PAPER – 5 : ADVANCED ACCOUNTING

Question No. 1 is compulsory.

Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made and disclosed by
way of note forming part of the answer.
Working Notes should form part of the respective answers.
Question 1
Answer the following questions:
(a) 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 purchase  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 15 th 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.
(v) Theft of cash of ` 2 lakhs by the cashier on 31 st March but was detected the next
day after the financial statements have been approved by the Directo rs.
(b) AB Ltd. is in the process of finalizing its account for the year ended 31 st 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.


PS: The word ‘purchase’ should be read as ‘sell’.

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 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

(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.
(c) ABC Ltd. purchased fixed assets for ` 50,00,000. Government grant received towards it
is 20%. Residual value is ` 8,00,000 and useful life is 8 years. Assumed depreciation is
on the basis of Straight Line Method, asset is shown in the Balance Sheet net of grant.
After one year, grant becomes refundable to the extent of ` 7,00,000 due to non-
compliance of certain conditions.
Pass Journal entries for 2nd year in the books of the company.
(d) Power Track Ltd. purchased a plant for US$ 50,000 on 31 st October, 2015 payable after
6 months. The company entered into a forward contract for 6 months @ ` 64.25 per
Dollar. On 31st October, 2015, the exchange rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the
company for the year ended 31 st March, 2016. ( 4 × 5 = 20 Marks)
Answer
(a) 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 company‘s advertisement by a
party on 10 th 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

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 PAPER – 5 : ADVANCED ACCOUNTING 3

occurring after the balance sheet date. Adjustment to assets and liabilities is
required since the event affects the determination and the condition of the amount s
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.
(b) (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 31 st 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.
(c) Journal Entries in the books of ABC Ltd. for 2 nd year
Year Particulars ` in lakhs ` in lakhs
(Dr.) (Cr.)
2ndyear Fixed Asset Account Dr. 7
To Bank Account 7
(Being government grant on asset partly
refunded which increased the cost of fixed
asset)
Depreciation Account (W.N.) Dr. 5
To Fixed Asset Account 5
(Being depreciation charged on SLM on
revised value of fixed asset prospectively)
Profit & Loss Account Dr. 5
To Depreciation Account 5
(Being depreciation transferred to Profit and
Loss Account at the end of year 2)
Working Note:
Depreciation for year 2
` in lakhs
Cost of the Asset 50

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 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Less: Government grant received (10)

40
 40  8 
Less: Depreciation for the first year   4
 8 
Book value at the end of 1 st year 36
Add: Government grant refundable in 2 nd year 7
43
 43  8 
Depreciation for the second year   5
 7 
(d) Calculation of profit or loss to be recognized in the books of Power Track Lim ited
`
Forward contract rate 64.25
Less: Spot rate (61.50)
Loss on forward contract 2.75
Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 × ` 2.75) `1,37,500
Contract period 6 months
Loss for the period 1st November, 2015 to 31st March, 2016 i.e. 5 months
5 months falling in the year 2015-2016
Hence, Loss for 5 months will be ` 1,37,500 
5
= ` 1,14,583
6

Thus, the loss amounting to ` 1,14,583 for the period is to be recognized in the year
ended 31st March, 2016.
Question 2
P and Q are partners of P & Co., sharing Profit and Losses in the ratio of 3:1 and Q and R are
partners of R & Co., sharing Profits and Losses in the ratio of 2:1. On 31 st March, 2015, 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 Sheets of two firms on
the above date are as under:
Liabilities P & Co. R & Co. Assets P & Co. R & Co.
(`) (`) (`) (`)
Capitals: Fixed assets:
P 2,50,000 - Building 50,000 60,000

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 PAPER – 5 : ADVANCED ACCOUNTING 5

