CDE

Question No 1 is compulsory. Candidates are required to answer any five out

of the remaining six questions Working notes should form part of the

answer Wherever necessary, suitable assumptions should be made and

indicated in the answer by the candidates

1. (a) A machine having expected useful life of 6 years, is leased for 4 years. Both
the cost and the fair value of the machinery are Rs 7,00,000. The amount will
be paid in 4 equal instalments and at the termination of lease, lessor will get
back the machinery. The unguaranteed residual value at the end of the 4th
year is Rs 70,000. The IRR of the investment is 10%. The present value of
annuity factor of Rs 1 due at the end of 4th year at 10% IRR is 3.169. The
present value of Rs 1 due at the end of 4th year at 10% rate of interest is 0.683.
State with reasons whether the lease constitutes finance lease and also
compute the unearned finance income.

(b) Plymouth Ltd. is engaged in research on a new process design for its
product. It had incurred Rs 10 lakh on research during first 5 months of the
financial year 2016-17. The development of the process began on 1st
September 2016 and up to 31st March 2017, a sum of Rs 8 lakh was incurred
as Development Phase Expenditure, which meets asset recognition criteria.
From 1st April 2017, the Company has implemented the new process design
and it is likely that this will result in after tax saving of Rs 2 lakh per annum for
next five years. The cost of capital is 10%. The present value of annuity factor
of Rs 1 for 5 years @ 10% is 3.7908. Decide the treatment of Research and
Development Cost of the project as per AS 26.
 (c) Ganesh Ltd. began construction of a new building on 1st April 2016. It had
obtained Rs 2 lakh special loan to finance the construction of the building
on 1st January 2016 at an interest rate of 11%. The company’s other
outstanding two nonspecific loans on the first day of the year were as
follows:

Amount Rate of Interest

Rs 3,00,000 12%
Rs 7,00,000 14%

The expenditures that were made on the building project were as follows:

For the financial year 2016-17 Rs

April 2016 1,60,000
August 2016 2,70,000
November 2016 4,20,000
March 2017 1,50,000

Building was completed by 31st March 2017. Following the principles

prescribed in AS 16 ‘Borrowing Cost,’ calculate the amount of interest to be
capitalized and pass Journal Entry for capitalizing the borrowing cost in
respect of the building.

(d) The following information is available for AB Ltd. for the accounting year
2015-16 and 2016-17:

Net profit for

Year 2015-16 Rs 22,00,000
Year 2016-17 Rs 30,00,000

No of shares outstanding prior to right issue 10,00,000 shares.

Right issue: One new share for each five shares outstanding i.e. 2,00,000
shares. Right Issue price Rs 25. Last date to exercise right 31st July 2016

Fair value of one equity share immediately prior to exercise of rights on

31.07.2016 is Rs 32.

You are required to compute:

 (i) Basic earnings per share for the year 2015-16.
(ii) Restated basic earnings per share for the year 2015-16 for right issue.
(iii) Basic earnings per share for the year 2016-17.

(4 x 5 Marks)

2. (a) DFL Limited recently made a public issue of debentures. The following
information is available in respect of the issue:

i. 3,00,000 partly convertible debentures of face value and issue price of Rs

100 per debenture were issued;
ii. Conversion of 50% of each debenture is to be done on expiry of 6 months
from date of close of issue;
iii. Date of closure of subscription list is 1st June 2016. Date of allotment is
1st July 2016;
iv. Interest on debenture at the rate of 12% is payable from date of
allotment;
v. Equity share of Rs 10 each are issued at Rs 50 per share for the purpose
of conversion;
vi. Underwriting commission is 2%;
vii. 2,25,000 debentures were applied for;
viii. Interest on debentures is payable half yearly on 30th September and
31st March.

