CWA ICWA Final - Group IV : Advanced Financial Accounting and Reporting - June 2011

CWA ICWA Final - Group IV • Advanced Financial Accounting and Reporting • June 2011

This Paper has 33 answerable questions with 0 answered.

F—P16(AFA) Syllabus 2008
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks.

PART A questions are compulsory. Attempt all of them.

PART B has seven questions. Attempt any five of them

Please:

(1) Write answers to all Parts of a question together
(2) Open a new page for answer to a new question
(3) Attempt the required number of questions only.
(4) Indicate in the front page of the answer book the required question attempted.

PART A (25 Marks)

Marks

(a)

In each of the cases given below, one out of four alternatives is correct. Indicate the correct answer ( = 1 mark) and give your workings/reasons briefly (= 1 mark):

2x10

(i)

PRAPTHANA LTD, a firm of contractors provides the following details for the year ended 31^st March, 2011:
Total Contract Price Rs. 1,000 lakhs, Work Certified Rs. 500 lakhs, Work not Certified Rs. 105 lakhs, Estimated further Cost to Completion Rs. 495 lakhs, Progress Payment: Received Rs. 400 lakhs, To be Received Rs. 140 lakhs.
Amoun due to customers as per AS–7 will be:

A.	Rs.100 lakhs
B.	Rs.550 lakhs
C.	Rs.35 lakhs
D.	None of these

(0)

(ii)

RAJASTHALI & CO. purchased fixed assets costing Rs. 3,000 lakhs on 1.4.2010 and the same was fully financed by foreign currency loan (U.S.Dollars) payable in three annual equal instalments. Exchange rates were 1 Dollar = Rs. 40.00 and Rs. 42.50 as on 1.4.2010 and 31.03.2011 respectively. First instalment was paid on 31.03.2011. As per AS–11 (Revised)

A.	Exchange Difference of Rs. 187.50 lakhs should be charged to P & L A/c.
B.	Exchange Difference of Rs. 125 lakhs should be charged to P & L A/c.
C.	Exchange Difference of Rs. 187.5 lakhs should be added to Fixes Assets A/c.
D.	Exchange Difference of Rs. 125 lakhs should be added to Fixed Assets A/c.

(0)

(iii)

Mr.RAKESH BEHARI bought a forward contract for three months of US$ 1,00,000 on 1^st December at 1 US$ = Rs. 47.10 when exchange rate was US$ 1 = Rs. 47.11. On 31^st December when he closed his books exchange rate was US$ 1 = Rs. 47.15. On 31^st January, he decicded to sell the contract at Rs.47.18 per dollar. The profits from contract to be recognized in the P & L A/c will be:

A.	Rs.1,000
B.	Rs.5,000
C.	Rs.8,000
D.	None of these

(0)

(iv)

BHARAT & TUSHAR LTD. obtained a loan from a bank for Rs. 50 lakhs on 30.04.2010.It was utilized as follows:

Construction of a shed Rs. 50 lakhs, Purchase of a machindery Rs. 40 lakhs, Working Capital Rs. 20 lakhs, Advance for purchase of truck Rs. 10 lakhs, Construction of shed was completed in March 2011. The machinery was installed on the same date. Delivery truck was not received. Total interest charged by the bank for the year ending 31.03.2011 was Rs. 18 lakhs. Interest to be debitex to Profit & Loss Account will be:

A.	Rs.18 lakhs
B.	Rs.10.5 lakhs
C.	Rs.4.5 lakhs
D.	Rs.None of these

(0)

(v)

The Chief Accountant of PELF FIN STOCK Ltd. gives the following data regarding its six segments:

	Rs. In lakhs
Particulars	M	N	O	P	Q	R	Total
Segment Assets Segment Results Segment Revenue	50 –50 200	25 –140 320	10 80 200	5 10 90	5 –10 90	5 10 10	100 –100 1000

Reportable Segments As per AS–17 are:

