Advanced Accounting

Past Papers Compilation

Intermediate
10 Attempts

3rd Edition
• Questions from May’18 to Nov’22
• For May 2023 Attempt
• All Questions in Chapter wise format

Vijay Singh Yadav | 9315782673

Table of Contents
Sr. Particulars Page Number
No
1 AS 4- Contingencies & Events occuring after the Balance sheet P 1.1-1 – P 1.1-3
Date
2 AS 5- Net Profit or Loss for the period, Prior period items & P 1.2-1 – P 1.2-4
Changes in Accounting policies
3 AS 7- Construction Contracts P 1.3-1 – P 1.3-5
4 AS 9- Revenue Recognition P 1.4-1- P 1.4-5
5 AS 14- Accounting for Amalgamation P 1.5-1- P 1.5-4
6 AS 17- Segment Reporting P 1.6-1 – P 1.6-4
7 AS 18- Related Party Disclosures P 1.7-1- P 1.7-3
8 AS 19- Leases P 1.8-1- P 1.8-5
9 AS 21- EPS P 1.9-1- P 1.9-6
10 AS 22- Accounting for Taxes on Income P 1.10-1 – P 1.10-6
11 AS 24- Discontinuing Operations P 1.11-1 – P 1.11-3
12 AS 26- Intangible Assets P 1.12-1- P 1.12-4
13 AS 29- Provisions, Contingent Liabilities & Contingent Assets P 1.13- P 1-1.13-4
14 ESOPs P 2.1-1- P 2.1-8
15 Buy back of securities P 2.2-1 – P 2.2-22
16 Equity shares with differential rights P 2.3-1 - P 2.3-3
17 Amalgamation of Co's P 3.1-1 - P 3.1-26
18 Internal Reconstruction of Co's P 3.2-1 – P 3.2-12
19 Liquidation of Co's P 3.3-1- P 3.3-16
20 Banking Companies P 4.1-1- P 4.1-24
21 NBFCs P 4.2-1 – P 4.2-8
22 Consolidated Financial Statements P 5.1 - P 5.30
23 Dissolution of Partnership Firms P 6.1-1 – P 6.1- 14
24 Amalgamation of Partnership Firms P 6.2-1 – P 6.2-3
25 Conversion of Partnership firms into a Company and sale of a P 6.3-1 - P 6.3-13
company
26 Issues relating to accounting in LLP P 6.4-1 – P 6.4-4
Advanced Accounting Past Paper NEW Course Compilation
includes:
10 Past Papers: March’18, Nov’18, May’19, Nov’19, Nov’20, Jan’21,
July ’21, Dec ’21, May’ 22, Nov ‘22

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 P 1.1-1

Chapter 1.1
AS 4- Contingencies & Events occurring after the Balance Sheet
Date
Question 1
Surya Limited follows the financial year from April to March. It has provided the following
information.
(i) A suit against the Company's Advertisement was filed by a party on 5th April, 2021,
claiming damages of ` 5 lakhs.
(ii) Company sends a proposal to sell an immovable property for ` 45 lakhs in March 2021.
The book value of the property is ` 30 lakhs as on year end date. However, the Deed was
registered on 15th April, 2021.
(iii) The terms and conditions for acquisition of business of another company have been
decided by the end of March 2021, but the financial resources were arranged in April
2021. The amount invested was ` 50 lakhs.
(iv) Theft of cash amounting to ` 4 lakhs was done by the Cashier in the month of March 2021
but was detected on the next day after the Financial Statements have been approved by
the Directors.
(v) A, major fire has damaged the assets in a factory on 5th April, 2018. However, the assets
are fully insured.
Keeping in view the provisions of AS-4, you are required to state with reasons whether
the above events are to be treated as Contingencies, Adjusting Events or Non-Adjusting
Events occurring after Balance Sheet date. (5 Marks July 21, May 19)
Answer 1
i. Suit filed against the company is a contingent liability but it was not existing as on date
of balance sheet date as the suit was filed on 5th April after the balance sheet date.
As per AS 4, 'Contingencies' is restricted to conditions or situations at the balance
sheet date, the financial effect of which is to be determined by future events which
may or may not occur. However, it may be disclosed with the nature of contingency,
being a contingent liability. This event does not pertain to conditions on the balance
sheet date. Hence, it will have no effect on financial statement and will be a non-
adjusting event.
ii.In this case, no adjustment to assets and liabilities is required as the event does not
affect the determination and the condition of the amounts stated in the financial
statements for the year ended 31st March, 2021. There was just a proposal before
31st March, 2021 and hence sale cannot be shown in the financial statements for the
year ended 31st March, 2021. Sale of immovable property is an event occurring after
the balance sheet date is a non-adjusting event.
iii.In the given case, terms and conditions for acquisition of business were finalized
before the balance sheet date and carried out before the closure of the books of
accounts but transaction for payment of financial resources was effected in April,
2021.Hence, it is an adjusting event and necessary adjustment to assets and liabilities
for acquisition of business is necessary in the financial statements for the year ended

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Chapter 1.1 AS 4- Contingencies & Events occurring after the Balance Sheet Date
 P 1.1-2

31st March 2021.

iv.Only those events which occur between the balance sheet date and the date on
which the financial statements are approved, may indicate the need for adjustments
to assets and liabilities as at the balance sheet date or may require disclosure.In the
given case, as the theft of cash was detected after approval of financial statements,
no adjustment is required. Hence it is non-adjusting event.
v. The condition of fire occurrence was not existing on the balance sheet date. Only
the disclosure regarding event of fire and loss being completely insured may be given
in the report of approving authority.

Question 2
As per the provision of AS 4, you are required to state with reason whether the following
transactions are adjusting event or non-adjusting event for the year ended 31.03.2021
in the books of NEW Ltd. (accounts of the company were approved by board of directors
on 10.07.2021):
1. Equity Dividend for the year 2020-21 was declared at the rate of 7% on 15.05.2021.
2. On 05.03.2021, ` 53,000 cash was collected from a customer but not deposited by the
cashier. This fraud was detected on 22.06.2021.
3.One building got damaged due to occurrence of fire on 23.05.221. Loss was estimated
to be ` 81,00,000. (5 Marks Dec ’21)
Answer 2
(i) If dividends are declared after the balance sheet date but before the financial statements
are approved, the dividends are not recognized as a liability at the balance sheet date
because no obligation exists at that time unless a statute requires otherwise. Such dividends
are disclosed in the notes. Thus, no liability for dividends needs to be recognized in financial
statements for financial year ended 31 st March, 2021 and declaration of dividend is non-
adjusting event.
(ii) As per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’ an event
occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes if such events relate to conditions existing at the
balance sheet date. In the given case, fraud of the accounting period is detected after the
balance sheet date but before approval of the financial statements, it is necessary to
recognize the loss. Thus loss amounting ` 53,000 should be adjusted in the accounts of the
company for the year ended 31st March, 2021 as it is adjusting event.
(iii) AS 4 states that adjustments to assets and liabilities are not appropriate for events occurring
after the balance sheet date, if such events do not relate to conditions existing at the
balance sheet date. The damage of one building due to fire did not exist on the balance
sheet date i.e. 31.3.2021. Therefore, loss occurred due to fire is not to be recognized in the
financial year 2020-2021 as it is non-adjusting event.
However, according to the standard, unusual changes affecting the existence or substratum
of the enterprise after the balance sheet date may indicate a need to consider the use of
fundamental accounting assumption of going concern in the preparation of the financial
statements. As per the information given in the question, the fire has caused major

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Chapter 1.1 AS 4- Contingencies & Events occurring after the Balance Sheet Date
 P 1.1-3

destruction; therefore, fundamental accounting assumption of going concern would have

to be evaluated. Considering that the going concern assumption is still valid, the fact of fire
together with an estimated loss of ` 81 lakhs should be disclosed in the report of the
approving authority for financial year 2020 -21 to enable users of financial statements to
make proper evaluations and decisions.

Question 3
As per the provisions of AS-4, a contingency is a condition or situation, the ultimate
outcome of which (gain or loss) will be known or determined only on the occurrence of
one or more uncertain future events (1 Mark, May’19)
Answer 3
False: A contingency is a condition or situation, the ultimate outcome of which, gain or
loss, will be known or determined only on the occurrence, or non-occurrence, of one or
more uncertain future events.
Question 4
The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were
approved on 30th April, 2018. On 15th April, 2018 a fire occurred in the factory and office
premises. The loss by fire is of such a magnitude that it was not possible to expect the
enterprise Dee Limited to start operation again. State with reasons, whether the loss
due to fire is an adjusting or non- adjusting event and how the fact of loss is to be
disclosed by the company in the context of the provisions of AS-4 (Revised). (5 Marks,
Nov 18)
Answer 4
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet
Date”, an event occurring after the balance sheet date should be an adjusting event even
if it does not reflect any condition existing on the balance sheet date, if the event is such
as to indicate that the fundamental accounting assumption of going concern is no longer
appropriate.
The fire occurred in the factory and office premises of an enterprise after 31 March, 2018
but before approval of financial statement of 30.4.18. The loss by fire is of such a
magnitude that it is not reasonable to expect the Dee Ltd. to start operations again, i.e.,
the going concern assumption is not valid. Since the fire occurred after 31/03/18, the loss
on fire is not a result of any condition existing on 31/03/18. But the loss due to fire is an
adjusting event the entire accounts need to be prepared on a liquidation basis with
adequate disclosures by the company by way of note in its financial statements in the
following manner: “Major fire occurred in the factory and office premises on 15th April, 2018
which has made impossible for the enterprise to start operations again. Therefore, the
financial statements have been prepared on liquidation basis.”

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Chapter 1.1 AS 4- Contingencies & Events occurring after the Balance Sheet Date
 P 1.2-1

Chapter 1.2
AS 5- Net Profit or Loss for the period, Prior period items &
Changes in Accounting policies
Question 1
State whether the following items are examples of change in Accounting Policy / Change
in Accounting Estimates / Extraordinary items / Prior period items / Ordinary Activity :
(i) Actual bad debts turning out to be more than provisions.
(ii) Change from Cost model to Revaluation model for measurement of carrying amount of
PPE.
(iii) Government grant receivable as compensation for expenses incurred in previous
accounting period.
(iv) Treating operating lease as finance lease.
(v) Capitalization of borrowing cost on working capital.
(vi) Legislative changes having long term retrospective application.
(vii) Change in the method of depreciation from straight line to WDV.
(viii) Government grant becoming refundable.
(ix) Applying 10% depreciation instead of 15% on furniture.
Change in useful life of fixed assets. (5 Marks Jan 21)
Answer 1
Classification of given items is as follows:
Sr. No. Particulars Remarks
(i) Actual bad debts turning out to be Change in Accounting Estimates
more than provisions
(ii) Change from Cost model to Revaluation Change in Accounting Policy
model for measurement of carrying
amount of PPE
(iii) Government grant receivable as Extra -ordinary Items
compensation for expenses incurred in
previous accounting period
(iv) Treating operating lease as finance Prior- period Items
lease.
(v) Capitalization of borrowing cost on Prior-period Items (as interest on
working capital working capital loans is not eligible
for capitalization)
(vi) Legislative changes having long term Ordinary Activity
retrospective application
(vii) Change in the method of depreciation Change in Accounting Estimates
from straight line to WDV
(viii) Government grant becoming Extra -ordinary Items
refundable

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 P 1.2-2

(ix) Applying 10% depreciation instead of Prior- period Items

15% on furniture
(x) Change in useful life of fixed assets Change in Accounting Estimates

Question 2
As per the provisions of AS-5, extraordinary items should not be disclosed in the statement
of profit and loss as a part of net profit or loss for the period. (1 Mark, May 19)

Answer 2
False: 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.
Question 3
PQR Ltd. is in the process of finalizing its accounts for the year ended 31 st March, 2018.
The company seeks your advice on the following:
(i) Goods worth ` 5,00,000 were destroyed due to flood in September, 2015. A claim was
lodged with insurance company. But no entry was passed in the books for insurance claim
in the financial year 2015-16. In March, 2018, the claim was passed and the company
received a payment of ` 3,50,000 against the claim. Explain the treatment of such receipt in
final account for the year ended 31 st March, 2018.
(ii) Company created a provision for bad and doubtful debts at 2.5% on debtors in preparing
the financial statements for the year 2017-18.
Subsequently, on a review of the credit period allowed and financial capacity of the
customers, the company decides to increase the provision to 8% on debtors as on
31.03.2018. The accounts were not approved by the Board of Directors till the date of
decision. While applying the relevant accounting standard, can this revision be considered
as an extra ordinary item or prior period item? (5 Marks, May 18)
Answer 3
(i) As per the provisions of AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes
in Accounting Policies”, prior period items are income or expenses, which arise, in the current
period as a result of error or omissions in the preparation of financial statements of one or
more prior periods. Further, the nature and amount of prior period items should be separately
disclosed in the statement of profit and loss in a manner that their impact on current profit
or loss can be perceived. In the given instance, it is clearly a case of error/omission in
preparation of financial statements for the year 2015-16. Hence, claim received in the
financial year 2017- 18 is a prior period item and should be separately disclosed in the
statement of Profit and Loss.
(ii) In the given case, a limited company created 2.5% provision for doubtful debts for the year
2017-2018. Subsequently, the company revised the estimates based on the changed
circumstances and wants to create 8% provision. As per AS 5, the revision in rate of provision
for doubtful debts will be considered as change in estimate and is neither a prior period item
nor an extraordinary item.

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 P 1.2-3

The effect of such change should be shown in the profit and loss account for the year ending
31st March, 2018.

Question 4
TQ Cycles Ltd. is in the manufacturing of bicycles, a labour intensive manufacturing sector.
In April 2022, the Government enhanced the minimum wages payable to workers with
retrospective effect from the 1st January,2022. Due to this legislative change, the
additional wages for the period from January 2022 to March 2022 amounted to ₹ 30 lakhs.
The management asked the Finance manager to charge ₹ 30 lakhs as prior period item
while finalizing financial statements for the year 2022-23. Further, the Finance manager
is of the view that this amount being abnormal should be disclosed as extra-ordinary item
in the Profit and loss account for the financial year 2021-22.
Discuss with reference to applicable Accounting Standards. ( 5 Marks) .(May’22)
Answer 4
As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies” prior period items are income or expenses which arise in the current period as a
result of errors or omissions in the preparation of the financial statements of one or more
prior periods. The term does not include other adjustments necessitated by circumstances
which though related to prior periods, are determined in the current period.
It is given that revision of wages took place in April, 2022 with retrospective effect from 1st
January, 2022. Therefore, wages payable for the period from 1 01.2022 to 31.3.2022
cannot be taken as an error or omission in the preparation of financial statements and
hence this expenditure cannot be taken as a prior period item. The full amount of wages
payable to workers will be treated as an expense of current year and it will be charged to
profit & loss account for the year 2022-23 as normal expenses.
It may be mentioned that additional wages is an expense arising from the ordinary activities
of the company. Such an expense does not qualify as an extraordinary item. Therefore,
finance manager is incorrect in treating increase as extraordinary item. However, as per AS
5, when items of income and expense within profit or loss from ordinary activities 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.
Therefore, additional wages liability of ₹ 30 lakhs should be disclosed separately in the
financial statements of TQ Cycles Ltd. for the year ended 31st March, 2023.

Question 5
The Accountant of Shiva Limited had sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Policies or
change in Accounting Estimates for the year ended 31st March, 2021. Please advise him
in the following situations in accordance with the provisions of AS 5:

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 P 1.2-4

(i) Provision for doubtful debts was created @3% till 31st March, 2020. From the Financial
year 2020-2021, the rate of provision has been changed to 4%.
(ii) During the year ended 31st March,2021, the management has introduced a formal
gratuity scheme in place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till 31st March, 2020 the furniture was depreciated on straight line basis over a period
of 5 years. From the Financial year 2020-2021, the useful life of furniture has been
changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get pension of
₹ 20,000 per month. Earlier there was no such scheme of pension in the organization.
(v) During the year ended 31st March 2021, there was change in cost formula in measuring
the cost of inventories. (5 Marks Nov’22)

Answer 5
In the given case, company has created 3cer% provision for doubtful debts till 31st
March, 2020. Subsequently from 1st April, 2020, the company revised the estimates
based on the changed circumstances and wants to create 4% provision. Thus, change
in rate of provision of doubtful debt is change in estimate and is not change in
accounting policy. This change will affect only current year.
(i) As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies”, the adoption of an accounting policy for events or transactions
that differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy. Introduction of a formal retirement
gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on
retirement is a transaction which is substantially different from the previous
transaction, will neither be treated as change in an accounting policy nor change in
accounting estimate.
(ii) Change in useful life of furniture from 5 years to 3 years is a change in accounting
estimate and is not a change in accounting policy.
(iii) Adoption of a new accounting policy for events or transactions which did not occur
previously should not be treated as a change in an accounting policy. Hence the
introduction of new pension scheme is neither a change in accounting policy nor a
change in accounting estimate.
(iv) Change in cost formula used in measurement of cost of inventories is a change in
accounting policy.

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 P 1.3-1

Chapter 1.3
AS 7- Construction Contracts
Question 1
The following data is provided for M/s. Raj Construction Co.
(i) Contract Price - ₹ 85 lakhs
(ii) Materials issued - ₹ 21 Lakhs out of which Materials costing ₹ 4 Lakhs is still lying
unused at the end of the period.
(iii) Labour Expenses for workers engaged at site - ₹ 16 Lakhs (out of which ₹ 1 Lakh is still
unpaid)
(iv) Specific Contract Costs - ₹ 5 Lakhs
(v) Sub-Contract Costs for work executed - ₹ 7 Lakhs, Advances paid to sub-contractors - ₹
4 Lakhs
(vi) Further Cost estimated to be incurred to complete the contract - ₹ 35 Lakhs
You are required to compute the Percentage of Completion, the Contract Revenue
and Cost to be recognized as per AS-7. (5 Marks, July 21)
Answer 1
Computation of contract cost
₹ Lakh ₹ Lakh
Material cost incurred on the contract (net of closing stock) 21-4 17
Add: Labour cost incurred on the contract (including 16
outstanding amount)
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7
Cost incurred (till date) 45
Add: further cost to be incurred 35
Total contract cost 80
Percentage of completion = Cost incurred till date/Estimated total cost
= ₹ 45,00,000/₹ 80,00,000
= 56.25%
Contract revenue and costs to be recognized
Contract revenue (₹ 85,00,000x56.25%) = ₹ 47,81,250
Contract costs = ₹ 45,00,000
Question 2
Rajendra undertook a contract ₹ 20,00,000 on an arrangement that 80% of the value of
work done, as certified by the architect of the contractee should be paid immediately and
that the remaining 20% be retained until the Contract was completed. In Year 1, the
amounts expended were ₹ 8,60,000, the work was certified for ₹ 8,00,000 and 80% of this
was paid as agreed. It was estimated that future expenditure to complete the Contract
would be ₹ 10,00,000. In Year 2, the amounts expended were ₹ 4,75,000. Three-fourth of
the work under contract was certified as done by December 31st and 80% of this was
received accordingly. It was estimated that future expenditure to complete the Contract
would be ₹ 4,00,000. In Year 3, the amounts expended were ₹ 3,10,000 and on June 30th,

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Chapter 1.3 AS 7- Construction Contracts
 P 1.3-2

the whole Contract was completed. Show how Contract revenue would be recognized in
the P & L A/c of Mr. Rajendra each year. (5 Marks , Nov 20)
Answer 2
(a) Year 1 ₹
Actual expenditure 8,60,000
Future estimated expenditure 10,00,000
Total Expenditure 18,60,000
, ,
% of work completed = 100 = 46.24%(Rounded off)
, ,

Revenue to be recognized (cumulative) = 20,00,000 x 76.95% = 15,39,000

Less: revenue recognized in Year 1 = ( 9,24,800)
Revenue to be recognized in Year 2 ₹ 6,14,200
Year 2
Actual expenditure 4,75,000
Future Expenditure 4,00,000
Expenditure incurred in year 1 8,60,000
17,35,000
, , , ,
% of work completed = = 76.95%(Rounded off)
, ,

Revenue to be recognized (cumulative) = 20,00,000 76.95%

= 15,39,000
Less: revenue recognized in Year 1 = (9,24,800)
Revenue to be recognized in Year 1 = Rs. 6,14,200
Year 3
Whole contract got completed therefore total contract value less revenue recognized up
to year 2 will be amount of revenue to be recognized in year 3 i.e. 20,00,000 – 15,39,000
(9,24,800 + 6,14,200) = ₹ 4,61,000. Note: Calendar year has been considered as
accounting year.

Question 3
(i) AP Ltd., a construction contractor, undertakes the construction of commercial complex for
Kay Ltd. AP Ltd. submitted separate proposals for each of 3 units of commercial complex. A
single agreement is entered into between the two parties. The agreement lays down
the value ofeach of the 3 units, i.e. Rs. 50 Lakh Rs. 60 Lakh and Rs. 75 Lakh respectively.
Agreement also lays downthe completion time for each unit. Comment, with reference to
AS- 7, whether AP Ltd., should treat it as a single contract or three separate contracts.
(ii) On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a
building for Rs. 45 lakhs. On 31st March, 2018, the company found that it had already spent
Rs. 32.50 lakhs on the construction. Additional cost of completion is estimated at Rs. 15.10
lakhs. What amount should be charged to revenue in the final accounts for the year ended
31st March, 2018 as per provisions of AS-7? [5 marks, May ’19]
Answer 3
(i) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the
construction of each asset should be treated as a separate construction contract when:

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Chapter 1.3 AS 7- Construction Contracts
 P 1.3-3

(a) separate proposals have been submitted for each asset;

(b) each asset has been subject to separate negotiation and the contractor and customer
have been able to accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
Therefore, Mr. AP Ltd. is required to treat construction of each unit as a separate
construction contract as the above-mentioned conditions of AS 7 are fulfilled in the given
case.
(ii)
Rs. in
lakhs
Cost of construction incurred till date 32.50
Add: Estimated future cost 15.10
Total estimated cost of construction 47.60
Percentage of completion till date to total estimated cost of construction
= (32.50/47.60) x 100 = 68.28%
Proportion of total contract value recognized as revenue for the year ended 31st March,
2018 per AS 7(Revised)
= Contract price x percentage of completion
= Rs. 45 lakh x 68.28% = Rs. 30.73 lakhs.
(Rs. in lakhs)
Total cost of constructionLess: Total contract price 47.60
Total foreseeable loss to be recognized as expense (45.00)
2.60
According to of AS 7, when it is probable that total contract costs will exceed total contract
revenue, the expected loss should be recognized as an expense immediately.

Question 4
Sarita Construction Co. obtained a contract for construction of a dam. The following details
are available in records of company for the year ended 31st March, 2018:
₹ In Lakhs
Total Contract Price 12,000
Work Certified 6,250
Work not certified 1,250
Estimated further cost to completion 8,750
Progress payment received 5,500
Progress payment to be received 1,500
Applying the provisions of Accounting Standard 7 “Accounting for Construction
Contracts” you are required to compute:
(i) Profit/Loss for the year ended 31st March, 2018.
(ii) Contract work in progress as at end of financial year 2017-18.
(iii) Revenue to be recognized out of the total contract value.
(iv) Amount due from/to customers as at the year end. [5 Marks , May ‘18]

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Chapter 1.3 AS 7- Construction Contracts
 P 1.3-4

Answer 4
(i) Loss for the year ended, 31st March, 2018 (₹ in lakhs)
Amount of foreseeable loss
Total cost of construction (6,250 + 1,250 + 8,750) 16,250
Less: Total contract price (12,000)
Total foreseeable loss to be recognised as expense 4,250
According to AS 7, when it is probable that total contract costs will exceed total contract
revenue, the expected loss should be recognized as an expense immediately. Loss for
the year ended, 31st March, 2018 amounting Rs. 4,250 will be recognized.
(ii)
Contract work-in-progress as on 31.3.18 (Rs. in lakhs)
Contract work-in-progress i.e. cost incurred to date are Rs.7,500
lakhs:
Work certified 6,250
Work not certified 1,250
7,500
(iii) Proportion of total contract value recognized as revenue
Cost incurred till 31.3.18 is 46.15% (7,500/16,250 x 100) of total costs of construction.
Proportion of total contract value recognised as revenue: 46.15% of Rs. 12,000 lakhs =
Rs. 5,538 lakhs
(iv) Amount due from/to customers at year end
(Contract costs + Recognised profits – Recognised Losses) – (Progress payments received
+ Progress payments to be received)
= (7,500 + Nil – 4,250) – (5,500 + 1,500) Rs. in lakhs
= [3,250 – 7,000] Rs. in lakhs Amount due to customers = Rs. 3,750 lakhs.
Question 5
Grace Ltd., a firm of contractors provided the following information in respect of a
contract for the year ended on 31st March,2022:
Particulars (₹ in ‘000)
Fixed Price Contract with an escalation clause Work Certified 35,000
Work not Certified (includes ₹ 26,25,000 for materials issued, out of which 17,500
material lying unused at the end of the period is ₹ 1,40,000)
Estimated further cost to completion 3,815
Progress Payment Received Payment to be Received 17,325
Escalation in cost is by 8% and accordingly the contract price is increased by 8% 14,000
4,900
From the above information, you are required to:
I. Compute the contract revenue to be recognized.
II. Calculate Profit /Loss for the year ended 31st March,2022 and additional provision
for loss to be made, if any, for the year ended 31st March,2022.( 5Marks) .(May’22)

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 P 1.3-5

Answer 5
Calculation of total estimated cost of construction
₹ in thousand
Cost of Contract incurred till date
Work certified 17,500
Work not certified (3,815 thousand – 140 thousand) 3,675 21,175
Add: Estimated future cost 17,325
Total estimated cost of construction 38,500
Contract Price (35,000 thousand x 1.08) 37,800
Stage of completion
Percentage of completion till date to total estimated cost of construction = [Cost of work
completed till date / total estimated cost of the contract] x 100
= [₹ 21,175 thousand / ₹ 38,500 thousand] x 100= 55%
Revenue to be recognized for the year ended 31stMarch, 2022
Proportion of total contract value recognized as revenue = Contract price x percentage of
completion = ₹ 37,800 thousand x 55% = ₹ 20,790 thousand
Loss to be recognized for the year ended 31stMarch, 2022
Loss for the year ended 31stMarch, 2022 = Cost incurred till date – Revenue to be
recognized for the year ended 31st March, 2022
= ₹ 21,175 thousand – ₹ 20,790 thousand = ₹ 385 thousand
Provision for loss to be made at the end of 31stMarch, 2022

₹ in thousand
Total estimated loss on the contract
Total estimated cost of the contract 38,500
Less: Total revised contract price (37,800) 700
Less: Loss recognized for the year ended 31st March, (385)
2022
Provision for loss to be made at the end of 31stMarch, 315
2022

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 P 1.4-1

Chapter 1.4
AS 9- Revenue Recognition
Question 1 (Includes concepts from AS 29-Provisions, Contingent Liabilities & Contingent Assets)
A Limited sells goods with unlimited right of return to its customers. The following pattern
has been observed in the Return of Sales:
Time frame of Return from date of purchase % of Cumulative Sales
Between 0-1 month 6%
Between 1-2 months 7%
Between 2-3 months 8%
The Company has made Sales of ₹ 36 Lakhs in the month of January, ₹ 48 Lakhs in the
month of February and of ₹ 60 Lakhs in the month of March. The Total Sales for the
Financial Year have been ₹ 400 Lakhs and the Cost of Sales was ₹ 320 Lakhs. You are
required to determine the amount of Provision to be made and Revenue to be recognized
as on 31st March. (5 Marks, July 21)
Answer 1
Amount of provision
The goods are sold with a right to return. The existence of such right gives rise to a present
obligation on the company as per AS 29, 'Provisions, Contingent Liabilities and Contingent
Assets'. According to the standard, a provision should be created on the Balance sheet
date, for sales returns after the Balance Sheet date, at the best estimate of the loss
expected, along with any estimated incremental cost that would be necessary to resell the
goods expected to be returned.
Sales Sales value Sales value Likely Likely Provision @ 20%
during (₹ in lacs) (cumulative) returns returns (₹ in lacs) (Refer
₹ (in lacs) (%) ₹ (in lacs) W.N.)
March 60 60 6% 3.60 0.720
February 48 108 7% 7.56 1.512
January 36 144 8% 11.52 2.304
Total 22.68 4.536
Revenue to be recognized
Revenue in respect of sale of goods is recognized fully at the time of sale itself assumed
that the company has complied with the conditions stated in AS 9 relating to recognition
of revenue in the case of sale of goods. As per AS 9, in a transaction involving the sale of
goods, performance should be regarded as being achieved when the following conditions
have been fulfilled:
(i) Seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods. AS 9 also provides that in case of retail sales offering
a guarantee of ‘money back, if not completely satisfied, it may be appropriate to
recognize the sale but to make a suitable provision for returns based on previous

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Chapter 1.4 AS 9- Revenue Recognition
 P 1.4-2

experiences.
Therefore, sale of ₹ 36 lakhs, ₹ 48 lakhs and ₹ 60 lakhs made in the months of January,
February and March will be recognized at full value. Thus, total revenue to be recognized
for RS. 400 lacs for the year.
Working Note:
Calculation of Profit % on sales
(₹ in lacs)
Sales for the year 400
Less: Cost of sales (320)
Profit 80
Profit mark up on sales (80/400) x 100 = 20%

Question 2
Given below are the following informations of B.S. Ltd.
(i) Goods of Rs. 50,000 were sold on 18-03-2018 but at the request of the buyer these were
delivered on 15-04-2018. On 13-01-2018 goods of Rs. 1,25,000 are sent on consignment
basis of which 20% of the goods unsold are lying with the consignee as on 31-03-2018.
(ii) Rs. 1,00,000 worth of goods were sold on approval basis on 01-12-2017. The period of
approval was 3 months after which they were considered sold. Buyer sent approval for
75% goods up to 31-01-2018 and no approval or disapproval received for the remaining
goods till 31-03-2018.
You are required to advise the accountant of B.S. Ltd., with valid reasons, the amount to
be recognized as revenue for the year ended 31st March, 2018 in above cases in the
context of AS-9. [5 Marks , May ‘19]
Answer 2
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are
fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all
significantrisks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
Case (i): The sale is complete but delivery has been postponed at buyer’s request. B.S. Ltd.
should recognize the entire sale of Rs. 50,000 for the year ended 31st March, 2018.
Case (ii) : In case of consignment sale revenue should not be recognized until the goods
are sold to a third party. 20% goods lying unsold with consignee should be treated as
closing inventory and sales should be recognized for Rs. 1,00,000 (80% of Rs. 1,25,000).
Case (iii) : In case of goods sold on approval basis, revenue should not be recognized until
the goods have been formally accepted by the buyer or the buyer has done an act adopting
the transaction or the time period for rejection has elapsed or where no time has been
fixed, a reasonable time has elapsed. Therefore, revenue should be recognized for the total
sales amounting Rs. 1,00,000 as the time period for rejecting the goods had expired.
Thus total revenue amounting Rs. 2,50,000 (50,000 + 1,00,000+ 1,00,000) will be
recognized for the year ended 31st March, 2018 in the books of B.S. Ltd.

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Chapter 1.4 AS 9- Revenue Recognition
 P 1.4-3

Question 3
Indicate in each case whether revenue can be recognized and when it will be recognized
as per As -9.
(1) Trade discount and column received.
(2) Whether goods are sold to distributor or others for resale.
(3) Whether seller concurrently agrees to repurchase the same goods at a late date.
(4) Insurance agency commission for rendering services.
(5) On 11-3-2019 cloths worth Rs. 50,000 were sold to X mart, but due to refurbishing of their
showroom being underway, on their request cloths were delivered on 12-04-2019. [5
Marks , Nov’19]
Answer 3
(1) Trade discounts and volume rebates received are not encompassed within the definition
of revenue, since they represent a reduction of cost. Trade discounts and volume rebates
given should be deducted in determining revenue.
(2) When goods are sold to distributor or others, revenue from such sales can generally be
recognized if significant risks of ownership have passed; however, in some situations the
buyer may in substance be an agent and in such cases the sale should be treated as a
consignment sale.
(3) For transactions, where seller concurrently agrees to repurchase the same goods at a later
date that are in substance a financing agreement, the resulting cash inflow is not revenue as
defined and should not be recognized as revenue.
(4) Insurance agency commissions should be recognized on the effective commencement or
renewal dates of the related policies.
(5) On 11.03.2019, if X mart takes title and accepts billing for the goods then it is implied that the
sale is complete and all risk and reward on ownership has been transferred to the buyers.
Revenue should be recognized for year ended 31st March, 2019 notwithstanding that physical
delivery has not been completed so long as there is every expectation that delivery will be
made and items were ready for delivery to the buyer at the time.

Question 4
Given the following information of Rainbow Ltd.
(i) On 15th November, goods worth ₹ 5,00,000 were sold on approval basis. The period of
approval was 4 months after which they were considered sold. Buyer sent approval for 75%
goods sold upto 31st January and no approval or disapproval received for the remaining
goods till 31st March.
(ii) On 31st March, goods worth ₹ 2,40,000 were sold to Bright Ltd. but due to refurnishing of
their show-room being underway, on their request, goods were delivered on 10th April.
(iii) Rainbow Ltd. supplied goods worth ₹ 6,00,000 to Shyam Ltd. and concurrently agrees to re-
purchase the same goods on 14th April.
(iv) Dew Ltd, used certain assets of Rainbow Ltd. Rainbow Ltd. received ₹ 7.5 lakhs and
₹ 12 as interest and royalties respectively from Dew Ltd. during the year 2020 -21.
(v) On 25th December, goods of ₹ 4,00,000 were sent on consignment basis of which 40% of
the goods unsold are lying with the consignee at the year-end on 31st March.

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Chapter 1.4 AS 9- Revenue Recognition
 P 1.4-4

In each of the above cases, you are required to advise, with valid reasons, the amount to
be recognized as revenue under the provisions of AS-9.(5 Marks Dec ’21)
Answer 4
(i) As per AS 9 “Revenue Recognition”, in case of goods sold on approval basis, revenue should
not be recognized until the goods have been formally accepted by the buyer or the buyer has
done an act adopting the transaction or the time period for rejection has elapsed or where
no time has been fixed, a reasonable time has elapsed. Therefore, revenue should be
recognized for the total sales amounting ₹ 5,00,000 as the time period for rejecting the goods
had expired.
(ii) The sale is complete but delivery has been postponed at buyer’s request. The entity should
recognize the entire sale of ₹ 2,40,000 for the year ended 31st March.
(iii) Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same
goods at a later date, such transactions that are in substance a financing agreement, the
resulting cash inflow is not revenue as defined and should not be recognized as revenue.
Hence no revenue to be recognized in the given case.
(iv) Revenue arising from the use by others of enterprise resources yielding interest and royalty
should be recognized when no significant uncertainty as to measurability or collectability
exists. The interest should be recognized on time proportion basis taking into account the
amount outstanding and rate applicable. The royalty should be recognized on accrual basis in
accordance with the terms of relevant agreement.
(v) 40% goods lying unsold with consignee should be treated as closing inventory and sales
should be recognized for ₹ 2,40,000 (60% of ₹ 4,00,000). In case of consignment sale revenue
should not be recognized until the goods are sold to a third party.

Question 5
Indicate in each case whether revenue can be recognized and when it will be recognized
as per AS-9.
(i) Delivery is delayed at buyer's request but buyer takes title and accepts billing.
(ii) Instalment Sales.
(iii) Trade discounts and volume rebates.
(iv) Insurance agency commission for rendering services.
(v) Advertising commission. (5 Marks Nov 22)

Answer 5
(i) Delivery is delayed at buyer’s request and buyer takes title and accepts billing :
Revenue should be recognized notwithstanding that physical delivery has not been
completed so long as there is every expectation that delivery will be made.
However, the item must be on hand, identified and ready for delivery to the buyer
at the time the sale is recognized rather than there being simply an intention to
acquire or manufacture the goods in time for delivery.

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Chapter 1.4 AS 9- Revenue Recognition
 P 1.4-5

(ii) Instalment sales: When the consideration is receivable in instalments, revenue

attributable to the sales price exclusive of interest should be recognized at the date
of sale. The interest element should be recognized as revenue, proportionately to
the unpaid balance due to the seller.
(iii) Trade discounts and volume rebates: Trade discounts and volume rebates
received are not encompassed within the definition of revenue, since they
represent a reduction of cost. Trade discounts and volume rebates given should be
deducted in determining revenue.
(iv) Insurance agency commissions for rendering services: Insurance agency
commissions should be recognized on the effective commencement or renewal
dates of the related policies.
(v) Advertising commission: Revenue should be recognized when the service is
completed. For advertising agencies, media commissions will normally be
recognized when the related advertisement or commercial appears before the
public and the necessary intimation is received by the agency, as opposed to
production commission, which will be recognized when the project is completed.

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Chapter 1.4 AS 9- Revenue Recognition
 P 1.5-1

Chapter 1.5
AS 14- Accounting for Amalgamation
Question 1
List the conditions to be fulfilled as per AS-14 (Revised) for an amalgamation to be in the
nature of merger.(5 Marks Jan 21)
Answer 1
Amalgamation in the nature of merger is an amalgamation which satisfies all the following
conditions:
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before
the amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree 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.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) 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 except to ensure uniformity of accounting policies.

Question 2
Distinguish between Amalgamation, Absorption and External Reconstruction of Company.
(5 Marks , May ’19)
Answer 2
Difference between Amalgamation, Absorption and External Reconstruction
Basis Amalgamation Absorption External Reconstruction
Meaning Two or more companies In this case, an existing In this case, a newly
are wound up and a new company takes over the formed company takes
company is formed to business of one or more over the business of an
take over their business. existing companies. existing company.
Minimum At least three are At least two companies Only two companies are
number of companies involved. are involved. involved.
Companies
involved
Number of Only one resultant No new resultant Only one resultant
new Company is formed. Two company is formed. company is formed. Under
resultant companies are wound up this case a newly formed
companies to form a single resultant company takes over the
company. business of an existing
company.

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Chapter 1.5 AS 14- Accounting for Amalgamation
 P 1.5-2

Objective Amalgamation is done to Absorption is done to cut External reconstruction is

cut competition and reap competition and reap the done to reorganise the
the economies in large economies in large scale. financial structure of the
scale. company.
Example A Ltd. and B Ltd. A Ltd. takes over the B Ltd. is formed to take
amalgamate to form C business of another over the business of an
Ltd. existing company B Ltd. existing company A Ltd.

Question 3
On 1st April, 2018, Tina Ltd. take over the business of Rina Ltd. and discharged purchase
consideration as follows:
(i) Issued 50,000 fully paid Equity shares of ₹ 10 each at a premium of ₹ 5 per share to the
equity shareholders of Rina Ltd.
(ii) Cash payment of ₹ 50,000 was made to equity shareholders of Rina Ltd.
(iii) Issued 2,000 fully paid 12% Preference shares of ₹ 100 each at par to discharge the
preference shareholders of Rina Ltd.
(iv) Debentures of Rina Ltd. (₹ 1,20,000) will be converted into equal number and amount of
10% debentures of Tina Ltd.
Calculate the amount of Purchase consideration as per AS-14 and pass Journal Entry
relating to discharge of purchase consideration in the books of Tina Ltd.(5 Marks , Nov’18)
Answer 3
Particulars ₹
Equity Shares (50,000 x 15) 7,50,000
Cash payment 50,000
12% Preference Share Capital 2,00,000
Purchase Consideration 10,00,000
As per AS 14, consideration for the amalgamation 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. Thus, payment to debenture holders
are not covered by the term ‘consideration’.
Journal entry relating to discharge of consideration in the books of Tina Ltd.
Liquidation of Rina Ltd.A/c 10,00,000
To Equity share capital A/c 5,00,000
To 12% Preference share capital A/c 2,00,000
To Securities premium A/c 2,50,000
To Bank/Cash A/c 50,000
(Discharge of purchase consideration)

Question 4
Moon Limited is absorbed by Sun Limited; the consideration, being the takeover of
liabilities, the payment of cost of absorption not exceeding ₹ 10,000 (actual cost ₹ 9000);
the payment of 9% Debentures of ₹ 50,000 at a premium of 20% through 8% debentures
issued at a premium of 25% of face value; the payment of ₹ 18 per share in cash; allotment
of two 11% preference shares of ₹ 10/- each and one equity share of ₹ 10/- each at a
premium of 30% fully paid for every three shares in Moon Limited respectively. The

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Chapter 1.5 AS 14- Accounting for Amalgamation
 P 1.5-3

number of shares of the vendor company is 1,50,000 of ₹ 10/- each fully paid. Calculate
purchase consideration as per AS-14. (5 Marks Dec ’21)
Answer 4
As per AS 14 “Accounting for Amalgamations”, the term consideration has been defined as
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.
Purchase consideration will be:
₹ Form
Equity shareholders: 1,50,000 × ₹ 18 27,00,000 Cash
1,50,000 × 2/3 × ₹ 10 10,00,000 11% Pref. shares
1,50,000 × 1/3 × ₹ 13 6,50,000 Equity shares
43,50,000
Note:
1. According to AS 14, ‘consideration’ excludes the any amount payable to debenture-
holders. The liability in respect of debentures of vendor company will be taken by
transferee company, which will then be settled by issuing new debentures.
2. Liquidation expenses will also not form part of purchase consideration.

Question 5
Star Limited agreed to take over Moon Limited on 1st April,2022. The terms and
conditions of takeover were as follows:
(i) Star Limited issued 70,000 Equity shares of ₹ 100 each at a premium of ₹ 10 per share
to the equity shareholders of Moon Limited.
(ii) Cash payment of ₹ 1,25,000 was made to the equity shareholders of Moon Limited.
(iii) 25,000 fully paid Preference shares of ₹ 70 each issued at par to discharge the
preference shareholders of Moon Limited.
You are required:
(i) to give the meaning of "consideration for the amalgamation' as per AS-14, and
(ii) Calculate the amount of purchase consideration. (5 Marks Nov 22)

Answer 5
Consideration for the amalgamation 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.

Computation of Purchase (₹) Form

consideration
For Preference Shareholders of 17,50,000 25,000
Moon Ltd. (25,000 × ₹ 70) Preference
For equity shareholders of Moon Ltd. 77,00,000 70,000
(70,000 × ₹ 110) Equity shares of Star Ltd.

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Chapter 1.5 AS 14- Accounting for Amalgamation
 P 1.5-4

1,25,000 Cash
Total Purchase consideration 95,75,000

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Chapter 1.5 AS 14- Accounting for Amalgamation
 P 1.6-1

Chapter 1.6
AS 17- Segment Reporting
Question 1
The Senior Accountant of AMF Ltd. gives the following data regarding its five segments:
(` in lakhs)
Particulars P Q R S T Total
(`) (`) (`) (`) (`) (`)
Segment Assets 80 30 20 20 10 160
Segment Results (190) 10 10 (10) 30 (150)
Segment Revenue 620 80 60 80 60 900
The Senior Accountant is of the opinion that segment "P" alone should be reported. Is he
justified in his view? Examine his opinion in the light of provision of AS-17 'Segment
Reporting'. (5 Marks , Jan 21) (Similar to Nov 20 & Nov 19 but different figures)
Answer 1
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be
identified as a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments; or
(ii) Its segment result whether profit or loss is 10% or more of:
(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss, whichever is greater in absolute amount;
or
(iii) Its segment assets are 10% or more of the total assets of all segments. Accordingly,
(a) On the basis of revenue from sales criteria, segment P is a reportable segment.
(b) On the basis of the result criteria, segments P & T are reportable segments (since their
results in absolute amount is 10% or more of ` 200 Lakhs).
(c) On the basis of asset criteria, all segments except T are reportable segments.
Since all the segments are covered in at least one of the above criteria, all segments have to
be reported upon in accordance with AS 17. Hence, the opinion of chief accountant that only
segment ‘P’ is reportable is wrong.

Question 2
The accountant of Parag Limited has furnished you with the following data related to its
Business Divisions: (` in Lacs)
Division A B C D Total
Segment Revenue 100 300 200 400 1,000
Segment Result 45 -70 80 -10 45
Segment Assets 39 51 48 12 150
You are requested to identify the reportable segments in accordance with the criteria laid
down in AS 17. (5 Marks, Nov 20) (Similar to Jan 21 & Nov 19 but different figures)
Answer 2
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be
identified as a reportable segment if:

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Chapter 1.6 AS 17- Segment Reporting
 P 1.6-2

Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments; or
Its segment result whether profit or loss is 10% or more of:
 The combined result of all segments in profit; or
 The combined result of all segments in loss, whichever is greater in absolute
amount; or Its segment assets are 10% or more of the total assets of all segments.
On the basis of revenue criteria, segments A, B, C and D - all are reportable segments.
On the basis of the result criteria, segments A, B and C are reportable segments (since their
results in absolute amount is 10% or more of 125 Lakhs). On the basis of asset criteria, all
segments except D are reportable segments. Since all the segments are covered in at least
one of the above criteria, all segments have to be reported upon in accordance with
Accounting Standard (AS) 17.

Question 3
Mac Ltd. gives the following data regarding to its six segments:
(` in lakhs)
Particulars A B C D E F Total
Segment assets 80 160 60 40 40 20 400
Segment results 100 (380) 20 20 (20) 60 (200)
Segment revenue 600 1,240 160 120 160 120 2,400
The accountant contends that segments 'A' and 'B' alone are reportable segments. Is he
justified in his view? Discuss in the context of AS-17 'Segment Reporting'.(5 Marks,
Nov’19) (Similar to Nov 20 & Jan 21 but different figures)
Answer 3
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be
identified as a reportable segment if:
Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments; or
Its segment result whether profit or loss is 10% or more of combined result of all segments
in profit; or combined result of all segments in loss, whichever is greater in absolute amount;
or
Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less than 75%
of total enterprise revenue, additional segments should be identified as reportable
segments even if they do not meet the 10% thresholds until at least 75% of total enterprise
revenue is included in reportable segments.
On the basis of turnover criteria segments A and B are reportable segments.
On the basis of the result criteria, segments A, B and F are reportable segments (since
their results in absolute amount is 10% or more of ` 400 lakhs).
On the basis of asset criteria, all segments except F are reportable segments. Since all the
segments are covered in at least one of the above criteria all segments have to be reported

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Chapter 1.6 AS 17- Segment Reporting
 P 1.6-3

upon in accordance with Accounting Standard (AS) 17. Hence, the opinion of accountant is
wrong.

Question 4
M/s Nathan Limited has three segments namely P, Q and R. The assets of the company are
` 15 crores. Segment P has 4 crores, Segment Q has 6 crores and Segment R has 5 crores.
Deferred tax assets included in the assets of each segment are P - ` 1 crore, Q - ` 0.90 crores
and R - ` 0.80 crores. The accountant contends all these three segments are reportable
segments. Comment. (5 Marks, May 18)
Answer 4
According to AS 17 “Segment Reporting”, segment Assets do not include income tax assets.
Therefore, the revised total assets are 12.3 crores [ ` 15 – (` 1 + 0.9 + 0.8). Details of Segment
wise assets Segment P holds total assets of ` 3 crores (` 4 crores – ` 1 crores); Segment Q holds
` 5.1 crores (` 6 crores – 0.9 crores); Segment R holds ` 4.2 crores (` 5 crores – ` 0.8 crores).
Thus, all the three segments hold more than 10% of the total assets, all segments are
reportable segments. Hence, the contention of the Accountant that all three segments are
reportable segments is correct.

Question 5
Answer any four of the following:
XYZ Ltd. has 5 business segments. Profit / Loss of each of the segments for the year ended
31st March,2022 has been provided below. You are required to identify from the following
whether reportable segments or not reportable segments, on the basis of "profitability
test" as per AS-17.
Segment Profit (Loss) ₹ in lakhs
A 225
B 25
C (175)
D (20)
E (105)
(5 Marks) (May’22)
Answer 5
As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be
identified as a reportable segment if:
Its segment results whether profit or loss is 10% or more of:
 The combined result of all segments in profit; i.e. ₹ 250 Lakhs or
 The combined result of all segments in loss; i.e. ₹ 300 Lakhs Whichever is greater in
absolute amount i.e. ₹ 300 Lakhs.

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Chapter 1.6 AS 17- Segment Reporting
 P 1.6-4

Operating Absolute amount of Profit or Reportable Segment Yes or

Segment Loss (₹ In lakhs) No
A 225 Yes
B 25 No
C 175 Yes
D 20 No
E 105 Yes
On the basis of the profitability test (result criteria), segments A, C and E are reportable
segments (since their results in absolute amount is 10% or more of ₹ 300 lakhs i.e. 30 lakhs).

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Chapter 1.6 AS 17- Segment Reporting
 P 1.7-1

Chapter 1.7
AS 18- Related Party Disclosures
Question 1
(i) Khushi Limited enter into an agreement with Mr. Happy for running a business for a
fixed amount payable to the later every year. The contract states that the day-to-day
management of the business will be handled by. Mr. Happy, while all financial and
operating policy decisions are taken by the Board of Directors of the Company. Mr.
Happy does not own any voting power in Khushi Limited.
(ii) Shri Bhanu a relative of key management personnel received remuneration of `
3,50,000 for his services in the company for the period from 1st April, 2020 to 30th June,
2020. On 1st July, 2020, he left the service. You are required to suggest how the above
transactions will be treated as at the closing date i.e. on 31st March, 2021 for the
purposes of AS 18- Related Party Disclosures. (5 Marks July 21)
Answer 1
(i) Mr. Happy will not be considered as a related party of Khushi Limited in view of
provisions of AS 18 “Related Party Disclosures” which states, "individuals owning, directly or
indirectly, an interest in the voting power of the reporting enterprise that gives them
control or significant influence over the enterprise, and relatives of any such
individual are related parties".
In the given case, in the absence of share ownership, Mr. Happy would not be
considered to exercise significant influence on Khushi Limited, even though there is an
agreement giving him the power to manage the company. Further, the fact that Mr
Happy does not have the ability to direct or instruct the board of directors does not
qualify him as a key management personnel.
(ii) According to AS 18 on ‘Related Party Disclosures’, parties are considered to be related
if at any time during the reporting period one party has the ability to control the other
party or exercise significant influence over the other party in making financial and/or
operating decisions.
Hence, Shri Bhanu, a relative of key management personnel should be identified as
related party for disclosure in the financial statements for the year ended 31.3.2021 as
he received remuneration for his services in the company for the period from 1st
April,2020 to 30th June,2020.

