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SOLUTION: ACCOUNTS TEST 2

Solution 1
Cash Flow Statement for the year ending on March 31, 2022
₹ ₹
I Cash flows from Operating Activities
Net profit made during the year (before tax) (W.N.1) 98,000
Add: Depreciation on Machinery 18,000
Add: Loss on sale of Plant 3,000
Add: Goodwill written off 13,000
Less: Dividend Income (1,500)
Operating profit before change in Working Capital 1,30,500
Decrease in inventory 7,000
Increase in trade receivables (33,000)
Increase in trade payables 21,000
Income-tax paid (28,000)
Net cash from operating activities 97,500
II. Cash flows from Investing Activities
Purchase of Plant (1,34,000)
Sale of Land 50,000
Sale of Plant 12,000
Purchase of Investments (25,600)
Dividend Received 2,100 (95,500)
III. Cash flows from Financing Activities
Proceeds from Issuance of equity shares 1,00,000
Redemption of Preference Shares (50,000)
Interim Dividend paid (10,000)
Final Dividend paid (27,000) 13,000
Net increase in cash and cash equivalent 15,000
Cash and cash equivalents at the beginning of the period 17,000
Cash and cash equivalents at the end of the period 32,000
Working Notes:
(i) Net Profit made during the year ended 31.3.2022
₹
Increase in P & L (Cr.) Balance (27,000-18,000) 9,000
Add: Transfer to general reserve 10,000
Add: Dividend declared during the year 37,000
Add: Interim Dividend paid during the year 10,000
Add: Provision for taxation made during the year 32,000
98,000

(ii) Land & Building Account

₹ ₹
To Balance b/d 1,00,000 By Bank (Sale) 50,000
To Capital Reserve 25,000 By Balance c/d 75,000
(Profit on Revaluation)
1,25,000 1,25,000

(iii) Plant & Machinery Account

₹ ₹
To Balance b/d 90,000 By Depreciation 18,000
To Bank A/c (Purchase) 1,34,000 By Bank (sale) 12,000
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By P&L A/c (Loss on sale) 3,000
By Balance c/d 1,91,000
2,24,000 2,24,000

(iv) Investments Account

₹ ₹
To Balance b/d 10,000 By Bank A/c (Dividend received) 600
To Bank A/c (Purchase) 25,600 By Balance c/d 35,000
35,600 35,600

Solution 2
Cash flow statement for the year ended 31st March, 2022
₹ (in crore) ₹ (in crore)
Cash flow from operating activities
Cash sales 131
Cash collected from credit customers 67
Less: Cash paid to suppliers for goods & services and to employees (159)
Cash from operations 39
Less: Income tax paid (14)
Net cash generated from operating activities 25.00
Cash flow from investing activities
Payment for purchase of Machine (40.00)
Proceeds from sale of Machine 20.70
Net cash used in investing activities (19.30)
Cash flow from financing activities
Redemption of Preference shares (15.00)
Proceeds from issue of Equity shares 20.00
Debenture interest paid (1.00)
Dividend Paid (11.70)
Net cash used in financing activities (7.70)
Net decrease in cash and cash equivalent (2.00)
Add: Cash and cash equivalents as on 1.04.2021 9.00
Cash and cash equivalents as on 31.3.2022 7.00

