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The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING
Question No.1is compulsory and candidates are required to answer any fivequestions from the
remaining sixquestions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Working notes should form part of the answers.
Question 1
(a) An employee Roshan has joined a company XYZ Ltd. in the year 2013. The annual
emoluments of Roshan as decided is ` 14,90,210. The company also has a policy of
giving a lump sum payment of 25% of the last drawn salary of the employee for each
completed year of service if the employee retires after completing minimum 5 years of
service. The salary of the Roshan is expected to grow @ 10% per annum.
The company has inducted Roshan in the beginning of the year and it is expected that he
will complete the minimum five year term before retiring.
What is the amount the company should charge in its Profit and Loss account every year
as cost for the Defined Benefit obligation? Also calculate the current service cost and the
interest cost to be charged per year assuming a discount rate of 8%.
(P.V factor for 8% - 0.735, 0.794, 0.857, 0.926, 1)
(b) Quick Ltd. is a company engaged in the trading of spare parts used in the repair of
automobiles. The company has been regular in depositing the tax, as such there is no
liability of Income Tax etc. for the Financial Year 2012-13.
The figures for the year are as under:
Income chargeable to tax ` 211.64 lakhs
Total income after adjustments ` 228.48 lakhs
Tax thereon ` 74.13 lakhs
TDS deducted during the year ` 30.45 lakhs
Tax paid for the year ` 43.68 lakhs
The company has prepared its Balance Sheet as per above figures. However, during the
assessment proceeding held before the finalization of the Balance Sheet the Income Tax
Officer has issued demand of ` 7.52 lakhs, insisting that this amount of TDS has not
been uploaded online and thus is not acceptable as deduction.
The company has in reply to the same filed a rectification with the Assessing Officer.
The company is trying to collect the TDS certificates, but ` 2.39 lakhs deducted by XY
LTD., is not traceable. The rectification is lying pending with the Assessing Officer.
Please suggest the treatment of ` 2.39 lakhs and ` 7.52 lakhs in Balance Sheet.
The Institute of Chartered Accountants of India
2 FINAL EXAMINATION: MAY, 2014

(c) Comptech Ltd. having office at Chennai, acquired a sophisticated three dimensional (3D)
computer printer having all inclusive MRP (Maximum Retail Price) of ` 50 lakhs from a
supplier located at New Delhi. The terms of the purchase were as under:
(i) The supplier would buy back the existing unit with Comptech that has carrying
amount of ` 10.20 lakhs. Prevailing CST rate is 2%.
(ii) The supplier would give a special discount of 10% on MRP to Comptech
considering their long standing relationship.
(iii) A cash payment of ` 38.25 lakhs would be made by Comptech Ltd. to the supplier.
(iv) Accessories required to operate the machine costing ` 7.60 lakhs (inclusive of all
taxes) will be purchased by Comptech.
(v) The supplier will deliver free of cost certain heavy duty cables etc. having MRP of
` 5.75 Iakhs, that are required to run the machine.
(vi) Transit insurance cost will be borne by Comptech @ 2% of MRP.
(vii) Freight and other incidentals amounting to ` 2.30 lakhs is borne by Comptech.
You are required to arrive at the cost of the new asset and show the profit/(loss) incurred
by Comptech on the buy back arrangement and also draft the Journal Entries to record
the above transaction.
(d) Compute Basic and Adjusted Earnings per share from the following information:
Net Profit for 2012-13 ` 22 lakhs
Net Profit for 2013-14 ` 33 lakhs
No. of shares before Rights Issue 1,10,000
Rights issue Ratio One for Every Four Held
Rights Issue Price ` 180
Date of exercising Rights option 31.7.2013 (fully subscribed on this date)
Fair value of share before Rights Issue ` 270
All workings may be rounded off to two decimals. (4 x 5 = 20 Marks)
Answer
(a) Calculation of Defined Benefit Obligation
Expected last drawn salary = ` 14,90,210 x 110% x 110% x 110% x 110% x 110%
= ` 24,00,000
Defined Benefit Obligation (DBO) = ` 24,00,000 x 25% x 5 = ` 30,00,000
Amount of ` 6,00,000 will be charged to Profit and Loss Account of the company every
year as cost for Defined Benefit Obligation.
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 3
Calculation of Current Service Cost
Year Equal apportioned amount
of DBO [i.e. ` 30,00,000/5
years]
Discounting @ 8%
PV factor
Current service cost
(Present Value)
a b c d = b x c
1 6,00,000 0.735 (4 Years) 4,41,000
2 6,00,000 0.794 (3 Years) 4,76,400
3 6,00,000 0.857 (2 Years) 5,14,200
4 6,00,000 0.926 (1 Year) 5,55,600
5 6,00,000 1 (0 Year) 6,00,000
Calculation of Interest Cost to be charged per year
Year Opening balance Interest cost Current service
cost
Closing balance
a b c = b x 8% d e = b + c + d
1 0 0 4,41,000 4,41,000
2 4,41,000 35,280 4,76,400 9,52,680
3 9,52,680 76,214 5,14,200 15,43,094
4 15,43,094 1,23,447 5,55,600 22,22,141
5 22,22,141 1,77,859* 6,00,000 30,00,000
*Due to approximations used in calculation, this figure is adjusted accordingly.
(b) As per para 10 of AS 29 Provisions, Contingent Liabilities and Contingent Assets, 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. 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.
In the given case, TDS shall be allowed by the IT department on submission of duplicate
TDS certificates. Since the company is making efforts and is hopeful for its ultimate
collection, contingent liability will be made for ` 2.39 lakhs in the books of account.
Further as per para 15 of the standard, where it is more likely that no present obligation
exists at the balance sheet date and the possibility of an outflow of resources embodying
economic benefits is remote, no contingent liability is disclosed.
The Institute of Chartered Accountants of India
4 FINAL EXAMINATION: MAY, 2014