Question 2
Identify the related parties in the following cases as per AS-18
(i) Maya Ltd. holds 61 % shares of Sheetal Ltd. Sheetal Ltd. holds 51 % shares of Fair Ltd.
Care Ltd. holds 49% shares of Fair Ltd. (Give your answer - Reporting Entity wise for
Maya Ltd., Sheetal Ltd., Care Ltd. and Fair Ltd.)
(ii) Mr. Subhash Kumar is Managing Director of A Ltd. and also holds 72% capital of B
Ltd.(5 Marks , May ’19)
Answer 2
(i) (a) Reporting entity- Maya Ltd.

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Chapter 1.7 AS 18- Related Party Disclosures
 P 1.7-2

• Sheetal Ltd. (subsidiary) is a related party

• Fair Ltd.(subsidiary) is a related party
(b) Reporting entity- Sheetal Ltd.
• Maya Ltd. (holding company) is a related party
• Fair Ltd. (subsidiary) is a related party
(c) Reporting entity- Fair Ltd.
• Maya Ltd. (holding company) is a related party
• Sheetal Ltd. (holding company) is a related party
• Care Ltd. (investor/ investing party) is a related party
(d) Reporting entity- Care Ltd.
• Fair Ltd. (associate) is a related party
(ii) Mr. Subhash Kumar is Key management personnel as he has the authority for
planning, directing and controlling the activities of A Ltd. He also holds
substantial interest in B Ltd. as he holds 72% capital ofB Ltd. Thus, Mr. Subhash
is related party for both A Ltd. and B Ltd. Moreover, as per the definition of
related party relationship described in para 3 of AS 18, enterprises over which
Subhash is able to exercise significant influence are also related parties. Thus,
a Ltd. and B Ltd. will also be construed as related to each other.
Question 3
Following transactions are disclosed as on 31st March, 2018:
(i) Mr. Sumit, a relative of Managing Director, received remuneration of Rs. 2,10,000 for his
services in the company for the period from 1st April, 2017 to 30th June, 2017. He left
the service on 1st July, 2017.
Should the relative be identified as a related party as on closing date i.e. on 31-3-
2018 for the purpose of AS-18.
(ii) Goods sold amounting to Rs. 50 lakhs to associate company during the 1st quarter ended
on 30th June, 2017. After that related party relationship ceased to exist. However, goods
were supplied as was supplied to any other ordinary customer. Decide whether
transactions of the entire year have to be disclosed as related party transaction. [5
Marks, Nov ‘18]
Answer 3
(i) According to AS 18 ‘Related Party Disclosures’, parties are considered to be related if at
any time during the reporting period, one party has the ability to control the other party or
exercise significant influence over the other party in making financial and/or operating
decisions.
Hence, Mr. Sumit a relative of key management personnel should be identified as related
party as at the closing date i.e. on 31.3.2018 as he received remuneration for his services
in the company from1st April, 2017 to 30th June, 2017and this period comes under the
reporting period.
(ii) As per provision of AS 18, the transactions only for the period in which related party
relationships exist need to be reported.
Hence, transactions of the entity with its associate company for the first quarter ending
30.06.2017 only are required to be disclosed as related party transactions. Transactions of

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Chapter 1.7 AS 18- Related Party Disclosures
 P 1.7-3

the entire year need not be disclosed as related party transactions and transactions for the
period (after 1st July) in which related party relationship did not exist need not be
reported.
Hence transaction of sale of goods with the associate company for first quarter ending
30th June, 2017 for Rs. 50 Lakhs only are required to be disclosed as related party
transaction on 31.3.18.

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Chapter 1.7 AS 18- Related Party Disclosures
 P 1.8-1

Chapter 1.8
AS 19- Leases
Question 1
X Ltd. sold machinery having WDV of ` 300 lakhs to Y Ltd. for ` 400 lakhs and the same
machinery was leased back by Y Ltd. to X Ltd. The lease back arrangement is operating
lease. Give your comments in the following situations:
(i) Sale price of ` 400 lakhs is equal to fair value.
(ii) Fair value is ` 450 lakhs.
(iii) Fair value is ` 350 lakhs and the sale price is ` 250 lakhs.
(iv) Fair value is ` 300 lakhs and sale price is ` 400 lakhs.
(v) Fair value is ` 250 lakhs and sale price is ` 290 lakhs. (5 Marks ,Jan 21) (Similar to May 18
but different figures)
Answer 1
Following will be the treatment in the given cases:
(i) When sale price of ` 400 lakhs is equal to fair value, X Ltd. should immediately recognise the
profit of `100 lakhs (i.e. 400 – 300) in its books.
(ii) When fair value is ` 450 lakhs then also profit of `100 lakhs should be immediately
recognised by X Ltd.
(iii) When fair value of leased machinery is ` 350 lakhs & sales price is ` 250 lakhs, then loss of `
50 lakhs (300 – 250) to be immediately recognised by X Ltd. in its books provided loss is not
compensated by future lease payment.
(iv) When fair value is ` 300 lakhs & sales price is ` 400 lakhs then, profit of ` 100 lakhs is to be
deferred and amortised over the lease period.
(v) When fair value is ` 250 lakhs & sales price is ` 290 lakhs, then the loss of ` 50 lakhs (300-
250) to be immediately recognised by X Ltd. in its books and profit of ` 40 lakhs (290-250)
should be amortised/deferred over lease period.

Question 2
Jaya Ltd. took a machine on lease from Deluxe Ltd., the fair value being Rs. 11,50,000.
Economic life of the machine as well as lease term is 4 years. At the end of each year, lessee
pays Rs. 3,50,000 to lessor. Jaya Ltd. has guaranteed a residual value of Rs. 70,000 on expiry
of the lease to Deluxe Ltd., however Deluxe Ltd. estimates that residual value will be only
Rs. 25,000. The implicit rate of return is 10% p.a. and present value factors at 10% are: 0.909,
0.826, 0.751 and 0.683 at the end of 1st, 2nd, 3rd and 4th year respectively.
Calculate the value of machinery to be considered by Jaya Ltd. and the value of the lease
liability as per AS-19. [5 Marks , May ‘19]
Answer 2
According to para 11 of AS 19 “Leases”, the lessee should recognise the lease as an asset and
a liability at an amount equal to the fair value of the leased asset at the inception of the
finance lease. However, if the fair value of the leased asset exceeds the present value of the
minimum lease payments from the stand point of the lessee, the amount recorded as an

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Chapter 1.8 AS 19- Leases
 P 1.8-2

asset and a liability should be the present value of the minimum lease payments from the
standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the
interest rate implicit in the lease. Present value of minimum lease payments will be
calculated as follows:
Year Minimum Lease Internal rate of return Present
Payment (Discount rate @10%) value
Rs. Rs.
1 3,50,000 0.909 3,18,150
2 3,50,000 0.826 2,89,100
3 3,50,000 0.751 2,62,850
4 0.683 2,86,860
4,20,000*
Total 14,70,000 11,56,960
Present value of minimum lease payments Rs. 11,56,960 is more than fair value at the
inception of lease.
i.e. Rs. 11,50,000, therefore, the lease liability and machinery should be recognized in
the books at Rs. 11,50,000 as per AS 19.

Question 3
A Ltd. sold JCB having WDV of Rs. 20 lakhs to B Ltd. for Rs. 24 lakhs and the same JCB was
leased back by B Ltd. to A Ltd. The lease is operating lease. In context of Accounting
Standard 19 “Leases” explain the accounting treatment of profit or loss in the books of A
Ltd. if
(i) Sale price of Rs. 24 lakhs is equal to fair value.
(ii) Fair value is Rs. 20 lakhs and sale price is Rs. 24 lakhs.
(iii) Fair value is Rs. 22 lakhs and sale price is Rs. 25 lakhs.
(iv) Fair value is Rs. 25 lakhs and sale price is Rs. 18 lakhs.
(v) Fair value is Rs. 18 lakhs and sale price is Rs. 19 lakhs. [5 Marks, May ‘18](Similar to Jan
21 but different figures)
Answer 3
Following will be the treatment in the given cases:
(i) When sale price of Rs. 24 lakhs is equal to fair value, A Ltd. should immediately recognise
the profit of Rs. 4 lakhs (i.e. 24 – 20) in its books.
(ii) When fair value is Rs. 20 lakhs & sale price is Rs.24 lakhs then profit of Rs. 4 lakhs is to be
deferred and amortised over the lease period.
(iii) When fair value is Rs.22 lakhs & sale price is Rs.25 lakhs, profit of Rs.2 lakhs (22 - 20) to be
immediately recognised in its books and balance profit of Rs.3 lakhs (25-22) is to be
amortised/deferred over lease period.
(iv) When fair value of leased machinery is Rs. 25 lakhs & sale price is Rs. 18 lakhs, then loss of Rs.
2 lakhs (20–18) to be immediately recognised by A Ltd. in its books provided loss is not
compensated by future lease payment.
(v) When fair value is Rs. 18 lakhs & sale price is Rs. 19 lakhs, then the loss of Rs. 2 lakhs (20-18)
to be immediately recognised by A Ltd. in its books and profit of Rs. 1 lakhs (19-18) should be
amortised/ deferred over lease period.

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Chapter 1.8 AS 19- Leases
 P 1.8-3

Question 4
Classify the following into either operating lease or finance lease with reason:
(1) Economic life of asset is 10 years, lease term is 9 years, but asset is not acquired at the end
of leaseterm.
(2) Lessee has option to purchase the asset at lower than fair value at the end of lease term.
(3) Lease payments should be recognized as an expense in the statement of Profit & Loss of a
lessee.
(4) Present Value (PV) of Minimum Lease Payment (MLP) = “X” Fair value of the asset is “Y”
And X = Y.
(5) Economics life of the asset is 5 years, lease term is 2 years, but the asset is of special
nature and has been procured only for use of the lessee. [5 Marks, Nov ‘19]
Answer 4
(i) The lease will be classified as a finance lease, since a substantial portion of the life of the
asset is covered by the lease term.
(ii) If it becomes certain at the inception of lease itself that the option will be exercised by the
lessee, it is a Finance Lease.

(iii) It is an operating lease under which lease payments are recognized as expense in the profit
and loss account of lessee to have better matching between cost and revenue.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
(v) Since the asset is of special nature and has been procured only for the use of lessee, it is a
finance lease.

Question 5
A machine was given on 3 years operating lease by a dealer of the machine for equal annual
lease rentals to yield 30% profit margin on cost of ` 2,25,000. Economic life of the machine
is 5 years and output from the machine is estimated as 60,000 units, 75,000 units, 90,000
units, 1,20,000 units and 1,05,000 units consecutively for 5 years. Straight line depreciation
in proportion of output is considered appropriate. You are required to compute the
following as per AS-19.
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years lease (5 Marks Dec’21)
Answer 5
(i) Annual lease rent
Total lease rent
= 130% of ` 2,25,000 X Output during lease period/ Total output
= 130% of ` 2,25,000 x (60,000 +75,000+ 90,000)/(60,000 + 75,000 + 90,000 +
1,20,000 + 1,05,000)
= 2,92,500 x 2,25,000 units/4,50,000 units = ` 1,46,250
Annual lease rent = ` 1,46,250 / 3 = ` 48,750

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Chapter 1.8 AS 19- Leases
 P 1.8-4

(ii) Lease rent Income to be recognized in each operating year

Total lease rent should be recognized as income in proportion of output during

lease period, i.e. in the proportion of 60,000 : 75,000 : 90,000 or 4:5:6
Hence income recognized in years 1, 2 and 3 will be as:
Year 1 ` 39,000,
Year 2 ` 48,750 and
Year 3 ` 58,500.
(iii) Depreciation for three years of lease
Since depreciation in proportion of output is considered appropriate, the
depreciable amount ` 2,25,000 should be allocated over useful life 5 years in
proportion of output,
i.e. in proportion of 60 :75: 90 : 120 : 105 .
Depreciation for year 1 is ` 30,000, year 2 = 37,500 and year 3 = 45,000.

Question 6
What are the disclosures requirements for operating leases by the lessee as per AS-19? (5
Marks) (May’22)

Answer 6
As per AS 19, lessees are required to make following disclosures for operating leases:
(a) the total of future minimum lease payments under non-cancelable operating leases for each
of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to be received under non-
cancelable subleases at the balance sheet date;
(c) lease payments recognised in the statement of profit and loss for the period, with separate
amounts for minimum lease payments and contingent rents;
(d) sub-lease payments received (or receivable) recognised in the statement of profit and loss
for the period;
(e) a general description of the lessee's significant leasing arrangements including, but not
limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation clauses;
and
(iii) restrictions imposed by lease arrangements, such as those concerning dividends,

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Chapter 1.8 AS 19- Leases
 P 1.8-5

additional debt, and further leasing.

Note: The Level II and Level III non-corporate entities (and SMCs) need not make disclosures
required by (a), (b) and (e) above.

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Chapter 1.8 AS 19- Leases
 P 1.9-1

Chapter 1.9
AS 20-EPS
Question 1
From the following information given by Sampark Ltd., Calculate Basis EPS and Diluted
EPS as per AS 20 :

Rs.
Net Profit for the current year 2,50,00,000
No. of Equity Shares Outstanding 50,00,000
No. of 12% convertible debentures of ₹ 100 each 50,000
Each debenture is convertible into 8 Equity
Shares
Interest expense for the current year 6,00,000
Tax saving relating to interest expense (30%) 1,80,000

[5 Marks , Nov ‘18]

Answer 1
Calculation of Basic Earning Per Share
. , , ,
Basic EPS = =
. , ,

Basic EPS per share = Rs. 5

Calculation of Diluted Earning Per Share

Diluted EPS =
.
Adjusted net profit for the current year Rs.
Net profit for the current year 2,50,00,000
Add: Interest expenses for the current year 6,00,000
Less: Tax saving relating to Tax Expenses (1,80,000)
2,54,20,000
No. of equity shares resulting from conversion of debentures: 4,00,000 Shares
Weighted average no. of equity shares used to compute diluted EPS: (50,00,000 +
4,00,000) = 54,00,000 Equity Shares
Diluted earnings per share: (2,54,20,000/54,00,000) = Rs. 4.71 (Approx.)

Question 2
As at 1st April, 2016 a company had 6,00,000 equity shares of Rs. 10 each (Rs. 5 paid up by
all shareholders). On 1st September, 2016 the remaining Rs. 5 was called up and paid by all
shareholders except one shareholder having 60,000 equity shares. The net profit for the
year ended 31st March, 2017 was Rs. 21,96,000 after considering dividend on preference
shares and dividend distribution tax on such dividend totaling to Rs. 3,40,000. Compute
Basic EPS for the year ended 31st March, 2017 as per Accounting Standard 20 “Earnings Per
Share”. [5 Marks, May ‘18]
Answer 2

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Chapter 1.9 AS 20-EPS
 P 1.9-2

Basic Earnings per share (EPS) =

!"#$%&'(# )##%(*+#)*," #& "-+(#. /ℎ)%"ℎ&,1"%2
3"(4ℎ#"1 )5"%)4" 6+7*"% &' "-+(#. 2ℎ)%"2 &+#2#)61(64 1+%(64 #ℎ" .")%
8,9:,
= ;, <, = > ? @
= Rs. 4.80 per share

Working Note :
Calculation of weighted average number of equity shares
As per AS 20 ‘Earnings Per Share’, partly paid equity shares are treated as a fraction of equity
share to the extent that they were entitled to participate in dividend relative to a fully paid
equity share during the reporting period. Assuming that the partly paid shares are entitled to
participate in the dividend to the extent of amount paid, weighted average number of
shares will be calculated as follows:
Date No. of equity Amount paidper Weighted average no.of equity
shares share shares
Rs. Rs. Rs.
1.4.2016 6,00,000 5 6,00,000 X 5/10 X 5/12 = 1,25,000
1.9.2016 5,40,000 10 5,40,000 X7/12 = 3,15,000
1.9.2016 60,000 5 60,000 X 5/10 X 7/12 = 17,500
Total weighted average equity shares 4,57,500

Question 3
Following information is supplied by K Ltd.
Number of shares outstanding prior to right issue - 2,50,000 shares.
Right issue price - Rs. 98
Last date of exercising rights-30-06-2018.
Fair value of one equity share immediately prior to exercise of right on 30-06-2018 is
Rs.102.
Net Profit to equity shareholders:
2017-2018 - Rs. 50,00,000
2018-2019 - Rs. 75,00,000
You are required to calculate the basic earnings per share as per AS - 20 Earning per Share.
[5 Marks , Nov ‘19]
Answer 3
A)(% 5),+" &' 2ℎ)%"2 (77"1()#",. $%(&% #& "B"%C(2" &' %(4ℎ#2 D E&#), )7&+6# %"C"(5"1'%&7 "B"%C(2"
!+7*"% &' /ℎ)%"2 &+#2#61(64 $%(&% #& "B"%C(2" D !+7*"% &' /ℎ)%"2 (22+"1 (6 #ℎ" "B"%C(2"

8 F , , G .9H F8, ,
I, ,

Theoretical ex-rights fair value per share = ₹ 100.86

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Chapter 1.9 AS 20-EPS
 P 1.9-3

Fair value per share prior to exercise of rights

Theoretical ex \ rights value per share

Computation of earnings per share:

EPS for the year 2017-18 as originally reported: Rs. 50,00,000/2,50,000 shares = Rs. 20
EPS for the year 2017-18 restated for rights issue: = Rs. 50,00,000/ (2,50,000 shares x 1.01)=
Rs. 19.80
EPS for the year 2018-19 including effects of rights issue: EPS = 75,00,000/3,25,625* = Rs.
23.03
* [(2,50,000 x 1.01 x 3/12) + (3,50,000 x 9/12)] =63,125 + 2,62,500 = 3,25,625 shares
Note: Financial year (ended 31st March) is considered as accounting year while giving the
above answer.

Question 4
“At the time calculating diluted earnings per share, effect is given to all dilutive potential
equity shares that are outstanding during the period”. Comment and also calculate the basic
and diluted earnings per share for the year 2020-21 from the following information:
(i) Net profit after tax for the year ₹ 64,12,500
(ii) No. of equity shares outstanding 15,00,000
(iii) No. of 9% convertible debentures of ₹ 100 issued on 75,000
1st July,2020
(iv) Each debenture is convertible into 8 Equity Shares
(v) Tax relating to interest expenses 35%
(5 Marks Dec’21)
Answer 4
In calculating diluted earnings per share, effect is given to all dilutive potential equity shares
that were outstanding during the period.” As per AS 20 ‘Earnings per Share’, the net profit or
loss for the period attributable to equity shareholders and the weighted average number of
shares outstanding* during the period should be adjusted for the effects of all dilutive
potential equity shares for the purpose of calculation of diluted earnings per share. Basic EPS
for the year 2020-21= 64,12,500/15,00,000 = ₹ 4.275 or ₹ 4.28

Computation of diluted earnings per share for year 2020-21

]^_`abc^ dcb efghib hgf bjc k`ffcdb lcmf
nciojbc^ mpcfmoc d`qrcf gh cs`ibl tjmfca
Adjusted net profit for the current year will be (64,12,500 + 5,06,250 – 1,77,188) = ₹
67,41,562
No. of equity shares resulting from conversion of debentures: 6,00,000 Shares (75,000 × 8)
Weighted average no. of equity shares used to compute diluted EPS:
(15,00,000 X12/12+ 6,00,000X9/12)

= 19,50,000 Shares
Diluted earnings per share: (67,41,562/19,50,000) = ₹ 3.46

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Chapter 1.9 AS 20-EPS
 P 1.9-4

Working Note:
Interest expense for 9 months = 75,00,000×9%×9/12 =₹ 5,06,250
Tax expense 35 % on interest is ₹1,77,188 (5,06,250 x 35%)
*Weighted average number of equity shares outstanding during the period is increased by
the weighted average number of additional equity shares which would have been outstanding
assuming the conversion of all dilutive potential equity shares.

Question 5
NAT, a listed entity, as on 1st April,2021 had the following capital structure:

10,00,000 Equity Shares having face value of ₹ 1 each 10,00,000

10,00,000 8% Preference Shares having face value of ₹ 1,00,00,000

10 each

During the year 2021-2022, the company had profit after tax of ₹ 90,00,000

On 1st January,2022, NAT made a bonus issue of one equity share for every 2 equity shares
outstanding as at 31st December,2021.

On 1st January,2022, NAT issued 2,00,000 equity shares of ₹ 1 each at their full market
price of ₹ 7.60 per share.

NAT's shares were trading at ₹ 8.05 per share on 31st March,2022.

Further it has been provided that the basic earnings per share for the year ended 31st
March,2021 was previously reported at ₹ 62.30.

You are required to:

Calculate the basic earnings per share to be reported in the financial statements of NAT
for the year ended 31st March,2022 including the comparative figure, in accordance with
AS-20 Earnings Per Share.

Explain why the bonus issue of shares and the shares issue at full market price are treated
differently in the calculation of the basic earnings per share? ( 5Marks) .(May’22)

Answer 5
I. Calculation of Basic Earnings per share for the year ended 31stMarch, 2022 including the
comparative figure:
Earnings for the year ended 31st March, 2021 = EPS x Number of shares outstanding during
2020-2021

= ₹ 62.30 x 10,00,000 equity shares

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Chapter 1.9 AS 20-EPS
 P 1.9-5

= ₹ 6,23,00,000
(a) Adjusted Earnings per share after taking into consideration bonus issue
Adjusted Basic EPS = Earnings for the year 2020-2021 / Total outstanding shares +Bonus
issue
= ₹ 6,23,00,000 / (10,00,000+ 5,00,000)
= ₹ 6,23,00,000 / 15,00,000
= ₹ 41.53 per share
(b) Basic EPS for the year 2021-2022
Basic EPS = Total Earnings – Preference Shares Dividend) / (Total shares outstanding at
the beginning + Bonus issue + weighted average of the shares issued in January,
2022)
= (₹ 90,00,000 – ₹ (1,00,00,000 x 8%) / (10,00,000 + 5,00,000 + (2,00,000 x 3/12))
= ₹ 82,00,000 / 15,50,000 shares
= ₹ 5.29 per share
II. In case of a bonus issue, equity shares are issued to existing shareholders for no additional
consideration. Therefore, the number of equity shares outstanding is increased without an
increase in resources. Since the bonus issue is an issue without consideration, the issue is
treated as if it had occurred prior to the beginning of the year 2021, the earliest period
reported.
However, the share issued at full market price does not carry any bonus element and usually
results in a proportionate change in the resources available to the enterprise. Therefore, it
is taken into consideration from the time it has been issued i.e. the time- weighting factor
is considered based on the specific shares outstanding as a proportion of the total number
of days in the period.

Question 6
The following information is provided to you:

Net profit for the year 2022: ₹ 72,00,000 Weighted average number of equity shares
outstanding

during the year 2022: 30,00,000 shares

Average Fair value of one equity share during the year 2022: ₹ 25.00
Weighted average number of shares under option during the year 2022:
6,00,000 shares

Exercise price for shares under option during the year 2022: ₹ 20.00

You are required to compute Basic and Diluted Earnings Per Share as per AS 20.

(5 Marks Nov’22)

Answer 6
Computation of Basic earnings per share

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Chapter 1.9 AS 20-EPS
 P 1.9-6

Earnings Shares Earnings/

Share
₹ ₹
Net profit for the year 2022 72,00,000
Weighted average no. of shares during 30,00,000
year 2022 Basic earnings per share 2.40
(72,00,000/30,00,000)
Computation of Diluted earnings per share
Earnings Shares Earnings/Share
₹ ₹
Net profit for the year 2022 72,00,000
Weighted average no. of shares during 30,00,000
year 2022
Number of shares under option 6,00,000
Number of shares that would have
been
issued at fair value
(6,00,000 x 20.00)/25.00 (4,80,000)
Diluted earnings per share 72,00,000 31,20,000 2.31
(rounded-off)

Note: The earnings have not been increased as the total number of shares has
been increased only by the number of shares (1,20,000) deemed for the purpose
of the computation to have been issued for no consideration.

To the extent that partly paid shares are not entitled to participate in dividends
during the reporting period they are considered the equivalent of options.

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Chapter 1.9 AS 20-EPS
 P 1.10-1

Chapter 1.10
AS 22- Accounting for Taxes on Income
Question 1
The following particulars are stated in the Balance Sheet of Deep Limited as on 31st
March, 2020:
(₹ In Lakhs)
Deferred Tax Liability (Cr.) 28.00
Deferred Tax Assets (Dr.) 14.00
The following transactions were reported during the year 2020 -2021:
(i) Depreciation as per books was ₹ 70 Lakhs whereas Depreciation for Tax purposes was
₹ 42 Lakhs. There were no additions to Fixed Assets during the year.
(ii) Expenses disallowed in 2019-20 and allowed for tax purposes in 2020-21 were ₹ 14
Lakhs.
(iii) Share issue expenses allowed under section 35(D) of the Income Tax Act, 1961 for the
year 2020-21 (1/10th of ₹ 70.00 lakhs incurred in 2019-20).

(iv) Repairs to Plant and Machinery were made during the year for ₹ 140.00 Lakhs and was
spread over the period 2020-21 and 2021-22 equally in the books. However, the entire
expenditure was allowed for income-tax purposes in the year 2020-21.
Tax Rate to be taken at 40%. You are required to show the impact of above items on
Deferred Tax Assets and Deferred Tax Liability as on 31st March, 2021. (5 Marks, July 21)
Answer 1
Impact of various items in terms of deferred tax liability/deferred tax asset on
31.3.21
Transactions Analysis Nature of Effect Amount (₹)
difference
Difference in Generally, written Responding Reversal 28 lakhs X 40%
depreciation down value method of timing of DTL = ₹ 11.20 lakhs
depreciation is difference
adopted under IT Act
which leads to higher
depreciation in
earlier years of
useful life of the
asset in comparison to
later years.
Disallowances, Tax payable for the Responding Reversal 14 lakhs X 40%
as per IT Act, of earlier year was higher timing of DTA = 5.6 lakhs
earlier years on this account. difference
Share issue Due to disallowance of Responding Reversal 7 lakhs X 40%
expenses full expenditure under timing of DTA = ₹ 2.8 lakhs
IT Act, tax payable in difference
the earlier

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Chapter 1.10 AS 22- Accounting for Taxes on Income
 P 1.10-2

years was higher.

Repairs to plant Due to allowance of Originating Increase in 70 lakhs X 40%

and machinery full expenditure under timing DTL =28 lakhs
IT Act, tax payable of difference
the current year will
be less.

Question 2
The following particulars are stated in the Balance Sheet of HS Ltd. as on 31 -3-2019 :
Particulars (₹ in
lakhs)
Deferred Tax Liability (Cr.) 60.00
Deferred Tax Assets (Dr.) 30.00
The following transactions were reported during the year
2019-20 :
Depreciation as per accounting records 160.00
Depreciation as per income tax records 140.00
Items disallowed for tax purposes in 2018-19 but allowed in 20.00
2019-20
Donation to Private Trust 20.00
Tax rate 30%
There were no additions to fixed assets during the year. You are required to show the
impact of various items on Deferred Tax Assets and Deferred Tax Liability as on 31-3-2020
as per AS-22. (5 Marks , Jan 21)
Answer 2
Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
(1) Difference in Depreciation- Generally, written down value method of depreciation is
adopted under income Tax Act which leads to higher depreciation in earlier years of useful
life of the asset in comparison to later years. It is timing difference for which reversal of
Deferred tax liability is required. Reversal of DTL= ₹ (160 – 140) Lakhs X 30% = ₹6 Lakhs
(2) Disallowances, as per IT Act of earlier years- Due to disallowance tax payable for the earlier
years was higher on this account. It is responding timing difference which required Reversal
of Deferred tax assets. Reversal of Deferred tax assets = ₹20 Lakhs X 30% = ₹ 6 Lakhs
(3) Donations to private trusts is not an allowable expenditure under IT Act. It is permanent
difference. Hence, no reversal of tax is required.

Question 3
From the following details of Aditya Limited for accounting year ended on 31st March,
2020:

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Chapter 1.10 AS 22- Accounting for Taxes on Income
 P 1.10-3

Particulars ₹
Accounting profit 15,00,000
Book profit as per MAT 7,50,000
Profit as per Income tax Act 2,50,000
Tax Rate 20%
MAT Rate 7.5%
Calculate the deferred tax asset/liability as per AS 22 and amount of tax to be debited to
the profit and loss account for the year. (5 Marks, Nov 20) (Similar to Nov 19 but different
figures)
Answer 3
Tax as per accounting profit 15,00,000X20%= ₹ 3,00,000
Tax as per Income-tax Profit 2,50,000X20% =₹ 50,000
Tax as per MAT 7,50,000X7.50%= ₹ 56,250
Tax expense= Current Tax +Deferred Tax
₹ 3,00,000 = ₹ 50,000+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-2020
= ₹ 3,00,000 – ₹ 50,000 = ₹ 2,50,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2020
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ₹ 50,000 + ₹ 2,50,000 + ₹ 6,250 (56,250 – 50,000) = ₹ 3,06,250

Question 4
Sheetal Ltd. has provided the following information for the year ended 31st March,
2019:
Particulars Amount (₹)
Accounting profit 9,00,000
Book profit as per MAT 5,25,000
Profit as per Income Tax Act 95,000
Tax rate 30%
MAT rate 7.5%
You are required to calculate the deferred tax asset/liability as per AS-22 and amount
of tax to be debited to the profit and loss account for the year. . (5 Marks, Nov 19) (Similar
to Nov 20 but different figures)
Answer 4

Tax as per accounting profit 9,00,000 X 30%= ₹ 2,70,000

Tax as per Income-tax Profit 95,000 X 30% =₹ 28,500
Tax as per MAT 5,25,000 X 7.50%= ₹ 39,375
Tax expense= Current Tax +Deferred Tax ₹ 2,70,000 = ₹ 28,500+ Deferred tax

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Chapter 1.10 AS 22- Accounting for Taxes on Income
 P 1.10-4

Deferred Tax liability as on 31-03-2019 = ₹ 2,70,000 – ₹ 28,500 = ₹ 2,41,500

Amount of tax to be debited in Profit and Loss account for the year 31-03-2019
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ₹ 28,500 + ₹ 2,41,500+ ₹ 10,875 (39,375 – 28,500)
= ₹ 2,80,875

Question 5
Write short note on Timing difference and Permanent Difference as per AS 22. (5 Marks,
May 19)
Answer 5
Matching of taxes against revenue for a period poses special problems arising from the
fact that in number of cases, taxable income may be different from the accounting
income. The divergence between taxable income may be different from the accounting
income arises due to two main reasons: Firstly, there are differences between items of
revenue and expenses as appearing in the statement of profit and loss and the items
which are considered as revenue, expenses or deductions for tax purposes, known as
Permanent Difference. Secondly, there are differences between the amount in respect of
a particular item of revenue or expense as recognised in the statement of profit and loss
and the corresponding amount which is recognised for the computation of taxable incom
e, known as Timing Difference.
Permanent differences are the differences between taxable income and accounting
income which arise in one accounting period and do not reverse subsequently. For
example, an income exempt from tax or an expense that is not allowable as a deduction
for tax purposes.
Timing differences are those differences between taxable income and accounting income
which arise in one accounting period and are capable of reversal in one or more
subsequent periods. For e.g., Depreciation, Bonus, etc.

Question 6
Rohit Ltd. has provided the following information
Particulars ₹
Depreciation as per accounting records 2,50,000
Depreciation as per tax records 5,50,000
Unamortised preliminary expenses as per tax record 40,000

There is adequate evidence of future profit sufficiency. How much deferred tax
assets/liability should be recognized as transition adjustment when the tax rate is 50%?
(5 Marks, May 18)

Answer 6
Table showing calculation of deferred tax asset / liability

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Chapter 1.10 AS 22- Accounting for Taxes on Income
 P 1.10-5

Particulars Amount Timing Deferred tax Amount

difference @ 50%
₹ ₹
Excess depreciation as per tax 3,00,000 Timing Deferred tax 1,50,000
records (₹ 5,50,000 – liability
₹ 2,50,000)
Unamortised preliminary 40,000 Timing Deferred tax
expenses as per tax records asset (20,000)
Net deferred tax liability 1,30,000
Net deferred tax liability amounting ₹ 1,30,000 should be recognized as transition
adjustment.

Question 7
The following information is furnished in respect of Mohit Limited for the year ending
31st March,2022.
Depreciation as per accounting records ₹ 56,000 Depreciation for income tax records ₹
38,000
The above depreciation does not include depreciation on new addition.
A new machinery purchased on 1st April, 2021 costing ₹ 24,000 on which 100%
depreciation in allowed in the 1st Year for income tax purpose, whereas straight line
method of depreciation is considered appropriate for accounting purpose with a life
estimation of 4 years.
(ii) The company has made a profit of ₹ 1,28,000 before depreciation and taxes.
Donation to private trust during the year is ₹ 15,000 (not allowed under Income tax
laws.)
Corporate tax is 40%. (5 Marks Nov’22)

Answer 7
Statement of profit and Loss for the year ended 31st March, 2022 (An Extract)
₹
Profit before taxes and depreciation 1,28,000
Less: Depreciation (56,000+ 6,000) 62,000
Profit before tax 66,000
Less: Current tax (W.N) (32,400)
Deferred Tax Nil
Profit after tax 33,600
Working Note:
Computation of taxable income
₹
Profit before taxes and depreciation 1,28,000
Less: Depreciation (38,000+ 24,000) (62,000)

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Chapter 1.10 AS 22- Accounting for Taxes on Income
 P 1.10-6

66,000
Add: Donation* 15,000
81,000
Current tax (40%) 32,400

Note: The profit of ₹ 1,28,000 given in the question is before depreciation and
taxes. It has been considered that this amount is after making adjustment of
donation amounting ₹ 15,000.
Impact of various items in terms of deferred tax liability/deferred tax asset
Transactions Nature of difference Effect Amount
(1) Difference in Timing difference Reversal of DTL ₹ 18,000
depreciation (56,000 – 38,000)
(old X 40% =
machinery) (+) ₹ 7,200
(2) Depreciation Timing difference Creation of DTL ₹ 18,000
on new (24,000 – 6,000) x
machinery 40%
= (-) ₹ 7,200
(3) Donation to Permanent Not applicable --
private trusts difference
Net Effect of Deferred Tax NIL

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Chapter 1.10 AS 22- Accounting for Taxes on Income
 P 1.11-1

Chapter 1.11
AS 24- Discontinuing Operations
Question 1
Rohini Limited is in the business of manufacture of passenger cars and commercial
vehicles. The Company is working on a strategic plan to close the production of passenger
cars and to produce only commercial vehicles over the coming 5 years. However, no
specific plans have been drawn up for sale of neither the division nor its assets. As part of
its prospective plan it will reduce the production of passenger cars by 20% annually. It also
plans to establish another new factory for the manufacture of commercial vehicles and
transfer surplus employees in a phased manner. You are required to comment:
(i) If mere gradual phasing out in itself can be considered as a 'discontinuing operation'
within the meaning of AS-24.
(ii) If the Company passes a resolution to sell some of the assets in the passenger car division
and also to transfer few other assets of the passenger car division to the new factory, does
this trigger the application of AS-24?
(iii) Would your answer to the above be different if the Company resolves to sell the assets of
the passenger car division in a phased but time bound manner? (5 Marks ,July 21)
Answer 1
As per AS 24, a discontinuing operation is a component of an enterprise:
(a) that the enterprise, pursuant to a single plan, is:
(i) disposing of substantially in its entirety, such as by selling the component in a single
transaction or by demerger or spin-off of ownership of the component to the
enterprise's shareholders; or
(ii) disposing of piecemeal, such as by selling off the component's assets and settling
its liabilities individually; or
(iii) terminating through abandonment; and
(b) that represents a separate major line of business or geographical area of operations;
and
(c) that can be distinguished operationally and for financial reporting purposes.
Mere gradual phasing out is not considered as discontinuing operation as defined under
AS 24, ‘Discontinuing Operations’. Examples of activities that do not necessarily satisfy
criterion of the definition, but that might do so in combination with other circumstances,
include:
(a) Gradual or evolutionary phasing out of a product line or class of service;
(b) Shifting of some production or marketing activities for a particular line of
business from one location to another; and
(c) Closing of a facility to achieve productivity improvements or other cost savings.
In this case, it cannot be considered as Discontinuing Operation as per AS-24 as
the and there is no specific time bound activities like shifting of assets and
employees. Moreover, the new segment i.e. commercial vehicle production line in
a new factory has not started.

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Chapter 1.11 AS 24- Discontinuing Operations
 P 1.11-2

(ii) No, the resolution is salient about stoppage of the Car segment in definite time period.
Though, sale of some assets and some transfer proposal were passed through a
resolution to the new factory, but the closure road map and new segment starting
roadmap are missing.
Hence, AS 24 will not be applicable and it cannot be considered as Discontinuing
operations.
(iii) Yes, phased and time bound program resolved in the board clearly indicates the closure
of the passenger car segment in a definite time frame and will constitute a clear roadmap.
Hence, this action will attract compliance of AS 24 and it will be considered as
Discontinuing Operations as per AS-24.

Question 2
What are the initial disclosure requirements of AS 24 for discontinuing operations? (5
Marks , Nov ’18)
Answer 2
An enterprise should include the following information relating to a discontinuing operation
in its financial statements beginning with the financial statements for the period in which the
initial disclosure event occurs:
A. A description of the discontinuing operation(s)
B. The business or geographical segment(s) in which it is reported as per AS 17
C. The date and nature of the initial disclosure event.
D. The date or period in which the discontinuance is expected to be completed if known
or determinable
E. The carrying amounts, as of the balance sheet date, of the total assets to be disposed
of and the total liabilities to be settled
F. The amounts of revenue and expenses in respect of the ordinary activities attributable
to the discontinuing operation during the current financial reporting period
G. The amount of pre-tax profit or loss from ordinary activities attributable to the
discontinuing operation during the current financial reporting period, and the income
tax expense related thereto
H. The amounts of net cash flows attributable to the operating, investing, and financing
activities of the discontinuing operation during the current financial reporting
period.

Question 3
MN Limited operates its business into various segments. Its financial year ended on 31st
March, 2022 and financial statements were approved by their approving authority on 15th
June, 2022. The following material events took place:
(i) On 7th April, 2022, a fire completely destroyed a manufacturing plant of the entity. It was
expected that the loss of ₹ 15 crores would be fully covered by the insurance company.
(ii) A claim for damage amounting to ₹ 12 crores for breach of patent had been received by
the entity prior to the year end. It is the director's opinion, backed by legal advice that the
claim will ultimately prove to be baseless. But it is still estimated that it would involve a
considerable expenditure on legal fees.
(iii) A major property was sold (it was included in the balance sheet at ₹ 37,50,000) for which
contracts had been exchanged on 15th March, 2022. The sale was completed on 15th May,

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Chapter 1.11 AS 24- Discontinuing Operations
 P 1.11-3

2022 at a price of ₹ 39,75,000.

You are required to state with reasons, how each of the above items should be dealt with
in the financial statements of MN Limited for the year ended 31st March, 2022 as per AS
4. (5 Marks Nov’22)
Answer 3
Treatment as per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet
Date’
(i) The event is a non-adjusting event since it occurred after the year-end and does not
relate to the conditions existing at the year-end. However, it is necessary to consider
the validity of the going concern assumption having regard to the extent of insurance
cover. Also, since it is said that the loss would be fully recovered by the insurance
company, the fact should be disclosed by way of note in the financial statements.
(ii) On the basis of evidence provided, the claim against the company will not succeed.
Thus, 12 crores should not be provided in the account but should be disclosed by
means of a contingent liability with full details of the facts as per AS 29. Provision can
be made for legal fee expected to be incurred to the extent that they are not expected
to be recovered if the amount can be ascertained.
(iii) The sale of property should be treated as an adjusting event since contracts had been
exchanged prior to the year-end. The effect of the sale would be reflected in the
financial statements ended on 31 3.2022 and the profit on sale of property ₹ 2,25,000
would be considered.

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Chapter 1.11 AS 24- Discontinuing Operations
 P 1.12-1

Chapter 1.12
AS 26- Intangible Assets
Question 1
A Company acquired for its internal use a software on 01.03.2020 from U.K. for £ 1,50,000.
The exchange rate on the date was as ` 100 per £. The seller allowed trade discount @
2.5%. The other expenditures were:
(i) Import Duty 10%
(ii) Additional Import Duty 5%

(iii) Entry Tax 2% (Recoverable later from tax department).

(iv) Installation expenses ` 1,50,000.
Professional fees for clearance from customs ` 50,000. Compute the cost of software to
be Capitalized as per relevant AS. (5 Marks , Jan 21)
Answer 1
Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software £ 1,50,000
Less: Trade discount @ 2.5% £ ( 3,750)
£1,46,250
Cost in ` (UK £1,46,250 x ` 100) 146,25,000
Add: Import duty on cost @ 10% (`) 14,62,500
160,87,500
Add: Additional import duty @ 5% (`) 8,04,375
168,91,875
Add: Installation expenses (`) 1,50,000
Add: Professional fee for clearance from customs (`) 50,000
Cost of the software to be capitalized (`) 170,91,875
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not
included as part of the cost of the asset.
Question 2
Swift Limited acquired patent rights to manufacture Solar Roof Top Panels at a cost of ` 600
lacs. The product life cycle has been estimated to be 5 years and the amortization was
decided in the ratio of future cash flows which are estimated as under:
Year 1 2 3 4 5
Cash Flows (` in lacs) 300 300 300 150 150
After 3rd year, it was estimated that the patents would have an estimated balance future
life of 3 years and Swift Ltd. expected the estimated cash flow after 5th year to be ` 75
Lacs. Determine the amortization cost of the patent for each of the above years as per
Accounting Standard 26. (5 Marks ,Nov 20)
Answer 2
Amortization of cost of patent as per AS 26

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Chapter 1.12 AS 26- Intangible Assets
 P 1.12-2

Year Estimated future cash Amortization Ratio Amortized Amount

flow (` in lakhs) (` in lakhs)
1 300 .25 150
2 300 .25 150
3 300 .25 150
4 150 .10 60
5 150 .10 60
6 75 .05 30
1.00 600
In the first three years, the patent cost will be amortized in the ratio of estimated future
cash flows i.e. (300: 300: 300: 150: 150).The unamortized amount of the patent after third
year will be ` 150 lakh (600-450) which will be amortized in the ratio of revised estimated
future cash flows (150:150:75 or 2:2:1) in the fourth, fifth and sixth year.
Question 3
M/s. Pasa Ltd. is developing a new production process. During the financial year ended
31st March, 2019, the total expenditure incurred on the process was ` 80 lakhs. The
production process met the criteria for recognition as an intangible asset on 1st November,
2018. Expenditure incurred till this date was ` 42 lakhs. Further expenditure incurred on the
process for the financial year ending 31st March, 2020 was ` 90 lakhs. As on 31.03.2020, the
recoverable amount of know how embodied in the process is estimated to be ` 82 lakhs.
This includes estimates of future cash outflows and inflows.
You are required to work out :
(1) What is the expenditure to be charged to Profit and Loss Account for the year ended 31st
March, 2019 ?
(2) What is the carrying amount of the intangible asset as on 31st March, 2019?
(3) What amount of expenditure to be charged to Profit and Loss Account for the year ended
31st March, 2020 ?
(4) What is the carrying amount of the intangible asset as on 31st March, 2020? ( 5 Marks , Nov
20 & Dec ‘21)
Answer 3
As per AS 26 ‘Intangible Assets’
(i) Expenditure to be charged to Profit and Loss account for the year ending 31.03.2019
` 42 lakhs is recognized as an expense because the recognition criteria were not met until 1st
November, 2018. This expenditure will not form part of the cost of the production process
recognized as an intangible asset in the balance sheet.

(ii) Carrying value of intangible asset as on 31.03.2019

At the end of financial year, on 31st March 2019, the production process will be recognized
(i.e. carrying amount) as an intangible asset at a cost of ` 38 (80-42) lakhs (expenditure
incurred since the date the recognition criteria were met, i.e., from 1st November 2018)
(iii) Expenditure to be charged to Profit and Loss account for the year ended 31.03.2020

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Chapter 1.12 AS 26- Intangible Assets
 P 1.12-3

(` in lacs)
Carrying Amount as on 31.03.2019 38
Expenditure during 2019 – 2020 90
Book Value 128
Recoverable Amount (82)
Impairment loss to be charged to Profit and loss 46
account
` 46 lakhs to be charged to Profit and loss account for the year ending 31.03.2020.
(iv) Carrying value of intangible asset as on 31.03.2020
(` in lacs)
Book Value 128
Less: Impairment loss (46)
Carrying amount as on 31.03.2020 82
Question 4
A company acquired a patent at a cost of Rs. 160 lakhs for a period of 5 years and the
product life cycle is also 5 years. The company capitalized the cost and started amortising
the asset at Rs. 16 lakhs per year based on the economic benefits derived from the product
manufactured under the patent. After 2 years it was found that the product life cycle may
continue for another 5 years from then (the patent is renewable and the company can get
it renewed after 5 years). The net cash flows from the product during these 5 years were
expected to be Rs. 50 lakhs, Rs. 30 lakhs, Rs. 60 lakhs, Rs. 70 lakhs and Rs. 40 lakhs. Find out
the amortization cost of the patent for each of the years. [5 Marks ,
May ‘18]
Answer 4
Company amortized Rs. 16,00,000 per annum for the first two years. Hence, Amortization for
the first two years (Rs. 16,00,000 X 2) = Rs. 32,00,000.
Remaining carrying cost after two years = Rs. 1,60,00,000 – Rs. 32,00,000 = Rs. 1,28,00,000
Since after two years it was found that the product life cycle may continue for another 5
years, hence the remaining carrying cost Rs. 128 lakhs will be amortized during next 5 years
in the ratio of net cash arising from the sale of the products of Fast Limited.
The amortization cost of the patents may be computed as follows:
Year Net cash flows Rs. Amortization Ratio Amortization Amount
Rs.
I - 0.1 16,00,000
II - 0.1 16,00,000
III 50,00,000 0.2 25,60,000
IV 30,00,000 0.12 15,36,000
V 60,00,000 0.24 30,72,000
VI 70,00,000 0.28 35,84,000
VII 40,00,000 0.16 20,48,000
Total 250,00,000 1.000 160,00,000

Question 5
As per provision of AS-26, how would you deal to the following situations:

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Chapter 1.12 AS 26- Intangible Assets
 P 1.12-4

(1) Rs. 23,00,000 paid by a manufacturing company to the legal advisor defending the patent
of a product is treated as a capital expenditure.
(2) During the year 2018-19 a company spent Rs. 7,00,000 for publicity and research expenses
on one of its new consumer product which was marketed in the same accounting year but
proved to be a failure.
(3) A company spent Rs. 25,00,000 in the past three years to develop a product ,these expenses
were charged to profit and loss account since they did not meet AS-26 criteria for
capitalization. In the current year approval of the concerned authority has been received.
The company wishes to capitalize Rs. 25,00,000 by disclosing it as a prior period item.
(4) A company with a turnover of Rs. 200 crores and an annual advertising budget of Rs. 1,
50,00,000 had taken up for the marketing of a new product by a company. It was estimated
that the company would have a turnover of Rs. 20 crore from the new product. The
company had debited to its Profit & Loss Account the total expenditure of Rs. 50,00,000
incurred on extensive special initial advertisement campaign for the new product.
[5 Marks, Nov 19]
Answer 5
As per AS 26 “Intangible Assets”, subsequent expenditure on an intangible asset after its
purchase orits completion should be recognized as an expense when it is incurred unless (a)
it is probable that the expenditure will enable the asset to generate future economic benefits
in excess of its originally assessed standard of performance; and (b) expenditure can be
measured and attributed to the asset reliably. If these conditions are met, the subsequent
expenditure should be added to the cost of the intangible asset.
(i) In the given case, the legal expenses to defend the patent of a product amounting Rs.
23,00,000 should not be capitalized and be charged to Profit and Loss Statement.
(ii) The company is required to expense the entire amount of Rs. 7,00,000 in the Profit and Loss
account for the year ended 31st March, 2019 because no benefit will arise in the future.
(iii) As per AS 26, expenditure on an intangible item that was initially recognized as an expense by
a reporting enterprise in previous annual financial statements should not be recognized as
part of the cost of an intangible asset at a later date. Thus the company cannot capitalize
the amount of Rs. 25,00,000 and it should be recognized as expense
(iv) Expenditure of Rs. 50,00,000 on advertising and promotional activities should always be
charged to Profit and Loss Statement. Hence, the company has done the correct treatment
by debiting the sum of 50 lakhs to Profit and Loss Account.

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Chapter 1.12 AS 26- Intangible Assets
 P 1.13.1

Chapter 1.13
AS 29- Provisions, Contingent Liabilities & Contingent Assets
Question 1
With reference to AS 29, how would you deal with the following in the Annual Accounts
of the company at the Balance Sheet date:
(i) The company operates an offshore oilfield where its licensing agreement requires it to
remove the oil rig at the end of production and restore the seabed. Eighty five percent of
the eventual costs relate to the removal of the oil rig and restoration of damage caused
by building it, and fifteen percent arise through the extraction of oil. At the balance
sheet date, rig has been constructed but no oil has been extracted.
(ii) The Government introduces a number of changes to the taxation laws. As a result of these
changes, the company will need to train a large proportion of its accounting and legal
workforce in order to ensure continued compliances with tax law regulations. At the
balance sheet date, no retraining of staff has taken place.( 5 Marks , Nov 20)
Answer 1
(i) The construction of the oil rig creates an obligation under the terms of the license to
remove the rig and restore the seabed and is thus an obligating event. At the balance sheet
date, however, there is no obligation to rectify the damage that will be caused by
extraction of the oil. An outflow of resources embodying economic benefits in settlement
is probable. Thus, a provision is recognized for the best estimate of 85% of the eventual
costs that relate to the removal of the oil rig and restoration of damage caused by building
it. These costs are included as part of the cost of the oil rig. However, there is no obligation
to rectify the damage that will be caused by extraction of oil, as no oil has been extracted
at the balance sheet date. So, no provision is required for the cost of extraction of oil at
balance sheet date. 15% of costs that arise through the extraction of oil are recognized as
a liability when the oil is extracted.
(ii) As per AS 29, a provision for restructuring costs is recognized only when the recognition
criteria for provisions are met. A restructuring provision does not include costs as of
retraining or relocating continuing staff. The expenditures of training the staff related to the
future conduct of the business and are not liabilities for restructuring at the balance
sheet date. Such expenditures are recognized on the same basis as if they arose
independently of a restructuring. At the balance sheet date, no such expenditure has been
incurred hence no provision is required.