Q 1,80,000 2,20,000 Plant & Machinery 1,60,000 1,70,000

R 1,20,000 Office Equipment 50,000 46,000
Reserves 60,000 1,50,000 Current assets:
Sundry Creditors 1,30,000 1,36,000 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 40,000 1,00,000
Cash in hand 20,000 10,000
Due from R& Co. 1,00,000 -
7,00,000 7,26,000 7,00,000 7,26,000
The amalgamated firm took over the business on the following terms:
(a) Building of P & Co. was valued at ` 1,50,000.
(b) Plant & Machinery of P & Co. was valued at ` 2,75,000 and that of R & Co. at
` 2,50,000.
(c) All stock in trade is to be appreciated by 20%.
(d) Goodwill of P & Co. was valued at ` 1,20,000 and of R & Co. at ` 60,000, but the same
will not appear in the books of PQR & Co.
(e) Partners of new firm will bring the necessary cash to pay other partners to adjust their
capitals according to the profit sharing ratio.
(f) Provisions for doubtful debts has to be carried forward at ` 15,000 in respect of debtors
of P & Co. and ` 30,000 in respect of debtors of R & Co.
You are required to prepare the Balance Sheet of new firm and capital accounts of the
partners in the books of old firms. (16 Marks)
Answer
Balance Sheet of M/s PQR & Co. as at 31st March, 2015
Liabilities ` Assets `
Capitals: Building
P 6,41,000 (1,50,000 + 60,000) 2,10,000
Q 4,27,333 Plant & machinery
(2,75,000+2,50,000) 5,25,000
R 2,13,667 12,82,000 Office equipment
Sundry creditors (50,000+46,000) 96,000
(1,30,000+1,36,000) 2,66,000 Stock-in-trade
Bank overdraft 80,000 (1,44,000+1,68,000) 3,12,000

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 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Sundry debtors
(1,60,000+2,00,000) 3,60,000
Less: Provision for
doubtful debts (45,000) 3,15,000
(15,000 +30,000)
Bank balance
(40,000+1,00,000) 1,40,000
Cash in hand 30,000
16,28,000 16,28,000
In the books of P & Co.
Partners’ Capital Accounts
Particulars P Q Particulars P Q
` ` ` `
To Capital A/cs – 5,53,000 2,81,000 By Balance b/d 2,50,000 1,80,000
M/s PQR & Co. By Reserve (3:1) 45,000 15,000
By Profit on
Realisation
A/c (W.N.3) 2,58,000 86,000
5,53,000 2,81,000 5,53,000 2,81,000
In the books of R & Co.
Partners’ Capital Accounts
Particulars Q R Particulars Q R
` ` ` ` `
To Capital A/cs – 4,12,000 2,16,000 By Balance b/d 2,20,000 1,20,000
M/s PQR & Co. By Reserve (2:1) 1,00,000 50,000
By Profit on
Realisation 92,000 46,000
(W.N.4)
4,12,000 2,16,000 4,12,000 2,16,000


` 20,000+ 10,000+ 1,78,000+ 27,667– 2,05,667= ` 30,000.

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 PAPER – 5 : ADVANCED ACCOUNTING 7

Working Notes:
1. Computation of purchase considerations
P & Co. R & Co.
` `
Assets:
Goodwill 1,20,000 60,000
Building 1,50,000 60,000
Plant & machinery 2,75,000 2,50,000
Office equipment 50,000 46,000
Stock-in-trade 1,44,000 1,68,000
Sundry debtors 1,60,000 2,00,000
Bank balance 40,000 1,00,000
Cash in hand 20,000 10,000
Due from R & Co. 1,00,000 -
(A) 10,59,000 8,94,000
Liabilities:
Creditors 1,30,000 1,36,000
Provision for doubtful debts 15,000 30,000
Due to P & Co. - 1,00,000
Bank overdraft 80,000 -
(B) 2,25,000 2,66,000
Purchase consideration (A-B) 8,34,000 6,28,000

2. Computation of Capital Adjustments

P Q R Total
` ` ` `
Balance transferred from P & Co. 5,53,000 2,81,000 8,34,000
Balance transferred from R & Co. 4,12,000 2,16,000 6,28,000
5,53,000 6,93,000 2,16,000 14,62,000
Less: Goodwill written off in the
ratio of 3:2:1 (90,000) (60,000) (30,000) (1,80,000)
Existing capital 4,63,000 6,33,000 1,86,000 12,82,000
Proportionate capital (3:2:1) 6,41,000 4,27,333 2,13,667 12,82,000
Amount to be brought in (paid off) 1,78,000 (2,05,667) 27,667

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 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

