CA Final - Group I : Financial Reporting - May2012

CA Final - Group I • Financial Reporting • May 2012

This Paper has 16 answerable questions with 5 answered.

Roll No………
Total No. of Questions — 7	Total No. of Printed Pages — 12
Time Allowed : 3 Hours	Maximum Marks : 100

Answers to questions are to be given only in English except in the case of candidates who have opted
for Hindi Medium. Answers in Hindi of any candidate who has not opted for Hindi Medium shall
not be valued.

Question No. 1 is compulsory.

Candidates are also required to answer any five questions from the remaining six questions.

Wherever necessary suitable assumptions may be made and disclosed by way of a note.

Working notes should form part of the answers.

Marks

(a)

Sun Co–operative Society Ltd has borrowed a sum of US $12.50 million at the commencement of the financial year 2011–12 for its solar energy project at LIBOR (London Interbank offered rate of 1%) + 4%. The interest is payable at the end of the respective financial year. The loan was availed at the then rate of Rs.45 to the US dollar while the rate as on 31^st March, 2012 is Rs.48 to the US dollar. Had Sun Co–operative Society Ltd borrowed the Rupee equivalent in India, the interest would have been 11%. You are required to compute ‘Borrowing Cost’ also showing the amount of exchange difference as per prevailing Accounting Standards.

4x5=20

(1)

(b)

Acute Ltd is the owner of a CGU (Cash Generating Unit)block of assets whose current carrying cost is Rs. 999 lakhs. The company, after a detailed study by its technical team, has assessed the present recoverable amount of this CGU block of assets at Rs. 555 lakhs. The value of the block of assets as per the Income tax Records is Rs. 777 lakhs. The Board of Directors of the company have issued a signed statement confirming that the impairment in the value of the CGU is only a temporary phenomenon which is reversible in subsequent periods and also assuring virtual certainty of taxable incomes in the foreseeable future. You are required to show Deferred Tax workings as per Accounting Standards in force, given the tax rate of 30% plus 10% surcharge thereon. The depreciation rate for tax purposes is 15% and that per books is 13.91%.

(1)

(c)

PRZ & Sons Ltd. are Heavy Engineering contractors specializing in construction of dams. From the records of the company, the following data is available pertaining to year ended 31^st March, 2012. Using this data and applying the relevant Accounting Standard you are required to :

(i)	Compute the amount of profit/loss for year ended 31^st March, 2012.

(ii)	Arrive at the contract work in progress as at the end of financial year 2011–12.

(iii)

Determine the amount of revenue to be recognized out of the total contract value.

(iv)	Work out the amount due from/to customers as at year end.

(v)	List down relevant disclosures with figures as per relevant Accounting Standard.

	(Rs. Crore)
Total Contact Price Work Certified Work pending certification Estimated further cost to completion Stage wise payments received Progress payments in pipe line	2,400 1,250 250 1,750 1,100 300

(1)

(d)

On 30–6–2011, X Limited incurred Rs. 3,00,000 net loss from disposal of a business segment. Also on 31–7–2011, the company paid Rs. 80,000 for Property taxes assessed for the calendar year 2011. How should the above transactions be included in determination of net income of X Limited for the six months interim period ended on 30–9–2011 ?

(1)

The Balance Sheets of A Limited and its subsidiaries B Limited and C Limited as on 31–3–2011 were as follows :

			Rs. in lakhs
	A Rs.	B Rs.	C Rs.
Investments: 1,00,000 shares in B Ltd. 80,000 shares in C Ltd. Other Assets	100 200 700	– – 600	– – 500
	1,000	600	500
Share Capital: Shares of Rs. 100 each Reserves and Surplus Liabilities	400 400 200	100 300 200	100 200 200
	1,000	600	500

A Limited acquired shares in B Limited in April 2008 when B Limited was formed with Share Capital of Rs. 100 lakhs.