Question 2

A Ltd. provides after sales warranty for two years to its customers. Based on past
experience, the company has the following policy for making provision for warranties on
the invoice amount, on the remaining balance warranty period.
Less than 1 year: 2% provision
More than 1 year: 3% provision
The company has raised invoices as under:

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 P 1.13.2

Invoice Date Amount (Rs. )

11th Feb,2017 60,000
25th Dec, 2017 40,000
04thOct,2018 1,35,000
Calculate the provision to be made for warranty under AS -29 as at 31st March , 2018 and
31st March 2019 Also compute amount to be debited to P & L account for the year ended
31st March 2019. [5 Marks , Nov ‘19]

Answer 2
Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities and
Contingent Assets’
As at 31st March, 2018 = Rs. 60,000 x .02 + Rs. 40,000 x .03
= Rs. 1,200 + Rs. 1,200 = Rs. 2,400
As at 31st March, 2019 = Rs. 40,000 x .02 + Rs. 1,35,000 x .03
= Rs. 800 + Rs. 4,050 = Rs. 4,850
Amount debited to Profit and Loss Account for year ended 31st March, 2019
Rs.
Balance of provision required as on 31.03.2019 4,850
Less: Opening Balance as on 1.4.2018 (2,400)
Amount debited to profit and loss account 2,450
Note: No provision will be made on 31st March, 2019 in respect of sales amounting Rs.
60,000 made on 11th February, 2017 as the warranty period of 2 years has
already expired.

Question 3
Alloy Fabrication Limited is engaged in manufacturing of iron and steel rods. The
company is in the process of finalisation of the accounts for the year ended 31 st
March,2022 and needs your advice on the following issues in line with the provisions of
AS-29:
I. On 1stApril,2019, the company installed a huge furnace in their plant. The furnace has
a lining that needs to be replaced every five years for technical reasons. At the Balance
Sheet date 31st March,2022, the company does not provide any provision for
replacement of lining of the furnace.
II. A case has been filed against the company in the consumer court and a notice for levy
of a penalty of ₹ 50 Lakhs has been received. The company has appointed a lawyer to
defend the case for a fee of ₹ 5 Lakhs. 60% of the fees have been paid in advance and
rest 40% will be paid after finalization of the case. There are 70% chances that the
penalty may not be levied.. ( 5 Marks) .(May’22)

Answer 3
I. A provision should be recognized only when an enterprise has a present obligation arising
from a past event or obligation. In the given case, there is no present obligation but a
future one, therefore no provision is recognized as per AS 29. The cost of replacement of
lining of furnace is not recognized as a provision because it is a future obligation. Even a
legal requirement does not require the company to make a provision for the cost of

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 P 1.13.3

replacement because there is no present obligation. Even the intention to incur the
expenditure depends on the company deciding to continue operating the furnace or to
replace the lining.
II. As per AS 29, an obligation is a present obligation if, based on the evidence available, its
existence at the balance sheet date is considered probable, i.e., more likely than not.
Liability is a present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits.
In the given case, there are 70% chances that the penalty may not be levied. Accordingly,
Alloy Fabrication Ltd. should not make the provision for penalty. The matter is disclosed
as a contingent liability unless the probability of any outflow is regarded as remote.
However, a provision should be made for remaining 40% fees of the lawyer amounting₹
2,00,000 in the financial statements of financial year 2021-2022

Question 4
At the end of the financial year ending on 31stMarch, 2022, a company finds that there
are twenty law suits outstanding which have not been settled till the date of approval
of accounts by the Board of Directors. The possible outcome as estimated by the Board
is as follows:

Particulars Probability Loss (₹)

In respect of five cases 100% -
(Win) Next ten cases 50% -
(Win) 40% 12,00,000
Lose (Low damages) 10% 20,00,000
Lose (High damages) 50% -
Remaining five cases 30% 10,00,000
Win Lose (Low 20% 21,00,000
damages)
Lose (High damages)
Outcome of each case is to be taken as a separate entity. Ascertain the amount of
contingent loss and the accounting treatment in respect thereof as per AS - 29. (5 Marks
Nov 22)
Answer 4
According to AS 29 (Revised) ‘Provisions, Contingent Liabilities and Contingent Assets’,
contingent liability should be disclosed in the financial statements if following conditions
are satisfied:

(i) There is a present obligation arising out of past events but not recognized
as provision.
(ii) It is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is

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 P 1.13.4

not remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability
to be recognized as provision.
In this case, the probability of winning of first five cases is 100% and hence, question of
providing for contingent loss does not arise. The probability of winning of next ten cases
is 50% and for remaining five cases is 50%. As per AS 29 (Revised), we make a provision
if the loss is probable. As the loss does not appear to be probable and the possibility of
an outflow of resources embodying economic benefits is remote, therefore disclosure
by way of note should be made. For the purpose of the disclosure of contingent liability
by way of note, amount may be calculated as under:
Expected loss in next ten cases = 40% of ₹ 12,00,000 + 10% of ₹ 20,00,000
= ₹ 4,80,000 + ₹ 2,00,000
= 6,80,000
Expected loss in remaining five cases = 30% of ₹ 10,00,000 + 20% of ₹ 21,00,000
= ₹ 3,00,000 + ₹ 4,20,000
= ₹ 7,20,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic.
Therefore, the better approach will be to disclose the overall expected loss of
1,04,00,000 (₹ 6,80,000 X 10 + ₹ 7,20,000 X 5) as contingent liability.

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 P 2.1-1

Chapter 2.1
ESOPs
Question 1
At the beginning of the year 1, Harmony Limited grants 600 options to each of its 1000
employees. The contractual life of option granted is 6 yrs.
Other relevant information is as follows:
Vesting Period 3 years
Exercise period 3 years
Expected Life 5 years
Exercise Price ₹ 100
Market Price ₹ 100
Expected Forfeitures per year 3%
The option granted vest according to a graded schedule of 25% at the end of the year 1, 25%
at the end of the year 2 and the remaining 50% at the end of the year 3. You are required to
calculate total compensation expenses for the options expected to vest and cost and
cumulative cost to be recognized at the end of all the three years assuming that expected
forfeiture rate does not change during the vesting period when the Intrinsic value of the
options at the grant date is ₹ 7 per options. (5 Marks, July 21)
Answer 1
Since the options granted have a graded vesting schedule, the enterprise segregates the
total plan into different groups, depending upon the vesting dates and treats each of these
groups as a separate plan. The enterprise determines the number of options expected to
vest under each group as below:
Vesting Date Options expected
(Year-end) to vest
1 600 options x 1,000 employees x 25% x 0.97 1,45,500 options
2 600 options x 1,000 employees x 25% x 0.97 x 0.97 1,41,135 options
3 600 options x 1,000 employees x 50% x 0.97x 0.97 2,73,802 options
x 0.97
Total options expected to vest 5,60,437 options
In case of intrinsic value method, total compensation expense for the options expected to vest
would be
Vesting Date Expected Vesting Value per Compensation
(End of year) (No. of Options) Option (₹) Expense (₹)
1 1,45,500 7 10,18,500
2 1,41,135 7 9,87,945
3 2,73,802 7 19,16,614
5,60,437 39,23,059
Total compensation expense of ₹ 39,23,059, determined at the grant date, would be
attributed to the years 1, 2 and 3 as below:

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Vesting Date Cost to be

recognized
(End of year) Year 1 Year 2 Year 3
1 10,18,500
2 4,93,972.50* 4,93,972.50
3 6,38,871 6,38,871 6,38,87
2
Cost for the year 21,51,343.50 11,32,843.50 6,38,872
Cumulative cost 21,51,343.50 32,84,187 39,23,059
* Alternatively, it may be rounded off as ₹ 4,93,972 in year 1 and ₹ 4,93,973 in year 2.
Question 2
Raja Ltd. has its share capital divided into equity shares of ₹ 10 each. On 01-08-2019, it
granted 2,500 employees stock options at ₹ 50 per share, when the market price was ₹
140 per share. The options were to be exercised between 1-10-2019 to 31-03-2020. The
employees exercised their options for 2,400 shares only and the remaining options lapsed.
Raja Ltd. closes its books of accounts on 31st March, every year. You are to required to pass
the necessary Journal Entries (including narration) for the year ended 31-03-2020, with
regard to employees' stock options and give working notes also. (5 Marks Jan 21 & May 19
)(Similar to May 19 but different figures)
Answer 2
Journal Entries in the books of Raja Ltd.

₹ ₹
1.10.1 Bank A/c Dr. 1,20,000
9
to Employee compensation expense A/c Dr. 2,16,000
31.3.20
To Equity share capital A/c 24,000
To Securities premium A/c 3,12,000
(Being shares issued to the employees
against the options vested to them in
pursuance of Employee Stock Option
Plan)
31.3.2 Profit and Loss A/c Dr. 2,16,000
0
To Employee compensation expense 2,16,000
A/c
(Being transfer of employee
compensation expenses to Profit and
Loss Account)
No entry is passed when stock options are granted to employees. Hence, no entry will be
passed on 1st August, 2019;
Working Note:

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Market Price = ₹ 140 per share and stock option price = 50, Hence, the difference 140
– 50 = ₹ 90 per share is equivalent to employee cost or employee compensation expense
and will be charged to P&L Account as such for the number of options exercised i.e. 2,400
shares.Hence, Employee compensation expenses will be 2,400 shares X ₹ 90 = ₹ 2,16,000
Question 3
Sun Ltd. grants 100 stock options to each of its 1200 employees on 01.04.2016 for ₹ 30,
depending upon the employees at the time of vesting of options. Options would be
exercisable within a year it is vested. The market price of the share is ₹ 60 each. These
options will vest at the end of the year 1 if the earning of Sun Ltd. is 16% or it will vest at
the end of year 2 if the average earning of two years is 13%, or lastly it will vest at the end
of the third year, if the average earning of 3 years is 10%. 6000 unvested options lapsed
on 31.3.2017, 5000 unvested options lapsed on 31.03.2018 and finally 4000 unvested
options lapsed on 31.03.2019. The earnings of Sun Ltd. for the three financial years ended
on 31st March, 2017, 2018 and 2019 are 15%, 10% and 6%, respectively.
1000 employees exercised their vested options within a year and remaining options were
unexercised at the end of the contractual life.
You are requested to give the necessary journal entries for the above and prepare the
statement showing compensation expenses to be recognized at the end of each year. ( 10
Marks , Nov 20 & Nov 18 )(Similar to Nov 18 but different figures)
Answer 3
Date Particulars ₹ ₹
31.3.2017 Employees compensation expense A/c Dr. 17,10,000
To ESOS outstanding A/c 17,10,000
(Being compensation expense
recognized in respect of the ESOP i.e.
100 options each granted to 1,200
employees at a discount of ₹ 30 each,
amortized on straight line basis over vesting
years (Refer W.N.)
Profit and Loss A/c Dr. 17,10,000
To Employees compensation expenses 17,10,000
A/c
(Being expenses transferred to profit and
Loss A/c)
31.3.2018 Employees compensation expenses A/c Dr. 4,70,000
To ESOS outstanding A/c 4,70,000
(Being compensation expense recognized in
respect of the ESOP- Refer W.N.)
Profit and Loss A/c Dr. 4,70,000
To Employees compensation 4,70,000
expenses A/c
(Being expenses transferred to profit and
Loss A/c)

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 P 2.1-4

31.3.2019 Employees compensation Expenses A/c Dr. 9,70,000

To ESOS outstanding A/c 9,70,000
(Being compensation expense recognized in
respect of the ESOP- Refer W.N.)
Profit and Loss A/c 9,70,000
To Employees compensation 9,70,000
expenses A/c
(Being expenses transferred to profit and
Loss A/c)
2019-20 Bank A/c (1,00,000 x ₹ 30) Dr. 30,00,000
ESOS outstanding A/c [(31,50,000/1,05,000) Dr. 30,00,000
x 1,00,000]
To Equity share capital (1,00,000 x₹ 10) 10,00,000
To Securities premium A/c 50,00,000
(1,00,000 x ₹ 50)
(Being 1,00,000 options exercised at an
exercise price of ₹ 30 each)
31.3.2020 ESOS outstanding A/c Dr. 1,50,000
To General Reserve A/c 1,50,000
(Being ESOS outstanding A/c on lapse of
5,000 options at the end of exercise of
option period transferred to General
Reserve A/c)
Working Note:
Statement showing compensation expense to be recognized at the end of:
Particulars Year 1 Year 2 Year 3
(31.3.2017) (31.3.2018) (31.3.2019)
Number of options expected to 1,14,000 options 1,09,000 options 1,05,000 options
vest
Total compensation expense ₹ 34,20,000 ₹ 32,70,000 ₹ 31,50,000
accrued (60-30)
Compensation expense of the 34,20,000 x 1/2 = 32,70,000 x 2/3
year ₹ 17,10,000 = ₹ 21,80,000 ₹ 31,50,000
Compensation expense
recognized previously Nil ₹ 17,10,000 ₹ 21,80,000
Compensation expenses to be
recognized for the year ₹ 17,10,000 ₹ 4,70,000 ₹ 9,70,000

Question 4
On 1st April, 2018, XYZ Ltd. offered 150 shares to each of its 750 employees at 60 per share.
The employees are given a year to accept the offer. The shares issued under the plan shall
be subject to lock-in period on transfer for three years from the grant date. The market
price of shares of the company of the grant date is Rs. 72 per share. Due to post-vesting
restrictions on transfer, the fair value of shares issued under the plan is estimated at Rs.

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 P 2.1-5

67 per share.
On 31st March, 2019, 6000 employees accepted the offer and paid 60 per share
purchased. Nominal value of each share is Rs. 10.
You are required to record the issue of shares in the books of the XYZ Ltd, under the
aforesaid plan. [5 Marks, Nov ‘19](Similar to May 18 but different figures)
Answer 4
Fair value of an option = Rs. 67(considered on grant date) – Rs. 60 = Rs. 7
Number of shares issued = 600 employees x 150 shares/employee = 90,000 shares
Fair value of ESOP = 90,000 shares x Rs. 7 = Rs. 6,30,000
Vesting period = 1 year
Expenses recognized in 2018-19 = Rs. 6,30,000
Date Particulars Rs. Rs.
31.03.201 Bank (90,000 shares x Rs. 60) Dr. 54,00,00
9 0
Employees stock compensation expense A/c Dr. 6,30,000
9,00,000
To Share Capital (90,000 shares x Rs. 10)
To Securities Premium (90,000 shares x Rs. 57) 51,30,000
(Being option accepted by 600 employees & payment
made @ Rs. 60 per share)
Profit & Loss A/c Dr. 6,30,000
6,30,000
To Employees stock compensation expense A/c
(Being Employees stock compensation expense
transferred to Profit & Loss A/c)

Question 5
.
A company grants 2,000 Employees Stock Options on 1st April 2018 at ₹ when the
market price is ₹ 170. The vesting period is 2.5 years, and the maximum exercise period is 1
year. 600 unvested options lapse on 01.05.2020, 1200 options are exercised on 30.06.2021.
200 vested options lapse at the end of the exercise period. You required to pass necessary
journal entries with narrations. (5 Marks Dec’21)
Answer 5
Journal Entries in the books of Company
Dr. Cr.
Date Particulars (₹) (₹)
31.3.2019 Employees compensation expense account Dr. 88,000
To Employee stock option outstanding account 88,000
(Being compensation expenses recognized in
respect of the employee stock option
Profit and loss account Dr. 88,000
To Employees compensation expenses account 88,000
(Being expenses transferred to profit and loss
account at year end)

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 P 2.1-6

31.3.2020 Employees compensation expenses account Dr. 88,000

To Employee stock option outstanding account 88,000
(Being compensation expense recognized in respect
of the employee stock)
Profit and loss account Dr. 88,000
To Employees compensation expenses account 88,000
(Being expenses transferred to profit and loss
account at year end)
31.3.2021 Employee stock option outstanding account (W.N.2) Dr. 22,000
To General Reserve account (W.N.2) 22,000
(Being excess of employees compensation
expenses transferred to general reserve
account)
30.6.2021 Bank A/c (1,200 × ₹ 60) Dr. 72,000
Employee stock option outstanding account (1,200 Dr. 1,32,000
× ₹ 110)
To Equity share capital account (1,200 × 12,000
₹ 10)
To Securities premium account (1,200 x 1,92,000
₹ 160)
(Being 1,200 employee stock option exercised at an
exercise price of ₹ 60 each)
01.10.2021 Employee stock option outstanding account (W.N.3) Dr. 22,000
To General reserve account (W.N.3) 22,000
(Being ESOS outstanding A/c on lapse of 200
options at the end of exercise of option period
transferred to General Reserve A/c)
Working Notes:
1 Compensation expenses recognized in respect of the employee stock option : 2,000 options
granted to employees at a discount of ₹ 110 each to be amortized on Straight line basis over
2 years i.e. 2,000 stock options x ₹ 110 / 2.5 years = ₹ 88,000
2 On 31.3.2021, company will examine its actual forfeitures and make necessary adjustments,
if any, to reflect expenses for the number of options that actually vested. Considering that
1400 stock options have completed 2.5 years vesting period, the expense to be recognized
during the year is in negative i.e.
No. of options actually vested 1,400 x 110 (170 – 60 = 110) ₹ 1,54,000
Less: Expenses recognized ₹ (88,000 + 88,000) (₹ 1,76,000)
Excess expense transferred to general reserve ₹ 22,000
3 Similarly, on 1.10.2021, Employee Stock Option Outstanding Account will be
No. of options actually vested (1,200 x 110) ₹ 1,32,000
Less: Expenses recognized (₹ 1,54,000)
Excess expense transferred to general reserve ₹ 22,000

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Question 6
On 1st April,2021, a company offered 100 shares to each of its 5,000 employees at ₹ 50
per share. The employees are given a year to accept the offer. The shares issued under
the plan shall be subject to lock-in on transfer for three years from the grant date. The
market price of shares of the company on the grant date is ₹ 60 per share. Due to post
vesting restrictions on transfer, the fair value of shares issued under the plan is estimated
at ₹ 56 per share and fair value per option worked out to be ₹ 6. On 31st March,2022,
4,000 employees accepted the offer and paid ₹ 50 per share purchased. Nominal value of
each share is ₹ 10.
You are required to pass journal entries (with narration) as would appear in the books of
the company up to 31st March,2022.(5 Marks) (May’22)

Answer 6
Fair value of an option = ₹ 56 – ₹ 50 = ₹ 6
Number of shares issued = 4,000 employees x 100 shares =
4,00,000 shares Fair value of ESOP = 4,00,000 shares x ₹ 6 = ₹ 24,00,000
Vesting period = 1 year
Expenses recognized in 2021 – 22 = ₹ 24,00,000

Date Particulars ₹ ₹
31.03.202 Bank (4,00,000 shares x ₹ 50) Dr. 200,00,000
2 Employees stock compensation expense A/c Dr. 24,00,000
To Share Capital (4,00,000 shares x₹ 10) 40,00,000
To Securities Premium (4,00,000 shares x ₹ 184,00,000
46)
(Being option accepted by 4,000 employees
& payment made @ ₹ 56 share)
Profit & Loss A/c Dr. 24,00,000
To Employees stock compensation expense 24,00,000
A/c
(Being Employees stock compensation
expense transferred to Profit & Loss A/c)

Question 7
At the beginning of year 1, an enterprise grants 1,000 stock options t o a senior
executive, conditional upon the executive remaining in the employment of the
enterprise until the end of year 3. The exercise price is ₹ 400. However, the exercise price
drops to ₹ 300 if the earnings of the enterprise increase by at-least an average of 10
percent per year over the three-year period.

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On the grant date, the enterprise estimates that the fair value of the stock options, with
an exercise price of ₹ 300, is ₹ 160 per option. If the exercise price is ₹ 400, the enterprise
estimates that the stock options have a fair value of ₹ 120 per option.

During year 1, the earnings of the enterprise increased by 12 percent, and the enterprise
expects that earnings will continue to increase at this rate over the next two years. The
enterprise, therefore, expects that the earnings target will be achieved, and hence the
stock options will have an exercise price of ₹ 300.
During year 2, the earnings of the enterprise increased by 13 percent, and the enterprise
continues to expect that the earnings target will be achieved.
During year 3, the earnings of the enterprise increased by only 3 percent, and therefore
the earnings target was not achieved. The executive completes three years' service, and
therefore satisfies the service condition. Because the earnings target was not achieved,
the 1,000 vested stock options have an exercise price of ₹ 400, You are required to
calculate the amount to be charged to Profit and Loss Account every year on account of
compensation expenses. (5 Marks Nov 22)

Answer 7
Since the exercise price varies depending on the outcome of a performance condition
which is not a market condition, the effect of that performance condition (i.e. the
possibility that the exercise price might be ₹400 and the possibility that the exercise price
might be ₹300) is not considered when estimating the fair value of the stock options at
the grant date. Instead, the enterprise estimates the fair value of the stock options at the
grant date under each scenario and revises the transaction amount to reflect the
outcomes of that performance condition at the end of every year based on the information
available at that point of time.
Calculation of compensation expense to be charged every year:
Year Calculation Cumulative expense Expense for the year
(₹) (₹)
1 1,000 x ₹ 160 x 1/3 53,333 53,333
2 1,000 x ₹ 160 x 2/3 1,06,667 (1,06,667 - 53,333)
53,334
3 1,000 x ₹ 120 x 3/3 1,20,000 (1,20,000 - 1,06,667)
13,333

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Chapter 2.2
Buy-back of Securities
Question 1
A company provides the following 2 possible Capital Structures as on 31st March, 2021:
Particulars Situation 1 Situation 2
(`) (`)
Equity Share Capital (Shares of ` 10 each, fully paid up) 30,00,000 30,00,000
Reserves & Surplus:
General Reserve 12,00,000 12,00,000
Securities Premium 6,00,000 6,00,000
Profit & Loss 2,10,000 2,10,000
Statutory Reserve 4,20,000 4,20,000
Loan Funds 25,00,000 1,20,00,000
The company is planning to offer buy back of Equity Share at a price of ` 30 per equity share.
You are required to calculate maximum permissible number of equity shares that can be
bought back in both the situations as per Companies Act, 2013 and are also required to
pass necessary Journal Entries in the situation where the buyback is possible. (15 Marks
July 21)
Answer 1
Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
Particulars When loan fund is
` 25,00,000 ` 1,20,00,000
Shares Outstanding Test (W.N.1) 75,000 75,000
Resources Test (W.N.2) 41,750 41,750
Debt Equity Ratio Test (W.N.3) 94,000 Nil
Maximum number of shares that can be 41,750 Nil
bought back [least of the above]
Journal Entries for the Buy-Back (applicable only when loan fund is ` 25,00,000)
`
Particulars Debit Credit
(a) Equity shares buy-back account Dr. 12,52,500
To Bank account 12,52,500
(Being payment for buy-back of 41,750 equity
shares of ` 10 each @ ` 30 per share)
(b) Equity share capital account Dr. 4,17,500
Premium Payable on buy-back account Dr. 8,35,000
To Equity share buy-back account 12,52,500
(Being cancellation of shares bought back)

Securities Premium account General Dr. 6,00,000

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Chapter 2.2 Buy-back of securities
 P 2.2-2

Reserve / Profit & Loss A/c Dr.

To Premium Payable on buy-back account 2,35,000 8,35,000
(Being Premium Payable on buy-back account
charged to securities premium and general
reserve/Profit & Loss A/c)
(c) General Reserve* Dr. 4,17,500
To Capital redemption reserve account 4,17,500
(Being transfer of free reserves to capital redemption
reserve to the extent of nominal value of share capital
bought back out of redeemed through free reserves)
*Profit and Loss account balance amounting ` 2,10,000 may also be used and General
Reserve may be debited for the balance amount.
Working Notes:
1. Shares Outstanding Test

Particulars (Shares in crores)

Number of shares outstanding 3,00,000
25% of the shares outstanding 75,000
2. Resources Test

Particulars
Paid up capital (`) 30,00,000
Free reserves (`) (12,00,000+6,00,000+2,10,000) 20,10,000
Shareholders’ funds (`) 50,10,000
25% of Shareholders fund (`) ` 12,52,500
Buy-back price per share ` 30
Number of shares that can be bought back 41,750 shares
3.Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds
post Buy-Back
Particulars When loan fund is
(a) Loan funds (`) ` 25,00,000 ` 1,20,00,000
(b) Minimum equity to be 12,50,000 60,00,000
maintained after buy-back in
the ratio of 2:1 (`) (a/2)
(c) Present equity shareholders fund 50,10,000 50,10,000
(`)
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
Equation 1: (Present Equity- Transfer to CRR)- Minimum Equity to be maintained =
Maximum Permitted Buy-Back
= (50,10,000 – x) – 12,50,000 = y

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= 37,60,000 – x =y (1)
Equation 2: Maximum Permitted Buy-Back X Nominal Value Per Share/Offer Price Per
Share
y/30 x 10 = x or

3x = y (2)
by solving the above two equations we get
x = ` 9,40,000 and y = ` 28,20,000

In situation 2, first equation will be negative. Buy back not possible in this situation.

Question 2
The Directors of Umang Ltd. passed a resolution to buyback 5,00,000 of its fully paid equity
shares of ` 10 each at ` 15 per share. This buyback is in compliance with the provisions of
the Companies Act, 2013.
For this purpose, the company
(i) Sold its investments of ` 30,00,000 for ` 25,00,000.
(ii) Issued 20,000, 12% preference shares of ` 100 each at par, the entire amount being
payable with application.
(iii) Used ` 15,00,000 of its Securities Premium Account apart from its adequate balance
in General Reserve to fulfill the legal requirements regarding buy-back.
(iv) The company has necessary cash balance for the payment to shareholders.
You are required to pass necessary Journal Entries (including narration) regarding buy-
back of shares in the books of Umang Ltd. (5 Marks, Jan 21)
Answer 2
Journal Entries in the books of Umang Ltd.
Dr. Cr.
` `
1. Bank A/c Dr. 25,00,000
Profit and Loss A/c Dr. 5,00,000
To Investment A/c 30,00,000
(Being investment sold for the purpose of buy-back of
Equity Shares)
2. Bank A/c Dr. 20,00,000
To 12% Pref. Share capital A/c 20,00,000
(Being 12% Pref. Shares issued for ` 20,00,000)
3. Equity share capital A/c Dr. 50,00,000
Premium payable on buy-back Dr. 25,00,000

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To Equity shares buy-back A/c 75,00,000

Equity shareholders A/c
(Being the amount due on buy-back of equity shares)
4. Equity shares buy-back A/c/ Equity shareholders A/c Dr. 75,00,000
To Bank A/c 75,00,000
(Being payment made for buy-back of equity shares)
5. Securities Premium A/c General Dr. 15,00,000
Reserve A/c Dr. 10,00,000
To Premium payable on buy-back 25,00,000
(Being premium payable on buy-back charged from
Securities premium)
6. General Reserve A/c Dr. 30,00,000
To Capital Redemption Reserve A/c 30,00,000
(Being creation of capital redemption reserve to the
extent of the equity shares bought back after deducting
fresh pref. shares issued)

Question 3
Following is the summarized Balance Sheet of Super Ltd. as on 31st March, 2018.
Liabilities In Rs.
Share Capital
Equity Shares of Rs. 10 each fully paid up 17,00,000
Reserves & Surplus
Revenue Reserve 23,50,000
Securities Premium 2,50,000
Profit & Loss Account 2,00,000
Infrastructure Development Reserve 1,50,000
Secured Loan
9% Debentures 22,50,000
Unsecured Loan 8,50,000
Current Maturities of Long term borrowings 15,50,000
93,00,000
Assets
Property, Plant & Equipment
Tangible Assets 58,50,000
Current Assets
Current Assets 34,50,000
93,00,000
Super Limited wants to buy back 35,000 equity shares of Rs. 10 each fully paid up on
1st April, 2018 at Rs. 30 per share. Buy Back of shares is fully authorised by its articles
and necessary resolutions have been passed by the company towards this. The payment
for buy back of shares will be made by the company out of sufficient bank balance
available as part of the Current Assets.

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Chapter 2.2 Buy-back of securities
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Comment with calculations, whether the Buy Back of shares by the company is within
the provisions of the Companies Act, 2013. [10 Marks, May ‘19]
Answer 3
Determination of maximum no. of shares that can be bought back as per the Companies
Act, 2013
1. Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding 1,70,000
25% of the shares outstanding 42,500
2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free
Reserves
Particulars Rs.
Paid up capital (Rs.) 17,00,000
Free reserves (Rs.) (23,50,000 + 2,50,000 + 2,00,000) 28,00,000
Shareholders’ funds (Rs.) 45,00,000
25% of Shareholders fund (Rs.) 11,25,000
Buy back price per share Rs.30
Number of shares that can be bought back (shares) 37,500
Actual Number of shares proposed for buy back 35,000
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Shareholder’s
Funds post Buy Back
Particulars Rs.
(a) Loan funds (Rs. ) (22,50,000+8,50,000+15,50,000) 46,50,000
(b) Minimum equity to be maintained after buy back in the ratio of 2:1 (Rs.) 23,25,000
(a/2)
(c) Present equity/shareholders fund (Rs. ) 45,00,000
(d) Future equity/shareholders fund (Rs.) (see W.N.) (45,00,000 – 5,43,750) 39,56,250*
(e) Maximum permitted buy back of Equity (Rs. ) [(d) – (b)] 16,31,250
(f) Maximum number of shares that can be bought back @ Rs. 30 per share 54,375 shares
(g) Actual Buy Back Proposed 35,000 Shares

Summary statement determining the maximumnumber of shares to be bought back

Particulars Number of shares
Shares Outstanding Test 42,500
Resources Test 37,500
Debt Equity Ratio Test 54,375
Maximum number of shares that can be bought back
[least of the above] 37,500
Company qualifies all tests for buy-back of shares and it can buy back maximum 37,500
shares on 1st April, 2018.
However, company wants to buy-back only 35,000 equity shares @ Rs. 30. Therefore, buy-
back of 35,000 shares, as desired by the company is within the provisions of the

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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 (45,00,000 – x) – 23,25,000 = y (1)
10 = x Or 3x = y (2)
by solving the above equation, we get
x = Rs. 5,43,750
y = Rs. 16,31,250

Question 4
Alpha Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2017:
Rs. In lakhs Rs. In lakhs
Equity & Liabilities
Shareholders’ Funds
Equity share capital (fully paid up shares of ` 10 each) 2,400
Reserves and Surplus
Securities Premium 350
General Reserve 530
Capital Redemption Reserve 400
Profit & Loss Account 340 1,620
Non-current Liabilities
12% Debentures 1,500
Current Liabilities
Trade PayabIes 1,490
Other Current Liabilities 390 1,880
Total 7,400
Assets
Non-current Assets
Property, Plant & Equipment 4,052
Current Assets
Current Investments 148
Inventories 1,200
Trade Receivables 520
Cash and Bank 1,480 3,348
Total 7,400
(i) On 1st April, 2017, the company announced buy-back of 25% of its equity shares@ Rs. 15
per share. For this purpose, it sold all its investment for Rs. 150 lakhs.
(ii) On 10th April, 2017 the company achieved the target of buy-back.
(iii) On 30th April, 2017, the company issued one fully paid up equity share of Rs. 10 each by
way of bonus for every four equity shares held by the equity shareholders by capitalization
of Capital Redemption Reserve.
You are required to pass necessary journal entries and prepare the Balance Sheet of Alpha
Ltd. after bonus issue. [10 Marks , May ‘18]

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Answer 4
In the books of Alpha Limited
Journal Entries
Date Particulars Dr. Cr.
2017 (` in lakhs)
April 1 Bank A/c Dr. 150
To Investment A/c 148
To Profit on sale of investment 2
(Being investment sold on profit)
April 10 Equity share capital A/c Dr. 600
Securities premium A/c Dr. 300
To Equity shares buy back A/c 900
(Being the amount due to equity shareholders on buy back)
Equity shares buy back A/c Dr. 900
To Bank A/c 900
(Being the payment made on account of buy back of 60
Lakh Equity Shares)
April 10 General reserve A/c Dr. 530
Profit and Loss A/c Dr. 70
To Capital redemption reserve (CRR) A/c 600
(Being amount equal to nominal value of buy back shares
from free reserves transferred to capital redemption
reserve account as per the law)
April 30 Capital redemption reserve A/c Dr. 450
To Bonus shares A/c (W.N.1) 450
(Being the utilization of capital redemption reserve to issue
bonus shares)
Bonus shares A/c Dr. 450
To Equity share capital A/c 450
(Being issue of one bonus equity share for every four equity
shares held)
Profit on sale of Investment Dr. 2
To Profit and Loss A/c 2
(Profit on sale transfer to Profit and Loss A/c)
Note: For transferring amount equal to nominal value of buy back shares from free reserves
to capital redemption reserve account, the amount of Rs. 340 lakhs from P & L A/c and
the balance from general reserve may also be utilized. The combination of different
set of amounts (from General Reserve and Profit and Loss Account) aggregating Rs.
600 lakhs may also be considered for the purpose of transfer to CRR.
Balance Sheet (After buy back and issue of bonus shares)

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Particulars Note No Amount (` in

Lakhs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 2,250
(b) Reserves and Surplus 2 872
(2) Non-Current Liabilities
(a) Long-term borrowings - 12% Debentures 1,500
(3) Current Liabilities
(a) Trade payables 1,490
(b) Other current liabilities 390
Total 6,502
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 4,052
(2) Current assets
(a) Current investments
(b) Inventory 1,200
(c) Trade receivables 520
(d) Cash and cash equivalents (W.N. 2) 730
Total 6,502
Notes to Accounts

Rs. In lakhs
1. Share Capital
Equity share capital (225 lakh fully paid up shares of Rs. 10 2,250
each)
2. Reserves and Surplus
General Reserve 530
Less: Transfer to CRR (530) -
Capital Redemption Reserve 400
Add: Transfer due to buy-back of shares from P/L 70
Add: Transfer due to buy-back of shares from Gen. res. 530
Less: Utilisation for issue of bonus shares (450) 550
Securities premium 350
Less: Adjustment for premium paid on buy back (300) 50
Profit & Loss A/c 340
Add: Profit on sale of investment 2
Less: Transfer to CRR (70) 272 872
Working Notes:
1. Amount of equity share capital = 2,400 - 600 (buyback) + 450 (Bonus shares) =
2,250
2. Cash at bank after issue of bonus shares

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` in lakhs
Cash balance as on 1st April, 2017 1480
Add: Sale of investments 150
1630
Less: Payment for buy back of shares (900)
730

Question 5
X Ltd. furnishes the following summarized Balance Sheet as at 31-03-2018.
Liabilities (in `) (in `)
Share Capital
Equity Share Capital of ` 20 each fully paid up 50,00,000
10,000, 10% Preference Shares of ` 100 each fully paid up 10,00,000
60,00,000
Reserves & Surplus
Capital Reserve 1,00,000
Security Premium 12,00,000
Revenue Reserve 5,00,000
Profit and Loss 20,00,000
Dividend Equalization Fund 5,50,000 43,50,000
Non-Current Liabilities
12% Debenture 12,50,000
Current Liabilities and Provisions 5,50,000
Total 1,21,50,000
Assets
Fixed Assets
Tangible Assets 1,00,75,000
Current Assets
Investment 3,00,000
Inventory 2,00,000
Cash and Bank 15,75,000 20,75,000
Total 1,21,50,000
The shareholders adopted the resolution on the date of the above mentioned Balance
Sheet to:
(1) Buy back 25% of the paid up capital and i was decided to offer a price of 20% over market
price. Theprevailing market value of the company’s share is Rs. 30 per share.
(2) To finance the buy back of share company :
(a) Issue 3000, 14 % debenture of 100 each at a premium of 20%
(b) Issue 2500, 10 % preference share of Rs. 100 each
(3) Sell investment worth Rs. 1,00,000 for Rs. 1,50,000.
(4) Maintain a balance of Rs. 2,00,000 in Revenue Reserve.
(5) Later the company issue three fully paid up equity share of Rs. 20 each by way of
bonus share forevery 15 equity share held by the equity shareholder.

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You are required to pass the necessary journal entries to record the above
transactions and prepare Balance Sheet after buy back. [15 Marks, Nov’19]

Answer 5
In the books of X Limited Journal Entries
Particulars Dr. Cr.
` `
1. Bank A/c Dr. 3,60,000
To 14 % Debenture A/c 3,00,000
To Securities Premium A/c 60,000
(Being 14 % debentures issued to finance buy back)
2. Bank A/c Dr. 2,50,000
To 10% preference share capital A/c 2,50,000
(Being 10% preference share issued to finance buy back)
3. Bank A/c Dr. 1,50,000
To Investment A/c 1,00,000
To Profit on sale of investment (Being investment 50,000
sold on profit)
4. Equity share capital A/c (62,500 x `20) Dr. 12,50,000
Securities premium A/c (62,500 x `16) 10,00,000
Dr.
To Equity shares buy back A/c (62,500 x `36) 22,50,000
(Being the amount due to equity shareholders on buy
back)
5. Equity shares buy back A/c Dr. 22,50,000
To Bank A/c 22,50,000
(Being the payment made on account of buy back of
62,500 Equity Shares as per the Companies Act)
6. Revenue reserve Dr. 3,00,000
Securities premium Dr. 2,60,000
Profit and Loss A/c Dr. 4,40,000
To Capital redemption reserve A/c* 10,00,000
(Being amount equal to nominal value of buy back
shares from free reserves transferred to capital
redemption reserve account as per the law)
[12,50,000 less 2,50,000]
7. Capital redemption reserve A/c Dr. 7,50,000
To Bonus shares A/c (W.N.1) 7,50,000
(Being the utilization of capital redemption reserve to
issue 37,500 bonus shares)
8. Bonus shares A/c Dr. 7,50,000
To Equity share capital A/c 7,50,000

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(Being issue of 3 bonus equity share for every 15equity

shares held)

*Alternatively, entry for combination of different amounts (from Revenue reserve,

Securities premium and profit and Loss account.) may be passed for transferring the
required amount to CRR.
Note: It may be noted that as per the provisions of the Companies Act, no buy-back of any
kind of shares or other specified securities shall be made out of the proceeds of an earlier
issue of the same kind of shares or same kind of other specified securities. Issue of
debentures has been excluded for the purpose of “specified securities” and the entire
amount of Rs. 10,00,000 (after deducting only pref. share capital) has been credited to CRR
while solving the question.
Balance Sheet (After buy back and issue of bonus shares)
Particulars Note No Amount
`
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 57,50,000
(b) Reserves and Surplus 2 27,10,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 15,50,000
(3) Current Liabilities
(a) Trade payables -
(b) current liabilities & Provisions 5,50,000
Total 1,05,60,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 1,00,75,000
(2) Current assets
(a) Investments 2,00,000
(b) Inventory 2,00,000
(c) Cash and cash equivalents (W.N. 2) 85,000
Total 1,05,60,000

Notes to Accounts

`
1. Share Capital
Equity share capital (Fully paid up shares of ` 20 each)
(2,50,000-62,500+37,500 shares) 45,00,000
10% preference shares @ ` 100 each (10,00,000 + 2,50,000)
12,50,000
2. Reserves and Surplus

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Capital Reserve 1,00,000 57,50,000

Revenue reserve 2,00,000
Securities premium 12,00,000
Add: Premium on debenture 60,000
Less: Adjustment for premium paid on buy back
(10,00,000)
Less: Transfer to CRR (2,60,000) Nil
Capital Redemption Reserve
Transfer due to buy-back of shares from P&L
10,00,000
Less: Utilisation for issue of bonus shares
(7,50,000) 2,50,000
Profit & Loss A/c 20,00,000
Add: Profit on sale of investment 50,000
Less: Transfer to CRR (4,40,000) 16,10,000
Dividend equalization reserve (5,50,000) 5,50,000 27,10,000
Long-term borrowings - 12% Debentures 12,50,000
- 14% Debentures 3,00,000 15,50,000
3
Working Notes:
1. Amount of bonus shares = [(2,50,000 -25%)3/15] x 20 = 37,500 x 20=7,50,000
2. Cash at bank after issue of bonus shares
Rs.
Cash balance as on 30.3.2018 15,75,000
Add: Issue of debenture 3,60,000
Add: issue of preference shares 2,50,000
Add: Sale of investments 1,50,000
23,35,000
Less: Payment for buy back of shares (22,50,000)
85,000

Question 6
Mohan Ltd. furnishes the following summarised Balance Sheet on 31st March 2021. (` in
Lakhs)

Amount
Equity and Liabilities:
Shareholders’ fund
Share Capital
Equity Shares of ` 10 each fully paid up 780
6% Redeemable Preference shares of ` 50 each fully Paid up 240

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Reserves and Surplus

Capital Reserves 58
General Reserve 625
Securities Premium 52
Profit & Loss 148
Revaluation Reserve 34
Infrastructure Development Reserve 16
Non-current liabilities
7% Debentures 268
Unsecured Loans 36
Current Liabilities 395
2652
Assets:
Non-current Assets
Plant and Equipment less depreciation 725
Investment at cost 720
Current Assets 1207
2652
Other Information:
(1) The company redeemed preference shares at a premium of 10% on 1st April,2021.
(2) It also offered to buy back the maximum permissible number of equity shares of ` 10 each
at ` 30 per share on 2nd April 2021.
(3) The payment for the above was made out of available bank balance, which appeared as a
part of the current assets.
(4) The company had investment in own debentures costing ` 60 lakhs (face value ` 75 lakhs).
These debentures were cancelled on 2nd April 2021.
(5) On 4th April 2021 company issued one fully paid-up equity share of ` 10 each by way of
bonus for every five equity shares held by the shareholders.
You are required to:
(a) Calculate maximum possible number of equity shares that can be bought back as per the
Companies Act, 2013 and
(b) Record the Journal Entries for the above-mentioned information. (10 Marks Dec’21)

Answer 6
(a) (i) Statement determining the maximum number of shares to be bought back
Number of shares (in lakhs)

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Chapter 2.2 Buy-back of securities
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Particulars When loan fund is ` 304 lakhs‘•

Shares Outstanding Test (W.N.1) 19.5
Resources Test (W.N.2) 11.175
Debt Equity Ratio Test (W.N.3) 29.725
Maximum number of shares that can be bought 11.175
back [least of the above]
Thus, the company can buy 11,17,500 Equity shares at ` 30 each.
Working Notes:
1. Shares Outstanding Test
Particulars (Shares in lakh)
Number of shares outstanding 78
25% of the shares outstanding 19.5
2. Resources Test
Particulars
Paid up capital (` in lakh) 780
Free reserves (` in lakh) (625+52+148-24-240*) 561
Shareholders’ funds (` in lakh) 1341
25% of Shareholders fund (` in lakh) 335.25
Buy-back price per share 30
Number of shares that can be bought back 11.175
*Amount transferred to CRR is excluded from free
reserves. Premium on redemption also reduced.
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-
Back
Particulars ` In lakh
(a) Loan funds (`) 304
(b) Minimum equity to be maintained after 152
buy- back in the ratio of 2:1 (`) (a/2)
(c) Present equity shareholders fund (`) 1341
(d) Future equity shareholders fund (`) (see 1043.75 (1341-297.25)
W.N.4)
(e) Maximum permitted buy-back of Equity (`) 891.75
[(d) – (b)]
(f) Maximum number of shares that can be 29.725
bought back @ ` 30 per share
As per the provisions of the Companies Act, Qualifies
2013, company
Alternatively, when current liabilities are considered as part of loan funds, in that case Debt
Equity Ratio Test will be done as follows:

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Particulars ` in lakh
(a) Loan funds (`) 699
(b) Minimum equity to be maintained after 349.5
buy-back in the ratio of 2:1 (`) (a/2)
(c) Present equity shareholders fund (`) 1341
(d) Future equity shareholders fund (`) (see 1093.125 (1341-247.875)
W.N.4)
(e) Maximum permitted buy-back of Equity (`) 743.625
[(d) – (b)]
(f) Maximum number of shares that can be 24.7875
bought back @ ` 30 per share
As per the provisions of the Companies Act, Qualifies
2013, company
4. 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
Equation 1: (Present Equity- Transfer to CRR) - Minimum Equity to be maintained =
Maximum Permitted Buy-Back
= (1341 – x) – 152 = y
= 1189 – x =y (1)
Equation 2: Maximum Permitted Buy-Back x Nominal Value Per Share/Offer Price Per
Share
y/30 x 10 = x or 3x = y (2)

by solving the above two equations we get x = ` 297.25 and y = ` 891.75

Alternatively, when current liabilities are considered as part of loan funds, in that case
Equation 1: (Present Equity- Transfer to CRR)- Minimum Equity to be maintained =
Maximum Permitted Buy-Back
= (1341 – x) – 349.5 = y
= 991.5 – x =y (1)
Equation 2: Maximum Permitted Buy-Back X Nominal Value Per Share/Offer Price Per
Share
y/30 x 10 = x or 3x = y (2)
by solving the above two equations we get x = 247.875 and y = 743.625
(ii) Journal Entries for Buy Back (` in lakhs)

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Date Particulars Debit Credit

2021
1st April 6% Redeemable preference share capital A/c Dr. 240
Premium on redemption of preference shares Dr. 24
A/c
To Preference shareholders A/c 264
(Being preference share capital transferred to
shareholders account)
Preference shareholders A/c Dr. 264
To Bank A/c 264
(Being payment made to shareholders)
General Reserve or P&L A/c* Dr. 24
To Premium on redemption of 24
preference shares A/c
(Being premium on redemption of preference
shares adjusted through securities premium)
2nd April Equity shares buy-back A/c Dr. 335.25
To Bank A/c 335.25
(Being 11.175 lakhs equity shares of ` 10 each
bought back @ ` 30 per share)
Equity share capital A/c Dr. 111.75
Securities Premium A/c Dr. 52
General Reserve or P&L A/c Dr. 171.50
To Equity Shares buy-back A/c 335.25
(Being cancellation of shares bought back)
General reserve A/c Dr. 351.75
To Capital redemption reserve A/c 351.75
(Being creation of capital redemption reserve
account to the extent of the face value of
preference shares redeemed and equity shares
bought back as per the law ie. 240+
111.75 lakhs)
2nd April 7% Debentures A/c Dr. 75
To Investment (own debentures) A/c 60
To Profit on cancellation of own debentures 15
A/c
(Being cancellation of own debentures costing
` 60 lakhs, face value being ` 75 lakhs and the
balance being profit on cancellation of
debentures)
4th April Capital Redemption Reserve Dr. 133.65
To Bonus Shares A/c 133.65

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(Being issue of one bonus equity share for every

five equity shares held)
Bonus shares A/c Dr. 133.65
To Equity share capital A/c 133.65
(Being bonus shares issued)

Working Note: Bonus Share to be issued =66.825 (78 - 11.175) lakh shares divided by 5 =
13.365 lakh shares.
Note: *Securities premium has not been utilized for the purpose of premium payable on
redemption of preference shares assuming that the company referred in the question is
governed by Section 133 of the Companies Act, 2013 and complies with the Accounting
Standards prescribed for them. Alternative entry considering otherwise is also possible by
utilizing securities premium amount.

Question 7
Quick Ltd. has the following capital structure as on 31st March,2021:

₹ in Crores
(1) Share Capital: 462
(Equity Shares of ₹ 10 each, fully paid)
(2) Reserves and Surplus:
General Reserve 336
Securities Premium Account 126
Profit and Loss Account 126
Statutory Reserve 180
Capital Redemption Reserve 87
Plant Revaluation Reserve 33 888
(3) Loan Funds:
Secured 2,200
Unsecured 320 2,520
On the recommendations of the Board of Directors, on 16th September, 2021, the
shareholders of the company have approved a proposal to buy-back of equity shares. The
prevailing market value of the company's share is ₹ 20 per share and in order to induce
the existing shareholders to offer their shares for buy-back, it was decided to offer a price
of 50% over market value. The company had sufficient balance in its bank account for the
buy-back of shares.
You are required to compute the maximum number of shares that can be bought back in
the light of the above information and also under a situation where the loan funds of the
company were either ₹ 1,680 Crores or ₹ 2,100 Crores.
Assuming that the entire buy-back is completed by 31st December,2021, Pass the
necessary accounting entries (narrations not required) in the books of the company in
each situation(10 Marks).(May’22)

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Answer 7
Statement determining the maximum number of shares to be bought back Number of
shares

Particulars When loan fund is

₹ 2,520 crores ₹ 1,680 crores ₹ 2,100 crores
Shares Outstanding Test (W.N.1) 11.55 11.55 11.55
Resources Test (W.N.2) 8.75 8.75 8.75
Debt Equity Ratio Test (W.N.3) Nil 5.25 Nil
Maximum number of shares that
can be bought back [least of the Nil 5.25 Nil
above]
Journal Entries for the Buy-Back (applicable only when loan fund is ₹ 1,680 crores)
₹ in crores

Particulars Debit Credit

(a) Equity share buy-back account Dr. 157.5
To Bank account 157.5
(b) Equity share capital account (5.25 x ₹ 10) Dr. 52.5
Securities premium account (5.25 x ₹ 20) Dr. 105
To Equity share buy-back account 157.5
(c) General reserve account Dr. 52.5
To Capital redemption reserve account 52.5
Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 46.2
25% of the shares outstanding 11.55
2. Resources Test
Particulars
Paid up capital (₹ in crores) 462
Free reserves (₹ in crores) (336+126+126) 588
Shareholders’ funds (₹ in crores) 1,050
25% of Shareholders fund (₹ in crores) ₹ 262.5 crores
Buy-back price per share ₹ 30
Number of shares that can be bought back (shares in crores) 8.75 crores shares

3. Debt Equity Ratio Test

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Particulars When loan fund is

₹ 2,520 crores ₹ 1,680 crores ₹ 2,100 crores
(a) Loan funds (₹ in crores) 2,520 1,680 2,100
(b) Minimum equity to be maintained
after buy- back in the ratio of 2:1 1,260 840 1,050
(₹ in crores)
(c) Present equity shareholders 1,050 1,050 1,050
fund (₹ in crores)
(d) Future equity shareholder N.A. 997.5 N.A.
fund (₹ in crores) (See Note 2) (1,050-52.5)

(e) Maximum permitted buy-back of Nil 157.5 (by Nil

Equity (₹ in crores) [(d) – (b)] (See simultaneous
Note 2) equation)
(f) Maximum number of shares that Nil 5.25 (by Nil
can be bought back @ ₹ 30 simultaneous
per share (shares in equation)
crores) (See Note 2)
Note:
1. Under Situations 1 & 3 the company does not qualify for buy-back of shares as per the
provisions of the Companies Act, 2013.
2. As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company
should not be more than twice the capital and its free reserve after such buy-back.
Amount transferred to CRR and maximum equity to be bought back will be calculated by
simultaneous equation method.
Suppose amount equivalent to nominal value of bought back shares transferred to CRR
account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
Equation 1: (Present equity – Nominal value of buy-back transfer to CRR) – Minimum equity
to be maintained= Maximum permissible buy-back of equity
(1,050 –x)-840 = y
Since 210 – x = y
Equation 2= x Nominal Value'
= Nominal value of the shares bought –back to be transferred to CRR
(
= +*
)*

Or 3x = y (2)
by solving the above two equations we get
x = ₹ 52.5 crores y = ₹ 157.5 crores

3. Statutory reserves, capital redemption reserve and plant revaluation reserves are not

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free reserves.
4. For calculation of debt -equity ratio both secured and unsecured loans have been
considered.

