CA Final - Group I : Financial Reporting - May 2011

CA Final - Group I • Financial Reporting • May 2011

This Paper has 17 answerable questions with 0 answered.

Roll No………
Total No. of Questions — 7]	[Total No. of Printed Pages — 8
Time Allowed : 3 Hours	Maximum Marks : 100

Question.No. 1 is compulsory.

Attempt any five questions from the remaining six questions.

Working notes should form part of the answer.

Wherever necessary, suitable assumption(s) may be made by the candidates.

Marks

(a)

The fair value of plan assets of Anupam Ltd. was Rs. 2,00,000 in respect of employee benefit pension plan as on 1^st April, 2009. On 30^th September, 2009 the plan paid out benefits of Rs. 25,000 and received inward contributions of Rs. 55,000. On 31^st March, 2010 the fair value of plan assets was Rs. 3,00,000. On 1^st April, 2009 the company made the following estimates, based on its market studies and prevailing prices.

	%
Interest and dividend income (after tax) payable by fund Realized gains on plan assets (after tax) Fund administrative costs Expected rate of return	10.25 3.00 (3.00) 10.25

Calculate the expected and actual returns on plan assets as on 31^st March, 2010, as per AS 15.

4x5=20

(0)

(b)

Certain callable convertible debentures are issued at Rs. 60. The value of similar debentures without call or equity conversion option is Rs. 57. The value of call as determined using Black and Scholes model for option pricing is Rs. 2. Determine values of liability and equity component.

(0)

(c)

HSL Ltd., is manufacturing goods for local sale and exports. As on 31^st March, 2010, it has the following finished stock in the factory warehouse:

(i)	Goods meant for local sales Rs. 100 lakhs (cost Rs. 75 lakhs)
(ii)	Goods meant for exports Rs. 50 lakhs (cost Rs. 20 lakhs)

Excise duty is payable at the rate of 12%. The company’s Managing Director says that excise duty is payable only on clearance of goods and hence not a cost. Please advise HSL using guidance note, if any issued on this, including valuation of stock.

(0)

(d)

Rama Ltd, has provided the following information:

Depreciation as per accounting records
Depreciation as per income tax records
Unamortized preliminary expenses as per tax record

= Rs. 2,00,000
= Rs. 5,00,000
= Rs. 30,000

There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability should be recognized as transition adjustment ? Tax rate 50%.

(0)

The Balance Sheets of three companies Sun Ltd., Moon Ltd. and Light Ltd. as at 31^st March, 2010 are given below:

Liabilities	Sun Ltd. Rs.	Moon Ltd. Rs.	Light Ltd. Rs.	Assets	Sun Ltd. Rs.	Moon Ltd. Rs.	Light Ltd. Rs.
Share Capital (Shares of Rs. 10 each) Reserves Profit and Loss A/c Sundry Creditors Sun Ltd.	1,50,000 50,000 60,000 30,000 —	1,00,000 40,000 50,000 35,000 10,000	60,000 30,000 40,000 25,000 8,000	Fixed Assets Investments (at cost) Shares in: Moon Ltd. Light Ltd. Light Ltd. Stock–in–trade Debtors Due from–– Moon Ltd. Light Ltd. Cash in hand	70,000 90,000 40,000 — 40,000 20,000 12,000 8,000 10,000	1,20,000 — 50,000 30,000 25,000 10,000	1,03,000 — 20,000 30,000 10,000
	2,90,000	2,35,000	1,63,000		2,90,000	2,35,000	1,63,000

(a)

Sun Ltd. held 8,000 shares of Moon Ltd. and 1,800 shares of Light Ltd.

(b)

Moon Ltd. held 3,600 shares of Light Ltd.

(c)

All investments were made on 1^st July, 2009.

(d)

The following balances were there on 1st July, 2009:

	Moon Ltd. Rs.	Light Ltd. Rs.
Reserves Profits and Loss A/c	25,000 20,000	15,000 25,000

(e)

Moon Ltd. invoiced goods to Sun Ltd. for Rs. 4,000 at a cost plus 25% in December, 2009. The closing stock of Sun Ltd. includes such goods valued at Rs. 5,000.

(f)

Light Ltd. sold to Moon Ltd. an equipment costing Rs. 24,000 at a profit of 25% on selling price on 1^st January, 2010. Depreciation at 10% per annum was provided by Moon Ltd. on the equipment.

(g)

Sun Ltd. proposes dividend at 10%.

Prepare the Consolidated Balance Sheet of the group as at 31^st March, 2010. Working should form part of the answer.