Solution 3
Journal Entries
[Link]. Particulars L.F. Dr. Cr.
1. Equity Share Capital A/c Dr. 3,00,000
Premium on buyback Dr. 3,00,000
To Equity Shares buy-back A/c 6,00,000
(Being Equity Share bought back, Share Capital cancelled,
and Premium on Buyback accounted for)
2. Securities Premium A/c Dr. 3,00,000
To Premium on Buyback A/c 3,00,000
(Being premium on buyback provided out of sec. premium)
3. Equity Shares buy-back A/c Dr. 6,00,000
To Bank A/c 6,00,000
(Being payment made to equity shareholders)
4. Revenue Reserve Account Dr. 3,00,000
To Capital Redemption Reserve Account 3,00,000
(Being transfer of free reserves to CRR to the extent of
nominal value of capital bought back through free reserves)
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Determination of Buy back of maximum no. of shares as per the Companies Act, 2013
1. Shares Outstanding Test
Particulars Shares
Number of shares outstanding 1,50,000
25% of the shares outstanding 37,500
2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves
Particulars
Paid up capital (₹) 15,00,000
Free reserves (₹) (18,00,000 + 3,00,000 + 1,50,000) 22,50,000
37,50,000
25% of Shareholders fund 9,37,500
Buyback Price ₹ 20
Number of shares that can be bought back (shares) 46,875
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy Back
Particulars Amount
Loan funds (₹) (22,50,000+12,00,000+19,80,000) 54,30,000
Minimum equity to be maintained after buy back in the ratio of 2:1 (₹) 27,15,000
Present equity/shareholders fund 37,50,000
Future equity/shareholders fund (₹) (see W.N.) (37,50,000 – 3,45,000) 34,05,000
Maximum permitted buy back of Equity (34,05,000 – 27,15,000) 6,90,000
Maximum number of shares that can be bought back @ ₹ 20 per share 34,500 shares
Summary statement determining the maximum number of shares to be bought back
Particulars No. of Shares
Shares Outstanding Test 37,500
Resources Test 46,875
Debt Equity Ratio Test 34,500
Maximum number of shares that can be bought back [least of the above] 34,500
Company qualifies all tests for buy-back of shares and conclusion is that it can buy maximum 34,500
shares on 1st April, 2021.
However, company wants to buy-back only 30,000 equity shares @ ₹ 30. Therefore, buy-back of 30,000
shares, as desired by the company is within the provisions of the Companies Act, 2013.
Working Note:
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous
equation method.
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
1. (₹ 37,50,000 – x) – ₹ 27,15,000 = y
2. (y/20)x10 = x
Or 2x = y
by solving the above equation we get x = ₹ 3,45,000 and y = ₹ 6,90,000

Solution 4
Journal Entries in the books of C Ltd. (Amt. in Lakhs)
[Link]. Particulars L.F. Dr. Cr.
1. Bank A/c Dr. 3,150
To Investments A/c 3,000
To Profit & Loss A/c 150
(Being investment sold on profit for the purpose of buyback)
2. Bank A/c Dr. 400
To Bank Loan A/c 400
(Being loan taken from bank to finance buyback &redemption
of shares)
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
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3. 10% Redeemable Preference Share Capital A/c Dr. 2,500
Premium on Redemption of Preference Shares A/c Dr. 250
To Preference Shareholders A/c 2,750
(Being redemption of preference share capital at 10% premium)
4. P&L A/c Dr. 250
To Premium on Redemption of Preference Shares A/c 250
Being premium on redemption of preference shares
adjusted through securities premium)
5. Equity Share Capital A/c Dr. 1,200
Premium on buyback Dr. 1,200
To Equity Shares buy-back A/c 2,400
(Being Equity Share bought back, Share Capital cancelled,
and Premium on Buyback accounted for)
6. Securities Premium A/c Dr. 800
General Reserve A/c Dr. 400
To Premium on Buyback A/c 1,200
(Being premium on buyback provided first out of securities
premium and the balance out of general reserves.)
7. Preference Shareholders A/c Dr. 2,750
Equity Shares buy-back A/c Dr. 2,400
To Bank A/c 5,150
(Being payment made to preference and equity shareholders)
8. General Reserve Account Dr. 3,700
To Capital Redemption Reserve Account 3,700
(Being amount transferred to capital redemption reserve
account towards face value of preference shares redeemed and
equity shares bought back)

Balance Sheet of C Ltd. (after Redemption and Buyback)

Amount (In Lakhs)
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 6,800
(b) Reserves & Surplus 2 6,800
2. Non-current Liabilities
(a) Long Term Borrowings 3 5,400
3. Current Liabilities
(a) Trade Payables 2,300
(b) Short Term Provisions 1,000
Total 22,300
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
(i) Property, Plant & Equipment 14,000
2. Current Assets
(a) Cash & Cash Equivalents 4 50
(b) Other Current Assets 8,250
Total 22,300
Notes to Accounts
Amount Amount
1. Share Capital
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
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680 Lakh Equity shares of ₹ 10 each 6,800
(120 lakh equity shares bought back)
2. Reserves and Surplus
General Reserve (6,000 – 400 – 3,700) 1,900
CRR (1,000 + 4,700) 4,700
Securities Premium Nil
Profit and Loss Account (300 + 150 – 250) 200 6,800
3. Long Term borrowings
9% Debentures 5,000
Bank Loan 400 5,400
4. Cash & Cash Equivalents
Cash at Bank (1,650 + 3,150 + 400 – 2,750 – 2,400) 50

Solution 5
1. c
2. c
3. a
4. a
5. c

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.