Question 8
In a limited company, Equity Share Capital is held by X, Y and Z in the proportion of
30:30:40. Also A, B and C hold preference share capital in the proportion of 50:30:20. The
company has not paid the dividend to holders of preference share capital for more than
3 years. Given that the paid-up equity share capital of the company is ₹ 1 Crore and that
of preference share capital is ₹ 50 Lakh
Find out the relative weight in the voting right of equity shareholders and preference
shareholders.
Also the company proposing to issue equity shares with differential voting rights (DVR) to
the extent of ₹ 50 lakhs. Assuming the company fulfils other conditions pertaining to the
issue of shares with DVR. Can the company issue the shares with DVR? (5 Marks) (May’22)

Answer 8
(i) The respective voting right of various shareholders will be
X = 2/3X30/100 = 3/15 OR 20%
Y = 2/3X30/100 = 3/15 OR 20%
Z = 2/3X40/100 = 4/15 OR 26.67%
A = 1/3X50/100 = 1/6 OR 16.67%
B = 1/3X30/100 = 1/10 OR 10%
C = 1/3X20/100 = 2/30 OR 6.67%
Hence their relative weights are 3/15: 3/15: 4/15: 1/6: 1/10 :2/30 or 6:6:8:5:3:2.
(ii) The voting power in resspect of shares with differential rights shall not exceed seventy four
percent of the total voting power including voting power in respect of equity shares with
differential rights (DVR) issued at any point of time as per Companies (Share Capital and
Debentures) Rules.
₹
Existing Equity Share Capital paid up 1,00,00,000.00
Proposed DVR 50,00,000.00
Post DVR Equity Share Capital paid up 1,50,00,000.00
% of shares with DVR to total paid up Equity Share Capital 33.33%
(including Equity Shares with DVR) (₹ 50,00,000 /
₹ 150,00,000 X 100)
In the given case 33.33% of shares with DVR to total post issue paid up Equity Capital
(including Equity Shares with DVR) is not exceeding 74%. Hence, the company can issue such
equity shares.

Question 9
PG Limited furnishes the following Balance Sheet as at 31st March,2022:

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Particulars Notes ₹ (in Lakhs)

1. Equity and Liabilities
Shareholders’ funds
Share Capital 1 12,000
Reserves and Surplus 2 8,100
2 Current liabilities
(a) Trade Payables 7,450
(b) Other Current Liabilities 1,950
Total 29,500
Assets
1 Non-current assets
Property, Plant and Equipment 12,760
Non-current Investments 740
2. Current assets
Inventories 6,000
Trade receivables 2,600
Cash and cash equivalents 7,400
Total 29,500
Notes to accounts:
Particulars ₹ (in
Lakhs)
1. Share Capital
Authorized, issued and subscribed capital
Equity share capital (fully paid up shares of ₹ 10 each) 12,000
2. Reserves and Surplus
Securities premium 1,750
General reserve 2,650
Capital redemption 2,000
reserve Profit and Loss 1,700
account 8,100
Total
On 1st April, 2022, the company announced the buy-back of 25% of its Equity Shares @ ₹
15 per share. For this purpose, it sold all of is investments for ₹ 750 lakhs.
On 5th April, 2022, the company achieved the target of buy-back You are required to pass
necessary journal entries for the above transactions. (5 marks Nov ‘22)
Answer 9
In the books of PG Limited
Journal Entries

Date Particulars Dr. Cr.

202 (₹ in lakhs)

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2
April Bank A/c Dr. 750
1
To Investment A/c 740
To P& L A/c (Profit on sale of investment) 10
(Being investment sold on profit)
April Equity share capital A/c Dr. 3,000
5
Premium payable on buy-back A/c Dr. 1,500
To Equity shares buy-back A/c 4,500
(Being the amount due to equity shareholders on
buy- back)
Securities Premium A/c Dr. 1,500
To Premium payable on buy-back A/c 1,500
(Being the amount of premium charged from
securities premium account)
Equity shares buy-back A/c Dr. 4,500
To Bank A/c 4,500
(Being the payment made on account of buy-back of
30 Lakh Equity Shares)
April Profit and Loss A/c Dr. 1,700
5 General reserve A/c Dr. 1,300
To Capital redemption reserve A/c 3,000
(Being amount equal to nominal value of buy-back
shares from free reserves transferred to capital
redemption reserve account as per the law)
Note: 1. In the last entry given in the solution, it is possible to adjust transfer to Capital
Redemption Reserve Account from different combinations of amounts from Securities
Premium, General Reserve and Profit and Loss Account to the extent available.
2. Calculation of amount of Buy Back of Share: ₹12,000/10 X 25% X ₹ 15 = ₹ 4,500 Lakhs

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Chapter 2.3
Equity share with differential rights
Question 1
(i) Explain the meaning of Equity Shares with Differential Rights. Can Preference Shares be
also issued with differential rights ?
(ii) In Jugnu Limited A, B, C and D hold equity share capital in the proportion of 30:30:30:
10 and M, N, O and P hold preference share capital in proportion of 40:20:30:10.
You are required to calculate their voting rights in case of resolution of winding up of the
company, if the paid up Equity Share Capital of the company is ` 100 Lakhs and Preference
Share Capital is ` 50 Lakhs. (5 Marks July 21)
Answer 1
(i) As per the Companies Act 2013, companies can issue equity shares with differential rights
subject to the fulfilment of certain conditions. Companies (Share Capital and Debentures)
Rules, 2014 deal with equity shares with differential rights. Differentiation can be done by
giving a superior dividend / Superior voting right / diluted voting right to a class of equity
shareholders. Preference shares are not issued with differential rights. It is only the equity
shares, which are issued.
(ii) In the given case, the relative weight in the voting right of equity shareholders and
preference shareholders will be 2/3 and 1/3. The respective voting right of various
shareholders will be
Relative weights Voting Power
A = 2/3X30/100 = 2/10 20%
B = 2/3X30/100 = 2/10 20%
C = 2/3X30/100 = 2/10 20%
D = 2/3X10/100 = 1/15 6.67%
M = 1/3X40/100 = 2/15 13.33%
N = 1/3X20/100 = 1/15 6.67%
O = 1/3X30/100 = 1/10 10%
P = 1/3X10/100 = 1/30 3.33%

Question 2
(i) Can preference shares be also issued with differential rights? Explain in brief.
(ii) Explain the conditions under Companies (Shares Capital and Debentures) Rules
2014, to deal with equity shares with differential rights. (5 Marks , Dec’21)
Answer 2
(i) No; the preference shares cannot be issued with differential rights. It is only the equity
shares, which are issued. Equity shares with Differential Rights means the share with
dissimilar rights as to dividend, voting or otherwise.
(ii) As per Share Capital and Debentures Rules, 2014, for equity shares with differential rights,
following conditions to be compulsorily complied with:
 The articles of association of the company authorizes the issue of shares with differential

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rights;
 The issue of shares is authorized by an ordinary resolution passed at a general meeting of
the shareholders: Provided that where the equity shares of a company are listed on a
recognized stock exchange, the issue of such shares shall be approved by the shareholders
through postal ballot;
 The voting power in respect of shares with differential rights shall not exceed seventy four
percent of the total voting power including voting power in respect of equity shares with
differential rights issued at any point of time;
 The company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue such
shares;
 The company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference shares
or debentures that have become due for redemption or payment of interest on such
deposits or debentures or payment of dividend;
 The company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or State level financial
institution or scheduled Bank that has become repayable or interest payable thereon or
dues with respect to statutory payments relating to its employees to any authority or default
in crediting the amount in Investor Education and Protection Fund to the Central
Government;
Provided that a company may issue equity shares with differential rights upon expiry of five
years from the end of financial year in which such default was made good.

 The company has not been penalized by Court or Tribunal during the last three years of any
offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of
India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange
Management Act, 1999 or any other special Act, under which such companies being
regulated by sectoral regulators.

Question 3
P, Q, R and S hold equity share capital in the proportion of 10:40:20:30. K, L, M and N hold
preference share capital in the proportion of 20:10:40:30. If the paid up equity share
capital of the company is ` 60 lakhs and Preference Share Capital is ` 30 lakhs, find their
voting rights in case of resolution of winding up of the company. (5 Marks Dec’21 , Nov 18
& Nov 20 ) (Similar to Nov 18 but different figures) (Similar to Dec 21 & Nov 20 but
different figures)
Answer 3
P, Q, R and S hold Equity capital is held by in the proportion of 10:40:20:30 and K, L, M and N
hold preference share capital in the proportion of 20:10:40:30. As the paid up equity share
capital of the company is ` 60 Lakhs and Preference share capital is ` 30 Lakh (2:1), then
relative weights in the voting right of equity shareholders and preference shareholders will
be 2/3 and 1/3.
The respective voting right of various shareholders will be

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P = 2/3X10/100 = 1/15
Q = 2/3X40/100 = 4/15
R = 2/3X20/100 = 2/15 S = 2/3X30/100 = 3/15
K = 1/3X20/100 = 1/15
L = 1/3X10/100 = 1/30
M = 1/3X40/100 = 2/15
N = 1/3X30/100 = 1/10
Hence, their relative weights are 1/15 : 4/15 : 2/15 : 3/15: 1/15 : 1/30 : 2/15 : 1/10 or
2:8:4:6:2:1:4:3.
Their respectively voting power is P (6.67%), Q (26.67%), R (13.33%), S (20%), K (6.67%),
L (3.33%), M (13.33%) and N (10%).

Question 5
Equity Capital is held by Anu, Adi and Arun in the proportion of 30 : 30 : 40 and Preference
Share Capital is held by Sonu, Shri and Sanaya in the proportion of 40 : 10 : 50. If the paid
up Equity Share Capital of the company is ` 60 lakhs and Preference Share Capital is ` 30
lakhs, find the proportion and percentage of their voting right in case of resolution of
winding up of the company. (5 Marks , Jan 21)

Answer 5
Equity capital is held by Anu, Adi and Arun in the proportion of 30:30:40. Sonu, Shri and
Sanaya hold preference share capital in the proportion of 40:10:50. If the paid up equity
share capital of the company is ` 60 lakhs and Preference share capital is ` 30 Lakh, then
relative weight in the voting right of equity shareholders and preference shareholders will
be 2/3 and 1/3.
The respective voting right of various shareholders will be:

Shareholders Relative weights Voting Power

Anu 2/3X30/100 3/15 20.00%
Adi 2/3X30/100 3/15 20.00%
Adi 2/3X30/100 3/15 20.00%
Arun 2/3 X40/100 4/15 26.67%
Sonu 1/3X40/100 4/30 13.33%
Shri 1/3X10/100 1/30 3.33%
Sanaya 1/3X50/100 5/30 16.67%

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Chapter 3.1
Amalgamation of Co's
Question 1
The summarized Balance Sheets of Black Limited and White Limited as on 31st March,
2020 is as follows:
Particulars Notes Black Limited (` White Limited (`
In 000) In 000)
Equity and Liabilities
Shareholders' Funds
(a) Share Capital 1 6,000 3,600
(b) Reserves and Surplus 2 1,080 660
Current Liabilities
Trade payables 600 360
Total 7,680 4,620
Assets
Non-current assets
Property, Plant and Equipment 3,600 2,400
Current assets
(a) Inventories 960 720
(b) Trade receivables 1,680 1,080
(c) Cash and Cash Equivalents 1,440 420
Total 7,680 4,620
Note Particulars Black Limited (` White Limited
No. in 000) (` in 000)
1. Share Capital 6,000 3,600
Equity Shares of ` 100 each
Reserves and Surplus
2. General Reserve 360 180
Profit and Loss Account 720 480
Total 1,080 660

Black Limited takes over White Limited on 1st July, 2020.

No Balance Sheet of White Limited is available as on that date. It is, however estimated
that White Limited earned profit of ` 2,40,000 after charging proportionate depreciation
@ 10% p.a. on Property Plant and Equipment, during April-June, 2020.
Estimated profit of Black Limited during these 3 months was ` 4,80,000 after charging
proportionate deprecation @ 10% p.a. on Property Plant and Equipment
Both the companies have declared and paid 10% dividend within this 3 months' period.
Goodwill of White Limited is valued at ` 2,40,000 and Property Plant and Equipment are
valued at ` 1,20,000 above the depreciated book value on the date of takeover.
Purchase consideration is to be satisfied by Black Limited by issuing shares at par. Ignore

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income tax. You are required to:

(i) Compute No. of shares to be issued by Black Limited to White Limited against purchase
consideration.
(ii) Calculate the balance of Net Current Assets of Black Limited and White Limited as on 1st
July, 2020.
(iii) Give balance of Profit or Loss of Black Limited as on 1st July, 2020

(iv) Give balance of Property Plant and Equipment as on 1st July, 2020 after takeover. (10
Marks July 21)
Answer 1
(i) No. of shares issued by Black Ltd. to White Ltd. against purchase consideration
White Ltd. ` `
Goodwill 2,40,000
Property, plant and equipment 24,00,000
Less: Depreciation [24,00,000  10 %  3/12] (60,000)
23,40,000
Add: Appreciation 1,20,000 24,60,000
Inventory 7,20,000
Trade receivables 10,80,000
Cash and Bank balances 4,20,000
Add: Profit after depreciation 2,40,000
Add: Depreciation (non-cash) 60,000 3,00,000
Less: Dividend [36,00,000  10%] (3,60,000) 3,60,000
48,60,000
Less: Trade payables (3,60,000)
Purchase Consideration 45,00,000
Number of shares to be issued by Black Ltd. @ ` 100 each 45,000 shares
(ii) Calculation of Net Current Assets as on 01.07.2020
Black Ltd. White Ltd.
` ` `
Current assets:
Inventory 9,60,000 7,20,000
Trade receivables 16,80,000 10,80,000
Cash and Bank 14,40,000 4,20,000
Less: Dividend (6,00,000) (3,60,000)
Add: Profit after depreciation 4,80,000 2,40,000
Add: Depreciation being non
cash 90,000 14,10,000 60,000 3,60,000
40,50,000 21,60,000
Less: Trade payables (6,00,000) (3,60,000)
34,50,000 18,00,000

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(iii) Profit and Loss Account balance of Black Ltd. as on 1.07.2020

`
P & L A/c balance as on 31.03.2020 7,20,000
Less: Dividend paid (6,00,000)
1,20,000
Add: Estimated profit for 3 months after charging 4,80,000
depreciation
6,00,000

(iv) Property, plant and equipment as on 01.07.2020

Property, plant and equipment of Black Ltd. as on 36,00,000
31.03.2020
Less: Depreciation for 3 months [36,00,000 x 10% x (90,000)
3/12]
35,10,000
Property, plant and equipment of White Ltd. Taken
over as on 31.03.2020
24,00,000
Less: Proportionate depreciation for 3 months on fixed (60,000)
assets
23,40,000
Add: Appreciation above the estimated book value 1,20,000 24,60,000
Total Property, plant and equipment as on 1.7.2020 59,70,000

Question 2
Galaxy Ltd. and Glory Ltd., are two companies engaged in the same business of chemicals.
To mitigate competition, a new company Glorious Ltd, is to be formed to which the assets
and liabilities of the existing companies, with certain exception, are to be transferred. The
summarized Balance Sheet of Galaxy Ltd. and Glory Ltd. as at 31st March, 2020 are as
follows:
Galaxy Ltd. Glory Ltd.
` `
(I) Equity & Liabilities
(1) Shareholders' fund

Share Capital .
8,40,000 4,55,000
Equity shares of ` 10 each
Reserves & Surplus
General Reserve 4,48,000 40,000
Profit & Loss A/c
1,12,000 72,000
(1) Non-current Liabilities Secured

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Loan
6% Debentures - 3,30,000
(1) Current Liabilities
Trade Payables 4,20,000 1,83,000
Total 18,20,000 10,80,000
(II) Assets
(1) Non-current assets Property,
Plant & Equipment

Freehold property, at cost 5,88,000 3,36,000

Plant & Machinery, at cost less 1,40,000 84,000

depreciation
Motor vehicles, at cost less 56,000 -
depreciation
(2) Current Assets
Inventories
3,36,000 4,38,000
Trade Receivables 4,62,000 1,18,000
Cash at Bank 2,38,000 1,04,000
Total 18,20,000 10,80,000
Assets and Liabilities are to be taken at book value, with the following exceptions:
(i) The Debentures of Glory Ltd. are to be discharged, by the issue of 8% Debentures of
Glorious Ltd. at a premium of 10%.
(ii) Plant and Machinery of Galaxy Ltd. are to be valued at ` 2,52,000.
(iii) Goodwill is to be valued at : Galaxy Ltd. ` 4,48,000 Glory Ltd. ` 1,68,000
(iv) Liquidator of Glory Ltd. is appointed for collection from trade debtors and payment to
trade creditors. He retained the cash balance and collected ` 1,10,000 from debtors
and paid ` 1,80,000 to trade creditors. Liquidator is entitled to receive 5% commission for
collection and 2.5% for payments. The balance cash will be taken over by new company.
You are required to :
(1) Compute the number of shares to be issued to the shareholders of Galaxy Ltd. and Glory
Ltd, assuming the nominal value of each share in Glorious Ltd. is ` 10.
(2) Prepare Balance Sheet of Glorious Ltd., as on 1st April, 2020 and also prepare notes to
the accounts as per Schedule III of the Companies Act, 2013. (20 Marks , Jan 21)
Answer 2
(i) Calculation of Purchase consideration (or basis for issue of shares of Glorious Ltd.

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Galaxy Ltd. Glory Ltd.

Purchase Consideration: ` `
Goodwill 4,48,000 1,68,000
Freehold property 5,88,000 3,36,000
Plant and Machinery 2,52,000 84,000
Motor vehicles 56,000 -
Inventory 3,36,000 4,38,000
Trade receivables 4,62,000 -
Cash at Bank 2,38,000 24,000
23,80,000 10,50,000
Less: Liabilities:
6% Debentures (3,00,000 x 110%) - (3,30,000)
(4,20,000) ____
Trade payables
19,60,000 7,20,000
Net Assets taken over
To be satisfied by issue of shares of Glorious. 1,96,000 72,000
Ltd. @ ` 10 each

(ii) Balance Sheet of Glorious Ltd. as at 1st April, 2020

Particulars Note No Amount

EQUITY AND LIABILITIES

1 Shareholders' funds
(a) Share capital 1 26,80,000
(b) Reserves and surplus 2 30,000
2 Non-current liabilities
(a) Long-term borrowings 3 3,00,000
3 Current liabilities
(a) Trade payables 4,20,000
Total 34,30,000
ASSETS
1 Non-current assets
(a) i
Property, plant and equipment 4 13,16,000
ii Intangible assets 5 6,16,000
2 Current assets
(a) Inventories 6 7,74,000

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(b) Trade receivables 4,62,000

(c) Cash and cash equivalents 7 2,62,000
Total 34,30,000

Notes to accounts:
` `
1. Share Capital
Equity share capital
2,68,000 shares of ` 10 each 26,80,000
(All the above shares are issued for consideration
other than cash)
2. Reserves and surplus
Securities Premium 30,000
(10% premium on debentures of `3,00,000)
3. Long-term borrowings 3,00,000
Secured 8% 3,000 Debentures of `100 each
4. Property Plant and Equipment
Freehold property
Galaxy Ltd. 5,88,000
Glory Ltd. 3,36,000 9,24,000
Plant and Machinery
Galaxy Ltd. 2,52,000
Glory Ltd. 84,000 3,36,000
Motor vehicles - Galaxy Ltd. 56,000
13,16,000
5 Intangible assets
Goodwill
Galaxy Ltd. 4,48,000
Glory Ltd. 1,68,000 6,16,000
6 Inventories
Galaxy Ltd. 3,36,000
Glory Ltd. 4,38,000 7,74,000
7 Cash and cash equivalents
Galaxy Ltd. 2,38,000
Glory Ltd.(As per working note) 24,000 2,62,000

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Question 3
High Ltd. and Low Ltd. were amalgamated on and from, 1st April, 2020. A new company
Little Ltd. was formed to take over the business of the existing Companies. The
summarized Balance sheets of High Ltd. and Low Ltd. as on 31st March, 2020 are as under:
(` in Lakhs)
Liabilities High Low Assets High Low
Ltd. Ltd. Ltd. Ltd.
Share Capital: Property, Plant and
Equipment:
Equity Shares of ` 100 each 1000 850 Land & Building 670 385

14% Pref Shares of 320 175 Plant & Machinery 475 355
` 100 each
Reserves & Surplus: Investments 95 80
Revaluation Reserve 225 110 Current Assets:
General Reserve 360 240 Stock 415 389
Investment Allowance 80 40 Sundry Debtors 322 213
Reserve
P & L Account 85 82 Bills Receivables 35 -
Non-Current Liabilities: Cash & Bank 303 166
Secured Loans:
13% Debentures (` 100 100 56
each)
Unsecured Loans (Public 50 -
Deposits)
Current Liabilities & -
Provisions:
Sundry Creditors 65 35
Bills Payable 30 -
TOTAL 2315 1588 TOTAL 2315 1588
Other Information :
(1) 13% Debenture holders of High Ltd. & Low Ltd. are discharged by Little Ltd. by issuing
such number of its 15% Debentures of ` 100 each so as to maintain the same amount of
interest.
(2) Preference Shareholders of the two companies are issued equivalent number of 15%
Preference shares of Little Ltd. at a price of ` 125 per share (Face Value ` 100)
(3) Little Ltd. will issue 4 Equity Shares for each Equity Share of High Ltd. & 3 equity shares
for each Equity Share of Low Ltd. The shares are to be issued at ` 35 each having a face
value of ` 10 per share.
(4) Investment Allowance Reserve is to be maintained for two more years.
Prepare the Balance sheet of Little Ltd. as on 1st April, 2020 after the amalgamation has

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been carried out in basis of in the nature of Purchase. ( 15 Marks ,Nov 20)
Answer 3
Balance Sheet of Little Ltd. as at 1st April, 2020
Particulars Note No. (` in lakhs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,150.0
(b) Reserves and Surplus 2 2,437.8
(2) Non-Current Liabilities
Long-term borrowings 3 135.2
Other Borrowings- Unsecured Loans 50
(3) Current Liabilities
Trade payables 4 130.0

Total 3,903
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 5 1,885
(b) Non-current investment (95 + 80) 175
(2) Current assets
(a) Inventory (415+389) 804
(b) Trade receivables 6 570
(c) Cash and bank balances (303 + 166) 469
Total 3,903
Notes to Accounts
(` in lakhs) (` in lakhs)
1. Share Capital
Equity share capital (W.N.1)
65,50,0001 Equity shares of 10 each 655
4,95,0002 Preference shares of ` 100 each 495
(all the above shares are allotted as fully
paid-up pursuant to contracts without
payment being received in cash)
1,150
2. Reserves and surplus
Securities Premium Account (W.N.3) (1080+
681.25) 1,761.25
Capital Reserve (W.N. 2)(283.33 + 393.22) 676.55
Investment Allowance Reserve (80 + 40) 120
Amalgamation Adjustment Reserve (80 + 40) (120) 2,437.8

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3. Long-term borrowings
15% Debentures 135.2
4. Trade payables
65
Sundry Creditors: High Ltd.
Low Ltd. 35
Bills Payable: High Ltd. 30 130
5. Property, Plant and Equipment
Land and Building : High Ltd 670
Low Ltd 385 1055
Plant and Machinery: High Ltd. 475
Low Ltd. 355 830 1,885
6. Trade receivables
Sundry Debtors: High Ltd. 322
Low Ltd. 213
Bills Receivables: High Ltd. 35 570

Working Notes:
(` in lakhs)
High Ltd. Low Ltd.
(1) Computation of Purchase consideration
(a) Preference shareholders:
3,20,00,000 400
. . 3,20,000 ℎ
100
. 125 ℎ

1,75,00,000 218.75
. . 1,75,000 ℎ
100
. 125 ℎ

(a) Equity shareholders 1400

10,00,00,000
. . 40,00,000 ℎ
100
. 35 ℎ

(2) 8,50,00,000
. . 25,50,000 ℎ - 892.50
100
. 35 ℎ
Amount of Purchase Consideration
1,800 1,111.25
Computation of Capital Reserve
Assets taken over:

Land and Building 670 385

Plant and Machinery 475 355

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Investments 95 80
Inventory 415 389
Trade receivables 322 213
Bills Receivables 35
Cash and bank 303 166
2,315 1,588
Less: Liabilities taken over:
Debentures 86.67 48.53
Unsecured Loan 50
Creditors Bills 65 35
Payable 30
231.67 83.53
Net assets taken over 2083.33 1,504.47
Purchase consideration 1,800 1,111.25
Capital reserve 283.33 393.22
(3) Computation of securities
premium
On preference share capital
80
High Ltd.- 3,20,000 x 25 43.75
Low Ltd.- 1,75,000 x 25
On equity share capital High 1000
Ltd.- 40,00,000 x 25 637.5
Low Ltd.- 25,50,000 x 25
Total 1080 681.25
(4) Issue of Debentures (` In Lakhs)
High Ltd.- 15% fresh issue of debenture for 13% old debentures = 100 X
13% /15% = 86.67(rounded off)
Low Ltd.- 15% fresh issue of debenture for 13% old debentures = 56 X 13%
/15% = 48.53 (rounded off)
Total number of debentures issued = 86.67 + 48.53 = 135.20 Lakhs

Question 4
The following are the summarized Balance Sheet of VT Ltd. and MG Ltd. as on 31st
March, 2018:
Particulars VT Ltd. (Rs. ) MG Ltd. (Rs.)
Equity and Liabilities
Equity Shares of Rs. 10 each 12,00,000 6,00,000
10% Pref. Shares of Rs. 100 each 4,00,000 2,00,000
Reserve and Surplus 6,00,000 4,00,000
12% Debentures 4,00,000 3,00,000
Trade Payables 5,00,000 3,00,000
Total 31,00,000 18,00,000
Assets
Property, Plant & Equipment 14,00,000 5,00,000
Investment 1,60,000 1,60,000

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Inventory 4,80,000 6,40,000

Trade Receivables 8,40,000 4,20,000
Cash at Bank 2,20,000 80,000
Total 31,00,000 18,00,000
Details of Trade receivables and trade payables are as under:
VT Ltd. (Rs.) MG Ltd. (Rs.)

Trade Receivable
Debtors 7,20,000 3,80,000
Bills Receivable 1,20,000 40,000
8,40,000 4,20,000
Trade Payables
Sundry Creditors 4,40,000 2,50,000
Bills Payable 60,000 50,000
5,00,000 3,00,000
Property, Plant & Equipment of both the companies are to be revalued at 15% above
book value. Inventory in Trade and Debtors are taken over at 5% lesser than their
book value.
Both the companies are to pay 10% equity dividend, Preference dividend having been
already paid.
After the above transactions are given effect to, VT Ltd. will absorb MG Ltd. on the
following terms:
(i) VT Ltd. will issue 16 Equity Shares of Rs. 10 each at par against 12 Shares of MG
Ltd.
(ii) 10% Preference Shareholders of MG Ltd. will be paid at 10% discount by issue of
10% Preference Shares of Rs. 100 each, at par, in VT. Ltd.
(iii) 12% Debenture holders of MG Ltd. are to be paid at 8% premium, by 12%
Debentures in VT Ltd., issued at a discount of 10%.
(iv) Rs. 60,000 is to be paid by VT Ltd. to MG Ltd. for Liquidation expenses.
(v) Sundry Debtors of MG Ltd. includes Rs. 20,000 due from VT Ltd. You are required
to prepare :
(1) Journal entries in the books of VT Ltd.
(2) Statement of consideration payable by VT Ltd. [10 Marks, May ‘19]
Answer 4
(i) Journal Entries in the Books of VT Ltd.

Dr. Cr.
Rs. Rs.
Property, Plant & Equipment Dr. 2,10,000
To Revaluation Reserve 2,10,000
(Revaluation of fixed assets at 15% above book
value)

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Reserve and Surplus Dr. 1,20,000

To Equity Dividend 1,20,000
(Declaration of equity dividend @ 10%)
Equity Dividend Dr. 1,20,000
To Bank Account 1,20,000
(Payment of equity dividend)
Business Purchase Account Dr. 9,80,000
To Liquidator of MG Ltd. 9,80,000
(Consideration payable for the business taken over
from MG Ltd.)
Property, Plant & Equipment (115% of Rs. 5,00,000) Dr. 5,75,000
Inventory (95% of Rs. 6,40,000) Dr. 6,08,000
Debtors Dr. 3,80,000
Bills Receivable Dr. 40,000
Investment Dr. 1,60,000
Cash at Bank Dr. 20,000
(Rs. 80,000 – Rs. 60,000 dividend paid)
To Provision for Bad Debts (5% of Rs. 3,60,000) 18,000
To Sundry Creditors 2,50,000
To 12% Debentures in MG Ltd. 3,24,000
To Bills Payable 50,000
To Business Purchase Account 9,80,000
To Capital Reserve (Balancing figure) 1,61,000
(Incorporation of various assets and liabilities
taken
over from MG Ltd. at agreed values and difference
of
net assets and purchase consideration being
credited
to capital reserve)
Liquidator of MG Ltd. Dr. 9,80,000
To Equity Share Capital 8,00,000
To 10% Preference Share Capital 1,80,000
(Discharge of consideration for MG Ltd.’s business)
12% Debentures in MG Ltd. (Rs. 3,00,000 × 108%) Dr. 3,24,000
Discount on Issue of Debentures Dr. 36,000
To 12% Debentures 3,60,000
(Allotment of 12% Debentures to debenture
holders of
MG Ltd. at a discount of 10%)
Sundry Creditors Dr. 20,000
To Sundry Debtors 20,000
(Cancellation of mutual owing)
Goodwill Dr. 60,000
To Bank 60,000

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(Being liquidation expenses reimbursed to MG Ltd.)

Capital Reserve/P&L A/c Dr. 60,000
To Goodwill 60,000
(Being goodwill set off)

(ii) Statement of Consideration payable by VT Ltd. for 60,000 shares (payment

method)
Shares to be allotted 60,000/12 x 16 = 80,000 shares of VT Ltd.
Issued 80,000 shares of Rs. 10 each i.e. Rs. 8,00,000

(i) For 10% preference shares, to be paid at 10% discount

Rs. 2,00,000x 90/100 Rs. 1,80,000

(ii) Consideration amount [(i) + (ii)] Rs. 9,80,000

Question 5
The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:
X Ltd. (Rs.) Y Ltd. (Rs. )
Equity and Liabilities
Equity Shares of Rs.10 each 30,00,000 9,00,000
9% Preference Shares of Rs. 100 each 3,00,000 -
10% Preference Shares of Rs. 100 each - 3,00,000
General Reserve 2,10,000 2,10,000
Retirement Gratuity Fund (long term) 1,50,000 60,000
Trade Payables 3,90,000 2,40,000
Total 40,50,000 17,10,000
Assets
Goodwill 1,50,000 75,000
Land & Buildings 9,00,000 3,00,000
Plant & Machinery 15,00,000 4,50,000
Inventories 7,50,000 5,25,000
Trade Receivables 6,00,000 3,00,000
Cash and Bank 1,50,000 60,000
Total 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%
Preference Shares of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of
average profits of preceding three financial years (2016-17 : Rs. 90,000; 2015-16
: Rs. 78,000 and 2014-15: Rs. 72,000). The profits of 2014-15 included credit of
an insurance claim of Rs. 25,000 (fire occurred in 2013-14 and loss by fire Rs.

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30,000 was booked in Profit and Loss Account of that year). In the year 2015-
16, there was an embezzlement of cash by an employee amounting to Rs.
10,000.
(iii) Land & Buildings are valued at Rs. 5,00,000 and the Plant & Machinery at Rs.
4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for
Doubtful Debts is to be created @ 2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value
amounted to Rs. 15,000 and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included Rs. 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to
(i) Prepare Realisation A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.
[20 Marks , May ‘18]
Answer 5
In the Books of Y Ltd. Realization Account
Rs. Rs.
To Sundry Assets : By Retirement Gratuity 60,000
Fund
Goodwill 75,000
Land & Building 3,00,000 By Trade payables 2,40,000
Plant & Machinery 4,50,000 By X Ltd. (Purchase 15,90,000
Inventory 5,25,000 Consideration)
Trade receivables 3,00,000
Bank 60,000 17,10,000
To Preference 30,000
Shareholders
(Premium on Redemption)
To Equity Shareholders
(Profit on Realisation) 1,50,000
18,90,000 18,90,000
In the Books of X Ltd. Journal Entries
Dr. Cr.
Rs. Rs.
Business Purchase A/c Dr. 15,90,000
To Liquidators of Y Ltd. Account 15,90,000
(Being business of Y Ltd. taken over)
Goodwill Account Dr. 1,50,000
Land & Building Account Dr. 5,00,000
Plant & Machinery Account Dr. 4,00,000
Inventory Account Dr. 4,72,500
Trade receivables Account Dr. 3,00,000
Bank Account Dr. 60,000

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Unrecorded assets Account Dr. 15,000

To Retirement Gratuity Fund Account 60,000
To Trade payables Account 2,40,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 15,90,000
(Being Assets and Liabilities taken over as per agreed
valuation).
Liquidators of Y Ltd. A/c Dr. 15,90,000
To 9% Preference Share Capital A/c 3,30,000
To Equity Share Capital A/c 12,00,000
To Securities Premium A/c 60,000
(Being Purchase Consideration satisfied as above)

Balance Sheet of X Ltd. (after absorption)as at 31st March,

2018
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 48,30,000
B Reserves and Surplus 2 2,70,000
2 Non-current liabilities
A Long-term provisions 3 2,10,000
3 Current liabilities
A Trade Payables 4 6,10,000
B Short term provision 5 7,500
Total 59,27,500
Assets
1 Non-current assets
A Fixed assets
Tangible assets 6 33,00,000
Intangible assets 7 3,00,000
2 Current assets
A Inventories 8 12,22,500
B Trade receivables 9 8,80,000
C Other current Assets 10 15,000
D Cash and cash equivalents 11 2,10,000
Total 59,27,500

Notes to accounts

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Rs.
1 Share Capital
Equity share capital
4,20,000 Equity Shares of Rs. 10 each fully paid (Out of above
1,20,000
Equity Shares were issued in consideration other than for cash) 42,00,000
Preference share capital
6,300 9% Preference Shares of Rs. 100 each (Out of above 3,300
Preference Shares were issued in consideration other than for cash) 6,30,000
Total 48,30,000
2 Reserves and Surplus
Securities Premium 60,000
General Reserve 2,10,000
Total 2,70,000
3 Long-term provisions
Retirement Gratuity fund 2,10,000
4 Trade payables (3,90,000 + 2,40,000 - 20,000*)* Mutual Owings 6,10,000
eliminated.
5 Short term Provisions
Provision for Doubtful Debts 7,500
6 Tangible assets
Land & Buildings 14,00,000
Plant & Machinery 19,00,000
Total 33,00,000
7 Intangible assets
Goodwill (1,50,000 +1,50,000) 3,00,000
8 Inventories (7,50,000 + 4,72,500) 12,22,500
9 Trade receivables (6,00,000 + 3,00,000 - 20,000) 8,80,000
10 Other current Assets 15,000
11 Cash and cash equivalents (1,50,000 +60,000) 2,10,000
Working Notes:
Computation of goodwill Rs.
Profit of 2016-17 90,000
Profit of 2015-16 adjusted Rs. 78,000 + 10,000) 88,000
Profit of 2014-15 adjusted (Rs. 72,000 – 25,000) 47,000
2,25,000
Average profit 75,000
Goodwill to be valued at 2 times of average profits = Rs. 75,000 x 2 = Rs.
1,50,000
Purchase Consideration: Rs.
Goodwill 1,50,000
Land & Building 5,00,000
Plant & Machinery 4,00,000
Inventory 4,72,500

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Trade receivables 3,00,000

Unrecorded assets 15,000
Cash at Bank 60,000
18,97,500
Less: Liabilities:
Retirement Gratuity 60,000
Trade payables 2,40,000
Provision for doubtful debts 7,500 (3,07,500)
Net Assets/ Purchase Consideration 15,90,000
To be satisfied as under:
10% Preference Shareholders of Y Ltd. 3,00,000
Add: 10% Premium 30,000
9% Preference Shares of X Ltd. 3,30,000
Equity Shareholders of Y Ltd. to be satisfied by issue of
1,20,000 equity Shares of X Ltd. at 5% Premium 12,60,000
Total 15,90,000

Question 6
Dark Ltd. and Fair Ltd. were amalgamated on and from 1st April, 2021. A new company
Bright Ltd. was formed to take over the business of the existing companies. The balance
Sheets of Dark Ltd. and Fair Ltd. as at 31st March, 2021 are given below:
(` In Lakhs)
Particulars Note No. Dark Ltd. Fair Ltd.
1 Equity and Liabilities
(1) Shareholders’ Funds

Share Capital 1 1,650 1,425

Reserves and Surplus 2 630 495

(2) Non-Current Liabilities Long Term

Borrowings: 90 45
10% Debentures of 100 ` each

(3) Current Liabilities Trade Payables

630 285
Total 3,000 2,250
II Assets
(1) Non Current Assets
1,350 975
(a) Property, Plant and Equipment
(b) Non Current Investments 225 75
(2) Current Assets
(a) Inventories 525 375
(b) Trade Receivables 450 525
450 300

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(c) Cash and Cash Equivalents

Total 3,000 2,250

Notes to Accounts
Dark Ltd. (` Fair Ltd. (`
in Lakh) in Lakh)
1 Share Capital
Equity Shares of ` 100 each 1, 200 1,125
450 300
14% Preference Shares of ` 100 each 1,650 1,425
2 Reserves and Surplus
Revaluation Reserve 225 150
General Reserve 255 225
Investment Allowance Reserve 75 75
Profit and Loss Account 75 45
630 495
Additional Information:
(i) Bright Limited will issue 5 equity shares for each equity share of Dark Limited and 4
equity shares for each equity share of Fair Limited. The shares are to be issued @ ` 35
each having a face value of ` 10 per share.
(ii) Preference shareholders of the two companies are issued equivalent number of 16%
preference shares of Bright Limited at a price of ` 160 per share (face value ` 100).
(iii) 10% Debenture holders of Dark Limited and Fair Limited are discharged by Bright
Limited, issuing such number of its 16% Debentures of ` 100 each so as to maintain the
same amount of interest.
(iv) Investment allowance reserve is to be maintained for 4 more years.
(v) Liquidation expenses are for Dark Limited ` 6,00,000 and for Fair Limited ` 3,00,000. It
is decided that these expenses would be borne by Bright Limited.
(vi) All the assets and liabilities of Dark Limited and Fair Limited are taken over at book
value.

(vii) Authorized equity share capital of Bright Limited is ` 15,00,00,000 divided into equity
share of ` 10 each. After issuing required number of shares to the liquidators of Dark
Limited and Fair Limited, Bright Limited issued balance shares to public. The issue was
fully subscribed.
You are required to prepare Balance Sheet of Bright Limited as at 1st April, 2021 after
amalgamation has been carried out on the basis of Amalgamation in the nature of
purchase (15 Marks Dec’21)

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Answer 6
Balance Sheet of Bright Ltd. as at 1st April, 2021
Particulars Note No. (` in lakhs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 2,250
(b) Reserves and Surplus 2 4,200
(2) Non-Current Liabilities
Long-term borrowings 3 84.375
(3) Current Liabilities
Trade payables 4 915
Total 7449.375
II. Assets
(1) Non-current assets
(a) i. Property, plant and equipment 5 2,325
ii. Intangible assets 6 633.375
(b) Non-current investments 7 300
(2) Current assets
(a) Inventories 8 900
(b) Trade receivables 9 975
(c) Cash and cash equivalents 10 2316
Total 7449.375
Notes to Accounts
(` in lakhs) (` in lakhs)
1. Share Capital
Authorized Share Capital
1,50,00,000 Equity shares of `10 each 1500
7,50,000 16% Preference Share of 100 each 750
Issued: 1,50,00,000 Equity shares of ` 10 each 1500
(Out of which 1,05,00,000 Shares were Issued for
consideration other than cash)
7,50,000 16% Preference Shares of 100 each
(Issued for consideration other than cash) 750 2,250
2. Reserves and surplus
Securities Premium Account
(1,50,00,000 shares ×` 25) 3750
(7,50,000 shares × ` 60) 450 4,200
Investment Allowance Reserve 150
Amalgamation Adjustment Reserve (150) 4,200
3. Long-term borrowings

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16% Debentures (56,25,000+28,12,500)

(W.N. 3) 84.375
4. Trade payables
Dark Ltd. 630
Fair Ltd. 285 915
5. Property, plant & equipment
Land and Building 1350
Plant and Machinery 975 2,325
6. Intangible assets
Goodwill [W.N. 2] 624.375
Add: liquidation exp. (6+3) 9.00 633.375
7. Non-current Investments
Investments (225+75) 300
8. Inventories
Dark Ltd. 525
Fair Ltd. 375 900
9 Trade receivables
Dark Ltd. 450
Fair Ltd. 525 975
10 Cash & cash equivalents
Dark Ltd. 450
Fair Ltd. 300
Liquidation Expenses (6+3) (9)
Shares issued for cash (45 lakh shares x `35) 1575 2316
Working Notes:
(` in lakhs)
Dark Ltd. Fair Ltd.
(1) Computation of Purchase consideration
(a) Preference shareholders:
4,50,00,000
100
i.e. 4,50,000 shares × ` 160 each
3,00,00,000 720
100

i.e. 3,00,000 shares × ` 160 each 480

(b) Equity shareholders:
12,00,00,000 5 2,100
100

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i.e. 60,00,000 shares x ` 35 each

11,25,00,000 4
100
i.e. 45,00,000 shares × ` 35 each
Amount of Purchase Consideration Net
2,820_____ 1,575
Assets Taken Over 2,055
(2) Assets taken over:
Property Plant & Equity 1,350 975

Non-Current Investments 225 75

Inventory 525 375

Trade receivables 450 525

Cash and bank 450 300
3,000 2,250
Less: Liabilities taken over:
10% Debentures 56.25 28.125
Trade payables 630 (686.25) 285 (313.125)
Net assets taken over 2,313.75 1936.875
Purchase consideration 2,820 2055.00
Goodwill 506.25 118.125
Total goodwill 624.375
(3) Issue of Debentures
Debentures ` 90,00,000 ` 45,00,000
Interest 10% ` 9,00,000 ` 4,50,000
9,00,000 100 4,50,000 100
16 16
56,25,000 28,12,500

NOTE: In the above solution ` 35 has been considered as the issue price of Equity shares for
public issue also. Alternative considering this as ` 10 also possible. In that case, the balance
of cash and cash equivalents will be ` 1,191 lakhs and securities premium will be ` 3,075 lakhs
in place of the balances given in the balance sheet in the above solution.

Question 7
The summarized Balance Sheet of A Ltd. and B Ltd. as at 31st March,2022 are as under:

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A Ltd. (in ₹) B Ltd. (in ₹)

Equity shares of ₹10 each, fully paid up 30,00,000 24,00,000
Securities Premium Account 4,00,000
General Reserve 6,20,000 5,00,000
Profit and Loss Account 3,60,000 3,20,000
Retirement Gratuity Fund Account 1,00,000
10% Debentures 20,00,000
Unsecured Loan (including loan from A Ltd.) 6,00,000 8,20,000
Trade Payables 1,00,000 3,40,000
71,80,000 43,80,000
Land and Buildings 28,00,000 21,00,000
Plant and Machinery 20,00,000 7,60,000
Long term advance to B Ltd. 2,20,000 7,00,000
Inventories 10,40,000 5,20,000
Trade Receivables 8,20,000 3,00,000
Cash and Bank 3,00,000
71,80,000 43,80,000
B Ltd. is to declare and pay ₹ 1 per equity share as dividend, before the following
amalgamation takes place with Z Ltd.
Z Ltd. was incorporated to take over the business of both A Ltd. and B Ltd.
(a) The authorized share capital of Z Ltd. is ₹ 60 lakhs divided into ₹ 6 lakhs equity shares
of ₹ 10 each.
(b) As per Registered Valuer the value of equity shares of A Ltd. is ₹ 18 per share and of
B Ltd. is ₹ 12 per share respectively and agreed by respective shareholders of the
companies.
(c) 10% Debentures of A Ltd. to be issued 12% Debentures of Z Ltd. at par in consideration
of their holdings.
(d) A contingent liability of A Ltd. of ₹ 2,00,000 is to be treated as actual liability.
(e) Liquidation expenses including Registered Valuer fees of A Ltd.₹ 50,000 and B Ltd.₹
30,000 respectively to be borne by Z Ltd.
(f) The shareholders of A Ltd. and B Ltd. is to be paid by issuing sufficient number of fully
paid up equity shares of ₹ 10 each at a premium of ₹ 10 per share.
Assuming amalgamation in the nature of purchase, you are required to pass the
necessary journal entries (narrations not required) in the books of Z Ltd. and Prepare
Balance Sheet of Z Ltd. immediately after amalgamation of both the companies.(20
Marks)(May’22)
Answer 7
Journal Entries in the books of Z Ltd.

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₹ ₹
Business Purchase A/c Dr. 54,00,000
To Liquidator of A Ltd. A/c 54,00,000
Land & Building A/c Dr. 28,00,000
Plant & Machinery A/c Dr. 20,00,000
Long term advance to B Ltd. A/c Dr. 2,20,000
Inventories A/c Dr. 10,40,000
Trade Receivables A/c Dr. 8,20,000
Cash and Bank A/c Dr. 3,00,000
Goodwill A/c Dr. 12,20,000
To Retirement Gratuity Fund A/c 1,00,000
To 10% Debentures A/c 20,00,000
To Unsecured Loan A/c 6,00,000
To Trade Payables A/c 1,00,000
To Other liabilities A/c 2,00,000
To Business Purchase A/c 54,00,000
10% Debentures A/c Dr. 20,00,000
To 12% Debentures A/c 20,00,000
Liquidator of A Ltd. A/c Dr. 54,00,000
To Equity Share Capital A/c 27,00,000
To Securities Premium A/c 27,00,000
Business Purchase A/c Dr. 28,80,000
To Liquidator of B Ltd. A/c 28,80,000
Land and Building A/c Dr. 21,00,000
Plant & Machinery A/c Dr. 7,60,000
Inventories A/c Dr. 7,00,000
Trade Receivables A/c Dr. 5,20,000
Cash and Bank (less dividend) A/c Dr. 60,000
To Unsecured Loan A/c 8,20,000
To Trade Payables A/c 3,40,000
To Business Purchase A/c 28,80,000
To Capital Reserve A/c 1,00,000
Liquidators of B Ltd. A/c Dr. 28,80,000
To Equity Share Capital A/c 14,40,000
To Securities Premium A/c 14,40,000
Unsecured Loans A/c Dr. 2,20,000
To Long term Advance to B Ltd. A/c 2,20,000
*Capital Reserve A/c Dr. 1,00,000
To Cash and Bank A/c (Liquidation expenses) 80,000
To Goodwill A/c 20,000

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Note:
1. The journal entries for A Ltd. and B Ltd. have been given separately in the above
solution. Alternatively, the entries may be given as combined for both companies.
2. *Alternatively, following set of entries may be given in place of the last entry given in
the above solution:
Goodwill A/c Dr. 50,000
To Cash & Bank A/c (Liquidation expenses of A 50,000
Ltd.)
Capital Reserve A/c Dr. 30,000
To Cash and Bank A/c (Liquidation expenses of B 30,000
Ltd.)
Capital Reserve A/c Dr. 70,000
To Goodwill A/c 70,000
Balance Sheet of Z Ltd. as at 31st March, 2022
Particulars Note No. (₹)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 41,40,000
(b) Reserves and Surplus 2 41,40,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 20,00,000
(b) Long term provisions 4 1,00,000
(3) Current Liabilities
(a) Short-term borrowings1 5 12,00,000
(b) Trade payables 6 4,40,000
(a) Other liability 2,00,000
Total 1,22,20,000
II. Assets
(1) Non-current assets
(a) i. Property, plant and equipment 7 76,60,000
ii. Intangible assets 12,00,000
(Goodwill 12,20,000-20,000)
(2) Current assets
(a) Inventories 8 17,40,000
(b) Trade receivables 9 13,40,000
(c) Cash and cash equivalents 10 2,80,000
Total 1,22,20,000
ii. Intangible assets 12,00,000

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(Goodwill 12,20,000-20,000)
(2) Current assets
(a) Inventories 8 17,40,000
(b) Trade receivables 9 13,40,000
(c) Cash and cash equivalents 10 2,80,000
Total 1,22,20,000
1 Unsecured loans have been considered as short-term borrowings. Alternatively, it

may be considered as long-term borrowings and presented accordingly

Notes to Accounts
(₹) (₹)
1. Share Capital
Authorized Share Capital
6,00,000 Equity shares of ₹ 10 each 60,00,000
Issued: 4,14,000 Equity shares of ₹ 10 each (all these 41,40,000
shares were Issued for consideration other than cash)
2. Reserves and surplus
Securities Premium Account (4,14,000 shares × ₹ 10) 41,40,000
3. Long-term borrowings
12% Debentures 20,00,000
4 Long term Provisions
Retirement gratuity fund 1,00,000
5. Short-term borrowings
Unsecured loans
A Ltd. 6,00,000
B Ltd. 8,20,000 14,20,000
Less: Mutual (2,20,000) 12,00,000
6. Trade payables
A Ltd. 1,00,000
B Ltd. 3,40,000 4,40,000
7. Property, plant & equipment
Land and Building
A Ltd. 28,00,000
B Ltd. 21,00,000 49,00,000
Plant and Machinery
A Ltd. 20,00,000
B Ltd. 7,60,000 27,60,000
8. Inventories 76,60,000

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A Ltd. 10,40,000
B Ltd. 7,00,000 17,40,000
9 Trade receivables
A Ltd. 8,20,000
B Ltd. 5,20,000 13,40,000
10 Cash & cash equivalents
A Ltd. 3,00,000
B Ltd. [3,00,000-2,40,000(dividend)] 60,000
3,60,000
Less: Liquidation Expenses (80,000) 2,80,000
Working Note:
Calculation of amount of Purchase Consideration
A Ltd. B Ltd.
Existing shares 3,00,000 2,40,000
Agreed value per share ₹ 18 ₹ 12
Purchase consideration 54,00,000 28,80,000
No. of shares to be issued of ₹ 20 each (including ₹ 10 2,70,000 1,44,000
premium)
Face value of shares at ₹ 10 27,00,000 14,40,000
Premium of shares at ₹ 10 27,00,000 14,40,000

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Chapter 3.2
Internal Reconstruction
Question 1
The summarized Balance Sheet of SK Ltd. as on 31st March, 2018 is given below.
( Rs. in
‘000)
Amount
Liabilities Equity Shares of Rs. 10 each 35,000
8%, Cumulative Preference Shares of Rs. 100 each 17,500
6% Debentures of Rs. 100 each 14,000
Sundry Creditors 17,500
Provision for taxation 350
Total 84,350
Assets

Property, Plant & Equipment 43,750

Investments (Market value Rs. 3325 thousand) 3,500
Current Assets (Including Bank Balance) 35,000
Profit and Loss Account 2,100
Total 84,350
The following Scheme of Internal Reconstruction is approved and put into effect on 31st
March, 2018.
(i) Investments are to be brought to their market value.
(ii) The Taxation Liability is settled at Rs. 5,25,000 out of current Assets.
(iii) The balance of Profit and Loss Account to be written off.
(iv) All the existing equity shares are reduced to Rs. 4 each.
(v) All preference shares are reduced to Rs. 60 each.
(vi) The rate of interest on debentures is increased to 9%. The Debenture holders surrender their
existing debentures of Rs. 100 each and exchange them for fresh debentures of Rs. 80 each.
Each old debenture is exchanged for one new debenture.
(vii) Balance of Current Assets left after settlement of taxation liability are revalued at Rs.
1,57,50,000.
(viii) Property, Plant & Equipment are written down to 80%.
(ix) One of the creditors of the Company for Rs. 70,00,000 gives up 50% of his claim. He is allotted
8,75,000 equity shares of Rs. 4 each in full and final settlement of his claim.
Pass journal entries for the above transactions. [10 Marks, Nov ‘18]
Answer 1
Journal Entries in the books of SK Ltd.

