued at 10% discount and redeemable at par

(b) Issued at 5% premium and redeemable at par

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(c) Issued at par and redeemable at premium of 5%.

(d) Issued at discount of 5% and redeemable at premium of 10%.

(e) Issued at premium of 10% and redeemable at premium of 20%. [5 Marks]

(iii) Excel Ltd. issued 1,00,000 equity shares and the entire issue was underwritten as follows:

Underwriter – X - 50%

Underwriter – Y - 30%

Underwriter – Z - 20%

Applications were received for 90,000 shares. Out of these, applications for 20,000 shares were marked with

X; 10,000 marked with Y and 5,000 marked with Z. The remaining applications for 55,000 shares did not

bear any stamp.

Determine the liability of each underwriter in relation to above. [5 Marks]

Q.3. (a) The extracts of balance sheets of H Ltd. and S Ltd. as on 31st March, 2015 are given below:

H Ltd. (`) S Ltd. (`)



(c) Share Capital



Securities premium

General Reserve

Surplus


Trade payables

5,00,000

50,000

1,00,000

75,000

80,000

2,00,000

10,000

50,000

20,000

40,000

TOTAL 8,05,000 3,20,000

IV. ASSETS


(4) Fixed Assets

Tangible assets

(5) Long-term investment

(15,000equity shares in S Ltd. at cost)

5,10,000

2,95,000

3,20,000

---

TOTAL 8,05,000 3,20,000

H ltd. acquired shares in S Ltd. on 31st March, 2015.

You are required to calculate –

(a) Minority interest; and

(b) Goodwill/capital reserve. [5 Marks]

(b) Nice Ltd. proposed to acquire the business of Kajal & Co. It was agreed to value goodwill at 3 years purchase

of the weighted average profits of the past 4 years. Profits and weights are as under:

Year Profit (`) Weight

2011-12 50,500 1

2012-13 62,000 2

2013-14 50,000 3

2014-15 80,000 4

Following further information is revealed:

(a) In the year 2012-13, closing stock was overvalued by ` 6,000.

239


(b) On 1st September, 2013, a major part was added to the plant at the cost of ` 15,000 which was charged to

revenue instead of capitalizing the same. It was decided to charge depreciation at 10% per annum on

reducing balance method.

(c) Annual charges of ` 12,000 should be made towards management charges.

Calculate the value of goodwill. [5 Marks]

(d) Liquidation of Weak Ltd. commenced on 2nd

April, 2015. However, certain creditors failed to receive

their dues out of realization of assets and contribution from „A‟ list contributories. Details of transfer of

shares between 1st March, 2014 and before commencement of winding up are given below:

Shareholder No. of shares

transferred

Date of ceasing to be

member

Creditors unpaid on

date of transfer (`)

A

B

C

D

E

4,000

3,000

2,000

1,000

600

01.03.2014

01.05.2014

01.10.2014

01.11.2014

01.02.2015

5,000

6,600

8,600

9,200

12,000

Shares were of ` 10 each, ` 8 paid-up. Find out the amount to be realized from various shareholders listed

above. [5 Marks]

Q.4. (a) The balance sheet of Magna ltd as on 31st March, 2015 is given below:

S Ltd. (`)



(c) Share Capital


12% cumulative preference shares of ` 100 each


Surplus



10% debentures of ` 100 each


(c) Trade payables

(d) Tax Provision

50,00,000

25,00,000

(2,00,000)

(1,00,000)

20,00,000

25,00,000

50,000

TOTAL 1,17,50,000

IV. ASSETS


(c) Fixed Assets

(d) Investment (market value ` 4,75,000)

(4) Current Assets

62,50,000

5,00,000

50,00,000

TOTAL 1,17,50,000

It was decided to reconstruct with the following scheme:

ix) All the existing equity shares are reduced to ` 40 each and preference shares to ` 6 0 each.

x) The debentureholders surrender their existing debentures and exchange the same with fresh 12%

debentures of ` 70 each.

xi) Creditor Prateek to whom the company owes ` 10,00,000 decided to reduce his claim by 40%. He is

allotted 15,000 equity shares of ` 40 each in full satisfaction of the claim.

xii) Tax liability is settled at ` 75,000.

xiii) Fixed assets are written down by 30%.

xiv) Current assets are revalued at ` 22,50,000.