A.	M, N, O, P, Q, R
B.	M, N, O, P, Q only
C.	M, N, O, P only
D.	M, N, O, R only

(0)

(vi)

X Ltd. holds 51% of Y Ltd., Y Ltd. holds 51% of W Ltd., Z Ltd. holds 49% of W Ltd.
Related Parties as per AS–18 are:

A.	X Ltd., Y Ltd. & W Ltd.
B.	X Ltd. & Z Ltd.
C.	Y Ltd. & Z Ltd.
D.	X Ltd. & Y Ltd. only

(0)

(vii)

S.S.SECURITIES LTD. Provides the following information:
Net Profit for the current year Rs. 1,00,00,000, No. of equity shares outstanding 50,00,000, Basic earnings per share Rs.2.00, No. of 12% convertible debentures of Rs.100 each 1,00,000. Each debenture is converitble into 10 equity shares, Interest expense for the current year Rs. 12,00,000, Tax relating to interest expense (30%) Rs. 3,60,000. Diluted Earnings per shares is:

A.	Rs.1.67
B.	Rs.1.87
C.	Rs.1.81
D.	None of these.

(0)

(viii)

M.S.GOYAL & A. JINDAL LTD. provides the following information:
Accounting Profit Rs. 6,00,000, Book Profit as per MAT Rs.3,50,000, Profit as per Income Tax Act Rs. 60,000, Tax RAte 20%,MAT Rate 7.50%. Deferred Tax Asset/Liability as per AS–22 will be:

A.	Rs.1,20,000 (DTL)
B.	Rs.1,08,000 (DTL)
C.	Rs.1,20,000 (DTA)
D.	Rs.1,08,000 (DTA)

(0)

(ix)

A ltd. had acquired 80% share in the B Ltd. for Rs.25 lacs. The net assets of B Ltd. on the day are Rs.22 lacs.
During the year A Ltd. sold the investment for Rs. 30 lacs and net assets of B Ltd. On the date of disposal was Rs. 35 lacs. The Profit or Loss on disposal of this investment to be recognised in consolidated financial statement is:

A.	Profit Rs.5,00,000
B.	Profit Rs.2,00,000
C.	Loss Rs.9,40,000
D.	Loss Rs. 5,40,000

(0)

(x)

Accountants of NAVEEN ND Ltd.show a net profit of Rs. 7,20,000 for the third quarter of 2011 after incorporating the following:

(i)	Bad debts of Rs. 40,000 incurred during the quarter. 50% of the bad debts have been deferred to the next quarter.
(ii)	Extra ordinary loss of Rs. 35,000 incurred during the quarter has been fully recognized in this quarter.
(iii)	Additional depreciation of Rs. 45,000 resulting from the change in the method of charge of depreciation.

The Correct Quarterly Income as per AS–25 is:

A.	Rs.7,00,000
B.	Rs.6,85,000
C.	Rs.6,65,000
D.	None of these.

(0)

(b)

State any five Indian Accounting Standards which make use of Fair value.

1x5

(0)

PART B (75 Marks)
Marks

PART B (75 Marks)

Marks

Answer any three of the following:

5+5
+5=15

(a)

HEAVEN & HELL Ltd. is develping a new production process. During the financial year 31^st March 2010,the total expenditure on this process was Rs. 40lakhs. The production process met the criteria for recognition as an intangible asset on 1^st Dcec. 2009. Expenditure incurred till this date was Rs. 16 lakhs.

Further expenditure incurred on the process for the financial year ending 31^st March 2011, was Rs. 70 lakhs. As at 31–3–2011, the recoverable amount of know–how embodied in the process is estimated to be Rs. 62 lakhs.
This includes estimates of future cash outflows as well as inflows.
You are required to work out:

(i)	What is the expenditure to be charged to the profit and loss account for the financial year ended 31^st March 2010? (Ignore depreciation for this purpose)
(ii)	What is the carrying amount of the intangible asset as at 31^st March 2010?
(iii)	What is the expenditure to be charged to the profit and loss account for the financial year ended 31^st March 2011? (Ignore depreciation for this purpose)
(iv)	What is the carrying amount of the intangible asset as at 31^st March 2011?

