CHARTERED ACCOUNTANCY PROFESSIONAL CAP-II

REVISION TEST PAPER

December 2018

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The Institute of Chartered Accountants of Nepal

 Paper 1: Advanced Accounting

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 Revision Questions
Business Combination
Question No 1:
The following is the Balance Sheet of Blue Star Ltd. as at 32nd Ashadh, 2075:
Liabilities Rs. Assets Rs.

8,000 equity shares of Rs.100 each 800,000 Building 340,000

10% debentures 400,000 Machinery 640,000

Term Loan from Bank 160,000 Stock 220,000

Creditors 320,000 Debtors 260,000

General Reserve 80,000 Bank 136,000

Goodwill 130,000

Deferred Revenue Exp. 34,000

1,760,000 1,760,000

Big Star Ltd. agreed to acquire Blue Star Ltd. on the following terms and conditions:
(1) Big Star Ltd. would take over all Assets, except bank balance at their book values less
10%. Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the
normal rate of return be 8% on the combined amount of share capital and general
reserve.
(2) Big Star Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of Rs. 600,000 and the
balance in fully paid equity shares of Rs.100 each at Rs.125 per share.
The average profit is Rs. 124,400. The liquidation expenses amounted to Rs. 16,000 to be
borne by Big Star Ltd. Blue Star Ltd. had purchased prior to 32 nd Ashadh, 2075 goods
costing Rs. 120,000 from Big Star Ltd. for Rs. 160,000. Rs. 100,000 worth of goods is still
in stock of Blue Star Ltd. on 32 nd Ashadh, 2075. Creditors of Blue Star Ltd. include
Rs.40,000 still due to Big Star Ltd.
Show the necessary Ledger Accounts to close the books of Blue Star Ltd. and prepare the
Balance Sheet (extract) of Big Star Ltd. as at 1 st Shrawan, 2075 after the acquisition.

Question No 2:
Following is given the Balance Sheets of M/s Himal Ltd. and Hill Ltd. for further course of actions:
Balance Sheet of Himal Ltd.

Rs. Rs.

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 Share Capital 20,00,000 Fixed Assets 15,00,000

General Reserve 15,00,000 Investment 2,50,000

Current Liabilities 15,00,000 Current Assets 32,50,000

50,00,000 50,00,000

Balance Sheet of Hill Ltd.

Rs. Rs.

Share Capital 10,00,000 Fixed Assets 3,00,000

General Reserve 5,00,000 Goodwill 1,00,000

Current Liabilities 2,00,000 Current Assets 14,00,000

Proposed dividend 1,00,000

18,00,000 18,00,000

Himal Ltd. absorbed Hill Ltd. on following terms & conditions:

a) Hill Ltd declares a dividend of 10% before absorption for the payment of which it is to
retain sufficient amount of cash.
b) The net worth of Hill Ltd. is valued at Rs. 1,450,000.
c) The purchase consideration is satisfied by the allotment of fully paid shares of Rs. 100
each in Himal Ltd.
Following additional information is also to be taken in to consideration:
 Himal Ltd. holds 2,500 shares of Hill Ltd. at a cost of Rs 200,000.
 The stock of Hill Ltd. includes items valued at Rs. 50,000 from Himal Ltd. (cost Rs.
37,500)
 The creditors of Hill Ltd include Rs. 15,000 due to Himal Ltd.
Required: Show ledger account in the books of Hill Ltd. to give effect to the above and Balance Sheet of
Himal Ltd. after completion of absorption.

Internal Reconstruction
Question No 3:
The following is the Balance Sheet of Pokhara Light Ltd. as on 31.3.2073:
Liabilities Rs. Assets Rs.
Equity shares of 10,000,000 Fixed assets 12,500,000
Rs.100 each
12% cumulative 5,000,000 Investments 1,000,000
preference (Mark