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₹ ‘000 ₹ ‘000
(i) Equity share capital (₹ 10) A/c Dr. 35,000
To Equity Share Capital (₹ 4) A/c 14,000
To Capital Reduction A/c 21,000
(Being conversion of equity share capital of
₹ 10 each into ₹ 4 each as per reconstruction scheme)
(ii) 8% Cumulative Preference Share capital (₹ 100) A/c Dr. 17,500
To 8% Cumulative Preference Share Capital (₹ 60) A/c 10,500

To Capital Reduction A/c 7,000

(Being conversion of 6% cumulative preference shares capital of ₹
100 each into ₹ 60 each as per reconstruction scheme)

(iii) 6% Debentures (₹ 100) A/c Dr. 14,000

To 9% Debentures (₹ 80) A/c 11,200
To Capital Reduction A/c 2,800
(Being 9% debentures of ₹ 80 each issued to existing 6%
debenture holders. The balance transferred to capital reduction
account as per reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 7,000
To Equity Share Capital (₹ 4) A/c 3,500
To Capital Reduction A/c 3,500
(Being a creditor of ₹ 70,00,000 agreed to surrender his claim by
50% and was allotted 8,75,000 equity shares of
₹ 4 each in full settlement of his dues as per reconstruction
scheme)
(v) Provision for Taxation A/c Dr. 350
Capital Reduction A/c Dr. 175
To Liability for Taxation A/c 525
(Being conversion of the provision for taxation into liability for
taxation for settlement of the amount due)
(vi) Liability for Taxation A/c Dr. 525
To Current Assets (Bank A/c) 525
(Being the payment of tax liability)
(vii) Capital Reduction A/c Dr. 34,125
To P & L A/c 2,100
To Fixed Assets A/c 8,750
To Current Assets A/c 18,725
To Investments A/c 175
To Capital Reserve A/c (Bal. fig.) 4,375

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(Being amount of Capital Reduction utilized in writing off P & L

A/c (Dr.) Balance, Fixed Assets, Current Assets, Investments and
the Balance transferred to Capital Reserve)
Working Note:
Capital Reduction Account
To Liability for taxation A/c 175 By Equity share capital 21,000
To P & L A/c 2,100 By 8% Cumulative preferences 7,000
To Property, Plant & Equipment 8,750 Share capital
To Current assets 18,725 By 6% Debentures 2,800
To Investment 175 By Sundry creditors 3,500
To Capital Reserve (Bal.fig.) 4,375
34,300 34,300

Question 2
Following is the summarized Balance Sheet of Fortunate Ltd. as on 31st March, 2019.
Particulars Amount (₹)
Liabilities
Authorized and Issued Share Capital
(a) 15,000 8% Preference shares of ₹ 50 each 7,50,000
(b) 18,750 Equity shares of ₹ 50 each 9,37,500
Profit and Loss Account (5,63,750)
Loan 7,16,250
Trade Payables 2,58,750
Other Liabilities 43,750
Total 21,42,500
Assets
Building at cost less depreciation 5,00,000
Plant at cost less depreciation 3,35,000
Trademarks and goodwill at cost 3,97,500
Inventory 5,00,000
Trade Receivables 4,10,000
Total 21,42,500
(Note: Preference shares dividend is in arrear for last five years).
The Company is running with the shortage of working capital and earnings profits. A scheme
of reconstruction has been approved by both the classes of shareholders. The summarized
scheme of reconstruction is as follows:
(1) The equity shareholders have agreed that their Rs. 50 shares should be reduced to Rs. 5 by
cancellation of Rs. 45,00 per shares of Rs. 5.00 each for each equity share held.

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(2) The preference shareholders have agreed to forego the arrears of dividends and to accept
for each Rs. 50 preference share 4 new 6% preference shares of Rs. 10 each, plus 3 new equity
shares of Rs. 5.00 each, all credited as fully paid.
(3) Lenders to the company for Rs. 1,87,500 have agreed to convert their loan into shares and for
this purpose they will be allotted 15,000 new preference shares of Rs. 10 each and 7,500 new
Equity shares of Rs. 5.00 each
(4) The directors have agreed to subscribe in cash for 25,000 new equity shares of Rs. 5.00 each in
addition to any shares to be subscribed by them under (1) above.
(5) Of the cash received by the issue of new shares, Rs. 2,50,000 is to be used to reduce the loan
due by the company.
(6) The equity share capital cancelled is to be applied:
(a) To write off the debit balance in the Profit and Loss A/c and
(b) To write off Rs. 43,750 from the value of plant.
Any balance remaining is to be used to write down the value of trademarks and goodwill. The
nominal capital as reduced is to be increased to Rs. 8,12,500 for preference share capital and
Rs. 9,37,500 for equity share capital.
You are required to pass Journal entries to show the effect of above scheme and prepare the
Balance Sheet of the Company after reconstruction. [15 Marks , Nov ‘19]
Answer 2
In the books of Fortunate Ltd.
Journal Entries
Particulars Debit Credit
(‘) (‘)
1. Equity share capital A/c (₹ 50) Dr. 9,37,500
To Equity share capital A/c (₹ 5) 93,750
To Capital reduction A/c* 8,43,750
(Being equity capital reduced to nominal value of ₹
5 each)
2. Bank A/c Dr. 2,81,250
To Equity share capital 2,81,250
(Being 3 right shares against each share was issued and
subscribed)
3. 8% Preference share capital A/c (₹ 50) Dr. 7,50,000
Capital reduction A/c Dr. 75,000
To 6% Preference share capital (₹ 10) 6,00,000
To equity share capital (₹ 50) 2,25,000
(Being 8% preference shares of ₹ 50 each converted
to 6% preference shares of ₹ 10 each and also given to
them 3 equity shares for every share held)
4. Loan A/c Dr. 1,87,500

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To 6% Preference share capital A/c (15,000 x ₹ 10) 1,50,000

To Equity share capital A/c (7,500 x ₹5) 37,500

(Being loan to the extent of ₹ 1,50,000 converted into
share capital)
5. Bank A/c (25,000 x ₹5) Dr. 1,25,000
To Equity share application A/c 1,25,000
(Being shares subscribed by the directors)
6. Equity share application A/c Dr. 1,25,000
To Equity share capital A/c 1,25,000
(Being application money transferred to capital A/c)
7. Loan A/c Dr. 2,50,000
To Bank A/c 2,50,000
(Being loan repaid)
Balance sheet of Fortunate Ltd. (and reduced) as on 31.3.2019

Particulars Notes ₹
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 15,12,500
2 Non-current liabilities
Long-term borrowings 2,78,750
a (7,16,250 – 1,87,500 – 2,50,000)
3 Current liabilities
a Trade Payables 2,58,750
b Other current liabilities 43,750
Total 20,93,750
Assets
1 Non-current assets
a Property, Plant and Equipment 2 7,91,250
b Intangible assets 3 2,36,250
2 Current assets
a Inventories 5,00,000
b Trade receivables 4,10,000
c Cash and cash equivalents 4 1,56,250
Total 20,93,750
Notes to accounts:

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Chapter 3.2 Internal Reconstruction
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₹
1 Share Capital
Authorized capital:
81,250 Preference shares of ₹ 10 each 8,12,500
1,87,500 Equity shares of ₹ 5 each 9,37,500
17,50,000
Issued, subscribed and paid up:
1,52,500 equity shares of ₹ 5 each 7,62,500
75,000, 6% Preference shares of ₹ 10 each 7,50,000 15,12,500
2 Property, Plant and Equipment
Building at cost less depreciation 5,00,000
Plant at cost less depreciation 2,91,250 7,91,250
3. Intangible assets
Trademarks and goodwill 2,36,250
4 Cash and cash equivalents
Bank (2,81,250+1,25,000-2,50,000) 1,56,250
Note: *In place of Capital Reduction Account, Reconstruction Account or Internal
Reconstruction Account may also be used.

Question 3
Sapra Limited has laid down the following terms upon the sanction of the reconstruction
scheme by the court.
(i) The shareholders to receive in lieu of their present holding at 7,50,000 shares of ₹ 10 each,
the following:
 New fully paid ₹ 10 Equity Shares equal to 3/5th of their holding.
 Fully paid ₹ 10, 6% Preference Shares to the extent of 2/5th of the above new equity
shares.
 7% Debentures of ₹ 250,000.
(ii) Goodwill which stood at ₹ 2,70,000 is to be completely written off.
(iii) Plant & Machinery to be reduced by ₹ 1,00,000, Furniture to be reduced by ₹ 88,000 and
Building to be appreciated by ₹ 1,50,000.
(iv) Investment of ₹ 6,00,000 to be brought down to its existing market price of ₹ 1,80,000.
(v) Write off Profit & Loss Account debit balance of ₹ 2,25,000.
In case of any shortfall, the balance of General Reserve of ₹ 42,000 can be utilized to write off
the losses under reconstruction scheme.
You are required to show the necessary Journal Entries in the books of Sapra Limited of the
above reconstruction scheme considering that balance in General Reserve is utilized to write
off the losses. (5 Marks , July 21)

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Answer 3
Journal Entries
₹ ₹
Equity Share Capital (old) A/c Dr. 75,00,000
To Equity Share Capital (₹ 10) A/c 45,00,000
To 6% Preference Share Capital (₹ 10) A/c 18,00,000
To 7% Debentures A/c 2,50,000
To Capital Reduction A/c 9,50,000
(Being new equity shares, 6% Preference Shares, 7%
Debentures issued and the balance transferred
to Reconstruction account as per the Scheme)
Building A/c Dr. 1,50,000
Capital Reduction A/c Dr. 9,53,000
To Goodwill Account 2,70,000
To Plant and Machinery Account 1,00,000
To Furniture Account 88,000
To Investment A/c 4,20,000
To Profit & Loss A/c 2,25,000
(Being Capital Reduction Account utilized for writing off
of Goodwill, Plant and Machinery, furniture,
investment and Profit & Loss as per the scheme)
General reserve A/c Dr. 3,000
To Capital Reduction A/c 3,000
(Being general reserve utilized to write off the balance in
Capital reduction A/c)
Note: In place of Capital Reduction Account, Reconstruction Account or Internal Reconstruction
Account may also be used in the above journal entries.

Question 4
The following is the Balance Sheet of Purple Limited as at 31st March, 2022:
Particulars Notes Amount in
₹
I. Equity and Liabilities
(1) Shareholders’ Funds
(a) Share Capital 1 15,00,000
(b) Reserves & Surplus 2 (3,00,000)
(2) Current Liabilities
(a) Trade Payables 2,20,000
(b) Short Term Borrowings – Bank 2,00,000
Overdraft

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Total 16,20,000
II. Assets
(1) Non-Current Assets
(a) Property, Plant and Equipment 3 10,20,000
(b) Intangible Assets 4 1,20,600
(2) Current Assets
(a) Inventories 1,70,000
(b) Trade Receivables 3,01,800
(c) Cash and cash equivalents 7,600
Total 16,20,000

Notes to Accounts
₹ ₹
(1) Share Capital
90,000 Equity Shares of ₹ 10 each fully paid 9,00,000
6% Preference Share Capital 6,00,000 15,00,000
(2) Reserves & Surplus
Profit & Loss account (3,00,000)
(3) Property, Plant and Equipment
Land and Building 5,40,000
Plant and Machinery 4,80,000 10,20,000
(4) Intangible Assets
Goodwill 84,600
Patents 36,000 1,20,600
Dividends on preference shares are in arrears for 3 years.
On the above date, the company adopted the following scheme of reconstruction:
(i) The preference shares are converted from 6% to 8% but revalued in a manner in which the
total return on them remains unaffected.
(ii) The value of equity shares is brought down to ₹ 8 per share.
(iii) The arrears of dividend on preference shares are cancelled.
(iv) The debit balance of Goodwill account is written off entirely.
(v) Land and Building and Plant and Machinery are revalued at 85% and 80% of their respective
book values.
(vi) Book debts amounting to ₹ 14,400 are to be treated as bad and hence to be written off.
(vii) The company expects to earn a profit at the rate of ₹ 90,000 per annum from the current year
which would be utilized entirely for reducing the debit balance of Profit and loss accounts for
3 years. The remaining balance of the said account would be written off at the time of capital

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 P 3.2-9

reduction process.
(viii) The balance of total capital reduction is to be utilized in writing down Patents.
(ix) A secured loan of ₹ 4,80,000 bearing interest at 12% per annum is to be obtained by
mortgaging tangible fixed assets for repayment of bank overdraft and for providing
additional funds for working capital.
You are required to give journal entries incorporating the above scheme of reconstruction,
capital reduction account and prepare the reconstructed Balance Sheet. (20 Marks Nov ‘22)

Answer 4
Particulars Debit Credit
(₹) (₹)
1. 6% Preference share capital A/c Dr. 6,00,000
To 8% Preference share capital A/c 4,50,000
To Capital reduction A/c 1,50,000
(Being 6% preference shares converted to 8%
preference shares so that return to pref.
shareholders remains unaffected)
2. Equity share capital A/c (₹ 10) Dr. 9,00,000
To Equity share capital A/c (₹ 8) 7,20,000
To Capital reduction A/c 1,80,000
(Being equity capital reduced to nominal value
of ₹ 8 each)
3. Capital Reduction A/c Dr. 3,30,000
To Goodwill A/c 84,600
To Land and Building A/c 81,000
To Plant and Machinery A/c 96,000
To Trade Receivables A/c (Book debts) 14,400
To Patents A/c (Bal. fig.) 24,000
To Profit and loss A/c 30,000
(Being losses and assets written off to the
extent required)
4. Bank A/c Dr. 4,80,000
To Bank Loan A/c 4,80,000
(Being Loan taken)
5. Bank overdraft A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being Bank overdraft repaid)

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 P 3.2-10

Capital Reduction Account

Particulars ₹ Particulars ₹
To Goodwill A/c 84,600 By Equity Share Capital A/c 1,80,000
To Land & Building A/c 81,000 By 6% Preference 1,50,000
Share Capital A/c
To Plant and Machinery 96,000
A/c
To Trade receivables 14,400
(Book Debts) A/c
To Profit & Loss A/c 30,000
To Patents A/c (Bal. fig.) 24,000
3,30,000 3,30,000
Balance Sheet of Purple Ltd. (and reduced) as at
31.3.2022

Particulars Notes ₹
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 11,70,000
b Reserves and surplus 2 (2,70,000)
2 Current liabilities
a Short term borrowings (Secured Bank Loan) 4,80,000
b Trade Payables 2,20,000
Total 16,00,000
Assets
1 Non-current assets
a Property, plant and equipment 3 8,43,000
b Intangible assets 4 12,000
2 Current Assets
a Inventory 1,70,000
b Trade receivables 5 2,87,400
c Cash and cash equivalents (7,600+4,80,000- 2,87,600
2,00,000)
Total 16,00,000
Notes to Accounts:
₹
1. Share Capital
Authorized

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Issued, subscribed and paid up:

90,000 equity shares of ₹ 8 each fully paid 7,20,000
8% Preference share capital* 4,50,000 11,70,000
2. Reserves and Surplus
Profit and Loss Account (Dr. balance) (2,70,000)
3. Property plant and equipment
Land and Building 4,59,000
Plant and Machinery 3,84,000 8,43,000
4. Intangible assets
Patent ₹ (36,000 - 24,000) 12,000
5. Trade Receivables
Sundry Debtors 3,01,800
Less: Bad debts (14,400) 2,87,400
Note: *Face value of preference share is not given in the question (pre and post
reconstruction) and hence any suitable value of preference share may be assumed.

Working Notes:
1. Calculation of new Preference Shares
Rate of return : 6% on Preference Shares

Dividend : (6/100) x ₹ 6,00,000 = ₹ 36,000

Rate of return : 8% on Preference Shares
Dividend : (8/100) x X = ₹ 36,000
X = (36,000/8) x 100 = ₹ 4,50,000
New Preference Share = ₹ 4,50,000
Capital
Old Preference Share = ₹ 6,00,000
Capital
(6,00,000 – 4,50,000) = ₹ 1,50,000 Amount taken to Capital
Reduction A/c.
2. Since the company expects to earn a profit of ₹ 90,000 p.a. consecutively for
three years and it shall be used to write-off debit balance of P & L account, hence
₹ 2,70,000 being loss shall be shown in the Balance Sheet under Reserve &
Surplus head and ₹ 30,000 shall be written-off from Capital Reduction A/c.
3. Calculation of Amount written off on Land & Building and Plant & Machinery

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Land & Building = (85/100) x = ₹ 4,59,000

Plant & Machinery 5,40,000 = ₹ 3,84,000
Reduced by: = (80/100) x
4,80,000
Land & Building = (5,40,000 - 4,59,000) = ₹ 81,000
Plant & Machinery = (4,80,000 - 3,84,000) = ₹ 96,000

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Chapter 3.3
Liquidation of Co's
Question 1
The different categories of shareholders of Earth Limited, who went into liquidation on
1st April, 2021 are as follows:
(i) 32,000 Equity shares of ₹ 100 each, ₹ 80 paid up
(ii) 48,000 Equity shares of ₹ 100 each, ₹ 35 paid up
(iii) 12,80,000 Equity shares of ₹ 10 each, ₹ 7 paid up.
You are required to distribute the surplus money among different categories of
shareholders, if the surplus available with Liquidator after discharging all the liabilities is ₹
32,00,000. (5 Marks ,July 21)
Answer 1
Particulars I II III Total (₹)
No. of shares Equity share 32,000 48,000 12,80,000 13,60,000
capital 32,00,000 48,00,000 128,00,000 208,00,000
(@₹ 100) (@₹ 100) (@₹ 10)
Paid up share Capital (A) 25,60,000 16,80,000 89,60,000 132,00,000
Loss due to Liquidation (B) (₹
100,00,000 in 2:3:8) (15,38,462) (23,07,692) (61,53,846) (100,00,000)
Surplus/ (deficiency)
amount distributed 10,21,538 (6,27,692) 28,06,154 32,00,000
among different
categories of shareholders
(A) – (B)
Loss due to Liquidation ₹ 100,00,000 will be distributed in ratio in 2:3:8
Note: Shareholders of category I and III will get surplus amount, while category II
shareholders will pay ₹ 6,27,692.
Alternative Answer
Particulars I II III
No. of shares (A) Nominal value per 32,000 48,000 12,80,000
share ₹ 100 ₹ 100 ₹ 10
Paid up value per share (B) 80 35 7
Loss per share due to Liquidation (C) 48.08 48.08 4.808
Surplus/ Deficiency amount
distributed among different
categories of shareholders (A) x [(B) – 10,21,440 (6,27,840) 28,05,760
(C)]
Calculation of loss per share
Total Paid up Share Capital = ₹ 1,32,00,000
Surplus = ₹ 32,00,000

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Loss to Shareholders = ₹1,00,00,000

No. Shares = = 2,08,000 [32,000 + 48,000 + (12,80,000 x 10/100)]
Loss per Share = = ₹ 48.08

Question 2
In the winding up of a company, certain Creditors could not receive payments out of the
realization of assets and out of contribution from "A" list contributories . Liquidation
started on 1st April, 2020. The following persons have transferred their holdings before
winding up :

Name Date of Transfer No. of shares Amount due to creditors

transferred on the date of transfer (₹)
O 4th April, 2019 1,000 42,000
P 2nd Feb, 2019 300 25,000
Q 8th Sep, 2019 200 57,000
R 11th Nov, 2019 1,400 85,000
S 2nd Feb, 2020 800 66,000
T 1st March, 2020 1,400 95,000
The shares were of ₹ 100 each, ₹ 70 being called up and paid up on the date of transfers.
'X' was the transferee of shares held by S. 'X' paid ₹ 30 per share as calls in advance
immediately on becoming a member.
Ignoring Expenses of Liquidation, Remuneration of Liquidator, etc. work out the amount
to be realized from the above contributories.(10 Marks ,Jan 21)
Answer 2
Statement of Liability as Contributories of Former Members

Creditors Amount to be O 1,000 Q 200 R 1,400 T 1,400 Amount to

outstanding paid to Shares Shares Shares Shares be paid to
creditors the
(Increase in creditors
creditors)
Date ₹ ₹ ₹ ₹ ₹ ₹ ₹
April 4 42,000 42,000 10,500 2,100 14,700 14,700 42,000
Sep 8 57,000 15,000 - 1,000 7,000 7,000 15,000
Nov 11 85,000 28,000 - - 14,000 14,000 28,000
March 1 95,000 10,000 - - - 10,000 6,300*
Total (A) 10,500 3,100 35,700 45,700
Maximum liability at ₹ 30 per shares on 30,000 6,000 42,000 42,000
shares held (B)
Amount paid [Lower of (A) and (B)] 10,500 3,100 35,700 42,000 91,300
*₹ (10,000 – 3,700 = 6,300)

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T can be called upon to pay maximum only ₹ 42,000. So T will pay only ₹ 6,300 (42,000 –
14,700 – 7,000 – 14,000) out of ₹ 10,000 above. Hence incremental creditors on 1.03.2020
amounting to ₹ 3,700 (10,000 – 6,300) will not be receiving any payment.
Note:
1. P will not be liable to pay any amount as the winding up proceedings commenced after
one year from the date of the transfer.
2. S also will not be liable, as the transferee X has paid the balance ₹ 30 per share as call in
advance.

Question 3
In a winding up of a company creditor remain unpaid. The following persons
had transferred their holdings before winding up.
Name Date of Transfer No of shares transferred Amt. due to creditors on
the transfer (₹)
D 1st January, 2019 1000 8,500
E 15th February, 2019 400 13,500
H 15th March, 2019 700 19,000
J 31st March, 2019 900 22,000
K 5th April, 2019 1000 31,000
The shares were of ₹ 100 each, ₹ 80 being called up and paid up on the date of transfers.
(1) A member G, who holds 200 shares died on 28th Feb., 2019 when the amount due
to creditors was ₹ 16000. His shares were transmitted to his Son X.
(2) R was the transferee of shares held by J. R paid ₹ 20 per share as calls in advance
immediately on becoming a member.
(3) The liquidation of the Company commenced on 1st February, 2020. Then the
liquidator made a call on the present and past contributories to pay the amount.
You are required to quantify the maximum liability of the transferors of shares mentioned
in the above table. ( 5 Marks ,Nov 20)
Answer 3
Statement of Liability as Contributories of Former Members
Date Creditors Amount No. of E 400 G/X 200 H 700 K 1,000 Amount
outstanding paid to shares shares shares shares shares to be paid
Creditors to
(Increase Creditors
in
Creditors)
2019 ₹ ₹ Ratio ₹ ₹ ₹ ₹ ₹
Feb 15 13,500 13,500 4:2:7:10 2,348 1,174 4,108 5,870 13,500
Feb 28 16,000 2,500 2:7:10 — 263 921 1,316 2,500
March 15 19,000 3,000 2:7:10 — 316 1,105 1,579 3,000
April 5 31,000 12,000 2:10 — 2,000 — 10,000 12,000

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(a) Maximum amount payable to 2,348 3,753 6,134 18,765 31,000

creditors
(b) Maximum liability at ₹ 20 per
share held 8,000 4,000 14,000 20,000
Lower of (a) and (b) 2,348 3,753 6,134 18,765
Working Note:
(1) The transferors are D, E, H, J and K. When the transferees pay the amount due as “present”
member contributories, there will not be any liability on the transferors. It is only when the
transferees do not pay as “present” member contributories then the liability would arise in
the case of “past” members as contributories.
(2) D will not be liable to pay any amount as the winding up proceedings commenced after one
year from the date of the transfer.
(3) J also will not be liable as the transferee R has paid the balance ₹ 20 per share as call in
advance.
(4) E, G/X, H and K will be liable, as former members, to the maximum extent as indicated,
provided the transferees do not pay the calls.
(5) X to whom shares were transmitted on demise of his father G would be liable as an existing
member contributory. He steps into the shoes of his deceased father under section 430. His
maximum liability would be at ₹ 20 per share on 200 shares received on transmission i.e. for
₹ 4,000.

Question 4
Beekey Limited is being wound up by the tribunal. All the assets of the company have been
charged in favour of the company's bankers to whom the company owes ₹ 2.50 crores.
The company owes following amounts to others:
Dues to workers - ₹ 62,50,000
Taxes payable to Government - ₹ 15,00,000
Unsecured creditors - ₹ 30,00,000
You are required to compute with reference to the provisions of the Companies Act, 2013,
the amount each kind of creditors is likely to get if the amount realized by the official
liquidator from the secured assets and available for distribution among creditors is only ₹
2,00,00,000. ( 5 Marks , Nov 20)
Answer 4
Section 326 of the Companies Act, 2013 is talks about the overriding preferential payments
to be made from the amount realized from the assets to be distributed to various kind of
creditors. According to the proviso given in the section 326 the security of every secured
creditor should be deemed to be subject to a pari passu change in favour of the workman
to the extent of their portion.

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Workman's Share to Secured Asset =

, , , , ,
Workman's Share to Secured Asset=
, , , , ,

= 2,00,00,000 X 1/5
Workmen’s share to Secured Assets = ₹ 40,00,000
Amount available to secured creditor is ₹ 200 Lakhs – 40 Lakhs = 160 Lakhs
Hence, no amount is available for payment of government dues and unsecured creditors.

Question 5
BT Ltd. went into Voluntary Liquidation on 31st March, 2018, when their detailed
Balance Sheet was as follows:
Liabilities In `
Issued & Subscribed Capital
10,000 12% cumulative preference shares of ` 100 each, 10,00,000
fully paid
10,000 Equity Shares of ` 100 each 75 per share paid up 7,50,000
20,000 Equity Shares of ` 100 each 60 per share paid up 12,00,000
Profit & Loss Account (5,25,000)
12% Debentures (Secured by a floating charge) 10,00,000
Interest outstanding on Debentures 1,20,000
Creditors 8,50,000
43,95,000
Assets
Land & Building 17,60,000
Plant & Machinery 12,50,000
Furniture 4,75,000
Patents 1,45,000
Stock 1,80,000
Trade Receivables 5,09,300
Cash at Bank 75,700
43,95,000
Preference dividends were in arrear for 1 year. Creditors include preferential creditors of
Rs. 75,000. Balance creditors are discharged subject to 5% discount.
Assets are realised as under:
In Rs.
Land & Building 24,50,000
Plant & Machinery 9,00,000
Furniture 2,85,000
Patents 90,000

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Stock 2,80,000
Trade Receivables 3,15,000
• Expenses of liquidation amounted to Rs. 45,000.
• The liquidator is entitled to a remuneration of 3% on all assets realised (except
cash at bank).
• All payments were made on 30th June, 2018.
You are required to prepare the Liquidator’s Final Statement of Account as on 30th
June, 2018. Working Notes should form part of the answer. (10 Marks , May ‘19)
Answer 5
BT Limited
Liquidator’s Statement of Account
Receipts Rs. Payments Rs.
To Assets By Liquidation expenses 45,000
realized:
Bank 75,700 By Preferential creditors 75,000
Other assets: By Liquidator’s
Remuneration (W.N.1) 1,29,600
Land & building 24,50,000 By Debenture holders:
Plant & Machinery 9,00,000 Debentures 10,00,000
Furniture 2,85,000 Interest accrued 1,20,000
Patents 90,000 Interest 1-4-18
to 30-6-18 30,000 11,50,000
Stock 2,80,000 By Unsecured creditors 7,36,250
Trade receivables 3,15,000 43,20,000 By Preferential shareholders
Preference capital 10,00,000
Arrear of Dividend 1,20,000 11,20,000
By Equity shareholders - 32,55,850
Rs. 32.995 on 20,000 shares 6,59,900
Rs. 47.995 on 10,000 shares 4,79,950
43,95,700
43,95,700
Working Notes:
(1) Liquidator’s remuneration 43,20,000 × 3/100 = Rs. 1,29,600
(2) As the company is solvent, interest on the debentures will have to be paid for the
period 1-4-2018 to 30-6-2018 10,00,000 x 12% x3/12 = Rs. 30,000
(3) Total equity capital - paid up (7,50,000 +12,00,000)
Rs.19,50,000
Less: Balance available after payment to unsecured and preference shares
(43,95,700—32,55,850) Rs.
(11,39,850)

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Rs.
8,10,150
Loss to be born by 30,000 equity shares
Loss per share Rs.
27.005
Hence, Refund for share on Rs. 60 paid share (60 - 27.005) Rs.
32.995
Refund for share on Rs. 75 paid (75 - 27.005) Rs.
47.995

Question 6
Virat Ltd. furnishes the following summarized Balance Sheet as at 31st March,
2018:
Particulars Rs. Rs.
Equity and Liabilities :
(1) Shareholders Funds:
Share Capital 10,000, 12% Pref. Shares of Rs. 100 each fully10,00,000
paid up
1,00,000 Equity shares of Rs. 10 each fully paid up 10,00,000
50,000 Equity shares of Rs. 10 each, Rs. 8 paid up 4,00,000 24,00,000
(b) Reserve and Surplus
Profit & Loss A/c. (Dr. Balance) (3,50,000)
(2) Non-current Liabilities:
12% Debentures 15,00,000
Loan on Mortgage 4,50,000 19,50,000
(3) Current Liabilities:
Bank Overdraft 2,75,000
Trade Payables 7,30,000 10,05,000
Total 50,05,000
Assets:
(1) Non-current Assets:
Property, Plant & Equipment- Land & Buildings 6,00,000
(2) Current Assets : Sundry Current Assets 44,05,000
Total 50,05,000
The mortgage loan was secured against the Land & Buildings. Debentures were secured
by a floating charge on all the assets of the company. The debenture holders appointed
a Receiver. The company being voluntarily wound up, a liquidator was also appointed.
The Receiver was entrusted with the task of realising the Land & Buildings which
fetched Rs. 7,50,000. Receiver also took charge of Sundry current assets of value Rs.
30,00,000 and sold them for Rs. 28,75,000. The Bank overdraft was secured by a
personal guarantee of the directors who discharged their obligations in full from
personal resources. The costs of the Receiver amounted to Rs. 10,000 and his
remuneration Rs. 15,000. The expenses of liquidator was Rs. 17,500 and his
remuneration was decided at 2% on the value of the assets realised by him. The
remaining assets were realised by liquidator for Rs. 12,50,000. Preference dividend
was in arrear for 2 years. Articles of Association of the company provide for payment of

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preference dividend arrears in priority to return of equity capital. Prepare the

accounts to be submitted by the Receiver and the Liquidator. (10 Marks , Nov ‘18)

Answer 6
Receiver’s Receipts and Payments Account
Rs. Rs.
Sundry Assets realized 28,75,000 Costs of the Receiver 10,000
Surplus received from Remuneration to 15,000
Receiver
Mortgage Debentures holders
Sale Proceeds of land and building Principal* 15,00,000
7,50,000
Less: Applied to Surplus transferred
Discharge to the Liquidator 16,50,000
of mortgage loan (4,50,000) 3,00,000
31,75,000 31,75,000
Note : *Assumed that interest on debentures has already been paid before
winding up
proceedings.

Liquidator’s Final Statement of Account

Rs. Rs.
Surplus received from Cost of Liquidation (legal exp.) 17,500
Receiver 16,50,000 Remuneration to Liquidator 25,000
Assets Realized 12,50,000 (12,50,000 x 2%)
Calls on partly paid Share Unsecured Creditors:
holders:
for Trade 7,30,000
Directors for payment of Bank 2,75,000
O/D
Preferential Shareholders:
Capital 10,00,000
Arrears of Preference Dividends 2,40,000
Equity shareholders:
Return of money to contributors
to holders
1,00,000 shares at Rs. 4.75 4,75,000
50,000 shares at Rs. 2.75 1,37,500
29,00,000 29,00,000
Working Note :
Amount to be paid or received from Equity shareholders Rs.
Total Equity share capital paid up 14,00,000
Less: Surplus before call from Equity Shares (29,00,000 — 22,87,500) (6,12,500)
Loss to be borne by 1,50,000 shares 7,87,500

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Loss per share = (7,87,500/ 1,50,000 shares) 5.25

Hence, Refund to Equity shareholders of 1,00,000 shares of Rs. 10 fully paid 4.75
up
Refund to Equity shareholders of 50,000 shares of Rs.8 paid up 2.75

Question 7
A liquidator is entitled to receive remuneration at 5% of the assets realised and 8% of the
amount distributed among the unsecured creditors. The assets realised Rs. 13,75,000.
Payment was made from realised amount as follows:
Rs.
Liquidation expenses 13,000
Preferential creditors (treated as unsecured creditors)Secured 88,500
creditors 1,00,000
You are required to calculate remuneration payable to the liquidator. [5 Marks,
Nov’19]
Answer 7
Calculation of Total Remuneration payable to Liquidator
Amount in Rs.
5% on Assets realised (13,75,000 x 5%) 68,750
8% on payment made to Unsecured creditors (Refer W.N)
7,080
Total Remuneration payable to Liquidator
75,830

Working Note:
Liquidator’s remuneration on payment to unsecured creditors = Cash available for
unsecured creditors after all payments including liquidation expenses, payment to
secured creditors and liquidator’s remuneration
Total amount realized Rs. Rs. 13,75,000
Less: Liquidation expenses paid (13,000)
Payment to secured creditors (1,00,000)
Liquidator’s remuneration on
assets realized (68,750)
Rs. 1,81,750
Rs. 11,93,250
Sufficient amount is available for preference creditors (treated as unsecured creditors)
therefore Liquidator’s remuneration on payment to unsecured creditors = 8% x Rs.
88,500 = Rs.7,080
Note: Since the amount of unsecured creditors (other than preferential creditors) is not given
in the question, the above solution is based on the assumption that there are no unsecured
creditors (other than preferential creditors who are treated as unsecured creditors).

Question 9
A liquidator is entitled to receive remuneration at 3% on the assets realized and 4% on

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the payment made to creditors and company’s bankers. The assets were realized for ₹
80,00,000. All the assets of the company have been charged to the company’s bankers to
whom the company owes ₹ 1,00,00,000. The company owes following amounts to others:
Due to workers ₹ 25,00,000
Other Preferential creditors ₹ 20,00,000
Unsecured creditors ₹ 10,50,000
With reference to the provisions of the Companies Act 2013, you are required to calculate
the amount payable to:
1 Workers;
2. Other Preferential creditors;
3. Unsecured creditors;
4. Liquidator for remuneration and
5. Company’s bankers. (5 Marks Dec’21)

Answer 9
Section 326 of the Companies Act, 2013 is talks about the overriding preferential payments
to be made from the amount realized from the assets to be distributed to various kind of
creditors. According to the proviso given in the section 326 the security of every secured
creditor should be deemed to be subject to a pari-passu charge in favour of the workman
to the extent of their portion.
Workman ‘s Share to Secured Assest =

Workmen share to secured assets = ₹ 80,00,000 x (25,00,000/125,00,000) = ₹ 80,00,000 x

1/5 i.e. ₹ 16,00,000
Amount available to secured creditor is ₹ 80,00,000 – ₹ 16,00,000 = ₹ 64,00,000
Amount payable to workers ₹ 16,00,000. Amount payable to Company’s bankers
= ₹ 64,00,000.
Hence, no amount is available for payment of other preferential creditors and unsecured
creditors.
Calculation of Total Remuneration payable to Liquidator
Amount in ₹
3% on Assets realized (80,00,000 x 3%) 2,40,000
4% on payment made to company’s Banker (Refer 2,36,923
W.N)
Total Remuneration payable to Liquidator 4,76,923
Working Note:
Liquidator’s remuneration on payment to Company’s banker:
Cash available after liquidator remuneration on assets realized
= ₹ 80,00,000 – ₹ 16,00,000 - 2,40,000= ₹ 61,60,000 X4/104= ₹ 2,36,923
Thus,

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1. Amount payable to workers ₹ 16,00,000.

2. No amount is available for payment of other preferential creditors
3. No amount is available for payment of unsecured creditors.
4. Liquidator for remuneration ₹ 4,76,923
5. Amount payable to Company’s bankers = ₹ 59,23,077 (₹ 61,60,000 less ₹
2,36,923).
Note: The answer given above assumes that the workers are given the full amount due
towards them without any deduction for Liquidators’ remuneration and amount realized
from sale of asset has been considered before Liquidator’s remuneration. Accordingly,
liquidator’s remuneration has been considered for payment to banker only in the given
answer. Hence, 4% remuneration has not been provided on the payment to workers as
the question states that the liquidator is entitled to receive remuneration at 4% on
payment made to banker and creditors. Moreover, workers are not considered as
creditors in the given answer.
Alternative answer is possible when Liquidators’ remuneration for asset realization is
considered for payment to Workmen. In this case, two alternative answers will be possible
which can be given as follows:

Alternative 1 -If Workmen are not treated as creditors for the purpose of Liquidator’s
remuneration (as the question states that the liquidator is entitled to receive
remuneration at 4% on payment made to banker and creditors)

Workman ‘s Share to Secured Assest =

Workmen share to secured assets = ₹ 80,00,000x (25,00,000/125,00,000)

= ₹ 80,00,000x1/5 i.e. ₹ 16,00,000
Banker’s share to secured assets is ₹ 80,00,000 – 16,00,000 = 64,00,000
Thus the ratio of workmen share and bankers share is 1:4. (64,00,000/16,00,000)
Calculation of Total Remuneration payable to Liquidator
Amount in ₹
3% on Assets realized (80,00,000 x 3%) 2,40,000
4% on payment made to company’s Banker (Refer 2,38,769
W.N)
Total Remuneration payable to Liquidator 4,78,769
Working Note:
Liquidator’s remuneration on payment to Company’s banker
Cash available after liquidator remuneration on assets realized
= ₹ 80,00,000 – ₹ 2,40,000 = ₹ 77,60,000 which will be paid to workers and Company’s
banker in ratio of 1:4.
Cash balance is available Company’s banker = ₹ 77,60,000 less ₹ 15,52,000 = 62,08,000 x
4/104= ₹ 2,38,769.
Thus,

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1. Amount payable to workers ₹ 15,52,000 (77,60,000 x 1/5).

2. No amount is available for payment of other preferential creditors
3. No amount is available for payment of unsecured creditors.
4. Liquidator for remuneration ₹ 4,78,769
5. Amount payable to Company’s bankers = ₹ 59,69,231 (62,08,000 less
2,38,769).
Alternative 2 - lf Workmen are treated as creditors for the purpose of Liquidator’s
remuneration
Ratio of workmen share and bankers share is 1:4. (64,00,000/16,00,000) as computed in
Alternative 1 above.

Calculation of Total Remuneration payable to Liquidator

Amount in ₹
3% on Assets realized (80,00,000 x 3%) 2,40,000
4% on payment made to company’s Banker 2,98,462
(Refer W.N)
Total Remuneration payable to Liquidator 5,38,462
Working Note:
Liquidator’s remuneration on payment to Company’s banker and workmen:
Cash available after liquidator remuneration on assets realized
= ₹ 80,00,000 – ₹ 2,40,000 = ₹ 77,60,000
Liquidator remuneration = ₹ 77,60,000 X 4/104 = ₹ 2,98,462 (rounded off)
Cash balance is available for workers and Company’s banker = ₹ 77,60,000 less
₹ 2,98,462 = ₹ 74,61,538.
The amount of ₹ 74,61,538 will be paid to workers and Company’s banker in ratio of 1:4.
Thus
1. Amount payable to workers ₹ 14,92,308 (rounded off) (74,61,538 x 1/5).
2. No amount is available for payment of other preferential creditors
3. No amount is available for payment of unsecured creditors.
4. Liquidator for remuneration ₹ 5,38,462
5. Amount payable to Company’s bankers = ₹ 59,69,230 (rounded off) (74,61,538
x 4/5).

Question 10
In a liquidation which commenced on 11th November, 2017 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 transfer, which took place in 2016 and 2017:

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Share holders Number of shares Date of ceasing to beCreditors remaining

transferred at the member unpaid and
date of ceasing to be outstanding
member (₹)
C 2,500 1st September, 2016 5,000
P 1,500 1st January, 2017 9,000
D 2,000 1st April, 2017 12,000
B 700 1st August, 2017 13,500
S 300 15th September, 2017 14,500
All the shares were ₹ 10 each, ₹ 5 paid up.
Ignoring expenses of and remuneration to liquidators show the amount to be realised
from various persons listed above. (5 Marks, May 18)
Answer 10
Statement of Liabilities of B list contributors (showing the amount realized)
P D B S Amount to
Creditors Outstanding 1,500 2,000 700 300 be paid to the
on the date of ceasing Shares Shares Shares Shares Creditors
to be member ₹ ₹ ₹ ₹ ₹
(1) 9,000 3,000 4,000 1,400 600 9,000
(2) 3,000 - 2,000 700 300 3,000
(3) 1,500 - - 1,050 450 1,500
(4) 1,000 - - - 1,000 150
Total (a) 3,000 6,000 3,150 2,350
(b) maximum liability on 7,500 10,000 3,500 1,500
shares held
(c) Amount to be
realized
(a) or (b)
whichever is lower 3,000 6,000 3,150 1,500
Working Notes:
1. C will not be liable since he transferred his shares prior to one year preceding the date
of winding up.
2. P will not be responsible for further debts incurred after 01.01.2017 (from the date when
he ceases to be a member). Similarly, D & B will not be liable for the debts incurred after
the date of their transfer of shares.

3. The increase between 1st August 2017 and 15th September 2017, is solely the
responsibility of S. Liability of S has been restricted to the maximum allowable limit of
₹ 1,500. Therefore, amount payable by S on 15.09.2017 is ₹ 150 only.
4. Ratio of discharge of liability will be in the ratio of no. of shares held by B List
Contributories which is as follows:

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Calculation of Ratio for discharge of Liabilities

Date Cumulative liability Increase in Ratio of no. of shares
liabilities held by L, M, N, O
₹ ₹
01.01.2017 9,000 - 15:20:7:3
01.04.2017 12,000 3,000 20:7:3
01.08.2017 13,500 1,500 7:3
15.09.2017 14,500 1,000 Only S

Question 11
The position of Bad Luck Limited on its liquidation on 31 March, 2022 is as under: Issued
and paid up capital:
90,000, 10% Preference Shares of ₹ 100 each, fully paid 90,000
Equity Shares of ₹ 100 each, fully paid up 30,000
Equity Shares of ₹ 50 each, 40 paid up
10,000 Equity Shares of ₹ 10 each, 4 paid up
Calls in arrears are ₹ 3,00,000 and calls received in advance ₹ 2,55,000, Preference dividends
are in arrears for two years. Amount left with the liquidator after discharging of all liabilities
is ₹ 1,25,15,000. 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 Liquidator's Final Statement of Account. (5 Marks) (May’22)

Answer 11
Liquidator’s Final Statement of Account

Receipts ₹ Payments ₹
Cash with liquidator 125,15,000 Return to contributors:
Realization from: Calls in Arrears of Preference dividend 18,00,000
arrears 3,00,000 Preference shareholders 90,00,000
Final call of ₹ 4 per equity Calls in advance 2,55,000
share on 10,000 shares Equity shareholders
(₹ 4 !10,000) See WN 40,000 (90,000 ! ₹ 20) 18,00,000
128,55,000 128,55,000
Working Notes:
(i) Calculation of amount available with liquidator after paying pref. shareholders
₹
Cash account balance 125,15,000
Less: Payment for dividend 18,00,000
Preference shareholders 90,00,000
Calls in advance 2,55,000 (110,55,000)
14,60,000
Add: Calls in arrears 3,00,000
17,60,000

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(ii) Paid up Share capital = 90,00,000 + 12,00,000 + 40,000=₹ 1,02,40,000

(iii) Deficiency for equity shareholders: ₹ 1,02,40,000 - ₹ 17,60,000 = ₹ 84,80,000
(iv) Nominal Value of Share Capital = ₹ 90,00,000 + 15,00,000+1,00,000 = 1,06,00,000
(v) % of deficiency to be borne by each equity shareholder: = (₹ 84,80,000 / ₹
1,06,00,000) x 100 = 80%
(vi) Amount refunded/recovered from equity shareholders:
90,000 shares 30,000 shares 10,000 shares
of ₹ 100 each of ₹ 50 each of ₹ 10 each
Paid up per share ₹ 100 ₹ 40 ₹4
Deficiency to bear per ₹ 80 ₹ 40 ₹8
share (80% of nominal
value)
To refund ₹ 20 NIL To recover ₹ 4
per share per share
Note: Alternative presentation of the above working notes may be provided in the
answer.

Question 12
Proud Limited is being wound up by the tribunal. All the assets of the company have
been charged to the company's banker to whom the company owes ₹ 10 crores. The
company owes the following amounts to others:
(i) Dues to workers-₹ 2,50,00,000
(ii) Taxes payable to Government-₹ 60,00,000

(iii) Unsecured Creditors-₹ 1,20,00,000

You are required to compute with the reference to the provisions of the Companies Act,
2013 the amount each kind of creditors is likely to get if the amount realized by the
official liquidator from the secured assets and available for distribution among creditors
is only ₹ 8,00,00,000. (5 Marks Nov ‘22)

Answer 12
Section 326 of the Companies Act, 2013 talks about the overriding preferential payments
to be made from the amount realized from the assets to be distributed to various kind of
creditors. According to the proviso given in the section 326 the security of every secured
creditor should be deemed to be subject to a pari-passu change in favor of the workman
to the extent of their portion.

Workman's Share to Secured Asset =

Amount Realized ! Workman sDues
workman sDues 5 Secured Loan

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9, , , ! , ,
=
, , : , , ,
1
8,00,00,000 !
5
Workman's Share to Secured Assets = ₹1,60,00,000
Amount available to secured creditor is ₹ 800 Lakhs – ₹160 Lakhs = ₹ 640 Lakhs
Hence, no amount is available for payment of government dues and unsecured creditors.

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Chapter 4.1
Banking Companies
Question 1
The following are the figures extracted from the books of New Bank Limited as on
31.03.2021.
Figure in `
Interest and Discount received 48,11,200
Interest paid on Deposits 22,95,920
Salaries and allowances 8,40,510
Directors fees and allowances 45,000
Issued and subscribed capital 16,00,000
Commission, Exchange and Brokerage received 1,45,000
Postage and Telegrams 60,000
Statutory Reserve Fund 8,00,000
Interest on cash credit 2,65,000
Profit on sale of Investments 1,15,800
Depreciation on Bank's Property 40,000
Interest on Overdraft 1,20,000
Rent Received 65,000
Legal Expenses 21,000
Auditors Fees 5,000
Statutory Expenses 38,000
The following information is also given:
(i) A customer to whom a sum of ` 5 Lakhs was advanced has become insolvent and it is
expected that only 50% can be recovered from his estate.
(ii) Make necessary provisions on Risk Assets:
Standard (excluding above ` 5,00,000) 10,00,000
Sub-Standard (fully secured) 8,20,000
Doubtful assets covered by security for 1 year 40,000
Loss assets 1,00,000
(iii) Provide ` 6,50,000 for Income Tax.
(iv) The directors desire to declare 10% dividend.
(v) 25% of profit is to be transferred to Reserve fund.
(vi) Rebate on Bills discounted on 31.03.2020 was ` 20,000 and ` 15,000 on 31.03.2021.
You are required to prepare Profit & Loss A/c of New Bank Limited for the year ended
31.03.2021. (10 Marks July 21)
Answer 1
New Bank Limited
Profit and Loss Account for the year ended 31st March, 2021

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Schedule Year ended

31.03.2021
`
I. Income:
Interest earned 13 52,01,200
Other income 14 3,25,800
Total 55,27,000
II. Expenditure
Interest expended 15 22,95,920
Operating expenses 16 10,49,510
Provisions and contingencies 11,37,000
(6,50,000+2,37,000+2,50,000)
Total 44,82,430
III. Profits/Losses
Net profit for the year 10,44,570
Profit brought forward Nil
10,44,570
IV. Appropriations
Transfer to statutory reserve (25% of 10,44,570) 2,61,143
Proposed dividend 1,60,000
Balance carried over to balance sheet 6,23,427
10,44,570
Note: Profit & Loss Account balance of ` 6,23,427 will appear under the head ‘Reserves and
Surplus’ in Schedule 2 of the Balance Sheet.
Year ended 31.3.2021 (`)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 48,16,200
Interest on cash credit* 2,65,000
Interest on overdraft * 1,20,000
52,01,200
Schedule 14 – Other Income
I. Commission, exchange and brokerage 1,45,000
II. Profit on sale of investment 1,15,800
III. Rent received 65,000
3,25,800
Schedule 15 – Interest Expended
I. Interests paid on deposits 22,95,920
22,95,920
Schedule 16 – Operating Expenses
I. Payment to and provisions for employees (salaries & allowances) 8,40,510
II. Depreciation on assets 40,000

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III. Director’s fee, allowances and expenses 45,000

IV. Auditor’s fee 5,000
V. Statutory (law) expenses 38,000
VI. Postage and telegrams 60,000
VII. Legal expenses 21,000
10,49,510
* Considered to be earned.
Working Notes:
1.
`
Interest and discount received 48,11,200
Add: Rebate on bills discounted on 31.3. 2020 20,000
Less: Rebate on bills discounted on 31.3. 2021 (15,000)
48,16,200
2.