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xv) Investments be brought down to its market value.

xvi) All fictitious assets be written-off.

Pass Journal entries in the books of the company and prepare capital reduction account. [8 Marks]

(b) Following is the statement of profit and loss of Target Ltd. for the year ended 31st March, 2015:

`

I. Revenue from Operations

II. Other income

- Subsidy received from government

- Interest on investments

- Transfer fees

- profit on sale of machinery

III. Total Revenue (I + II)

IV. Expenses

- Administrative, selling and distribution expenses

- Donation to charitable funds

- Director‟s fee

- Interest on debentures

- Compensation for breach of contract

- Managerial remuneration

- Depreciation on fixed assets

- Provision for taxation

- General Reserve

- Investment revaluation reserve

V. Profit for period (III – IV)

VI. Profit brought forward from the last year‟s statement

VII. profit carried forward (V + VI)

2,32,560

15,640

720

25,000

8,22,540

25,500

66,760

31,240

42,530

2,85,350

5,22,540

12,42,500

4,00,000

12,500

2,73,920

42,99,280

34,51,460

8,47,820

5,72,360

14,20,180


Original cost of machinery sold was ` 55,000. The written down value as on the date of sale was `

30,000.

Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was ` 4,75,340.

You are required to calculate and comment on managerial remuneration in the following cases in accordance

with the Companies Act, 2013 if:

i) There is only one whole-time director;

ii) There are two whole-time directors; and

iii) There are two whole-time directors, a part-time director and a manager. [7 Marks]

PART - B

Q.5. (a) What do you mean by „efficiency audit‟? How does it help the management of an enterprise?

(b) Distinguish between „internal control‟ and „internal audit‟.

(c) An auditor appointed under Rule 3 of the Companies (Audit and Auditors) Rules, 2014 is required to submit

a certificate and notice to the Registrar of Companies. State the matters to be covered in the certificate and

name of the form of notice required to be submitted. [5 Marks each]

Q.6. (a) What is the difference between „inter-firm comparison‟ and „intra-firm comparison‟? Explain the usefulness

of ratio analysis in inter-firm comparison.

241


(b) Draft an internal control questionnaire for review of goods receiving procedures and controls.

(c) Audit documentation is pivotal to auditing process. In this context, mention any ten documents and records

which should be kept in permanent audit fee. [5 Marks each]

OR

6A. (i) Following data is extracted from the books of Right Ltd. an unlisted company for the accounting year 2014-

15:

- Equity share capital : ` 40 crore (80% of equity shares are held by the Central

Government)

- Outstanding term loans

From various banks on

Balance sheet date : ` 85 crore (maximum outstanding balance during preceding

accounting year was ` 118 crore)

- Turnover for the year : ` 1,750 crore.

(a) Should be company be subject to CAG audit?

(b) Is the company required to appoint internal auditor?

(c) Is the company required to appoint secretarial auditor?

(d) Can the company appoint statutory auditor?

(e) Is it compulsory for the company to appoint cost auditor? [5 Marks]

(ii) Distinguish between „vouching and „verification‟. [5 Marks]

(iii) In the course of audit of Growth ltd you want to review the internal control in the area of sales return.

Mention the aspects which are to be specifically looked into to ascertain its soundness. [5 Marks]

242





PART – A

Q.1. (a) State the order of payment to be followed by liquidator.

(b) State the drawbacks of adopting shareholder value added (SVA) approach.

(c) Prosperous Bank has a criterion that it will give loans to companies that have an economic value added

(EVA) greater than zero for the past three years on an average. The bank is considering lending money to a

small company that has the economic value characteristics shown below:

v) Average operating income after tax equals to ` 25,00,000 per year for the last 3 years.

vi) Average total assets over the last 3 years equal ` 75,00,000.

vii) Weighted average cost of capital appropriate for the company is 10%, applicable for all 3 years.

viii) The company‟s average current liabilities over the past 3 years are ` 15,00,000. Does the company meet

the bank‟s criterion for a positive EVA? Show your workings?

(d) State the purposes for which balance in the securities premium account may be applied.