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 shares of et
Rs.100 each value
Rs.950
,000)
10% debentures of 4,000,000 Current assets 10,000,000
Rs.100 each
Sundry creditors 5,000,000 P & L A/c 400,000
Provision for 100,000 Preliminary 200,000
taxation expens
es
24,100,000 24,100,000
The following scheme of reorganization is sanctioned by the AGM and Company Registrar:
(i) All the existing equity shares are reduced to Rs.40 each.
(ii) All preference shares are reduced to Rs.60 each.
(iii) The rate of interest on debentures is increased to 12%. The debenture holders surrender
their existing debentures of Rs.100 each and exchange the same for fresh debentures of
Rs. 70 each for every debenture held by them.
(iv) One of the creditors of the company to whom the company owes Rs. 2,000,000 decides
to forgo 40% of his claim. He is allotted 30,000 equity shares of Rs.40 each in full
satisfaction of his claim.
(v) Fixed assets are to be written down by 30%.
(vi) Current assets are to be revalued at Rs. 4,500,000.
(vii) The taxation liability of the company is settled at Rs.150,000.
(viiii) Investments to be brought to their market value.
(ix) It is decided to write off the fictitious assets.
Pass Journal entries and show the Balance sheet of the company after giving effect to the above.

Cash Flow Statement

Question No 4:
The summarized Balance Sheet of Raniban Pvt. Ltd. as on 31st December 2015 and 2016 are as
follows:
.
Liabilities 2015 2016 Assets 2015 2016

Share Capital 100,000 100,000 Building 46,800 45,000

General Reserve 38,400 42,000 Plant & Machinery 38,280 42,030

Creditors 9750 6380 Goodwill 13,000 13,000

Tax Provision 19,000 21,000 Investment 10,000 11,250

Prov. for doubtful debt 1,000 1,200 Stock 30,000 28,000

Debtors 22,070 22,300

Cash 8,000 9,000

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 Total 168,150 170,580 Total 168,150 170,580

After taking the following information into account, prepare a cash flow statement for the year
ended on 31st December 2016.
i) Profit for year 2016 was Rs. 8,600 against this had been charged depreciation Rs. 3,050
and increase in provision for doubtful debt Rs.200/-.
ii) Income Tax Rs. 18,000 was paid during the year charged against the provision and in
addition Rs. 20,000 was charged against profit and carried to the provision.
iii) An interim dividend of Rs. 5,000 was paid in January 2016.
iv) Additional Plant was purchased in September 2015 for Rs. 5,000
v) Investments (cost Rs. 5,000) were sold for Rs. 4,800 in 2016 and on 1 st March 2016
another investment was made for Rs. 6,250.

Insurance Claim
Question No 5:
A fire broke out in the godown of a business house on Shrawan 08, 2074. Goods costing Rs. 203,000
in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from
the main godown were valued at Rs. 197,000. The following particulars were available from the
books of account:
Stock on the last balance sheet date at 31.03.2074 was Rs. 1,572,000
Purchases for the period from Shrawan 01 to Shrawan 07 were Rs. 3,710,000
Sales during the same period amounted to Rs. 5,260,000
The average gross profit margin was 30% on sales.
The business house has a fire insurance policy for Rs. 1,000,000 in respect of its entire stock.
Required: Assist the accountant of the business house in computing the amount of claim of loss by
fire.

Question No 6:
A fire occurred in the premises of M/s Gadbadh Co. on 30 th Mangsir 2073. Following particulars is
provided to the period 1 st Shrawan 2073 to 30 th Mangsir 2073.
Rs.
st
i) Stock as per Balance Sheet as at 31 Ashadh 2073 99,000
ii) Purchases (including purchase of a machinery Costing Rs. 30,000) 170,000
iii) Wages (including wages for the installation of Machinery Rs. 3,000) 50,000
iv) Sales (including goods sold on approval basis amounting to Rs. 49,500.
No confirmation had been received in respect of two-thirds of such Goods sold on approval basis.
275,000
v) Sales value of goods drawn by proprietor 15,000
vi) Cost of goods sent to consignee on 15 Mangsir 2073 lying unsold With them 16,500
vii) Sales value of goods distributed as free samples 1,500
The average rate of gross profit had been 20% in the past. This selling price had been increased by
20% with effect from 1st Shrawan 2073.

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 For valuing the stocks for the Balance Sheet as at 31st Ashadh 2073, Rs. 1,000 had been written off
in respect of a slow moving item, the cost of which was Rs. 5,000. A portion of those goods were
sold at a loss of Rs. 500 on the original cost of Rs. 2,500. The remainder of the stock was now
estimated to be worth the original cost.