(0)

(b)

LOVE & SACRIFICE LTD. gives the following estimates of cash flows relating to fixes asset on 31–12–2010.The discount is 15%

Year	2011	2012	2013	2014	2015
Cash Flow (Rs. in lakhs)	4000	6000	6000	8000	4000
Present Value Factors @ 15%	0.870	0.756	0.658	0.572	0.497

Residual value at the end of 2015 Rs. 1000 lakhs, Fixed Asset purchased on 1–1–2008 Rs. 40,000 lakhs, Useful life 8 Years, Net selling price on 31–12–2010 Rs. 20,000 lakhs.
Calculate on 31–12–2010:

(a)	Value in use on 31–12–2010
(b)	Carrying amount at the end of 2010
(c)	Recoverable amount on 31–12–2010
(d)	Impairment loss to be recognized for the year ended 31–12–2010
(e)	Revised carrying amount
(f)	Depreciation charge for 2011

(0)

(c)

At the end of the financial year ending on 31^st March 2011, CONSLE & CLIENT LTD. finds that there are twenty law suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors.The possible outcome as estimated by the Board is as follows:

	Probability	Loss (Rs.)
In respect of five cases(Win)	100%	—
Next ten cases (win)	60%	—
Lose (Low damages)	30%	1,20,000
Lose (High damages)	10%	2,00,000
Remaining five cases
Win	50%	—
Lose (Low damages)	30%	1,00,000
Lose (High damages)	20%	2,10,000

Outcome of each case is to taken as a separate entity. Ascertain the amount of contingent loss and the accounting treatment in respect thereof.

(0)

(d)

J Ltd. purchased machinery from K Ltd. on 30.09.2010. the price was Rs. 370.44 lakhs after charging 8% Sales–tax and giving a trade discount of 2% on the quoted price. Transport charges were 0.25% on the quoted price and installation charges come to 1% on the quoted price. A loan of Rs. 300 lakhs was taken from the bank on which interest at 15% per annum was to be paid. Expenditure incurred on the trial run was Materials Rs. 35,000, Wages Rs. 25,000 and Overheads Rs. 15,000.

Machinery was ready for use on 1.12.2010. However, it was actually put to use only on 1.5.2011. Find out the cost of the machine and suggest the accounting treatment for the expenses incurred in the interval between the dates 1.12.2020 to 1.5.2011. The entire loan amount remained unpaid on 1.5.2011.

(0)

(e)

FIRE & WATER LTD. provides the following information:

Net profit for the year 2009–2010	Rs. 11,00,000
Net profit for the year 2010–2011	Rs. 15,00,000
No. of shares outstanding prior to rights issue	5,00,000 shares
Rights issue price	Rs. 15.00
Last date to exercise rights	1^st March 2011

Rights issue is one new share for each five outstanding (i.e 1,00,000 new shares)

Fair value of one equity share immediately prior to exercise of right on 1^st March 2011 was Rs. 21.00.
Compute Basic Earnings Per Share.

(0)

(a)

On 24th January 2011 NAVEEN JOSH of Delhi sold goods to PEARSON of New York, U.S.S. for an invoice price of $ 40,000 when the spot market rate was Rs. 44.20 per US $. Payment was to be received after three months on 24th April 2011. To mitigate the risk of loss from decline in the exchange rate on the date of receipt of payment, NAVEEN JOSHI immediately acquired a forward contract to sell on 24th April 2011 US $ 40,000 @ Rs. 43.70. NAVEEN JOSHI closed his books of account on 31^st March 2011 when the spot rate was Rs. 43.20 per US $. On 24th April 2011, the date of receipt of money by NAVEEN JOSHI, the spot rate was Rs. 42.70 per US $.

