CA Inter Advanced Account - Regular Course by CA P S Beniwal

B-44
WITH MAHARAJ JI KRIPA
Dedicated to
My Parents
Sh. Balwan Beniwal
and Smt. Murti Devi Beniwal
whose happiness is only aim of
my life
CA Inter – Advance Accounting CA P. S. BENIWAL (9990301165)
INDEX
Unit Marks Sr. Chapter Page No.
No.
I 12-16 1 Banking Company 1.1 to 1.33
2 NBFC 2.1 to 2.8
II 25-30 3 Partnership 3.1 to 3.49
4 Consolidated Financial 4.1 to 4.12
Statement
5 Amalgamation, Absorption and 5.1 to 5.48
External Reconstruction
6 Internal Reconstruction 6.1 to 6.30
III 33-38 7 Liquidation of Company 7.1 to 7.23
8 ESOP 8.1 to 8.8
9 Buy back of Securities and 9.1 to 9.13
Equity Shares with differential
Rights
IV 20- 26 10 Accounting Standards 10.1 to 10.104
V 11 Schedule III 11.1 to 11.15
CA Pardeep Beniwal
+91 98 999 54308 (Only Whatsapp)
Chapter 1: Accounting for Banking Companies CA P. S. Beniwal (9990301165)
Q1. A loan outstanding of Rs. 50,00,000 has DICGC cover. The loan guaranteed by DICGC is assigned a
risk weight of 50%. What is the value of Risk – adjusted asset?
Q2. On 31st March, 1997, Uncertain Bank Ltd. Had a balance of Rs. 9 crores in “rebate on bills discounted”
account. During the year ended 31st March, 1998. Uncertain Bank Ltd. Discounted bills of exchange of
Rs. 4,000 crores charging interest at 18% per annum, the average period of discount being for 73 days.
Of these, bills of exchange of Rs. 600 crores were due for realization from the acceptors/customers after
31st March, 1998, the average period outstanding after 31st March, 1998 being 36.5 days.
Uncertain Bank Ltd. Asks you to pass journal entries and show the ledger accounts pertaining to:
(i) Discounting of bills of exchange and
(ii) Rebate on bills discounted.
Q3. Following are the statements of interest on advances in respect of performing and non-performing assets
of Madura Bank Ltd. Find out the income to be recognized for the year ended 31 st March, 1998.
Rs. in lakhs
Performing Assets Interest Interest
earned received
Cash credit and overdrafts 1,800 1,060
Term loan 480 320
Bills purchased and discounted 700 550
Non-Performing Assets
Cash credit and overdrafts 450 70
Term loan 300 40
Bills purchased and discounted 350 36
Q4. From the following details prepare “Acceptances, Endorsements and other Obligation A/c” as would
appear in the general ledger.
On 1-4-1998 Acceptances not yet satisfied stood at Rs. 22,30,000. Out of which Rs. 20 lacs were
subsequently paid off by clients and bank had to honour the rest. A scrutiny of the Acceptance Register
revealed the following:
Client Acceptances/ Remarks
Guarantees
A 10,00,000 Bank honoured on 10-06-1998
B 12,00,000 Party paid off on 30-09-1998
C 5,00,000 Party failed to pay and bank had to honour on 30-11-1998
D 8,00,000 Not satisfied upto 31-03-1999
E 5,00,000 Not satisfied upto 31-03-1999
F 2,70,000 Not satisfied upto 31-03-1999
Q5. From the following information find out the amount of provisions required to be made in the profit &
Loss Account of a commercial book for the year ended 31st March, 2007:
(i) Packing credit outstanding from Food Processors Rs. 60 lakhs against which the bank holds
securities worth Rs. 15 lakhs. 40% of the above advance is covered by ECGC. The above
advance has remained doubtful for more than 3 years.
(ii) Rs. In lakhs
Asset classification
Standard 3,000
Sub-standard 2,200
Doubtful:
For one year 900
For two years 600
For three years 400
For more three years 300
Loss assets 600
1.1
Q6. The following particulars are extracted from the (Trial Balance) Books of the M/s Commercial Bank
Ltd. For the year ending 31st March, 2003.
Rs.
(i) Interest and Discounts 1,96,62,400
(ii) Rebate on Bills Discounted (balance on 1.4.2002) 65,040
(iii) Bills Discounted and purchased 67,45,400
It is ascertained that proportionate discount not yet earned on the Bills Discounted which will mature
during 2003- 2004 amounted to Rs. 92,760.
Pass the necessary Journal entries with narration adjusting the above and show:
(a) Rebate on Bill Discounted Account; and
(b) Interest and Discount Account in the ledger of the Bank.
Q7. A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I and
Tier II capitals, Find out the risk-adjusted asset and risk weighted assets ratio:
Capital Funds: Figures in Rs. Lakhs
Equity Share Capital 4,80,00
Statutory Reserve 2,80,00
Capital Reserve (of which Rs. 280 lakhs were due to 12,10
revaluation of assets and the balance due to sale)
Assets:
Cash Balance with RBI 4,80
Balance with other bank 12,50
Certificate of Deposits with other commercial Bank 28,50
Other investments 78,250
Loans and Advances:
(i) Guaranteed by government 128,20
(ii) Guaranteed by public sector undertakings of
Government of India 702,10
(iii) Others 52,02,50
Premises, furniture and fixtures 182,00
Other Assets 201,20
Off- Balance Sheet Items:
Acceptances, endorsements and letters of credit 3,70,250
Q8. Given below interest on advances of a commercial bank (Rs. In lakhs)

Performing assets NPA
Interest Interest Interest Interest
earned received earned received
Terms Loans 120 80 75 5
Cash credits and overdrafts 750 620 150 12
Bills purchased and discounted 150 150 100 20
Find out the income to be recognized for the year ended 31 st March, 1993.
Q9. Mohan Bank Ltd. Gives you the following information for the year. 31.03.07
(i) Export Credit given Rs. 50 lakhs
ECGC cover 40%
Securities held Rs. 10 lakhs (realizable value
Rs. 12 lakhs)
Period for which the advance has More than 3 years
Remained doubtful Ans.: Rs. 34,80,000
1.2
(ii) Terms Loan Rs. 75 lakhs

DICGC cover 50% (maximum limit Rs. 20 lakhs)
Securities held Rs. 20 lakhs (realizable value
Rs. 18 lakhs)
Period for which the loan has More than 3 years
Remained doubtful
You are asked to compute the provision required on the above advances.
Q10. From the following information find out the amount of provisions to be shown in the Profit and Loss
Account of a Commercial bank.
Rs. In lakhs
Assets
Standard 5000
Sub-standard 4000
Doubtful : For one year 800
: For three year 600
: For more than three years 200
Loss Assets 1000
Q11. The following is an extract from Trial Balance of Overseas bank Ltd., as at 31 st March, 1991.
Rs. Rs.
Bill discounted 12,64,000
Rebate on bills discounted not due
on March 31st,1990 22,160
Discount received 1,05,708
An analysis of the bills discounted is as follows:
Amount Due Date Rate of
Rs. 1991 Discount (%)
(i) 1,40,000 June 5 14
(ii) 4,36,000 June 12 14
(iii) 2,82,000 June 25 14
(iv) 4,.06,000 July 6 16
Calculate Rebate on Bills Discounted as on 31-3-1991 also show necessary journal entries.
Q.12 On 1-4-1990 Bills for collection were Rs. 7,00,000. During 1990-91 bills received for collection
amounted to Rs. 64,50,000, bills collected were Rs. 47,00,000 and bills dishonored and returned were
Rs. 5,50,500. Prepare Bills for collection (Assets A/c) and bills for collection (Liability A/c).
Q13. On 1-4-1990, Acceptance, Endorsement, etc. not yet satisfied amounted to Rs. 14,50,000. During the
year under question, Acceptances, Endorsements, Guarantees etc., amounted to Rs. 44,00,000. Bank had
to pay Rs. 10,00,000 under guarantee agreement. Guarantee worth Rs. 5 lakhs were paid by clients and 2
lakhs paid by Bank. Prepare the “Acceptances Endorsements and other Obligations A/c” as it would
appear in the General ledger.
Q14. The following balance are extracted from the Trial Balance as on 31-3-92;
Dr. (Rs.) Cr. (Rs.)
Interest and Discount 98,00,000
Rebate for bills discounted 20,000
Bills discounted and purchased 4,00,000
It is ascertained that the proportionate discounts not yet earned for bills to mature in 1992-93 amount to
Rs. 14,000. Prepare Ledger Accounts.
1.3
Q15. From the following information, prepare Profit and Loss A/c of Modern Bank Ltd. as on 31-3-1992.
‘000 Rs. Item ‘000 Rs.
1990-91 1991-92
14,27 Interest and Discount 20,45
1,14 Income from investment 1,12
1,15 Interest on Balance with RBI 1,77
7,22 Commission, Exchange and Brokerage 7,12
12 Profit on sale of investments 1,22
6,12 Interest to RBI 8,22
1,27 Payment to and Provision for employees 1,47
7,27 Rent, taxes and lighting 8,55
1,58 Payment for expenses 1,79
1,47 Printing and stationery 2,12
1,12 Advertisement and publicity 98
98 Depreciation 98
1,48 Director’s fees 2,12
1,10 Auditor’s fees 1,10
50 Law Charges 1,52
48 Postage, telegrams and 62
42 Insurance 52
57 Repair & maintenance 66
Also give necessary schedules
Other Information
(i) The following items are already adjusted with Interest and Discount
(Cr.)
Tax Provision (‘000 Rs.) 1,48
Provision for Doubtful Debts (‘000 Rs.) 92
Loss on sale of investments (‘000 Rs.) 12
Rebate on Bills discounted (‘000 Rs.) 55
(ii) Appropriations:
20% of profit is transferred to Statutory Reserves.
5 % of profit is transferred to Revenue Reserve.
Q16. From the following information, prepare Profit and Loss A/c of Hyderabad Bank Ltd. for ended 31/3/93.
Items 000 Rs.
Interest on cash credit 18,20
Interest on overdraft 7,50
Interest on term loans 15,40
Income on investment 8,40
Interest on balance with RBI 1,50
Commission on remittances and transfer 75
Commission on letters of credit 1,18
Commission on government business 82
Profit on sale of land and building 27
Loss on exchange transactions 52
Interest paid on deposit 7,20
Auditor’s fees and allowances 1,20
Director’s fees and allowances 2,50
Advertisements 1,80
Salaries, allowances and bonus to employees 12,40
Payment to Provident Fund 2,80
Printing and Stationery 1,40
Repairs and maintenance 50
Postage, telegrams, telephones 80
1.4
Other Information
(i) Interest on NPA Is as follows:
Earned (Rs. ‘000) Collected (Rs. ‘000)
Cash credit 8,20 4,00
Overdraft 450 1,00
Term Loans 750 2,50
(ii) Classification of advances (‘000 Rs.)
Sub-standard 11,20
Doubtful assets not covered by security 2,00
Doubtful assets covered by security for one year 50
Loss Assets 2,00
(iii) Book value of Investments Rs 2750 out of which 25% held for maturity. Market Value of best
investments 75% is Rs. 19,00
Q17. On the 31st March 1996 Vaishya Bank has following Capital funds and asset:
Capital Funds Rs (in Assets Rs. (in
Crores)
(Crores)
Equity shares capital 52.50 Cash balance 5.80
Statutory Reserve 26.00 Balance with RBI 4.00
Capital Reserve (Rs. 2.8 Balance with other Bank 15.00
Crore For revaluation of
assets and Deposit certificates in other banks 20.00
Balance due to Sales) 5.00 Equity investments in Subsidiaries 5.00
Share premium 3.00 Other investments 78.00
General Reserve 5.00 Loans and Advances
Off-balance Sheet Items (i) Granted to Government 15.00
Acceptances 365.00 (ii) Guaranteed by government
of Govt. of India 80.00
(iii) Others 625.00
Premises 100.00
Furniture & Fixtures 75.00
Other Assets 200.00
Intangible assets 10.00
Calculate capital adequacy ratio of the bank
Q18. It is found from the books that a loan of Rs. 6,00,000 was advanced on 30-9-2001 @ 10% per cent p.a.
interest payable half yearly; but the loan was outstanding as on 31-3-2002 without any payment recorded
in the meantime, either towards principal or towards interest. The security for the loan was 10,000 fully
paid shares of Rs. 100 each (the market value was Rs. 98 as per the Stock Exchange information as on
30th Sept., 2001). But due to fluctuations, the price fell to Rs.40 per share in January, 2002. On 31-3-
2002, the price as per Stock Exchange rate was Rs. 82 per share. State how you would classify the loan
as secured/unsecured in the Balance Sheet of the Company.
Q19. From the following information, calculate the amount of provisions and contingencies and prepare profit
& Loss Account of A Bank Ltd. For the year ending 31.3.20X2 (The figure in thousands)
Rs. Rs.
Interest and Discount 8,860 Interest Expended 2,270
Other Income 250 Operating Expenses 2,662
Interest accrued on investments 10 Investment 5000
Additional Information :
(a) Rebate on bills discounted to be provided for Rs. 30
1.5
(b) Classify the investments into held to trade & held to maturity. The details of the Investment is as
follows
Name of the investment Cost Price Market price
i) RBI 180 216
ii) ICICI Bank 1,050 600
iii) Govt. Deposit 1,520 912
iv) Share 2,250 1,350
(c) Classification of Advances: Rs.

Standard Assets 5,000
Sub-Standard Assets 1,200
Doubtful Assets not covered by Security 200
Doubtful Assets covered by Security
For 1 Year 50
For 2 Year 100
For 3 Year 200
For 4 Year 300
Loss Assets 200
(d) Make Tax provision @ 35%
(e) Profit and loss A/c Rs. 80 opening credit Balance.
Q20. The following balance appear in the books of Northern Bank Ltd. as at 31st March, 1993. (Rs.)
Bills discounted 8,72,000
Rebate on Bills discounted 17,200
Discount Received 75,600
The particulars of bills discounted are details below:
Amount of bill discounted Rs. Due date % of Discount
1. 1,00,000 March 31, 1993 12
2. 2,12,000 April 15, 1993 12
3. 3,50,000 June 12, 1993 12
4. 2,10,000 May 12, 1993 12
Calculate the rebate on bills discounted as on 31-03-1993, and show the Journal entries required.
Q21. The following are the statements of income received and income accrued in respect of Performing and
Non-Performing Assets of a Bank. Ascertain the income to be recognized for the year ended 31 st March,
1993.
Interest Interest
Earned Received
Rs. Lakhs Rs. In lakhs
Performing Assets
Term loans 270 190
Cash Credits and Overdrafts 800 610
Bills Purchased and Discounted 200 175
Non-Performing Assets
Term Loans 100 25
Cash Credits and Overdrafts 170 31
Bills Purchased and Discounted 95 10
Q22. As on 31st December, 1985 the books of the Hercules Bank, include among others, the following
balances:
Rebate on bills discounted (1-1-1985) 3,20,000
Bills discounted and purchased 3,15,47,000
Bills for collection 12,00,000
1.6
Throughout 1985, the Bank’s rate discounting has been 18% and the rate of commission on bills for
collection, 4%.
On investigation and analysis, the average due date for the bills discounted and purchased is calculated
as 14th February, 1986 and that for bills for collection as 15th January, 1986.
Show the calculation of the amount to be credited to the Bank’s Profit and Loss Account under discount
earned for the year 1985. Show also the journal entries required to adjust the above mentioned accounts.
Q23. Bidisha Bank Ltd. had expended the following credit lines to a Small Scale Industry which had not paid
any interest since March, 1995:
Term Loan Export Credit
Balance outstanding on 31-3-2001 70 lacs 60 lacs
DICGC/ECGC Cover 50% 40%
Securities held 30 lacs 25 lacs
Realizable value of securities 20 lacs 15 lscs
Compute the necessary provisions to be made for the year ended 31st March, 2001.
Q24. Calculate Provision required by Bank.

Asset classification status Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or 75% of the unsecured amount
or Rs. 18.75 lakh, whichever is the least
Realizable value of Security Rs. 1.50 lakh
Balance outstanding Rs. 10 lakhs
Q25. Calculate Provision required by Bank.

Asset classification status Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or 75% of the unsecured amount
or Rs. 18.75 lakh, whichever is the least
Realizable value of Security Rs. 10.00 lakh
Balance outstanding Rs. 40.00 lakhs
Q26. Check and maintain C.R.R. for schedule Bank

Trial Balance Dr. Cr.
Saving deposits 15,000
Term deposits 40,000
Demand deposits 4,000 80,000
R.B.I. non current account 6,000 ---
R.B.I. current account 4,000 ---
Cash in hand 20,000 ---
Q27. Check C.R.R. and S.L.R. for a schedule bank:

Rs.
Deposits (Net) 1,50,000
Debit Deposits 10,000
Gold 1,000
Cash with R.B.I. (Current Account) 3,000
Cash in Hand 12,000
Encumbered securities 20,000
Money at call & short notice 5,000
Balance with other banks 5,000
1.7
Q28. Calculate capital for capital adequacy ratio.

Rs.
Share Capital 10,00,000
Statutory Reserve 2,00,000
Capital reserve (40% realize in cash) 5,00,000
Revaluation reserve 40,00,000
Ans.: 28,00,000
Q29. Rajatapeeta Bank Ltd. had extended the following credit lines to a Small Scale Industry, which had not
paid any Interest since March, 1997:
Term Loan Export Credit
Balance Outstanding on 31.3.06 Rs. 35 lakhs Rs. 30 lakhs
DICGGC/ECGC cover 40% 50%
Securities held Rs. 15 lakhs Rs. 10 lakhs
Realizable value of Securities Rs. 10 lakhs Rs. 08 lakhs
Compute necessary Provisions to be made for the year ended 31st March, 2006.
Q30. From the following information calculate the amount of Provisions and Contingencies and prepare Profit
and Loss Account of Zed Bank Ltd. for the year ended 31.3.2007:
(Rs. In ‘000)
Interest and Discount (includes interest accrued on investments) 8,860
Other Income 220
Interest expended 2,720
Operating expenses 2,830
Interest accrued on Investments 10
Additional Information:
(a) Rebate on bills discounted to be provided for 30
(b) Classification of Advances:
(i) Standard assets 4,000
(ii) Sub-standard assets 2,240
(iii) Doubtful assets – fully unsecured) 390
(iv) Doubtful assets – covered fully by security
Less than 1 year 100
More than 1 year, but less than 3 years 600
More than 3 years 600
(v) Loss assets 376
(c) Provide 35% of the profit towards provision for Taxation.
(d) Transfer 20% of the profit to Statutory Reserve.
Q31. From the following details, prepare bill for collection (Asset) A/c and Bills for collection (Liability) A/c:
Rs.
On 1.4.2005, Bills for Collection were 51,00,000
During the year 2005-06 Bills received for Collection
amounted to 75,00,000
Bills collected during the year 2005-06 98,47,000
Bill dishonored and returned during the year 27,10,000
1.8
Q32. From the following information, compute the amount of provisions to be made in the Profit and Loss
account of a Commercial bank:
Assets Rs. In lakhs
(i) Standard (Value of security Rs. 6,000 lakhs) 7,000
(ii) Sub-standard 3,000
(iii) Doubtful
a. Doubtful for less than one year 1,000
(Realizable value of security Rs. 500 lakhs)
b. Doubtful for more than one year, but less than 3 years 500
(Realizable value of security Rs. 300 lakhs)
c. Doubtful for more than 3 years (No security) 300
Q33. The following is extract from the Trial Balance of Dream Bank Ltd. as at 31st March, 2006.
Rebate on bills discounted as on 1-4-2005 68,259 (Cr.)
Discount received 1,70,156 (Cr.)
An analysis of the bills discounted reveals as follows:
Amount (Rs.) Due date
2,80,000 June 1,2006
8,72,000 June 8,2006
5,64,000 June 21,2006
8,12,000 July 1,2006
6,00,000 July 5,2006
You are required to find out the amount of discount to be credited to Profit and Loss account for the year
ending 31st March, 2006 and pass Journal Entries. The rate of discount may be taken at 10% per annum.
Q34. In X Bank Ltd., the doubtful assets (more than 3 years) as on 31.3.2007 is Rs. 1,000 lakhs. The value of
security (including DICGC 100% cover of Rs. 100 lakhs) is ascertained at Rs. 500 lakhs. How much
provision must be made in the books of the Bank towards doubtful assets?
Q35. The following information is available in the books of X Bank Limited as on 31 st March, 2007:
Rs.
Bills discounted 1,37,05,000
Rebate on Bills discounted (as on 1.4.2006) 2,21,600
Details of bills discounted are as follows:
Value of bills(Rs.) Due Date Rate of Discount
18,25,000 05.06.2007 12%
50,00,000 12.06.2007 12%
28,20,000 25.06.2007 14%
40,60,000 06.07.2007 16%
Calculate the rebate on bills discounted as on 31.3.2007 and give necessary Journal Entries.
Q36. The following are the figures extracted from the books of New Generation Bank Limited as on 31.3.2008:
Rs.
Interest and discount received 37,05,738
Interest paid on deposits 20,37,452
Issued and subscribed capital 10,00,000
Salaries and allowances 2,00,000
Directors fee and allowances 30,000
Rent and taxes paid 90,000
Postage and telegrams 60,286
1.9
Statutory reserve fund 8,00,000

Commission, exchange and brokerage 1,90,000
Rent received 65,000
Profit on sale of investments 2,00,000
Depreciation on bank’s properties 30,000
Statutory expenses 40,000
Preliminary expenses 25,000
Auditor’s fee 5,000
The following further information is given:
(i) A customer to whom a sum of Rs.10 lakhs has been advanced has become insolvent and it is
expected only 50% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs.1,50,000 was found necessary by the
auditors.
(iii) Rebate on bills discounted on 31.3.2007 was Rs.12,000 and on 31.3.2008 was Rs.16,000.
(iv) Provide Rs.6,50,000 for Income-tax.
(v) The directors desire to declare 10% dividend.
Prepare the Profit and Loss account of New Generation Bank Limited for the year ended 31.3.2008 and
also show, how the Profit and Loss account will appear in the Balance Sheet, if the Profit and Loss
account opening balance was Nil as on 31.3.2007. (10 Marks) (PE II- May, 2008)
Q.37 The following informations are also given for SM Bank :

Assets Rs. in Lakhs
Standard 75,00
Sub-Standard 60,00
Doubtful : for 1 Year (fully secured) 12,00
for 1 to 3 Years (fully secured) 9,00
for more than 3 Years 9,00
Loss Assets 15,00
(1) Standard Assets includes Rs. 15,00 Lakhs Advances to Commercial Real Estate (CRE).
(2) Out of Rs. 60,00 Lakhs of Sub-Standard Asset Rs. 20,00 Lakhs are unsecured. Unsecured includes Rs.
5,00 Lakhs in respect of Infrastructure Loan Accounts with ESCROW safeguard.
(3) Doubtful Asset for more than 3 Years includes Rs. 4,00 Lakhs, which is covered by 50% ECGC, value
of security of which is Rs. 150 Lakhs.
You are required to find out the amount of provision to be shown in the Profit & Loss Account of SM
Bank.
Q 38. Following information is furnished to you by Sound Bank Ltd. for the year ended 31st March, 2008:
(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 31.3.2008 30
1.10
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, 2008.
(ii) Provision in respect of advances. (8 Marks) (PE II- Nov. 2008)
Q.39 Zee Bank Ltd., for the year ending 31st March, 2009:
Rs. Rs.
Interest and Discount 44,00,000 Interest expended 13,60,000
Other Income 1,25,000 Operating expenses 13,31,000
Income on investments 5,000 Interest on balance with RBI 25,000
Additional information:
(a) Rebate on bills discounted to be provided for Rs. 15,000
(b) Classification of advances:
Rs.
Standard assets 25,00,000
Sub-standard assets 5,60,000
Doubtful assets not covered by security 2,55,000
Doubtful assets covered by security
For 1 year 25,000
For 2 years 50,000
For 3 years 1,00,000
For 4 years 75,000
Loss assets 1,00,000
(c) Make tax provision @ 35%
(d) Profit and Loss A/c (Cr.) Rs. 40,000. (IPCC Nov. 09)
Q.40 A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I and
Tier II capitals, Find out the risk-adjusted asset and risk weighted assets ratio:
Figures in
Rs. cores
Equity Share Capital 500.00
Statutory Reserve 270.00
Capital Reserve (of which Rs. 16 crores were due to 78.00
revaluation of assets and the balance due to sale)
Assets:
Cash Balance with RBI 10.00
Balance with other bank 18.00
Other investments 36.00
Loans and Advances:
(i) Guaranteed by government 16.50
(ii) Others 5675.00
Premises, furniture and fixtures 78.00
Off- Balance Sheet Items:
(i) Guarantee and Other Obligation 800.00
(ii) Acceptances, endorsements and letters of credit 4800.00(IPCC NOV 2010 8 marks)
1.11
Q41. From the following information, compute the amount of provision to be made in the profit and loss
account of A Commercial Bank for the year ending 31-03-2012.
Assets ( Categories of Advances) Rs. in
Lakhs
Standard Advances 7,000
Sub-standard Advances 3,500
(include secured exposure Rs. 1,000 lakhs and balances unsecured exposures Rs.
2,500 lakhs includes Rs. 1,500 lakhs in respect of infrastructure loan accounts
where escrow accounts are available)
Doubtful advances- unsecured portion 1,500
Doubtful advances- secured portion :-
For doubtful up to 1 year 500
For doubtful more than 1 year and upto 3 years 600
For doubtful more than 3 years 300
Loss Advances 200
Q42. As on 31st March, 2009, Strong Bank Ltd. Had a balance of Rs. 27 crores in “rebate on bills discounted”
account. The bank provides you the following further information:
(1) During the year ended 31st March, 2010. Strong Bank Ltd. Discounted bills of exchange of Rs. 4,000
crores charging interest at 15% per annum, the average period of discount being 146 days.
(2) Bills of exchange of Rs. 600 crores were due for realization from the acceptors/customers after 31 st
March, 2010, the average period outstanding after 31st March, 2010 being 73 days.
You are required you to pass journal entries in the books of strong Bank Ltd. for the above transactions.
Q43. The following are the ledger balances (in Rupees thousands) extracted from the books of Vaishnavi
Bank as on March 31, 2012 :
Dr. Cr.
Share Capital 19,00,00
Current accounts control 9,70,00
Employee security deposits 74,20
Investments in Govt. of India Bonds 9,43,70
Gold Bullion 1,51,30
Silver 20,00
Constituent liabilities for
acceptances and endorsements 5,65,00 5,65,00
Borrowings from banks 7,72,30
Building 6,50,00
Furniture 50,00
Money at call and short notice 2,60,00
Commission & brokerage 2,53,00
Saving accounts 1,50,00
Fixed deposits 2,30,50
Balances with other banks 4,63,50
Other investments 5,56,30
Interest accrued on investments 2,46,20
Reserve Fund 14,00,00
P & L A/c 65,00
Bills for collection 4,35,00 4,35,00
Interest 6,20,00
Loans 18,10,00
Bills discounted 1,25,00
Interest 79,50
Discounts 4,20,00
Rents 6,00
Audit fees 50,00
Depreciation reserve (furniture) 2,00
1.12
Salaries 2,12,00
Rent, rates and taxes 1,20,00
Cash in hand and with Reserve Bank 7,50,00
Miscellaneous income 39,00
Depreciation reserve (building) 8,00
Directors fees 10,00
Postage 12,50
Loss on sale of investments 2,00,00
Branch adjustments 2,00,00
79,10,00 79,10,00
Other Information:
The bank’s Profit and Loss Account for the year ended and Balance Sheet as on 31st March, 2012 are required to
be prepared in appropriate form. Further information (in Rupees thousands) available is as follows —
(a) Rebate on bills discounted to be provided 40,00
(b) Depreciation for the year
Building 50,00
Furniture 5,00
(c) Included in the current accounts ledger are accounts overdrawn to the extent of 25,00.
Q44. A loan account remains out of order as on the date of Balance Sheet of a Bank. The account has been classified
as doubtful assets (upto 1 year).
Details of the accounts are :
Outstanding Rs. 6,73,000
ECGC coverage 25% (Limited to Rs. 1,00,000)
Value of security held Rs. 1,50,000
Compute the necessary provision to be made by a Bank as per applicable rates.
Q45. From the following information prepare the Profit & Loss Account of Jawahar Bank Limited for the year ended
31st March, 2012. Also give necessary Schedules.
Figures are in Rs. thousands
Interest earned on term loans 17.26
Interest earned on term loans classified as NPA 4.52
Interest received on term loans classified as NPA 2.04
Interest on cash credits and overdrafts 38.54
Interest earned but not received on cash credit and
overdraft treated as NPA 8.39
Interest on deposits 27.20
Commission 1.97
Profit on sale of investments 11.76
Profit on revaluation of investments 2.76
Income from investments 15.53
Salaries, bonus and allowances 18.75
Rent, taxes and lighting 1.70
Printing and stationary 0.75
Director,s fees, allowances expenses 1.33
Law charges 0.22
Repairs and maintenance 0.18
Insurance 0.30
Other information:
Make necessary provision on risk assets:
(i) Sub-standard 15.00
(ii) Doubtful for one year 7.00
(iii) Doubtful for two years 2.40
(iv) Loss assets 0.65
Investments 3700
Bank should not keep more than 25% of its investments as ,held-for-maturity, investment. The market value of
its best 75% investments is Rs. 9,00,000 as on 31st March, 2012.
1.13
Q46. How will you disclose the following Ledger balances in the Final accounts of DVD bank:
Rs. in lacs
Current accounts 700
Saving accounts 500
Fixed deposits 700
Cash credits 600
Term Loans 500
Bills discounted & purchased 800
(i) Included in the current accounts ledger are accounts overdrawn to the extent of Rs. 250 lacs.
(ii) One of the cash credit account of Rs. 10 lacs (including interest Rs. 1 lac) is doubtful.
(iii) 60% of term loans are secured by government guarantees, 20% of cash credits are unsecured,
other portion is secured by tangible assets.
Q47. The following is an extract of Trial Balance of SM Bank, an overseas bank as on 31st March, 2018.
Dr. Cr. (Rs.)
Bill Discounted 15,16,800

Discount Received 1,26,859
st
Rebate on Bills discounted not due on 31 March 2017 26,592
An analysis of bill discounted is as follows :
Amount in Due Date Rate of Discount
1,46,200 4th May, 2018 15
2,30,400 12th May, 2018 15
4,35,900 28th May, 2018 15
4,36,200 18th June, 2018 16
2,68,100 4th July, 2018 16
You are, required to calculate Rebate on Bills Discounted as on 31st March, 2018 and show necessary Journal Entries.
48. A Commercial Bank has the following capital funds and assets. Segregate the capital funds into Tier-1
and tier- 2 Capitals. Find out the risk adjusted and risk weighed assets and capital adequacy ratio:
Capital Funds: (Rs.in crores)

Paid up Equity share capital 750
Statutory reserve 150
Share Premium 150
Capital Reserve ( of which capital funds Rs. 40 crore were due to revalution of 90
assets and balance due to sale)
Assets:
Cash balance with RBI 60
Claims on Banks 170
Other Investments 2,300
Loss and Advances:
Guaranteed by Government of India/State Government 400
Granted to staff of bank . fully covered by Super Annuation Benefits and
mortgage of flats/house 50
Other Loans and Advances 6,170
Premises, Furnitures and Fixtures, Other Assets 3,925
Intangible Assets 15
Off –Balance Sheet items:
Acceptance, Endorsements and Letter of Credit, Gurantes and other obligations. 1,550
1.14
Q49. Calculate Rebate on Bills discounted as on 31 December, 2011 from the following data and show
journal entries:
Date of Bill Rs. Period Rate of Discount
(i) 15.10.11 25,000 5 months 8%
(ii) 10.11.11 15,000 4 months 7%
(iii) 25.11.11 20,000 4 months 7%
(iv) 20.12.11 30,000 3 months 9%
Q50. The following figures are extracted from the books of KLM Bank Limited as on 31.3.2012:
Rs.
Interest and discount received 38,00,160

Interest paid on deposits 22,95,360
Issued and subscribed capital 10,00,000
Salaries and allowances 2,50,000
Directors fee and allowances 35,000
Rent and taxes paid 1,00,000
Postage and telegrams 65,340
Statutory reserve fund 8,00,000
Commission, exchange and brokerage 1,90,000
Rent received 72,000
Profit on sale of investments 2,25,800
Depreciation on assets 40,000
Statutory expenses 38,000
Auditor’s fee 12,000
The following further information is given:
(a) A customer to whom a sum of Rs.10 lakhs was advanced has become insolvent and it is expected
only 55% can be recovered from his estate.
(b) There were also other debts for which a provision of Rs.2,00,000 was found necessary .
(c) Rebate on bills discounted on 31.3.2012 was Rs.15,000 and on 31.3.2012 was Rs.20,000.
(d) Income-tax of Rs. 2,00,000 is to be provided.
(e) The directors desire to declare 5% dividend.
Prepare the Profit and Loss account of KLM Bank Limited for the year ended 31.3.2012 and also show,
how the Profit and Loss account will appear in the Balance Sheet, if the Profit and Loss account opening
balance was Nil as on 31.3.2011. (8 Marks- Nov 12)
Q51. From the following facts drown from the records of Honest Bank for the year ended 31 st March 2015
prepare the accounts as mentioned below:
I. On 1st April, 2015 Bills for Collection were Rs. 28,00,000. During 2014-2015 bills received for
collection were Rs. 2,58,00,000. Bills collected were Rs. 1,88,00,000. Bills dishonored and
returned were Rs. 22,00,000. Prepare Bills for Collection (Assets) Account and Bills for
Collection (Liability) Account.
II. On 1st April, 2014, Acceptance, Endorsement etc. not yet satisfied amounted to Rs. 58,00,000.
During the year, Acceptances, Endorsements, Guarantees etc. were Rs. 1,76,00,000. The Bank
honoured acceptances of Rs. 1,00,00,000 and a client paid Rs. 40,00,000 against guaranteed
liabilities. The Bank paid Rs. 4,00,000 which clients failed to pay. Prepare “Acceptances,
Endorsements and Other Obligations Account’’ in the General Ledger.
1.15
III. A loan of Rs. 24,00,000 Advanced by the Bank on 30 st August, 2014 @ 10% per annum, whose
interest is payable half-yearly. The loan was outstanding a on 31st March, 2015 Nothing was paid
either towards Principal or Interest of this loan. The security for the loan was 40,000 fully paid
share of Rs 100 each. The shares were quoted on the stock exchange on 30st September 2014 at
Rs. 90 per share. Due to fluctuations, the price fell to Rs. 50 per share in January, 2015. On 31 st
March 2015 the share price quoted on the stock exchange was Rs. 96 per share. State giving
reasons, whether the loan would be classified as secured or unsecured in the Balance Sheet of the
company as on 31st March, 2015.
IV. The following balances were taken from the Trial Balance as on 31st March, 2015
Dr(Rs.) Cr(Rs.)
Interest & Discounts 3,92,00,000
Rebate for Bill Discounted 80,000
Bills Discounted & Purchased 16,00,000
Proportionate discounts not yet earned for Bills to mature in 2014-15 were Rs.56,000
Prepare the following Accounts :
(a) Rebate on Bills Discounted Account
(b) Interest and Discount Account (Nov 16)
Q52. From the following information of Wealth Bank Limited, Prepare Profit and Loss Account for the year
ended 31st March, 2016:
Particulars Rs. In Particulars Rs. In
Lakhs Lakhs
Interest on Cash Credit 364 Interest paid on Recurring Deposits 17
Interest on Overdraft 150 Interest paid on Savings Bank Deposits 12
Interest on Term Loans 308 Auditor’s Fees and Allowances 24
Income on Investments 168 Directors’ Fees and Allowances 50
Interest on Balance with RBI 30 Advertisements 36
Commission on remittances and 15 Salaries allowances and bonus to 248
transfer employees
Commission on Letters of Credit 24 Payment to Provident fund 56
Commission on Government Business 16 Printing & Stationary 28
Profit on Sale of Land & Building 5 Repairs & Maintenance 10
Loss on exchange transactions 10 Postage, courier & telephones 16
Interest paid on Fixed Deposits 25
Other Information:
Rs.In lakhs
Earned Collected
(i) Interest on NPA is as follows:
Cash Credit 164 80
Term Loans 90 20
Overdraft 150 50
(ii) Classification of Non-Performing Advances:

Standard 60
Sub-standard – fully secured 22
Doubtful assets – fully unsecured 40
Doubtful assets covered fully by security:
Less than 1 year 6
More than 1 year up to 3 years 3
More than 3 years 2
Loss 38
1.16
(iii) Investments
Bank should not keep more than 25% of its investment as held-for maturity investment; the market value
of its rest 75% investment is Rs.3,95,00,000 as on 31.03.2016.
(iv) Provide 35% of the profits towards provision for taxation.
(v) Transfer 20% of the profit to Statutory Reserves. (May 16)
Q53. ABC bank Ltd. has a balance of Rs.40 crores in “Rebate on bills discounted” account as on 31st March,
2014. The Bank provides you the following information:
i. During the financial year ending 31st March, 2015 ABC Bank Ltd. discounted bills of exchange
of Rs.5,000 crores charging interest @ 14% and the average period of discount being 146 days.
ii. Bills of exchange of Rs.500 crores were due for realization from the acceptors/customers after
31st March, 2015. The average period of outstanding after 31st March, 2015 being 73 days.
These bills of exchange of Rs.500 crores were discounted charging interest @ 14% P.A.
You are requested to pass necessary Journal Entries in the books of ABC Bank Ltd. for the above
transactions. (Nov 15)
Q54. Following facts have been taken out from the records of M/s. Sneha Bank Ltd. in respect of the year
ending March 31, 2015:
(i) On 1-4-2014 Bills for collection were Rs. 10, 15,000. During 2014-15 bills received for collection
amounted to Rs. 89, 75,000, bills collected were Rs. 64, 50,000 and bills dishonored and returned
were Rs. 11, 25,000.
Prepare Bill for collection (Assets) Account and bills for Collection (Liability) Account.
(ii) On 1-4-2014, Acceptance, Endorsement, etc. not yet satisfied amounted to Rs. 27, 50,000. During
the year under question, Acceptances, Endorsements, Guarantees etc., amounted to Rs. 67,50,000.
Bank honoured acceptances to the extent of Rs, 44, 50,000 and client paid of Rs. 15, 00,000
against the guaranteed liability, Clients failed to pay Rs. 4, 00,000 which the Bank had to pay.
Prepare the “Acceptances, Endorsements and other obligations Account” as it would appear in the
General Ledger.
(iii) It is found from the books that a loan of Rs. 50, 00,000 was advanced on 30.09.2014 @ 14% p.a.
Interest payable half yearly; but the loan was outstanding as on 31.3.2015 without any payment
recorded in the meantime, either towards principal or towards interest. The security for the loan
was 1, 00,000 fully paid shares of Rs. 100 each (the market value was Rs. 98 per share as per the
Stock Exchange information as on 30th September 2014.) But due to fluctuations, the price fell to
Rs. 45 per share in January, 2015. On 31-3-2015, the price as per Stock Exchange rate was Rs. 85
per share. State how would you classify the loan as secured/unsecured in the Balance Sheet of the
Company.
(iv) The Following balances are extracted from the Trial Balance as on 31.3.2015.
Dr. (Rs.) Cr. (Rs.)

Interest and Discounts 98,00,000
Rebate for bills discounted 45,000
Bills discounted and purchased 5,00,000
It is ascertained that the proportionate discounts not yet earned for bills to mature in 2014-15
amount to Rs. 24,000. Prepare Ledger accounts.
1.17
(v) From the following information of M/s. XY Bank Ltd. for the year ended 31st March, 2014,
compute the provision to be made in the Bank’s Books for Doubtful Assets.
Rs .in lakhs
Doubtful Assets (More than 3 years) 2,000
DICGC 100% Cover 200
Value of Security including DICGC Cover 1,000
(May 15)
Q55. A Commercial bank has the allowing capital funds and assets. Segregate the capital funds into Tier
capitals. Find out the risk adjusted asset and risk weighted asset ratio. State your observation on the risk
weighted asset ratio.
Particulars Amount (Rs. in
crores)
Equity Share Capital 400.000
Statutory Reserve 250.000
Capital Reserve (of which Reserve Rs.18 crores were due to 86.000
revaluation of assets and the balance due to sale capital assets)
Assets
Cash Balance with RBI 12.00
Balance with other Bank 20.00
Other Investment 40.00
Loans & Advances
(i)Guaranteed by Government 14.50
(ii)Others 5,465.00
Premises Furniture & Fixtures 74.00
Off Balance Sheet Items
(i) Guarantees and other obligations 700
(ii)Acceptances, endorsement and letter of credit 4,900.00
(Nov 14)
Q56. A loan account remains out of order as on the date of Balance Sheet of a Bank .The account has been
classified as doubtful assets (up to 3 years).Detail of the account is;
Outstanding Rs 7,24,000
ECGC Cover 30% of outstanding
(subject to maximum of
Rs 1,50,000)
Value of security
As per valuation on the date of grant of loan 2,25,000
As per realizable value as on date of Balance Sheet 1,75,000
Compute the necessary provision to be made by Bank as per applicable rate. (May 14)
Q57. State with reason whether the following cash credit accounts are NPA or not:
Case-1 Case-2 Case- 3 Case-4
Sanctioned limit 50,00,000 60,00,000 55,00,000 45,00,000
Drawing power 44,00,000 56,00,000 50,00,000 42,00,000
Amount outstanding continuously
01-01-18 to 31-03-18 40,00,000 48,00,000 56,00,000 30,00,000
Total interest debited for
the above period 3,20,000 3,84,000 4,48,000 2,40,000
Total credits for the above period 1,80,000 Nil 4,48,000 3,20,000
1.18
Q58. The following information is furnished by ALFA Bank Ltd.

Rs in Lakhs
Margins held against letter of credit 200
Recurring accounts deposits 100
Current accounts deposits 375
Demand deposit 125
Unclaimed deposit 75
Gold deposit 235
Demand liabilities portion of saving bank deposit 1325
Time liabilities portion of saving bank deposit 722
Explain CRR and you are required to calculate the amount of Cash Reserve Ratio (CRR) as per the direction of
Reserve Bank of India.
1.19
Theory
Q1. Define Acceptance and Endorsement.
Ans. A bank has more acceptable credit as compared to that of its customer, because of this more often than not the bank is
called to accept or endorse a bill on behalf of its customers. The bank has to honour this acceptance on behalf of its
client only in the event of a client failing to honour the bill on the due date.
As against this liability, the bank has a corresponding claim against the customer on whose behalf it has undertaken to
be a party to the bill, either as an acceptor or as an endorser.
Such Acceptance (Liabilities) which are outstanding at the close of the year and the corresponding asset (security) is
disclosed as Contingent liability. As a safeguard against the customer not being able to meet the demand of the bank in
this respect, usually the bank requires the customer to deposit a security equivalent to the amount of the bill accepted
on his behalf.
If the bill, at the end of its term, has to be retired by the bank and the amount cannot be collected from the customer on
demand, the bank reimburses itself by disposing of the security deposited by the customer.
Q2. Write short note on Non-Performing Assets./Specify the condition when cash credit overdraft account is treated
as “Out of Order”?
Ans. An asset is classified as non-performing asset (NPA) if:-
A) Bills purchased and discounted:- If they remain overdue and unpaid for a period of more than 90 days.
B) A term loan is treated as a NPA if interest and/or instalments of principal remains overdue for a period of more
than 90 days.
C) A cash credit/overdraft account is treated as NPA if it remains out of order for a period of more than 90 days.
An account is treated an ‘out of order’ if any of the following conditions is satisfied:
(a) the outstanding balance remains continuously in excess of the sanctional limit/drawing power.
(b) though the outstanding balance is less than the sanctioned limit/drawing power—
(i) there are credits continuously for more than 90 days as on the date of balance sheet or
(ii) credits during the aforesaid periods are not enough to cover the interest debited during the same period.
[For out of order also Included these two lines
a. If Borrower fails to submit stock statement for continuous period of 6 months
b. If cash credit is not paid on due date fixed by the bank.]
* If any advance or credit facility granted by a bank to a borrower becomes non-performing, then the bank will have to
treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact
that there may still exist certain advances/credit facilities having performing status.
**Income from NPA can only be accounted for as and when it is actually received.
Note:- Necessary provision should be made for non-performing assets after classifying them as sub-standard, doubtful
or loss asset as the case may be.(As discussed in class)
Q3. Write short note on Classification of advances in the case of a Banking Company.
Ans. Banks have to classify their advances into four broad groups:
(i) Standard Assets- Standard assets is one which does not disclose any problems and which does not carry more
than normal risk attached to the business. Such an asset is not a NPA as discussed earlier.
(ii) Sub-standard Assets- Sub-standard asset is one which has been classified as NPA for a period not exceeding 12
months. In other words, such an asset will have well-defined credit weaknesses that jeopardise the liquidation of
the debt and are characterised by the distinct possibility that the bank will sustain some loss, if deficiencies are not
corrected.
(iii) Doubtful Assets-A doubtful asset is one which has remained sub-standard for a period exceeding 12 months. A
loan classified as doubtful has all the weaknesses inherent in that classified as sub-standard with added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts,
conditions and values, highly questionable and improbable.
(iv) Loss Assets-A loss asset is one where loss has been identified by the bank or internal or external auditors or the
RBI inspectors but the amount has not been written off, wholly or partly.
*The classification of advances should be done taking into account :-

(i) Degree of well defined credit worthiness and (ii) Extent of dependence on collateral security.
The above classification is meant for the purpose of computing the amount of provision to be made in respect of
advances and not for the purpose of presentation of advances in the balance sheet.
1.20
Solutions
Answer 46.
Relevant Schedules (forming part of the Balance sheet) of DVD Bank
Schedule 3: Deposits
Rs. in lacs
A Demand deposits (700 – 250) 450
B Saving bank deposits 500
C Term deposits 700
1,650
Schedule 9: Advances
Rs. in lacs
A (i) Bills discounted and purchased 800
(ii) Cash credits and overdrafts (600 + 250) 850
(iii) Term loans 500
2,150
B. (i) Secured by tangible assets (bal. fig.) 1,730
(ii) Secured by Bank/Government guarantees (500 x 60%) 300
(iii) Unsecured (600 x 20%) 120
2,150
Schedule 5: Other Liabilities & Provisions

Rs. in lacs
Others (Provision for doubtful debts) 10
Profit and Loss Account (an extract)

Rs. in lacs
Less: Provision for doubtful debts* 10
*Note: It is assumed that the cash credit has been in ,doubtful, category for more than three years
Answer 49:-
(a) Calculation of Rebate on Bills Discounted

Rs. Due Date Days after 31 December 2011 Discount Rate Rs.
25,000 18-03-2012 31 + 29 + 18 = 78 8% 426.22
15,000 13-03-2012 3 1 + 29 + 13 = 73 7% 209.42
20,000 28-03-2012 3 1 + 29 + 28 = 88 7% 336.61
30,000 23-03-2012 3 1 + 29 + 23 = 83 9% 612.30
Total 1584.55
Journal Entry
Date Particulars Debit Credit
Rs. Rs.
Dec. 31 Interest and Discount Account Dr. 1584.55
To Rebate on Bills Discounted 1584.55
(Being the provision for unexpired discount required at the end of the year)
1.21
Q57.
Case 1 Case 2 Case 3 Case 4
Rs. Rs. Rs. Rs.
Sanctioned limit 50,00,000 60,00,000 55,00,000 45,00,000
Drawing power 44,00,000 56,00,000 50,00,000 42,00,000
Amount outstanding continuously
from 1.01.2018 to 31.03.2018 40,00,000 48,00,000 56,00,000 30,00,000
Total interest debited 3,20,000 3,84,000 4,48,000 2,40,000
Total credits 1,80,000 - 4,48,000 3,20,000
Is credit in the account The credit in the Yes
is sufficient to cover the interest debited account is sufficient to
during the period or amount is not cover the interest debited
‘overdue’ for a continuous but the amount outstanding
period of 90 days. No No is continuously in excess of
the sanctioned drawing
power for a continuous
period of 90 days.
NPA NPA NPA NOT NPA
1.22
Formats:-
New Revised Formats
The Third Schedule
(See Section 29)
Form ‘A’
Form of Balance Sheet
Balance Sheet of ______________________ (here enter name of the Banking company)
Balance Sheet as on 31st March (Year) (000’s omitted)
Schedule As on 31.3.... As on 31.3......
(Current year) (Previous year)
Capital & Liabilities
Capital 1
Reserve & Surplus 2
Deposits 3
Borrowings 4
Other liabilities and provisions 5
Total
Assets
Cash and balances with
Reserve Bank of India 6
Balance with banks and Money at call
and short notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent liabilities 12
Bills for collection
Annexure I
Schedules forming part of Balance Sheet
Schedule 1 - Capital
As on 31.3... As on 31.3...
I. For Nationalised Banks
Capital (Fully owned by
Central Government)
II. For Banks Incorporated outside India
Capital
(i) (The amount brought in by banks by way of
start-up capital as prescribed by RBI should
be shown under this head)
(ii) Amount of deposit kept with the RBI under
Section 11(2) of the Banking Regulation Act, 1949
Total
III. For other Banks
Authorised Capital
( ___Shares of Rs. ____ each)
Issued Capital
( ___Shares of Rs. ____each)
Subscribed Capital
( ____Shares of Rs. ___ each)
Called-up Capital
( ____Shares of Rs. ___ each)
Less : Calls unpaid
Add : Forfeited shares
Total
1.23
Schedule 2 - Reserves and Surplus

As on 31.3.... As on 31.3....
I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balance
III. Share Premium
Opening Balance
IV. Revenue and other Reserves
Opening Balance
V. Balance in Profit and loss Account
Total : (I, II, III, IV and V)
Schedule 3 - Deposits
As on 31.3... As on 31.3...
A. I. Demand Deposits
(i) From banks
(ii) From others
II. Savings Bank Deposits
III. Term Deposits
(i) From Banks
(ii) From others
Total :(I, II and III)
B. (i) Deposits of branches in India
(ii) Deposits of branches outside India
Total
Schedule 4 - Borrowings
As on 31.3.... As on 31.3....
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other banks
(iii) Other institutions and agencies
II. Borrowings outside India
Total : (I and II)
Secured borrowings included in I & II above - Rs.
Schedule 5 - Other Liabilities and Provisions

As on 31.3.... As on 31.3....
I. Bills payable
II. Inter-office adjustments (net)
III. Interest accrued
IV. Others (including provisions)
Total
1.24
Schedule 6 - Cash and Balances with Reserve Bank of India

As on 31.3.... As on 31.3....
I. Cash in hand (including foreign currency notes)
II. Balances with Reserve Bank of India
(i) In Current Account
(ii) In Other Accounts
Total : (I & II)
Schedule 7 - Balances with Banks & Money at Call & Short Notice
As on 31.3.... As on 31.3....
I. In India
(i) Balances with banks
(a) in Current Accounts
(b) in Other Deposit Accounts
(ii) Money at call and short notice
(a) with banks
(b) with other institutions
Total : (i & ii)
II. Outside India
(i) In Current Accounts
(ii) in other Deposits Accounts
(ii) Money at call and short notice
Total
Grand Total (I & II) :
Schedule 8 - Investments
As on 31.3.... As on 31.3....
I. Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
Total
II. Investments outside India in
(i) Government securities
(Including local authorities)
(ii) Subsidiaries and/or joint ventures abroad
(iii) Other investments (to be specified)
Total
Grand Total :(I & II)
Schedule 9 - Advances
As on 31.3.... As on 31.3....
A.
(i) Bills purchased and discounted
(ii) Cash credits, overdrafts
and loans repayable on demand
(iii) Term loans
Total
B.
(i) Secured by tangible assets
(ii) Covered by Bank/Government Guarantees
(iii) Unsecured
Total
1.25
C.
I. Advances in India
(i) Priority Sectors
(ii) Public Sector
(iii) Banks
(iv) Others
Total
II.Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated loans
(c) Others
Total
Grand Total :(C. I & II)
Schedule 10 - Fixed Assets

As on 31.3.... As on 31.3....
I. Premises
At cost as on 31st March of the preceding year
Depreciation to date
Other Fixed Assets (including Furniture and Fixtures)
At cost as on 31st March of the preceding year
Depreciation to date
Total : (I & II)
Schedule 11 - Other Assets
As on 31.3.... As on 31.3....
I. Inter-office adjustments (net)
II. Interest accrued
III. Tax paid in advance/tax deducted at source
IV. Stationery and stamps
V. Non-banking assets acquired in satisfaction of claims
VI. Others*
Total
*In case there is any unadjusted balance of loss the same may be shown under this item with appropriate foot-note.
Schedule 12 - Contingent Liabilities

As on 31.3.... As on 31.3....
I. Claims against the bank not acknowledged
as debts
II. Liability for partially paid investments
III. Liability on account of outstanding forward
exchange contracts
IV. Guarantees given on behalf of constituents
(a) In India
(b) Outside India
V. Acceptances, endorsements and other
obligations
VI. Other items for which the bank is contingently
liable
Total
1.26
Form ‘B’
Form of Profit & Loss Account for the year ended 31st March
(’000 omitted)
Schedule No. Year ended Year ended
As on 31.3.... As on 31.3....
I. Income
Interest earned 13
Other income 14
Total
II. Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
Total
III. Profit/Loss
Net profit/loss (—) for the year
Profit/Loss (—) brought forward
Total
IV. Appropriations
Transfer to statutory reserves
Transfer to other reserves
Transfer to Government/Proposed dividends
Balance carried over to balance sheet

Total
Annexure II
Schedules forming part of Profit and Loss Account

Schedule 13 - Interest Earned
Year ended Year ended
31.3.... 31.3....
I. Interest/discount on advances/bills
II. Income on investments
III. Interest on balances with Reserve Bank of
India and other inter-bank funds
IV. Others
Total
1.27
Schedule 14 - Other Income

31.3.... 31.3....
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less : Loss on sale of investments
III. Profit on revaluation of investments
Less : Loss on revaluation of investments
IV. Profit on sale of land, building and other assets
Less : Loss on sale of land, building and other assets
V. Profit on exchange transactions
Less : Loss on exchange transactions
VI. Income earned by way of dividends etc.
from subsidiaries/companies and/or joint
ventures abroad/in India
VII. Miscellaneous Income
Total
Note : Under items II to V loss figures may be shown in brackets.
Schedule 15 - Interest Expended

31.3.... 31.3....
I. Interest on deposits
II. Interest on Reserve Bank of India/inter-bank
borrowings
III. Others
Total
Schedule 16 - Operating Expenses
31.3.... 31.3....
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on Bank’s property
VI. Director’s fees, allowances and expenses
VII. Auditor’s fees and expenses (including
branch auditor’s fees and expenses)
VIII. Law Charges
IX. Postages, Telegrams, Telephones, etc.
X. Repair and maintenance
XI. Insurance
XII. Other expenditure
Total
In ‘Notes on Accounts’, the following disclosures should be made:
1.28
New Guidelines for Calculating CAR
A. Funded Risk Assets

Sr. No. Item of assets Risk Weight %
I Balances
1. Cash, balances with RBI 0
2. Balances in current account with other banks 20
II Investments
1. Investment in Government Securities 0
2. Investments in other approved securities guaranteed by 0
Central/State Government.
3. Investment in other approved securities where payment of interest 20

and repayment of principal are not guaranteed by Central/State
Govt.
4. Claims on Commercial banks and public financial intuitions 20
5. Investments in bonds issued by other banks 20
6. Investments in securities which are guaranteed by banks 20
7. All other investments 100
III Loans & Advances
1. Loans guaranteed by Govt. of India 0
2. Loans granted to public sector undertakings of Govt. of India 100
3. Others 100
4. Leased assets 100
5. Advances covered by DICGC/ECGC 50
IV Other Assets
1. Premises, furniture an fixtures 100
2. (i) Income tax deducted at source (net of provision) 0
(ii) Advance tax paid (net of provision) 0
(iii) Interest due on Government securities 0
(iv) All other assets 100
B. Off- Balance sheet Items
Sr. Instruments Credit Conversion

No. Factor (%)
1. General guarantees of indebtedness (including standby L/Cs 100
2. Forward asset purchases, forward deposits and partly paid shares and 100
securities, which represent commitments with certain drawdown.
Always Remember:
1.29
MCQ (ICAI Study Material)
1. A banking company can pay dividend on its shares

(a) After writing off all its capitalized expenses including preliminary expenses.
(b) After charging depreciation on its investments.
(c) After charging bad debts where adequate provisions has been made to the satisfaction of the auditor.
(d) Before charging depreciation on its investments and writing off all its capitalized expenses.
2. On 1.4.20X1 Bills for collection were ₹ 10,000. During 20X1-20X2 bills received for collection amounted to ₹ 1,00,000,
bills collected were ₹ 80,000 and bills dishonoured and returned were ₹ 5,000. What will be the amount of bills for
collection (assets) account as on 31.3.20X2?
(a) 25,000.
(b) 30,000.
(c) 35,000.
(d) None of the above.
3. Rebate on bill discounted is shown in the
(a) Assets side of the balance sheet.

(b) Liabilities side of the balance sheet.
(c) Income side of the income statement.
(d) Expense side of the income statement.
4. Bills for collection are shown
(a) On Assets side of the balance sheet.

(b) On liabilities side of the balance sheet.
(c) On the income side of the income statement.
(d) As note below the balance sheet.
5. What percentage of provision is required on standard assets?
(a) 10
(b) 40
(c) 0.40
(d) 25.
6. As per the Banking Regulations Act, 1949, a bank can engage in the following banking business
(a) Borrowing and raising of money.

(b) Dealing in bills of exchange, hundies, promissory notes etc.
(c) Carrying on and transacting every kind of guarantee and indemnity business.
(d) All of the above.
7. When income is to be recognized on cash basis by Safe Trust Bank, a distinction should be made between
(a) Banking and Non-banking assets.

(b) Monetary and Non-banking assets.
(c) Current and Non-current assets.
(d) Performing and Non-performing assets.
8. For the year ended 31st March, 20X1 non-performing assets classified as sub-standard in Centura Bank Ltd. will be
classified as doubtful after
(a) 24 months.
(b) 18 months.
(c) 12 months.
(d) 180 days. [Ans. 1. (a), 2. (a), 3. (b), 4. (d), 5. (c), 6. (d), 7. (d), 8. (c)]
1.30
REVISION STRUCTURE
Question Status Copy Revision Important concept in this question (In student words)
no. page no. 1 2 3 to 5 Student can refer copy page number
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SUMMARY NOTES
1.32
SUMMARY NOTES
1.33
Chapter 2: NBFC CA P.S. Beniwal(9990301165)
Part I
1. Anischit Finance Ltd. is a non-banking finance company. It makes available to you the costs and market
price of various investments held by it as on 31.3.2012: (Figures in Rs. lakhs)
Cost Market Price

Scripts: A. Equity Shares-
A 60.00 61.20
B 31.50 24.00
C 60.00 36.00
D 60.00 120.00
E 90.00 105.00
F 75.00 90.00
G 30.00 6.00
B. Mutual funds-
MF-1 39.00 24.00

MF-2 30.00 21.00
MF-3 6.00 9.00
C. Government securities-
GV-1 60.00 66.00

GV-2 75.00 72.0
(i) Can the company adjust depreciation of a particular item of investment within a category?
(ii) What should be the value of investments as on 31.3.2012?
(iii) Is it possible to off-set depreciation in investment in mutual funds against appreciation of the value of
investment in equity shares and government securities?
2. While closing its books of accounts on 31st March 2018, a Non-Banking Finance Company has its advances
classified as follows:
₹ (in lakhs)
Standard assets 18,400
Sub-standard assets 1,250
Secured Portion of doubtful debts:
Up to one year 300
One year to three years 90
More than three years 30
Unsecured portions of doubtful debts 92
Loss assets 47
Calculate the amount of provision which must be made against the Advances as per -
(i) The Non-banking Financial Company - Non-systematically Important Non-Deposit taking Company
(Reserve Bank) Directions, 2016; and
(ii) Non-banking Financial Company - Systematically Important Non- Deposit taking Company (Reserve
Bank) Directions, 2016. (Nov 18)
2.1
3. While closing its books of account on 31st March, 2006 a Non-Banking Finance Company has its advances
classified as follows:
Rs.in lakhs
Standard assets 16,800
Sub-standard assets 1,340
Secured positions of doubtful debts:
- upto one year 320
- one year to three years 90
- more than three years 30
Unsecured portions of doubtful debts 97
Loss assets 48
Calculate the amount of provision, which must be made against the Advances.
Solution: Calculation of provision required on advances as on 31st March, 2006
Amount Percentage of Provision
Rs. in lakhs provision Rs. in lakhs
Standard assets 16,800 .25 42

Sub-standard assets 1,340 10 134
Secured portions of doubtful debts-
- upto one year 320 20 64
- one year to three years 90 30 27
- more than three years 30 50 15
Unsecured portions of doubtful debts 97 100 97
Loss assets 48 100 48
427
4. Mahindra Finance Ltd. is a non-banking finance company. The extracts of its balance sheet are given below:
Liabilities Amount Assets Amount

Paid up equity share capital 100 Leased out Assets Investment: 800
Free Reserves 500 In shares of subsidiaries and
Loans 400 group companies 100
Deposit 400 In debentures of subsidiaries
and group companies 100
Cash and Bank balances 200
Deferred Expenditure 200
1,400 1,400
You are required to compute Tier – I Capital of Mahindra Finance Ltd. according to NBFC Prudential
Norms (RBI) Directions 1998.
Solution:
Statement Showing Computation of Tier-I Capital
(Rs. in lakhs)
Paid up Equity Capital 100
Free Reserve 500
(A) 600
Deduct deferred expenditure (B) 200
(C) 400
Investments
In shares of subsidiaries and Group Companies 100
In Debenture of subsidiaries and Group Companies 100
200
10% (C) (D) 40
Excess of Investment over 10% of (C) = (E) 160
Tier-I Capital [(C + E)] 240
2.2
5. Samvedan Limited is a non-banking finance company. It accepts public deposit and also deals in hire
purchase business. It provides you with the following information regarding major hire purchase deals as on
31-03-2011. Few machines were sold on hire purchase basis. The hire purchase price was set as Rs. 100
lakhs as against the cash price of Rs. 80 lakhs. The amount was payable as Rs. 20 lakhs down payment and
balance in 5 equal instalments. The hire vendor collected first instalment as on 31-03-2012, but could not
collect the second instalment which was due on 31-03-2013. The company was finalising accounts for the
year ending 31-03-2013. Till 15-05-2013, the date 'on which the' Board of Directors signed the accounts, the
second instalment was not collected. Presume IRR to be 10.42%.
Required:-
(i) What should be the principal outstanding on 1-4-2012? Should the company recognize finance charge
for the year 2012-13 as income?
(ii) What should be the net book value of assets as on 31-03-13 so far Samvedan Ltd. is concerned as per
NBFC prudential norms requirement for provisioning?
(iii) What should be the amount of provision to be made as per prudential norms for NBFC laid down by
RBI?
6. Peoples Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer durables. The
following information is extracted from its books for the year ended 31st March, 2017:
Interest Overdue but recognized in Net Book Value of
Asset Funded Profit & loss Assets outstanding
Period Overdue Interest Amount
(₹ in crore) (₹ in crore)
LCD Televisions Upto 12 months 480.00 20,123.00

Washing For 24 months 102.00 2,410.00
Machines
Refrigerators For 30 months 50.50 1,280.00
Air For 45 months 26.75 647.00
Conditioners
You are required to calculate the amount of provision to be made.
Solution:
On the basis of the information given, in respect of hire purchase and leased assets, additional provision shall
be made as under:
(Rs. in crore)
(a) Where hire charges are overdue Nil -
upto 12 months
(b) Where hire charges are overdue 10% of the net book value 241
for more than 12 months but upto 10% x 2,410
24 months
(c) Where hire charges are overdue 40 percent of the net book 512
for more than 24 months but upto value
36 months 40% x 1,280
(d) Where hire charges or lease 70 percent of the net book 452.90
rentals are overdue for more than value
36 months but upto 48 months 70% x 647
Total 1,205.90
2.3
7. Bright Finance Ltd. is a non-banking financial company. It provides you with the following information
regarding its outstanding hire purchase instalments, Rs. 200 lakhs of which instalments are overdue on 200
accounts for last three months (amount overdue Rs. 40 lakhs) on 24 accounts for eight months (amount
overdue Rs. 24 Iakhs). On 10 accounts for more than 30 months (amount overdue Rs. 20 lakhs) and 4
accounts for more than three years (amount over due Rs. 20 lakhs-already identified as sub-standard assets)
and one account of Rs. 10 lakhs which has been identified as non-recoverable by the management. Out of 10
accounts overdue for more than 30 months, 6 accounts are already identified as sub-standard (amount Rs. 6
lakhs) for more than two years and other are identified as sub-standard asset for a period of less than two
years.
Classify the assets of the company in line with Non-Banking Financial (Deposit, Accepting or Holding)
Companies, Prudential Norms (Reserve Bank) Directions, 2007.
Solution: Statement showing classification as per Non Banking Financing (Deposit, Accepting or
Holding) Companies, Prudential Norms (Reserve Bank) Directions, 2007
(Rs. in lakhs)
Standard Assets
Accounts (Balancing figure) 86.00
200 accounts overdue for a period for 3 months 40.00
24 accounts overdue for a period by 8 months 24.00 150.00
Sub-Standard Assets
4 accounts identified as sub-standard asset for a period less than 18 months 14.00
Doubtful Debts
6 accounts identified as sub-standard for a period more than 2 years 6.00
4 accounts identified as sub-standard for a period more than 3 years 20.00
Loss Assets
1 account identified by management as loss asset 10.00
Total overdue 200.00
8. Albert Finance Ltd. has made the following investments:

(i) Purchased the following equity shares from stock exchange on 1st June 2009
Shares cost
Scrip X 1,80,000
Scrip Y 50,000
Scrip Z 1,70,000
(ii) Purchase gold of Rs. 3,00,000 on 1st April 2006
(iii) Investment in mutual funds at a cost of Rs. 6,00,000 on 31st March 2009
(iv) Purchased government securities at a cost of 5,00,000 on 1st April 2009
How will you treat these investment as per applicable AS in the books of the company for the year ended on
31st March 2010 if the values of these investments are as follows :
Shares Rs. Rs.

ScripX 1,90,000
ScripY 40,000
Scripz 70,000 3,00,000
Gold 5,00,000
Mutual Funds 4,50,000
Government Securities 7,00,000
Also explain is it possible to off – set depreciation in investment in mutual funds against appreciation of the
value of investment in government securities.
2.4
Part II
9. Glory Finance Ltd is Non–Banking Finance Company. The extracts of its Balance Sheet are given below:
Liabilities Rs. in 000s Assets Rs. in 000s

Paid–up Capital 100 Leased out Assets 800
Free Reserve 500 Investments:
Loans 400 In Shares of Subsidiaries 100
Deposits 400 In Debentures of Subsidiaries 100
Cash and Bank Balances 200
Deferred Expenditure 200
Total 1,400 Total 1,400
Compute “Net Owned Fund” of Glory Ltd as per NBFC (Deposit Accepting or Holding) Companies
Prudential Norms (RBI) Directions, 2007.
10. ABC Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring consumer durables. The
following information is extracted from its books for the year ending 31st March, 2017:
Assets Funded Interest Overdue Net book value of

but recognized in Profit & Loss Assets outstanding
Paid Overdue Interest (₹ In lakhs) Interest (₹ In lakhs)
Computers Upto 12 months 960.00 40,812.00
Televisions For 20 months 205.00 4,950.00
Washing Machines For 32 months 104.20 2,530.00
Refrigerators For 45 months 53.50 1328.00
Air-conditioners For 52 months 13.85 305.00
You are required to calculate the amount of provision to be made.
THEORY QUESTIONS
11. Write short notes on:
(i) “Non-Performing Assets” as per NBFC Prudential Norms (RBI) directions.

(ii) Capital adequacy ratio.
(iii) Earning value (Equity share).
Answer:-
(i) “Non−Performing Asset” as per NBFC Prudential Norms (RBI) directions means:
(a) an asset, in respect of which, interest has remained overdue for a period of Three months or more;
(b) a term loan inclusive of unpaid interest, when the instalment is overdue for a period of Three months or
more or on which interest amount remained overdue for a period of Three months or more;
(c) a demand or call loan, which remained overdue for a period of Three months or more from the date of
demand or call or on which interest amount remained overdue for a period of Three months or more;
(d) a bill which remains overdue for a period of Three months or more;
(e) the interest in respect of a debt or the income on receivables under the head ‘other current assets’ in the
nature of short term loans/advances, which facility remained overdue for a period of Three months or
more;
(f) any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which
remained overdue for a period of Three months or more;
(g) the lease rental and hire purchase instalment, which has become overdue for a period of Three months
or more;
(h) in respect of loans, advances and other credit facilities (including bills purchased and discounted), the
balance outstanding under the credit facilities (including accrued interest) made available to the same
borrower/beneficiary when any of the above credit facilities becomes non-performing asset:
Provided that in the case of lease and hire purchase transactions, a non-banking financial company may
classify each such account on the basis of its record of recovery.
2.5
(ii) Non-Banking Financial Companies (NBFC) are required to maintain adequate capital. Every NBFC shall
maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 12%
of its aggregate risk-weighted assets on balance sheet and of risk adjusted value of off-balance sheet
items.
The total of Tier II capital, at any point of time, shall not exceed 100% of Tier I capital.
Capital adequacy is calculated as under:
[(Tier I + Tier II Capital)/Risk Adjusted Assets]* 100
(iii) “Earning value” means the value of an equity share computed by taking the average of profits after tax as
reduced by the preference dividend and adjusted for extra-ordinary and nonrecurring items, for the
immediately preceding three years and further divided by the number of equity shares of the investee
company and capitalised at the following rate:
in case of predominantly manufacturing company, eight per cent;

1.
in case of predominantly trading company, ten per cent; and
2.
in case of any other company, including non-banking financial company, twelve percent;
3.
NOTE: If an investee company is a loss making company, the earning value will be taken at zero.
Lease and hire purchase assets

The provisioning requirements in respect of hire purchase and leased assets shall be as under:
Hire purchase assets
(i) In respect of hire purchase assets, the total dues (overdue and future instalments taken together) as reduced by
(a) the finance charges not credited to the profit and loss account and carried forward as unmatured finance charges; and
(b) the depreciated value of the underlying asset, shall be provided for.
Explanation :
For the purpose of this paragraph,
(1) the depreciated value of the asset shall be notionally computed as the original cost of the asset to be reduced by
depreciation at the rate of twenty per cent per annum on a straight line method; and
(2) in the case of second hand asset, the original cost shall be the actual cost incurred for acquisition of such second
hand asset.
Additional provision for hire purchase and leased assets
(ii) In respect of hire purchase and leased assets, additional provision shall be made as under:
(a) Where hire charges or lease rentals are overdue upto 12 months Nil
(b) where hire charges or lease rentals are overdue for more than12 months but upto 24 months 10% of the net book
value
(c) where hire charges or lease rentals are overdue for more 40 percent of the net
than 24 months but upto 36 months book value
(d) where hire charges or lease rentals 70 percent of the net
are overdue for more than 36 months but upto 48 months book value
(e) where hire charges or lease rentals are overdue 100 percent of the net
for more than 48 months book value
(iii) On expiry of a period of 12 months after the due date of the last instalment of hire purchase/leased asset, the entire net
book value shall be fully provided for.
In case of Lease and hire purchase assets provisions amount and Net Book Value shall be calculated as
follows:
2.6
Differences between NBFC and Bank
S.No. NBFC Bank

1. An NBFC cannot accept demand deposits. A Bank can accept demand deposits
2. An NBFC is not a part of the payment and A Bank is a part of the payment and settlement
settlement system. system
3. An NBFC cannot issue cheques drawn on itself. A Bank can issue cheques drawn on itself.
4. Deposit insurance facility of the Deposit Deposit insurance facility of the Deposit
Insurance and Credit Guarantee Corporation Insurance and Credit Guarantee Corporation
(DICGC) is not available for NBFC depositors. (DICGC) is available for banks.
MCQs(ICAI Study Material)
1. For the purpose of RBI Directions relating to Acceptance of Public Deposits, non-banking financial company
means the non-banking institution which is a
(a)Loan company or investment company.
(b)Hire-purchase finance company or equipment leasing company.
(c)Both (a) and (b).
2. For Sub-standard assets in the case of NBFC, a general provision of

(a)5% of total outstanding shall be made.
(b)10% of total outstanding shall be made.
(c)15% of total outstanding shall be made
3. Owned fund” excludes

(a) paid up capital.
(b) free reserves, balance in share premium account.
(c) reserves created by revaluation of asset.
Answers: [1.(c); 2. (b); 3. (c)]
2.7
REVISION STRUCTURE
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SUMMARY NOTES
2.8
Chapter 3 - Partnership CA P. S. Beniwal (9990301165)
Part I
1. P, Q and R are partners sharing profits and losses in the ratio of 2 : 2 : 1. Their Balance Sheet as on 31 st
March, 2009 is as follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Plant & Machinery 1,08,000
P 1,20,000 Fixtures 24,000
Q 48,000 Stock 60,000
R 24,000 1,92,000 Sundry debtors 48,000
Reserve fund 60,000 Cash 60,000
Creditors 48,000
3,00,000 3,00,000
They decided to dissolve the firm. The following are the amounts realized from the assets:
Rs.
Plant and Machinery 1,02,000
Fixtures 18,000
Stock 84,000
Sundry debtors 44,400
Creditors allowed a discount of 5% and realization expenses amounted to Rs.1,500. A bill for Rs.4,200
due for sales tax was received during the course of realization and this was also paid.
(a) Realization account
(b) Partners’ capital accounts
(c) Cash account. (PCC Nov 09 6 Marks and PE-II Nov 09, 8 Marks)
Answer: Realization Profit Rs. 5,100
2. Ram, Rahim and Auntony were in partnership sharing profits and losses in the ratio of 1/2, 1/3 and 1/6
respectively. They decided to dissolve the partnership firm on 31.3.1998, when the Balance Sheet of the
firm appeared as under :
Balance Sheet of the firm as on 31.3.1998
Sundry Creditors 5,67,000 Goodwill A/c 4,56,300
Bank Overdraft 6,06,450 Plant and Machinery 6,07,500
Joint Life Policy Reserve 2,65,500 Furniture 64,650
Loan from Mrs. Ram 1,50,000 Stock 2,36,700
Capital Accounts: Sundry Debtors 5,34,000
Ram 4,20,000 Joint Life Policy 2,65,500
Rahim 2,25,000 Commission Receivable 1,40,550
Auntony 1,20,000 7,65,000 Cash in Hand 48,750
23,53,950 23,53,950
The following details are relevant for dissolution :
(i) The joint life policy was surrendered for Rs. 2,32,500.
(ii) Ram took over goodwill and plant and machinery for Rs. 9,00,000.
(iii) Ram also agreed to discharge bank overdraft and loan from Mrs. Ram.
(iv) Furniture and stocks were divided equally between Ram and Rahim at an agreed valuation of Rs.
3,60,000.
(v) Sundry debtors were assigned to firm’s creditors in full satisfaction of their claims.
(vi) Commission receivable was received in time. A bill discounted was subsequently returned
dishonored and proved valueless Rs. 30,750 (including Rs. 500 noting charges).
(vii) Ram paid the expenses of dissolution amounting to Rs. 18,000.
(viii) Auntony agreed to receive Rs. 1,50,000 in full satisfaction of his rights, title and interest in the firm.
You are required to show accounts relating to closing of books on dissolution of the firm.
3.1
3. ‘X’ and ‘Y’ carrying on business in partnership sharing Profits and Losses equally, wished to dissolve the
firm and sell the business to ‘X’ Limited Company on 31-3-2009, when the firm’s position was as
follows:
X’s Capital 1,50,000 Land and Building 1,00,000
Y’s Capital 1,00,000 Furniture 40,000
Sundry Creditors 60,000 Stock 1,00,000
Debtors 66,000
Cash 4,000
3,10,000 3,10,000
The arrangement with X Limited Company was as follows:
(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and stock were purchased at book values less 15%.
(iii) The goodwill of the firm was valued at Rs.40,000.
(iv) The firm’s debtors, cash and creditors were not to be taken over, but the company agreed to collect
the book debts of the firm and discharge the creditors of the firm as an agent, for which services, the
company was to be paid 5% on all collections from the firm’s debtors and 3% on cash paid to firm’s
creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares of Rs.10 each at
a premium of Rs.2 per share. The company collected all the amounts from debtors. The creditors
were paid off less by Rs.1,000 allowed by them as discount. The company paid the balance due to
the vendors in cash.
Prepare the Realisation account, the Capital accounts of the partners and Cash account in the books of
partnership firm.
Answer : Realisation Profit 34,930; Final Cash paid to A Rs. 3,485 and B Rs. 2,445
4. X, Y and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of 4 : 3 : 2.
Following is the Balance sheet of the firm as at 31st March, 2008:
Balance Sheet as at 31st March, 2008
Partners’ Capitals: Fixed Assets 5,00,000
X 4,00,000 Stock in trade 3,00,000
Y 3,00,000 Sundry debtors 5,00,000
Z 2,00,000 Cash in hand 10,000
General Reserve 90,000
Sundry Creditors 3,20,000 ________
13,10,000 13,10,000
Partners of the firm decided to dissolve the firm on the above said date. It was found that a credit purchase of
Rs. 20,000 in January, 2008 had not been recorded in the books of the firm.
Fixed assets realized Rs. 5,20,000 and book debts Rs. 4,40,000.
Stocks were valued at Rs. 2,50,000 and it was taken over by partner Y.
Creditors allowed discount of 5% and the expenses of realization amounted to Rs. 6,000.

(i) Realisation account;
(ii) Partners capital account; and
(iii) Cash account.
3.2
5. Neptune, Jupiter, Venus and Pluto had been carrying on business in partnership sharing profits and losses in
the ratio of 3 : 2 : 1 : 1. They decide to dissolve the partnership on the basis of the following Balance Sheet
as on 30th April, 2003:
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Account: Premises 1,20,000
Neptune 1,00,000 Furniture 40,000
Jupiter 60,000 1,60,000 Stock 1,00,000
General Reserve 56,000 Debtors 40,000
Capital Reserve 14,000 Cash 8,000
Sundry Creditors 20,000 Capital Overdrawn:
Mortgage Loan 80,000 Venus 10,000
Pluto 12,000 22,000
3,30,000 3,30,000
(i) The assets were realised as under:
Rs.
Debtors 24,000
Stock 60,000
Furniture 16,000
Premises 90,000
(ii) Expenses of dissolution amounted to Rs. 4,000.
(iii) Further Creditors of Rs. 12,000 had to be met.
(iv) General Reserve unlike Capital Reserve was built up by appropriation of profits.
You are required to draw up the Realisation Account, Partners’ Capital Accounts and the Cash Account
assuming that Venus became insolvent and nothing was realised from his private estate. Apply the
principles laid down in Garner vs Murray. (16 marks) (PE – II – Nov. 2003)
6. A, B, C & D were partners sharing profits and losses in the ratio of 3:3:2:2. Following was their Balance
Sheet as on 31.12.12:
Capital Accounts: Capital Accounts:
A 60,000 C 48,000
B 45,000 1,05,000 D 18,000 66,000
Creditors 46,500 Furniture 12,000
A’s Loan 30,000 Trademarks 21,000
Stock 30,000
Debtors 48,000
Less: Provision for
doubtful debts (1,500) 46,500
Bank 6,000
1,81,500 1,81,500
On 31.12.2012, the firm was dissolved and B was appointed to realise the assets and to pay off the liabilities.
He was entitled to receive 5% commission on the amount finally paid to other partners as capital. He agreed
to bear the expenses of realisation. The assets were realised as follows:
Debtors Rs. 33,000; Stock Rs. 24,000; Furniture Rs. 3,000; Trademarks Rs. 12,000.
Creditors were paid off in full, in addition, a contingent liability for Bills Receivable discounted materialised
to the extent of Rs. 7,500. Also, there was a joint life policy for Rs. 90,000. This was surrendered for Rs.
9,000. Expenses of realisation amounted to Rs. 1,500. C was insolvent but Rs. 11,100 was recovered from
his estate.
Prepare Realisation Account, Bank Account and Capital Accounts of the partners.
3.3
7. The firm of Kapil and Dev has four partners and as of 31st March, 1995, its Balance Sheet stood as follows:
Balance Sheet as on 31st March, 1995

Capital A/cs: Land 50,000
F. Kapil 2,00,000 Building 2,50,000
S. Kapil 2,00,000 Office equipment 1,25,000
R. Dev 1,00,000 Computers 70,000
Current A/cs Debtors 4,00,000
F. Kapil 50,000 Stocks 3,00,000
S. Kapil 1,50,000 Cash at Bank 75,000
R. Dev 1,10,000 Other Current Assets 22,600
Loan from NBFC 5,00,000 Current A/c :
Current Liabilities 70,000 B. Dev 87,400
13,80,000 13,80,000
The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to dissolve the
firm on 1.4.1995 on the basis of the following understanding:
(a) The following assets are to be adjusted to the extent indicated with respect to the book values :
Land 200%
Building 120%
Computers 70%
Debtors 95%
Stocks 90%
(b) In the case of the loan, the lender’s are to be paid at their insistence a prepayment premium of 1%.
(c) B. Dev is insolvent and no amount is recoverable from him. His father, R.Dev, however, agrees to
bear 50% of his deficiency. The balance of the deficiency is agreed to be apportioned according to
law.
Assuming that the realisation of the assets and discharge of liabilities is carried out immediately, show
the Cash A/c, Realisation Account and the Partners’ Accounts.
8. P, Q and R were partners sharing profits and losses in the ratio of 3 : 2 : 1, no partnership salary or interest
on capital being allowed. Their balance sheet on 30th June, 2012 is as follows:
Fixed Capital Fixed assets :

P 20,000 Goodwill 40,000
Q 20,000 Freehold Property 8,000
R 10,000 50,000 Plant and Equipment 12,800
Current Accounts : Motor Vehicle 700
P 500 Current Assets
Q 9,000 9,500 Stock 3,900
Loan from P 8,000 Trade Debtors 2,000
Trade Creditors 12,400 Less : Provision (100) 1,900
Cash at Bank 200
Miscellaneous losses
R's Current Account 400
Profit and Loss Account 12,000
79,900 79,900
3.4
On 1st July, 2012 the partnership was dissolved. Motor Vehicle was taken over by Q at a value of Rs. 500
but no cash passed specifically in respect of this transaction. Sale of other assets realised the following
amounts:
Rs.
Goodwill nil
Freehold Property 7,000
Plant and Equipment 5,000
Stock 3,000
Trade Debtors 1,600
Trade Creditors were paid Rs. 11,700 in full settlement of their debts. The costs of dissolution amounted to
Rs. 1,500. The loan from P was repaid, P and Q were both fully solvent and able to bring in any cash
required but R was forced into bankruptcy and was only able to bring 1/3 of the amount due.
You are required to show:

(a) Cash and Bank Account,
(b) Realisation Account, and
(c) Partners Fixed Capital Accounts (after transferring Current Accounts’ balances).
9. A, B, C and D sharing profits in the ratio of 4:3:2:1 decided to dissolve their partnership on 31st March 2012
when their balance sheet was as under:
Creditors 15,700 Bank 535
Employees Provident Fund 6,300 Debtors 15,850
Capital Accounts :- Stock 25,200
A 40,000 Prepaid Expenses 800
B 20,000 60,000 Plant & Machinery 20,000
Patents 8,000
C’s Capital A/c 3,200
D’s Capital A/c 8,415
82,000 82,000
Following information is given to you :-
1. One of the creditors took some of the patents whose book value was Rs. 5,000 at a valuation of Rs.
3,200. Balance of the creditors were paid at a discount of Rs. 400.
2. There was a joint life policy of Rs. 20,000 (not mentioned in the balance sheet) and this was surrendered
for Rs. 4,500.
3. The remaining assets were realised at the following values:- Debtors Rs. 10,800; Stock Rs. 15,600; Plant
and Machinery Rs. 12,000; and Patents at 60% of their book-values.
Expenses of realisation amounted Rs. 1,500.
D became insolvent and a dividend of 25 paise in a rupee was received in respect of the firms claim against
his estate. Prepare necessary ledger accounts.
10. M/s X, Y and Z who were in partnership sharing profits and losses in the ratio of 2:2:1 respectively, had the
following Balance Sheet as at December 31, 2012:
Liabilities Rs. Rs. Assets Rs. Rs.
Capital : X 29,200 Fixed Assets 40,000
Y 10,800 Stock 25,000
Z 10,000 50,000 Book Debts 25,000
Z’s Loan 5,000 Less : Provision (5,000) 20,000
Loan from Mrs. X 10,000 Cash 1,000
Sundry Trade Creditors 25,000 Advance to Y 4,000
90,000 90,000
The firm was dissolved on the date mentioned above due to continued losses. After drawing up the balance
sheet given above, it was discovered that goods amounting to Rs. 4,000 have been purchased in November,
2012 and had been received but the purchase was not recorded in books.
3.5
Fixed assets realised Rs. 20,000; Stock Rs. 21,000 and Book Debt Rs. 20,500. Similarly, the creditors
allowed a discount of 2% on the average. The expenses of realisation come to Rs. 1,080. X agreed to take
over the loan of Mrs. X. Y is insolvent, and his estate is unable to contribute anything.
Give accounts to close the books; work according to the decision in Garner vs. Murray.
11. Read, Write and Add give you the following Balance Sheet as on 31st March, 2011.
Read,s Loan 15,000 Plant and Machinery at cost 30,000
Capital Accounts: Fixtures and Fittings 2,000
Read 30,000 Stock 10,400
Write 10,000 Debtors 18,400
Add 2,000 42,000 Less: Provision (400) 18,000
Sundry Creditors 17,800 Joint Life Policy 15,000
Loan on Hypothecation of Patents and Trademarks 10,000
Stock 6,200 Cash at Bank 8,000
Joint Life Policy Reserve 12,400
93,400 93,400
The partners shared profits and losses in the ratio of Read 4/9, Write 2/9 and Add 1/3. Firm was dissolved on
31st March, 2011 and you are given the following information:
(a) Add had taken a loan from insurers for Rs. 5,000 on the security of Joint Life Policy.
The policy was surrendered and Insurers paid a sum of Rs. 10,200 after deducting Rs. 5,000 for.
Add,s loan and Rs. 300 as interest thereon.
(b) One of the creditors took some of the patents whose book value was Rs. 6,000 at a valuation of Rs.
4,500. The balance to that creditor was paid in cash.
(c) The firm had previously purchased some shares in a joint stock company and had written them off on
finding them useless. The shares were now found to be worth Rs. 3,000 and the loan creditor agreed
to accept the shares at this value.
(d) The remaining assets realized the following amount: Rs.
Plant and Machinery 17,000
Fixtures and Fittings 1,000
Stock 9,000
Debtors 16,500
Patents 50% of their book value
(e) The liabilities were paid and a total discount of Rs. 500 was allowed by the creditors.
(f) The expenses of realization amounted to Rs. 2,300.
Prepare the Realisation Account, Bank Account and Partners Capital Accounts in columnar form.
12. A, B, C and D are sharing profit and losses in the ratio of 5:5:4:2. Frauds committed by C during the year
were found out and it was decided to dissolve the partnership on 31st March 2010 when their Balance Sheet
was as under:

Capital: Building 1,20,000
A 90,000 Stock 85,500
B 90,000 Investment 29,000
C - Debtors 42,000
D 35,000 Cash 14,500
General Reserve 24,000 C 15,000
Trade Creditors 47,000
Bills Payable 20,000
Total 3,06,000 Total 3,06,000
Following information given to you:
(i) A cheque for Rs. 4,300 received from debtor was not recorded in the books and was misappropriated
by C.
(ii) Investment costing Rs. 5,400 were sold by C at Rs. 7,900 and the funds transferred to his personal
account. This sale was omitted from the firm’s books
3.6
(iii) A creditor agreed to take over investments of the book value of Rs. 5,400 at Rs. 8,400. The rest of
the creditors were paid off at a discount of 2%.
(iv) The other assets realized as follows:
Building 105% of book value.
Stock Rs. 78,000
Investments The rest of the investment sold at a profit of Rs. 4,800.
Debtors The rest of the debtors were realized at a discount of 12%.
(v) The bills payable were settled at a discount of Rs. 400.
(vi) The expenses of dissolution amounted to Rs. 4,900.
(vii) It was found out that realization from C’s private assets only be Rs. 4,000.
Prepare the necessary Ledger Accounts. (IPCC Nov 2010.)
13. Following is the Balance Sheet of Ram & Shyam

Balance Sheet
Ram’s Capital 40,000 Fixed Assets 1,00,000
Shyam’s Capital 60,000 1,00,000 Current Assets 80,000
Sundry Creditors 40,000
Profit & Loss A/c 40,000
1,80,000 1,80,000
A Limited Company took over the business of partnership firm
1. Fixed Assets were valued at Rs. 1,20,000 only. 50% of creditors were taken over.
2. Rest of the creditors were taken over by Ram and Shyam equally.
3. Purchase consideration was settled by issue of Equity shares.
Required:
1. Close Books of old firm.
2. Open Books of New Firm.
3. Prepare B/S of New Company.
4. Prepare B/S of New Company if same set of Books is followed.
14. M and R carrying on business in partnership, sharing profits and losses in the ratio of 3:2 wish to dissolve the
firm and sell the business to a limited company on 31st December, 1991 when the firm’s Balance Sheet
stands as under:

Capital Account Furniture 8,000
M 70,000 Motor Car 12,000
R 50,000 Stock 81,000
Reserve 20,000 Debtors 60,000
Sundry Creditors 25,000 Cash 4,000
1,65,000 1,65,000
A limited company with an authorized capital of Rs. 3,00,000 in equity shares of Rs. 10 each is registered to
purchase the above business on the following terms:
(1) Goodwill is valued at Rs. 30,000.
(2) Furniture and stock are revalued at Rs. 6,000 and Rs. 85,000 respectively.
(3) Debtors are subject to 5% provision.
Motor car is not required by the company and M takes over the same at an agreed valuation of Rs. 8,000.
Purchase consideration is satisfied by the issue of equity shares of Rs. 10 each at par.
Show Journal entries and Balance Sheet of the company assuming that the same set of books is continued.
Ans.: Balance Sheet 1,82,000
3.7
15. Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5:3:2. It was decided that
Robert would retire on 31.03.2005 and in his place Richard would be admitted as a partner with new profit
sharing ratio between Ram, Rahim and Richard at 3:2:1.
Balance Sheet of Ram, Rahim and Robert as at 31.03.2005:

Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash at Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ----------
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
(i) Plant & Machinery to be depreciated by Rs. 30,000
(ii) Land & Building to be valued at Rs. 6,00,000
(iii) Stock to be valued at 95% of book value.
(iv) Provision for doubtful debts @ 10% to be provided on debtors.
(v) General Reserve to be apportioned amongst Ram, Rahim and Robert.
(vi) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3 years. The
relevant figures are:
Year ended 31.03.2002 Profit Rs. 50,000
(vii) Out of the amount due to Robert Rs. 2,00,000 would be retained as loan by the firm and the balance
will be settled immediately.
(viii) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare: (a) Capital accounts of the partners; and (b) Balance Sheet of the reconstituted firm.
Ans.: Capital Accounts: Ram-1,90,000; Rahim-2,00,333; Richard-1,95,167 Balance Sheet: 15,85,500.
16. The following was the Balance Sheet of ‘A’ and ‘B’, who were sharing Profit and Losses in the ratio of 2:1
on 31.12.2006.

