CA Final - Group I : Financial Reporting - November 2010

CA Final - Group I • Financial Reporting • November 2010

This Paper has 16 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

Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, his answers in Hindi will not be valued.

Q.No. 1 is compulsory.

Attempt any five questions from the remaining six questions.

Working notes should form part of the answer.

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

Marks

(a)

Night Ltd. sells beer to customers; some of the customers consume the beer in the bars run by Night Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company takes possession of these empty bottles. The company has laid down a detailed internal record procedure for accounting for these empty bottles which are sold by the company by calling for tenders. Keeping this in view :

(i)	Decide whether the stock of empty bottles is an asset of the company;
(ii)	If so, whether the stock of empty bottles existing as on the date of Balance Sheet is to be considered as inventories of the company and valued as per AS–2 or to be treated as scrap and shown at realizable value with corresponding credit to ‘Other Income’?

(0)

(b)

AS–4 prescribes that adjustments to assets and liabilities are required for events 5 occurring after the Balance Sheet date that provide additional information materially affecting the determination of the amount relating to conditions existing at the Balance Sheet date–generally called adjusting events. "Proposed Dividend" is shown and adjusted in the Balance Sheet even if it is not an adjusting event as per AS–4 because it is proposed by the Board of Directors of the company after the Balance Sheet date.

Keeping this in view, is it not violation of AS–4 to show proposed dividends as current liabilities and provisions ? Comment.

(0)

(c)

Bright Ltd. acquired 30% of East India Ltd. shares for Rs. 2,00,000 on 01–06–09. By such an acquisition Bright can exercise significant influence over East India Ltd. During the financial year ending on 31–03–09 East India earned profits Rs.80,000 and declared a dividend of Rs.50,000 on 12–08–2009. East India reported earnings of Rs.3,00,000 for the financial year ending on 31–03–10 and declared dividends of Rs. 60,000 on 12–06–2010.
Calculate the carrying amount of investment in :

(i)	Separate financial statement of Bright Ltd. as on 31–03–10;
(ii)	Consolidated financial statement of Bright Ltd., as on 31–03–10;
(iii)	What will be the carrying amount as on 30-6-2010 in consolidated financial statement ?

(0)

(d)

An asset does not meet the requirements of environment laws which have been recently enacted. The asset has to be destroyed as per the law. The asset is carried in the Balance Sheet at the year end at Rs. 6,00,000. The estimated cost of destroying the asset is Rs. 70,000. How is the asset to be accounted for ?

(0)

Softex Ltd. announced a Stock Appreciation Right (SAR) on 01–04–07 for each of its employees. The scheme gives the employees the right to claim cash payment equivalent to an excess of market price of company shares on exercise date over the exercise price of Rs.125 per share in respect of 100 shares, subject to a condition of continuous employment of 3 years. The SAR is exercisable after 31–03–2010 but before 30–06–10.

The fair value of SAR was Rs. 21 in 2007–08, Rs.23 in 2008–09 and Rs. 24 in 2009–10. In 2007–08 the company estimated that 2% of its employees shall leave the company annually this was revised to 3% in 2008–09. Actually 15 employees left the company in 2007–08, 10 left in 2008–09 and 8 left in 2009–10. The SAR therefore actually vested in 492 employees on 30–06–2010 ; when SAR was exercised the intrinsic value was Rs.25 per share.

Show the provision for SAR account by fair value method. Is this provision a liability or equity ?

(0)

Air Ltd., a listed company, entered into an expansion programme on 1^st October, 16 2009. On that date the company purchased from Bag Ltd. its investments in two Private Limited Companies. The purchase was of

(a)

the entire share capital of Cold Ltd.

and

(b)

50% of the share capital of Dry Ltd.

Both the investments were previously owned by Bag Ltd. After acquisition by Air Limited, Dry Ltd. was to be run by Air Ltd. and Bag Ltd. as a jointly controlled entity.

Air Ltd. makes its financial statements upto 30^th September each year. The terms of acquisition were :

Cold Ltd.

The total consideration was based on price earnings ratio (P/E) of 12 applied to the reported profit of Rs. 20 lakhs of Cold Ltd. for the year 30 September, 2009. The consideration was settled by Air Ltd. issuing 8% debentures for Rs. 140 lakhs (at par) and the balance by a new issue of Rs. 1 equity shares, based on its market value of Rs. 2.50 each.