Pass journal entries in the books of NAVEEN JOSHI to record the effect of all the above mentioned effects.

The following are the Balance Sheets of C Ltd. and D Ltd. as at 31^st March, 2011.

Liabilities	C Ltd. Rs.	D Ltd. Rs.	Assets	C Ltd. Rs.	D Ltd. Rs.
Equity Shares of Rs. 100each fully paid General Reserve Profit and Loss A/c Current Liabilities	45,00,000 4,00,000 7,34,000 6,00,000 62,34,000	15,00,000 3,00,000 30,000 11,70,000 30,00,000	Fixed Assets Investments 3,000 Shares in D Ltd. 9,000 Share in C Ltd. Current Assets	30,00,000 4,50,000 — 27,84,000 62,34,000	1,50,000 15,00,000 13,50,000 30,00,000

C Ltd. absorbs D Ltd. on the basis of the intrinsic value of the shares of both companies as on 31^st March 2011. Before absorption C Ltd. has declared a dividend of 12%. Dividend tax is 10%. Show the Calculation of Purchase consideration and the working for the number of shares issued.

10+5=15

(0)

(b)

SUN & MOON LTD. has its share capital divided into shares of Rs. 10 each. On 1st April 2009 it granted 10,000 employees’ stock options at Rs. 40, when the market price was Rs. 130. The options were to be exercised between 16th December 2010 and 15th March 2011. The employees exercised their options for 9,500 shares only; the remaining options lapsed. The company closes its books on 31st March every year. Show Journal Entries.

(0)

(a)

Calculate the Minority Interest and Cost of Control from the following Balance Sheets of A Ltd. and B Ltd. as at 31^st March 2011:

Liabilities	A Ltd. Rs.	B Ltd. Rs.	Assets	A Ltd. Rs.	B Ltd. Rs.
Share Capita: (Rs. 100 each) Profits: Capital profit Revenu profit Creditors	5,00,000 1,00,000 3,00,000 1,50,000 10,50,000	2,00,000 80,000 50,000 60,000 3,90,000	Investments: 1,600 Shares in B Ltd. 1,000 Share in A Ltd. Sundry Assets	2,20,000 8,30,000 10,50,000	— 1,50,000 2,40,000 3,90,000

9+6=15

(0)

(b)

A Ltd. Purchased 40% stake of B Ltd. for RS. 12 per share. After two years A Ltd. decided to purchase another 40% share in B Ltd. B Ltd. has 1,00,00,000 equity shares of Rs. 10 each as fully paid up shares. The purchase deal was finalised on the following terms:

•	Purchase price per share to be calculated on the basis of average profit of last three years capitalised at 7.5%. Profits for last three years are Rs. 35 lacs, Rs. 65 lacs and Rs. 89 lacs.
•	Total assets of B Ltd. of Rs. 11,50,00,000. Assets to be appreciated by Rs. 40,00,000.
•	Of the External Creditors for Rs. 2,50,00,000 one creditor to whom Rs. 10,00,000 was due has expired and nothing is to be paid to settle this liability.
•	B Ltd. will declare dividend @ 15%

Calculate the Goodwill or Capital Reserve for A Ltd. in Consolidated Financial Statement.

(0)

(a)

A Ltd. acquired 25% of shares in B Ltd. as on 31.3.2010 for Rs. 3 lakhs. The Balance Sheet of B Ltd. as on 31.3.2010is given below:

	Rs.
Share Capital Reserves and Surplus Fixed Assets Investments Current Assets	5,00,000 5,00,000 10,00,000 5,00,000 2,00,000 3,00,000 10,00,000

During the year ended 31.3.2011 the following are additional information available:

(i)	A Ltd., received dividend from B Ltd., for the year ended 31.3.2011 at 40% from the Reserves.
(ii)	B Ltd., made a profit after tax of Rs. 7 lakhs for the year ended 31.3.2011
(iii)	B ltd., declared a dividend @ 50% for the year ended 31.3.2011 on 30.4.2011

A Ltd. is preparing Consolidated Financial Statements in accordance with AS–21 for its various subsidiaries.
Calculate:

(i)	Goodwill if any on acquisition of B Ltd.’s shares.
(ii)	How A Ltd., will reflect the value of investment in B Ltd., in the Consolidated Financial Statements?.
(iii)	How the dividend received from B Ltd. will be shown in the Consolidated Financial Statements?