Capital Accounts Plant and Machinery 12,00,000
A 10,00,000 Building 9,00,000
B 5,00,000 Sundry Debtors 3,00,000
Reserve Fund 9,00,000 Stock 4,00,000
Sundry Creditors 4,00,000 Cash 1,00,000
Bills payable 1,00,000
29,00,000 29,00,000
They agreed to admit C into the partnership on the following terms:
(i) The Goodwill of the firm was fixed at Rs. 1,05,000
(ii) That the value of Stock and Plant and Machinery were to be reduced by 10%.
(iii) That a provision of 5% was to be created for Doubtful Debts.
(iv) That the Building Account was to be appreciated by 20%.
(v) There was an unrecorded Liability of Rs. 10,000.
(vi) Investment worth Rs. 20,000 (Not mentioned in the Balance Sheet) were taken into account.
(vii) That the value of Reserve fund, the values of Liabilities and the values of Assets other than Cash
are not to be altered.
‘C’ was to be given one-fourth share in the ‘Profit and was to bring capital equal to his share of Profit after
all adjustment.
3.8
Prepare Memorandum Revaluation Account, Capital Account of the Partners and the Balance Sheet of the
Newly Reconstituted firm.
Answer: Capital of A, B and C Rs 11,70,000 5,85,000 5,85,000 respectively and Cash Bring by C Rs.
8,40,000
17. R, K and C have carried on business as drapers for twenty years and on 30th June, 2001, their Balance Sheet
was as under:

Bank overdraft 20,000 Plant and Machinery 32,000
Creditors for suppliers 30,000 Premises 50,000
Creditors for expenses 18,000 Sundry Debtors 48,000
Capital account: Stock in trade 40,000
(fixed) Cash and Bank
R 30,000 Balance 8,000
K 20,000
C 20,000 70,000
Current Accounts:
R 16,000
C 24,000 40,000
1,78,000 1,78,000
The profits and losses were shared in the ratio of fixed capitals on 30th June, 2001. The partners agreed that
due to old age R would retire from the firm when its goodwill will be valued and proportionate share credited
to R. It was also decided that premises appearing in the books at cost would be valued a their market value of
Rs. 80,000 and allotted to R in satisfaction of his dues. Any excess or deficit would be settled in cash. It was
also agreed that stock-in-trade and debtors would be taken at 90% of the book value and an unrecorded
liability of bonus of Rs. 10,000 to staff brought into books. Goodwill of the firm was to be taken at Rs.
70,000.
After R’s retirement, the business was carried on by K and C sharing profits and losses equally and till 30th
September 2001 the firm had made a net profit of Rs. 30,000 after crediting each partner’s capital account
with Rs. 500 p.m. as salary. No drawing were made by the partners in the quarter.
K and C now find that they cannot continue the business and decide to sell it to a private limited company as
and from 1st October, 2001. The company is to take over the entire business for a consideration of Rs. 90,000
which the vendors agree to make 40% in 14% secured debentures and the balance in cash. To enable the
company to pay the vendors and also leave it with a working capital of Rs. 20,000, the company makes issue
of equity shares of Rs. 10 each at par.
Show the Balance Sheet of the company after the take over of the business of K and C.All workings should
frompart of your answer.
Ans.: Profit on adjustment. R – Rs. 4,800, K – Rs. 3,200 & C – Rs. 3,200; Balance Sheet Rs. 1,46,600.
18. A and B were carrying on business sharing profits and losses equally. The firm’s Balance Sheet as at
31.12.2011 was:
Sundry Creditors 60,000 Stock 60,000
Bank overdraft 35,000 Machinery 1,50,000
Capital A/cs: Debtors 70,000
A 1,40,000 Joint Life Policy 9,000
B 1,30,000 2,70,000 Leasehold Premises 34,000
Drawings Accounts:
A 10,000
B 6,000 16,000
3,65,000 3,65,000
3.9
The business was carried on till 30.6.2012. The partners withdrew in equal amounts half the amount of
profits made during the period of six months after charging depreciation at 10% p.a. on machinery and after
writing off 5% on leasehold premises. In the half year, sundry creditors were reduced by Rs. 10,000 and
bank overdraft by Rs. 15,000.
On 30.6.2012, stock was valued at Rs. 75,000 and Debtors at Rs. 60,000; the Joint Life Policy had been
surrendered for Rs. 9,000 before 30.6.2012 and other items remained the same as at 31.12.2011.
On 30.6.2012, the firm sold the business to a Limited Company. The value of goodwill was fixed at Rs.
1,00,000 and the rest of the assets were valued on the basis of the Balance Sheet as at 30.6.2012. The
company paid the purchase consideration in Equity Shares of Rs. 10 each.
You are required to prepare: (a) Balance Sheet of the firm as at 30.6.2012; (b) The Realisation Account; (c)
Partners’ Capital Accounts showing the final settlement between them.
19. A, B and C were in partnership sharing profits and losses 3:2:1. There was no provision in the agreement for
interest on capitals or drawings.
A died on 1.1.2011 and on that date, the partners’ balance were as under:
Capital Account : A – Rs. 60,000; B- Rs. 40,000; C- Rs. 20,000
Current Account: A – Rs. 29,000; B – Rs. 20,000; C – Rs. 5,000 (Dr.).
By the partnership agreement, the sum due to A’s estate was required to be paid within a period of 3 years,
and minimum instalment of Rs. 20,000 each were to be paid, the first such instalment falling due
immediately after death and the subsequent instalments at half-yearly intervals. Interest @ 5% p.a. was to be
credited half-yearly.
In ascertaining his share, goodwill (not recorded in the books) was to be valued at Rs. 60,000 and the assets,
excluding the Joint Endowment Policy (mentioned below), were valued at Rs. 36,000 in excess of the book
values.
No Goodwill Account was raised and no alteration was made to the book values of fixed assets. The Joint
Assurance Policy shown in the books at Rs. 20,000 matured on 1.1.2011, realising Rs. 26,000; payments of
Rs. 20,000 each were made to A’s Executors on 1.1.2011, 30.6.2011 and 31.12.2011. B and C continued
trading on the same terms as previously and the net profit for the year to 31.12.2011 (before charging the
interest due to A’s estate) amounted to Rs. 32,000. During that period, the partners drawings were: B- Rs.
15,000; and C- Rs. 8,000.
On 1.1.2012, the partnership was dissolved and an offer to purchase the business as a going concern for Rs.
1,40,000 was accepted on that day. A cheque for that sum was received on 30.6.2012.
The balance due to A’s estate, including interest, was paid on 30.6.2012 and on that day, B and C received
the sums due to them. You are required to write-up the Partners’ Capital and Current Accounts from
1.1.2011 to 30.6.2012. Show also the account of the executors of A.
20. The following is the Balance Sheet of A, B, C on 31st December, 20X1 when they decided to dissolve the
partnership:

Creditors 2,000 Sundry Assets 48,500
A’s Loan 5,000 Cash 500
Capital Accounts :
A 15,000
B 18,000
C 9,000
49,000 49,000
3.10
The assets realised the following sums in instalments:
I 1,000
II 3,000
III 3,900
IV 6,000
V 20,100
34,000
The expenses of realisation were expected to be Rs. 500 but ultimately amounted to Rs. 400 only.
Show how at each stage the cash received should be distributed between partners. They share profits in the
ratio of 2:2:1.
21. X and Y are partners sharing Profits and Losses in the ratio of 3:2. On 30th September, 2006 they admitted Z
as a partner. The new profit sharing ratio agreed was 2:2:1.
At the time of admission Z brought in a fixture valued at Rs. 6,000 and a machinery worth Rs. 24,000. No
accounting entry was passed for the fixture brought in by partner Z in the books of the firm.
Also at the time of admission the valuation of goodwill was made. The value of goodwill of X and Y was
decided at Rs. 40,000 and value of goodwill of partner Z was fixed at Rs. 20,000. No effect was given to the
goodwill value in the books of the firm.
On 31.3.2007, it was decided that partner X would retire and the other partners viz., Y and Z would continue
the business of the firm by converting it into a company called YZ Ltd., with equal shareholding in the
Company.
The partners agreed as below:
(i) The goodwill of the firm shall be fixed at Rs. 80,000. Necessary effect for goodwill value not recorded
earlier shall be given. The present goodwill value being Rs. 80,000 shall be reflected in the books of
the company.
(ii) All the Assets and Liabilities of the firm shall be taken over by the company.
(iii) Partner X would take Motor car of the firm at a value of Rs. 7,400.
(iv) A plant owned by the firm is sold for Rs. 6,000.
(v) The Profit of the firm upto 30.9.2006 was Rs. 44,000.
(vi) Partner X agreed to leave Rs. 90,000 as loan with the firm in return for 12% interest per annum.
Following is the Trial Balance of the firm as on 31.3.2007:
Particulars Dr. Cr. (Rs.)
Capital Account:
X - 80,000
Y - 50,000
Z - 24,000
Drawings Account:
X 22,000 -
Y 20,000 -
Z 9,600 -
Sundry Debtors 70,000 -
Sundry Creditors - 32,000
Plant (Book value of plant sold Rs. 8,000) 46,000 -
Fixtures 14,000 -
Stock 24,000 -
Motor Car 5,400 -
Cash at Bank 34,600 -
Profit and Loss A/c (for the year) _ 59,600
2,45,600 2,45,600
(i) Goodwill Adjustment account (ii) Profit and Loss Appropriation Account.
(iii) Partners’ Capital Accounts. (iv) Balance Sheet of YZ Ltd. after conversion.
3.11
22. A, B and C share profits and losses in the ratio of 5 : 3 : 2. Their firm was dissolved due to misconduct of B
and their balance sheet on that date was as under:
Balance Sheet as at 31.3.2005

Capital Accounts: Land and Building 2,00,000
A 3,00,000 Plants 2,00,000

B 2,00,000 Sundry Debtors 50,000
C 1,00,000 6,00,000 Stock 1,50,000
Current Accounts: Bills Receivable 50,000
A 50,000 Cash 1,00,000

B 30,000 80,000 Current Account:
Sundry Creditors: 40,000 C 50,000

Bills payable 80,000
8,00,000 8,00,000
The whole business of the firm was sold to Govinda Company Ltd. on that day on the following terms:
(i) Govinda Company Limited will issue the following securities in consideration for transfer of business:
10,000 equity shares @ Rs. 15 each; 15,000 Preference shares @ Rs. 15 each; and 20,000 debentures @
Rs. 14.725 each.
(ii) The agreed value of assets and liabilities of partnership firm are as follows:
Rs.
Land and Building 3,00,000
Plants 1,50,000
Sundry Debtors 47,500
Stock 1,40,000
Bills Receivable 50,000
C was admitted to the partnership firm on 1.4.2002 and paid Goodwill premium for her share of Rs. 30,000
based on 5 years purchase of super profit method. A and B were sharing profits in equal ratio before C
admission.
It is mutually decided that preference shares will be distributed in profit sharing ratio and debentures and
cash will be shared equally by all the partners.
Prepare the necessary accounts to close the books of the firm.
23. A and B were in partnership sharing profit and losses in the ratio of 2 : 1. Their summarized Balance Sheet
as on 31st March, 2004 was as under:
Capital Accounts: Fixed Assets 1,40,000

A 1,00,000 (including two motor cars
B 80,000 1,80,000 for Rs. 28,000)
Current Accounts: Stock 70,000
A 40,000 Debtors 1,00,000
Less: B 23,000 17,000 Bills Receivable 25,000
Loan from B 63,000 Bank 20,000
Creditors for Goods 1,10,000 Advertisement Suspense Account 15,000
3,70,000 3,70,000
They decided to dissolve the business and accepted the offer of N & Co. Ltd. to acquire stocks and fixed
assets excluding two motor cars at a total price of Rs. 3,35,000. The debtors realized Rs. 97,000, and bills
receivable Rs. 24,000. Creditors for goods allowed a discount of 5%.
3.12
The purchase consideration was to be discharged by a cash payment of Rs. 83,000, the allotment by the
company to the partners of 8,000 preference shares of Rs. 10 each (valued at Rs. 9 each) and the balance by
the allotment of 9,000 ordinary shares of Rs. 10 each. The partners agreed that following should be the basis
of distribution on dissolution of the firm.
(a) A to take over one Motor car at a value of Rs. 25,000, and B, the other car at Rs. 15,000.
(b) B to accept preference shares for her loan to the firm, the remainder to be taken over by A.
(c) The ordinary shares to be taken over by A and B in proportion of their fixed capitals.
(d) The balance to be settled in cash.
Prepare the necessary accounts to close the books of the firm.
24. The firm of LMS was dissolved on 31.3.95, at which date its Balance Sheet stood as follows:
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capital
L 15,00,000
M 10,00,000
S 5,00,000
Total 47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets and distribute
the cash after discharge of liabilities. Their fees which are to include all expenses is fixed at Rs. 1,00,000. No
loss is expected on realisation since fixed assets include valuable land and building.
Realisations are:
S.No. Amount in Rs.
1 5,00,000
2 15,00,000
3 15,00,000
4 30,00,000
5 30,00,000
The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’.
You are required to prepare a statement showing distribution of cash with necessary workings.
25. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs. 9,600, Rs.
6,000 and Rs. 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
Rs. Rs.
Liability for interest on Investments 1,000

loans from : Furniture 2,000
Spouses of partners 2,000 Machinery 1,200
Partners 1,000 Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when available, applying
maximum possible loss procedure.
3.13
26. Ajay Enterprises, a partnership firm in which A, Band C are three partners sharing profit and loss in the ratio
4:3:3 the balance sheet of the firm as on 31st December, 2011 is as below:
Liabilities Rs Assets Rs
A Capital 15,000 Factory Building 24,160
B Capital 7,500 Plant & Machinery 16,275
C Capital 15,000 Debtors 5,400
B Loan A/C 4,500 Stock 12,390
Sundry creditors 16,500 Cash at Bank 275
58,500 58,500
On balance sheet date all the three partners have decided to dissolve their partnership. Since the realization
of assets was prostrated, they decide to distribute amounts as and when feasible and for this purpose they
appoint C who was to get as his remunerations 1%of the value of the assets realized other than cash at bank
and 10% of the amount distributed to the partners.
Assets were piece-meal as under
Rs
First instalment 18,650
Second instalment 17,320
Third instalment 10,000
Last instalment 7,000
Dissolution expenses were provided for estimated amount of 3,000
The Creditors were finally settled for 15,900
Prepare a statement showing distribution of cash amongst the partners by “Highest Relative capital method”.
(16 Marks)
27. The partners A, B and C have called you to assist them in winding up the affairs of their partnership on 30th
June, 2012. Their Balance Sheet as on that date is given below :
Sundry Creditors 17,000 Cash at Bank 6,000
Capital Accounts : Sundry Debtors 22,000
A 67,000 Stock in trade 14,000
B 45,000 Plant and Equipment 99,000
C 31,500 Loan-A 12,000
Loan-B 7,500
1,60,500 1,60,500
(1) The partners share profit and losses in the ratio of 5:3:2
(2) Cash is distributed to the partners at the end of each month
(3) A summary of liquidation transactions are as follows:
July 2012
Rs. 16,500 – collected from Debtors; balance is uncollectable.
Rs. 10,000 – received from sale of entire stock.
Rs. 1,000 – liquidation expenses paid.
Rs. 8,000 – cash retained in the business at the end of the month.
August 2012
Rs. 1,500 – liquidation expenses paid. As part payment of his Capital, C accepted a piece of equipment for
Rs. 10,000 (book value Rs. 4,000).
Rs. 2,500 – cash retained in the business at the end of the month.
September 2012
Rs. 75,000 – received on sale of remaining plant and equipment.
Rs. 1,000 – liquidation expenses paid. No cash retained in the business.
Required: Prepare a schedule of cash payments as of Sept. 30, showing how the cash was distributed.
3.14
28. Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2. The firm Y & Co.
consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.
On 31st March, 2010 it was decided to amalgamate both the firms and form a new firm XY & Co., wherein
A, B and C would be partners sharing Profits and Losses in the ratio of 4:5:1.
Following is the Balance sheet of the firm and that of the company as at 31.3.2010:
Liabilities X & Co. Y & Co. Assets X & Co. Y & Co.
Rs. Rs. Rs. Rs.
Capital: Cash in hand/bank 40,000 30,000

A 1,50,000 ----- Debtors 60,000 80,000
B 1,00,000 75,000 Stock 50,000 20,000
C ---- 50,000 Vehicles ---- 90,000
Reserve 50,000 40,000 Machinery 1,20,000
Creditors 1,20,000 55,000 Building 1,50,000 ------
4,20,000 2,20,000 4,20,000 2,20,000
The following were the terms of amalgamation:
(a) Goodwill of X & Co., was valued at Rs. 75,000. Goodwill of Y & Co., was valued at Rs. 40,000.
Goodwill account not to be opened in the books of the firm of the new firm but adjusted through the
capital accounts of the partners.
(b) Building, machinery and Vehicles are to be taken over at Rs. 2,00,000, Rs. 1,00,000 and Rs. 74,000
respectively.
(c) Provision for doubtful debts at Rs. 5,000 in respect of X & Co. and Rs. 4,000 in respect of Y & Co. are
to be provided.
(d) Required:
(i) Show, how the goodwill value is adjusted among partners.
(ii) Prepare the B/S of XY & Co. as at 31.03.2010 by keeping partners capital in their profit sharing ratio
by taking capital of ‘B’ as the basis. The excess or deficiency to be kept in the respective Partner’s
current account.
29. P & Q are partners of P & Co. sharing Profits and Losses in the ratio of 3 : 1 and Q and Rare partners of R &
Co. sharing Profits and Losses in the ratio of 2 : 1. On 31st March, 2009, they decide to amalgamate and
form a new firm M/s PQR & Co., wherein P, Q and R would be partners sharing Profits and Losses in the
ratio of 3:2:1.
The Balance sheet of two firms of the above date are as under:
Liability P & Co. R & Co. Assets P & Co. R & Co.
Capitals: Fixed Assets:
P 2,40,000 -- Building 50,000 60,000
Q 1,60,000 2,00,000 Plant & Machinery 1,50,000 1,60,000
R -- 1,00,000 Office Equipment 20,000 6,000
Reserves 50,000 1,50,000 Current Assets:
Sundry Creditors 1,20,000 1,16,000 Stock-in-trade 1,20,000 1,40,000
Due to P & Co. -- 1,00,000 Sundry Debtors 1,60,000 2,00,000
Bank Overdraft 80,000 --- Bank Balance 30,000 90,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 ----
6,50,000 6,66,000 6,50,000 6,66,000
The amalgamated firm took over the business on the following terms:
(a) Building of P& Co. was valued at Rs. 1,00,000.

(b) Plant & machinery of P & Co. was valued at Rs. 2,50,000, and that of R & Co. at Rs. 2,00,000.
(c) All stock in trade is to be appreciated by 20%.
(d) Goodwill valued of P & Co. at Rs. 1,20,000 and R & Co. at Rs. 60,000, but the same will not appear
in the books of PQR & Co.
(e) Partners of new firm will bring the nessary cash to pay other partners to adjust their capitals
according to the profit sharing ratio.
(f) Provision for doubtful debts has to be carried forward at Rs. 12,000 in respect of debtors of P & Co.
and Rs. 26,000 in respect of debtors of R & Co.
3.15
You are required to prepare the Balance Sheet of New Firm and Capital Accounts of the partners in the
books of old firms.
30. A, B and C were equal partners. Their balance sheet on 31.12.2006 stood as under, when the firm was
dissolved:

Sundry creditors 32,000 Machinery 12,000
A’s capital 4,000 Furniture 3,000
B’s capital 3,000 Sundry debtors 5,000
Stock 4,000
Cash at bank 2,800
C’s capital 12,200
39,000 39,000
The assets realised as under:
Machinery Rs.6,000; furniture Rs.1,000; sundry debtors Rs. 4,000 and stock Rs. 3,000. The expenses of
realisation came to Rs. 1,400.
A’s personal properties are not sufficient to pay his personal liabilities, whereas in B’s and C’s private estate
there is a surplus of Rs. 2,400 and Rs. 3,000 respectively.
Show necessary accounts closing the books of the firm. (RTP Nov 2007)
31. THEORY QUESTIONS
Explain Garner V/S Murrary rule applicable in the case of partnership firms. State, when is this rule not
applicable.
Answer:-
a) Garner vs. Murray rule
When a partner is unable to pay his debt due to the firm, he is said to be insolvent and the share of
loss is to be borne by other solvent partners in accordance with the decision held in the English case
of Garner vs. Murray. According to this decision, normal loss on realisation of assets is to be brought
in cash by all partners (including insolvent partner) in the profit sharing ratio but a loss due to
insolvency of a partner has to be borne by the solvent partners in their capital ratio. In order to
calculate the capital ratio, no adjustment will be made in case of fixed capitals. However, in case of
fluctuating capitals, ratio should be calculated on the basis of adjusted capital before
considering profit or loss on realization at the time of dissolution.
b) Non-Applicability of Garner V/S Murray rule:
i. When the solvent partner has a debit balance in the capital account. Only solvent partners
will bear the loss of capital deficiency of insolvent partner in their capital ratio. If
incidentally a solvent partner has a debit balance in his capital account, he will escape the
liability to bear the loss due to insolvency of another partner.
ii. When the firm has only two partners.
iii. When there is an agreement between the partners to share the deficiency in capital account
of insolvent partner.
iv. When all the partners of the firm are insolvent.
3.16
Part II
32. P, Q and R are partners sharing profits and losses as to 2:2:1. Their Balance Sheet as on 31st March, 2009 is
as follows:
Capital accounts Plant and Machinery 1,08,000

P 1,20,000 Fixtures 24,000
Q 48,000 Stock 60,000
R 24,000 1,92,000 Sundry debtors 48,000
Reserve Fund 60,000 Cash 60,000
Creditors 48,000
3,00,000 3,00,000
They decided to dissolve the business. The following are the amounts realized:
Fixtures 18,000
Stock 84,000
Creditors allowed a discount of 5% and realization expenses amounted to Rs.1,500. There was an unrecorded
assets of Rs.6,000 which was taken over by Q at Rs.4,800. A bill for Rs.4,200 due for sales tax was received
during the course of realization and this was also paid

(i) Realisation account (ii) Partner’s capital account. (iii) Cash account
33. Ajay, Vijaya, Ram and Shyam are partners in a firm sharing profits and losses in the ratio of 4 : 1 : 2 : 3. The
following is their Balance Sheet as at 31st March, 1996 :

Sundry
3,00,000 Sundry Debtors 3,50,000
Creditors
Capital A/cs : Less: Doubtful Debts 50,000
Ajay 7,00,000 3,00,000
Shyam 3,00,000 Cash in hand 1,40,000
10,00,000 Stocks 2,00,000
Other Assets 3,10,000
Capital A/cs:
Vijay 2,00,000
Ram 1,50,000
13,00,000 13,00,000
On 31st March, 1996, the firm is dissolved and the following points are agreed upon:
Ajay is to takeover sundry debtors at 80% of book value
Shyam is to takeover the stocks at 95% of the value and
Ram is to discharge sundry creditors.
Other assets realise Rs. 3,00,000 and the expenses of realisation come to Rs. 30,000.
Vijay is found insolvent and Rs. 21,900 is realised from his estate.
Prepare Realisation Account and Capital Accounts of the partners. Show also the Cash A/c.
The loss arising out of capital deficiency may be distributed following the decision in Garner vs Murray.
34. X, Y and Z are partners. X became insolvent on 15.4.2009. The Capital account balance of partner Y is on
the debit side. Partner Y is solvent. Should partner Y bear the loss arising on account of the insolvency of
partner X?Answer: No
3.17
35. The following is the Balance Sheet of M/s Red and Black as on 31st March,2018:
Liabilities (Rs) Assets (Rs)

Red’s Capital Building 1,00,000
80,000 1,80,000 Closing Stock 60,000
Black’s Capital 20,000 Sundry Debtors 40,000
1,00,000 20,000 Investment
Red’s Loan 40,000 6%Debentures in Cool Ltd. 40,000
General Reserve Cash 20,000
Sundry Creditors 2,60,000 2,60,000
It was agreed that Mr. White is to be admitted for a fifth share in the future profits from 1st April, 2018. He is
required to contribute cash towards goodwill and Rs. 20,000 towards capital.
(a) The following further information in furnished:

(i) The Partners Red and Black shared the profits in the ratio of 3:2.
(ii) Mr. Red was receiving a salary of Rs. 1000p.m. from the very inception of the firm in addition to the
share of profit.
(iii) The future profit ratio between Red, Black and White will be 3:1:1. Mr. Red will not get any salary
after the admission of Mr. White.
(iv) The goodwill of the firm should be determined on the basis of 2 years purchase of the average profits
from business of the last 5 years. The particulars of profits/losses are as under:
Year Ended Rs Profit/Loss
31.3.2014 40,000 Profit
31.3.2015 20,000 Loss
31.3.2016 40,000 Profit
31.3.2017 50,000 Profit
31.3.2018 60,000 Profit
The above profits and losses are after charging the salary of Mr. Red. The profit of the year ended
31st March, 2014 included an extraneous profit of Rs. 60,000 and the loss of year ended 31st March,
2015 was on account of loss by strike to the extent of Rs. 40,000.
(v) It was agreed that the value the goodwill should not appear in the books of the firm..
(b) Trading profit for the year ended 31st March, 2019 was Rs. 80,000 (Before charging depreciation).
(c) Each partner has drawn Rs. 2,000 per month as drawing during the year 2018-19.
(d) On 31st March, 2019 the following balances appeared in the books:
Building (Before Depreciation) Rs 1,20,000
Closing Stock Rs. 80,000
Sundry Debtors NIL
Sundry Creditors NIL
Investment Rs. 40,000
(e) Interest @6%per annum on Red’s loan was not paid during the year.
(f) Interest on Debenture received during the year.
(g) Depreciation is to be provided @5% on Closing Balance of Building.
(h) Partners applied for conversion of the firm into a private Limited Company. i.e. RBW Private Limited.
Certificate received on 1.4.2019.They decided to convert Capital accounts of the partners into share
capital, in the ratio of 3:1:1 (on the basis of total Capital as on 31.3.2019). If necessary, Partners have to
subscribe to fresh capital or withdraw.
(1) Profit &Loss Account for the year ended 31st March, 2019 in the books of M/s Red and Black.
(2) Balance Sheet as on 1st April, 2019 in the books of RBW Private Limited.
3.18
36. Parveen, Queen and Ram were in partnership sharing profits and losses equally and their Balance Sheet was
as follows as on 31st December, 1999.
Liabilities Balance Assets Amount
Capital Account Cash 2,000
Parveen 50,000 Stock 18,000
Queen 40,000 Book Debts 7,500
Ram 30,000 1,20,000 Investments 12,500
Factory:
Creditors 7,000 Section-I 32,000
Staff Security Deposits 80,00 Section-II 40,000 72,000
Staff Provident Fund 7,900 Vehicles 28,000
Profit & Loss Account 5,100 Fixed Bank Deposits of
Staff Securities 8,000
1,48,000 1,48,000
As proposals for expansion were being considered, Ram decided to retire and start a similar business, subject
to the following terms:
(i) Stock was revalued at 20 per cent less and investments at 10 per cent less.
(ii) A debt of Rs. 2,500 due to the firm was suspected to be bad; but since it was allowed at Ram’s
instance, Ram agreed to collect it himself, the firm, however, agreeing to value it at 10% less.
(iii) One of the vehicles, fully depreciated but still in operation, was to be raised to its scrap value of Rs.
3,000 and given to Ram in part payment of his dues from the firm.
(iv) Ram’s salary as Marketing Chief was raised by Rs. 500 a month from 1st January, 1999, on the
understanding that he would continue in the firm for at least three years from that date and that, if he
retired within that period, he should return to the firm half of the additional salary he drew since 1st
January, 1999.
(v) The partnership agreement stipulated that any retiring partner going into similar business outside
should pay the firm a consolidated payment of Rs. 9,000 at the time of retirement. The amount was
to be shared between the continuing partners in the ratio of their capital before all adjustments were
given effect to.
As soon as the amount due from the firm to Ram was finally arrived at, Parveen and Queen, disposed of the
investments whose market value at the time of sale stood at Rs. 12,000 and they introduced cash in equal
amounts in such a way that not only was Ram’s claim fully settled but the firm had a total cash balance of
Rs. 7,000.
After settling Ram’s account on retirement, Parveen & Queen decided on converting their business into a
joint stock company. Negotiations were carried on with Sumit & Tilak, who agreed to joiin the business on
the following conditions:
(a) Factory Section II being uneconomical, should be replaced by modern equipment which Sumit &
Tilak will supply at a price of Rs. 65,000. Sumit & Tilak would buy up factory Section-II at Rs.
35,000, the dismantling charges of Rs. 2,000 being borne by the firm of Parveen & Queen.
(b) For the rest of their claims Sumit & Tilak would take equity shares in the new company.
The Parveen & Queen Co. Ltd. Would have an authorized capital of Rs. 2,00,000 divided into shares of Rs.
10 each. It was decided that Parveen & Queen would get equity shares at par for their capital account
balanced. The shares other than those given to Parveen & Queen and Simit & Tilak, were subscribed for by
the public and paid up fully in cash.
You are required to show (a) the capital Account of Parveen, Queen and Ram and Profit and Loss
Adjustment Account in the firm’s books (b) Balance Sheet of Parveen and Queen immediately on Ram’s
retirement and (c) the opening Balance Sheet of the Parveen & Queen Co. Ltd.
Ans.: Balance Sheet Total Rs. 2,22,900.
3.19
37. ‘S’ and ‘T’ were carrying on business as equal partners. Their Balance Sheet as on 31st March, 2008 stood as
follows:
Capital accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint life policy 47,500
Bank overdraft 1,50,000 Plant 1,72,500
Bills payable 62,500 Building 9,10,000
18,40,000 18,40,000
The operations of the business were carried on till 30th September, 2008. S and T both withdrew in equal
amounts, half the amount of profits made during the current period of 6 months after 10% per annum had
been written off on building and plant and 5% per annum written off on furniture. During the current period
of 6 months, creditors were reduced by Rs. 50,000, Bills payable by Rs. 11,500 and Bank overdraft by Rs.
75,000. The Joint Life policy was surrendered for Rs. 47,500 on 30th September, 2008. Stock was valued at
Rs. 3,17,000 and debtors at Rs. 3,25,000 on 30th September, 2008. The other items remained the same as on
31st March, 2008.
On 30th September, 2008 the firm sold its business to ST Ltd. The value of goodwill was estimated at
Rs.5,40,000 and the remaining assets were valued on the basis of the Balance Sheet as on 30th September,
2008. The ST Ltd. paid the purchase consideration in equity shares of Rs.10 each. You are required to
prepare a Realization Account and Capital accounts of the partners.
Answer: Shares issued in ST Ltd. to S and T Rs. 9,30,000 and Rs. 9,50,000 respectively.
38. Prabhu & Co. is a partnership firm consisting of Mr. Prabhu, Mr. Bhola and Mr. Shiv who share profits and
losses in the ratio of 2:2:1 and Bhagwan Ltd. is a company doing similar business.
Following is the Balance sheet of the firm and that of the company as at 31.3.2012:
Liabilities Prabhu Bhagwan Prabhu Bhagwan
& Co. Ltd. & Co. Ltd.
Rs. Rs. Rs. Rs.
Equity share Capital: Plant & machinery 2,50,000 8,00,000
Equity shares of
Rs. 10 each 10,00,000 Furniture & fixture 25,000 1,12,500
Stock in trade 1,00,000 4,25,000
Partners’ capital: Sundry debtors 1,00,000 4,12,500
Prabhu 1,00,000 Cash at bank 5,000 2,00,000
Bhola 1,50,000 Cash in hand 20,000 50,000
Shiv 50,000
General reserve 50,000 3,50,000
Sundry creditors 1,50,000 6,50,000
5,00,000 20,00,000 5,00,000 20,00,000
It was decided that the firm Prabhu & Co. be dissolved and all the assets (except cash in hand and cash at
bank) and all the liabilities of the firm be taken over by Bhagwan Ltd. by issuing 25,000 shares of Rs. 10
each at a premium of Rs. 2 per share.
Partners of Prabhu & Co. agreed to divide the shares issued by Bhagwan Ltd. in the profit sharing ratio and
bring necessary cash for settlement of their capital.
The creditors of Prabhu & Co. includes Rs. 50,000 payable to Bhagwan Ltd. An unrecorded liability of Rs.
12,500 of Prabhu & Co. must also be taken over by Bhagwan Ltd.
Prepare:
(1) Realisation account, Partners’ capital accounts and Cash in hand/Bank account in the books of Prabhu &
Co.
(2) Pass journal entries in the books of Bhagwan Ltd. for acquisition of Prabhu & Co.
3.20
39. Ramesh, Roshan and Rohan were partners of the firm ,3R Enterprises, sharing profits and losses in the ratio
of 3:2:1 respectively. On 31st March, 2011 their Balance Sheet stood as follows:
Liabilities Rs. Assets

Rs.
Ramesh,s Capital A/c 16,80,000 Land and Buildings 14,00,000
Roshan,s Capital A/c 11,60,000 Machinery 11,00,000
Rohan,s Capital A/c 6,70,000 Furniture 6,10,000
General Reserve 6,30,000 Stock 8,40,000
Creditors 6,00,000 Debtors 6,00,000
Cash at Bank 1,90,000
47,40,000 47,40,000
On the above-mentioned date, the partners decided to convert their firm into a private limited company and
named it,3REnterprises (Private) Ltd.,. The company took over all the assets including cash at bank and all
the creditors for Rs. 42,00,000 payable in the form of fully paid equity shares of Rs. 10 each. It recorded in
its books, land and buildings at Rs. 16,40,000, machinery at Rs. 9,90,000 and created a provision for bad
debts @ 5% on debtor, The expenses of the take-over came to Rs. 23,000 which were paid and borne by the
company.
The expenses of getting the company incorporated were Rs. 57,000.
The partners distributed the company,s shares amongst themselves in their profit sharing ratio. They settled
their accounts by paying or receiving cash.
Prepare Realization Account and all the partners, capital accounts in the firm,s ledger and pass journal
entries in the books of the company for all of its transactions mentioned above.
40. ‘Thin’, ‘Short’ and ‘Fat’ were in partnership sharing profits and losses in the ratio of 2:2:1. On 30th
September, 2012 their Balance Sheet was as follows :
Capital Accounts : Premises 50,000
Thin 80,000 Fixtures 1,25,000
Short 50,000 Plant 32,500
Fat 20,000 1,50,000 Stock 43,200
Current Accounts : Debtors 54,780
Thin 29,700
Short 11,300
Fat (Dr.) (14,500) 26,500
Bank Overdraft 44,330
3,05,480 3,05,480
‘Thin’ decides to retire on 30th September, 2012 and as ‘Fat’ appears to be short of private assets, ‘Short’
decides that he does not wish to take over Thin’s share of partnership, so all three partners decide to dissolve
the partnership with effect from 30th September, 2012. It then transpires that ‘Fat’ has no private assets
whatsoever.
The premises are sold for Rs. 60,000 and the plant for Rs. 1,07,500. The fixtures realize Rs. 20,000 and the
stock is acquired by another firm at book value less 5%. Debtors realise Rs. 45,900. Realisation expenses
amount to Rs. 4,500.
The bank overdraft is discharged and the creditors are also paid in full.
You are required to write up the following ledger accounts in the partnership books following the rules in
Garner vs. Murray:
(i) Realisation Account;
(ii) Partners’ Current Accounts;
(iii) Partners’ Capital Accounts showing the closing of the firm’s books.
3.21
Part III
41. Amar, Akbar and Antony are in partnership. The following is their Balance Sheet as at March 31, 2010 on
which date they dissolved their partnership. They shared profit in the ratio of 5:3:2.
Liabilities Rs. Assets

Rs.
Creditors 80,000 Plant & Machinery 60,000
Loan A/c - Amar 20,000 Premises 80,000
Capital A/c’s - Amar 1,00,000 Stock 60,000
Akbar 30,000 Debtors 1,20,000
Antony 90,000
3,20,000 3,20,000
It was agreed to repay the amounts due to the partners as and when the assets were realized, viz.
April, 15 2010 Rs. 60,000
May 1, 2010 Rs. 1,46,000
May 31, 2010 Rs. 94,000
Prepare a statement showing how the distribution should be made under maximum loss method and write up
the cash account and Partner’s Capital account.
42. Yash, Tanish and Ruchika were partners sharing Profit & Loss in ratio of 3:2:1. Balance Sheet of the firm is
as follows:
Liabilities Amount(Rs) Assets Amount(Rs)

Fixed Capital: Yash 50,000 Fixed Assets 45,000
- Tanish 20,000 Investments 15,000
- Ruchika 10,000 Current Assets:
Current Account: Yash 6,000 - Stock 10,000
- Ruchika 4,000 - Debtors 27,500
Unsecured Loans 15,000 - Cash & Bank 12,500
Current Liabilities 15,000 Current Account: Tanish 10,000
1,20,000 1,20,000
On 1st April, 2014 all the partners agreed to form a new company YTR Pvt. Ltd. which shall take over the
firm as going concern including goodwill, but excluding cash and bank balance.
The following matters were also agreed upon:
(i) Goodwill shall be valued at 3 years’ purchase of super profits.

(ii) Actual profit for the purpose of goodwill valuation will be Rs.20,000.
(iii) The normal rate of return will be 17,50% per annum of Fixed Capital.
(iv) All other Assets and Liabilities will be taken over at book value.
(v) The purchase consideration will be paid party in share of Rs.1 each and partly in cash. Yash and
Tanish to acquire interest in new company in the ratio of 3:2 at face value. Ruchika agreed to retire
after taking her share in cash.
(vi) Realisation expenses amounted to Rs.5,000.
Prepare Realisation Account, Cash and Bank Account, YTR Private Limited Account and Capital Account
of the partners.
3.22
43. Avi and Bishnu are partners of Abhay & Co. sharing profit and losses in the ratio 3 : 1 and Bishnu and Joe
are partners of Bijoy & Co. sharing profit and losses in the ratio 2 : 1.
On 31st March, 2013, they decided to amalgamate and form a new firm M/s Abeejay & Co.,wherein Avi,
Bishnu and Joe would be partners sharing profit and losses in the ratio 3 : 2 : 1.The Balance Sheets of the
two firms on 31st March, 2013 were as under:
Liabilities Abhay & Bijoy & Assets Abhay & Bijoy &
Co Co. Co. Co.
Rs. Rs. Rs. Rs.
Capital Building 3,50,000 2,80,000
Avi 5,31,000 Plant & Machinery 2,00,000 1,50,000
Bishnu 2,00,000 3,97,000 Vehicles - 90,000
Joe 2,00,000 Furniture - 10,000
Reserve 12,000 9,000 Office Equipments 38,000 45,000
Sundry Creditors 1,20,000 89,000 Stock in trade 65,000 70,000
Bank O/D 90,000 - Sundry Debtors 1,00,000 90,000
Due to R & Co. - 1,00,000 Bank Balances 80,000 60,000
Cash in hand 20,000 -
Due from R & Co. 1,00,000 -
9,53,000 7,95,000 9,53,000 7,95,000
The amalgamated firm M/s Abeejay & Co. took over the business on the following terms:
(a) Goodwill of Abhay & co. was worth Rs. 42,000 and that of Bijoy & Co. Rs. 30,000. Goodwill account
was not to be opened in the books of the new firm, the adjustments being recorded through capital
accounts of the partners.
(b) The following assets were valued as below:
Abhay & Co. Bijoy & Co.
Building 4,00,000 3,00,000

Plant & Machinery 2,50,000 2,00,000
Vehicles - 98,000
Furniture - 11,000
Office Equipments 39,000 50,000
Stock in trade 70,000 80,000
(c) Provision for doubtful debt was carried forward at Rs. 4,000 in respect of Debtors of Abhay & co. and
Rs. 3,000 in respect of Debtors of Bijoy & Co.
(d) Partners of new firm brought necessary cash to pay other partners to adjust their capitals according to the
profit sharing ratio.
44. Daksh Associates is a reputed firm. On account of certain misunderstanding between the partners, it was
decided to dissolve the firm as on 31st December, 2011. Their Balance Sheet as on 31st December, 2011 was
follows:
Capitals: Land and Buildings 7,00,000
Daksh 3,00,000 Other Fixed Assets 3,00,000
Yash 2,00,000 Stock in Trade 2,00,000
Siddhart (Minor) 1,00,000 Debtors 4,00,000
Bills Receivable 1,50,000
Trade Loans 3,00,000 Goodwill 30,000
Bank Overdraft 3,00,000 Cash 20,000
Other Loans 2,00,000
Creditors 2,00,000
Siddhart’s Loan 2,00,000
18,00,000 18,00,000
3.23
It was decided that Mr. Daksh shall be in-charge of Realisation. He shall set apart Rs. 10,000 towards
expenses. He shall be paid a remuneration of 5 percent on the amounts distributed to the partners towards
their contribution other than loans. Assets realized are as under:
Rs.
1-1-2012 Debtors 3,50,000
15-1-2012 Fixed Assets 4,00,000
1-2-2012 Debtors 50,000
15-2-2012 Bills Receivable 1,40,000
1-3-2012 Fixed Assets 50,000
15-3-2012 Land and Buildings 8,00,000
Prepare a statement showing how the money received on various dates will be distributed assuming:
(a) The actual expenses of realization amounted to Rs. 20,005.
(b) The firm is solvent.
(c) The profit sharing ratio was as under:
Profit Loss
Daksh 2 1
Yash 2 1
Siddhart 1 Nil
5 2
(d) The final dissolution is made on 15th March, 2010.
45. On 31st March 2012, Sri Raman acquires on payment of Rs. 80,000 the business of M/s Gupta and Singh
taking over at book value the following assets and liabilities :
Rs.
Debtors 35,000
Furniture 3,000
Stock 46,000
Creditors 10,000
There was no change between 1st January, 2012 and 31st March, 2012 in the book value of the assets and
liabilities not taken over.
The same set of books has been continued after the acquisition and no entries of the acquisition have been
passed except for the payment of Rs. 80,000 made by Sri Raman.
From the following balance sheet and trial balance prepare Business Purchase Account, Profit and Loss
Account for the year ended 31st December, 2012 and Balance Sheet at that date.
Balance Sheet as at December, 2011

Capital Accounts Furniture 3,000
Sri Gupta 30,000 Investments 5,000
Sri Singh 20,000 50,000 Insurance Policy 2,000
Bank Loan 18,000 Stock 40,000
Creditors 12,000 Debtors 30,000
80,000 80,000
On 31st December 2012 the trial balance is:
Rs. Rs.
Stock 40,000
Furniture 3,000
Investment 5,000
Insurance Policy 2,000
Business Purchase Account 80,000
Bank Loan 18,000
Capital :
Gupta 30,000
Singh 20,000
Raman 30,000
Bank 3,000
3.24
Debtors 48,000
Creditors 15,000
Purchases 3,20,000
Expenses 12,000
Sales 4,00,000
5,13,000 5,13,000
Closing Stock Rs. 50,000
46. Hari, Lal and Jay have been in partnership for a number of years, sharing profits/losses in the ratio of 2:2:1
as wholesale stationers trading under the name ‘Hari Brothers’. They decide to convert their partnership into
a limited company (with effect from 1st January, 2013) to be known as Hari Ltd.
Immediately prior to this conversion the balance sheet of partnership as at 31st December 2012 was as
follows:
Balance Sheet
As on 31st December 2012
Liabilities Rs. Rs. Assets Rs.

Capital accounts Fixed assets
Hari 70,000 (at written down value)
Lal 30,000 Land & Buildings 50,000
Jay 20,000 1,20,000 Plant & Machinery 30,000
Current accounts Motor vehicles 20,000
Hari 7,000 Current Assets:
Lal 5,000 Inventories 60,000
Jay 3,000 15,000 Debtors 25,000
Current liabilities Axis Bank account 5,000
Creditors 25,000
Dena Bank
Account 20,000 45,000
Long-term liabilities
Loan-Hari 3,000
Loan-Gopi Ltd. 7,000 10,000
1,90,000 1,90,000
The terms of conversion are that Hari Ltd. is to take over the assets and liabilities of Hari Brothers as
follows:
Valuation for take-over
Rs.
Land and Building 96,000
Plant and Machinery 28,000
Motor vehicles 15,000
Inventories 60,000
Debtors 24,000
Creditors 25,000
Goodwill 10,000
The closing balance in Axis Bank account is to be transferred to Dena Bank account before all the other
dissolution entries are effected in the partnership ledgers.
Lal took over one of the motor vehicles at an agreed amount of Rs. 2,000. All other liabilities were paid from
the Dena Bank account.
The purchase consideration is discharged by an issue at par of Rs. 60,000 10%
Debentures (fully paid) to the partners in their capital account proportions as shown in the above balance
sheet plus equity shares in Hari Ltd. of Rs. 1 each (fully paid to make up the balance due to each partner).
You are required to
(i) Prepare (a) Realisation Account (b) Partners’ Capital Accounts (c) Bank account of Axis Bank and Dena
Bank in the books of Hari Brothers;
(ii) ‘Business purchase account’ and ‘Hari Brothers’ account in Hari Ltd.'s books.
3.25
47. Mohit, Neel and Om were Partners sharing Profits and Losses in the ratio of 5:3:2 respectively. The Trial
Balance of the Firm on 31st March, 2019 was the following:
Particulars Rs Rs
Machinery at Cost 2,00,000
Inventory 1,37,400
Trade receivables 1,24,000
Trade payables 1,69,400
Capital A/cs:
Mohit 1,36,000
Neel 90,000
Om 46,000
Drawing A/cs:
Mohit 50,000
Neel 46,000
Om 34,000
Depreciation on Machinery 80,000
Profit for the year ended 31st March 2,48,600
Cash at Bank 1,78,600
7,70,000 7,70,000
Interest on Capital Accounts at 10% p.a. on the amount standing to the credit of Partners' Capital Account at
the beginning of the year, was not provided before preparing the above Trial Balance. On the above date,
they formed a MNO Private Limited Company with an Authorized Share Capital of 2,00,000 shares of Rs 10
each to be divided in different classes to take over the business of Partnership firm.
You are provided the following information:
(1) Machinery is to be transferred at Rs. 1,40,000.

(2) Shares in the Company are to be issued to the partners, at par, in such numbers, and in such classes as
will give the partners, by reason of their shareholdings alone, the same rights as regards interest on
capital and the sharing of profit and losses as they had in the partnership.
(3) Before transferring the business, the partners wish to draw from the partnership profits to such an extent
that the bank balance is reduced to Rs 1,00,000. For this purpose, sufficient profits of the year are to be
retained in profit -sharing ratio.
(4) Assets and liabilities except Machinery and Bank, are to be transferred at their book value as on the
above date.
(a) Statement showing the workings of the Number of Shares of each class to be issued by the company, to
each partner.
(b) Capital Accounts showing all adjustments required to dissolve the Partnership.
(c) Balance Sheet of the Company immediately after acquiring the business of the Partnership and Issuing of
Shares.
3.26
PART V:- LIMITED LIABILITY PARTNERSHIP THEORY
1. The Limited Liability Partnerships (LLPs) in India were introduced by Limited Liability Partnership Act, 2008
which lay down the law for the formation and regulation of Limited Liability Partnerships.
2. Definitions :
Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines the following terms as:
(a) "Limited Liability Partnership" means a partnership formed and registered under this Act;
(b) "Limited Liability Partnership Agreement" means any written agreement between the partners of the
limited liability partnership or between the limited liability partnership and its partners which determines
the mutual rights and duties of the partners and their rights and duties in relation to that limited liability
partnership;
(c) "Foreign Limited Liability Partnership" means a limited liability partnership formed, incorporated or
registered outside India which establishes a place of business within India.
(d) "business" includes every trade, profession, service and occupation;
(e) " designated partner" means any partner designated as such pursuant to section 7 of the Act;
(f) "partner", in relation to a limited liability partnership, means any person who becomes a partner in the
limited liability partnership in accordance with the limited liability partnership agreement;
3. Nature of Limited Liability Partnership

a) A limited liability partnership is a body corporate formed and incorporated under this Act and is a
legal entity separate from that of its partners.
b) A limited liability partnership shall have perpetual succession.
c) Any change in the partners of a limited liability partnership shall not affect the existence, rights or
liabilities of the limited liability partnership.
4. Non-applicability of the lndian Partnership Act, 1932

Save as otherwise provided, the provisions of the Indian Partnership Act, 1932 shall not apply to a limited
liability partnership.
5. Minimum number of partners

As per section 5 of the LLP Act, any individual or body corporate may be a partner in a limited liability
partnership:
Provided that an individual shall not be capable of becoming a partner of a limited liability partnership, if-
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending
As per section 6 of the LLP Act, every limited liability partnership shall have at least two partners.
If at any time the number of partners of a limited liability partnership is reduced below two and the limited
liability partnership carries on business for more than six months while the number is so reduced, the person,
who is the only partner of the limited liability partnership during the time that it so carries on business after
those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be
liable personally for the obligations of the limited liability partnership incurred during that period.
6. Designated partners
As per Section 7 of the LLP Act, every limited liability partnership shall have at least two designated
partners who are individuals and at least one of them shall be a resident in India: Provided that in case of a
limited liability partnership in which all the partners are bodies corporate or in which one or more partners
are individuals and bodies corporate, at least two individuals who are partners of such limited liability
partnership or nominees of such bodies corporate shall act as designated partners.
Explanation.- For the purposes of this section, the term "resident in India" means a person who has stayed in
India for a period of not less 182 days during the immediately preceding one year.
3.27
Subject to the provisions of sub-section (1),

(1) if the incorporation document-
(a) specifies who are to be designated partners, such persons shall be designated partners on
incorporation; or
(b) states that each of the partners from time to time of limited liability partnership is to be designated
partner, every such partner shall be a designated partner;
(2) any partner may become a designated partner by and in accordance with the limited liability partnership
agreement and a partner may cease to be a designated partner in accordance with limited liability
partnership agreement.
(3) An individual shall not become a designated partner in any limited liability partnership unless he has
given his prior consent to act as such to the limited liability partnership in such form and manner as may
be prescribed.
(4) Every limited liability partnership shall file with the registrar the particulars of every individual who has
given his consent to act as designated partner in such form and manner as may be prescribed within
thirty days of his appointment.
(5) An individual eligible to be a designated partner shall satisfy such conditions and requirements as may
be prescribed.
7. Liabilities of designated partners:-

As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a designated partner shall be-
(a) responsible for the doing of all acts, matters and things as are required to be done by the limited liability
partnership in respect of compliance of the provisions of this Act including filing of any document,
return, statement and the like report pursuant to the provisions of this Act and as may be specified in the
limited liability partnership agreement; and .
(b) liable to all penalties imposed on the limited liability partnership for any contravention of those
provisions.
8. Changes in designated partners

A limited liability partnership may appoint a designated partner within thirty days of a vacancy arising for any
reason and provisions of sub-section (4) and sub-section (5) of section 7 shall apply in respect of such new
designated partner: Provided that if no designated partner is appointed, or if at any time there is only one
designated partner, each partner shall be deemed to be a designated partner.
9. Distinction between an ordinary partnership firm and an LLP
SN Key Elements Partnerships LLPs

1 Applicable Law Indian Partnership Act 1932 Partnerships Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Agreement Created by Law
4 Body Corporate No Yes
5 Separate Legal No Yes
Entity
6 Perpetual Partnerships do not have It has perpetual succession and individual
Succession perpetual succession partners may come and go.
7 Number of Partners Minimum 2 and Maximum 20 Minimum 2 but no maximum limit
(subject to 10 for banks)
8 Ownership of Firm cannot own any assets. The The LLP is an independent entity can of the
Assets partners own the assets firm own assets
9 Liability of Unlimited: Partners are severally Limited to the extent of their contribution
Partners / Members and jointly liable for actions of towards LLP except in case of intentional fraud
other partners and the firm and or extends to personal assets wrongful act of
their liability omission or commission by a partner.
10 Principal Agent Partners are the agents of the Partners are agents of the firm only and not of
Relationship firm and of each other other partners.
3.28
10. Formation of LLP:-

Two or more persons associated for the purpose of carrying on a lawful business with a view to earn profits
may subscribe their names to an incorporation document and file the same with the Registrar of the state in
which the Registered Office of the LLP is to be situated, in such manner with such fees as may be prescribed
along with a statement in the prescribed form made by an advocate, a company secretary or a chartered
accountant or a cost accountant that all the requirements of the LLP Act 2008 and the rules made there under
have been complied with.
11. Limitation of Liability of an LLP and its partners

(i) Under section 27 (3) of the LLP Act, 2008 an obligation of an LLP arising out of a contract or
otherwise, shall be solely the obligation of the LLP;
(ii) The Liabilities of an LLP shall be met out of the properties of the LLP;
(iii) Under section 28 (1) a partner is not personally liable, directly or indirectly, for an obligation referred
to in Section 27 (3) above, solely by reason of being a partner in the LLP;
(iv) Section 27 (1) states that an LLP is not bound by anything done by a partner in dealing with a person,
if:
• The partner does not have the authority to act on behalf of the LLP in doing a particular act; and
• The other person knows that the partner has no authority or does not know or believe him to be a
partner in the LLP
(v) Under section 30 (1) the liability of the LLP and the partners perpetrating fraudulent dealings shall be
unlimited for all or any of the debts or other liabilities of the LLP.
12. Financial Disclosures & Returns

(i) Maintain such proper books of accounts as may be prescribed relating to its affairs for each year of its
existence on cash basis or accrual basis and according to the double entry system of accounting and
shall maintain the same at its registered office for such period as may be prescribed;
(ii) LLP shall within six months of the end of each financial year prepare a Statement of Account and
Solvency for the said financial year as at the last day of the said financial year, in such form as may be
prescribed, and such statement shall be signed by the designated partners of the LLP;
(iii) Every LLP shall file within the prescribed time, the Statement of Account and Solvency with the
Registrar every year in such form and manner and accompanied by such fee as may be prescribed;
(iv) The accounts of an LLP must be audited in accordance with such rules as may be prescribed.
(v) Every LLP is required to file an Annual Return which is duly authenticated with the registrar within
sixty days of the closure of its financial year in such form and manner and with such fees as may be
prescribed.
13. Assignment and Transfer of Partnership Rights

(i) The rights of a partner to the share of profits and losses of an LLP and to receive distribution in
accordance with the LLP Agreement are transferable wholly or in part;
(ii) The transfer of any right by a partner as above does not by itself cause the disassociation of the partner
or a dissolution or winding up of the LLP;
(iii) Similarly the transfer of the right as above does not entitle the transferee to participate in the
management or the conduct of activities of the LLP, or give access to any information concerning the
transactions of the LLP.
14. Conversion of firm into Limited Liability Partnership

(i) Section 55 of LLP Act: A firm may convert into a LLP in accordance with the provisions of the Act
and the Second Schedule to the Act.
(ii) Section 56 of LLP Act: A private limited company may convert into an LLP in accordance with the
provisions of the Act and the Third Schedule to the Act.
(iii) Section 57 of LLP Act: An unlisted public limited company may convert into an LLP in accordance
with the provisions of the Act and the Fourth Schedule to the Act.
3.29
15. Winding up and Dissolution

(i) Under section 63 of the LLP Act, 2008 an LLP may be wound up voluntarily or by the Tribunal and
such LLP so wound up may be dissolved
(ii) Under section 64 and LLP may be wound up by the Tribunal:
a) If the LLP decides that it should be wound up by the Tribunal;
b) If for a period of more than six months, the number of partners of the LLP is reduced below two;
c) If the LLP is unable to pay its debts;
d) If the LLP has acted against the interests of the integrity and sovereignty of India, the security of
the state or public order;
e) If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar
for five consecutive financial years;
f) If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
MCQs (ICAI Study Material)
1. On the dissolution of partnership, profit or loss on realization of assets and liabilities should be divided
among partners
(a)In the ratio of their capitals. (b)In the same ratio in which they share profits. (c)Equally.
2. 2. An unrecorded asset realized at the time of dissolution is credited to

(a)Realisation account. (b)Revaluation account. (c)Capital accounts.
3. A liability taken over by a partner at the time of dissolution is credited to

(a) Profit and loss account. (b)Partners’ capital accounts. (c)Realization account.
4. Realisation accounts is a
(a)Nominal account. (b)Real account. (c)Personal account.
5. Which of the following method/methods is adopted to ensure that distribution of cash among partners is
in proportion to their interest in partnership?
(a)Maximum loss method. (b)Highest relative capital method. (c)Either(a) or (b) .
6. When one firm is merged with another existing firm, entries will be made for
(a)Winding up in the books of firm which will cease to exist.
(b)Business purchase in the books of other firm.
(c)Both (b) and (b).
7. In case of amalgamation of firms, profit \ Ioss on sale of the firm is ascertained by

(a) Realisation account.
(b)Revaluatin account.
(c)New firm’s account.
8. Liabilities not taken over by the new firm (at the time of amalgamation) will be transferred to
(a) Capital accounts.
(b) Revaluation account.
(c)New firm‘s account.
3.30
Solutions:-
Q15.
Partners’ Capital Accounts
Dr. Cr.
Ram Rahim Robert Richard Ram Rahim Robert Richard
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Revaluation 10,000 6,000 4,000 - By Balance 1,00,000 1,50,000 2,00,000 -
A/c (W.N.1) b/d
To Loan from 2,00,000 By General 1,00,000 60,000 40,000 -
Robert A/c reserve -
To Bank 58,000 By Goodwill 55,000 33,000 22,000
(W.N. 2)
To Balance c/d 2,45,000 2,37,000 ----------- --------
2,55,000 2,43,000 2,62,000 -------- 2,55,000 2,43,000 2,62,000
To Goodwill 55,000 36,667 - 18,333 By Balance b/d 2,45,000 2,37,000 - -
To Balance c/d 1,90,000 2,00,333 1,95,167 By Loan A/c - - 2,00,000
- transfer - -
By Bank - 13,500
2,45,000 2,37,000 - 2,13,500 2,45,000 2,37,000 - 2,13,500
Balance Sheet as at 31.3.2011 after the admission of Richard

Capital Accounts: Land and Building 6,00,000
Ram 1,90,000 Plant and Machinery 2,70,000
Rahim 2,00,333 Stock 1,90,000
Richard 1,95,167 Debtors 4,50,000
Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500
Loan from Robert 2,00,000 Cash in hand 20,000
15,85,500 15,85,500
Working Notes:
(1) Revaluation Account
Rs. Rs.
To Plant and Machinery 30,000 By Land and Building 70,000
To Stock 10,000 By Partners Capital A/cs:
To Debtors 50,000 Ram 10,000
Rahim 6,000
Robert 4,000 20,000
90,000 90,000
(2) Calculation of Goodwill:
Profit for the year ended 31.3.2008 50,000
1,65,000
Average profit = 1,65,000/3 = Rs.55,000
Goodwill = Rs. 55,000 x 2 years = Rs. 1,10,000.
(3) Bank Account

Rs. Rs.
To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000
To Richard’s Capital A/c 13,500 By Balance c/d 55,500
1,13,500 1,13,500
Q16.
Memorandum Revaluation Account
To Stock 40,000 By Building 1,80,000

To Plant & machinery 1,20,000 By Investments 20,000
To Provision for doubtful debts 15,000
To Unrecorded liability 10,000
To Profit transferred to
Partners’ Capital A/cs (in old
ratio) A = 10,000
B = 5,000 15,000
2,00,000 2,00,000
3.31
To Building 1,80,000 By Stock 40,000

To Investments 20,000 By Plant & machinery 1,20,000
By Provision for doubtful debts 15,000
By Unrecorded liability 10,000
By Loss transferred to
Partners’ Capital A/cs (in
new ratio)
A = 7,500
B = 3,750
C = 3,750 15,000
2,00,000 2,00,000

A B C A B C
To Loss on 7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 -
Revaluation
To Reserve Fund 4,50,000 2,25,000 2,25,000 By Reserve Fund 6,00,000 3,00,000 -
To A (W.N.3) - - 17,500 By C (W.N.3) 17,500 8,750 -
To B (W.N.3) - - 8,750 By Profit on 10,000 5,000
Revaluation
To Balance c/d By Cash (Bal. Fig.) 8,40,000
(Refer W.N.2) 11,70,000 5,85,000 5,85,000
16,27,500 8,13,750 8,40,000 16,27,500 8,13,750 8,40,000
Balance Sheet of newly reconstituted firm as on 31.12.2011

Capital Accounts Plant & Machinery 12,00,000
A 11,70,000 Building 9,00,000
B 5,85,000 Sundry Debtors 3,00,000
C 5,85,000 Stock 4,00,000
Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000
Sundry Creditors 4,00,000
Bills Payable 1,00,000
37,40,000 37,40,000
Working Notes:
1. Calculation of new profit and loss sharing ratio
C will get 1/4 th share in the new profit sharing ratio.
Therefore, remaining share will be 1-1/4 =3/4
Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2
Share of B will be 3/4 x 1/3 = 1/4
New ratio will be
A:B:C
1/2 : 1/4 : 1/4
2 : 1: 1
2. Calculation of closing capital of C: Closing capitals of A & B after all adjustments are:
A = Rs.11,70,000
B = Rs.5,85,000
Since B’s capital is less than A’s capital, therefore B’s capital is taken as base. Hence, C’s closing capital should be
Rs.5,85,000 i.e. at par with B (as per new profit and loss sharing ratio)
3. Adjustment entry for goodwill

Partners Goodwill as per old ratio Goodwill as per new ratio Effect
A 70,000 52,500 + 17,500 -
B 35,000 26,250 + 8,750 -
C - 26,250 - 26,250
1,05,000 1,05,000 26,250 26,250
Adjustment entry will be:
C’s Capital A/c Dr. 26,250
To A’s Capital A/c 17,500
To B’s Capital A/c 8,750
3.32
Q 19.
Partners’ Current Account
Particulars A B C Particulars A B C
1.1.2011 Rs. Rs. Rs. 1.1.2011 Rs. Rs. Rs.
To Balance b/d --- --- 5,000 By Balance b/d 29,000 20,000 --
To A’s Current - 20,000 10,000 By B’s Current A/c - 20,000 -- --
A/c - Goodwill
Goodwill
To A’s Current - 12,000 6,000 By C’s Current A/c - 10,000 - -
A/c - Goodwill
Revaluation
Profit -
To A’s Capital 80,000 - By B’s Current A/c - 12,000 -
A/c - Revaluation profit
Transfer By C’s Current A/c - 6,000
Revaluation profit
By Joint Life Policy A/c 3,000 2,000 1,000
(Rs.26,000 – Rs.20,000)
- - - By Balance c/d 10,000 20,000
80,000 32,000 21,000 80,000 32,000 21,000
1.1.2011 31.12.2011
To Balance b/d 10,000 20,000 By Profit & Loss 17,617 8,808
Appropriation A/c
31.12.2011 By Balance c/d 7,383 19,192
To Drawing 15,000 8,000 - -
A/c
25,000 28,000 25,000 28,000
1.1.2012 30.06.2012
To Balance b/d 7,383 19,192 By Realisation A/c-profit 12,573 6,287
To B’s Capital By C’s Capital A/c - --- 12,905
A/c - Transfer
transfer 5,190 ---
12,573 19,192 12,573 19,192

Particulars A B C Particulars A B C
1.1.2011 Rs. Rs. Rs. 1.1.2011 Rs. Rs. Rs.
To A’s Executors 1,40,000 ---- ---- By Balance b/d 60,000 40,000 20,000
A/c
To Balance c/d --- 40,000 20,000 By A’s Current A/c 80,000 --- ---
140,000 40,000 20,000 1,40,000 40,000 20,000
31.12.2011 1.1.2012
To Balance c/d 40,000 20,000 By Balance b/d 40,000 20,000
40,000 20,000 40,000 20,000
30.6.2012 1.1.2012
To C’s Current ---- 12,905 By Balance b/d 40,000 20,000
A/c – transfer
To Bank A/c 45,190 7,095 30.6.2012
By B’s Current A/c
----- ---- - Transfer 5,190 ----
45,190 20,000 45,190 20,000
A’s Executors Account

Date Particulars Rs Date Particulars Rs.
1.1.2012 To Bank A/c 20,000 1.1.2012 To A’s Capital A/c 1,40,000
1.1.2012 To Balance c/d 1,20,000
1,40,000 1,40,000
30.06.2011 To Bank A/c 20,000 1.1.2011 By Balance b/d 1,20,000
30.06.2011 To Balance c/d 1,03,000 30.06.2011 By Interest A/c 3,000
1,23,000 1,23,000
3.33
31.12.2011 To Bank A/c 20,000 1.7.2011 By Balance b/d 1,03,000

31.12.2011 To Balance c/d 85,575 31.12.2011 By Interest A/c 2,575
1,05,575 1,05,575
30.06.2012 To Bank A/c 87,715 1.1.2012 By Balance b/d 85,575
30.06.2012 By Interest A/c 2,140
87,715 87,715
Working Notes:
(1) Adjustment in regard to Goodwill
Partners A C C
Share of goodwill before death (Rs.) 30,000 20,000 10,000
Share of goodwill after death (Rs.) - 40,000 20,000
Gain (+)/Sacrifice (-) (Rs.) (30,000) 20,000 10,000
Cr. Dr. Dr.
(2) Adjustment in regard to revaluation of assets

Partners A C C
Share of profit on revaluation (Rs.) 18,000 12,000 6,000
credited to all the partners
Debited to the continuing partners (Rs.) - 24,000 12,000
(Rs.) (18,000) 12,000 6,000
Cr. Dr. Dr.
(3) Ascertainment of Profit for the year ended 31.12.2011

Rs. Rs.
Profit before charging interest on balance due to A’s executors 32,000
Less: Interest payable to A’s executors:
from 1.1.2011 to 30.6.2011 3,000
From 1.7.2011 to 31.12.201 2,575 (5,575)
Balance of profit to be shared by B and C 26,425
(4) Ascertainment of Profit for the year ended 31.12.2011

Capital Account – B 40,000 Sundry Assets (balancing 1,19,000
Capital Account – C 20,000 figure) 7,383
A’s Executors A/c 85,575 Partners’ Current A/cs - B 19,192
1,45,575 Partners’ Current A/cs - C 1,45,575
(5) Realisation Account

Rs. Rs.
To Sundry Assets A/c 1,19,000 By Bank A/c (purchase 1,40,000
To Interest A/c – A’s 2,140 Consideration
Executors
To Partners’ Capital A/cs – B 12,573
To Partners’ Capital A/cs – C 6,287
1,40,000 1,40,000
Q21.
(i) Goodwill Adjustment Account
Rs. Rs.
30.9.06 To Partners’ Capital 30.9.06 By Partners’ Capital A/cs
A/cs X 24,00 X (2/5) 24,00
(3/5)
Y 016,00 Y (2/5) 024,00
Z(2/5) 0
20,00 Z (1/5) 0
12,00
31.3.07 To Partners’ Capital 0 31.3.07 By Goodwill A/c 0
A/cs X (2/5) 32,00 (Goodwill raised in the 80,00
Y (2/5) 0
32,00 books) 0
Z (1/5) 016,00
0
1,40,00 1,40,00
3.34
(ii) Profit and Loss Appropriation Account

To Plant - Loss on sale of plant 2,000 By Motor Car 2,000
To Partners’ Capital A/cs* By Profit and Loss A/c 59,600
X 32,640
Y 23,840
Z 3,120
61,600 61,600
*Calculation of profit
apportionment: Total X Y Z
Rs. Rs. Rs. Rs.
Upto 30.9.2006 ( in 3:2) 44,000 26,400 17,600 NIL
From 01.10.2006 to 31.3.2007 (in 15,600 6,240 6,240 3,120
2:2:1) 59,600 32,640 23,840 3,120
(iii) Partners’ Capital Accounts

X Y Z X Y Z
Rs. Rs. Rs. Rs. Rs. Rs.
30.9.06 To Goodwill 30.9.06 By Balance
Adjustment A/c 24,000 24,000 12,000 b/d 80,000 50,000 -
31.3.07 To Motor car 7,400 - - By Plant &
machinery - - 24,000
To Drawings 22,000 20,000 9,600 By Fixtures - - 6,000
To 12% Loan 90,000 - - By Goodwill
Adjustment
A/c 24,000 16,000 20,000
To Bank 25,240 - - By Profit upto
30.9.06 26,400 17,600 -
To Shares of - 62,680 62,680 31.3.07 By Profit for 6
YZ Ltd. months ended
To Bank a/c 15,160 31.3.07 6,240 6,240 3,120
By Goodwill
Adjustment a/c 32,000 32,000 16,000
By bank a/c 15,160
1,68,640 1,21,840 84,280 1,68,640 1,21,840 84,280
(iv) Balance Sheet of YZ Ltd.

Share capital 1,25,360 Goodwill 80,000
12% Loan 90,000 Plant (46,000 – 8,000) 38,000
Sundry creditors 32,000 Fixtures (14,000 + 6,000) 20,000
Stock 24,000
Cash at bank (W.N. 1) 15,360
2,47,360 2,47,360
Working Notes:
1. Bank Account
To Balance b/d 34,600 By X’s Capital A/c 25,240
To Plant (sold) A/c 6,000 By Y’s Capital A/c 15,160
To Z’s capital A/c 15,160 By Balance c/d 15,360
55,760 55,760
3.35
2. Total capital of the firm before conversion Rs.

Y 77,840
Z 47,520
1,25,360
As Y and Z would continue with equal shareholding, therefore, share capital of Y and Z would be Rs.1,25,360 / 2 =
Rs.62,680 each.
Rs.
Z should bring cash Rs.(62,680 – 47,520) = 15,160
Y should withdraw cash Rs.(77,840 – 62,680) = 15,160
Q 22.
Realisation Account
Dr. Cr.
Rs. Rs.
To Land and Building A/c 2,00,000 By Sundry Creditors 40,000
To Plants 2,00,000 By Bills Payable 80,000
To Sundry Debtors 50,000 By Govinda Company Ltd. 6,69,500
To Stock 1,50,000
To Bills Receivable 50,000
To Cash 1,00,000
To Profit transferred to:
A 19,750
B 11,850
C 7,900 39,500
7,89,500 7,89,500
Govinda Company Ltd.

Dr. Cr.
Rs. Rs.
To Realisation A/c 6,69,500 By Equity Shares A/c 1,50,000
By Preference Shares A/c 2,25,000
By Debentures A/c 2,94,500
6,69,500 6,69,500
Equity Shares (in Govinda Company Ltd.) Account

Dr. Cr.
Rs. Rs.
To Govinda Company Ltd. 1,50,000 By A’s Capital A/c 1,22,450
By B’s Capital A/c 27,550
1,50,000 1,50,000
Preference Shares (in Govinda Company Ltd.) Account

Dr. Cr.
Rs. Rs.
To Govinda Company Ltd. 2,25,000 By A’s Capital A/c 1,12,500
By C’s Capital A/c 45,000
2,25,000 2,25,000
Debentures (in Govinda Company Ltd.) Account

Dr. Cr.
Rs. Rs.
To Govinda Company Ltd. 2,94,500 By A’s Capital A/c 98,166
By C’s Capital A/c 98,167
2,94,500 2,94,500
3.36
Cash Account
Dr. Cr.
Rs. Rs.
To C’s Capital A/c 73,267 By A’s Capital A/c 36,634
73,267 73,267
Capital Account
Dr. Cr.
A B C A B C
To C’s Current A/c 30,000 By Balance b/d 3,00,000 2,00,000 1,00,000
To Preference 1,12,500 67,500 45,000 By A’s Current A/c 69,750
Shares
A/c
To Debentures A/c 98,166 98,167 98,167 By B’s Current A/c 29,850
To Cash A/c 36,634 36,633 - By Cash A/c(B/F) 73,267
To Equity Shares A/c 1,22,450 27,550 -
3,69,750 2,29,850 1,73,267 3,69,750 2,29,850 1,73,267
Current Account
Dr. Cr.
A B C A B C
To Balance b/d - - 50,000 By Balance b/d 50,000 30,000 -
To C’s Current A/c - 12,000 - By Realisation A/c 19,750 11,850 7,900
To A’s Capital A/c 69,750 - - By B’s Current A/c - - 12,000
To B’s Capital A/c - 29,850 - By C’s Capital A/c - - 30,100
69,750 41,850 50,000 69,750 41,850 50,000
Working Notes:
1. Calculation of purchase consideration:
Net Payment method Rs.
Equity Shares - 10,000 @ Rs. 15 = 1,50,000
Preference Shares - 15,000 @ Rs. 15 = 2,25,000
Debentures - 20,000 @ Rs. 14.725 = 2,94,500
6,69,500
2. Net Assets Method: Rs.

Plants 1,50,000
Stock 1,40,000
Bills Receivable 50,000
Cash 1,00,000
7,87,500
Less: Sundry Creditors 38,000
6,69,500
3. Unexpired benefit of goodwill premium paid by C = 2/5*30,000=12,000

Sacrificing ratio of A and B on admission of C : Old share – New Share
A= 1/2-5/10 = Nil
B= ½-3/10 = 2/10.
Hence, adjustment entry for return of premium due to premature dissolution is as under:
B’s Current Account Dr. 12,000
To C’s Current Account 12,000
4. As whole business of the firm was sold to Govinda Company Ltd., cash balance of the Firm Rs. 1,00,000 is also
transferred to realization account. Cash brought in by C equal to Dr. balance appearing in her account, after distribution
of preference shares in profit sharing ratio and debentures equally, would be shared by A and B equally. The balance
amount payable to A and B would be settled by transfer of equity shares in Govinda Company Ltd.
3.37
Q23.
Realisation A/c
Particulars Rs. Particulars Rs.
To Fixed Assets 1,40,000 By Creditors for goods 1,10,000
To Stock 70,000 By N & Co. Ltd. 3,35,000
To Debtors 1,00,000 By Bank A/c (Debtors) 97,000
To Bills Receivable 25,000 By Bank A/c (B/R) 24,000
To Bank A/c (Creditors) 1,04,500 By A’s Capital A/c 25,000
To Profit on Realisation transferred to: By B’s Capital A/c 15,000
A’s Capital A/c 1,11,000
B’s Capital A/c 55,500 1,66,500
6,06,000 6,06,000
Dr. Cr.
B
Particulars A B Particulars A
Rs. Rs. Rs. Rs.
To Realisation A/c 25,000 15,000 By Balance b/d 1,00,000 80,000
To Equity Shares in N & By Current A/c 1,41,000 27,500
Co. 1,00,000 80,000
To Preference Shares
in N & Co. 9,000 −
To Bank A/c 1,07,000 12,500
2,41,000 1,07,500 2,41,000 1,07,500
Partners’ Current Accounts
Dr. Cr.
Particulars A B Particulars A B
Rs. Rs. Rs. Rs.
To Balance b/d − 23,000 By Balance b/d 40,000 −
To Advt. Suspense A/c 10,000 5,000 By Realisation A/c 1,11,000 55,500
To Capital A/c 1,41,000 27,500
1,51,000 55,500 1,51,000 55,500
B’s Loan Account

To Preference Shares in N & Co. 63,000 By Balance b/d 63,000
63,000 63,000
Bank Account
Dr. Cr.
To Balance b/d 20,000 By Realisation A/c 1,04,500
To Realisation A/c 97,000 By A’s Capital A/c 1,07,000
To Realisation A/c 24,000 By B’s Capital A/c 12,500
To N & Co. 83,000
2,24,000 2,24,000
N & Co.
Dr. Cr.
To Realisation A/c 3,35,000 By Bank A/c 83,000
By Preference shares in N & Co. 72,000
By Equity shares in N & Co. 1,80,000
3,35,000 3,35,000
3.38
Preference shares in N & Co.

Dr. Cr.
To N & Co. 72,000 By B’s Loan A/c 63,000
By A’s Capital A/c 9,000
72,000 72,000
Equity shares in N & Co.
Dr. Cr.
To N & Co. 1,80,000 By A’s Capital A/c 1,00,000
1,80,000 1,80,000
Q26. Statement showing distribution of cash amongst the partners

Creditors B’s Capitals
Loan
A(Rs.) B(Rs.) C(Rs.)
Balance Due 16,500 4,500 15,000 7,500 15,000
On 1st Instalment amount with
the firm Rs. (275 + 18,650)
18,925
Less: Dissolution expenses
provided for
(3,000)
15,925
Less: C’s remuneration of 1% on
assets realized (18,650 x 1%) (187)
15,738
Less: Payment made to creditors (15,738) (15,738)
Balance due Nil 762
2nd instalment realised 17,320
assets realized (17,320 x 1%)
(173)
17,147
Less: Payment made to creditors (162) (162)
Transferred to P& L A/c 16,985 600
Less: Payment for B’s loan A/c (4,500) (4,500)
Amount available for distribution

to partners 12,485 nil
Less: C’s remuneration of 10%
of the amount distributed to
partners (12,485 x 10/110) (1,135)
Balance distributed to partners
on the basis of HRCM 11,350
Less: Paid to C (W.N.1) (3,750) (3,750)
7,600 11,250
Less: Paid to A and C in 4:3
(W.N.1) (7,600) (4,343) - (3,257)
Balance due nil 10,657 7,500 7,993
Amount of 3rd instalment 10,000
9,900
partners (9,900 x 10/110) (900)
9,000
3.39
Less: Paid to A and C in 4:3 for

(Rs. 8,750 – 7,600) (W.N.1) (1,150) (657) -
(493)
7,850 10,000 7,500 7,500
Less: Paid to A, B and C in 4:3:3 (7,850) (3,140) (2,355) (2,355)
Balance due nil 6,860 5,145 5,145
Amount of 4th and last
Instalment 7,000
6,930
partners (6,930 x 10/110) (630)
6,300
Less: Paid to A, B and C in 4:3:3 (6,300) (2,520) (1,890) (1,890)
Loss suffered by partners 4,340 3,255 3,255
Working Note:
(i) Highest Relative Capital Basis
A B C
Rs. Rs . Rs.
Balance of Capital Accounts (A) 15,000 7,500 15,000
Profit sharing ratio 4 3 3
Capital Profit sharing ratio 3,750 2,500 5,000
Capital in profit sharing
ratio taking B’s Capital as base (B) 10,000 7,500 7,500
Excess of A’s Capital and C’s Capital
(A-B) =(C) 5,000 nil 7,500
Again repeating the process
Profit sharing ratio 4 3
Capital Profit sharing ratio 1,250 2,500
Capital in profit sharing
ratio taking A’s Capital as base (D) 5,000 3,750
Excess of C’s Capital (C-D)=(E) nil 3,750
Therefore, firstly Rs. 3,750 is to be paid to C then A and C to be paid in proportion of 4:3 upto Rs. 8,750 to bring the
capital of all partners A, B and C in proportion to their profit sharing ratio. Thereafter, balance available will be paid in
their profit sharing ratio 4:3:3 to all partners viz A, B and C.
Q30. In the books of A,B and C

Realisation Account
2006 Rs. Rs. 2006 Rs. Rs.
Dec. To Sundry Dec. By Bank A/c
31 assets: 31
Machinery 12,000 Machinery 6,000
Furniture 3,000 Furniture 1,000
Debtors 5,000 Debtors 4,000
Stock 4,000 24,000 Stock 3,000 14,000
To Bank A/c: By Partner’s
expenses 1,400 Capital A/c
(loss on realisation)
A 3,800
B 3,800
_____ C 3,800 11,400
25,400 25,400
3.40
Bank Account
2006 Rs. 2006 Rs.
Dec. 31 To Balance b/d 2,800 Dec. 31 By Realisation A/c 1,400
To Realisation A/c 14,000
To B’s capital A/c 2,400 By Creditors A/c 20,800
(balancing figure)
To C’s capital A/c 3,000 _____
22,200 22,200
Creditors Account
2006 Rs. 2006 Rs.
Dec. 31 To Bank A/c 20,800 Dec. 31 By Balance b/d 32,000
To Deficiency A/c 11,200 _____
32,000 32,000

A B C A B C
2006 Rs. Rs. Rs. 2006
Dec. To balance 12,200 Dec. By Balance 4,000 3,000 -
31 b/d 31 b/d
To 3,800 3,800 3,800 By Bank A/c - 2,400 3,000
Realisation
A/c
To Deficiency 200 1,600 By 13,000
A/c Deficiency
A/c - -
4,000 5,400 16,000 4,000 5,400 16,000
Deficiency Account
Dr. Cr.
2006 Rs. 2006 Rs.
Dec.31 To C’s capital A/c 13,000 Dec.31 By Creditors A/c 11,200
By A’s capital A/c 200
--------- By B’s capital A/c 1,600
13,000 13,000
Q 37.
Realisation Account
To Sundry assets: By Creditors 2,77,500
Stock 3,17,000 By Bills payables 51,000
Debtors 3,25,000 By Bank overdraft 75,000
Plant 1,63,875 By Shares in ST Ltd. (W.N. 3) 18,80,000
Building 8,64,500 To Profit:
Furniture 73,125 S 2,70,000
T 2,70,000 5,40,000
22,83,500 22,83,500

Date Particulars S T Date Particulars S T
2008 2008
April 1 To Cash – April 1 By Balance b/d 6,40,000 6,60,000
Drawings
(W.N. 2) 20,000 20,000
Sept. 30 Sept. 30 By Profit
To Shares in (W.N.2) 40,000 40,000
ST Ltd. 9,30,000 9,50,000 By Realisation
A/c (Profit) 2,70,000 2,70,000
9,50,000 9,70,000 9,50,000 9,70,000
3.41
Working Notes:
1. Ascertainment of capital as on 30th September, 2008
Balance Sheet as at 30th September, 2008
Sundry creditors 2,77,500 Building 9,10,000
Bills payable 51,000 Less: Depreciation 45,500 8,64,500
Bank overdraft 75,000 Plant 1,72,500
Total capital (bal. fig.) 13,40,000 Less: Depreciation 8,625 1,63,875
Furniture 75,000
Less: Depreciation 1,875 73,125
Stock 3,17,000
Debtors 3,25,000
17,43,500 17,43,500
2. Profit earned during six months ended 30 September, 2008 Rs.

Total capital (of S and T) on 30th September, 2008 (W.N.1) 13,40,000
Capital on 1st April, 2008
S 6,40,000
T 6,60,000 13,00,000
Net increase (after drawings) 40,000
Since drawings are half of profits therefore, actual profit earned is Rs.40,000 x 2 = Rs.80,000 (shared equally
by partners S and T).
Half of the profits, has been withdrawn by both the partners equally i.e. drawings Rs. 40,000 (Rs.80,000 x ½)
withdrawn by S and T in 1:1 (i.e. Rs.20,000 each).
3. Purchase consideration Rs.

Total assets (W.N.1) 17,43,500
Add: Goodwill 5,40,000
22,83,500
Less: Liabilities (2,77,500 + 51,000 + 75,000) 4,03,500
Purchase consideration 18,80,000
Note: The above solution is given on the basis that reduction in bank overdraft is after surrender of Joint life
policy. Alternatively, the reduction in bank overdraft may be taken as before surrender of joint life policy.
Accordingly, the solution will change.
Q38.
(i) In the books of Prabhu & Co.
Realisation Account
Rs. Rs.
To Plant & Machinery 2,50,000 By Sundry Creditors 1,50,000
To Furniture & Fixture 25,000 By Bhagwan Ltd. (Refer W.N.) 3,00,000
To Stock in trade 1,00,000 By Partners’ Capital Accounts (loss):
To Sundry Debtors 1,00,000 Prabhu’s Capital A/c 10,000
Bhola’s Capital A/c 10,000
Shiv’s Capital A/c 5,000
4,75,000 4,75,000
Prabhu Bhola Shiv Prabhu Bhola shiv
To Realisation A/c 10,000 10,000 5,000 By Balance b/d 1,00,000 1,50,000 50,00
To Share in By General
Baghwan Ltd. 1,20,000 1,20,000 60,000 Reserve 20,000 20,000 10,000
To Cash - 40,000 - By Cash 10,000 - 5,000
1,30,000 1,70,000 65,000 1,30,000 1,70,000 65,000
Cash and Bank Account
Rs. Rs. Rs. Rs.
To Balance b/d 20,000 5,000 By Cash A/c (Contra)* 5,000
To Bank A/c (Contra) 5,000 By Bhola 40,000
To Prabhu 10,000
To Shiv 5,000 - - -
40,000 5,000 40,000 5,000
3.42
(ii) In the Books of Bhagwan Ltd.