(e) Explain the procedure for reduction of share capital. [5 Marks Each]

Q.2. (a) Explain the convergence of Indian Accounting Standards (IAS) with International Financial Reporting

Standards (IFRS).

(b) Differentiate between „net assets method‟ and „net payment method‟ of computation of purchase

consideration for accounting for amalgamation.

(c) Discuss the circumstances under which valuation of shares is necessary.

(d) What are the key features of statement of profit and loss as per Schedule III of the Companies Act, 2013?

(e) From the following particulars, calculate goodwill on the basis of 3 years purchase of super profits:

i) Capital Employed : ` 50,000

ii) Trading profit (after tax): 2011 : ` 12,200

2012 : ` 15,000

2013 : ` 2,000 (loss)

2014 : ` 21,000

iii) Normal rate of interest on investment: 10% p.a.

iv) Remuneration from alternative employment: ` 36,000 p.a. (included in above profit). [3 Marks Each]

Or

i) What are the disclosure requirements as per AS-18 for a related party transaction?

ii) Under What circumstances, an amalgamation is classified as an „amalgamation in the nature of merger‟?

iii) The following balances appeared in the books of Bright Ltd. as on 1st April, 2013:

(a) Sinking fund account ` 50,000.

(b) Sinking fund investment account ` 48,000 (10% government securities, nominal value ` 45,000)

(c) 12% Debenture account ` 1,00,000.

The company sold ` 30,000 government securities at 110% and redeemed part of the debentures at a premium

of 10% on 1st April, 2013.

Show debenture account, sinking fund account, sinking fund investment account and debentureholders

account. [5 Marks Each]

Q.3. (a) Following is the balance Sheet of Tulika Ltd. as on 31st March, 2014:

243


As on 31st March

2014 (`)


Shareholders‟ funds

(a) Share Capital

Authorised capital

20,000 equity shares of ` 10 each

Issued, subscribed and paid-up capital

12,000 equity shares of ` 10 each 12,000

Less: calls in arrear (` 3 per share on 3,00 shares) 9,000


Surplus as per last balance sheet (loss) (22,000)

Add: profit for the year 1,200

(2) Current liabilities

(a) Trade payables

(b) Other current liabilities (provision for taxes)

2,00,000

1,11,000

(20,800)

15,425

4,000

TOTAL 1,09,625

II. ASSETS


(a) Fixed Assets

i) Tangible Assets

Land and Building

Machinery


Goodwill

(2) Current Assets

(a) Inventories

(b) Trade Receivables

(c) Cash and cash equivalents

(d) Other current assets (preliminary expenses)

20,500

50,850

10,000

10,275

15,000

1,500

1,500

TOTAL 1,09,625

The directors have found that the valuation of the machinery was overvalued by ` 10,000. It is proposed to

write down these assets to its true value and to extinguish the deficiency in the statement of profit and loss

and to write-off goodwill and preliminary expenses by adoption of the following schemes:

i) Forfeit the shares on which the calls are outstanding.

ii) Reduce the paid-up capital by ` 3 per share

iii) Re-issue of forfeited shares at ` 5 per share

iv) Utilise the provision for taxes, if necessary

The shares on which the calls were in arrear were duly forfeited and re-issued as fully paid-up shares of ` 7

each on payment of ` 5 per share.

You are required to pass necessary journal entries. [5 Marks]

(b) Green Ltd. was established on 1st August, 2013 and received its certificate of commencement of business on

1st November, 2013. The company bought the business of Purple & Co. with effect from 1

st April, 2013.

From the following information for the year ended on 31st March, 2014, find out the profit available for

dividends:

i) Sales for the year ` 12,00,000 out of which sales upto 1st August, 2013 was ` 5,00,000

ii) Gross profit for the year was ` 3,60,000.

iii) Expenses shown in the statement of profit and loss were as under:

`

Sales

Rent

Audit Fee

Directors‟ fee

Interest on debentures

Commission

24,000

12,000

12,000

9,600

10,000

19,200

244


Depreciation

General Expenses

Bad Debts (` 1,000 prior to incorporation)

51,000

16,800

3,000

[5 Marks]

(c) Time Ltd. went into liquidation on 31st March, 2014 and its position on that date was as under:

i) 50,000, 10% Preference shares of ` 10 each fully paid

ii) 70,000 Equity Shares of ` 10 each fully paid.

iii) 60,000 Equity Shares of ` 5 each, ` 3 per share paid

iv) Calls-in-arrear ` 20,000

v) Calls received in advance `17,000

vi) Preference dividend is in arrear for 1 year.

