Suggested answers November 2018 - Advance accounting Old Course IPCC

November 2018

Following are answers, a care is taken to answer them correctly, however, if any mistakes are identified by you, kindly share with me, I would love to hear them and will incorporate changes accordingly.

Question Covered in post

1(a), 1(b), 1(c), 1(d), 2, 3(a),  3(b), 4, 5(a), 5(b),  6(b), 7(a), 7(b), 7(c),  7(d), 7(e)

Question Pending

6(a)

1(a)

(i) Annual lease rent = Rs. 32,500

(ii) Income = 26,000, 32,500, 39,000

(iii) Depreciation = Rs. 20,000, Rs. 25,000, Rs. 30,000

1(b)

(i) Prior period Item adjustment

• Prior Period A/c Dr.
• To Salary Payable

• Salary payable A/c Dr
• To Cash

Prior period item shall be disclosed separately

(ii) Wages with retrospective effect

It is not taken as error or omission in the preparation of Financial statements and hence this is not a prior period item, additional liability of Rs. 75,000 shall be included in current year Salary

1(c)

(i) Present obligation as a result of a past obligating event, the construction of the oil rig creates an obligation under the terms of the licence to remove the rig and restore the seabed and is thus an obligating event. At the balance sheet date, however, there is no obligation to rectify the damage that will be caused by extraction of the oil.

An outflow of resources embodying economic benefits in settlement is probable

A provision is recognized for the best estimate of 90% of the eventual costs that relate to the removal of the oil rig and restoration of damage caused by building it. These costs are included as part of the cost of the oil rig. The 10% of costs that arise through the extraction of the oil are recognised as a liability when the oil is extracted.

(ii) (a) at end of previous year - The obligating event is the giving of the guarantee, which gives rise to an obligation.

An outflow of resources embodying economic benefits in settlement, no outflow of benefits is probable at end of previous year. thus no provision is recognised. The guarantee is disclosed as contingent liability unless the probability of any outflow is regarded as remote.

(b) at end of current year

The obligating event is the giving the guarantee, which gives rise to a legal obligation, and it is probable that an outflow of resources embodying economic benefits will be required to be settles and thus a provision is recognized for the best estimate of the obligation .

1(d)

As per para 63 of AS 26, the depreciable amount of an intangible asset should be allocated on a systematic basis, over the best estimated of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed 10 years from the date when the asset is available for use. Amortization shoould commence when the asset is available for use.

RC Ltd has been following the policy of the amortization of the intangible asset over a period of 15 years on SLM, the period of 15 years is more than the maximum period of 10 years specified as per AS26.

Accordingly, RC Ltd. would be required to restate the carrying amount of intangible asset as on 31-03-2018 for 6 years i.e. 2012-18 at Rs.120 (-) 120 X 6/10 = Rs. 48. The difference of Rs. 72-48 = Rs. 24 will be adjusted against the opening balance of revenue reserve. The carrying amount of Rs. 48 would be amortized over remaining 4 years by Rs. 12 lakhs per year.

2

Bank Account

Partner's Capital Account

Realisation account

3(a)

3(b)

4

(1)  Equity Share capital (Old) 15,000 X 100 Dr. Rs.15,00,000
To Equity Share Capital (New) 1,50,000 X 10 Cr. Rs. 15,00,000

(2) Equity Share Capital (New) 80% X 15,00,000 Dr. Rs. 12,00,000
To Equity Share Capital (New-Surrendered) A/c Cr. Rs. 12,00,000

(3) 7% Preference share A/c Dr. 10,00,000
To 9% Preference shares Rs. 10,00,000
(Being Cumulative preference shares)

(4)(a) Trade Payable A/c Dr. Rs. 4,52,000
To Capital Reconstruction Rs. 4,52,000
(Being Claim of Trade payable being reduced by 40% X 11,30,000)

(4)(b) Equity Share Capital (New-Surrendered) Rs. 2,50,000
To Equity Share capital (New) Rs. 2,50,000
(Being shares given to Trade Payable amounting To Rs. 2,50,000)