Subject to the above exceptions, the gross profit had remained at a uniform rate throughout. The
value of goods salvaged was estimated at Rs. 25,000. The enterprise had taken an insurance policy
for Rs. 60,000 which was subject to the average clause.

Required: To ascertain the amount of claim to be filed with the insurance company for the loss of
stock.

Contract Accounting
Question No 7:
M/s Santi Construction started working on a contract on 1 stBaisakh 2074 for Rs. 500,000. On
31stAshad 2074, when the company prepared its final accounts, the following information relating to
the contractor was extracted from his books of accounts:
Particulars Rs.
Material issued from stores and sent to site 160,000
Wages paid 101,200
Wages outstanding on 31-03-2074 37,520
New machines purchased and sent to the site on 1-1-2074 148,000
Direct charges paid 7,500
Direct charges outstanding on 31-03-2074 600
Establishment charges apportioned to contract 6,400
On 31 Ashad 2074 materials lying unused at the site were valued at Rs.21,620. Machines were
depreciated at 20% per annum. Value of work certified by 31stAshad 2074 was Rs. 350,000 while the
cost of work done but yet not certified as on that date was Rs.18,000. On the basis of architect‘s
certificate, the company had received a total sum of Rs. 280,000 from the contractee till 31 stAshadh
2074.
Required: Contract account and relevant portion of the balance sheet in the books of M/s Santi
Construction.

Hire Purchase Transactions

Question No 8:
Omega Enterprises sells computers on hire purchase basis at cost plus 25%. Terms of sales are Rs.
10,000 as down payment and 8 monthly instalments of Rs. 5,000 for each computer. From the
following particulars prepare Hire Purchase Trading Account for the year 2017.
As on 1st January, 2017 last instalment on 30 computers was outstanding as these were not due up to
the end of the previous year.
During 2017 the firm sold 240 computers. As on 31 st December, 2017 the position of instalments
outstanding were as under :
Instalments due but not collected :

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 2 instalments on 2 computers and last instalment on 6 computers.
Instalments not yet due :
8 instalments on 50 computers, 6 instalments on 30 and last instalment on 20 computers.
Two computers on which 6 instalments were due and one instalment not yet due on 31.12.2017 had to be
repossessed. Repossessed stock is valued at 50% of cost. All other instalments have been received.

Issue of Shares and Debentures

Question No 9:
Kitkit Limited recently made a public issue in respect of which the following information is
available:
a) No. of partly convertible debentures issued 200,000; face value and issue price NRs.100 per
debenture.
b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the date of
closing of issue.
c) Date of closure of subscription lists 1.5.2016, date of allotment 1.6.2016, rate of interest on
debenture 15% payable from the date of allotment, value of equity share for the purpose of
conversion NRs. 60 (Face Value NRs. 10).
d) Underwriting Commission 2%.
e) No. of debentures applied for 150,000.
f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended 31st
March, 2017 (including cash and bank entries).

Question No 10:
Yeti Ltd. with an authorized capital of Rs. 30,000,000 offered to public 400,000 ordinary shares of
NRs.50 each at a premium of NRs.5 each. The payment was to be made as;
NRs.15 on application,
NRs.25 on allotment (including premium) and
NRs.15 on first and final call.
Application totalled 800,000 shares; shares were allotted on a pro-rata basis. Amit who had applied for
800 shares and to whom 400 shares had been allotted failed to pay the balance of allotment money due
from him. His shares were forfeited and then reissued to Tanka as Rs.40 (including premium of NRs.5) per
share as fully paid up. Rojina, another shareholder, failed to pay the call money on 100 shares held by her.
Her shares were also forfeited. Later, these shares were reissued as fully paid to Suchitra for NRs.60 per
share.
Expenses of the issue of shares came to Rs.12,000.
Required: Pass necessary journal entries in the books of M/s Yeti Ltd.

