07/04/2024

UDESH REGULAR MAY 24 (GROUP-1)

Master Test – 4

ANSWER KEY

1(a). (1) (k). (2)

(b). (2) (l). (3)

(c). (3) (m). (3)

(d). (1) (n). (3)

(e). (3) (o). (1)

(f). (2) (p). (2)

(g). (4) (q). (1)

(h). (3) (r). (3)

(i). (2) (s). (3)

(j). (3) (t). (3)

 Hints & Solution
2(a). (H & S)
Prashant Ltd. Balance Sheet as on 31st March, 2022

Particulars Note No. ₹

I. Equity and Liabilities

(1) Shareholder's Funds

a) Share Capital 1 14,95,000

b) Reserves and Surplus 2 3,76,800

(2) Non-current liabilities

a) Long-term borrowings 3 3,65,000

(3) Current Liabilities

a) Trade Payables 2,67,000

b) Other current liabilities 4 10,000

c) Short-term provision 5 72,000

Total 25,85,800

II. Assets

(1) Non-current assets

a) Property, Plant & Equipment & Intangible Assets

i) Property, Plant & Equipment 6 15,95,000

(2) Current assets

a) Inventories 3,15,000

b) Trade Receivables 7 2,95,000

c) Cash &bank balances 8 3,22,300

d) Short-term loans and advances 58,500

Total 25,85,800

Notes to Accounts

Sr. No. Particulars ₹

1 Share Capital

Equity share capital

Issued & subscribed & fully paid up

1,50,000 Equity Shares of ₹10 each

 (of the above 10,000 shares have been issued for consideration
15,00,000
other than cash)

Less: Calls in arrears (5,000) 14,95,000

2 Reserves and Surplus

General Reserve 2,70,000

Profit & Loss balance 1,06,800 3,76,800

3 Long-term borrowings

Secured

Loan from State Financial Corporation (2,10,000 − 10,000)

2,00,000
(Secured by hypothecation of Plant and Machinery)

Unsecured Loan 1,65,000 3,65,000

4 Other current liabilities

Interest acciued but not due on loans (SFC) 10,000

5 Short-term provisions

Provision for taxation 72,000

6 Property, Plant & Equipment

Land 5,50,000

Building 5,50,000

Less: Depreciation(b.f.) (65,000) 4,85,000

Plant & Machinery 6,25,000

Less: Depreciation (b.f.) (65,000) 5,60,000

15,95,000

7 Trade receivables

Undisputed Trade Receivables: Good: Due Less than 6 months 2,40,000

Undisputed Trade Receivables: Good: Due More than 6 months 55,000 2,95,000

8 Cash and bank balances

Cash and cash equivalents

Cash at bank (includes 15,000 with non-scheduled bank) 2,85,000

Cash in hand 37,300 3,22,300

2(b). (H & S)
Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy Back

Particulars Amount

Loan funds (₹) 42,00,000

Minimum equity to be maintained after buy back in the ratio of 2:1 (₹) 21,00,000

Present equity/shareholders fund 72,80,000

Future equity/shareholders fund (₹) (see W.N.) (72,80,000-12,95,000) 59,85,000

Maximum permitted buy back of Equity (59,85,000-21,00,000) 38,85,000

Maximum number of shares that can be bought back @ ₹ 30 per share 1,29,500

Working Note:
Shareholders' funds
Paid up capital 30,00,000
Free reserves (32,50,000+6,00,000+4,30,000) 42,80,000
Total 72,80,000
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
1. (₹72,80,000 - x) - ₹21,00,000 = y
2. (y/30) × 10 = x
Or 3x = y
by solving the above equation, we get x = ₹12,95,000 and y = ₹38,85,000

3(a). (H & S)
M/s MNT Ltd.
Cash Flow Statement for the year ended 31st March, 2022
Particulars

Cash flows from Operating Activities

Cash sales (3,82,500/.30) 12,75,000

Less: Cash payments for trade payables (4,60,000)

Wages Paid (4,92,500)

Office and selling expenses (75,000) (10,27,500)

Cash generated from operations before taxes 2,47,500

Income tax paid (65,000)

Net cash generated from operating activities (A) 1,82,500

Cash flows from investing activities

Sale of investments 7,20,000

 Payments for purchase of Plant & machinery (2,50,000)

