CWA ICWA Inter Stage II : Advanced Financial Accounting - December 2005

CWA ICWA Inter - Stage II • Advanced Financial Accounting • December 2005

This Paper has 21 answerable questions with 0 answered.

I—10(AFA) Revised Syllabus
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks.
Attempt Question No. 1 which is compulsory and any five from the rest.
Total six questions are to be answered.
Marks

(a)

What journal entry is made in the holding company’s accounts to record dividends received from a subsidiary pre–acquisition profits?

2x10

(0)

(b)

A company has incurred a net loss during an accounting period, but its net worth (assets—liabilities) has increased. How could this happen?

(0)

(c)

What is the implication of a high price–earnings (P/E) ratio?

(0)

(d)

What are the principal sources of Indian GAAP?

(0)

(e)

Indicate any three areas in respect of which different accounting policies may be adopted by different enterprises.

(0)

(f)

When might an account in the debtors' ledger show a credit balance?

(0)

(g)

What is the objective of 'Accounting Standards'?

(0)

(h)

In accordance with the provisions of the Companies Act it is necessary to group the items appearing in the company's balance sheet under certain headings:
What are these headings?

(0)

(i)

What is the importance of 'Average Clause' in an insurance policy for Loss of Stock?

(0)

(j)

For what purposes contingency reserve may be utilised by an electricity undertaking?

(0)

Cimex Ltd. is in financial difficulties. Its Balance Sheet as on 31 March, 2005 was as follows:

	Rs.		Rs.
Special capital		Fixed assets
Authorised 8% Preference shares of Rs. 10 each Equity shares of Rs. 10 each	14,00,000 14,00,000	Intangibles Land and buildings Plant and machinery	1,00,000 2,00,000 3,00,000
	28,00,000
Issued an subscribed 8% Preference shares of Rs. 10 each, fully paid up Equity shares of Rs. 10 each Rs. 7.5 paid up Securies premium Unsecured creditors—Loan from directors Current liabilities and provisions Sundry creditors	12,00,000 4,50,000 1,50,000 2,00,000 3,00,000	Investments Current assets Stocks Debtors Bank Miscellaneous expenditure Profit and loss account (Dr.)	1,00,000 3,00,000 2,50,000 50,000 10,00,000
	23,00,000		23,00,000

Note: Preference dividend is in arrear for three years. The following scheme of reorganisation has been prepared and duly sanctioned:

(1)

the unpaid capital in respect of the equity shares are to be called up.

(2)

The equity shares are to be split into shares of Re. 1 each. The equity shareholders are to surrender 80% of their holdings after the split.

(3)

Arrear preference dividends are to be cancelled.

(4)

The preference shareholders are to surrender their holdings and the surrendered shares are to be cancelled.

(5)

For every 20 surrendered preference shares, the shareholders are to receive:

(i)	1(one) 10% debentures of Rs. 100 each; and
(ii)	30 fully paid equity shares of Re. 1 each (out of those surrendered by the equity shareholders).

(6)

The unutilised surrendered equity shares are to be cancelled.

(7)

The directors are to forego 50% of the amount advanced to the company by way of unsecured loan.

(8)

Tangible fixed assets are to be revalued at:

Land and buildings
Plant and machinery

Rs.

3,00,000
2,50,000

(9)

Investments are to be sold at the current market value of Rs. 90,000.

(10)

The profit and loss account debit balance is to be eliminated.

(11)

If any surplus is available, that is to be utilised towards reducing the carrying amount of intangibles.

(12)

The securities premium account is to be kept intact.

(13)

The amount of authorised capital is to remain unchanged.

The scheme is to take effect from 1 April, 2005. Draft the journal entries to give effect to the above and prepare the Balance Sheet after reconstruction. Narrations are not required. Show necessary workings.

(0)

(a)

Explain the meanings of "free reserves" in the context of buy back of shares. State the adjustments that should be made to arrive at the net amount available for the purpose for the buy back.