A Limited acquired shares in C Limited in April 2008 when C Ltd. had share Capital of Rs.100 lakhs and Reserves and surplus of Rs.100 lakhs.

The group amortises goodwill on consolidation on a SLM basis over a period of 5 years. A full year’s amortisation is provided if the goodwill exists for more than 6 months.

On 1^st April, 2011 A Limited sold 40000 shares of C Limited for cash consideration of Rs. 150 lakhs. The Balance sheets of the companies for the year 2011–12 were as follows:

(1)	Balancesheet as on 31–3–2012
				Rs. in lakhs
		A Rs.	B Rs.	C Rs.
	Investments at cost: 1,00,000 shares in B Ltd. 40,000 shares in C Ltd. Other Assets	100 100 1,000	– – 800	– – 700
		1,200	800	700
	Share Capital: Reserves and Surplus Liabilities	400 550 250	100 420 280	100 280 320
		1,200	800	700

(2)	Profit and Loss A/c for the year ended 31–3–2012
				Rs. in lakhs
		A Rs.	B Rs.	C Rs.
	Profit before tax Tax Profit after tax Extraordinary items Profit after tax Reserves & Surplus – Beginning Reserves & Surplus – End	150 50 100 50 150 400 550	180 60 120 – 120 300 420	120 40 80 – 80 200 280

Prepare for A Limited, group Balance Sheets as on 31–3–2011 and as on 31–3–2012.

(1)

The Shareholders of Sunrise Ltd decided on a corporate restructuring exercise necessitated due to economic recession and a slump in business. From the audited statements as on 31–03–2010 and the information supplied, you are requested to prepare:

(i)	Balance Sheet after the completion of the restructuring exercise,
(ii)	The capital reduction account,
(iii)	The cash account of the entity.

Balance Sheet of Sunrise Ltd as on 31–03–2010
Liabilities	Rs.	Assets	Rs.
Share Capital 30,000 Equity shares (Rs. 10 each) 40,000 8% Cumulative Preference Shares (Rs. 10 each) Reserve and Surplus Share Premium Account Profit and Loss Account Secured Borrowings: 9% Debentures (Rs. 100)1,20,000 Accrued Interest5,400 Current Liabilities Creditors Deferred Vat Payable Temporary Bank Overdraft	3,00,000 4,00,000 10,000 (1,38,400) 1,25,400 1,20,000 50,000 2,23,100	Fixed Assets Trade Marks and Patents Goodwill at cost Freehold Land Freehold Premises Plant and Equipment Investment (Marked to Market) Current Assets Inventories: Raw materials and packing materials60,000 Finished goods16,000 Trade receivables	1,10,000 36,100 1,20,000 2,44,000 3,20,000 64,000 76,000 1,20,000
	10,90,100		10,90,100

Note: Preference dividends are in arrears for 4 years.
The scheme of reconstruction that received the permission of the Court was on the following lines:

(1)	The Authorized capital of the Company to be re–fixed at Rs. 10 Lakhs (preference Capital Rs. 3 Lakhs and Equity Capital Rs. 7 Lakhs both Rs. 10/- shares each).
(2)	The Preference shares are to be reduced to Rs.5 each and equity share reduced by Rs. 3 per share. Post reduction, both classes of shares to be re–consolidated into Rs. 10 shares.
(3)	Trade Investments are to be liquidated in open market.
(4)	One fresh equity share of Rs. 10 to be issued for every Rs. 40 of preference dividends in arrears (ignore taxation).
(5)	The Share Premium is to be fully utilized to meet the reconstruction programme.
(6)	The debenture holders took over freehold land at Rs. 2,10,000 and settled the balance after adjusting their dues.
(7)	Unprovided contingent Liabilities were settled at Rs. 54,000 and a pending insurance claim receivable settled at Rs. 12,500 on condition that claim will be immediately settled.
(8)	The Intangible assets were all to be written off along with Rs. 10,000 worth obsolete packing material and 10% of the receivables.
(9)	Expenses for the Scheme were Rs. 10,000.
(10)	Remaining cash available as a result of the above transactions is to be utilised to payoff the bank overdraft to that extent.
(11)	The Equity shareholders agree that they will bring in cash to liquidate the balance outstanding on the overdraft account and also agree that sufficient funds will be bought in to bring up the net working capital, after completing the re–structuring exercise, to Rs. 2 Lakhs. The Equity Shares will be issued at par for this purpose.

