Test Series: March, 2019

MOCK TEST PAPER - 1

INTERMEDIATE (NEW) : GROUP – II
PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: Three hours) (Maximum Marks: 100)

1. (a) Sun Ltd. has entered into a sale contract of Rs. 5 crores with X Ltd. during 2015-2016 financial
year. The profit on this transaction is Rs. 1 crore. The delivery of goods to take place during the
first month of 2016-2017 financial year. In case of failure of Sun Ltd. to deliver within the
schedule, a compensation of Rs. 1.5 crores is to be paid to X Ltd. Sun Ltd. planned to
manufacture the goods during the last month of 2015-2016 financial year. As on balance sheet
date (31.3.2016), the goods were not manufactured and it was unlikely that Sun Ltd. will be in a
position to meet the contractual obligation.
(i) Should Sun Ltd. provide for contingency as per AS 29? Explain.
(ii) Should provision be measured as the excess of compensation to be paid over the profit?
(b) K Ltd. launched a project for producing product X in October, 2016. The Company incurred
Rs. 40 lakhs towards Research and Development expenses upto 31st March, 2018. Due to
prevailing market conditions, the Management came to conclusion that the product cannot be
manufactured and sold in the market for the next 10 years. The Management hence wants to
defer the expenditure write off to future years. Advise the Company as per the applicable
Accounting Standard
(c) ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being Rs. 10,00,000. The
economic life of the machine as well as the lease term is 4 years. At the end of each year, ABC
Ltd. pays Rs. 3,50,000. The lessee has guaranteed a residual value of Rs. 50,000 on expiry of
the lease to the lessor. However, XYZ Ltd. estimates that the residential value of the machinery
will be Rs. 35,000 only. The implicit rate of return is 16% and PV factors at 16% for year 1, year
2, year 3 and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively.
You are required to calculate the value of machinery to be considered by ABC Ltd. and the
finance charges for each year.
(d) From the following information, you are required to compute the basic and adjusted Earnings per
share:
Net profit for 2015-16 11 lakh
Net profit for 2016-17 15 lakh
No. of shares issued before rights issue 5 lakhs
Right issue One for every 5 held
Right issue price 15 per share
Last date of exercising right option 1-06-2016
Fair value of shares before right issue 21 per share
(4 parts x 5 Marks = 20 Marks)

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2. (a) The shareholders of Lili Ltd. decided on a corporate restructuring exercise necessitated because
of economic recession. From the given summarised balance sheet as on 31-3-2017 and the
information supplied, you are required to prepare (i) Journal entries reflecting the scheme of
reconstruction, (ii) Capital reduction account, (iii) Cash account in the books of Lili Ltd.
Summarised Balance Sheet of Lili Ltd. as on 31.3.2017
Liabilities Rs. Assets Rs.
Share Capital Fixed Assets
30,000 Equity shares of Rs.10 3,00,000 Trademarks and Patents 1,10,000
each
40,000 8% Cumulative Preference Goodwill at cost 36,100
shares Rs.10 each 4,00,000
Freehold Land 1,20,000
Reserves and Surplus Freehold Premises 2,44,000
Securities Premium Account 10,000 Plant and Equipment 3,20,000
Profit and Loss Account (1,38,400) Investment (marked to market)
Secured Borrowings 64,000
9% Debentures (Rs.100) 1,20,000 Current Assets
Accrued Interest 5,400 1,25,400 Inventories:
Current liabilities Raw materials and packing
Trade payables 1,20,000 materials 60,000
Tax payable 50,000 Finished goods 16,000 76,000
Temporary bank overdraft 2,23,100 Trade receivables 1,20,000
10,90,100 10,90,100
Note: Preference dividends are in arrears for 4 years.
The scheme of reconstruction that received the permission of the Court was on the following
lines:
(1) The authorized capital of the Company to be re-fixed at Rs.10 lakhs (preference capital of
Rs.3 lakhs and equity capital ofRs.7 lakhs). Both classes of shares are of Rs.10 each.
(2) The preference shares are to be reduced to Rs. 5 each and equity shares reduced by Rs. 3
per share. Post reduction, both classes of shares to be re-consolidated into Rs.10 shares.
(3) Trade Investments are to be liquidated in open market.
(4) One fresh equity shares of Rs.10 to be issued for every Rs.40 of preference dividends in
arrears (ignore taxation).
(5) Expenses for the scheme were Rs. 10,000.
(6) The debenture holders took over freehold land at Rs.2,10,000 and settled the balance after
adjusting their dues.
(7) Unprovided contingent liabilities were settled at Rs. 54,000 and a pending insurance claim
receivable settled at Rs. 12,500.
(8) The intangible assets were all to be written off along with Rs. 10,000 worth obsolete packing
material and 10% of the receivables.
(9) Remaining cash available as a result of the above transactions is to be utilized to pay off the
bank overdraft to that extent.