3. In the books of P & Co.

Realisation Account
` `
To Building 50,000 By Creditors 1,30,000
To Plant & machinery 1,60,000 By Bank overdraft 80,000
To Office equipment 50,000 By M/s PQR & Co. 8,34,000
To Stock-in-trade 1,20,000 (purchase consideration)
To Sundry debtors 1,60,000 (W.N.1)
To Bank balance 40,000
To Cash in hand 20,000
To Due from R & Co. 1,00,000
To Partners‘ capital A/cs
P 2,58,000
Q 86,000 3,44,000
10,44,000 10,44,000
4. In the books of R & Co.
Realisation Account
` `
To Building 60,000 By Creditors 1,36,000
To Plant & machinery 1,70,000 By Due to P & Co. 1,00,000
To Office equipment 46,000 By M/s PQR & Co. 6,28,000
To Stock-in-trade 1,40,000 (purchase consideration)
To Sundry debtors 2,00,000 (W.N.1)
To Bank balance 1,00,000
To Cash in hand 10,000
To Partners‘ capital A/cs
Q 92,000
R 46,000 1,38,000
8,64,000 8,64,000

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 PAPER – 5 : ADVANCED ACCOUNTING 9

Question 3
(a) Following is the summarized Balance Sheet of Complicated Ltd. as on 31 st March, 2016 :
Liabilities Amount
(`)
Equity shares of ` 10 each fully paid up 12,50,000
Bonus shares 1,00,000
Share option outstanding Account 4,00,000
Revenue Reserve 15,00,000
Securities Premium 2,50,000
Profit & Loss Account 1,25,000
Capital Reserve 1,00,000
Revaluation Reserve 1,00,000
Unpaid dividends 1,00,000
12% Debentures (Secured) 18,75,000
Advance from related parties (Unsecured) 10,00,000
Current maturities of long term borrowings 16,50,000
Application money received for allotment due for refund 2,00,000
86,50,000
Fixed Assets 46,50,000
Current Assets 40,00,000
86,50,000
The Company wants to buy back 25000 equity shares of ` 10 each, on 1 st April, 2016 at
` 20 per share. Buy back of shares is duly authorised by its Articles and necessary
resolution has 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 shown as
part of Current Assets.
Comment with your calculations, whether buy back of shares by the Company is within the
provisions of the Companies Act, 2013. If yes, pass necessary journal entries towards buy
back of shares and prepare the Balance Sheet after buy back of shares. (12 Marks)
(b) Mention the ways by which Redeemable Debentures may be redeemed under the
Companies Act, 2013. (4 Marks)

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 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Answer
(a) Determination of Buy back of maximum no. of shares as per the Companies
Act, 2013
1. Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding (`12,50,000 + `1,00,000)/ ` 10 1,35,000
25% of the shares outstanding 33,750
2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free
Reserves
Particulars
Paid up capital (`) ` 13,50,000
Free reserves (`) (15,00,000 + 2,50,000 + 1,25,000) ` 18,75,000
Shareholders‘ funds (`) ` 32,25,000
25% of Shareholders fund (`) ` 8,06,250
Buy back price per share ` 20
Number of shares that can be bought back (shares) 40,312
Actual Number of shares for buy back 25,000
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds
post Buy Back
Particulars `
(a) Loan funds (`) (18,75,000+10,00,000+16,50,000 + 48,25,000
1,00,000 + 2,00,000)
(b) Minimum equity to be maintained after buy back in the ratio 24,12,500
of 2:1 (`) (a/2)
(c) Present equity/shareholders fund (`) 32,25,000
(d) Future equity/shareholders fund (`) (see W.N.) (32,25,000
– 2,70,833) 29,54,167 
(e) Maximum permitted buy back of Equity (`) [(d) – (b)] 5,41,667


As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the company should not be more than
twice the capital and its free reserves after such buy-back. Further under Section 69 (1), 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 Capital Redemption
Reserve (CRR). As per section 69 (2) utilization of CRR is restricted to fully paying up unissued shares of the Company
which are to be issued as 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 buy-back has to be excluded from the present equity.