Give Journal entries for all transactions relating to the above, including cash and
bank entries for the year ended 31st March 2017.
(8 Marks)
(b)The summarized Balance Sheet of Vasant Ltd. as on 31st March 2016, being
the date of voluntary winding up is as under:

Liabilities Amount Assets Amount Rs

Rs
Share Capital: Land & Building 1,30,000
10% Pref. Shares of 10 each 1,50,000 Sundry Current 4,36,000
Assets
10,000 Equity Shares of 10
each,
fully paid up 1,00,000 Profit and Loss 35,000
Account
5,000 Equity Shares of Rs 10 Debenture
each issue expenses
8 per share paid up 40,000 not written off 2,000
13% Debentures 1,50,000
Mortgage Loan 70,000
Bank overdraft 30,000
Trade Creditors 38,000
Income Tax Arrears 25,000
(assessment concluded in Feb
16)
Total 6,03,000 Total 6,03,000

Mortgage loan was secured against Land & Building. Debentures were secured by
a floating charge on all assets. The company was unable to meet the payments
and therefore the debenture holders appointed a Receiver for the debenture
holders. He brought the Land & Buildings to auction and realized Rs 1,60,000. He
also took charge of Sundry Assets of value of Rs 2,36,000 and realized Rs 2,00,000.
The Bank overdraft was secured by personal guarantee of the directors of the
company and on the Bank raising a demand, the Directors paid off the due from
their personal resources. Costs incurred by the Receiver were Rs 1,950 and by the
Liquidator Rs 3,000. The receiver was not entitled to any remuneration, but the
Liquidator was to receive 2% fee on the value of assets realized by him. Preference
Shareholders have not been paid dividend for period after 31st March 2011 and
interest for the last half year was due to the Debenture holders. Rest of the assets
were realized at Rs 1,50,000.
Prepare the accounts to be submitted by the receiver and Liquidator.

(8 Marks)
3. (a)
Show adjustment Journal entry in the books of Head Office at the end of
April 2016 for incorporation of inter-branch transactions assuming that only
Head Office maintains different branch accounts in its books.

A. A.P. Branch:
(1) Received goods from M.P. – Rs 30,000 and Rs 25,000 from U.P.
(2) Sent goods to W.B. – Rs 20,000, U.P. – Rs 30,000.
(3) Bill Receivable received – Rs 10,000 from W.B.
(4) Acceptances sent to M.P. – Rs 10,000, U.P. – Rs 20,000.

B. M.P. Branch (apart from the above):

(5) Received goods from U.P. – Rs 20,000, A.P – Rs 10,000.
(6) Cash sent to A.P – Rs 20,000, U.P. – Rs 10,000.

C. W.B. Branch (apart from the above):

(7) Received goods from U.P. – Rs 40,000.
(8) Acceptances and Cash sent to U.P. – Rs 10,000 and Rs 15,000 respectively.

D. U.P. Branch (apart from the above):

(9) Paid cash to W.B. – Rs 20,000 and M.P. – Rs 10,000
(8 Marks)

(b) The following balances were extracted from the books of M/s Division. You
are required to prepare Departmental Trading Account and Profit and Loss
account for the year ended 31st March 2016 after adjusting the unrealized
department profits if any.

Dept. A Rs Dept. B Rs
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000

a. General expenses incurred for both the departments were Rs 1,25,000 and
you are also supplied with the following information:
b. Closing stock of Department, A Rs 1,00,000 including goods from
Department B for Rs 20,000 at cost to Department A.
 c. Closing stock of Department B Rs 2,00,000 including goods from
Department A for Rs 30,000 at cost to Department B.
d. Opening stock of Department, A and Department B include goods of the
value of Rs 10,000 and Rs 15,000 taken from Department B and Department
A respectively at cost to transferee departments.
e. The rate of gross profit is uniform from year to year.
(8 Marks)

4. A and B are Partners of AB & Co. sharing Profits and Losses in the ratio of 2 :
1 and C and D are Partners of CD & Co sharing Profits and losses in the ratio
of 3 : 2. On 1st April, they decided to amalgamate and form a new Firm M/s.
AD & Co wherein all the Partners of the both the Firm would be the Partners
sharing Profits and Losses in the ratio of 2 : 1 : 3 : 2 respectively to A, B, C
and D. Their Balance Sheets on that date were as under:

Liabilities AB & Co CD & Co Assets AB & Co CD & Co

(Rs.) (Rs.) (Rs.) (Rs.)
Capitals Building 75,000 90,000
- A 1,50,000 - Machinery 1,20,000 1,00,000
- B 1,00,000 - Furniture 15,000 12,000
- C - 1,20,000 Stock 24,000 36,000
- D - 80,000 Debtors 65,000 78,000
Reserve 66,000 54,000 Due from CD & Co 47,000 -
Creditors 52,000 35,000 Cash at Bank 18,000 15,000
Due to AB & Co. - 47,000 Cash in Hand 4,000 5,000
Total 3,68,000 3,36,000 Total 3,68,000 3,36,000