Amount left with the liquidator after discharging all liabilities is ` 6,27,000. Preference dividend in arrear is

to be paid in priority to the equity capital.

Prepare liquidator‟s final statement of accounts. [5 Marks]

Q.4. (a) Prepare the consolidated balance sheet from the following balance sheets of H. Ltd. and S Ltd.:

(` in „000)

H Ltd. S. Ltd.



(a) Share Capital

Equity Shares of ` 10


Reserve fund

surplus


(a) Trade Payables

(b) Other current liabilities (bills payable)

10,000

1,000

4,000

2,000

---

2,000

600

1,200

1,200

300

TOTAL 17,000 5,300

H Ltd. S. Ltd.

II. ASSETS


(a) Sundry assets

(b) Investments (1,50,000 equity shares in S. Ltd. at

cost)

(2) Current Assets

(a) Inventories


(c) Other current assets (bills receivables)

8,000

1,500

6,100

1,300

100

1,200

---

2,400

1,700

---

TOTAL 17,000 5,300

Following additional information is also given:

i) S. Ltd. has earned all the profits only since the above 1,50,000 shares were acquired by H. Ltd.

ii) On the date of acquisition of these 1,50,000 shares by H. Ltd. S. Ltd. had balance in the reserve fund of `

6,00,000.

iii) The bills payable of S. ltd. were in favour of H. Ltd. which had discounted ` 2,00,000 of them.

iv) Sundry assets of S. Ltd. were undervalued by ` 2,00,000. Stock of H. Ltd. includes goods of ` 5,00,000

purchased from S. Ltd. on which S. Ltd. made a profit of 25% on cost. [8 Marks]

(c) Rose Ltd. is taking over entire business of Lily Ltd. on the basis of following balance sheets as at 31st

March, 2014:

Rose Ltd. Lily Ltd.

245




(c) Share Capital

Equity Shares of ` 10 each, fully paid


General Reserve

surplus


Trade Payables

10,80,000

1,72,000

1,32,000

88,800

8,06,600

1,09,980

87,000

1,16,400

TOTAL 14,72,800 11,19,980

IV. ASSETS


(b) Fixed Assets

iii) Tangible Assets (Plant)

iv) Intangible Assets (Goodwill)

(4) Current Assets

(d) Inventories

(e) Trade receivables

(f) Cash and Cash equivalents

4,20,000

1,00,000

1,83,000

5,73,000

1,96,000

1,200

---

2,400

1,700

---

TOTAL 14,72,800 11,19,980

Further Information:

(f) Plant of Rose Ltd. and Lily Ltd. is worth ` 3,90,000 and ` 3,50,000 respectively.

(g) Goodwill of Rose Ltd. and Lily Ltd. is to be valued at ` 1,50,000 and ` 1,00,000 respectively.

(h) Stock of Lily Ltd. is over-valued by 10% above its cost.

(i) Rose Ltd. is taking over Lily Ltd. by issue of shares at the intrinsic value.

(j) All the assets and liabilities of Lily Ltd. were incorporated in the books of Rose Ltd. at fair value and

assets and liabilities of Rose Ltd. have been carried at carrying values only.

You are required to prepare post absorption balance sheet of Rose Ltd. [7 Marks]

PART – B

Q.5. (a) Explain the penal provisions applicable to auditors under the Companies Act, 2013.

(b) What are the important matters which an auditor should ensure to ascertain and establish true and fair view?

(c) Differentiate between „secretarial audit‟ and „internal audit‟. [5 Marks Each]

Q.6. (a) Explain the procedure of fraud reporting by an auditor as per the Companies Act, 2013.

(b) What are the techniques of internal control system? Discuss with examples.

(c) What is audit in-depth? Mention the various stages in purchase of goods. [5 Marks Each]

Or

i) What are the points for consideration in audit planning in relation to the audit engagement?

ii) What precautions should be taken while adopting test checking?

iii) Distinguish between „audit‟ and „investigation‟. [5 Marks Each]

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