Underwriting of Shares and Debentures

Question No 11:

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Nepal Capital Ltd. came out with an issue of 450,000 equity shares of Rs. 100 each at a premium of
Rs. 20 per share. The promoters took 20% of the issue and the balance was offered to the public. The
issue was equally underwritten by A & Co; B & Co. and C & Co.
Each underwriter took firm underwriting of 10,000 shares each. Subscriptions for 310,000 equity
shares were received with marked forms for the underwriters as given below:
A & Co. 72,500 shares

B & Co. 84,000 shares

C & Co. 131,000 shares

Total 287,500 shares

The underwriters are eligible for a commission of 5% on face value of shares. The entire amount
towards shares subscription has to be paid along with application. You are required to:
(a) Prepare the statement showing the underwriters‘ liability (number of shares)
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Nepal Capital Ltd. relating to underwriting.

Incomplete Records
Question No 12
The following is the Balance Sheet of Mr. Sanjay Rijal, a small trader as on 32.3.2075 :
(Figures in Rs. ‗000)
Liabilities Rs. Assets Rs.
Capital 200 Fixed Assets 145
Creditors 50 Stock 40
Debtors 50
Cash in Hand 5
Cash at Bank 10
250 250
A fire destroyed the accounting records as well as the closing cash of the trader on 32.3.2075. However,
the following information was available :
(a) Debtors and creditors on 32.3.2075 showed an increase of 20% as compared to 31.3.2074.
(b) Credit Period :
Debtors – 1 month Creditors – 2 months
(c) Stock was maintained at the same level throughout the year.
(d) Cash sales constituted 20% of total sales.
(e) All purchases were for credit only.
(f) Current ratio as on 32.3.2075 was exactly 2.
(g) Total expenses excluding depreciation for the year amounted to Rs. 250,000.
(h) Depreciation was provided at 10% on the closing value of fixed assets.

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(i) Bank and cash transactions :
(1) Payments to creditors included Rs. 50,000 by cash.
(2) Receipts from debtors included Rs. 5,90,000 by way of cheques.
(3) Cash deposited into the bank Rs. 1,20,000.
(4) Personal drawings from bank Rs. 50,000.
(5) Fixed assets purchased and paid by cheques Rs. 2,25,000.
You are required to prepare:
(a) The Trading and Profit & Loss Account of business for the year ended 32.3.2075 and
(b) A Balance Sheet as on that date.
Assume that cash destroyed by fire is written off in the Profit and Loss Account.

Ratio Analysis
Question No 13:
M/s Nyatapola Enterprises asked you to prepare their Balance Sheet from the particulars furnished
hereunder:
Gross Profit Margin: 10%
Stock Velocity: 12
Capital turnover ratio: 2
Fixed assets turnover ratio: 5
Debt collection period: 1 month
Creditor‘s payment period: 73 days
Gross Profit: Rs. 100,000
Excess of closing stock over opening stock: Rs. 30,000
Make suitable assumptions wherever necessary.

Profit or Loss Pre and Post Incorporation

Question No 14:
The partnership of Bara Enterprises decided to convert the partnership into private limited company
named Churimai Company Pvt. Ltd. with effect from 1 st Baisakh 2071. The consideration was agreed
at Rs. 23,400,000 based on firm‘s Balance Sheet as on 31 st Chaitra 2070. However, due to some
procedural difficulties, the company could be incorporated only on 1 st Shrawan 2071. Meanwhile, the
business was continued on behalf of the company and the consideration was settled on that day with
interest at 12% p.a. The same books of accounts were continued by the company, which closed its
accounts for the first time on 31 st Ashadh, 2072 and prepared the following summarized profit and
loss account:

Particulars Rs. Particulars Rs.

To Cost of goods sold 327,60,000 By sales 468,00,000

Managing Director‘s Salary 180,000
Profit 3834,000

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 The company‘s only borrowing was a loan of Rs. 100,00,000 at 12% p.a. to pay the purchase
consideration due to the firm and for working capital requirements. The company was able to
double the monthly average sales of the company from 1 st Shrawan 2071 but the salaries treble
from that date. It had to occupy additional space from 1 st Kartik 2071 for which rent was Rs.
60,000 per month.
Prepare a statement showing apportionment of costs and revenue between pre -incorporation and
post-incorporation periods.