The amalgamated Firm took over the business on the following terms:

a. Building was taken over at Rs. 1,00,000 and Rs. 1,25,000 of AB & Co. and CD &
Co. respectively. Machinery was taken over at Rs. 1,25,000 and Rs. 1,10,000 of
AB & Co. and CD & Co. respectively.

b. Goodwill of AB & Co. was worth Rs. 75,000 and that of CD & Co. was worth Rs.
50,000. Goodwill account was not to be opened in the books of the new Firm;
the adjustments being recorded through Capital Accounts of the partners.

c. Provisions for Doubtful Debts has to be carried forward at Rs. 5,000 in respect
of Debtors of AB & Co and Rs. 8,000 in respect of CD & Co.
 You are required to:

1. Compute the adjustments necessary for Goodwill.

2. Pass the Journal Entries in the Books of AD & Co assuming that Excess /
Deficit Capital (taking D’s Capital as base) with reference to share in
Profits are to be transferred to Current Accounts. (without narrations).

3. Prepare the Balance Sheet of M/s. AD & Co after takeover.

(16
Marks)
5.
a) Following information is furnished to you by Well-to-do Bank Ltd. for the year
ended 31st March 2016:
(Rs. in thousands)
Interest and discount - (Income) 8,860
Interest on public deposits – (Expenditure) 2,720
Operating expenses 2,662
Other incomes 250
Provisions and contingencies (it includes provision in respect
of Non-performing Assets (NPAs) and tax provisions) 2,004
Rebate on bills discounted to be provided for as on 31.3.2016 30
Classification of Advances:
Standard Assets 5,000
Sub-standard Assets 1,120
Doubtful Assets – fully unsecured 200
Doubtful assets – fully secured
Less than 1 year 50
More than 1 year but less than 3 years 300
More than 3 years 300
Loss assets 200
 You are required to prepare:
(i) Profit and Loss Account of the Bank for the year ended 31st March 2016.
(ii) Provision in respect of advances
(8
Marks)

(b) Metro General Insurance Company submits the following information for the
year ended 31st March 2016:

Particulars Direct Business (Rs) Reinsurance

(Rs)
Premium Received 75,25,000 8,25,000
Premium Paid – 4,90,000
Claims Paid during the Year 49,70,000 5,10,000
Claims Payable: 1st April 2015 6,85,000 95,000
31st March 2016 7,38,000 70,000
Claims Received – 3,95,000
Claims Receivable: 1st April 2015 – 75,000
31st March 2016 – 1,25,000
Expenses of Management 2,90,000 –
Commission: On Insurance Accepted 1,60,000 15,000
On Insurance Ceded – 18,000

The following additional information are also available:

(i) Expenses of Management include Rs 45,000 Surveyor’s Fees and Rs 55,000
Legal Expenses for settlement of claims.
(ii) Reserve for Unexpired Risk is to be maintained @ 40%. The balance of
Reserve for Unexpired Risk as on 01.04.2015 was Rs 28,40,000.

You are required to compute net premium and net claims to be transferred
to Revenue A/c.

(8
Marks)
6. Following is the summarized Balance Sheets as at March 31, 2016: (Rs.
Lakhs)
Liabilities Kanak Ronak Assets Kanak Ronak
Share Capital: Goodwill 60 -
Equity shares of Rs.100 45,00 30,00 Other Fixed Assets 45,00 22,80
each Debtors 19,53 13,20
9% Pref. shares of Rs.100 15,00 12,00 Stock 11,79 20,40
each Cash at Bank 78 390
General Reserve 540 510 Own Debenture 576
Profit and Loss Account - 45 (Nominal Value Rs. 6
12% Debentures of Rs. 18,00 600 lakh)
100 each Discount on issue of 6
Sundry Creditors 12,45 675 Debentures 12,33
P&L
Total 95,85 60,30 Total 95,85 60,30