3+3+6+4

(0)

(b)

The Balance Sheet of BXT Ltd. as on 31^st March, 2005 was as follows:

	Rs./lakh		Rs./lakh
Special capital		Fixed assets
Equity shares of Rs. 10 each, fully paid Reserves and surplus General reserve Securities premium Profit and loss account Secured loan 10% debentures Unsecured loan Term loan Current liabilities and provisions Trade creditors Accruals	20.00 7.00 5.00 8.00 6.00 4.00 5.00 2.50	Land and buildings Plant and machinery Investments Corporate securities Current assets Stock Debtors Cash and Bank	15.50 9.00 4.00 7.00 10.00 12.00
	57.50		57.50

The company has decided to buy back the maximum number of equity shares premissible under the law and has completed the necessary formalities in this respect. The buy back is to take place at a price of Rs. 20 per share.

Pass the necessary journal entries and prepare the post buy back Balance Sheet.

(0)

Modern City School is a privately run educational institution. Its Balance Sheet as on 31^st March, 2004 was as follows:

	Rs.		Rs.
Capital fund Development fund Special donation fund General fund Employee super annuation fund Outstanding salaries (March, 2005) Teaching staff Non-teaching staff Outstanding electricity	20,00,000 10,00,000 6,00,000 6,50,000 5,00,000 1,50,000 80,000 20,000	Land School buildings School bus Furniture Laboratory equipment Science lab Computer lab Library books Investments in Govt. securities Tuition fee outstanding Cash and Bank	8,00,000 15,00,000 8,00,000 2,00,000 50,000 2,00,000 2,50,000 8,00,000 60,000 3,40,000
	50,00,000		50,00,000

Receipts and payment account for the year ended 31^st March, 2005
	Rs.		Rs.
Opening balance Admission fee Tuition fee Contribution to special donation funds (from ex-students) Interest on investment	3,40,000 9,00,000 80,00,000 3,00,000 75,000	Salaries Teaching staff Non-teaching staff Purchase of library books Purchase of science lab equipment Purchase of computers Construction of new school buildings Purchase of school bus Purchase of Govt. securities Education tour expenses Annual function Building maintenance expenses Purchase of new furniture Electricity Printing, postage stationery and other expenses Closing balance	58,00,000 10,00,000 1,00,000 50,000 60,000 4,00,000 6,00,000 5,00,000 1,50,000 1,00,000 1,50,000 60,000 80,000 1,40,000 4,25,000
	96,15,000		96,15,000

The following further information is available:

(1)	Interest accrued but not received	Rs. 10,000
(2)	The school has decided to charge depreciation as follows:
	School buildings (excluding new construction)	5%
	School furniture (excluding new additions)	10%
	School furniture (excluding new additions)
	Lab equipment Science lab (old & new) Computer lab (old & new) School bus (excluding the one newly acquired during the year) Library books (old & new)	8% 20% 15% 10%
(3)	Amount to be contributed to employee superannuation fund during the year	Rs. 1,50,000
(4)	Outstanding expenses at the end of the year: Staff salaries Teaching staff Non-teaching staff Telephone bill	Rs. 80,000 Rs. 20,000 Rs. 2,000
(5) (6)	Building contractor's bill outstanding as on 31^st March, 2005 Tuition fee receivable as on 31^st March, 2005	Rs. 70,000 Rs. 50,000
(7)	Admission fee includes Rs. 2,50,000 representing collection towards development fund.

You are required to prepare

an income and expenditure account for the year ended 31st March, 2005 and a Balance Sheet as on that date.

8+8

(0)

The Balance Sheet of Small Ltd. as on 31^st March, 2005 was as under:

(Rupees in lakhs)
Liabilities			Assets
Share capital In Equity shares of Rs. 100 each General reserve Profit and loss A/c Balance B/F Profit for the year Trade Creditors	1.20 0.60	6.00 3.00 1.80 1.20	Land and building Machinery balance B/F Less: Depreciation for the year Stock at cost Debtors Cash and Bank balance Preliminary expenses	3.50 0.50	4.00 3.00 2.00 1.50 1.00 0.50
		12.00			12.00

Big Ltd. purchased 4000 Equity shares of Rs. 100 each on 1st October, 2004 on which date it was found that Land and Buildings were under valued by Rs. 1 lakh and machinery was worth only Rs. 2.75 lakhs. In preparing the consolidated Balance Sheet of holding company, it was decided to adopt proper values of Assets, and write off preliminary expenses. On the above information given,

Ascertain:

(a)	Capital Profits

(b)	Revenue Profits

(c)	Minority interest

8+4+4

(0)

A Trader keeps his books under Single Entry system. On 31^st March, 2004 his statement of affairs stood as follows: `

Liabilities		Assets
	Rs.		Rs.
Capital account Trade creditors Bills payable Outstanding Expenses	3,00,000 5,80,000 1,25,000 45,000	Fixed assets Stock Trade debtors Bills receivable Un-expired insurance Cash in hand and at Bank	1,50,000 6,10,000 1,48,000 60,000 2,000 80,000
	10,50,000		10,50,000

The following was the summary of Cash Book for the year ended 31^st March, 2005:

Receipts		Payments
	Rs.		Rs.
Cash in hand and at Bank On 1st April, 2004 Cash sales Receipts from Trade Debtors Receipts for Bills Receivable	80,000 73,80,000 15,10,000 3,40,000	Payment to Trade creditors Payments for Bills payable Sundry expenses paid Drawings Cash in hand and at Bank	75,07,000 8,15,000 6,20,700 2,40,000 1,27,300
	93,10,000		93,10,000

Discount allowed to Trade debtors and Received from Trade creditors amounted to Rs. 36,000 and Rs. 28,000 respectively. Bills endorsed to Rs. 15,000. Annual Fire Insurance premium of Rs. 6,000 was paid every year on 1st August for the Renewal of the policy. Fixed assets were subject to depreciation @ 10% per annum on diminishing balance method.

You are also informed about the following balance as on 31^st March, 2005:

	Rs.
Stock Trade debtors Bills receivable Outstanding expenses	6,50,000 1,52,000 1,40,000 5,000

The Trader maintains a steady Gross Profit Ratio of 10% on sale.
Prepare Trading and Profit & Loss Account for the year ended 31^st March, 2005 and Balance Sheet as at that date.

(0)

On 1.4.2004 Ramen had 25,000 equity shares of 'X' Ltd. at a book value of Rs. 15 per share (face value Rs. 10).
On 20.6.2004, he purchased another 5000 shares of the company at Rs. 16 per share. The Directors of 'X' Ltd. announced a Bonus and rights issue. No dividend was payable on these issues. The terms of the issue are as follows: Bonus basis 1:6 (date 16-8-2004)
Rights basis 3:7 (date 31-8-2004) price Rs. 15 per share
Due date for payment 30-9-2004. Shareholders can transfer their rights in full or in part. Accordingly Ramen sold 331/3% of his entitlement to Rupen for a consideration of Rs. 2 per share. Dividends: Dividends for the year ended 31-3-04 at the rate of 20% were declared by X Ltd. and received by Ramen on 31-10-04. Dividend for shares acquired by him on 20-6-04 are to be adjusted against the cost of purchase.
On 15-11-04 Ramen sold 25000 equity shares at a premium of Rs. 5 per share.
You are required to prepare in the books of Ramen:
(1) Investment Account
(2) Profit & Loss Account
For your exercise, assume that the books are closed on 31-12-04 and shares are valued at average cost.

(0)

Write Short notes on the following:-

4x4=16

(a)

The application of double entry principle in Government accounts;

(0)

(b)

Accounting for commercial undertakings run by Government departments;

(0)

(c)

Contingency Funds; and

(0)

(d)

Indian Audit and Accounts Department.

(0)

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