TDS certificates for ` 5.13 lakhs (` 7.52 lakhs less ` 2.39 lakhs) have been submitted
and the company has filed a rectification with the Assessing Officer. Therefore, the
possibility of an outflow of resources embodying economic benefits is remote; the
company shall not disclose it as contingent liability. This amount should be disclosed by
way of a note to the accounts.
Note: An alternative view can also be considered on the basis of the paragraph 14 of
the standard which states that a provision should be recognised in the books 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.
Accordingly, in the given case, since there is a probability of outflow of resources and
also the amount can be quantified on account of non-traceability of TDS certificates, a
provision may be made for ` 2.39 lakhs in the books of account.
Regarding the balance amount of ` 5.13 lakhs (` 7.52 lakhs less ` 2.39 lakhs), since
TDS certificated have been submitted, it is likely that the Income-tax Officer may accept
the rectification filed by the assessee. However, since the TDS details have not been
uploaded online because of which demand has been issued, there may be a possibility
that the rectification may also not be accepted. Therefore, taking a conservative
approach, ` 5.13 lakhs may be disclosed as a contingent liability.
(c) As per para 22 of AS 10 Accounting for Fixed Assets, when a fixed asset is acquired in
part exchange for another asset, the cost of the asset acquired should be recorded either
at fair market value or at the net book value of the asset given up, adjusted for any
balancing payment. In the given question the FMV of the new machine is its MRP net of
special concession given to the buyer.
1. Calculation of Cost of New Asset
` in lakhs
MRP of Printer 50
Less: Special Discount 10% of MRP 5
45
Add: Accessories 7.6
Add: Transit Insurance Cost (2% of 50 lakh) 1
Add: Freight and other incidental amount 2.30
55.9
2. Calculation of Profit /Loss incurred on buy-back arrangement
` in lakhs
Discounted price of new machine 45.00
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 5
Less: Cash portion thereof 38.25
FMV of old machine 6.75*
Less: Book Value thereof 10.20
Loss on Buy back 3.45
*This includes CST of 2%. Thus the CST will be 6.75 x 2/102 = 0.13
lakh

3. Journal Entries
1. 3D Computer Printer A/c Dr. 49.15
To Cash A/c 49.15
(Being the expenses incurred for purchase of 3D computer cash payment
38.25 + accessory 7.6 + insurance 1 and freight 2.3)
2. 3D Computer Printer A/c Dr. 6.75
Loss on buy back of old machine A/c Dr. 3.45
To Old Machine A/c 10.20
(Being the transfer of FMV of ` 6.75 lakhs of old machine to new printer under
buy-back scheme and recognition of loss on buy back)
Note: It is assumed that the cash payment of ` 38.25 lakhs is the full and final
payment to the supplier for the printer.
(d) Computation of earnings per share
EPS for the year 2012-13 as originally reported
= ` 22,00,000/1,10,000 shares = ` 20
EPS for the year 2012-13 restated for rights issue
= ` 22,00,000/ (1,10,000 shares x 1.07) = ` 18.69
EPS for the year 2013-14 including effects of rights issue
= (1,10,000 x 1.07 x 4/12) + (1,37,500 x 8/12) = 1,30,900
=
33,00,000
=25.21
1,30,900



Working Note:
1. Calculation of Theoretical ex-rights fair value per share
Fair value of shares immediately prior to exercise of rights + Total amount received from exercise
Number of shares outstanding prior to exercise + Number of shares issued in the exercise

The Institute of Chartered Accountants of India
6 FINAL EXAMINATION: MAY, 2014


( 2701,10,000 shares) + ( 180 27,500 Shares) 3,46,50,000
1,10,000 + 27,500 Shares 1,37,500
=
` `

Theoretical ex-rights fair value per share = ` 252
2. Calculation of Computation of adjustment factor:
share per value rights - ex l Theoretica
rights of exercise to prior share per value Fair

(270)
(252)
`
`

= 1.071
Question 2
A Company Q is willing to sell its business. The purchaser has sought professional advice for
the valuation of the goodwill of the company. He has the last audited financial statements
together with some additional information. Help him to ascertain the correct price for the
purpose of purchase:
The extract of the Balance Sheet as on 31-3-2014 is as under:
Liabilities ` Assets `
Equity Share Capital (shares of
` 100 each)
9,50,000 Goodwill 2,75,000
8% Preference Share Capital
(shares of ` 100 each)
2,25,000 Land & Building 5,45,000
Reserves & Surplus 10,25,500 Plant & Machinery 4,55,000
9% Debentures 5,60,000 Investments in shares 4,85,000
Current Liabilities 3,25,640 Inventories 3,80,000
Trade Receivables (net) 4,25,620
Cash & Bank balance 5,20,520
30,86,140 30,86,140
(1) The purchaser wants to acquire all the equity shares of the company.
(2) The Debentures will be redeemed at a discount of 25% of the value in Balance Sheet and
investments in share will be sold at their present market value which is quoted as
` 4,95,200. The above will be prior to the purchase of the equity shares.
For the purpose of pricing of Goodwill:
(3) The normal rate of return on net assets for equity shares is 10%.
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 7
(4) Profits for the past three years after debenture interest but before Preference Share
Dividend have been as under:
31-3-2014 ` 2,95,000
31-3-2013 ` 4,99,000
31-3-2012 ` 3,25,000
(5) Goodwill is valued at three years purchase of the adjusted average super profit.
(6) In the year 2013, 20% of the profit mentioned above was due to non recurring transaction
resulting in increase of profit.
(7) The Land & Building has a current rental value of ` 62,400 and a 8% return is expected
from the property.
(8) On 31-3-2014, 8% of debtors existing on the date had been written as bad and charged
to Profit and Loss Account as Provision for Bad debts. The same are now recoverable
Tax is applicable at 35%.
(9) A claim of compensation long contingent of ` 25,000 has perspired and is to be
accounted for.
(10) No Debenture interest shall be payable in future due to its redemption. (16 Marks)
Answer
Valuation of goodwill: Super profits method
Particulars ` `
Net trading assets attributable to equity share holders
As computing in (WN 1) 23,18,506
Less: Preference share Capital (2,25,000) 20,93,506
Normal Rate of Return (NRR) to equity share holders 10%
Normal Profit available to equity share holders (a b) 2,09,351
Future Maintainable Profits (FMP) to equity share holders
As computed in (WN 3) 3,75,096
Less: Preference dividend* (8% of 2,25,000) (18,000) 3,57,096
Super profits to equity share holders 1,47,745
Goodwill (1,47,745 x 3) 4,43,235
*Since, NRR is given as percentage of net assets attributable to equity shareholders,
preference share capital and preference share dividend have been deducted from the net
assets and future maintainable profit respectively.
The Institute of Chartered Accountants of India
8 FINAL EXAMINATION: MAY, 2014