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 PAPER – 5 : ADVANCED ACCOUNTING 11

(f) Maximum number of shares that can be bought back @ ` 27,083

20 per share Shares
(g) Actual Buy Back Proposed Shares 25,000
Summary statement determining the maximum number of shares to be bought
back
Particulars Number of
shares
Shares Outstanding Test 33,750
Resources Test 40,312
Debt Equity Ratio Test 27,083
Maximum number of shares that can be bought back [least of 27,083
the above]
Company qualifies all tests for buy-back of shares and conclusion is that it can buy
maximum 27,083 shares on 1 st April, 2016.
However, company wants to buy-back only 25,000 equity shares @ ` 20. Therefore,
buy-back of 25,000 shares, as desired by the company is within the provisions of the
Companies Act, 2013.
Journal Entries for buy-back of shares
Debit (`) Credit (`)
(a) Equity shares buy-back account Dr. 5,00,000
To Bank account 5,00,000
(Being buy back of 25,000 equity shares of ` 10
each @ ` 20 per share)
(b) Equity share capital account Dr. 2,50,000
Securities premium account Dr. 2,50,000
To Equity shares buy-back account 5,00,000
(Being cancellation of shares bought back)
(c) Revenue reserve account Dr. 2,50,000
To Capital redemption reserve account 2,50,000
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of capital bought back through free
reserves)

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 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Balance Sheet of Complicated Ltd.

as on 1st April, 2016
Particulars Note Amount
No `
EQUITY AND LIABILITIES
1 Shareholders' funds
(a) Share capital 1 11,00,000
(b) Reserves and Surplus 2 22,25,000
2 Non-current liabilities
(a) Long-term borrowings 3 28,75,000
3 Current liabilities
(a) Other current liabilities 4 19,50,000
Total 81,50,000
ASSETS
1 Non-current assets
(a) Fixed assets 46,50,000
2 Current assets (40,00,000-5,00,000) 35,00,000
Total 81,50,000
Notes to Accounts
` `
1. Share Capital
Equity share capital
1,10,000 Equity shares of `10 each 11,00,000

2. Reserves and Surplus

Profit and Loss A/c 1,25,000
Revenue reserves 15,00,000
Less: Transfer to CRR (2,50,000) 12,50,000
Securities premium 2,50,000
Less: Utilization for share buy-back (2,50,000) -
Share Option Outstanding Account 4,00,000
Capital Reserve 1,00,000
Revaluation Reserve 1,00,000

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 PAPER – 5 : ADVANCED ACCOUNTING 13

Capital Redemption Reserve 2,50,000 22,25,000

3. Long-term borrowings
Secured
12% Debentures 18,75,000
Unsecured loans 10,00,000 28,75,000

4. Other Current Liabilities

Current maturities of long term borrowings 16,50,000
Unpaid dividend 1,00,000
Application money received for allotment due
for refund 2,00,000 19,50,000
Working Note:
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
(` 32,25,000 – x) – ` 24,12,500 = y (1)
y 
 10  = x
 20 
Or 2x = y (2)
by solving the above equation we get x = ` 2,70,833 and y = ` 5,41,667
(b) Redemption of debentures must be done according to the terms of issue of debentures
and any deviation will be treated as a default by the company.
Redemption by paying off the debt on account of debentures issued can be done in one
of the following four methods viz:
(a) By payment in lump sum at the end of a specified period of time;
(b) By payment in annual installments;
(c) By purchasing its own debentures in the open market.
(d) By conversion into shares in full or in part depending on the terms of issue.

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 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Question 4
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 (`) (`)
6,00,000 Equity shares of ` 10 each, ` 8 paid-up 48,00,000
6% 2,00,000 Preference shares of ` 10 each 20,00,000
Less: Calls in arrear 1,00,000 19,00,000
5% Debentures having a floating charge on the assets (interest
20,00,000
paid up to 30th September, 2015)
Mortgage on Land & Building 16,00,000
Trade Payable 53,10,000
Wage Payable 4,00,000
Secretary's Salary Payable @ ` 10,000 p.m. 60,000
Managing Director's Salary Payable @ ` 30,000 p.m. 1,20,000

Assets Estimated to produce (`) Book value(`)

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
Inventory 14,80,000 17,40,000
Investments in the hand of a Bank for an 34,00,000 36,00,000
Overdraft of ` 38,00,000
Trade Receivables 12,00,000 18,00,000
On 31st March, 2011 the Balance Sheet of the Company showed a General Reserve of
` 8,00,000 accompanied by a debit balance of ` 5,00,000 in the Profit & Loss Account.
In 2012, the Company made a profit of ` 8,00,000 and declared a dividend of 10% on Equity
Shares.
The Company suffered a total loss of ` 21,80,000 besides loss of stock due to fire to the tune
of ` 8,00,000 during financial years ending March 2013, 2014 and 2015. For the financial year
ended 31st March, 2016, accounts were not made.
The cost of winding-up is expected to be ` 3,00,000. (16 Marks)