Classification of Assets Amount of Advances % age of Amount of

provision provision
Standard assets 10,00,000 0.40 4,000
Sub-standard assets 8,20,000 15 1,23,000
Doubtful assets:
For one year (secured) 40,000 25 10,000
Loss assets 1,00,000 100 1,00,000
Total provision required 2,37,000

Question 2
A commercial bank has the following capital funds and assets. Segregate the capital funds
into Tier I and Tier II capitals. Find out the risk-adjusted asset and risk weighted assets
ratio:
Capital Funds: (` in lakhs)
Equity Share Capital 29,00
Perpetual Non-cumulative Preference Shares 8,00
Perpetual Cumulative Preference Shares (fully paid up) 5,50
Statutory Reserve 13,50
Capital Reserve (of which ` 13.5 lakhs were due to revaluation of assets
and the balance due to sale of assets) 45
Securities Premium 7,00
Assets:
Cash balance with RBI 3,50
Balances with other banks 4,75

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Claims on Banks 10,25

Investments in Bonds issued by other banks 78,00
Investments in venture capital funds 17,00
Other investments 121,00
Loan and Advances:
(i) Loans guaranteed by Government 16,10
(ii) Loans guaranteed by public sector undertakings 6,20
(iii) Leased assets 4
(iv) Advances against term deposits 15,00
(v) Educational loans 12

Other Assets:
(i) Premises, Furniture & Fixtures and other assets 150,55
(ii) Intangible assets 18
(iii) Deferred tax asset 0.40
Off Balance Sheet Items :
(i) Acceptances, Endorsements & letter of credit 203,00
(ii) Non funded exposure to real estate 19,00
(10 Marks Jan 21)

Answer 2
(in lakhs)
(i) Capital Funds - Tier I:
Equity Share Capital 29,00.00
Securities premium 7,00.00
Perpetual non-cumulative pref. shares 8,00.00
Statutory Reserve 13,50.00
Capital Reserve (arising out of sale of assets) 31.50
57,81.50
Less: Intangible assets (18.00)
Deferred tax assets (0.40) (18.40)
Total 57,63.10
Capital Funds - Tier II:
Perpetual cumulative pref. shares 5,50.00
Capital Reserve (arising out of revaluation of assets)13.50
Less: Discount to the extent of 55% (7.43)* 6.07
Total 556.07
Total Capital Funds 63,19.17
* 7.425 has been rounded off as 7.43.
(ii) Calculation of Risk Adjusted Assets

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` in lakhs Weight in % Amount

(` in lakhs)
Funded Risk Assets
Cash Balance with RBI 3,50 0 0
Balances with other Banks 4,75 20 95
Claims on banks 10,25 20 2,05
Investment in bonds issued by other
banks 78,00 20 15,60
Investment in venture capital funds 17,00 150 25,50
Other Investments 121,00
121,00 100
Loans and Advances:
(i) guaranteed by government 16,10 0 0
(ii) guaranteed by public sector
undertakings 6,20 0 0
(iii) Leased assets 4 100 4
(iv) Advances against term deposits 15,00 0 0
(v) Educational Loans 12 100 12
Premises, furniture and fixtures 150,55 100 150,55
315,81

Off-Balance Sheet Item ` in lakhs Credit ` in lakhs

Conversion
Factor
Acceptances, Endorsements and Letters 203,00 100 203,00
of credit
Non-funded exposure to real estate 19,00 150 28,50
sector
231,50
(iii) Risk Weighted Assets Ratio:

&
X 100
Capital Adequacy Ratio = 63,19.17/315,81+231,50
= (63,19.17/547,31) x 100=11.55%

Question 3
Vasu Commercial Bank has the following capital funds and assets. Segregate the capital
funds into Tier I and Tier II capitals. Find out the risk adjusted assets and risk weighted
assets ratio.
Particulars ` in crores
Equity Share Capital 600.00
Statutory Reserve 250.00
Capital Reserve (of which ` 26 crores were due to revaluation of assets 87.00
and the balance due to sale of capital assets)
Assets:
Cash Balance with RBI 20.00

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Balance with other banks 28.00

Other investments 38.00
Loans and advances :
(i) Guaranteed by the Govt. 18.50
(ii) Others 6,625.00
Premises, Furniture and fixtures 108.00
Off-Balance Sheet Items
(i) Guarantee and other obligations 600.00
(ii) Acceptances, endorsements and letter of credit 4,200.00
( 10 Marks ,Nov 20)
Answer 3
(` in
Crores)
Capital Funds - Tier I : Rs. Rs.

Equity Share Capital 600

Statutory Reserve 250

Capital Reserve (arising out of sale of assets) (87 – 26) 61

Capital Fund Tier I 911.0

Capital Funds - Tier II :
Capital Reserve (arising out of revaluation of assets) 26.0

Less: Discount to the extent of 55% (14.3)

Capital fund Tier II 11.7

Total Capital Fund 922.7

(ii) Calculation of Risk Adjusted Assets Amount

` weight in % `
Funded Risk Assets
Cash Balance with RBI 20 0 0
Balances with other Banks 28 20 5.6
Other Investments 38 100 38
Loans and Advances:
(i) guaranteed by government 18.5 0 0
(ii) Others 6625 100 6625
Premises, furniture and fixtures 108 100 108
6776.60
Off-Balance Sheet Item ` in Credit

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Crores Conversion
Factor
Guarantees & Other Obligations 600 100 600
Acceptances, Endorsements
and Letters of credit 4,200 100 4,200
11576.60
Risk Weighted Assets Ratio: Capital Funds (Tier I & Tier II) ×100
Risk Adjusted Assets+ off Balance sheet
items
911 X 11.7
=
6776.60 X 4,800
Capital Adequacy Ratio = 922.7/ 11576.6 = 7.97%

Question 4
The following is an extract of Trial Balance of SM Bank, an overseas bank as on 31st
March, 2018.
Dr. Cr. Rs.
Bill Discounted Rs. 15,16,800
Discount Received 1,26,859
Rebate on Bills discounted not due on 31st 26,592
March,17 An analysis of bill discounted is as
follows :
Amount in Rs. Due Date Rate of
Discount
1,46,200 4th May, 2018 15
2,30,400 12th May, 2018 15
4,35,900 28th May, 2018 15
4,36,200 18th June, 2018 16
2,68,100 4th July, 2018 16
You are required to calculate Rebate on Bills Discounted as on 31st March, 2018
and show necessary Journal Entries.
(ii) The following information are also given for SM Bank :
Assets Rs. in Lakhs
Standard 75,00
Sub-Standard 60,00
Doubtful: for 1 Year (fully secured) 12,00
for 1 to 3 Year (fully secured) 9,00
for more than 3 Years 9,00
Loss Assets 15,00
Additional Information:
(1) Standard Assets includes Rs. 15,00 Lakhs Advances to Commercial Real
Estate (CRE).
(2) Out of Rs. 60,00 Lakhs of Sub-Standard Asset Rs. 20,00 Lakhs are unsecured.
Unsecured amount includes Rs. 5,00 Lakhs in respect of Infrastructure Loan

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Accounts with ESCROW safeguard.

(3) Doubtful Asset for more than 3 Years includes Rs. 4,00 Lakhs, which is covered
by 50% ECGC,
(4) value of security of which is Rs. 150 Lakhs.
You are required to find out the amount of provision to be shown in the Profit &
Loss Account of SM Bank. [10 Marks, May ‘19]
Answer 4
(i) Statement showing rebate on bills discounted
Value Due Date Days after Rate of discount Discount
31.3.2018 Amount
1,46,200 4.5.18 (30+ 4) = 34 15% 2,043
2,30,400 12.5.18 (30+12) = 42 15% 3,977
4,35,900 28.5.18 (30+28) = 58 15% 10,390
4,36,200 18.6.18 (30+ 31+ 18) = 79 16% 15,106
2,68,100 4.7.18 (30+ 31+30+4) = 95 16% 11,165
Rebate on bills discounted on
15,16,800 42,681
31.3.2018
In the books of SM Bank Ltd.
Journal Entries
(i) Rebate on bills discounted Account Dr. 26,592
To Discount on bills Account 26,592
[Being opening balance of rebate on bills
discounted account transferred to discount
on bills account]
(ii) Bills purchased & discounted Account Dr. 15,16,800
To Discount on bills Account 1,26,859
To Clients Account 13,89,941
(Being bills purchased and discounted during the
year)
(iii) Discount on bills Account Dr. 42,681
To Rebate on bills discounted Account 42,681
[Being provision made on 31st March, 2018]
(iv) Discount on bills Account Dr. 1,10,770
To Profit and loss Account 1,10,770
[Being transfer of discount on bills, of the
year, to profit and loss account]
Credit to Profit and Loss A/c will be as follows:
Rs. (1,26,859 + 26,592 – 42,681) = Rs. 1,10,770
(ii) Statement showing the amount of provisions on Assets
(Rs. in
lakhs)
Assets Amount % of provision Provision
Standard:
Advances to CRE 15,00 1 15
Others 60,00 .4 24
Sub-standard:
Secured 40,00 15 6,00
Unsecured- Others 15,00 25 3,75
Unsecured infrastructure 5,00 20 1,00
Doubtful Secured:

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up to one year 12,00 25 3,00

For more than 1 year up to 3 years 9,00 40 3,60
More than 3 years 4,00 W.N.1 2,75
Doubtful unsecured (more than 3 5,00 100 5,00
years)
Loss 15,00 100 15,00
Total Provision Required 40,49
Working Note :
Provision required where assets are ECGC covered

Rs. In Lakhs
Outstanding balance (ECGC 4,00
Covered)Less: Value of security 1,50
Unrealized balance Less: 2,50
ECGC Cover @ 50% 1,25
Net Unsecured Balance 1,25
Provision for unsecured portion 1,25
@100% Provision for secured portion 1,50
@100% 2,75
Total Provision to be made

Question 5
Forward Bank Ltd furnishes the following information as on 31st March, 2018.
Amount in
Rs.
Bills Discounted 82,23,000
Rebate on bills discounted as on 1st April, 2017 1,32,960
Discount received 6,33,990
Details of bills discounted is as given below:
Value of Bills (Rs. ) Due Date Rate of
Discount
10,95,000 15th June, 2018 14%
30,00,000 25th June, 2018 12%
16,92,000 5th July, 2018 16%
24,36,000 15th July, 2018 16%
(i) Calculate the rebate on bills discounted as on 31st March, 2018.
(ii) Pass necessary Journal Entries. [5 Marks , Nov ‘18]
Answer 5
In order to determine the amount to be credited to the Profit and Loss A/c it is necessary
to first ascertain the amount attributable to the unexpired portion of the period of the
respective bills. The workings are as given below:
Value (Rs.) Due Date Days after Discount Discount
31-03-2018 % Amount
Rs.
10,95,000 15-06-2018 (30+31 + 15) = 76 14% 31,920

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30,00,000 25-06-2018 (30 + 31 + 25) = 86 12% 84,822

16,92,000 05-07-2018 (30 + 31 + 30 + 5) = 96 16% 71,203
24,36,000 15-07-2018 (30 + 31 + 30 + 15) = 106 16% 1,13,191*
Rebate on bills discounted
as
on 31.3.2018 3,01,136
The journal entries will be as follows :
Dr. Cr.
` `
Rebate on Bills Discounted A/c Dr. 1,32,960
To Discount on Bills A/c 1,32,960
(Being the transfer of Rebate on Bills Discounted on 1.4.2017
to Discount on Bills Account)
Discount on Bills A/c Dr. 3,01,136
To Rebate on Bills Discounted A/c 3,01,136
(Being the transfer of rebate on bills discounted
required on 1.4.2018 from discount on Bills Account)
Discount on Bills A/c Dr. 4,65,814
To Profit and Loss A/c 4,65,814
(Being the amount of discount on Bills transferred
to Profit and Loss Account)

Working Note :
The amount of discount to be credited to the Profit and Loss Account will be:
discount as on 1.4.17 1,32,960
Add: Discount received during
the year ended 31-3-2018 6,33,990
7,66,950
Less: Rebate on bills discounted
as on 31.3.2018 (3,01,136)
4,65,814

Question 6
Astha Bank has the following Capital Funds and Assets as at 31st March, 2018:
Rs. in crores
Capital Funds:
Equity Share Capital 600.00
Statutory Reserve 470.00
Profit and Loss Account (Dr. Balance) 30.00
Capital Reserve (out of which Rs. 25 crores were due to
revaluation of
assets and balance due to sale of assets) 130.00
Assets:
Balance with other banks 15.00
Cash balance with RBI 35.50

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Claim on Banks 52.50

Other Investments 70.00
Loans and Advances:
(i) Guaranteed by government 22.50
(ii) Guaranteed by DICGC/ECGC 110.00
(iii) Other 9,365.00
Premises, furniture and fixtures 92.50
Leased assets 40.00
Off- Balance Sheet items:
(i) Acceptances, endorsements and letters of credit 1,100.00
(ii) Guarantees and other obligations 6,200.00
You are required to:
(i) Segregate the capital funds into Tier I and Tier II capitals.
(ii) Find out the risk-adjusted assets and risk weighted assets ratio [10 Marks ,
May ‘18]
Answer 6
(i) Capital Funds –Tier I : Rs. in crore
Equity Share Capital 600
Statutory Reserve 470
Capital Reserve (arising out of sale of assets) 105
Less: Profit & Loss (Dr. bal.) (30)
1,145
Capital Funds - Tier II :
Capital Reserve (arising out of revaluation of assets) 25
Less: Discount to the extent of 55% (13.75)
11.25

(ii) Risk Adjusted Assets

Funded Risk Assets Rs. in Percentage Amount
crore weight Rs. in
crore
Cash Balance with RBI 35.50 0 —
Balances with other Banks 15 20 3
Claims on banks 52.50 20 10.50
Other Investments 70 100 70
Loans and Advances:
(i) guaranteed by government 22.50 0 —
(ii) guaranteed by DICGC/ECGC 110 50 55
(iii) Others 9,365 100 9,365
Premises, furniture and fixtures 92.50 100 92.50
Leased Assets 40 100 40
9,636
Off-Balance Sheet Item Rs. in Credit Rs. In
Crore Conversion Crore
Factor
(i) Acceptances, Endorsements
and Letters of credit 1,100 100 1,100
(ii) Guarantees and other obligations 6,200 100 6,200
7,300

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!"#$!% &'()* +#,- . & +#,- ..

Risk Weighted Assets Ratio : /#*0 1)2'*$,) 1**,$* 344 5!%!(6, 78,,$ #$,9* : 100
= (1,145 +11.25)/ (9,636 +7,300)
= (1,156.25 /16,936) x 100 = 6.83% (rounded off)

Question 7
From the following information, you are required to prepare Profit and Loss Account of
Simple Bank for the ended as on 31st March, 2019:
2017-18 Item 2018-19
(Rs. in ‘000) (Rs. in ‘000)
71,35 Interest and Discount 1,02,25
5,70 Income from investment 5,60
7,75 Interest on Balances with RBI 8,85
36,10 Commission , Exchange and Brokerages 35,60
60 Profit on sale of investments 6.10
30,60 Interest on Deposits 41.10
6,35 Interest to RBI 7,35
36,35 Payment to and provision for employees 42,75
7,90 Rent, taxes and lighting 8,95
7,35 Printing and Stationery 10.60
5,60 Advertising and publicity 4,90
4,90 Depreciation 4,90
7,40 Director’s fees 10,60
5,50 Auditor’s feed 5,50
2,50 Law Charges 7,60
2,40 Postage, telegrams and telephones 3,10
2,10 Insurance 2,60
2,85 Repair and maintenance 3,30
Other Information:
(i) The following items are already adjusted with interest and Discount (Cr.)

Tax Provision (Rs. ‘000) 7,40

Provision for Doubtful Debts(Rs. ‘000) 4,60
Loss on sale of investments (Rs. ‘000) 60
Rebate on Bills discounted (Rs. ‘000) 2,75
(ii) Appropriations:
25% of profit is transferred to Statutory Reserves. 5% of profit is transferred to Revenue
Reserve. You are required to give necessary Schedules also. [10 Marks, Nov-19]

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Answer 7
Simple Bank
Profit and Loss Account for the year ended 31-3-2019
Schedul (Rs. 000’s) (Rs. 000’s)
e Year ended Year ended
No. 31-3-2019 31-3-2018
I. Income Interest Earned 13 1,29,30 84,80
Other Income 14 41,10 36,70
II. Total Expenditure 1,70,40 1,21,50
Interest Expended 15 48,45 36,95
Operating Expenses 16 1,04,80 84,85

Provisions and Contingencies 12,00

Total 1,65,25 1,21,80

III. Profit/Loss
Net Profit/Loss for the year 5,15 (30)
Profit/Loss brought forward (30)
Total 4,85 (30)
IV. Appropriations
Transfer to Statutory Reserve 128.75
Transfer to Other Reserve, Proposed Dividend 25.75
Balance carried over to Balance Sheet 330.5
Total 485.0
Schedule 13 - Interest Earned
Year ended (Rs. 000’s)
Year ended
31-3-2019 31-3-2018
I. Interest/Discount 1,14,85 71,35
II. Income on Investments 5,60 5,70
III. Interest on Balances with RBI
and other inter-bank fund 8,85 7,75
IV. Others
Total 1,29,30 84,80
Schedule 14 - Other Income
(Rs. 000’s)
Year ended Year ended
31-3-2019 31-3-2018
I. Commission, Exchange and Brokerage 35,60 36,10
II. Profit on Sale of Investments 6,10 60

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Less: Loss on sale of Investments (60) -

Total 41,10 36,70
Schedule 15 - Interest Expended
(Rs. 000’s)
Year ended Year ended
31-3-2019 31-3-2018
I. Interest on Deposits 41,10 30,60
II. Interest on RBI/inter-bank borrowings 7,35 6,35
Total 48,45 36,95
VII. Auditor’s fees and expenses
(including branch auditors) 5,50 5,50
VIII. Law charges 7,60 2,50
IX. Postage, telegrams, telephones etc. 3,10 2,40

X. Repairs and maintenance 3,30 2,85

XI. Insurance 2,60 2,10
XII. Other Expenditure
Total 1,04,80 84,85

Question 9
The following information is furnished by ALFA Bank Ltd.
Rs. in Lakhs
Margins held against letter of credit 200
Recurring accounts deposits 100
Current accounts deposits 375
Demand deposit 125
Unclaimed deposit 75
Gold deposit 235
Demand liabilities portion of saving bank deposit 1325
Time liabilities portion of saving bank deposit 722
Explain CRR and you are required to calculate the amount of Cash Reserve Ratio (CRR)
as per the direction of reserve Bank of India. [5 Marks , Nov ‘19]
Answer 9
Cash Reserve Ratio (CRR): For smoothly meeting cash payment requirement, banks are
required to maintain certain minimum ready cash balances at all times. This is called as Cash
Reserve Ratio (CRR). Cash reserve can be maintained by way of either a cash reserve with
itself or as balance in a current account with the Reserve Bank of India or by way of net
balance in current accounts or in one or more of the aforesaid ways. Every Scheduled
Commercial Bank has to maintain cash reserve ratio (i.e. CRR)as per direction of the RBI.
The current Cash Reserve Ratio (CRR) is 4% (3% as per amendment in Nov 20) of their Net
Demand and Time Liabilities (NDTL).
Margins held against letters of credit Demand 200
Liability
Recurring Accounts deposits Time Liability 100

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Current deposits Demand 375

Liability
Demand deposits Demand 125
Liability
Unclaimed deposits, Demand 75
Liability
Gold deposits Time Liability 235
Demand liabilities portion of savings bank deposits Demand 1325
Liability
Time liabilities portion of savings bank deposits Time Liability 722
Total 3,15
7
Cash Reserve Ratio = Net (demand + Time) liabilities
X 4/100 CRR= 3,157 x 4/100 = 126.28 Lakhs
As per amendment in Nov 20
Cash Reserve Ratio = Net (demand + Time) liabilities X 3/100
CRR= 3,157 x 3/100 = 94.71 Lakhs

Question 10
From the following information, you are required to prepare Profit and Loss Account of
Popular Bank for the year ended 31st March 2021.
Particulars `
Interest on cash credit 13,65,000
Interest on overdraft 5,62,500
Interest on term loans 11,55,000
Income on investments 6,30,000
Interest on balance with RBI 1,12,500
Commission on remittances and transfer 56,250
Commission on letters of credit 88,500
Commission on government business 61,500
Profit on sale of land and building 20,250
Loss on exchange transactions 39,000
Interest paid on deposit 20,40,000
Auditor’s fees and allowances 90,000
Directors’s fees and allowances 1,87,500
Advertisements 1,35,000
Salaries, allowances and bonus to employees 9,30,000
Payment to Provident Fund 2,10,000
Printing and stationery 1,05,000
Repairs and maintenance 37,500
Postage, telegrams, telephones 60,000
Other information:

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Interest on NPA is as follows:

(i)
Earned (`) Collected (`)
Cash credit 6,15,000 3,00,000
Overdraft 3,37,500 75,000
Term loans 5,62,500 1,87,500
(ii) Classification of Non-Performing Advances:
`
Standard 22,50,000
Sub-standard 8,40,000
Doubtful assets not covered by security 1,50,000
Doubtful assets covered by security for one year 37,500
Loss Assets 1,50,000
(iii) Investment ` 20,62,500
Bank should not keep more than 25% of its investment as ‘Held-to Maturity’.
The market value of its rest 75% investment is ` 14,81,250 as on 31st March, 2021. (10 Marks
Dec’21)
Answer 10
Popular Bank Profit and Loss Account
For the year ended 31st March, 2021
Particulars Schedule Year ended
31-3-2021 (`)
I Income
Interest earned 13 28,72,500
Other income 14 1,87,500
30,60,000
II Expenditure
Interest expended 15 20,40,000
Operating expenses 16 17,55,000
Provisions and Contingencies (W.N) 5,10,000
43,05,000
III Profit/Loss (12,45,000)
IV Appropriations Nil
Schedule 13 - Interest Earned
Year ended 31-3-2021 (`)
I Interest/discount on advances/bills
Interest on cash credit ` (13,65,000-3,15,000) 10,50,000
Interest on overdraft ` (5,62,500-2,62,500) 3,00,000
Interest on term loans ` (11,55,000-3,75,000) 7,80,000 21,30,000
II Income on investments 6,30,000
III Interest on Balance with RBI 1,12,500
28,72,500

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Interest on NPA is recognized on cash basis, hence excess reduced.

Schedule 14 - Other Income
Year ended 31-3-2021 (`)
I Commission, Exchange and Brokerage
Commission on remittances and transfer 56,250
Commission on letter of credit 88,500
Commission on Government business 61,500 2,06,250
II Profit on sale of Land and Building 20,250
III Loss on Exchange Transactions (39,000)
1,87,500
Schedule 15 - Interest Expended
Year ended 31-3-2021 (`)
I Interest on Deposits 20,40,000
Schedule 16 - Operating Expenses
Year ended 31-3-2021 (`)
I Payment and provision for employees
Salaries, allowances and bonus 9,30,000
Provident Fund Contribution 2,10,000 11,40,000
II Printing and Stationery 1,05,000
III Advertisement and publicity 1,35,000
IV Directors’ fees and allowances 1,87,500
V Auditors’ fees and expenses 90,000
VI Postage, telegrams, telephones etc. 60,000
VII Repairs and maintenance 37,500
17,55,000
Working Note:
Provisions and contingencies (`)
Provision for NPA:
Standard 22,50,000 × 0.40% 9,000
Sub-standard 8,40,000 × 15%* 1,26,000
Doubtful not covered by security 1,50,000 × 100% 1,50,000
Doubtful covered by security for one 37,500 × 25% 9,375
year
Loss Assets 1,50,000 × 100% 1,50,000
4,44,375
Depreciation on current investments
Cost (75% of 20,62,500) 15,46,875
Less: Market value (14,81,250) 65,625
5,10,000
Note: 25% of the total investments are held to maturity. In the case of Held to Maturity

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investments the valuation is done at cost and these are not marked to market value
generally. Hence, depreciation on investments has been calculated only on other
investments which can either be Held for Trading (HFT) or Available for Sale (AFS).

Question 11
(i) Write a short note on Non-performing assets of a banking company.
(ii) Dee Bank provides you the following information relating to their two cash credit
accounts:
Account A Account B
₹ In Lakhs ₹ In Lakhs
Sanctioned limit 4,500 3,200
Drawing power 4,200 2,500
Amount outstanding continuously from 01.01.2021 to 3,600 2,000
31.03.2021
Total Interest debited for the above period 288 315
Total credits for the above period 120 380
State with reason whether the above cash credit accounts are NPA or not? (5 = 20
Marks) (May ‘22)

Answer 11

I. Performing assets are also called as Standard Assets. A non-performing asset is a loan or
advance for which the principal or interest payment remains overdue for a period of 90 days.
The assets other than performing assets are called Non-Performing Assets (NPA). NPAs are
classified into three groups: (i) sub-standard Assets (ii) doubtful assets & (iii) Loss Assets.
(i) Sub-standard Assets –A Sub-standard asset is one which has been classified as an
NPA for a period not exceeding 12 months.
(ii) Doubtful Assets - An asset would be classified as doubtful if it has remained in the
substandard category for a period of at least12 months.
(iii) Loss Assets - A loss asset is one where loss has been identified by the bank or
internal or external auditors or the RBI inspectors but the amount has not been
written off, wholly or partly. In other words, such an asset is considered
uncollectible or if collected of such little value that its continuance as a bank asset
is not warranted although there may be some salvage or recovery value.
Income from non-performing assets can only be accounted for as and when it is
actually received.

II. Performing assets are

Account A Account B
₹ in lakhs ₹ in lakhs
Sanctioned limit 4,500 3,200
Drawing power 4,200 2,500
Amount outstanding continuously from 1.01.2021 to 3,600 2,000

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31.03.2021
Total interest debited 288 315
Total credits 120 380
Is credit in the account is sufficient to cover the interest No Yes
debited during the period? or
Is amount ‘overdue’ for a continuous period of 90 Yes No
days?
NPA Not NPA

Question 12
Deluxe Commercial Bank has the following capital funds and assets:
₹ In Crores
Capital Funds and Assets
Capital Funds:
Paid up Equity Share Capital 2,400
Statutory Reserves 480
Securities Premium 480
Capital Reserve (of Which ₹ 128 Crores were due to revaluation of
assets and balance due to sale of assets) 288
Profit and Loss Account (Dr. Balance) 48
Assets:
(i) Cash balance with Reserve Bank of India. 192
(ii) Claims on Banks 544
(iii) Other Investments 7,360
Loans and Advances:
(i) Guaranteed by Government of India and State Governments. 1,280
(ii) Bank Staff Advances -fully covered by superannuation benefit 160
Other loans and advances 544
Other Assets:
(i) Premises, Furniture & Fixtures 12,560
(ii) Intangible Assets 48
Off-Balance Sheet Items:
Acceptance, Endorsements and Letters of Credit 4,800
Guarantee and other obligations 160
You are required to:
(i) Segregate the capital funds into Tier I and Tier II capitals, and
(ii) Find out the risk-adjusted asset and risk weighted assets ratio. (10 Marks) .(May’22)

Answer 12

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(₹ in crores)
(i) Capital Funds - Tier I:
Paid up Equity Share Capital 2,400.00
Securities premium 480.00
Statutory Reserve 480.00
Capital Reserve (arising out of sale of assets) 160.00
3,520.00
Less: Intangible assets 48.00
Profit and Loss Account (Dr. balance) 48.00 (96.00)
Total 3,424.00
Capital Funds - Tier II:
Capital Reserve (arising out of revaluation of assets) 128.00
Less: Discount to the extent of 55% (70.40) 57.60
Total Capital Funds 3,481.60
(ii) Calculation of Risk Adjusted Assets
₹ in crore Weight in % Amoun
t (₹ in
crore)
Funded Risk Assets
Cash Balance with RBI 192 0 0
Claims on banks 544 20 108.80
Other Investments 7,360 100 7,360
Loans and Advances:
(i) Guaranteed by government 1,280 0 0
(ii) Staff advances fully covered by
superannuation benefits 160 20 32
(iii) Other Loans 544 100 544
Premises, furniture and fixtures 12,560 100 12,560

20,604.80

Off-Balance Sheet Items ₹ in Credit Conversion ₹ in crore

crores Factor
Acceptances, Endorsements and 4,800 100 4,800
Letters of credit
Guarantees and other obligations 160 100 160
4,960
!"#$!% &'()* +#,- . & +#,- ..
Risk Weighted Assets Ratio= × 100
/#*0 1)2'*$,) 1**,$* 344 5!%!(6, *8,,$ #$,9*

Capital Adequacy Ratio = 3424 + 57.60/ 20,604.80 + 4,960

= (3481.60/25,564.80) x 100
= 13.62% (rounded off)

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Question 13
Following information of RJS Bank Limited for the year ended 31st March, 2022 are as
under:
Particulars ₹ in ‘000
Total interest earned and received on term 6375.00
loans Interest earned on term loans 1827.50
classified as NPA Interest received on term 595.00
loans classified as NPA Total interest earned 14157.50
on cash credits and overdrafts 2307.50
Interest earned but not received on cash credits and
overdrafts treated as NPA 10300.00
Interest on Deposits 502.50
Commission, exchange and brokerage 4690.00
Profit on sale of Investments
Profit on revaluation of 855.00
Investments Income from 5435.00
Investments 6862.50
Payment to and provision for 962.50
employees Rent, Taxes and 155.00
Lighting 782.50
Printing and Stationery 140.00
Director’s fees, allowances and expenses 247.50
Repairs and Maintenance 107.50
Depreciation on Bank’s
property Insurance
Classification of Assets:
Particulars ₹
Standard [including advances to Commercial Real Estate 11,750
(CRE) sector
₹ 17,50,000] 4,750
Sub-standard (fully secured)
1,000
Doubtful Assets not covered by security
100
Doubtful Assets covered by security for 1 750
year Loss Assets

You are required to prepare Profit and Loss account of RJS Bank Limited including
Schedules for the year ended 31stMarch, 2022 and calculate provision required to be
made on Risk Assets. (15 Marks Nov ‘22)

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Answer 13
RJS Bank
Profit and Loss Account
For the year ended 31st March, 2022
Particulars Schedule (₹ ’000’)
Year ended
31-3-2022
I Income
Interest earned 13 23,660.00
Other income 14 6,047.50
29,707.50
II Expenditure
Interest expended 15 10,300.00
Operating expenses 16 9,257.50
Provisions and Contingencies (refer W.N) 2,545
22,102.50
III Profit/Loss 7,605.00
Schedule 13 - Interest Earned
Year
ended
31-3-
2022
(₹ ’000’)
I Interest/discount on advances/bills
Interest on term loans * 6,375.00
Interest on cash credits and overdrafts (14157.50- 11,850.00
2307.50)
II Income on investments 5,435.00
23,660.00
Schedule 14 - Other Income
Year ended
31-3-2022
(₹ ’000’)
Commission, exchange and brokerage 502.50
Profit on sale of investments 4690
Profit on revaluation of investments 855
6047.50
Schedule 15 - Interest Expended
Year ended
31-3-2022

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I Interest on Deposits 10,300

Schedule 16 - Operating Expenses
Year Ended
31-3-2022
I Payment and provision for employees
Salaries, allowances and bonus 6862.50
II Rent, taxes and lighting 962.50
III Printing & stationery 155.00
IV Director’s fee, allowances and expenses 782.50
V Depreciation on the Bank’s Property 247.50
VI Repairs & maintenance 140.00
VII Insurance 107.50
9,257.50
Working Note:
Calculation of Provisions amount on risk assets (₹
’000)
Provision for NPA:
Standard (excluding advances to Commercial 10,000 ×
Real Estate (CRE) Sector 11,750-1,750) 0.40% 40
Standard - advances to Commercial Real Estate 1,750 x 1% 17.5
(CRE)
Sub-standard- fully secured 4750 × 15% 712.5
Doubtful assets not covered by security 1,000 × 100% 1000
Doubtful covered by security for one year 100 × 25% 25
Loss Assets 750 × 100% 750
2,545

Note: *The amount of total interest earned and received on term loans
amounting ₹ 63,75,000 is given in the question. It has been assumed in the given
answer that this amount does not include any amount of interest earned but not
received on term loans (classified as NPA). Hence no adjustment for the amount
of interest earned but not received on term loans (classified as NPA) has been
done. Alternatively, it may be assumed that the amount of total interest earned
and received on term loans amounting
₹ 63,75,000 is inclusive of interest amount earned but not received on term loans
classified as NPA. In this case, the Profit and Loss Account and Schedule 13 will
be changed and
will be given as follows (Schedules 14 to 16 and Working Note will remain same):
RJS Bank
Profit and Loss Account
For the year ended 31st March, 2022

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Particulars Schedule Year ended

31-3-2022
(₹ ’000’)
I Income
Interest earned 13 22,427.50
Other income 14 6,047.50
28,475
II Expenditure
Interest expended 15 10,300.00
Operating expenses 16 9,257.50
Provisions and Contingencies (refer W.N) 2,545
22,102.50
III Profit/Loss 6,372.50
Schedule 13 - Interest Earned
Year ended
31-3-2022
(₹ ’000’)
I Interest/discount on advances/bills
Interest on term loans [6375- (1827.50-595)] 5,142.50
Interest on cash credits and overdrafts (14157.50- 11,850.00
2307.50)
II Income on investments 5,435.00
22,427.50

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Chapter 4.2
NBFCs
Question 1
Siddhartha Auto Financiers Limited is a NBFC providing Finance for purchasing of Auto
Rickshaws. The following information is extracted from its books for the year 31st March,
2021:
(a) Interest recognised in Profit and Loss Net Book Value of Assets
Overdue but Outstanding
Account
Period Overdue Interest Amount (` In Crore) (` In crores)
Up to 12 Months 750.00 30,000
For 24 Months 200.00 4,000
For 30 Months 200.00 3,750
For 45 Months 250.00 3,000
For 60 Months 500.00 10,000
You are required to calculate the amount of provision io be made. (5 Marks,
July 21)
Answer 1
On the basis of the information, in respect of financed assets, provision shall be made as
under:
(` in crore)
(a) Where hire charges are overdue Nil -
upto 12 months
(b) Where hire charges are overdue for 10% of the net book value 10% x 400
more than 12 months but upto 24 4,000
months
(c) Where hire charges are overdue for 40 percent of the net book value 1,500
more than 24 months but upto 36 40% x 3,750
months
(d) Where hire charges or lease rentals 70 percent of the net book value 2,100
are overdue for more than 36 months 70% x 3,000
but upto 48 months
(e) Where hire charges or lease rentals 100% of net book value (100% x 10,000
are overdue for more than 48 100)
months
Total 14,000

Question 2
Universal Financers Ltd. is a Non-Banking Financial Company. It provides you the following
information regarding its advances of ` 440 lakhs, of which instalments are overdue on :
 550 accounts for last 3 months (amount overdue ` 105 lakhs)
 75 accounts for 4 months (amount overdue ` 64 lakhs)

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 P 4.2-2

 25 accounts for more than 30 months (amount overdue ` 66 lakhs)

 15 accounts already identified as sub-standard for more than 3 years (unsecured)

(amount overdue ` 82 lakhs)
 8 accounts of ` 33 lakhs have been identified as non-recoverable by the management.
(out of 25 accounts overdue for more than 30 months, 17 accounts are already
identified as sub standard for more than 12 months (amount overdue ` 19 lakhs) and
others are identified as substandard asset for a period of less than 12 months.
Classify the assets of the company In line with the Non-Banking Financial Company -
Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016. (5 Marks , Jan 21) (Similar to Nov 20 but different figures)
Answer 2
Statement showing classification as per Non-Banking Financial Company - Systemically
Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank)
Directions, 2016
(` in lakhs)
Standard Assets
Accounts (Balancing figure) 90
550 accounts overdue for a period of 3 months 105
75 accounts overdue for a period of 4 months 64 259
Sub-Standard Assets
8 accounts identified as sub-standard asset for a period less than 12 47
months
Doubtful Debts
17 accounts identified as sub-standard for a period more than 12 19
months
15 accounts identified as sub-standard for a period more than 3 years 82

Loss Assets
8 accounts identified by management as loss asset 33
Total overdue 440

Question 3
PGL Finance Ltd. is a non-banking financial company. The following information is
provided by the company regarding its outstanding amounts: ` 600 Lakhs, of which
instalments are overdue on 300 accounts for last two months (amount overdue ` 150
Lakhs), on 48 accounts for three months (amount overdue ` 64 Lakhs), on 20 accounts
for more than 30 months (amount overdue ` 120 Lakhs) and in 4 accounts for more than
three years (amount overdue ` 60 Lakhs - already identified as sub-standard asset) and
one account of ` 40 Lakhs which has been identified as non-recoverable by the
management. Out of 20 accounts overdue for more than 30 months, 16 accounts are
already identified as sub-standard (amount ` 28 Lakhs) for more than fourteen months and
others are identified as sub-standard asset for a period of less than fourteen months.

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 P 4.2-3

Classify the assets of the company in line with Non-Banking Financial Company-
Systematically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016. ( 5 Marks, Nov 20) (Similar to Jan 21 but different
figures)
Answer 3
Statement showing classification as per Non-Banking Financial Company - Systemically
Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank)
Directions, 2016
(` in lakhs)
Standard Assets
Accounts (Balancing figure) 166.00
300 accounts overdue for a period for 2 months 150.00
48 accounts overdue for a period by 3 months 64.00 380.00
Sub-Standard Assets
4 accounts identified as sub-standard asset for a period less than 14 92.00
months
Doubtful Debts
16 accounts identified as sub-standard for a period more than 14 28.00
months
4 accounts identified as sub-standard for a period more than 3 years 60.00
Loss Assets
One account identified by management as loss asset 40.00
Total overdue 600.00

Question 4
Vikas Finance Ltd. is a Non Banking Finance Company. The extracts of its Balance Sheet are
as under :
Liabilities (` in '000) Assets (` in '000)
Paid up Equity Capital 250 Leased out Assets 2,000
Free Reserves 1,250 Investments:
Loans 1,000 - In shares of subsidiaries and 275
Group Companies
Deposits 1,000 - In debentures of subsidiaries and 225
Group Companies
Cash & Bank Balances 500
Deferred Expenditure 500
TOTAL 3,500 TOTAL 3,500
You are requested to compute the "Net Owned Funds" of Vikas Finance Ltd. as per Non
Banking Finance Company - Systematically Important Non-Deposit taking company and
Deposit taking company (Reserve Bank) Directions, 2016. (5 Marks ,Nov 20)

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 P 4.2-4

Answer 4
Statement showing computation of 'Net Owned Fund'
` in 000
Paid up Equity Capital 250
Free Reserves 1,250
1,500
Less: Deferred expenditure (500)
A 1,000
Investments
In shares of subsidiaries and group companies 275
In debentures of subsidiaries and group companies 225
B 500
10% of A 100
Excess of Investment over 10% of A (500-100) C 400
Net Owned Fund [(A) - (C)] (1,000-400) 600

Question 5
Explain the criterion of income recognition in the case of Non-Banking Financial
Companies. [5 Marks , Nov ‘19]
Answer 5
Income Recognition in case of NBFC
(1) The income recognition shall be based on recognised accounting principles.
(2) Income including interest/ discount or any other charges on NPA shall be recognised only
when it is actually realised. Any such income recognised before the asset became non-
performing and remaining unrealised shall be reversed.
(3) In respect of hire purchase assets, where instalments are overdue for more than 12 months,
income shall be recognised only when hire charges are actually received. Any such income
taken to the credit of profit and loss account before the asset became nonperforming and
remaining unrealized, shall be reversed.
(4) In respect of lease assets, where lease rentals are overdue for more than 12 months, the
income shall be recognised only when lease rentals are actually received. The net lease
rentals* taken to the credit of profit and loss account before the asset became non-
performing and remaining unrealised shall be reversed.
*‘Net lease rentals’ mean gross lease rentals as adjusted by the lease adjustment account
debited/ credited to the profit and loss account and as reduced by depreciation at the rate
applicable under Schedule XIV of the Companies Act, 1956 (1 of 1956)/ 2013.

Question 6
While closing its books of accounts on 31st March 2018, a Non-Banking Finance Company
has its advances classified as follows:

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 P 4.2-5

` (in lakhs)
Standard assets 18,400
Sub-standard assets 1,250
Secured Portion of doubtful debts:
Upto one year 300
One year to three years 90
More than three years 30
Unsecured portions of doubtful debts 92
Loss assets 47
Calculate the amount of provision which must be made against the Advances as per -
(i) The Non-banking Financial Company - Non-systematically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016; and
(ii) Non-banking Financial Company - Systematically Important Non- Deposit taking Company
(Reserve Bank) Directions, 2016. (10 Marks , Nov ‘18)
Answer 6
Calculation of provision required on advances as on 31st March, 2018 as per the Non-
Banking Financial Company – Non-Systemically Important Non-Deposit taking Company
(Reserve Bank) Directions, 2016
Amount Percentage Provision
` in lakhs of provision ` in lakhs
Standard assets 18,400 0.25 46.00
Sub-standard assets 1,250 10 125.00
Secured portions of doubtful debts
 upto one year 300 20 60.00
 one year to three years 90 30 27.00
 more than three years 30 50 15.00
Unsecured portions of doubtful debts 92 100 92.00
Loss assets 47 100 47.00
412.00
Calculation of provision required on advances as on 31st March, 2018 as per the Non- Banking
Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016

Amount Percentage of Provision

` in lakhs provision ` in lakhs
Standard assets 18,400 0.40* 73.60
Sub-standard assets 1,250 10 125.00
Secured portions of doubtful debts
 upto one year 300 20 60.00
 one year to three years 90 30 27.00
 more than three years 30 50 15.00

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 P 4.2-6

Unsecured portions of doubtful debts 92 100 92.00

Loss assets 47 100 47.00
439.60
*Note: For the year ending on 31st March, 2018, the provision rate for standard assets is
0.40%.
Question 7
GEM Ltd. is a NBFC providing Hire Purchaser Solutions for acquiring consumer durables.
The following information is extracted from its books for the year ended 31st March
2021.
` in Lakhs
Paid up Equity Capital 2520
Compulsory convertible preference shares 1035
Free Reserve 243
Securities premium 56
Capital Reserve 319
(` 220 Lakhs surplus arising out of sale of Building)
Deferred revenue expenditure 54
Debenture issued 702
Cash & Bank Balances 243
Investments in debentures of subsidiaries 171
Investments in shares of other NBFC 945
You are required to calculate Owned Fund and Net Owned Fund. (5 Marks Dec’21)
Answer 7
Statement showing computation of ‘Owned Fund’ and 'Net Owned Fund'
` in lakhs
Paid up Equity Capital 2,520
Free Reserves 243
Compulsory convertible preference shares 1035
Securities Premium 56
Capital Reserve (arising out of sale of building) 220
4074
Less: Deferred revenue expenditure (54)
Owned Fund A 4020
Investments
In shares of other NBFC 945
In debentures of subsidiaries and group companies 171
B 1116
10% of A 402
Excess of Investment over 10% of A (1116-402) C 714

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 P 4.2-7

Net Owned Fund [(A) - (C)] (4020-714) 3306

Question 8
ABC Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer
durables. The following information is extracted from its books for the year ending 31st
March, 2017:
Interest Overdue but recognized in Net book value of
Profit & Loss Assets outstanding
Assets Funded Paid Overdue Interest (` In lakhs) (` In lakhs)
Computers Upto 12 months 960.00 40,812.00
Televisions For 20 months 205.00 4,950.00
Washing Machines For 32 months 104.20 2,530.00
Refrigerators For 45 months 53.50 1328.00
Air-conditioners For 52 months 13.85 305.00
You are required to calculate the amount of provision to be made. (5 Marks May ‘18)
(Similar to May 19 but different figures)

Answer 8
Amount of provision to be made is as under:

Asset Funded (` in crore)

Computers (a) Where hire charges Nil -
are overdue upto 12
months
Televisions (b) Where hire charges 10% of the net book value 495
are overdue for more 10% x 4,950
than 12 months but
upto 24 months
Washing Machines (c) Where hire charges 40 percent of the net 1,012
are overdue for more book value
than 24 months but 40% x 2,530
upto 36 months
Refrigerators (d) Where hire charges or 70 percent of the net 929.60
lease rentals are book value
overdue for more than 70% x 1,328
36 months but upto 48
months
Air Conditioners e) (where hire charges or 100 percent of the net 305
lease rentals are book value
overdue for more than 305 x 100%
48 months
Total 2,741.60

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Question 9
DS Finance Limited is a non-banking financial company. It provides you with the
following information regarding its outstanding amount, ₹ 100 lakhs of which
instalments are overdue on:
 400 accounts for last one month (amount overdue ₹ 20 lakhs),
 24 accounts for two months (amount overdue ₹ 12 lakhs),

 10 accounts for more than 30 months (amount overdue ₹ 10 lakhs)

 4 accounts for more than 3 years (amounts overdue ₹ 10 lakhs - already identified
as sub-standard assets)
 1 account of ₹ 5 lakhs which has been identified as non- recoverable by management.
 Out of 10 accounts overdue for more than 30 months, 6 accounts are already identified
as sub-standard (amount ₹ 3 lakhs) for more than 12 months and others are identified
as sub-standard assets for a period of less than twelve months.
Classify the assets of the company in line with Non-Banking Financial Company-
Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016. (5 Marks Nov ‘22)
Answer 9

Statement showing classification as per Non-Banking Financial Company - Systemically

Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank)
Directions, 2016

(₹ in lakhs)
Standard Assets:
Accounts (Balancing figure) 43.00
400 accounts overdue for a period of 1 month 20.00
24 accounts overdue for a period of 2 months 12.00 75.00
Sub-Standard Assets:
4 accounts identified as sub-standard asset for a period less 7.00
than 12 months
Doubtful Debts:
6 accounts identified as sub-standard for a period more than 3.00
12 months
4 accounts identified as sub-standard for a period more than 10.00
3 years
Loss Assets
1 account identified by management as loss asset 5.00
Total overdue 100.00

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Chapter 5
Consolidated Financial Statements
Question 1
The Trial Balances of X Limited and Y Limited as on 31st March, 2021 were as under:
X Limited (Rs. In Y Limited (Rs. In 000)
000)
Dr. Cr. Dr. Cr.
Equity Share capital (Share of Rs. 100 each) 2,000 400
7% Preference share capital - 400
Reserves 600 200
6% Debentures 400 400
Trade Receivables/Trade Payables 160 180 100 120
Profit & Loss A/c balance 40 30
Purchases /Sales 1,000 1,800 1,200 1,900
Wages and Salaries 200 300

Debenture Interest 24 24

General Expenses 160 120

Preference share dividend up to 30.09.2020 7 14
Inventory (as on 31.03.2021) 200 100
Cash at Bank 27 12
Investment in Y Limited 1,056 -
Property, Plant & Equipment 2,200 1,580
Total 5,027 5,027 3,450 3,450
Investment in Y Limited was acquired on 1st July, 2020 and consisted of 80% of Equity Share
Capital and 50% of Preference Share Capital.
 After acquiring control over Y Limited, X Limited supplied to Y Limited goods at cost plus
25%, the total invoice value of such goods being Rs. 1,20,000, one fourth of such goods
were still lying in inventory at the end of the year.
 Depreciation to be charged @ 10% in X Limited and @ 15% in Y Limited on Property, Plant
& Equipment.
You are required to prepare the Consolidated Statement of Profit and Loss for the year
ended on 31st March, 2021. (15 Marks , July 21)
Answer 1
Consolidated Profit and Loss Account of X Ltd. and Y Ltd. for the year ended 31st March,
2021

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Particulars Note No. Rs.

I. Revenue from operations 1 35,80,000
II. Total revenue 35,80,000
III. Expenses
Cost of Material purchased/Consumed 2 20,80,000

Changes of Inventories of finished goods -

Employee benefit expense 3 5,00,000
Finance cost 4 48,000
Depreciation and amortization expense 5 4,57,000
Other expenses 6 2,80,000
Total expenses 33,65,000
IV. Profit before Tax (II-III) 2,15,000
Profit transferred to Consolidated Balance Sheet
Profit After Tax 2,15,000
Preference dividend 7,000
Preference dividend payable 7,000 (14,000)
2,01,000
Share in pre-acquisition loss (WN 3) 1,800
Share of Minority interest in losses (WN 1) 1,800
Less: Investment Account- dividend for 3 months (prior to (3,500)
acquisition)
Inventory reserve (WN 2) (6,000)
Profit to be transferred to consolidated balance sheet 1,95,100
Notes to Accounts
Rs. Rs.
1 Revenue from Operations
X Ltd. 18,00,000
Y Ltd. 19,00,000
Total 37,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 35,80,000
2 Cost of Materials Purchased/Consumed
X Ltd. 10,00,000
Y Ltd. 12,00,000
Total 22,00,000
Less: Intra-group sales (X sold to Y) (1,20,000) 20,80,000
3 Employee benefit and expenses
Wages and salaries
H Ltd. 2,00,000
S Ltd. 3,00,000 5,00,000
4 Finance cost
Interest

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H Ltd. 24,000
S Ltd. 24,000 48,000
5 Depreciation
H Ltd. 2,20,000
S Ltd. 2,37,000 4,57,000
6 Other expenses
H Ltd. 1,60,000
S Ltd. 1,20,000 2,80,000
Working Note
1. Profit of Subsidiary Rs.
Revenue from Operations 19,00,000
Less: Expenses
Cost of Material purchased/Consumed 12,00,000
Changes of Inventories of finished goods -
Employee benefit expense 3,00,000
Finance cost 24,000
Depreciation and amortization expense 2,37,000
Other expenses 1,20,000
Total expenses (18,81,000)
Profit Before Tax 19,000
Less: Preference Dividend 14,000
Less: Preference Dividend Payable 14,000 (28,000)
Profit available for shareholders (9,000)
Minority Share (20% of loss Rs. 9,000) (1,800)
,
2. Inventory reserve = =Rs. 6,000
3. Pre-acquisition loss = 80% of 3 month’s profit up to 30th June,2020 i.e. 80 % of ¼ of loss
Rs. 9,000. Hence, pre-acquisition loss = Rs. 1,800
4. Investment account includes Preference dividend for 3 months prior to acquisition
i.e. Rs. 4,00,000 X 50% X 7% X1/4 = Rs. 3,500

Question 2
Long Limited acquired 60% stake in Short Limited for a consideration of Rs. 112 lakhs. On
the date of acquisition Short Limited's Equity Share Capital was Rs. 100 lakhs, Revenue
Reserve was Rs. 40 lakhs and balance in Profit & Loss Account was Rs. 30 lakhs. From the
above information you are required to calculate Goodwill / Capital Reserve in the
following situations:
(i) On consolidation of Balance Sheet.
(ii) If Long Limited showed the investment in subsidiary at a carrying amount of Rs. 104
lakhs.
(iii) If the consideration paid for acquiring the 60% stake was Rs. 92 lakhs. (5 Marks,

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July 21)
Answer 2
Rs.
60% of the Equity Share Capital Rs. 100 Lakhs 60
60% of Accumulated Reserve Rs. 70 Lakhs (40+30) Lakhs 42
Book value of shares of Short Ltd. 102
(i) Goodwill / Capital Reserve computation on consolidation of balance sheet
Long Ltd. paid a positive differential of Rs. 10 Lakhs (112 - 102). This differential Rs. 10
Lakhs is called goodwill and is shown in the balance sheet under the head intangibles
(ii) If Long Ltd. showed the investment in Short Ltd. at carrying amount of Rs. 104 Lakhs, then
the goodwill will be Rs. 2 Lakhs.
(iii) If the consideration paid is Rs. 92 lakhs, then there would have been capital reserve
amounting Rs. 10 Lakhs (102- 92).

