| 1. | The following informations extracted from the Books of ’X’ Limited group (as at 31st December, 2006): | Liabilities | X Ltd. Rs. | Y Ltd. Rs. | Z Ltd. Rs. | Share capital
(Fully paid equity share of Rs. 10 each)
Profit and Loss Account
Dividend received
From Y Ltd. in 2005
From Y Ltd. in 2006
From Z Ltd. in 2006
Current Liabilities |
8,00,000
2,10,000
60,000
60,000
40,000
11,70,000 |
6,00,000
1,90,000
36,000
10,000
8,36,000 |
4,00,000
1,28,000
34,000
5,62,000 |
| X Ltd. Rs. | Y Ltd. Rs. | Z Ltd. Rs. | Fixed Assets
Less Depreciation:
Investment At cost
Current Assets |
4,20,000
6,30,000
1,20,000
11,70,000 |
3,76,000
4,00,000
60,000
8,86,000 |
5,22,000
—
40,000
5,62,000 |
All the companies pay dividends of 12 percent of paid–up Share Capital in March following the end of the accounting year. The receiving companies account for the dividends in their books when they are received. ’X’ Limited acquired 50,000 equity shares of Y Ltd. on 31st December, 2004. ’Y’ Limited acquired 30,000 equity shares of Z Ltd. on 31st December, 2005. The detailed information of Profit and Loss Accounts is as follows: | X Ltd. Rs. | Y Ltd. Rs. | Z Ltd. Rs. | Balance of Profit and Loss Account on
31st December, 2004 after dividends of 12%
in respect of Calendar year 2004, but
excluding Dividends received
Net profit earned in 2005
Less — Dividends of 12% (Received in 2006)
| 86,000
1,20,000
2,06,000
96,000
1,10,000 | 78,000
84,000
1,62,000
72,000
90,000 | 60,000
56,000
1,16,000
48,000
68,000 | Net Profit earned in 2006 (Before taking
into account proposed Dividends of 12% in
respect of Calendar year 2006)
| 1,00,000
2,10,000 | 1,00,000
1,90,000 | 60,000
1,28,000 |
Taking into account the transactions from 2004 to 2006 and ignoring taxation, you are required to prepare: | (i) | The consolidated Balance Sheet of X Limited group as at 31st December, 2006. | | (ii) | The consolidated Profit and Loss Account for the year ending 31st December 2006. | | (iii) | Cost of control | | (iv) | Minority shareholders interest. |
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| 2. | The following are the Balance Sheets (as at 31.3.2006) of A Ltd. and B Ltd: | Liabilities | X Ltd. Rs. | Y Ltd. Rs. | Assets | X Ltd. Rs. | Y Ltd. Rs. | Share Capital:
Equity Shares of Rs. 10 each
10% Preference shares of
Rs. 100 each
12% Preference shares of
Rs. 100 each
Reserve and Surplus:
Statutory Reserve
General Reserve
Secured Loan
15% Debentures
12% Debentures
Current Liabilities
Sundry creditors
Bills payable |
36,00,000
12,00,000
—
1,00,000
25,00,000
5,00,000
—
10,80,000
20,000
90,00,000 |
18,00,000
—
6,00,000
1,00,000
17,00,000
—
5,00,000
12,80,000
20,000
60,00,000 | Fixed assets
Investment
Current Assets
Stock
Debentures
Bills receivable
Cash at Bank | 50,00,000
5,00,000
18,00,000
15,00,000
50,000
1,50,000
90,00,000 | 30,00,000
5,00,000
12,00,000
12,00,000
10,000
90,000
60,00,000 |
Contingent liabilities for bills receivable discounted Rs. 20,000 | (A) | The following additional information is provided to you: | A Ltd.
Rs. | B Ltd.