Value Per Equity Share
Net Trading Assets attributable to equity shareholders ` 20,93,506
Add: Goodwill ` 4,43,235
` 25,36,741
Number of Equity Shares = 9,500 shares,
Value per share=
25,36,741
9,500
= ` 267 (approx.)
Working Notes:
1. Computation of net trading assets
Particulars ` `
Sundry assets
i Land & Building (62,400 8%) 7,80,000
ii Plant and Machinery 4,55,000
iii Inventory 3,80,000
iv Trade receivables (4,25,620 92%) 4,62,630
v Bank balance (given balance 5,20,520 + Sale of
investment 4,95,200 - redemption of debentures
5,60,000 75%)


5,95,720


26,73,350
Less: Outside liabilities:
i Current Liabilities 3,25,640
ii Contingent Liability now to be accounted for 25,000
iii Tax provision (WN 2) 4,204 (3,54,844)
Net assets 23,18,506
2. Calculation of tax provision
`
Profit on reversal of provision for bad debts 37,010
Loss on recognizing omitted claim (assuming tax deductible) (25,000)
Net incremental profit on which tax is payable 12,010
Tax provision 35% 4,204
3. Computation of future maintainable profit for the year ended on 31
st
March
Particulars 2012 2013 2014
Profit after tax 3,25,000 4,99,000 2,95,000
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 9
Less: Non-recurring profits (after tax) (20% of 2013
Profit)
- (99,800) -
Less: Claims not recorded (after tax)
[25,000 x (1-35%)]
- - (16,250)
Add: Provision no longer required (net of tax)
[4,25,620 8/92 (1-35%)]

-

-

24,057
Adjusted profits after tax 3,25,000 3,99,200 3,02,807

Simple average of the profits (as profits are fluctuating) 3,42,336
Adjustments for items which will not be reflected in future
Add: Debenture interest (net of tax) [5,60,000 9% (1 0.35)] 32,760
Future maintainable profit [for shareholders- both preference and equity) 3,75,096
Assumptions
1. Tax effect has been ignored on profit on sale of investments and discount on
redemption of debentures.
2. Assets and liabilities are recorded at realizable value or fair value. In the absence of
information, book values are assumed to be fair values.
3. Additional depreciation on revaluation of property is ignored.
4. Profits for past three years given in the question have been assumed as profits after
tax.
Question 3
The Balance Sheets of the Greatness Group of Companies as at 31
st
March, 2014 is given
below:
Capital & Liabilities Greatest Ltd. BIG Ltd. SMALL Ltd.
` ` `
Share Capital:
Ordinary shares of ` 10 5,00,000 2,00,000 1,00,000
General reserve 1,00,000 50,000 30,000
Profit & Loss Account 2,00,000 1,00,000 50,000
Creditors 3,00,000 2,00,000 1,00,000
Total 11,00,000 5,50,000 2,80,000
Assets:
Fixed Assets 7,75,000 4,10,000 2,35,000
The Institute of Chartered Accountants of India
10 FINAL EXAMINATION: MAY, 2014

Investments:
16,000 shares in BIG Ltd. 2,00,000 - -
6,000 shares in SMALL Ltd. - 90,000 -
Other (Non-current) 25,000 - 15,000
Current Assets 1,00,000 50,000 30,000
Total : 11,00,000 5,50,000 2,80,000
(1) The investment in BIG Ltd. was made on 1
st
April, 2007 and that in SMALL Ltd. was
made on 1
st
April, 2009.
(2) The Balances in Reserves and P & L Account on relevant dates are as under:
BIG Ltd. 1
st
April 2007 1
st
April 2009
` `
Reserves 20,000 22,000
P&L Account 60,000 68,000

SMALL Ltd. 1
st
April 2007 1
st
April 2009
` `
Reserves 8,000 10,000
P&L Account 17,000 20,000
(3) Current Assets of SMALL Ltd. includes inventories of ` 10,800 acquired at a mark up of
20% from Greatest Ltd.
You are required to prepare the Consolidated Balance Sheet of the group as at 31
st
of
March, 2014. (16 Marks)
Answer
Consolidated Balance Sheet of Greatest Ltd. with its subsidiaries
Big Ltd. and Small Ltd. as on 1st April, 2014
Particulars Note `
I. EQUITY AND LIABILITIES
1. Shareholders funds
a. Share capital 1 5,00,000
b. Reserves and surplus 2 3,86,600
c. Minority interest (W.N.3) 1,51,600