(0)

A Ltd. and B Ltd. were amalgamated on and from 1^st April, 2010. A new company C Ltd. was formed to take over the business of the existing companies. The Balance Sheets of A Ltd., and B Ltd., as on 31^st March, 2010 are given below:

				(Rs. in lakhs)
Liabilities	A Ltd.	B Ltd.	Assets	A Ltd.	B Ltd.
Share capital: Equity shares of Rs. 100 each 12% Preference shares of Rs. 100 each Reserves and surplus: Revaluation Reserve General Reserve Investment Allowance Reserve Profit & Loss account Secured Loans: 10% Debentures (Rs. 100 each) Current Liabilities and Provisions:' Sundry Creditors Bills Payable	800 300 150 170 50 50 60 270 150	750 200 100 150 50 30 30 120 70	Fixed Assets: Land and Building Plant and Machinery Investments: Current Assets, Loans and Advances: Stock Sundry Debtors Bills Receivable Cash and Bank	550 350 150 350 250 50 300	400 250 50 250 300 50 200
	2,000	1,500		2,000	1,500

Additional Information:

(1)	10% Debentureholders of A Ltd., and B Ltd., are discharged by C Ltd., issuing such number of its 15% Debentures of Rs. 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 C Ltd., at a price of Rs. 150 per share (face value of Rs. 100).
(3)	C Ltd., will issue 5 equity shares for each equity share of A Ltd. and 4 equity shares for each share of B Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10 per share
(4)	Investment allowance reserve to be maintained for 4 more years.

Prepare the Balance Sheet of C Ltd., as on 1^st April, 2010 after the amalgamation has been carried out on the basis of amalgamation in the nature of purchase.

(0)

(a)

A Ltd., agreed to absorb B Ltd., on 31^st March 2010, whose Balance Sheet stood as follows:

Liabilities	Rs.	Assets	Rs.
Share Capital: 80,000 Equity shares of Rs. 10 each fully paid up Reserves & Surplus: General Reserve Current Liabilities and Provisions : Sundry Creditors	8,00,000 1,00,000 1,00,000	Fixed Assets: Investments Current Assets, Loans and Advances: Stock-in-trade Sundry Debtors	7,00,000 – 1,00,000 2,00,000
	10,00,000		10,00,000

The consideration was agreed to be paid as follows:

(a)

A payment in cash of Rs. 5 per share in B Ltd., and

(b)

The issue of shares of Rs. 10 each in A Ltd. on the basis of 2 equity shares (valued at Rs. 15) and one 10% Cumulative Preference shares (valued at Rs. 10) for every five shares held in B Ltd.

The whole of the share capital consists of shareholdings in exact multiple of five except the followings holdings:

A B C D Other individual	116 76 72 28 8	(each member holding one share each)
	300

It was agreed that A Ltd. will pay in cash for fractional shares equivalent at agreed value of shares in B Ltd., i.e. Rs. 65 for five shares of Rs. 50 paid.
Prepare a statement showing the purchase consideration receivable in shares and cash.

(0)

(b)

The following are the summarized Balance Sheets of two companies, A Ltd., and B Ltd. as on 31–03–2010:

Liabilities	A Ltd. Rs.	B Ltd. Rs.	Assets	A Ltd. Rs.	B Ltd. Rs.
Equity shares of Rs. 10 each Reserves 10% Debentures Creditors	15,00,000 3,00,000 6,00,000 3,00,000	10,00,000 2,00,000 4,00,000 5,00,000	Goodwill Net tangible block Current Assets	2,00,000 17,00,000 8,00,000	1,00,000 14,00,000 6,00,000
	27,00,000	21,00,000		27,00,000	21,00,000

Additional information:

(i)

Assets are to be revalued as follows:

	A Ltd. Rs.	B Ltd. Rs.
Revaluation of Tangible Block Revaluation of Current Assets	21,00,000 10,00,000	12,00,000 4,00,000

(ii)

Average annual profit for three years before
charging debenture interest

4,50,000

3,10,000

(iii)

Goodwill is to be valued at four year’s purchase of average super profits for three years. Average is to be calculated after adjustment of depreciation at 10% on the amount of increase/decrease on revaluation of fixed assets. In the case of B Ltd. a claim of Rs. 10,000, which was omitted, is to be adjusted against its average profit. Income tax is to be ignored.

(iv)

Normal profit on capital employed is to be taken at 15%, capital employed being considered on the basis of revalued amount of tangible assets.

Ascertain the value of goodwill of A Ltd. and B Ltd.