Journal Entries
Dr. (Rs.) Cr. (Rs.)
1. Business Purchase Account Dr. 3,00,000
To Liquidators of Prabhu & Co. 3,00,000
(Being business of Prabhu & Co. purchased and payment due)
2. Plant and Machinery A/c Dr. 2,50,000

Furniture and Fixture A/c Dr. 25,000
Stock in Trade A/c Dr. 1,00,000
Sundry Debtors A/c Dr. 1,50,000
To Sundry Creditors 1,50,000
To Unsecured Liability 12,500
To Business Purchase Account 3,00,000
To Capital Reserve (B.F.) 12,500
(Being take over of all assets and liabilities)
3. Liquidators of Prabhu & Co. Dr. 3,00,000

To Equity Share Capital Account 2,50,000
To Securities Premium Account 50,000
(Being purchase consideration discharged in the
form of shares of Rs.10 each issued at a premium of 2 each)
*It is assumed that cash at bank has been withdrawn to pay to Partner Bhola.
4. Sundry Creditors Account Dr. 50,000

To Sundry Debtors Account 50,000
(Being mutual owing eliminated)
Working Note:
Computation of purchase consideration:
25,000 Equity shares of Rs.12 each = Rs.3, 00,000
Equity shares to be given to partners:
Prabhu = 10,000 Shares @ Rs.12 = Rs.1,20,000
Bhola = 10,000 shares @ Rs.12 = Rs.1,20,000
Shiv = 5,000 shares @ Rs.12 = Rs.60,000
Q46. It is assumed that trade loans, bank overdraft, other loans and creditors have equal priority at the time of payment.
Therefore, they all have been paid in the ratio of their s outstanding.
Trade Bank Other Creditor Siddhart’s Daksh’s Yash’s Siddhart

Loans. Overdraft Loans s Loan Capital Capital h’s
Rs. Rs. Rs. Rs. Rs. Rs. Capital
Rs. Rs.
Amount due 3,00,000 3,00,000 2,00,000 2,00,000 2,00,000 3,00,000 2,00,000 1,00,000
Cash in hand 20,000
Less: Amount kept for
Realization expenses (10,000)
10,000
Less: Distributed among
Outsiders (3:3:2:2) (10,000) (3,000) (3,000) (2,000) (2,000) -
Balance due Nil 2,97,000 2,97,000 1,98,000 1,98,000 2,00,000 3,00,000 2,00,000 1,00,000
Debtors realised on 1-12012 3,50,000
Outsiders (3:3:2:2) (3,50,000) (1,05,000) (1,05,000) (70,000) (70,000) - - - -
Balance Due Nil 1,92,000 1,92,000 1,28,000 1,28,000 2,00,000 3,00,000 2,00,000 1,00,000
Fixed Assets realised on
15-12-2012 4,00,000
outsiders (3:3:2:2) (4,00,000) (1,20,000) (1,20,000) (80,000) (80,000) - - - -
Balance Due Nil 72,000 72,000 48,000 48,000 2,00,000 3,00,000 2,00,000 1,00,000
Debtors realised on 1-2- 50,000
2012
3.43

Outside (3:3:2: (50,000) (15,000) (15,000) (10,000) (10,000) - - - -
Balance Due Nil 57,000 57,000 38,000 38,000 2,00,000 3,00,000 2,00,000 1,00,000
Bills Receivables realised
on 15-2-2012 1,40,000
Outsiders (3:3:2:2) (1,40,000) (42,000) (42,000) (28,000) (28,000) - - - -
Balance Due Nil 15,000 15,000 10,000 10,000 2,00,000 3,00,000 2,00,000 1,00,000
Fixed Assets realised on 1-
3-2012 50,000
Les: Distributed among
Outsiders (3:3:2:2) (50,000) (15,000) (15,000) (10,000) (10,000) - - - -
Balance Due Nil - - - - 2,00,000 3,00,000 2,00,000 1,00,000
Land and Building realised 8,00,000
on 15-3-2012
Less: Additional payment
of realization expenses
(20,005 – 10,000) (10,005)
7,89,995
Less: Payment of
Siddharth’s Loan (2,00,000) (2,00,000) - - -
Amount available for
partner’s Capital 5,89,995
Less: Daksh’s Commission - 3,00,000 2,00,000 1,00,000
(i.e. 5,89,995 x 5/105) (28,095)
5,61,900
Less: Siddharth’s Capital is
paid first because he will
not share any loss on
account of being minor
partner (1,00,000) - - (1,00,00
4,61,900 3,00,000 2,00,000 0)
Less: Paid to Daksh to -
make his capital equal to
that of Yash (1,00,000) (1,00,000) -
3,61,900 2,00,000 2,00,000
Less: Distributed equally -
between Daksh and Yash (3,61,900) (1,80,950) (1,80,950)
Balance Due 19,050 19,050 Nil*

*Siddharth will get 1/5 share (i.e., share of profit) of what remains after paying Rs.19,050 to each Daksh and Yash out
of the proceeds of stock-in trade. If stock does not realize any amount, then amount unpaid to Daksh and Yash will
become loss on realization. Siddharth has been paid first because he is not to share any loss on realization.
Q47 (a)Number of Shares to be issued to Partners

Rs
Assets:
Machinery Rs 1,40,000 + Inventory Rs 1,37,400 +Trade
Receivable Rs1,24,000 + Bank Rs 1,00,000 5,01,400
Less: Liabilities taken over (1,69,400)
Net Assets taken over (Purchase Consideration) 3,32,000
Classes of Shares to be issued : Mohit Neel Om Total

10% Preference Shares of Rs 10 each (to 1,36,000 90,000 46,000 2,72,000
retain rights as to Interest on Capital)
Balance in Equity Shares of Rs 10 each 30,000 18,000 12,000 60,000
(3,32,000 -2,72,000) (issued in profit - - - -
sharing ratio)
1,66,000 1,08,000 58,000 3,32,000
3.44
(b)Partners’ Capital Accounts
Particulars Mohit Neel Om Particulars Mohit Neel Om

To Drawings 50,000 46,000 34,000 By balance b/d 1,36,000 90,000 46,000
To 10% 1,36,000 90,000 46,000 By Interest on 13,600 9,000 4,600
Preference share Capital
capital
To Equity 30,000 18,000 12,000 By profit for the 1,10,700 66,420 44,280
Shares year 5:3:2 (WN1)
To Bank – 54,300 17,420 6,880 By Machinery* 10,000 6,000 4,000
Additional A/c
drawings (W.N. 2)
Total 2,70,300 1,71,420 98,880 2,70,300 1,71,420 98,880
* Gain on Transfer of Machinery = Rs 1,40,000 – (Rs 2,00,000-Rs 80,000) = Rs 20,000 in 5:3:2 ratio.
(c) Balance sheet of MNO Ltd. as on 31st March, 2019 (after Takeover of Firm)
Note no. Rs
I Equity and Liabilities:
(1) Shareholders Funds
Share Capital 1 3,32,000
(2) Current Liabilities
Trade Payables 1,69,400
Total 5,01,400
Assets
II (1) Non-Current Assets
Property, plant & equipment 1,40,000
(2) Current Assets:
(a) Inventories 1,37,400
(b) Trade Receivables 1,24,000
(c) Cash and Cash Equivalents 1,00,000
Total 5,01,400
Notes to Accounts
Particulars Rs
1. Shares capital
Authorized shares capital 20,00,000
Issued, Subscribed & paid up
6,000 Equity Shares of Rs 10 each 60,000
27,200 10% Preference Shares capital of Rs 10 each 2,72,000
(All above shares issued for consideration other than cash, in takeover of 3,32,000
partnership firm)
Working Note:
1. Profit & Loss Appropriation Account for the year ended 31st March, 2019
Particulars Rs Rs Particulars Rs
To Interest on Capital: By Net Profit 2,48,600
Mohit [Rs 1,36,000 x 10%] 13,600 (given)
Neel [Rs 90,000 x 10%] 9,000
Om [Rs 46,000 x 10%] 4,600 27,200
To Profits transferred to Capital in
profit sharing ratio 5:3:2
Mohit 1,10,700
Neel 66,420
Om 44,280 2,21,400
Total 2,48,600 Total 2,48,600
3.45
2. Statement showing Additional Drawings in Cash
(a) Funds available for Drawings
Total Drawing of Partners (given) 1,30,000

Add: Further Funds available for Drawings (1,78,600-1,00,000) 78,600
2,08,600
Less: Interest on Capital (27,200)
Amount available for Additional Drawings 1,81,400
(b) Ascertainment of Additional Drawings
Particulars Mohit Neel Om

As per above statement Rs 1,81,400
(in profit sharing ratio) 90,700 54,420 36,280
Add: Interest 13,600 9,000 4,600
1,04,300 63,420 40,880
Less: Already drawn (50,000) (46,000) (34,000)
Additional Drawings 54,300 17,420 6,880
Answers of MCQs
1. (b) 2. (a) 3. (b) 4. (a) 5. (c) 6. (c) 7. (a) 8. (a)
3.46
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SUMMARY NOTES
3.48
SUMMARY NOTES
3.49
Chapter 4- Holding Company Accounts CA P.S. Beniwal-09990301165
1. On 31st March, 2004 the Balance Sheets of H Ltd. and its subsidiary S Ltd. stood as follows:
H Ltd. S Ltd.
Liabilities Rs. in lakhs Rs. in lakhs
Share Capital:
Authorised 15,000 6,000
Issued and Subscribed:
Equity Shares of Rs. 10 each, fully paid up 12,000 4,800
General Reserve 2,784 1,380
Profit and Loss Account 2,715 1,620
Bills Payable 372 160
Sundry Creditors 1,461 854
Provision for Taxation 855 394
Dividend Payable 1,200 -------
21,387 9,208
H Ltd. S Ltd.
Assets Rs. in lakhs Rs. in lakhs
Land and Buildings 2,718 -----
Plant and Machinery 4,905 4,900
Furniture and Fittings 1,845 586
Investments in shares in S Ltd. 3,000 -----
Stock 3,949 1,956
Debtors 2,600 1,363
Cash and Bank Balances 1,490 204
Bills Receivable 360 199
Sundry Advances 520 -------
21,387 9,208
The following information is also provided to you:
(a) H Ltd. purchased 180 lakh shares in S Ltd. on 1st April, 2003 when the balances to General Reserve
and Profit and Loss Account of S Ltd. stood at Rs. 3,000 lakh and 1,200 lakh respectively.
(b) On 4th July, 2003 S Ltd. declared a dividend @ 20% for the year ended 31st March, 2003. H Ltd.
credited the dividend received by it to its Profit and Loss Account.
(c) On 1st January, 2004 S Ltd. issued 3 fully paid-up shares for every 5 shares held as bonus shares out of
balances to its general reserve as on 31st March, 2003.
(d) On 31st March, 2004 all the bills payable in S Ltd.’s balance sheet were acceptances in favour of H Ltd.
But on that date, H Ltd. held only Rs. 45 lakh of these acceptances in hand, the rest having been
endorsed in favour of its creditors.
(e) On 31st March, 2004 S Ltd.’s stock included goods which it had purchased for Rs. 100 lakh from H Ltd.
which made a profit @ 25% on cost.
Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as at 31st March, 2004 bearing in
mind the requirements of AS 21.
2. Exe Ltd. acquires 70% of equity shares of Zed Ltd. as on 31st March, 2010 at a cost of Rs. 70 lakhs. The
following information is available from the balance sheet of Zed Ltd. as on 31st March, 2010:
Rs. in lakhs
Fixed Assets 120
Investments 55
Current Assets 70
Loans & Advances 15
15% Debentures 90
Current Liabilities 50
The following revaluations have been agreed upon (not included in the above figures):
Fixed Assets Up by 20%
Investments Down by 10%
Zed Ltd. declared and paid dividend @ 20% on its equity shares as on 31st March, 2010. Exe Ltd. purchased
the shares of Zed Ltd. @ Rs. 20 per share.
Calculate the amount of goodwill/capital reserve on acquisition of shares of Zed Ltd.
Ans: Capital Reserve: 33.95
4.1
3. Given below are the Profit & Loss Account of H Ltd. and its subsidiary Ltd. for the year ended 31st March,
2010.
H Ltd. S Ltd.
(Rs. in lacs) (Rs. in lacs)
Incomes:
Sales and other income 5,000 1,000
Increase in stock 1,000 200
6,000 1,200
Expenses:
Raw material consumed 800 200
Wages and Salaries 800 150
Production expenses 200 100
Administrative Expenses 200 100
Selling and Distribution Expenses 200 50
Interest 100 50
Depreciation 100 50
2,400 700
Profit before tax 3,600 500
Provision for tax 1,200 200
Profit after tax 2,400 300
Proposed dividend 1,200 150
Balance of Profit 1,200 150
Other Information:
(1) H Ltd. sold goods to S Ltd. of Rs. 120 lacs at cost plus 20%. Stock of S Ltd. includes such goods
valuing Rs. 24 lacs. Administrative Expenses of S Ltd. include Rs. 5 lacs paid to H Ltd. as consultancy
fees. Selling and Distribution expenses of H Ltd. include Rs.10 lacs paid to S Ltd. as commission.
(2) H Ltd. holds 80% of equity share capital of Rs. 1,000 lacs in S Ltd. prior to 2008-09.
H Ltd. took credit to its Profit and Loss Account, the proportionate amount of dividend declared and
paid by S Ltd. for the year 2008-2009.
Prepare a consolidated profit and loss account.
4. The Profit and Loss Accounts of A Ltd. and its subsidiary B Ltd. for the year ended 31st March, 2018 are
given below : (Rs ,000)
Incomes A Ltd. B Ltd.
Sales and other income 7,500 1,500
Increase in Inventory 1,500 300
Total 9,000 1,800
Expenses
Raw material consumed 1,200 300
Wages and Salaries 1,200 225
Production expenses 300 150
Administrative expenses 300 150
Selling and distribution expenses 300 75
Interest 150 75
Depreciation 150 75
Total 3,600 1,050
Profit before tax 5,400 750
Provision for tax 1,800 300
Profit after tax 3,600 450
Dividend paid 1,800 225
Balance of Profit 1,800 225
The following information is also given:
(i) A Ltd sold goods of ₹ 180 Lakhs to B Ltd at cost plus 25%. (1/6 of such goods were still in inventory
of B Ltd at the end of the year)
(ii) Administrative expenses of B Ltd include ₹ 8 Lakhs paid to A Ltd as consultancy fees.
4.2
(iii) Selling and distribution expenses of A Ltd include ₹15 Lakhs paid to B Ltd as commission.
(iv) A Ltd holds 72% of the Equity Capital of B Ltd. The Equity Capital of B Ltd prior to 2016-17 is
₹1,500 Lakhs
Prepare a consolidated Profit and Loss Account for the year ended 31st March, 2018.
5. Ram Ltd. Holds 80% share in Shyam Ltd its subsidiary. Share Capital of shyam Ltd is Rs 25,00,000 and
reserves being Rs 5,00,000 on the date of acquisition 31.3.2012.
Following is the results of Shyam Ltd :
Year Ended Profit /(Loss) Net Worth (Rs. In Lakhs)
31.3.2013 (15,00,000) +15.00
31.3.2014 (20,00,000) (5.00)
31.3.2015 4,00,000 (1.00)
31.3.2016 5,00,000 +4.00
Calculate Minority interest for the period from 2011-12 to 2015-16 as per AS -21.
6. H Ltd. acquired 3,000 shares in S Ltd., at a cost of Rs. 4,80,000 on 1st August, 2012. The capital of S Ltd.
consisted of 5,000 shares of Rs. 100 each fully paid. The Profit & Loss Account of this company for 2012
showed an opening balance of Rs. 1,25,000 and profit for the year of Rs. 3,00,000. At the end of the year, it
declared a dividend of 40%. Record the entry in the books of H Ltd., in respect of the dividend.
7. A Ltd. acquired 70% of equity shares of B Ltd. as on 1st January, 2005 at a cost of Rs. 10,00,000 when B
Ltd. had an equity share capital of Rs. 10,00,000 and reserves and surplus of Rs. 80,000. Both the companies
follow calendar year as the accounting year. In the four consecutive years B Ltd. fared badly and suffered
losses of Rs. 2,50,000, 4,00,000, Rs. 5,00,000 and Rs. 1,20,000 respectively. Thereafter in 2009, B Ltd.
experienced turnaround and registered an annual profit of Rs. 50,000. In the next two years i.e. 2010 and
2011, B Ltd. recorded annual profits of Rs. 1,00,000 and Rs. 1,50,000 respectively.
Show the minority interests and cost of control at the end of each year for the purpose of consolidation.
8. H Ltd. acquires 70% of the equity shares of S Ltd. on 1st January, 2012. On that date, paid up capital of S
Ltd. was 10,000 equity shares of Rs. 10 each; accumulated reserve balance was Rs. 1,00,000. H Ltd. paid Rs.
1,60,000 to acquire 70% interest in the S Ltd. Assets of S Ltd. were revalued on 1.1.2012 and a revaluation
loss of Rs. 20,000 was ascertained.
Ans. Goodwill Rs. 34,000
9. Consider the following balance sheets of subsidiary B Ltd.:

2008 2009 2008 2009
Rs. Rs. Rs. Rs.
Share-Capital Fixed Assets
Issued & subscribed Cost 3,20,000 3,20,000
5,000 equity shares Less: Accumulated
of Rs. 100 each 5,00,000 5,00,000 depreciation 48,000 96,000
Reserves & Surplus 2,72,000 2,24,000
Revenue reserves 2,86,000 7,14,000 Investments
Current Liabilities & at cost — 4,00,000
Provisions: Current Assets:
Sundry Creditors 4,90,000 4,94,000 Stock 5,97,000 7,42,000
Bank overdraft — 1,70,000 Sundry Debtors 5,94,000 8,91,000
Provision for taxation 3,10,000 4,30,000 Prepaid Expenses 72,000 48,000
Cash at Bank 51,000 3,000
15,86,000 23,08,000 15,86,000 23,08,000
4.3
Consider also the following information:

(a) B Ltd. is a subsidiary of A Ltd. Both the companies follow calendar year as the accounting year.
(b) A Ltd. values stocks on LIFO basis while B Ltd. used FIFO basis. To bring B Ltd.’s values in line with
those of A Ltd. its value of stock is required to be reduced by Rs. 12,000 at the end of 2008 and Rs.
34,000 at the end of 2009.
(c) Both the companies use straight-line method of depreciation. However A Ltd. charges depreciation @
10%.
(d) B Ltd. deducts 1% from sundry debtors as a general provision against doubtful debts.
(e) Prepaid expenses in B Ltd. include advertising expenditure carried forward of Rs. 60,000 in 2008 and
Rs. 30,000 in 2009, being part of initial advertising expenditure of Rs. 90,000 in 2008 which is being
written off over three years. Similar amount of advertising expenditure of A Ltd. has been fully written
off in 2008.
Restate the balance sheet of B Ltd. as on 31st December, 2009 after considering the above information for
the purpose of consolidation. Such restatement is necessary to make the accounting policies adopted by A
Ltd. and B Ltd. uniform.
10. From the following balance sheets of H Ltd. and its subsidiary S Ltd. drawn up at 31st March, 2010, prepare
a consolidated balance sheet as at that date, having regard to the following :
(i) Reserves and Profit and Loss Account of S Ltd. stood at Rs. 25,000 and Rs. 15,000 respectively on the
date of acquisition of its 80% shares by H Ltd. on 1st April, 2009.
(ii) Machinery (Book-value Rs. 1,00,000) and Furniture (Book value Rs. 20,000) of S Ltd. were revalued at
Rs. 1,50,000 and Rs. 15,000 respectively on 1.4.2009 for the purpose of fixing the price of its shares.
[Rates of depreciation: Machinery 10%, Furniture 15%.]
Balance Sheet of H Ltd. as on 31st March, 2010
Liabilities H Ltd. S. Ltd. Assets H Ltd. S Ltd.
Rs. Rs. Rs. Rs.
Share Capital Machinery 3,00,000 90,000
Shares of Furniture 1,50,000 17,000
Rs. 100 each 6,00,000 1,00,000 Other assets 4,40,000 1,50,000
Reserves 2,00,000 75,000 Shares in
Profit and Loss S Ltd.:
Account 1,00,000 Rs. 25,000 800 shares at
Creditors 1,50,000 57,000 Rs. 200 each 1,60,000 —
10,50,000 2,57,000 10,50,000 2,57,000
Answer: Goodwill Rs. 12,000/-
11. A Ltd. acquired 1,600 ordinary shares of Rs.100 each of B Ltd. on 1st July 2009. On December 31, 2009 the
Balance Sheets of the two companies were as given below:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Rs. Rs. Rs. Rs.
Capital (Shares of Land & Buildings 1,50,000 1,80,000
Rs. 100 each Plant & Machinery 2,40,000 1,35,000
fully paid) 5,00,000 2,00,000 Investment in B Ltd.
Reserves 2,40,000 1,00,000 at cost 3,40,000 —
Profit & Loss A/c 57,200 82,000 Stock 1,20,000 36,400
Bank Overdraft 80,000 — Sundry Debtors 44,000 40,000
Bills Payable — 8,400 Bills Receivable 15,800 —
Creditors 47,100 9,000 Cash 14,500 8,000
9,24,300 3,99,400 9,24,300 3,99,400
The Profit & Loss Account of B Ltd. showed a credit balance of Rs. 30,000 on 1st January, 2009 out of
which a dividend of 10% was paid on 1st August; A Ltd. has credited the dividend received to its Profit &
Loss Account. The Plant & Machinery which stood at Rs. l,50,000 on 1st January, 2009 was considered as
worth Rs. 1,80,000 on 1st July, 2009; this figure is to be considered while consolidating the Balance Sheets.
Prepare consolidated Balance Sheet as on December 31, 2009.
4.4
12. From the following data, determine in each case:

(1) Minority interest at the date of acquisition and the date of consolidation.
(2) Goodwill or Capital Reserve.
(3) Amount of holding company’s profit in the consolidated Balance Sheet assuming holding company’s
own Profit & Loss Account to be Rs. 2,00,000 in each case.
Subsidiary Company
Company Cost Date of acquisition Consolidation Date
& % shares owned 1.1.2010 31.12.2010
Share Profit & Share Profit &
Capital Loss Capital Loss
Account Account
Rs. Rs. Rs. Rs. Rs.
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 55,000
13. XYZ Ltd. purchased 80% shares of ABC Ltd. on 1st January, 2010 for Rs. 1,40,000. The issued capital of
ABC Ltd., on 1st January, 2010 was Rs. 1,00,000 and the balance in the Profit & Loss Account was Rs.
60,000.
For the year ending on 31st December, 2010 ABC Ltd. has earned a profit of Rs. 20,000 and, at the same
time, declared and paid a dividend of Rs. 30,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
What is the amount of minority interest as on 1st January, 2010 and 31st December, 2010?
Also please check whether there should be any Goodwill/Capital Reserve at the date of Aquisition.
14. Consider the following summarized balance sheets:

A Ltd (As B Ltd. (As A Ltd (As B Ltd. (As on
on 31/03/17) on 31/12/16) on 31/03/17) 31/12/16)
Share Capital Fixed Assets 6,50,000 4,05,000
(Shares of ₹ 10 each) 10,00,000 5,00,000 Investment:
Reserves and Surplus 4,50,000 2,05,000 40,000 Shares in B Ltd. 8,00,000 -
Secured Loan: 1,000 Debentures in B
13% Debentures Ltd . 1,50,000 -
(₹100 each) - 3,00,000 Current Assets:
Current Liabilities: Inventory 2,00,000 3,50,000
Trade payables 3,80,000 80,000 Trade Receivable 1,50,000 2,65,000
Other liabilities 2,00,000 40,000 Cash and Bank 80,000 1,05,000
20,30,000 11,25,000 20,30,000 11,25,000
On 5th January 2017, certain inventory of B Ltd. costing ₹ 20,000 were completely destroyed by fire.
The insurance company paid 75% of the claim.
On 20th January, 2017, A Ltd. sold goods to B Ltd. costing ₹ 1, 50,000 at an invoice price of cost plus 20%.
50% of those goods were resold by B Ltd. to A Ltd. within 31st March, 2017 (these were then sold by A Ltd.
to a third party before 31st March, 2017). As on 31st March, 2017, B Ltd. owes ₹ 60,000 to A Ltd. In respect
of those goods. Pre-acquisition profits of B Ltd. were ₹ 75,000. Prepare consolidated balance sheet as on 31 st
March, 2017 after making necessary adjustments in the balance sheet of B Ltd.
15.
(a) A Ltd holds 80% of the equity capital and voting power in B Ltd. A Ltd sells inventories costing Rs. 180
lacs to B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with B Ltd at the financial
year end i.e. 31 March 2019.
(b) A Ltd holds 75% of the equity capital and voting power in B Ltd. A Ltd purchases inventories costing
Rs. 150 lacs from B Ltd at a price of Rs. 200 lacs. The entire inventories remain unsold with A Ltd at the
financial year end i.e. 31 March 2019.
Suggest the accounting treatment for the above mentioned transactions in the consolidated financial
statements of A Ltd giving reference of the relevant guidance/standard.
4.5
Solution: As per para 16 and 17 of AS 21

Intragroup balances and intragroup transactions and resulting unrealised profits should be eliminated in full.
Unrealised losses resulting from intragroup transactions should also be eliminated unless cost cannot be
recovered.
Intragroup balances and intragroup transactions, including sales, expenses and dividends, are eliminated in
full. Unrealised profits resulting from intragroup transactions that are included in the carrying amount of
assets, such as inventory and fixed assets, are eliminated in full. Unrealised losses resulting from intragroup
transactions that are deducted in arriving at the carrying amount of assets are also eliminated unless cost
cannot be recovered.
One also needs to see whether the intragroup transaction is “upstream” or “downstream”. Upstream
transaction is a transaction in which the subsidiary company sells goods to holding company. While in the
downstream transaction, holding company is the seller and subsidiary company is the buyer.
In the case of upstream transaction, since the goods are sold by the subsidiary to holding company; profit is
made by the subsidiary company, which is ultimately shared by the holding company and the minority
shareholders. In such a transaction, if some goods remain unsold at the balance sheet date, the unrealized
profit on such goods should be eliminated from minority interest as well as from consolidated profit on the
basis of their share-holding besides deducting the same from unsold inventory.
But in the case of downstream transaction, the whole profit is earned by the holding company, therefore,
whole unrealized profit should be adjusted from unsold inventory and consolidated profit and loss account
only irrespective of the percentage of the shares held by the parent.
Using above mentioned guidance, following adjustments would be required:
(a) This would be the case of downstream transaction. In the consolidated profit and loss account for the
year ended 31 March 2019, entire transaction of sale and purchase of Rs. 130 lacs each, would be
eliminated by reducing both sales and purchases (cost of sales).
Further, the unrealized profits of Rs. 20 lacs (i.e. Rs. 200 lacs – Rs. 180 lacs), would be eliminated from
the consolidated financial statements for financial year ended 31 March 2019, by reducing the
consolidated profits/ increasing the consolidated losses, and reducing the value of closing inventories as
of 31 March 2019.
(b) This would be the case of upstream transaction. In the consolidated profit and loss account for the year
ended 31 March 2019, entire transaction of sale and purchase of Rs. 200 lacs each, would be eliminated
by reducing both sales and purchases (cost of sales).
Further, the unrealized profits of Rs. 50 lacs (i.e. Rs. 200 lacs – Rs. 150 lacs), would be eliminated in the
consolidated financial statements for financial year ended 31 March 2019, by reducing the value of
closing inventories by Rs. 50 lacs as of 31 March 2019. In the consolidated balance sheet as of 31 March
2019, A Ltd’s share of profit from B Ltd will be reduced by Rs. 37.50 lacs (being 75% of Rs. 50 lacs)
and the minority’s share of the profits of B Ltd would be reduced by Rs. 12.50 lacs (being 25% of Rs. 50
lacs).
16. Consider the following summarized Balance Sheets of subsidiary MNT Ltd.
Liabilities 2017-18 2018-19
Amount in Rs Amount in Rs
Share Capital
Issued and subscribed
7,500 Equity Shares of Rs100 each 7,50,000 7,50,000
Reserve and Surplus
Revenue Reserve 2,14,000 5,05,000
Securities Premium 72,000 2,07,000
Current Liabilities and Provisions
Trade Payables 2,90,000 2,46,000
Bank Overdraft - 1,70,000
Provision for Taxation 2,62,000 4,30,000
15,88,000 23,08,000
4.6
Assets
Fixed Assets (Cost) 9,20,000 9,20,000
Less : Accumulated Depreciation (1,70,000) (2,82,500)
7,50,000 6,37,500
Investment at Cost - 5,30,000
Current Assets
Inventory 4,12,300 6,90,000
Trade Receivable 2,95,000 3,43,000
Prepaid expenses 78,000 65,000
Cash at Bank 52,700 42,500
15,88,000 23,08,000
Other Information:
(1) MNT Ltd. is a subsidiary of LTC Ltd.

(2) LTC Ltd. values inventory on FIFO basis, while MNT Ltd. used LIFO basis. To bring MNT Ltd.’s
inventories values in line with those of LTC Ltd., its value of inventory is required to be reduced by Rs
5,000 at the end of 2017-2018 and increased by Rs 12,000 at the end of 2018-2019. (Inventory of 2017-
18 has been sold out during the year 2018-19)
(3) MNT Ltd. deducts 2% from Trade Receivables as a general provision against doubtful debts.
(4) Prepaid expenses in MNT Ltd. include Sales Promotion expenditure carried forward of Rs 25,000 in
2017-18 and 12,500 in 2018-19 being part of initial Sales Promotion expenditure of Rs 37,500 in 2017-
18, which is being written off over three years. Similar nature of Sales Promotion expenditure of LTC
Ltd. has been fully written off in 2017-18.
Restate the balance sheet of MNT Ltd, as on 31st March, 2019 after considering the above information for the
purpose of consolidation. Such restatement is necessary to make the accounting policies adopted by LTC
Ltd. and MNT Ltd. uniform.
17. On 31st March, 1989, the Balance Sheets of H Ltd. and S Ltd. stood as follows:
H Ltd. S Ltd.
(Rs. in 000’s)
Liabilities
Equity Share of Rs. 100 each fully paid 1,000 800
Reserve and Surplus
General Reserve 200 200
Profit and Loss Account 400 300
Other Liability 200 200
1,800 1,500
Assets:
Fixed Assets 500 400
Investment in S Ltd. 500 ---
Current Assets 800 1100
1,800 1,500
The following further information is furnished:-
(1) H Ltd. acquired 3,000 shares in S Ltd. on 1-4-88 when the Reserves and Surplus of S Ltd. was as under:
(a) General Reserve Rs. 5,00,000
(b) Profit & Loss Account- Credit Balance Rs. 2,00,000
(2) On 1-10-88 S Ltd. issued 3 fully paid up shares for every 5 shares held, as bonus shares out of pre-
acquisition General Reserve. No entry is made in the books of H Ltd. for the receipt of these bonus
shares.
(3) On 30-6-88 S Ltd. declared 20% dividend, out of pre-acquisition profit and H Ltd. credited the receipt of
Dividend to its Profit & Loss Account.
(4) S Ltd. owed H Ltd. on 31-3-89 Rs. 1,00,000 for purchase of stock from H Ltd. The entire stock is held
by S Ltd. on 31-3-89. H Ltd. made a profit of 25% on cost.
4.7
(5) H Ltd. transferred for cash payment a machine to S Ltd. for Rs. 80,000. The book value of the machine
to H Ltd. was Rs. 60,000.
Prepare Consolidated Balance Sheet as at 31st March, 1989. Adjustment for depreciation on machine
transferred by H Ltd. to S Ltd. is to be ignored.
Answer:- Minority Intt. 5,20,000. Capital reserve 2,20,000
18. The following summarised Balance Sheets of H Ltd. and its subsidiary S Ltd. were prepared as on 31st
March, 2017:
H Ltd. (₹) S Ltd. (₹)
Equity and Liabilities
Shareholders, Funds
Equity Share Capital (fully paid up shares of ₹ 10 each) 12,00,000 2,00,000
Reserves and Surplus
General Reserve 4,35,000 1,55,000
Profit and Loss Account 2,80,000 65,000
Current Liabilities
Total 22,37,000 5,43,000
Assets
Non-Current Assets
Fixed Assets
Machinery 6,40,000 1,80,000
Furniture 3,75,000 34,000
Non-Current Investments
Shares in S Ltd. - 16,000 shares @ ₹ 20 each 3,20,000 -
Current Assets
Inventories 2,68,000 62,000
Trade Receivables 4,70,000 2,35,000
Cash and Bank 1,64,000 32,000
Total 22,37,000 5,43,000
H Ltd. acquired the 80% shares of S Ltd. on 1st April, 2016. On the date of acquisition, General Reserve and
Profit Loss Account of S Ltd. stood at ₹ 50,000 and ₹ 30,000 respectively.
Machinery (book value ₹ 2,00,000) and Furniture (book value ₹ 40,000) of S Ltd. were revalued at ₹
3,00,000 and ₹ 30,000 respectively on 1st April,2016 for the purpose of fixing the price of its shares (rates
of depreciation computed on the basis of useful lives : Machinery 10% and Furniture 15%). Trade Payables
of H Ltd. include ₹ 35,000 due to S Ltd. for goods supplied since the acquisition of the shares. These goods
are charged at 10% above cost. The inventories of H Ltd. includes goods costing ₹ 55,000 purchased from S
Ltd.
You are required to prepare the Consolidated Balance Sheet as at 31 st March, 2017
19. The Balance Sheets of Sun Ltd. and Moon Ltd. as on 31.3.2000 are given below:
Liability Sun Ltd. Moon Ltd. Assets Sun Ltd. Moon Ltd.
Share Capital (Rs. 10) 1,20,000 1,00,000 Fixed Assets 44,000 84,000
General Reserve 20,000 36,000 Investment in Moon Ltd.
Profit and Loss Account 12,000 20,000 8,000 shares @ Rs. 11 88,000
Bills Payable 2,000 5,000
Sundry Creditors 4,000 7,000 Sundry Debtors 6,000 15,000
Contingent Liability Bills Receivable 4,000 16,000
Sun Ltd.: Bills Stock in Trade 10,000 40,000
Discounted not yet Cash at Bank 6,000 13,000
matured Rs. 2,500
1,58,000 1,68,000 1,58,000 1,68,000
4.8
Shares were purchased on 1.4.1997. When the shares were purchased General Reserve andProfit and Loss
Account of Moon Ltd. stood at Rs. 30,000 and Rs. 16,000 respectively. Dividends have been paid @
10% every year after acquisition of shares, first dividend being paid out of pre-acquisition profits. No
dividend has been proposed for 1999-2000 as yet and no provision need be made in consolidated Balance
Sheet. Sun Ltd. has credited all dividends received to Profit and Loss Account.
On 31.3.2000, Bonus shares has been declared by Moon Ltd. @ 1 fully paid share for 5 held, but no effect
has been given to that in the above accounts. The Bonus was declared out of profits earned prior to
1.4.1997 from General Reserve.
When the shares were purchased, agreed valuations of Fixed Assets of Moon Ltd. Was Rs. 1,08,000 although
no effect has been given thereto in accounts.
Depreciation has been charged @ 10% p.a. on the book value as on 1.4.1997, (on straight line method),
there being no addition or sale since then.
Out of Current Profits, Rs. 2,000 has been transferred to general reserve every year. Bills receivable of Sun
Ltd. include Rs. 2,000 bills accepted by Moon Ltd. and bills discounted by Sun Ltd., but not yet matured
include Rs. 1,500 accepted by Moon Ltd. Sundry creditors of Sun Ltd. include Rs. 2,000 due to Moon
Ltd. whereas Sundry Debtors of Moon Ltd. include Rs. 4,000 due from Sun Ltd. It is found that Sun Ltd.
has remitted a cheque of Rs. 2,000, which has not yet been received by Moon Ltd.
Prepare consolidated Balance Sheet as at 31.3.2000 of Sun Ltd. and its Subsidiary.
20. The Balance Sheet of Golden and Silver Limited as on 31.3.2006 are given below:
Liability Golden Silver Assets Golden Silver
Ltd. Ltd. Ltd. Ltd.
Equity share Capital 2,40,000 2,40,000 Fixed Assets 88,000 1,68,000
General reserve 40,000 32,000 Investment 1,80,000 10,000
Profit and Loss Account 24,000 39,000 Sundry debtors 12,000 30,000
Bills payable 4,000 10,000 Bills receivable 8,000 32,000
Sundry creditors 8,000 15,000 Stock in trade 20,000 80,000
Cash at bank 8,000 16,000
3,16,000 3,36,000 3,16,000 3,36,000
Note:- Contingent liability of Golden Ltd.: Bills discounted not yet matured at Rs.5,000.
(i) On 1.10.2003, Golden Ltd. acquired 16,000 shares of Rs.10 each at the rate of Rs.11 per share.
(ii) Balances to General reserve and Profit and Loss account of Silver Ltd. stood on 1.4.2003 at
Rs.60,000 and Rs.32,000 respectively.
(iii) Dividends have been paid @ 10% for each of the years 2003-04 and 2004-05. Dividend for the year
2003-04 was paid out of the pre-acquisition profits. No dividend has been proposed for the year
2005-06 as yet and no provision need to be made in consolidated Balance Sheet. Golden Ltd. has
credited all dividends received to profit and Loss account.
(iv) On 1.3.2006, bonus shares were issued by Silver Ltd. at the rate of one fully paid share for every five
held and effect has been given to that in the above accounts. The bonus was declared from general
reserves from out of profits earned prior to 1.4.2003.
(v) On 1.10.2003, Fixed assets was revalued at Rs.2,16,000, but no adjustment had been made in the
books.
(vi) Depreciation had been charged @ 10% p.a. on the book value as on 1.4.2003 (on straight line
method), there being no addition or sale since then.
(vii) Out of Current profits Rs.4,000 have been transferred to General reserve every year.
(viii) Bills receivable of Golden Ltd. include Rs.4,000 bills accepted by Silver Ltd. Bills
discounted by Golden Ltd., but not yet matured include Rs.3,000 accepted by Silver Ltd.
(ix) Sundry creditors of Golden Ltd. include Rs.4,000 due to Silver Ltd. Sundry debtors of Silver Ltd.
include Rs.8,000 due from Golden Ltd.
(x) It is found that Golden Ltd. has remitted a cheque of Rs.4,000, which has not yet been received by
Silver Ltd.
Prepare consolidated Balance Sheet as at 31.3.2006 of Golden Ltd. and its Subsidiary.
4.9
1. Minority interest should be presented in the consolidated balance sheet

(a)As a part of liabilities
(b)As a part of equity of the parent’s shareholders
(c)Separately from liabilities and the equity of the parent’s shareholders
2. Minority of the subsidiary is entitled to

(a)Capital profits of the subsidiary company
(b)Revenue profits of the subsidiary company
(c)Both capital and revenue profits of the subsidiary company
3. In consolidation of accounts of holding and subsidiary company _________ is eliminated in full.

(a)Current liabilities of subsidiary company
(b)Reserves and surplus of both holding and subsidiary company
(c)Mutual indebtedness
4. In consolidated balance sheet, the share of the outsiders in the net assets of the subsidiary must be shown as
(a)Minority interest
(b)Capital reserve
(c)Current liability
5. Taxation provision made by the subsidiary company will appear in the consolidated balance sheet as an item
of
(a)Current liability.
(b)Revenue profit.
(c)Capital profit.
6. Issue of bonus shares by the subsidiary company out of capital profits will
(a)Decrease cost of control.
(b)Increase cost of control.
(c)Have no effect on cost of control
7. Dividend paid by subsidiary to its parent, out of capital profits, should be credited by the parent company in
its
(a)Profit and loss account.
(b)Dividend account.
(c)Shares invested in subsidiary account.
Answers: 1. (c); 2. (c); 3. (c); 4. (a); 5. (a); 6. (c); 7. (c)
4.10
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
SUMMARY NOTES
4.11
SUMMARY NOTES
4.12
Chapter 5:Amalgamation Absorbtion & Reconstruction CA P. S. Beniwal (9990301165)
Q1. The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31 st March, 2002 was as under:
Hari Ltd. Vayu Ltd.
(Rs.) (Rs.)
Assets:
Goodwill 50,000 25,000
Building 3,00,000 1,00,000
Machinery 5,00,000 1,50,000
Stock 2,50,000 1,75,000
Debtors 2,00,000 1,00,000
Cash at Bank 50,000 20,000
Preliminary Expenses 30,000 10,000
13,80,000 5,80,000
Liabilities:
Share Capital:
Equity Shares of Rs. 10 each 10,00,000 3,00,000
9% Preference Shares of Rs. 100 each 1,00,000 ---
10% Preference Shares of Rs. 100 each --- 1,00,000
General Reserve 1,00,000 80,000
Retirement Gratuity fund 50,000 20,000
Sundry Creditors 1,30,000 80,000
13,80,000 5,80,000
Hari Ltd. absorbs Vayu Ltd. on the following terms:

1. 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of
Hari Ltd.
2. Goodwill of Vayu Ltd. is valued Rs. 50,000, Building are valued at Rs. 1,50,000 and the Machinery at
Rs. 1,60,000.
3. Stock to be taken over at 10% less value and Reserve on Bad and Doubtful Debts to the created @
7.5%.
4. Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ Rs. 10.50 each.
Prepare necessary Ledger Account to close the books of Vayu Ltd. and show the acquisition entries in the
books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31 st March, 2002.
Q2. Balance Sheet of Ram Ltd. & Sham Ltd. is given as on 31st Mach 2002.
Ram Sham Ram Sham
Ltd. Ltd. Ltd. Ltd.
Equity Share Fixed Assets 80,000 70,000
Capital of Books Debts 30,000 40,000
Rs. 10 each 1,00,000 50,000 Stock 20,000 10,000
Reserve & Cash in hand 10,000 5,000
Surplus 10,000 20,000
Debentures 20,000 40,000
Creditors 10,000
Share premium 15,000
1,40,000 1,25,000 1,40,000 1,25,000
Ram Ltd. Took over Sham Ltd. On following conditions:

(1) That necessary shares would be issued to old share holders in accordance with intrinsic value of
shares.
(2) That fixed assets has market value of Rs. 75,000 and 80,000 respectively, Debtors are good, Stock is
shown at cost price whose gross realizable value Rs. 25,000 and 12,000 respectively.
(3) Debentures of Sham Ltd. were to be issued equivalent Debentures at premium of 10%
Calculate Purchase Consideration
5.1
Q3. Sham Ltd. Balance Sheet as on 31st March, 2002 is as follows:

Equity Share Capital of Fixed Assets 1,00,000
Rs. 10 each 1,50,000 Current Assets 2,00,000
9% Debenture 1,00,000
Current Liabilities 50,000
3,00,000 3,00,000
Ram Ltd. agreed to take over Sham Ltd.
(1) New company will issue necessary equity shares to old company’s share holders.
(2) 10,000 11% debentures of Rs. 10 each were issued at Rs. 12 each for 9% Debenture holders.
(3) Current Liabilities were also taken over.
Calculate Purchase Consideration assuming intrinsic value of old & new company are Rs. 20 and 15 per
share respectively.
Q4. The Balance Sheet as on 31st March, 2002 of X Ltd. and Y Ltd. are as under:
X Ltd.

Share Capital: Fixed Assets:
Authorized and Subscribed Buildings 20,00,000
60,000 equity shares of Machineries 26,00,000
Rs. 100 each fully paid 60,00,000 Furniture 40,000
Reserve and Surplus: Current Assets:
Profit and Loss Account 4,80,000 Debtors 9,20,000
Current Liabilities & Cash in Hand 2,80,000
Provision: Bank Balance 8,00,000
Creditors 9,60,000
82,40,000 82,40,000
Y Ltd.

Share Capital: Goodwill 4,00,000
Authorized and Subscribed Machineries 16,80,000
20,000 equity shares of Furniture 20,000
Rs. 100 each fully paid 20,00,000 Stock 7,20,000
Reserve and Surplus: Debtors 7,20,000
Capital Reserve 2,00,000 Cash in Hand 20,000
General Reserve 1,00,000 Bank Balance 1,60,000
Profit and Loss Account 1,40,000 Expenditure on
Unsecured Loan: New Project 3,00,000
12% Debentures 12,00,000
Current Liabilities & Provision:
Creditors 3,80,000
40,20,000 40,20,000
Y Ltd. was absorbed by X Ltd. on 1st April, 2002, on the following terms:
(a) Fixed Assets other than Goodwill to be valued at Rs. 20,00,000 including Rs. 24,000 for furniture.
(b) Stock to be reduced by Rs. 80,000 and Debtors by 5 per cent.
(c) X Ltd. to assume liabilities and to discharge the 12% Debentures by issue of 11% Debentures of the
same value.
(d) The new project to be valued at Rs. 3,80,000.
5.2
(e) The Shareholders of Y Ltd, to receive cash payment of Rs. 30 per share plus four equity shares in X
Ltd. for every five shares held in Y Ltd.
(f) Both the companies to declare and pay dividend of 6% prior to absorption.
(g) Expenses of liquidation of Y Ltd. are to be reimbursed by X Ltd. Rs. 24,000.
Draft journal entries recording the scheme in the books of Y Ltd. and prepare the balance Sheet of X Ltd.
after absorption assuming that X Ltd.’s authorized capital has been increased to Rs. 80,00,000.
Ans.: Purchase Consideration 22,00,000; Total of B/S 1,10,60,000 Realization Loss 1,20,000
Q5. Exe Limited is absorbed by Wye Limited. Given below are the Balance Sheet of the two Companies
prepared after revaluation of their assets on a uniform basis.
Balance Sheet of Exe Limited

Authorized Share Capital: Sundry Assets
16,85,000
9,000 Equity Shares of Cash in hand 3,500
Rs. 150 each 13,50,000
Paid-up Share Capital:
9,000 Equity Share of
Rs. 150 each Rs. 135 paid-up 12,15,000
General Reserve 4,03,500
Profit and Loss A/c 15,000
16,88,500 16,88,500
Balance Sheet of Wye Limited

Authorized Share Capital: Sundry Assets 43,57,500
60,000 Equity Shares of Cash in hand 27,500
Rs. 75 each 45,00,000
Paid-up Share Capital:
40,000 Equity Share of
Rs. 75 paid-up 30,00,000
General Reserve 12,85,000
Profit and Loss A/c 35,000
43,85,000 43,85,000
The Holder of every three Shares in Exe Limited was to receive five Shares in the Wye Limited plus as
much cash as is necessary to adjust the rights of shareholders of both the Companies in accordance with
the intrinsic values of the share as per the respective balance Sheets.
Pass necessary journal entries in the books of Wye Limited and prepare the Balance Sheet giving effect to
the above scheme of absorption. Entries are to be made at par value only.
Ans.: Purchase Consideration Rs. 11,38,500; Realization loss 4,95,000; Balance Sheet 60,60,000;
Capital Reserve 4,95,000
5.3
Q6. Star and Moon had been carrying on business independently. They agreed to amalgamate and from a new
company Neptune Ltd. with an authorized share capital of Rs. 2,00,000 divided into 40,000 equity shares
of Rs. 5 each.
On 31st December, 2002, the respective Balance Sheets of Star and Moon were as follows:
Star Rs. Moon Rs.
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
Loss: Current Liabilities 2,98,500 90,125
Representing Capital 1,82,500 1,76,250
(a) Revalued figures of Fixed and Current Assets were as follows:
Star Rs. Moon Rs.
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
(b) The debtors and creditors – include Rs. 21,675 owed by Star to Moon.
The purchase consideration is satisfied by issue of the following shares and debentures:
(i) 30,000 equity shares of Neptune, Ltd., to star and Moon in the proportion to the profitability of their
respective business based on the average net profit during the last three years which were as follows:
Star Rs. Moon Rs.
2000 Profit 2,24,788 1,36,950
2001 (Loss) / Profit (1,250) 1,71,050
2002 Profit 1,88,962 1,79,500
(ii) 15% debentures in Neptune Ltd. at par to provide an income equivalent to 8% return on capital
employed in their respective business as on 31st December, 2002 after revaluation of assets.
You are requested to:
(1) Compute the amount of debentures and shares to be issued to star and Moon.
(2) A Balance Sheet of Neptune Ltd., showing the position immediately after amalgamation.
Q7. The following were the Balance Sheet of P Ltd. and V Ltd. As at 31st March, 2002:
Liabilities P Ltd. V Ltd.
Rs. In lakhs Rs. In lakhs
Equity shares Capital (Fully paid shares
of Rs. 10 each) 15,000 6,000
Securities Premium 3,000
Foreign Project Reserve 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures 1,000
Bills Payable 120
Sundry Creditors 1,080 463
Sundry Provisions 1,830 702
33,400 12,500
Assets P Ltd. V Ltd.
Rs. In lakhs Rs. In lakhs
Land and Buildings 6,000
Furniture, Fixtures and Fittings 2,304 1,700
Stock 7,862 4,041
Debtors 2,120 1,020
Cash at Bank 1,114 609
Bills Receivable 80
Cost of Issue of Debentures 50
33,400 12,500
5.4
All the bills receivable held by V Ltd. were P. Ltd.’s acceptances.

On 1st April, 2002 P Ltd. took over V Ltd. in an amalgamation in the nature of merger. It was agreed that
in discharge of consideration for the business. P Ltd. Would allot three fully paid equity shares of Rs. 10
each at par for every two shares held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be
converted into 13% debentures in P Ltd. of the same amount and denomination.
Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.
You are required to:
(i) Pass Journal entries in the books of P Ltd., and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger.
Ans.: PC 9,000 lakhs; Realization Loss 1,285 lakhs
Q8. Super Express Ltd. and Fast Express Ltd. were in company business. They decided to form a new
company named Super Fast Express Ltd. The balance sheets of both the companies were as under:
Super Express Ltd.
Balance Sheet as at 31st December, 2002
Liabilities Rs. Assets. Rs.
20,000 Equity Shares Building
10,00,000
of Rs. 100 each 20,00,000 Machinery 4,00,000
Provident Fund 1,00,000 Stock 3,00,000
Sundry Creditors 60,000 Sundry Debtors 2,40,000
Insurance Reserve 1,00,000 Cash at Bank 2,20,000
Cash in Hand 1,00,000
22,60,000 22,60,000
Fast Express Ltd.

Liabilities Rs. Assets. Rs.
10,000 Equity Shares Goodwill 1,00,000
of Rs. 100 each 10,00,000 Building 6,00,000
Employees Profit sharing Machinery 5,00,000
account 60,000 Stock 40,000
Sundry Creditors 40,000 Sundry Debtors 40,000
Reserve Account 1,00,000 Cash at Bank 10,000
Surplus 1,00,000 Cash in Hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company their book values.
The companies were allotted equity shares of Rs. 100 each in lieu of purchase consideration.
Prepare opening balance sheet of Super Fast Express Ltd.
Ans.: Total of Balance Sheet 36,60,000; Purchase Consideration Rs. 33,00,000.
Q9. Given below are the Balance Sheet of two companies as on 31st December, 2000;
Anand Ltd.
Share Capital: Goodwill 1,50,000
Rs. 10 shares fully paid 15,00,000 Freehold Property 4,00,000
Share Premium Account 4,500 Plant & Machinery 3,50,000
Profit and Loss Account 1,65,650 Sundry Debtors 2,58,500
8% Debentures 3,50,000 Bank 3,37,500
21,78,000 21,78,000
5.5
Bhanu Ltd.
Share Capital Goodwill 50,000
Rs. 10 shares fully paid 3,90,000 Freehold Property 1,80,000
10% Debentures 70,000 Plant & Machinery 1,00,000
Bank Overdraft 6,000 Stock 1,62,000
Sundry Creditors 2,57,000 Sundry Debtors 95,000
Profit & Loss A/c 1,36,000
7,23,000 7,23,000
The two companies decided to amalgamate, as on 31st December, 2000, and a new company called Anand
Bhanu Ltd. was formed with an authorized capital of Rs. 25,00,000 in shares of Rs. 10 each. The terms of
amalgamation were as follows:
Anand Ltd.:
(i) 6 shares of Rs. 10 each fully paid in the new company in exchange for every 5 shares in Anand Ltd.
and Rs. 10,000 in cash;
(ii) The debenture-holders were to be allotted such debentures in the new company bearing interest at 7%
per annum as would bring the same amount of interest.
Bhanu Ltd.:
(i) 1 share of Rs. 10 each fully paid in the new company in exchange for every 3 shares I Bahnu Ltd., and
Rs. 5,000 in cash;
(ii) Debenture-holders were to be allotted such debentures in the new company bearing interest at 7% per
annum as would bring the same amount of interest.
The new company took over all the assets and liabilities of the two existing companies.
Show Journal entries in the books of Anand Bhanu Ltd., giving effect to the arrangement and prepare its
Opening Balance Sheet.
Ans.: Anand Ltd. 18,10,000; R.P. 39,850 Bhanu Ltd. 1,35,000; R.L. 1,19,000 Balance Sheet 27,50,850
Q10. X Ltd. is absorbed by Y Ltd. Given below are the Balance Sheets of the two companies taken after
revaluation of their assets on an uniform basis:
X Ltd. (Rs.) Y Ltd. (Rs.)
Authorised Share capital:
9,000 shares of Rs. 300 each 27,00,000
40,000 shares of Rs. 180 each 72,00,000
Paid-up capital:
9,000 shares Rs. 270 per share paid-up 24,30,000
40,000 shares Rs. 150 per shares paid-up 60,00,000
Creditors 1,10,000 1,30,000
Profit and Loss Account 30,000 70,000
33,77,000 87,70,000
Sundry Assets 33,70,000 87,15,000
Cash at Bank 7,000 55,000
33,77,000 87,70,000
The holder of every three shares in X Ltd. were to receive 5 shares in Y ltd. plus as much cash as is
necessary to adjust the rights of shareholders of both the companies in accordance with the intrinsic values
of the shares as per the respective Balance Sheets.
Pass the necessary Journal entries in the books of Y Ltd. and prepare the Balance Sheet giving effect to
the above scheme of absorption.
Ans.: Balance Sheett 1,21,20,000; PC 32,67,000; Int. X 363; Y 216;
5.6
Q11. The Balance Sheet of Anand Ltd. and Dany Ltd. as at 31st December, 2000 were as follows:
Anand Dany Anand Dany
Ltd. Ltd. Ltd. Ltd.
Equity Fixed Assets
Shares of 3,00,000 2,00,000 (other than
Rs. 10 each goodwill) 2,50,000 1,75,000
Reserves 75,000 50,000 Stock in trade 47,500 37,500
Profit & Debtors 70,000 50,000
Loss A/c 32,500 27,500 Cash and
Sundry Bank 58,750 30,000
Creditors 18,750 15,000
4,26,250 2,92,500 4,26,250 2,92,500
Anand Ltd. took over and absorbed Deny Ltd., as on 1st July, 2001. No Balance Sheet of Dany Ltd., were
prepared on the date of take over. But the following information is made available to you.:
(i) In the six months ended 30th June, 2001, Dany Ltd., made net profits of Rs. 30,000 after providing for
depreciation at 10% per annum on fixed assets.
(ii) Anand Ltd., during that period had made net profits of Rs. 72,500 after providing fir depreciation at
10% per annum on the fixed assets.
(iii) Both the companies had distributed dividends of 10% on 1st April, 2001.
(iv) Goodwill of Dany Ltd., on the date of take over, was estimated at Rs. 12,500 and it was agreed that
the stocks of Dany Ltd., would be appreciated by Rs. 7,500 on the date of take over.
(v) Anand Ltd. to issue shares at par to shareholders of Dany Ltd., on the basis of the intrinsic value of its
shares on the date of take over.
Draft the Balance Sheet of Anand Ltd. after absorption.
Q12. Balance Sheet of X Ltd. as on 31st March, 1995:

Liabilities Rs. (000) Assets Rs. (000)
Share Capital: Land & Building 50,00
Equity Shares of Rs. 10 each 75,00 Plant & Machinery 45,00
14% Preference Shares of Furniture 10,50
Rs. 100 each 25,00 Investments 5,00
General Reserve 12,50 Stock 23,00
12% Debentures 40,00 Debtors 24,00
Sundry Creditors and other Cash & bank Balance 15,00
Current liabilities 20,00
172,50 172,50
Other Information:
(i) Y Ltd. takes over X Ltd. on 1st April, 1995.

(ii) Debenture holders of X Ltd. are discharged by Y Ltd. at 10% premium by issuing 15% own
debentures of Y Ltd.
(iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by issuing necessary
number of 15% Preference Shares of Y Ltd. (Face value Rs, 100 each).
(iv) Intrinsic value per share of X Ltd. is Rs. 20 and that of Y Ltd. Rs. 30 Y Ltd. will issue equity shares to
satisfy the equity shareholders of X Ltd. on the basis of intrinsic value. However, the entry should be
made at par value only. The nominal value of each equity share of Y Ltd. is Rs. 10.
Compute the purchase consideration. Ans.: Rs. (‘000) 8,000.
5.7
Q13. Following balance sheets of X Ltd. and Y Ltd.

Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000
Equity Share Capital Land & Building 2,500 1,550
Rs. 10 each) 50,00 30,00 Plant & Machinery 3,250 1,700
14% Pref. Share Furniture & Fittings 575 350
Capital (Rs. 100 each) 22,00 17,00 Investments 700 500
General Reserve 5,00 2,50 Stock 1,250 950
Export Profit Reserve 3,00 2,00 Debtors 900 1,030
Investment Cash & Bank 725 520
Allowance
Reserve --- 1,00
Profit & Loss A/c 7,50 5,00
13% Debentures 5,00 3,50
(Rs. 100 each)
Trade Creditors 4,50 3,50
Other Current
Liabilities 2,00 1,50
99,00 66,00 99,00 66,00
X Ltd. takes over Y Ltd. on 1st April, 1995. X Ltd. discharges the purchase consideration as below:
(i) Issued 3,50,000 equity shares of Rs. 10 each at par to the equity share holders of Y Ltd.
(ii) Issued 15% preference shares of Rs. 100 each to discharge the preference shareholders of Y Ltd. at
10% premium.
The debentures of Y Ltd. will be converted into equivalent number of debentures of X Ltd. The statutory
reserves of Y Ltd. are to be maintained for 2 more years.
(a) The amalgamation is in the nature of merger.
(b) The amalgamation is in the nature of purchase.
Q14. S. Ltd. is absorbed by P. Ltd. The balance sheet of S. Ltd. is as under:

Balance Sheet
Rs. Rs.
Share Capital: Sundry Assets 13,00,000
2,000 7% Preference
shares of Rs. 100 each
(Fully paid-up) 2,00,000
5,000 Equity shares of Rs.
100 each (Fully paid-up) 5,00,000
Reserves 3,00,000
Trade creditors 1,00,000
13,00,000 13,00,000
P Ltd. has agreed:
(a) To issue 9% Preference shares of Rs. 100 each, in the ratio of 3 shares of P. Ltd. for 4 preference
shares in S. Ltd.
(b) To issue to the debenture holders in S. Ltd. 8% Mortgage Debentures at Rs. 96 in lieu of 6%
Debentures in S. Ltd. which are to be redeemed at a premium of 20%
(c) To pay Rs. 20 per share in cash and to issue six equity shares of Rs. Rs. 100 each (market value Rs.
125) in lieu of every five shares held in S. Ltd., and
(d) To assume the liability to trade creditors.
Prepare Books of S Ltd.
Ans.: R.P. 50,000; P.C. 10,00,000;
5.8
Q15.Wye Ltd. acquires the business of Z Ltd. Whose balance sheet on 31st December, 1996 is as under:
Share Capital divided into Goodwill 2,00,000
Share of Rs. 100 each Land & Building 4,00,000
6% Preference share Plant and Machinery 6,00,000
capital 4,00,000 Patents 50,000
Equity share capital 8,00,000 Stock 1,50,000
Capital Reserve 1,00,000 Books Debts 1,80,000
Profit & Loss A/c 50,000 Cash at Bank 70,000
6% Debentures 2,00,000 Underwriting
Interest outstanding on Commission 40,000
Above 12,000
Workmen’s Compensation
Reserve (Expected liability
Rs. 5,000) 8,000
Trade Creditors 1,20,000
16,90,000 16,90,000
Wye Ltd. was to take over all assets (except cash) and liabilities (except for interest due on debentures)
and to pay following amounts:
(i) Rs. 2,00,000 7% Debentures (Rs. 100 each) in Wye Ltd. for the existing debentures in Zed Ltd.; for
the purpose, each debenture of Wye Ltd. is to be treated as worth Rs. 105.
(ii) For each preference in Zed Ltd. Rs. 10 in cash and one 9% preference share of Rs. 100 each Wye Ltd.
(iii) For each equity share in Zed Ltd. Rs. 20 in cash and one equity share in Wye Ltd. Rs. 100 each having
the market value of Rs. 140.
(iv) Expense of liquidation of Zed Ltd. are to be reimbursed by Wye Ltd. to the extent of Rs. 10,000.
Actual expenses amounted to Rs. 12,500.
Wye Ltd. valued Land and Building at Rs. 5,50,000 Plant and Machinery at Rs. 6,50,000 and patents at
Rs. 20,000.
Ans.: Purchase Consideration 17,20,000;
Q16. K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two
companies on the date of amalgamation was as under:
K Ltd. L Ltd. K Ltd. L Ltd.
Rs. Rs. Rs. Rs.
Share Capital: Good will 80,000
Equity shares Land &
of Rs. 100 Building 4,50,000 3,00,000
each 8,00,000 3,00,000 Plant &
7% Machinery 6,20,000 5,00,000
Preference Furniture
Share and Fittings 60,000 20,000
of Rs. 100 Sundry
each 4,00,000 3,00,000 Debtors 2,75,000 1,75,000
5% Stores &
Debentures 2,00,000 --- Stock 2,25,000 1,40,000
General Cash at
Reserve --- 1,00,000 Bank 1,20,000 55,000
P & L A/c 3,71,375 97,175 Cash in
Sundry hand 41,375 17,175
Creditors 1,00,000 2,10,000
Secured Loan --- 2,00,000
19,31,375 12,07,175 19,31,375 12,07,175
5.9
The terms of amalgamation are as under:

(A)
(i) The assumption of liabilities of both the Companies.
(ii) Issue of 5 Preference shares of Rs. 20 each in LK Ltd. @ Rs. 18 paid up at premium of Rs. 4 per
share for each preference share held in both the companies.
(iii) Issue of 6 Equity shares of Rs. 20 each in LK Ltd. @ Rs. 18 paid up at a premium of Rs. 4 per share
for each equity share held in both the Companies. In addition, necessary cash should be paid to the
Equity Shareholders of both the Companies as is required to adjust the rights of shareholders of both
the Companies in accordance with the intrinsic value of the shares of both the Companies.
(iv) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5%
debentures in K Ltd.
(B) (i) The assets and liabilities are to be taken at books values except stock and debtors for which
provisions at 2% and 2 ½% respectively to be raised.
(ii) The sundry debtors of K Ltd. include Rs. 20,000 due from L Ltd.
(C) The LK Ltd. is to issue 15,000 new equity shares of Rs. 20 each, Rs. 18 paid up at premium of Rs. 4
per share so as to have sufficient working capital. Prepare ledger accounts in the books of K Ltd. And
L Ltd. to close their books.
Ans.: P.C. 15,60,000, 7,90,000; Realization Loss 51,375, 37,175
Q17. P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to the
combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and undertakings
of the two companies in exchange for share in PQ Ltd.
The Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date of amalgamation) are given
below:
Summarised balance sheet as at 31-03-2017
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
₹ ₹ ₹ ₹
Equity & liabilities: Assets:
Shareholders Non-current Assets:
Fund
a. Share Capital 6,00,000 8,40,000 Fixed Assets 7,20,000 10,80,000
(excluding Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current Liabilities a. inventories 3,60,000 6,60,000
Bank Overdraft - 5,40,000 b. Trade receivables 4,80,000 7,80,000
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000
The consideration was to be based on the net assets of the companies as shown in the above Balance
Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted
average of net profits for the three years ended 31st March, 2017. The weights for this purpose for the
years 2014 -15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.
The profit had been:
2014-15 ₹ 3,00,000; 2015-16 ₹ 5,25,000 and 2016-17 ₹ 6,30,000.
The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed
net assets value of these companies.
In order to raise working capital, PQ Ltd. increased its authorized capital by ₹ 12,00,000 and proceeded to
issue 72,000 shares of ₹ 10 each at the same rate of premium as issued for discharging purchase
consideration to P Ltd. and Q Ltd.
(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording its journal entries.
(May 17)
5.10
Q18. The Balance Sheets of B Ltd. and C Ltd., as on 31st March, 2000 were as follows:
B. C. B. C.
Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.
50,000 12% Preference Goodwill -- 150
Shares of Rs. 100 each 5,000 -- Land & Building 7,400 --
15,00,00 Equity 15,000
Shares of Rs. 10 each -- 4,000 Plant & Machinery 16,380 --
4,00,000 Equity Shares
of Rs. 10 each
Capital Reserve 4,800 -- Furniture 270 500
General Reserve 3,500 1,000 Patents 600 --
Profit & Loss Account 600 150 Motor Vehicles -- 705
Creditors 700 250 Stock 4,050 2,600
Debtors 800 1,290
Cash at Bank 100 155
29,600 5,400 29,600 5,400
A new company, D Ltd. was formed with an authorized capital of Rs. 4 crore divided into 50,000
preference shares of Rs. 100 each and 35,00,000 equity shares of Rs. 10 each, B Ltd. and C Ltd. merged
into D Ltd. on the following terms:
(i) D Ltd. allotted to B Ltd., 50,000 13% fully paid preference shares and 20 lakh fully paid equity shares
to satisfy the claims of B Ltd.’s preference shareholders and equity shareholders respectively.
(ii) D. Ltd. allotted to C. Ltd. 4,40,000 fully paid equity shares to be distributed among C Ltd.’s
shareholders in full satisfaction of their claims.
(iii) Mr. D. who mooted the scheme was allotted 5,000 fully paid equity shares in consideration of his
services. The company debited the amount to Preliminary Expenses Account.
(iv) Expenses on the liquidation of B. Ltd. and C. Ltd. totaled Rs. 3,000 and were borne by D Ltd.
D. Ltd. made a public issue of 2 lakh equity shares of Rs. 10 each at a premium of Rs. 2 per share. The
issue was underwritten at a commission of 2½% on the issue price of the shares. The issue was fully
subscribed for by the public. D Ltd. paid Rs. 85,000 in cash as its preliminary expenses.
Show important Ledger Account to close the books of B. Ltd., pass journal entries in the books of D ltd.,
prepare D. Ltd.’s Balance Sheet immediately after all the above mentioned transactions have been
recorded.
Ans.: P.C. 25,000 and 4,400.
Q19. Exe Limited was wound up on 31.3.2004 and its Balance Sheet as on that date was given below:
Share Capital : 1,20,000 Equity Fixed assets 9,64,000
Share of Rs. 10 each 12,00,000 Current assets
Reserves and Surplus Stock 7,75,000
Profit prior to Incorporation 42,000 Sundry Debtors 1,60,000
Contingency Reserve 2,70,000 Less: Provision for
Bad and doubtful debts 8,000
Profit and loss Accounts 2,52,000 Bills Receivable 30,000
Current Liabilities Cash at bank 3,29,000 12,86,000
Sundry creditors 2,26,000
Provisions:
Provision for Income tax 2,20,000
22,50,000 22,50,000
Wye Limited took over the following assets at values shown as under:
Fixed assets Rs. 12,80,000, Stock Rs. 7,70,000 and Bills Receivable Rs. 30,000.
Purchase consideration was settled by Wye Limited as under:
Rs. 5,10,000 of the consideration was satisfied by the allotment of fully paid 10% preference shares of Rs.
100 each. The balance was settled by issuing equity shares of Rs. 10 each at Rs. 8 per share paid up.
5.11
Sundry debtors realized Rs. 1,50,000. Bill payable was settled for Rs. 38,000. Income tax authorities fixed
the taxation liability at Rs 2,22,000.
Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to Rs
8,000.
a. Calculate the number of equity shares and preference shares to be allotted by Wye Limited in
discharge of purchase consideration.
b. Prepare the Realizations account, cash/bank account, Equity Shareholders account and Wye Limited.
c. Journal entries in the books of Wye Limited.
Ans.: Purchase Consideration 20,80,000; Realization Profit 3,16,000.
Q20. Y Ltd. decides to absorb X Ltd. The balance Sheet of X Ltd. is as follows:
Rs. Rs.
3,000 Equity shares of Sundry Net Assets 2,90,000
Rs. 100 each (Fully paid) 3,00,000 Profit and Loss
Preference shares 60,000 Account 70,000
3,60,000 3,60,000
Y Ltd. agrees to take over the net assets of X Ltd. An equity share in X Ltd., for purposes of absorption, is
valued @ Rs. 70. Y Ltd. agrees to pay Rs. 60,000 in cash for payment to preference shareholders and the
balance in the form of its equity shares valued at Rs. 120 each. Ans.: P.C. 2,70,000
Q21. The summarized Balance Sheet of M/s. A Ltd. and M/s. B Ltd. as on 31.03.2014 were as under:

Rs. Rs. Rs. Rs.
Share Capital : Freehold Property 3,00,000 2,40,000
40,000 Equity Shares Plant & 60,000 40,000
of Rs. 10 each, Fully Paid - Machinery 30,000 20,000
30,000 Equity Shares 4,00,000 Motor Vehicle 2,00,000 80,000
of Rs. 10 each, Fully Paid 3,00,000 Trade 2,30,000 1,80,000
General Reserve - - Receivables 80,000 40,000
Profit & Loss Account 2,40,000 50,000 Inventory
Trade Payables 50,000 1,30,000 Cash at Bank
6% Debentures 2,10,000 1,20,000
-
9,00,000 6,00,000 9,00,000 6,00,000
M/s. A Ltd. and M/s. B Ltd. carry on business of similar nature and they agreed to amalgamate. A new
Company, M/s. AB Ltd. is formed to take over the Assets and Liabilities of M/s. A Ltd. and M/s. B Ltd.
on the following basis:
Assets and Liabilities are to be taken at Book Value, with the following exceptions:
(a) Goodwill of M/s. A Ltd. and M/s. B Ltd. is to be valued at Rs. 1, 40,000 and 40,000 respectively.
(b) Plant & Machinery of M/s. A Ltd. are to be valued at Rs. 1, 00,000.
(c) The Debentures of M/s. B Ltd. are to be discharged by the issue of 6% Debentures of M/s. AB Ltd. at
a premium of 5%.

(i) Compute the basis on which shares in M/s. AB Ltd. will be issued to Shareholders of the existing
Companies assuming nominal value of each share of M/s. AB Ltd. is Rs. 10.
(ii) Draw up a Balance Sheet of M/s. AB Ltd. as on 1st April, 2014, when Amalgamation is completed.
(iii) Pass Journal entries in the Books of M/s. AB Ltd. for acquisition of M/s. A Ltd. & M/s. B Ltd.
(May 15)
5.12
Q22. The following is the Balance Sheet of ‘A’ Ltd. As on 31.3.2007:

14,000 Equity Shares of Sundry Assets 18,00,000
Rs. 100 each fully paid 14,00,000 Discount on issue of
General Reserve 10,000 Debentures 10,000
10% Debentures 2,00,000 Preliminary Expenses 30,000
Sundry Creditors 2,00,000 P & L A/c 60,000
Bill Payable 40,000
19,00,000 19,00,000
‘R’ Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under Net method
on the basis of the following:
The market value of 75% of the Sundry Assets is estimated to be 12% more than the books value and that
of the remaining 25% at 8% less than the book value. The liabilities at book values. There is an
unrecorded liability of Rs. 25,000.
Q23. P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both the
companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorised capital
of Rs 10,00,000 divided into 1,00,000 equity shares of Rs 10 each. The Balance Sheet of the companies as
on 31.03.2014 were as under:
P Limited
Balance sheet as at 31.03.2014
Particulars Amount Rs
I. Equity and liabilities
1.Shareholder’s fund
Share capital 1,40,000
Reserve and surplus
Profit and loss A/c 30,000
2.Non current liabilities
8% secured debentures
3.Current Liabilities 1,10,000
Trade Payables
54,000
Total 3,34,000
II. Assets
1.Non current assets
(a)Fixed assets
Building at cost less depreciation 1,00,000
Plant and machinery at cost less depreciation 25,000
2. Current assets
(a)Inventories 1,35,000
(b)Trade Receivables 44,000
(c) Cash at Bank 30,000
Total 3,34,000
Q Limited
Balance sheet as at 31.03.2014
Particulars Amount
Rs.
I. Equity and liabilities
1.Shareholder’s fund
Share capital 2,50,000
Reserve and surplus
General reserve 1,20,000
5.13
2.Current Liabilities
Total Liabilities 5,45,000
II. Assets
1.Non current assets
(a)Fixed assets
Building at cost less depreciation 1,90,000
Plant and machinery at cost less Depreciation 80,000
Furniture & Fixtures at cost less Depreciation 25,000
2. Current assets
(a)Inventories 50,000
(b)Trade Receivables 1,42,000
The assets and liabilities of the existing companies are to be transferred at the book value with the
exception of some items detailed below:
(i) Goodwill of P Ltd. was worth Rs 50,000 and of Q Ltd. was worth Rs 1, 50,000.
(ii) Furniture and fixture of Q Ltd. was valued at Rs 35,000.
(iii) The debtors of P Ltd. are realized fully and bank balance of P Ltd.are to be retained by the liquidator
and the sundry creditors are to be paid out of the proceeds thereof.
(iv) The debentures of P Ltd. are to be discharged by issue of 8% debentures of PQ Ltd. at a premium 10%
You are required to;
(i) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of existing
companies.
(ii) Draw up a balance sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation,
Write up journal entries including bank entries for closing the books of P Ltd. (May 14)
Q24. P and Q have been carrying on same business independently. Due to competition in the market, they
decided to amalgamate and form a new company called PQ Ltd.
Following is the Balance Sheet of P and Q as at 31.3.2007:
Liabilities P Q Asstes P Q
Rs. Rs. Rs. Rs.
Capital 7,75,000 8,55,000 Plant & Machinery 4,85,000 6,14,000
Current liabilities 6,23,500 5,57,600 Building 7,50,000 6,40,000
Current assets 1,63,500 1,58,600
13,98,500 14,12,600 13,98,500 14,12,600
Following are the additional information:

(i) The authorised capital of the new company will be Rs. 25,00,000 divided into 1,00,000 equity shares
of Rs. 25 each.
(ii) Liabilities of P includes Rs .50,000 due to Q for the purchases made. Q made a profit of 20% on sale
to P.
(iii) P has goods purchased from Q, cost to him Rs. 10,000. This is included in the Current assets of P as at
31st March, 2007.
(iv) The assets of P and Q are to be revalued as under:
P Q
Rs. Rs.
Plant and machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000
5.14
(v) The purchase consideration is to be discharged as under:

(a) Issue 24,000 equity shares of Rs. 25 each fully paid up in the proportion of their profitability in the
preceding 2 year.
(b) Profit for the preceding 2 year are given below:
P Q
Rs. Rs.
1st year 2,62,800 2,75,125
2nd year 2,12,200 2,49,875
Total 4,75,000 5,25,000
(c) Issue12% preference shares of Rs. 10 each fully paid up at par to provide income equivalent to 8%
return on capita employed in the business as on 31.3.2007 after revaluation of assets of P and Q
respectively.
(i) Compute the amount of equity and preference shares issued to P and Q.
(ii) Prepare the Balance Sheet” of P&Q Ltd. immediately after amalgamation.
Q. 25 The following are the summarized Balance Sheets of X Ltd. and Y Ltd :
X Ltd. Y Ltd.
Rs. Rs.
Liabilities :
Share Capital 1,00,000 50,000
–
Creditors 25,000 5,000
Loan X Ltd. — 15,000
1,35,000 70,000
Assets :
Sundry Assets 1,20,000 60,000
Loan Y Ltd. 15,000 –
Profit & Loss A/c — 10,000
1,35,000 70,000
A new company XY Ltd. is formed to acquire the sundry assets and creditors of X Ltd. and Y Ltd. and for
this purpose, the sundry assets of X Ltd. are revalued at Rs. 1,00,000. The debt due to X Ltd. is also to be
discharged in shares of XY Ltd. Show the Ledger Accounts to close the books of X Ltd.
Answer: Loss on Realisation Rs. 20,000.
Q26. The following was the balance sheet of V Ltd. As on 31st March,2012:
Particulars Note No. Amount(Rs. In lakhs)
1) Shareholders Funds
(a) Share capital 1 1150
(b) Reserve and surplus 2 (87)
2) Non-current Liabilities
(a) Long -term Borrowing 3 630
3) Current Liabilities
Trade Payables 170
__________
Total 1,863
5.15
Assets
(1) Non-Current Assets
Tangible Assets 4 1,152
(2) Current Assets
Inventories 380
Trades Receivables 256
Cash and Cash equivalents 5 75
Total 1,863
Notes :
1) Share Capital
Authorised : ?
Issued , Subscribed and Paid up : __________
80 lakh Equity Share of Rs. 10 each, fully paid up 800
35 lakh 12% Cumulative Preference Shares of Rs. 10 each, fully paid up 350
Total 1150
2) Reserve & Surplus
Debit Balance of Profit & Loss Account (87)
Total (87)
3) Long-Term Borrowings
10% Secured Cumulative Debentures of

Rs. 100 each, Fully paid up 600
Outstanding Debenture Interest 30
Total 630
4) Tangible Assets
Land & Buildings 445

Plant & Machinery 593
Furniture, Fixtures & Fittings 114
Total 1,152
5) Cash & Cash Equivalents
Balance at Bank 69
Cash in hand 6
Total 75
On 1st April, 2012 P Ltd. took over the entire business of V Ltd. On the following terms:
V Ltd. Equity shareholders would receive 4 fully paid equity shares of P Ltd. of Rs. 10 each issued at
premium of Rs. 2.5 each for every five shares held by them in V Ltd.
Preference shareholders of V Ltd. Would get 35 lakh 13% cumulative Preference Shares of Rs.10 each
Fully paid up in P Ltd., in Lieu of their present holding.
All the debentures of V Ltd. Would be converted into equal no. of 10.5% Secured Cumulative Debentures
of Rs.100 each, fully paid up after the takeover by P Ltd., which would also pay outstanding debenture
interest in cash.
5.16
Expenses of amalgamation would be borne by P Ltd. Expenses came to be Rs. 2 Lakh .

P Ltd. discovered that its creditors included Rs.7 lakh due to V Ltd. for goods purchased.
Also P Ltd. stock included goods of the invoice price of Rs. 5 lakh earlier purchased from V Ltd., which
had charged profit @ 20% of the invoice price.
(i) Prepare Realisation A/c in the books of V Ltd.
(ii) Pass journal entries in the books of P Ltd. Assuming it to be an amalgamation in the nature of
merger.
Q27. The summarized Balance Sheet of Srishti Ltd as on 31st March 2014 was as follows:
(Rs) (Rs)
Equity Shares of Rs 10 fully paid 30,00,000 Good will 5,00,000
Export profit Reserves 8,50,000 Tangible Fixed Assets 30,00,000
General Reserves 50,000 Stock 10,40,000
Profit and loss Account 5,50,000 Debtors 1,80,000
9%Dedentures 5,00,000 Cash &Bank 2,80,000
Trade Creditors 1,00,000 Preliminary Expenses 50,000
50,50,000 50,50,000
ANU Ltd. agreed to absorb the business of SRISHTI Ltd. with effect from 1 st April, 2014.
a. The purchase consideration settled by ANU Ltd. as agreed:
(i) 4,50,000 equity Shares of Rs 10each issued by ANU Ltd. by valuing its share @Rs15per share.
(ii) Cash payment equivalent to Rs 2.50 for every share in SRISHTI Ltd.
b. The issue of such an amount of paid 8% Debentures in ANU Ltd. at 96% as is sufficient to discharge
9% Debentures in SRISHTI Ltd. at a premium of 20%.
c. ANU Ltd. will take over the tangible Fixed Assets at 100%more than the book value, Stock at Rs
7,10,000 and Debtors at their face value subject to a provision of 5%for doubtful Debts.
d. The actual cost of liquidation of SRISHTI Ltd. was Rs 75,000 Liquidation cost of SRISHTI Ltd. is to
be reimbursed by ANU Ltd. to the extent of Rs 50.000.
e. Statutory Reserves are to be maintained for 1 more year.
You are required to ;

(i) Close the books of SRISHIT Ltd. by preparing Realisation Account, ANU Ltd. Account, Shareholders
Account and Debenture Account and
(ii) Pass Journal Entries in the books of ANU Ltd. regarding acquisition of business.
Q28. Following is the Balance Sheet of Y Ltd., as at 31st March 2010.
Liability Amount Assets Amount

Issued and Paid up: Goodwill 8,00,000
2,50,000 equity shares of Rs. 10 each, Building 7,00,000
Rs. 8 Paid up 20,00,000 Plant & Machinery 13,00,000
1,00,000 (10%) Preference shares of Current Assets:
Rs. 10 each fully paid up 10,00,000 Stock 7,00,000
Reserve and Surplus: Sundry Debtors 9,00,000
General Reserve 6,00,000 Bank Balance 6,60,000
Profit & Loss A/c 8,00,000 Miscellaneous Expenditure
Current Liabilities: Preliminary Expenses 40,000
Creditors 4,00,000
Workmen’s profit sharing fund 3,00,000
51,00,000 51,00,000
5.17
X Ltd. Decided to absorb the business of Y Ltd. At the respective book value of assets and trade liabilities
except building which was valued at Rs. 12,00,000 and plant & Machinery at Rs. 10,00,000.
The Purchase consideration was as follows:
(a) Payment of liquidation expenses Rs. 5,000 and workman’s profit sharing fund at 10% premium.
(b) Issue of equity share of Rs. 10 each fully paid at Rs. 11 per share for every preference share and
every equity share of Y Ltd., and a payment Rs. 4 per equity share in cash.
Calculate the purchase consideration, show the necessary ledger accounts in the books of Y Ltd., and
opening journal entries in the books of X Ltd.
Answer: PC Rs. 51,85,000. Realisation Profit Rs. 3,90,000. Goodwill Rs. 11,25,000.
Q29. The following are the Balance Sheets of M Ltd. and N Ltd. as at 31st March, 2009:
(Rs. in lakhs)
Liabilities M Ltd. N Ltd.
Fully paid equity shares of Rs.10 each 3,600 900
10% preference shares of Rs.10 each, fully paid up 1,200 -
Capital Reserve 600 -
General Reserve 2,100 -
Profit and Loss Account 780 -
8% Redeemable debentures of Rs.1,000 each - 300
Trade Creditors 2,421 369
Provisions 870 93
11,571 1,662
Assets
Plant and Machinery 4,215 468
Furniture and Fixtures 2,400 183
Motor Vehicles - 51
Stock 2,370 444
Sundry Debtors 1,044 237
Cash at Bank 1,542 240
Preliminary Expenses - 33
Discount on Issue of Debentures - 6
11,571 1,662
A new Company MN Ltd. was incorporated with an authorised capital of Rs.15,000 lakhs divided into
shares of Rs.10 each. For the purpose of amalgamation in the nature of merger, M Ltd. and N Ltd. were
merged into MN Ltd. on the following terms:
(a) Purchase consideration for M Ltd.’s business is to be discharged by issue of 120 lakhs fully paid 11%
preference shares and 720 lakhs fully paid equity shares of MN Ltd. to the preference and equity
shareholders of M Ltd. in full satisfaction of their claims.
(b) To discharge purchase consideration for N Ltd.’s business, MN Ltd. to allot 90 lakhs fully paid up
equity shares to shareholders of N Ltd. in full satisfaction of their claims.
(c) Expenses on the liquidation of M Ltd. and N Ltd. amounting to Rs.6 lakhs are to be borne by MN Ltd.
(d) 8% redeemable debentures of N Ltd. to be converted into 8.5% redeemable debentures of MN Ltd.
(e) Expenses on incorporation of MN Ltd. were Rs.15 lakhs.
You are requested to:

(a) Pass necessary Journal Entries in the books of MN Ltd. to record above transactions, and
(b) Prepare Balance Sheet of MN Ltd. after merger.
5.18
Q30. The following are the Balance Sheets of A Ltd. and B Ltd. as on 31st December, 2001 :
Rs Rs. Rs Rs.
Share Capital Fixed Assets 7,00,000 2,50,000
Equity Shares of Current Assets:
Each 6,00,00 3,00,000 Inventory 2,40,000 3,20,000
10% Pref. Shares of Debtors 3,60,000 1,90,000
Rs. 100 each 2,00,00 1,00,000 Bills Receivable 1,40,000 1,00,000
Reserves and 3,00,00 2,00,000 Cash at Bank 1,10,000 40,000
Secured Loans:
12% Debentures 2,00,00 1,50,000
Current Liabilities:
15,50,00 9,00,000 15,50,000 9,00,000
0
Details of Trade receivables and trade payables are as under:
P Ltd. (Rs.) Q Ltd. (Rs.)
Trade receivables
Debtors 3,60,000 1,90,000
Bills Receivable 60,000 20,000
4,20,000 2,10,000
Trade payables
2,50,000 1,50,000
Fixed Assets of both the companies are to be revalued at 15% above book value. I n v e n t o r y in
Trade and Debtors are taken over at 5% lesser than their book value. Both the companies are to pay
10% Equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, A Ltd. will absorb B Ltd. on the following
terms:
(i) 8 Equity Shares of Rs. 10 each will be issued by A Ltd. at par against 6 shares of B Ltd.
(ii) 10%Preference Shareholders of B Ltd. will be paid at 10% discount by issue of 10%
Preference Shares of Rs. 100 each at par in A Ltd.
(iii) 12% Debentureholders of B Ltd. are to be paid at 8% premium by 12% Debentures in A Ltd.
issued at a discount of 10%.
(iv) Rs. 30,000 is to be paid by A Ltd. to B Ltd. for Liquidation expenses. Sundry Creditors of B
Ltd. include Rs. 10,000 due to A Ltd.
Prepare :
(a) Absorption entries in the books of A Ltd.
(b) Statement of consideration payable by A Ltd.
5.19
Q. 31 The following is the Balance Sheet of A Ltd. as at 31st March, 2006:

8,000 equity shares of Rs.100 each 8,00,000 Building 3,40,000
10% debentures 4,00,000 Machinery 6,40,000
Loan from A 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Misc. Expenses 34,000
Total 17,60,000 Total 17,60,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:
(i) B 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 superprofits, assuming that the normal rate of return be 8% on the combined
amount of share capital and general reserve.
(ii) B Ltd. is to take over creditors at book value.
(iii) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and the balance in fully paid
equity shares of Rs.100 each at Rs.125 per share. The average profit is Rs.1,24,400. The liquidation
expenses amounted to Rs.16,000. B Ltd. sold prior to 31st March, 2006 goods costing Rs.1,20,000 to A Ltd.
for Rs.1,60,000. Rs.1,00,000 worth of goods are still in stock of A Ltd. on 31st March, 2006. Creditors of A
Ltd. include Rs.40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the Balance Sheet of B Ltd. as at
1st April, 2006 after the takeover.
Answer: Realisation Loss Rs. 76,000.
Q.32 Sun Ltd. and Moon Ltd. were amalgamated on and from 1st April, 2009. A new company Star Ltd. was
formed to take over the business of the existing companies. The Balance Sheets ofSun Ltd. and Moon Ltd.
as at 31st March, 2009 are given below:
(Rs. in lakhs)
Liabilities Sun Ltd. Moon Ltd. Assets Sun Ltd. Moon Ltd.
Share capital: Fixed Assets:
Equity shares of Rs.100
Each 400 375 Land & Building 275 200
12% Preference shares of
Rs.100 each 150 100 Plant & Machinery 175 125
Investments 75 25
Reserves and surplus: Current Assets, Loans and
Advances:
Revaluation reserve 75 50 Stock 175 125
General reserve 85 75 Sundry Debtors 125 150
Investment allowance
Reserve 25 25 Bills Receivables 25 25
Profit and Loss Account 25 15 Cash and Bank balances 150 100
Secured loan:
10% Debentures (Rs.100
each) 30 15
Current liabilities and
provisions:
Sundry creditors 135 60
Acceptance 75 35
1,000 750 1,000 750
5.20
(i) Star Ltd. will issue 5 equity shares for each equity share of Sun Ltd. and 4 equity shares for each
equity share of Moon Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10
per share.
(ii) Preference shareholders of the two companies are issued equivalent number of 15% preference shares
of Star Ltd. at a price of Rs. 150 per share (face value Rs. 100).
(iii) 10% Debentureholders of Sun Ltd. and Moon Ltd. are discharged by Star Ltd., issuing such number of
its 15% Debentures of Rs.100 each so as to maintain the same amount of interest.
(iv) Investment allowance reserve is to be maintained for 4 more years.
(v) Liquidation expenses are:
Sun Ltd. Rs.2,00,000 Moon Ltd. Rs.1,00,000
It was decided that these expenses would be borne by Star Ltd.
(vi) All the assets and liabilities of Sun Ltd. and Moon Ltd. are taken over at book value.
(vii) Authorised equity share capital of Star Ltd. is Rs. 5,00,00,000, divided into equity shares of Rs. 10
each. After issuing required number of shares to the Liquidators of Sun Ltd. and Moon Ltd., Star Ltd.
issued balance shares to Public. The issue was fully subscribed.
Required: Prepare the Balance Sheet of Star Ltd. as at 1st April, 2009 after amalgamation has been
carried out on the basis of Amalgamation in the nature of purchase.
Answer: PC Sun Rs. 825 and Moon Rs. 600 respectively. Balance Sheet Total Rs. 1,960.
Q33. X Co. Ltd. having share capital of Rs.50 lakhs divided into equity shares of Rs.10 each was taken over by
Y Co. Ltd. X Co. Ltd. has General Reserve of Rs.10,00,000 and Profit and Loss account Cr. Rs.5,00,000.
Y Co. Ltd. issued 11 equity shares of Rs.10 each for every 10 shares of X Co. Ltd.
How the Journal entry would be passed in the books of Y Co. Ltd. for the shares issued under the ‘Pooling
of interest method’ of amalgamation.
Q34. AX Ltd. and BX Ltd. amalgamated on and from 1st January 2012. A new Company ABX Ltd. was
formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-2011
AX Ltd. BX Ltd. AX Ltd. BX Ltd.
Equity and Liabilities ’000 ’000 Assets ’000 ’000
Share Capital Sundry Fixed
Equity Shares of Assets 85,00 75,00
Rs. 10 each 60,00 70,00 Investment 10,50 5,50
General Reserve 15,00 20,00 Stock 12,50 27,50
P & L A/c 10,00 5,00 Debtors 18,00 40,00
Investment Allowance Cash & Bank 4,50 4,00
Reserve 5,00 1,00
Export Profit Reserve 50 1,00
12% Debentures 30,00 40,00
Sundry Creditors 10,00 15,00
130,50 152,00 130,50 152,00
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of the
transferor companies. You are required to prepare (i) Note showing purchase consideration and discharge
thereof, (ii) Journal entries in the books of ABX Ltd. for taking over both the companies (iii) Balance
Sheet of ABX Ltd. as on 1st January, 2013 assuming the amalgamation is in the nature of purchase.
Q35. The Abridged Balance Sheet (Draft) of Cyber Ltd. as on 31st March, 2012 is as under:
24,000, Equity shares of Rs. 10 each 2,40,000 Goodwill 5,000
5000, 8% cumulative preference shares
of Rs. 10 each 50,000 Fixed Assets 2,57,000
Inventories 50,000
8% Debentures 1,00,000 Trade receivables 60,000
Interest accrued on debentures 8,000 Bank 1,000
Trade payables 1,00,000 Profit & Loss Account 1,25,000
4,98,000 4,98,000
5.21
The following scheme is passed and sanctioned by the court:

(i) A new company Mahal Ltd is formed with Rs. 3,00,000, divided into 30,000 Equity shares of Rs. 10
each.
(ii) The new company will acquire the assets and liabilities of Cyber Ltd. on the following terms:
(a) Old company's debentures are paid by similar debentures in new company and for outstanding
accrued interest, shares of equal amount are issued at par.
(b) The trade payables are paid for every Rs. 100, Rs. 16 in cash and 10 shares issued at par.
(c) Preference shareholders are to get equal number of equity shares at par. For arrears of dividend
amounting to Rs. 12,000, 5 shares are issued at par for each Rs. 100 in full satisfaction.
(d) Equity shareholders are issued one share at par for every three shares held.
(e) Expenses of Rs. 8,000 are to be borne by the new company.
(iii) Current Assets are to be taken at book value (except Inventory, which is to be reduced by Rs. 3,000).
Goodwill is to be eliminated, balance of purchase consideration being attributed to fixed assets.
(iv) Remaining shares of the new company are issued to public at par and are fully paid.
You are required to show:

(a) In the old company's books:
(i) Realisation Account (ii) Equity Shareholder's Account
(b) In the new company's books:

(i) Bank Account (ii) Summarised Balance Sheet as per the requirements of Revised Schedule-III.
Q36. X Ltd. and Y Ltd. were amalgamated on and from 1st April, 2012 and formed a new company Z Ltd. to
takeover the business of X Ltd. and Y Ltd. The summarized Balance Sheets of X Ltd. and Y Ltd., as on
31st March, 2012 are as follows:
(Rs. in Crores)
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
Share Capital: Land and Buildings 38 25
Equity share of Rs. 10 each 50 45 Plant and Machinery 24 17
10% Preference shares of Rs. 100
Each 20 14 Investments 10 6
Revaluation Reserve 10 6 Inventory 22 15
General Reserve 12 8 Sundry Debtors 25 20
Investment Allowance 5 4 Bills Receivable 5 4
Reserve Cash at Bank 16 13
Profit & Loss Account 8 6
15% Debentures of Rs. 100 each
(Secured) 4 5
Sundry Creditors 19 7
Bills Payable 12 5
140 100 140 100
(1) Z Ltd. will issue 6 equity shares for 10 equity shares of X Ltd. and 2 equity shares for 5 equity shares
of B Ltd. The shares are issued @ Rs. 30 each having a face value of Rs. 10 per share.
(2) Preference shareholders of two companies are issued equivalent number of 15% preference shares of
Z Ltd. at a price of Rs. 120 per share (face value Rs. 100).
(3) 15% Debentureholders of X Ltd. and Y Ltd. are discharged by Z Ltd. issuing such number of its 18%
Debentures of Rs. 100 each so as to maintain the same amount of interest.
(4) Investment allowance reserve is to be maintained for 4 more years.
Prepare the Balance Sheet of Z Ltd. after amalgamation. The amalgamation took place in the nature of
purchase.
5.22
Q37. The summarized Balance Sheet of A Limited and B Limited as at 31st March, 2012 are as follows:
Equity share of Rs.
10 each 20,00,000 12,00,000 Sundry assets 30,00,000 18,00,000
General reserve 4,00,000 2,20,000
Trade payables 6,00,000 3,80,000
30,00,000 18,00,000 30,00,000 18,00,000
Sundry assets of B Ltd. includes long term investment of Rs. 4,00,000, the market value of which is now
Rs. 4,80,000. A Ltd. absorbed B Ltd. on the basis of intrinsic value of the shares. The purchase
consideration is to be discharged in fully paid-up equity shares. A sum of Rs. 1,00,000 is owed by A Ltd.
to B Ltd., also included in the Inventory of A Ltd. is Rs. 1,20,000 goods supplied by B Ltd. at cost plus
20%. Give Journal entries in the books of both the companies, if entries are made at intrinsic value. Also
prepare Balance Sheet of A Ltd. after absorption.
Q38. Ram Limited and Shyam Limited carry on business of a similar nature and it is agreed that they should
amalgamate. A new company, Ram and Shyam Limited, is to be formed to which the assets and liabilities
of the existing companies, with certain exception, are to be transferred. On 31st March 2011 the Balance
Sheets of the two companies were as under:
Ram Limited
Issued and Subscribed Freehold Property, at cost 2,10,000
Share capital: Plant and Machinery, at cost less
30,000 Equity shares of , 10 depreciation 50,000
each, fully paid 3,00,000 Motor Vehicles, at cost
General Reserve 1,60,000 less depreciation 20,000
Profit and Loss Account 40,000 Stock 1,20,000
Sundry Creditors 1,50,000 Debtors 1,64,000
Cash at Bank 86,000
6,50,000 6,50,000
Shyam Limited
Issued and Subscribed Freehold Property, at cost 1,20,000
Share Capital: Plant and Machinery, at cost less
16,000 Equity shares of , 10 depreciation 30,000
each, fully paid 1,60,000 Stock 1,56,000
Profit and Loss Account 40,000 Debtors 42,000
6% Debentures 1,20,000 Cash at Bank 36,000
3,84,000 3,84,000
Assets and Liabilities are to be taken at book-value, with the following exceptions:
(a) Goodwill of Ram Limited and of Shyam Limited is to be valued at Rs. 1,60,000 and Rs. 60,000
respectively.
(b) Motor Vehicles of Ram Limited are to be valued at , 60,000.
(c) The debentures of Shyam Limited are to be discharged by the issue of 6% Debentures of Ram and
Shyam Limited at a premium of 5%.
(d) The debtors of Shyam Ltd. realized fully and bank balance of Shyam Ltd, are to be retained by the
liquidator and the sundry creditors of Shyam Ltd. are to be paid out of the proceeds thereof.
(i) Compute the basis on which shares in Ram and Shyam Limited will be issued to the shareholders of
the existing companies assuming that the nominal value of each share in Ram and Shyam Limited is
Rs. 10.
(ii) Draw up a Balance Sheet of Ram and Shyam Limited as of 1st April, 2011, the date of completion of
amalgamation.
(iii) Write up journal entries, including bank entries, for closing the books of Shyam Limited.
5.23
Q39. Summarised Balance Sheets as on 31st March, 2012

Liabilities Gee Ltd. Pee Ltd Assets Gee Ltd. Pee Ltd.
Equity share capital 25,00,000 15,00,000 Buildings 12,50,000 7,75,000
(Rs. 10 per share) Plant and 16,25,000 8,50,000
14% Preference machinery
share capital 11,00,000 8,50,000 Furniture and
(Rs. 100 each) fixtures 2,87,500 1,75,000
Investments 3,50,000 2,50,000
General reserve 2,50,000 2,50,000 Stock 6,25,000 4,75,000
Export profit reserve 1,50,000 1,00,000 Debtors 4,00,000 4,60,000
Investment Bills receivables 50,000 55,000
allowance reserve - 50,000
Profit and loss
Account 3,75,000 1,25,000 Cash at bank 3,62,500 2,60,000
15% Debentures
(Rs. 100 each) 2,50,000 1,75,000
Trade creditors 1,50,000 75,000
Bills payables 75,000 1,00,000
Other current
Liabilities 1,00,000 75,000
49,50,000 33,00,000 49,50,000 33,00,000
All the bills receivables of Pee Ltd. were having Gee Ltd.’s acceptances.
Gee Ltd. takes over Pee Ltd. on 1st April, 2012. The purchase consideration is discharged as follows:
(i) Issued 1,65,000 equity shares of Rs. 10 each at par to the equity shareholders of Pee Ltd.
(ii) Issued 15% preference shares of Rs. 100 each to discharge the preference shareholders of Pee Ltd. at
10% premium.
(iii) The debentures of Pee Ltd. will be converted into equivalent number of debentures of Gee Ltd.
(iv) The statutory reserves of Pee Ltd. are to be maintained for two more years.
(v) Expenses of amalgamation amounting to Rs. 10,000 will be borne by Gee Ltd.
Show the opening Journal entries and the opening balance sheet of Gee Ltd. as at 1st April, 2012 after
amalgamation, on the assumption that the amalgamation is in the nature of the merger.
Q40. The following draft Balance Sheets are given as on 31st March, 2012:
(Rs. in lakhs) (Rs. in lakhs)
Best Better Best Better
Ltd. Ltd. Ltd. Ltd.
Rs. Rs. Rs. Rs.
Share Capital: Fixed Assets 25 15
Shares of Rs. 100, each Investments 5 –
fully paid 20 10 Current Assets 20 5
Reserve and Surplus 10 8
Other Liabilities 20 2
50 20 50 20
The following further information is given —
(a) Better Limited issued shares on 1st April, 2012, in the ratio of one share for every two held, out of
Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the basis of the latter’s
Balance Sheet, the consideration taking the form of allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be Rs. 150 and the shares in Better Ltd. were
valued at Rs. 100 after the issue of the bonus shares. The allotment of shares is to be made on the
basis of these values.
(d) Liabilities of Better Ltd., included Rs. 1 lakh due to Best Ltd., for purchases from it, on which Best
Ltd., made profit of 25% of the cost. The goods of Rs. 50,000 out of the said purchases, remained in
stock on the date of the above Balance Sheet.
Make the closing ledger in the Books of Better Ltd. and the opening journal entries in the Books of Best
Ltd., and prepare the Balance Sheet as at 1st April, 2012 after the takeover.
5.24
Q41. The following are the summarized Balance Sheets of A Ltd. and B Ltd. as on 31.3.2012:
(Rs. in thousands)
Liabilities A Ltd. B Ltd.
Share capital:
Equity shares of 100 each fully paid up 2,000 1,000
Reserves 800 ---
10% Debentures 500 ---
Loans from Banks 250 450
Bank overdrafts --- 50
Trade payables 300 300
Proposed dividend 200 ---
Total 4,050 1,800
Assets
Tangible assets/fixed assets 2,700 850
Investments 700 ---
Trade receivables 400 150
Cash at bank 250 ---
Accumulated loss --- 800
Total 4,050 1,800
B Ltd. has acquired the business of A Ltd. The following scheme of merger was approved:
(i) Banks agreed to waive off the loan of Rs. 60 thousands of B Ltd.
(ii) B Ltd. will reduce its shares to Rs. 10 per share and then consolidate 10 such shares into one share of
Rs. 100 each (new share).
(iii) Shareholders of A Ltd. will be given one share (new) of B Ltd. in exchange of every share held in A
Ltd.
(iv) Proposed dividend of A Ltd. will be paid after merger to shareholders of A Ltd.
(v) Trade payables of B Ltd. includes Rs. 100 thousands payable to A Ltd.
Pass necessary entries in the books of B Ltd. and prepare Balance Sheet after merger.
Q42. The following are the summarised Balance Sheets of Yes Ltd. and No Ltd. as on 31 st October, 20X1:
Yes Ltd. No Ltd.
Rs. (in crores) Rs. (in crores)
Sources of funds:
Share capital:
Authorised 25 5
Issued and Subscribed :
Equity Shares of Rs. 10 each fully paid 12 5
Reserves and surplus 88 10
Shareholders funds 100 15
Unsecured loan from Yes Ltd. — 10
100 25
Funds employed in :
Fixed assets: Cost 70 30
Less: Depreciation (50) (24)
Written down value 20 6
Investments at cost:
30 lakhs equity shares of Rs. 10 each 3
Long-term loan to No. Ltd. 10
Current assets 100 34
Less : Current liabilities (33) 67 (15) 19
100 25
5.25
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one equity share of Yes Ltd.
issued at a premium of Rs. 2 per share for every five equity shares held by them in No Ltd. The necessary
approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the above.
Q43.The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:
Particulars X Ltd. (₹) Y Ltd. (₹)
Equity Shares of ₹ 10 each 30,00,000 9,00,000
9% Preference Shares of ₹ 100 each 3,00,000 -
10% Preference Shares of ₹ 100 each - 3,00,000
Retirement Gratuity Fund (long term) 1,50,000 60,000
Total 40,50,000 17,10,000
Assets
Goodwill 1,50,000 75,000
Land & Buildings 9,00,000 3,00,000
Plant & Machinery 15,00,000 4,50,000
Inventories 7,50,000 5,25,000
Cash and Bank 1,50,000 60,000
Total 40,50,000 17,10,000
X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of X
Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of
preceding three financial years (2016-17 : ₹ 90,000; 2015-16 : ₹ 78,000 and 2014-15:₹ 72,000). The
profits of 2014 -15 included credit of an insurance claim of ₹ 25,000 (fire occurred in 2013-14 and
loss by fire ₹ 30,000 was booked in Profit and Loss Account of that year). In the year 2015 -16, there
was an embezzlement of cash by an employee amounting to ₹ 10,000.
(iii) Land & Buildings are valued at ₹ 5,00,000 and the Plant & Machinery at ₹ 4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts is to be created @
2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to ₹ 15,000
and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included ₹ 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to

(1) Prepare Realisation A/c in the books of Y Ltd.
(2) Show journal entries in the books of X Ltd.
(3) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March,2018.
5.26
Q44. The following are the summarized Balance Sheet of VT Ltd. and MG Ltd. as on 31St March, 2018:
Particulars VT Ltd. (Rs.) MG Ltd. (Rs.)
Equity Shares of Rs. 10 each 12,00,000 6,00,000
10% Pref. Shares of Rs. 100 each 4,00,000 2,00,000
Reserve and Surplus 6,00,000 4,00,000
12% Debentures 4,00,000 3,00,000
Total 31,00,000 18,00,000

Assets
Fixed Assets 14,00,000 5,00,000
Investment 1,60,000 1,60,000
Inventory 4,80,000 6,40,000
Cash at Bank 2,20,000 80,000
Total 31,00,000 18,00,000
Details of Trade receivables and trade payables are as under :

VT Ltd. (Rs.) MG Ltd. (Rs.)
Trade Receivable
Debtors 7,20,000 3,80,000
Bills Receivable 1,20,000 40,000
8,40,000 4,20,000
Trade Payables
5,00,000 3,00,000
- Fixed Assets of both the companies are to be revalued at 15% above book value.
- Inventory in Trade and Debtors are taken over 5% lesser than their book value.
- Both the companies are to pay 10% equity dividend, Preference dividend having been already
paid.
After the above transactions are given effect to, VT Ltd. will absorb MG Ltd. on the following terms:
(i) VT Ltd. will issue 16 Equity Shares of Rs. 10 each at par against 12 Shares of MG Ltd.
(ii)10% Preference Shareholders of MG Ltd. will be paid at 10% discount by issue of 10%
Preference Shares of Rs. 100 each at par in VT Ltd.
(iii) 12% Debenture holders of MG Ltd. are to be paid at 8% premium by 12% Debentures in VT Ltd.
issued at a discount of 10%.
(iv) Rs. 60,000 is to be paid by VT Ltd. to MG Ltd. for Liquidation expenses.
(v) Sundry Debtors of MG Ltd. includes Rs. 20,000 due from VT Ltd.
5.27

(1) Journal entries in the books of VT Ltd.
(2) Statement of consideration payable by VT Ltd.
Solution:
(1) Journal Entries in the Books of VT Ltd.
Dr. Cr.
Rs. Rs.
(i) Fixed Assets Dr. 2,10,000
To Revaluation Reserve 2,10,000
(Being Revaluation of fixed assets at 15% above book value)
(ii) Reserve and Surplus Dr. 1,20,000

To Equity Dividend 1,20,000
(Being Declaration of equity dividend @ 10%)
(iii) Equity Dividend Dr. 1,20,000

To Bank Account 1,20,000
(Being Payment of equity dividend)
(iv) Business Purchase Account Dr. 9,80,000

To Liquidator of MG Ltd. 9,80,000
(Being Consideration payable for the business taken over from MG Ltd.)
(v) Fixed Assets (115% of Rs. 5,00,000) Dr. 5,75,000

Inventory (95% of Rs. 6,40,000) Dr. 6,08,000
Debtors Dr. 3,80,000
Bills Receivable Dr. 40,000
Investment Dr. 1,60,000
Cash at Bank Dr. 20,000
(Rs. 80,000 –Rs. 60,000 dividend paid)
To Provision for Bad Debts (5% of Rs. 3,80,000) 19,000
To Sundry Creditors 2,50,000
To Bills Payable 50,000
To Debentures holder of MG Ltd. 3,24,000
To Business Purchase Account 9,80,000
To Capital Reserve (Balancing figure) 1,60,000
(Being Incorporation of various assets and liabilities taken over from MG Ltd.)
(vi) Liquidator of MG Ltd. Dr. 9,80,000

To Equity Share Capital 8,00,000
To 10% Preference Share Capital 1,80,000
(Being Discharge of consideration for MG Ltd.’s business)
(vii) Debentures holder of MG Ltd. (Rs. 3,00,000 × 108%) Dr. 3,24,000

Discount on Issue of Debentures Dr. 36,000
To 12% Debentures (3,24,000/90%) 3,60,000
(Being allotment of 12% Debentures to debenture holders
of MG Ltd. at a discount of 10%)
5.28
(viii) Sundry Creditors A/c Dr. 20,000

To Sundry Debtors A/c 20,000
(Being Cancellation of mutual owing)
(ix) Capital Reserve Dr. 60,000

To Bank 60,000
(Being liquidation expenses reimbursed to MG Ltd.)
(2) Statement of Consideration payable by VT Ltd.

ESH:
Shares to be allotted (60,000/12) X 16 = 80,000 shares of VT Ltd.
Issued 80,000 shares of Rs. 10 each i.e. Rs. 8,00,000
PSH:
For 10% preference shares, to be paid at 10% discount
Rs. 2,00,000 X 90 Rs. 1,80,000
100
Consideration amount [(i) + (ii)] Rs. 9,80,000
Q45. System Ltd. and HRD Ltd. decided to amalgamate as on 01.04.2010. Their Balance Sheets as on
31.03.2010 were as follows:
(Rs. ‘000)
Particulars System Ltd. HRD Ltd.
Source of Funds :
Equity share capital (Rs. 10 each) 150 140
9% preference share Capital (Rs. 100 each) 30 20
Investment allowance Reserve 5 2
Profit and Loss Account 34 34
10 % Debentures 50 30
Sundry Creditors 25 15
Tax provision 7 4
Total 307 245
Application of Funds :
Building 60 50
Plant and Machinery 80 70
Investments 40 25
Sundry Debtors 45 35
Stock 36 40
Cash and Bank 40 25
Total 307 245
From the following information, you are to prepare the draft Balance Sheet as on 01.04.2010 of a
new company, Intranet Ltd., which was formed to take over the business of both the companies
and took over all the assets and liabilities:
(i)50 % Debenture are to be converted into Equity Shares of the New Company.
(ii) Out of the investments, 20% are non-trade investments.
(iii) Fixed Assets of Systems Ltd. were valued at 10% above cost and that of HRD Ltd. at 5%
above cost.
(iv) 10 % of sundry Debtors were doubtful for both the companies. Stocks to be carried at cost.
(v) Preference shareholders were discharged by issuing equal number of 9% preference shares
at par.
(vi) Equity shareholders of both the transferor companies are to be discharged by issuing
Equity shares of Rs. 10 each of the new company at a premium of Rs. 5 per share.
Amalgamation is in the nature of purchase.
5.29
Q46. Balance Sheet of V. Co. as on 31.3.02

Equity Share Capital 1,50,000 Goodwill 20,000
(15,000 equity shares of 10 each) Land & Building 2,20,000
15% Pref. Share Capital 50,000 Patents 15,000
Capital Redemption Reserve 30,000 Motor car 25,000
Dividend Equalization fund 10,000 Investments 30,000
Insurance fund 40,000 Stock 75,000
Workmen compensation fund 30,000 Insurance policy 50,000
10% debenture 1,00,000 Debtors 45,000
Creditors 60,000 Cash 35,000
Outstanding wages 10,000 Discount on shares 5,000
Proposed dividend 15,000
Provision for tax 25,000
Total 5,20,000 Total 5,20,000
Contingent liability Rs. 10,000. It was agreed by P Co. to take over V Co. as on 31.3.02.
1. P Co. took over V. Co and it was agreed to pay Rs. 2 in cash per share and issue 4 shares for
every 6 held valued at 12 each.
2. Preference Shareholders are issued 10% new preference shares in such quantity so as to
maintain their dividend.
3. Patents are valued 25% lesser while investments are valued at 80%.
4. Insurance policy was taken over by P Ltd. at its surrender value of 30,000.
5. Contingent liabilities was agreed to be taken over by P. Ltd. which is estimated to Rs. 7,000.
6. Liability against workman compensation fund is 10,000.
7. Shareholders holding 600 shares dissented and its was agreed to pay them Rs. 13 in cash
while 30 shares are fund fractional which was discharged @ Rs. 10.
8. Liquidation expenses amounting to Rs. 5,000.
Close the books of V. Co. Journalise in P.Co. and show new balance sheet of P. Co.
Ans.: Purchase Consideration Rs. 2,26,740.
Q47. P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to the
combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and undertakings
of the two companies in exchange for share in PQ Ltd.
The Summarized Balance Sheets of P Ltd. and Q Ltd. as on 31st March, 2017 (the date of amalgamation)
are given below:
Summarized balance sheets as at 31-03-2017
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
Rs. Rs. Rs. Rs.
Equity & liabilities: Assets:
Shareholders Fund Non-current Assets:
a. Share Capital 6,00,000 8,40,000 Fixed Assets 7,20,000 10,80,000
(excluding Goodwill)
b. Reserves 10,20,000 6,00,000 Current Assets
Current Liabilities a. Inventories 3,60,000 6,60,000
Bank Overdraft - 5,40,000 b. Trade receivables 4,80,000 7,80,000
Trade payables 2,40,000 5,40,000 c. Cash at Bank 3,00,000 -
18,60,000 25,20,000 18,60,000 25,20,000
The consideration was to be based on the net assets of the companies as shown in the above Balance
Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted
5.30
average of net profits for the three years ended 31 st March, 2017. The weights for this purpose for the
years 2014-15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively. The profit had been:
2014-15 Rs. 3,00,000; 2015-16 Rs. 5,25,000 and 2016-17 Rs. 6,30,000.
The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed
net assets value of these companies.
In order to raise working capital, PQ Ltd proceeded to issue 72,000 shares of Rs. 10 each at the same rate
of premium as issued for discharging purchase consideration to P Ltd. and Q Ltd.
(i) Calculate the number of shares issued to P Ltd. and Q Ltd; and
(ii) Prepare required journal entries in the books of PQ Ltd.; and
(iii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary journal
entries.
Q48. On 1st April, 2018, Tina Ltd. take over the business of Rina Ltd. and discharged purchase consideration as
follows:
(a) Issued 50,000 fully paid Equity shares of ₹ 10 each at a premium of ₹ 5 per share to the equity
shareholders of Rina Ltd.
(b) Cash payment of ₹ 50,000 was made to equity shareholders of Rina Ltd.
(c) Issued 2,000 fully paid 12% Preference shares of ₹ 100 each at par to discharge the preference
shareholders of Rina Ltd.
(d) Debentures of Rina Ltd. (₹ 1,20,000) will be converted into equal number and amount of 10%
debentures of Tina Ltd.
Calculate the amount of Purchase consideration as per AS-14 and pass Journal Entry relating to discharge
of purchase consideration in the books of Tina Ltd.
Q49. P Ltd. and Q Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized balance
sheets of both the companies on the date of amalgamation stood as below:
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd
Rs Rs Rs Rs
Equity Shares 8,20,000 3,20,000 Land & Building 4,50,000 3,40,000
(Rs 100 each) Furniture & Fittings 1,00,000 50,000
9% Pref. Shares 3,80,000 2,80,000 Plant & Machinery 6,20,000 4,50,000
(Rs 100 each) Trade receivables 3,25,000 1,50,000
8% Debentures 2,00,000 1,00,000 Inventory 2,33,000 1,05,000
General Reserve 1,50,000 50,000 Cash at bank 2,08,000 1,75,000
Profit & Loss A/c 3,52,000 2,05,000 Cash in hand 54,000 20,000
Unsecured Loan - 1,75,000
Trade payables 88,000 1,60,000
19,90,000 12,90,000 19,90,000 12,90,000
PQ Ltd. took over the assets and liabilities of both the companies at book value after creating provision @
5% on inventory and trade receivables respectively and depreciating Furniture & Fittings by @ 10%, Plant
and Machinery by @ 10%. The trade receivables of P Ltd. include Rs 25,000 due from Q Ltd.
PQ Ltd. will issue:
(i) 5 Preference shares of Rs 20 each @ Rs 18 paid up at a premium of Rs 4 per share for each pref. share
held in both the companies.
(ii) 6 Equity shares of Rs 20 each @ Rs 18 paid up a premium of Rs 4 per share for each equity share held
in both the companies.
(iii) 6% Debentures to discharge the 8% debentures of both the companies.
(iv) 20,000 new equity shares of Rs 20 each for cash @ Rs18 paid up at a premium of Rs 4 per share.
PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per the
intrinsic value of the shares of both the companies.
You are required to prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their books.
5.31
Q50. Distinguish between Amalgamation, Absorption and External Reconstruction of Company.

Solution:
Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more In this case an In this case, a newly
companies are existing company formed company
Wound up and a takes over the takes over the
new company is business of one or business of an
formed to take over more existing existing company.
their business. companies.
Minimum At least three At least two Only two
number of companies are companies are companies are
Companies involved. involved. involved.
involved
Number of Only one resultant No new resultant Only one resultant
new company is formed. company is formed. company is formed.
resultant Two companies are Under this case a
companies wound up to form a newly formed
Single resultant company takes over
company. the business of an
existing company.
Objective Amalgamation is Absorption is done External
done to cut to cut competition & reconstruction is
competition & reap reap the economies done to reorganize
the economies in in large scale. the financial
large scale. structure of the
company.
Example A Ltd. and B Ltd. A Ltd. takes over the B Ltd. is formed to
amalgamate to business of another take over the
form C Ltd. existing company B business of an
Ltd. existing company A
Ltd.
5.32
Solution 28:
(i) Calculation of purchase consideration Rs. In lakhs Rs. In lakhs
Cash payment for:

Liquidation expenses 5,000
Workmen’s profit sharing fund 3,30,000
Cash to equity shareholders (2,50,000x4) 10,00,000 13,35,000
Payment by Equity share to

Preference shareholders (1,00,000 x 11) 11,00,000
Equity shareholders (2,50,000 x 11) 27,50,000 38,50,000
(ii) In the books of Y Ltd.
Realisation A/c
To Goodwill 80,00,000 By Creditors 4,00,000

To Building 7,00,000 By X Ltd. 51,85,000
To Plant and machinery 13,00,000 By Workmen’s Profit
To Stock 7,00,000 Sharing Fund A/c 3,00,000
To Sundry debtors 9,00,000
To Bank 6,60,000
To Workmen’s profit sharing 3,30,000
fund
To Preference shareholders 1,00,000
To Bank (Expenses) 5,000
To Profit 3,90,000
58,85,000 58,85,000
X Ltd. A/c
To Realisation A/c 51,85,000 By Bank 13,35,000
By Equity shares in X Ltd. 38,50,000
51,85,000 51,85,000
Bank A/c
To X Ltd. 13,35,000 By Realisation (Expenses) 5,000
By Workmen’s profit 3,30,000
Sharing fund
By Equity Shareholders 10,00,000
13,35,000 13,35,000
Preference Shareholders A/c

To Equity Shares in X Ltd. 11,00,000 By Preference shares capital 10,00,000
By Realisation A/c (Bal fig.) 1,00,000
11,00,000 11,00,000
Equity Shareholders A/c

To Preliminary expenses 40,000 By Equity share capital 20,00,000
To Bank 10,00,000 By General reserve 6,00,000
To Equity shares in Y Ltd. 27,00,000 By Profit & Loss A/c 8,00,000
(Bal. fig.) 3,90,000
37,90,000 37,90,000
Equity Shares in X Ltd. A/c

To X Ltd. 38,50,000 By Preference 11,00,000
shareholders
By Equity shareholders 27,50,000
38,50,000 38,50,000
5.33
(iii) In the books of X Ltd.

Journal Entries
Dr.(Rs.) Cr.(Rs.)
1. Business purchases A/c Dr. 51,85,000
To Liquidators of Y Ltd. 51,85,000
(Being business purchased of Y Ltd.)
2. Building A/c Dr. 12,00,000
Plant & machinery A/c Dr. 10,00,000
Stock A/c Dr. 7,00,000
Debtors A/c Dr. 9,00,000
Bank A/c Dr. 6,00,000
Goodwill A/c(Bal. fig.) Dr. 11,25,000
To Credtiors 4,00,000
To Business purchase A/c 51,85,000
(Being assets and liabilities taken over and purchase
consideration due)
3. Liquidators of Y Ltd. Dr. 51,85,000
To Bank 13,35,000
To Equity share capital 35,00,000
To Securities premium 3,50,000
(Being payment of purchase consideration )
Q31.
Books of A Limited
Realisation 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 76,000
(Loss)
To Debtors 2,60,000
To Goodwill 1,30,000
To Bank (Exp.) 16,000
16,06,000 16,06,000
Bank Account
To Balance b/d 1,36,000 By Realisation (Exp.) 16,000
To B Ltd. 6,00,000 By 10% debentures 4,00,000
By Loan from A 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000
10% Debentures Account

To Bank 4,00,000 By Balance b/d 4,00,000
4,00,000 4,00,000
Loan from A Account

To Bank 1,60,000 By Balance b/d 1,60,000
1,60,000 1,60,000
Misc. Expenses Account

To Balance b/d 34,000 By Equity shareholders 34,000
34,000 34,000
General Reserve Account

To Equity shareholders 80,000 By Balance b/d 80,000
80,000 80,000
5.34
B Ltd. Account
To Realisation A/c 12,10,000 By Bank 6,00,000
By Equity share in B Ltd.(4,880
shares at Rs.125 each) 6,10,000
12,10,000 12,10,000
Equity Shares in B Ltd. Account

To B Ltd. 6,10,000 By Equity shareholders 6,10,000
6,10,000 6,10,000
Equity Share Holders Account

To Realisation 76,000 By Equity share capital 8,00,000
To Misc. Expenses 34,000 By General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000
B Ltd.
Balance Sheet as at 1st April, 2006
Particulars
I. Equity and Liabilities Rs. Rs.
Shareholder fund:-
a) Share Capital:
4880 Equity shares of Rs.100 4,88,000
Each (Shares have been issued for consideration other than cash)
b) Reserve and Surplus
Security Premium 1,22,000
Current Liability
Creditors (3,20,000 - 40,000) 2,80,000
Bank Overdraft 6,00,000
Total 14,90,000
II. Assets
Non-current Assets
Fixed Assets
Tangible
Building 3,06,000
Machine 5,76,000
Intangible(2,16,000+15,000) 2,31,000
Current Assets
Stock (1,98,000 -15,000) 1,83,000
Debtors (2,60,000 – 40,000-26,000) 1,94,000
Total 14,90,000
Working Notes:
1. Valuation of Goodwill Rs.
Average profit 1,24,400
Less: 8% of Rs.8,80,000 70,400
Super profit 54,000
Value of Goodwill = 54000 x 4 2,16,000
2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Stock 1,98,000
Debtors 2,60,000
Total Assets 15,56,000
Less: Creditors 3,20,000
Provision for bad debts 26,000 3,46,000
Net Assets 12,10,000
5.35
Out of this Rs.6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000) Rs. 6,10,000 in
shares of Rs.125/-. Thus, the number of shares to be allotted 6,10,000/125 = 4,880 shares.
3. Unrealised Profit on Stock Rs.

The stock of A Ltd. includes goods worth Rs.1,00,000 which was sold by
B Ltd. on profit. Unrealized profit on this stock will be
40,000/160,000 x 1,00,000 25,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book
value, 10% need to be adjusted from the stock i.e., 10% of Rs.1,00,000. (-10,000)
Amount of unrealized profit 15,000
Q38.
Calculation of Purchase consideration
Ram Ltd. Shyam
Ltd.
Purchase Consideration: Rs. Rs
Goodwill 1,60,000 60,000
Freehold property 2,10,000 1,20,000
Motor vehicles 60,000 -
Stock 1,20,000 1,56,000
Debtors 1,64,000 -
Cash at Bank 86,000 -
8,50,000 3,66,000
Less: Liabilities:
6% Debentures (1,20,000 x 105%) - (1,26,000)
Sundry Creditors (1,50,000) -
Net Assets taken over 7,00,000 2,40,000
To be satisfied by issue of shares of Ram and Shyam Ltd. @ Rs. 10 70,000 24,000
Each
Balance Sheet of Ram and Shyam Ltd. as at 1st April, 2011

Equity and Liabilities Rs.
1 Shareholders' funds
a Share capital 1 9,40,000
b Reserves and Surplus 2 2,60,000
2 Non-current liabilities
a Long-term borrowings 3 1,20,000
3 Current liabilities
a Trade Payables 1,50,000
Total 12,16,000
Assets
1 Non-current assets
a Fixed assets
i Tangible assets 4 4,70,000
ii Intangible assets 5 2,20,000
2 Current assets
a Inventories (1,20,000 + 1,56,000) 2,76,000
b Trade receivables 1,64,000
c Cash and cash equivalents 86,000
Total 12,16,000
Notes to accounts:
1. Share Capital
Equity share capital
94,000 shares of Rs. 10 each 9,40,000
5.36
2. Reserves and Surplus

Securities Premium (W.N.1) 6,000
3. Long-term borrowings
Secured
6% Debentures (assumed to be secured) 1,20,000
4. Tangible assets
Free hold property (2,10,000 + 1,20,000) 3,30,000
Plant & Machinery (50,000+30,000) 80,000
Motor vehicles 60,000
Total 4,70,000
5. Intangible assets
Goodwill (1,60,000 + 60,000) 2,20,000
In the books of Shyam Ltd.

Journal Entries
1. Realisation A/c Dr. 3,48,000
To Freehold Property 1,20,000
To Plant and Machinery 30,000
To Stock 1,56,000
To Debtors 42,000
(Being all assets except cash transferred to Realisation
Account)
2. 6% Debentures A/c Dr. 1,20,000
Sundry Creditors A/c Dr. 64,000
To Realisation A/c 1,84,000
(Being all liabilities transferred to Realisation Account)
3. Equity Share Capital A/c Dr. 1,60,000
Profit and Loss A/c Dr. 40,000
To Realisation A/c 2,20,000
(Being equity transferred to equity shareholders account)
4. Ram and Shyam Ltd. Dr. 2,40,000
To Realization A/c 2,40,000
(Being purchase consideration due)
5. Bank A/c Dr. 42,000
To Realisation A/c 42,000
(Being cash realized from debtors in full)
6. Realization A/c Dr. 64,000
To Bank A/c 64,000
(Being payment made to creditors)
7. Shares in Ram and Shyam Ltd. Dr. 2,40,000
To Ram and Shyam Ltd. 2,40,000
(Being purchase consideration received in the form of
shares of Ram and Shyam Ltd.)
8. Realisation A/c Dr. 54,000
To Equity shareholders A/c 54,000
(Being profit on Realisation account transferred to
shareholders account)
9. Equity shareholders A/c Dr. 2,54,000
To Shares in Ram and Shyam Ltd. 2,40,000
To Bank A/c 14,000
(Being final payment made to shareholders)
Working Note:
Calculation of Securities Premium balance
Debentures issued by Ram and Shyam Ltd. to Shyam Ltd. at 5% premium

Therefore, securities premium account will be credited with (Rs. 1, 20,000 x 5%) Rs. 6,000.
5.37
Q39. In the books of Gee Ltd.

Journal Entries
Particulars Debit Rs. Credit Rs.
Business purchase A/c (W.N.1) Dr. 25,85,000
To Liquidator of Pee Ltd. 25,85,000
(Being business of Pee Ltd. taken over)
Building A/c Dr. 7,75,000
Plant and machinery A/c Dr. 8,50,000
Furniture and fixtures A/c Dr. 1,75,000
Investments A/c Dr. 2,50,000
Stock A/c Dr. 4,75,000
Debtors A/c Dr. 4,60,000
Bills receivables A/c Dr. 55,000
Cash at bank A/c Dr. 2,60,000
To General reserve A/c (W.N.2) 15,000
(2,50,000-2,35,000)
To Export profit reserve A/c 1,00,000
To Investment allowance reserve A/c 50,000
To Profit and loss A/c 1,25,000
To 15% Debentures A/c (Rs. 100 each) 1,75,000
To Trade creditors A/c 75,000
To Bills payables A/c 1,00,000
To Other current liabilities A/c 75,000
To Business purchase A/c 25,85,000
(Being assets and liabilities taken over)
Liquidator of Pee Ltd. Dr. 25,85,000
To Equity share capital A/c 16,50,000
To 15% Preference share capital A/c 9,35,000
(Being purchase consideration discharged)
General Reserve A/c Dr. 10,000
To Cash at bank 10,000
(Being expenses of amalgamation paid)
15% Debentures in Pee Ltd. A/c Dr. 1,75,000
To 15% Debentures A/c 1,75,000
(Being debentures in Pee Ltd. discharged by
issuing own 15% debentures)
Bills payables A/c Dr. 55,000
To Bill receivables A/c 55,000
(Cancellation of mutual owing on account of bills of exchange)
Opening Balance Sheet of Gee Ltd. (after absorption) as on 1st April, 2012
Particulars Note Rs.

1. Shareholders' funds
2. Non-current liabilities
a Long-term borrowings 3 4,25,000
3. Current liabilities
a Trade Payables 4 3,45,000
b Other current liabilities 5 1,75,000
Total 81,85,000
Assets
1. Non-current assets
a Fixed assets
Tangible assets 6 49,62,500
b Investments 7 6,00,000
5.38
2. Current assets
a Inventories 8 11,00,000
b Trade receivables 9 9,10,000
c Cash and cash equivalents 10 6,12,500
Total 81,85,000
Notes to accounts
Rs.
1. Share Capital
4,15,000 Equity shares of Rs. 10 each
(Out of above, 1,65,000 shares were issued for consideration other than cash) 41,50,000
Preference share capital
9,350 15% Preference shares of Rs. 100 each 9,35,000
(Out of above, 9,350 shares were issued for consideration other than cash)
11,000 14% Preference Shares of Rs. 100 each 11,00,000
Total 61,85,000
2 Reserves and Surplus
General Reserve
Opening balance 2,50,000
Add: Adjustment under scheme of amalgamation 15,000
Less: Amalgamation expense paid (10,000) 2,55,000
Export profit reserve
Add: Adjustment under scheme of amalgamation 1,00,000 2,50,000
Investment allowance reserve 50,000
Profit and loss account
Add: Adjustment under scheme of amalgamation 1,25,000 5,00,000
Total 10,55,000
3 Long-term borrowings
Secured 2,50,000
15% Debentures 1,75,000 4,25,000
Add: Adjustment under scheme of amalgamation 4,25,000
Total
4 Trade payables
Creditors: Opening balance 1,50,000
Add: Adjustment under scheme of amalgamation 75,000 2,25,000
Bills Payables: Opening balance 75,000 75,000
Less: Cancellation of mutual owning upon
amalgamation (55,000) 1,20,000
3,45,000
5 Other current liabilities
Add: Adjustment under scheme of amalgamation 75,0000 1,75,000
6 Tangible assets
Buildings- Opening balance
12,50,000
7,75,000
Plant and machinery- Opening balance
8,50,000 24,75,000
Furniture and fixtures- Opening balance
1,75,000 4,62,500
Total
49,62,500
5.39
7 Investments 3,50,000
Opening balance 2,50,000 6,00,000
Add: Adjustment under scheme of amalgamation
8 Inventories 6,25,000
Opening balance 4,75,000 11,00,000
Add: Adjustment under scheme of amalgamation
9 Trade receivables 4,00,000
Debtors: Opening balance 4,60,000 8,60,000
Add: Adjustment under scheme of amalgamation 50,000
Bills Payables: Opening balance 55,000
Add: Adjustment under scheme of amalgamation (55,000) 50,000
Less: Cancellation of mutual owning upon amalgamation 9,10,000
Total
10 Cash and cash equivalents 3,62,000

Add: Adjustment under scheme of amalgamation (10,000) 6,12,500
Less: Amalgamation expense paid
Working Notes:
1. Calculation of purchase consideration
Rs.
Equity shareholders of Pee Ltd. (1,65,000 x Rs.10) 16,50,000
Preference shareholders of Pee Ltd. (8,50,000 x 110%) 9,35,000
Purchase consideration would 25,85,000
2. Amount to be adjusted from general reserve

The difference between the amount recorded as share capital issued and the amount of share capital of Transferor
Company should be adjusted in General Reserve.
Thus, General reserve will be adjusted as follows:
Rs.
Less: Share capital issue (Rs.15,00,000 + Rs.8,50,000) (23,50,000)
Amount to be adjusted from general reserve 2,35,000
Q40. LEDGER OF BETTER LIMITED

Fixed Assets Account
Rs. Rs.
To Balance b/d 15,00,000 By Realisation A/c (transfer) 15,00,000
Current Assets Account

Rs. Rs.
To Balance b/d 5,00,000 By Realisation A/c (transfer) 5,00,000
Liabilities Account
Rs. Rs.
To Realisation A/c 2,00,000 By Balance b/d 2,00,000
Realisation Account
Rs. Rs.
To Fixed Assets A/c 15,00,000 By Liabilities A/c 2,00,000
” Current Assets A/c 5,00,000 ” Best Limited 15,00,000
(Purchase consideration)
” Shareholders’ A/c 3,00,000
(Loss on realisation)
20,00,000 20,00,000
5.40
Share Capital Account

Rs. Rs.
To Sundry shareholders By Balance b/d 10,00,000
A/c - (transfer) 15,00,000 ” Reserves & Surplus A/c
(Bonus issue) 5,00,000
15,00,000 15,00,000
Reserves & Surplus Account

Rs. Rs.
To Share Capital (Bonus issue) 5,00,000 By Balance b/d 8,00,000
” Sundry Shareholders 3,00,000
8,00,000 8,00,000
Best Ltd.
Rs. Rs.
To Realisation A/c - Purchase By Shares in Best Ltd 15,00,000
Consideration 15,00,000
15,00,000 15,00,000
Shares in Best Ltd.

Rs. Rs.
To Best Ltd. 15,00,000 By Sundry Shareholders A/c 15,00,000
Sundry Shareholders Account

Rs. Rs.
To Realisation A/c 3,00,000 By Share Capital A/c 15,00,000
(Loss) ” Reserves & Surplus A/c 3,00,000
” Share in Best Ltd. 15,00,000
18,00,000 18,00,000
Journal of Best Ltd.

Dr. Cr.
2012 Rs. Rs.
Apr. 1 Fixed Assets A/c Dr. 15,00,000
Current Assets A/c Dr. 5,00,000
To Liabilities A/c 2,00,000
To Liquidator of Better Ltd.
15,00,000
To Capital Reserve A/c 3,00,000
(Assets & Liabilities of Better Ltd. taken over for an
agreed purchase consideration of Rs. 15,00,000 as per agreement dated....)
Liquidator of Better Ltd. Dr. 15,00,000

To Share Capital A/c
10,00,000
To Securities Premium A/c 5,00,000
(Discharge of Purchase consideration by the issue of
equity shares of Rs. 10,00,000 at a premium of Rs. 50 per
share as per agreement)
Trade payables A/c Dr. 1,00,000

To Trade receivables A/c 1,00,000
(Amount due from Better Ltd., and included in its
creditors taken over, cancelled against own Trade receivables)
Capital Reserve A/c Dr. 10,000

To Current Asset (Stock) A/c 10,000
(Unrealized profit on stock included in current assets of
Better Ltd. written off to Reserve Account)
5.41
Working Note :
Calculation of Purchase consideration:
Issued Capital of Better Ltd. (after bonus issue) at Rs. 100 per share Rs. 15,00,000
Purchase consideration has been discharged by Best Ltd. by the issue of shares for Rs. 10,00,000 at a premium of Rs.
5,00,000. This gives the value of Rs. 150 per share.
Balance Sheet of Best Ltd. (After absorption)

Particulars Note Rs.
Equity and Liabilitie
1. Shareholders' funds
2. Current liabilities 21,00,000
Total 68,90,000
Assets
1. Non-current assets
a Fixed assets
Tangible assets 3 40,00,000
b Non-current investments 5,00,000
2. Current assets 23,90,000
Total 68,90,000
Notes to accounts
Rs.
1 Share Capital
Issued & Subscribed
30,000 shares of Rs. 100
(Of the above 10,000 shares have been issued for consideration other than cash) 30,00,000
Total
2 Reserves and Surplus 30,00,000
Capital Reserve (3,00,000 – 10,000) 2,90,000
Securities Premium 5,00,000
Other reserves and surplus 10,00,000
Total 17,90,000
3 Tangible assets
Fixed Assets 25,00,000
Acquired during the year 15,00,000
Total 40,00,000
Q50.
In the Books of P Ltd.

Realization Account
Rs Rs
To Land & Building 4,50,000 By 8% Debentures 2,00,000
To Plant & Machinery 6,20,000 By Trade Payables 88,000
To Furniture & Fitting 1,00,000 By PQ Ltd. 16,02,100
To Trade receivables 3,25,000 (Purchase consideration)
To Inventory/Stock 2,33,000 By Equity Shareholders A/c 1,37,900
To Cash at Bank 2,08,000 (loss)
To Cash in Hand 54,000
To Preference shareholders 38,000
(excess payment)
20,28,000 20,28,000
5.42
Equity Shareholders Account

Rs Rs
To Realization A/c (loss) 1,37,900 By Share capital 8,20,000
To Equity Shares in PQ Ltd. 10,82,400 By Profit & Loss A/c 3,52,000
To Cash 1,01,700 By General Reserve 1,50,000
13,22,000 13,22,000
9% Preference Shareholders Account

To Preference Shares in 4,18,000 By Pref. Share capital 3,80,000
PQ Ltd. By Realization A/c 38,000
4,18,000 4,18,000
PQ Ltd. Account
T Realization A/c 16,02,100 By Shares in PQ Ltd.
o For Equity 10,82,40
For Pref. 0 15,00,400
By Cash 4,18,000 1,01,700
16,02,100 16,02,100
8% Debentures holders Account

To 6% Debentures 2,00,000 By 8% Debentures 2,00,000
Books of Q Ltd.
Realization Account
Rs Rs
To Land & Building 3,40,000 By 8% Debentures 1,00,000
To Plant & Machinery 4,50,000 By Trade payables 1,60,000
To Furniture & Fittings 50,000 By Unsecured loan 1,75,000
To Trade receivables 1,50,000 By PQ Ltd. (Purchase
To Inventory 1,05,000 consideration) 7,92,250
To Cash at bank 1,75,000 By Equity Shareholders A/c 90,750
To Cash in hand 20,000 Loss
To Pref. shareholders 28,000
13,18,000 13,18,000
Equity Shareholders Account

Rs Rs
To Equity shares in PQ Ltd 4,22,400 By Share Capital 3,20,000
To Realization 90,750 By Profit & Loss A/c 2,05,000
To Cash 61,850 By General Reserve 50,000
5,75,000 5,75,000
9% Preference Shareholders Account

Rs Rs
To Preference Shares in PQ Ltd. 3,08,000 By Share capital 2,80,000
By Realization A/c 28,000
3,08,000 3,08,000
5.43
PQ Ltd. Account
Rs Rs.
To Realization A/c 7,92,250 By Equity shares in PQ Ltd.
For Equity 4,22,400
Preference 3,08,000 7,30,400
By Cash 61,850
7,92,250 7,92,250
8% Debentures holders Account

Rs Rs
To 6% Debentures 1,00,000 By 8% Debentures 1,00,000
Working Notes:
(i)Purchase consideration
P Ltd. Q Ltd.
Payable to preference shareholders: 4,18,000 3,08,000
Preference shares at Rs 22 per share 10,82,400 4,22,400
Equity Shares at Rs 22 per share 1,01,700 61,850
Cash [See W.N. (ii)] 16,02,100 7,92,250
(ii)Value of Net Assets

P Ltd. Q Ltd.
Land & Building 4,50,000 3,40,000
Plant & Machinery less 10% Depreciation 5,58,000 4,05,000
Furniture & Fittings less 10% Depreciation 90,000 45,000
Trade receivables less 5% 3,08,750 1,42,500
Inventory less 5% 2,21,350 99,750
Cash at Bank 2,08,000 1,75,000
Cash in Hand 54,000 20,000
18,90,100 12,27,250
Less: Debentures 2,00,000 - 1,00,000
Trade payables 88,000 1,60,000
Secured Loans - (2,88,000) 1,75,000 (4,35,000)
16,02,100 7,92,250
Payable in Shares 15,00,400 7,30,400
Payable in cash 1,01,700 (61,850)
(iii)
P Q
Plant &Machinery 6,20,000 4,50,000

Less: Depreciation 10% 62,000 45,000
5,58,000 4,05,000
Furniture & Fixtures 1,00,000 50,000
Less: Depreciation 10% 10,000 5,000
90,000 45,000
*This cash is paid to equity shareholders of both the companies for adjustment of their rights as per
intrinsic value of both companies.
5.44

1. In case of amalgamation, the entry for elimination of unrealized profit or loss on stock is made
(a)By the vendor company
(b)By the purchasing company
(c)By the third party
2. Under the ‘pooling of interests’ method, the difference between the purchase consideration and share
capital of the transferee company should be adjusted to
(a)General reserve.
(b)Amalgamation adjustment account.
(c)Goodwill or capital reserve.
3. At the time of amalgamation, purchase consideration does not include

(a)The sum which the transferee company will directly pay to the creditors of the transferor company
(b)Payments made in the form of assets by the transferee company to the shareholders of the transferor
company
(c)Preference shares issued by the transferee company to the preference shareholders of the transferor
company
4. As per AS 14, purchase consideration is the amount agreed payable to

(a)Shareholders
(b)Shareholders, debenture holders and creditors
(c)Shareholders and debenture holders
5. If expenses of liquidation of the vendor company are paid by the purchasing company then, in purchasing
company’s book, the account debited is
(a)Goodwill account.
(b)Liquidation expense account.
(c)Vendor company account
6. Amalgamation adjustment reserve is opened in the books of the amalgamating company to incorporate
(a)Assets of the amalgamating company
(b)Non Statutory reserves of the amalgamating company
(c)Statutory reserves of the amalgamating company
7. Amalgamation Adjustment Reserve is presented in the financial statements of the transferee company as
(a)Other current asset.
(b)Separate line item with a negative sign under the head ‘Reserves and Surplus’.
(c)Other non-current assets.
Answers: [1.(b), 2.(a), 3. (a), 4.(a), 5. (a), 6. (c); 7. (b])
5.45
REVISION STRUCTURE
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5.46
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SUMMARY NOTES
5.47
SUMMARY NOTES
5.48
Chapter 6- Internal Reconstruction CA P. S. Beniwal (9990301165)
Q.1 The Balance Sheet of A & Co. Ltd. As on 31-12-1999 is as follows:
Assets Rs. Rs.

Fixed Assets:
Freehold Property 4,25,000
Plant 50,000
Patent 37,500
Goodwill 1,30,000 6,42,500
Traded Investments (at cost) 55,000
Current Assets:
Debtors 4,85,000
Stock 4,25,000
Deferred Adverting 1,00,000 10,10,000
Profit and Loss Account 4,35,000
Total 21,42,500
Liabilities
Share Capital:
4,000 6% Cumulative Preference Shares of
Rs. 100 each 4,00,000
75,000 Equity Shares of Rs. 10 each 7,50,000 11,50,000
6% Debentures (Secured on Freehold
Property) 3,75,000
Accrued Interest 22,500 3,97,500
Current Liabilities
Creditors 3,00,000
Directors’ Loans 1,00,000 5,95,000
Total 21,42,500
The Court approved a Scheme of re-organization to take effect on 1-1-2000, whereby:

(i) The Preference Share to be written down to Rs. 75 each and Equity Shares to Rs. 2 each.
(ii) Of the Preference Share dividends which are in arrears for four years, three fourths to be waived and Equity
Shares of Rs. 2 each to be allotted for the remaining quarter.
(iii) Accrued interest on debentures to be paid in cash.
(iv) Debenture-holders agreed to take over freehold property, books value Rs. 1,00,000 at a valuation of Rs.
1,20,000 in part repayment of their holding and to provide additional cash of Rs. 1,30,000 secured by a
floating charge on company’s assets at an interest rate of 8% p.a.
(v) Patents, Goodwill and Deferred Advertising to be written off.
(vi) Stock to be written off by Rs. 65,000.
(vii) Amount of Rs. 68,500 to provided for bad debts.
(viii) Remaining freehold property to be re-valued at Rs. 3,87,500.
(ix) Trade Investments be sold for Rs. 1,40,000.
(x) Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares of Rs. 2 each
and as to 5% in cash, and balance 5% being waived.
(xi) There were capital commitment totaling Rs. 2,50,000. These contacts are to be cancelled on payment of 5%
of the contract price as a penalty.
(xii) Ignore taxation and cost of the scheme.
You are requested to show Journal entries reflection the above transaction (including cash transactions) and
prepare the Balance Sheet of the company after completion of the Scheme.
6.1
Q2. S.P. Construction Co. finds itself in financial difficulty. The following is the balance sheet on 31 st December, 99.

Share Capital Land 1,56,000
20,000 Equity Shares of Building (Net) 27,246
Rs 10 each fully paid 2,00,000 Equipment 10,754
5% cum. Pref. Shares of Goodwill 60,000
Rs. 10 each fully paid 70,000 Investment
8% Debentures 80,000 (Quoted) in shares 27,000
Loan from Directors 16,000 Stock 1,20,247
Trade Creditors 96,247 Sundry Debtors 70,692
Bank Overdraft 36,713 Profit & Loss A/c 39,821
Interest Payable on 12,800
Debentures
5,11,760 5,11,760
The authorized capital of the company is 20,000 Equity shares of Rs. 10 each and 10,000 5% Cum. Preference
Shares of Rs. 10 each.
During a meeting of shareholders and directors, it was decided to carry out a scheme of internal reconstruction.
The following scheme has been agreed:
(1) The equity shareholders are to accept reduction of Rs. 7.50 per share. And each equity share of Rs. 2.50
each.
(2) The equity shareholders are to subscribe for a new share on the basis of 1 for 1 at price of Rs. 3 per share.
(3) The existing 7,000 Preference Shares are to be exchanged for a new issue of 3,500 8% Cumulative
Preference Shares of Rs. 10 each and 14,000 Equity Shares of Rs. 2.50 each.
(4) The Debenture holders are to accept 2,000 Equity shares of Rs. 2.50 each in lieu of interest payable.
The interest rate is to be increased to 9½%. Further Rs. 9,000 of this 9½% Debentures are to be issued and
taken up by the existing holders at Rs. 90 for Rs. 100.
(5) Rs. 6,000 of director’s Loan is to be debited. The balance is to be fully settled by issue of 1,000 Equity
Shares of Rs. 2.50 each.
(6) Goodwill and the profit and loss account balance are to be written off.
(7) The investment is shares is to be sold at current market value of Rs. 60,000.
(8) The bank overdraft is to be repaid.
(9) Rs. 46,000 is to be paid to trade creditors now and balance at quarterly intervals.
(10) 10% of the debtors are to be written off.
(11) The remaining assets were professionally valued and should be included in the books of account as follows:
Rs.
Land 90,000
Building 80,000
Equipment 10,000
Stock 50,000
(12) It is expected that due to changed condition and new management operation profit will be earned at the rate
of RS. 50,000 p.a. after depreciation but before interest and tax. Due to losses brought it is unlikely that any
tax liability will arise until 2002.
You are required to show the necessary journal entries to effect the reconstruction scheme; prepare the balance
sheet of the company immediately after the reconstruction.
6.2
Q3. The Balance Sheet of Revise Limited as at 31st March, 1999 was as follows:
Authorized and subscribed Fixed Assets:
Capital: Machineries 1,00,000
10,000 Equity shares of Current assets:
Rs. 100 each fully paid 10,00,000 Stock 3,20,000
Unsecured Loans: Debtors 2,70,000
12% Debentures 2,00,000 Bank 30,000
Accrued interest 24,000
Current liabilities-creditors 72,000 Profit and Loss A/c 6,00,000
Provision for income tax 24,000
13,20,000 13,20,000
It was decided to reconstruct the company for which necessary resolution was passed and sanctions were
obtained from appropriate authorities. Accordingly, it was decided that:-
(a) Each share be sub-divided into ten fully paid up equity shares of Rs. 10 each.
(b) After sub-division, each shareholder shall surrender to the company 50% of his holding, for the purpose of
re-issue to debenture holders and creditors as necessary.
(c) Out of shares surrendered, 10,000 shares of Rs. 10 each shall be converted into 12% preference shares of Rs.
10 each fully paid up.
(d) The claims of the debenture-holders shall be reduced by 75 per cent. In consideration of the reduction, the
debenture holders shall receive preference shares of Rs. 1,00,000 which are converted out of shares
surrendered.
(e) Creditors claim shall be reduced to 50 per cent, it is to be settled by the issue of equity shares of Rs. 10 each
out of shares surrendered.
(f) Balance of profit and loss account to be written off.
(g) The shares surrendered and not re-issued shall be cancelled.
You are required to show the journal entries giving effect to the above and the resultant balance Sheet.
Ans.: Balance Sheet Total 7,20,000
Q4. Following is the Balance Sheet of Mohan Chemicals Ltd. as at 31st March 1991:

Authorized and Issued Capital Goodwill and
12,000 7% Pref. Shares of Trade marks at cost 4,18,000
Rs. 50 each fully paid 6,00,000 Building at cost
15,000 Equity Shares of Less Depreciation 3,00,000
Rs. 50 each fully paid 7,50,000
13,50,000 Plant, Machinery and
Furniture at cost
Loans 5,73,000 Less depreciation 2,68,000
Current Liabilities 35,000 Preliminary Expenses 21,000
Stock-in-trade 3,50,000
Sundry Debtors 3,78,000
P & L Account 4,30,000
21,65,000 21,65,000
Note: Preference Dividends are in arrear for 5 years.
The company is now earning profit but is badly in need of additional working capital. The following scheme of
reconstruction has, therefore, been approved by both the classes of shareholders and has been sanctioned by the
Court.
Equity shares be reduced to Rs. 2.50 per share and the Equity Shareholders to subscribe, in cash, three equity
shares of Rs. 2.50 each for each equity share now held (b) To issue four fully paid new 5 per cent preference
shares of Rs. 10 each plus six fully paid new equity shares of Rs. 2.50 each to preference shareholders for each
preference share now held. These shareholders have agreed to cancel all arrears of preference dividends also.
6.3
(c) Several loan creditors lending Rs. 1,50,000 have agreed to settle by converting their loans into 12,000 5 per
cent preference as fully paid shares. (d) In addition to shares to be subscribed by the directors under (a) above
they have agreed to subscribe, in cash, for 40,000 equity shares of Rs. 2.50 each. (e) Share Capital thus reduced
is to be applied in writing off the preliminary expenses and the debit balance in the Profit and Loss Account.
Balance remaining thereafter should be used to write down the value of Goodwill and Trade Marks Account.
Show the necessary Journal entries recording this scheme and prepare the Balance Sheet of the company after
reconstruction.
Q5. Balance Sheet as at 31st March, 1993:

2,00,000 equity shares of Fixed Assets 11,40,000
Rs. 10 each, Rs. 5 paid 10,00,000 Patents and
6,000 8% Preference Copyrights 80,000
Shares of Rs. 100 each 6,00,000 Investment at cost 65,000
9% Debentures 6,00,000 (Market value
Interest accrued on debentures 1,08,000 Rs. 55,000)
Bank of India 1,50,000 Current Assets:
Interest accrued on Bank Stock 4,00,000
Overdraft 15,000 Debtors 4,39,000
Current Liabilities Bank 10,000
Creditors 69,000 Profit and Loss 4,08,000
25,42,000 25,42,000
Preference dividend is in arrear for one year:-
(i) Preference shareholders to give up their claims, inclusive of dividends, to the extent of 30% and desire to be
paid off.
(ii) Debenture-holders agree to give up their claims to interest in consideration of their interest being enhanced
to 12%.
(iii) Bank agrees to give up 50% of its interest outstanding in consideration of its being paid off at once.
(iv) Creditors would like to grant a discount of 5% if they are paid immediately.
(v) Balance of Profit & Loss Account, Patents and Copyrights and Debtors of Rs. 30,000 to be written off.
(vi) Fixed Assets to be written down by Rs. 34,000.
(vii) Investments are to reflect their marked value.
(viii) To the extent not specifically stated, equity shareholders suffer on reduction of their rights. Cost of
reconstruction is Rs. 3,350.
Draft journal entries in the books of the company assuring that the scheme has been put through fully with the
equity shareholders bringing in necessary cash to pay off the parties and to leave a working capital of Rs. 30,000,
and prepare the Balance Sheet after reconstruction.
Q6. Green Limited had decided to reconstruct the Balance Sheet since it had accumulated huge losses. The following
is the Balance Sheet of the Company on 31.3.2000 before reconstruction:
Authorized: Goodwill 20,00,000
1,50,000 Equity Shares Building 10,00,000
of Rs. 50 each 75,00,000 Plant 10,00,000
Subscribed and paid up Computers 25,00,000
Capital: Investments Nil
50,000 Equity Shares Current Assets Nil
of Rs. 50 each 25,00,000 Profit and Loss A/c 20,00,000
1,00,000 Equity Shares
of Rs. 50 each
Rs. 40 per Share paid up 40,00,000
6.4
Secured Loans:
12% First Debentures 5,00,000
12% Second Debentures 10,00,000
Current Liabilities
85,00,000 85,00,000
The following is the interest of Mr. X and Mr. Y in Green Limited:
Mr. X Mr. Y
Rs. Rs.
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
12,00,000 6,00,000
Fully paid up Rs. 50 Shares 3,00,000 2,00,000
Partly paid up Shares (Rs. 40 paid up) 5,00,000 5,00,000
The following Scheme of Reconstruction is approved by all parties interested and also by the, Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be converted into
equity shares of Rs. 20 each.
(b) Mr. X is to cancel Rs.7,00,000 of his total debt (other than share amount) and to pay Rs. 2 lakhs to the
company and to receive new 14% First Debentures for the balance amount.
(c) Mr. Y is cancel Rs. 3,00,000 of his total debt (other than equity shares) and to accept new 14% Debentures
for the balance.
(d) The amount thus rendered available by the scheme shall be utilized in writing off of Goodwill, Profit and
Loss A/c and the balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the
reconstructed company.
Q7. The paid-up capital of Toy Ltd. amounted to Rs. 2,50,000 consisting of 25,000 equity shares of Rs. 10 each.
Due to losses incurred by the company continuously, the directors of the company prepared a scheme for
reconstruction which was duly approved by the court. The terms of reconstruction were, as under:
(i) In lieu of their present holdings, the shareholders are to receive:
(a) Fully paid equity shares equal to 2/5th of their holdings.
(b) 5% preference shares fully paid-up to the extent of 20% of the above new equity shares.
(c) 3,000 6% second debenture of Rs. 10 each.
(ii) An issue of 2,500 5% first debentures of Rs. 10 each was made and fully subscribed in cash.
(iii) The assets were reduced as follows:
(a) Goodwill from Rs. 1,50,000 to Rs. 75,000.
(b) Machinery from Rs. 50,000 to Rs. 37,500.
(c) Leasehold premises form Rs. 75,000 to Rs. 62,500.
Show the journal entries to give effect to the above scheme of reconstruction.
Q8. The following is the Balance Sheet of Rocky Ltd. as at March 31, 2002:
Liabilities Rs. In Lacs
Fully paid equity shares of Rs. 10 each 500
Capital Reserve 6
12% Debentures 400
Debenture Interest Outstanding 48
Trade Creditors 165
Directors’ Remuneration Outstanding 10
Other Outstanding Expenses 11
Provisions 33
1,173
6.5
Assets
Goodwill 15
Land and Machinery 184
Plant and Machinery 286
Furniture and Fixtures 41
Stock 142
Debtors 80
Cash at Bank 27
Discount on Issue of Debentures 8
Profit and Loss Account 390
1,173
The following scheme of internal reconstruction was framed, approved by the court, all the concerned parties
and implemented:
(1) All the equity shares be converted into the same number of fully-paid equity shares of Rs. 2.50 P. Each.
(2) Directors agree to forgo their outstanding remuneration.
(3) The debenture holders also agree to forgo outstanding interest in return of their 12% debentures being
converted into 13% debentures.
(4) The existing shareholders agree to subscribe for cash, fully paid equity shares of Rs. 2.50 P. each for Rs. 125
lacs.
(5) Trade creditors are given the option of either to accept fully-paid equity shares of Rs. 2.50 each for the
amount due to them or to accept 80% of the amount due in cash. Creditors for Rs. 65 lacs accept equity
shares whereas those for Rs. 100 lacs accept Rs. 80 lacs in cash in fully settlement.
(6) The assets are revalued as under:
Rs. In Lacs
Land and Building 230
Stock 120
Debtors 76
Pass Journal Entries for all the above mentioned transaction and draft the company’s Balance Sheet immediately
after the reconstruction.
Q9. Balance Sheet of R Ltd. as on 31-12-2000.

Authorized Issued and Goodwill 50,000
Subscribed Capital: Plant 3,00,000
30,000 Equity shares of Loose Tools 10,000
Rs. 10 each 3,00,000 Debtors 2,50,000
2,000 8% Cumulative Stocks 1,50,000
Preference shares of 100 Cash 10,000
Each fully paid 2,00,000 Bank 35,000
Share Premium 90,000 Preliminary Exp. 5,000
Unsecured Loan P & L A/c 2,00,000
(From Director) 50,000
Sundry Creditor 3,00,000
Outstanding Expenses
(including Directors
remuneration – 20,000) 70,000
10,10,000 10,10,000
Note: Dividends on cumulative preference shares are in arrears for 3 years.
The following scheme of reconstruction has been agreed upon and duly approved by the court:
(1) Equity shares to be converted into 1,50,000 shares of Rs. 2 each.
(2) Equity shareholders to surrender to the company 90 per cent of their holding.
(3) Preference shareholders agree to forego their right to arrears to dividend 8 per cent preference shares are to
be converted into 9 per cent preference shares.
6.6
(4) Sundry creditors agree to reduce their claim by one-fifth in consideration of their getting shares of Rs.
35,000 out of the surrendered equity shares.
(5) Directors agree to forego loan and remuneration.
(6) Surrendered shares not otherwise utilized to be cancelled.
(7) Assets to be reduced as under.
Goodwill by Rs. 50,000
Plant by Rs. 40,000
Tools by Rs. 8,000
S/Debtors by Rs. 15,000
Stock by Rs. 20,000
(8) Any surplus after meeting the losses should be utilized in writing down the value of the plant further.
(9) Expenses of reconstruction amounted to Rs. 10,000.
(10) Further 50,000 equity shares were issued to the existing members for increasing the working capital. The
issue was fully subscribed and paid up.
(11) Authorized capital was suitably increased.
You are required to pass the journal entries for giving effect to the above arrangement and also to draw up the
resultant balance sheet of the company:
Q10. The following is the balance sheet of Pune Estate Ltd. as on 31 March 1996:
Authorized: Pune Property 1,60,000
30,000 Equity Shares Bombay Property 1,20,000
of Rs. 10 each 3,00,000 Plant and Machinery 1,50,000
30,000, 7% Pref. Shares Investments:
of Rs. 10 each 6% Government loan
3,00,000 earmarked against
6,00,000 Workmen’s compensation
Subscribed, Issued and fund 30,000
Paid –up: Miscellaneous expenditure
20,000 Equity Shares of and losses:
Rs. 10 each fully paid Profit and Loss Account 40,000
18,000, 7% Pref. Shares of 2,00,000
Rs. 10 fully paid 1,80,000
Workmen’s compensation
Fund:
Pune 20,000
Bombay 10,000 30,000
Secured loan:
6% ‘a’ Debentures 30,000
secured on Pune Property
6% ‘B’ Debentures
secured on Bombay 35,000
Property
5,00,000 5,00,000
The following scheme of reconstruction was duly approved:
(i) Equity shares were to be reduced to Re. one each.
(ii) Preference shares were to be reduced by Rs. Two per shares.
(iii) Debenture holders were to forgo their unpaid interest Rs. 5,200 which is included in sundry creditors.
(iv) ‘B’ Debenture holders agreed to take over the Bombay property at Rs. 50,000 and paid the balance amount
due from them in cash.
6.7
(v) Workmen’s compensation fund (Bombay) disclosed the fact that actually there was a liability of Rs. 2,000
only. As a result the relevant fund amount balance was to be brought down to the required amount.
Investments were realized at 10% above the book value.
(vi) The Plant and machinery were to be written down by Rs. 90,000.
(vii) Any balance remaining was to be applied as to 75% in writing down Pune property and 25% transferred to
capital reserve.
Pass the necessary journal entries and prepare a balance sheet as on 1 April 1996 after giving effect to the above
scheme.
Q11. The balance sheet of Overcome Ltd. before reconstruction is:

Liabilities Amount Assets Amount (Rs.)
(Rs.)
Authorised and issued Building at cost less
capital
15,000 Equity shares of 7,50,000 Depreciation 4,00,000
Rs.50 each
12,000 7% Preference
6,00,000 Plant at cost less
shares of
Rs. 50 each Depreciation 2,68,000
(Note: Preference dividend Trademarks and goodwill at 3,18,000
is in arrear for five years) cost
Loan 5,73,000 Stock 4,00,000
Sundry creditors 2,07,000 Debtors 3,28,000
Other Liabilities 35,000 Preliminary expenses 11,000
Profit and loss account 4,40,000
21,65,000 21,65,000
The Company is now earning profits short of working capital and a scheme of reconstruction has
been approved by both classes of shareholders. A summary of the scheme is as follows:
(a) The equity shareholders have agreed that their Rs. 50 shares should be reduced to Rs. 2.50
by cancellation of Rs. 47.50 per share. They have also agreed to subscribe for three new equity
shares of Rs. 2.50 each for each equity share held.
(b) The preference shareholders have agreed to cancel the arrears of dividends and to accept for each Rs.
50 share, 4 new 5% preference shares of Rs. 10 each, plus 6 new equity shares of Rs. 2.50 each, all
credited as fully paid.
(c) Lenders to the company for Rs. 1,50,000 have agreed to convert their loan into share and for this
purpose they will be allotted 12,000 new preference shares of Rs. 10 each and 12,000 new equity
share of Rs. 2.50 each.
(d) The directors have agreed to subscribe in cash for 40,000 new equity shares of Rs. 2.50 each, in
addition to any shares to be subscribed by them under (a) above.
(e) Of the cash received by the issue of new shares, Rs. 2,00,000 is to be used to reduce the loan due
by the company.
(f) The equity share capital cancelled is to be applied:
(i) to write off the preliminary expenses;
(ii) to write off the debit balance in the Profit and loss A/c; and
(iii) to write off Rs. 35,000 from the value of plant.
Any balance remaining is to be used to write down the value of trademarks and goodwill.
6.8
Show by journal entries how the financial books are affected by the scheme and prepare the balance sheet of
company after reconstruction. The nominal capital as reduced is to be increased to the old figures of Rs.
6,50,000 for preference share capital and Rs. 7,50,000 for equity share capital.
Q12. The Balance Sheet of Y Limited as on 31st March, 2003 was as follows:
(Rs.) (Rs.)
5,00,000 Equity Shares of 50,00,000 Goodwill 10,00,000
Rs. 10 each fully paid
9% 20,000 Preference shares of 20,00,000 Patent 5,00,000
Rs. 100 each fully paid
10% First debentures 6,00,000 Land and Building 30,00,000
10% Second debentures 10,00,000 Plant and machinery 10,00,000
Debentures interest outstanding 1,60,000 Furniture and Fixtures 2,00,000
Trade creditors 5,00,000 Computers 3,00,000
Directors loan 1,00,000 Trade Investment 5,00,000
Bank O/D 1,00,000 Debtors 5,00,000
Outstanding liabilities 40,000 Stock 10,00,000
Provision for Tax 1,00,000 Discount on issue of 1,00,000
Debentures
Profit and Loss Account 15,00,000
(Loss)
96,00,000 96,00,000
Note: preference dividend is arrears for three years.
A holds 10% first debentures for Rs. 4,00,000 and 10% second debentures for Rs. 6,00,000. He is also creditors
for Rs. 1,00,000. B holds 10% first debentures for Rs. 2,00,000 and 10% second debentures for Rs. 4,00,000
and is also creditors for Rs. 50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the court.
(i) All the equity shares be converted into fully paid equity shares of Rs. 5 each.
(ii) The preference shares be reduced to Rs. 50 each and the preference shareholders agree to forego their
arrears of preference dividends in consideration of which 9% preference shares are to be converted into
10% preference shares.
(iii) Mr. ‘A’ is to cancel Rs. 6,00,000 of his total debt including interest on debentures and to pay Rs. 1 lakh to
the company and to receive now 12% debentures for the Balance amount.
(iv) Mr. ‘B’ is to cancel Rs. 3,00,000 of his total debt including interest on debentures and to accept new 12%
debentures for the balance amount.
(v) Trade creditors (other than A and B) agreed to forego 50% of their claim.
(vi) Directors to accept settlement of their loans as to 60% thereof by allotment of equity shares and balance
being waived.
(vii) There were capital commitments totaling Rs. 3,00,000. These contracts are to be cancelled on payment of
5% of the contract price as a penalty.
(viii) The Directors refund Rs. 1,10,000 of the fees preciously received by them.
(ix) Reconstruction expenses paid Rs. 10,000.
(x) The taxation liability of the company is setted at Rs. 80,000 and the same is paid immediately.
(xi) The assets are revalued as under:
Rs.
Stock 7,00,000
Debtors 3,00,000
Computers 1,80,000
Furniture and Fixtures 1,00,000
Trade Investment 4,00,000
6.9
Pass journal entries for all the above mentioned transaction including amounts to be written off of Goodwill,
Patents, Loss in Profit & Loss Account and Discount on issue of debenture. Prepare Bank Account and working
of allocation of Interest on Debentures between A and B.
Answer: Reconstruction Total 47,45,000
Q 13. The Balance Sheet of Munna Ltd. on 31st March, 2005 is as under:
Authorised, issued equity share
Goodwill 2,00,000
capital
20,000 shares of Rs. 100 each 20,00,000 Plant and machinery 18,00,000
10,000 preference shares (7%) of Stock 3,00,000
Rs. 100 each 10,00,000 Debtors 7,50,000
Sundry creditors 7,00,000 Preliminary expenses 1,00,000
Bank overdraft 3,00,000 Cash 1,50,000
________ Profit and loss account 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 forego 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 9% 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 reorganization.
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; and
(e) A proforma balance sheet after reorganization.
Q.14 The Balance Sheet of R Ltd., at March, 2008 was as follows:

Rs. Rs.
Share capital authorised 14,00,000 Intangibles 68,000
Issued: 64,000, 8% Freehold premises at cost 1,40,000
cumulative preference shares Plant and equipment at cost
of Rs. 10 each, fully paid 6,40,000 less depreciation 2,40,000
64,000 Equity shares of Rs. Investments in shares in Q Ltd.
10 each, Rs. 7.5 paid 4,80,000 at cost 3,24,000
Loans from directors 60,000 Stocks 2,48,000
Sundry creditors 4,40,000 Debtors 3,20,000
Bank overdraft 2,08,000 Deferred revenue expenditure 48,000
Profit and loss account 4,40,000
18,28,000 18,28,000
6.10
Note: The arrears of preference dividends amount to Rs. 51,200.
A scheme of reconstruction was duly approved with effect from 1st April, 2008 under the conditions stated
below:
(a) The unpaid amount on the equity shares would be called up.
(b) The preference shareholders would forego their arrear dividends. In addition, they would accept a reduction
of Rs. 2.5 per share. The dividend rate would be enhanced to 10%.
(c) The equity shareholders would accept a reduction of Rs. 7.5 per share.
(d) R Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the share capital of that company. Q Ltd. is not
a quoted company. The average net profit (after tax) of the company is Rs. 2,50,000. The shares would be
valued based on 12% capitalization rate.
(e) A bad debt provision at 2% would be created.
(f) The other assets would be valued as under:
Rs.
Intangibles 48,000
Plant 1,40,000
Freehold premises 3,80,000
Stocks 2,50,000
(g) The profit and loss account debit balance and the balance standing to the debit of the deferred revenue
expenditure account would be eliminated.
(h) The directors would have to take equity shares at the new face value of Rs. 2.5 per share in settlement of
their loan.
(i) The equity shareholders, including the directors, who would receive equity shares in settlement of their
loans, would take up two new equity shares for every one held.
(j) The preference shareholders would take up one new preference share for every four held.
(k) The authorised share capital would be restated to Rs. 14,00,000.
(l) The new face values of the shares-preference and equity will be maintained at their reduced levels.
(i) Necessary ledger accounts to effect the above; and
(ii) The Balance Sheet of the company after reconstruction.
Solution:
In the books of R Ltd.
Ledger Accounts
Capital Reduction Account

Rs. Rs.
To Intangibles 20,000 By 8% Cumulative preference
(68,000 – 48,000) shares capital account 1,60,000
To Plant and equipment account 1,00,000 By Equity share capital account 4,80,000
(2,40,000 – 1,40,000)
To Deferred revenue expenditure 48,000 By Freehold premises account 2,40,000
Account (3,80,000 – 1,40,000)
To Profit and loss account 4,40,000 By Stock account 2,000
To Investment account (W.N. 2) 11,500 (2,50,000 –2,48,000)
To Provision for doubtful debts 6,400
To Capital reserve account
(Balance Transferred) 2,56,100
8,82,000 8,82,000
6.11
Equity Share Capital Account

Rs. Rs.
To Capital reduction account 4,80,000 By Balance b/d 4,80,000
To Balance c/d 6,60,000 By Bank account - final call 1,60,000
(64,000 × Rs.2.5)
By Loan from Directors account 60,000
By Bank account
[(64,000+24,000) ×2 × Rs.2.5] 4,40,000
11,40,000 11,40,000
8% Cumulative Preference Share Capital Account

Rs. Rs.
To 10% Cumulative preference 4,80,000 By Balance b/d 6,40,000
share capital account
To Capital reduction account 1,60,000
6,40,000 6,40,000
Bank Account
Rs. Rs.
To Equity share capital Account 1,60,000 By Balance b/d (overdraft) 2,08,000
To Equity share capital account 4,40,000 By Balance c/d 5,12,000
To 10% Cumulative preference 1,20,000
7,20,000 7,20,000
10% Cumulative Preferences Share Capital Account

Rs. Rs.
To Balance c/d 6,00,000 By 8% Cumulative preference 4,80,000
share capital account
By Bank (16,000 x Rs. 7.5) 1,20,000
6,00,000
Balance Sheet of R. Ltd. (and Reduced) as at 1 April, 2008

Rs. Rs.
I. Equity and Liability
1. Shareholder Fund:-
(a) Share Capital
Authorised: Share capital 14,00,000
Issued: 80,000 10% Cumulative
preference shares of Rs.7.5 each 6,00,000
2,64,000 equity shares of Rs.2.5 each 6,60,000 12,60,000
(b) Reserve and Surplus
Capital reserve 2,56,100
2. Current Liability
Sundry creditors 4,40,000
Total 19,56,100
II. Assets
1. Non-current Assets
(a) Fixed Asstes
Tangible
Plant and equipment 1,40,000 5,20,000
Intangibles 48,000
(b) Investment in Q Ltd. (W.N.1) 3,12,500
2. Current Assets
Stock 2,50,000
Debtors 3,13,600
Bank 5,12,000
Total 19,56,100
6.12
Working Notes:
1. Valuation of investments in shares of Q Ltd. = (2,50,000/.12)*15/100=Rs.3,12,500
2. Reduction in the value of investment in shares of Q Ltd.
Rs.3,24,000 – Rs.3,12,500 = Rs.11,500.
Q. 15 Following is the Balance Sheet of ABC Ltd. as at 31st March, 2007:

Share capital: Plant and machinery 9,00,000
2,00,000 Equity shares of Furniture and fixtures 2,50,000
Rs 10 each fully paid up 20,00,000 Patents and copyrights 70,000
6,000 8% Preference shares Investments (at cost)
of Rs. 100 each 6,00,000 (Market value Rs. 55,000) 68,000
9% Debentures 12,00,000 Stock 14,00,000
Bank overdraft 1,50,000 Sundry debtors 14,39,000
Sundry creditors 5,92,000 Cash and bank balance 10,000
Profit and Loss A/c 4,05,000
45,42,000 45,42,000
The following scheme of reconstruction was finalised:
a) Preference shareholders would give up 30% of their capital in exchange for allotment of 11%
Debentures to them.
b) Debenture holders having charge on plant and machinery would accept plant and machinery in full
settlement of their dues.
c) Stock equal to Rs.5,00,000 in book value will be taken over by sundry creditors in full settlement of
their dues.
d) Investment value to be reduced to market price.
e) The company would issue 11% Debentures for Rs.3,00,000 and augment its working capital requirement
after settlement of bank overdraft.
Pass necessary Journal Entries in the books of the company. Prepare Capital Reduction account and Balance
Sheet of the company after internal reconstruction.
Q16. The shareholders of Sunrise Ltd. decided on a corporate restructuring exercise necessitated due to economic
recession and a slump in business. From the audited statements as on 31-3- 2010 and the information supplied,
you are requested to prepare:
(i) Journal entries reflecting the scheme of reconstruction,
(ii) The capital reduction account,
(iii) The cash account of the entity.
Balance Sheet of Sunrise Ltd. as on 31.3.2010

Share Capital Fixed Assets
30,000 Equity shares of Rs. 10 each 3,00,000 Trademarks and Patents 1,10,000
40,000 8% Cumulative Preference
shares Rs. 10 each 4,00,000 Goodwill at cost 36,100
Reserves and Surplus Freehold Land 1,20,000
Securities Premium Account 10,000 Freehold Premises 2,44,000
Profit and Loss Account (1,38,400) Plant and Equipment 3,20,000
Secured Borrowings: Investment (marked to
9% Debentures (Rs. 100) 1,20,000 Market) 64,000
Accrued Interest 5,400 1,25,400 Current Assets
Creditors 1,20,000 Inventories:
Raw materials and
packing materials 60,000
Deferred vat payable 50,000 Finished goods 16,000 76,000
Temporary bank overdraft 2,23,100 Trade receivable 1,20,000
10,90,100 10,90,100
Note: Preference dividends are in arrears for 4 years.
6.13
The scheme of reconstruction that received the permission of the Court was on the following lines:
(1) The authorized capital of the Company to be re-fixed at Rs. 10 lakhs (preference capital Rs. 3 lakhs and
equity capital 7 lakhs both Rs. 10 shares each).
(2) The preference shares are to be reduced to Rs.5 each and equity shares reduced by Rs. 3 per share. Post
reduction, both classes of shares to be re-consolidated into Rs. 10 shares.
(3) Trade Investments are to be liquidated in open market.
(4) One fresh equity shares of Rs. 10 to be issued for every Rs. 40 of preference dividends in arrears (ignore
taxation).
(5) The securities premium is to be fully utilized to meet the reconstruction programme.
(6) The debenture holders took over freehold land at Rs. 2,10,000 and settled the balance after adjusting their
dues.
(7) Unprovided contingent liabilities were settled at Rs. 54,000 and a pending insurance claim receivable settled
at Rs. 12,500 on condition that claim will be immediately settled.
(8) The intangible assets were all to be written off along with Rs. 10,000 worth obsolete packing material and
10% of the receivables.
(9) Expenses for the scheme were Rs. 10,000.
(10) Remaining cash available as a result of the above transactions is to be utilized to pay off the bank overdraft
to that extent.
(11) The Equity shareholders agree that they will bring in cash to liquidate the balance outstanding on the
overdraft account and also agree that sufficient funds will be bought in to bring up the net working capital,
after completing the re-structuring exercise, to Rs. 2 lakhs. The equity shares will be issued at par for this
purpose.
Solution:
Balance Sheet (as reduced) as on 31.3.2010
Particulars Note No. (Rs.)

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 7,64,000
(2) Non-Current Liabilities

Deferred vat payable 50,000

Trade payables 1,20,000
Total 9,34,000
II. Assets
(1) Non-current assets

(a) Fixed assets
i. Tangible assets 2 5,64,000
(2) Current assets

(a) Inventories 3 1,74,000
(b) Cash and cash equivalents 1,96,000
Total 9,34,000
6.14
Notes to Accounts
Rs. Rs.
1. Share Capital
Authorised share capital:
70,000 Equity shares of Rs. 10 each 7,00,000
30,000 Preference shares of Rs. 10 each 3,00,000
10,00,000
Issued share capital:
56,400 Equity shares of Rs. 10 each (W.N.1) 5,64,000
20,000 Preference shares of
Rs. 10 each (W.N.1)
2,00,000 7,64,000
2. Tangible Assets
Plant & equipment 3,20,000 5,64,000
3. Inventories:
Raw materials and packing materials - 50,000
(60,000 – 10,000)
Finished goods 16,000
Trade receivables (1,20,000-12,000) 1,08,000 1,74,000
Capital Reduction Account

To Equity share capital 32,000 By Preference share capital 2,00,000
To Cash (contingent liability 54,000 By Equity share capital 90,000
settled)
To Trademarks and Patents 1,10,000 By Freehold land (2,10,000- 90,000
1,20,000)
To Goodwill 36,100 By Cash (insurance claim) 12,500
To Raw material and 10,000
Packing materials
To Trade receivables 12,000
To Profit and loss account 1,38,400
3,92,500 3,92,500
Cash Account

To Investment 64,000 By Capital reduction 54,000
(Contingent liability)
To 9% Debenture holders 84,600
(2,10,000-1,25,400) By Securities Premium- 10,000
Expenses
To Capital reduction 12,500 (See Note)
(insurance claim) 12,500 By Temporary bank overdraft
Equity share capital 3,22,000 (64,000+84,600+12,500-
54,000-10,000) 97,100
By Temporary bank overdraft
(2,23,100 – 97,100) 1,26,000 2,23,100
By Balance c/d (W.N.1) 1,96,000
4,83,100 4,83,100
6.15
Working Notes:
1. Calculation of cash brought in by Equity shareholders:
Net working capital: Rs.
Raw Materials & Packing materials 50,000
Finished goods 16,000
Trade Receivables 1,08,000
1,74,000
Less: Creditors 1,20,000
Deferred VAT payable 50,000 (1,70,000)
4,000
Add : Cash brought in to maintain net working
capital of Rs. 2,00,000 (Bal.fig.) 1,96,000
Desired net working capital 2,00,000
2. Determination of number of shares issued

Equity shares Preference shares
Rs. No. of Rs No. of
shares shares
Share capital as per balance 3,00,000 4,00,000
sheet before reconstruction
Less: Capital reduction (90,000) (2,00,000)
Share capital of Rs. 7 each 2,10,000
Share capital of Rs. 5 each 2,00,000
Consolidated value per share 10 21,000 10 20,000
Add: Shares issued against 3,200
arrears of preference dividend
(Rs. 4,00,000 x 8% x 4
years) /Rs. 40
Add: Shares issued to existing 12,600
equity shareholders for bringing
cash for payment of balance of
bank overdraft (1,26,000/10)
Add: Shares issued to existing
equity shareholders for bringing
cash for maintaining net working
capital of Rs. 2,00,000 (1,96,000/10) 19,600
56,400 20,000
Note: As per Companies Act, 2013, securities premium can be utilized only for limited purpose. Since, the
question requires utilization of securities premium to meet the reconstruction programme, it is assumed that
‘Expenses for the scheme Rs. 10,000’ has been incurred on account of issue of shares to existing shareholders
which is an eligible expense to be set off against securities premium amount.
Q 17. M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses.
The following is the Balance Sheet of the company as on 31st March, 2012 before reconstruction:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Share Capital Goodwill 22,00,000

50,000 shares of Rs. 50 each fully paid up 25,00,000
1,00,000 shares of Rs.50 each Rs.40 paid up 40,00,000 Land and building 42,70,000
Capital Reserve 5,00,000 Machinery 8,50,000
8% Debentures of Rs.100 each 4,00,000 Computers 5,20,000
12% Debentures of Rs.100 each 6,00,000 Stock 3,20,000
Trade Creditors 12,40,000 Trade Debtors 10,90,000
Outstanding expenses 10,60,000 Cash at Bank 2,68,000
Profit and Loss account 7,82,000
Total 1,03,00,000 Total 1,03,00,000
6.16
Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Linited:
Mr. Shiv Mr.
Ganesh
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved by the court and
concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of Rs. 40
each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of Rs. 40 each for Rs.
12,50,000.
(3) Trade creditors are given option of either to accept fully paid equity shares of Rs. 40 each for the amount due
to them or to accept 70% of the amount due to them in cash in fully settlement of their claim. Tread
Creditors for Rs. 7,50,000 accept equity shares and rest of them opted for cash towards full and final
settlement of their claim.
(4) Mr. Shiv agrees to cancel debenture amounting to Rs.2.00,000 out of total debenture due to him and agree to
15% Debenture for the balance amount due. He also agree to subscribe further 15% Debenture in cash
amounting to Rs.1,00,000.
(5) Mr. Ganesh agree to cancel debenture amounting to Rs. 50,000 out of total debenture due to him and agree
to accept 15% Debenture for the balance amount due.
(6) Land and Building to be revalued at Rs. 51,84,000, Machinery at Rs. 7,20,000, Computers at Rs. 4,00,000,
Stock at Rs. 3,50,000 and Tread Debtors at 10% less to as they are appearing in Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
(8) Goodwill and Profit and Loss A/c will be written off and balance, if any, of Capital Reduction A/c will be
adjusted against Capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and draft the company’s
Balance Sheet immediately after the reconstruction.
Q18. Repair Ltd. is in the hands of a receiver for debenture holders who holds a charge on all assets except uncalled
capital. The following statement shows the position as regards creditors as on 30th June, 2012:
6,000 shares of Rs. 60 each, Property, machinery
Rs. 30 paid up and plant etc. (Cost
First debentures 3,00,000 Rs. 3,90,000)
Second debentures 6,00,000 Estimated at 1,50,000
Unsecured creditors 4,50,000 Cash in hand of
the receiver 2,70,000
Charged under debentures 4,20,000
Uncalled capital 1,80,000
6,00,000
Deficiency 7,50,000
13,50,000 13,50,000
A holds the first debentures for Rs. 3,00,000 and second debentures for Rs. 3,00,000. He is also an unsecured
creditor for Rs. 90,000. B holds second debentures for Rs. 3,00,000 and is an unsecured creditor for Rs. 60,000.
6.17
The following scheme of reconstruction is proposed:

1. A is to cancel Rs. 2,10,000 of the total debt owing to him, to bring Rs. 30,000 in cash and to take first
debentures (in cancellation of those already issued to him) for Rs. 5,10,000 in satisfaction of all his claims.
2. B is to accept Rs. 90,000 in cash in satisfaction of all claims by him.
3. In full settlement of 75% of the claim, unsecured creditors (other than A and B) agreed to accept four shares
of Rs. 7.50 each, fully paid against their claim for each share of Rs. 60. The balance of 25% is to be
postponed and to be payable at the end of three years from the date of Court’s approval of the scheme. The
nominal share capital is to be increased accordingly.
4. Uncalled capital is to be called up in full and Rs. 52.50 per share cancelled, thus making the shares of Rs.
7.50 each.
Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary journal entries.
Q19. The Balance Sheet of M/s Clean Ltd. as on 31st March. 2015 was summarized as follow :
Liabilities Amount(Rs.) Assets Amount(Rs.)
Share Capital : Equity Shares Land & Building 75,00,000
of Rs.50 Each fully paid up 60,00,000 Plant & Machinery 22,00,000
9% Preference Shares of Trade Investment 16,50,000
Rs.10 each fully paid up 40,00,000 Inventories 9,50,000
7% Debentures (secured by Trade Receivables 18,00,000
plant & machinery) 23,00,000 Cash and Bank Balances 3,60,000
8% Debentures 17,00,000 Profit & Loss Account 2,15,000
Provision for Tax 75,000
1,46,75,000 1,46,75,000
The Board of Directors of the company decided upon the following scheme of reconstruction duly approved by
all concerned parties:
(1) The equity shareholders agreed to receive in lieu of their present holding of 1,20,000 shares of Rs.50 each as
under:
(a) New fully paid equity shares of Rs.10 each equal to 2/3rd of their holding.
(b) 9% preference shares of Rs.8 each to the extent of 25% of the above new equity share capital.
(c) Rs.2, 80,000, 10% debentures of Rs.80 each.
(2) The preference shareholders agreed that their Rs.10 shares should be reduced to Rs. 8 by cancellation of
Rs.2 per share. They also agreed to subscribe for two new equity shares of Rs.10 each every five preference
shares held.
(3) The taxation liability of the company is settled at Rs. 66,000 and the same is paid immediately.
(4) One of the trade creditors of the company to whom the company owes Rs.1,00,000 decides to forgo 30% of
his claim. He is allotted equity shares of Rs. 10 each in full satisfaction of his balance claim.
(5) Other trade creditors of Rs.5,00,000 are given option of either to accept fully paid 9% preference shares of
Rs 8 each for the amount due to them or to accept 80% of the amount due to them in cash in full settlement
of their claim. Trade creditors for Rs.3,50,000 accepted preference shares option and rest of them opted for
cash towards full settlement of their claim.
(6) Company’s contractual commitments amounting to Rs.6,50,000 have been settled by paying 4% penalty of
contract value.
(7) Debenture holders having charge on plant and machinery accepted plant and machinery in full settlement of
their dues.
(8) The rate of interest on 8% debentures is increased to 10%. The debenture holders surrender their existing
debenture of Rs50 each & agreed to accept 10%debenture of Rs80 each for every 2 debentures held by them.
(9) The land and building to be depreciated by 5%.
(10) The debit balance of profit and loss account is to be eliminated.
(11) 1/4th of trade receivables and 1/5th of inventory to be written off.
Pass journal Entries and prepare Balance Sheet after completion of the reconstruction scheme in the books of
M/s Clean Ltd. as per Schedule III to the Companies Act, 2013.
6.18
Q20. The Balance sheet of Vaibhav Ltd. as on 31st March 2014 is as follows :
Equity Shares of Rs. 100 each 2,00,00,000 Fixed Assets 2,50,00,000
6% Cumulative Preference Shares of 1,00,00,000 Investments 20,00,000
Rs. 100 Each (Market Value Rs. 19.00,000)
5% Debentures of Rs. 100 each 80,00,000 Current Assets 2,00,00,000
Sundry Creditors 1,00,00,000 P & L A/c 12,00,000
Provision for Taxation 2,00,000
TOTAL 4,82,00,000 TOTAL 4,82,00,000
The following scheme of Internal Reconstruction is sanctioned:
(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 6%. 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) Fixed assets are to be written down by 20%
(v) Current assets are to be revalued at Rs. 90,00,000
(vi) Investments are to be brought to their market value.
(vii) Ones of the creditors of the company to whom the company owes Rs. 40,00,000 decides to forgo 40%
of his claim. The Creditor is allotted with 60000 equity shares of Rs. 40 each in full and final settlement
of his claim.
(viii) The taxation liability is to be settled at Rs. 3,00,000.
(ix) It is decided to write off the debit balance of Profit & Loss A/c.
Pass journal entries and show the Balance Sheet of the Company after giving effect to the above.
Q21. The following is the Balance Sheet of Star Ltd. as on 31st March, 2015:
Rs.
A. Equity & Liabilities
1. Shareholders’ Fund:
(a) Share Capital:
9,000 7% Preference Shares of Rs 100 each fully paid 9,00,000
10,000 Equity Shares of Rs 100 each fully paid 10,00,000
(b) Reserve & Surplus:
Profit & Loss Account (2,00,000)
2. Non-current liabilities:
“A” 6% Debentures (Secured on Bombay Works) 3,00,000
“B” 6% Debentures (Secured on Chennai Works) 3,50,000
3. Current Liabilities and Provisions:
(a) Workmen’s Compensation Fund:
Bombay Works 10,000
Chennai Works 5,000
(b) Trade Payables 1,25,000
24,90,000
B. Assets:
Non-current Assets:
1. Tangible Assets:
Bombay Works 9,50,000
Chennai Works 7,75,000
2. Investment:
Investments for Workman’s Compensation Fund 15,000
6.19
3. Current Assets:
(a) Inventories 4,50,000
(b) Trade Receivables 2,50,000
24,90,000
A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as follows:
(i) Paid up value of 8% (To be read as 7%) Preference and be reduced to Rs.80, but the rate of dividend being
raised to 9%.
(ii) Paid up value of Equity Shares to be reduced to Rs.10.
(iii) The directors to refund Rs.50,000 of the fees previously received by them.
(iv) Debenture holders forego their interest of Rs.26,000 which is include among the Sundry Creditors.
(v) The preference shareholders agreed to waive their claims for preference share dividend, which is in arrears
for the last three years.
(vi) “B” 6% Debenture holders agreed to take over the Chennai works at Rs.4,25,000 and to accept an
allotment of 1,500 equity shares of Rs.10 each at per, and upon their forming a company called Zia Ltd.
(to take over the Chennai Works) they allotted 9,000 equity shares of Rs.10 each fully paid at par to Star
Ltd.
(vii) The Chennai Works men’s compensation fund disclosed that there were actual liabilities of Rs.1,000 only.
As a consequence, the investments of the fund were realized to the extent of the balance. Entire
investments were sold at a profit of 10% on book value and the proceeds were utilized for part payment of
the creditors.
(viii) Stock was to be written off by Rs.1,90,000 and a provision for doubtful debts is to be made to the extent of
Rs.20,000.
(ix) Chennai Works completely written off.
(x) Any balance of the Capital Reduction Account is to be applied as two-third to write off the value of
Bombay Works and one-third to Capital Reserve.
Pass necessary Journal Entries in the books of Star Ltd. after the scheme has been carried into effect.
Q22. The summarized Balance Sheet of SK Ltd. as on 31st March, 2018 is given below.
Amount
Liabilities
Equity Shares of ₹ 10 each 35,000
8%, Cumulative Preference Shares of ₹ 100 each 17,500
6% Debentures of ₹ 100 each 14,000
Provision for taxation 350
Total 84,350
Assets
Fixed Assets 43,750
Investments (Market value ₹ 3325 thousand) 3,500
Current Assets (Including Bank Balance) 35,000
Profit and Loss Account 2,100
Total 84,350
The following Scheme of Internal Reconstruction is approved and put into effect on 31st March, 2018.
(i) Investments are to be brought to their market value.
(ii) The Taxation Liability is settled at ₹ 5,25,000 out of current Assets.
(iii) The balance of Profit and Loss Account to be written off.
(iv) All the existing equity shares are reduced to ₹ 4 each.
(v) All preference shares are reduced to ₹ 60 each.
(vi) The rate of interest on debentures is increased to 9%. The Debenture holders surrender their existing
debentures of ₹ 100 each and exchange them for fresh debentures of ₹ 80 each. Each old debenture is
exchanged for one new debenture.
(vii) Balance of Current Assets left after settlement of taxation liability are revalued at ₹1,57,50,000.
6.20
(viii) Fixed Assets are written down to 80%.