The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 11
2. Current Liabilities
Trade payables 3 6,00,000
Total 16,38,200
II. ASSETS
1. Non-current assets
(i) Fixed assets
Tangible assets 4 14,20,000
(ii) Other non current assets 5 40,000
2. Current assets 6 1,78,200
16,38,200
Notes to the financial statements
Particulars `
1 Share capital
Authorised, Issued, subscribed and fully paid up
50,000 shares of ` 10 each 5,00,000
2 Reserves and surplus
General Reserve (WN 5) 1,33,600
Capital Reserve (WN 4) 8,400
Profit & loss A/c (WN 5) 2,44,600 3,86,600
3 Trade payables
Greatest Ltd. 3,00,000
Big Ltd. 2,00,000
Small Ltd. 1,00,000 6,00,000

4 Tangible assets
Greatest Ltd. 7,75,000
Big Ltd. 4,10,000
Small Ltd. 2,35,000 14,20,000
5 Other non current assets
Greatest Ltd. 25,000
Small Ltd. 15,000 40,000
6 Current assets
Greatest Ltd. 1,00,000
Big Ltd. 50,000
The Institute of Chartered Accountants of India
12 FINAL EXAMINATION: MAY, 2014

Small Ltd. 30,000
Less: Unrealised profit on downstream transaction

20
10,800
120




(1,800) 1,78,200
Working Notes:
1. Apportionment of reserve & profits of Small Ltd.
Particulars Pre-acquisition Post acquisition
Capital Profit Reserve P&L
` ` `
Profit and loss A/c 20,000 - 30,000
General Reserve 10,000 20,000 -
Total 30,000 20,000 30,000
Big Ltd.s share (60%) 18,000 12,000 18,000
Minority interest (40%) 12,000 8,000 12,000
2. Apportionment of reserve & profits of Big Ltd. (Indirect Method)
Particulars Pre-acquisition Post acquisition
Capital Profit Reserve P&L
` ` `
Share from Small Ltd. 18,000 12,000 18,000
Profit and Loss A/c 60,000 40,000
Reserves 20,000 30,000
Total 98,000 42,000 58,000
Greatest Ltd. share (80%) 78,400 33,600 46,400
Minority interest (20%) 19,600 8,400 11,600
3. Calculation of Minority interest
Particulars Big Ltd. Small Ltd.
(20%) (40%)
` `
Equity share capital 40,000 40,000
Capital profit 19,600 12,000
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 13
Revenue Profit 11,600 12,000
Revenue Reserve 8,400 8,000
Total 79,600 72,000
Total minority interest 1,51,600
4. Calculation of Cost of control
Particulars Greatest Ltd. in
Big Ltd.
Big Ltd. in
Small Ltd.
(80%) (60%)
Cost of investment: 2,00,000 90,000
Less: Share of net assets as on the date of
acquisition:

Share capital (1,60,000) (60,000)
Capital profit (78,400) -
Goodwill/(Capital reserve) (38,400) 30,000
Capital reserve for Consolidated Balance Sheet 8,400
5. Consolidated Reseves & P/L (Post acquisition)
Particulars Reserves Profit and Loss A/c
`

`

Greatest Ltd. Balances as per its balance sheet 1,00,000 2,00,000
Add: Share of post acquisition Reserves /P&L of Big Ltd. 33,600 46,400
Less: Unrealized profit on downstream transaction (1,800)
Reserves for consolidated balance sheet 1,33,600 2,44,600
Question 4
(a) Quittle Ltd. announced a Stock Appreciation Rights (SAR) Scheme to its employees on
1
st
April, 2011. The salient features of the scheme is given below:
(1) The scheme will be applicable to employees who have completed three years of
continuous service with the company.
(2) Each eligible employee can claim cash payment amounting to the excess of Market
Price of the company's shares on exercise date over exercise price in respect of 60
(sixty) shares.
(3) The exercise price is fixed at ` 75 per share.
The Institute of Chartered Accountants of India
14 FINAL EXAMINATION: MAY, 2014

(4) The option to exercise the SAR is open from 1
st
April, 2014 for 45 days and the
same vested on 975 employees.
(5) The intrinsic value of the company's share on date of closing (15
th
May, 2014) was
` 30 per share.
(6) The fair value of the SAR was ` 20 in 2011-12; ` 25 in 2012-13 and ` 27 in
2013-14.
(7) In 2011-12, the expected rate of employee attrition was 5% which rate was doubled
in the next year.
(8) Actual attrition year wise was as under:
2011-12 35 employees of which 5 had served the company for less than 3 years.
2012-13 30 employees of which 20 employees served for more than 3 years.
2013-14 20 employees of which 5 employees served for less than 3 years.
You are required to show the Provision for Stock Appreciation Rights Account by Fair
Value Method. (8 Marks)
(b) 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 31
st
March, 2014:
Asset Funded
Interest Overdue but recognized in
Profit & loss
Net Book Value of
Assets outstanding
Period Overdue Interest Amount
(` in crore) (` in crore)
LCD Televisions Upto 12 months 480.00 20,123.00
Washing Machines For 24 months 102.00 2,410.00
Refrigerators For 30 months 50.50 1,280.00
Air Conditioners For 45 months 26.75 647.00
You are required to calculate the amount of provision to be made. (4 Marks)
(c) The capital structure of W Ltd. whose shares are quoted on the NSE is as under:
Equity Shares of ` 100 each fully paid ` 505 lakhs
9% Convertible Pref. Shares of ` 10 each ` 150 lakhs
12% Secured Debentures of ` 10 each 5,00,000
Reserves ` 101 lakhs
Statutory Fund ` 50,50,000
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 15
The Statutory Fund is compulsorily required to be invested in Government Securities.
The ordinary shares are quoted at a premium of 500%; Preference Shares at ` 30 per
share and debentures at par value.
You are required to ascertain the Market Value added of the company and also give your
assessment on the market value added as calculated by you. (4 Marks)
Answer
(a) Provision for SARs Account
Year Particulars Amount Year Particulars Amount
2011-12 To Balance c/d 3,56,667