Liquidator’s Final Statement

Question No 15:
The following is the Balance Sheet of Himchuli Co. Limited as at 31st Ashadh, 2073:
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
2,000 Equity Shares of Rs. 100 Land & Buildings 400,000
each Rs. 75 per share paid up 150,000 Plant and Machineries 380,000
6,000 equity shares of Rs. 100 Current Assets:
each Rs. 60 per share paid up 360,000 Stock at Cost 110,000
2,000 10% Preference Share of Cash at Bank 60,000
Rs. 100 each fully paid up 200,000 Profit and Loss A/c 240,000
10% Debentures (having a floating Sundry Debtors 220,000
charge on all assets) 200,000
Interest accrued on Debentures
(also secured as above) 10,000
Sundry Creditors 490,000
1,410,000 1,410,000
On that date, the company went into Voluntary Liquidation. The dividends on preference shares were
in arrear for the last two years. Sundry Creditors include a loan of Rs. 90,000 on mortgage of Land
and Buildings. The assets realized were as under:-
Rs.
Land and Buildings 340,000
Plant & Machineries 360,000
Stock 120,000
Sundry Debtors 160,000
Interest accrued on loan on mortgage of buildings upto the date of payment amounted to Rs.
10,000. The expenses of Liquidation amounted to Rs. 4,600. The Liquidator is entitled to a
remuneration of 3% on all the assets realized (except cash at bank) and 2% on the amounts
distributed among equity shareholders. Sundry creditor included preferential creditors Rs.
30,000. All payments were made on 31 st Ashwin 2073. Prepare the liquidator‘s final statement.

Accounting for Partnership

Question No 16:
The following is the trial balance as on 31 st Ashad 2074 of Amar, Bisnhu and Chetan who had
branches at different places and who shared profits & losses in the ratio of 2:1:2 respectively,
Rs. Rs.

Dr. Cr.

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Capitals, 1st Shrawan 2073
Amar 140,000
Bishnu 140,000
Chetan 20,000
Drawings
Amar 22,720
Bishnu 19,920
Chetan 9,160

Patents & Trade Marks 24,000

Sundry Creditors 69,800
Profit & Loss account for the year (before allowing interest @ 10%
on capital, as a charge) 25,000
Sundry Debtors-
Dhankuta 67,500
Pokhara 32,500
Kailali 15,000

Furniture-
Dhankuta 10,000
Pokhara 5,000
Kailali 6,000

Stock-
Dhankuta 46,000
Pokhara 34,000
Kailali 53,000
_______ _______
369,800 369,800
The firm was dissolved on that date. Amar took over Dhankuta Branch, and Bisnu took over Pokhara
Branch; the assets being taken at 10% less than the book values. Patents and Trade Marks were found
valueless. The business at Kailali was sold to a limited company which allotted 6,000 equity shares of
Rs. 10 each credited as fully paid. To pay the liabilities, Amar and Bisnhu introduced cash in the
profit sharing ratio. The cost of winding up came to Rs. 4,000 for which Amar advanced cash. Chetan
is insolvent and can pay nothing. Bishnu received all the shares.

Required: Necessary accounts to close the books of the firm; partners give effect to the correct
position without having to make up losses in cash. Assume the capitals to be fluctuating. Amar
and Bishnu settles accounts themselves.

Accounting for Non-profit making Organization

Question No 17:
Following information has been given for Himalayan Sports Club, Lalitpur for the year ending
31.3.2073 and 31.3.2074

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 31.3.2073 31.3.2074
Building (subject to 10% depreciation for the current year) 60,000 ?
Furniture (subject to 10% depreciation for the current year) - 20,000
Stock of Sports Materials 5,000 2,000
Prepaid Insurance 3,000 6,000
Subscription Receivable 12,000 8,000
Advance Subscription 6,000 4,000
Locker Rent receivable - 6,000
Advance Locker Rent received - 2,000
Outstanding Rent for Godown 6,000 3,000
12% Investment –General Fund 200,000 200,000
Accrued Interest on Investment - 4,000
Cash Balance 1,000 64,000
Bank Balance 2,000 -
Bank Overdraft - 2,000
Additional information:
(i) Entrance fees received Rs. 20,000, Life membership fees received Rs. 20,000 during the
year.
(ii) Surplus from income and expenditure account Rs. 60,000.
(iii) It is the policy of the club to treat 60% of entrance fees and 40% of life membership fees as
revenue nature.
(iv) The furniture was purchased on 1.4.2073.
Prepare Balance Sheets of the club as on 31.3.2073 and 31.3.2074

Accounting for Banks

Question No 18:
Following information as at third quarter ending FY 2074/75 were drawn from the records of
M/s Mechi Bank Limited as under:
Loan outstanding for Amount Rs.