Rs. | Profit before Interest and Tax
Rate of Income–tax
Preference dividend
Equity dividend | 14,75,000
40%
1,20,000
3,60,000 | 7,80,000
40%
72,000
2,70,000 |
| | (B) | The equity shares of both the companies are quoted on the Mumbai Stock Exchange. Both the companies are carrying on similar manufacturing operations. | | (C) | A Ltd. proposes to absorb B Ltd. as at the end of business on 31.3.2006. The agreed terms for absorption are: | (i) | 12% Preference shareholders of B Ltd. will receive 10% Preference shares of A Ltd. sufficient to increase their present income by 20%. | | (ii) | The Equity shareholders of B Ltd. will receive equity shares of A Ltd. on the following terms: | (a) | The Equity shares of B Ltd. will be valued by applying to the earnings per share of B Ltd. 60 per cent of price earnings ratio of A Ltd. based on the results of 2005–06 of both the Companies. | | (b) | The market price of Equity shares of A Ltd. is Rs. 40 per share. | | (c) | The number of shares to be issued to Equity shareholders of B Ltd. will be based on the 80% of market price. | | (d) | In addition to Equity shares, 10% Preference shares of A Ltd. will be issued to the equity shareholders of B Ltd. to make up for the loss in income arising from the above exchange of shares based on the dividends for the year 2005–2006. |
| | (iii) | 12% Debenture holders of B Ltd. are to be paid at 8% premium by 15% debentures in A Ltd. issued at a discount of 10%. | | (iv) | Rs. 16,000 is to be paid by A Ltd. to B Ltd. for liquidation expenses. Sundry Creditors of B Ltd. include Rs. 20,000 due to A Ltd. Bills receivable discounted by A Ltd. were all accepted by B Ltd. | | (v) | Fixed assets of both the companies are to be revalued at 20% above book value. Stock–in trade is taken over at 10% less than their book value. | | (vi) | Statutory reserve has to be maintained for two more years. | | (vii) | For the next two years, no increase in the rate of equity dividend is anticipated. | | (viii) | Liquidation expenses is to be considered as part of purchase consideration. | | You are required to: | | (i) | Find out the purchase consideration. | | (ii) | Give journal entries in the books of A Ltd. | | (iii) | Give the Balance Sheet as at 31.3.2006 after absorption. |
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| 3. | The following is the Balance Sheet (as at 31st December, 2006) of Sun Ltd: | Liabilities | Rs. | Assets | Rs. | Share Capital:
80,000 Equity shares of
Rs. 10 each fully paid up
50,000 Equity shares of
Rs. 10 each Rs. 8 paid up
36,000 Equity shares of
Rs. 5 each fully paid up
30,000 Equity shares of
Rs. 5 each Rs. 4 paid–up
3,000 10% Preference shares
of Rs. 100 each fully paid
Reserve and Surplus:
General reserve
Profit and Loss account
Secured Loan : 12% debenture
Unsecured loan : 15% term loan
Deposits
Current Liabilities
Bank Loan
Creditors
Outstanding expenses
Provision for tax
Proposed Dividend:
Equity
Preference |
8,00,000
4,00,000
1,80,000
1,20,000
3,00,000
1,40,000
2,10,000
2,00,000
1,50,000
1,00,000
50,000
1,50,000
20,000
2,00,000
1,50,000
30,000 | Fixed Assets
Goodwill
Plant and Machinery
Land and Building
Furniture and Fixtures
Vehicles
Investments
Current Assets
Stock
Debtors
Prepaid Expenses
Advances
Cash and Bank balance
Preliminary Expenses |
1,00,000
8,00,000
10,00,000
1,00,000
2,00,000
3,00,000
2,10,000
1,95,000
40,000
45,000
2,00,000
10,000 | | 32,00,000 | | 32,00,000 |
Additional Information: | (1) | In 2004 a new machinery costing Rs. 50,000 was purchased, but wrongly charged to revenue (no rectification has yet been made for the same). | | (2) | Stock is overvalued by Rs. 10,000 in 2005. Debtors are to be reduced by Rs. 5,000 in 2006, some old furniture (Book value Rs. 10,000) was disposed of for Rs. 6,000. | | (3) | Fixed assets are worth 5 per cent more than their actual book value. Depreciation on appreciated value of Fixed assets except machinery is not to be considered for valuation of goodwill. | | (4) | Of the investment 20 per cent is trading and the balance is non-trading. All trade investments are to be valued at 20 per cent below cost. Trade investment were purchased on 1st January, 2006. 