9+5=16

(0)

(b)

A Ltd. entered into a joint venture with B Ltd. on 1 : 1 basis and a new company C Ltd. was formed for the same purpose and following are the balance sheets of all the three companies as at 31^st March 2011:

Particulars	A Ltd	B Ltd	C Ltd
Share Capital Reserves & Surplus Loans Current Liabilities Fixed Assets Investment in JV Current Assets	1,000,000 1,800,000 300,000 400,000 3,050,000 2,50,000 200,000	750,000 1,600,000 400,000 250,000 2,625,000 250,000 125,000	500,000 1,200,000 200,000 100,000 1,950,000 — 50,000

Prepare the Blance Sheet of A Ltd., B Ltd. and C Ltd. under proportionate consolidation method.

(0)

Answer any three of the following:

5+5
+5=15

(a)

At the begining of year 1,DONOR & BEGGER LTD. issued 20,000 Covertible Debentures with face value Rs.100 per debenture,at par.The debentures have six–year term.The interest at annual rate of 9% is paid half–yearly.The bondholders have an option to convert half of the face value of debentures into 2 ordinary shares at the end of year 3.The bondholders not excrcising the conversion option will be repaid at par to the extent of Rs.50 per debenture at the end of year3.The non–convertible portion will be repaid at 10% premium at the end of year 6.At the time of issue,the prevailing market interest rate for similar debt with out conversion option was 10%.Compute the value of Embedded Derivative.

Years	1–3	3–6	1–6	7–12
Annuity Factors @ 10%	2.487	1.868	4.355	2.459
Annuity Factors @ 5%	2.723	2.353	5.076	3.787

Present Value Factors @ 10%/5% at the end of 6th year and 12th year respectively are 0.564 and 0.557.

(0)

(b)

RICH & POOR LTD. issued certain callable convertible debentures 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)

On April 1,2010,BORROWER LTD.borrowed Rs.10 lakh at annual fixed interest rate of 7% payable half–yearly.The life of the loan is 4 years with no pre–payment permitted.The company expected the interest rate to fall and on the same day,it entered into an interest rate swap arrangement, where by the company would pay 6 month LIBOR and would receive annual fixed interest of 7% every half–year.The swap effectively converted the company’s fixed rate obligation to floating rate obligation.
The follow value of swap and debt are available:

	Value of swap Rs.lakh	Value of debt Rs.lakh
April 1,2010 March 31,2011	+0.2 –0.1	10.2 9.9

Six–month LIBOR on April 1,2010 was 6% and that on October 1,2011 was 8%
Show important ccounting entries in respect of the swap arrangement.

(0)

(d)

As on 1^st April 2010 the fair value of plan assets was Rs.1,00,000 in respect of a pension plan of BHC out benefits of Rs.19,000 and received inward contributions of Rs.49,000.On 31^st March 2011 the fair value of the defined benefit obligation was Rs.1,47,920.Acturial losses on the obligations for the year 2010–11 were:
On 1^st April 2010 the company made the following estimates,based on its market studies,understanding and prevailing prices.

Interest and dividend income,after tax payable by the fund	% 9.25
Realized and unrealized gains on plan assets (after tax)	2.00
Fund administrative costs	(1.00)
Expected Rate of Return	10.25

You are required to find the expected and Actual Returns on plan Assets and Actuarial Gain/Loss for the year 2010–11.