Upto 3 months 1,673,000

More than 3 months but not more than 6 months 13,612

More than 6 months but not more than 12 months 782

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 More than 12 months 2,198

Total 1,689,592

The bank has not restructured or rescheduled any of its credit

Following additional information relating to previous quarter ending were extracted from the
records of the bank:
Particulars Amount Rs.

Paid up Equity Share Capital 171,010

General Reserve 155,432

Retained Earnings 87,886

General Loan Loss Provision 16,983

Exchange Equalization Reserve 22,313

Un-audited current year profit 31,991

Deferred Revenue expenses 2,884

The bank is in the process of preparing the documents for quarterly reporting. The bank has
also provided a term loan of Rs.125,000 to a single party during the period under review. As a
reporting and compliance officer of the bank you are required to calculate movement in loan
loss provision amount.

Question No 19:
From the following information calculate Core capital ratio and total capital adequacy ratio of
DDD Bank Ltd. and suggest management about the compliance of the same:
In lakh
Paid up Capital 20,000
General Reserve Fund 377
Retained Earnings 308
Profit for current year 1,945
General Loan Loss Provision 1,215
Investment Adjustment Reserve 22
Loan Given to Relatives of Staffs 37
Risk weighted Exposure for Credit Risk 213,546
Risk weighted Exposure for Operational Risk 4,235
Risk Weighted Exposure for Market Risk 1,618

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Accounting for Departments
Question No 20:
Department Blue sells goods to Department Black at a profit of 25% on cost and to Department
Pink at 10% profit on cost. Department Black sells goods to Blue and Pink at a profit of 15%
and 20% on sales, respectively. Department Pink charges 20% and 25% profit on cost to
Department Blue and Black, respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated. Departmental profits after charging Managers‘ commission, but
before adjustment of unrealized profit are as under:
Rs.

Department Blue 36,000

Department Black 27,000
Department Pink 18,000

Stocks lying at different departments at the end of the year are as under:

Dept. Blue Dept. Black Dept. Pink

Rs. Rs. Rs.
Transfer from Department Blue — 15,000 11,000
Transfer from Department Black 14,000 — 12,000
Transfer from Department Pink 6,000 5,000 —
Required: Correct departmental Profits after charging Managers‘ commission.

Nepal Accounting Standards (NAS)

Question No 21:
a. Shree Ganesh Ltd. is a manufacturing company produces durable consumer goods with an annual
turnover of Rs. 100 crores. The company receives orders from its commission agents all over the
country, but goods are dispatched directly to the customers. The documents including transport
bills are sent through the bank for collection. At the end of the 6th year, it is found that documents
covering the dispatch of goods worth Rs. 10 crores were still lying with the banks not cleared by
the customers even though the normal collection period of 15 days from the date of dispatch has
expired. Should revenue be recognized in the above case?
b. While preparing its final accounts for the year ended 32nd Ashad, 2075, a company made
provision for bad debts @5% of its total debtors. In the last week of Jestha 2075 a debtor for Rs.
20 lakhs had suffered heavy loss due to a heavy fire; the loss was not covered by any insurance
policy. In Shrawan 2075 the debtor became a bankrupt. Can the company provide for the full loss
arising out of insolvency of the debtor in the final accounts for the year ended 32 nd Ashad, 2075?
Give your opinion on the basis of relevant NAS.