Net cash used in investing activities (B) 4,70,000

Cash flows from financing activities

Bank loan repayment (including interest) (2,15,000)

Dividend paid (30,000)

Net cash used in financing activities (C) (2,45,000)

Net increase in cash (A+B+C) 4,07,500

Cash and cash equivalents at beginning of the period 2,00,000

Cash and cash equivalents at end of the period 6,07,500

Note: In the above answer, Cash Flow Statements has been prepared by Direct Method

3(b). (H & S)
New York Branch Trial Balance (in Rupees)
As on 31st March, 2021
Dr. (In Cr. (in Conversion
Particulars Dr. (in ₹) Cr. (in ₹)
US $) US $) Rate

Fixed Assets 46,080 43 19,81,440

Depreciation on Fixed Assets 5,120 43 2,20,160

Opening Stock 22,400 47 10,52,800

Purchases 96,000 45 43,20,000

Sales 1,66,400 45 74,88,000

Goods sent from H.O 32,000 Actual 15,80,000

Carriage inward 400 45 18,000

Branch Expenses 5,200 45 2,34,000

Outstanding
400 50 20,000
Expenses

Head Office A/c 45,600 Actual 20,50,000

Trade Debtors 9,600 50 4,80,000

Trade Creditors 6,800 50 3,40,000

Cash & Bank 2,400 50 1,20,000

Exchange Gain (bal.fig.) 1,08,400

1,00,06,400 1,00,06,400
Exchange Difference of ₹ 1,08,400 will be credited to the Statement of Profit & Loss.
3(c). (H & S)
As per Para 24 of AS 2, materials and other supplies held for use in the production of inventories are not
written down below cost if the finished products in which they will be incorporated are expected to be sold
at or above cost.
However, when there has been a decline in the price of materials and it is estimated that the cost of the
finished products will exceed net realizable value, the materials are written down to net realizable value. In
such circumstances, the replacement cost of the materials may be the best available measure of their net
realizable value. Therefore, in this case, USA Ltd. will value the stock of raw material at ₹ 30,00,000 (10,000
kg. @ ₹ 300 per kg.).

4(a). (H & S)

Journal Entries in the books of VT Ltd.

Dr. Cr.
Property, Plant & Equipment A/c Dr. 2,10,000
1 To Revaluation Reserve A/c 2,10,000
(Revaluation of fixed assets at 15% above book value)
Reserves & Surplus A/c Dr. 1,20,000
2 To Equity Dividend 1,20,000
(Declaration of equity dividend @ 10%)
Equity Dividend A/c Dr. 1,20,000
3 To Bank A/c 1,20,000
(Payment of equity dividend)
Business Purchase A/c Dr. 9,80,000
4 To Liquidator of MG Ltd. 9,80,000
(Being purchase of business of MG Ltd.)
Property, Plant & Equipment A/c Dr. 5,75,000
Inventory A/c Dr. 6,08,000
Debtors A/c Dr. 3,80,000
Investment A/c Dr. 1,60,000
Bills receivables A/c Dr. 40,000
5 Cash at bank A/c (80000-60000) 20,000
To Provision for Doubtful Debts A/c* 18,000
To Creditors A/c 2,50,000
To Bills Payable A/c 50,000
To 12% Debentures of MG Ltd. A/c 3,24,000
To Business purchase A/c 9,80,000
 To Capital Reserves A/c (Bal Fig.) 1,61,000
(Incorporation of various assets and liabilities taken over from MG Ltd. at
agreed values and difference of net assets and purchase consideration being
credited to capital reserve)
Liquidator of MG Ltd. A/c Dr. 9,80,000
To Equity share capital A/c 8,00,000
6
To 10% Preference Share Capital A/c 1,80,000
(Discharge of consideration for MG Ltd.'s business)

Creditors A/c Dr. 20,000

7 To Debtors A/c 20,000

(Being mutual owing cancelled)

12% Debentures of MG Ltd. A/c Dr. 3,24,000
Discount on Issue of Debentures Dr. 36,000
8 To 12% Debentures A/c 3,60,000
(Allotment of 12% Debentures to debenture holders of
MG Ltd. at a discount of 10%)
Capital Reserve A/c Dr. 60,000
9 To Bank A/c 60,000
(Being liquidation expenses reimbursed to MG Ltd.
Statement of Consideration payable by VT Ltd. for 60,000 shares (payment method)
Shares to be allotted 60,000/12 × 16 = 80,000 shares of VT Ltd.
Issued 80,000 shares of ₹ 10 each i.e. ₹ 8,00,000 (i)
For 10% performance shares, to be paid at 10% discount ₹ 2,00,000 × 90/100 ₹ 1,80,000 (ii)
Consideration amount [(i)+ (ii)] ₹ 9,80,000