(5) Loan A/c Dr. Rs.2,20,000
To Capital reconstruction A/c Rs.2,20,000

(6) Equity Share Capital (New-Surrendered) A/c Dr. Rs.9,50,000

To Capital reconstruction A/c Rs. 9,50,000

(7) Capital Reconstruction A/c Dr. Rs. 5,70,000

To Patent Rs. 2,00,000

To Plant & Machinery Rs. 2,00,000

To Inventory Rs. 1,70,000

(8) Capital Reconstruction A/c Dr. Rs.2,85,000

To Trade Receivables Cr. Rs.2,85,000

(9) Building A/c Dr (2,75,000 - 3,50,000) Rs. 75,000

To Capital Reconstruction Rs. 75,000

(10) Proposed Dividend A/c Rs. 1,10,000

To Cash  Rs. 1,10,000

(11) Make capital reconstruction control account to arrive at this figure and JV

(12) Capital Reconstruction A/c Dr. 30,000

To Cash Rs. 30,000

(13) Cash A/c Dr. 20,000 X 10 Rs. 2,00,000

To Equity share capital (New) 20,000 X 10 Rs. 2,00,000

(14) Capital Reconstruction A/c Rs. 4,20,000
To Profit and Loss A/c Rs. 4,20,000

Capital Reconstruction Control A/c

Trade Payable (-) 4,52,000
Loan From Director (-) 2,20,000
Surrendered Equity Share Capital (-) 9,50,000

Patent + 2,00,000

Plant & Machinery + 2,00,000

Inventory + 1,70,000

Trade Receivable + 2,85,000
Bank (Expenses) +30,000
Building (-) 75,000

Profit and Loss A/c + 4,20,000

Balance to be used to write down P&M Rs. 3,92,000

M/s NTC Limited Balance sheet As on 31st March 2018

PART I. Liability

(1) Share Capital

A. Equity Share Capital

1,50,000 X 10 X 20% = 3,00,000
25,000 X 10 = 2,50,000
New 20,000 X 10 = 2,00,000

Rs. 7,50,000

B. Preference Share Capital

9% Preference share Capital 10,000 X 100 = Rs. 10,00,000

(2) Reserves and Surplus
General Reserve Rs. 3,00,000

(3) Non Current Liabilities
Loan From Directors Rs. Nil

(4) Current Liabilities

Trade Payable Rs. 6,78,000
Proposed Dividend Rs. Nil (Since Paid Now)
Expenses payable Rs. 1,60,000

Total Rs. 28,88,000


PART II. Assets

Tangible Assets

Plant and Machinery Rs. 13,00,000 (-) Rs. 3,92,000 = Rs. 9,08,000
Building Rs. 3,50,000

Intangible Assets
Patent Rs. Nil

Current Assets
Inventory Rs. 5,45,000
Trade Receivable Rs. 8,50,000
Bank Rs. 1,75,000 + Rs. 2,00,000 - Rs. 1,10,000 - Rs. 30,000 (Expenses) = Rs. 2,35,000

Total Rs. 28,88,000

5(a)

Profit and loss account

I. Income
- Interest Earned = 8,971
- Other Income = 2,419
Total = 11,390

II. Expenditure
- Interest expended = 4,120
- Operating Expense = 3,703
- Provisions = 2,120

Total = 9,943

Profit/Loss = 1,447

Working Note Provision and contingency

Standard 40% X 4,700 = 1,880
Substandard 15% X 1,900 = 285
Doubtful not covered 100% X 400 = 400
Doubtful covered 1 Year 25% X 40 = 10
Loss Assets 200% X 300 = 600
Diminution in value of investment
Cost 75% X 3,600 = 2,700
Less Market value (1,875)

Provision = 2,120

5(b)

Journal Enteries

(a) Marine Revenue A/c Dr. 6.20
     To URR A/c Cr. 6.20
(Being difference between Being the difference between closing provision of 41.20 and opening provision charged to marine revenue account)

(b) Fire revenue A/c Dr 15.85
      To URR A/c Cr. 15.85

(c) URR A/c Dr. 0.45
      To Misc. A/c Cr. 0.45

URR A/c

Opening
+ M 35.00
+ F 50.00
+ Ms 15.0

Revenue
- M 6.20
- F 15.85
- Ms (0.45)

Closing
= M 41.20
= F 65.85
= Ms 14.55

6(b)

7(a)

Identification of NPA The Reserve Bank of India has issued detailed guidelines to banks regarding the classification of advances between performing and non-performing assets which are revised from time to time. The latest guidelines for identifying an NPA’s are:

1. Bills purchased and discounted become NPA if interest and / or instalment of principal remain overdue for a period exceeding 90 days.