Question 3
On 31st March, 2020 the summarised Balance Sheets of H Ltd. and its subsidiary S Ltd.
stood as follows:
H Ltd. S Ltd.
Rs. Rs.
Shareholders' Fund
Issued and subscribed
Equity shares of Rs. 10 each 13,40,000 2,40,000
Reserves and Surplus 4,80,000 1,80,000
Profit & Loss Account 2,40,000 60,000
Secured Loans
12% Debentures 1,00,000 -
Current Liabilities
Trade Payables 2,00,000 1,22,000
Bank Overdraft 1,00,000 -
Bills Payable 60,000 14,800
Total 25,20,000 6,16,800
Assets
Non-Current Assets •
(a) Property, Plant & Equipment .
Machinery 7,20,000 2,16,000
Furniture 3,60,000 40,800
(b) Investments
Investments in S Ltd. 3,84,000 -
(19,200 shares at Rs. 20 each)
Current Assets
Inventories 6,00,000 2,00,000

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Chapter 5 Consolidated Financial Statements
 P 5.5

Trade Receivables 3,00,000 90,000

Bill Receivables 1,00,000 30,000
Cash at Bank 56,000 40,000
Total 25,20,000 6,16,800
The following information is also provided to you:
(a) H Ltd. purchased 19,200 shares of S Ltd. on 1st April, 2019, when the balances of Reserves
& Surplus and Profit & Loss Account of S Ltd. stood at Rs. 60,000 and Rs. 36,000
respectively.
(b) Machinery (Book value Rs. 2,40,000) and Furniture (Book value Rs. 48,000) of S Ltd were
revalued at Rs. 3,60,000 and Rs. 36,000 respectively on 1st April, 2019, for the purpose of
fixing the price of its shares. (Rates of depreciation computed on the basis of useful lives:
Machinery 10%, Furniture 15%).
(c) On 31st March, 2020, Bills payable of Rs. 12,000 shown in S Ltd.'s Balance Sheet had been
accepted in favour of H Ltd.
You are required to prepare Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as at 31st March, 2020. (20 Marks Jan 21)
Answer 3
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as at 31st March, 2020

Particulars Note Amoun

No t
Rs.
EQUITY AND LIABILITIES

1 Shareholders' funds
(a) Share capital 1 13,40,000
(a) Reserves and Surplus 2 8,27,040
2 Minority Interest 1,15,560
3 Non- Current Liabilities
(a) 12% Debentures 1,00,000
4 Current Liabilities
(a) Trade Payables
3 3,84,800
(b) Short term Borrowings (Bank overdraft 1,00,000
Total 28,67,400
ASSETS
1 Non-current assets

( a) (i)Property, Plant & Equipment 4 14,34,600

(ii)Intangible assets 5 28,500

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Chapter 5 Consolidated Financial Statements
 P 5.6

2 Current assets
(a) Inventory (6,00,000+2,00,000) 8,00,000

6
(b) Trade Receivables 5,08,000

(c) Cash and Cash equivalents 96,000

Total 28,67,400

Notes to Accounts

Rs.
1. Share Capital

Equity share capital 1,34,000 shares of 13,40,000

Rs. 10 each fully paid up
Reserves and Surplus
2.
Reserves 4,80,000
Add: 4/5th share of S Ltd.’s post- 96,000 5,76,000
acquisition reserves (W.N.3)
Profit and Loss Account 2,40,000
Add: 4/5th share of S Ltd.’s post- 11,040 2,51,040
acquisition profits (W.N.4)
8,27,040
3. Trade Payables

2,00,000
H Ltd.
S Ltd 1,22,000 3,22,000
Bills Payables

H Ltd. 60,000
S Ltd 14,800 74,800
3,96,800
Less: Mutual Owings (12,000) 3,84,800
4. Property Plant and Equipment

Machinery

H Ltd. 7,20,000
S Ltd 2,40,000

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Chapter 5 Consolidated Financial Statements
 P 5.7

Add: Appreciation 1,20,000

3,60,000
Less: Depreciation (3,60,000 X 10%) (36,000) 3,24,000
Furniture
3,60,000
H Ltd.
S Ltd 48,000
Less: Decrease in value (12,000)
36,000
Less: Depreciation (36,000 X 15%) 5,400 30,600 14,34,600
5. Intangible assets

Goodwill [WN 6] 28,800

6. Trade receivables
H Ltd. 3,00,000
S Ltd. 90,000 3,90,000
Bills Receivables

H Ltd.
1,00,000
S Ltd. 30,000 1,30,000
5,20,000
Less: Mutual Owings (12,000) 5,08,000
Working Notes:

1. Pre-acquisition profits and reserves of S Ltd. Rs.

Reserves 60,000
Profit and Loss Account 36,000
96,000
H Ltd.’s = 4/5 (or 80%) × 96,000 76,800
Minority Interest= 1/5 (or 20%) × 96,000 19,200
2. Profit on revaluation of assets of S Ltd.
Profit on Machinery Rs. (3,60,000 – 2,40,000) 1,20,000
Less: Loss on Furniture Rs.(48,000 –36,000) (12,000)
Net Profit on revaluation 1,08,000
H Ltd.’s share 4/5 × 1,08,000 86,400
Minority Interest 1/5 × 1,08,000 21,600
3. Post -acquisition profits of S Ltd.
Total reserves 1,80,000
Less: Pre- acquisition reserves (60,000)
Post-acquisition reserves 1,20,000

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 P 5.8

H Ltd.’s share 4/5 × 1,20,000 96,000

Minority interest 1/5 × 1,20,000 24,000
4. Post -acquisition profits of S Ltd.
Post-acquisition profits (Profit & loss account balance 24,000
less pre-acquisition profits = Rs. 60,000 – 36,000)
Add: Excess depreciation charged on furniture @ 15% on Rs. 12,000 1,800
i.e. (48,000 – 36,000)
25,800
Less: Under depreciation on machinery @ 10% on Rs. 1,20,000 i.e. (12,000)
(3,60,000 – 2,40,000)
Adjusted post-acquisition profits 13,800
H Ltd.’s share 4/5 × 13,800 11,040
Minority Interest 1/5 × 13,800 2,760
5. Minority Interest
Paid-up value of (24,000 – 19,200) = 4,800 shares held by outsiders i.e. 48,000
2,40,000 X 20%
Add: 1/5th share of pre-acquisition profits and reserves 19,200
1/5th share of profit on revaluation 21,600
1/5th share of post-acquisition reserves 24,000
1/5th share of post-acquisition profit 2,760
1,15,560
6. Cost of Control or Goodwill
Price paid by H Ltd. for 19,200 shares (A) 3,84,000
Less: Intrinsic value of the shares
Paid-up value of shares held by H Ltd. i.e. 2,40,000 X 80% 1,92,000
Add: 4/5th share of pre-acquisition profits and reserves 76,800
4/5th share of profit on the revaluation 86,400

Intrinsic value of shares on the date of acquisition(B) 3,55,200

Cost of control or Goodwill(A-B) 28,800

Question 4
H Limited acquired 64000 Equity Shares of Rs. 10 each in S Ltd. as on 1st October, 2019.
The Balance Sheets of the two companies as on 31st March, 2020 were as under:
Particulars H Ltd. (Rs.) S Ltd. (Rs.)
Equities and Liabilities:
Equity Share Capital: Shares of Rs. 10 each 20,00,000 8,00,000
General Reserve (1st April, 2019) 9,60,000 4,20,000
Profit & Loss Account 2,28,800 3,28,000

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Preliminary Expenses (1st April, 2019) - (20,000)

Bank Overdraft 3,00,000 -
Bills Payable - 52,000
Trade Payables 1,66,400 80,000
Total 36,55,200 16,60,000
Assets:
Land and Building 7,20,000 7,60,000
Plant & Machinery 9,60,000 5,40,000
Investment in Equity Shares of S Ltd. 12,27,200 -
Inventories 4,56,000 1,68,000
Trade Receivables 1,76,000 1,60,000
Bills Receivable 59,200 -
Cash in Hand 56,800 32,000
Total 36,55,200 16,60,000
Additional Information:
(1) The Profit & Loss Account of S Ltd. showed credit balance of Rs. 1,20,000 on 1st April, 2019.
S Ltd. paid a dividend of 10% out of the same on 1st November, 2019 for the year 2018-
19. The dividend was correctly accounted for by H Ltd.
(2) The Plant & Machinery of S Ltd. which stood at Rs. 6,00,000 on 1st April, 2019 was
considered worth Rs. 5,20,000 on the date of acquisition by H Ltd. S Ltd. charges
depreciation @ 10% per annum on Plant & Machinery.
Prepare consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March,
2020 as per Schedule III of the Companies Act, 2013. ( 15 Marks ,Nov 20)
Answer 4
Consolidated Balance Sheet of H Ltd. and its subsidiary, S Ltd. as at 31st March, 2020
Particulars Note No. (Rs.)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 20,00,000
(b) Reserves and Surplus 2 13,07,200
(2) Minority Interest (W.N 4) 2,96,400
(3) Current Liabilities
(a) Trade Payables 3 2,98,400
(b) Short term borrowings 3,00,000
Total 42,02,000
II. Assets
(1) Non-current assets
(i) Property, Plant and Equipment 4 29,34,000
(ii) Intangible assets (W.N.5) 1,60,000

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(2) Current assets

(a) Inventories 5 6,24,000
(b) Trade receivables 6 3,95,200
(c) Cash & Cash equivalents (Cash) 7 88,800
Total 42,02,000
Notes to Accounts
Rs. Rs.
1. Share Capital
2,00,000 equity shares of Rs. 10 each 20,00,000
2. Reserves and Surplus
Reserves 9,60,000
Profit & loss
H Ltd 2,28,800
S Ltd. (As per W.N. 3) 1,18,400 3,47,200
13,07,200
3. Trade Payables
H Ltd. 1,66,400
S Ltd. (80,000+52,000) 1,32,000 2,98,400
4. Property, Plant and Equipment
Land and building
H Ltd. 7,20,000
S Ltd. 7,60,000
Plant & Machinery
H Ltd. 9,60,000
S Ltd. (As per W.N. 7) 4,94,000
5. Inventories
H Ltd. 4,56,000
S Ltd. 1,68,000
6,24,000
6. Trade Receivables
H Ltd. 1,76,000
S Ltd. 1,60,000 3,36,000
Bills receivable: H Ltd. 59,200 3,95,200
7. Cash & Cash equivalents
Cash
H Ltd. 56,800
S Ltd. 32,000 88,800
Working Notes:
1. Share holding pattern
Total Shares of S Ltd 80,000 shares

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Chapter 5 Consolidated Financial Statements
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Shares held by H Ltd 64,000 shares i.e. 80 %; Minority Shareholding 16,000 shares i.e. 20
%
2. Capital profits of S Ltd.
Rs. Rs.
Reserve on 1st October, 2019 (Assumed there is no 4,20,000
movement in reserves during the year and hence balance as
on 1st October, 2019 is same as of 31st March 2020)
Profit & Loss Account Balance on 1st April, 2019 1,20,000
Less: Dividend paid (80,000) 40,000
Profit for year:
Total Rs. 3,28,000
Less: Rs. 40,000 (opening balance)
Rs. 2,88,000
Proportionate up to 1st October, 2019 on time basis (Rs. 1,44,000
2,88,000/2)
Reduction in value of Plant & Machinery (WN 6) (50,000)
5,54,000
Less: Preliminary expenses written off (20,000)
Total Capital Profit 5,34,000
Holding company’s share (5,34,000 X 80%) 4,27,200
Minority Interest (5,34,000 X 20%) 1,06,800
Note: Preliminary expenses as on 1st April, 2019 amounting Rs. 20,000 have been written
off.
3. Revenue profits of S Ltd.
Profit after 1st October, 2019 (3,28,000 - 40,000)/2 1,44,000
Less 10% depreciation on Rs.5,20,000 for 6 months
Add: Depreciation already charged for 2nd half year on (26,000)
30,000 4,000
6,00,000
1,48,000

Holding company’s share (1,48,000 X 80%) 1,18,400

Minority Interest (1,48,000 X 20%) 29,600
4. Minority interest
Par value of 16,000 shares (8,00,000 X 20%) 1,60,000
Add: 1/5 Capital Profits [WN 2] 1,06,800
1/5 Revenue Profits [WN 3] 29,600
2,96,400
5. Cost of Control
Amount paid for 64,000 shares 12,27,200
Less:
Par value of shares (8,00,000 X 80%) 6,40,00

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0
Capital Profits – share of H Ltd. [WN 2] 4,27,20 (10,67,200
0 )
Cost of Control or Goodwill 1,60,000
6. Calculation of revaluation loss on Plant and Machinery of S Ltd.
on 1st October, 2019
Rs.
Value of plant and machinery as on 1st April,2019 6,00,000
Less: Depreciation for the six months (30,000)
Value of plant and machinery as on 1st October, 2019 5,70,000
Less: Plant and machinery valued by H Ltd. on 1st (5,20,000)
October,2019
Revaluation Loss 50,000

7. Value of plant & Machinery of S Ltd. On 31st March,2020

Value of machinery on 1st October, 2019 5,20,000
Less: depreciation for next six month (26,000)
4,94,000

Question 5
H Ltd. acquire 70% of equity share of S Ltd. as on 1st January, 2011 at a cost of Rs. 5,00,000
when S Ltd. had an equity share capital of Rs. 5,00,000 and reserves and surplus of Rs.
40,000. Both the companies follow calendar year as the accounting year.
In the four consecutive years, S Ltd. performed badly and suffered losses of Rs. 1,25,000,
Rs. 2,00,000, Rs.2,50,000 and Rs. 60,000 respectively.
Thereafter in 2015, S Ltd. experienced turnaround and registered an annual profit of Rs.
25,000. In the next two years i.e. 2016 and 2017, S Ltd. recorded annual profits of Rs.
50,000 and Rs. 75,000 respectively.
Show the Minority Interests and Cost of Control at the end of each year for the purpose of
consolidation. [10 Marks, May ‘19]
Answer 5
The losses applicable to the minority in a consolidated subsidiary may exceed the minority
interest in the equity of the subsidiary. The excess, and any further losses applicable to the
minority, are adjusted against the majority interest except to the extent that the minority has
a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently
reports profits, all such profits are allocated to the majority interest until the minority’s
share of losses previously absorbed by the majority hasbeen recovered. Accordingly,
Year Profit / Minority Additional Minority’s Share of Cost of
(Loss) Interest Consolidated P losses borne Control
(30%) & L (Dr.) or by H Ltd.
Cr. Rs. Balance
At the time of -
acquisition on 1,62,000
1.1.2011 (W.N.)

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Chapter 5 Consolidated Financial Statements
 P 5.13

2011 (1,25,000) (37,500) (87,500) 1,22,000

(W.N.)
Balance 1,24,500
2012 (2,00,000) (60,000) (1,40,000) 1,22,000
Balance 64,500
2013 (2,50,000) (75,000) (1,75,000) 1,22,000
(10,500)
Loss of 10,500 (10,500) 10,500 10,500
minority
borne by
Holding Co.
Balance Nil (1,85,500)
2014 (60,000) (18,000) (42,000) 1,22,000
Loss of
minority
borne by
Holding Co. 18,000 (18,000) 18,000 28,500
Balance Nil (60,000)
2015 25,000 7,500 17,500 1,22,000
Profit (7,500) 7,500 (7,500) 21,000
share of
minority
adjusted
against
losses of
minority
absorbed
by
Holding Co.
Balance Nil 25,000
2016 50,000 15,000 35,000 (15,000) 6,000 1,22,000
(15,000) 15,000
Balance Nil 50,000
2017 75,000 22,500 52,500 (6,000) Nil 1,22,000
(6,000) 6,000
Balance 16,500 58,500
Working Note :
Calculation of Minority interest and Cost of control on 1.1.2011
Share of Holding Co. Minority Interest
100% 70% 30%
(Rs.) (Rs.) (Rs.)
Share Capital 5,00,000 3,50,000 1,50,000
Reserve 40,000 28,000 12,000
3,78,000 1,62,000
Less: Cost of investment (5,00,000)
Goodwill 1,22,000

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Chapter 5 Consolidated Financial Statements
 P 5.14

Question 6
The Profit and Loss Accounts of A Ltd. and its subsidiary B Ltd. for the year ended 31st
March, 2018 are given below :
Rs. in
Incomes A Ltd. Lakhs
B Ltd.
Sales and other income 7,500 1,500
Increase in Inventory 1,500 300
Total 9,000 1,800
Expenses
Raw material consumed 1,200 300
Wages and Salaries 1,200 225
Production expenses 300 150
Administrative expenses 300 150
Selling and distribution expenses 300 75
Interest 150 75
Depreciation 150 75
Total 3,600 1,050
Profit before tax 5,400 750
Provision for tax 1,800 300
Profit after tax 3,600 450
Dividend paid 1,800 225
Balance of Profit 1,800 225
The following information is also given:
(i) A Ltd sold goods of Rs. 180 Lakhs to B Ltd at cost plus 25%. (1/6 of such goods were still in
inventory of B Ltd at the end of the year)
(ii) Administrative expenses of B Ltd include Rs. 8 Lakhs paid to A Ltd as consultancy fees.
(iii)Selling and distribution expenses of A Ltd include Rs. 15 Lakhs paid to B Ltd as
commission.
(iv)A Ltd holds 72% of the Equity Capital of B Ltd. The Equity Capital of B Ltd prior to 2016-17
is Rs. 1,500 Lakhs
Prepare a consolidated Profit and Loss Account for the year ended 31st March, 2018. [10
Marks , Nov ‘18]
Answer 6
Consolidated Profit & Loss Account of A Ltd. and its subsidiary B Ltd.
for the year ended on 31st March, 2018
Particulars Note No. Rs.in Lacs
I. Revenue from operations 1 8,797
II. Total revenue 8,797
III. Expenses
Cost of Material purchased/Consumed 3 1,770
Changes of Inventories of finished 2 (1,794)
goods expense

Employee benefit expense 4 1,425

Finance cost 6 225

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Chapter 5 Consolidated Financial Statements
 P 5.15

Depreciation and amortization e 7 225

Other expenses 5 802
Total expenses 2,653
IV. Profit before Tax(II-III) 6,144
V. Tax Expenses 8 2,100
VI. Profit After Tax 4,044
Notes to Accounts
Rs. in Lacs Rs. in Lacs
1. Revenue from Operations
Sales and other income
A Ltd. 7,500
B Ltd. 1,500
9,000
Less: Inter-company Sales (180)
Consultancy fees received by A Ltd. from B Ltd. (8)
Commission received by B Ltd. from A Ltd. (15) 8,797
2. Increase in Inventory
A Ltd. 1,500
B Ltd. 300
1,800
Less: Unrealised profits Rs. 180×1/6 x 25/125 (6) 1,794
3. Cost of Material purchased/consumed
A Ltd. 1,200
B Ltd. 300
1,500
Less: Purchases by B Ltd. from A Ltd. (180) 1,320
Direct Expenses
A Ltd. 300
BLtd. 150 450
1,770
4. Employee benefits and expenses
Wages and Salaries:
A Ltd. 1,200
B Ltd. 225 1,425
5. Other Expenses
Administrative Expenses
A Ltd. 300
B Ltd. 150
450
Less: Consultancy fees received by A Ltd. from BLtd. (8) 442
Selling and Distribution Expenses:
A Ltd. 300
B Ltd. 75
375
Less: Commission received from B Ltd. from A Ltd. (15) 360
802
6. Finance Cost
Interest:

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 P 5.16

A Ltd. 150
B Ltd. 75 225
7. Depreciation and Amortisation
Depreciation:
A Ltd. 150
B Ltd. 75 225
8. Provision for tax
A Ltd. 1800
B Ltd. 300 2100
Note: it is assumed that dividend adjustment has not be done in sales & other income of A
Ltd i.e. dividend received from B Ltd is not included in other income of A Ltd. Alternative
Answer is possible considering is otherwise.

Question 7
The following summarized Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepared
as on 31st March, 2017:
H Ltd. (Rs. ) S Ltd. (Rs.)
Equity and Liabilities
Shareholders’ Funds
Equity Share Capital (fully paid up shares of ‘ 10 each) 12,00,000 2,00,000
Reserves and Surplus
General Reserve 4,35,000 1,55,000
Profit and Loss Account 2,80,000 65,000
Current Liabilities
Trade Payables 3,22,000 1,23,000
Total 22,37,000 5,43,000
Assets
Non-Current Assets
Property, Plant & Equipment
Machinery 6,40,000 1,80,000
Furniture 3,75,000 34,000
Non-Current Investments
Shares in S Ltd. - 16,000 shares @ Rs. 20 each 3,20,000 -
Current Assets
Inventories 2,68,000 62,000
Trade Receivables 4,70,000 2,35,000
Cash and Bank 1,64,000 32,000
Total 22,37,000 5,43,000
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2016. On the date of acquisition,
General Reserve and Profit Loss Account of S Ltd. stood at Rs. 50,000 and Rs. 30,000
respectively. Machinery (book value Rs.2,00,000) and Furniture (book value Rs. 40,000) of
S Ltd. were revalued at Rs. 3,00,000 and Rs. 30,000 respectively on 1st April,2016 for the
purpose of fixing the price of its shares (rates of depreciation computed on the basis of
useful lives : Machinery 10% and Furniture 15%). Trade Payables of H Ltd. include Rs. 35,000
due to S Ltd. for goods supplied since the acquisition of the shares. These goods are charged
at 10% above cost. The inventories of H Ltd. includes goods costing Rs. 55,000 purchased
from S Ltd. You are required to prepare the Consolidated Balance Sheet as at 31st March,

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Chapter 5 Consolidated Financial Statements
 P 5.17

2017. [20 Marks, May ‘18]

Answer 7
Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd.
as at 31st March, 2017
Particulars Note No. (Rs.)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 12,00,000
(1,20,000 equity shares of Rs. 10 each)
(b) Reserves and Surplus 8,16,200
1
(2) Minority Interest (W.N.4) 99,300
(3) Current Liabilities
(a) Trade Payables 2 4,10,000
Total 25,25,500
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 3 13,10,500
(ii) Intangible assets 4 24,000
(b) Current assets
(i) Inventories 5 3,25,000
(ii) Trade Receivables 6 6,70,000
(iii) Cash at Bank 7 1,96,000
Total 25,25,500
Notes to Accounts
Rs.
1. Reserves and Surplus
General Reserves 4,35,000
Add: 80% share of S Ltd.’s post-acquisition reserves 84,000 5,19,000
(W.N.3)
Profit and Loss Account 2,80,000
Add: 80% share of S Ltd.’s post-acquisition profits 21,200
(W.N.3)
Less: Unrealized gain (4,000) 17,200 2,97,200
8,16,200
2. Trade Payables
H Ltd. 3,22,000
S Ltd. 1,23,000
Less: Mutual transaction (35,000) 4,10,000

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Chapter 5 Consolidated Financial Statements
 P 5.18

3. Tangible Assets
Machinery
H. Ltd. 6,40,000
S Ltd. 2,00,000
Add: Appreciation 1,00,000
3,00,000
Less: Depreciation (30,000) 2,70,000 9,10,000
Furniture
H. Ltd. 3,75,000
S Ltd. 40,000
Less: Decrease in value (10,000)
30,000
Less: Depreciation (4,500) 25,500 4,00,500
13,10,500
4. Intangible assets
Goodwill [WN 5] 24,000
5. Inventories
H Ltd. 2,68,000
S Ltd. 62,000 3,30,000
Less: Inventory reserve (5,000)
3,25,000
6. Trade Receivables
H. Ltd. 4,70,000
S Ltd. 2,35,000
7,05,000
Less: Mutual transaction (35,000)
6,70,000
7. Cash and Bank
H. Ltd. 1,64,000
S Ltd. 32,000 1,96,000
Working Notes:
1. Profit or loss on revaluation of assets in the books of S Ltd. and their book values as
on 1.4.2016
Rs.
Machinery
Revaluation as on 1.4.2016 3,00,000
Less: Book value as on 1.4.2016 (2,00,000)
Profit on revaluation 1,00,000
Furniture
Revaluation as on 1.4.2016 30,000
Less: Book value as on 1.4.2016 (40,000)
Loss on revaluation (10,000)
2. Calculation of short/excess depreciation
Machinery Furniture
Upward/ (Downward) Revaluation (W.N. 4) 1,00,000 (10,000)
Rate of depreciation 10% p.a. 15% p.a.
Difference [(short)/excess] (10,000) 1,500

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Chapter 5 Consolidated Financial Statements
 P 5.19

3. Analysis of reserves and profits of S Ltd. as on 31.03.2017

Pre-acquisition profit upto 1.4.2016(Capital profits) Post-acquisition profits
(1.4.2016 – 31.3.2017)
General Profit and loss
Reserve account
General reserve as on 31.3.2017 50,000 1,05,000
Profit and loss account as on 31.3.2017 30,000 35,000
Upward Revaluation of machinery as on 1,00,000
1.4.2016
Downward Revaluation of Furniture as on (10,000)
1.4.2016
Short depreciation on machinery (W.N. 5) (10,000)
Excess depreciation on furniture (W.N. 5) 1,500
Total 1,70,000 1,05,000 26,500
4. Minority Interest
Rs.
Paid-up value of (2,00,000 x 20%) 40,000
Add: 20% share of pre-acquisition profits and reserves [(20% of (50,000 + 16,000
30,000)]
20% share of profit on revaluation 18,000
20% share of post-acquisition reserves 21,000
20% share of post-acquisition profit 5,300
1,00,300
Less: Unrealised Profit on Inventory (55,000 x 10/110)* x 20% (1,000)
99,300
* considered that Rs. 55,000 is cost to H Ltd. Alternative solution considering it as
cost to S Ltd. is also possible
5. Cost of Control or Goodwill
Cost of Investment 3,20,000
Less: Paid-up value of 80% shares 1,60,000
80% share of pre-acquisition profits and reserves (Rs. 64,000 1,36,000 (2,96,000)
+ Rs. 72,000)
Cost of control or Goodwill 24,000

Question 8
From the following data determine in each case : Minority Interest at the date of
acquisition and at the date of consolidation. (5 Marks , Nov ’19)
Case Subsidiar % of Cost Date of Acquisition Consolidation date
y Share 01-01-2018 31-12-2018
Company Owned Share Capital Profit and Share Profit and
Rs. Loss a/c Capital Loss a/c
Rs. Rs. Rs.
Case - A X 90% 2,00,000 1,50,000 75,000 1,50,000 85,000
Case -B Y 75% 1,75,000 1,40,000 60,000 1,40,000 20,000
Case-C Z 70% 98,000 40,000 20,000 40,000 20,000
Case-D M 95% 75,000 60,000 35,000 60,000 55,000
Case - E N 100% 1,00,000 40,000 40,000 40,000 65,000

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Chapter 5 Consolidated Financial Statements
 P 5.20

Answer 8
Minority Interest = Equity attributable to minorities
Equity is the residual interest in the assets of an enterprise after deducting all its
liabilities i.e. in this case, it should be equal to Share Capital + Profit & Loss A/c
A = Share capital on 1.1.2018
B = Profit & loss account balance on 1.1.2018
C = Share capital on 31.12.2018
D = Profit & loss account balance on 31.12.2018
Minority % Minority interest as Minority interest
Shares Owned at the date of as at the date of
[E] acquisition consolidation
[E] x [A + B] Rs. [E] X [C + D] Rs.
Case A [100-90] 10 % 22,500 23,500
Case B [100-75] 25 % 50,000 40,000
Case C [100-70] 30 % 18,000 18,000
Case D [100-95] 5% 4,750 5,750
Case E [100-100] NIL NIL NIL

Question 9
Consider the following summarized Balance Sheets of subsidiary MNT Ltd.

Liabilities 2017-18 2018-19

Amount in Amount in
Rs. Rs.
Share Capital
Issued and subscribed 7500 Equity Shares of Rs. 100 each 7,50,000 7,50,000
Reserve and Surplus
Revenue Reserve 2,14,000 5,05,000
Securities Premium 72,000 2,07,000
Current Liabilities and Provisions
Trade Payables 2,90,000 2,46,000
Bank Overdraft - 1,70,000
Provision for Taxation 2,62,000 4,30,000
15,88,000 23,08,000
Assets
Fixed Assets (Cost) 9,20,000 9,20,000
Less: Accumulated Depreciation (1,70,000) (2,82,500)
7,50,000 6,37,500
Investment at Cost - 5,30,000
Current Assets
Inventory 4,12,300 6,90,000

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Chapter 5 Consolidated Financial Statements
 P 5.21

Trade Receivable 2,95,000 3,43,000

Prepaid expenses 78,000 65,000
Cash at Bank 52,700 42,500
15,88,000 23,08,000
Other Information:
(1) MNT Ltd. is a subsidiary of LTC Ltd.
(2) LTC Ltd. values inventory on FIFO basis, while MNT Ltd. used LIFO basis. To bring MNT
Ltd.'s inventories values in line with those of LTC Ltd., its value of inventory is required to
be reduced by Rs. 5,000 at the end of 2017-2018 and increased by Rs. 12,000 at the end of
2018-2019. (Inventory of 2017-18 has been sold out during the year 2018-19)
(3) MNT Ltd. deducts 2% from Trade Receivables as a general provision against doubtful
debts.
(4) Prepaid expenses in MNT Ltd. include Sales Promotion expenditure carried forward of Rs.
25 ,000 in 2017-18 and Rs. 12,500 in 2018-19 being part of initial Sales Promotion
expenditure of Rs. 37,500 in 2017-18, which is being written off over three years. Similar
nature of Sales Promotion expenditure of LTC Ltd. has been fully written off in 2017-18.
Restate the balance sheet of MNT Ltd. as on 31st March, 2019 after considering the above
information for the purpose of consolidation. Such restatement is necessary to make the
accounting policies adopted by LTC Ltd. and MNT Ltd. uniform.(10 Marks Nov ’19)

Answer 9
Restated Balance Sheet of MNT Ltd. as at 31st December, 2019
Particulars Note (Rs.)
No.
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 7,50,000
(b) Reserves and Surplus 1 7,18,500
(2) Current Liabilities
(a) Short term borrowings 2 1,70,000
(b) Trade Payables 2,46,000
(c) Short-term provision 3 4,30,000
Total 23,14,500
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment 4 6,37,500
(b) Non-current Investment 5,30,000
(2) Current assets
(a) Inventories (6,90,000 +12,000) 5 7,02,000
(b) Trade Receivables (3,43,000/98 X100) 3,50,000

(c) Cash & Cash Equivalents 42,500

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Chapter 5 Consolidated Financial Statements
 P 5.22

(d) Other current assets 6 52,500

Total 23,14,500
Notes to Accounts
Rs.
1. Reserves and Surplus
Revenue Reserve (refer W.N.) 5,11,500
Securities Premium 2,07,000 7,18,500
2. Short term borrowings
Bank overdraft 1,70,000
3. Short-term provision
Provision for taxation 4,30,000
4. Property, Plant and Equipment
Cost 9,20,000
Less: Depreciation to date (2,82,500) 6,37,500
5. Inventories 6,90,000
Increase in value as per FIFO 12,000 7,02,000
6. Other current assets
Prepaid expenses (After adjusting sales promotion 52,500
expenses to be written off each year) (65,000 -
12,500)
Working Note:
Adjusted revenue reserves of MNT Ltd.:
Rs. Rs.
Revenue reserves as given 5,05,000
Add: Provision for doubtful debts [3,43,000 X 2/98) 7,000
Add: Increase in value of inventory 12,000 19,000
5,24,000
Less: Sales Promotion expenditure to be written off (12,500)
Adjusted revenue reserve 5,11,500

Question 10
Moon Ltd. and its subsidiary Star Ltd. provided the following information for the year
ended 31st March, 2021:
Particulars Moon Ltd (Rs.) Star Ltd. (Rs.)
Equity Share Capital 20,000,000 6,000,000
Finished Goods Inventory as on 01.04.2020 4,200,000 3,010,000
Finished Goods Inventory as on 31.03.2021 8,575,000 3,762,500
Dividend Income 1,680,000 437,500
Other non-operating Income 350,000 105,000

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Chapter 5 Consolidated Financial Statements
 P 5.23

Raw material consumed 13,930,000 4,725,000

Selling and Distribution Expenses 3,325,000 1,575,000
Production Expenses 3,150,000 1,400,000
Loss on sale of investments 262,500 Nil
Sales and other operating income 33,250,000 19,075,000
Wages and Salaries 13,300,000 2,450,000
General and Administrative Expenses 2,800,000 1,225,000
Royalty paid Nil 50,000
Depreciation 315,000 140,000
Interest expense 175,000 52,500
Other information
 On 1st September 2018 Moon Ltd., acquired 50,000 equity shares of Rs. 100 each fully
paid up in Star Ltd.
 Star Ltd. paid a dividend of 10% for the year ended 31st March 2020. The dividend
was correctly accounted for by Moon Ltd.
 Moon Ltd. sold goods of Rs. 17,50,000 to Star Ltd. at a profit of 20% on selling price.
Inventory of Star Ltd. includes goods of Rs. 7,00,000 received from Moon Ltd.
 Selling and Distribution expenses of Star Ltd. include Rs. 2,12,500 paid to Moon Ltd.
as brokerage fees.
 General and Administrative expenses of Moon Ltd. include Rs. 2,80,000 paid to Star
Ltd. as consultancy fees.
 Star Ltd. used some resources of Moon Ltd., and Star Ltd. paid Rs. 50,000 to Moon Ltd.
as royalty.
Prepare Consolidated Statement of Profit and Loss of Moon Ltd. and its subsidiary Star Ltd.
for the year ended 31st March, 2021 as per Schedule III to the Companies Act, 2013. (15
Marks Dec’21)
Answer 10
Consolidated statement of profit and loss of Moon Ltd. and its subsidiary Star Ltd. for
the year ended on 31st March, 2021
Particulars Note No. Rs.
Revenue from operations 1 5,00,32,500
Other Income 2 23,10,000
Total revenue (I) 5,23,42,500
Expenses:
Cost of material purchased/consumed 3 2,14,55,000
Changes (Increase) in inventories of finished goods 4 (49,87,500)
Employee benefit expense 5 1,57,50,000
Finance cost 6 2,27,500
Depreciation and amortization expense 7 4,55,000
Other expenses 8 84,32,500
Total expenses (II) 4,13,32,500
Profit before tax (II-III) 1,10,10,000

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Chapter 5 Consolidated Financial Statements
 P 5.24

Notes to Accounts:
Rs. Rs.
1. Revenue from operations
Sales and other operating revenues1
Moon Ltd. 3,32,50,000
Star Ltd. 190,75,000
523,25,000
Less: Inter-company sales (17,50,000)
Consultancy fees received by Star (2,80,000)
Ltd. from Moon Ltd.
Royalty received by Moon Ltd. (50,000)
from Star Ltd.
Brokage received by Moon Ltd. (2,12,500) 5,00,32,500
from Star Ltd.
2. Other Income
Dividend income:
Moon Ltd. 16,80,000
Star Ltd. 4,37,500 21,17,500
Loss on sale of investments Star Ltd. (2,62,500)
Other Non-operating Income
Moon Ltd. 3,50,000
Star Ltd. 1,05,000 4,55,000 23,10,000
3. Cost of material purchased/consumed
Moon Ltd. 1,39,30,000
Star Ltd. 47,25,000
1,86,55,000
Less: Purchases by Star Ltd. From
Moon Ltd. (17,50,000) 1,69,05,000
Direct expenses (Production)
Moon Ltd. 31,50,000
Star Ltd. 14,00,000 45,50,000 2,14,55,000
4. Changes (Increase) in inventories of
finished goods
Moon Ltd. 43,75,000
Star Ltd. 7,52,500
51,27,500
Less: Unrealized profits Rs. 7,00,000 ×
20/100 (1,40,000) 49,87,500
5. Employee benefits and expenses
Wages and salaries:
Moon Ltd. 1,33,00,000
Star Ltd. 24,50,000 1,57,50,000

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Chapter 5 Consolidated Financial Statements
 P 5.25

6 Finance cost
Interest:
Moon Ltd. 1,75,000
Star Ltd. 52,500 2,27,500
7. Depreciation
Moon Ltd. 3,15,000
Star Ltd. 1,40,000 4,55,000
8. Other expenses
General & Administrative expenses:
Moon Ltd. 28,00,000
Star Ltd. 12,25,000
40,25,000
Less: Consultancy fees received by Star (280,000) 37,45,000
Ltd. from Moon Ltd.
Royalty:
Star Ltd. 50,000
Less: Received by Moon Ltd. Selling (50,000) Nil
and distribution Expenses:
Moon Ltd. 33,25,000
Star Ltd. 15,75,000
49,00,000
Less: Brokerage received by Moon Ltd. (2,12,500) 46,87,500 84,32,500
from Star Ltd.

Question 12
White Ltd. acquired 2,250 shares of Black Ltd. on 1st October,.2020. The summarized
balance sheets of both the companies as on 31st March, 2021 are given below:
White Ltd. (₹) Black Ltd. (₹)
(I) Equity and Liabilities
(1) Shareholder's fund
Share capital (Equity shares of ₹ 100 each fully
paid up) 6,50,000 3,00,000
Reserves and Surplus General Reserve
60,000 30,000
Profit and loss account 1,50,000 90,000
(2) Current Liabilities
1,15,000 75,000
Trade payables Due to White Ltd.
- 30,000
Total 9,75,000 5,25,000
(II) Assets:
Non-current assets
Property, Plant and Equipment 5,80,000 3,51,000
Investments

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Chapter 5 Consolidated Financial Statements
 P 5.26

Shares in Black Ltd. (2,250 shares) 2,70,000

Current assets
Inventories 50,000 1,20,000
Due from Black Ltd. 36,000
Cash and Cash equivalents 39,000 54,000
Total 9,75,000 5,25,000
Other information:
(i) During the year, Black Limited fabricated a machine, which is sold to White Ltd. for
₹ 39,000, the transaction being completed on 30th March,2021.
(ii) Cash in transit from Black Ltd. to White Ltd. was ₹ 6,000 on 31st March,2021. Profits
during the year 2020-2021 were earned evenly
(iii) The balances of Reserve and Profit and Loss account as on 1st April,2020 were as
follows:
Reserves Profit and Loss A/c
₹ ₹
White Ltd. 30,000 15,000 Profit
Black Ltd. 30,000 10,000 Loss
You are required to prepare consolidated Balance Sheet of the group as on 31st
March,2021 as per the requirement of Schedule III of the Companies Act, 2013.(15
Marks)(May ‘22)

Answer 12
Consolidated Balance Sheet of White Ltd. and its Subsidiary Black Ltd.
as at 31st March, 2021
Particulars Note No. (₹)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,50,000
(b) Reserves and Surplus 2 2,55,000
(2) Minority Interest 3 1,05,000
(3) Current Liabilities
(a) Trade Payables 4 1,90,000
Total 12,00,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 5 9,31,000
(2) Current assets
(i) Inventory 6 1,70,000
(ii) Cash & cash equivalent 7 99,000
Total 12,00,000
Notes to Accounts

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Chapter 5 Consolidated Financial Statements
 P 5.27

₹
1. Share capital
6,500 equity shares of ₹ 100 each, fully paid up 6,50,000
Total 6,50,000
2. Reserves and Surplus
General Reserves 60,000
Profit and Loss Account 1,50,000
Add: 75% share of Black Ltd.’s post-acquisition
profits (W.N.1) 37,500 1,87,500
Capital reserve (W.N. 5) 7,500
Total 2,55,000
3. Minority interest in Black Ltd. (WN 4) 1,05,000
4. Trade payables
White Ltd. 1,15,000
Black Ltd. 75,000 1,90,000
5. Property, plant and equipment
White Ltd. 5,80,000
Black Ltd. 3,51,000 9,31,000
6 Inventory
White Ltd. 50,000
Black Ltd. 1,20,000 1,70,000
7 Cash & cash equivalent
White Ltd. 39,000
Black Ltd. 54,000
Cash in transit 6,000 99,000
Working Notes:
1. Post-acquisition profits of Black Ltd. ₹
profits earned during the year = ₹ 90,000 + ₹10,000 1,00,000
Pre-acquisition profits (1.4.20 to 30.9.20) 50,000
Post-acquisition profits (1.10.20 to 31.3.21) 50,000
White Ltd.’s share 75% of 50,000 37,500
Minority Interest 25% of 50,000 12,500
2. Pre-acquisition profits and reserves of Black Ltd.
Reserves as on 1.4.2020 30,000
Profit and Loss Account 40,000
[10,000 (loss as on 1.4.20) +50,000 (6 month Adjusted pre-acquisition
profits)]
70,000
White Ltd.’s = (75%) × 70,000 52,500
Minority Interest= (25%) × 70,000 17,500
3. Post-acquisition reserves of Black Ltd.

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Chapter 5 Consolidated Financial Statements
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Post-acquisition reserves (Total reserves less pre-acquisition reserves = ₹ nil

30,000 – 30,000)
4. Minority Interest
Paid-up value of (3,000 – 2,250) = 750 shares
held by outsiders i.e. 750 × ₹ 100 75,000
Add: 25% share of pre-acquisition reserves & Profit 17,500
25% share of post-acquisition profit 12,500
5. Capital Reserve 1,05,000
Price paid by White Ltd. for 2,250 shares (A) 2,70,000
Intrinsic value of the shares-
Paid-up value of 2,250 shares held by White Ltd. i.e. 2,250 2,25,000
× ₹ 100
Add 75% share of pre-acquisition reserves & profit
(70,000 x 75%) 52,500 (B) 2,77,500
Capital reserve (A – B) 7,500

Question 13
H Ltd. and S Ltd. provide the following information as at 31st March,2022:
H Ltd.₹ S Ltd.₹
Property, Plant and Equipment 2,00,000 2,60,000
Investments (14,000 Equity Shares of S Ltd.) 2,52,000 -
Current Assets 1,48,000 1,40,000
Share capital (Fully paid equity shares of ₹ 10 3,00,000 2,00,000
each)
Profit and loss account 1,00,000 80,000
Trade Payables 2,00,000 1,20,000
Additional information:
H Ltd. acquired the shares of S Ltd. on 1stJuly, 2021 and Balance of profit and loss
account of S Ltd. on 1stApril, 2021 was ₹ 60,000. Prepare consolidated balance sheet of
H Ltd. and its subsidiary as at 31st March, 2022. (15 Marks Nov ‘22)
Answer 13
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 2022
Note Amount
No (₹)
I Equity and Liabilities
1 Shareholders’ Fund:
(a) Share Capital 1 3,00,000
(b) Reserve and Surplus 2 1,10,500
2 Minority interest 3 84,000
3 Current Liabilities
Trade payables 4 3,20,000
Total 8,14,500

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II Assets
1 Non-Current Assets:
Property, plant and equipment 5 4,60,000
Intangible Asset 6 66,500
2 Current Assets 7 2,88,000
Total 8,14,500
Notes to Accounts
Amount (₹)
1 Share capital 3,00,000
30,000 Equity Shares @ ₹10 each
2 Reserve and Surplus
Profit and loss account (₹ 1,00,000 + 70% of 9/12 x
20,000 i.e. ₹ 10,500) 1,10,500
3 Minority Interest (W/N 2) 84,000
4 Trade payables
H Ltd. 2,00,000
S Ltd. 1,20,000
3,20,000
5 Property, plant and equipment
H Ltd. 2,00,000
S Ltd. 2,60,000
4,60,000
6 Intangible Asset:
Goodwill (W/N 3) 66,500
7 Current Assets
H Ltd. 1,48,000
S Ltd. 1,40,000
2,88,000
Working Notes:
1. Percentage of holding
No. of Shares Percentage
Holding Co. : 14,000 (70%)
Minority shareholders: 6,000 (30%)

Total Shares : 20,000

2. Calculation of Minority Interest
Share capital (30% of ₹ 2,00,000) 60,000
Share in Profit and loss account (₹ 80,000 X 30%) 24,000 84,000

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Chapter 5 Consolidated Financial Statements
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3. Calculation of Cost of Control (Goodwill)

Cost of Investment 2,52,000
Less: Paid up value of shares (70% of ₹ (1,40,000)
2,00,000) Share in pre-acquisition profits
70% of [60,000+3/12(80,000-60,000)] (45,500)
66,500

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Chapter 6.1
Dissolution of Partnership Firms
Question 1
Ananya Enterprises is a partnership firm is which A, B and C are three partners sharing
profits and losses in the ratio of 5 : 3 : 2. The Balance Sheet of the firm as on 31st October,
2019 is as below:
Liabilities ₹ Assets ₹
Capital:
A 95,00,000 Land & Buildings 45,00,000
B 75,00,000 Plant & Machinery 65,00,000
C 30,00,000 Furniture & Fixtures 18,00,000
Sundry Creditors 11,00,000 Stock 13,50,000
Sundry Debtors 7,50,000
Cash 7,00,000
Loan A 25,00,000
Loan B 30,00,000
2,11,00,000 2,11,00,000
On the Balance Sheet date all the three partners have decided to dissolve their partnership
and called you to assist them in winding up the affairs of the firm. They also agreed that
asset realization is distributed among them at the end of each month.
A summary of liquidation transactions is as follows:
November, 2019:
 ₹ 3,00,000 - collected from debtors, balance is uncollectable
 ₹ 11,00,000 - received from the sale of entire furniture
 ₹ 2,00,000 - liquidation expenses paid
 ₹ 6,00,000 - Cash retained in the business at the end of month
December, 2019:
 ₹ 2,20,000 - Liquidation expenses paid
 As part payment of his capital, C accepted a machinery for ₹ 9,00,000 (Book value
₹ 6,00,000)
 ₹ 2,00,000 - Cash retained in the business at the end of month.
January, 2020:
 ₹ 28,00,000 - Received on the sale of remaining plant & machinery
 ₹ 9,00,000 - Received from the sale of entire stock
 ₹ 1,50,000 - Liquidation expenses paid
 ₹ 63,00,000 - Received on sale of Land & Buildings
 No cash is retained in the business.
You are required to prepare a schedule of cash payments amongst the partners by "Highest

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Relative Capital Method" as on 31st January, 2020. (15 Marks ,Jan 21)
Answer 1
Statement showing distribution of cash
Creditors Capitals
Particulars ₹ ₹ A (₹) B (₹) C (₹)
Balance Due after loan 11,00,000 70,00,000 45,00,000 30,00,000
Nov. 2019
Balance available 7,00,000
Realization less expenses
and cash retained 6,00,000
Amount available and paid 13,00,000 11,00,000 - 1,20,000 80,000
Balance due — 70,00,000 43,80,000 29,20,000
Dec. 2019
Opening balance 6,00,000
Expenses paid and
balance carried forward 4,20,000
Available for distribution 1,80,000
Cash paid to B and —
Machinery given to C 1,80,000 9,00,000
Balance due 70,00,000 42,00,000 20,20,000
Jan.2020
Opening balance 2,00,000
Amount realized less 98,50,000
expenses
Amount available and paid 100,50,000
to partners
First, ₹31,20,000 is paid to
A and B in the ratio of 5:3 19,50,000 11,70,000
Balance (100,50,000 –
31,20,000) ₹ 69,30,000 is
paid to A,B and C in the 34,65,000 20,79,000 13,86,000
ratio of 5:3:2
Total amount paid 54,15,000 32,49,000 13,86,000
Total loss 15,85,000 9,51,000 6,34,000
Working note:
Calculation of Highest Relative Capital Basis
(1) Scheme of payment for November

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Particulars A B C
₹ ₹ ₹
Balance of Capital Accounts 95,00,000 75,00,000 30,00,000
Less: Loans (25,00,000) (30,00,000) —
70,00,000 45,00,000 30,00,000
Profit-sharing ratio 5 3 2
Capital Profit sharing ratio 14,00,000 15,00,000 15,00,000
Capital in profit sharing ratio, taking A’s
capital as base 70,00,000 42,00,000 28,00,000
Excess of C’s Capital and B’s Capital (A-B) 3,00,000 2,00,000
Profit-sharing ratio 3 2
It means realization up to ₹ 5,00,000 is distributed among B and C in the ratio of 3:2. So
excess amount of ₹ 2,00,000 after paying creditors is distributed among B and C in the
ratio of 3:2 i.e. ₹1,20,000 and 80,000 respectively.
(2) Scheme of payment for December
In the month of December C has received machinery amounting ₹ 9,00,000 against his
excess capital of ₹ 1,20,000 (2,00,000 – 80,000). Excess capital of B is ₹3,00,000 out of
which ₹1,20,000 already paid to him, so balance ₹ 1,80,000 available in the month of
December will be paid to B.

(3) Scheme of payment for January

Particulars A B C
₹ ₹ ₹
Balance of Capital Accounts at the end of 70,00,000 42,00,000 20,20,000
December
Profit-sharing ratio 5 3 2
Capital Profit sharing ratio 14,00,000 14,00,000 10,10,000
Capital in profit sharing ratio, taking C’s
capital as base 50,50,000 30,30,000 20,20,000
Excess Capital 19,50,000 11,70,000
Since ₹ 19,50,000 and 11,70,000 is already in the ratio of 5:3, so amount realized up to ₹
31,20,000 is distributed among A and B in the ratio of 5:3 .
After that any amount realized is distributed among all the three partners in the ratio of
5:3:2.