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 PAPER – 5 : ADVANCED ACCOUNTING 15

Answer
In the matter of the Companies Act and in the matter of Sun City Development Ltd. (in winding
up)
Statement of Affairs on 31st March, 2016, the date of winding up

Estimated realisable value

Assets `
Assets not specifically pledged (as per list A)
Trade receivables 12,00,000
Inventory 14,80,000
Plant and Machinery 26,00,000
Tools and Equipment 80,000
Patents and copyrights 6,00,000
Unpaid calls 1,00,000
60,60,000
Assets specifically pledged (as per list B)
Estimated Due to Deficiency Surplus
Realisation Secured Ranking as carried to the
Creditors Unsecured last column
Creditors
` ` ` ` `
Investments 34,00,000 38,00,000 4,00,000
Land & Building 26,00,000 16,00,000 10,00,000
60,00,000 54,00,000
Estimated surplus from assets specifically pledged 10,00,000
Estimated total assets available for preferential creditors, 70,60,000
debenture holders and unsecured creditors
Summary of Gross Assets:
Gross realisable value of -
assets specifically charged 60,00,000
others assets 60,60,000
1,20,60,000
Estimated total assets available for preferential creditors,
debenture holders, bank overdraft and unsecured
creditors brought forward 70,60,000

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 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Gross Liabilities Liabilities

` ` `
50,00,000 (34,00,000 Secured creditors (as per List B) to the
+16,00,000) extent to which claims are estimated to be
covered by assets specifically pledged
4,20,000* Preferential creditors as per list C 4,20,000*
Estimated balance of assets available for
Debenture holders, Bank & unsecured 66,40,000
creditors
20,50,000 (20,00,000 Debenture holders secured by a floating
+ 50,000) charge as per list D (20,50,000)
Surplus as regards debenture holders 45,90,000
Unsecured creditors as per list E
Estimated unsecured balance of claim of
creditors partly secured on
Specific assets 4,00,000
Trade payable 53,10,000
58,70,000 Outstanding expenses (40,000 + 1,60,000 58,70,000
1,20,000)
Estimated deficiency as regards creditors
being the difference between gross liabilities
- and gross assets 12,80,000
1,33,40,000
Issued & Called up Capital:
6,00,000 Equity shares or ` 10 each, `8 48,00,000
paid
6% 2,00,000 Preference shares of ` 10
each fully called 20,00,000 68,00,000
Estimated Deficiency as regards members
as per list H 80,80,000
*Note
(i) The Secretary of a Company, being an officer, is to be included within the definition of
‗employee‘ for the purpose of computing preferential creditors. The preferential creditor
for secretary‘s salary has been restricted to 4 months salary but maximum pay shall not
exceed ` 20,000 per claimant as per the requirement of the law.

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 PAPER – 5 : ADVANCED ACCOUNTING 17

(ii) The above is subject to cost of winding up estimated as ` 3,00,000 and to any surplus /
deficiency on realisation of assets.
(iii) There are 6,00,000 shares unpaid @ ` 2 per share liable to be called up.
List H - Deficiency Account
A. Item contributing to Deficiency `
1. Excess of capital & liabilities over assets on 1-4-2011 NIL
2. Net dividend & bonuses during the period (4,80,000 + 1,14,000) 5,94,000
3. Net trading losses after charging depreciation, taxation, interest
on debentures, etc. during the same period
(` 21,80,000 + ` 26,26,000) 48,06,000
4. Losses other than trading losses written off or for which provision
has been made in the books during the same period - stock loss. 8,00,000
5. Estimated losses now written off or for which provision
has been made for the purpose of preparing the statement:
`
Plant and Machinery 14,00,000
Tools and equipments 3,20,000
Patents and copyrights 4,00,000
Inventories 2,60,000
Investments 2,00,000
Debtors 6,00,000 31,80,000
6. Other items contributing to deficiency NIL
93,80,000
B. Items reducing Deficiency
7. Excess of assets over capital and liabilities on 1st April, 2011
(8,00,000 – 5,00,000) 3,00,000
8. Net trading profit during the period 8,00,000
9. Profit & Incomes other than trading profit during the same period -
10. Other items - Profit expected on Land & Building (26,00,000 - 24,00,000) 2,00,000
13,00,000
Deficiency as shown by the Statement of Affairs (A) - (B) 80,80,000
Working Notes:
(1) Trial Balance to ascertain the amount of loss for the year ended 31 st March, 2016
Dr. Cr.
` `
Land & Building 24,00,000