2011-12 By Employees
Compensation

3,56,667
3,56,667 3,56,667
2012-13 To Balanced c/d 8,18,100 2012-13 By Balanced B/d 3,56,667
-

By Employees
Compensation

4,61,433
8,18,100 8,18,100
2013-14 To Balance c/d 15,79,500 2013-14 By Balance B/d 8,18,100


By Employees
Compensation

7,61,400
15,79,500 15,79,500
2014-15 To Bank
(975x60x30)
17,55,000 2014-15 By Balance B/d
By Employees
15,79,500
Compensation 1,75,500
17,55,000 17,55,000
Working Notes:
1. No. of eligible employees = 975 + 35 - 5 + 20 + 20 - 5 = 1040
2. Expenses to be recognized each year:
2011-12 2012-13 2013-14
No. of SARS to
Vest
1040 x 0.95 x
0.95 x .95 x 60
1040 - (35-5) x 0.90 x
0.90 x 60
1040 - (35-5) 20 -
(20-5) x 60
53,500

49,086 58,500
Fair Value of SAR 20 25 27

SARs expected to vest in years 2011-12 and 2012-13 can also be worked out by rounding off the
number of employees.
The Institute of Chartered Accountants of India
16 FINAL EXAMINATION: MAY, 2014

Total Fair Value 10,70,000 12,27,150 15,79,500
Expenses to be
recognized each
year
10,70,000 x1/3 =
3,56,667
12,27,150x2/3-3,56,667
= 4,61,433
15,79,500 (3,56,667
+ 4,61,433) = 7,61,400
3. Expenses to be recognized in the year 2014-15.
Total intrinsic Value of SARs less expense recognized till date.
= (975 x 60 x 30) -15,79,500 = 1,75,500.
(b) On the basis of the information given, in respect of hire purchase and leased assets,
additional provision shall be made as under:
(` in crore)
(a) Where hire charges are overdue
upto 12 months
Nil -
(b) Where hire charges are overdue
for more than 12 months but upto
24 months
10% of the net book value
10% x 2,410
241
(c) Where hire charges are overdue
for more than 24 months but upto
36 months
40 percent of the net book value
40% x 1,280
512
(d) Where hire charges or lease
rentals are overdue for more than
36 months but upto 48 months
70 percent of the net book value
70% x 647
452.90
Total 1,205.90
(c) Market Value Added (MVA) is the difference between the current market value of a firm
and the capital contributed by investors (both debentureholders and shareholders). In
other words, it is the sum of all capital claims held against the company plus market
value of debt and equity. If MVA is positive, firm has added value.
Market Value Added = Market value of firm less amount invested in the firm
` in lakhs
Equity Share Capital (market value)
(505 lakhs x 600%) 3030
Preference share capital (15,00,000 x 30) 450
Debentures 50
Current market value of firm 3,530
Less: Equity Share Capital 505
Preference share capital 150
Reserves 101
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 17
Debentures
Statutory Reserve
50
50.50

(856.50)
Market Value Added 2,673.50
The significant Market Value addition implies that the management of W Ltd. has
created wealth for its shareholders and that market investors are willing to pay a price
greater than the historical net worth of the company.
Question 5
The summarized Balance Sheets of A Ltd. and B Ltd., as at 31-3-2014 were as follows:
(` in lakhs)
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share Capital Fixed Assets 60 18
(Share of ` 10 each) 50 10 Investment in B Ltd.
General Reserves 50 20 (60,000 shares) 6 -
Profit & Loss Account 20 15 Debtors 35 5
Secured Loan 20 3 Inventories 30 25
Current Liabilities 30 2 Cash at bank 39 2
170 50 170 50
A Ltd. holds 60% of the paid up capital of B Ltd. and balance is held by a foreign company.
The foreign company agreed with A Ltd. as under:
(i) The shares held by the foreign company will be sold to A Ltd. at ` 50 above than nominal
value of per share.
(ii) The actual cost per share to the foreign company was ` 11, gain accruing to foreign
company is taxed @ 20%. The tax payable will be deducted from the sale proceeds and
paid to Government by A Ltd., 50% of the consideration (after payment of tax) will be
remitted to foreign company by A Ltd., and also any cash for fractional shares allotted.
(iii) For the balance consideration A Ltd. would issue its shares at their intrinsic value.
It was also decided that A Ltd. would also absorb B Ltd., simultaneously by writing down the
fixed assets of B Ltd. by 10%. The Balance Sheet figure included a sum of ` 1,00,000 due by
B Ltd. to A Ltd. and stock of A Ltd. included stock of ` 1,50,000 purchased from B Ltd., who
sold them at cost plus 20%.
The entire arrangement was approved and put through by all concern effective from 1-4-2014.
You are required to prepare the Balance Sheet of A Ltd., after absorption of B Ltd. Workings
should form part of your answer. (16 Marks)

The Institute of Chartered Accountants of India
18 FINAL EXAMINATION: MAY, 2014

Answer
A Ltd.
Balance Sheet as at 1
st
April, 2014
Particulars Note No. Amount (`)

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 53,34,660

(b) Reserves and Surplus 2 89,64,320
(2) Non-Current Liabilities
Long-term borrowings 3 23,00,000