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 (10) The Equity shareholders agree that they will bring in necessary cash to liquidate the
balance outstanding on the overdraft account by subscribing the fresh shares. The equity
shares will be issued at par for this purpose.
(b) A Liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount
distributed to Preferential Creditors and 3% on the payment made to Unsecured Creditors. The
assets were realized for Rs. 25,00,000 against which payment was made as follows:
Liquidation expenses Rs. 25,000
Secured Creditors Rs. 10,00,000
Preferential Creditors Rs. 75,000
The amount due to Unsecured Creditors was Rs. 15,00,000. You are asked to calculate the total
Remuneration payable to Liquidator. Calculation shall be made to the nearest multiple of a
rupee. (15 + 5 = 20 Marks)
3. (a) From the following information as on 31 st March, 2016 of Xeta Insurance Co. Ltd. engaged in fire
insurance business, prepare the Revenue Account, reserving 50% of the net premiums for
unexpired risks and an additional reserve of Rs. 7,00,000:
Particulars Amount
(Rs.)
Reserve for unexpired risk on 31st March, 2015 15,00,000
Additional reserve on 31st March, 2015 3,00,000
Claims paid 19,20,000
Estimated liability in respect of outstanding claims on 31st March, 2015 1,95,000
Estimated liability in respect of outstanding claims on 31st March, 2016 2,70,000
Expenses of management (including Rs. 90,000 incurred in connection with claims) 8,40,000
Re-insurance premium paid 2,25,000
Re-insurance recoveries 60,000
Premiums 33,60,000
Interest and dividend (gross before TDS) 1,50,000
Profit on sale of investments 30,000
Commission 50,000

(b) As on 31st March 2016, Strong Bank Ltd. has a balance of Rs. 27 crores in “rebate on bills
discounted” account. The bank provides you the following further information:
(1) During the financial year ending 31 st March 2017, Strong Bank Ltd. discounted bills of
exchange of Rs. 4,000 crores charging interest @ 15% p.a. and the average period of
discount being 146 days.
(2) Bills of exchange of Rs. 600 crores were due for realization from the acceptors/customers after
31st March 2017, the average period outstanding after 31 st March 2017, being 73 days.
You are required to pass necessary journal entries in the books of Strong Bank Ltd. for the above
transactions.

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 (c) A Mutual Fund raised 100 lakh on April 1, 2017 by issue of 10 lakh units of Rs. 10 per unit. The
fund invested in several capital market instruments to build a portfolio of Rs. 90 lakhs. The initial
expenses amounted to Rs. 5 lakh. During April, 2017, the fund sold certain securities of cost
Rs. 38 lakhs for Rs. 40 lakhs and purchased certain other securities for Rs. 28.20 lakhs. The
fund management expenses for the month amounted to Rs. 4.50 lakhs of which Rs. 0.35 lakh
was in arrears. The dividend earned was Rs. 1.20 lakhs. 75% of the realized earnings were
distributed. The market value of the portfolio on 30.04.2017 was Rs. 112 lakh.
Determine NAV per unit. (10 Marks + 6 Marks + 4 Marks = 20 Marks)
4. (a) SMM Ltd. has the following capital structure as on 31 st March, 2017: Rs. in crore
Particulars Situation Situation
(i) Equity share capital (shares of Rs. 10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory Reserve) 320 320
(iii) Loan Funds 3,200 6,000
The company has offered buy back price of Rs. 30 per equity share. You are required to
calculate maximum permissible number of equity shares that can be bought back in both
situations and also required to pass necessary Journal Entries.
(b) Paper Limited comes out with a public issue of share capital on 01-01-2016 of 30,00,000 equity
shares of Rs. 10 each at a premium of 5%. Rs. 2.50 is payable on application (on or before 31-
01-2016) and Rs. 3 on allotment (31-3-2016) including premium.
This issue was underwritten by two underwriters namely White and Black, equally, the
commission being 4% of the issue price. Each of the underwriters underwrites 60,000 shares
firm. Subscriptions including firm underwriting came for 28,80,000 shares, the distribution of
forms being White: 15,60,000; Black; 10,80,000 and Unmarked 2,40,000.
One of the allottees (using forms marked with name of White) for 6000 shares fails to pay the
amount due to allotment, all the other money due being received in full including any due from
the shares devolving upon the underwriters. The commission due was paid separately.
6,000 shares of one allottee who failed to pay the allotment money were finally forfeited by
30-06-2016 and were re-allotted for payment in cash of Rs. 4 per share. You are required to
prepare each underwriter’s liability (in shares) in statement form and to pass necessary journal
entries to record the above events and transactions (including cash). (12 + 8 = 20 Marks)
5. (a) A Ltd. acquired 70% of equity shares of B Ltd. on 1.4.2010 at cost of Rs. 10,00,000 when B Ltd.
had an equity share capital of Rs. 10,00,000 and reserves and surplus of Rs. 80,000. In the four
consecutive years, B Ltd. fared badly and suffered losses of Rs. 2,50,000, Rs. 4,00,000,
Rs. 5,00,000 and Rs. 1,20,000 respectively. Thereafter in 2014-15, B Ltd. experienced
turnaround and registered an annual profit of Rs. 50,000. In the next two years i.e. 2015-16 and
2016-17, B Ltd. recorded annual profits of Rs. 1,00,000 and Rs. 1,50,000 respectively.
You are required to compute the minority interests and cost of control at the end of each year for
the purpose of consolidation.