Dry Ltd.

The market value of Dry Ltd. on first October, 2009 was mutually agreed as Rs. 375 lakhs. Air Ltd. satisfied its share of 50% of this amount by issuing 75 lakhs Rs. 1 equity shares (market value Rs. 2.50 Each) to Bag Ltd.

Air Ltd. has not recorded in its books the acquisition of the above investments or the discharge of the consideration.

The summarized statements of financial position of the three entities at 30^th September, 2010 are :

Rs. in Thousands
	Air Ltd.	Cold Ltd.	Dry Ltd.
Assets Tangible Assets Inventories Debtors Cash Total Assets	34,260 9,640 11,200 — 55,100	27,000 7,200 5,060 3,410 42,670	21,060 18,640 4,620 40 44,360
Liabilities Equity capital : Rs. 1 Each Retained earnings Trade and other payables Overdraft Provision for taxes	10,000 20,800 17,120 1,540 5,640 55,100	20,000 15,000 5,270 — 2,400 42,670	25,000 4,500 14,100 — 760 44,360

The following information is relevant,

(a)	The book values of the net assets of Cold Ltd. and Dry Ltd. on the date of acquisition were considered to be a reasonable approximation to their fair values.
(b)	The current profits of Cold Ltd. and Dry Ltd. for the year ended 30^th September, 2010 were Rs.80 lakhs and Rs.20 lakhs respectively. No dividends were paid by any of the companies during the year.
(c)	Dry Ltd., the jointly controlled entity, is to be accounted for using proportional consolidation, in accordance with AS–27 "Interests in joint venture".
(d)	Goodwill in respect of the acquisition of Dry Ltd. has been impaired by Rs. 10 lakhs at 30^th September, 2010. Gain on acquisition, if any, will be separately accounted.

Prepare the consolidated Balance Sheet of Air Ltd. and its subsidiaries as at 30^th September, 2010.

(0)

The following are the Balance Sheets of X Ltd. and Y Ltd. as on 31^st December 2009.

Amount in Rs.
	X Ltd.	Y Ltd.
Assets Fixed Assets Stock Debtors Bills Receivable Cash at Bank Investments in : 6000 share of Y Ltd. 5000 share of X Ltd.	7,00,000 2,40,000 3,60,000 60,000 1,10,000 80,000 15,50,000	2,50,000 3,20,000 1,90,000 20,000 40,000 80,000 9,00,000
Liabilities Share Capital : Equity share of Rs.10 each 10% preference share of Rs. 10 each Reserve and Surplus 12% Debentures Sundry Creditors Bills payable	6,00,000 2,00,000 3,00,000 2,00,000 2,20,000 30,000 15,50,000	3,00,000 1,00,000 2,00,000 1,50,000 1,25,000 25,000 9,00,000

Fixed assets of both the companies are to be revalued at 15% above book values and stock and debtors are to be taken over at 5% less than their book values. Both the companies are to pay 10% equity dividends, preference dividends having been paid already.

After the above transactions are given effect to X Ltd. will absorb Y Ltd. on the following terms:

(i)	8 equity shares of Rs. 10 each will be issued by X Ltd. at par against 6 shares of Y Ltd.
(ii)	10% preference share of Y Ltd. will be paid off at 10% discount by issue of 10% preference shares of Rs. 100 each of X Ltd. at par.
(iii)	12% Debenture holders of Y Ltd. are to be paid off at a 8% premium by 12% debentures in X Ltd. issued at a discount of 10%.
(iv)	Rs. 30,000 to be paid by X Ltd. to Y Ltd. for liquidation expenses.
(v)	Sundry creditors of Y Ltd. include Rs. 10,000 due to X Ltd.
Prepare
(a)	A statement of purchase consideration payable by X Ltd.
(b)	A Balance Sheet of X Ltd. after its absorption of Y Ltd.

(0)

(a)

From the following information, calculate the value of a share if you want to

(i)	buy a small lot of shares ;
(ii)	buy a controlling interest in the company.

Year	Profit (Rs.)	Capital Employed (Rs.)	Dividend (%)
2007 2008 2009 2010	55,00,000 1,60,00,000 2,20,00,000 2,50,00,000	3,43,75,000 8,00,00,000 10,00,00,000 10,00,00,000	12 15 18 20

The market expectation is 12%.