(3) Current Liabilities 4 31,00,000

Total 1,96,98,980

II. Assets
(1) Non-current assets
(a) Fixed assets
Tangible assets 5 76,20,000

(2) Current assets
(a) Inventories 6 54,75,000

(b) Trade receivables 7 39,00,000

(c) Cash and cash equivalents (WN 5) 27,03,980

Total 1,96,98,980

Notes to Accounts
` `
1. Share Capital
5,33,466 shares of ` 10 each

53,34,660


(Out of the above 33,466 shares of ` 10 each had
been issued for consideration other than cash)


2. Reserves and surplus
General Reserve 50,00,000
Capital Reserve (W.N.4)

13,20,000
Profit and Loss Account ` 20,00,000
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 19
Less: Unrealized profit on inventory (` 25,000) 19,75,000
Securities Premium (` 33,46620) 6,69,320 89,64,320
3. Long Term Borrowings
Secured Loans (` 20,00,000 + ` 3,00,000)

23,00,000

4. Current Liabilities
(` 30,00,000 + ` 2,00,000) 32,00,000
Less: Mutual owings (1,00,000) 31,00,000

5. Tangible Assets
Fixed Assets (60,00,000 +18,00,000) 78,00,000
Less :Revaluation loss (1,80,000) 76,20,000
6. Inventories (` 30,00,000+ ` 25,00,000) 55,00,000
Less: Unrealised profit on inventory (25,000) 54,75,000
7. Trade receivables


Trade receivables (` 35,00,000+ ` 5,00,000) 40,00,000
Less: Mutual owings (1,00,000) 39,00,000
Working Notes:
(1) Price per share paid by A Ltd. to Foreign Company for shares held by them ` 60
(i.e., ` 50 above the normal value of ` 10)
(2) Calculation of intrinsic value of shares of A Ltd.
`
Total Assets of A Ltd. excluding Investment in B Ltd. 1,64,00,000
Value of Investment in B Ltd. (60,000 shares ` 60) 36,00,000
2,00,00,000
Less: Outside Liabilities:
Secured Loan 20,00,000
Current Liabilities 30,00,000 (50,00,000)
Net Assets 1,50,00,000
Intrinsic value per share =
Shares of . No
Assets Net
=
=
000 , 00 , 5
000 , 00 , 50 , 1 `
` 30 per share
The Institute of Chartered Accountants of India
20 FINAL EXAMINATION: MAY, 2014

(3) Discharge of purchase consideration by A Ltd. to Foreign Company
Equity share
capital
Cash Total
`

`

`

(i) Payment of Tax
[` 24 Lakhs - ` 4.40 Lakhs] x
100
20


---

3,92,000

3,92,000
(ii) Issue of shares to foreign company
[50% of (24 lakhs 3.92 lakhs) = 10.04
lakhs


No. of shares issued by A Ltd.
10,04,000
30
=
33,466.6666 shares

Value of shares capital (33,466 ` 30) 10,03,980 --- 10,03,980
(iii) Cash Payment [50% of (` 24 Lakhs
` 3.92 Lakhs = 10.04 lakhs
--- 10,04,000 10,04,000
(iv) Cash for fractional shares = 0.6666 shares ` 30 --- 20 20
10,03,980 13,96,020 24,00,000
(4) Calculation of Goodwill/Capital Reserve to A Ltd.
`
Total of assets of B Ltd. as per the Balance Sheet 50,00,000
Less:
10% Reduction in the value of Fixed Assets
10
18,00,000
100




(1,80,000)
48,20,000
Less: Outside Liabilities
Secured Loan 3,00,000
Current Liabilities 2,00,000 (5,00,000)
Net Assets 43,20,000
Less: Purchase consideration (paid to Foreign Company) (24,00,000)
19,20,000
Less: Investment in B Ltd. as per Balance Sheet of A Ltd. (6,00,000)
Capital Reserve 13,20,000
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 21
(5) Cash and Bank Balance of A Ltd. after acquisition of B Ltd.
`
Opening Balance (A Ltd.) 39,00,000
Cash and Bank Balance of B Ltd. 2,00,000
41,00,000
Less: Remittance to foreign company (10,04,020)
30,95,980
Less: T.D.S. paid to Government (3,92,000)
27,03,980
(6) Unrealized profit included in inventory of A Ltd. = ` 1,50,000 x
20
120
= ` 25,000
Question 6
(a) The following information is supplied to you about Lookdown Ltd.
Capital & Reserves
Equity Shares of ` 100 each of which ` 75 has been called up 5,00,000
Equity Shares in respect of which calls are in arrear @ 25 per share ` 1,00,000
General Reserve ` 10,00,000
Profit & Loss account (balance at beginning of the year) ` (25,00,000)
Profit/(loss) for the year ` (1,80,000)
Industry Average Profitability 12.50%
8% Debentures of ` 10 each 8,00,000
Lookdown Ltd. is proposing to hire the services of Mr. X to turn the
company around.

Minimum take home salary per month demanded by Mr. X ` 4,00,000
Average Income tax rate on salaries above ` 3 lakhs per annum 25%
Provident Fund contribution by Employer per month ` 50,000
Profits over and above target expected by hiring Mr. X 10%
You are required to analyze the proposal and see whether it is worthwhile to employ
Mr. X and also suggest the maximum emoluments that could be paid to him.
Note:
(i) PF contributions are tax exempt.
(ii) Take home salary is that remaining after employee's contribution to PF @ ` 50,000
per month and after deduction of Income-tax on salary. (8 Marks)
The Institute of Chartered Accountants of India
22 FINAL EXAMINATION: MAY, 2014