(ix) One of the creditors of the Company for ₹ 70,00,000 gives up 50% of his claim. He is allotted 8,75,000
equity shares of ₹ 4 each in full and final settlement of his claim.
Pass journal entries for the above transactions.
Q23. The Balance Sheet of X Ltd. as at 31st March.2014 was as follows;

X Limited
Particulars Amount
(Rs.)
I Equity and Liabilities
Shareholders Fund
1 Share capital
40000equity shares of Rs 100each fully paid 40,00,000
20000,10%preference shares of Rs 100each fully paid 20,00,000
Reserve &Surplus
(a)Securities premium Account 1,50,000
(b)profit& Loss Account (23,00,000)
2. Non Current Liabilities
Long term Borrowing
7%Debentures of Rs 100each 4,00,000
3. Other current Liabilities
(a) Creditors 10,00,000
(b) Loan from Director 2,00,000
II Assets
1. Non Current Assets
Fixed Assets
(a) Land & Building 20,00,000
(b) Plant & machinery 12,00,000 32,00,000
Intangible Assets
Goodwill 4,00,000
2. Current Assets
. (a) Debtors 12,00,000
(b) Stock 5,00,000
(c) Cash at Bank 1,50,000 18,50,000
Total assets 54,50,000
No Dividend on preference Shares has been paid for last 5 Years.
The following scheme of reorganisation was duly approved by the court;
(i) Each equity share to be reduced to Rs.25.
(ii) Each existing Preference share to be reduced to Rs75and then exchanged for one new
13%Preference share of Rs 50 each and one Equity share of 25 each.
(iii) Preference Shareholders have forgone their right for dividend for four years. One years’s dividend at the
old rate is however, payable to them in fully paid equity shares of Rs.25.
(iv) The Debenture Holders be given the option to either accept 90%of their claims in cash or to
convert their claims in full into new 13%Prefernce shares of Rs 50 each issued at par. One-
fourth in value of the Debenture Holders accepted Preference shares for their claims The rest
were pained in cash.
6.21
(v) Contingent Liability of Rs 2,00,000 is payable which has been created by wrong action of one
Director. He has agreed to compensate this loss out of the loan given by the Director to the
Company.
(vi) Goodwill does not have any value in the present. Decrease the value of Plant &Machinery, stock
and Debtors by Rs 3,00,000;Rs 1,00,000,and Rs 2,00,000 respectively. Increase the value of Land
&Building to Rs 25,00,000.
(vii) 50,000 new Equity shares of Rs 25 each are to be issued at par payable in full on application
The issue was underwritten for a commission of 4% Shares were fully taken up.
(viii) Total expenses incurred by the Company in connection with the Scheme excluding
Underwriting Commission amounted to Rs 20,000.
Pass necessary Journal Entries to record the above transactions. (Nov 14)
Q24. The Balance Sheet of M/s. Cube Limited as on 31-03-2013 is given below:
Particulars Note No. Amount
(Rs. in lakh)
Equity & Liabilities
Shareholders' Funds
Shares’ Capital 1 700
Reserves & Surplus 2 (261)
Non-Current Liabilities
Long term Borrowings 3 350
Current Liabilities
Trade Payables 4 51
Other Liabilities 5 12
Total 852
Assets
Non-Current Assets
Fixed Assets
Tangible Assets 6 375
Current Assets
Current Investments 7 100
Inventories 8 150
Trade Receivables 9 225
Cash & Cash Equivalents 10 2
Total 852
Notes to Accounts:
Rs. in Lakhs
(1) Share Capital
Authorised :
100 lakh shares of Rs. 10 each 1,000
4 lakh, 8% Preference Shares of Rs. 100
each 400
1,400
Issued, Subscribed and paid up:
50 lakh Equity Shares of Rs. 10 each, full 500
6.22
paid up
2 lakh 8% Preference Shares of Rs. 100 each, fully paid up 200

Total 700
(2) Reserves and Surplus
Debit balance of Profit & Loss A/c (261)
(3) Long Term Borrowings
6% Debentures (Secured by Freehold Property) 200

Directors’ Loan 150
350
(4) Trade Payables
Trade payables for Goods 51
(5) Other Current Liabilities
Interest Accrued and Due on 6% Debentures 12
(6) Tangible Assets
Freehold Property 275
Plant & Machinery 100
375
(7) Current Investment
Investment in Equity Instruments 100
(8) Inventories
Finished Goods 150
(9) Trade Receivables
Trade receivables for Goods 225
(10) Cash and Cash Equivalents
Balance with Bank 2
The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of
respective shareholders:
(1) Preference Shares are to be written down to Rs. 80 each and Equity Shares to Rs. 2 each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3 rd, Equity Shares
of Rs. 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of Rs. 150 lakh in part payment of
their holding. Balance Debentures to remain as liability of the company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at Rs. 200 lakh.
(6) All investments sold out for Rs. 125 lakh.
(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of Rs. 2 each to be allowed.
(8) 40% of Trade receivables and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to Rs. 300 lakh have been settled by paying 5% penalty of
contract value.
You are required to :
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Reconstruction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after the implementation
of scheme of internal reconstruction.
6.23
Answer
(a) Journal Entries in the books of M/s. Cube Ltd. (Rs. in lakhs)
Particulars Debit Credit
(i) 8% Preference share capital A/c (Rs. 100 each) Dr. 200
To 8% Preference share capital A/c (Rs. 80 each) 160
To Capital Reduction A/c 40
(Being the preference shares of Rs. 100 each reduced
to Rs. 80 each as per the approved scheme)
(ii) Equity share capital A/c (Rs. 10 each) Dr. 500
To Equity share capital A/c
(Rs. 2 each)
(Being the equity shares of Rs. 10 each reduced to Rs. 2
each)
(iii) Capital Reduction A/c
To Equity share capital A/c
(Rs. 2 each) 16
(Being 1/3rd arrears of preference share dividend of 3
years to be satisfied by issue of 8 lakhs equity shares of
Rs. 2 each)
(iv) 6% Debentures A/c
To Freehold property A/c 150
(Being claim of Debenture holders settled in part by
transfer of freehold property)
(v) Accrued debenture interest A/c Dr. 12
To Bank A/c 12
(Being accrued debenture interest paid)
(vi) Freehold property A/c Dr. 75
(Being appreciation in the value of freehold property)
(vii) Bank A/c Dr. 125
To Investments A/c 100
(Being investment sold at profit)
(viii) Director’s loan A/c Dr. 150
To Equity share capital A/c (Rs. 2 each) 45
(Being director’s loan waived by 70% and balance
being discharged by issue of 22.5 lakhs equity
shares of Rs. 2 each)
(ix) Capital Reduction A/c Dr. 483
To Profit and loss A/c 261
To Trade receivables A/c (225 x 40%) 90
To Inventories-in-trade A/c (150 x 80%) 120
To Bank A/c (300 x 5%) 15
6.24
(Being certain value of various assets, penalty on

cancellation of contract, profit and loss account debit
balance written off through Capital Reduction Account)
(x) Capital Reduction A/c 143
To Capital reserve A/c 143
(Being balance transferred to capital reserve account
as per the scheme)
(b) Capital Reduction Account

To Equity Share Capital 16 By Preference Share Capital 40
To Trade receivables 90 By Equity Share Capital 400
To Finished Goods 120 By Freehold Property 75
To Profit & Loss A/c 261 By Bank 25
To Bank A/c 15 By Director’s Loan 105
To Capital Reserve 143
645 645
(c) Notes to Balance Sheet
(Rs. in Lakhs)
1. Share Capital
Authorised:
100 lakhs Equity shares of Rs. 2 each 200
4 lakhs 8% Preference shares of Rs. 80 each 320
520
Issued:
80.5 lakhs equity shares of Rs. 2 each 161
2 lakhs Preference Shares of Rs. 80 each 160
321
2. Tangible Assets
Freehold Property 275
Less: Utilized to pay Debenture holders (150)
125
Add: Appreciation 75 200
300
6.25
Q25. The following is the Balance Sheet of Star Ltd. as on 31st March, 2019:
Rs
A. Equity & Liabilities
1. Shareholders’ Fund:
(a) Share Capital:
9,000 7% Preference Shares of Rs 100 each fully paid 9,00,000
10,000 Equity Shares of Rs 100 each fully paid 10,00,000
(b) Reserve & Surplus:
2.Non-current liabilities:
“A” 6% Debentures (Secured on Bombay Works) 3,00,000
“B” 6% Debentures (Secured on Chennai Works) 3,50,000
Current Liabilities and Provisions:
(a)Workmen’s Compensation Fund:
Bombay Works 10,000
Chennai Works 5,000
(b)Trade Payables 1,25,000
Total 24,90,000
Assets:
Non- current Assets:
PPE:
Bombay Works 9,50,000
Chennai Works 7,75,000
Investment:
Investments for Workman’s Compensation Fund 15,000
Current Assets:
(a)Inventories 4,50,000
(b)Trade Receivables 2,50,000
(c)Cash at Bank 50,000
Total 24,90,000
A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as follows:
(1) Paid up value of 7% Preference Share to be reduced to Rs 80, but the rate of dividend being raised to 9%.
(2) Paid up value of Equity Shares to be reduced to Rs 10.
(3) The directors to refund Rs 50,000 of the fees previously received by them.
(4) Debenture holders forego their interest of Rs 26,000 which is included among the trade payables.
(5) The preference shareholders agreed to waive their claims for preference share dividend, which is in arrears
for the last three years.
(6) “B” 6% Debenture holders agreed to take over the Chennai Works at Rs 4,25,000 and to accept an allotment
of 1,500 equity shares of Rs 10 each at par, and upon their forming a company called Zia Ltd. (to take over
the Chennai Works) they allotted 9,000 equity shares of Rs 10 each fully paid at par to Star Ltd.
(7) The Chennai Worksmen’s compensation fund disclosed that there were actual liabilities of Rs 1,000 only. As
a consequence, the investments of the fund were realized to the extent of the balance. Entire investments
were sold at a profit of 10% on book value and the proceeds were utilized for part payment of the creditors.
(8) Inventory was to be written off by Rs 1,90,000 and a provision for doubtful debts is to be made to the extent
of Rs 20,000.
(9) Chennai works completely written off.
(10) Any balance of the Capital Reduction Account is to be applied as two-third to write off the value of
Bombay Works and one-third to Capital Reserve.
Pass necessary Journal Entries in the books of Star Ltd. after the scheme has been carried into effect.
6.26
Answer: In the books of Star Ltd.

Journal Entries
Particulars Amount (Rs) Amount(Rs)

(i) 7% Preference share capital (Rs 100) Dr. 9,00,000
To 9% Preference share capital (Rs 80) 7,20,000
To Capital reduction A/c 1,80,000
(Being preference shares reduced to Rs 80 and also rate of
dividend raised from 7% to 9%)
(ii) Equity share capital A/c (Rs 100 each) Dr. 10,00,000
To Equity share capital A/c (Rs 10 each) 1,00,000
To Capital reduction A/c 9,00,000
(Being reduction of nominal value of one share of Rs 100
each to Rs 10 each)
(iii) Bank A/c Dr. 50,000
To Capital reduction A/c 50,000
(Being directors refunded the fee amount)
(iv) Trade payables A/c (Interest on debentures) Dr. 26,000
(Being interest forgone by the debenture holders)
(v) No entry required
(vi)a ‘B’ 6% Debentures A/c Dr 3,50,000

To Debentures holders A/c 3,50,000
(Being amount due to Debentures holders)
b Debentures holders A/c Dr. 4,40,000
To Chennai Works A/c 4,25,000
To Equity share capital A/c 15,000
(Being Chennai works taken over and equity
shares issued to ‘B’ 6% Debenture holders)
c Equity share of Zia ltd. A/c Dr. 90,000
To Debentures holders A/c 90,000
(Being 9,000 equity shares of Zia Ltd. issued by Debentures
holders)
Chennai Works – Workmen Compensation Fund Dr.
(vii)a To Capital reduction A/c 4,000
(Being difference due to reduced amount of actual liability 4,000
transferred to capital reduction account)
b Bank A/c Dr. 15,400
To Investment for Workmen Compensation Fund 14,000
(Being investment for Workmen Compensation Fund sold
@ 10% profit)
c 15,400
Trade Payables A/c Dr.
15,400
To Bank A/c
(Being part payment made to trade payables)
(viii) 2,10,000
Capital reduction A/c Dr.
20,000
To Provision for Doubtful Debts A/c
1,90,000
To Inventory A/c
(Being assets revalued)
(ix) 5,50,000
Capital reduction A/c Dr.
2,00,000
To Profit & Loss A/c
3,50,000
To PPE – Chennai Works (7,750,000 – 4,25,000)
6.27
(Being assets revalued and losses written off)

(x) Capital reduction A/c Dr. 4,01,400
To PPE – Bombay Works 2,67,600
To Capital reserve A/c 1,33,800
(Being assets revalued and remaining amount transferred to
capital reserve account)

1. When the object of reconstruction is usually to re-organise capital or to compound with creditors or to effect
economies then such type of reconstruction is called
(a)Internal reconstruction with liquidation

(b)Internal reconstruction without liquidation of the company
(c)External reconstruction
2. The accumulated losses under scheme of internal reconstruction are written off against
(a)Capital Reduction account

(b)Share Capital account
(c)Shareholders’ account
3. A process of reconstruction, which is carried out without liquidating the company and forming a new one is
called
(a)Internal reconstruction.
(b)External reconstruction.
(c)Amalgamation
4. Reconstruction is a process by which affairs of a company are reorganized by
(a)Revaluation of assets and Reassessment of liabilities.

(b)Writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights
attached to different classes of shares.
(c)Both (a) and (b)
Answer: [1. (b), 2. (a), 3. (a), 4. (c)]
6.28
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
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16
17
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20
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6.29
SUMMARY NOTES
6.30
Chapter 7: Liquidation of Companies CA P. S. Beniwal (9990301165)
Q 1. Liquidation of YZ Ltd. commenced on 2 nd April.2004, Certain creditors could not receive payments out of the
realization of assets and out of the contributions from A list contributions. The following are the details of
certain transfers which took place in 2003 and 2004.
Shareholders No. of shares Date of ceasing to Creditors remaining
Transferred be a member unpaid and outstanding
On the date of such transfer
A. 2,000 1st March, 2003 Rs.5, 000
P. 15, 00 1st May, 2003 Rs.3, 300
Q. 1,000 1st October,2003 Rs.4,300
R. 500 1st November,2003 Rs.4,600
S. 300 1st February,2004 Rs.6,000
All the shares were of Rs.10 each,Rs.8 per shares paid-up. Show the amount to be realized from the various
persons listed above ignoring expenses and remuneration to liquidator etc.
Answer: Amount due from P Rs. 1500, Q Rs. 1,555, R Rs. 966 and S Rs. 600
Q2. The position of valueless Ltd. On its liquidation is as under:

Issued and paid up Capital
3000 11% preference shares of Rs.100 each fully paid.
3000 Equity shares of Rs.100 each fully paid.
1000 Equity shares of Rs.50 each Rs.30 per shares called.
Calls in Arrear are Rs.10,000 and Calls received in advance Rs.5,000.Preference Dividends are in arrear for one
year. Amount left with the liquidator after discharging all liabilities is Rs. 4,13,000.Articles of Association of the
company provide for payment of preference dividend arrears in priority to return of equity capital. You are
required to prepare the liquidators final statement of account.
Q3. Break limited went into voluntary liquidation on 31-3-1991.The balance in its books on that dates were:
Rs. Rs.
Share capital
Authorized & Subscribed: Land 50,000
5000 6% preference shares of Building 2,00,000
Rs.100 each fully paid 5,00,000 Plant & machinery 6,25,000
2500 equity shares of Rs. Stock 1,37,500
100 each Rs.75 paid-up 1,87,500 Sundry Debtors 2,75,000
7500 equity shares of Rs. Cash at bank 75,000
100 each Rs.60 paid-up 4,50,000 P&L A/c 4,10,000
5% Debenture (secured by a
Floating charge on all assets) 2,50,000
Interest due on debentures 12,500
Bank overdraft 1,00,000
Unsecured creditors 2,00,000
Taxes due to govt.within
12 months 12,500
Salaries & wages due for 4
Months for workers 60,000
17,72,500 17,72,500
The liquidator is entitled to a remuneration of 5% on assets relised except cash and 1% on the amount distributed
to unsecured creditors other than preferential creditors.
Bank overdraft is secured by deposit of title deed of land & Building which realized Rs.3,00,000.Other assets
realized the following sums:
Plant & Machinery Rs.5,00,000
Stock Rs.1,50,000
Sundry Debtors Rs.2,00,000
Expenses of liquidation amounted to Rs.27,250.
7.1
Prepare Liquidator’s final statement of account. Liquidator realized assets on 1-4-1991 and discharged his
obligation on the same date. Dividend on preference shares were in arrears for two years.
Ans. Calls on 7,500 shares @ 8.925 per share, Total Rs. 66,938. Amount paid; 2,500 equity shareholder @ 6.075
per share. Total Rs. 15,188.
Q4. X Co. Ltd went into voluntary liquidation on 1st April,1992 The following balances are extracted from its books
on that date:
Rs. Rs.
Capital
24,000 equity shares Machinery 90,000
Of Rs.10 each 2,40,000 Leasehold properties 1,20,000
Debentures (secured Stock 3,000
By floating charge) 1,50,000 Debtors 1,50,000
Bank overdraft 54,000 Investment 18,000
Creditors 60,000 Cash in hand 3,000
P&L A/c 1,20,000
5,04,000 5,04,000
The following assets are valued as under:

Rs.
Machinery 1,80,000
Leasehold properties 2,18,000
Investments 12,000
Stock 6,000
Debtors 1,40,000
The bank overdraft is secured by deposit of title deeds of leasehold properties. There were preferential creditors
Rs.3000 which were not included in creditors Rs.60,000.
Prepare a statement of affairs to be submitted to the meeting of members/creditors.
Answer. Gross Assets Rs. 5,59,000; estimated surplus as regard member Rs. 52,000.
Q5. The balance sheet of Asco Ltd as on 31st March 1993:

Rs. Rs.
Share Capital Fixed Assets
1,000 6% Preference Machinery 1,90,000
Shares of Rs.100 each Furniture 10,000
Fully paid 1,00,000 Current Assets:
2000 Equity shares of Stock 1,20,000
Rs.100 each fully paid 2,00,000 Debtors 2,40,000
2000 Equity Shares of Cash at bank 50,000
Rs.100 each Rs.75 paid 1,50,000 Misc. Expenditure
Loan-Bank(secured on P&L A/c 3,00,000
stock) 1,00,000
Current Liabilities &
Provision:
Creditors 3,50,000
Income Tax Payable 10,000
9,10,000 9,10,000
The company went into liquidation on 1st April,1993.
7.2
The assets were realized as follows:

Rs.
Machinery 1,66,000
Furniture 8,000
Stock 1,10,000
Debtors 2,30,000
Liquidation expenses amounted to 4,000
The Liquidators are entitled to a commission at 2% on amount paid to unsecured creditors except preferential
creditors. Calls on partly paid shares were made but the amount due on 200 shares was found to be irrecoverable.
Prepare Liquidator’s statement of Account.
Ans. Amount paid to equity shareholder Rs. 20,000; Notional surplus Rs. 38,000.
Q6. The following is the balance sheet of Y Ltd as at 31st March,1994:

Rs. Rs.
2000 equity shares of Land & Building 4,00,000
Rs.100 each Rs.75 per share Plant & machinery 3,80,000
Paid-up 1,50,000 Current Assets:
6000 equity shares of Stock at cost 1,10,000
Rs.100 each Rs.60 per Sundry Debtors 2,20,000
Share paid-up 3,60,000 Cash at Bank 60,000
2000 10% preference share P&L A/c 2,40,000
Of Rs.100 each fully paid-up 2,00,000
10% Debentures(having a
Floating charge on all assets) 2,00,000
Interest accrued on
Debentures(also secured as Above) 10,000
14,10,000 14,10,000
On the date, the company went into voluntary liquidation. The dividends on preference shares were in arrears for
the last two years. Sundry creditors include a loan of Rs.90,000 on mortgage of Land & Buildings. The assets
realized were as under:
Rs.
Land & Buildings 3,40,000
Plant & Machinery 3,60,000
Stock 1,20,000
Interest accrued on loan on mortgage of building upto the date of payment amounted to Rs.10,000. The expenses
of liquidation amounted to Rs.4600.The liquidator is entitled to a remuneration of 3% on all the assets
realized(except cash at banks) and 2% on the amounts distributed among equity shareholders. Preferential
creditors includes in sundry creditors amount to Rs.30,000.All payments were made on 30 th june, 1994.Prepare
the liquidator’s final statement of account.
Ans. Liquidator’s Remuneration Rs. 30,400. Amount payable to ESH (i) 17.5/share on 2000 shares and (ii) Rs.
2.5 per share on 6,000 shares; Surplus Rs. 50,000.
Q7. The following particulars relate to a limited company which has gone into voluntary liquidation. You are
required to prepare the liquidator’s statement of account allowing for his remuneration @ 2.5% on all assets
realized excluding call money received and 2% on the amount paid to unsecured creditors including preferential
creditors:
Share Capital issued:
10,000 Preference shares of Rs.100 each fully paid.
50,000 equity shares of Rs.10 each fully paid.
30,000 equity shares of rs.10 each Rs.8 paid up.
7.3
Assets realized Rs. 20,00,000 excluding the amount realized by sale of securities held by partly secured
creditors.
Rs.
Preferential Creditors 50,000
Unsecured Creditors 18,00,000
Partly secured, creditors (Assets realized Rs.3,20,000) 3,50,000
Debenture holders having floating charge on all
Asset of the company 6,00,000
Expenses of Liquidation 10,000
A call of Rs.2 per share on the partly paid equity shares was duly received except in case of one shareholder
owning 1,000 shares.
Also calculate the percentage of amount paid to the unsecured creditors to the total unsecured creditors.
Answer: Amount available to Unsecured creditors Rs. 13,12,745/-
Q8. The following balance sheet of X Ltd as on 31-03-1998:

Rs Rs
Share capital Fixed Assets:
14%,4000 preference Land 40,000
Shares of Rs.100 each fully Buildings 1,60,000
Paid up 4,00,000 Plant & Machinery 5,40,000
8000 equity shares of Patents 40,000
Rs.100 each, Rs.60 Investment NIL
Per share paid up 4,80,000 Current assets,
Reserves & Surplus NIL Loans & advances
Secured Loans Current assets:
1. 14% debentures 2,30,000 Sundry debtors 2,30,000
(having a floating Stock at cost 1,00,000
charges on all assets) Cash at bank 60,000
Interest accrued on 32,200 Loan & Advances:
Above debentures Misc. Exp NIL
(also having a P&L A/c 2,40,000
Floating charge as above)
2.Loan on mortgage 1,50,000
Of land and building
Unsecured Loan NIL
Current liabilities and
Provisions
(A) Current liabilities
14,10,000 14,10,000
On 31-3-1998 the company went into voluntary liquidation. The dividend on 14% preference, shares was in
arrears for one year. Sundry creditors includes preferential creditors amounted to Rs.30,000.
The assets realized the following sums.
Land Rs.80,000; Building Rs.2,00,000; Plant & Machinery Rs.5,00,000; Patents Rs.50,000; Stock Rs. 1,60,000;
Sundry debtors Rs 2,00,000
The expenses of liquidation amounted to Rs. 29,434. The liquidator is entitled to a commission of 2% on all
assets realized (except cash at bank) and 2% on amounts distributed among unsecured creditors other than
preferential creditors. All payments were made on 30th June, 1998.Interest on mortgage loan shall be ignored at
the time of a payment.
Prepare the liquidator’s final statement of accounts.
Ans. Payment to ESH Rs. 25.12/share on 8,000 shares Rs. 2,00,960.
7.4
Q9.Pessimist Ltd has gone into liquidation on 10th May, 2000.The details of members, who have ceased to be
member within the year 31st March,2000 are given below. The debts that could not be paid out of realization of
assets and contribution from present member (‘A’ contributories) are also given with their date-wise break up.
Shares are of Rs.10 each Rs.6 per share paid-up.
You are to determine the amount realizable from each person
Shareholders No. of shares Date of transfer Proportionate
Transferred unpaid debts
P 1,000 20-04-1999 3000
Q 1200 15-05-1999 5000
S 1500 18-09-1999 9200
T 800 24-12-1999 10500
U 500 12-03-2000 11000
Ans. Amount paid by Q is Rs. 1,500, R Rs. 4,125 , S Rs. 3,000, T Rs. 2,000.
Q10. X Ltd was ordered to be wound up on March 31st 1999 on which date is balance sheet was as follows:
Subscribed Capital: Goodwill 1,00,000
10,000 shares of Building 3,50,000
Rs.100 each 10,00,000 Plant 5,50,000
5% Debentures 1,60,000 Fixtures 23,000
Interest Accrued 4,000 Stock 38,000
(Secured by floating Debtors 25,000
Charge on all assets) Cash 500
Bank Overdraft 25,000 P&L A/c 1,38,500
(Secured by
Hypothecation of stock)
12,25,000 12,25,000
The amounts estimated to be realized are: Goodwill Rs.1000;Building Rs.3,00,000;Plant Rs.5,25,000;Fixtures
Rs.10,000;Stock Rs.31,000;Debtors Rs.20,000.
Creditors included Rs.6000 on account of wages of 15 men at Rs.100 per month for 4 months immediately
before the date of winding up: Rs.9000 being the salaries of 5 employees at Rs.300 per month for the previous 6
months; Rent for godown for the last six month amounting to Rs. 3,000; Income –tax deducted out of salaries of
employees Rs.1,000 and Directors Fees Rs.500.
Three years ago, the debit balance in the profit and loss account was Rs. 77,925 and since that date the accounts
of the company have shown the following figures:
Year Year Year
31-3-97 31-3-98 31-3-99
Rs. Rs. Rs.
Gross Profit 65000 45000 40000
Wages & Salaries 40,500 36,000 34,400
Electricity and water Tax 5,750 6,380 5,260
Debentures interest 8,000 8,000 8,000
Bad debts 8,540 7,600 6,700
Depreciation 6,700
Directors’ Fees 1,000 1,000 1,000
Miscellaneous Expenses 10,500 7,265 7,980
Total 80,990 66,245 63,340
In addition it is estimated that the company would have to pay Rs.5,000 as compensation to an employee for
injuries suffered by him which was contingent liability not accepted by the company.
Prepare the statement of affairs and the deficiency account.
Ans. Deficiency Rs. 3,42,500.
7.5
Q11.From the following particulars, prepare a statement of affairs and the deficiency account for submission to the
official liquidator of the Equipment Ltd., which went into liquidation on December 31, 1998:
Rs. Rs.
3,000 equity shares of 100 each,Rs.80 paid-up 2,40,000
6% 1,000 preference shares of Rs.100 each
Full called-up 1,00,000
Less: Calls in arrear 5,000 95,000
5% Debentures having a floating charge on the
Assets( interest paid upto June 30,1998) 1,00,000
Mortgage on Land & Buildings 80,000
Owing for wages 20,000
Secretary’s salary @ Rs.500 p.m owing 3,000
Managing Director’s salary (@ Rs.1,500 p.m) 6,000
Assets Estimated to Book

Produce value
Rs. Rs.
Land & Building 1,30,000 1,20,000
Plant 1,30,000 2,00,000
Tools 4,000 20,000
Patents 30,000 50,000
Stock 74,000 87,000
Investments in the hand of a
Bank for an overdraft of Rs.1,90,000 1,70,000 1,80,000
Book debts 60,000 90,000
On 31st December,1993 the balance sheet of the company showed a general reserve of Rs.40,000 accompanied
by a debit balance of Rs 25,000 in the profit& loss Account.
In 1994 the company made a profit of Rs.40,000 and declared a dividend of 10% on equity shares. The company
suffered a total loss of Rs.1,09,000 besides loss of stock due to fire of Rs.40,000 during 1995,1996 and 1997.
For 1998 accounts were not made.
The cost of winding up is expected to be Rs.15,000.
Q12. In a liquidation which commenced on april2,1997 certain creditors could not receive payments out of the
realization of assets and out of the contributions from “A” list contributories. The following are the details of
certain transfers which took place in 1996 and 1997.
Shareholders No. of share Date of ceasing to Creditors remaining

Transferred be member unpaid and outstanding
At the date of ceasing to
Be member
X 1,500 1st March 1996 4,000
A 1,000 1st May 1996 6,000
V 1,500 1st July,1996 7,500
C 300 1st Nov.1996 8,000
D 200 1st Februrary,1997 9,500
All the shares were Rs.10 each,Rs 6 paid up ignoring expenses of and remuneration to liquidators,etc,show the
amount to be realized from the various persons listed above.
Ans. Liability A 2,000, B 4,125, C 1,125, and D 800.
7.6
Q13. N Ltd resolved on 31st December 1998 that the company be wound up voluntarily. The following was the trial
balance extracted from its books as on that date:
Rs. Rs.
Equity shares of Rs.10 each 2,00,000
9% Preference shares of Rs.10 each 1,00,000
Plant(less depreciation w/o Rs.85,000) 2,15,000
Stock in trade 2,50,000
Bank Balance 74,000
Preliminary Expenses 6,000
P&L A/c(Balance on 1st Jan 1998) 30,000
Trading loss for the year1998 24,000
Preference dividend for the year 1998 6,000
Outstanding Expenses (including mortgage interest) 25,000
4% Mortgage Loan 2,00,000
Total 6,30,000 6,30,000
On 1st January,1999 the liquidator sold to M Ltd .Plant for Rs.2,05,000 and stock in trade for Rs.2,00,000.The
sale was completed in January,1999 and the consideration satisfied as to Rs. 2,62,200 in cash and as to the
balance in 6% Debentures of the purchasing company issued to the liquidator at a premium of 2%.
The remaining steps in the liquidation were as follows:

1. The liquidator realized Rs.52,000 out of the book debts and the cost of collection amounted to Rs.2,000.
2. The loan mortgage was discharged on 31st January,1999 along with interest from 31st july,1998.Creditors
were discharged subject to 2% and outstanding expenses excluding mortgage interest were settled for
Rs.2,000.
3. On 30th June 1999 six month’s interest on debentures was received from M.Ltd.
4. Liquidation expenses amounting to Rs.3,000 and liquidator’s remuneration of 3% on disbursements to
members were paid on 30th June,1999 when:
(a) The preference shareholders were paid out in cash; and
(b) The debentures on M Ltd. And the balances of cash were distributed ratably among the equity
shareholders.
Prepare the liquidator’s statement of account showing the distribution
Ans. Payment to ESH Rs. 1,43,398
Q14. Insol Ltd. is to be liquidated. Their summarized balance sheet as at 30 th September,1998 appears as under:
Liabilities:
2,50,000 equity shares of Rs.10 each 25,00,000
Secured debentures( on land and Buildings) 10,00,000
Unsecured loans 20,00,000
90,00,000
Assets:
Other fixed assets 20,00,000
Current assets 45,00,000
90,00,000
Contingent liabilities are:
For bills discounted 1,00,000
For excise duty demands 1,50,000
7.7
On investigation, it is found that the contingent liabilities are certain to devolve and the assets are likely to be
realized as follows:
Land & Buildings 11,00,000
Other fixed assets 18,00,000
Current assets 35,00,000
Taking the above into account, prepare the statement of affairs.
Q15.Prakash processors Ltd. Went into voluntary liquidation on 31 st December,1998 when their balance sheet read
as follows:
Rs.
Liabilities
Issued and subscribed capital:
5000 10% cumulative preference shares
Of Rs.100 each, fully paid 5,00,000
2,500 equity shares of Rs.100 each,Rs.75 paid 1,87,500
7,500 equity shares of Rs.100 each,Rs.60 paid 4,50,000
15% Debentures secured by a floating charges 2,50,000
Interest outstanding on Debentures 37,500
Creditors 3,18,750
17,43,750
Assets:
Land & Building 2,50,000
Machinery & Plant 6,25,000
Patents 1,00,000
Stock 1,37,500
Cash at bank 75,000
P&L A/c 2,81,250
17,43,750
Preference dividends were in arrears for 2 years and the creditors included preferential creditors of Rs.38,000.
The assets realized as follows:
Land & building Rs.3,00,000; Machinery and Plant Rs.5,00,000;Patents Rs.75,000;Stock Rs.1,50,000;Sundry
debtors Rs.2,00,000.
The expenses of liquidation amounted to Rs. 27,250.The liquidator is entitled to a commission of 3% on assets
realized except cash. Assuming the final payment including those on debentures is made on 30 th June,1999 show
the liquidator’s Final statement of Account. Ans. Payment to ESH 30,875
Q16. The following is the balance sheet of Confidence Builders Ltd.,as at 30th September,1998.

Share Capital Land and Building 1,20,000
Issued:11% Pref.shares Sundry Current
Of Rs.10 each 1,00,000 Assets 3,95,000
10,000 equity shares of P&L A/c 38,500
Rs.10 each fully paid-up 1,00,000 Debenture Issue
5,000 equity shares of Expenses not
Rs.10 each,Rs 7.50 per written off 2,000
Share paid up 37,500
Mortgage Loan 80,000
Bank overdraft 30,000
Creditors for trade 32,000
7.8
Income Tax arrears:

(Assessment concluded in
July 1998)
Assessment year 96-97 21,000
Assessment year 97-98 5,000 .
5,55,500 5,55,500
Mortgage loan was secured against land and buildings. Debentures were secured by a floating charge on all the
other 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 and building to auction and realized Rs.1,50,000.He also
took charge of sundry assets of value of Rs.2,40,000 and realized Rs.2,00,000.The Bank Overdraft was secured
by a personal guarantee of two 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. 2,000 and by the
Liquidator Rs. 2,800. The receiver was not entitled to any remuneration but the liquidators were to receive 3%
fee on the value of assets realized by him. Preference shareholders had not been paid divided for period after 30 th
September 1996 and interest for the last half year was due to the debenture holders. Rest of the assets were
realized at Rs.1,00,000.
Prepare the accounts to be submitted by the receiver and liquidator.
Ans. Payment to ESH 3,300
Q17. (a) Before paying the creditors totaling Rs.3,04,000 the liquidators of a company were left with
Rs.1,25,000.The shares of the company were as follows:
(i) 3,000 9% preference shares of Rs.100 each,Rs.80 paid.
(ii) 2,000 Equity shares of Rs.100 each,Rs.60 paid.
(iii) 3,000 Equity shares of 100 each,Rs.75 paid.
(b) In a company where the shares are as mentioned above, the liquidator is left with Rs.2,20,000 after paying
off creditors.
What will be the call in shares?
Ans. (a) Preference share call Rs. 8, Equity Rs. 40 & Rs. 25
(b) Preference share refund Rs. 80, Equity call Rs. 13 & Refund Rs. 2.
Q18. A winding up order has been issued against M Lts.The following information is obtained with regards to the
assets and liabilities as on 30th June,1999.
Rs.
Freehold premises(book value Rs.4,50,000)valued at 3,75,000
First Mortgage of freehold premises 3,00,000
Second Mortgage of freehold premises 1,12,500
8% Debenture carrying a floating charges on the
Undertaking, interest due 1st September and 1st April, and
Paid on due dates 1,50,000
Managing Directors emoluments (6 months) 22,500
Staff salary unpaid (one month) 16,050
Trade debtors (good) 31,500
Doubt full(estimated to realize 50% 12,900
Bad 72,750
Plant & Machinery(book value Rs.2,47,500) estimated
To realize 1,74,000
Bank Overdraft Unsecured 58,125
Cash in hand 825
Stock(at cost Rs.50,850)estimated to realize 33,900
Issued Capital:
Equity shares of Rs.10 each, fully called up 1,50,000
Calls on arrears,Rs.3,000 estimated to realize 15,00
Unsecured Creditors 2,96,250
7.9
Contingent liability in respect of a claim for damages

Rs.37,500 estimated to be settled for 18,000
Income-tax Liability:
For 30-6-1997 5,250
For 30-6-1998 1,275
For 30-6-1999 2,700
The Reserve of the company on 1-7-1998 amounted to Rs.7,500
You are required to prepare: (i) Statement of Affairs (ii) Deficiency Account
Ans. Deficiency 5,10,975; Current year loss Rs. 2,55,825.
Q19. BT Ltd. went into Voluntary Liquidation on 31St March, 2018, when their detailed Balance Sheet read as
follows:
Liabilities In Rs.
Issued & Subscribed Capital
10,000 12% cumulative preference shares of Rs. 100 each, fully paid 10,00,000
10,000 Equity Shares of Rs. 100 each 75 per share paid up 7,50,000
20,000 Equity Shares of Rs. 100 each 60 per share paid up 12,00,000
12% Debentures (Secured by a floating charge) 10,00,000
Interest outstanding on Debentures 1,20,000
Creditors 8,50,000
43,95,000
Assets
Furniture 4,75,000
Patents 1,45,000
Stock 1,80,000
Cash at Bank 75,700
43,95,000
Preference dividends were in arrear for 1 year. Creditors include preferential creditors of Rs. 75,000. Balance
creditors are discharged subject to 5% discount.
Assets are realised as under :
In Rs.
Furniture 2,85,000
7.10
Patents 90,000
Stock 2,80,000
- Expenses of liquidation amounted to Rs. 45,000.
- The liquidator is entitled to a remuneration of 3% on all assets realised (except cash at bank).
- All payments were made on 30th June, 2018.
You are required to prepare the Liquidator's Final Statement of Account as on 30 th June, 2018. Working Notes
should form part of the answer.
Solution:
BT Ltd.
Liquidator’s Final Statement of Account
Receipt Rs. Payment Rs.
To Balance b/d By Liquidation expenses 45,000

Cash at Bank 75,700 By Liquidator’s remuneration 1,29,600
To Amount realized from Assets not (43,20,000 X 3%)
specifically Pledged By Preferential Creditors 75,000
Land & Building 24,50,000 By amount paid to secured creditor having
Plant & Machinery 9,00,000 floating charges
Furniture 2,85,000 12% Debenture 10,00,000
Patents 90,000 Add: Outstanding Interest
Stock 2,80,000 upto 31/03/18 1,20,000
Trade Receivable 3,15,000 43,20,000 Accrued Interest from
01/04/18 to 30/06/18 30,000 11,50,000
(10,00,000 X 12% X 3/12)
By unsecured creditors 7,36,250
(8,50,000 – 75,000) - 5%
By Amount paid to Preference Shareholders
Preference share capital 10,00,000
Arrears of dividend 1,20,000 11,20,000
(10,00,000 X 12%)
By Amount paid to Equity Shareholders 11,39,850
ESH 1 ( 10,000 X 47.995) 4,79,950
ESH 1 ( 20,000 X 32.995) 6,59,900
43,95,700 43,95,700
Working Note 1: Calculation of call/paid from/to Equity Shareholder

Balance Available 11,39,850
(75,700 + 43,20,000 – 45,000 – 1,29,600 – 75,000 – 11,50,000 – 7,36,250
- 11,20,000)
(+) Notional calls
Shareholders No. of shares X uncalled call Amount(Rs.)
ESH 1 10,000 X 25 2,50,000
ESH 2 20,000 X 40 8,00,000 10,50,000
Balance for Equity Shareholders 21,89,850
÷ Numbers of Equity Shares (10,000 + 20,000) 30,000
Payable per Equity Share 72.995
Net call received/refund per Equity Share:

ESH 1 (72.995 – 25) = Rs. 47.995 Refund
ESH 2 (72.995 – 40) = Rs. 32.995 Refund
7.11
Q20.A Company went into liquidation on the 31st December,1992,when the following balance sheet was prepared:
Authorized Capital Goodwill 50,000
30,000 shares of Rs.10 each 3,00,000 Leasehold property 48,000
Subscribed & paid up Capital Plant & Machinery 65,500
19500 shares of Rs.10 each 1,95,000 Stock 56,800
Sundry Creditors Sundry Debtors 64,820
Preferential 24,200 Cash 2,600
Partly secured 55,310 Profit & Loss A/c 98,580
Unsecured 99,790 1,79,300
3,86,300 3,86,300
A Liquidator realized the assets as follows:
Rs.
Leasehold property which was used in the first 35,000
Instance to pay the partly secured creditors pro rata
Plant & Machinery 51,000
Stock 39,000
The Expenses of liquidation amounted to Rs.1500 and the liquidator’s remuneration was agreed at 2% on the all
assets realized(excluding cash) and 2% on the amount paid to the unsecured creditors.
You are required to prepare the liquidator’s Final Account showing the distribution.
Ans. 1,18,388/-
Q21. M Co.Ltd went into voluntary liquidation on 1st March,1991.The following balances are extracted from its
books on that date:
Capital:50,000 equity Buildings 1,50,000
Shares of Rs.10 each 5,00,000 Plant & Machinery 2,10,000
Debentures(secured by a Stock in trade 95,000
Floating charge) 2,00,000 Book Debts 75,000
Bank overdraft 30,000 Less: Provision 10,000 65,000
Creditors 40,000 Calls in arrear 1,00,000
Cash on hand 10,000
7,70,000 7,70,000
Plant & Machinery and Building are valued at Rs.1,50,000 and Rs. 1,20,000 respectively. On realization, losses
of Rs.15,000 are expected on stock, Book debts will realize Rs.70,000.Calls in arrear are expected to realize
90%.Bank overdraft is secured against Bulidings.Preferential Creditors for taxes and wages are Rs.6,000 and
Miscellaneous expenses outstanding Rs.2,000.
Prepare a statement of affairs to be submitted to the meeting of Creditors. Ans. Deficiency 2,48,000
Q22. Calculate Call on shares in following cases.

Case-I Balance leftover with liquidator Rs.5, 00,000.Capital structure of Company:
2000 equity share of Rs.100 each 90 paid-up
1000 Preference share of Rs.50 each 40 paid-up
Case-II Balance leftover with liquidator’s Rs.6, 60,000.Capital structure of Company:

Ans. (I) Refund preference share 40; ESC 50 & 60 (II) ESC 70.80, 45.41 and 46.23
7.12
Q23. From the data relating to a company which went into voluntary liquidation, you are required to prepare the
liquidator’s Final Statement of Account.
(1) Cash with liquidators (after all assets are realised and secured creditors and debenture holders are paid) is
Rs.7,50,000.
(2) Preferential creditors to be paid Rs.35,000.
(3) Other unsecured creditors Rs.2,30,000.
(4) 5,000, 10% preference shares of Rs.100 each fully paid.
(5) 3,000 equity shares of Rs.100 each, Rs.75 per share paid up.
(6) 7,000 equity shares of Rs.100 each, Rs.60 per share paid up.
(7) Liquidator’s remuneration is 2% on payments to preferential and other unsecured creditors
Answer: (Amount received on call for 7,000 equity shares @ Rs.6.53 per share) (Amount paid to holders of
3,000 equity shares @ Rs.8.47 per equity share)
Q.24 The Liquidator of a company is entitled to a remuneration of 2% on assets realized and 3% on the amount
distributed to unsecured creditors. The assets realized Rs. 10,00,000. Amount available for distribution to
unsecured creditors before paying liquidator’s remuneration is Rs. 4,12,000. Calculate liquidator’s remuneration
if the surplus is insufficient to pay off unsecured creditors, in toto. (PCC Account May 10, 2 marks)
Answer: Rs. 32,000.
Q25.The summarized Balance Sheet of Full Stop Limited as on 31st March 2012, being the date of voluntary
winding up is as under:
Liabilities (Rs.) Assets (Rs.)
Share capital: Land & building 5,20,000
5,000, 10% Cumulative Plant & machinery 7,80,000
Preference shares of Rs. 100 Stock in trade 3,25,000
each fully paid up 5,00,000 Book debts 10,25,000
Equity share capital: Profit & loss account 5,50,000
5,000 Equity shares of Rs. 100
each Rs. 60 per share called
and paid up 3,00,000
5,000 Equity shares of Rs. 100
each Rs. 50 per share called up
and paid up 2,50,000
Securities premium 7,50,000
Preferential creditors 1,05,000
Bank overdraft 4,85,000
32,00,000 32,00,000
Preference dividend is in arrears for three year, By 31-03-2012, the assets realized were as follows(Rs.):
Land & building 6,20,000
Stock in trade 3,10,000
Plant & machinery 7,10,000
Book debts 6,60,000
Expenses of liquidation are Rs. 86,000. The remuneration of the liquidator is 2% of the realization of assets.
Income tax payable on liquidation is Rs. 67,000. Assuming that the final payments were made on 31-03-2012,
prepare the Liquidator’s Statement of Account.
7.13
Q26. The summarized Balance Sheet of Vasant Ltd. as on 31st March, 2013, being the date of voluntary winding up
is as under:
Liabilities Amount Assets Amount Rs.
Rs.
Share Capital Land & Building 1,30,000
Issued:10% Pref. Shares of Rs. 10 each 1,50,000 Sundry Current Assets 4,36,000
10,000 Equity Shares of Rs. 10 each fully 1,00,000 Profit and loss Account 35,000
paid up Debenture issued expenses
5,000 Equity Shares of Rs. 10 each, Rs. 8 per 4,00,000 not written off 2,000
share paid up
Mortgage Loan 70,000
Trade Creditor 38,000
Income Tax Arrears (assessment concluded 25,000
in February, 2013)
6,03,000 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. (Nov 13)
Q27. A Liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount distributed to
Preferential Creditors and 3% on the payment made to Unsecured Creditor, The assets were realized for Rs.
25,00,000 against which payment was made as follows:
Liquidation Rs. 25,000
Secured Creditors Rs. 10,00,000
Preferential Creditors Rs. 75,000
The amount due to Unsecured Creditors was Rs. 15,00,000. You are asked to calculate the total Remuneration
payable to Liquidator. Calculation shall be made to the nearest multiple of a rupee.
Q28. From the following Trial Balance of PQ Ltd. on 31.12.2009, prepare liquidators final statements of account :
Rs. Rs.
9% preference share capital - 1,25,000
(1250 Pref. shares @ 100 each fully paid)
Equity share capital :
2,000 equity shares @ 100 each fully paid - 2,00,000
2,000 equity @ 100 each Rs.50 paid up - 1,00,000
Plant 3,00,000 -
Stock – in – trade 3,60,000 -
Sundry debtors 85,000 -
Sundry creditors - 2,21,000
Bank balance 1,20,00
6% Mortgage loan - 2,30,000
Outstanding liabilities for expenses - 25,000
(Trading loss for the year 2009) _______ _______
9,01,000 9,01,000
7.14
Following points should be kept in mind :

i. On 21 January, 2010 the liquidator of PQ Ltd. sold plant for Rs.2,95,000 and stock in trade at 10% less than
the book value. He realized 80% of Sundry debtors and incurred cost of collection of Rs.1,850 (remaining
debtors are to be treated as bad).
ii. The loan mortgagee was discharged as 31st January, 2001 along with interest for 6 months. Creditors were
discharged subject to 5% discount. Outstanding expenses paid at 20% less.
iii. Preference share dividend in due for one year and paid with final payment.
iv. Liquidation expenses incurred are Rs.1,800 and liquidators remuneration is settled at 4% on disbursement
to members, subjects to minimum of Rs.10,000. (12 Marks)
Q29. In a winding up of a company, certain creditors remained unpaid. The following persons had transferred their
holding sometime before winding up :
Name Date of Transfer No. of Shares transferred Amount due to
creditors on the date of transfer
2010 Rs.
P January 1 1,000 7,500
Q February 15 400 12,500
S March 15 700 18,000
T March 31 900 21,000
U April 5 1,000 30,000
The shares were of Rs. 100 each, Rs. 80 being called up and paid up on the date of transfers.
A member, R, who held 200 shares died on 28th February, 2010 when the amount due to creditors was Rs.
15,000. His shares were transmitted to his son X.
Z was the transferee of shares held by T. Z paid Rs. 20 per share as calls in advance immediately on becoming a
member.
The liquidation of the company commenced on 1st February, 2011 when the liquidator made a call on the
present and the past contributories to pay the amount.
You are asked to quantify the maximum liability of the transferors of shares mentioned in the above table, when
the transferees:
(i) pay the amount due as “present” member contributories;
(ii) do not pay the amount due as “present” member contributories.
Also quantity the liability of X to whom shares were transmitted on the demise of his father R.
Answer: Liability of Q, R/X, S and U will be Rs. 2,174, Rs. 3,666, Rs. 5,830 and Rs. 18,330 respectively.
Q30. The summarized Balance Sheet of M/s. X Limited as at 31st March, 2016 are as follows:
Equity & Liabilities Amount Assets Amount

(Rs) (Rs)
Shareholders Fund : Non-Current Assets
Share capital Land & Building 6,50,000
50,000 equity shares of Rs.10 each fully paid 5,00,000 Current Assets
75,000; 10% Preference Shares of Rs 10 fully 7,50,000 Sundry Current Assets 21,80,000
paid up
25,000 Equity Shares of Rs 10 Each, Rs 8 per 2,00,000 Debenture issue expenses
share paid up Not written-off 10,000
Non-Current Liabilities:
Mortgage Loan 3,50,000
Current Liabilities:
Income Tax Arrears (Assessment completed in
February, 2016) 1,25,000
28,40,000 28,40,000
7.15
Mortgage loan was secured against Land and 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 bought the Land & Building to auction and realized Rs.8,00,000. He
also took charge of Sundry Assets of value of Rs. 11,80,000 and realized Rs 10,00,000. 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. Cost incurred by the receiver were Rs. 9,750 and by the
Liquidator Rs.15,000. 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, 2014 and interest for the last half year was due to Debenture Holders. Rest of the Assets were
realized at Rs 7,50,000. Prepare the accounts to be submitted by the receiver and liquidator. (Nov 16)
Q31.From the following particulars, prepare a Statement of Affairs and the Deficiency Account for submission to
official liquidator of Sun City Development Ltd., which went into liquidation on 31st March, 2016.
Liabilities (Rs) (Rs)
6,00,000 Equity shares of Rs.10 each, Rs.8 paid-up 48,00,000
6% 2,00,000 Preference shares of Rs.10 each 20,00,000
Less: call in arrear 1,00,000 19,00,000
5% Debentures having a floating charge on the assets
(interest paid up to 30th September, 2015) 20,00,000
Mortgage on Land & Building 16,00,000
Trade Payable 53,10,000
Wage payable 4,00,000
Secretary’s Salary Payable @ Rs.10,000 p.m. 60,000
Managing Director’s Salary Payable @ Rs.30,000 1,20,000
p.m.
Assets Estimated to Book value (Rs)
produce (Rs)
Land & Building 26,00,000 24,00,000
Plant & Machinery 26,00,000 40,00,000
Tools & Equipments 80,000 4,00,000
Patents & Copyrights 6,00,000 10,00,000
Inventories 14,80,000 17,40,000
Investments in the hand of a Bank
For an Overdraft of Rs.38,00,000 34,00,000 36,00,000
On 31st March, 2011 the Balance Sheet of the company showed a General Reserve of Rs.8,00,000 accompanied
by a debit balance of Rs.5,00,000 in the Profit & Loss Account.
In 2012 the company made a profit of Rs.8,00,000 and declared a dividend of 10% on Equity shares.
The Company suffered a total loss of Rs.21,80,000 besides loss of stock due to fire to the tune of Rs.8,00,000
during financial years ending March 2013, 2014 and 2015. For the financial year ended 31 st March,2016,
accounts were not made.
The cost of winding-up is expected to be Rs.3,00,000. (May 16)
7.16
THEORY
Q 1. Define “B LIST CONTRIBUTORIES”

Ans. The shareholders who transferred partly paid shares (otherwise than by operation of law or by death) within
1 year, prior to the date of winding up may be called upon to pay an amount (not exceeding the amount not
called up when the shares were transferred) to pay off such creditors as existed on the date of transfer of
shares.
Their liability will crystallize only
(i) when the existing assets available with the liquidator are not sufficient to cover the liabilties;
(ii)when the existing shareholders fail to pay the amount due on the shares to the liquidator.
Q2. What are the contents of “Liquidators’ statement of account”? How frequently does a liquidator have to
submit such statement?
Ans.The statement prepared by the liquidator showing receipts and payments of cash in case of voluntary
winding up is called “Liquidators’ statement of account” (Form No. 156 Rule 329 of the Companies Act,
1956).
Receipts are shown in the following order:
(a) Amount realised from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from it, if any.
(c) In case of partly paid up shares, the ESH should be called up to pay necessary amount if creditors’
claims/claims of preference shareholders can’t be satisfied with the available amount. PSH would be
called upon to contribute for paying of creditors. (not exceeding the amount of uncalled capital).
(d) Amounts received from calls to contributories made at the time of winding up are shown on the Receipts
side.
(e) Receipts per Trading Account are also included on the Receipts side.
Payments are made and shown in the following order:
(a) Legal charges;
(b) Liquidator’s expenses including Liquidator’s Remuneration;
(c) Debentureholders (including interest)
(d) Creditors: (i) Preferential (in actual practice, preferential creditors are paid before debenture holders
having a floating charge); (ii) Unsecured creditors;
(e) Preferential shareholders (Including Arrears of dividends on cumulative preference shares) should be
paid up to the date of commencement of winding up); and
(f) Equity shareholders.
Liquidator’s statement of account of the winding up is prepared for the period starting from the
commencement of winding up to the close of winding up. If winding up of company is not concluded within
one year after its commencement, Liquidator’s statement of account pursuant to section 551 of the
Companies Act, 1956 (Form No. 153) is to be filed by a Liquidator within a period of two months of the
conclusion of one year and thereafter until the winding up is concluded at intervals of not more than one year
or at such shorter intervals, if any, as may be prescribed.
Q3. Statement of affairs should accompany eight lists:
List A Full particulars of every description of property not specifically pledged and included in any
other list are to be set forth in this list.
List B Assets specifically pledged and creditors fully or partly secured.
List C Preferential creditors for rates, taxes, salaries, wages and otherwise.
List D List of debenture holders secured by a floating charge.
List E Unsecured creditors.
List F List of preference shareholders.
List G List of equity shareholders.
List H Deficiency or surplus account.
7.17
Solutions
Q2.
Liquidators’ Final Statement of Account

Receipts Rs. Payments Rs.
Cash 4,13,000 Return to contributors:
Realisation from: Preference dividend 33,000
Calls in arrears 10,000 Preference shareholders 3,00,000
Final call of Rs. 5 per Calls in advance 5,000
equity share of Rs. 50 each (Rs. 5 5,000 Equity shareholders of 90,000
×1,000) Rs. 100 each (3,000 × Rs. 30)
4,38,000 4,38,000
Working Note:
Rs.
Cash account balance 4,13,000
Less: Payment for dividend 33,000
Preference shareholders 3,00,000
Calls in advance 5,000 (3,38,000)
75,000
Add: Calls in arrears 10,000
85,000
Add: Amount to be received from equity shareholders of Rs. 50 each (1,000 × 20) 20,000
Amount disposable 1,05,000
Number of equivalent equity shares:
3,000 shares of Rs. 100 each = 6,000 shares of Rs. 50 each
1,000 shares of Rs. 50 each = 1,000 shares of Rs. 50 each
= 7,000 shares of Rs. 50 each
Final payment to equity shareholders = Amount left for distribution
Total number of equivalent equity shares
= Rs. 1,05,000 / 7,000 shares = Rs. 15 per share to equity shareholders of Rs. 50 each.
Therefore for equity shareholders of Rs. 100 each 15 x 100/50
= Rs. 30 per share to equity shareholders of Rs. 100 each.
Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equity shareholders of
Rs. 50 each have to pay Rs. 20 and receive Rs. 15 each. As a result, they are required to pay net Rs. 5
per share.
Q7.
Liquidator’s Statement of Account
Rs. Rs..
To Assets Realised 20,00,000 By Liquidator’s remuneration
To Receipt of call money on 29,000 equity 2.5% on 23,20,000* 58,000
shares @ 2 per share 58,000 2% on 50,000 1,000
2% on 13,12,745 (W.N.3) 26,255 85,255
By Liquidation Expenses 10,000
By Debenture holders having
a floating charge on all assets 6,00,000
By Preferential creditors 50,000
By Unsecured creditors 13,12,745
20,58,000 20,58,000
(ii) Percentage of amount paid to unsecured creditors to total unsecured creditors =

(13,12,745/18,30,000) × 100=71.73%
7.18
Working Notes:
1. Unsecured portion in partly secured creditors=Rs. 3,50,000-Rs. 3,20,000 = Rs. 30,000
* Total assets realised = Rs. 20,00,000 + Rs. 3,20,000 = Rs. 23,20,000
2. Total unsecured creditors = 18,00,000 + 30,000 (W.N.1) = Rs. 18,30,000
3. Liquidator’s remuneration on payment to unsecured creditors
Cash available for unsecured creditors after all payments including payment to preferential creditors &
liquidator’s remuneration on it = Rs. 13,39,000
Liquidator’s remuneration on unsecured creditors = (Rs. 13,39,000*2/102) = Rs. 26,255
Q 18.
Statement of Affairs
Assets not specifically pledged as per list A; Estimated Realisable value
Rs
Cash in hand 825
Trade debtors 37,900
Unpaid calls 1,500
Stock 33,900
Assets specifically pledged as per list B;
Name of Assets Name of Loan ERV Loan Amount Surplus Deficiency
Freehold Prem. First Mortgage 3,75,000 3,00,000 75,000 ----
Freehold Prem. Second Mortgage 75,000 1,12,500 ----- 37500
Estimated total assets available for Preferential creditors, Debentureholders
Secured by a floating charge and other creditors [carried forward] 2,48,175
Summary of Gross Assets Rs

Assets specifically pledged 3,75,000
Other assets 2,48,175
6,23,175
Estimated total assets available for Preferential creditors, Debentueholders
Secured by a floating charge and unsecured creditors brought forward 2,48,175
Gross Liabilities
Liabilities
Rs Rs.
3,75,000 Secured creditors as per List B to the extent claims -
are covered by assets specifically pledged.
20,025 Preferential creditors as per List C 20,025
Estimated balance of assets available for
Debenture holders
having a floating charge and unsecured creditors 2,28,150
1,53,000 Debentureholders secured by floating charge as per List D. 1,53,000
75,150
Estimated surplus as regards Debentureholders
37,500 Estimated unsecured balance of claims 37,500
of partly secured creditors
2,96,250 Trade creditors 2,96,250
27,750 Outstanding expenses and taxes 27,750
58,125 Bank overdraft 58,125
18,000 Contingent liability for claim for damages 18,000 4,37,625
Estimated deficiency as regards creditors ,being the
excess of gross liabilities over gross assets 3,62,475
Issued and called up capital.
148,500 equity shares ,Rs10 each fully called 1,48,500
up less calls in arrears,Rs1,500 [As per List G]
Estimated deficiency as regards contributories 5,10,975
7.19
Deficiency Account “List H”

A) Items contributing to Deficiency Rs.
Loss upto date (Net of Reserve, 2,55,825-7,500) 2,48,325
Freehold Premises 75,000
Trade debtors (12900*50%)+72,750 79,200
Plants Machinery 73,500
Stock 16,950
Claim for damages 18,000
Total (A)
B ltems Decrease Deficiency; Nil

Total(B)
C. Deficiency as explained in the Statement ot Affairs(A)-(B) 5,10,975
Balance Sheet
Liability Amount Assets Amount
Capital (Net) 1,47,000 Freehold premises 4,50,000
Reserves 7,500 Plant and Machinery 2,47,500
1stMortgage 3,00,000 SundryDedtors 1,17,150
2ndMortgaga 1,12,500 Stock 50,850
8%Dedentures 1,50,000 Cash 825
Interest for3Months 3,000 Profit and Loss Account 2,55,825
Sundry creditors(including) 3,34,800 (Balancing figure)
Managerial remuneration and salaries)
Provision for taxation 9,225 11,22,150
11,22,150
(ii)Preferential Creditors:
Income tax; 20x1-20x2 1,275
20x2-20x3 2,700
Staff Salary 16,050
20,025
Q28.
PQ LTD.
Liquidator’s Final Statement of Account
Receipt Rs. Payment Rs.
To Assets realized By Liquidation expenses 1,800

Bank 1,20,000 By Liquidator’s remuneration(W.N.1) 12,500
Plant 2,95,000 By Mortgage Loan 2,30,300
Stock 3,24,000 Add: Interest for 6 months 6,900 2,36,900
Debtors 66,150 By unsecured creditors 2,09,950
(Rs.68,000-Rs.1850) By Outstanding liabilities 20,000
By Preference Shareholders
Preference share capital 1,25,000
Arrears of dividend 11,250 1,36,250
By Equity Shareholders
Rs. 50 on 2,000 fully paid shares 1,00,000
RS.21,935 on 4,000 equity
shares(W.N.2) 87,740
8,05,0150 8,05,150
Working notes:
1: Liquidator’s remuneration
Rs.
Available Surplus 3,25,250
Less: Liquidator’s remuneration @ 4% (Rs.3,25,250x4/104) 12,510
Balance to be paid to Members 3,12,740
7.20
2: Disposal of amount to members

Rs.
Balance available for members 3,12,740
Less : Preference share capital 1,25,000
1,87,740
Less : Rs. 50 on 2,000 fully paid equity shares 1,00,000
Rs. 21.827 on 4,000 equity shares 87,740
Q29.
(i) The transferors are P, Q, S, T and U. When the transferees pay the amount due as “present” member
contributories, there will not be any liability on the transferors.
(ii) It is only when the transferees do not pay as “present” member contributories that the liability would arise in the
case of “Past” members as contributories.
STATEMENT OF LIABILITY OF ‘B’ LIST CONTRIBUTORIES

Credit outstanding on the date of transfer (ceasing Q R/X S U Amount to be
to be member) 400 200 700 1,000 paid to the
Shares Shares Shares Shares creditors
Rs. Rs. Rs. Rs. Rs.
(i) 12,500 2,174 1,087 3,804 5,435 12,500
(ii) 2,500(i.e.15,000-12,500) 263 921 1,316 2,500
(iii) 3,000(i.e.18,000-15,000) 316 1,105 1,579 3,000
(iv) 12,000(i.e.30,000-18,000) 2,000 - 10,000 12,000
Total (a) 30,000 2,174 3,666 5,830 18,330 30,000
Maximum Liability at Rs.20 per shares on held b) 8,000 4,000 14,000 20,000
Lower of (a) and (b) 2,174 3,666 5,830 18,330
(a) X to whom shares were transmitted on demise of his father R would be liable as an existing member
contributory. He steps into the shoes of his deceased father under section 430. His maximum liability
would be Rs.20 per share on 200 shares received on transmission i.e. for Rs.4, 000.
(b) P will not be liable to pay amount as the winding up proceedings commenced after one year from the
date of the transfer.
(c) T also will not be liable as the transferee Z has paid the balance Rs.20 per share as call in advance.
Q, R/X, S and U will be liable as former members, to the maximum extent as indicated, provided the transferee
do not pay the calls.
7.21
REVISION STRUCTURE
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7.22
SUMMARY NOTES
7.23
Chapter 8 : ESOP CA P.S. Beniwal (9990301165)
Q1. X Ltd. offered 15,000 ESOP’S to it’s employees on April 1, 2001. Exercisable on 31 st March, 2004 On 1st
January, 2002, 1000 options were withdrawn from employee X. On 31 st March, 2003, 8000 options were
cancelled due to resignation of employees. Rest of the options were availed by employees on due date. Market
price on 1-4-2001 for equity shares of company is Rs. 40 (face value Rs. 10). However, market price on 31-3-
2004 is Rs. 80 per share. Journalize entries.
Q2. A Company grants 500 options on 1-4-1999 at Rs .40 when the market price is Rs. 160 the vesting period is two
and a half years, the maximum exercise period is one year. Also 150 unvested options lapsed on 1-5-2001, 300
options are exercised on 30-6-2002 and 50 vested options lapsed at the end of the exercise period. Journalize.
Q3 Company has its share capital divided into shares of Rs. 10 each. On 1st April, 2005 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, 2005 and 15th March, 2006. 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.
Q4. X Co. Ltd. has its share capital divided into equity shares of Rs. 10 each. On 1.4.2012 it granted 20,000
employees, stock option at Rs. 50 per share, when the market price was Rs. 120 per share. The options were to
be exercised between 15th March, 2013 and 31st March, 2013. The employees exercised their options for 16,000
shares only and the remaining options lapsed. The company closes its books on 31st March every year. Show
Journal entries (with narration) as would appear in the books of the company up to 31st March, 2013.
Q5. A company has its share capital divided into shares of Rs. 10 each. On 1-4-2012, it granted 5,000 employees
stock option at Rs. 50, when the market price was Rs. 140. The options were to be exercised between 1-3-2013
to 31-03-2013. The employees exercised their options for 4,800 shares only; remaining options lapsed. Pass the
necessary journal entries for the year ended 31-3-2013, with regard to employees, stock option.
Q6. On 1st April, 2012, a company offered 100 shares to each of its 500 employees at Rs. 50 per share. The
employees are given a year to accept the offer. The shares issued under the plan shall be subject to lock-in on
transfer for three years from the grant date. The market price of shares of the company on the grant date is Rs. 60
per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated
at Rs. 56 per share.
On 31st March, 2013, 400 employees accepted the offer and paid Rs. 50 per share purchased.
Nominal value of each share is Rs. 10.
Record the issue of share in the books of the company under the aforesaid plan.
Q7. Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2008 for Rs. 20, depending upon the
employees at the time of vesting of options. The market price of the share is Rs. 50. These options will vest at
the end of year 1 if the earning of Choice Ltd. is 16%, or it will vest at the end of the year 2 if the average
earning of two years is 13%, or lastly it will vest at the end of the third year if the average earning of 3 years will
be 10%. 5,000 unvested options lapsed on 31.3.2009. 4,000 unvested options lapsed on 31.3.2010 and finally
3,500 unvested options lapsed on 31.3.2011.
Following is the earning of Choice Ltd. :
Year ended on Earning (in %)
31.3.2009 14%
31.3.2010 10%
31.3.2011 7%
850 employees exercised their vested options within a year and remaining options were unexercised at the end of
the contractual life. Pass Journal entries for the above.
8. 1
Q8. The following particulars in respect of stock options granted by a company are available:
Grant date April 1,2006
Number of employees covered 300
Vesting condition: Continuous employment upto 31/03/09
Nominal value per share (Rs.) 10
Exercise price per share (Rs.) 40
Fair value of option per share on grant date (Rs.) 20
Exercise date July 31, 2009
The number options to vest per employee shall depend on company’s average annual earning after tax during
vesting period as per the table below:
Average annual earning after tax Number of options per employee
Less than Rs. 100 crores Nil
Rs. 100 crores to less than Rs. 120 crores 30
Rs. 120 crores to less than Rs. 150 crores 45
Above Rs. 150 crores 60
Position on 31/03/07
(a) The company expects to earn Rs. 115 crores after tax on average per year during vesting period.
(b) Number of employees expected to be entitled to option = 280
(a) The company expects to earn Rs. 130 crores after tax on average per year during vesting period.
(b) Number of employees expected to be entitled to option = 270
(a) The company earned Rs. 128 crores after tax on average per year during vesting period.
(b) Number of employees entitled to option = 275
Position on July 31, 2009

Number of employees exercising option = 265
Compute expenses to recognise in each year and value of option forfeited.
Grant date April 1, 2016
Number of options granted per employee 1,000
The options will vest to employees serving continuously for 3 years from vesting date, provided the share price
is Rs. 65 or above at the end of 2018-19.
The estimates of number of employees satisfying the condition of continuous employment were 48 on 31/03/17,
47 on 31/03/18. The number of employees actually satisfying the condition of continuous employment was 45.
The share price at the end of 2018-19 was Rs. 68.
You are required to compute expenses to be recognised in each year in the books of the company.
Q10. P Ltd. granted option for 8,000 equity shares on 1st October, 2010 at Rs.80 when the market price was Rs.170.
The vesting period is 4-1/2 year, 4,000 unvested options lapsed on 1 st December, 2012, 3,000 option are exercise
on 30th September, 2014 (This date should be read as 30th September,2015) and 1,000 vested option lapsed at
the end of the exercise period. Pass Journal Entries for above transactions.
8. 2
Q11. X Ltd. granted 500 stock options to its employees on 1.4.2011 at Rs 50 per share . The vesting period is
2-1/2 years and the maximum exercise period is one year. Market price on that date is Rs.140 per share. All
the option were exercised on 30.06.2014. pass journal entries giving suitable narrations, if the face value of
equity share is Rs. 10 per share.
Q12. Ajanta grants 120 share options to each of its 460 employees. Each grant is conditional on the employee working
for Ajanta over the next three years. Ajanta has estimated that the fair value of each share option is Rs. 12.
Ajanta estimates that 25% of employees will leave during the three-year period and so forfeit their rights to the
share options. Everything turns out exactly as expected.
Required: Calculate the amounts to be recognized as expense during the vesting period.
Q13. At the beginning of year 1, the enterprise grants 1,000 stock options to each member of its sales team,
conditional upon the employees remaining in the employment of the enterprise for three years, and the team
selling more than 50,000 units of a particular product over the three-year period. The fair value of the stock
options is Rs. 15 per option at the date of grant.
During year 2, the enterprise increases the sales target to 1,00,000 units. By the end of year 3, the enterprise has
sold 55,000 units, and the stock options do not vest.
Twelve members of the sales team have remained in service for the three-year period. You are required to
examine and give comment in light of the relevant Guidance Note that whether the company should recognise
the expenses on the base of options granted or not.
Also state will your answer differ if, instead of modifying the performance target, the enterprise had increased
the number of years of service required for the stock options to vest from three years to ten years.
Q14. PQ Ltd. grants 100 stock options to each of its 1,000 employees on 1 -4-2015, conditional upon the employee
remaining in the company for 2 years. The fair value of the option is Rs. 18 on the grant date and the exercise
price is Rs. 55 per share. The other information is given as under:
(i) Number of employees expected to satisfy service condition are 930 in the 1 st year and 850 in the 2nd year.
(ii) 40 employees left the company in the 1st year of service and 880 employees have actually completed 2 year
vesting period.
You are required to calculate ESOP cost to be amortized by PQ Ltd. in the years 2015- 2016 and 2016-2017.
Grant date April 1,2006
Number options granted per employee 100
The vesting period shall be determined as below:
(a) If the company earns Rs. 120 crore or above after taxes in 2006-07, the options will vest on 31/03/07.
(b) If condition (a) is not satisfied but the company earns Rs. 250 crores or above after taxes in aggregate in
2006-07 and 2007-08, the options will vest on 31/03/08.
(c) If conditions (a) and (b) are not satisfied but the company earns Rs. 400 crores or above after taxes in
aggregate in 2006-07, 2007-08 and 2008-09, the options will vest on 31/03/09.
(a) The company earned Rs. 115 crore after taxes in 2006-07
(b) The company expects to earn Rs. 140 crores in 2007-08 after taxes
(c) Expected vesting date: March 31, 2008
(d) Number of employees expected to be entitled to option = 474
8. 3
(b) The company expects to earn Rs. 160 crores in 2008-09 after taxes
(c) Expected vesting date: March 31, 2009
(d) Number of employees expected to be entitled to option = 465
(b) Number of employees on whom the option actually vested = 450
Compute expenses to recognise in each year.
Grant date April 1, 2006
Number options granted per employee 100
Vesting condition: Continuous employment for 3 years
Nominal value per share (Rs.) 100
Exercise price per share (Rs.) 125
Market price per share on grant date (Rs.) 149
Vesting date March 31, 2009
Exercise Date March 31, 2010
(a) Estimated annual rate of departure 2%
(b) Number of employees left = 15
(a) Estimated annual rate of departure 3%
(b) Number of employees left = 10
(a) Number of employees left = 8
(b) Number of employees entitled to exercise option = 492
(a) Number of employees exercising the option = 480
(b) Number of employees not exercising the option = 12
Compute expenses to recognise in each year by (i) fair value method (ii) intrinsic value method
Q17. Siya Ltd. provides you the following information:

No. of employees 2,500
No. of option to be granted to each employee 500
Vesting period 4 years
No. of employees not expected to fulfil the vesting condition other then
Market conditions
1st Year 20%
2nd Year 15%
3rd Year 10%
4th Year 10%
Fair value of the option per share Rs. 5
Exercise Price Rs. 50
Face value of each share Rs. 10
8. 4
At the end of third year it has been re-estimated that all vesting condition have been fulfilled and no other further
condition are required for options to vest and 600 employees exercise their option at the end of 4 th year, 800
employees exercise their option at the end of 5th year, 100 employees exercise their option at the end of 6th
year.
You are required to pass necessary journal entries for first 3 years.
Solution:-
Journal entries in the book of siya Ltd.
Particulars Dr.(Rs.) Cr.(Rs.)
At the end of 1 year
Employee Compensation- Dr. 8,60,625
Expenses Account
To Employee Stock- 8,60,625
Option Outstanding Account
(Being compensation expense - recognized in respect of-
the ESOP)
Profit and Loss Account Dr. 8,60,625 8,60,625
To Employee Compensation-
Expense Account
(Being employees - expense of the year- transferred to P&L A/c)
At the end of year 2
Employee Compensation- Dr. 8,60,625
Expenses Account
To Employee Stock- 8,60,625
(Being expense respect of the ESOP
recognized for the year 2)
Profit and Loss Account Dr. 8,60,625
To Employee Compensation- 8,60,625
Expense Account
(Being Expense of the year- transferred to P&L A/c)
At the end of year 3
Employees Compensation- Dr. 21,03,750
Expenses Account 21,03,750
To Employee Stock-
(Being expense respect of the ESOP recognized for the year 3)
Profit and Loss Account Dr. 21,03,750
To Employee Compensation- 21,03,750
Expense Account
(Being Expense of the year- transferred to P&L A/c)
Working Notes:
A. No. of employees expected to take options = 2,500 x .80 x .85 x .90 x .90 = 1377
B. No. of Options to be granted to each employee = 500
C. Fair value of each option = Rs.5
D. Total fair value of each options expected to vest (A x B x C) = Rs. 34,42,500
E. Amount of fair value of option to be recognized as an expences 1st year (34,42,500/4) = Rs. 8,60,625
2nd year (34,42,500 x (2/4) - Rs. 8,60,625 = Rs. 8,60,625
3rd year [(1530 employees x 500 option x Rs. 5) – (8,60,625 + 8,60,625)] = Rs.21,03,750
Since vesting period has been revised in 3rd year all the remaining liabilities in respect of employees stock option
plan has been recognized at the year of 3rd year and data for the 4th year has been ignored.
Q18. What is employee stock option plan? Explain the importance of such plans in the modern time.
Ans. Employee Stock Option Plan: It is a plan under which the enterprise grants employee stock options.
Employee stock option is a contract that gives the employees of the enterprise the right, but not the
obligation, for a specified period of time to purchase or subscribe the shares of the company at a fixed or
determinable price. Employee stock option plans encourage employees to have higher participation in
the company.
8. 5
The importance of these plans is as follows:

(a) Stock options provide an opportunity to employees to contribute in the growth of the company.
(b) Stock option creates long term wealth in the hands of the employees.
(c) They are important means to attract, retain and motivate the best available talent for the company.
(d) It creates a common sense of ownership between the company and its employees.
Q19. State the conditions of issuance of Sweat Equity Shares by Joint Stock Companies.
Ans. A company may issue sweat equity shares of a class of shares already issued, if the following conditions
are fulfilled-
(i) the issue of sweat equity shares is authorised by a special resolution passed by the company in the
general meeting.
(ii) the resolution specifies the number of shares, current market price, the consideration if any, and the
class or classes of directors or employees to whom such equity shares are to be issued.
(iii) not less than one year has, at the time of the issue, elapsed since the date on which the company was
entitled to commence business.
(iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock exchange,
are issued in accordance with the regulations made by the SEBI.
Q20. Graded vesting under an employee stock option plan.

Ans. Graded vesting under an employee stock option plan: In case the options/shares granted under an
employee stock option plan do not vest on one date but have graded vesting schedule, total plan should
be segregated into different groups, depending upon the vesting dates. Each of such groups would be
having different vesting period and expected life and, therefore, each vesting date should be considered
as a separate option grant and evaluated and accounted for accordingly. For example, suppose an
employee is granted 100 options which will vest @ 25 options per year at the end of the third, fourth,
fifth and sixth years. In such a case, each tranche of 25 options would be evaluated and accounted for
separately.

1. For accounting purposes, employee share-based payment plans are classified as
(a)Equity settled and cash settled.
(b)Liability settled and cash settled.
(c)Equity settled, cash settled and employees share based payment plans with cash alternatives.
2. Under the Companies Act 2013, there shall be a minimum period of

(a)two years between grant of options and vesting of option
(b)one year between grant of options and vesting of option
(c)six months between grant of options and vesting of option.
3. The excess of the market price of the share under ESOS over the exercise price of the option is
(a)Exercise Price (b)Intrinsic Value (c)Fair value
4. Which amount would be recognized for Share based payment?

(a)Fair value of Share prices/ value
(b)Amount as per agreement
(c)Fair value of goods/ services received unless it is not reliably measurable then fair value of share prices
would be used
Answer: [1. (c); 2(b); 3. (b) 4(c) ]
8. 6
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
SUMMARY NOTES
8. 7
SUMMARY NOTES
8. 8
Chapter 9: Buyback of securities and ES with differential rights CA P.S. Beniwal (9990301165)
Q1. Following is the summarized Balance Sheet of Super Ltd. as on 31st March, 2018.
Liabilities In Rs.
Share Capital
Equity Shares of Rs. 10 each fully paid up 17,00,000
Reserves & Surplus
Revenue Reserve 23,50,000
Profit & Loss Account 2,00,000
Infrastructure Development Reserve 1,50,000

Secured Loan
Unsecured Loan 8,50,000
Current Maturities of Long term borrowings 15,50,000
93,00,000
Assets
Fixed Assets
Tangible Assets 58,50,000
Current Assets
Current Assets 34,50,000
_ 93,00,000
Super Limited wants to buy back 35,000 equity shares of Rs. 10 each fully paid up on 1 st April, 2018 at Rs. 30
per share. Buy Back of shares is fully authorised by its articles and necessary resolutions have been passed by
the company towards this. The payment for buy back of shares will be made by the company out of sufficient
bank balance available as part of the Current Assets.
Comment with calculations, whether the Buy Back of shares by the company is within the provisions of the
Companies Act, 2013.
Solution: As per section 68(1) of the Companies Act 2013, maximum buy back of Equity shares by the
company, shall be lower of the following three:
(i) Shares Outstanding Test

Particulars (Shares)
Number of shares outstanding 1,70,000
25% of the shares outstanding 42,500
9. 1
(ii) Resources Test

Particulars Rs.
Paid up capital 17,00,000
Free reserves (23,50,000 + 2,50,000 + 2,00,000) 28,00,000
Shareholders’ funds 45,00,000
25% of Shareholders fund 11,25,000
Buy back price per share 30
Number of shares that can be bought back (shares) 37,500
(iii) Post Buy Back Debt Equity Ratio Test

Particulars Rs.
Total Debt(22,50,000 + 8,50,000 + 15,50,000) 46,50,000
Minimum equity to be maintained
after buy back in the ratio of 2:1 23,25,000
Present equity shareholders fund 45,00,000
Maximum permitted buy back of Equity (W.N. 1) 16,31,250
Maximum number of shares that can
be bought back @ Rs. 30 per share (Rs. 16,31,250 / Rs. 30) 54,375
or
(Rs. 5,43,750 / Rs. 10)
Maximum buy back of equity share is 37,500 Equity Shares.

In the given question company can make a buy back of 35,000 Equity shares, as it is within the provisions
of the Companies Act, 2013.
Working Note:
1. 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. Also as per the section, on buy-back of shares
out of free reserves a sum equal to the nominal value of the share bought back shall be transferred to Capita
Redemption Reserve (CRR). As per Company Act. 2013, 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 transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
(45,00,000 – x) – 23,25,000 = y (1)
(y/buyback price) * Face Value = x
(y/30)*10 = x (2)
Or 3x=y
by solving the above equation we get
x = Rs. 5,43,750
y = Rs. 16,31,250
9. 2
Q2. Kuber Ltd. furnishes you with the following Balance Sheet as at 31 St March, 2000:
(Rs. in crores)
Sources of funds:
Share Capital:
Authorized 100
Issued:
12% redeemable preference share of Rs. 100 each fully paid 75
Equity shares of Rs. 10 each fully paid 25 100
Reserves and surplus:
Capital reserve 15
Share Premium 25
Revenue Reserves 260 300
400
Funds employed in:
Fixed Assets: Cost 100
Less: Provisions for depreciation 100 NIL
Investments at cost (market value Rs. 400 Cr.) 100
Current assets 340
Less: Current Liabilities 40 300
400
The Company redeemed preference shares on 1st April, 2000. It also bought back 50 lakh equity shares of Rs. 10
each at Rs. 50 per share.
The Payments for the above were made out of the huge bank Balance which appeared as part of current assets.
You are asked to:
(i) Pass journal entries to record the above
(ii) Prepare balance sheet
Q3. On 31st March, 2001, following was the balance sheet of New Era Ltd. :
(Rs. In Lakhs)
Equity Share capital 2,400 Machinery 3,600
10/- Furniture 452
Securities premium 350 Investments 148
General reserve 930 Stock 1,200
Profit & Loss account 340 Debtors 520
12% Deb. 1,500 Bank 740
Sundry creditors 750
Sundry provisions 390
6,660 6,660
On 1st April, 2001 the Company announced the buy-back of 25% of its Equity shares @ 15 per share. For the
purpose, it sold all of its investments for Rs. 150 lakh and issued 2,00,000 14% preference shares of Rs. 100
each at par the entire amount being payable with application. The issue was fully subscribed. The Company
achieved the target of the buy-back.
Later, the Company issued one fully paid up Equity Share of Rs. 10 by way of bonus share for every four Equity
Shares held by the equity shareholders.
Show the journal entries for all the transaction including cash transactions.
9. 3
Q4. From the following information, you are required to prepare Profit and Loss Account of Dee Limited furnishes
the following Balance Sheet as at 31st March, 2008:
Rs.’000 Rs.’000
Liabilities
Share capital:
Authorised capital 30,00
Issued and subscribed capital:
2,50,000 Equity shares of Rs.10 each fully paid up 25,00
2,000, 10% Preference shares of Rs.100 each
(Issued two months back for the purpose of buy back) 2,00 27,00
Reserves and surplus:
Capital reserve 10,00
Revenue reserve 30,00
Securities premium 22,00
Profit and loss account 35,00 97,00
Current liabilities and provisions: 14,00
1,38,00
Assets
Fixed assets 93,00
Investments 30,00
Current assets, loans and advances (including cash and bank balance) 15,00
1,38,00
The company passed a resolution to buy back 20% of its equity capital @ Rs.50 per share. For this purpose, it
sold all of its investment for Rs.22,00,000. You are required to pass necessary journal entries and prepare the
Balance Sheet.
Q5. Alpha Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2017:
₹ In lakhs ₹ In lakhs
Shareholders' Funds
Equity share capital (fully paid up shares of ₹ 10 each) 2,400
Reserves and Surplus
Securities Premium 350
General Reserve 530
Capital Redemption Reserve 400
Profit & Loss Account 340 1,620
Non-current Liabilities
12% Debentures 1,500
Current Liabilities
Trade Payables 1,490
Other Current Liabilities 390 1,880
Total 7,400
Assets
Non-current Assets
Fixed Assets 4,052
Current Assets
Current Investments 148
Inventories 1,200
Trade Receivables 520
Cash and Bank 1,480 3,348
Total 7,400
9. 4
(i) On 1st April, 2017, the company announced buy-back of 25% of its equity shares @ ₹ 15 per share. For this
purpose, it sold all its investment for ₹ 150 lakhs.
(ii) On 10th April, 2017 the company achieved the target of buy-back.
(iii) On 30th April, 2017, the company issued one fully paid up equity share of₹10 each by way of bonus for
every four equity shares held by the equity shareholders by capitalization of Capital Redemption Reserve.
You are required to pass necessary journal entries and prepare the Balance Sheet of Alpha Ltd. after bonus issue.
Q6. Following is the balance sheet of M/s Competent Limited as on 31st March 2012.