(0)

The following was the abrided Balance Sheet of X Co. Ltd, as at 31^st March, 2012.

Liabilities	Rs.	Assets	Rs.
Capital: Authorised : 10,000 equity shares of Rs. 100 each Issued and Paid up : 8,000 equity shares of Rs.100 each, fully paid up Reserve and Surplus : General Reserve5,00,000 Share premium4,00,000 Profit and Loss3,60,000 11% Debentures secured against the assets of the Co. Sundry Creditors	10,00,000 8,00,000 12,60,000 5,00,000 4,00,000	Plant and Machinery at depreciated value Land CurrentAssets Patents, trade marks and copyrights	8,60,000 7,00,000 8,00,000 6,00,000
	29,60,000		29,60,000

The Company ran two district departments utilizing the trademarks and copyrights owned and generated by it. The assets and liabilities of one of the departments as on the date of Balance Sheet were:

	Rs.
Plant and Machinery Land (used for business) Current assets Trademarks and copyrights Sundry Creditors	4,00,000 2,00,000 2,00,000 3,50,000 11,50,000 2,50,000 9,00,000

Due to managerial constraints, X is unable to develop this department. An overseas buyer is interested to acquire this department and after due diligence, offers a consideration of Rs. 20,00,000 to the company for transfer of business. The buyer offered to discharge the purchase consideration immediately after 31^st March, 2012, in the following manner:

(i)

Issue of equity shares of the buyer’s company for Rs.10,00,000 at a premium of 20% over the face value; and

(ii)

Payment of the balance consideration in £ sterling. The exchange rate agreed upon is Rs. 80 per £ sterling. This amount will be retained in London, till the actual take over of the business is done by the buyer.

(a)	expenses to put through the transaction come to Rs. 8,00,000 initially to be incurred by X but to be shared equally by the parties.
(b)	the balance value of trademarks, copyrights and patents left with X does not enjoy any market value and has to be written off
(c)	the value of the balance of land in X’s possession will be taken at its market value in the books of accounts. Such a value, determined by an approved valuer, is 200 percent of the book value.
(d)	the parties agree that the date of legal ownership of the transferred business shall be 31^st March,2012, though certain formalities may have to be gone through and agree that the actual transfer to the buyer will be effected before 30^th April, 2012 X Co. Ltd to carry on the business in the normal course and account for the profits of the transferred department to the foreign buyer. X made a net profit of Rs. 2,40,000 from the whole business for April, 2012; 40 percent of the net profit related to the business of the transferred department
(e)	the shares of the overseas buyer’s company were quoted on the London Stock Exchange and on 30^th April, 2012 were quoted at 95 percent of their face value
(f)	the cash received by X at London was remitted by it to its Indian banking account on 30^th April 2012 when the rupee–sterling rate was Rs. 75 per UK sterling pound.

Draw the Balance Sheet of X Co. Ltd as at 30^th April, 2012, after the transfer of the business to the overseas buyer.