Question 2
State the circumstances when Garner v/s Murray rule is not applicable. (5 Marks Dec’21)
Answer 2
Non-Applicability of Garner vs Murray rule:
1. When the solvent partner has a debit balance in the capital account.
Only solvent partners will bear the loss of capital deficiency of insolvent partner in their

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capital ratio. If incidentally, a solvent partner has a debit balance in his capital account, he will
escape the liability to bear the loss due to insolvency of another partner.
2. When the firm has only two partners.
3. When there is an agreement between the partners to share the deficiency in capital account
of the insolvent partner.
4. When all the partners of the firm are insolvent.

Question 3
G, S & J were partners sharing profits and losses in the ratio of 4:3:2, no partnership salary
or interest on capital being allowed. Their Balance Sheet as on 31.3.2019 is as follows:
Liabilities Amount Amount Assets Amount Amount
(₹) (₹) (₹) (₹)
Partners’ fixed Fixed assets:
capital accounts:
G 24,000 Goodwill 48,000
S 24,000 Land 9,600
J 12,000 60,000 Plant & Machinery 15,360
Partners’ current Motor car 840 73,800
accounts:
G 600 Current assets:
S 10,800 Stock 4,680
J (480) 10,920 Trade debtors 2,400
Loan from G 9,600 Less: provision 120 2,280
Trade creditors 14,880 Cash at bank 240
Miscellaneous losses:
Profit & loss sale 14,400
95,400 95,400
On 1st April, 2019, the partnership was dissolved. Motor car was taken over by G at a value
of ₹ 600, but no cash was given specifically in respect of this transaction. Sale of other assets
realized the following amounts:
Particulars ₹
Goodwill Nil
Land 8,400
Plant & machinery 6,000
Stock 3,600
Trade debtors 1,920
Trade creditors were paid ₹ 14,040 in full settlement of their debts. The cost of dissolution
amounted to ₹ 1,800. The loan from G was repaid; G and S both were fully solvent and
able to bring in any cash required but J was forced into bankruptcy and was only able to
bring 1/2 of the amount due.
You are required to prepare:

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Chapter 6.1 Dissolution of Partnership Firms
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(i) Cash & Bank account

(ii) Realization account, and
(iii) Partners’ Fixed Capital Accounts (after transferring current accounts balances) Apply
Garner Vs. Murray rule. (15 Marks Nov’19)
Answer 3
(a) Cash & Bank Account
₹ ₹
To Balance b/d 240 By Realisation A/c-Creditors 14,040
To Realisation A/c- By Realisation A/c-Expenses 1,800

Land 8,400 By G’s Loan A/c 9,600

Plant and Machinery 6,000 By G’s Capital A/c 16,280
Stock 3,600 By S’s Capital A/c 28,680
Trade Debtors 1,920
To Capital
Accounts:
G 27,200
S 20,400
J 2,640 50,240
70,400 70,400
Realization Account
₹ ₹
To Goodwill 48,000 By Trade Creditors 14,880
To Land 9,600 By Provision for Bad Debts By Bank: 120

To Plant and Machinery 15,360 Land

8,400
To Motor Car 840 Plant and Machinery 6,000
To Stock 4,680 Stock 3,600

To Sundry Debtors 2,400 Debtors 1,920

To Bank (Creditors) 14,040 By G (Car) 19,920
To Bank (Expenses) 1,800 By Capital Accounts: 600
(Loss)
G 27,200
S 20,400
J 13,600 61,200
96,720 96,720
Partners’ Fixed Capital Accounts

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Chapter 6.1 Dissolution of Partnership Firms
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G S J G S J
₹ ₹ ₹ ₹ ₹ ₹
To Current A/c 5,800 3,680 By Balance b/d 24,000 24,000 12,000
(Transfer)
To Realization A/c 27,200 20,400 13,600 By Current A/c 6,000
(Loss) (Transfer)
By Bank 2,640
To Realization A/c 600 -
(Car) By Bank* 27,200 20,400
(realisation loss)
To J's Capital A/c 1,320 1,320
(Deficiency) By G & S 2,640
(Deficiency)
To Bank* 16,280 28,680

51,200 50,400 17,280 51,200 50,400 17,280

Note:
1. G, S and J will bring cash to make good their share of the loss on realization.
2. As per Garner Vs. Murray rule, solvent partners- G and S have to bear the loss due to
insolvency of a partner J in their fixed capital ratio.
*Alternatively, posting may be done for the net amount being received from /paid to G and
S respectively.
Working Note:
Current account balances of partners have been arrived after adjusting profit and loss
account debit balance as follows:
Current account balance Profit & loss
G 600 (6,400) 5,800 Dr.
S 10,800 (4,800) 6,000 Cr.
J (480) (3,200) 3,680 Dr.

Question 4
AD, BD & SD are partners sharing profits and losses in the ratio of 5:3:2. There capitals
were ₹ 13,440, ₹ 8,400, ₹ 11,760 respectively.
Liabilities and assets of the firm are as under:
Liabilities: ₹
Trade creditors 2.800
Loan from partners 1,400
Assets of the firm:
Patent 1,400
Furniture 2,800
Machinery 1,680
Stock 5,600

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Chapter 6.1 Dissolution of Partnership Firms
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The assets realized in full in the order in which they are listed above. BD is insolvent. You
are required to prepare a statement showing the distribution of cash as and when available,
applying maximum possible loss procedure. (5 Marks Nov’19)
Answer 4
(a) Statement of Distribution of Cash
Realization Trade Loans Partners’ Capitals
Creditor from
partners
AD BD SD Total
₹ ₹ ₹ ₹ ₹ ₹ ₹
Balances due (1) 2,800 1,400 40 8,400 ,760 00
13,4 11 33,6
(i) Sale of Patent 1,400 00) -
(1,4
1,400 1,400
(ii) Sale of furniture 2,800 (1,400) (1,400)
(iii) Sale of machinery 1,680
Maximum possible ₹ 31,920 (15,960) (9,576) (6,384) (31,920)
loss
(total of capitals ₹
33,600
less cash available
₹ 1,680) allocated to
partners in the
profit
sharing ratio i.e. 5 : 3 : 2
Amounts at credit (2,520) (1,176) 5,376 1,680
Deficiency of AD and BD 2,520 1,176 (3,696) -
written off against SD
Amount paid (2) – – 1,680 1,680
Balances in capital 13,440 8,400 10,080 31,920
accounts (1 – 2) = (3)
(iv) Sale of stock 5,600
Maximum possible loss 26,320
(₹31,920 – ₹5,600)
allocated
to partners in the ratio
5:3:2 (13,160) (7,896) (5,264) (26,320)
Amounts at credit and
cash paid (4) 280 504 4,816 5,600
Balances in capital 13,160 7,896 5,264 26,320
accounts left unpaid—
Loss (3 – 4) = (5)

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Question 5
State the circumstances when Garner V/s Murray rule is not applicable. (5 Marks May’19)
Answer 5
Garner vs Murray rule is non-applicable in the following cases:
1. When the solvent partner has a debit balance in the capital account.
Only solvent partners will bear the loss of capital deficiency of insolvent partner in their
capital ratio. If incidentally a solvent partner has a debit balance in his capital account, he will
escape the liability to bear the loss due to insolvency of another partner.
2. When the firm has only two partners.
3. When there is an agreement between the partners to share the deficiency in capital account
of insolvent partner.
4. When all the partners of the firm are insolvent.

Question 6
E, F and G were partners in a firm, sharing profits and losses in the ratio of 3:2:1,
respectively. Due to extreme competition, it was decided to dissolve the partnership
on 31 st December, 2017. The balance sheet on that date was as follows:
Liabilities ₹ Assets ₹
Capital accounts: Machinery 1,54,000
E 1,13,100 Furniture & fittings 25,800
F 35,400 Investments 5,400
G 31,500 1,80,000 Stock 97,700
Current accounts: Debtors 56,400
E 26,400 Bank 29,700
G 6,000 32,400 Current account: F 18,000
Reserves 1,08,000
Loan account: G 15,000
Creditors 51,600
3,87,000 3,87,000
The realization of assets is spread over the next few months as follows:
February, Debtors, ₹ 51,900; March, Machinery, ₹ 1,39,500; April, Furniture,
etc.
₹ 18,000; May, G agreed to take over investment at ₹ 6,300; June, Stock, ₹ 96,000.
Dissolution expenses, originally provided, were ₹ 13,500, but actually amounted
to ₹ 9,600 and were paid on 30th April. The partners decided that after creditors were
settled for ₹ 50,400, all cash received should be distributed at the end of each month
in the most equitable manner. You are required to prepare a statement of actual
cash distribution as received using "Maximum loss basis" method. (20 Marks Nov’18)
Answer 6
Statement of Distribution of Cash by ‘Maximum Loss Method’

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Chapter 6.1 Dissolution of Partnership Firms
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Creditor G ’s Loan E₹ F₹ G₹ Total

s ₹
₹
Feb: Balance due 51,600 15,000 1,93,500 53,400 55,500 3,02,400*
Cash available 29,700
Collection from debtors
51,900
81,600
Less: prov for expenses 13,500
68,100
Creditors & Loan paid (50,400) (15,000)
(50,400 +15,000) 65,400 1,200 -
(1,200)
Discount written off
Available for E, F & G 2,700 -
Maximum possible loss
(3,02,400-2,700) =2,99,700
In ratio of 3:2:1

(1,49,850) (99,900) (49,950) (2,99,700

)
43,650 (46,500) 5,550

Adjustment for F’s (36,370) 46,500 (10,130)

deficiency
in ratio of 1,13,100: 31,500

7,280 - (4,580)

(4,580) - 4,580
Adjustment for G’s deficiency

2,700
Cash paid to E 2,700
Balance due 1,90,800 53,400 55,500 (2,99,700
)
March

Cash available ₹ 1,39,500

Maximum possible
loss₹ 2,99,700 – ₹
1,39,500

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= ₹ 1,60,200 in ratio of 3:2:1 (80,100 (53,400) (26,700) (1,60,200

)

Cash paid 1,10,700 - 28,800 1,39,500

Balance 80,100 53,400 26,700 1,60,200

April
18,000 +3,900 (saving in
expenses) = 21,900
Maximum possible loss (46,100)
₹ 1,60,200-21,900= 1,38,300 (69,150) (23,050) (1,38,300
)
in ratio of 3:2:1
Cash paid 10,950 7,300 3,650 21,900
Balance
May 69,150 46,100 23,050 1,38,300
Investment taken by G 6300 6300
Balance 69150 46100 16750 132000
Maximum loss (1,38,300 less (66,000) (44,000) (22,000) (1,32,000
6,300) )
Balance 3,150 2,100 1,050 6,300
Cash brought by G (6,300 less 5,250 5,250
1,050)
Cash paid to E and F (3,150) (2,100) (5,250)
Balance 66,000 44,000 22,000 1,32,000
June
Stock 96,000
Maximum loss (1,32,000-
(18,000) (12,000) (6,000) 36,000
96,000)
Cash paid 48,000 32,000 16,000 96,000

Unpaid balance (18,000) (12,000) (6,000) 36,000

*Partners’ capital balances after adjusting reserves and current A/c balance.
Working Note:
Statement showing the cash available for distribution:
Feb. ₹29,700 + 51,900 - 13,500 = ₹68,100
March ₹ 1,39,500
April ₹18,000 + 3,900 = 21,900 May - Nil June ₹96,000

Question 7
Amit paid ₹ 50,000 as premium to other partners of the firm at the time of his admission

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Chapter 6.1 Dissolution of Partnership Firms
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to the firm, with a condition that it will not be dissolved before expiry of five years.
The firm is dissolved after three years. Amit claims refund of premium. Explain -
(1) Whether he is entitled to get a refund of the premium? If yes, list the
criteria for the calculation of the amount of the refund.
(2) Also explain any two conditions when no claim in this respect will arise.
(5 Marks Nov’18)
Answer 7
If the firm is dissolved before the term expires, as is the case, Amit, being a partner who
has paid premium on admission, will have to be repaid / refunded.
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence No claim for
refund will arise if:
(i) The firm is dissolved due to death of a partner or If the dissolution of the
firm is basically because of misconduct of,
(ii) If the dissolution is through an agreement and such agreement does not
have a stipulation for refund of premium.

Question 8
Ajay, Vijay and Sanjay have been in partnership for a number of years, sharing profits and
losses in the ratio 7:7: 4 as a wholesale stationer running business under the name "AVS
Traders". On 31st March,2021, it was found that some frauds were committed by Sanjay
during the year 2020-2021. So, it was decided to dissolve the partnership business on 31st
March,2021 when their Balance sheet stood as under Balance Sheet as at 31st March,2021
Liabilities Amount (₹) Assets Amount (₹)
Capital accounts: Building 1,90,000
Ajay 1,80,000 Inventory 1,30,000
Vijay 1,80,000 3,60,000 Investments 50,000
General Reserve 36,000 Trade Debtors 70,000
Trade Creditors 80,000 Cash & Bank 26,000
Bills payables 30,000 Sanjay's Capital 40,000
(overdrawn)
5,06,000 5,06,000
Additional Information:
(i) Following frauds were committed by Sanjay:
(1) Investments costing ₹8,000 were sold by Sanjay at ₹ 11,000 and the funds were
transferred to his personal account. This sale was omitted from firm's books.
(2) A cheque for ₹ 7,000 received from trade debtors was not recorded in the books
and was misappropriated by Sanjay.
(ii) A trade creditor agreed to take over investments of the book value of ₹ 9,000 at ₹
13,000. The rest of the trade creditors were paid off at a discount of 10%.

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(iii) Other assets were realized as follows:

Inventory ₹ 1,20,000
Building 110% of book value
Investments The rest of the investments were sold at a profit of ₹
7,000
Trade Debtors The rest of the trade debtors were realised at a discount
of 10%
(iv) The Bills payables were settled at a discount of, ₹500.
(v) The expenses of dissolution amounted to ₹8,060.
(vi) It was found out, that realisation from Sanjay's private assets would be ₹ 7,000.
You are required to prepare
(1) Realisation Account
(2) Cash & Bank Account
(3) Partners’ Capital Accounts.
(All workings should form part of your answer)(15 Marks)(May’22)

Answer 8
Realization Account
Particulars ₹ Particulars ₹
To Building 1,90,000 By Trade creditors 80,000
To Inventory 1,30,000 By Bills payable 30,000
To Investment 50,000 By Cash
To Trade Debtors 70,000 Building 2,09,000
To Cash - Trade creditors 60,300 Inventory 1,20,000
paid (W.N.1)
To Cash-expenses 8,060 Investments (W.N.2) 40,000
To Cash-bills payable 29,500 Trade Debtors (W.N. 3) 56,700 4,25,700
(30,000-500)
To Partners’ Capital A/cs By Sanjay’s Capital A/c 7,000
(Trade Debtors-
unrecorded)
Ajay 6,160 By Sanjay’s Capital A/c 11,000
(Investments- unrecorded)
Vijay 6,160
Sanjay 3,520 15,840
5,53,700 5,53,700
Cash and Bank Account

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Chapter 6.1 Dissolution of Partnership Firms
 P 6.1-13

Particulars Amount Particulars Amount

₹ ₹
To Balance b/d 26,000 By Realization A/c- Trade 60,300
creditors paid
To Realization A/c– By Realization A/c-bills 29,500
assets realized payable
Building 2,09,000 By Realization A/c- 8,060
expenses
Inventory 1,20,000 By Capital accounts:
Investments 40,000 Ajay 1,80,420
(W.N.2)
Trade Debtors (W.N. 56,700 4,25,700 Vijay 1,80,420
3)
To Sanjay’s capital A/c 7,000
4,58,700 4,58,700
Partners’ Capital Accounts
Particulars Ajay Vijay Sanjay Particulars Ajay Vijay Sanjay
₹ ₹ ₹ ₹ ₹ ₹
To Balance b/d 40,000 By Balance 1,80,000 1,80,000 -
b/d
To Trade 7,000 By General 14,000 14,000 8,000
Debtors- reserve
misappropriatio
n
To Investment- 11,000 By 6,160 6,160 3,520
misappropriatio Realization
n profit
To Sanjay’s 19,740 19,740 By Cash A/c 7,000
capital A/c
(W.N. 4)
To Cash A/c 1,80,420 1,80,420 By Ajay’s 19,740
capital A/c
By Vijay’s 19,740
capital A/c
2,00,160 2,00,160 58,000 2,00,160 2,00,160 58,000
Working Notes:
1. Amount paid to Trade creditors
₹
Book value 80,000
Less: Creditors taking over investments (13,000)

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Chapter 6.1 Dissolution of Partnership Firms
 P 6.1-14

67,000
Less: Discount @ 10% (6,700)
60,300
2. Amount received from sale of investments
₹
Book value 50,000
Less: Misappropriated by Sanjay (8,000)
42,000
Less: Taken over by a trade creditor (9,000)
33,000
Add: Profit on sale of investments 7,000
40,000

1. Amount received from Trade debtors

₹
Book value 70,000
Less: Unrecorded receipt (7,000)
63,000
Less: Discount @ 10% (6,300)
56,700
2. Deficiency of Sanjay
₹
Balance of capital as on 31st March, 2021 40,000
Debtors-misappropriation 7,000
Investment-misappropriation 11,000
58,000
Less: Realization Profit (3,520)
General reserve (8,000)
Contribution from private assets (7,000)
Net deficiency of capital 39,480
This deficiency of ₹ 39,480 in Sanjay’s capital account will be shared by other
partners Ajay and Vijay in their capital ratio of 1:1 Accordingly,
Ajay’s share of deficiency = [39,480/2] = ₹ 19,740
Vijay’s share of deficiency = [39,480/2] = ₹ 19,740

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Chapter 6.1 Dissolution of Partnership Firms
 P 6.2-1

Chapter 6.2
Amalgamation of Partnership Firms
Question 1
A Partnership firm C & Co. consists of partners P and Q sharing Profits and Losses in the
ratio of 4:1. The firm H & Co. consists of Partners Q and R sharing Profits and Losses in the
ratio of 3:2. On 31st March, 2021, it was decided to amalgamate both the firms and form
a new firm CH & Co., wherein P, Q, R would be partners sharing Profits and Losses in the
ratio of 6:3:1. The summarized Balance Sheets of both the firms as on 31st March, 2021
were as follows:
Labilities C & Co. H & Co. Assets C & Co. H & Co.
(` in 000) (` in 000) (` in 000) (` in 000)
Capital P Cash in hand/bank 160 120
QR 600 - Debtors 240 320
Reserve 400 300 Stock Vehicles 200 80
Creditors - 200 Machinery - 350
200 150 Building 480 -
480 220 600 -
Total 1,680 870 Total 1,680 870
The following were the terms of amalgamation:
(i) Goodwill of C & Co. was valued at ` 2,80,000 and the Goodwill of H & Co. was valued
at ` 1,60,000. Goodwill account is not to be opened in the books of the new firm but
to be adjusted through the Capital accounts of the partners.
(ii) Building, Machinery and Vehicles are to be taken over at ` 8,00,000, ` 4,00,000 and `
3,00,000, respectively.
(iii) Provision for doubtful debts at ` 20,000 in respect of C & Co. and ` 10,000 in respect
of H & Co. are to be provided.
You are required to:
(i) Show how the Goodwill value will be adjusted amongst the partners.
(ii) Prepare the Balance Sheet of CH & Co as at 31st March, 2021 by keeping Partners’
capital in their profit sharing ratio taking capital of 'Q' as the basis. The excess or
deficiency to be kept in the respective Partner's Current Account. (15 Marks July
21)
Answer 1
Adjustment for raising and writing off of goodwill
Raised in old profit-sharing Total Written off in Difference
ratio new ratio
C & Co. H & Co.
4:1 3:2 6:3:1
` ` ` ` `

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 P 6.2-2

P 2,24,000 --- 2,24,000 Cr. 2,64,000 Dr. 40,000 Dr.

Q 56,000 96,000 1,52,000 Cr. 1,32,000 Dr. 20,000 Cr.
R --- 64,000 64,000 Cr. 44,000 Dr. 20,000 Cr.
2,80,000 1,60,000 4,40,000 4,40,000 Nil
(iii) Balance Sheet of CH & Co. (New firm) as on 31.3.2021

Liabilities ` Assets `
Capital Accounts: Vehicle 3,00,000
P 16,68,000 Machinery 4,00,000
Q 8,34,000 Building 8,00,000
R 2,78,000 Stock 2,80,000
Creditors 7,00,000 Debtors 5,30,000
Cash & Bank 2,80,000
Current Accounts:
P 8,68,000
R 22,000
34,80,000 34,80,000

Working Notes:
1. Balance of Capital Accounts at the time of amalgamation of firms C & Co.
Particulars P’s Capital Q’s Capital
` `
C & Co. Profit and loss sharing ratio 4:1
Balance as per Balance Sheet 6,00,000 4,00,000
Add: Reserves 1,60,000 40,000
Revaluation profit (Building) 1,60,000 40,000
Less: Revaluation loss (Machinery) (64,000) (16,000)
Provision for doubtful debt (16,000) (4,000)
8,40,000 4,60,000
H & Co.
Particulars Q’s Capital R’s Capital
` `
H & Co. Profit and loss sharing ratio 3:2
Balance as per Balance sheet 3,00,000 2,00,000
Add: Reserves 90,000 60,000
Less: Revaluation (vehicle) (30,000) (20,000)
Provision for doubtful debts (6,000) (4,000)
3,54,000 2,36,000

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 P 6.2-3

2. Balance of Capital Accounts in the balance sheet of the new firm as on

31.3.2021
Particulars P Q R
` ` `
Balance b/d: C & Co. 8,40,000 4,60,000 --
H & Co. -- 3,54,000 2,36,000
8,40,000 8,14,000 2,36,000
Adjustment for goodwill (40,000) 20,000 20,000
8,00,000 8,34,000 2,56,000
Total capital ` 27,80,000 (Q’s capital i.e.
` 8,34,000 x 10/3) to be contributed in 6:3:1 16,68,000 8,34,000 2,78,000
ratio.
Deficiency Transferred to Current Account 8,68,000 --- 22,000


NOTE: Alternative solution using Revaluation Account is also possible. In that case,
Revaluation account will be prepared in the books of both amalgamating firms for
recording profit /loss on revaluation of assets. However, the final balances of partners’
capitals in the balance sheet of amalgamated firm will remain same as given in the
above solution.

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 P 6.3-1

Chapter 6.3
Conversion of Partnership firms into a Company and sale of a
company
Question 1
Mohan and Sohan were carrying business in partnership, sharing profit and losses equally.
The Balance Sheet of the firm as on 31st March, 2019 stood as under:
Liabilities ₹ Assets ₹
Partners’ Capital Leasehold Premises 40,800
Accounts:
- Mohan 1,68,000 Plant & Machinery 1,80,000
-Sohan 1,56,000 3,24,000 Inventories 72,000
Bank Overdraft 42,000 Trade Receivables 84,000
Trade Payables 72,000 Joint Life Policy 10,800
Profit & Loss Account 31,200
Partners' Current Accounts:
-Mohan 12,000
-Sohan 7,200 19,200
4,38,000 4,38,000

The business was carried on till 30th September, 2019. The partners withdrew the
amounts equal to half the amount of profit made during the period of six months ended
on 30th September, 2019 equally. The profit was calculated after charging depreciation
@5% per annum on Leasehold premises and 10% per annum on Plant & Machinery.
In the half year, the amounts of Bank Overdraft and Trade Payables stood reduced by
₹ 18,000 and ₹ 12,000 respectively. On 30th September, 2019, the inventories were
valued at ₹ 90,000 and Trade Receivables at ₹ 72,000. The Joint Life Policy had been
surrendered for ₹ 10,800 before 30th September, 2019 and all other items remained the
same as at 31st March, 2019. On 30th September, 2019, the firm sold off its business to PKR
Limited. The value of Goodwill was fixed at ₹ 1,20,000 and the rest of the assets and
liabilities were valued on the basis of their book values as at 30th September, 2019. PKR
Ltd. paid the purchase consideration in equity shares of ₹10 each.
You are requested to prepare the following:
(1) Balance Sheet of the Firm as at 30th September, 2019;
(2) Realization Account;
Partners' Capital Account showing the final settlement between them. ( 15 Marks Nov 20)
Answer 1
(i) Balance Sheet of the Firm as at 30.9.2019

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 P 6.3-2

Liabilities ₹ ₹ Assets ₹ ₹
Capital Accounts: Machinery 1,80,000
Mohan balance as on Less: Depreciation
30.9.2019 1,40,400

Add: Profit for 15,180 @10% p.a. for 6 (9,000) 1,71,000

6months 1,55,580 months

Less: Drawings for 6 (7,590) 1,47,990 Leasehold 40,800

months premises Less:
Written-off @ 5%
Sohan balance as on for 6 months (1,020) 39,780
30.9.2019 1,33,200
Add: Profit for 6 15,180 Inventory 90,000
months
1,48,380 Trade receivables 72,000
Less: Drawings for 6 (7,590) 1,40,790
months
Trade payables 60,000
(72,000 – 12,000)
Bank overdraft
(42,000 – 18,000) 24,000
3,72,780 3,72,780
(ii) Realization Account
Particulars ₹ Particulars ₹
To Machinery A/c 1,71,000 By Trade payables A/c 60,000
To Leasehold Premises A/c 39,780 By Bank Overdraft A/c 24,000
To Inventory A/c 90,000 By PKR Ltd. A/c 4,08,780
To Trade receivables A/c 72,000 (W.N.1)
To Mohan Capital A/c 60,000
To Sohan Capital A/c 60,000
4,92,780 4,92,780

Partners’ Capital Accounts

(iii)
Date Particulars Mohan Sohan Date Particulars Mohan Sohan
₹ ₹ ₹ ₹
1.4.19 To Profit & 15,600 15,600 1.4.19 By Balance b/d 1,68,000 1,56,000
Loss A/c
To Current A/c 12,000 7,200
30.9.19 Balance c/d 1,40,400 1,33,200
1,68,000 1,56,000 1,68,000 1,56,000
30.9.19 To Drawings 7,590 7,590 30.9.19 By Balance b/d 1,40,400 1,33,200

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 P 6.3-3

A/c

To Shares in 2,07,990 2,00,790 30.9.19 By Profit & Loss 15,180 15,180

PKR Ltd A/c Appropriation
A/c
By Realization
A/c 60,000 60,000
2,15,580 2,08,380 2,15,580 2,08,380
Working Notes:
(1) Ascertainment of purchase consideration
₹ ₹
Assets:
Inventory 90,000
Trade receivables 72,000
Machinery less depreciation 1,71,000
Leasehold premises less written off 39,780
3,72,780
Less: Liabilities:
Trade payables 60,000
Bank overdraft 24,000 (84,000)
Closing Net Assets 2,88,780
Add: Goodwill 1,20,000
Purchase Consideration 4,08,780

(2) Ascertainment of profit for the 6 month ended 30th September,2019

₹ ₹
Closing Net Assets 2,88,780
Less: Opening Combined Capital
Mohan – (1,68,000- 15,600-12,000) 1,40,400
Sohan – (1,56,000-15,600-7,200) 1,33,200
Profit after adjustment of Drawings
(2,73,600)
Add: Combined drawings during the 6 month (equal 15,180
to profit)
15,180
Profit for 6 months 30,360

Question 2
TJM & Sons is a partnership firm consisting of T, J and M who share profits and loses in the
ratio of 2:2:1 and JEK Limited is another company doing similar business.
The firm (TJM & Sons) and the company (JEK Ltd) provide you the following ledger
balances as on 31.03.2021:

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 P 6.3-4

TJM Sons (₹) JEK Ltd. (₹)

Debit Balances:
Plant & Machinery 7,50,000 24,00,000
Furniture & Fixtures 75,000 3,37,500
Inventories 3,00,000 12,75,000
Trade receivables 3,00,000 12,37,500
Cash at Bank 15,000 6,00,000
Cash in hand 60,000 1,50,000
Credit Balances
Equity share capital: Equity shares of ₹ 30,00,000
10 each
Partners Capitals
T 3,00,000
J 4,50,000
M 1,50,000
General Reserve 1,50,000 10,50,000
Trade Payables 4,50,000 19,50,000
On the balance sheet date, it was decided that the firm TJM & Sons be dissolved and all the
assets (except cash in hand and cash at bank) and all the liabilities of the firm be taken over
by JEK Limited by issuing 75,000 shares of ₹ 10/- each at a premium of ₹ 4/- per share. Plant
& Machinery and Furniture & Fixtures are to be revalued at ₹ 8,50,000 and ₹ 1,00,000.
Partners of TJM & Sons agreed to divide the shares issued by JEK Limited in the profit -
sharing ratio and bring necessary cash for settlement of their capital.
The trade payables of TJM & Sons include ₹ 1,50,000 payables to JEK Limited. An unrecorded
liability of ₹ 37,500 of TJM & Sons must also be taken over by JEK Ltd.
You are required to prepare:
(i) Realization account, Partners’ capital accounts and cash in hand/Bank
account in the books of TJM & Sons.
(ii) Pass journal entries in the books of JEK Limited for acquisition of TJM &
Sons. (15 Marks Dec’21)
Answer 2
(i) In the books of TJM& Sons Realization Account
Particulars ₹ Particulars ₹
To Plant & Machinery 7,50,000 By Trade payable 4,50,000
To Furniture & Fixture 75,000 By JEK Ltd. (Refer W.N.) 10,50,000
To Inventories 3,00,000
To Trade receivables 3,00,000
To Partners’ Capital
Accounts (Profit):
T’s Capital A/c 30,000

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 P 6.3-5

J’s Capital A/c 30,000

M’s Capital A/c 15,000 75,000
15,00,000 15,00,000
Partners’ Capital Accounts
Particulars T J M Particulars T J M
₹ ₹ ₹ ₹ ₹ ₹
To Shares in 4,20,000 4,20,000 2,10,000 By Balance b/d 3,00,000 4,50,000 1,50,000
JEK Ltd.
To Cash - 1,20,000 By General
Reserve 60,000 60,000 30,000
By Realization 30,000 30,000 15,000
A/c
By Cash 30,000 - 15,000
4,20,000 5,40,000 2,10,000 4,20,000 5,40,000 2,10,000

Cash and Bank Account

Particulars Cash Bank Particulars Cash Bank
₹ ₹ ₹ ₹
To Balance b/d 60,000 15,000 By Cash A/c (Contra) 15,000
To Bank A/c 15,000 By J 1,20,000
(Contra)*
To T 30,000
To M 15,000
1,20,000 15,000 1,20,000 15,000
(ii) Journal Entries in the Books of JEK Ltd.

Dr. (₹) Cr. (₹)

1. Business Purchase Account Dr. 10,50,000
To Liquidators of TJM& Sons 10,50,000
(Being business of TJM& Sons purchased and
payment due)
2. Plant and Machinery A/c Dr. 8,50,000
Furniture and Fixture A/c Dr. 1,00,000
Inventories A/c Dr. 3,00,000
Trade Receivables A/c Dr. 3,00,000
To Trade Payables 4,50,000
To Unrecorded Liability 37,500
To Business Purchase Account 10,50,000
To Capital Reserve (B.F.) 12,500
(Being take over of all assets and liabilities)
3. Liquidators of TJM& Sons Dr. 10,50,000

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 P 6.3-6

To Equity Share Capital Account 7,50,000

To Securities Premium Account 3,00,000
(Being purchase consideration discharged in
the form of shares of ₹ 10 each issued at a
premium of ₹ 4 each)
4. Trade Payables Account Dr. 1,50,000
To Trade Receivables Account 1,50,000
(Being mutual owing eliminated)

*It is assumed that cash at bank has been withdrawn to pay to Partner J.

Working Note:
Computation of purchase consideration:
75,000 Equity shares of ₹14 each = ₹ 10,50,000 Equity shares to be given to partners :
T = 30,000 Shares @ ₹ 14 = ₹ 4,20,000
J = 30,000 shares @ ₹ 14 = ₹ 4,20,000
M = 15,000 shares @ ₹ 14 = ₹ 2,10,000

Question 3
A and B carrying on business in partnership sharing profits and losses equally, wished to
dissolve the firm and sell the business to AB Limited Company on 31.03.2018 when th e
firm's position was as follows:
Liabilities (₹) Assets (₹)
A’s Capital 7,50,000 Land & Building 5,00,000
B’s Capital 5,00,000 Furniture 2,00,000
Sundry Creditors 3,00,000 Stock 5,00,000
Debtors 3,30,000
Cash 20,000
15,50,000 15,50,000
The arrangement with AB Limited Company was as follows:
(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and stock were purchased at book value less 15%.
(iii) The Goodwill of the firm was valued at ₹ 2,00,000.
(iv) The firm's debtors, cash and creditors were not to be taken over, but the company
agreed to collect the book debts of the firm and discharge the creditors of the firm as
an agent, for which services the company was to be paid 5% on all collections from
the firm's debtors and 3% on cash paid to firm's creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares
of ₹ 10 each at a premium of ₹ 2 per share.
The company collected all the amounts from the debtors. The creditors were paid off less by

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 P 6.3-7

₹ 5,000 allowed as discount. The company paid the balance due to the vendors in cash.
Prepare the Realisation A/c, the Capital Accounts of the Partners and the Cash Account in the
books of the Partnership firm. (15 Marks May’18)
Answer 3
In the Books of Partnership Firm
Realization Account
₹ ₹
To Land & Building 5,00,000 By Sundry Creditors 3,00,000

To Furniture 2,00,000 By AB Ltd. Co. - Purchase 13,95,000

consideration –
(W.N.1)
To Stock 5,00,000 By AB Ltd. Company – 3,30,000
Sundry Debtors
To Debtors 3,30,000 Less: Commission 5% on
3,30,000 16,500 3,13,500
To AB Ltd. Co. - Sundry 2,95,000
Creditors (3,00,000
less 5,000)
To AB Ltd. Co. – 8,850
(Commission 3% on
2,95,000)
To Profits transferred to:
A’s Capital A/c 87,325
B’s Capital A/c 87,325 1,74,650
20,08,500 20,08,500
Capital Accounts of Partners
A B A B
₹ ₹ ₹ ₹
To Shares in AB By Balance b/d 7,50,000 5,00,000
Ltd. Co.– 8,19,900 5,75,100
(W.N.2)
To Cash – Final By Realization a/c -
Payment 17,425 12,225 Profit 87,325 87,325
8,37,325 5,87,325 8,37,325 5,87,325
Cash Account
₹ ₹
To Balance b/d 20,000 By A’s Capital A/c- Final
payment 17,425
To AB Ltd. Co. (Amount realized By B’s Capital A/c- Final
from Debtors less amount Payment 12,225
paid to creditors) –(W.N.3) 9,650

29,650 29,650

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 P 6.3-8

Working Notes:
1. Calculation of Purchase consideration:
₹
Land & Building 6,00,000
Furniture 1,70,000
Stock 4,25,000
Goodwill 2,00,000
13,95,000
2. Distribution of shares among partners
The shares received from the company have been distributed between the two
partners A & B in the ratio of their final claims i.e., 8,37,325: 5,87,325*.
No. of shares received from the company = 13,95,000/12= 1,16,250
A gets [(1,16,250 X 8,37,325)/14,24,650] = 68,325 shares valued at 68,325 x 12 =
₹ 8,19,900. B gets the remaining 47,925 shares, valued at ₹ 5,75,100 (47,925  12)
3. Calculation of net amount received from AB Ltd on account of amount realized from
debtors less amount paid to creditors.
₹
Amount realized from Debtors 3,30,000
Less: Commission for realization from debtors (5% on 16,500
3,30,000)
3,13,500
Less: Amount paid to creditors 2,95,000
18,500
Less: Commission for cash paid to creditors (3% on 2,95,000) 8,850
Net amount received 9,650
Note: In the above situation, shares received from AB Ltd. Company have been distributed
between two partners A and B in the ratio of their final claims. Alternatively, shares received
from AB Ltd. can be distributed among the partners in their profit sharing ratio i.e. ₹ 13,95,000
x ½ = ₹ 6,97,500 each. In that case, firm will pay cash amounting ₹ 1,39,825 to A and will
receive cash ₹ 1,10,175 from B. Partners’ capital accounts and cash account will, accordingly
get changed.

Question 4
M, N and O were in partnership sharing profits and losses in the ratio of 3:2: 1. There was no
provision in the agreement for interest on capitals or drawings.
M died on 31st March, 2021 and on that date, the partners' balances were as under: Capital
Account: M- ₹ 75,000 (Cr); N- ₹ 50,000 (Cr); O- ₹ 25,000 (Cr)
Current Account: M- ₹ 50,000 (Cr); N- ₹ 37,500 (Cr); O- ₹ 12,500 (Dr)
By the partnership agreement, the sum due to M's estate was required to be paid within a period
of 3 years, and minimum instalment of ₹ 37,500 each were to be paid, the first such instalment
falling due immediately after death and the subsequent instalments at half- yearly intervals.

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 P 6.3-9

Interest @ 6% was to be credited half-yearly.

In ascertaining M's share, Goodwill (not recorded in the books) was to be valued at ₹ 1,12,500 and
the assets, excluding the Joint Assurance Policy (mentioned below) were valued at ₹ 75,000 in
excess of the book values.

No Goodwill account was raised and no alteration was made to the book values of fixed assets.
The Joint Assurance Policy shown in the books at ₹ 50,000 matured on 01.04.2021, realizing ₹
65,000; payment of ₹ 37,500 each were made to M's Executors on 01.04.2021, 30.09.2021 and
31.03.2022. N and O continued trading on the same terms and conditions as previously and the
net profit for the year ending 31.03.2022 (before charging the interest due to M's estate)
amounted to ₹ 65,000. During that period, the partners' drawings were N -₹ 18,750 and O -₹
10,000.
On 01.04.2022, the partnership was dissolved and an offer to purchase the business as a going
concern for ₹ 2,25,000 was accepted on that day. A cheque for that sum was received on
30.06.2022.
The balance due to M's estate, including interest, was paid on 30.06.2022 and on that day, N
and O received the sums due to them.
You are required to write-up the Partners' Capital Accounts and Partners' Current Accounts from
01.04.2021 to 30.06.2022. Show also the account of executors of M. (15 Marks Nov ‘22)

Answer 4
Partners’ Current Accounts
Particulars M N O Particulars M N O
₹ ₹ ₹ ₹ ₹ ₹
31.3.2021 31.3.2021
To Balance - - 12,500 By Balance b/d 50,000 37,500 -
b/d
To M’s - 37,500 18,750 By N’s Current 37,500 - -
Current A/c –
A/c– goodwill
goodwill
To M’s - 25,000 12,500 By O’s 18,750 - -
Current Current
A/c– A/c –
Revaluatio goodwill
n Profit
To M’s Capital 1,51,250 - - By N’s Current 25,000 - -
A/c– A/c–
transfer Revaluation
profit
By O’s Current 12,500
A/c –
Revaluatio
n profit
By Joint
assurance
policy 7,500 5,000 2,500
By Balance c/d 20,000 41,250

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1,51,250 62,500 43,750 1,51,250 62,500 43,750

1.4.21 31.3.22
To Balance 20,000 41,250 By Profit & 29,280 14,640
b/d Loss
31.3.22 Appropriati
on A/c
(43,920)
To Drawings 18,750 10,000 By Balance c/d 9,470 36,610
A/c
38,750 51,250 38,750 51,250
1.4.22 1.4.22
To Balance 9,470 36,610 By Realization 38,137 19,068
b/d A/c -profit
To N’s Capital By O’s Capital
A/c- 28,667 - A/c - - 17,542
transfer transfer
38,137 36,610 38,137 36,610

Partners’ Capital Accounts

Particulars M N O Particulars M N O
₹ ₹ ₹ ₹ ₹ ₹
31.3.21 31.3.21
To M’s 2,26,250 ---- --- By Balance b/d 75,000 50,000 25,000
Executors
A/c
To Balance c/d --- 50,000 25,000 By M’s 1,51,250 -- --
Curre
nt
A/c
2,26,250 50,000 25,000 2,26,250 50,000 25,000
31.3.22 1.4.21
To Balance c/d 50,000 25,000 By Balance b/d 50,000 25,000
50,000 25,000 50,000 25,000
1.4.22 1.4.22
To O’s Current --- By Balance b/d 50,000 25,000
A/c 17,542
– transfer
30.6.22
To Bank A/c By N’s
78,667 7,458 Curre 28,667 ---
nt
A/c –
transfer
78,667 25,000 78,667 25,000

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M’s Executor’s Account

Date Particulars Amount Date Particulars Amount
31.3.2021 To Balance c/d 2,26,250 31.3.2021 By M’s Capital 2,26,250
2,26,250 A/c 2,26,250
1.4.2021 To Bank 37,500 1.4.2021 By Balance b/d 2,26,250
30.9.2021 To Bank 37,500 30.9.2021 By Interest A/c 11,325
30.9.2021 To Balance c/d 1,62,575 (12% p.a. for -----------
2,37,575 6 months) 2,37,575
31.3.2022 To Bank 37,500 1.10.2021 By Balance b/d 1,62,575
31.3.2022 To Balance c/d 1,34,830 31.3.2022 By Interest A/c 9,755
(12% p.a. for ------------
1,72,330 6 months) 1,72,330
30.6.2022 To Bank 1,38,875 1.4.2022 By Balance b/d 1,34,830
30.6.2022 By Interest 4,045
----------- (12% p.a. for -----------
1,38,875 3 months) 1,38,875
Working Notes:
(1) Adjustment in regard to Goodwill
Partners M N O
Share of goodwill before death (₹) 56,250 37,500 18,750
Share of goodwill after death (₹) - 75,000 37,500
Gain (+)/Sacrifice (-) (₹) (56,250) 37,500 18,750
Cr. Dr. Dr.
(2) Adjustment in regard to revaluation of assets
Partners M N O
Share of profit on revaluation (₹) 37,500
credited to all the partners 25,000 12,500
(75,000 in 3:2:1)
Debited to the continuing partners (₹) - 50,000 25,000
(₹) (37,500) 25,000 12,500
Cr. Dr. Dr.
(3) Ascertainment of Profit for the year ended 31.3.22
₹ ₹
Profit before charging interest on balance due to M’s 65,000
executors
Less: Interest payable to M’s executors:
From 1.4.21 to 30.9.21 11,325
From 1.10.21 to 31.3.22 9,755 (21,080)
Balance of profit to be shared by N and O in 2:1 43,920
(4) Ascertainment of Sundry Assets as on 31.3.22
Liabilities ₹ Assets ₹
Capital Account – 50,000 Sundry Assets (balancing 1,63,750

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N figure)
Capital Account – 25,000 Partner’s Current A/c – N 9,470
O
M’s Executors A/c 1,34,830 Partner’s Current A/c- O 36,610
2,09,830 2,09,830
(5) Realization Account
₹ ₹
To Sundry Assets A/c 1,63,750 By Bank A/c (purchase 2,25,000
To Interest A/c– M’s 4,045 consideration)
Executors
To Partner’s Current A/c – N {38,137
To Partner’s Current A/c – O 19,068}
2,25,000 2,25,000
(6) Bank Account
₹ ₹
To Purchase 2,25,000 By M’s Executors A/c 1,38,875
consideration
By Partner’s Capital - N 78,667
By Partner’s Capital - O 7,458
2,25,000 2,25,000
Note:
1. As per the information given in the question, Interest @ 6% was to be credited half
- yearly to M’s executor’s account. Hence the rate of 12% per annum has been
considered in the solution while working the interest computations.

(7) Ascertainment of Profit for the year ended 31.3.22

₹ ₹
Profit before charging interest on balance due to M’s 65,000
executors
Less: Interest payable to M’s executors:
From 1.4.21 to 30.9.21 11,325
From 1.10.21 to 31.3.22 9,755 (21,080)
Balance of profit to be shared by N and O in 2:1 43,920
(8) Ascertainment of Sundry Assets as on 31.3.22
Liabilities ₹ Assets ₹
Capital Account – 50,000 Sundry Assets (balancing 1,63,750
N figure)
Capital Account – 25,000 Partner’s Current A/c – N 9,470
O
M’s Executors A/c 1,34,830 Partner’s Current A/c- O 36,610
2,09,830 2,09,830

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(9) Realization Account

₹ ₹
To Sundry Assets A/c 1,63,750 By Bank A/c (purchase 2,25,000
To Interest A/c– M’s 4,045 consideration)
Executors
To Partner’s Current A/c – N {38,137
To Partner’s Current A/c – O 19,068}
2,25,000 2,25,000
(10) Bank Account
₹ ₹
To Purchase 2,25,000 By M’s Executors A/c 1,38,875
consideration
By Partner’s Capital - N 78,667
By Partner’s Capital - O 7,458
2,25,000 2,25,000
Note:
1. As per the information given in the question, Interest @ 6% was to be credited half
- yearly to M’s executor’s account. Hence the rate of 12% per annum has been
considered in the solution while working the interest computations.

2. Interest computations have been rounded off.

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Chapter 6.4
Issues relating to accounting in LLP
Question 1
Under what circumstances an LLP can be wound up by the tribunal? ( 5 Marks , Nov 20)
Answer 1
An LLP may be wound up by the Tribunal in the following circumstances:
 If the LLP decides that it should be wound up by the Tribunal;
 If for a period of more than six months, the number of partners of the LLP is reduced below
two;
 If the LLP is unable to pay its debts;
 If the LLP has acted against the interests of the integrity and sovereignty of India, the
security of the state or public order;
 If the LLP has defaulted in the filing of the Statement of Account and Solvency with the
Registrar for five consecutive financial years;
 If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

Question 2
Write short notes on extent of liability of LLP and its Partners. ( 5 Marks , May 18)
Answer 2
Extent of Liability of LLP and its partners
Every partner of an LLP for the purpose of its business is an agent of the LLP but is not an
agent of other partners. Obligations of LLP are solely its obligations and liabilities of LLP are
to be met out of properties of LLP.
The partners of an LLP in the normal course of business are not liable for the debts of the LLP.
The LLP is liable if a partner of LLP is liable to any person as a result of wrongful or omission
on his part in the course of business of the LLP or with his authority. However, a partner will
be liable for his own wrongful acts or commissions, but will not be liable for the wrongful acts
or commissions of other partners of the LLP. Thus a partner may be called to pay the liability
of an LLP under exceptional circumstances.
If an LLP or any of its partners act with the intent to defraud creditors of the LLP or any other
person or for any fraudulent purpose, then the liability of the LLP and the concerned partners
is unlimited. However, where the fraudulent act is carried out by a partner, the LLP is not
liable if it is established by the LLP that the act was without the knowledge or authority of the
LLP. Where the business is carried out with fraudulent intent or for fraudulent purpose, every
person who was knowingly a party is punishable with imprisonment and fine.
Question 3
Give an analytical statement of distinction between an ordinary partnership firm and a
limited liability partnership. ( 5 Marks , Nov 19)

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 P 6.4-2

Answer 3
Distinction between an ordinary partnership firm and an LLP
Key Elements Partnerships LLPs
1 Applicable Law Indian Partnership ActThe Limited Liability
1932 Partnerships Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Agreement
Created by Law
4 Body Corporate No Yes
5 Separate Legal Entity No Yes
6 Perpetual Partnerships do not have
It has perpetual succession and
Succession perpetual succession individual partners may come
and go
7 Number of Partners Minimum 2 and Maximum Minimum 2 but no maximum
20 (subject to 10 for limit
banks)

8 Ownership of Assets Firm cannot own any The LLP as an independent

assets. The partners own entity can own assets
the assets of the firm
9 Liability of Partners/ Unlimited: Partners are Limited to the extent of their
Members severally and jointly liable contribution towards LLP except
for actions of other in case of intentional fraud or
partners and the firm and wrongful act of omission or
their liability extends to commission by a partner.
personal assets

10 Principal Agent Partners are the agents Partners are agents of the firm
Relationship of the firm and of each only and not of other partners
other

Question 4
Explain the nature of a Limited Liability Partnership. Who can be a designated partner in
a Limited Liability Partnership and what are their liabilities?(5 Marks) (May’22)

Answer 4
Nature of Limited Liability Partnership: A limited liability partnership is a body corporate
formed and incorporated under the LLP Act, 2008 and is a legal entity separate from that of
its partners. A limited liability partnership shall have perpetual succession and any change
in the partners of a limited liability partnership shall not affect the existence, rights, or
liabilities of the limited liability partnershipDesignated partners: Every limited liability
partnership shall have at least two designated partners who are individuals and at least one
of them shall be a resident in India. In case of a limited liability partnership in which all the
partners are bodies corporate or in which one or more partners are individuals and bodies

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 P 6.4-3

corporate, at least two individuals who are partners of such limited liability partnership or
nominees of such bodies corporate shall act as designated partners.
Liabilities of Designated partners: As per the LLP Act, unless expressly provided otherwise
in this Act, a designated partner should be-
a. responsible for the doing of all acts, matters, and things as are required to be done
by the limited liability partnership in respect of compliance of the provisions of this
Act including filing of any document, return, statement, and the like report pursuant
to the provisions of this Act and as may be specified in the limited liability
partnership agreement; and.
b. Liable to all penalties imposed on the limited liability partnership for any
contravention of those provisions

Question 5
Differentiate on ordinary partnership firm with an LLP (Limited Liability Partnership)
firm in respect of the following:
(i) Applicable Law
(ii) Perpetual Succession
(iii) Ownership of Assets
(iv) Liability of Partners / Members
(v) Principal-Agent Relationship (5 Marks Nov ‘22)

Answer 5
Distinction between an ordinary partnership firm and an LLP
Basis LLP Partnership firm
1. Applicable law The Limited Liability The Indian Partnership Act,
Partnership Act, 2008. 1932.
2. Perpetual The death, insanity, The death, insanity,
succession retirement or insolvency of the retirement or insolvency of the
partner(s) does not affect its partner(s) may affect its
existence of LLP. Members existence. It has no perpetual
may join or leave but its succession.
existence continues forever.
3 Ownership of The LLP as an independent Firm cannot own any assets.
assets entity can own assets The partners own the assets of
the firm
4. Liability of Liability of each partner is Liability of each partner is
Partners/ limited to the extent to agreed unlimited. Partners are
Members contribution except in case of severally and jointly liable for
willful fraud. actions of other partners and
the firm and their liability
extends to personal assets

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 P 6.4-4

5. Principal-agent Partners are agents of the firm Partners are the agents of the
relationship only and not of other partners. firm and of each other

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