Equity Shares rs.10 each 12,50,000 Fixed Assets 46,50,000
fully paid Current Assets 30,00,000
Profit &Loss Account 1,25,000
Secured Loans:
Unsecured Loans 10,00,000
Current liabilities 16,50,000
Total 76,50,000 Total 76,50,000
st
The company wants to buy back 25,000 equity shares of Rs. 10 each, on 1 April, 2012 at Rs. 20 per share. Buy
back of shares of duly authorized by its articles and necessary resolution passed by the company towards
this.The payment for buy back of shares will be by the company out of sufficient bank balance available as part
of Current Assets.
Comments with your calculations, whether buy back of shares by company within the provisions of the
Companies Act, 2013. If yes, pass necessary journal entries towards buy back of shares and prepare Balance
Sheet after buy back of shares.
Q7. Perrotte Ltd. has the following capital structure as on 31-03-09

(Rs. In crores)
1. ESC(Shares of Rs. 10 each fully paid) 330
2. Reserve & Surplus
General Reserve 240
Security premium account 90
P&L a/c 90
Infrastructure Development Reserve 180 600
3. Loan funds 1,800
The shareholders of Perrotte Ltd. have on the recommendation of their Board of Directors approved on 12-9-09 a
proposal to buy back the maximum permissible number of Equity shares considering the large surplus funds
available at the disposal of the company.
The prevailing market value of the company’s shares is Rs. 25 per share and in order to induce the existing
shareholders to offer their shares for buy back, it was decided to offer a price of 20% over market.
You are also informed that the Infrastructure Reserve is created to satisfy Income-Tax requirements.
You are required to compute the maximum number of shares that can be bought back in the light of the above
information and also under a situation where the loan funds of the company were either Rs. 1,200 crores or Rs.
1,500 crores.
Assuming that the entire buy back is completed by 09.12.2009, show the accounting entries in the company’s
books in each situation.
9. 5
Q 8. X Ltd. furnishes, the following summarized Balance Sheet as at 31-03-2018.
Liabilities (in Rs) (in Rs)
Share Capital
Equity Share Capital of Rs 20 each fully paid up 50,00,000
10,000, 10% Preference Share of Rs100 each
fully paid up, 10,00,000 60,00,000
Reserves & Surplus
Capital Reserve 1,00,000
Security Premium. 12,00,000
Profit and Loss 20,00,000
Dividend Equalization Fund 5,50,000 43,50,000
12% Debenture 12,50,000
Current Liabilities and Provisions 5,50,000
Total : 1,21,50,000
Assets
Fixed Assets
Tangible Assets 1,00,75,000
Current Assets 3,00,000
Investment 2,00,000
Inventory 15,75,000
Cash and Bank 20,75,000
Total : 1,21,50,000
The shareholders adopted the resolution on the date of the above mentioned Balance Sheet to :
(1) Buy back 25% of the paid up capital and it was decided to offer a price of 20% over market price. The
prevailing market value of the company's share is Rs 30 per share.
(2) To finance the buyback of share company;
(a) Issue 3000, 14% debenture of Rs 100 each at a premium of 20%.
(b) Issue 2500, 10% preference share of Rs100 each.
(3) Sell investment worth Rs 1,00,000 for Rs 1,50,000.
(4) Maintain a balance of Rs 2,00,000 in Revenue Reserve.
(5) Later the company issue three fully paid up equity share of Rs 20 each by way of bonus share for every
15 equity share held by the equity shareholder.
You are required to pass the necessary journal entries to record the above transactions and prepare Balance Sheet
after buy back.
Q9. M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2012 :
Rs. in ,000 Rs. in ,000
Share Capital:
Authorised Capital: 5,000
Issued and Subscribed Capital :
3,00,000 Equity shares of , 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
(issued two months back for the purpose of buy back) 5,000
Reserve and Surplus:
Capital reserve 10
Revenue reserve 4,000
Securities premium 500
Profit and Loss account 1,800 6,310
Non-current liabilities - 10% Debentures 400
Current liabilities and provisions 40
11,750
9. 6
Assets
Fixed Assets: Cost 3,000
Less: Provision for depreciation 250 2,750
Non-current investments at cost 5,000
Current assets, loans and advances (including
cash and bank balances) 4,000
11,750
(1) The company passed a resolution to buy back 20% of its equity capital @ Rs. 15 per share.For this
purpose, it sold its investments of Rs. 30 lakhs for Rs. 25 lakhs.
(2) The company redeemed the preference shares at a premium of 10% on 1st April, 2012.
(3) Included in its investments were ,Investments in own debentures, costing Rs. 3 lakhs (facvalue Rs. 3.30
lakhs). These debentures were cancelled on 1st April, 2012.
You are required to pass necessary Journal entries and prepare the Balance Sheet on 01.04.2012.
Q10. Umesh Ltd. (A listed company) resolves to buy back 4lakhs or its fully paid equity shares of Rs. 10
each at Rs. 22 per share from the open the market. For the purpose , it issues 1 lakh 11% preference
shares of Rs 10each at par, the entire amount being payable with applications. The company uses Rs 16
lakhs of its balance in Securities Premium Account apart from its adequate balance in General Reserve
to fulfill the legal requirements regarding buy –back Give necessary journal entries to record to the above
transactions.
Q11. SMM Ltd. has the following capital structure as on 31 st March, 2017: ₹ in crore
Particulars Situation Situation
(i) Equity share capital (shares of ₹ 10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory 320 320
Reserve)
(iii) Loan Funds 3,200 6,000
The company has offered buy back price of ₹ 30 per equity share. You are required to calculate maximum
permissible number of equity shares that can be bought back in both situations and also required to pass
necessary Journal Entries. (May 17)
Q12. W, X, Y and Z hold Equity capital is held by in the proportion of 40:30:10:20. A, B, C and D hold preference
share capital in the proportion of 30:40:20:10. If the paid up capital of the company is Rs. 40 Lakh and
Preference share capital is Rs. 20 Lakh, Find their voting rights in case of resolution of winding up of the
company.
THEORY QUESTION
Q1. What are the conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares. Explain in brief.
Answer: As per section 68 of the Companies Act 2013, a joint stock company has to fulfill the following
conditions to buy-back its own equity shares:
(1) A company may purchase its own shares or other specified securities (hereinafter referred to as buy-
back) out of-
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities(not being the proceeds of an
earlier issue of the same kind of shares or other specified securities.)
(2) The buy-back is authorised by its articles;
9. 7
(3) A special resolution has been passed at a general meeting of the company authorising the buy-back.
(4) The buy-back is twenty-five percent or less of the aggregate of paid-up capital and free reserves of the
company.
(5) The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not
more than twice the paid-up capital and its free reserves (Provided that the Central Government may, by
order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies)
(6) All the shares or other specified securities for buy-back are fully paid-up;
(7) Every buy-back shall be completed within a period of one year from the date of passing of the special
resolution.
(8) The buy-back under sub-section (1) may be—

(a) from the existing shareholders or security holders on a proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.
SOLUTIONS
Q7. Statement determining the maximum number of shares to be bought back

Number of shares
Particulars When loan fund is (crores)
Rs. 1,800 Rs. 1,200 Rs. 1,500
Shares Outstanding Test (W.N.1) 8.25 8.25 8.25
Resources Test (W.N.2) 6.25 6.25 6.25
Debt Equity Ratio Test (W.N.3) Nil 3.75 Nil
Maximum number of shares that can be
bought back [least of the above] Nil 3.75 Nil
Journal Entries for the Buy Back (applicable only when loan fund is Rs. 1,200 crores)
Rs. in crores
Debit Credit
(a) Equity share buy back account Dr. 112.5
To Bank account 112.5
(Being buy back of 3.75 crores equity shares of Rs. 10 each
@ Rs. 30 per share)
(b) Equity share capital account Dr. 37.5
Securities premium account Dr. 75
To Equity share buy back account 112.5
(Being cancellation of shares bought back)
(c) General reserve account Dr. 37.5
To Capital redemption reserve account 37.5
(Being transfer of free reserves to capital redemption
reserve to the extent of nominal value of share capital
bought back out of redeemed through free reserves)
Working Notes:
1 . Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 33
25% of the shares outstanding 8.25
9. 8
2. Resources Test
Particulars
Paid up capital (Rs. in crores) 330
Free reserves (Rs. in crores) 420
Shareholders’ funds (Rs. in crores) 750
25% of Shareholders fund (Rs. in crores) Rs. 187.5 crores
Buy back price per share Rs. 30
Number of shares that can be bought back (shares in crores) 6.25 crores shares
3. Debt Equity Ratio Test

Particulars When loan fund is(crores)
Rs. 1,800 Rs. 1,200 Rs. 1,500
(a) Loan funds (Rs. in crores) 1,800 1,200 1,500
(b) Minimum equity to be maintained
after buy back in the ratio of 2:1
(Rs. in crores) 900 600 750
(c) Present equity shareholders fund
(Rs. in crores) 750 750 750
(d) Future equity shareholder fund (Rs. in
crores) (See Note 2)
N.A. 712.5 N.A
(750-37.5)
(e) Maximum permitted buy back of Equity
(Rs. in crores) [(d) – (b)] (See Note 2) Nil 112.5 (by Nil
simultaneous
equation)
(f) Maximum number of shares that can
be bought back @ Rs. 30 per share
(shares in crores) (See Note 2) Nil 3.75 (by Nil
simultaneous
equation)
Note:
1. Under Situations 1 & 3 the company does not qualify for buy back of shares as per the provisions of Section 77A
of the Companies Act, 1956.
2. As per Company 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. Also as per the section, on buy-back of shares out of free reserves a sum equal
to the nominal value of the share bought back shall be transferred to Capita Redemption Reserve (CRR). As per
section 80, 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 transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
(750 –x)-600 = y (1)
(y/30*10) = x
Or 3x=y
by solving the above equation we get
x = Rs. 37.5 crores
y = Rs. 112.5 crores
9. 9
Q9.
Journal Entries in the books of M Ltd.
Dr. Cr.
Rs. in ‘000 Rs. in ‘000
1. Bank A/c Dr. 2,500
Profit and Loss A/c Dr. 500
To Investment A/c 3,000
(Being investment sold for the purpose of buy-back)
2. Preference share capital A/c Dr. 2,000

Premium on redemption of Preference Shares A/c Dr. 200
To Preference shareholders A/c 2,200
(Being redemption of preference share capital at premium of 10%)
3. Preference shareholders A/c Dr. 2,200

To Bank A/c 2,200
(Being payment made to preference shareholders)
4. Revenue Reserve A/c Dr. 2,000

To Capital redemption reserve A/c (Refer Note) 2,000
(Being creation of capital redemption reserve to the extent
of nominal value of preference shares redeemed)
5. Equity share capital A/c Dr. 600

Securities Premium A/c (Premium payable on buy-back) Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back )
6. Equity shares buy-back A/c Dr. 900

To Bank A/c 900
(Being payment made for buy-back)
7. 10% Debentures A/c Dr. 330

To Own debentures A/c 300
To Capital reserve A/c (Profit on cancellation) 30
(Being own debentures cancelled at profit)
8. Securities Premium A/c Dr. 200

To Premium on redemption of preference shares A/c 200
(Being premium on redemption of preference shares
adjusted through securities premium)
Balance Sheet of the M Ltd. as on 1st April, 2012

Notes No. Rs. in ‘000
1 Shareholders funds
Share capital 1 2,400
Reserves and Surplus 2 5,340
2 Non-current liabilities
Long term borrowings 3 70
3 Current liabilities 40
Total 7,850
Assets
1 Non-current assets
(a) Fixed assets 2,750
(b) Non-current investments 4 1,700
2 Current assets 5 3,400
Total 7,850
9. 10
Notes to Accounts
Rs. in ‘000 Rs. In ‘000
1. Share Capital
Authorised share capital: 5,000
Issued, subscribed and fully paid up share capital:
2,40,000 Equity shares of rs. 10 each, fully paid up 2,400
(60,000 equity shares had been bought back and
cancelled during the year)
2. Reserves and Surplus

Capital Reserves 10
Add: Profit on cancellation of debentures 30 40
Securities Premium 500
Less: Premium on redemption of preference (200)
Shares
Premium on buy-back of equity shares (300) -
Revenue Reserve 4,000
Less: Transfer to Capital Redemption Reserve (2,000) 2,000
Capital Redemption reserve 2,000
Surplus (Profit & Loss Account) 1,800
Less: Loss on sale of investment (500) 1,300 5,340
3. Long term borrowings

10% Debentures (400 - 330) 70
4. Non-current investments
Balance as on 31.03.2012 5,000
Less: Investment sold (3,000)
Own debentures cancelled (300) 1,700
5. Current assets
Balance as on 31.03.2012 4,000
Add: Cash received on sale of investment 2,500
Less: Payment made to equity shareholders for buy
back of shares (900)
Payment made to preference shareholders (2,200) 3,400
Note: In the given solution, it is assumed that buy-back of shares has been done out of the proceeds of issue of preference
shares, therefore, no amount is transferred to capital redemption reserve for buy-back. However, if it is assumed that buy-
back is from sale of investments and not from the proceeds of issue of preference shares, then, amount of revenue reserves
transferred to capital redemption reserve will be Rs.2, 600 instead of Rs. 2,000.
9. 11
1. As per section 68(1) of the Companies Act, buy back of own shares by the company, shall not exceed
(a)25% of the total paid-up capital and free reserves of the company.
(b)20% of the total paid-up capital and free reserves of the company.
(c)15% of the total paid-up capital and free reserves of the company.
2. The companies are permitted to buy back their own shares out of
(a) Free reserves and Securities premium
(b)Proceeds of the issue of any shares.
(c)Both (a) and (b)
3. When a company purchases its own shares out of free reserves; a sum equal to nominal value of shares so
purchased shall be transferred to
(a)Revenue redemption reserve.
(b)Capital redemption reserve.
(c)Buyback reserve
4. Of the following, preference shareholders do not have a right to vote on resolutions

(a)Which directly affect the rights attached to his preference shares.
(b)For entering a private equity agreement to raise further capital diluting their overall stake in the company.
(c) For the repayment.
5. Preference shareholders will have a right to vote on all resolutions if the dividend on their share remains unpaid
for
(a)1 year (b)2 year (c)3 year
6. The differential in the class of equity shares can be created for

(a)Dividend. (b)Voting rights. (c)Both (a) and (b).
Answer: [1. (a); 2. (c); 3. (b); 4. ( b); 5. (b); 6. (c)]
9. 12
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
SUMMARY NOTES
9. 13
Chapter 10 : Accounting Standards, IFRS and IND AS Brief CA P.S. Beniwal(9990301165)
Part I:- ACCOUNTING STANDARDS
1. Meaning:- Accounting Standards (ASs) are written policy documents issued by expert accounting body or
by government or other regulatory body covering the aspects
 recognition,
 measurement,
 presentation and
 disclosure
of accounting transactions in the financial statements.
Accounting Standards are “Principle Based” and not ruled based.
2. ACCOUNTING STANDARDS SETTING PROCESS: The (ICAI), being a premier accounting body in
the country, took upon itself the leadership role by constituting the Accounting Standards Board (ASB) in
1977(Set up on 21st April, 1977). The composition of ASB includes, representatives of industries (namely,
ASSOCHAM, CII, FICCI), regulators, academicians, government departments etc.
3. Preparation of Accounting Standard: The standard-setting procedure of ASB can be briefly outlined as
follows:
Identification of broad areas
Study groups by ASB to prepare preliminary drafts
preliminary draft prepared by the study group of ASB and revision
Circulation of draft of accounting standard to the Council members of the ICAI and
specified outside bodies such as DCA, SEBI, C&AG, CBDT, SCOPE.
Meeting with the representatives of the specified outside bodies
Finalisation of the exposure draft & its issuance inviting public comments.
Consideration of comments on exposure draft and finalisation
After approval of council accounting standards are issued
4. Regulatory Framework of Accounting Standards in India

A) Company AS Rule 2006:- Companies are classified into only two levels, viz., (i) Non-SMC Companies
and (ii) Small and Medium Companies, for brevity referred to as SMCs.
(i) Small and Medium Companies (SMC’s)
a) The equity or debt securities of the company are not listed or not in the process of listing on any
stock exchange, whether in India or outside India.
b) The company is not a bank or financial institution or insurance company.
c) The company’s turnover (excluding other income) does not exceed Rs. 50 crores in the immediately
preceding accounting year.
d) The company does not have borrowing (including public deposits) exceeding Rs. 10 crores at any
time during the immediately preceding accounting year, and
e) The company is not a holding company or subsidiary of a non-SMC company.
(ii) Non- SMC’s:- Company other than SMC’s
10.1(AS)
Instructions:
A. General Instructions: SMCs shall follow the following instructions while complying with
Accounting Standards under these Rules:-
a. The SMC which does not disclose certain information pursuant to the exemptions or relaxations
given to it shall disclose (by way of a note to its financial statements) the fact that it is an SMC
and has complied with the Accounting Standards insofar as they are applicable to an SMC on
the following lines:
“The Company is a Small and Medium Sized Company (SMC) as defined in the General
Instructions in respect of Accounting Standards notified under the Companies Act, 1956.
Accordingly, the Company has complied with the Accounting Standards as applicable to a Small
and Medium Sized Company.”
b. Where a company, being an SMC, has qualified for any exemption or relaxation previously but
no longer qualifies for the relevant exemption or relaxation in the current accounting period, the
relevant standards or requirements become applicable from the current period and the figures for
the corresponding period of the previous accounting period need not be revised merely by
reason of its having ceased to be an SMC. The fact that the company was an SMC in the
previous period and it had availed of the exemptions or relaxations available to SMCs shall be
disclosed in the notes to the financial statements.
c. If an SMC opts not to avail of the exemptions or relaxations available to an SMC in respect of
any but not all of the Accounting Standards, it shall disclose the standard(s) in respect of which
it has availed the exemption or relaxation.
d. If an SMC desires to disclose the information not required to be disclosed pursuant to the
exemptions or relaxations available to the SMCs, it shall disclose that information in compliance
with the relevant accounting standard.
e. The SMC may opt for availing certain exemptions or relaxations from compliance with the
requirements prescribed in an Accounting Standard: Provided that such a partial exemption or
relaxation and disclosure shall not be permitted to mislead any person or public.
B. Other Instructions:- Rule 5 of the Companies (Accounting Standards) Rules, 2006, provides
as below:
“5. An existing company, which was previously not a Small and Medium Sized Company
(SMC) and subsequently becomes an SMC, shall not be qualified for exemption or relaxation in
respect of Accounting Standards available to an SMC until the company remains an SMC for
two consecutive accounting periods.”
Accounting Standard pronouncements by ICAI
Level I: Enterprise
a) Enterprises whose equity or debt securities are listed whether in India or outside India or in the process
of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard.
b) Banks including co-operative banks, Financial Institution and Enterprises carrying on insurance
business.
c) All commercial, industrial and business reporting enterprises, whose turnover for the immediately
preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover
does not include ‘other income’.
d) All commercial, industrial and business reporting enterprises having borrowings, including public
deposits, in excess of Rs. 10 crore at any time during the accounting period.
e) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
10.2(AS)
Level II : Enterprises
a) All commercial, industrial and business reporting enterprises, whose turnover for the immediately
preceding accounting period on the basis of audited financial statements exceeds Rs. 1 crore but does not
exceed Rs. 50 crore, Turnover does not include ‘ other income’.
b) All commercial, industrial and business reporting enterprises having borrowings, including public
deposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during the accounting
period.
c) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
Level III : Enterprises

Other than Level I Enterprise and Level II Enterprise.
Q1. Comment whether the following Companies can be classified as a Small and Medium Size (SMC) as per the
Companies (Accounting Standards), Rules, 2006:
(i) A Pvt. Ltd. a subsidiary of a multinational company listed on London Stock Exchange. It has turnover of
Rs. 11 crores and borrowings of Rs. 5.5 crores.
(ii) B Pvt. Ltd., has turnover of Rs. 44 crores, other income of Rs. 8 crores and bank borrowings of Rs. 9
crores.
5. Applicability of Accounting Standards on some specific organisations:-

As per the “preface to the statements of accountings standards”
i) Trust (Revised 2004), accounting standards apply to enterprises
ii) Co-operative Society engaged in commercial, industrial or business activities
iii) Mutual Fund
irrespective of whether it is profit oriented or established purely
iv) Partnership and Proprietorship
for charitable or religious purposes. Therefore they do not apply
to enterprises that do not carry out any commercial industrial or
business activity.
Q2.As an Auditor, state your opinion on the following situation: A public charitable institution registered u/s 8 of
the Companies Act, 2013 is running a printing press and a transport system as feeder of funds to carry on
charitable activities. The accounting policies by way of notes to accounts are stated as follows:
(i) Accounts are maintained on cash basis.

(ii) Accounting standards are not being followed as they are considered to be inapplicable to charitable
entities.
Answer.
(i) Since it is registered under companies act hence it is a company. Section 128(1) of Company Act. 2013
accounts books are to be maintained at accrual basis. Hence maintaining account on cash basis and hence
auditor should qualify his audit report.
(ii) Since it is registered under companies act hence it is a company, it is mandatory to follow accounting
standards which is not followed by the trust hence auditor should qualify audit report.
10.3(AS)
6. Impact of Non-compliance of Accounting Standards:-
A. Companies Act. 2013, Section 129
1. Every profit and loss account and balance sheet of the company shall comply with the accounting
standards.
2. Where the profit and loss account and the balance sheet of the company do not comply with the
accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the
following, namely:-
(a) the deviation from the accounting standards ;
(b) the reasons for such deviation ; and
(c) the financial effect, if any, arising due to such deviation.
3. For the purposes of this section, the expression "accounting standards" means the standards of
accounting recommended by the Institute of Chartered Accountants of India constituted under the
Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in
consultation with the National Advisory Committee on Accounting Standards established under section
133:
Provided that the standards of accounting specified by the Institute of Chartered Accountants of India
shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the
Central Government.
B. The ‘Preface to the Statements of Accounting Standards’ issued by the Institute in 2004
states(paragraphs 6.1 and 6.3):
“6.1 While discharging their attest function, it will be the duty of the members of the Institute to
examine whether the Accounting Standard is complied with in the presentation of financial
statements covered by their audit. In the event of any deviation from the Accounting Standard, it will
be their duty to make adequate disclosures in their reports so that the users of such statements may
be aware of financial deviations.”
“6.3 Financial Statements can not be described as complying with the Accounting Standards unless
they comply with all the requirements of each applicable standard.”
7. Benefits of Accounting standards:-

(i) Standardisation of alternative accounting treatments
(ii) Requirements for additional disclosures
(iii) Comparability of financial statements
(iv) Benefits to accountants and auditors
(v) Additional disclosures
(vi) Evaluation of managerial ability
(vii) Helpful to Government
(viii) Reform in accounting theory
8. Limitations of setting of accounting standards:-

(i) Difficulties in making choice between different treatments
(ii) Lack of flexibilities
(iii) Restricted scope
10.4(AS)
9. Accounting Standards with date of applicability.
AS Name of Accounting Standard Date of
Applicability
1 Disclosure of Accounting Policies 01/04/1993
2 Valuation of Inventories (Revised) 01/04/1999
3 Cash Flow Statement (Revised) 01/04/2001
4 Contingencies and Events Occurring after the Balance Sheet Date 01/04/1998
5 Net Profit or Loss for the Period, Prior Period Items and Changes in 01/04/1996
Accounting Policies (Revised)
6 Depreciation Accounting (Revised) 01/04/1995
7 Construction Contracts (Revised) 01/04/2002
9 Revenue Recognition 01/04/1993
10 Accounting for Fixed Assets 01/04/1993
11 The Effects of Changes in Foreign Exchange Rates (Revised) 01/04/2004
12 Accounting for Government Grants 01/04/1994
13 Accounting for Investments 01/04/1995
14 Accounting for Amalgamations 01/04/1995
15 Employee Benefits 01/04/2006
16 Borrowing Costs 01/04/2000
17 Segment Reporting 01/04/2001
18 Related Party Disclosures 01/04/2001
19 Leases 01/04/2001
20 Earning Per Shares 01/04/2001
21 Consolidated Financial Statement 01/04/2001
22 Accounting for Taxes on Income
23 Accounting for Investment in Associates in Consolidated Financial 01/04/2002
Statements
24 Discontinuing Operations 01/04/2004
25 Interim Financial Statement 01/04/2002
26 Intangible Assets 01/04/2003
27 Financial Reporting of Interests in Joint Ventures 01/04/2002
28 Impairment of Assets 01/04/2008
29 Provisions, Contingent Liabilities and Contingent Assets 01/04/2004
30 Financial Instruments: Recognition and Measurement- 01/04/2009
(Recommendatory)
31 Financial Instruments: Presentation - (Recommendatory) 01/04/2009
32 Financial Instruments: Disclosure - (Recommendatory) 01/04/2009
Notes:-
1. The MCA has notified Companies (Accounting Standards) Amendment Rules, 2016 as on 30.03.2016
and Amended the following Accounting Standards and omitted AS 6, Depreciation Accounting, issued
under Companies (AS) Rules, 2006.
(i) AS-2 : Valuation of Inventories
(ii) AS-4 : Contingencies and Events Occurring after the Balance Sheet Date
(iii) AS-10 : Property, Plant and Equipment.
(iv) AS-13 : Accounting for Investments
(v) AS-14 : Accounting for Amalgamations
(vi) AS-21 : Consolidated Financial Statement
(vii) AS- 29 : Provisions, Contingent Liabilities and Contingent Assets.
2. With the view to harmonise AS issued by ICAI for the Non- Corporate Entities and the Amendments to
the AS notified by the Central Govt., the council (359 th Meeting held on August 16-17, 2016) decided
that the amendments notified by the Central Govt. after appropriate changes shall also be incorporated in
the ASs issued by the ICAI.
10.5(AS)
10. Exemptions or Relaxations from Accounting Standards:-
(i) For SMCs as defined in the Notification
A) Accounting Standards not applicable to SMCs in their entirety:-

AS3, AS-17
B) Accounting Standards in respect of which relaxations from certain requirements have been given
to SMCs:-
AS 15 1. Recognition and measurement of short term accumulated compensating
absences contained in Para 11 to 16 do not apply.
2. Amounts due for payment under Defined Contribution Plans or Termination
Benefits after 12 months from the end of the year need not be accounted for on
discounted basis (Para 46 and 139).
3. Recognition and measurement under Defined Benefit Plans contained in para
50 to 116 and disclosures in para 117 and 118 do not apply. However, the
projected unit credit method and the discount rate provisions shall apply.
4. Disclosures contained in para 119 to 123 under Defined Benefit Plans do not
apply. However, actuarial assumptions should be disclosed.
5. Recognition and measurement of other long term employee benefits contained
in Para 129 to 141 do not apply. However, projected unit credit method and the
discount rate provisions shall apply.
AS-19 Exempt from certain disclosure requirements.
AS 20 No need to disclose diluted EPS.
AS 28 Option to measure value in use on a reasonable estimate basis
AS 29 Disclosures in para 66 and 67 do not apply
(ii) Additional exemption and relaxation given to Level III : Enterprises

(a) Not Applicable:- AS 18, AS 24, AS-21, AS-23, AS-27, AS-25.
(b) Relaxations from certain requirements:-

1. For recognition and measurement of liabilities under defined benefit plans, projected unit credit
method need not be applied. Some other rational method can be applied.
2. For recognition and measurement of long term employee benefits, projected unit credit method
need not be applied. Some other rational method can be applied.
10.6(AS)
Part II:- International Accounting Standards (IAS)
1. Meaning
Standards for the preparation and presentation of financial statements created by the International
Accounting Standards Committee (IASC). They were first written in 1973, and stopped when the
International Accounting Standards Board (IASB) took over their creation in 2001.
2. List of International Accounting Standards (IAS)

IAS 1: Presentation of Financial Statements
IAS 2: Inventories
IAS 7: Statement of Cash Flows
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10: Events after the Reporting Period
IAS 11: Construction Contracts
IAS 12: Income Taxes
IAS 16: Property, Plant and Equipment
IAS 17: Leases
IAS 18: Revenue
IAS 19: Employee Benefits
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
IAS 21: The Effects of Changes in Foreign Exchange Rates
IAS 23: Borrowing Costs
IAS 24: Related Party Disclosures
IAS 26: Accounting and Reporting by Retirement Benefit Plans
IAS 27: Consolidated and Separate Financial Statements – Superseded by IFRS 10, IFRS 12
and IAS 27 (rev. 2011) effective 2013
IAS 28: Investments in Associates – Superseded by IAS 28 (rev. 2011) and IFRS 12 effective
2013
IAS 29: Financial Reporting in Hyperinflationary Economies
IAS 31: Interests in Joint Ventures – Superseded by IFRS 11 and IFRS 12 effective 2013
IAS 32: Financial Instruments: Presentation – Disclosure provisions superseded by IFRS 7
effective 2007
IAS 33: Earnings per Share
IAS 34: Interim Financial Reporting
IAS 36: Impairment of Assets
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
IAS 38: Intangible Assets
IAS 39: Financial Instruments: Recognition and Measurement – Superseded by IFRS 9
effective 2013
IAS 40: Investment Property
IAS 41: Agriculture
10.7(AS)
Part III:-INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
1. Meaning of IFRS: The term IFRS refers to the International Financial Reporting Standards issued by
International Accounting Standard Board (IASB). IFRS is a set of international accounting standards stating
how particular types of transactions and other events should be reported in financial statements. It includes
 International accounting standards (IAS)
 International Financial Reporting Standards (IFRSs)
 International Financial Reporting Interpretation (IFRI)
 Standing Interpretation (SI)
International Financial Reporting Standards (IFRS) are the globally accepted accounting standards
adopted by International Accounting Standard Board (IASB) earlier known International Accounting
Standard Committee (IASC).
Note:- International Financial Reporting Standards (IFRSs) are considered a "principles-based" set of
standards. In fact, they establish broad rules rather than dictating specific treatments. Every major nation
is moving toward adopting them to some extent. Large number of authorities requires public companies
to use IFRS for stock-exchange listing purposes, and in addition, banks, insurance companies and stock
exchanges may use them for their statutorily required reports. So over the next few years, thousands of
companies will adopt the international
2. Basic objective of IFRS - to develop, in the public interest, a single set of high quality, understandable
and enforceable global accounting standards that require high quality, transparent and comparable
information in financial statements and other financial reporting to help participants in the world's capital
markets and other users make economic decisions;
- to promote the use and rigorous application of those standards;
3. Need of IFRSs
a) To develop global accounting standards requiring transparency, comparability and high quality in
financial statements
b) To encourage global accounting standards
c) When implementing global accounting standards, to take into account the needs of emerging markets
d) Converge various national accounting standards with the global accounting standards
4. Conversions With IFRSs: In general, convergence of Accounting Standards (AS) with IFRS means to
achieve harmony with IFRS. The term convergence can be considered as “to design and maintain
national accounting standards in a way that financial statements prepared in accordance with rational
AS are in convergence with IFRS”. IAS I require financial statements to comply with all requirements
of IFRS. This does not mean that IFRS should be adopted word by word. The local standard setters can
add disclosure requirements or can remove some requirements which do not create non compliance with
IFRS. Thus, convergence with IFRS means adoption of IFRS with exceptions wherever necessary.
5. List of IFRS:-
IFRS 1: First time Adoption of International Financial Reporting Standards
IFRS 2: Share-based Payment
IFRS 3: Business Combinations
IFRS 4: Insurance Contracts
IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
IFRS 6: Exploration for and Evaluation of Mineral Resources
IFRS 7: Financial Instruments: Disclosures
IFRS 8: Operating Segments
IFRS 9: Financial Instruments
IFRS 10: Consolidated Financial Statements
IFRS 11: Joint Arrangements
IFRS 12: Disclosure of Interests in Other Entities
IFRS 13: Fair Value Measurement
IFRS 14: Regulatory Deferral Accounts
IFRS 15: Revenue from Contracts with Customers
10.8(AS)
Part IV:- INDIAN ACCOUNTING STANDARDS (IND AS)
1. Meaning:- Indian Accounting Standards (abbreviated as Ind AS) are a set of accounting standards
notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting
Standards (IFRS) (IND AS is notified by NACAS on 25th Feb 2011.) (NFRA= National Financial
Reporting Authority U/s 132)
2. OBJECTIVE The basic objective of Accounting Standards is to remove variations in the treatment of
several accounting aspects and to bring about standardization in presentation. They intent to harmonize
the diverse accounting policies followed in the preparation and presentation of financial statements by
different reporting enterprises so as to facilitate intra-firm and inter-firm comparison.
3. Applicability of IND AS:- The Ind AS shall be applicable to the companies as follows: As notified by
MCA as on 16/02/15 in Companies (Indian Accounting Standards) Rules, 2015.
Obligation to comply with Indian Accounting Standards (Ind AS). - (1) The Companies and their
auditors shall comply with the Indian Accounting Standards (Ind AS) specified in Annexure to these
rules in preparation of their financial statements and audit respectively, in the following manner.
(i) On On mandatory basis

voluntary (ii) Accounting periods beginning on or (iii) Accounting periods beginning on or
basis after 1/4/16(For 31/3/17) with the after 01/04/17(For 31/3/18), with the
comparatives for the periods ending on comparatives for the periods ending on
31st March, 2016 31st March, 2017
Accounting (a) Companies whose equity and/or debt (a) Companies whose equity and/or debt
periods securities are listed or are in the process of securities are listed or are in the process of
beginning on or listing on any stock exchange in India or being listed on any stock exchange in India
after April 1, outside India and having net worth* of Rs. or outside India and having net worth* of
2015, with the 500 Crore or more. less than rupees five hundred Crore.
comparatives (b) Companies other than those covered in (b) Companies other than those covered in
for the periods (ii) (a) above, having net worth of Rs. 500 paragraph (ii) and paragraph (iii)(a) above
ending 31st Crore or more. that is unlisted companies having net
March, 2015 or (c) Holding, subsidiary, joint venture or worth of two hundred and fifty crore or
thereafter; associate companies of companies covered more but less than rupees five hundred
under (ii) (a) and (ii) (b) above. Crore.
(c) Holding, subsidiary, joint venture or
associate companies of companies covered
under paragraph (iii) (a) and (iii) (b) above.
* NET WORTH:
(i) “net worth” shall have the meaning assigned to it in clause (57) of section 2 of the Act.: “NET
WORTH” means the aggregate value of the paid-up share capital and all reserves created out of the
profits and securities premium account, after deducting the aggregate value of the accumulated losses,
deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but
does not include reserves created out of revaluation of assets, write-back of depreciation and
amalgamation.
(ii) or the purposes of calculation of net worth of companies under sub-rule (1), the following principles
shall apply, namely:-
10.9(AS)
Explanation.- For the purposes of sub-clause (b), the companies meeting the specified thresholds given in
sub-rule (1) for the first time at the end of an accounting year shall apply Indian Accounting Standards (Ind
AS) from the immediate next accounting year in the manner specified in sub-rule (1).
Illustration .-
(i) The companies meeting threshold for the first time as on 31st March, 2017 shall apply Ind AS for the
financial year 2017-18 onwards.
(ii) The companies meeting threshold for the first time as on 31st March, 2018 shall apply Ind AS for the
financial year 2018-19 onwards and so on.
Note:-
1. Companies whose securities are listed or in the process of listing on SME exchanges shall not be required
to apply Ind AS. Such companies shall continue to comply with the existing Accounting Standards unless
they choose otherwise.
2. Once a company opts to follow the Indian Accounting Standards (Ind AS), it shall be required to follow
the Ind AS for all the subsequent financial statements.
3. This press realise do not apply on Banking Companies, Insurance Companies and Non- Banking Finance
Companies ( NBFC’s)
IND AS ROADMAP FOR BANKS, INSURANCE COMPANIES AND NBFCS
A) Scheduled commercial banks (excluding RRBs) and insurers/insurance companies:-

Mandatory for accounting periods beginning from 1 April 2018 onwards (With Comparative)
a. Scheduled commercial banks (excluding RRBs), All-India term-lending refinancing
institutions (i.e. Exim Bank, NABARD, NHB and SIDBI ), Insurers/insurance companies
b. Notwithstanding the roadmap for companies, holding, subsidiary, joint venture or associate
companies of scheduled commercial banks
* On insurance Company: Applicable from 01st April 2020(20-21) as notified as on 28/6/17 by IRDA
** On banking Company:- Applicable from 01st April 19 (19-20) as notified as on 06/04/18 by RBI
B) NBFCs: NBFCs will be required to prepare Ind AS based financial statements in two
phases.
Phase 1: Mandatory for accounting periods beginning from 1 April 2018 onwards (With
Comparative)
a. NBFCs having a net worth of Rs. 500 crore or more
b. Holding, subsidiary, joint venture or associate companies of the above, other than those
companies already covered under the corporate roadmap announced by MCA
Phase 2: Mandatory for accounting periods beginning from 1 April 2019 onwards (With
Comparative)
a. NBFCs whose equity and/or debt securities are listed or are in the process of listing on any
stock exchange in India or outside India and having a net worth less than 500 crore INR
b. NBFCs that are unlisted companies, having a net worth of 250 crore INR or more but less
than 500 crore INR
c. Holding, subsidiary, joint venture or associate companies of companies covered above, other
than those companies already covered under the corporate roadmap announced by MCA
C) Voluntary adoption not permitted: Scheduled commercial banks (excluding

RRBs)/NBFCs/insurance companies/insurers shall apply Indian Accounting Standards (Ind AS)
only if they meet the specified criteria; they shall not be allowed to voluntarily adopt Ind AS.
10.10(AS)
This, however, does not preclude an insurer/ insurance company/NBFC from providing Ind AS
compliant financial statement data for the purpose of preparation of consolidated financial
statements by its parent/investor, as required by the parent/investor, to comply with the existing
requirements of the law.
D) Companies/entities not covered in the roadmap

a. NBFCs having a net worth below 250 crore INR and not covered under the above provisions
shall continue to apply Accounting Standards specified in Annexure to Companies
(Accounting Standards) Rules, 2006.
b. Urban cooperative banks (UCBs) and RRBs shall not be required to apply Ind AS and shall
continue to comply with the existing Accounting Standards for the present.
4. List of IND AS:-

1. Ind AS 101 First-time Adoption of Indian Accounting Standards
2. Ind AS 102 Share based Payment
3. Ind AS 103 Business Combinations
4. Ind AS 104 Insurance Contracts
5. Ind AS 105 Non current Assets Held for Sale and Discontinued Operations
6. Ind AS 106 Exploration for and Evaluation of Mineral Resources
7. Ind AS 107 Financial Instruments: Disclosures
8. Ind AS 108 Operating Segments
9. Ind AS 109 Financial Instruments: Recognition and Measurement issued.
10. Ind AS 110 Consolidated Financial.
11. Ind AS 111 Joint Arrangements.
12. Ind AS 112 Disclosure of Interest in Other.
13. Ind AS 113 Fair Value Measurement.
14. Ind AS 114 Regulatory Deferral Accounts.
15. Ind AS 115: Revenue from Contracts.
16. Ind AS 116: Lease
17. Ind AS 1 Presentation of Financial Statements
18. Ind AS 2 Inventories
19. Ind AS 7 Statement of Cash Flows
20 Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
21. Ind AS 10 Events after the Reporting Period
22. Ind AS 12 Income Taxes
23 Ind AS 16 Property, Plant and Equipment
24 Ind AS 19 Employee Benefits
25. Ind AS 20 Accounting for Government Grants and Disclosure of Government
Assistance
26. Ind AS 21 The Effects of Changes in Foreign Exchange Rates
27. Ind AS 23 Borrowing Costs
28. Ind AS 24 Related Party Disclosures
29. Ind AS 27 Consolidated and Separate Financial Statements
30. Ind AS 28 Investments in Associates
31. Ind AS 29 Financial Reporting in Hyperinflationary Economies
32. Ind AS 31 Interests in Joint Ventures
33. Ind AS 32 Financial Instruments: Presentation
34. Ind AS 33 Earnings per Share
35. Ind AS 34 Interim Financial Reporting
36. Ind AS 36 Impairment of Assets
37. Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
38. Ind AS 38 Intangible Assets
39. Ind AS 39 Financial Instruments: Recognition and Measurement
40. Ind AS 40 Investment Property
41. Ind AS 41 Agriculture.
10.11(AS)
AS 4 - CONTINGENCIES AND EVENT OCCURRING AFTER BALANCE SHEET DATE
1. Meaning:- Contingency is a condition or Situation, the ultimate outcome of which Gain/ loss which will be
determine or known only on the occurrence or Non-occurrence of certain events which are not-within the
control of entity. Contingency are of two types
(A) Contingency which do not give any outflow resources:- Such Contingency are covered under AS-4.
For example provision for doubtful/B/R
(B) Contingency which Give outflow of resources in future:- There contingency are covered under AS-29
2. Event occurring after Balance sheet date:- There are those events which
(A) Are occurred after B/S date but before approval date of financial statement and
(B) Such event may be favourable or unfavourable. and
(C) Such event should be significant
Two types of events can be identified:
(a) those which provide further evidence of conditions that existed at the balance sheet date; and
(b) those which are indicative of conditions that arose subsequent to the balance sheet date.
3. Para 13,”Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide
additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or
that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or
substratum of the enterprise) is not appropriate.”
4. Treatment of proposed dividend:- There are events which, although they take place after the balance sheet
date, are sometimes reflected in the financial statements because of statutory requirements or because of their
special nature. For example, if dividends are declared after the balance sheet date but before the financial
statements are approved for issue, the dividend are not recognised as a liability at the balance sheet date because
no obligation exist at that time unless a statute requires otherwise. Such dividends are disclosed in notes.
5. Para 14 : - If an enterprise declares dividends to shareholders after the balance sheet date, the enterprise should
not recognise those dividends as a liability at the balance sheet date unless a statute requires otherwise. Such
dividends should be disclosed in notes.
10.12(AS)
Practical Questions
1. A major fire has damaged the assets in a factory of a limited company on 2nd April-two days after the year
end closure of account. The loss is estimated at Rs. 20 crores out of which Rs. 12 crores will be recoverable
from the insurers. Explain briefly how the loss should be treated in the final accounts for the previous year.
Answer:- The loss due to break out of fire is an example of event occurring after the balance sheet date. The
event does not relate to conditions existing at the balance sheet date. It has not affected the financial position
as on the date of balance sheet and therefore requires no specific adjustments in the financial statements.
However, paragraph 8.6 of AS 4 states that disclosure is generally made of events occurring after balance
sheet date i.e. in subsequent periods that represent unusual changes affecting the existence or substratum of
the enterprise after the balance sheet date. In the given case, the amount of loss of assets in a factory is
material and may be considered as an event affecting the substratum of the enterprise. Hence, as
recommended in paragraph 15 of AS 4, disclosure of the event should be made.
2. A Limited Company closed its accounting year on 30.6.98 and the accounts for that period were
considered and approved by the board of directors on 20th August, 1998. The company was engaged
in laying pipe line for an oil company deep beneath the earth. While doing the boring work on
1.9.1998 it had met a rocky surface for which it was estimated that there would be an extra cost to the
tune of Rs. 80 lakhs. You are required to state with reasons, how the event would be dealt with in the
financial statements for the year ended 30.6.
Answer: Para 3.2 of AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet
Date defines 'events occurring after the balance sheet date' as 'significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which financial statements are
approved by the Board of Directors in the case of a company'. The given case is discussed in the light
of the above mentioned definition and requirements given in paras 13-15 of the said AS 4 (Revised).
In this case the incidence, which was expected to push up cost became evident after the date of
approval of the accounts. So that was not an 'event occurring after the balance sheet date'. However,
this may be mentioned in the Directors’ Report.
3. Bottom Ltd. entered into a sale deed for its immovable property before the end of the year. But
registration was done with registrar subsequent to Balance Sheet date. But before finalisation, is it
possible to recognise the sale and the gain at the Balance Sheet date? Give your view with reasons.
Answer: Yes, both sales and gain of Bottom Ltd. should be recognized. In accordance with AS 9 at
the Balance Sheet date and what was pending was merely a formality to register the deed. It is clear
that significant risk and rewards of ownership had passed before the balance sheet date. Further the
registration post the balance sheet date confirms the condition of sale at the balance sheet date as per
AS 4.
4. Pure Oil Ltd. closed the books of accounts on March 31, 2012 for which financial statement was finalized by
the Board of Directors on September 04, 2012. During the month of December 2011, company undertook the
project of laying a pipeline across the country and during May 2012 engineers realized that due to
unexpected heavy rain, the total cost of the project will be inflated by Rs. 50 lakhs. How this should be
provided for in the balance sheet of 2011-12 in accordance to AS 4?
Answer: This event occurred after March 31, 2012 but before September 04, 2012 is an event occurring after
the balance sheet date. But this event is not affecting financial position on the date of balance sheet therefore
it should be disclosed in the directors report.
10.13(AS)
5. A company deals in petroleum products. The sale price of petrol is fixed by the government. After the
Balance Sheet date, but before the finalisation of the company’s accounts, the government unexpectedly
increased the price retrospectively. Can the company account for additional revenue at the close of the
year? Discuss.
Answer: According to para 8 of AS 4 (Revised 1995), the unexpected increase in sale price of petrol by the
government after the balance sheet date cannot be regarded as an event occurring after the Balance Sheet
date, which requires an adjustment at the Balance Sheet date, since it does not represent a condition present
at the balance sheet date. The revenue should be recognized only in the subsequent year with proper
disclosures. The retrospective increase in the petrol price should not be considered as a prior period item, as
per AS 5, because there was no error in the preparation of previous period’s financial statements.
6. In preparing the financial statements of R Ltd. for the year ended 31st March, 2012, you come across the
following information. State with reasons, how you would deal with this in the financial statements:
The company invested 100 lakhs in April, 2012 in the acquisition of another company doing similar
business, the negotiations for which had started during the year.
Answer: Para 3.2 of AS 4 (Revised) defines "Events occurring after the balance sheet date" as those
significant events, both favourable and unfavourable, that occur between the balance sheet date and the
date on which the financial statements are approved by the Board of Directors in the case of a company.
Accordingly, the acquisition of another company is an event occurring after the balance sheet date.
However no adjustment to assets and liabilities is required as the event does not affect the determination
and the condition of the amounts stated in the financial statements for the year ended 31st March, 1998.
Applying para 15 which clearly states that/disclosure should be made in the report of the approving
authority of those events occurring after the balance sheet date that represent material changes and
commitments affecting the financial position of the enterprise, the investment of Rs. 100 lakhs in April,
1998 in the acquisition of another company should be disclosed in the report of the Board of Directors
to enable users of financial statements to make proper evaluations and decisions.
7. During the year 2012-2013, 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. 10lakhs in
its financial statements for the year ended 31st March, 2013. On 18th May, 2013, 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, 2013, and
approved by the board on 30th May, 2013.
Solution: As per para 8 of AS 4 “Contingencies and Events Occurring After the Balance Sheet Date,
adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide
additional information material y affecting the determination of the amounts relating to conditions existing at
the balance sheet date.
In the given case, since Raj Ltd. was sued by a competitor for infringement of a trademark during the year
2012-13 for which the provision was also made by it, the decision of the Court on 18th May, 2013, for
payment of the penalty will constitute as an adjusting event because it is an event occurred before approval
of the financial statements. Therefore, Raj Ltd. should adjust the provision upward by Rs. 4 lakhs to reflect
the award decreed by the Court to be paid by them to its competitor.
Had the judgment of the Court been delivered on 1st June, 2013, it would be considered as post reporting
period i.e. event occurred after the approval of the financial statements. In that case, no adjustment in the
financial statements of 2012-13 would have been required.
8. While preparing its final accounts for the year ended 31st March, 2003 a company made a provision for bad
debts @ 5% of its total debtors. In the last week of February, 2003 a debtor for Rs. 2 lakhs had suffered
heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2003 the debtor
10.14(AS)
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 31st March, 2003?
Answer: As per paras 8.2 and 13 of Accounting Standard 4 on Contingencies and Events Occurring
after the Balance Sheet Date, Assets and Liabilities should be adjusted for events occurring after the balance
sheet date that provide additional evidence to assist estimation of amounts relating to conditions existing at
the balance sheet date. So full provision for bad debt amounting to Rs. 2 lakhs should be made to cover the
loss arising due to the insolvency in the Final Accounts for the year ended 31 st March, 2003. It is because
earthquake took place before the balance sheet date. Had the earthquake taken place after 31st March, 2003,
then mere disclosure required as per para 15, would have been sufficient.
9. A company has filed a legal suit against the debtor from whom Rs. 15 lakh is recoverable as on 31.3.2012.
The chances of recovery by way of legal suit are not good as per legal opinion given by the counsel in April,
2012. Can the company provide for full amount of Rs. 15 lakhs as provision for doubtful debts? Discuss in
detail.
Answer:- As per para 13 of AS 4 “Contingencies and Events Occurring After the Balance Sheet Date”,
assets and liabilities should be adjusted for events occurring after the balance sheet date that provide
additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet
date. In the given case, company should make the provision for doubtful debts, as legal suit has been filed on
31st March, 2012 and the chances of recovery from the suit are not good. Though, the actual result of legal
suit will be known in future yet situation of non-recovery from the debtors exists before finalisation of
financial statements. Therefore, provision for doubtful debts should be made for the year ended on 31st
March, 2012.
10. In X Co. Ltd., theft of cash of Rs. 5 lakhs by the cashier in January, 2013 was detected only in May, 2013.
The accounts of the company were not yet approved by the Board of Directors of the company.
Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31.3.2013.
Decide.
Answer:- As per paragraph 13 of AS 4 (revised) ‘Contingencies and Events occurring after the Balance
Sheet Date’, an event occurring after the balance sheet date may require adjustment to the reported values of
assets, liabilities, expenses or incomes.
If a fraud of the accounting period is detected after the balance sheet date but before approval of the financial
statements, it is necessary to recognize the loss amounting Rs. 5,00,000 and adjust the accounts of the
company for the year ended 31st March, 2013.
11. AS 4 prescribes that adjustments to assets and liabilities are required for events 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 a violation of AS 4 to show proposed dividends as current liabilities and
provisions? Comment.
Answer:-As per para 8.5 of AS-4, There are events which, although they take place after the balance sheet
date, are sometimes reflected in the financial statements because of statutory requirements or because of their
special nature. For example, if dividends are declared after the balance sheet date but before the financial
statements are approved for issue, the dividend are not recognised as a liability at the balance sheet date
because no obligation exist at that time unless a statute requires otherwise. Such dividends are disclosed in
notes.
10.15(AS)
Further as per Para 14 of AS-4 If an enterprise declares dividends to shareholders after the balance sheet
date, the enterprise should not recognise those dividends as a liability at the balance sheet date unless a
statute requires otherwise. Such dividends should be disclosed in notes.
So in the given question proposed dividend shall be disclosed into notes to account.
12. Neel Limited has its corporate office in Mumbai and sells its products to stockists all over India. On 31 st
March, 2013 the company want to recognize receipt of cheques bearing date 31st March, 2013 or before, as
“Cheques in Hand” by reducing “Trade Receivables”. The “Cheques in Hand” is shown in the Balance Sheet
as an item of cash and cash equivalents. All cheques are presented to the bank in the month of April 2013
and are also realized in the same month in normal course after deposit in the bank. State with reasons,
whether each of the following is an adjusting event and how this fact is to be disclosed by the company, with
reference to the relevant accounting standard
(i) Cheques collected by the marketing personnel of the company from the stockists on or before 31st
March, 2013.
(ii) Cheques sent by the stockists through Courier on or before 31st March 2013.
Answer:-
(i) Cheques collected by the marketing personnel of the company is an adjusting event as the marketing
personnel are employees of the company and therefore, are representatives of the company. Handing
over of cheques by the stockist to the marketing employees discharges the liability of the stockist.
Therefore, cheques collected by the marketing personnel of the company on or before 31st March, 2013
require adjustment from the stockists’ accounts i.e. from ‘Trade Receivables A/c’ even though these
cheques (dated on or before 31st March, 2013) are presented in the bank in the month of April, 2013 in
the normal course. Hence, collection of cheques by the marketing personnel is an adjusting event as per
AS 4 ‘Contingencies and Events Occurring after the Balance Sheet Date’. Such ‘cheques in hand’ will be
shown in the Balance Sheet as ‘Cash and Cash equivalents’ with a disclosure in the Notes to accounts
about the accounting policy followed by the company for such cheques.
(ii) Even if the cheques bear the date 31st March or before and are sent by the stockists through courier on or
before 31st March, 2013, it is presumed that the cheques will be received after 31st March. Collection of
cheques after 31st March, 2013 does not represent any condition existing on the balance sheet date i.e.
31st March. Thus, the collection of cheques after balance sheet date is not an adjusting event. Cheques
that are received after the balance sheet date should be accounted for in the period in which they are
received even though the same may be dated 31st March or before as per AS 4. Moreover, the collection
of cheques after balance sheet date does not represent any material change affecting financial position
of the enterprise, so no disclosure in the Director’s Report is necessary.
13. State with reasons, how the following events would be dealt with in the financial statements of Pradeep Ltd.
for the year ended 31st March, 2013:
(i) An agreement to sell a land for ₹ 30 lakh to another company was entered into on 1st March, 2013. The
value of land is shown at ₹ 20 lakh in the Balance Sheet as on 31st March, 2012. However, the Sale
Deed was registered on15th April, 2013.
(ii) The negotiation with another company for acquisition of its business was started on 2nd February, 2013.
Pradeep Ltd. invested ₹ 40 lakh on 12th April, 2013.
Answer:
(i) According to AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, assets and
liabilities should be adjusted for events occurring after the balance sheet date that provide
10.16(AS)
additional evidence to assist the estimation of amounts relating to conditions existing at the balance
sheet date.
In the given case, sale of immovable property was carried out before the closure of the books of
accounts. This is clearly an event occurring after the balance sheet date but agreement to sell was
effected on 1st March, 2013 i.e. before the balance sheet date. Registration of the sale deed on 15th April,
2013, simply provides additional information relating to the conditions existing at the balance sheet date.
Therefore, adjustment to assets for sale of land is necessary in the financial statements of Pradeep Ltd.
for the year ended 31st March, 2013.
(ii) AS 4 (Revised) defines "Events occurring after the balance sheet date" as those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Board of Directors in the case of a company. Accordingly, the
acquisition of another company is an event occurring after the balance sheet date. However, no
adjustment to assets and liabilities is required as the event does not affect the determination and the
condition of the amounts stated in the financial statements for the year ended 31st March, 2013.
Applying provisions of the standard which clearly state that/disclosure should be made in the report of
the approving authority of those events occurring after the balance sheet date that represent material
changes and commitments affecting the financial position of the enterprise, the investment of ₹ 40 lakhs
in April, 2013 in the acquisition of another company should be disclosed in the report of the Board of
Directors to enable users of financial statements to make proper evaluations and decisions.
14. In its Final Accounts for the year ended 31st March, 2014, Z Ltd. made a provision of 3% of its total debtors.
On 10th March, 2014, a debtor of ₹ 5 lakhs suffered a heavy loss and became insolvent in April 2014. The
loss was not insured. State giving reasons, if the company may provide for the full loss in its accounts for the
year ended 31st March, 2014. (5 Marks)
Answer: According to para 8.2 of Accounting Standard 4 “Contingencies and Events Occurring after the
Balance Sheet Date”, adjustments to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the determination of the amounts relating
to conditions existing at the balance sheet date.
In the given case, though the debtor became insolvent after balance sheet date, yet he had suffered heavy loss
(not covered by the insurance), before the balance sheet date and this loss was the cause of the insolvency of
the debtor.
Therefore the company must make full provision for bad debts amounting ₹ 5 lakhs in its final accounts for
the year ended 31st March, 2014.
15. With reference to AS 4 "Contingencies and events occurring after the balance sheet date", state whether the
following events will be treated as contingencies, adjusting events or non-adjusting events occurring after
balance sheet date in case of a company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5 th April, 5 days after the year end. However, the
assets are fully insured and the books have not been approved by the Directors.
(ii) A suit against the company's advertisement was filed by a party on 10 th April, 10 days after the year end
claiming damages of ₹ 20 lakhs.
(iii) It sends a proposal to sell an immovable property for ₹ 30 lakhs in March. The book value of the
property is ₹ 20 lakhs as on year end date. However, the deed was registered as on 15th April.
(iv) The terms and conditions for acquisition of business of another company have been decided by March
end. But the financial resources were arranged in April and amount invested was ₹ 40 lakhs.
10.17(AS)
(v) Theft of cash of ₹ 2 lakhs by the cashier on 31st March but was detected the next day after the financial
statements have been approved by the Directors.
Answer: According to AS 4 on ‘Contingencies and Events Occurring after the Balance Sheet Date‘,
adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide
additional information materially affecting the determination of the amounts relating to conditions existing at
the balance sheet date. However, adjustments to assets and liabilities are not appropriate for events occurring
after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date.
―Contingencies used in the Standard is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may not occur.
(i) Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore, the event
becomes immaterial and the event is non-adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date. However, in the given
case, suit was filed against the co mpany‘s advertisement by a party on 10th April for amount of ₹ 20
lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event.
(iii) In the given case, proposal for deal of immovable property was sent before the closure of the books of
accounts. This is a non-adjusting event as only the proposal was sent and no agreement was effected in
the month of March i.e. before the balance sheet date.
(iv) As the term and conditions of acquisition of business of another company had been decided by the end
of March, acquisition of business is an adjusting event occurring after the balance sheet date.
Adjustment to assets and liabilities is required since the event affects the determination and the
condition of the amounts stated in the financial statements for the financial year ended on 31st March.
(v) Since the financial statements have been approved before detection of theft by the cashier of ₹ 2,00,000,
it becomes a non-adjusting event and no disclosure is required in the report of the Approving Authority.
16. The Board of Directors of M/s. New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered
and approved the Audited Financial results along with Auditors Report for the Financial Year ended 31st
March, 2017 and recommended a dividend of ₹ 2 per equity share (on 2 crore fully paid up equity shares of ₹
10 each) for the year ended 31st March, 2017 and if approved by the members at the forthcoming Annual
General Meeting of the company on 18th June, 2017, the same will be paid to all the eligible shareholders.
Answer:- As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet
Date” vide Companies (Accounting Standards) Amendments Rules, 2016 dated 30 th March, 2016, the
events which take place after the balance sheet date, are sometimes reflected in the financial statements
because of statutory requirements or because of their special nature.
However, dividends declared after the balance sheet date but before approval of financial statements are not
recognized as a liability at the balance sheet date because no statutory obligation exists at that time. Hence
such dividends are disclosed in the notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends are to be
disclosed in the notes to financial statements. Accordingly, the dividend of ₹ 4 crores recommended by New
Graphics Ltd. in its Board meeting on 18 th April, 2017 shall not be accounted for in the books for the year
2016 -17 irrespective of the fact that it pertains to the year 2016-17 and will be paid after approval in the
Annual General Meeting of the members / shareholders.
17. For six companies whose financial year ended on 31st March, 2014, the financial statements were approved
by their approving authority on 15th June, 2014. During 2014-15, the following material events took place:
a. A Ltd. sold a major property which was included in the balance sheet at Rs. 1,00,000 and for which
contracts had been exchanged on 15th March, 2014. The sale was completed on 15th May, 2014 at a
price of Rs. 2,50,000.
b. On 31st May, 2014, the mail order activities of C Ltd. (a retail trading group) were shut down with
closure costs amounting to Rs. 2.5 million.
10.18(AS)
c. On 1st July, 2014 the discovery of sand under D Ltd.'s major civil engineering contract site causes
the cost of the contract to increase by 25% for .which there would be no corresponding recovery
from the customer.
d. A fire, on 2nd April, 2014, completely destroyed a manufacturing plant of E Ltd. It was expected
that the loss of Rs. 10 million would be fully covered by the insurance company.
e. A claim for damage amounting to Rs. 8 million for breach of patent had been received by F Ltd.
prior to the year-end. It is the director's opinion, backed by legal advice that the claim will ultimately
prove to be baseless. But it is still estimated that it would involve a considerable expenditure on legal
fees.
f. The change in foreign exchange rate of 8% between 1st April, 2014 and 1st June, 2014 has resulted
in G Ltd.'s foreign assets being reduced by Rs. 1.3 million.
You are required to state with reasons, how each of the above items numbered (a) to (g) should be dealt with
in the financial statement of the various companies for the year ended 31st March, 2014.
Answer:-Treatment as per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’
a. A Ltd. The sale of property should be treated as an adjusting event since contracts had been
exchanged prior to the year-end. The effect of the sale would be reflected in the financial statements
ended on 31.3.2014 and the profit on sale of property Rs. 1,50,000 would be treated as an
extraordinary item.
b. C Ltd. A closure not anticipated at the year-end would be treated as a non-adjusting event.
Memorandum disclosure would be required for closure of mail order activities since non disclosure
would affect user's understanding of the financial statements.
c. D Ltd. The event took place after the financial statements were approved by the approving authority
and is thus outside the purview of AS 4. However, in view of its significance of the transaction, the
directors may consider publishing a separate financial statement/additional statement for the
attention of the members in general meeting.
d. E Ltd. The event is a non adjusting event since it occurred after the year-end and does not relate to
the conditions existing at the year-end. However, it is necessary to consider the validity of the going
concern assumption having regard to the extent of insurance cover. Also, since it is said that the loss
would be fully recovered by the insurance company, the fact should be disclosed by way of a note
to the financial statements.
e. F Ltd. On the basis of evidence provided, the claim against the company will not succeed. Thus, Rs.
8 million should not be provided in the account, but should be disclosed by means of a contingent
liability with full details of the facts as per AS 9. Provision should be made for legal fee expected to
be incurred to the extent that they are not expected to be recovered.
f. G Ltd. The change in exchange rates is a non adjusting event since it does not relate to the
conditions existing at the balance sheet date. However, they may be of such significance that they
may require a disclosure in the report of the approving authority to enable users of financial
statements to make proper evaluations and decisions.
10.19(AS)
REVISION STRUCTURE
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SUMMARY NOTES
10.20(AS)
Accounting Standard – 5
Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
The objective of this accounting standard is special disclosure of some specific items into P&L A/c. These
items are of following types
(A) Ordinary activity:

(i) Meaning:- Ordinary activities are principal revenue generating activity and ancillary to it.
(ii) Disclosure:- These activity should be disclosed separately if either these size or nature or both all
material.
(iii) Example of ordinary activities which nature is material

(a) Decline in the value of inventory to NRV as well as reversal.
(b) Any Profit or loss on sale of fixed assets/Long term investments.
(c) legislative changes having retrospective application;
(d) litigation settlements;
(e) Creation of provision.
(f) Reversal of provision.
(B) Extra-ordinary Activity:

(i) Meaning: Extra ordinary Activity are those activity which not ordinary Activity
(ii) Disclosure: All extra ordinary activity should be disclosed separately
(iii) Examples of extra ordinary activities:-

(a) Any loss due to failure of commitment
(b) Any loss due to fraud.
(c) Loss due to enemy attack, flood, fire etc.
(d) Refund of Govt. Grant.
(e) Attachment of property of the enterprise by government
(C) Prior Period items:

(i) Meaning:- Prior period item are those income or expenses which are recorded in current year but
pertain to earlier years but not recorded in the earlier years due to any error or omission whether
intentionally or unintentionally.
(ii) Disclosure:- Prior period item should be disclosed always separately.
(iii) Example of items which are considered as prior period item

(a) Wrong calculation of deprecation.
(b) Wrong recording of Inventory i.e. any item of inventory is recorded twice or any item of
inventory is not included while calculating inventory.
(c) Not recording/excess recording/ less recording/ double recording of any income or expenses in
earlier year.
(d) Wrong valuation of Inventory etc.
(iv) Example of items which are not considered as prior period items
(a) Increase in salary with retrospective effect
(b) Retrospective raising demand of VAT by Delhi Govt.
10.21(AS)
(D) Change in Accounting Estimate: In case there is any change in accounting estimate due to new
information, the effect of such change will be taken on prospective Basis. In case there is any change in
accounting estimate but amount is not quantify then such change will be disclosed into Notes to A/c and
mentioned that amount is not quantified.
Examples of change in accounting estimate.
(a) Estimate Life of assets is change
(b) Change into rate of provision
(c) Provision for Doubtful Debts
(d) Change in valuation technique of inventory etc.
(E) Change in Accounting policy:-

(i) Meaning:- Accounting policy are accounting principal and methods of applying those principal,
Accounting principal means solution of accounting problem. (AS-1)
(ii) When Accounting policy can be changed:- Accounting policy can be changed in the following
cases:-
(a) Any change in law or accounting standard
(b) For true & fair view of financial statement
(c) For better presentation of financial standard
(iii) In case accounting policy is changed then its effect will be calculated retrospectively and following
disclose are required:-
(a) Old policy
(b) New policy
(c) Reason of change in policy
(d) Impact of such change on P & L A/c.
(iv) Example: Change in cost formula in measuring the cost of inventories.
Note:-In case it is not possible to identify whether change in accounting estimate or policy assume change in
accounting estimate.
10.22(AS)
Practical Questions
1. A company signed an agreement with the Employees Union on 1.9.2007 for revision of wages with
retrospective effect from 30.9.2006. This would cost the company an additional liability of Rs. 5,00,000 per
annum. Is a disclosure necessary for the amount paid in 2007-08?
Answer:- It is given that revision of wages took place on 1st September, 2007 with retrospective effect from
30.9.2006. Therefore wages payable for the half year from 1.10.2006 to 31.3.2007 cannot be taken as an
error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a
prior period item. Additional wages liability of Rs. 7,50,000 (for 1½ years @ Rs. 5,00,000 per annum)
should be included in current year’s wages.
It may be mentioned that additional wages is an expense arising from the ordinary activities of the company.
Although abnormal in amount, such an expense does not qualify as an extraordinary item. However, as per
para 12 of AS 5 (Revised), when items of income and expense within profit or loss from ordinary activities
are of such size, nature or incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed separately.
2. A limited company created a provision for bad and doubtful debts at 2.5% on debtors in preparing the
financial statements for the year 2008-2009. Subsequently on a review of the credit period allowed and
financial capacity of the customers, the company decided to increase the provision to 8% on debtors as on
31.3.2009. The accounts were not approved by the Board of Directors till the date of decision. While
applying the relevant accounting standard can this revision be considered as an extraordinary item or prior
period item?
Answer: This change in estimate is neither a prior period item nor an extraordinary item. However, as per
para 27 of AS 5 (Revised), a change in accounting estimate which has material effect in the current period,
should be disclosed and quantified. Any change in the accounting estimate which is expected to have a
material effect in later periods should also be disclosed.
3. M/s Dinesh & Company signed an agreement with workers for increase in wages with retrospective effect.
The outflow on account of arrears was for 2008-09 —Rs. 10.00 lakhs, for 2009-10 — Rs. 12.00 lakhs and
for 2010-11 — Rs. 12.00 lakhs. This amount is payable in September, 2011. The accountant wants to
chargers Rs. 22.00 lakhs as prior period charges in financial statement for 2011-12. Discuss.
Answer:- According to AS 5 (Revised) “Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies”, the term prior period item refers only to income or expenses which arise in the current
period as a result of errors or omission in the preparation of the financial statements of one or more prior
periods. The term does not include other adjustments necessitated by circumstances, which though related to
prior periods are determined in the current period. The full amount of wage arrears paid to workers will be
treated as an expense of current year and it will be charged to profit and loss account as current expenses and
not as prior period expenses.
It may be mentioned that additional wages is an expense arising from the ordinary activities of the company.
Although abnormal in amount, such an expense does not qualify as an extraordinary item. However, as per
Para 12 of AS 5 (Revised), when items of income and expense within profit or loss from ordinary activities
are of such size, nature or incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed separately.
4. During the year 2001-2002, a medium size manufacturing company wrote down its inventories to net
realizable value by Rs. 5, 00,000. Is a separate disclosure necessary?
Answer:- Although the case under consideration does not relate to extraordinary item, but the
nature and amount of such item may be relevant to users of financial statements in understanding
the financial position and performance of an enterprise and in making projections about financial
position and performance. Para 12 of AS 5 (Revised in 1997) on Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies states that:
“When items of income and expense within profit or loss from ordinary activities are of such size,
nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the
period, the nature and amount of such items should be disclosed separately.”
10.23(AS)
Circumstances which may give to separate disclosure of items of income and expense in accordance with
para 12 of AS 5 include the write-down of inventories to net realisable value as well as the reversal of
such write-downs.
5. A Limited Company finds that the stock sheets as on 31.3.97 had included twice an item the cost of
which was Rs. 20,000. You are asked to suggest, how the error would be dealt with in the accounts of
the year ended 31.3.98
(May, 1999)
Answer: The error in the recording of closing stock of the year ended 31st March, 1997 must have also
resulted in overstatement of profits of previous year, b rought forward to the current year ended 31st
March, 1998. Vide para 4 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies, the rectifications as required in the current year are 'Prior
Period Items '. Accordingly, Rs. 20,000 should be deducted from opening stock in the profit and loss
account. And Rs. 20,000 should be charged as prior period adjustment in the profit and loss account for
the year ended 31st March 1998 in accordance with para 15 of AS 5 (Revised) which requires that the
nature and amount of prior period items should be separately disclosed in the statement of profit and loss
in a manner that their impact on the current profit or loss can be perceived.
6. State, how you will deal with the following matters in the accounts of U Ltd. for the year ended 31st March,
2012 with reference to Accounting Standard:
The company finds that the stock sheets of 31.3.2011 did not include two pages containing details of
inventory worth Rs. 14.5 lakhs.
Answer:- Paragraph 4 of Accounting Standard 5 on “Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies”, defines Prior Period items as "income or expenses which arise in the
current period as a result of errors or omissions in the preparation of the financial statements of one or more
prior periods”.
Rectification of error in stock valuation is a prior period item vide Para 4 of AS 5.
Rs. 14.5 lakhs must be added to the opening stock of 1/4/2011. It is also necessary to show Rs. 14.5 lakhs as
a prior period adjustment in the Profit and loss Account below the line.
Separate disclosure of this item as a prior period item is required as per Para 15 of AS 5.
7. S.T.B. Ltd. makes provision for expenses worth Rs. 7,00,000 for the year ending March 31, 2009, but the
actual expenses during the year ending March 31, 2010 comes to Rs. 9,00,000 against provision made during
the last year. State with reasons whether difference of Rs. 2,00,000 is to be treated as prior period item as per
AS-5.
Answer:- As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies’, as a result of the uncertainties inherent in business activities, many financial statement items
cannot be measured with precision but can only be estimated. The estimation process involves judgments
based on the latest information available. The use of reasonable estimates is an essential part of the
preparation of financial statements and does not undermine their reliability.
Estimates may have to be revised, if changes occur regarding the circumstances on which the estimate was
based, or as a result of new information, more experience or subsequent developments.
As per the standard, the effect of a change in an accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. Prior period items
are income or expenses which arise in the current period as a result of errors or omissions in the preparation
of the financial statements of one or more prior periods. Thus, revision of an estimate by its nature i.e. the
difference of Rs. 2 lakhs, is not a prior period item.
Therefore, in the given case expenses amounting Rs. 2,00,000 (i.e. Rs. 9,00,000 – Rs. 7,00,000) relating to
the previous year recorded in the current year, should not be regarded as prior period item.
8. Goods of Rs.5,00,000 were destroyed due to flood in September, 2006. A Claim was lodged with insurance
company. But no entry was passed in the books for insurance claim. In March, 2009, the claim was passed
and the company received a payment of Rs.3,50,000 against the claim. Explain the treatment of such receipt
in final accounts for the year ended 31st March, 2009.
10.24(AS)
Answer. As per provisions of AS 5 “Net Profit or Loss for the period, prior period items and
changes in accounting policies”, prior period items are income or expenses, which arise, in the current
period as a result of error or omissions in the preparation of financial statements of one or more
prior periods. Further, the nature and amount of prior period items should be separately disclosed in
the statement of profit and loss in a manner that their impact on current profit or loss can be perceived.
In the given example, it is clearly a case of error in preparation of financial statement for financial year
2006-07. Hence, claim received in financial year 2008-09 is a prior period items and should be separately
disclosed in the statement of Profit and Loss.
9. Briefly explain, as per relevant Accounting Standard:

ABC Ltd. was making provision for non-moving stocks based on no issues for the last 12 months upto
31.3.2002.
The company wants to provide during the year ending 31.3.2003 based on technical evaluation:
Total value of stock Rs. 100 lakhs
Provision required based on 12 months issue Rs. 3.5 lakhs
Provision required based on technical evaluation Rs. 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of provision?
OR
XY Ltd. was marking provisions for non-moving stocks based on no issues for the last 12 months upto
31.3.08. Based on technical evaluation the company wants to make previsions during the year 31.3.09.
Total value of stock – Rs. 150 lakhs.
Provisions required based on 12 months issue Rs. 4.0 lakhs.
Provisions required based on technical evaluation Rs. 3.20 lakhs.
Does this amount to change in accounting policy? Can the company change the method of provision?
Answer:- The decision of making provision for non-moving stocks on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a company may
require that provision for non-moving stocks should be made. The method of estimating the amount of
provision may be changed in case a more prudent estimate can be made.
In the given case, considering the total value of stock, the change in the amount of required provision of
non-moving stock from Rs.3.5 lakhs to Rs.2.5 lakhs is also not material. The disclosure can be made for
such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for
the year 2002 -03:
“The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding
years. Had the same method been followed as in the previous year, the profit for the year and the
corresponding effect on the year end net assets would have been higher by Rs.1 lakh.”
10. Closing stock for the year ending on 31.03.2010 is Rs. 50,000 which includes stock damaged in a fire in
2008-09. On 31.3.2009, the estimated NRV of the damaged stock was Rs. 12,000. The revised estimate of
NRV of damaged goods amounting Rs. 4,000 has been included in closing stock of Rs. 50,000 as on
31.03.2010.
Find the value of closing stock to be shown in the profit & loss account.
Answer: The fall in estimated net realisable value of damaged stock ₹ 8,000 is the effect of change in
accounting estimate. As per para 25 of AS 5 ‘Net Profit or Loss the Period, Prior Period Items and Changes
in Accounting Policies’, the effect of a change in accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. It is presumed that
the loss by fire in the year ended 31.3.2009, i.e. difference of cost and NRV was shown in the profit and loss
account as an extra-ordinary item. Therefore, in the year 2009-10, revision in accounting estimate should
also be classified as extra-ordinary item in the profit and loss account and closing stock should be shown
excluding the value of damaged stock.
Value of closing stock for the year 2009-10 will be as follows:
₹
Closing Stock (including damaged goods) 50,000

Less: Revised value of damaged goods (4,000)
Closing stock (excluding damaged goods) 46,000
10.25(AS)
11. In preparing the Financial Statements of Santhanam Ltd. for the year ended 31st March, 2009, you come
across the following features. State with reasons, how you would deal with them in the Financial Statements:
There was a major theft of stores valued at Rs.46 lakhs in the preceding year which was detected only during
the current financial year. (6marks)
Answer: Due to major theft of stores in the preceding year (2007-08) which was detected only during the
current financial year (2008-09), there was overstatement of closing stock of stores in the preceding year.
This must have also resulted in the overstatement of profits of previous year, brought forward to the current
year. The adjustments are required to be made in the current year as 'Prior Period Items' as per AS 5
(Revised) “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.
Accordingly, the adjustments relating to both opening stock of the current year and profit brought forward
from the previous year should be separately disclosed in the statement of profit and loss together with their
nature and amount in a manner that their impact on the current profit or loss can be perceived. The disclosure
as to the theft and the resulting loss is required in the notes to the accounts for the current year i.e, year ended
31st March, 2009.
12. Give two examples on each of the following items:

(i) Change in Accounting Policy
(ii) Change in Accounting Estimate
(iii) Extra Ordinary Items
(iv) Prior Period Items.
13. When can a company change its accounting policy?
14. Shama was working with ABC Ltd. drawing monthly salary of Rs. 25,000 per month. She went on
maternity leave with pay for 7 months i.e. from 1-01-2017 to 31-7-17. Her salary for 3 months was not
provided for in financial statements for F.Y. 2016-17 due to omission. When she joined after leave
period, the whole salary for 7 months was paid to her. You are required to:
(i) Pass the necessary journal entries in F.Y. 2017-18 to record the above transaction as per accounting
standard-5 and state reason for the same.
(ii) Would the treatment have been different, if Shama was terminated on 01-01-2017 and was
reinstated in service by the court w.e.f. 01-08-2017 with instruction to pay Shama salary for the
intervening period i.e. 1-01- 2017 to 31-07-2017.
15. X Ltd. estimated 1% bad debts while preparing financial statement for 2000-2001. Provision for doubtful
debts was created accordingly. However, it appears that inventories 2001-2002 some debts are still
uncollected. The management feels that an additional provision of 40% is necessary on such debts. Should
such change inventories estimate be treated extraordinary items or is it prior period items? Discuss Briefly.
16. A company created a provision of Rs. 75,000 for staff welfare while preparing the financial statements for
the year 2007-08. On 31st March, in a meeting with staff welfare association, itwas decided to increase the
amount of provision for staff welfare to Rs. 1,00,000. The accounts were approved by Board of Directors on
15th April, 2008.
Explain the treatment of such revision in financial statements for the year ended 31st March, 2008.
Answer:- As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies”, the change in amount of staff welfare provision amounting Rs. 25,000 is neither a prior period
item nor an extraordinary item. It is a change in estimate, which has been occurred in the year 2007-2008.
As per the provisions of the standard, normally, all items of income and expense which are recognised in a
period are included in the determination of the net profit or loss for the period. This includes extraordinary
items and the effects of changes in accounting estimates. However, the effect of such change in accounting
estimate should be classified using the same classification in the statement of profit and loss, as was used
previously, for the estimate.
10.26(AS)
17. Vishwakarma Construction Ltd. was a awarded a contract of construction of a bridge for 100 crores on
1.6.210. Total contract cost estimated was 80 crores. The position of the contract on 31.3.2013 was under :
As on 31.3.2012 As on 31.3.2013
Contract Price 100 100
Contract cost incurred upto date 25 95(100% complete)
Estimate contract cost of completion 60 Nil
While closing books of account on 31.3.2013 the chief accountant treated excess cost of 10 crores incurred
as against estimated of (25+60) = 85 crores as on 31.3.2012 as mistakes in estimation of cost, hence
categorized 10crores (95-85) as prior period expenses. Comment.
Answer:- As per AS-5, a change in estimate is neither a prior period item nor an extraordinary item. Hence,
the treatment given by the company is not correct.
18. An extract from the statement profit and loss of a company for 2012-13 is given below:
Rs. 000 Rs. 000
Sales 3,000
Opening stock 500
Production cost 2,800
3,300
Less: Closing Stock (600) (2,700)
Gross Profit 300

Expenses (250)
Profit before tax 50
Tax 20
Profit after tax 30
The closing stock includes stock damaged in a fire in 2011-12. On 31/03/12, the estimated net realisable
value of this stock was Rs. 15,000. The revised estimate of net realisable value included in closing stock of
2012-13 is Rs. 5,000. Rewrite the statement of profit and loss if necessary to comply with requirements of
AS 5.
Answer:- The fall in estimated net realisable value of damaged stock Rs. 10,000 is the effect of change in
accounting estimate. As per paragraph 25 of the standard, the effect of a change in accounting estimate
should be classified using the same classification in the statement of profit and loss as was used previously
for the estimate.
The difference between cost of the stock and its net realisable value after fire was presumably classified as
loss on fire in 2011-12. The loss on fire is an extraordinary item. Since paragraph 25 does not permit change
in classification, the fall in net realisable value of damaged stock Rs. 10,000 should be classified as extra
ordinary item in 2011-12 as well.
Paragraph 8 of the standard requires the extraordinary items to be disclosed in such manner that their impact
on current profit or loss can be perceived. To comply with this requirement, enterprises should present
profit/loss before and after extraordinary items.
Rs. 000
Rs. 000
Sales 3,000
Opening stock (500 – 15) 485
Production cost 2,800
3,285
Less: Closing Stock (600 – 5) (595) (2,690)
Gross Profit 310
Expenses 250
Profit before loss on fire 60
Less: Loss on fire (10)
Profit before tax 50
Tax 20
Profit after tax 30
10.27(AS)
19. How would you deal with the following in the annual accounts of a company for the year ended.
(a) The company has to pay delayed cotton clearing charges over and above the negotiated price for
taking delayed delivery of cotton from the Suppliers' Godown. Upto 1994 -95, the company has
regularly included such charges in the valuation of closing stock. This being in the nature of
interest the company has decided to exclude it from closing stock valuation for the year 1995-96.
This would result into decrease in profit by Rs. 7.60 lakhs.
Answer: Para 29 of AS 5 (Revised) ‘Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies” states that a change in an accounting policy should be made only
if the adoption of a different accounting policy is required by statute or for compliance with an
accounting standard or if it is considered that the change would result in a more appropriate
presentation of the financial statements of an enterprise. Therefore the change in the method of
stock valuation is justified in view of the fact that the change is in line with the recommendations
of AS 2 (Revised) ‘Valuation of Inventories’ and would result in more appropriate preparation
of the financial statements. As per AS 2, this accounting policy adopted for valuation of
inventories including the co st formulae used should be disclosed in the financial statements.
Also, appropriate disclosure of the change and the amount by which any item in the financial
statements is affected by such change is necessary as per AS 1, AS 2 and AS 5. Therefore, the
under mentioned note should be given in the annual accounts.
"In compliance with the Accounting Standards issued by the ICAl, delayed cotton clearing charges
which are in the nature of interest have been excluded from the valuation of closing stock
unlike preceding years. Had the company continued the accounting practice followed earlier,
the value of closing stock as well as profit before tax for the year would have been higher by Rs.
7.60 lakhs."
(b) Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuel
surcharge of Rs. 5.30 lakhs for the period October, 1990 to September, 1994 has been received
and paid in February, 1995.
Answer: The final bill having been paid in February, 1995 should have been accounted for in the
annual accounts of the company for the year ended 31st March, 1995. How ever it seems that as a
result of error or omission in the preparation of the financial statements of prior period i.e., for the
year ended 31st March 1995, this material charge has arisen in the current period i.e., year ended
31st March, 1996. Therefore it should be treated as 'Prior period item' as per para 16 of AS 5. As
per para 19 of AS 5 (Revised), prior period items are normally included in the determination of net
profit or loss for the current period. An alternative approach is to show such items in the
statement of profit and loss after determination of current net profit or loss. In either case, the
objective is to indicate the effect of such items on the current profit or loss.
It may be mentioned that it is an expense arising from the ordinary course of business. Although
abnormal in amount or infrequent in occurrence, such an expense does not qualify an
extraordinary item as per Para 10 of AS 5 (Revised). For better understanding, the fact that power
bill is accounted for at provisional rates billed by the state electricity board and final adjustment
thereof is made as and when final bill is received may be mentioned as an accounting policy.
20. A company desires to make provision in respect of its non –moving or slow moving items of stock. The
following information is available:
Rs in lacs
Particulars Current Previous
year year
Value of Closing Stock 169 105

Provision based on No, of issues during the year 4.50 4.00
Provision based on products technicality 5.50 4.25
The company has been making provisions based on number of issues. However, from this year, the
management has decided to make provision based on technical evaluation.
Explain whether such change will amount to change in accounting policy. Also draw a suitable note if in
your view the proposed change requires the same to be given in the financial statement of the current year.
10.28(AS)
21. Closing Stock for the year ending on 31st March, 2013 is ₹ 1,50,000 which includes stock damaged in a fire
in 2011 -12. On 31 st March, 2012, the estimated net realizable value of the damaged stock was ₹ 12,000.
The revised estimate of net realizable value of damaged stock included in closing stock at 2012-13 is ₹
4,000. Find the value of closing stock to be shown in Profit and Loss Account for the year 2012-13, using
provisions of Accounting Standard 5.
Answer: The fall in estimated net realisable value of damaged stock ₹ 8,000 is the effect of change in
accounting estimate. As per para 25 of AS 5 ‘Net Profit or Loss the Period, Prior Period Items and Changes
in Accounting Policies’, the effect of a change in accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate. It is presumed that
the loss by fire in the year ended 31.3.2012, i.e. difference of cost and NRV was shown in the profit and loss
account as an extra-ordinary item. Therefore, in the year 2012-13, revision in accounting estimate should
also be classified as extra-ordinary item in the profit and loss account and closing stock should be shown
excluding the value of damaged stock.
Value of closing stock for the year 2012-13 will be as follows:
₹
Closing Stock (including damaged goods) 1,50,000

Less: Revised value of damaged goods (4,000)
Closing stock (excluding damaged goods) 1,46,000
22. During the course of the last three years, a company owning and operating Helicopters lost four
Helicopters. The company Accountant felt that after the crash, the maintenance provision created in
respect of the respective helicopters was no longer required, and proposed to write back to the Profit
and Loss account as a prior period item. Is the Company’s proposed accounting treatment correct?
Discuss.
Answer: The balance amount of maintenance provision written back to profit and loss account, no
longer required due to crash of the helicopters, is not a prior period item because there was no error in
the preparation of previous periods’ financial statements. The term ‘prior period items’, as defined in
AS 5 (revised) “Net Profit or Loss for the Period, Prior Period Items and Changes In Accounting
Policies”, refer only to income or expenses which arise in the current period as a result of errors or
omissions in the preparation of the financial statements of one or more prior periods. As per paragraph
8 of AS 5, extraordinary items should be disclosed in the statement of profit and loss as a part of net
profit or loss for the period. The nature and the amount of each extraordinary item should be
separately disclosed in the statement of profit and loss in a manner that its impact on current profit or
loss can be perceived. The amount so written-back (If material) should be disclosed as an extraordinary
item as per AS 5.
23. Explain whether the following will constitute a change in accounting policy or not as per AS 5.
(i) Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia
payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired after completing 5 years of
service in the organistaion. Such employees will get pension of Rs. 20,000 per month.
Earlier there was no such scheme of pension in the organization.
Answer: As per para 31 of AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies’, the adoption of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions, will not be considered as a change in accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-
gratia payments to employees on retirement is not a change in an accounting policy
(ii) Similarly, the adoption of a new accounting policy for events or transactions which did not occur
previously or that were immaterial wil not be treated as a change in an accounting policy.
10.29(AS)
REVISION STRUCTURE
1
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5
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7
8
9
10
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SUMMARY NOTES
10.30(AS)
SUMMARY NOTES
10.31(AS)
AS 7: Construction Contracts
Part I:-
1. PRZ & Sons Ltd. are Heavy Engineering contractors specializing in construction of dams. From the records
of the company, the following data is available pertaining to year ended 31st March, 2012. Using this data
and applying the relevant Accounting Standard you are required to:
(i) Compute the amount of profit/loss for the year ended 31st March, 2012.
(ii) Arrive at the contract work in progress as at the end of financial year 2011-12.
(iii) Determine the amount of revenue to be recognized out of the total contract value.
(iv) Work out the amount due from/to customers as at year end.
(v) List down relevant disclosures with figures as per relevant Account Standard
(Rs. crore)
Total Contract Price 2,400
Work Certified 1,250
Work pending certification 250
Estimated further cost to completion 1,750
Stage wise payments received 1,100
Progress payments in pipe line 300
2. SC (P.) Ltd. has undertaken a bridge construction contract, in respect of which details has been given below:
(i) Initial amount of revenue, 9,000 crore
(ii) Initial estimate of contract costs 8,000 crore
(iii) Contract duration – 3 years
Amount in crore
Years
1st 2nd 3rd
Estimated contract costs 8,050
Increase in contract revenue 200
Estimated additional contract costs 150
Cost incurred upto the reporting date 2,093 6,168 8,200
At the end of year 2, cost incurred include 100 for standard material stored at the site to be used in year 3 to
complete the project. You are required to calculate the profit/loss to be recognised in the Profit and Loss
Account at the end of three year.
3. A undertook a contract for 15,00,000 on an arrangement that 80% of the value of work done as certified by
the architect of the contractee, should be paid immediately and that the remaining 20% be retained until the
contract was completed.
In 2005, the amounts expended were 3,60,000; the work was certified for 3,00,000 and 80% of this was paid
as agreed. It was estimated that future expenditure to complete the contract would be 10,00,000.
In 2006, the amounts expended were 4,75,000. Three-fourths of the contract was certified as done by
December 31st and 80% of this was received accordingly. It was estimated that future expenditure to
complete the contract would be 4,00,000.
In 2007, the amounts expended were 3,10,000 and on June 30th the whole contract was completed. Show
how the contract revenue would be recognised in the profit and loss account for each year.
4. Mr. ‘X’ as a contractor has just entered into a contract with a local municipal body for building a flyover.
As per the contract terms, ‘X’ will receive an additional Rs.2 crore if the construction of the flyover were to
be finished within a period of two years of the commencement of the contract. Mr. X wants to recognize this
revenue since in the past he has been able to meet similar targets very easily. Is X correct in his proposal?
Discuss.
Answer: According to para 14 of AS 7 (Revised) ‘Construction Contracts’, incentive payments are
additional amounts payable to the contractor if specified performance standards are met or exceeded. For
example, a contract may allow for an incentive payment to the contractor for early completion of
the contract. Incentive payments are included in contract revenue when: (i) the contract is sufficiently
advanced that it is probable that the specified performance standards will be met or exceeded; and (ii) the
10.32(AS)
amount of the incentive payment can be measured reliably. In the given problem, the contract has not even
begun and hence the contractor (Mr. X) should not recognize any revenue of this contract.
5. Sagar Limited belongs to the engineering industry. The Chief Accountant has prepared the draft accounts for
the year ended 31.03.2012. You are required to advise the company on the following items from the
viewpoint of finalization of accounts, taking note of the mandatory accounting standards.
The company undertook a contract for building a crane for Rs. 10 lakhs. As on 31.03.2012 it incurred a cost
of Rs. 1.5 lakhs and expects that there will be Rs. 9 lakhs more for completing the crane. It has received so
far Rs. 1 lakh as progress payment.
Answer: Para 21 of AS 7 (Revised) ‘Construction Contracts’ provides that when the outcome of a
construction contract can be estimated reliably, contract revenue and contract costs associated with the
construction contract should be recognized as revenue and expenses respectively with reference to the stage
of completion of the contract activity at the reporting date. Para 35 of AS 7 states that when it is probable
that total contract cost will exceed total contract revenue, the expected losses should be recognized as an
expense irrespective of :
a. Whether or not work has commenced
b. Stage of completion of contract
c. The amount of profit on other contracts which are not treated as a single contract
Thus, when Estimated Contract Costs > Total Contract Revenue

Expected Loss = Work Certified + Work uncertified + estimated cost to complete the project - Total value of
contract
Thus, in the given case, the foreseeable loss of Rs. 50,000 (expected cost Rs. 10.5 lakhs less contract revenue
Rs. 10 lakhs) should be recognized as an expense in the year ended 31st March, 2012.
The following disclosures should also be given in the financial statements:
a. the amount of contract revenue recognized as revenue in the period;

b. the aggregate amount of costs incurred and loss recognized upto the reporting date;
c. amount of advances received;
d. amount of retentions; and
e. gross amount due from/due to customers Amount∗
* Amount due from/to customers = contract costs + Recognised profits – Recognised losses – Progress
billings = Rs. 1.5 + Nil – Rs. 0.5 – Rs. 1.0 = Nil.
6. Jain Construction Co. Ltd. undertook a contract on 1st January, 2012 to construct a building for Rs. 80 lakhs.
The company found on 31st March, 2012 that it had already spent Rs. 58,50,000 on the construction. Prudent
estimate of additional cost for completion was Rs.31,50,000. What amount should be charged to revenue and
what amount of contract value to be recognized as turnover in the final accounts for the year ended 31st
March 2012 as per provisions of AS 7 (revised)?
7. Mr. Shyam, a construction contractor undertakes the construction of an industrial complex. He has separate
proposals raised for each unit to be constructed in the industrial complex. Since each unit is subject to
separate negotiation, he is able to identify the costs and revenues attributable to each unit. Should Mr. Shyam
treat construction of each unit as a separate construction contract according to AS 7?
Answer: As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the construction
of each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and customer have been able to
accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
8. Uday Constructions undertake to construct a bridge for the Government of Uttar Pradesh. The construction
commenced during the financial year ending 31.03.2016 and is likely to be completed by the next year. The
contract is for a fixed price of Rs. 12 crores with an escalation clause. The costs to complete the whole
contract are estimated at Rs.9.50 crores of rupees. You are given the following information for the year
ended 31.03.2016.
Cost incurred upto 31.03.2016 Rs. 4 crores
10.33(AS)
Cost estimated to the contract Rs. 6 crores
Escalation in cost by 5% and accordingly the contract price is increased by 5%.
You are required to ascertain the state of completion and state the revenue and profit to be recognised for the
year as per AS-7.
Answer: As per AS 7 ‘Construction Contracts’ the amount of revenue agreed in a fixed price contract may increase as
a result of cost. So in the given question:
Contact price will be Rs. 12 crores plus 5%= Rs. 12.60 Crores
Percentage of completion method = (Actual cost/Total estimated cost) x100
= 4 crores/10 crores = 40%
Revenue to be recognised= (12crores+5%) =12.60crores X 40% = 5.04 Crores
Less:- Actual cost has been incurred (4.00) Crores
Profit recognised. 1.04 crores
9. Akar Ltd. Signed on 01/04/16, a construction contract for Rs 1,50,00,000.