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 c. A company is in a dispute involving allegation of infringement of patents by a competitor
company who is seeking damages of a huge sum of Rs. 20 million. The directors are of the
opinion that the claim can be successfully resisted by the company. How would you deal with the
same in the annual accounts of the company?

d. ABC Co. took a machine on lease from XYZ Co. the fair value being Rs. 1,000,000. The
economic life of the machine as well as lease term is 4 years. At the end of each year, ABC Co.
pays Rs. 350,000. The lessee has guaranteed a residual value of Rs. 40,000 on expiry of lease to
the lessor. However, XYZ Co. estimates that the residual value of the machinery will be Rs.
35,000 only. The implicit rate of return is 16% and PV factors at 16% for year 1, year 2, year 3
and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively. You are required to calculate the
value of machinery to be considered by ABC Co.

e. Discuss on ‘Other comprehensive income’ as outlined in Nepal Accounting Standard.

f. A company capitalizes interest cost of holding investments and adds to cost of investment every
year, thereby understating interest cost in profit and loss account. Comment on the accounting
treatment done by the company in context of the relevant NAS.
Write Short Notes
Question No 22:
(a). Leases
(b). Re-Insurance
(c). Contingent Assets
(d). Non Banking Assets
(e). Debt Service Coverage Ratio
(f). Watch List in Loan loss provisioning
(g). Government Accounting System in Nepal
(h). Outsourcing the Accounting function to third party

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 SUGGESTED ANSWERS HINT

Business Combination

Answer No 1:
Books of Blue Star Limited
Realization Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders A/c (Loss) 60,000
To Debtors 2,60,000
To Goodwill 1,30,000
1,590,000 1,590,000

Bank Account
To Balance b/d 136,000 By 10% debentures 400,000
To Big Star Ltd. 600,000 By Loan from A 160,000
By Equity shareholders A/c 176,000
736,000 736,000

Big Star Ltd. Account

To Realisation A/c 1,210,000 By Bank A/c 600,000
By Equity Share holders A/c
(4,880 shares at Rs.125 each in Big Star
Ltd.) 610,000
1,210,000 1,210,000

Equity Shareholders Account

To Realisation A/c 60,000 By Equity Share Capital 800,000
To Deferred Revenue Exp. 34,000 By General Reserve 80,000
To Equity shares in Big Star Ltd. 610,000
To Bank A/c 176,000
880,000 880,000

Big Star Ltd.

Balance Sheet as on 1 st Shrawan, 2075 (An extract)
Liabilities Rs. Assets Rs.
4880 Equity shares of Rs.100 each 488,000 Goodwill 232,000
(Shares have been issued for Building 306,000
consideration other than cash)
Securities Premium 122,000 Machine 576,000

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Profit and Loss A/c ….
Less: unrealized profit 15,000 …..
Creditors (320,000 - 40,000) 280,000 Stock (198,000 -15,000) 183,000
Bank Overdraft 616,000 Debtors (260,000 – 40,000) 220,000
Less: Provision for bad debts 26,000 194,000

Working Notes:
1. Valuation of Goodwill Rs.
Average profit 124,400
Less: 8% of Rs. 880,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 216,000

2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 216,000
Building 306,000
Machinery 576,000
Stock 198,000
Debtors 260,000
Total Assets 1,556,000
Less: Creditors 320,000
Provision for bad debts 26,000 346,000
Net Assets 1,210,000

Out of this Rs. 600,000 is to be paid in cash and remaining i.e., (1,210,000–600,000) Rs. 610,000 in
shares of Rs. 125/-. Thus, the number of shares to be allotted 610,000/125 = 4,880 shares.
3. Unrealized Profit on Stock Rs.
The stock of Blue Star Ltd. includes goods worth Rs. 100,000 which was sold by
40,000
Big Star Ltd. on profit. Unrealized profit on this stock will be 1,00,000 25,000
1,60,000
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than the (10,000)
book value, 10% need to be adjusted from the stock i.e., 10% of Rs.100,000.
Amount of unrealized profit 15,000
4. Liquidation expenses borne by the Big Star Ltd. so that should be debited to Goodwill Account.

The Institute of Chartered Accountants of Nepal

 Answer No 2:
Books of Hill Ltd.
Realisation Account

Particulars Amount Rs. Particulars Amount Rs.