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 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Plant and Machinery 40,00,000

Tools and Equipments 4,00,000
Patents and Copyrights 10,00,000
Inventories 17,40,000
Investment 36,00,000
Trade Receivables 18,00,000
Equity Capital 48,00,000
6% Preference share capital 19,00,000
5% Debentures 20,00,000
Interest Outstanding 50,000
Mortgage on Land & Building 16,00,000
Trade Creditors 53,10,000
Owing for Wages 4,00,000
Secretary‘s Salary 60,000
Managing Director‘s Salary 1,20,000
Bank Overdraft 38,00,000
Profit & Loss Account on 1.4.2015 24,74,000
1,74,14,000 2,00,40,000
Loss for the year (balancing figure) 26,26,000 -
2,00,40,000 2,00,40,000
2. Reserve & Surplus Account
` `
1.4.2011 To Profit & Loss 5,00,000 1.4.2011 By Balance 8,00,000
A/c (Transfer) b/d
31.3.2012 To Dividend- Equity 4,80,000 31.3.2012 By Profit for 8,00,000
Preference 1,14,000 the year
1.4.12 to To Profit & Loss 21,80,000 31.3.2015 By Balance 24,74,000
31.3.15 A/c (Loss) c/d
To Loss of Stock 8,00,000
40,74,000 40,74,000

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 PAPER – 5 : ADVANCED ACCOUNTING 19

Question 5
(a) From the following information of Wealth Bank Limited, Prepare Profit and Loss Account
for the year ended 31 st March, 2016:
Particulars ` in lakhs Particulars ` in lakhs
Interest on Cash Credit 364 Interest paid on Recurring 17
Deposits
Interest on Overdraft 150 Interest paid on Savings Bank 12
Deposits
Interest on Term Loans 308 Auditor’s Fees and 24
Allowances
Income on Investments 168 Directors’ Fees and 50
Allowance
Interest on Balance with RBI 30 Advertisement 36
Commission on remittances 15 Salaries, allowances and 248
and transfer bonus to employees
Commission on Letters of 24 Payment to Provident Fund 56
Credit
Commission on Government 16 Printing & Stationery 28
Business
Profit on Sale of Land & 5 Repairs & Maintenance 10
Building
Loss on exchange 10 Postage, courier & telephones 16
transactions
Interest paid on Fixed 25
Deposits
Other Information:
` 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

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 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Doubtful assets-fully unsecured 40

Doubtful assets covered fully by security:
Less than 1 year 6
More than 1 year upto 3 years 3
More than 3 years 2
Loss Assets 38
(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 `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.
(b) Write short notes on the following principles and terms of Insurance Business:
(i) Principle of Indemnity
(ii) Insurable Interest
(iii) Principle of UBERRIMAE FIDEI
(iv) Catastrophic Loss (10 + 6 = 16 Marks)
Answer
(a) Wealth Bank Limited
Profit and Loss Account
For the year ended 31st March, 2016
` in lakhs
Particulars Schedule Year ended
31-3-2016
I Income
Interest earned 13 766
Other income 14 50
816
II Expenditure
Interest expended 15 54
Operating expenses 16 468
Provisions and Contingencies (Refer W.N.) 158.96
680.96

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 PAPER – 5 : ADVANCED ACCOUNTING 21