Following particulars are extracted in respect of contract, for the period ending 31/03/17.
- Materials issued Rs. 75, 00,000
- Labour charges paid Rs. 36, 00,000
- Hire charges of plant Rs. 10,00,000
- Other contract cost incurred Rs.15,00,000
- Out of material issued, material lying unused at the end of period is Rs. 4,00,000
- Labour charges of Rs. 2,00,000 are still outstanding on 31.3.17.
- It is estimated that by spending further Rs. 33,50,000 the work can be completed in all respect.
You are required to compute profit/loss to be taken to profit & Loss Account and additional provision for
foreseeable loss as per AS-7.
Answer:- As per AS-7, “Construction Contracts” profit/loss to be taken to profit & Loss Account and
additional provision for foreseeable loss is calculated as follows:-
(i) Calculation of % of Completion:-

x100
, ,
, , ,
x100 = 80%
(1) Calculation the Total Cost Incurred upto date:

Material : Issued 75,00,000
Less:- Closing (4,00,000) 71,00,000
Labour : Paid 36,00,000
+O/S 2,00,000 38,00,000
Hire Charges 10,00,000
Other cost incurred 15,00,000
1,34,00,000
(2) Total Estimated Cost :-
Cost incurred upto date: 1,34,00,000
+Further estimated cost to be incurred 33,50,000
1,67,50,000
(ii) Calculation of revenue to be recognized
Contract Price X % of Stage of completion
= 80% x 1,50,00,000 = 1,20,00,000
(iii) Calculation of loss recognised on contract

Contract Revenue recognised 1,20,00,000
Less:- Total cost incurred (1,34,00,000)
14,00,000
(iv) Calculation of total expected loss on contract
Contract Price 1,50,00,000
Less:- Total estimated cost to be incurred (1,67,50,000)
Total Expected loss on contract 17,50,000
10.34(AS)
(v) Calculation of provision for expected loss:-
Less: Total loss recognised on contract 14,00,000
Provision for expected loss 3,50,000
(vi) Loss of 17,50,000 (14,00,000 + 3,50,000) is be to recognized immediately by debiting into profit & loss account.
10. X Ltd. commenced a construction contract on 01/04/20X1. The fixed contract price agreed was ₹ 2,00,000.
The company incurred ₹ 81,000 in 20X1-20X2 for 45% work and received ₹ 79,000 as progress payment
from the customer. The cost incurred in 20X2-20X3 was ₹ 89,000 to complete the rest of work. Prepare P&L
and customer Account.
Solution:
Profit & Loss Account
Year Rs. 000 Year Rs. 000

2013-14 To Construction 81 2013-14 By Contract Price 90
Costs (for 45% (45% of Contract
work) Price)
To Net profit 9
(for 45% work)
90 90
2014-15To Construction 89 2014-15By Contract Price 110
costs (55% of Contract
(for 55% work) Price)
To Net Profit 21
(for 55% work)
110 110
Customer Account
Year Rs. 000 Year Rs. 000

2013-14 To Contract Price 90 2013-14 By Bank 79
By Balance c/d 11
90 90
2014-15 To Balance b/d 11 2014-15 By Bank 121

To Contract Price 110
121 121
11. X Ltd. commenced a construction contract on 01/04/13. The contract price agreed was reimbursable cost
plus 20%. The company incurred ₹ 1,00,000 in 2013-14, of which ₹ 90,000 is reimbursable. The further non-
reimbursable costs to be incurred to complete the contract are estimated at ₹ 5,000. The other costs to
complete the contract could not be estimated reliably. Prepare P&L A/c.
Solution:
Profit & Loss Account
Rs. 000 Rs. 000
To Construction Costs 100 By Contract Price 90

To Provision for loss 5 By Net loss 15
105 105
10.35(AS)
12. A Construction Contractor has a fixed price contract for Rs. 13,500 Lakhs to build a Railway Tunnel. The
Contractor’s initial estimate of Contract Costs is Rs. 12,000 Lakhs. It will take 3 years to build the Tunnel.
By the end of Year 1, the Contractor’s estimate of Contract Costs has increased to Rs. 12,075 Lakhs. In Year
2, the Railway Authority approves a variation resulting in an increase in Contract Revenue of Rs. 300 Lakhs
and estimated Additional Contract Costs of Rs. 225 Lakhs. At the end of the Year 2, costs incurred include
Rs. 200 Lakhs for Materials at Site to be used fully in Year 3, to complete the work. Contract Costs incurred
up to the reporting date of
Year 1 Rs. 3,139 Lakhs

Year 2 Rs. 9,102 Lakhs
Year 3 Rs. 12,300 Lakhs.
Find the amount of Revenue, Expenses and Profit to be recognized in the statement of Profit and Loss in all
the three years.
Part II:-
13. A firm of contractors obtained a contract for construction of bridges across river Revathi. The following
details are available in the records kept for the year ended 31st March, 1997.
(Rs. in lakhs)

Work Certified 500
Work not Certified 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140
The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements
of AS 7 (Revised) issued by your institute.
Answer:-
(a) Amount of foreseeable loss (Rs in lakhs)

Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price 1,000
Total foreseeable loss to be recognized as expense 100
According to para 35 of AS 7 (Revised 2002), when it is probable that total contract costs will exceed
total contract revenue, the expected loss should be recognized as an expense immediately.
(b) Contract work-in-progress i.e. cost incurred to date are Rs. 605 lakhs (Rs in lakhs)
Work certified 500
Work not certified 105
605
This is 55% (605/1,100 * 100) of total costs of construction.
(c) Proportion of total contract value recognised as revenue as per para 21 of AS 7 (Revised).
55% of Rs. 1,000 lakhs = Rs. 550 lakhs
(d) Amount due from/to customers = Contract costs + Recognised profits – Recognised losses – (Progress
payments received + Progress payments to be received)
= [605 + Nil – 100 – (400 + 140)] Rs. in lakhs
= [605 – 100 – 540] Rs. in lakhs
Amount due to customers = Rs. 35 lakhs
The amount of Rs. 35 lakhs will be shown in the balance sheet as liability.
10.36(AS)
(e) The relevant disclosures under AS 7 (Revised) are given below:
Rs. in lakhs
Contract revenue 550
Contract expenses 605
Recognised profits less recognized losses (100)
Progress billings (400 + 140) 540
Retentions (billed but not received from contractee) 140
Gross amount due to customers 35
14. On 1st December, 2002, Vishwakarma Construction Co. Ltd. undertook a contract to construct a building for
Rs. 85 lakhs. On 31st March, 2003 the company found that it had already spent Rs. 64,99,000 on the
construction. Prudent estimate of additional cost for completion was Rs. 32,01,000. What amount should be
charged to revenue in the final accounts for the year ended 31st March, 2003 as per provisions of Accounting
Standard 7 (Revised)?
Answer: Rs.
Cost incurred till 31st March, 2003 64,99,000
Prudent estimate of additional cost for completion 32,01,000
Total cost of construction 97,00,000
Less: Contract price 85,00,000
Total foreseeable loss 12,00,000
According to para 35 of AS 7 (Revised 2002), the amount of Rs. 12,00,000 is required to be recognized as an
expense.
Contract work in progress= (Rs. 64,99,000/Rs. 97,00,000) = 67%
Proportion of total contract value recognized as turnover as per para 21 of AS 7 (Revised) on
Construction Contracts. = 67% of Rs.85,00,000 = Rs.56,95,000.
15. Atul and Rahul procured a Rs. 5,00,000 contract that required 3 years to complete and incurred a total cost of
Rs. 4,05,000. The following data pertain to the construction period:
Year I Year II Year III
Cumulative costs incurred to date 1,50,000 3,60,000 4,05,000

Estimated cost yet to be incurred at year end 3,00,000 40,000
Progressive billing made during year 1,00,000 3,70,000 3,00,000
Collections of billings 75,000 3,00,000 1,25,000
The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements
of AS-7 (using percentage completion basis).
16. Advise the company on the following items from the viewpoint of finalization of accounts, taking note of the
mandatory accounting standards.
The company had taken a large sized civil construction, for a public sector undertaking valued at 2 crores. In
the course of execution of the work on 29th May, 1995, the company found, while raising the foundation
work, that it had met a rocky surface and cost of contract would go up by extra 50 lakhs which would not be
recoverable from the contractee.
Answer:- As per AS 7- where contract costs exceeds the contract revenue then the provision for expected
loss should be recognised immediately and such an event becomes an adjusting event as per AS – 4.
17. Lucky ltd. had signed at 31st Dec. 2012 ,the balance sheet dates, the contract where the total revenue is
estimated at Rs 15 crores and total cost is estimated at Rs 20 crores .no work began contract. Is contractor
required to give any accounting effect for the year ended 31st dec.2012,in his accounts?
10.37(AS)
18. M/s Excellent Construction Company Limited undertook a Contract to construct a building for Rs.
3crore on 1st September, 2011. On 31st March, 2012 the co. found that it had already spent Rs.
1crore 80lakhs on the construction . Prudent estimate of additional cost for completion was Rs. 1crore
40lakhs .what amount should be charged, to revenue in the final accounts for the year ended on 31 st
March, 2012, as per the provisions of accounting standard 7 “construction contract (revised)”?
19. M/s Highway. Constructions undertook the construction of a highway on 01.04.2013. The contract was to be
completed in 2 years. The contract price was estimated at Rs. 150 crores. Up to 31.03.2014 the company
incurred Rs. 120 croses on the construction. The engineers involved in the project estimated that a future Rs.
45 crores would be incurred for completing the work.
What amount should be charged to revenue for the year 2013-14 as per the provisions of Accounting
Standard 7 “Construction Contracts”? Show the extract of the profit & Loss A/c in the books of M/s.
Highway Constructions.
20. GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of “Retail Petrol & Diesel
Stations”. Based on proposals submitted to different Regional Offices of BOCL, the final approval for one
outlet each in Region X, Region Y, Region Z, is awarded to GTI Ltd. A single agreement is entered into
between two. The agreement lays down values for each of the three outlets i.e. Rs.102 lacs, Rs.150 lacs,
Rs.130 lacs for Region X, Region Y, Region Z respectively. Agreement also lays down completion time for
each Region.
Comment whether GTI Ltd. will treat it as single contract or three separate contracts with reference to AS-7?
Answer: As per AS 7‘Construction Contracts’, two or more contracts can be combined if all following
conditions are fulfilled:-
a. If negotiation has been taken place in combined manner AND
b. Such contracts are interrelated AND
c. performed in sequence order
As per the information given in question, contract prices are quoted different for each contract by the contractor and
completion time is also different for each contract due to which the contracts are considered as separate contracts
even if a single agreement is entered into between the parties.
21. On 1st December, 2011, “Sampath” Construction Company Limited undertook a contract to construct a
building for Rs. 108 lakhs. On 31st March, 2012 the company found that it had already spent Rs. 83.99 lakhs
on the construction. A prudent estimate of additional cost for completion was Rs. 36.01 lakhs.
What is the provision for foreseeable loss, which must be made in the Final Accounts for the year ended 31st
March, 2012 based on AS 7 “Accounting for Construction Contracts.” Answer: Rs. 12 lakhs
22. Sarita Construction Co. obtained a contract for construction of a dam. The following details are available in
records of company for the year ended 31st March, 2018:
₹ In Lakhs
Work Certified 6,250
Work not certified 1,250
Estimated further cost to completion 8,750
Progress payment received 5,500
Progress payment to be received 1,500
Applying the provisions of Accounting Standard 7 "Accounting for Construction Contracts" you are required
to compute:
(i) Profit/Loss for the year ended 31st March, 2018.
(ii) Contract work in progress as at end of financial year 2017-18.
(iii) Revenue to be recognized out of the total contract value.
(iv) Amount due from/to customers as at the year end.
10.38(AS)
Solution:
(i) Loss for the year ended, 31st March, 2018 (₹ in lakhs)
Amount of foreseeable loss
Total cost of construction (6,250 + 1,250 + 8,750) 16,250
Less: Total contract price (12,000)
Total foreseeable loss to be recognised as expense 4,250
According to AS 7, when it is probable that total contract costs will exceed total contract revenue, the
expected loss should be recognised as an expense immediately.
Loss for the year ended, 31st March, 2018 amounting ₹ 4,250 will be recognized.
(ii) Contract work-in-progress as on 31.3.18(₹ in lakhs): Contract work-in-progress i.e. cost incurred to
date are ₹ 7,500 lakhs:
Work certified 6,250
Work not certified 1,250
7,500
(iii) Proportion of total contract value recognised as revenue
Cost incurred till 31.3.18 is 46.15% (7,500/16,250 X 100) of total costs of construction.
Proportion of total contract value recognised as revenue: 46.15% of ₹ 12,000 lakhs = ₹ 5,538 lakhs
(iv) Amount due from/to customers at year end

(Contract costs + Recognised profits – Recognised Losses) – (Progress payments received + Progress
payments to be received)
= (7,500 + Nil – 4,250) – (5,500 + 1,500) ₹ in lakhs
= [3,250 – 7,000] ₹ in lakhs Amount due to customers
= ₹ 3,750 lakhs
23. AP Ltd., a construction contractor, undertakes the construction of commercial complex for Kay Ltd. AP Ltd.
submitted separate proposals for each of 3 units of commercial complex. A single agreement is entered into
between the two parties. The agreement lays down the value of each of the 3 units, i.e. Rs. 50 Lakh, Rs. 60
Lakh and Rs. 75 Lakh respectively. Agreement also lays down the completion time for each unit.
Comment, with reference to AS-7, whether AP Ltd., should treat it as a single contract or three separate
contracts.
Solution:
Provision of Accounting Standard(AS) – 7 As per AS 7 ‘Construction Contracts’, when a contract covers a
number of assets, the construction of each asset should be treated as a separate construction contract when:
(d) separate proposals have been submitted for each asset;
(e) each asset has been subject to separate negotiation and the contractor and customer have been able to
accept or reject that part of the contract relating to each asset; and
(f) the costs and revenues of each asset can be identified.
In the given case, each unit is submitted as a separate proposal, which can be separately negotiated, and
costs and revenues thereof can be separately identified. Hence, each asset will be treated as a “single
contract” even if there is one single agreement for contracts.
Therefore, three separate contract accounts must be recorded and maintained in the books of AP Ltd. For
each contract, principles of revenue and cost recognition must be applied separately and net income will be
determined for each asset as per AS 7.
24. On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a building for 45 lakhs.
On 31st March, 2018, the company found that it had already spent Rs. 32.50 lakhs on the construction.
Additional cost of completion is estimated at Rs. 15.10 lakhs. What amount should be charged to revenue in
the final accounts for the year ended 31" March, 2018 as per provisions of AS-7?
10.39(AS)
Solution: As per AS-7, “Construction Contracts” profit/loss to be taken to profit & Loss Account and
additional provision for foreseeable loss is calculated as follows:-
(i) Calculation of % of Completion:-
x100
, ,
X 100 = 68.28%
, , , ,
(ii) Calculation of revenue to be recognized

Contract Price X % of Stage of completion
= 45,00,000 X 68.28 %
= 30,72,600
(iii) Calculation of loss recognised on contract

Contract Revenue recognised 30,72,600
Less:- Total cost incurred (32,50,000)
1,77,400
(iv) Calculation of total expected loss on contract

Contract Price 45,00,000
Less:- Total estimated cost to be incurred (47,60,000)
(v) Calculation of provision for expected loss:-

Less: Total loss recognised on contract (1,77,400)
Provision for expected loss 82,600
(vi) Loss of Rs. 2,60,000 (1,77,400 + 82,600) is be to recognized immediately by debiting into profit & loss
account.
10.40(AS)
REVISION STRUCTURE
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SUMMARY NOTES
10.41(AS)
SUMMARY NOTES
10.42(AS)
AS 9: Revenue Recognition
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary
activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others
of enterprise resources yielding interest, royalties and dividends. In an agency relationship, the revenue is the
amount of commission and not the gross inflow of cash, receivables or other consideration.
1. Deals in revenue arising from ordinary course of business:

A) Sale of goods B) Rendering of services C) Income as interest, royalty & dividend.
2. Does not deal with revenue arising from :

a) Construction contract b) Hire purchase, Lease agreements
c) Government grants & subsidies d) Insurance contracts
Examples of items not included within the definition of “revenue” for the purpose of this Statement are:
(i) Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of,
non-current assets e.g. appreciation in the value of fixed assets;
(ii) Unrealised holding gains resulting from the change in value of current assets, and the natural
increases in herds and agricultural and forest products;
(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments
arising on the translation of foreign currency financial statements;
(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;
(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.
3. Revenue recognition :
A) From sale of goods :A transaction involving the sale of goods is that the seller has transferred the
property in the goods to the buyer for a consideration. The transfer of property in goods, in most cases,
results in or coincides with the transfer of significant risks and rewards of ownership to the buyer.
B) From rendering of services:- Revenue from service transactions is usually recognised as the service
is performed, either by the proportionate completion method or by the completed service contract
method.
a) Proportionate completion method is a method of accounting which recognises revenue in the
statement of profit and loss proportionately with the degree of completion of services under a
contract. Here performance consists of the execution of more than one act. Revenue is recognised
proportionately by reference to the performance of each act.
b) Completed service contract method is a method of accounting which recognises revenue in the
statement of profit and loss only when the rendering of services under a contract is completed or
substantially completed. In this method performance consists of the execution of a single act.
Alternatively, services are performed in more than a single act, and the services yet to be
performed are so significant in relation to the transaction taken as a whole that performance cannot
be deemed to have been completed until the execution of those acts. The completed service
contract method is relevant to these patterns of performance and accordingly revenue is recognised
when the sole or final act takes place and the service becomes chargeable
C) From resources :
a) Interest:- Revenue is recognized on a time proportion basis taking into account the amount
outstanding and the rate applicable.
b) Royalty:-Revenue is recognized on an accrual basis in accordance with the terms of the
relevant agreement. If agreement is signed for royalty payable on the basis of the number of
copies of the book published, it will be recognised on that basis only.
c) Dividend - Upon declaring basis.
Note:-There should be reasonable certainty of collection & consideration before booking any of the
all types of above recognised income.
10.43(AS)
4. Disclosure Requirement:
(a) Revenue recognised policy should be disclosed.
(b) If any amount is not booked due to uncertainty of collection or consideration, then notes to be
disclosed the Fact.
(c) The amount of turnover should be disclosed in the following manner on the face of the statement of
profit and loss:
Turnover (Gross) XXXXX

Less: Excise Duty XXXXX
Turnover (Net) XXXXX
Note:- The amount of excise duty to be shown as deduction from turnover should be the total excise duty for
the year except the excise duty related to the difference between the closing inventory and opening
inventory.
Practical Questions
Part I:-
1. X Limited has recognized Rs. 10 lakhs on accrual basis income from dividend on units of mutual funds
of the face value of Rs. 50 lakhs held by it as at the end of the financial year 31st March, 2003. The
dividends on mutual funds were declared at the rate of 20% on 15th June, 2003. The dividend was
proposed on 10th April, 2003 by the declaring company. Whether the treatment is as per the relevant
Accounting Standard? You are asked to answer with reference to provisions of Accounting Standard.
Answer: AS-9 is not followed.
2. How would you deal with the following in the annual accounts of a company for the year ended 31st March,
1996?
The Board of Directors decided on 31.3.1996 to increase the sale price of certain items retrospectively from
1st January, 1996. In view of this price revision with effect from 1st January, 1996, the company has to
receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 1996 to 31st March, 1996
and the Accountant cannot make up his mind whether to include Rs. 15 lakhs in the sales for 1995-96.
Answer: Price revision was effected during the current accounting period 1995 -1996. As a result, the
company stands to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 1996
to 31st March, 1996. If the company is able to assess the ultimate collection with reasonable
certainty, then additional revenue arising out of the said price revision may be recognised in 1995-96 vide
Para 10 of AS 9.
3. Briefly explain, as per relevant Accounting Standard:

(a) TVSM company has taken a Transit Insurance Policy. Suddenly in the year 2002 -2003 the percentage
of accident has gone up to 7% and the company wants to recognise insurance claim as revenue in
2002-2003 in accordance with relevant Accounting Standards. Do you agree?
(b) SCL Ltd., sells agriculture products to dealers. One of the condition of sale is that interest is payable
at the rate of 2% p.m., for delayed payments. Percentage of interest recovery is only 10% on such
overdue outstanding due to various reasons. During the year 2002-2003 the company wants to
recognise the entire interest receivable. Do you agree?
Answer:
(a) AS 9 on Revenue Recognition defines revenue as ‘gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of the enterprise from the sale of goods,
from the rendering of services and from the use by others of enterprise resources yielding interest,
royalties and dividends’.
To recognise revenue AS 9 requires that revenue arises from ordinary activities and that it is
measurable and there should be no uncertainty. As per para 9.2 of the Standard, where the ability to
assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim,
revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be
10.44(AS)
appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be
made.
In the given case, TVSM company wants to suddenly recognise Insurance claim because it has
increased over the previous year. But, there are uncertainties involved in the settlement of the claim.
Also, the claim does not seem to be in the course of ordinary activity of the company.
Hence, TVSM company is not advised to recognise the Insurance claim as revenue.
(b) As per para 9.2 of AS 9 on Revenue Recognition, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export
incentives, interest etc, revenue recognition is postponed to the extent of uncertainty involved. In such
cases, it may be appropriate to re cognise revenue only when it is reasonably certain that the ultimate
collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised
at the time of sale or rendering of service even though payments are made by instalments.
Thus, SCL Ltd. cannot recognise the interest amount unless the company actually receives it.
10% rate of recovery on overdue outstandings is also an estimate and is not certain. Hence, the
company is advised to recognise interest receivable only on receipt basis.
4. M/s Prima Co. Ltd. sold goods worth Rs. 50,000 to M/s Y and Company. M/s Y and Co. asked for discount
of Rs. 8,000 which was agreed by M/s Prima Co. Ltd. the sale was affected and goods were dispatched. After
receiving goods worth Rs. 7,000 was found defective which they returned immediately. They made the
payment of Rs. 35,000 to M/s Prima Co. Ltd. Accountant booked the sales for Rs. 35,000. Please discuss.
Answer: As per Para 4.1 of AS 9 “Revenue Recognition”, revenue is the gross inflow of cash, receivables or
other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods,
from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties
and dividends. In the given case, M/s Prima Co. Ltd. should record the sales at gross value of Rs. 50,000.
Discount of Rs. 8,000 in price and goods returned worth Rs. 7,000 are to be adjusted by suitable provisions.
M/s Prime Co. Ltd. might have sent the credit note of Rs. 15,000 to M/s Y & Co. to account for these
adjustments. The contention of the accountant to book the sales for Rs. 35,000 is not correct.
5. Victory Ltd. purchased goods on credit from Lucky Ltd. for Rs. 250 crores for export. The export order was
cancelled. Victory Ltd. decided to sell the same goods in the local market with a price discount. Lucky Ltd.
was requested to offer a price discount of 15%. The Chief Accountant of Lucky Ltd. wants to adjust the sales
figure to the extent of the discount requested by Victory Ltd. Discuss whether this treatment is justified.
Answer: Lucky Ltd. had sold goods to Victory Ltd on credit worth for Rs. 250 crores and the sale was
completed in all respects. Victory Ltd’s decision to sell the same in the domestic market at a discount does
not affect the amount recorded as sales by Lucky Ltd. The price discount of 15% offered by Lucky Ltd. after
request of Victory Ltd. was not in the nature of a discount given during the ordinary course of trade because
otherwise the same would have been given at the time of sale itself. Now, as far Lucky Ltd is concerned,
there appears to be an uncertainty relating to the collectability of the debt, which has arisen subsequent to the
time of sale therefore, it would be appropriate to make a separate provision to reflect the uncertainty relating
to collectability rather than to adjust the amount of revenue originally recorded.
Therefore, such discount should be written off to the profit and loss account and not shown as deduction
from the sales figure.
6. Bottom Ltd. entered into a sale deed for its immovable property before the end of the year. But registration
was done with registrar subsequent to Balance Sheet date. But before finalization, is it possible to recognize
the sale and the gain at the Balance Sheet date? Give your view with reasons.
Answer: Yes, both sales and gain of Bottom Ltd. should be recognized. In accordance with AS 9, at the
Balance Sheet date and what was pending was merely a formality to register the deed. It is clear that
significant risk and rewards of ownership had passed before the balance sheet date. Further the registration
post the balance sheet date confirms the condition of sale at the balance sheet date as per AS 4.
10.45(AS)
7. A Ltd. has sold its building for Rs. 50 lakhs to B Ltd. and has also given the possession to B Ltd. The book
value of the building is Rs. 30 lakhs. As on 31st March, 2012, the documentation and legal formalities are
pending. The company has not recorded the sale and has shown the amount received as advance. Do you
agree with this treatment?
Answer: As per AS …….., “The economic reality and substance of the transaction is that the rights and
beneficial interest in the property has been transferred although legal title has not been transferred.” A Ltd.
should record the sale and recognize the profit of Rs. 20 lakhs in its profit and loss account. The building
should be eliminated from the balance sheet.
8. The stages of production and sale of a producer are as follows (all in Rupees):
Stage Activity Costs to date Net Realisable Value

A Raw Materials 10,000 8,000
B WIP 1 12,000 13,000
C WIP 2 15,000 19,000
D Finished Product 17,000 30,000
E Ready for Sale 17,000 30,000
F Sale Agreed 17,000 30,000
G Delivered 18,000 30,000
H Paid For 18,000 30,000
State and explain the stage at which you think revenue will be recognized and how much would be gross
profit and net profit on a unit of this product?
Answer: According to AS 9, sales will be recognized only following two conditions are satisfied:
(i) The sale value is fixed and determinable.
(ii) Property of the goods is transferred to the customer.
Both these conditions are satisfied only at Stage F when sales are agreed upon at a price and goods allocated
for delivery purpose.
Gross Profit will be determined at Stage E, when goods are ready for sale after all necessary process for
production is over i.e. Rs. 13,000 (30,000 – 17,000).
Net Profit will be determined at Stage H, when goods are delivered and payment collected i.e. Rs.12,000
(30,000-18,000).
9. Moon Ltd. entered into agreement with Sun Ltd. for sale of goods of Rs. 8 lakhs at a profit of 20% on cost.
The sale transaction took place on 1st February, 2011. On the same day Sun Ltd. entered into another
agreement with Moon Ltd. to resell the same goods at Rs. 10.80 lakhs on 1st August, 2011. State the
treatment of this transaction in the financial statements of Moon Ltd. as on 31.03.11. The pre-determined re-
selling price covers the holding cost of Sun Ltd.
Give the Journal Entries as on 31.03.11 in the books of Moon Ltd.
Answer: In the given case, Moon Ltd. concurrently agreed to repurchase the same goods from Sun Ltd. on
1st Feb., 2011. Also the re-selling price is pre-determined and covers purchasing and holding costs of Sun
Ltd. Hence, the transaction between Moon Ltd. and Sun Ltd. on 1st Feb., 2011 should be accounted for as
financing rather than sale. The resulting cash flow of Rs. 9.60 lakhs received by Moon Ltd., cannot be
considered as revenue as per AS 9 “Revenue Recognition”.
Journal Entries in the books of Moon Ltd.

(Rs. in lakhs)
1.02.11 Bank Account Dr. 9.60
To Advance from Sun Ltd*. 9.60
(Being advance received from Sun Ltd amounting [Rs. 8 lakhs + 20% of
Rs. 8 lakhs= 9.60 lakhs] under sale and re-purchase agreement)
31.03.11 Financing Charges Account Dr. 0.40
To Sun Ltd. 0.40
(Financing charges for 2 months at Rs. 1.20 lakhs [10.80
– 9.60] i.e. 1.2 lakhs x 2/6 )
31.03.11 Profit and Loss Account Dr. 0.40
To Financing Charges Account 0.40
(Being amount of finance charges transferred to P& L Account)
10.46(AS)
* The balance of Sun Ltd. account will be disclosed as an advance under the heading liabilities in the balance sheet
of Moon Ltd. as on 31st March, 2011.
10. Media Advertisers obtained advertisement rights for One Day World Cup Cricket Tournament to be held in
May/June, 2011 for Rs. 250 lakhs.
By 31st March, 2011, they have paid Rs. 150 lakhs to secure these advertisement rights. The balance Rs. 100
lakhs was paid in April, 2011.
By 31st March, 2011, they procured advertisement for 70% of the available time for Rs. 350 lakhs. The
advertisers paid 60% of the amount by that date. The balance 40% was received in April, 2011.
Advertisements for the balance 30% time were procured in April, 2011 for Rs. 150 lakhs. The advertisers
paid the full amount while booking the advertisement.
25% of the advertisement time is expected to be available in May, 2011 and the balance 75% in June, 2011.
You are asked to: Pass journal entries in relation to the above.
Answer:-
In the books of Media Advertisers
Journal Entries
Dr. Cr.
Rs. in lakhs Rs. in lakhs
2011 March Advance for advertisement rights (purchase) A/c Dr. 150.00
To Bank A/c 150.00
(Being advance paid for obtaining advertisement rights)
Bank A/c Dr. 210.00

To Advance for advertisement time (sale) A/c 210.00
(Being advance received from advertisers amounting
to 60% of Rs. 350 lakhs for booking 70% advertisement time)
April Advance for advertisement rights (purchase) A/c Dr. 100.00

To Bank A/c 100.00
(Being balance advance i.e., Rs. 250 lakhs less Rs. 150 lakhs paid)
Bank A/c Dr. 140.00

(Being balance advance i.e., Rs. 350 lakhs less
Rs. 210 lakhs received from advertisers)
Bank A/c Dr. 150.00

(Being advance received from advertisers in respect
of booking of balance 30% time)
May Advertisement rights (purchase) A/c Dr. 62.50

To Advance for advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights used in May i.e.,
25% of Rs. 250 lakhs, adjusted against advance paid)
Advance for advertisement time (sale) A/c Dr. 125.00

To Advertisement time (sale) A/c 125.00
(Being sale price of advertisement time in May i.e.,
25% of Rs. 500 lakhs adjusted, against advance
received from advertisers)
Profit and Loss A/c Dr. 62.50

To Advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights debited to Profit
and Loss Account in May)
Advertisement time (sale) A/c Dr. 125.00

To Profit and Loss A/c 125.00
(Being revenue recognised in Profit and Loss Account in May)
10.47(AS)
June Advertisement rights (purchase) A/c Dr. 187.50
To Advance for advertisement rights (purchase) A/c 187.50
(Being cost of advertisement rights used in June, i.e.,
75% of Rs. 250 lakhs, adjusted against advance paid)
Advance for advertisement time (sale) A/c Dr. 375.00

To Advertisement time (sale) A/c 375.00
(Being sale price of advertisement time availed in
June i.e., 75% of Rs. 500 lakhs, adjusted against
advance received from advertisers)
June Profit and Loss A/c Dr. 187.50

To Advertisement rights (purchase) A/c 187.50
(Being cost of advertisement rights used in June,
debited to Profit and Loss Account in June)
Advertisement time (sale) A/c Dr. 375.00

To Profit and Loss Account 375.00
(Being revenue recognised in June)
11. A Ltd. entered into a contract with B Ltd. to dispatch goods valuing Rs. 25,000 every month for 4 months
upon receipt of entire payment. B Ltd. accordingly made the payment of Rs. 1,00,000 and A Ltd. started
dispatching the goods. In the third month, due to a natural calamity, B Ltd. requested A Ltd. not to dispatch
goods until further notice though A Ltd. is holding the remaining goods worth Rs. 50,000 ready for dispatch.
A Ltd. accounted Rs. 50,000 as sales and transferred the balance to Advance Received against Sales.
Comment upon the treatment of balance amount with reference to the provisions of Accounting Standard 9.
Answer: As per para 6 of AS-9, Revenue Recognition, Revenue from sale of goods should be recognized
when performance has been achieved and
(i) The seller has transfer all risk & rewards to buyers and
(ii) No significant uncertainly exists regarding the amount of consideration and collection.
So in the given case A Ltd. should recognized sale of Rs. 1,00,000.
12. Given the following information of M/s. paper Products Ltd.

(i) Goods of Rs 60,000 were sold on 20-3-2015 but at the request of the buyer these were delivered
on10-4-2015.
(ii) On 15-1-2015 goods of Rs 1,50,000 were sent on consignment basis of which 20%of the goods
unsold are lying with the consignee as on 31-3-2015.
(iii) Rs 1,20,00 worth of goods were sold on approval basis on 1-12-2014 The period of approval was 3
months after which they were considered sold Buyer sent approval for 75%goods up to 31-1-2015
and no approval or disapproval received for the remaining goods till 31-3-2015.
(iv) Apart from the above, the company has made cash sales of Rs. 7,80,000(Gross) Trade discount of
5%was allowed on the cash sales.
You are required to advise the accountant of M/s. Paper products Ltd. with valid reasons the amount to be
recognized as revenue in above cases in the context of As 9 and also determine the total revenue to be
recognized for the year ending 31-3-2015.
Answer:- Calculation of total revenue Recognised as Per AS-9
Particulars Amount(Rs.)
Case I:- Sale is recorded because Risk and Rewards has been transferred. 60,000
Case II:- Sale should be recorded upto 80% (1,50,000*80%) 1,20.000
Case III:- Since period of approval has expired so whole sale should be 1,20,000
recorded.
Case IV:- Trade Discount shall be adjusted in cash sale (Rs. 7,80,000-5%) 7,41,000
Total Revenue to be recognized Rs.10,41,000
10.48(AS)
13. Sarita Publications publishes a monthly magazine on the 15 th of every month. It sells advertising space in the
magazine to advertisers on the terms of 80% sale value payable in advance and the balance within 30 days of
the release of the publication. The sale of space for the March 2014 issue was made in February 2014. The
magazine was published on its scheduled date. It received Rs. 2,40,000 on 10.3.2014 and Rs. 60,000 on
10.4.2014 for the March 2014 issue. Discuss in the context of AS 9 the amount of revenue to be recognized
and the treatment of the amount received from advertisers for the year ending 31.03.2014. What will be the
treatment if the publication is delayed till 02.04.2014.
Answer:-As per AS – 9 ,”Revenue Recognition” Revenue from a transaction involving the sale of
goods is recorded when the transfer of significant risks and rewards of ownership with ownership is
transferred to the buyer . Further there should be certainty of collection and consideration.
In the given case Sarita Publications recorded the sale of Rs. 3,00,000 in the year ended 31/03/2014.
And advance received Rs. 2,40,000 is adjusted with sale value and balance due Rs. 60,000 is shown as
trade receivable.
If the publication is continued or delayed till 02/04/2014 then revenue should not be recognised and
advance of Rs. 2,40,000 should be shown as advance from customer as current liability.
14. M/s Umang Ltd. sold goods through its agent. As per terms of sales, consideration is payable within one
month. In the event of delay in payment, interest is chargeable @ 12% p.a. from the agent. The company has
not realized interest from the agent in the past. For the year ended 31st March, 2015 interest due from agent
(because of delay in payment) amounts to Rs.1, 72,000. The accountant of M/s Umang Ltd. booked Rs.1,
72,000 as interest income in the year ended 31st March, 2015. Discuss the contention of the accountant with
reference to Accounting Standard-9.
Answer:-
1. AS Provision:- As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, the revenue recognition is postponed
to the extent of uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably
certain that the ultimate collection will be made.
2. In the given case:-The company never realized interest for the delayed payments make by the dealers.
Hence, it has to recognize the interest only if the ultimate collection is certain. The interest income of Rs.
1,72,000 hence is not to be recognized.
3. Conclusion:-The Company should not recognize the entire interest Receivable .it should be recognized
only as and when received.
15. Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods- valuing Rs 5, 00,000 every month for
next 6 months on receipt of entire payment. Heena Ltd. accordingly made the entire payment of Rs.
30,00,000 and Raj Ltd. started dispatching the goods. In fourth month, due to fire in premise of Heena Ltd.,
Henna Ltd. requested to Raj Ltd. not to dispatch goods untill further notice. Due to this, Raj Ltd. is holding
the remaining goods worth Rs 15, 00,000 ready for dispatch. Raj Ltd. accounted Rs 15, 00,000 as sales and
transferred the balance to Advance received against Sales account. Comment upon the above treatment by
Raj Ltd. with reference to the provision of AS -9.
Answer:- As per AS-9, “Revenue recognition” In a transaction involving the sale of goods, performance
should be regarded as being achieved when the following conditions have been fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks
and rewards of ownership have been transferred to the buyer and the seller retains no effective control of
the goods transferred to a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the
sale of the goods.
Further as per Point 1 of Appendix of AS-9 Revenue should be recognised notwithstanding that physical
delivery has not been completed so long as there is every expectation that delivery will be made. However,
the item must be on hand, identified and ready for delivery to the buyer at the time the sale is recognised
rather than there being simply an intention to acquire or manufacture the goods in time for delivery.
10.49(AS)
In the given case, transfer of property in goods results in or coincides with the transfer of significant risk and
rewards of ownership to the buyer. Also, the sale price has been recovered by the seller. Hence, the sale is
complete but delivery has been postponed at buyer’s request. A Ltd. should be recognized the entire sale of
Rs. 30,00,000 (Rs.5,00,000 x6) and no part of the same is to be treated as Advance Receipt against Sales.
16. A claim lodged with the Railways in March, 2015 for loss of goods of ₹ 2,00,000 had been passed for
payment in March, 2017 for ₹ 1,50,000. No entry was passed in the books of the Company, when the claim
was lodged. Advise P Co. Ltd. about the treatment of the following in the Final Statement of Accounts for
the year ended 31st March, 2017.
Answer: AS 9 on ‘Revenue Recognition’ states that where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent
of uncertainty involved. When recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is properly recognised. In this case it may be assumed that
collectability of claim was not certain in the earlier periods. This is supposed from the fact that only ₹
1,50,000 were collected against a claim of ₹ 2,00,000. So this transaction cannot be taken as a Prior Period
Item.
In the light of AS 5, it will not be treated as extraordinary item. However, AS 5 states that when items of
income and expense within profit or loss from ordinary activities are of such size, nature, or incidence that
their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount
of such items should be disclosed separately. Accordingly, the nature and amount of this item should be
disclosed separately.
17. Perfect Ltd. manufactures machinery used in power plants. In response to the tender issued by power
plant, Perfect Ltd. quotes its price. As per terms of contract, full price of machinery is not released by the
power plants, but 10% thereof, is retained and paid after one year if there is satisfactory performance of the
machinery supplied. From the past experience, it is observed that Perfect Ltd. normally performs
satisfactorily and fulfil the expectation of power plants. Perfect Ltd. accounts for only 90% of the invoice
value as sales revenue and book the balance amount in the year of receipt to the extent of actual receipts
only. Comment on the treatment done by the company.
Answer:- As per para11of AS 9, Revenue Recognition revenue from sale of goods should be recognises
when
(i) the seller has transferred the property in the goods to the buyer for a consideration and the transfer of
transfer of property in goods results in or coincides with the transfer of significant risks and rewards of
ownership to the buyer and the seller retains no effective control of the goods transferred and
(ii) no significant uncertain exists regarding the amount consideration that will be derived from the sale of
the goods In the present case the goods ,as well as risks and rewards of ownership have been transferred
to the power plants since the invoice raised by perfect Ltd is for the full price though it receives only
90%of the invoice value in the yeas of sale and 10%is kept as Retention Money perfect Ltd should
recognise revenue at the full invoice price i.e 100%of the sales price The company should make a
separate provision for the balance 10%amount to reflect the uncertainty rather than to adjust the amount
of revenue originally recorded Therefore the practice adopted of recognising only 90%of sales as
revenue by perfect Ltd .is not in consonance with AS 9.
18. Given below are the following information's of M/s B.S. Ltd.
(i) Goods of Z Rs. 50,000 were sold on 18-03-2018 but at the request of the buyer these were delivered on
15-04-2018.
(ii) On 13-01-2018 goods of Rs. 1,25,000 were sent on consignment basis of which 20% of the goods unsold
are lying with the consignee as on 31-03-2018.
(iii) Rs. 1,00,000 worth of goods were sold on approval basis 01-12-2017. The period of approval was 3
months after which they were considered sold. Buyer sent approval for 75% goods up to 31-01-2018 and
no approval or disapproval received for the remaining goods till 31-03-2018.
10.50(AS)
You are required to advise the accountant of M/s B.S. Ltd., with valid 'reasons, the amount to be recognized
as revenue for the year ended 31st March, 2018 in above cases in the context of AS-9.
Solution:
(i) Provision of Accounting Standard(AS) – 9: As per AS-9, “Revenue recognition” In a transaction
involving the sale of goods, performance should be regarded as being achieved when the following
conditions have been fulfilled:
(iii) the seller of goods has transferred to the buyer the property in the goods for a price or all significant
risks and rewards of ownership have been transferred to the buyer and the seller retains no effective
control of the goods transferred to a degree usually associated with ownership; and
(iv) no significant uncertainty exists regarding the amount of the consideration that will be derived from
the sale of the goods.
Further as per Point 1 of Appendix of AS-9 Revenue should be recognised notwithstanding that
physical delivery has not been completed so long as there is every expectation that delivery will be
made. However, the item must be on hand, identified and ready for delivery to the buyer at the time the
sale is recognised rather than there being simply an intention to acquire or manufacture the goods in time
for delivery.
(ii) In the given question treatment will be as follows:-

Particulars Amount(Rs.)
Case I:- Sale is recorded because Risk and Rewards has been transferred. 50,000
Case II:- Sale should be recorded upto 80% (1,25,000*80%) 1,00,000
Case III:- Since period of approval has expired so whole sale should be 1,00,000
recorded.
Total Revenue to be recognized 2,50,000
19. Indicate in each case whether revenue can be recognized and when it will be recognized as per AS-9.
(1) Trade discount and volume rebate received.
(2) Where goods are sold to distributor or others for resale.
(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-03-2019 cloths worth Rs 50,000 were sold to X mart, but due to refurbishing of their showroom
being underway, on their request cloths were delivered on 12-04-2019.
10.51(AS)
REVISION STRUCTURE
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SUMMARY NOTES
10.52(AS)
SUMMARY NOTES
10.53(AS)
AS 17: Segment Reporting
1. The Chief Accountant of Sports Ltd. gives the following data regarding its six segments:
Rs. In lakhs
Particulars M N O P Q R Total
Segment Assets 40 80 30 20 20 10 200
Segment Results 50 -190 10 10 -10 30 -100
Segment Revenue 300 620 80 60 80 60 1,200
The Chief accountant is of the opinion that segments “M” and “N” alone should be reported. Is he justified in
his view? Discuss.
Answer: As per para 27 of AS 17 ‘Segment Reporting’, a business segment or geographical segment should
be identified as a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with other segments is 10%
or more of the total revenue- external and internal of all segments; or
(ii) Its segment result whether profit or loss is 10% or more of:
(1) The combined result of all segments in profit; or
(2) The combined result of all segments in loss,
whichever is greater in absolute amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less than 75% of total enterprise
revenue, additional segments should be identified as reportable segments even if they do not meet the 10%
thresholds until atleast 75% of total enterprise revenue is included in reportable segments.
(a) On the basis of turnover criteria segments M and N are reportable segments.
(b) On the basis of the result criteria, segments M, N and R are reportable segments (since their results
in absolute amount is 10% or more of Rs.200 lakhs).
(c) On the basis of asset criteria, all segments except R are reportable segments.
Since all the segments are covered in atleast one of the above criteria all segments have to be reported upon
in accordance with Accounting Standard (AS) 17. Hence, the opinion of chief accountant is wrong.
2. The Chief Accountant of Cotton Garments Limited gives the following data regarding its five segments:
(Rs Crore)
Particulars A B C D E Total
Segment Assets 40 15 10 10 5 80
Segment Results (95) 5 5 (5) 15 (75)
Segment Revenue 310 40 30 40 30 450
The Chief Accountant is of the opinion that segment A alone should be reported. Is he justified in his view?
Examine his opinion in the light of provisions of AS 17 ‘Segment Reporting’.
3. State the possible objections to segmental reporting. (7 marks)(May, 1998)

Ans:-Objections to segmental reporting: The possible objections to segmental reporting can be
enumerated as below:
(i) It is generally felt that segmental revenues and expenses are not distinguishable objectively in many
cases. Revenues of a weak product line may be derived only because of the existence of a strong
product line. Also many joint costs are only separable arbitrarily.
(ii) Much of segmental results depend on the inter-departmental transfer pricings which are not always
logically established.
(iii) Various segments of an enterprise may use common resources which makes it difficult to arrive at a
segment wise performance ratio.
10.54(AS)
(iv) Since the users are in no position to know the proper base for cost allocation, the segment results
would be less than meaningful.
(v) The last objection consists of the competitive implications to the firm. Some academics contend
that company secrets will be disclosed while others referred to the competitive hardship suffered
by some firms if segmented data is required. Suppose that Company X, a small company, has a
segment identical to one in Company Y, a huge conglomerate. Company X would have to
disclose the segment while Company Y would not because the segment is not considered material to
Y's operations.
However, considering the problems of joint cost allocation, often it is suggested to follow a contribution
margin approach for reporting segmental results. By this only identifiable costs are deducted from
segment revenues and gross segment margins may only be indicated. But for all practical purposes, this
becomes a useless exercise when proportion of identifiable cost is insignificant.
4. A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The market prices are
generally 25% above cost. Is the policy adopted by the company correct?
Answer: AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis
that the enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and
any change therein should be disclosed in the financial statements. Hence, the enterprise can have its
own policy for pricing inter -segment transfers and hence, inter-segment transfers may be based on cost,
below cost or market price. However, whichever policy is followed, the same should be disclosed and
applied consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by the
company is correct if, followed consistently.
5. ABC Limited has three segments viz. A, B, and C. The total assets of the company is Rs. 15 crores. The
assets of Segment A is Rs. 1.85 crores, Segment B is Rs 6.15 crores and Segment C is Rs 7.00crores. Assets
of each segment include deferred tax assets of Rs. 0.50 crores in A, Rs 0.40 crores in B and Rs 0.30 crores in
C. The accountant of ABC Limited contends that all segments are reportable segments. Based on segment
assets criteria determine the veracity of the contention of the accountant.
6. Prepare a segmental report for publication in Diversifiers Ltd. from the following details of the company’s
three divisions and the head office:
Rs.(’000)
Forging Shop Division
Sales to Bright Bar Division 4,575
Other Domestic Sales 90
Export Sales 6,135
10,800
Bright Bar Division
Sales to Fitting Division 45
Export Sales to Rwanda 300
345
Fitting Division
Export Sales to Maldives 270
Particulars Head Office Forging Shop Bright Bar Fitting
Division Division Division
Rs. (‘000) Rs. (‘000) Rs. (‘000) Rs. (‘000)
Pre-tax operating result 240 30 (12)
Head office cost
Reallocated 72 36 36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180
10.55(AS)
7. Following details are given for Omega Textiles Ltd. for the year ended 31st March, 2004.
(Rs. ‘000)
Sales:
Cotton textiles 5,650
Silk fabrics 625
Woolen clothes 345
Others 162 6,782
Expenses:-
Cotton 3,335
Silk fabrics 425
Woolen clothes 222
Others 200 4,182
Other Items:
General Corporate Expenses 562
Income from investments 132
Interest expenses 65
Identifiable assets:
Cotton textiles 7,320
Silk fabrics 1,320
Woolen clothes 1,050
Others 665 10,355
General Corporate Assets 722
Other information:
(a) Inter segment sales are as below:
(Rs. ‘000)
Cotton textiles 55
Silk fabrics 72
Woolen clothes 21
Others 7
(b) Operating Profit includes Rs. 33 (‘000) on inter segment sales.
(c) Information about inter segment expenses are not available.
You are required to prepare a statement showing financial information about Omega Textiles Ltd.’s
operations in different industry segments.
Answer:- Information about Omega Textiles Ltd.s’ operations in different industry segments is furnished
in the following table:
(Amount/Rs.000)
Cotton Silk Woolen Others Inter Consolidated
textiles fabric clothes Segment
Elimination
External Sales 5,595 553 324 155 − 6,627
Inter Segment 55 72 21 7 155 −
Total 5,650 625 345 162 155 6,627
Segment expenses 3,335 425 222 200 122 4,060
Operating Profit 2,315 200 123 (38) 33 2,567
General corporate expenses (562)
Income from investment 132
Interest (65)
Income from continuing 2072
operations assets
Identifiable 7,320 1,320 1,050 665 10,355
Corporate assets − − − − − 722
Total assets 11,077
10.56(AS)
REVISION STRUCTURE
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SUMMARY NOTES
10.57(AS)
AS 18: Related Party Disclosures
1. Who are related parties under AS 18? What are the related party disclosure requirements?
Answer:- Parties are considered to be related if at any time during the reporting period one party has the
ability to control the other party or exercise significant influence over the other party in making financial
and/or operating decisions.
If there have been transactions between related parties, during the existence of a related party relationship, the
reporting enterprise should disclose the following:
i. the name of the transacting related party;

ii. a description of the relationship between the parties;
iii. a description of the nature of transactions;
iv. volume of the transactions either as an amount or as an appropriate proportion;
v. any other elements of the related party transactions necessary for an understanding of the financial
statements;
vi. the amounts or appropriate proportions of outstanding items pertaining to related parties at the
balance sheet date and provisions for doubtful debts due from such parties at that date; and
vii. amounts written off or written back in the period in respect of debts due from or to related parties.
2. Narmada Ltd. sold goods for Rs.90 lakhs to Ganga Ltd. during financial year ended 31-3- 2006. The
Managing Director of Narmada Ltd. own 100% of Ganga Ltd. The sales were made to Ganga Ltd. at normal
selling prices followed by Narmada Ltd. The Chief accountant of Narmada Ltd contends that these sales need
not require a different treatment from the other sales made by the company and hence no disclosure is
necessary as per the accounting standard. Is the Chief Accountant correct?
Answer: As per paragraph 13 of AS 18 ‘Related Party Disclosures’, Enterprises over which a key
management personnel is able to exercise significant influence are related parties. This includes enterprises
owned by directors or major shareholders of the reporting enterprise that have a member of key management
in common with the reporting enterprise.
In the given case, Narmada Ltd. and Ganga Ltd are related parties and hence disclosure of transaction between
them is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Narmada Ltd is wrong.
3. P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly enjoys
voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P Ltd. The
management of R Ltd. has not disclosed its relationship with P Ltd.
How would you assess the situation from the viewpoint of AS 18 on Related Party Disclosures?
(4 Marks)(Nov. 2007)
Answer: P Ltd. has direct economic interest in R Ltd to the extent of 14%, and through Q Ltd. in which it is
the majority shareholders, it has further control of 12% in R Ltd. (60% of Q Ltd’s 20%). These two taken
together (14% + 12%) make the total control of 26%. Para 10 of AS 18 ‘Related Party Disclosures’, defines
related party as one that has at any time during the reporting period, the ability to control the other party or
exercise significant influence over the other party in making financial and/or operating decisions.
Here, Control is defined as ownership directly or indirectly of more than one-half of the voting power of an
enterprise; and Significant Influence is defined as participation in the financial and/or operating policy
decisions of an enterprise but not control of those policies.
In the present case, control of P Ltd. in R Ltd. directly and through Q Ltd., does not go beyond 26%. However,
as per para 12 of AS 18, significant influence may be exercised as an investing party (P Ltd.) holds, directly or
indirectly through intermediaries 20% or more of the voting power of the R Ltd. As R Ltd. is a listed company
and regularly supplies goods to P Ltd. therefore, related party disclosure, as per AS 18, is required.
4. Identify the related parties in the following cases as per AS 18

A Ltd. holds 51% of B Ltd.
B Ltd holds 51% of O Ltd.
Z Ltd holds 49% of O Ltd.
10.58(AS)
5. Mr. Raj a relative of key Management personnel received remuneration of Rs. 2,50,000 for his services in the
company for the period from 1.4.2011 to 30.6.2011. On 1.7.2011 he left the service.
Should the relative be identified as at the closing date i.e. on 31.3.2010 for the purposes of AS 18?
6. X Ltd. sold goods to its associate Company for the 1st quarter ending 30.6.2012. After that, the related party
relationship ceased to exist. However, goods were supplied as was supplied to any other ordinary customer.
Decide whether transactions of the entire year have to be disclosed as related party transaction.
7. SP hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return payable to the
later every year. The contract involves the day-to-day management of the hotel, while all financial and
operating policy decisions are taken by the Board of Directors of the company. Mr. A does not own any
voting power in SP Hotels Limited. Would he be considered as a related party of SP Hotels Limited”?
Solution: Mr. A will not be considered as a related party of SP Hotels Limited in view of paragraph 3(c) of
AS 18 which states, “individuals owning, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any
such individual”. In the given case, in the absence of share ownership, Mr. A would not be considered to
exercise significant influence on SP Hotels Limited, even though there is an agreement giving him the power
to manage the company. Further, the fact that Mr. A does not have the ability to direct or instruct the board of
directors does not qualify him as a key management personnel.
8. Following transactions are disclosed as on 31st March, 2018:

(i) Mr. Sumit, a relative of Managing Director, received remuneration of ₹ 2,10,000 for his services in the
company for the period from 1st April, 2017 to 30th June, 2017. He left the service on 1st July, 2017.
Should the relative be identified as a related party as on closing date i.e. on 31-3-2018 for the purpose of
AS-18.
(ii) Goods sold amounting to ₹ 50 lakhs to associate company during the 1st quarter ended on 30th June,
2017. After that related party relationship ceased to exist. However, goods were supplied as was supplied
to any other ordinary customer.
Decide whether transactions of the entire year have to be disclosed as related party transactions.
9. Sun Ltd. sold goods for Rs. 50 lakhs to Moon Ltd. during financial year ended 31st March 2017 at normal
selling price followed by Sun Ltd. The Managing Director of Sun Ltd. holds 75% shares of Moon Ltd. The
Chief accountant of Sun Ltd contends that these sales need not require a different treatment from the other
sales made by the company and hence no disclosure is necessary as per the accounting standard. You are
required to examine and advise whether the contention of the Chief Accountant is correct?
Solution: As per AS 18 ‘Related Party Disclosures’, Enterprises over which a key management personnel is
able to exercise significant influence are related parties. This includes enterprises owned by directors or
major shareholders of the reporting enterprise and enterprise that have a member of key management in
common with the reporting enterprise.
In the given case, Sun Ltd. and Moon Ltd are related parties and hence disclosure of transaction between
them is required irrespective of whether the transaction was done at normal selling price.
Hence the contention of Chief Accountant of Sun Ltd is wrong.
10. Is remuneration paid to Board of Directors a related party transaction? Explain.

Solution: In case of a Company, the Managing Director, whole time director, manager and any person in
accordance with whose directions or instructions the board of directors of the company is accustomed to act,
are usually considered Key Managerial Personnel (KMP).
Persons who do not have the authority and responsibility for planning, directing and controlling the activities
of the enterprise would not be KMP. Conversely, persons without any formal titles may be considered to be
KMP, if they plan, direct and control the activities of the enterprise.
Further, as per Sec 2(76) of Companies Act, 2013, a related party includes a director or his relative. Sec
2(34) defines a director as a director appointed to the Board of a Company.
Hence, remuneration paid to Board of Directors will be considered as related party transaction.
10.59(AS)
11. Identify the related parties in the following cases as per AS-18
(i) Maya Ltd. holds 61% shares of Sheetal Ltd.
Sheetal Ltd. holds 51% shares of Fair Ltd.
Care Ltd. holds 49% shares of Fair Ltd.
(Give your answer Reporting Entity wise for Maya Ltd., She etal Ltd., Care Ltd. and Fair Ltd.)
(ii) Mr. Subhash Kumar is Managing Director of A Ltd. and also holds 72% capital of B Ltd.(B Ltd. is
subsidiary of A Ltd.)
Solution:
(i) As Per AS-18, “Related Party Disclosure”
Reporting entity - Maya Ltd.
 Sheetal Ltd. (subsidiary) is a related party
 Fair Ltd.(subsidiary) is a related party
Reporting entity- Sheetal Ltd.
 Maya Ltd. (holding company) is a related party
 Fair Ltd. (subsidiary) is a related party
Reporting entity- Fair Ltd.
 Maya Ltd. (holding company) is a related party
 Sheetal Ltd. (holding company) is a related party
 Care Ltd. (investor/ investing party) is a related party
Reporting entity- Care Ltd.
 Fair Ltd. (associate) is a related party
(ii) As per Para 3e of AS- 18, ““Related Party Disclosure” Enterprises over which any person described in
(c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a member of key management in common
with the reporting enterprise.
In the given all parties are related to each other.
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10.60(AS)
SUMMARY NOTES
10.61(AS)
AS-19: Leases
PART I
1. Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being Rs.7,00,000. The economic life of
the machine as well as the lease term is 3 years. At the end of each year Lessee Ltd. pays Rs.3,00,000.
Guaranteed Residual Value (GRV) is Rs.22,000 on expiry of the lease. However Lessor Ltd., estimates that
the residual value of the machinery will be only Rs. 15,000. Implicit Rate of Return (IRR) is 15% p.a. and
present value factors at 15% are 0.869, 0.756 and 0.657 at the end of first, second and third years
respectively. Calculate the value of machine to be considered by Lessee Ltd. and the interest (Finance
charges) in each year.
2. A Ltd. Leased a machinery to B Ltd. on the following terms:

(Rs. in Lakhs)
Fair value of the machinery 20.00

Lease term 5 years
Lease Rental per annum 5.00
Guaranteed Residual value 1.00
Expected Residual value 2.00
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.
3. On 1st April 20X2 ABC ltd. leases equipment for 4 years to XYZ ltd. The cost of the equipment is Rs.
1,500,000 and has a useful life of 10 years (assume straight line method of depreciation). The lease payments
to be made are as follows;
Year Amount
1 100,000
2 150,000
3 175,000
4 200,000
625,000
The lease is classified as an operating lease. How would this lease be accounted for in the books of account
of the lessee and the lessor?
4. An equipment is leased for 3 years and its useful life is 5 years. Both the cost and the fair value of
the equipment are Rs. 3,00,000. The amount will be paid in 3 instalments and at the termination of
lease lessor will get back the equipment. The unguaranteed residual value at the end of 3 years is Rs.
40,000. The (internal rate of return) IRR of the investment is 10%. The present value of annuity factor
of Re. 1 due at the end of 3rd year at 10% IRR is 2.4868. The present value of Re. 1 due at the end of
3rd year at 10% rate of interest is 0.7513.
(i) State with reason whether the lease constitutes finance lease.
(ii) Calculate unearned finance income.
5. Global Ltd. has initiated a lease for three years in respect of an equipment costing Rs.1,50,000 with
expected useful life of 4 years. The asset would revert to Global Limited under the lease agreement. The
other information available in respect of lease agreement is:
(1) The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at
Rs.20,000.
(2) The implicit rate of interest is 10%.
(3) The annual payments have been determined in such a way that the present value of the lease
payment plus the residual value is equal to the cost of asset.
(4) Ascertain in the hands of Global Ltd.
a. The annual lease payment.
b. The unearned finance income.
10.62(AS)
6. Lessee Ltd. has an asset of Rs. 1 lakh, which it depreciates at 10% on SLM method. At the end of the 5th
year, it sells the asset at Rs. 60,000 (fair value) and leases it back for the remaining useful life of 5 years.
Lessee Ltd. agrees to pay at the end of each of the 5 years a lease rental of Rs. 15,000 and guarantees a
residual value of Rs. 6,000 at the end of the lease term. Lessees incremental borrowing rate is 10%. The PV
of Re. 1 @ 10% at the end of 5th year is 0.62 and annuity is 3.79. Advice on accounting in the books of both
the lessor and Lessee Ltd.
Answer:
A) In the books of the lessee
 The leaseback is a finance lease since it covers almost all of the remaining useful life of the asset.
 The PV of the MLP = (3.79* 15,000) + (0.62*6,000) = Rs. 60,570
 A finance lease is capitalized at fair value or PV of MLP if that is lower than fair value.
 Since in the given case, the PV is much higher than the fair value of the asset, Rs. 60,000, the asset
will be capitalized at its fair value of Rs. 60,000.
 The new carrying value of the asset (Rs. 60,000) less the residual value (Rs. 6,000) will be equally
depreciated over the next 5 years (Rs. 10,800 each year).
 The profit on lease back Rs. 10,000 will not be recognized immediately but taken credit of in the
next 5 years in proportion to the depreciation charge. In this case, each year Rs. 2,000 will be
released to the credit of the Profit and Loss Account over the next 5 years.
 The interest charge will be determined in accordance with the reducing balance method (IRR
method).
B) In the books of the lessor

As far as the lessor is concerned, he makes an investment of Rs. 60,000 in respect of which he receives Rs.
75,000 over the next 5 years and a residual value of Rs. 5,000. This gives him an IRR of 9.8%, which will be
recognized as follows:
Principal outstanding MLPs Income @ 9.98% Principal redeemed
60,000 15,000 5,988 9,012
50,988 15,000 5,089 9,911
41,077 15,000 4,099 10,901
30,176 15,000 3,012 11,988
18,188 20,000 1,812 18,188
Total 80,000 20,000 60,000
The principal outstanding will appear as a recoverable amount in the balance sheet of the lessor.
7. X Ltd. sold JCB Machine having WDV of Rs. 50 Lakhs to Y Ltd for Rs. 60 Lakhs and the same JCB was
leased back by Y Ltd to X Ltd. The lease is operating lease
Comment according to relevant Accounting Standard if
(i) Sale price of Rs. 60 Lakhs is equal to fair value.
(ii) Fair Value is Rs. 50 Lakhs and sale price is Rs.45 Lakhs.
(iii) Fair value is Rs. 55 Lakhs and sale price isRs. 62 lakhs
(iv) Fair value is Rs. 45 Lakhs and sale price is Rs. 48 Lakhs.
Answer:- According to AS 19, following will be the treatment in the given situations:
(i) When sales price of Rs. 60 lakhs is equal to fair value, X Ltd. should immediately recognize the
profit of Rs.10 lakhs (i.e. 60 – 50) in its books.
(ii) When fair value of leased JCB machine is Rs. 50 lakhs & sales price is Rs. 45 lakhs, then loss of Rs.
5 lakhs (50 – 45) to be immediately recognized by X Ltd. in its books provided loss is not
compensated by future lease payments.
(iii) When fair value is Rs. 55 lakhs & sales price is Rs. 62 lakhs, profit of Rs. 5 lakhs (55 - 50) to be
immediately recognized by X Ltd. in its books and balance profit of Rs. 7 lakhs (62-55) is to be
amortised/deferred over lease period.
(iv) When fair value is Rs. 45 lakhs & sales price is Rs. 48 lakhs, then the loss of Rs. 5 lakhs (50- 45) to
be immediately recognized by X Ltd. in its books and profit of Rs. 3 lakhs (48-45) should be
10.63(AS)
8. A Ltd. sold machinery having WDV of Rs. 40 lakhs to B Ltd. for Rs. 50 lakhs and the same machinery was
leased back by B Ltd. to A Ltd. The lease back is operating lease. Comment if –
(a) Sale price of Rs.50 lakhs is equal to fair value.
(b) Fair value is Rs. 60 lakhs.
(c) Fair value is Rs. 45 lakhs and sale price is Rs. 38 lakhs.
(d) Fair value is Rs. 40 lakhs and sale price is Rs.50 lakhs.
(e) Fair value is Rs.46 lakhs and sale price is Rs. 50 lakhs
(f) Fair value is Rs.35 lakhs and sale price is Rs.39 lakhs.
Answer:- Following will be the treatment in the given cases:

(a) When sales price of Rs. 50 lakhs is equal to fair value, A Ltd. should immediately recognize the
profit of Rs.10 lakhs (i.e. 50 – 40) in its books.
(b) When fair value is Rs. 60 lakhs then also profit of Rs.10 lakhs should be immediately recognized by
A Ltd.
(c) When fair value of leased machinery is Rs. 45 lakhs & sales price is Rs. 38 lakhs, then loss of Rs. 2
lakhs (40 – 38) to be immediately recognized by A Ltd. in its books provided loss is not
compensated by future lease payment.
(d) When fair value is Rs. 40 lakhs & sales price is Rs. 50 lakhs then, profit of Rs. 10 lakhs is to be
deferred and amortized over the lease period.
(e) When fair value is Rs. 46 lakhs & sales price is Rs. 50 lakhs, profit of Rs. 6 lakhs (46 - 40) to be
immediately recognized in its books and balance profit of Rs.4 lakhs (50-46) is to be
(f) When fair value is Rs. 35 lakhs & sales price is Rs. 39 lakhs, then the loss of Rs. 5 lakhs (40- 35) to
be immediately recognized by A Ltd. in its books and profit of Rs. 4 lakhs (39-35) should be
amortised/deferred over lease period
9. AS Ltd. Leased a machine to SB Ltd. on the following terms:

(Rs. In lakhs)
Fair value of the machine 4.00

Lease term 5 years
Lease Rental Per annum 1.00
Guaranteed Residual value 0.20
Expected Residual value 0.40
Internal Rate of Return 15%
Depreciation is provided on straight line method at 10 per cent per annum. Ascertain Unearned
Financial Income. Necessary Journal entries in the books of the Lessee in first year may be shown.
10. L Ltd. has taken an asset on lease from V Ltd. for a period of 3 years. Annual lease rentals are Rs. 6 lakhs
payable at the end of every year. The Residual Value guaranteed by L is Rs. 2 lakhs whereas V expects the
estimated salvage value to be Rs. 5 lakhs at the end of the lease term. If the Fair Value of the asset at the
lease inception is Rs. 15 lakhs and the interest rate implicit in the lease is 12% then compute the Net
Investment in the Lease from the viewpoint of V Ltd.
11. WIN Ltd. has entered into a three year lease arrangements with Tanya sports club in respect of Fitness
Equipments costing Rs. 16, 99,999.50. The annual lease payments to be made at the end each year are
structured in such way that the sum of the Present Values of the lease payments and that of the residual value
together equal the cost of the equipments leased out. The unguaranteed residual value of the equipment at the
expiry of the lease is estimated to be Rs. 1, 33,500. The assets would revert to the lessor at the end of the
lease. Given that the implicit rate of interest is 10% you are required to compute the amount of the annual
lease and the unearned finance income. Discounting Factor at 10% for years 1,2, and 3 are 0.909, 0.826 and
0.751 respectively.
10.64(AS)
12. A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease rentals to
yield 30% profit margin on cost Rs. 1,50,000. Economic life of the machine is 5 years and output from the
machine are estimated as 40,000 units, 50,000 units, 60,000 units, 80,000 units and 70,000 units
consecutively for 5 years. Straight line depreciation in proportion of output is considered appropriate.
Compute the following:
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease.
13. Kusum Ltd. sold a machinery to Rajender Ltd. on 31-03-2003 and simultaneously leased back for 4 years.
The sale price is Rs. 8 lakhs whereas the fair value is Rs 6 lakhs . The estimated remaining useful life of
machinery is 10 years. How much deferred gain should be recognised by Kusum Ltd. for the financial year
2002-03?
14. Suraj Limited wishes to obtain a machine costing Rs.30 lakhs by way of lease. The effective life of the
machine is 14 years, but the company requires it only for the first 5 years. It enters into an agreement with
Ashok Ltd., for a lease rental for Rs.3 lakhs p.a. payable in arrears and the implicit rate of interest is 15%.
The chief accountant of Suraj Limited is not sure about the treatment of these lease rentals and seeks your
advise.
Answer: As per AS 19 ‘Leases’, a lease will be classified as finance lease if at the inception of the lease, the
present value of minimum lease payment amounts to at least substantially all of the fair value of leased asset.
In the given case, the implicit rate of interest is given at 15%. The present value of minimum lease payments
at 15% using PV - Annuity Factor can be computed as follows:
Annuity Factor (Year 1 to Year 5) 3.36 (approx.)
Present value of minimum lease payments (for Rs.3 lakhs each year) Rs.10.08 lakhs (approx.)
Thus, present value of minimum lease payments is Rs.10.08 lakhs and the fair value of the machine is Rs.30
lakhs. In a finance lease, lease term should be for the major part of the economic life of the asset even if title
is not transferred. However, in the given case, the effective useful life of the machine is 14 years while the
lease is only for five years. Therefore, lease agreement is an operating lease. Lease payments under an
operating lease should be recognized as an expense in the statement of profit and loss on a straight line
basis over the lease term unless another systematic basis is more representative of the time pattern of
the user’s benefit.
15. R Ltd. the lessee acquired machinery on lease, when its fair value was Rs. 350,000. The lease term cover the
entire economic life of asset, i.e.3 years the lessee pays Rs. 150,000at the end of each year. The lessee has
guaranteed a residual value of Rs. 11,400 though the lessor estimates the salvage value to be Rs. 10,000 at
the end of lease term. Compute the value of machinery to be recognized by the lessee and finance charges
every year. IRR is 15% pa and PV factor of 15% in three years is 2.283.
16. Naveen ltd. has initiated a lease for three years in respect of an equipment costing Rs 3,00,000 with
unexpected useful life of 4 years. The assets would revert to Naveen Ltd. under the lease agreement. The
other information available in respect of lease agreement is;
(i) The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at Rs
40,000.
(ii) The implicit rate of interest is 10% . Present value factor at 10 % are 0.909, 0.827 and 0.751 at the end
of the first, second and third years respectively.
(iii) The annual payment have been determined in such a way that the present value of the lease payment
plus the residual is equal to the cost of asset.
Ascertain in the hand of Naveen Ltd.
a. The annual lease payment.
b. The unearned finance income.
10.65(AS)
17. X Ltd. has leased equipments over its useful life that cost Rs 7,46,55,100 for a three year lease period.
After the lease term the asset would revert to the Lessor. You are informed that:
(i) The estimated unguaranteed residual value would be Rs 1 lakh only .
(ii) The annual lease payments have been structured in such a way that the sum of their present values
together with that of the residual value of the assets will equal the cost thereof.
(iii) Implicit interest rate is 10%.
You are required to ascertain the annual lease payment and the unearned finance income.
P.V. factor @10% for year 1 to 3 are 0.909, 0.826 and 0.751 respectively.
18. Classify the following into either operating or finance leases:
(i) Ownership of an assets gets vested to the leases at the end of lease term.
(ii) Lease has option to purchase the asset at lower than fair value , at the end of lease term.
(iii) Economic life of the asset is 5 years , lease term is 4-2 years, but asset is not acquired at the end of lease
term.
(iv) Present value (PV) of Minimum lease payments (MLP) = “X”, Fair value of the asset is Y.
(v) Economic life is 5 years lease term is 2 years, but the asset is of a special nature, and has been procured
only for use of leasee.
Answer.
(i) Finance Lease.
(ii) If it become certain at the inception of lease itself that the option will be exercise by the leases, it is a
Finance lease.
(iii) It will still be classified as a finance lease, since a substantial portion of the life of the asset is covered
by lease term.
(iv) Where X=Y , or where X substantailly equals Y, it is a finance lease.
(v) Since the asset is procured only for the use of lessee, it is a finance lease.
19. 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".
Answer:-
(i) If it becomes certain at the inception of lease itself that the option will be exercised by the lessee, it is a
Finance Lease.
(ii) The lease will be classified as a finance lease, since a substantial portion of the life of the asset is
covered by the lease term.
(iii) Since the asset is procured only for the use of lessee, it is a finance lease.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
20. What do you understand by the term "Interest rate implicit on lease"? Calculate the interest rate implicit on
lease from the following details:
Annual Lease Rent ₹ 80,000 at the end of each year

Lease Period 5 Years
Guaranteed Residual Value ₹ 40,000
Unguaranteed Residual Value ₹ 24,000
Fair Value at the inception of the lease ₹ 3,20,000
Discounted rates for the first 5 years are as below:
10.66(AS)
At 10% 0.909, 0.826, 0.751, 0.683, 0621
At 14% 0.877, 0.769, 0.675, 0.592, 0.519
Answer:- As per para 3 of AS 19 ‘ Leases’ the interest rate implicit in the lease is the discount rate that, at
the inception of the lease, causes the aggregate present value of
(a) the minimum lease payments under a finance lease from the standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor,
to be equal to the fair value of the leased asset.
Present value at discount rate of 10% and 14%

Year Lease Payments (₹) Disc. Factor (10%) Present Value (₹) Disc. Factor (14%) PV (₹)
1 80,000 0.909 72,720 0.877 70,160
2 80,000 0.826 66,080 0.769 61,520
3 80,000 0.751 60,080 0.675 54,000
4 80,000 0.683 54,640 0.592 47,360
5 80,000 0.621 49,680 0.519 41,520
5 40,000 0.621 24,840 0.519 20,760
5 24,000 0.621 14,904 0.519 12,456
Total 3,42,944 3,07,776
Interest Rate Implicit on Lease = 10% +[{(14% −10%)×(3,42,944 − 3,20,000)}/(3,42,944 − 3,07,776)]
= 10% + 2.609%
= 12.609% or say 12.61%
21. 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 ₹ 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 ₹ 70,000.
The IRR of the investment is 10%. The present value of annuity factor of ₹ 1 due at the end of 4th year at
10% IRR is 3.169. The present value of ₹ 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.
Answer:
(i) Determination of nature of lease
Fair value of asset ₹ 7,00,000 Unguaranteed residual value ₹ 70,000
Present value of residual value at the end of 4th Year = ₹ 70,000 x 0.683 = ₹ 47,810
Present value of lease payment recoverable = ₹ 7,00,000 - ₹ 47,810
= ₹ 6,52,190
The percentage of present value of lease payment to fair value of the asset is
= (₹ 6,52,190/₹7,00,000)x100
= 93.17%
Since it substantially covers the major portion of lease payment and life of the asset, the lease
constitutes a finance lease.
(ii) Calculation of Unearned finance income

Annual lease payment = ₹ 6,52,190 / 3.169
= ₹ 2,05,803 (approx.)
Gross investment in the lease = Total minimum lease payment + unguaranteed residual value.
= (₹ 2,05,803 x 4) + ₹70000
= ₹ 8,23,212 + ₹70,000
= ₹ 8,93,212
Unearned finance income = Gross investment – Present value of minimum lease payment and
unguaranteed residual value.
= ₹ 8,93,212 – ₹ 7,00,000 (₹ 6,52,190 + ₹ 47,810)
= ₹ 1,93,212
10.67(AS)
22. An Equipment having expected useful life of 5 Years, is leased for 3 years. Both the cost and the fair value
of the equipment are Rs. 6,00,000. The amount will be paid in 3 equal installments and at the termination of
lease, lessor will get back the equipment. The unguaranteed residual value at the end of 3rd year is Rs.
60,000. The IRR of the investment is 10%. The Present Value of annuity factor of Re. 1 due at the end of 3 rd
year at 10% IRR is 2.4868. The Present Value of Re. 1 due at the end of 3rd year at 10% rate of interest is
0.7513. State with reason whether the lease constitutes finance lease and also compute the unearned finance
income.
23. S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as under:
Lease term = 4 years
Fair value at inception of lease = Rs. 20,00,000
Lease rent = Rs. 6,25,000 p.a. at the end of year
Guaranteed residual value = Rs. 1,25,000
Expected residual value = Rs. 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561, 0.6575 and 0.5718
respectively.
Calculate the value of the lease liability as per AS-19.
24. Annual Lease rent = Rs. 40,000at the end of the each year
Lease Period= 5years
Guaranteed residual value = Rs. 14,000
Fair value at the inception (beginning) of lease = Rs. 1,50,000
Interest rate implicit on lease is 12.6% .The present value factors at 12.6% are 0.89, 0.79, 0.70, 0.622, 0.552
at the end of first, second, third ,fourth, and fifth year respectively .
Show the journal entry to record the assets taken on finance lease in the books of the lessee.
25. Prakash Limited leased a machine to Badal Limited on the following terms: (Rs. In lakhs)
(i) Fair value of the machine 48.00

(ii) Lease term 5 years
(iii) Lease rental per annum 8.00
(iv) Guaranteed residual value 1.60
(v) Expected residual value 3.00
(vi) Internal rate of return 15%
Discounted rates for 1st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718, and 0.4972 respectively.
Ascertain Unearned Finance Income.
26. Write short note on Sale and Lease Back Transactions as per Accounting Standard 19.
10.68(AS)
REVISION STRUCTURE
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10.69(AS)
SUMMARY NOTES
10.70(AS)
AS 20: Earnings Per Share
1. From the following information relating to Y ltd. Calculate Earnings Per Share (EPS)
Rs. In crore
Profit before V.R.S. Payments but after depreciation 75.00
Depreciation 10.00
VRS payments 32.10
Provision for taxation 10.00
Fringe benefit tax 5.00
Paid up Share Capital (Shares of Rs. 10 each fully Paid) 93.0
2. In April, 2004 a Limited Company issued 1,20,000 equity shares of Rs. 100 each. Rs. 50 per share was
called up on that date which was paid by all shareholders. The remaining Rs. 50 was called up on
1.9.2004. All shareholders paid the sum in September, 2004, except one shareholder having 24,000
shares. The net profit for the year ended 31.3.2005 is Rs. 2,64,000 after dividend on preference shares
and dividend distribution tax of Rs. 64,000. Compute basic EPS for the year ended 31.3.2005 as per
Accounting Standard 20.
3. Net profit for the current year Rs. 1,00,00,000

No. of equity shares outstanding Rs. 50,00,000
Interest expense for the current year Rs. 12,00,000
Rate of income tax 30%
No. of 12% debentures of Rs. 100 each 1,00,000
Each debentures is convertible into 10 equity shares
Calculate Basic EPS and Diluted EPS.
Answer: Rs.2 and Rs. 1.81/share.
4. Net profit for the year 2005 Rs. 11,00,000

Net profit for the year 2006 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 1st March 2006
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 rights on 1st March 2006 was Rs. 21.00.
Compute Basic Earnings Per Share. Answer: Rs. 2.55/share.
5. A Ltd. had 6,00,000 equity shares on April 1, 2007. The company earned a profit of Rs.15,00,000 during the
year 2007-08. The average fair value per share during 2007-08 was Rs.25. The company has given share
option to its employees of 1,00,000 equity shares at option price of Rs.15. Calculate basic EPS and diluted
EPS. Answer: Rs.2.5/share and Rs. 2.34/share.
6. The following information is available for Raja Ltd. for the accounting year 2009-10 and 2010-11:
Net Profit for Rs.
Year 2009-10 25,00,000
Year 2010-11 40,00,000
No. of shares outstanding prior to right issue 12,00,000 shares.
Right issue : One new share for each three outstanding i.e. 4,00,000 share.
: Right issue price Rs. 22
: Last date to exercise rights 30-6-2010
Fair value of one equity share immediately prior to exercise of rights on 30-06-2010=Rs. 28
You are required to compute BEPS for the years 09-10 & 10-11.
10.71(AS)
7. In April, 2010, A Limited issued 18,00,000 Equity shares of Rs. 10 each, Rs. 5 per share was called up on
that date which was paid by all the shareholders. The remaining Rs. 5 was called up on 1-9-2010. All the
Shareholders (except one having 3,60,000 shares) paid the sum in September 2010. The net profit for the
year ended 31-3-2011 is Rs. 33 lakhs after dividend on preference shares and dividend distribution tax of Rs.
6.60 lakhs. Compute the basic EPS for the year ended 31st March, 2011 as per AS 20.
8. “While calculating diluted earning per share, effect is given to all dilutive potential equity shares that were
outstanding during that period.” Explain. Also calculate the diluted earnings per share from the following
information:
Net profit for the current year Rs. 85,50,000
No. of equity shares outstanding 20,00,000
No. of 8% convertible debentures of Rs. 100 each 1,00,000
Each debenture is convertible into 10 equity shares
Interest expenses for the current year Rs. 6,00,000
Tax relating to interest expenses 30%
Answer:- “In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that
were outstanding during the period.” As per para 26 of AS 20 ‘Earnings per Share’, the net profit or loss for
the period attributable to equity shareholders and the weighted average number of shares outstanding during
the period should be adjusted for the effects of all dilutive potential equity shares for the purpose of
calculation of diluted earnings per share. DEPS Rs.3.26/-
9. Compute Basic Earnings per share from the following information:

Date Particulars No. of shares
1st April, 2008 Balance at the beginning of the year 1,500
1st August, 2008 Issue of shares for cash 600
31st March, 2009 Buy back of shares 500
Net profit for the year ended 31st March, 2009 was Rs. 2,75,000.
10. XYZ Ltd. had issued 30,000, 15% convertible debentures of Rs. 100 each on 1st April, 2008. The debentures
are due for redemption on 1st March, 2011. The terms of issue of debentures provided that they were
redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their
holding into equity shares (Nominal Value Rs. 10) at a price of Rs. 15 per share. Debenture holders holding
2500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the
Debenture holders exercising the option to the maximum.
11. Explain the concept of “ Weighted average number of equity shares outstanding during the period” State
how would you compute, based on AS-20 the weighted average number of equity shares in the following
cases:
No of Shares
1st April, 2011 Balance of equity Shares 4,80,000

31st August, 2011 Equity Shares issued for cash 3,60,000
1st February,2012 Equity Shares bought back 1,80,000
31st March, 2012 Balance of equity shares 6,60,000
12. Computed adjusted earning per share and basic earning per share based on the following Information:
Net Profit 2010- 2011 Rs. 11,40,000
Net Profit 2011-2012 Rs. 22,50,000
No of equity shares outstanding Rs. 5,00,000
Until 31st December, 2011

Bonus issue on 1st January, 2012
1 equity share for each equity share Outstanding as at 31st December, 2011
10.72(AS)
13. Date Particulars No. of Share Face Value Paid up Value
1st January Balance at beginning of year 1,800 Rs. 10 Rs. 10
31st October Issue of Shares 600 Rs. 10 Rs. 5
Calculate Weighted Number of Shares.
14. 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 convertible into 10 equity shares
Interest expense for the current year Rs. 12,00,000
Tax relating to interest expense (30%) Rs. 3,60,000
Compute Diluted Earnings Per Share.
15. Net profit for the year 2012 Rs. 12,00,000

Weighted average number of equity shares outstanding during the year 2012 5,00,000 shares
Average fair value of one equity share during the year 2012 Rs. 20.00
Weighted average number of shares under option during the year 2012 1,00,000 shares
Exercise price for shares under option during the year 2012 Rs. 15.00
Compute Basic and Diluted Earnings Per Share.
16. In the following list of shares issued, for the purpose of calculation of weighted average number of shares,
from which date weight is to be considered:
(i) Equity Shares issued in exchange of cash,
(ii) Equity Shares issued as a result of conversion of a debt instrument,
(iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise,
(iv) Equity Shares issued for rendering of services to the enterprise,
(v) Equity Shares issued in lieu of interest and/or principal of an other financial instrument,
(vi) Equity Shares issued as consideration for the acquisition of an asset other than in cash.
Also define Potential Equity Share.
Answer: The following dates should be considered for consideration of weights for calculation of weighted
average number of shares in the given situations:
(i) Date of Cash receivable

(ii) Date of conversion
(iii) Date on which settlement becomes effective
(iv) When the services are rendered
(v) Date when interest ceases to accrue
(vi) Date on which the acquisition is recognised.
A Potential Equity Share is a financial instrument or other contract that entitles, or may entitle its holder to
equity shares.
17. “While calculating diluted EPS, effect is given to all dilutive potential equity shares that were outstanding
during the period.” Explain this statement in the light of relevant AS.
Also calculate the diluted EPS from the following information:

Net Profit for the current year (After Tax) ₹ 1,00,00,000
No. of Equity shares outstanding 10,00,000
No. of 10% Fully Convertible Debentures of ₹ 100 each 1,00,000
(Each Debenture is compulsorily & fully convertible into 10 equity shares)
Debenture interest expense for the current year ₹ 5,00,000
Assume applicable Income Tax rate @ 30%.
10.73(AS)
Answer: As per AS 20 ‘Earnings per Share’, the net profit or loss for the period attributable to equity
shareholders and the weighted average number of shares outstanding during the period should be adjusted for
the effects of all dilutive potential equity shares for calculation of diluted earnings per share. Hence, “in
calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were
outstanding during the period.”
Computation of diluted earnings per share=

Adjusted net profit for the current year / Weighted average number of equity shares
Adjusted net profit for the current year ₹

Net profit for the current year (after tax) 1,00,00,000
Add: Interest expense for the current year 5,00,000
Less: Tax relating to interest expense (30% of ₹5,00,000) (1,50,000)
Adjusted net profit for the current year 1,03,50,000
Weighted average number of equity shares
Number of equity shares resulting from conversion of debentures
= (1,00,000 X 100) / 10 = 10,00,000 Equity shares
Weighted average number of equity shares used to compute diluted earnings per share
= [(10,00,000 x 12) + (10,00,000 x 6)]/12 = 15,00,000 equity shares
Diluted earnings per share

= ₹ 1,03,50,000 / 15,00,000 shares = ₹ 6.90 per share.
Note: Interest on debentures for full year amounts to ₹ 10,00,000 (i.e. 10%
of ₹ 1,00,00,000). However, interest expense amounting ₹5,00,000 has been given in the question. It may be
concluded that debentures have been issued at the mid of the year and interest has been provided for 6
months.
18. Compute EPS from the given information relating to equity shares of A Ltd. and B Ltd. Two companies
amalgamated w.e.f. 1.10.2003. A Ltd. issued the required no. of shares on the basis of the agreed valuation.
A Ltd. B Ltd.
No. of outstanding Equity Shares as on 1.4.2003 (No. in lakhs) 500 200

Agreed value per share for acquisition 120 30
Date of acquisition 1.10.2003
Profit after tax (Rs. in lakhs) of which 1200 350
Profit after tax of B Ltd. during 1.10.2003 – 31.3.2004 (Rs. in lakhs) 200
Answer.
Amalgamation in the nature of purchase No. of shares Period Weighted
Outstanding average
Equity shares as on 1.4.2003 – upto 30.09.2003 5,00,00,000 6 2,50,00,000
Post acquisition equity shares 50,00,000
From 1.10.2003 – 31.03.2004 5,50,00,000 6 2,75,00,000
Weighted average no. of equity shares 5,25,00,000
Profit available to equity shareholders (Rs.) 14,00,00,000
EPS (Rs.) 2.67
Amalgamation in the nature of merger
Equity shares as on 1.4.2003 – upto 30.09.2003 5,00,00,000
Post acquisition equity shares 50,00,000
Total equity shares 5,50,00,000 12 5,50,00,000
Profit available to equity shareholders (Rs.) 15,50,00,000
EPS (Rs.) 2.82
In the above-mentioned solution, the numerator for computing EPS in the amalgamation in the nature of
purchase is profit of A Ltd. plus post merger profit of B Ltd., which is now a division of A Ltd., i.e. Rs.1,400
lakhs. Whereas in the case amalgamation in the nature of merger, the numerator should be the entire profit
of A Ltd. and B Ltd. including post-merger profit of B Ltd.
10.74(AS)
19. If Potential Equity Shares were not considered in the previous year because they were antidilutive, can
these be considered in the current period if they are dilutive? If yes, is the prior period EPS required to be
restated?
Answer:
(1) AS-20 Principle: As per Para 41, “Potential Equity Shares are anti-dilutive when their conversion to
equity shares would increase EPS from continuing ordinary activities or decrease loss per share from
continuing ordinary activities. The effects of anti-dilutive Potential Equity shares are ignored in
calculating Diluted EPS”.
(2) Analysis: The above assessment of dilutive/anti-dilutive effect should be performed in each
reporting period and accordingly, the same Potential Equity Shares may in the subsequent year
become dilutive in nature and would need to be considered in calculating Dilutive EPS.
(3) Conclusion: Potential Equity Shares that were not considered in previous year because they were
anti -dilutive, can be considered in the current period if they are dilutive. If Potential Equity Shares
that were not considered in previous year because they were anti-dilutive are considered in the
current period, prior period EPS does not require to be restated.
REVISION STRUCTURE
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10.75(AS)
SUMMARY NOTES
10.76(AS)
AS 22: Accounting for taxes on Income
1. A company, ABC Ltd., prepares its accounts annually on 31st March. On 1st April, 20X1, it purchases a
machine at a cost of Rs. 1,50,000. The machine has a useful life of three years and an expected scrap value of
zero. Although it is eligible for a 100% first year depreciation allowance for tax purposes, the straight-line
method is considered appropriate for accounting purposes. ABC Ltd. has profits before depreciation and
taxes of Rs. 2,00,000 each year and the corporate tax rate for X2,X3 and X4 are 40%, 35% and 38%
respectively. Show the profit and loss account and pass the journal entries as per Accounting Standard-22.
2. Omega Limited is working on different projects which are likely to be completed within 3 years
period. It recognizes revenue from these contracts on percentage of completion method for financial
statements during 2006, 2007 and 2008 for Rs.11,00,000, Rs.16,00,000 and Rs.21,00,000
respectively. However, for Income - tax purpose, it has adopted the completed contract method
under which it has recognized revenue of Rs.7,00,000, Rs.18,00,000 and Rs.23,00,000 for the years
2006, 2007 and 2008 respectively. Income-tax rate is 35%. Compute the amount of deferred tax
asset/liability for the years 2006, 2007 and 2008.
3. PQR Ltd.'s accounting year ends on 31st March. The company made a loss of Rs. 2,00,000 for the year
ending 31.3.2001. For the years ending 31.3.2002 and 31.3.2003, it made profits of Rs. 1,00,000 and Rs.
1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight years and tax rate
is 40%. By the end of 31.3.2001, the company feels that there will be sufficient taxable income in the future
years against which carry forward loss can be set off. There is no difference between taxable income and
accounting income except that the carry forward loss is allowed in the years ending 2002 and 2003 for
tax purposes. Prepare a statement of Profit and Loss for the years ending 2001, 2002 and 2003.
Answer:
Statement of Profit and Loss
31.03.01 31.03.02 31.03.03
Rs. Rs. Rs.
Profit (Loss) (2,00,000) 1,00,000 1,20,000

Less: Current tax (8,000)
Deferred tax:
Tax effect of timing differences originating during the year 80,000
Tax effect of timing differences reversed/adjusted during the
Year (40,000) (40,000)
Profit(loss) after tax effect (1,20,000) 60,000 72,000
4. Ram Ltd. Started business on 1st April 1998. The following details are available from the books of accounts
and other records of Rama Ltd.
Profit before depreciation and taxes Rs.
1998-1999 14,45,500
1999-2000 18,20,200
2000-2001 24,56,560
2001-2002 30,22,280
The company purchased the following machines:
Date of purchase Amount (Rs.)