(0)

(a)

A Ltd Leased a machinery to B Ltd on the following terms:
Fair value of the machinery Rs.20lakhs,Lease term 5 years,Lease Rental per annum Rs.5 lakhs,Guaranteed Residual value Rs.1 lakh,Expected Residual value Rs.2 lakhs,Internal Rate of Return 15%.
Depreciation is provided on straight line method @ 10% per annum.Ascertain unearned financial income and necessary entries may be passed in the books of the Lessee in the First year.

Or,

The Balance Sheet of HARD LUCK Ltd. on 31^st March, 2011 is as under:

Liabilities	Rs.	Assets	Rs.
Authorised, Issued Equity Share Capital 20,000 Shares of Rs.100 each 10,000, 7% Preference Shares of Rs.100 each Sundry Creditors Bank Overdraft	20,00,000 10,00,000 7,00,000 3,00,000	Goodwill Plant and Machinery Stock Debtors Preliminary Expenses Cash Profit and Loss Account	2,00,000 18,00,000 3,00,000 7,50,000 1,00,000 1,50,000 7,00,000
	40,00,000		40,00,000

Two years’ preference dividends are in arrears.The company had bad time during the last two years and hopes for better business in future,earning profit and paying dividend provided the capital base is reduced.
An internal reconstruction scheme as follows was agreed to by all concerned.

(i)

Creditors agreed to fore go 50% of the claim.

(ii)

Preference shareholders withdrew arrear dividend claim.They also agreed to lower their capital claim by 20% by reducing nominal value in consideration of (% dividend effective after reorganization in case equity shareholders’ loss exceed 50% on the application of the scheme.

(iii)

Bank agreed to convert overdraft into term loan to the extent required for making current ratio equal to 2:1.

(iv)

Revalued figure for plant and machinery was accepted as Rs.15,00,000

(v)

Debtors to the extent of Rs.4,00,000 were considered good.

(vi)

Equity shares shall be exchanged for the same number of equity shares at a revised denomination as required after the reorganisation.
Show:

(a)	Total loss to be borne by the equity and preference shareholders for the reorganization;
(b)	Share of loss to the individual classes of shareholders;
(c)	New structure of share capital after reorganization;
(d)	Working capital of the reorganized Company.

9+6=15

(0)

(b)

Prepare a Gross value Added Statement from the following Profit and Loss Account of STRONG and WEEK Ltd.Show also the reconciliation between Gross Value Added and Profit before Taxation:

Profit and Loss Account for the year ended 31^st March 2011
Income	Notes	Amount
		(Rs.in.lakhs)	(Rs.in.lakhs)
Sales Other Income Expenditure Production and Opreational Expenses Administration Expenses Interest and Other Charges Depreciation Profit before Taxes Provision for Taxes Balance as per Last Balance Sheet Transferred to: General Reserve Proposed Dividend Surplus Carried to Balance Shteet	1 2 3	610 25 465 19 27 14 60 11	635 525 110 16 94 7 101 71 30
			101

Notes

1.	Production and Operational Expenses	(Rs. in lakhs)
	Increase in Stock Consumption of Raw Materials Consumption of Stores Salaries, Wages, Bonus and Other Benefits Cess and Local Taxes Other Manufacturing Expenses	112 185 22 41 11 94 465
2.	Aministration expenses include inter–alia audit fees of Rs. 4.80 lakhs, salaries and commission to directors Rs. 5 lakhs and provision for doubtful debts Rs. 5.20 lakhs.
3.	Interest and Other Charges:	(Rs. in lakhs)
	On Working Capital Loans from Bank On Fixed Loans from IDBI Debentures	8 12 7 27

(0)

Answer any three of the following:

3x5=15

(a)

State the criteria of Reportable Segment as per AS–17

(0)

(b)

Briefly describe the Role of public Accounts Committee.

(0)

(c)

Write a short note on Enviromental Accounting.

(0)

(d)

Write a short note on Human Resource Accounting.

(0)

(e)

Compare the following items as per Indian AS and IFRS:
(i) Impairment of Assets (ii) Business Combination.

(0)

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