(b) Gold Ltd. has provided the following data for the Financial Year ending 2014:
Liabilities (Fig. in lakhs) Assets (Fig. in lakhs)
Share Capital 1,000 Fixed Assets 3,000
Reserve & Surplus 2,000 Investments 150
Long Term Debt 200 Current Assets 100
Trade Payables 50
3,250 3,250
Additional information provided is as follows:
Profit before Interest and Tax is ` 1,000 lakhs.
Interest is ` 20 Lakhs
Tax Rate 35.875%
Risk Free Rate 10%
Market Rate 15%
Beta ) ( factor 1.4
Calculate the Economic Value Added by Gold Ltd. (8 Marks)
Answer
(a) Cost to Company in employing to Mr. X
`
Salary before tax
` 4,00,000 x 12 =
48,00,000
0.75

64,00,000*
Add: Employees PF contribution (50,000 x 12) 6,00,000
70,00,000
Add: Employers PF contribution (50,000 x 12) 6,00,000
76,00,000
Capital base
`
Equity Share Capital paid up (5,00,000 shares of ` 75 each) 3,75,00,000
Less: Calls in arrears (1,00,000)
3,74,00,000
General Reserve 10,00,000
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 23
Profit & Loss A/c (balance) at the beginning of the year (25,00,000)
Loss for the year (1,80,000)
8% Debentures 8,000,000
Capital base 4,37,20,000
Target Profit 12.5% of capital base (4,37,20,000) 54,65,000
Profits achieved due to Mr. X 54,65,000+ 10% (54,65,000) 60,11,500
Maximum emoluments that can be paid to Mr. X = 60,11,500
Thus, the company is advised not to hire him as his CTC ` 76,00,000 is more than
` 60,11,500
Note: It is assumed that the average income tax rate of 25% given in the question is after
considering the impact of ` 3 lakhs p.a. i.e., the exemption amount.
(b) Computation of Economic Value Added
Particulars ` in lakhs
Profit after taxes (as per Profit and Loss A/c W.N.5) 628.425
Add: Interest on long term borrowing adjusted net of tax (W.N.2) 12.825
Total return to Providers of funds 641.250
Less: Cost of Capital (W.N.4) (522.825)
Economic Value Added 118.425
Working Notes:
1. Cost of Equity = Risk Free Rate + Factor (Market Rate Risk Free Rate)
= 10% + 1.4 (15% - 10%) = 10% + 7% = 17%
2. Cost of Debt (Post tax)

Particulars ` in lakhs
Interest 20.000
Less: Tax Saving (20 x 35.875%) (7.175)
Interest after tax savings 12.825
Cost of Debt =
Interest on LongtermDebt
LongtermDebts

Cost of Debt =
12.825
=6.4125%
200
`
`


The Institute of Chartered Accountants of India
24 FINAL EXAMINATION: MAY, 2014

3. Capital Employed
Particulars Amount Amount
Share capital 1,000
Reserves and surplus 2,000 3,000
Long term Debts 200
Total Capital employed 3,200
4. Weighted Average Cost of Capital
Particulars ` in lakhs
a. Cost of Equity 3,000 x 17% (WN 1) 510.000
b. Cost of Debt 200 x 6.4125% (WN 2) 12.825
c. Total (a+b) 522.825
WACC =
522.825
=16.34%
3200

5. Profit after Tax
Particulars Amount Amount
Profit before interest & tax 1,000
Less: Interest (20) 980.000
Less: Tax (980 x 35.875%) 351.575
Profit after Tax 628.425
Question 7
Answer any four of the following:
(a) KAY Ltd. is in the process of finalizing its accounts for year ended 31
st
March, 2014 and
furnishes the following information:
(i) Finished goods normally are held for 30 days before sale.
(ii) Sales realization from Debtors usually takes 60 days from date of credit invoice.
(iii) Raw materials are held in stock to cover one month's production requirements.
(iv) Packing materials, being specifically made for the company and having lead time of
90 days is held in stock for 90 days.
(v) The holding period in respect of unfinished goods is 30 days.
(vi) Being a monopoly KAY Ltd. enjoys a credit period of 12.5 months from its suppliers
who sometimes at the end of their credit period opt for conversion of their dues into
long term debt of KAY Ltd.
The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 25
You are required to compute the operating cycle of KAY Ltd. as per revised Schedule IV


of Companies Act, 1956. As the suppliers of the company are paid off after a credit
period of 12.5 months should this be part of Current Liability? Would your answer be the
same if the creditors are settled in 330 days?
(b) A Mutual Fund has launched a new scheme All Purpose Scheme. The Mutual Fund's
Asset management company wishes to invest 25% of the NAV of the Scheme in an
unrated debt instrument of a company Y Ltd. which has been paying above average
returns for the past many years. The promoters of the company seek your professional
advice in light of the Regulations of SEBI. Will the position change in case the debt
instruments of the company Y Ltd., is a rated.
(c) What are Timing Differences and Permanent Differences as per Accounting Standard
22? Explain with example.
(d) X Ltd. has leased equipment over its useful life that costs ` 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 ` 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 asset 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 years 1 to 3 are 0.909, 0.826 and 0.751 respectively.
(e) AQ Ltd., an investment company is finalizing its account for the Financial Year ending
2013 in the month of August 2013.
How will the following incomes be accounted for in the books of AQ Ltd.?
(1) X Ltd., has declared interim dividend which has not been received till 31-3-2013 but
received on 25-4-2013.
(2) Y Ltd., has declared dividend on 8
th
May 2013 for the year ending 31-3-2013 which
has been approved by the shareholders of the company on 30
th
June 2013.
(3) Z Ltd., a subsidiary of AQ Ltd., has declared dividend for the year ended 31-3-2013
on 25
th
May 2013 the AGM for which is to be held on September 2013.
(4 x 4 = 16 Marks)

PS : Read Schedule IV as Schedule VI.