On 1.4.2016, Kanak Ltd. adopted the following scheme of reconstruction:

i. Each equity share shall be sub-divided into 10 equity shares of Rs 10 each

fully paid up. 50% of the equity share capital would be surrendered to the
Company.
ii. Preference dividends are in arrear for 3 years. Preference shareholders
agreed to waive 90% of the dividend claim and accept payment for the
balance.
iii. Own debentures of Rs 2,40,000 were sold at Rs 98 cum-interest and
remaining own debentures were cancelled.
iv. Debenture holders of Rs 8,40,000 agreed to accept one machinery of book
value of Rs 9,00,000 in full settlement.
v. Trade payables, trade receivables and inventory were valued at Rs
10,50,000, Rs17,70,000 and Rs 10,80,000 respectively. The goodwill,
discount on issue of debentures and Profit and Loss (Dr.) are to be written
off.
vi. The Company paid Rs 45,000 as penalty to avoid capital commitments of Rs
9,00,000.
 On 2.4.2016 a scheme of absorption was adopted. Kanak Ltd. would take over
Ronak Ltd. The purchase consideration was fixed as below:

a. Equity shareholders of Ronak Ltd. will be given 50 equity shares of Rs 10

each fully paid up, in exchange for every 5 shares held in Ronak Ltd.
b. Issue of 9% preference shares of Rs 100 each in the ratio of 4 preference
shares of Kanak Ltd. for every 5 preference shares held in Ronak Ltd.
c. Issue of one 12% debenture of Rs 100 each of Kanak Ltd. for each 12%
debenture in Ronak Ltd.

You are required to give Journal entries in the books of Kanak Ltd. (narrations
are not required) and draw the resultant Balance Sheet as at 2nd April 2016.
(16
Marks)

7. Answer any 4 of the following:

a) During the year 2015-2016, Raj Ltd. was sued by a competitor for Rs. 15
lakhs for infringement of a trademark. Based on the advice of the
company's legal counsel, Raj Ltd. provided for a sum of Rs. 10 lakhs in its
financial statements for the year ended 31st March 2016. On 18th May
2016, the Court decided in favour of the party alleging infringement of the
trademark and ordered Raj Ltd. to pay the aggrieved party a sum of Rs.14
lakhs. The financial statements were prepared by the company's
management on 30th April 2016 and approved by the board on 30th May
2016. Should Raj Ltd. adjust its financial statements for the year ended 31st
March 2016?

b) Classify the following into either operating or finance lease:

i. Lessee has option to purchase the asset at lower than fair value, at the
end of lease term;
ii. Economic life of the asset is 7 years, lease term is 6 years, but asset is not
acquired at the end of the lease term;
iii. Economic life of the asset is 6 years, lease term is 2 years, but the asset
is of special nature and has been procured only for use of the lessee;
iv. Present value (PV) of Minimum lease payment (MLP) = "X". Fair value of
the asset is "Y".
c) A company had imported raw materials worth US Dollars 6,00,000 on 5th
January 2016, when the exchange rate was Rs.43 per US Dollar. The
company had recorded the transaction in the books at the above-
mentioned rate. The payment for the import transaction was made on 5th
April 2016 when the exchange rate was Rs.47 per US Dollar. However, on
31st March 2016, the rate of exchange was Rs.48 per US Dollar. The
company passed an entry on 31st March 2016 adjusting the cost of raw
materials consumed for the difference between Rs.47 and Rs.43 per US
Dollar. In the background of the relevant accounting standard, is the
company’s accounting treatment correct? Discuss.

d) Write short notes on the following principles and terms of Insurance

Business:
(i) Principle of Indemnity
(ii) Insurable Interest
(iii) Principle of UBERRIMAE FIDEI
(iv) Catastrophic Loss

e) A Commercial Bank has the following Capital Funds and Assets. Segregate
the Capital Funds into Tier I and Tier II Capitals. Also find out the Risk
Adjusted Asset and Risk Weighted Asset Ratio.

Particulars Rs
Crores

Liabilities:
Equity Share Capital 400
Statutory Reserve 250
Capital Reserve (of which Rs18 Crores were due to 86
Revaluation of Assets & Balance due to Sale of Capital Assets)

Assets:
Cash Balance with RBI 12
Balances with other Banks 20
Other Investments 40
Loans & Advances
(a) Guaranteed by Government 14.5
(b) Others 5465
Premises, Furniture & Fixtures 74

Off Balance Sheet Items

(a) Guarantees and Other Obligations 700
(b) Acceptances, Endorsements and Letter of Credit 4900

(4 x 4
Marks)