2. Term Loans: become NPA if their amount (interest or principal) remain overdue wholly or partly for a period exceeding 90 days.

3. A cash credit / overdraft account is treated as NPA if it becomes out of order. An account is deemed to be out of order if the outstanding balance remains continuously in excess of the sanctioned borrowing power or though the outstanding balance remains below the sanctioned borrowing power, there have been no credits in the account for a continuous period of more than 90 days prior to the Balance Sheet date or where the credits have not been enough to cover the interest debited during the same period.

Therefore, an account is treated as 'out of order' if any of the following conditions are satisfied:

(a) The outstanding balance remains continuously in excess of the sanctioned limit/drawing power for a continuous period of 90 days prior to the Balance Sheet date
(b) Though the outstanding balance is less than the sanctioned limit/drawing power –
(i) there have been no credits for a continuous period of more than 90 days prior to the date of balance sheet; or
(ii) credits during the aforesaid period are not enough to cover the interest debited during the same period.
(c) Further any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

Case 1 NPA reason 3(b)(ii)
Case 2 NPA reason 3(b)(i)
Case 3 NPA reason 3(a)
Case 4 Not an NPA

7(b)

As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company should not be more than twice the capital and its free reserve after such buy-back.

It is presumed that buy- back is out of free reserves or securities premium and hence a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption Reserve (CRR).

Utilization of CRR is restricted to issuance of fully paid-up bonus shares only.

It means CRR is not available for distribution as dividend.

Hence, CRR is not a free reserve.

Therefore, for calculation of future equity i.e. share capital and free reserves, amount transferred to CRR on buyback has to be excluded from present equity.

Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method.

Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.

Then Equation 1 :(Present equity – Nominal value of buy(-)back transfer to CRR) – Minimum equity to be maintained= Maximum permissible buy-back of equity

72,80,000 (3000000+4900000-620000) - x - 21,00,000 = y

51,80,000 - x = y....(a)

Equation 2: Maximum buyback/Offer price for buy back X NominalValue = Nominal value of the shares bought (–)back to be transferred to CRR

y/30X10 = x

3x = y...(b)

Solving (a) and (b)

x = 12,95,000
y= 38,85,000

Loan Funds = 42,00,000
Minimum Equity to be maintained after buy back = Loan/2 = 21,00,000
Current Equity= 72,80,000
Future Equity shareholder fund = 72,80,000 - x = 59,85,000
Maximum permitted buy back of Equity = 38,85,000
Maximum number of shares that can be bought back @ Rs. 30 per share = 1,29,500

7(c)

Total Claim paid in  2018 = 5,00,000 (80,000+70,000+3,50,000)
Less outstanding in the begging intimated in 2017 or earlier whether admitted in 2017 or 2018 (80,000 + 70,000) = 1,50,000
Add: Outstanding at the end, intimated in 2018 whether accepted in 2018 or 2019 (65,000 + 45,000) = 1,10,000
Less Re-insurance Claims = 1,22,000

Claim to be shown in revenue account = 3,38,000

7(d)

7(e)

"Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement."

There are a number of measurement basis that are employed in different degrees and in varying combinations in financial statements. They are listed below:

1. Historical cost: Historical cost is the most common measurement basis adopted by enterprises in preparing their financial statements. This is usually combined with other measurement basis, such as current cost basis, realisable basis, etc., which are discussed later in this section. Under historical cost measurement basis, assets are originally recorded at their costs or purchasing price or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received received in exchange for the obligation.
2. Current cost: Under current cost basis, assets are carried at the amount of cash that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash that would be required to settle the obligations currently.
3. Realisable value: Assets are carried at the amount of cash that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amount of cash expected to be paid or satify the liabilities in the normal course of business.
4. Present value: Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the presentd discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.