*Note: Provision = (3,80,000-20,000 mutual owing)∗5% = 18,000

Since debtors of MG include 20,000 due from VT Ltd & these are to be cancelled after takeover so no
provision created on this portion.
If creditors of MG include 20,000 due to VT Ltd. then provision will be on full amount of debtors as creditors
include 20,000 & not debtors & cancellation entry would be passed in similar manner

4(b). (H & S)
As per AS 4, 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, 2020 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, 2020.
4(c). (H & S)
As per AS 5, 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 ₹ 2 lakhs, is not a prior period item.
Therefore, in the given case expenses amounting ₹ 2,00,000 (i.e. ₹ 9,00,000 – ₹ 7,00,000) relating to the
previous year recorded in the current year, should not be regarded as prior period item.

5(a). (H & S)
Books of Sundar
Investments in Equity shares in X Ltd.
No. of No. of
Date Particulars Amount Date Particulars Amount
Shares Shares

By Bank A/c
(Pre-
01.04.2021 To Balance b/d 25,000 3,75,000 31.10.2021 - 10,000
acquisition
Dividend)

By Bank A/c
20.06.2021 To Bank A/c 5,000 80,000 15.11.2021 (Sale of 25,000 3,75,000
Shares)

By Balance
16.08.2021 To Bonus Issue 5,000 - 31.12.2021 20,000 2,64,444
c/d (Bal. Fig.)

To Bank A/c
30.09.2021 10,000 1,50,000
(Right Shares)

To P&L A/c
15.11.2021 - 44,444
(Profit on Sale)

45,000 6,49,444 45,000 6,49,444

Profit & Loss Account
Particulars Amount Particulars Amount

To Balance c/d 1,04,444 By Sale of Rights 10,000

By Profit Transferred 44,444

By Dividend 50,000

1,04,444 1,04,444
Working Notes:
25,000+5,000
1. Bonus shares = 6
×1 = 5,000 shares
 25,000+5,000+5,000
2. Right shares = × 3 = 15,000 shares
7
Shares subscribed by S = 15,000∗ 2/3 = 10,000 shares Value of right shares subscribed = 10,000 shares
@ ₹ 15 per share = ₹1,50,000
3. Calculation of sale of right entitlement: 5,000 shares × ₹2 per share = ₹10,000
Amount received from sale of rights will be credited to 𝑃& L A/c as per para 13 of AS 13 'Accounting for
Investments'.
4. Dividend received on investment held as on 1st April, 2021 = 25,000 shares × ₹10 × 20% = ₹50,000 will
be transferred to Profit and Loss A/c
5. Dividend received on shares purchased on 20th June, 2021 = 5,000 shares × ₹10 × 20% = ₹10,000 will be
adjusted to Investment A/c
6. Calculation of profit on sale of shares
Cost of total holdings of 45,000 shares (on average basis) = ₹3,75,000 + ₹80,000 + ₹1,50,000 - 10,000 =
₹5,95,000
Average cost of 25,000 shares would be = 5,95,000/45, 000∗ 25,000=3,30,556
Sale proceeds of 25,000 equity shares sold = 3,75,000
Profit on sale == Sales proceeds - Average cost =3,75,000 - 3,30,556 = 44,444
7. Calculation of closing value of shares (on average basis) as on 31st December, 2021 = 5,95,000 ×
20,000/45,000 = 2,64,444

5(b). (H & S)
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.

5(c). (H & S)
The entries to be passed would be:
Accumulated depreciation A/c Dr.
To Asset A/c
55,000 55,000
(Being elimination of accumulated depreciation
against the cost of the asset)

Asset A/c Dr.

To Revaluation Surplus 20,000 20,000
(Being increase of net asset value to Fair value)
Note: The net result is that the asset has a carrying amount of ₹ 65,000 [1,00,000 - 55,000 + 20,000.]