(0)

(a)

As point of staff welfare measures, Y Co. Ltd has contracted to lend to its employees sums of money at 5 percent per annum rate of interest. The amounts lent are to be repaid alongwith the interest in five equal annual instalments. The market rate of interest is 10 percent per annum.
Y lent Rs. 16,00,000 to its employees on 1^st January, 2011.
Following the principles of recognition and measurement as laid down in AS 30, you are required to record the entries for the year ended 31^st December, 2011 for the transaction and also calculate the value of the loan initially to be recognised and the amortised cost for all the subsequent years.
For purposes of calculation, the following discount factors at interest rate of 10 percent may be adopted.
At the end of year

1
2
3
4
5

.909
.827
.751
.683
.620

(0)

(b)

Hindusthan Corporation Limited (BCL) has been consistently preparing Value Added Statement (VAS) as part of Financial Reporting. The Human Resource department of the Company has come up with a new scheme to link employee incentive with ‘Value Added’ as per VAS. As per the scheme an Annual Index of Employee cost to Value Added annual (% of employee cost to Value Added rounded off to nearest whole number) shall be prepared for the last 5 years and the best index out of results of the last 5 years shall be selected as the ‘Target Index’. The Target Index percentage shall be applied to the figure of ‘Value Added’ for a given year and the target employee cost ascertained. Any saving in the actual employee cost for the given year compared to the target employee cost will be rewarded as ‘Variable incentive’ to the extent of 70% of the savings. From the given data, you are requested to ascertain the eligibility of ‘Variable Incentive’ for the year 2011–2012 of the employees ofthe HCL.

Value added statement of HCL for Last 5 years (Rs. lakhs)

Year
Sales
Less:
Bought Out Goods
and Services
Value added

2006–07
3,200

2,100
1,100

2007–08
3,250

2,080
1,170

2008–09
2,900

1,940
960

2009–10
3,800

2,510
1,290

2010–11
4,900

3,200
1,700

Application of Value Added

To Pay Employees
To Providers of Capital
To Government Tax
For Maintenance and expansion

2006–07
520
160
210
210

2007–08
480
170
190
330

2008–09
450
120
220
170

2009–10
600
190
300
200

2010–11
750
210
250
490

Summarized Profit and Loss Account of the HCL for 2011–2012

		(Rs.in lakhs)
Sales Less:		5,970
Material Consumed Wages Production Salaries Production Expenses Production Depreciation Administrative Salaries Administrative Expenses Administrative Depreciation Interest Selling and Distribution Salaries Selling Expenses Selling Depreciation Profit	1,950 400 130 500 150 150 200 100 150 120 350 120	4,320 1,650

(0)

(a)

NRPL (Nuclear Reactors Private Limited) is engaged in the business of design and construction of nuclear reactors that are supplied exclusively to the Atomic Energy Department The core component of such reactors is out sourced by NRPL from FIL (Fusion Industrials Ltd) the sole manufacturer of this item. NRPL wants to gain leadership in this industry and seeks to take over FIL. NRPL estimates that its Goodwill in the industry will increase by a minimum of Rs. 300 crores consequent on the acquisition. NRPL has made the following calculation of the economic benefits presently available and that foreseen as a result of the acquisition.

(i)

Projected Cash Flows of NRPL for the next 5 years:

Year
Cash flow (Rs. in Crores)

1
1,000

2
1,500

3
2,000

4
2,500

5
3,000

(ii)

Projected Cash Flow of FIL for the next 5 years:

Year
Cash flow (Rs. in Crores)

1
400

2
400

3
600

4
800

5
1,000

(iii)

Audited Net worth of FIL

	Rs.
Fixed Assets Investments (Non Trade) Current Assets Total Current Liabilities Net Worth	2,000 1,000 1,000 4,000 1,000 3,000

(iv)

Other Information:

(a)	10% of the Fixed Assets of FIL will not be required in the event of the acquisition and the same has ready buyers for Rs. 100 Crore.
(b)	Current Assets include surplus stocks of Rs. 20 crore that can realise Rs. 30 Crore.
(c)	Investments have a ready market for Rs. 1,500 Crore.
(d)	The Current Liabilities are to be paid off immediately ; Rs. 510 Crores are payable on account of a compensation claim awarded against FIL, which has been treated as a contingent liability in the accounts on which 20 percent was provided for.