The Institute of Chartered Accountants of India
26 FINAL EXAMINATION: MAY, 2014

Answer
(a) Operating cycle of Kay Ltd. will be computed as under:
Raw material stock holding period + Work-in-progress holding period + Packing Materials
holding period+ Finished goods holding period + Debtors collection period
= 1 + 1 + 3 + 1 + 2 = 8 months
Classification of liability to suppliers: Revised Schedule VI provides that:
A liability shall be classified as current when it satisfies any of the following criteria:
(i) it is expected to be settled in the companys normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the reporting date; or
(iv) 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 and do not affect its classification.
There are two situations:
(a) When credit period given by supplier is 12.5 months: The nature of classification
of liability is to be seen with reference to the reporting date. Hence all liabilities
except those that arise in the last fortnight of the accounting period will be Current
as this will have to be settled within 12 months of the reporting date. Thus, all
liabilities that do not arise in the last fortnight of the accounting period will be Non -
Current.
(b) When credit period given by suppliers is 330 days (i.e. 11 months approx.): If
the creditors are settled in 330 days i.e. within 11 months. This satisfies the third
condition i.e. it is due to be settled within twelve months after the reporting date and
there is no option to defer it. Hence, in the case it will be treated as current liability.
(b) The Seventh Schedule of SEBI (Mutual funds) Regulations, 1996 states that a mutual
fund scheme shall not invest more than 10% of its NAV in unrated debt instruments
issued by a single issuer and the total investment in such instruments shall not exceed
25% of the NAV of the scheme. All such investments shall be made with the prior
approval of the Board of Trustees and the Board of Asset Management Company. It also
states that a mutual fund scheme shall not invest more than 15% of its NAV in debt
instruments issued by a single issuer which are rated not below investment grade by an
authorised credit rating agency. Such investment limit may be extended to 20% of the
NAV of the scheme with the prior approval of the Board of Trustees and the Board of
Asset Management Company.

The Institute of Chartered Accountants of India
PAPER 1 : FINANCIAL REPORTING 27
Accordingly,
(i) If the debts instruments of Y Ltd. unrated then Mutual funds Asset Management
Company (AMC) cannot invest more than 10% of its NAV in it.
(ii) If the debts instruments of Y Ltd are rated, then also, Mutual Funds AMC cannot
invest more than 20% of its NAV in it. Therefore, investment of 25% of its NAV of
the scheme in debts instrument of Y Ltd. by Mutual Funds AMC is not permissible
as per the SEBI (Mutual Fund) Regulation 1996.
(c) The differences between taxable income and accounting income can be classified into
permanent differences and timing differences as follows:
(i) Permanent differences are those differences between taxable income and
accounting income which originate in one period and do not reverse subsequently.
For instance, if for the purpose of computing taxable income, the tax laws allow only
a part of an item of expenditure, the disallowed amount would result in a permanent
difference.
(ii) Timing differences are those 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. Timing differences arise because the period in which
some items of revenue and expenses are included in taxable income do not coincide
with the period in which such items of revenue and expenses are included or
considered in arriving at accounting income. For example, machinery purchased for
scientific research related to business is fully allowed as deduction in the first year for
tax purposes whereas the same would be charged to the statement of profit and loss
as depreciation over its useful life. The total depreciation charged on the machinery
for accounting purposes and the amount allowed as deduction for tax purposes will
ultimately be the same, but periods over which the depreciation is charged and the
deduction is allowed will differ.
(d) (i) Calculation of Annual Lease Payment


`
Cost of the equipment 7,46,55,100
Unguaranteed Residual Value 1,00,000
PV of unguaranteed residual value for 3 years @ 10%
(` 1,00,000 x 0.751)
75,100
Fair value to be recovered from Lease Payment
(` 7,46,55,100 ` 75,100)

7,45,80,000
PV Factor for 3 years @ 10% 2.486
Annual Lease Payment (` 7,45,80,000 / PV Factor for 3 years
@ 10% i.e. 2.486)

3,00,00,000

Annual lease payments are considered to be made at the end of each accounting year.
The Institute of Chartered Accountants of India
28 FINAL EXAMINATION: MAY, 2014

(ii) Unearned Finance Income
Total lease payments [` 3,00,00,000 x 3] 9,00,00,000
Add: Residual value 1,00,000
Gross Investments 9,01,00,000
Less: Present value of Investments (` 7,45,80,000+ ` 75,100) (7,46,55,100)
Unearned Finance Income 1,54,44,900
(e) As per para 8 of AS 9 Revenue Recognition, dividends from investment in shares is
recognized in the statement of Profit and Loss only when the owners right to receive the
payment is established.
(i) In the first case, it is clear that interim dividend was declared by X Ltd. before
31st March 2013 which implies that the dividend had been vested (acrrued) to the
shareholders of AQ Ltd. in the year 2012-13. Therefore, though it is received on
25.4.13 (before finalization of accounts) yet it should be recognized in the financial
statements for the year ended 31st March, 2013.
(ii) Dividend declared by Y Ltd and approved by the shareholders of AQ Ltd. after
balance sheet date but before finalization of accounts cannot be accounted for in
the financial statements for the year ended 31st March, 2013. This will be
accounted in 2013-14 as the right to receive dividend will arise when the AGM will
approve the dividend i.e. on 30th June 2013. Since right to receive the dividend
was not established on or before 31
st
March, 2013, it will not be accounted for in the
books for the year ended 31
st
March, 2013.
(iii) In the given case, dividend declared by Z Ltd. will be approved in the AGM to be
held on 30
th
September, 2013. Before that right to receive dividend cannot be
established. Hence it will not be accounted for in the financial year ended on
31
st
March, 2013.
The Institute of Chartered Accountants of India