(0)

(b)

On February 1, 2009, Future Ltd. entered into a contract with Son Ltd. to receive the fair value of 1000 Future Ltd.’s own equity shares outstanding as on 31–01–2010 in exchange for payment of Rs.1,04,000 in cash i.e. Rs.104 per share. The contract will be settled in net cash on 31–01–2010.

The fair value of this forward contract on the different dates were :

(i)	Fair value of forward on 01–02–2009	Nill
(ii)	Fair value of forward on 31–12–2009	Rs.6,300
(iii)	Fair value of forward on 31–01–2010	Rs.2,000

Presuming that Future Ltd. closes its books on 31^st December each year, pass entries :

(i)	If net settled is in cash
(ii)	If net is settled by Son Ltd. by delivering shares of Future Ltd.

(0)

(a)

On 1^st April, 2008 Sigma Ltd. issued 6% Convertible debentures efface value of Rs.100 per debenture at par. The debentures are redeemable at a premium of 10% on 31–03–2012 or these may be converted into ordinary shares at the option of the holder, the interest rate for equivalent debentures without conversion rights would have been 10%. Being a compound financial instrument, you are required to separate equity and debt portions as on 01–04–2008. Equity portion is Rs.1,85,400. Find out the debt portion (Debenture amount). The present value of Rs.1 receivable at the end of each year based on discount rates of 6% and 10% can be taken as :

End of year	6%	10%
1	0.94	0.91
2	0.89	0.83
3	0.84	0.75
4	0.79	0.68

(0)

(b)

(i)	What is the meaning of ‘valuation of liabilities’ ?
(ii)	State the purpose of valuation of liabilities in financial accounting and reporting.
(iii)	How is liability determined in the case of a finance lease ?

(0)

Answer any four of the following:

4x4=16

(a)

M/s TS Ltd. has entered into a contract by which it has the option to sell its specified asset to NB Ltd. for Rs.100 lakhs after 3 years whereas the current market price is Rs.150 lakhs. Company always settles account by delivery. What type of option is this ? Is it a financial instrument ? Explain with reference to the relevant accounting standard.

(0)

(b)

Assam Ltd. purchased an oil well for $ 100 million. It estimates that the well contains 250 million barrels of oil. The oil well has no salvage value. If the company extracts and sells 10,000 barrels of oil during the first year, how much depletion expense should be recognized as per IFRS 6 ?

(0)

(c)

X Ltd. sold its building to Mini Ltd. for Rs.60 lakhs on 30–09–2009 and gave possession of the property to Mini Ltd. However, documentation and legal formalities are pending. Due to this, the company has not recorded the sale and has shown the amount received as an advance. The book value of the building is Rs.25 lakhs as on 31^st March, 2010. Do you agree with this treatment ? If you do not agree, explain the reasons with reference to the accounting standard.

(0)

(d)

Southern Tower Ltd. purchased a plant from M/s. Tatamaco Ltd. on 30–09–2008 with a quoted price of Rs.180 lakhs. Tatamaco offer 3 months credit with a condition that discount of 1.25% will be allowed if the payment were made within one month. VAT is 12.5% on the quoted price. Company incurred 2% on transportation costs and 3% on erection costs of the quoted price. Preoperative cost amounted to Rs.1.50 lakhs. To finance the purchase of the machinery, company took a term bank loan of Rs.125 lakhs at an interest rate of 14.50% per annum. The machine was ready for use on 30–12–2008; however, it was put to use only on 01–04–2009.

(i)	Find out the original cost.
(ii)	Suggest the accounting treatment for the cost incurred during the period, between the date the machine was ready for use and the actual date the machine was put to use.

(0)

(e)

S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as under :

Lease term
Fair value at inception of lease
Lease rent
Guaranteed residual value
Expected residual value
Implicit interest rate

= 4 years
= Rs.20,00,000
= Rs.6,25,000 p.a. at the end of year
= Rs.1,25,000
= Rs.3,75,000
= 15%

Discounted rates for 1^st year, 2^nd year, 3^rd year and 4^th year are 0.8696, 0.7561, 0.6575 and 0.5718 respectively.

Calculate the value of the lease liability as per AS–19

(0)

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