6(a). (H & S)
a) Interest for the period 2021-22 = US$ 10 lakhs x 4% × ₹ 62 per US$ = ₹24.80 lakhs
b) Increase in liability towards the principal amount = US $ 10 lakhs × ₹ (62 - 56) = ₹ 60 lakhs
c) Interest that would have resulted if the loan was taken in Indian currency = US$ 10 lakhs × ₹ 56 × 10.5%
= ₹ 58.80 lakhs
 d) Difference between interest on local currency borrowing and foreign currency borrowing = ₹ 58.80 lakhs
- ₹ 24.80 lakhs = ₹34 lakhs. Therefore, out of ₹ 60 lakhs increase in the liability towards principal amount,
only ₹ 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would be ₹ 58.80
lakhs being the aggregate of interest of ₹ 24.80 lakhs on foreign currency borrowings plus the exchange
difference to the extent of difference between interest on local currency borrowing and interest on
foreign currency borrowing of ₹ 34 lakhs. Hence, ₹ 58.80 lakhs would be considered as the borrowing
cost to be accounted for as per AS 16 “Borrowing Costs” and the remaining ₹ 26 lakhs (60 - 34) would be
considered as the exchange difference to be accounted for as per AS 11 “The Effects of Changes in Foreign
Exchange Rates”.

6(b). (H & S)
Desire Limited amortized ₹ 20,00,000 per annum for the first two years i.e. ₹ 40,00,000. 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 amortization may be found as follows
Year Net cash flows Amortization Ratio Amortization Amount

1 - 0.200 20,00,000

2 - 0.200 20,00,000

3 45,00,000 0.225 13,50,000

4 42,00,000 0.210 12,60,000

5 40,00,000 0.200 12,00,000

6 38,00,000 0.190 11,40,000

7 35,00,000 0.175 10,50,000

Total 2,00,00,000 1.000 1,00,00,000

It may be seen from above that from third year onwards, the balance of carrying amount i.e., ₹ 60,00,000 has
been amortized in the ratio of net cash flows arising from the product of Desire Ltd.

6(c). (H & S)
According to 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 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.

6(d). (H & S)
As per para 12 of AS 9 ‘Revenue Recognition’, ‘In a transaction involving the rendering of services,
performance should be measured either under the completed service contract method or under the
proportionate completion method, whichever relates the revenue to the work accomplished’. In the given
case, income accrues when the related advertisement appears before public. The advertisement service
would be considered as performed on the day the advertisement is seen by public and hence revenue is
recognized on that date. In this case, it is 15.03.2020, the date of publication of the magazine. Hence, ₹
 3,00,000 (₹ 2,40,000 + ₹ 60,000) is recognized as income in March, 2020. The terms of payment are not
relevant for considering the date on which revenue is to be recognized. ₹ 60,000 is treated as amount due
from advertisers as on 31.03.2020 and ₹ 2,40,000 will be treated as payment received against the sale.
However, if the publication is delayed till 02.04.2020 revenue recognition will also be delayed till the
advertisements get published in the magazine. In that case revenue of ₹ 3,00,000 will be recognized for the
year ended 31.03.2021 after the magazine is published on 02.04.2020. The amount received from sale of
advertising space on 10.03.2020 of ₹ 2,40,000 will be considered as an advance from advertisers for the year
ended 31st March, 2020.

7a(i). (H & S)
Journal Entries

Particulars L.F. ₹ ₹
a) Equity share capital A/c Dr. 20,00,000

To Equity Stock A/c 1,00,000

To 12% Fully convertible Debentures A/c 19,00,000
(Being conversion of 2 lakh equity shares of ₹ 10 each
into stock of ₹1,00,000 and balance as 12% fully
convertible debentures as per resolution dated...)
b) Equity Share Capital A/c (₹2.50) Dr. 1,00,00,000

To Equity Share Capital A/c (₹10) 1,00,00,000

(Being consolidation of 40 lakh shares of ₹2.50 each into
10 lakh shares of ₹10 each as per resolution dated...)
c) 11% Preference shares capital A/c (₹50) 5,00,00,000

To 11% Preference shares capital A/c (₹10) 5,00,00,000

(Being subdivision of 10 lakh preference shares of ₹50 each

into 50 lakh shares of ₹10 each as per resolution dated....)
d) 12% Preference shares capital A/c 5,00,000

To 14% Preference Share capital A/c 3,00,000

To 12% non-cumulative preference shares capital A/c 2,00,000

(Being conversion of 12% Preference shares of ₹500,000 into
14% preference shares of ₹3,00,000 and 12% non-cumulative
preference shares of ₹2,00,000 as per resolution dated...)