(0)

The Balance Sheet of PNR Limited as on 31–12–2010 is as follows:

(Rs. in lakhs)
Liabilities		Assets
1,00,000 Equity shares of Rs. 10 each fully paid up 1,00,000 Equity shares of Rs. 6 each fully paid–up Reserves & Surplus Liabilities	10 6 4 10	Goodwill Fixed Assets Others Tangible Assets Intangible Assets (Market Value) Miscellaneous expenditure to the extent not written off	5 15 5 3 2
	30		30

Fixed assets are worth Rs. 24 lakhs. Other tangible assets are valued at Rs. 3 lakhs. The company is expected to settle the disputed bonus claim of Rs. 1 lakh, not provided for in the accounts. Goodwill appearing in the Balance Sheet is purchased goodwill. It is considered reasonable to increase the value of goodwill by an amount equal to average of the book value and a valuation made at 3 years’ purchase of average super profit for the last 4 years.
After tax profits and dividend rates were as follows:

Year	PAT (Rs. in lakhs)	Dividend %
2007 2008 2009 2010	3.00 3.50 4.00 4.10	11 12 13 14

Normal expectation in the industry to which the company belongs to is 10%.

Kamalesh holds 20,000 equity shares of Rs. 10 each fully paid up and 10,000 equity shares of Rs. 6 each fully paid up. He wants to sell away his holdings.

(i)	Determine the break-up value and market value of both kinds of shares.
(ii)	What should be the fair value of shares, if controlling interest is being sold?

Note: Make necessary assumptions, wherever required.

(0)

(a)

Prosperous Bank has a criterion that it will give loans to companies that have an "Economic Value Added" greater than zero for the past three years on an average. The bank is considering lending money to a small company that has the economic value characteristics shown below. The data relating to the company is as follows:

(i)	Average operating income after tax equals Rs. 25,00,000 per year for the last three years.
(ii)	Average total assets over the last three years equals Rs. 75,00,000.
(iii)	Weighted average cost of capital appropriate for the company is 10% which is applicable for all three years.
(iv)	The company’s average current liabilities over the last three years are Rs. 15,00,000.

Does the company meet the bank’s criterion for a positive economic value added?

(0)

(b)

Calculate the NAV of a mutual fund from the following information:
On 1–4–2009
Outstanding units 1 crore of Rs. 10 each = Rs. 10 crores (Market Value Rs. 16 crores)
Outstanding liabilities Rs. 5 crores.
Other information:

(i)	20 lakhs units were sold during the year at Rs. 24 per unit.
(ii)	No additional investments were made during the year and as at the year end 50% of the investments held at the beginning of the year were quoted at 80% of book value.
(iii)	10% of the investments have declined permanently 10% below cost.
(iv)	At the year end 31–3–10 outstanding liabilities were Rs. 1 crore.
(v)	Remaining investments were quoted at Rs. 13 crores.

(0)

(c)

A Company has a capital base of Rs. 3 crores and has earned profits of Rs. 33 lakhs. Return on investment of the particular industry to which the company belongs is 12.5%. If the services of a particular executive are acquired by the company, it is expected that the profits will increase by Rs. 7.5 lakhs over and above the target profit. Determine the amount of maximum bid price for that particular executive and the maximum salary that could be offered to him.

	Rs.
Capital base Actual profit Target profit	3,00,00,000 33,00,000 37,50,000

(0)

Answer any four of the following:

4x4=16

(a)

Anil Pharma Ltd. ordered 16,000 kg of certain material at Rs.160 per unit. The purchase price includes excise duty Rs.10 per kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to Rs.1,40,160. Normal transit loss is 2%. The company actually received 15,500 kg and consumed 13,600 kg of material. Compute cost of inventory under AS 2 and amount of abnormal loss.

(0)

(b)

Jain Construction Co. Ltd. undertook a contract on 1st January, 2010 to construct a building for Rs. 80 lakhs. The company found on 31st March, 2010 that it had already spent Rs. 58,50,000 on the construction. Prudent estimate of additional cost for completion was Rs. 31,50,000.

What amount should be charged to revenue and what amount of contract value to be recognized as turnover in the final accounts for the year ended 31st March 2010 as per provisions of AS 7 (revised)?

(0)

(c)

Kumar Ltd., is in engineering industry. The company received an actuarial valuation for the first time for its pension scheme which revealed a surplus of Rs. 6 lakhs. It wants to spread the same over the next 2 years by reducing the annual contribution to Rs. 2 lakhs instead of Rs. 5 lakhs. The average remaining life of the employee is estimated to be 6 years.
You are required to advise the company.

(0)

(d)

An enterprise reports quarterly, estimates an annual income of Rs. 10 lakhs. Assume tax rates on 1st Rs. 5,00,000 at 30% and on the balance income at 40%. The estimated quarterly income are Rs. 75,000, Rs. 2,50,000, Rs. 3,75,000 and Rs. 3,00,000.
Calculate the tax expense to be recognized in each quarter.

(0)

(e)

From the following information determine the possible value of brand under the potential earning model:

	(Rs. in lakhs)
(a) Profit before tax (b) Income tax (c) Tangible Fixed Asset (d) Identifiable Intangible other than brand model (e) Expected return on tangible fixed assets	13.00 3.00 20.00 10.00 6.00

Appropriate capitalization factor for intangibles is 25%.

(0)

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