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 (b) The summarized Balance Sheet of R Ltd. for the year ended on 31 st March, 2013, 2014 and 2015
are as follows:
(Rs. in thousands)
Liabilities 31.3.2013 31.3.2014 31.3.2015
3,20,000 equity shares of Rs. 10 each, fully paid 3,200 3,200 3,200
General reserve 2,400 2,800 3,200
Profit and Loss account 280 320 480
Trade Payables 1,200 1,600 2,000
7,080 7,920 8,880
Assets
Goodwill 2,000 1,600 1,200
Building and Machinery less, depreciation 2,800 3,200 3,200
Inventory 2,000 2,400 2,800
Trade Receivables 40 320 880
Bank balance 240 400 800
7,080 7,920 8,880
Additional information:
(i) Actual valuations were as under:
Building and machinery less, depreciation 3,600 4,000 4,400
Inventory 2,400 2,800 3,200
Net profit (including opening balance after writing off
depreciation, goodwill, tax provision and transferred to
general reserve) 840 1,240 1,640
(ii) Capital employed in the business at market value at the beginning of 2012-13 was
Rs. 73,20,000 which included the cost of goodwill. The normal annual return on average
capital employed in the line of business engaged by R Ltd. is 12½%.
(iii) The balance in the general reserve on 1 st April, 2012 was Rs. 20 lakhs.
(iv) The goodwill shown on 31.3.2013 was purchased on 1.4.2012 for Rs. 20 lakhs on which
date the balance in the Profit and Loss account was Rs. 2,40,000. Find out the average
capital employed in each year.
You are required to compute the value of Goodwill at 5 year’s purchase of Super profit (Simple
average method). (10+ 10 = 20 Marks)
6. (a) Explain on ‘presentation of MAT credit’ in the financial statements in brief.
OR
How will a company classify its investment in preference shares, which are convertible into equity
shares within one year from the balance sheet date? Will it classify the investment as a current
asset or a non-current asset? Explain.
(b) A company has its share capital divided into shares of Rs. 10 each. On 1-1-20X1, it granted
5,000 employees stock options at Rs. 50, when the market price was Rs. 140. The options were
to be exercised between 1-3-20X2 to 31-03-20X2. The employees exercised their options for
4,800 shares only; remaining options lapsed. Pass the necessary journal entries for the year
ended 31-3-20X2, with regard to employees’ stock options.

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 (c) Explain “Non-Performing Assets” as per NBFC Prudential Norms (RBI) directions.
(d) From the following data, determine the amount of holding company’s profit in the consolidated
Balance Sheet assuming holding company’s own Profit & Loss Account to be Rs.2,00,000 in
each case:
Subsidiary % shares Cost Date of acquisition Consolidation Date
Company owned
1.1.2018 31.12.2018
Case Share Profit & Loss Share Profit & Loss
Capital Account Capital Account
Rs. Rs. Rs. Rs. Rs.
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 55,000
(4 Parts x 5 Marks = 20 Marks)

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