7a(ii). (H & S)
According to AS 17 “Segment Reporting”, segment assets do not include income tax assets. Therefore, the
revised total assets are ₹ 8.8 crores [₹ 10 crores – (₹ 0.5 + ₹ 0.4 + ₹ 0.3)].
Segment X holds total assets of ₹ 1.5 crores (₹ 2 crores – ₹ 0.5 crores);
Segment Y holds ₹ 2.6 crores (₹ 3 crores – ₹ 0.4 crores); and Segment Z holds ₹ 4.7 crores (₹ 5 crores – ₹ 0.3
crores).
Thus all the three segments hold more than 10% of the total assets, all segments are reportable segments.
7b(i). (H & S)
a) As per AS 29, 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. Liability is a present obligation of the
enterprise arising from past events, the settlement of which is expected to result in an out how from the
enterprise of resources embodying economic benefits. In the given case, there are 75% chances that the
penalty may not be levied. Accordingly, Saharsh Ltd. Should not make the provision for penalty. However,
provision should be made for remaining 50% fees of the lawyer in the financial statements of financial
year 2019-2020.
b) Loss due to accident ₹ ₹30,00,000
Insurance claim receivable by company = ₹30,00,000 × 90% = ₹27,00,000
Loss to be recognised in the books for 2019-2020 ₹3,00,000
Insurance claim receivable to be recorded in the books ₹27,00,000
Compensation claim by dealer against company to be provided for in the books
= ₹30,00,000 × 15% = ₹4,50,000

7b(ii). (H & S)
According to AS 15 ‘Employee Benefits’, actuarial gains and losses should be recognized immediately in the
statement of profit and loss as income or expense.
Therefore, surplus amount of ₹ 6 lakhs is required to be credited to the profit and loss statement of the
current year.

7(c). (H & S)
Consolidated Balance Sheet of Virat Ltd. and its Subsidiary Anushka Ltd. as at 31st March, 2021
Particulars Note No. Amount
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,00,000
(b) Reserves and Surplus 2 1,80,000
(2) Minority Interest 3 1,00,000
(3) Non Current Liabilities
(a) Long Term Borrowings 4 3,00,000
(4) Current Liabilities
(a) Trade Payables 5 2,00,000
Total 13,80,000
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
(i) Property, Plant & Equipment 6 7,00,000
(2) Current assets
(a) Inventories 7 3,60,000
(b) Trade Receivables 8 2,20,000
(c) Cash at Bank 9 1,00,000
Total 13,80,000
Notes to Accounts
1 Share Capital
60,000 equity shares of ₹ 10 each 6,00,000
2 Reserves and Surplus
General Reserve 1,00,000
Add: General Reseve of Anushka Ltd (Post) (80%) 80,000 1,80,000
3 Minority Interest
20% share in Anushka Ltd.
Paid-up value of (4,00,000 x 20%) 80,000
Add: 20% share of post-acquisition profits [(20% of 1,00,000) 20,000 1,00,000
4 Long Term Borrowings
Virat Ltd. 2,00,000
Anushka Ltd. 1,00,000 3,00,000
5 Trade Payables
Virat Ltd. 1,00,000
Anushka Ltd. 1,00,000 2,00,000
6 PPE
Virat Ltd. 4,00,000
Anushka Ltd. 3,00,000 7,00,000
7 Inventories
Virat Ltd. 1,60,000
Anushka Ltd. 2,00,000 3,60,000
8 Trade Receivables
Virat Ltd. 80,000
Anushka Ltd. 1,40,000 2,20,000
9 Cash & Cash Equivalents
Virat Ltd. 40,000
Anushka Ltd. 60,000 1,00,000
Working Notes:
% of holding = Virat Ltd: = 80% Minority Interest %= 20%
Analysis of General Reserve of Anushka Ltd.
Since Virat Ltd. holds shares in Anushka Ltd. since its incorporation, the entire Reserve balance of 1,00,000
will be Revenue (Post acquisition)
Cost of Control or Goodwill
Cost of Investment 3,20,000
Less: Paid-up value of 80% shares 3,20,000
80% share of pre-acquisition profits Nil (3,00,000)
Cost of Control Nil

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