50 percent of the non–trade investments were acquired on 1st January, 2005 and the rest on 1st January, 2004. A uniform rate of dividend of 10 percent is earned on all investments. | | (5) | Expected increase in expenditure without commensurate increase in selling price is Rs. 20,000 | | (6) | Research and Development expenses anticipated in future Rs. 30,000 per annum. | | (7) | In a similar business a normal return on capital employed is 10% | | (8) | Profit (after tax) are as follows: In 2004 – Rs. 2,10,000, in 2005 – Rs. 1,90,000 and in 2006 – Rs. 2,00,000. | | (9) | Current income tax rate is 50%, expected income tax rate will be 40%. | | From the above, ascertain the ex–dividend and cum–dividend intrinsic value for different categories of Equity shares. For this purpose goodwill may be taken as 3 years purchase of superprofits. Depreciation is charged on machinery @ 10% on reducing system. |
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| 4. | (a) | A buyer buys a stock option of New Light Company Limited on 30th August, 2006 with a strike price of Rs. 150 per unit to be expired on September 30, 2006. The premium is Rs. 10 per unit and the market lot is of 100. The margin to be paid is Rs. 60 per unit. Show, how the transactions will appear in the books of the seller, when: | (i) | The option is settled by deliver of the Asset, and | | (ii) | The option is settled in cash and the Index price is Rs. 160 per unit. |
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| | (b) | When the general price index, was 100, Expert Ltd. purchased Fixed assets of Rs. 2 crore and it had also permanent Working capital of Rs. 80 lakhs. The entire amount required for purchase of the Fixed Assets and permanent Working capital was raised by way of 12% redeemable preference share capital. Expert Ltd. wants to maintain its physical capital. On 31st March, 2006, the company had reserves of Rs. 3.50 crores. The general price index on that day was 200. The written down value of Fixed assets was Rs. 20 lakhs and they were sold for Rs. 3.00 crores. The proceeds were utilised for redemption of the Preference shares. On the same day (31st March, 2006), the Company purchased a new factory for Rs. 20 crores. The ratio of permanent working capital to cost of Assets is to be maintained at 0.4 : 1. The company raised the additional funds required for the purpose by issue of Equity shares: (1) Calculate the amount of Equity capital raised, and (2) Show the Balance Sheet as at 1.4.2006. | 8 | (0) |
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| 5. | (a) | During the course of the last three years, a company owning and operating Helicopters lost four Helicopters. The company Accountant felt that after the crash, the maintenance provision created in respect of the respective helicopters was no longer required, and proposed to write back to the Profit and Loss account as a prior period item. Is the Company’s proposed accounting treatment correct? Discuss. | 4 | (0) |
| | (b) | Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building a flyover. As per the contract terms, ‘X’ will receive an additional Rs. 2 crore if the construction of the flyover were to be finished within to recognize this revenue since in the past he has been able to meet similar targets very easily. Is X correct in his proposal? Discuss. | 4 | (0) |
| | (c) | A Company is in the process of setting up a production line for manufacturing a new product. Based on trial runs conducted by the company. It was noticed that the production lines output was not of the desired quality. However company has taken a decision to manufacture and sell the sub–standard product over the next one year due to the huge investment involved.
In the background of the relevant accounting standard, advise the company on the cut–off date for capitalisation of the project cost. | 4 | (0) |
| | (d) | A Company has an inter–segment transfer pricing policy of charging at cost less 10%. The market prices are generally 25% above cost. Is the policy adopted by the company correct? | 4 | (0) |
| 6. | Write short notes on any five of the following: | 4x5=20 | |
| | (a) | Capital adequacy requirements of merchant bankers. | | (0) |
| | (b) | Interest rate swaps. | | (0) |
| | (c) | Major issues in environmental accounting. | | (0) |
| | (d) | Impairment of asset and its application to Inventory. | | (0) |
| | (e) | Treatment of borrowing costs. | | (0) |
| | (f) | Accounting for investment by a holding company in subsidiaries. | | (0) |