1.4.1998 3,45,000
1.4.1999 2,75,000
1.4.2000 10,00,000
1.4.2001 3,62,000
The Company charges depreciation on machines @ 15% p.a., whereas the rates as per tax is 25% p.a. Tax
rates for years is 50%, 45% 40% 35% and 35% respectively.
You are required to prepare the profit and loss statement showing the provisions for taxes under the AS-22.
10.77(AS)
5. From the given information you are required to compute the deferred tax assets and deferred tax liability for
Ramanujam Limited as on 31st march 2014. The tax rate applicable is 35%
(i) The company has charged depreciation of Rs 7,42,900 in its books of accounts while as per income-tax
computation, the depreciation available to the company is Rs. 8, 65,400.
(ii) The company has made provision for doubtful debts for Rs. 54,300 during the year.
(iii) The company has debited share issue expenses of Rs 6, 23,500 which will be available for deduction
under the income-tax Act from the next year.
(iv) The expense of Rs 7,84,500 has been charged to profit and loss account which are disallowed under the
income-tax Act.
(v) The company has made donation of Rs 2,00,000 which has been debited to profit and loss account and
only 50% thereof will be allowed as deduction as per income-tax law. (Nov 14)
6. The following particulars are stated in the Balance Sheet of PQR Ltd. as on 31.03.2018:
(Rs in lakh)
Deferred Tax Liability (Cr.) 30.00
Deferred Tax Assets (Dr.) 15.00
The following transactions were reported during the year 2018 -2019:
i. Tax Rate 30%
(Rs in lakh)
ii. Depreciation as per books 80.00
Depreciation for tax purposes 70.00
iii. Items disallowed in 2017-2018 and allowed for tax purposes in 2018-2019. 10.00
iv. Donations to Private Trust made in 2018-2019. 10.00
There were no additions to Fixed Assets during the year.
You are required to show the impact of various items on Deferred Tax Assets and Deferred Tax Liability as
on 31.03.2019
7. Milton Ltd. is a full tax free enterprise for the first 10 years of its existence and is in the second year of
its operations. Depreciation timing difference resulting in a deferred tax liability in years 1 and 2 is
Rs.200 lakhs and 400 lakhs respectively. From the 3 rd year onwards, it is expected that the timing
difference would reverse each year by Rs.10 lakhs. Assuming tax rate @35%, find out the deferred tax
liability at the end of the second year and any charge to the profit and loss account.
Answer: In the case of tax free companies, no deferred tax liability is recognized, in respect of timing
differences that originate and reverse in the tax holiday period. Deferred tax liability or asset is created in
respect of timing differences that originate in a tax holiday period but are expected to reverse after the
tax holiday period. For this purpose, adjustments are done in accordance with the FIFO method.
Of Rs. 200 lakhs, Rs.80 lakhs will reverse in the tax holiday period. Therefore, Deferred Tax Liability will
be created on Rs.120 lakhs @ 35% (i.e.) Rs.42 lakhs.
In the second year, the entire Rs.400 lakhs will reverse only after the tax holiday period.
Therefore, deferred tax charge in the Profit and Loss Account will be Rs.400 x 35% = 140 lakhs and
deferred tax liability in the Balance Sheet will be (42+140) = Rs.182 lakhs.
8. XYZ is an export oriented unit and was enjoying tax holiday upto 31.3.2016. No provision for deferred tax
liability was made in accounts for the year ended 31.3.2016. While finalising the accounts for the year ended
31.3.2017, the Accountant says that the entire deferred tax liability upto 31.3.2016 and current year deferred
tax liability should be routed through Profit and Loss Account as the relevant Accounting Standard has
already become mandatory from 1.4.2001. Do you agree?
Answer: Paragraph 33 of AS 22 on “Accounting For Taxes on Income” relates to the transitional provisions.
It says, “On the first occasion that the taxes on income are accounted for in accordance with this statement,
the enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated
prior to the adoption of this statement as deferred tax asset/liability with a corresponding credit/charge to the
revenue reserves, subject to the consideration of prudence in case of deferred tax assets.
10.78(AS)
Further Paragraph 34 lays down, “For the purpose of determining accumulated deferred tax in the period in
which this statement is applied for the first time, the opening balances of assets and liabilities for accounting
purposes and for tax purposes are compared and the differences, if any, are determined. The tax effects of
these differences, if any, should be recognised as deferred tax assets or liabilities, if these differences are
timing differences.”
Therefore, in the case of XYZ, even though AS 22 has come into effect from 1.4.2001, the transitional
provisions permit adjustment of deferred tax liability/asset upto the previous year to be adjusted from
opening reserve. In other words, the deferred taxes not provided for alone can be adjusted against opening
reserves.
Provision for deferred tax asset/liability for the current year should be routed through profit and loss account
like normal provision.
9. Under the Income Tax Act, depreciation is allowed to the extent of 100% of the cost of asset on WDV basis.
However, under the Companies Act, 1956, a company has the option to provide depreciation for such an
amount as is arrived at by dividing 95% of the original cost of the asset by the specified period. Is the
difference of 5% a permanent difference?
10. Compute the DTA/DTL with the following information if Tax Rate 40%-
Profit before tax as per books = Rs.100 lakhs

Add back: Goodwill written off in books = Rs. 10 lakhs
Depreciation as per books = Rs. 60 lakhs
Less: Depreciation under Income Tax Act = Rs.(30) lakhs
Taxable income as per Income Tax Act = Rs.140 lakhs
11. Ultra Ltd. has provided the following information.

Depreciation as per accounting records = Rs. 2,00,000
Depreciation as per tax records = Rs . 5,00,000
Unamortized preliminary expenses as per tax record = Rs. 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability should be
recognized as transition adjustment? Tax rate 50%
Answer:- Calculation of difference between taxable income and accounting income
Particulars Amount (Rs.)
Excess depreciation as per tax (5,00,000 – 2,00,000) 3,00,000
Less: Expenses provided in taxable income 30,000
Timing difference 2,70,000
Tax expense is more than the current tax due to timing difference.
Therefore deferred tax liability = 50% x 2,70,000 = Rs. 1,35,000
12. From the following details of Jubilee Ltd for the year ended 31.03.2016, calculate the Deferred Tax Asset /
Liability as per AS–22and amount of tax to be debited to Profit & Loss A/c for the year ended 31.03.2016.
Particulars Rs.
Accounting Profit 15 Lakhs
Profit as per MAT 8.75 Lakhs
Profit as per Income Tax Act. 1.50 Lakhs
Tax Rate 30%
MAT Rate 7.50%.
13. From the following details of A Ltd. for the year ended 31-03-2010, calculate the deferred tax asset/liability
as per AS-22
Particulars Rs.
Accounting Profit 6,00,000
Book Profit as per MAT 3,50,000
Profit as per Income Tax Act 60,000
Tax rate 20%
MAT rate 7.50%
10.79(AS)
Theory Questions
14. Classify the following as “Timing Difference” and “Permanent Difference”
(i) Interest on loans payable to Scheduled Banks not paid during current year but accounted as expenditure
in the books.
(ii) Difference in Depreciation rates as per income tax and as per books.
(iii) Unabsorbed losses.
(iv) Revaluation Reserve.
Answer:-The following is classified as “Timing Difference” and “Permanent Difference”
(i) Interest paid to bank is a timing difference.

(ii) Difference in depreciation rates is a timing difference.
(iii) Unabsorbed loss is a timing difference.
(iv) Revaluation Reserve is a permanent difference.
15. Distinguish between “Timing differences” and “Permanent differences” referred to in AS 22 on Accounting
for Taxes, giving 2 examples of each.
Answer: Timing Differences:- are the differences between taxable income and accounting income for a
period that originate in one period and are capable of reversal in one or more subsequent periods.
Examples:
(i) Unabsorbed depreciation and, carry forward of losses which can be set -off against future taxable
income.
(ii) Statutory dues deferred for payment under Section 43B of the Income -Tax Act.
Permanent Differences:- are the differences between taxable income and accounting income for a
period that originate in one period but do not reverse subsequently.
Examples:
(i) Agricultural income.

(ii) Donations/contributions disallowed for tax purposes
Difference between timing difference and permanent difference (Nov., 2008 & 2005)
Permanent Difference Timing Difference
(i) Difference which originate (i) Originate in one period and are capable of reverse in one or more
in one period and do not subsequent periods.
reverse subsequently
(ii) There is no effect on (ii) The timing difference may lead to
Deffered tax. It means no (a) Tax of initial year being higher and subsequent year being
deferred tax asset or lower.
liabilities emerges.
Taxable Income is more than Accounting Income = DTA.
For Example :-
(a) Payment of For Example:-
remuneration to  Expenditure of nature mentioned in Sec. 43B like taxes, duty,
partners in excess of cess, fees etc. accrued but allowed for tax purposes on
amount allowed by the payment basis.
partnership deed.  Payment accrued and recorded in the books, but disallowed
(b) Goodwill written off for tax purposes u/s 40(a)(i) and allowed when relevant tax is
not allowed as
deducted or paid subsequently.
deductible expenses.
(c) Contribution to  Provisions made in anticipation of liabilities, where the
unapproved provident relevant liabilities are allowed in subsequent year when they
fund / employee welfare crystallize.
fund.  Unabsorbed depreciation and carried forward losses. (Subject
to Para 17)
(b) Tax of initial year being lower and subsequent year being
10.80(AS)
higher.
Taxable income is lower than Accounting income = DTL
For example:-
 Excess of depreciation charged as per Section 32 in
comparison to books of accounts.
 100% capital expenditure incurred on scientific research
claimed under income tax Act. 1961.
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SUMMARY NOTES
10.81(AS)
SUMMARY NOTES
10.82(AS)
AS 24: Discontinuing Operations
1. A discontinuing operation is a component of an enterprise:
a. that the enterprise, pursuant to a single plan, is:

(i) disposing of substantially in its entirety, such as by selling the component in a single transaction or
by demerger or spin-off of ownership of the component to the enterprise's shareholders; or
(ii) disposing of piecemeal, such as by selling off the component's assets and settling its liabilities
individually; or
(iii) terminating through abandonment; and
b. that represents a separate major line of business or geographical area of operations; and
c. that can be distinguished operationally and for financial reporting purposes.
Note: - Following are not D.C.O:-

-Change in Product Mix
-Decline in production
- Shifting of location
-Improvement in machine
-Outsourcing of a process
-Sale of subsidiary
2. Initial Disclosure Events:-It means any event which trigger disclosure of A.S 24. Any Event from following
is called Initial Disclosure Event-:
a. The enterprise has entered into a binding sale agreement for substantially all of the assets attributable to
the discontinuing operation or
b. The enterprise's board of directors or similar governing body has both

(i) approved a detailed, formal plan for the discontinuance and
(ii) made an announcement of the plan.
Note: - Detail plan includes following features-:
(i) identification of the major assets to be disposed of;

(ii) the expected method of disposal;
(iii) the period expected to be required for completion of the disposal;
(iv) the principal locations affected;
(v) the location, function, and approximate number or employees who will be compensated for
terminating their services; and
(vi) the estimated proceeds or salvage to be realised by disposal.
3. Disclosure Requirements
(i) Details of D.C.O.
(ii) Segment affected due to D.C.O.
(iii) Location& Employees affected.
(iv) Initial disclosure Event & its date.
(v) Method of disposal (eq. lump.sum, instalment, termination)

10.83(AS)
(vi) Expected sale proceeds from business.
(vii) Expected date of completion of disposal.
(viii) On the face of P&L A/C

D.C.O C.O Total
Sale
Expenses
Profit on sale of Assets
Total
(ix) On the face of cash flow

D.C.O C.O Total
Cash flow from
Operating Activities
Investing Activities
Financing Activities
+-operating cash &cash equivalents
Closing cash &cash equivalents
Note:- Disclosure will begin from year in which IDE occurs, it will continue till the year in which DCO
has been discontinued. Every year above disclosure will update.
Note:- If DCO again becomes C.O. due to change in management plan then above disclosure will not be
given, rather reason of again making it C.O will be given in that year.
10.84(AS)
Practical Questions:-
1. A Cosmetic articles producing company provides the following information:

Cold Cream Vanishing Cream
January, 2006 – September, 2006 per month 2,00,000 2,00,000
October, 2006 – December, 2006 per month 1,00,000 3,00,000
January, 2007- March, 2007 per month 0 4,00,000
The company has enforced a gradual change in product-line on the basis of an overall plan. The Board of
Directors of the company has passed a resolution in March, 2006 to this effect. The company follows
calendar year as its accounting year. Should this be treated as a discontinuing operation? Give reasons in
support of your answer.
Answer: In response to the market forces, business enterprises often abandon products or even product lines
and reduce the size of their work-force. These actions are not in themselves discontinuing operations
unless they satisfy the definition criteria.
In the instant case the company has been gradually reducing operation in the product line of cold creams,
simultaneously increasing operation in the product line of vanishing creams. The company was not disposing
of any of its components. Phasing out a product line as undertaken by the company does not meet definition
criteria in paragraph 3 of AS 24, namely, disposing of substantially in its entirety a component of the
enterprise. Therefore, this change over is not a discontinuing operation.
2. Qu Ltd. in the business of manufacture of Passenger cars and commercial vehicles. The company is working
on a strategic plan to shift from the passenger car segment over the coming 5 years However no specific plans
have been drawn up for sale of neither the division nor its assets. As part of its plan it will reduce the
production of passenger cars by 20% annually. It also plans to commence another new factory for the
manufacture of commercial vehicles and transfer plus employees in a phased manner.
(i) You are required to comment if mere gradual phasing out in itself can be considered as a ‘Discounting
Operation’ within the meaning of AS 24.
(ii) If the company passes a resolution to sell some of the assets in the passenger car division and also to
transfer few other of the passenger car division to the new factory. Does this trigger the application or
AS 24?
(iii) Would your answer to the above be different if the company resolves to sell the assets of the
Passenger Car Division in phased but time manner?
3. A healthcare goods producer has changed the product line as follow :

Washing soap Bathing soap
January 2007 –september 2007 per month 2,00,000 2,00,000
October 2007 –december 2007 per month 1,00,000 3,00,000
January 2007- March 2008 per month 0 4,00,000
The company has enforced a gradual enforcement of change in product line on the basis of an overall plant
capacity . The board of Directors of the company has passed a resolution in March 2007 to this effect. The
companies follow calendar year as its accounting year. Should it be treated as discontinuing operation?
Answer:- Business enterprises frequently close facilities, abandon products, or even product line, and reduce
the size of their work force in response to market force. These kinds of terminations, generally are not in
themselves discontinuing operations unless they satisfy the definition criteria. By gradually reducing the size
of operation in product line of washing soap, the company has increased its scale of operation in bathing soap.
Such a change is gradual or evolutionary, phasing out of a product line or class of services does not meet
definition criteria in paragraph 3(a) of AS 24 –namely , disposing substantially in its entirely a component of
enterprise. Hence changeover is not a discontinuing operation.
10.85(AS)
Theory Question:-
4.
(i) What are the disclosure and presentation requirements of AS 24 for discontinuing operations?
(ii) Give four examples of activities that do not necessarily satisfy criterion (a) of paragraph 3 of AS 24, but that
might do so in combination with other circumstances.
Answer:-
(i) An enterprise should include the following information relating to a discontinuing operation in its financial
statements beginning with the financial statements for the period in which the initial disclosure event (as
defined in paragraph 15) occurs:
a) a description of the discontinuing operation(s);
b) the business or geographical segment(s) in which it is reported as per AS 17, Segment Reporting;
c) the date and nature of the initial disclosure event;
d) the date or period in which the discontinuance is expected to be completed if known or determinable;
e) the carrying amounts, as of the balance sheet date, of the total assets to be disposed of and the total
liabilities to be settled;
f) the amounts of revenue and expenses in respect of the ordinary activities attributable to the discontinuing
operation during the current financial reporting period;
g) the amount of pre-tax profit or loss from ordinary activities attributable to the discontinuing operation
during the current financial reporting period, and the income tax expense related thereto; and
h) the amounts of net cash flows attributable to the operating, investing, and financing activities of the
discontinuing operation during the current financial reporting period.
(ii) Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination of discontinuing operations.
According to Paragraph 9 of AS 24, examples of activities that do not necessarily satisfy criterion (a) of
paragraph 3, but that might do so in combination with other circumstances, include:
a) Gradual or evolutionary phasing out of a product line or class of service;

b) Discontinuing, even if relatively abruptly, several products within an ongoing line of business;
c) Shifting of some production or marketing activities for a particular line of business from one location to
another; and
d) Closing of a facility to achieve productivity improvements or other cost savings.
An example in relation to consolidated financial statements is selling a subsidiary whose activities are similar
to those of the parent or other subsidiaries.
REVISION STRUCTURE
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10.86(AS)
SUMMARY NOTES
10.87(AS)
AS 26: Intangible Assets
1. Dell International Ltd. is developing a new production process. During the financial year 31st March, 2012,
the total expenditure incurred on this process was Rs. 40 lakhs. The production process met the criteria for
recognition as an intangible asset on 1st December, 2011. Expenditure incurred till this date was Rs. 16 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March 2013, was Rs. 70 lakhs.
As at 31-3-2013, 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:
(a) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st
March 2012? (Ignore depreciation for this purpose).
(b) What is the carrying amount of the intangible asset as at 31st March 2012?
(c) What is the expenditure to be charged to the profit and loss account for the financial year ended 31st
March 2013? (Ignore depreciation for this purpose)
(d) What is the carrying amount of the intangible asset as at 31st March 2013?
Solution:
(a) Rs. 16 lakhs
(b) Carrying amount as on 31-3-2012 will be expenditure incurred after 1-12-2011

Rs. 24 lakhs
(c) Book cost of intangible asset as on 31-3-2013 is as follows

Total Book cost = Rs. (70 + 24) lakhs = Rs. 94 lakhs
Recoverable amount as estimated = Rs. 62 lakhs
Difference to be charged to Profit and Loss account = Rs. 32 lakhs
(d) Rs. 62 lakhs
2. A Company had deferred research and development cost of Rs. 150 lakhs. Sales expected in the subsequent
years are as under:
Years Sales (Rs. in lakhs)

I 400
II 300
III 200
IV 100
You are asked to suggest how should Research and Development cost be charged to Profit and Loss account.
If at the end of the III year, it is felt that no further benefit will accrue in the IV year, how the unamortised
expenditure would be dealt with in the accounts of the Company?
3. An enterprises acquired patent right for Rs. 400 Lakhs. The product life cycle has been estimated to be 5 year
and the amortization was decided in the ratio of estimated future cash flows which are as under:
Year Estimate Future Cash Flows

(Rs. In Lakhs)
1 200
2 200
3 200
4 100
5 100
After 3rd Year, it was ascertained that the patent would have an estimated balance future life of 3 years the
estimated cash flow after 5th year is expected to be Rs. 50 Lakhs. Determine the amortization under
Accounting Standard 26.
10.88(AS)
Solution :-Amortization of cost patent of as per AS 26. (Rs. in lakhs)
Year Estimated future cash Amortization Ratio Amortized Amount
flow
1 200 .25 100
2 200 .25 100
3 200 .25 100
4 100 .40(Revised) 40
5 100 .40(Revised) 40
6 50 .20(Revised) 20
400
In the first three years, the patent cost will be amortised in the ratio of estimated future cash flows i.e. (200:
200: 200: 100: 100).
The unamortized amount of the patent after third year will bè 100 (400-300) which will be amortised in the
ratio of revised estimated future cash flows (100:100:50) in the fourth, fifth and sixth year.
4. Swift Ltd. acquired a patent at a cost of Rs.80,00,000 for a period of 5 years and the product life-cycle is also 5
years. The company capitalized the cost and started amortizing the asset at Rs.16,00,000 per annum. After
two years it was found that the product life-cycle may continue for another 5 years from then. The net cash
flows from the product during these 5 years were expected to be Rs.36,00,000,Rs.46,00,000, Rs.44,00,000,
Rs.40,00,000 and Rs.34,00,000. Find out the amortization cost of the patent for each of the years.
Answer: Swift Limited amortised Rs.16,00,000 per annum for the first two years i.e. Rs. 32,00,000. The
remaining carrying cost can be amortized during next 5 years on the basis of net cash flows arising from the
sale of the product. The amortisation may be found as follows:
Year Net Cash Flows Amortization Ratio Amortization Amount
Rs. Rs.
I - 0.200 16,00,000
II - 0.200 16,00,000
III 36,00,000 0.180 8,64,000
IV 46,00,000 0.230 11,04,000
V 44,00,000 0.220 10,56,000
VI 40,00,000 0.200 9,60,000
VII 34,00,000 0.170 8,16,000
Total 2,00,00,000 1.000 80,00,000
Note: The answer has been given on the basis that the patent is renewable and Swift Ltd. got it renewed after
expiry of five years.
5. A Pharma Company spent Rs. 33 lakhs during the accounting year ended 31st March, 2002 on a research
project to develop a drug to treat “AIDS”. Experts are of the view that it may take four years to establish
whether the drug will be effective or not and even if found effective it may take two to three more years to
produce the medicine, which can be marketed. The company wants to treat the expenditure as
deferred revenue expenditure. Comment.
Answer: As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research (or from the
research phase of an internal project) should be recognized. Expenditure on research (or on the research
phase of an internal project) should be recognized as an expense when it is incurred. Thus the company
cannot treat the expenditure as deferred revenue expenditure. The entire amount of Rs. 33 lakhs spent on
research project should be charged as an expense in the year ended 31st March, 2002.
6. Himalaya Ltd. in the past three years spent Rs. 75,00,000 to develop a Drug to treat Cancer, which
was charged to Profit and Loss Account since they did not meet AS 26 criteria for capitalization. In
the current year approval of the concerned Government Authority has been received. The Company
wishes to capitalize Rs. 75,00,000 and disclose it as a prior period item. Is it correct? Give reason for
your views.
10.89(AS)
Answer: As per AS 26 ‘Intangible Assets’ the condition for recognition of a research and development
asset has to be fulfilled when the expenditure was incurred. If the recognition conditions are not fulfilled
the amount has to be charged to the profit and loss account. Once the amount is charged to the
Profit and Loss account, such amount cannot be restated later as a Research and Development Asset
when the condition for recognition get fulfilled. The Company therefore cannot capitalize Rs. 75,00,000
even as a prior period item.
7. Hera Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of Rs. 200 lakhs.
Given below is the pattern of expected production and expected operating cash inflow:
Year Production in bottles (in lakhs) Net operating cash flow (Rs. in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory management and handling
method. Suggest the amortization method.
Answer:- As per para 72 of AS 26 ‘Intangibles Assets’, the amortization method used should reflect the
pattern in which economic benefits are consumed by the enterprise. If pattern cannot be determined reliably,
then straight-line method should be used.
In the instant case, the pattern of economic benefit in the form of net operating cash flow visà- vis production
is determined reliably. Initially net operating cash flow per thousand bottles is Rs. 3 lakhs for first two years
and Rs. 4 lakhs from fourth year onwards, the pattern is established. Therefore Hera Ltd. should amortize the
license fee of Rs. 200 lakhs as under:
Year Net Operating Cash Inflow (NOCI) Ratio Amortize amount (Rs. in lakhs)
1 900 0.03 6
2 1,800 0.06 12
3 2,300 0.08 16
4 3,200 0.12 24
5 3,200 0.12 24
6 3,200 0.12 24
7 3,200 0.12 24
8 3,200 0.12 24
9 3,200 0.12 24
10 3,200 0.11 (bal.) 22
27,400 1.00 200
8. NDA Corporation is engaged in research on a new process design for its product. It had incurred an
expenditure of Rs.a 530 lakhs on research upto 31st March, 2010.
The development of the process began on 1st April, 2010 and Development phase expenditure was Rs. 360
lakhs upto 31st March, 2011 which meets assets recognition criteria.
From 1st April, 2011, the company will implement the new process design which will result in after tax saving
of Rs. 80 lakhs per annum for the next five years.
The cost of capital of company is 10%.
Explain:
(1) Accounting treatment for research expenses.
(2) The cost of internally generated intangible asset as per AS 26.
(3) The amount of amortization of the assets. (The present value of annuity factor of Rs. 1 for 5 years @ 10%
= 3.7908)
10.90(AS)
Answer:-
(i) Research Expenditure - According to para 41 of AS 26 ‘Intangible Assets’, the expenditure on research of
new process design for its product Rs. 530 lakhs should be charged to Profit and Loss Account in the year
in which it is incurred. It is presumed that the entire expenditure is incurred in the financial year 2009-10.
Hence, it should be written off as an expense in that year itself.
(ii) Cost of internally generated intangible asset - The question states that the development phase expenditure
amounting Rs. 360lakhs incurred upto 31st March, 2011 meets asset recognition criteria. As per AS 26
for measurement of such internally generated intangible asset, fair value can be estimated by discounting
estimated future net cash flows.
Savings (after tax) from implementation of new design for next 5 years 80 lakhs p.a.
Company’s cost of capital 10 %
Annuity factor @ 10% for 5 years 3.7908
Present value of net cash flows (Rs. 80 lakhs x 3.7908) 303.26 lakhs
The cost of an internally generated intangible asset would be lower of cost value Rs.360 lakhs or present
value of future net cash flows Rs.303.26lakhs. Hence, cost of an internally generated intangible asset will
be Rs.303.26 lakhs.
The difference of Rs. 56.74 lakhs (i.e. Rs. 360 lakhs – Rs. 303.26 lakhs) will be amortized by the
enterprise for the financial year 2010-11.
(iii) Amortisation - The company can amortise Rs. 303.26 lakhs over a period of five years by charging Rs.
60.65 lakhs per annum from the financial year 2011-12 onwards.
9. A company with a turnover of Rs.250 crores and an annual advertising budget of Rs.2 crore had taken up the
marketing of a new product. It was estimated that the company would have a turnover of Rs. 25 crores from
the new product. The company had debited to its Profit and Loss account the total expenditure of Rs.2 crore
incurred on extensive special initial advertisement campaign for the new product. Is the procedure adopted by
the company correct?
Answer: According to paras 55 and 56 of AS 26 ‘Intangible Assets’, “expenditure on an intangible item
should be recognised as an expense when it is incurret unless it forms part of the cost of an intangible asset”.
In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the marketing of a new
product which may provide future economic benefits to an enterpris e by having a turnover of Rs.25
crores. Here, no intangible asset or other asset is acquired or created that can be recognised. Therefore,
the accounting treatment by the company of debiting the entire advertising expenditure of Rs.2 crores to the
Profit and Loss account of the year is correct.
10. State, how you will deal with the following matters in the accounts of U Ltd. for the year ended 31st March,
2012 with reference to Accounting Standards:-
The company had spent Rs. 45 lakhs for publicity and research expenses on one of its new consumer product,
which was marketed in the accounting year 2011-2012, but proved to be a failure.
Answer:- In the given case, the company spent Rs. 45 lakhs for publicity and research of a new product which
was marketed but proved to be a failure. It is clear that in future there will be no related further revenue/benefit
because of the failure of the product. Thus according to paras 41 to 43 of AS 26 ‘Intangible Assets’, the
company should charge the total amount of Rs. 45 lakhs as an expense in the profit and loss account.
11. X Ltd is engaged in the business of newspaper and radio broadcasting. It operates through different brand
names. During FY 12-13 it incurred substantial amounts on external trade, business communication and
branding expenses by participation in various corporate social responsibility initiatives. The company expects
to receive benefits by this expenditure by attracting new customers over a period of time and accordingly it has
capitalized the same under brand development expenses and intends to amortize the same over the period in
which it expects the benefits to flow. Comment on this in line with the relevant Accounting Standard
Answer:- As per AS 26 on intangible Assets, Expenditure on an intangible item should be recognized as an
expense when it is incurred unless it forms part of the cost of an intangible asset that meets the recognition
criteria. In the given case, it incurred substantial amounts on external trade, business communication and
10.91(AS)
branding expenses by participation in various corporate social responsibility initiatives. The company expects
to receive benefits by this expenditure by attracting new customers over a period of time and accordingly it has
capitalized the same under brand development expenses. Here, on intangible assets or other asset is acquired
or created that can be recognized. Therefore the accounting treatment by the company to amortize the entire
expenditure over the period in which it expects the benefits to flow is not correct and the same.
12. AB Ltd. launched a project for producing product X in October, 2004. The Company incurred Rs.20 lakhs
towards Research and Development expenses upto 31st March, 2006. Due to prevailing market conditions, the
Management came to conclusion that the product cannot be manufactured and sold in the market for the next
10 years. The Management hence wants to defer the expenditure write off to future years.
Answer:- As per Para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized as an
expense when it is incurred. An intangible asset arising from development (or from the development phase of
an internal project) should be recognized if, and only if, an enterprise can demonstrate all of the conditions
specified in para 44 of the standard. An intangible asset (arising from development) should be derecognised
when no future economic benefits are expected from its use according to para 87 of the standard. Therefore,
the manager cannot defer the expenditure write off to future years. Hence, the expenses amounting Rs. 20
lakhs incurred on the research and development project has to be written off in the current year ending 31st
March, 2006.
13. ABC Ltd. developed know-how by incurring expenditure of Rs. 20 lakhs, The know-how was used by the
company from 1.4.2005. The useful life of the asset is 10 years from the year of commencement of its use. The
company has not amortised the asset till 31.3.2012. Pass Journal entry to give effect to the value of know-how
as per Accounting Standard-26 for the year ended 31.3.2012.
Answer:- Journal Entry

Rs. Rs.
Profit and Loss A/c (Prior period item) Dr. 12,00,000
Depreciation A/c Dr. 2,00,000
To Know-how A/c 14,00,000
[Being depreciation of 7 years (out of which depreciation of 6 years charged as PPI)]
14. A company acquired for its internal use a software on 28.01.2012 from the USA for US $ 1,00,000. The
exchange rate on that date was Rs. 52 per USD. The seller allowed trade discount @ 5 %. The other
expenditure were:
(i) Import Duty : 20%
(ii) Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
(iv) Installation expenses : Rs. 25,000
(v) Profession fees for Clearance from Customs: Rs. 20,000
Compute the cost of Software to be capitalized.
Answer:- Calculation of cost of software (intangible asset) acquired for internal use
Purchase cost of the software $ 1,00,000
Less: Trade discount @ 5% ($ 5,000)
$ 95,000
Cost in Rs. (US $ 95,000 x Rs. 52) 49,40,000
Add: Import duty on cost @ 20% (Rs. ) 9,88,000
59,28,000
Purchase tax @ 10% (Rs.) 5,92,800
Installation expenses (Rs. ) 25,000
Profession fee for clearance from customs (Rs.) 20,000
Cost of the software to be capitalized (Rs.) 65,65,800
Note: Since entry tax has been mentioned as a recoverable/refundable tax, it is not included as part of the
cost of the asset.
10.92(AS)
15. Base Limited is showing an intangible asset at Rs. 85 lakhs as on 1-4-2011. This asset was acquired for Rs.
112 lakhs on 1-4-2008 and the same was available for use from that date. The company has been following the
policy of amortization of the intangible asset over a period of 12 years on straight line basis. Comment on the
accounting treatment of the above with reference to the relevant accounting standard.
Answer:- As per para 63 of AS 26 “Intangible Assets,” the depreciable amount of an intangible asset should
be allocated on a systematic basis over the best estimates of its useful life. There is a rebuttable presumption
that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for
use. Amortization should commence when the asset is available for use.
Base Limited has been following the policy of amortization of the intangible asset over a period of 12 years on
straight line basis. The period of 12 years is more than the maximum period of 10 years specified as per AS
26.
Accordingly, Base Limited would be required to restate the carrying amount of intangible asset as on 1.4.2011
at Rs. 112 lakhs less Rs. 33.6 lakhs (112 lakhs ×3 years/10 years) = Rs. 78.4 lakhs.
The difference of Rs. 6.6 lakhs i.e. (Rs. 85 lakhs – Rs. 78.4 lakhs) will be adjusted against the opening balance
of revenue reserve. The carrying amount of Rs. 78.4 lakhs would be amortized over remaining 7 years by Rs.
11.2 lakhs per year.
16. During 2006, an enterprise incurred costs to develop and produce a routine, low risk computer software
product, as follows:
Amount (Rs).
Completion of detailed program and design 25,000
Coding and Testing 20,000
Other coding costs 42,000
Testing costs 12,000
Product masters for training materials 13,000
Duplication of computer software and training materials,
from product masters (2,000 units) 40,000
Packing the product (1,000 units) 11,000
What amount should be capitalized as software costs in the books of the company, on Balance Sheet date?
Answer:- As per AS-26, costs incurred in creating a computer software product should be charged to research
and development expense when incurred until technological feasibility/asset recognition criteria has been
established for the product. A technological feasibility/asset recognition criterion has been established upon
completion of detailed programme design or working model. In this case, Rs. 45,000 would be recorded as an
expense (Rs. 25,000 for completion of detailed program design and Rs. 20,000 for coding and testing to
establish technological feasibility/asset recognition criteria). Cost incurred from the point of technological
feasibility/asset recognition criteria until the time when products costs are incurred are capitalized as software
cost (Rs. 42,000 + Rs. 12,000 + Rs.13,000) Rs. 67,000.
17. U.K. International Ltd. is developing a new production process. During the financial year ending 31st March,
2011, the total expenditure incurred was Rs. 50 lakhs. This process met the criteria for recognition as an
intangible asset on 1st December, 2010. Expenditure incurred till this date was Rs. 22 lakhs. Further
expenditure incurred on the process for the financial year ending 31st March, 2012 was Rs. 80 lakhs. As at
31st March, 2012, the recoverable amount of know-how embodied in the process is estimated to be Rs. 72
lakhs. This includes estimates of future cash outflows as well as inflows.
You are required to calculate:
(i) Amount to be charged to Profit and Loss A/c for the year ending 31 st March, 2011 and carrying value
of intangible as on that date.
(ii) Amount to be charged to Profit and Loss A/c and carrying value of intangible as on 31st March, 2012.
Ignore depreciation.
10.93(AS)
Answer:- As per AS 26 ‘Intangible Assets’
(i) For the year ending 31.03.2011
(1) Carrying value of intangible as on 31.03.2011:
At the end of financial year 31st March 2011, the production process will be recognized (i.e. carrying amount)
as an intangible asset at a cost of Rs. 28 lakhs (expenditure incurred since the date the recognition criteria were
met, i.e., from 1st December 2010).
(2) Expenditure to be charged to Profit and Loss account:

The Rs. 22 lakhs is recognized as an expense because the recognition criteria were not met until 1st December
2011. This expenditure will not form part of the cost of the production process recognized in the balance sheet.
(ii) For the year ending 31.03.2012

(1) Expenditure to be charged to Profit and Loss account:
(Rs. in lakhs)
Carrying Amount as on 31.03.2011 28
Expenditure during 2011 – 2012 80
Total book cost 108
Recoverable Amount (72)
Impairment loss 36
Rs. 36 lakhs to be charged to Profit and loss account for the year ending 31.03.2012.
(2) Carrying value of intangible as on 31.03.2012:

(Rs. in lakhs)
Total Book Cost 108
Less: Impairment loss (36)
Carrying amount as on 31.03.2012 72
18. Nirman Solutions incurred costs to develop and produce a routine, low risk Computer Software Product, as
follows, as on 31.03.2016
Completion of Detailed Program Design Rs. 15,00,000
Costs incurred for Coding and Testing to establish technological feasibility Rs. 8,00,000
Other Coding and Testing Costs after establishment of technological feasibility Rs. 6,50,000
Cost of producing Product Masters for Training Materials Rs. 4,20,000
Duplication of Computer Software and Training Materials from
Product Master (5,000 Units) Rs. 2,50,000
Packaging Product (2,500 Units) Rs. 1,50,000
Required:
(i) What amount should be capitalized as Software Cost, subject to amortization of Nirman Solutions as
on 31st March 2016?
(ii) What amount should be reported in Inventory of Nirman Solutions as on 31st March 2016?
10.94(AS)
REVISION STRUCTURE
Question Status Copy Revisions Important concept in this question (In student words)
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SUMMARY NOTES
10.95(AS)
AS 29: Provisions, Contingent Liabilities and Contingent Assets
1. Scope: This Standard should be applied in accounting for provisions and contingent liabilities and in dealing
with contingent assets, other than
a. Those resulting from financial instruments that are carried at fair value;
b. Those resulting from executory contracts;
c. Those arising in insurance enterprises from contracts with policy-holders; and
d. Those covered by another Accounting Standard.
Where another Accounting Standard like 7; 9; 15; 19; 22 & 24 deals with a specific type of provision,
contingent liability or contingent asset, an enterprise applies that Standard instead of this Standard.
2. Definitions and accounting treatment:

A) Executory contracts are contracts under which neither party has performed any of its obligations or
both parties have partially performed their obligations to an equal extent.
Examples of executory contracts include:
a. Employee contracts in respect of continuing employment;
b. Contracts for future delivery of services such as gas and electricity;
c. Obligations to pay local authority charges and similar levies; and
d. Most purchase orders.
B) A Provision is a liability which can be measured only by using a substantial degree of estimation.
 A provision should be recognised when:
(a) An enterprise has a present obligation as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
 Disclosure Requirement:- For each class of provision, an enterprise should disclose:

(a) The carrying amount at the beginning and end of the period;
(b) Additional provisions made in the period, including increases to existing provisions;
(c) Amounts used (i.e. incurred and charged against the provision) during the period; and
(d) Unused amounts reversed during the period.
C) A Liability is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits.
D) An Obligating event is an event that creates an obligation that results in an enterprise having no
realistic alternative to settling that obligation.
E) A Contingent liability is:

a. A possible obligation that arises from past events and the existence of which will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise; or
b. A present obligation that arises from past events but is not recognised because:
(i) It is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; or
(ii) A reliable estimate of the amount of the obligation cannot be made.
Note:- An enterprise should not recognise a contingent liability but should be disclosed.
10.96(AS)
F) A Contingent asset: Contingent assets usually arise from unplanned or other unexpected events that
give rise to the possibility of an inflow of economic benefits to the enterprise.
An enterprise should not recognise a contingent asset, since this may result in the recognition of income
that may never be realised. However, when the realisation of income is virtually certain, then the related
asset is not a contingent asset and its recognition is appropriate. A contingent asset is not disclosed in
the financial statements. It is usually disclosed in the report of the approving authority.
G) Present obligation – An enterprise determines whether a present obligation exists at the balance sheet
date by taking account of all available evidence. On the basis of such evidence:
(a) Where it is more likely than not that a present obligation exists at the balance sheet date, the
enterprise recognises a provision (if the recognition criteria are met); and
(b) Where it is more likely that no present obligation exists at the balance sheet date, the enterprise
discloses a contingent liability, unless the possibility of an outflow of resources embodying
economic benefits is remote.
H) Possible obligation - an obligation is a possible obligation if, based on the evidence available, its
existence at the balance sheet date is considered not probable.
3. Reimbursements
An, enterprise with a present obligation may be able to seek reimbursement of part or all of the expenditure
from another party, for example via:
 An insurance contract arranged to cover a risk;
 An indemnity clause in a contract; or
 A warranty provided by a supplier.
The basis underlying the recognition of a reimbursement is that any asset arising is separate from the related
obligation. Consequently, such a reimbursement should be recognised only when it is virtually certain that it
will be received consequent upon the settlement of the obligation.
In most cases, the enterprise will remain liable for the whole of the amount in question so that the enterprise
would have to settle the full amount if the third party failed to pay for any reason. In this situation, a
provision is recognised for the full amount of the liability, and a separate asset for the expected
reimbursement is recognised when it is virtually certain that reimbursement will be received if the enterprise
settles the liability.
In some cases, the enterprise will not be liable for the costs in question if the third party fails to pay. In such
a case, the enterprise has no liability for those costs and they are not included in the provision.
4. An ‘onerous contract’ is a contract in which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it.
The unavoidable costs under a contract reflect the least of
(a) net cost of execution the contract or
(b) any compensation or penalties arising from failure to fulfill it.
Recognition Criteria will be same as of recognition provision.
5. Restructuring:
A Restructuring is a programme that is planned and controlled by management, and materially changes
either:
(a) The scope of a business undertaken by an enterprise; or
(b) The manner in which that business is conducted.
The following are examples of events that may fall under the definition of restructuring:
(a) Sale or termination of a line of business;

(b) The closure of business locations in a country or region or the relocation of business activities from
one country or region to another;
(c) Changes in management structure, for example, eliminating a layer of management; and
(d) Fundamental re-organisations that have a material effect on the nature and focus of the enterprise's
operations.
10.97(AS)
A provision for restructuring costs is recognised only when the recognition criteria for provisions. No
obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e., there is a
binding sale agreement. Until there is a binding sale agreement, the enterprise will be able to change its mind
and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms.
PRACTICAL QUESTIONS
1. There is a sales tax demand of Rs. 2.50 crores against a company relating to prior years against which the
company has gone on appeal to the appellate authority in the department. The grounds of appeal deal with
points covering Rs. 2 crores of the demand. State how the matter will have to be dealt with in the final
accounts for the year.
2. At the end of the financial year ending on 31st December, 2005, a company 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 be taken as a separate entity. Ascertain the amount of contingent loss and the
accounting treatment in respect thereof.
Answer: For the purpose of the disclosure of contingent liability by way of note, amount may be calculated
as under:
Expected loss in next ten cases = 30% of Rs. 1,20,000 + 10% of Rs. 2,00,000
= Rs. 36,000 + Rs. 20,000
= Rs. 56,000
Expected loss in remaining five cases = 30% of Rs. 1,00,000 + 20% of Rs. 2,10,000
= Rs. 30,000 + Rs. 42,000
= Rs. 72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic.
Therefore, the better approach will be to disclose the overall expected loss of Rs. 9,20,000 (Rs. 56,000 *10 +
Rs. 72,000 * 5) as contingent liability.
3. There is a sales tax demand of Rs.3 crores against X Ltd. relating to prior years against which the company
has gone in appeal.
Answer:-According to AS – 29 “Provisions, Contingent Liabilities and Contingent Assets”, provision should
be made only if there is a present obligation that probably requires an outflow of resources. In the given
situation, since the enterprise has gone on appeal against the sales tax demand, the company should have
estimated that there is no present obligation, but it can be a possible obligation. Therefore, the sales tax
demand of Rs.3 crores should be disclosed as a contingent liability.
4. Shyam Ltd. (a Public Sector Company) provides consultancy and engineering services to its clients. In the
year 2012-13, the Government has set up a commission to decide about the pay revision. The pay will be
revised with effect from 1-1-2006 based on recommendations of the commission. The company makes the
provision of Rs. 680 lakhs for pay revision in the financial year 2012-13 on the estimated basis as the report
of the commission is yet to come. As per the contracts with the client on cost plus job, the billing is done on
the actual payment made to the employees on each job.
10.98(AS)
The company gives the following disclosures in its notes to accounts:
“Salaries and benefits include the provision of Rs. 680 lakhs in respect of pay revision. The amount
chargeable from reimbursable jobs will be billed as per the contract. When the actual payments is made”
Comment.
The accountant feels that the company should also recognise the income by Rs. 680 lakhs in Profit and Loss
Account as per the terms of the contract. Otherwise it will be the violation of matching concept and will to
understatement of profit.
Answer: As per para 46 of AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, when some or
all of the expenditure required to settle a provision is expected to be reimbursement by another party, the
reimbursement should be recognised when , and only when, it is virtually certain that reimbursement should
not exceed the amount of the provision.
Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent liability is
matched by a related counter – claim or claim against a third party. In such cases, the amount of the
provision is determined after taking into account the probable recovery under the claim if no significant
uncertainly as to its measurability or collectability exists.
5. 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. 900 lakhs. The directors are of the opinion that the claim can be
successfully resisted by the company.
How would you deal the same in the annual accounts of the company?
Answer:- As per para 14 of AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision
should be recognised when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no
provision should be recognised.
If these conditions are not met, no provision should be recognised.
In the given situation, since, the directors of the company are of the opinion that the claim can be
successfully resisted by the company, therefore there will be no outflow of the resources. The company will
disclose the same as contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor who alleges that the
company has infringed patents and is seeking damages of Rs. 900 lakhs. However, the directors are of the
opinion that the claim can be successfully resisted by the company.”
6. An airline is required by law to overhaul its aircraft once in every five years. The pacific Airlines which
operate aircrafts does not provide any provision as required by law in its final accounts. Discuss with
reference to relevant Accounting Standard 29.
Answer:- A provision should be recognised only when an enterprise has a present obligation as a result of a
past event. In the given case, there is no present obligation, therefore no provision is recognized as per AS
29.
The cost of overhauling aircraft is not recognized as a provision because it is a future obligation and the
incurring of the expenditure depends on the company’s decision to continue operating the aircrafts. Even a
legal requirement to overhaul does not require the company to make a provision for the cost of overhaul
because there is no present obligation to overhaul the aircrafts.
Further, the enterprise can avoid the future expenditure by its future action, for example by selling the
aircraft. However, an obligation might arise to pay fines or penalties under the legislation after completion of
five years. Assessment of probability of incurring fines and penalties depends upon the provisions of the
legislation and the stringency of the enforcement regime. A provision should be recognized for the best
estimate of any fines and penalties if airline continues to operate aircrafts for more than five years.
7. The difference between actual expense or income and the estimated expense or income as accounted for in
earlier years’ accounts, does not necessarily constitute the item to be a prior period item comment.
Ans. The statement given in the question is correct.
10.99(AS)
8. An Engineering goods company provides after sales warranty for 2 years to its customers. Based on past
experience, the company has been following policy for making provision for warranties on the invoice
amount, on the remaining balance warranty period:
Less than 1 year: 2% provision
More than 1 year: 3% provision
The Company has raised invoices as under:
Invoice Date Amount (Rs.)

19th January, 2011 40,000
29th January, 2012 25,000
15th October, 2012 90,000
Calculated the provision to be made for warranty under Accounting Standard 29 as at 31 st March, 2012 and
31st March 2013 Also compute amount to be debited to Profit and Loss Account for the year ended 31 st
March, 2013.
Answer: Provision to be made for warranty under AS 29 ‘Provisions, Contingent Liabilities and Contingent
Assets’
As at 31st March, 2012 = ₹ 40,000 x .02 + ₹ 25,000 x .03
= ₹ 800 + ₹ 750
= ₹ 1,550
As at 31st March, 2013 = ₹ 25,000 x .02 + ₹ 90,000 x .03 = ₹ 500 + ₹ 2,700 = ₹ 3,200
Amount debited to Profit and Loss Account for year ended 31st March, 2013
₹
Balance of provision required as on 31.03.2013 3,200
Less: Opening Balance as on 1.4.2012 (1,550)
Amount debited to profit and loss account 1,650
Note: No provision will be made on 31st March, 2013 in respect of sales amounting ₹ 40,000 made on 19th
January, 2011 as the warranty period of 2 years has already expired.
8. AB Ltd. is in the process of finalizing its account for the year ended 31st March, 2015. The company seeks
your advice on the following:
(i) The company's sale tax assessment for assessment year 2012 -13 has been completed on 14th February,
2015 with a demand of ₹ 5.40 crore. The company paid the entire due under protest without prejudice to
its right of appeal. The company files its appeal before the appellate authority wherein the grounds of
appeal cover tax on additions made in the assessment order for a sum of ₹ 3.70 crore.
(ii) The company has entered into a wage agreement in May 2015 whereby the labour union has accepted a
revision in wage from June 2014. The agreement provides that the hike till May 2015 will not be paid to
the employees but will be settled to them at the time of retirement. The company agrees to deposit the
arrears in Government Bonds by September 2015.
Answer:
(i) Since the company is not appealing against the addition of ₹ 1.70 crore (₹ 5.40 crore less ₹ 3.70 crore),
therefore, the same should be provided/ expensed off in its accounts for the year ended on 31st March,
2015. However, the amount paid under protest can be kept under the heading ‗Long -term Loans &
Advances / Short-term Loans and Advances‘ as the case may be alongwith disclosure as contingent
liability of ₹ 3.70 crore.
(ii) The arrears for the period from June, 2014 to March, 2015 are required to be provided for in the accounts
of the company for the year ended on 31 st March, 2015 assuming that negotiations for hike in wages
had already started in the year 2014 - 15 i.e. before the balance sheet date though the agreement was
entered in May, 2015.
10.100(AS)
9. With reference to AS 29 "Provisions, Contingent Liabilities and Contingent Assets", define:
(i) A Provision
(ii) A Liability
(iii) A Contingent Asset
(iv) Present Obligation
Answer:
(i) A Provision is a liability which can be measured only by using a substantial degree of estimation.
(ii) A Liability is a present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic benefits.
(iii) A Contingent asset is a possible asset that arises from past events the existence of which will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the enterprise.
(iv) Present obligation - An obligation is a present obligation if, based on the evidence available, its
existence at the balance sheet date is considered probable, i.e., more likely than not.
10. Mini Ltd. took a factory premises on lease on 1.4.07 for Rs.2,00,000 per month. The lease is
operating lease. During March, 2008, Mini Ltd. relocates its operation to a new factory building. The
lease on the old factory premises continues to be live upto 31.12.2010. The lease cannot be
cancelled and cannot be sub-let to another user. The auditor insists that lease rent of balance 33
months upto 31.12.2010 should be provided in the accounts for the year ending 31.3.2008. Mini Ltd.
seeks your advice.
Answer: In accordance with AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’ and ASI
30 ‘Applicability of AS 29 to Onerous Contracts’, if an enterprise has a contract that is onerous, the
present obligation under the contract should be recognized and measured as a provision. In the given
case, the operating lease contract has become onerous as the economic benefit of lease contract for
next 33 months up to 31.12.2010 will be nil. However, the lessee, Mini Ltd., has to pay lease rent of
Rs. 66,00,000 (i.e.2,00,000 p.m. for next 33 months).
For a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligation under the
contract should exceed the economic benefits expected to be received under it.
Therefore, provision on account of Rs.66,00,000 is to be provided in the accounts for the year ending
31.03.08. Hence auditor is right.
11. XYZ Ltd. has not made provision for warrantee in respect of certain goods due to the fact that the company
can claim the warranty cost from the original supplier. Hence the accountant of the company says that the
company is not having any liability for warrantees on a particular date as the amount gets reimbursed. You
are required to comment on the accounting treatment done by the XYZ Ltd. in line with the provisions of AS
29.
Solution: As per para 46 of AS 29 "Provisions, Contingent Liabilities and Contingent Assets", where some
or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be
received if the enterprise settles the obligation. The reimbursement should be treated as a separate asset. The
amount recognised for the reimbursement should not exceed the amount of the provision.
It is apparent from the question that the company had not made provision for warranty in respect of certain
goods considering that the company can claim the warranty cost from the original supplier. However, the
provision for warranty should have been made as per AS 29 and the amount claimable as reimbursement
should be treated as a separate asset in the financial statements of the company rather than omitting the
disclosure of such liability. Accordingly, it is viewed that the accounting treatment adopted by the company
with respect to warranty is not correct.
12. Sun Ltd. Has entered into a sale contract of Rs.5 crores with X Ltd. During 2009-10 financial year. The
profit on this transaction is Rs.1 crore. The delivery of goods to take place during the first month of 2010-11
financial year. In case of failure of Sun Ltd. to deliver within the schedule a compensation of Rs.1.5 crore is
to be paid to X Ltd. Sun Ltd. Planned to manufacture the goods during the last month of the 2009-10
financial year. As on Balance Sheet date (31.3.2010), the goods were not manufactured and it was unlikely
that Sun Ltd. Will be in a position to meet the contractual obligation.
10.101(AS)
(i) Should Sun Ltd. Provide for contingency as per AS-29?
(ii) Should provision is measured as the excess of compensation to be paid over the profit?
Answer:-
(i) Yes, the contingency should be provided for. As on 31st March 2010, it is unlikely that the contractual
obligation will be met. Therefore, it is probable that the compensation of Rs.1.5 crore will have to be
paid under the binding contract, resulting in outflow of economic resources. Therefore, according to AS-
29 “Provisions, Contingent liabilities and contingent assets”, the amount should be provided for.
(ii) No, According to para41 of AS – 29, future events should be taken into account in the measurement of
provisions only if there is sufficient objective evidence that such future events will occur. In the absence
of such evidences, anticipated profits should not be deducted from the compensation amount. The entire
compensation amount should be provided for.
13. With reference to AS-29, how would you deal with the following in the annual accounts of the company at
the Balance Sheet dates:
(i) An organization operates an offshore oilfield where its licensing agreement requires it to remove the
oil rig at the end of production and restore the seabed. Ninety percent of the eventual costs relate to
the removal of the oil rig and restoration of damage caused by building it, and ten percent arise through
the extraction of oil. At the balance sheet date, the rig has been constructed but no oil has been
extracted.
(ii) During 2016-17 Ace Ltd. gives a guarantee of certain borrowings of Brew Ltd., whose financial
condition at that time is sound. During 2017-18, the financial condition of Brew Ltd. deteriorates and at
31st Dec. 2017 it goes into Liquidation. (Balance Sheet date 31-3-17)
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11
12
13
10.102(AS)
SUMMARY NOTES
10.103(AS)
1. AB Company Ltd. had 1,00,000 shares of common stock outstanding on January 1. Additional 50,000
shares were issued on July 1, and 25,000 shares were re-acquired on September 1. The weighted average
number of shares outstanding during the year on Dec. 31 is
(a) 1,40,000 shares.
(b) 1,25,000 shares.
(c) 1,16,667 shares.
2. A Ltd. sold machinery having WDV of ₹ 40 lakhs to B Ltd. for ₹ 50 lakhs (Fair value ₹ 50 lakhs) and
same machinery was leased back by B Ltd. to A Ltd. The lease back is in nature of operating lease. The
treatment will be
(a) A Ltd. should amortise the profit of ₹ 10 lakhs over lease term.
(b) A Ltd. should recognise the profit of ₹ 10 lakhs immediately.
(c) A Ltd. should defer the profit of ₹ 10 lakhs.
(d) None of the three.
3. A Ltd. sold its building for ₹ 50 lakhs to B Ltd. and has also given the possession to B Ltd. The book
value of the building is ₹ 30 lakhs. As on 31st March, 2017, the documentation and legal formalities are
pending. For the financial year ended 31st March, 2017
(a) The company should record the sale.
(b) The company should recognise the profit of ₹ 20 lakhs in its profit and loss account.
(c) Both (a) and (b).
4. As per AS 20, potential equity shares should be treated as dilutive when, and only when, their conversion
to equity shares would
(a) Decrease net profit per share from continuing ordinary operations.
(b) Increase net profit per share from continuing ordinary operations.
(c) Make no change in net profit per share from continuing ordinary operations.
(d) None of the above.
5. Internally generated goodwill is

(a) Recorded at cost of generating goodwill.
(b) Recorded at valuation done by experts.
(c) Not recorded.
(d) Either (a) or (b).
6. A Ltd. sold its building for Rs50lakhs to B Ltd. and has also given the possession to B Ltd . The book
value of the building is Rs 30lakhs. As on 31st March 2017,the documentation and legal formalities are
pending .For the financial year end headcount 31st March 2017
(a) The company should record the sale.
(b) The company should recognize the profit of Rs.20lakhs in its profit and loss account.
(c) Both (a) and (b)
7. As per AS 22 on Accounting for Taxes on Income, Tax expense is

(a) Current tax + deferred tax charged to profit and loss account
(b) Current tax-deferred tax credited to profit and loss account
(c) Either (a) or (b)
Answers: 1. (c), 2. (b), 3. (c), 4 (a), 5. (c) 6. (c) 7. (c)
10.104(AS)
Chapter 11: Schedule III CA P.S. Beniwal (9990301165)
Final Accounts – PART I

Schedule III (Section 129)
A) General instruction:-
1. Compliance with the requirements of the Companies Act including Accounting Standards to have precedence
over the requirements of the Schedule III to the Companies Act, 2013.
2. Disclosure requirements specified in Part I and Part II of this Schedule are in addition to the disclosure
requirements of the Companies Act including Accounting Standards.
3. Notes to accounts to contain information in addition to that presented in the Financial Statements and shall
provide where required (a) narrative descriptions or disaggregations of items recognized in those statements
and (b) information about items that do not qualify for recognition in those statements.
4. Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross referenced to any
related information in the notes to accounts.
5. The corresponding amounts for the immediately preceding year to be shown for all items in financial
statements including notes except for first financial statements.
6. Round off
a) Turnover < Rs. 100 Crores – Round off to the nearest hundreds, thousands, lakhs or millions or decimal
thereof.
b) Turnover > Rs. 100 Crores - Round off to the nearest lakhs, millions or crores, or decimal thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial Statements.
7. A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company's normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting date. Terms of a liability that could at the option of the counterparty, result in
its settlement by the issue of equity instruments do not affect its classification.
All other liabilities shall be classified as non- current.
8. An asset shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating
cycle;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at
least twelve months after the reporting date.
All other assets shall be classified as non-current.
.
9. An operating cycle is the time between the acquisition of assets for processing and their realization in Cash or
cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration of 12
months.
10. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of goods
sold or services rendered in the normal course of business.
11. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods
purchased or services received in the normal course of business.
12. “Broad heads” shall be decided taking into account the concept of materiality and presentation of true and fair
view of financial statements.
11.1
Formats
Part I- BALANCE SHEET
Balance Sheet as at 31st March, 20XX

Figures as at Figures as at
the end of the end of
Note
Particulars current previous
No
reporting reporting
period period
I. EQUITY AND LIABILITIES
(1) Shareholder's Funds

(a) Share Capital
(b) Reserves and Surplus
(c) Money received against share warrants
(2) Share application money pending allotment
(3) Non-Current Liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions
(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total
II.Assets
(1) Non-current assets
(a) Property, Plant and equipment
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other non-current assets
(2) Current assets

(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
Total
11.2
Part II- STATEMENT OF PROFIT AND LOSS
Profit and Loss statement for the year ended 31st March, 20XX.
Figures as at the Figures as at the
Particulars Note No end of current end of previous
reporting period reporting period
I. Revenue from operations
II. Other Income
III. Total Revenue (I +II)
IV. Expenses:
Cost of materials consumed
Purchase of Stock-in-Trade
Changes in inventories of finished goods, work-in-progress and
Stock-in-Trade
Employee benefit expense
Financial costs
Depreciation and amortization expense
Other expenses
Total Expenses
V. Profit before exceptional and extraordinary items and tax

(III - IV)
VI. Exceptional Items
VII. Profit before extraordinary items and tax (V - VI)
VIII. Extraordinary Items
IX. Profit before tax (VII - VIII)
X. Tax expense:
(1) Current tax
(2) Deferred tax
XI. Profit(Loss) from the perid from continuing operations (VII-

VIII)
XII. Profit/(Loss) from discontinuing operations
XIII. Tax expense of discounting operations
XIV. Profit/(Loss) from Discontinuing operations (XII - XIII)
XV. Profit/(Loss) for the period (XI + XIV)
XVI. Earning per equity share:

(1) Basic
(2) Diluted
11.3
Explanation of Notes:
Part I: Balance Sheet.
SHARE CAPITAL:
for each class of share capital (different classes of preference shares to be treated separately):
(a) the number and amount of shares authorized;
(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully paid;
(c) par value per share;
(d) a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period;
(e) the rights, preferences and restrictions attaching to each class of shares including restrictions on the
distribution of dividends and the repayment of capital;
(f) shares in respect of each class in the company held by its holding company or its ultimate holding company
including shares held by or by subsidiaries or associates of the holding company or the ultimate holding
company in aggregate;
(g) shares in the company held by each shareholder holding more than 5 percent shares specifying the number of
shares held;
(h) For the period of five years immediately preceding the date as at which the Balance Sheet is prepared:
 Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment
being received in cash.
 Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
 Aggregate number and class of shares bought back.
(i) Calls unpaid (showing aggregate value of calls unpaid by directors and officers)
(j) Forfeited shares (amount originally paid up)
RESERVES AND SURPLUS
1. Classification of Reserves and Surplus into

- Capital reserves
- Capital Redemption Reserves
- Securities premium
- Debenture Redemption Reserve
- Revaluation Reserve
- Share Option Outstanding Account
- Other reserves – (specifying nature, purpose and amount of each reserve)
- Surplus, showing allocations and appropriations such as dividend, bonus shares and transfer to / from
reserves
2. Additions and Deductions since last Balance Sheet date to be shown under each of the specified heads
3. The word ‘fund' in connection with reserve is to be used only where such Reserve is specifically represented
by earmarked investments.
4. Negative Balance of Profit and Loss Account, if any, to be shown under the "Surplus" head as a negative
figure.
NON-CURRENT LIABILITIES
(a) Long-term Borrowings

(i) Classification of Long term Borrowings into-
a) Bonds / Debentures
b) Term Loans:
 From Banks
 From Other Parties
c) Deferred Payment liabilities
d) Deposits shown
e) Loans and advances from related parties
f) Long Term maturities of finance lease obligations
g) Other Loans and advances, specifying nature, shown
(ii) Long term Borrowings to be sub-classified as:
- Secured(nature of the security to be specified)
- Unsecured
(iii) Aggregate of loans guaranteed by the following should be disclosed
- Directors - Others
(iv) Rate of interest and terms of redemption / conversion of bonds / debentures (to be stated in descending order of
maturity of redemption / conversion)
(v) Period and amount of continuing default in the repayment of loans and interest shown separately in each case
11.4
(b) Other Long-term Liabilities: Classification as:-

- Trade payables - Others
(c) Long-Term Provisions: Classification of Provisions as:

- Provision for employee benefits - Others (Specifying nature)
CURRENT LIABILITIES
(a) Short-Term Borrowings

(i) Classification of borrowings as:
(a) Loans repayable on demand
- From banks - From other parties
(b) Loans and Advances from related parties
(c) Deposits
(d) Other Loans and Advances, specifying nature
(ii) Further sub-classification of the borrowings into:
- Secured(nature of the security to be specified) - Unsecured
(iii) Aggregate of loans guaranteed by the following should be disclosed:
- Directors - Others
(iv) Period and amount of continuing default in the Repayment of Loans and Interest shown separately in each case
(b) Other Current Liabilities

1. Classification of other current liabilities into:
- Current maturities of Long term debt
- Current maturities of finance lease obligations
- Interest accrued but not due on borrowings
- Interest accrued and due on borrowings
- Income received in advance
- Application money received for allotment of securities and due for refund and interest accrued thereon.
- Unpaid matured deposits and interests accrued thereon
- Unpaid matured debentures and interest accrued thereon
- Other payables, specifying nature
(c) Short- term Provisions:- Classification of short term provisions into:

- Provision for employee benefits - Others, specifying nature
NON-CURRENT ASSETS
(a) Fixed Assets

(i) Tangible Assets:-
1. Classification of Tangible Assets into:
- Land
- Buildings
- Plant and Equipment
- Furniture and fixtures
- Vehicles
- Office Equipments
- Others (specifying nature)
2. Asset under lease shall be shown separately under each class of asset
3. Reconciliation of gross and net carrying amounts of each class of assets at the beginning and end of the
reporting period showing:
- Additions
- Disposals
- Acquisitions through business combinations
- Other Adjustments
- Depreciation
- Impairment losses/reversals
4. Where a capital reduction scheme or a revaluation of assets has taken place, every balance sheet subsequent to
the reduction or revaluation shall show the reduced/increased figures, the date of the reduction/increase and
the amount of reduction / increase for the first 5 years subsequent to the reduction /revaluation.
11.5
(ii) Intangible Assets

1. Classification of Intangible Assets into:
- Goodwill
- Brands/trademarks
- Computer software
- Mastheads and publishing titles
- Mining rights
- Copyrights and patents and other Intellectual property rights, services and operating rights
- Recipes, formulae, models, designs and prototypes
- Licenses and franchises
2. Reconciliation of gross and net carrying amounts of each class of assets at the beginning and end of the
reporting period showing:
- Additions
- Disposals
- Acquisitions through business combinations
- Other Adjustments
- Amortization
- Impairment losses/reversals
3. Where a capital reduction scheme or a revaluation of assets has taken place, every balance sheet subsequent to
the reduction or revaluation shall show the reduced/increased figures, the date of the reduction/increase and
the amount of reduction / increase for the first 5 years subsequent to the reduction / revaluation.
(iii) Capital Work In Progress
(iv) Intangible Assets Under Development
(b) Non-Current Investments

1. Non-current Investments are classified into Trade investments and Other Investments and further classified
into
a) Investments in Property
b) Investments in Equity instruments
c) Investments in Preference shares
d) Investments in Government or trust securities
e) Investments in Debentures or Bonds
f) Investments in Mutual funds
g) Investments in Partnership firms
h) Others (specifying nature)
2. In case of investments in bodies corporate the following additional disclosures shall be made under each
classification:
- Names of the body corporate (indicating whether they are associates, joint ventures, subsidiaries or controlled
special purpose entities)
- Nature and extent of the investments
- Partly paid investments to be separately shown.
3. Investments carried at other than costs to be separately shown specifying basis of valuation
4. Following shall be additionally disclosed:

- Aggregate book value of Quoted Investments and market value thereof
- Aggregate amount of unquoted investments
- Aggregate provision for diminution in value of investments.
(d) Long Term Loans and Advances

1. Loans and advances classified into:
a) Capital Advances
b) Security deposits
c) Loans and advances to related parties (giving details thereof)
d) Other loans and advances (specifying nature)
11.6
2. Sub-classification of above as:

- Secured, considered good
- Unsecured, considered good
- Doubtful
3. Allowance for bad and doubtful loans and advances disclosed under relevant heads.
4. Loans and Advances due from:

- Directors or other officers of the company
- Amounts due by firms in which any director is a partner
- Amounts due by private companies in which any director is a director or member.
(e) Other Non-Current Assets

1. Other non-current assets classified into:
- Long term trade receivables (including deferred credits)
2. Long term trade receivables, shall be sub-classified as:

a) Secured, considered good
Unsecured, considered good
Doubtful
b) Allowance for bad and doubtful loans and advances disclosed under relevant heads.
c) Loans and Advances due from:
- Amounts due by private companies in which any director is a director or member.
CURRENT ASSETS
(a) Current Investments

1. Current Investments are classified as follows
a) Investments in Property
b) Investments in Equity instruments
c) Investments in Preference shares
d) Investments in Government or trust securities
e) Investments in Debentures or Bonds
f) Investments in Mutual funds
g) Investments in Partnership firms
h) Others (specifying nature)
2. In case of investments in bodies corporate the following additional disclosures shall be made under each
classification:
- Names of the body corporate (indicating whether they are associates, joint ventures, subsidiaries or controlled
special purpose entities)
- Nature and extent of the investments
- Partly paid investments to be separately shown
3. Following shall be additionally disclosed:

- The basis of valuation of individual investments
- Aggregate book value of Quoted Investments and market value thereof
- Aggregate amount of unquoted investments
- Aggregate provision for diminution in value of investments
(b) Inventories
1. Classification of Inventories into:
a) Raw materials
b) Work in progress
c) Finished goods
d) Stock in trade (in respect of goods acquired for trading )
e) Stores and spares
f) Loose tools
g) Others (specifying nature)
2. Goods-in-transit to be disclosed under relevant sub-head.
3. Mode of Valuation to be stated
11.7
(c) Trade Receivables

1. Aggregate amount of outstanding trade receivables exceeding 6 months shown separately
2. Sub-classification of Trade Receivables:

- Secured, considered good
- Unsecured, considered good
- Doubtful
3. Allowance for bad and doubtful debts disclosed under relevant heads:
4. Debts due from:

- Amounts due by private companies in which any director is a director or member
(d) Cash and Cash Equivalents

1. Classification of Cash and Cash Equivalents into:
a) Balances with Bank
b) Cheques, Drafts on hand
c) Cash on hand
d) Others (specifying nature)
2. The following shall be shown separately :

a) Earmarked balances with bank.
b) Balances with bank held as margin money or security against borrowing, guarantees and other
commitments.
c) Repatriation restrictions, if any, in respect of cash and bank balances.
d) Bank deposits with more than 12 months maturity.
(e) Short Term Loans And Advances

1. Classification of Loans and Advances :
a) Loans and Advances to Related parties (giving details thereof)
b) Others (specifying nature)
2. Sub-classification of Loans and Advances :

a) Secured, considered good
b) Unsecured, considered good
c) Doubtful
3. Allowance for bad and doubtful debts disclosed under relevant heads
4. Debts due from:

- Amounts due by private companies in which any director is a director or member
(f) Other Current Assets

All inclusive heading which incorporates current assets that do not fit in other asset categories.
CONTINGENT LIABILITIES AND COMMITMENTS

The following shall be disclosed to the extent not provided for:
1. Classification of Contingent liabilities:
a) Claims against the company not acknowledged as debts\
b) Guarantees.
c) Other money for which the company is contingently liable.
2. Commitments shall be classified as:

a) Estimated amount of contracts remaining to be executed on capital account and not provided for;
b) Uncalled liability on shares and other investments partly paid
c) Other commitments (specify nature).
3. Bills discounted/endorsed.
11.8
PROFIT AND LOSS ACCOUNT

The following shall be disclosed separately by way of notes to accounts:
I. REVENUE FROM OPERATIONS
1. In respect of Company other than Finance Company, revenue shall be disclosed separately in notes from:
- Sale of products
- Sale of services
- Other Operating revenues
- Less: Excise Duty(GST to be discussed separately)
2. In respect of Finance Company, revenue shall be disclosed separately in notes from:

- Interest
- Other Financial Services
3. Gross Income / Sales to be shown under broad heads.
II. OTHER INCOME

Classification of Other Income into:
- Interest Income (except for a finance company)
- Dividend Income
- Net gain / loss on sale of Investments
- Net gain from foreign currency transactions & translations other than those considered as Finance Costs
III. EXPENSES:
a) Employee Benefits Expense: The following shall be shown separately:
- Salaries and Wages
- Contribution to Provident and Other Funds
- Expenses on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP)
- Staff Welfare Expenses
b) Finance Costs: Classification of Finance Cost into:

- Interest Expense
- Other Borrowing Cost
- Net gain / loss from foreign currency transactions and translations
c) Other Expenses
1. Any item of expenditure which exceed 1 % of revenue from operations or Rs.1 lakh, whichever is higher
2. Adjustments to the carrying amount of investments
3. Net loss from foreign currency transactions and translations other than those considered as Finance Costs
d) Payment to the Auditors:

- As Auditors
- For Taxation matters
- For Company Law matters
- For Management services
- For other services
- For Reimbursement of expenses
e) Prior Period Items
f) Following expenditures to be shown separately:

- Consumption of stores and spare parts
- Power and Fuel
- Rent
- Repairs to Buildings
- Repairs to Machinery
- Insurance
- Rates and Taxes, excluding Tax on Income
- Miscellaneous Expenses
GENERAL INSTRUCTIONS FOR THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
TO BE DISCUSSED IN Holding
11.9
Questions of Schedule III
Q1. In the financial statements of the financial year 2011-12, Alpha Ltd. has mentioned in the notes to accounts
that during financial year, 24,000 equity shares of Rs. 10 each were issued as fully paid bonus shares.
However, the source from which these bonus shares were issued has not been disclosed. Is such non-disclosure
a violation of the Schedule III to the Companies Act, 2013 to the Companies Act? Comment.
Answer: Schedule III to the Companies Act, 2013 has come into force for the Balance Sheet and Profit and
Loss Account prepared for the financial year commencing on or after 1st April, 2011. As per Part I of the
Schedule III to the Companies Act, 2013, a company shall, inter alia, disclose in notes to accounts for the
period of 5 years immediately preceding the balance sheet date (31st March, 2012 in the instant case) the
aggregate number and class of shares allotted as fully paid-up bonus shares. Schedule III to the Companies
Act, 2013 does not require a company to disclose the source from which bonus shares have been issued.
Therefore, nondisclosure of source from which bonus shares have been issued does not violate the Schedule III
to the Companies Act, 2013.
Q2. The management of Loyal Ltd. contends that the work in process is not valued since it is difficult to ascertain
the same in view of the multiple processes involved. They opine that the value of opening and closing work in
process would be more or less the same. Accordingly, the management had not separately disclosed work in
process in its financial statements. Comment in line with Schedule III to the Companies Act, 2013.
Answer: Schedule III to the Companies Act, 2013 to the companies Act does not require that the amounts for
which WIP have been completed at the beginning and at the end of the accounting period should be disclosed
in the statement of profit and loss . Therefore, the nondisclosure in the financial statements by the company
may not amount to violation of Schedule III to the Companies Act, 2013 if the differences between opening
and closing WIP are not material.
Q3. (a) Futura ltd. had the following items under the head ‘’reserve & surplus’’ in the balance sheet as on 31st
March, 2013;
Amount Rs in lakhs
Securities premium account 80
Capital reserve 60
General reserve 90
The company had an accumulated loss of Rs 250 lakhs on the same date, which it has disclosed under the head
‘’statement of profit & loss’’ as asset in its balance sheet . Comment on accuracy of this treatment in the line
with revised scheduled VI to the companies act,1956.
(b) Sumedha ltd. took a loan from bank for Rs 10,00,000 to be settled within year in 10 equal half yearly
instalments with interest. First instalment is due 30.09 .2013 of Rs 1,00,000. Determine how the loan will be
classified in preparation of financial statement of Sumedha ltd for the year ended 31st march, 2013 according to
revised scheduled VI.
Answer(a) Note 6 (B) given under part I of Schedule III to the Companies Act, 2013 provides that the
balance of statement of profit & loss (after all allocation and appropriation) shall be shown as a negative figure
under the head ‘surplus’. Similarly , the balance of reserve and surplus ,after adjusting negative balance of
surplus ,shall be shown under the head ‘’ reserve and surplus’’ even if the resulting figure is in the negative . in
this case , the negative balance of profit and loss that is Rs 250 lakhs . Exceed the total of all the reserves i.e
Rs 230 lakhs. Therefore the balance ‘reserve and surplus ‘ after adjusting the debit balance of profit and loss is
negative by Rs 20 lakhs , which should be disclosed on the face of balance sheet .
(b) As per Schedule III to the Companies Act, 2013 a liability shall be classified as current when it satisfies
any of the following criteria:
(a) it is expected to be settled in the company's normal operating cycle;
months after the reporting date.
In the given case, instalment due on 30.9. 2013 and 31.3.2014 will be shown under the head “other current
liabilities” as per criteria (c).
Therefore ,in the balance sheet as on 31.3.2013 ,Rs 8,00,000 will be shown under the heading “long term
borrowing” and Rs 2,00,000 will be shown under the heading “other current liabilities” as current maturities of
loan from bank.
11.10
Q4. Alpha Ltd. provides you the following information :

1. Raw material stock holding period : 3 months
2. Work – in- progress holding period 1 months
3. Finished goods holding period : 5 months
4. Debtors collection period: 5 months
You are required to compute the operating cycle of Alpha Ltd. What would happen if the trade is payables of
the company are paid in 13 months – whether these should be classified as current or non-current liability?
Answer. According to Schedule III to the Companies Act, 2013 “An operating cycle is the time between the
acquisition of assets for processing and their realization in cash or cash equivalents”.
Therefore, operating cycle of Alpha Ltd. will be computed as under:
Raw material stock holding period + Work – in – progress holding period + Finished goods holding period +
Debtors collection period
= 3 + 1+ 5 + 5 = 14 months
A Liability shall be classified as current when it is expected to be settled in the Company’s normal operating
cycle.
Since the operating cycle of Alpha Ltd. is 14 months, trade payables expected to be paid in 13 months should
be treated as current liability.
Q5. X Ltd is a company engaged in the business of manufacturing white & rose wine. The process of
manufacturing white & rose wine takes around 2 years. Due to this reason X Ltd has prepared its financial
statements considering its operating cycle as 2 years, and accordingly classified the raw material purchased &
held in stock for less than 2 years as current asset. Comment on the accuracy of the decision and the treatment
of asset by X Ltd as per Schedule III to the Companies Act, 2013?
Solution:- As per Schedule III to the Companies Act, 2013, one of the criteria for classification of an asset as a
current asset is that the asset is expected to be realised in the company’s’ operating cycle or is intended for sale
or consumption in the company’s normal operating cycle.
Further, Schedule III to the Companies Act, 2013 defines that an operating cycle is the time between the
acquisition of assets for processing and their realization in cash or cash equivalents. However, when the
normal operating cycle cannot be identified, it is assumed to have duration of 12 months.
As per the facts given in the question, the process of manufacturing of lotus wine takes around 18 months;
therefore, its realisation into cash and cash equivalents will be done only when it is ready for sale i.e. after 18
months. This means that normal operating cycle of the product is 18 months. Therefore, the contention of the
company's management that the operating cycle of the product lotus wine is 18 months & not 12 months is
correct.
Q6. Combine Ltd. is a group engaged in manufacture and sale of industrial and consumer products. One of its
division deals with the real estate. The real estate division is continuously engaged in leasing of real estate
properties. The accountant showed the rent arising from leasing of real estate as ‘other income’ in the
Statement of Profit and Loss. State, whether the classification of the rent income made by the accountant is
correct or not in light of Schedule III to the Companies Act, 2013?
Solution:- As per para 4 of the ‘General Instructions for preparation of Statement of Profit and Loss’ given in
the Schedule III to the Companies Act, 2013, ‘other income’ does not include operating income. However, rent
income arising from leasing of real estate properties is an operating income as Real Estate is one of the
divisions of Combine Ltd.
There is a separate head for operating income i.e. ‘Revenue from Operations’.
Therefore, classification of rent income as ‘Other income’ in the Statement of Profit and Loss will not be
correct. It would infact be shown under the heading ‘Revenue from Operations’ only.
Q7. Presented below is an extract of the Schedule of Secured and Unsecured Loans of Annual Report 10-11 of
Super Star Ltd.
Particulars Schedule No As at
31st Mar’2011 (Rs.)
Loan Funds
a) Secured Loans 3 6,07,114
b) Unsecured Loans - Short Term
- Banks 36,112
6,43,226
Schedule 3: Secured Loans
Term Loans from:
- Banks 2,95,002
- Others 3,12,112
6,07,114
Other Information:
11.11
Current maturities of long-term loan from bank Rs. 30,000

Current maturities of long-term loan from other parties Rs. 15,376
There was no interest accrued/due as at end of the year.
Prepare appropriate note to accounts complying with the requirements of Schedule III to the Companies Act,
2013 on the basis of available information.
Solution:- Balance Sheet of Super Star Ltd.
As on 31st Mar’2011
Particulars Note No Amount
Non Current Liabilities
Long term borrowings 4 5,61,738
Current Liabilities
Short term borrowings 5 36,112
Other current liabilities 6 45,376
6,43,226
Notes to Accounts
4. Long-Term Borrowings
Term loans – Secured
- from banks 2,95,002
- from other parties 3,12,112
6,07,114
Less : Shown in current maturities of long-term debt (Refer Note 6) (45,376)
5,61,738
5. Short-Term Borrowings
(Unsecured – payable on demand)
- from bank 36,112
6. Other Current Liabilities
Current maturities of long-term debt
From banks 30,000
From other 15,376
45,376
It is assumed the Note 1 is for ‘Significant Accounting Policies’, Note 2 for ‘Share Capital’, Note 3 for
‘Reserves and Surplus’.
Q8. The Balance Sheet of Appropriate Ltd. as at 31st March, 2013 is as follows:
Note 31st 31st
No. March 13 March 12
Share Capital 1 XXX XXX
Reserves and Surplus 2 0 0
Employee stock option outstanding 3 XXX XXX
Share application money refundable 4 XXX XXX
Deferred tax liability (Arising from Indian Income Tax) 5 XXX XXX
Current Liabilities
Trade Payables 6 XXX XXX
Total XXXX XXXX
Assets
Non-Current Assets
Fixed Assets -Tangible 7 XXX XXX
Capital Work in progress (including capital advances) 8 XXX XXX
Current Assets
Trade Receivables 9 XXX XXX
Deferred Tax Asset (Arising from Indian Income Tax) 10 XXX XXX
Profit and Loss (Debit balance) XXX XXX
Total XXXX XXXX
Comment on the presentation in terms of Revised Schedule VI (Now Schedule III to the companies Act, 2013)
and Accounting Standards notified by the Central Government.
11.12
Answer :
(1) Share Capital’ and ‘Reserves and Surplus’ are required to be shown under the heading “Shareholders’
funds”, which have not been shown in the given balance sheet. Although it is a part of ‘Equity and Liabilities’
yet it must be shown under the head “Shareholders’ Funds”. The heading “Shareholders’ Funds” is missing in
the balance sheet given in the question.
(2) Reserves & Surplus is showing zero balance, which is not correct since there is. Debit balance of Statement
of Profit & Loss. This debit balance of Profit and Loss should be shown as a negative figure under the head
‘Surplus’. The balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus shall be shown
under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative. It should be noted that
Profit and Loss Debit Balance is not a part of current assets rather debit balance of Statement of Profit and
Loss shall be shown as a negative figure under the head ‘Surplus’ as per requirement of Revised Schedule VI
(Now Schedule III to the companies Act, 2013).
(3) As per Revised Schedule VI (Now Schedule III to the companies Act, 2013) Employee Stock Option
Outstanding A/c is part of Reserves and Surplus and should not be shown separately.
Classification of Reserves and Surplus should be reflected is ‘Notes to Accounts’ for the same.
(4) Share application money refundable shall be shown by way of note under the sub-heading “Other Current
Liabilities”. As this is refundable and not pending for allotment, hence it is not a part of equity.
(5) Deferred Tax Liabilities has been correctly shown under Non-Current Liabilities. But Deferred tax assets
and deferred tax liabilities, both, can not be shown in balance sheet because only the net balance of Deferred
Tax Liabilities or Asset is to be shown as per para 29 of AS 22, Appropriate Ltd. should offset Deferred Tax
Asset & Deferred Tax Liabilities and the break up of Deferred Tax Asset & Deferred Tax Liabilities into major
components of the respective balance should be disclosed in ‘Notes to Account’. Deferred Tax Asset shall be
shown under Non-Current Asset. It should be the net balance of Deferred Tax Asset after adjusting the balance
of deferred tax liability.
(6) Under the main heading of Non-Current Assets, Fixed Assets are further classified as under:
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work in Progress
(iv) Intangible assets under development.
Keeping in view the above, the Capital Work-in Progress shall be shown under Fixed Assets as Capital Work
in Progress. The amount of Capital advances included in CWIP shall be disclosed under the sub-heading
“Long term loans and advances” under the heading Non-Current Assets.
Q9. Astha Ltd. has FCCBs worth Rs. 100 crore which are due to mature on 31st December 2013. While preparing
the financial statements for the year ending 31st March 2013, it is expected that the FCCB holders will not
exercise the option of converting the same to equity shares. How should the company classify the FCCBs on
31st March 2013? Will your answer be different if the company expects that FCCB holders will convert their
holdings into equity shares of Astha Ltd.?
Answer :- Schedule III to the companies Act, 2013 provides that:
“A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
months after the reporting date. Terms of a liability that could, at the option of the counterparty, result in its
settlement by the issue of equity instruments and do not affect its classification.”
In the present situation, Astha Ltd. does not have an unconditional right to defer settlement of the liability for
at least 12 months after the reporting date. The position will be same even when the FCCB holders are
expected to convert their holdings into equity shares of Astha Ltd.
Expectations cannot be called as unconditional rights. Thus, in both the situations, Astha Ltd. should classify
the FCCBs as current liabilities as on 31 March 2013
11.13
Q10. Sagar Ltd. has issued convertible bonds for ₹ 65 crores which are due to mature on 30th September, 2018.
While preparing financial statements for the year ending 31st March, 2018, company expects that bond holders
will not exercise their option of converting bonds to equity shares. How should the company classify the
convertible bonds as per the requirements of Schedule-Ill to the Companies Act, 2013 as on 31st March,
2018?
Also state, whether classification of convertible Bonds as per Schedule-III to the Companies Act will change if
the company expects that convertible bond holders will convert their holdings into equity shares of Sagar Ltd.
Solution: Schedule III to the companies Act, 2013 provides that:

“A liability should be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
months after the reporting date. Terms of a liability that could, at the option of the counterparty, result in
its settlement by the issue of equity instruments and do not affect its classification.”
In the present situation, Sagar Ltd. does not have an unconditional right to defer settlement of the liability for
at least 12 months after the reporting date, hence Sagar Ltd. should classify the FCCBs as current liabilities as
on 31st March 2018.
The position will be same even when the bond holders are expected to convert their holdings into equity shares
of Sagar Ltd. Expectations cannot be called as unconditional rights. Thus, in this situation also, Sagar Ltd.
should classify the FCCBs as current liabilities as on 31st March 2018.
REVISION STRUCTURE
1
2
3
4
5
6
7
8
9
10
11.14
SUMMARY NOTES
11.15

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B-44

WITH MAHARAJ JI KRIPA

V 11 Schedule III 11.1 to 11.15

Q8. Given below interest on advances of a commercial bank (Rs. In lakhs)

(ii) Terms Loan Rs. 75 lakhs

(c) Classification of Advances: Rs.

Q24. Calculate Provision required by Bank.

Q25. Calculate Provision required by Bank.

Q26. Check and maintain C.R.R. for schedule Bank

Q27. Check C.R.R. and S.L.R. for a schedule bank:

Q28. Calculate capital for capital adequacy ratio.

Statutory reserve fund 8,00,000

Q.37 The following informations are also given for SM Bank :

Bill Discounted 15,16,800

Capital Funds: (Rs.in crores)

Interest and discount received 38,00,160

(ii) Classification of Non-Performing Advances:

Dr. (Rs.) Cr. (Rs.)

Q58. The following information is furnished by ALFA Bank Ltd.

*The classification of advances should be done taking into account :-

Schedule 5: Other Liabilities & Provisions

Profit and Loss Account (an extract)

(a) Calculation of Rebate on Bills Discounted

NPA NPA NPA NOT NPA

Schedule 2 - Reserves and Surplus

Schedule 5 - Other Liabilities and Provisions

Schedule 6 - Cash and Balances with Reserve Bank of India

Schedule 10 - Fixed Assets

Schedule 12 - Contingent Liabilities

Provisions and contingencies

Transfer to other reserves

Transfer to Government/Proposed dividends

Balance carried over to balance sheet

Schedules forming part of Profit and Loss Account

Schedule 14 - Other Income

Schedule 15 - Interest Expended

New Guidelines for Calculating CAR

A. Funded Risk Assets

3. Investment in other approved securities where payment of interest 20

B. Off- Balance sheet Items

Sr. Instruments Credit Conversion

MCQ (ICAI Study Material)

1. A banking company can pay dividend on its shares

3. Rebate on bill discounted is shown in the

(a) Assets side of the balance sheet.

4. Bills for collection are shown

(a) On Assets side of the balance sheet.

5. What percentage of provision is required on standard assets?

(a) Borrowing and raising of money.

(a) Banking and Non-banking assets.

Cost Market Price

MF-1 39.00 24.00

GV-1 60.00 66.00

(ii) What should be the value of investments as on 31.3.2012?

Standard assets 16,800 .25 42

Liabilities Amount Assets Amount

LCD Televisions Upto 12 months 480.00 20,123.00

8. Albert Finance Ltd. has made the following investments: