CA Final - Group I : Financial Reporting - May 2010

CA Final - Group I • Financial Reporting • May 2010

This Paper has 11 answerable questions with 0 answered.

Roll No………
Total No. of Questions — 6]	[Total No. of Printed Pages — 4
Time Allowed : 3 Hours	Maximum Marks : 100

Answer all questions.

Working notes should form part of the answer.

Wherever necessary, suitable assumptions may be made by the candidates.

Marks

(a)

Mr. A bought a forward contract for three months of US $ 1,00,000 on 1st December at 1 US $ = Rs.47.10 when exchange rate was US $ 1 = Rs.47.02. On 31st December when he closed his books, exchange rate was US $ 1 = Rs.47.15. On 31^st January, he decided to sell the contract at Rs.47.18 per dollar. Show how the profits from contract will be recognised in the books.

4x5=20

(0)

(b)

Sun Ltd. has entered into a sale contract of Rs.5 crores with X Ltd. during 2009-10 financial year. The profit on this transaction is Rs.1 crore. The delivery of goods to take place during the first month of 2010-11 financial year. In case of failure of Sun Ltd. to deliver within the schedule, a compensation of Rs.1.5 crores is to be paid to X Ltd. Sun Ltd. planned to manufacture the goods during the last month of 2009-10 financial year. As on balance sheet date (31.3.2010), the goods were not manufactured and it was unlikely that Sun Ltd. will be in a position to meet the contractual obligation.

(i)	Should Sun Ltd. provide for contingency as per AS 29?
(ii)	Should provision be measured as the excess of compensation to be paid over the profit?

(0)

(c)

Rainbow Limited borrowed an amount of Rs.150 crores on 1.4.2009 for construction of boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. The weighted average cost of capital is 13% p.a. The accountant of Rainbow Ltd., capitalised interest of Rs.19.50 crores for the accounting period ending on 31.3.2010. Due to surplus fund out of Rs.150 crores, an income of Rs.3.50 crores was earned and credited to profit and loss account. Comment on the above treatment of accountant with reference to relevant accounting standard.

(0)

(d)

Y Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs.200 lakhs and Rs.400 lakhs respectively. From the third year it is expected that the timing difference would reverse each year by Rs.10 lakhs. Assuming tax rate of 40%, find out the deferred tax liability at the end of the second year and any charge to the Profit and Loss account.

(0)

(a)

While closing its books of account as on 31.12.2009 a non-banking finance company (NBFC) has its advances classified as under:

	Rs. in lakhs
Standard assets Sub-standard assets Secured portion of doubtful debts –Upto one year –One year to three year –More than three years Unsecured portion of doubtful debts Loss assets	10,000 1,000 160 70 20 90 30

Calculate the provision to be made against advances by NBFC as per prudential norms.

4+12=16

(0)

(b)

Comforts Ltd. granted Rs.10,00,000 loan to its employees on January 1, 2009 at a concessional interest rate of 4% per annum. Loan is to be repaid in five equal annual installments along with interest. Market rate of interest for such loan is 10% per annum. Following the principles of recognition and measurement as laid down in AS 30 ‘Financial Instruments : Recognition and Measurement’, record the entries for the year ended 31^st December, 2009 for the loan transaction, and also calculate the value of loan initially to be recognised and amortised cost for all the subsequent years. The present value of Re.1 receivable at the end of each year based on discount factor of 10% can be taken as:

Year end

1
2
3
4
5

0.9090
0.8263
0.7512
0.6829
0.6208

(0)

The draft Balance Sheet of three companies, W, H, O, as at 31.3.2010 is as under:

	Rs. in thousands
Assets Fixed assets Investments 1,60,000 shares in H 80,000 shares in O Cash at bank Trade receivables Inventory Total Liabilities Share capital (Nominal value Re.1 per share) Reserves Trade payables Debentures Total	W 697 562 184 101 386 495 2,425 600 1,050 375 400 2,425	H 648 – – 95 321 389 1,453 200 850 253 150 1,453	O 349 – – 80 251 287 967 200 478 189 100 967

You are given the following information:

(a)

W purchased the shares in H on 13.10.2005 when the balance in reserves was Rs.500 thousands.

(b)

The shares in O were purchased on 11.5.2005 when the balance in reserves was Rs.242 thousands.

(c)

The following dividend have been declared but not accounted for before the accounting year end.

W
H
O

–
–
–

Rs.65 thousands
Rs.30 thousands
Rs.15 thousands

(d)

Included in inventory figure of O is inventory valued at Rs.20 thousands which had been purchased from W at cost plus 25%.

(e)

Goodwill in respect of the acquisition of H has been fully written off.

(f)

On 31.3.2010 H made bonus issue of one share for every share held. This had not been accounted in the balance sheet as on 31.3.2010.

(g)

Included in trade payables of W is Rs.18 thousands to O, which is included in trade receivables of O.