(v)

NRPL has estimated the combined cash flows post merger as under:

Year
Cash flow (Rs. in Crores)

1
1,500

2
2,000

3
2,500

4
3,000

5
3,500

You are required to advise NRPL the maximum value it can pay for take over of FIL ; also show the current valuation of FIL as a ‘Stand Alone’ entity. The Discount rate of 15% is advised appropriate, values for which are given below:

Year	P.V.
1 2 3 4 5	0.870 0.756 0.658 0.572 0.497

(0)

(b)

The following information (as of 31–03–2012) is supplied to you by M/s Fox Ltd

			(Rs.. in crore)
(i) (ii) (iii) (iv)	Profit after tax (PAT) Interest Equity Share Capital Accumulated surplus Shareholders fund Loans (Long term) Total long term funds Market capitalization	40.00 700.00 740.00 37.00	205.90 4.85 777.00 2,892.00

Additional information:

(a)
(b)
(c)
(d)

Risk free rate
Long Term MMketRate (Based on BSE Sensex)
Effective tax rate for the company
Beta (β)for last few years

12.00 percent
15.50 percent
25.00 percent

Year
1 2 3 4 5	0.48 0.52 0.60 1.10 0.99

Using the above data you are requested to calculate the Economic Value Added of Fox Limited as on 31^st March,2012.

(0)

Answer any four of the following:

4x4=16

(a)

Bellhop LLC submits the following infonnation pertaining to year 2011. Using the data, you are required to find the ending cash and Bank balances given an opening figure there of was Rs. 1.55 million.

	(Rs. millions)
Additional shares issued CAPEX (Capital expenditure) Proceeds from Assets sold Dividends declared Gains from disposal of Assets Net Income Increase in Accounts Receivable Redemption of 4.5% debentures Depreciation & Amortization	6.50 9.90 1.60 0.50 (1.20) 3.30 1.50 2.50 0.75

(0)

(b)

From the infonnation furnished you are required to compute the Basic and Diluted EPS (earnings per share) for accounting year 01–04–2011 to 31–03–2012 and adjusted EPS for the year 01–04–2010 to 31–03–2011.

Net profit for year ended 31–03–2011
Net profit for year ended 31–03–2012
No. of Equity shares as on 01–04–2011
Bonus issue on 01–01–2012
No. of 12% Convertible Debentures of Rs. 100
each issued on 01–01–2012
Conversion Ratio of Debentures
Tax Rate

Rs. 75,50,000
Rs. 1,00,25,000
50,00,250
1 share for every 2 held
1,00,000

10 shares per debenture
30 percent

(0)

(c)

X Limited was making provisions upto 31–3–2011 for non–moving stocks based on no issues for the last 12 months. Based on a technical evaluation the company wants to make provisions during the year 31–3–2012 in the following manner:

Total value of stock Rs. 3 crores.

Provision required based on 12 months Rs. 8 1akhs

Provision required based on technical evaluation Rs. 7.50 lakhs.

Does this amount to change in accounting policy?

Can the company change the method of provision?

(0)

(d)

X Limitedbegan constructionof a new plant on 1^st April 2011 and obtained a special Loan of Rs. 8 lakhs to finance the construction of the plant. The rate of interest on loan was 10 percent per annum
The expenditurethat was made on the project of plant constructionwas as follows:

		Rs.
1–4–2011 1–8–2011 1–1–2012	— — —	10,00,000 24,00,000 4,00,000

The Company’s other outstanding non specific loan was Rs. 46,00,000 at an interest of 12 percent per annum.
The construction of the plant was completed on 31–3–2012. You are required to calculate the amount of interest to be capitalized as per the provision of AS–16 of the borrowing cost (including cost).

(0)

(e)

X Limited on 1–1–2012 had made an investment of Rs. 600 lakhs in the equity shares of Y limited of which 50% is made in the long term category and the rest as temporary investment. The realisable value of all such investment on 31–3–2012 become Rs. 200 lakhs as X limited lost a case of copy right. How will you recognize the reduction in financial statements for the year ended on 31–3–2012.

(0)

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