To Good will 1,00,000 By Current Liabilities 2,00,000

To Fixed Assets 3,00,000 By Himal Ltd. 10,87,500
To Current Assets 13,00,000 By Share Capital 2,50,000
By Equity Shareholders a/c ( loss) 1,62,500
17,00,000 17,00,000

Equity Shareholders (outside) Account

Particulars Amount Rs. Particulars Amount Rs.

To Realisation 2,50,000 By Share Capital 10,00,000

To Realisation Loss 1,62,500 By General reserve 5,00,000
To Shares in Himal Ltd 10,87,500
15,00,000 15,00,000

Balance Sheet of Himal Ltd.

(After completion of absorption)

Capital & Liabilities Amount Rs. Assets Amount Rs.

Share Capital 30,87,500 Fixed Assets 18,00,000

30875 shares @ Rs. 100 fully Himal Ltd. 15,00,000
paid Hill Ltd. 3,00,000

Reserve & Surplus 16,25,000 Investment 50,000

General reserve 15,25,000
Capital reserve 1,00,000 Current Assets 45,47,500

Current Liabilities 16,85,000

63,97,500 63,97,500

Workings:

The Institute of Chartered Accountants of Nepal

 Adjusted Balance Sheet of Hill Ltd.

Capital & Liabilities Amount Rs Assets Amount Rs.

Share Capital 10,00,000 Fixed assets 3,00,000
General Reserve 5,00,000 Goodwill 1,00,000
Current Liabilities 2,00,000 Current assets 13,00,000*
17,00,000 17,00,000

Hill Ltd retains Rs. 100,000 in cash for dividend (10%) ( 1,400,000-100,000)
1. Total Purchase consideration (based on net worth of Hill Ltd.) is Rs. 1,450,000.
2. Himal Ltd. holds 2,500 shares in Hill Ltd. The percentage of holding is 25%
3. The net purchase consideration to pay Rs. 1,450,000 * ¾ = 1,087,500
4. Calculation of Current Assets

Current assets of Himal Ltd. 3,250,000

Add Dividend 25,000
3,275,000
Less: intercompany amount 15,000
3,260,000
Current Assets of Hill Ltd. 1,300,000
Less unrealized profit 12,500
(Rs. 50,000-37,500) 1,287,500
Total Current Assets 4,547,500

5. Calculation of Current Liabilities

Himal Ltd. 1,500,000
Hill Ltd. (200,000-15,000) 185,000
1,685,000

6. Calculation of Capital Reserve

Assets taken over from Hill Ltd:
Fixed assets 300,000
Current assets (1,300,000-12,500) 1,287,500
1,587,500
Liabilities:
Investment in Hill Ltd. 200,000
Current Liabilities 200,000
Purchase consideration 1,087,500 1,487,500
Capital Reserve 100,000

The Institute of Chartered Accountants of Nepal

Internal Reconstruction

Answer No 3:
Journal Entries

in the books of Pokhara Light Ltd.

Rs.
Rs.
(i) Equity Share Capital (Rs.100) A/c Dr. 1,00,00,000
To Equity Share Capital (Rs.40) A/c 40,00,000
To Reconstruction A/c 60,00,000
(Being conversion of equity share capital of Rs.100 each into Rs.40 each as
per reconstruction scheme)
(ii) 12% Cumulative Preference Share capital (Rs.100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (Rs.60) A/c 30,00,000
To Reconstruction A/c 20,00,000
(Being conversion of 12% cumulative preference share capital of Rs.100 each
into Rs.60 each as per reconstruction scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
To Reconstruction A/c 12,00,000
(Being 12% debentures issued to 10% debenture-holders for 70% of their
claims. The balance transferred to capital reduction account as per
reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
To Reconstruction A/c 8,00,000
(Being a creditor of Rs.20,00,000 agreed to surrender his claim by 40% and
was allotted 30,000 equity shares of Rs.40 each in full settlement of his dues
as per reconstruction scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Reconstruction A/c Dr. 50,000
To Current Assets (Bank A/c) 1,50,000
(Being conversion of the provision for taxation into liability for taxation for
settlement of the amount due)
(vi) Reconstruction A/c Dr. 99,50,000
To P & L A/c 4,00,000
To Preliminary Expenses A/c 2,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000

The Institute of Chartered Accountants of Nepal