Prepare Consolidated Balance Sheet of W as at 31.3.2010.

(0)

The following are the Balance Sheets of Cat Ltd. and Bat Ltd. as on 31.3.2010:

	(Rs. in thousands)
Liabilities	Cat Ltd.	Cat Ltd.
Share capital: Equity shares of 100 each fully paid up Reserves 10% Debentures Loans from Banks Bank overdrafts Sundry creditors Proposed dividend Total Assets Tangible assets/fixed assets Investments (including investments in Bat Ltd.) Sundry debtors Cash at bank Accumulated loss Total	2,000 800 500 250 – 300 200 4,050 2,700 700 400 250 – 4,050	1,000 – – 450 50 300 – 1,800 850 – 150 – 800 1,800

Bat Ltd. has acquired the business of Cat Ltd. The following scheme of merger was approved:

(i)	Banks agreed to waive off the loan of Rs.60 thousands of Bat Ltd.
(ii)	Bat Ltd. will reduce its shares to Rs.10 per share and then consolidate 10 such shares into one share of Rs.100 each (new share).
(iii)	Shareholders of Cat Ltd. will be given one share (new) of Bat Ltd. in exchange of every share held in Cat Ltd.
(iv)	Proposed dividend of Cat Ltd. will be paid after merger to shareholders of Cat Ltd.
(v)	Sundry creditors of Bat Ltd. includes Rs.100 thousands payable to Cat Ltd.
(vi)	Cat Ltd. will cancel 20% holding in Bat Ltd. as investment, which was held at a cost of Rs.250 thousands.

Pass necessary entries in the books of Bat Ltd. and prepare Balance Sheet after merger.

(0)

The Balance Sheet of D Ltd. on 31^st March, 2009 is as under:

Liabilities	Rs.	Assets	Rs.
1,25,000 shares of Rs.100 each fully paid up Bank overdraft Creditors Provision for taxation Profit and loss account Total	1,25,00,000 46,50,000 52,75,000 12,75,000 53,00,000 2,90,00,000	Goodwill Building Machinery Stock Debtors (all considered good)	10,00,000 80,00,000 70,00,000 80,00,000 50,00,000 2,90,00,000

In 1989, when the company started its activities the paid up capital was the same. The Profit/Loss for the last five years is as follows:

2004–2005: Loss (13,75,000), 2005–2006: Profit Rs.24,55,000, 2006–2007: Profit Rs.29,25,000, 2007–2008: Profit Rs.36,25,000, 2008–2009: Profit Rs.42,50,000.

Income–tax rate so far has been 40% and the above profits have been arrived at on the basis of such tax rate. From 2008–2009, the rate of income–tax should be taken at 45%. 10% dividend in 2005–2006, 2006–2007 and 15% dividend in 2007–2008 and 2008–2009 has been paid. Market price of this share on 31^st March, 2009 is Rs.125. With effect from 1^st April, 2009, the Managing Directors remuneration will be Rs.20,00,000 instead of Rs.15,00,000. The company has secured a contract from which it can earn an additional Rs.10,00,000 per annum for the next five years.

Calculate the value of goodwill at 3 years purchase of super profit. (For calculation of future maintainable profits weighted average is to be taken).

(0)

(a)

From the following information, determine the possible value of brand as per potential earning model:

		Rs. in lakhs
(i) (ii) (iii) (iv) (v) (vi)	Profit After Tax (PAT) Tangible fixed assets Identifiable intangible other than brand Weighted average cost of capital (%) Expected normal return on tangible assets weighted average cost (14%) + normal spread 4% Appropriate capitalisation factor for intangibles	Rs.2,500 Rs.10,000 Rs.1,500 14% 18% 25%

4+12=16

(0)

(b)

Hero Ltd. was registered on 1^st April, 2008. It raised its capital as under:

(i) (ii)	Issued 2,00,000 equity shares at Rs.10 each 12.5% debentures of Rs.100 each	Rs.20,00,000 Rs.2,00,000
This money was invested as under: Equipments (useful life 10 years with nil scrap value) Goods purchased for resale at Rs.200 per unit		Rs.16,00,000 Rs.6,00,000

Goods purchased were entirely sold upto 31^st January, 2009, for Rs.10,00,000. All the sale proceeds were collected except Rs.60,000 as on 31^st March, 2009. Goods sold were replaced at a cost of Rs.7,20,000 at the rate of Rs.240 per unit. Creditors outstanding as on 31.3.2009 was Rs.40,000.

The replaced goods remained entirely in stock on 31.3.09. The replacement cost as at 31.3.09 was considered to be Rs.280 per unit. Replacement cost of equipment was Rs.20,00,000 as at 31.3.09, considering depreciation on straight line basis.

Prepare Profit and Loss account and Balance Sheet on replacement cost (entry value) basis.

(0)

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