III Profit/Loss
Net Profit/(Loss) for the year 135.04
Net Profit/(Loss) brought forward Nil
135.04
IV Appropriations:
Transfer to Statutory reserve (20% of the profits) 27.01
Balance carried to the balance sheet 108.03
Total 135.04
Schedule 13 - Interest Earned
Year ended 31-3-2016
(` in lakhs)
I Interest/discount on advances/bills
Interest on cash credit (364-84) 280
Interest on overdraft (150-100) 50
Interest on term loans (308-70) 238 568
II Income on investments 168
III Interest on Balance with RBI 30
766
Interest on NPA is recognized on cash basis, hence difference of accrued interest not
received have been reduced from the total accrued interest.
Schedule 14 - Other Income
Year ended 31-3-2016
(` in lakhs)
I Commission, Exchange and Brokerage:
Commission on remittances and transfer 15
Commission on letter of credit 24
Commission on Government business 16 55
II Profit on sale of Land and Building 5
III Loss on Exchange Transactions (10)
50

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 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Schedule 15 - Interest Expended

Year ended 31-3-2016
(` in lakhs)

I Interest on Deposits
Fixed deposits 25
Recurring deposits 17
Saving bank deposits 12 54
Schedule 16 - Operating Expenses
Year Ended 31-3-2016
(` in lakhs)
I Payment to and provision for employees
Salaries, allowances and bonus 248
Provident Fund Contribution 56 304
II Printing and Stationery 28
III Advertisement and publicity 36
IV Directors‘ fees, allowances and expenses 50
V Auditors‘ fees and expenses 24
VI Postage, telegrams, telephones etc. 16
VII Repairs and maintenance 10
468
Working Note:
Provisions and contingencies (` in lakhs)
Provision for Advances:
Standard 60 × 0.40% 0.24
Sub-standard 22 × 15% 3.3
Doubtful not covered by security 40× 100% 40
Doubtful covered by security:
Less than 1 year 6 x 25% 1.5 4.7
More than 1 year but less 3 x 40% 1.2
than 3 years 2 x 100% 2.0
More than 3 years

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 PAPER – 5 : ADVANCED ACCOUNTING 23

Loss Assets (38 × 100%) 38

86.24
Provision for tax 35% of (Total Income –
Total Expenditure)
35% of [816-(54+468+86.24)]
35% of [816 - 608.24]
35% of 207.76 72.72
158.96

Notes :
1 As per RBI norms, every banking company incorporated in India is required to
transfer at least 25% of its profit to the statutory reserve. However, in the above
solution, transfer @ 20% of current profit has been done strictly on the basis of the
information given in the question.
2. Cost of investment is missing in the question. Therefore, it is assumed that cost of
75% of the investments, other than the investments held for maturity, is same as its
market value. Hence no diminution in the value is provided for in the given solution.
(b) (i) Principle of indemnity: Insurance is a contract of indemnity. The insurer is called
indemnifier and the insured is the indemnified. In a contract of indemnity, only those
who suffer loss are compensated to the extent of actual loss suffered by them. One
cannot make profit by insuring his risks.
(ii) Insurable interest: All cannot enter into contract of insurance. For example, A
cannot insure the life of B who is a total stranger. But if B. happens to be his wife or
his debtor or business manager, A has insurable interest i.e. vested interest and
therefore he can insure the life of B. For every type of policy insurable interest is
insisted upon. In the absence of such interest the contract will amount to a wagering
contract.
(iii) Principle of UBERRIMAE FIDEI: Under ordinary law of contract there is no positive
duty to tell the whole truth in relation to the subject-matter of the contract. There is
only the negative obligation to tell nothing but the truth. In a contract of insurance,
however there is an implied condition that each party must disclose every material
fact known to him. All contracts of insurance are contracts of uberrima fidei, i.e.,
contracts of utmost good faith. This is because the assessment of the risk and the
determination of the premium by the insurer depend on the full and frank disclosure
of all material facts in the proposal form.
(iv) Catastrophic Loss: A loss (or related losses) which is unbearable i.e. it causes
severe consequences such as bankruptcy to a family, organization, or insurer.

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 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Question 6
(a) There is transfer/sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to Department
Z at 20% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to urealised
profit on departmental sales being eliminated.
Departmental profits after charging Managers' commission, but before adjustment of
unrealised profit are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers' commission.
(b) M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India).
Bangalore branch is an integral foreign operation of ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31 st March, 2015 and the
additional information given thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2014 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -

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 PAPER – 5 : ADVANCED ACCOUNTING 25

Sundry Charges 160 -

Computers 240 -
Bank Balance 420 -
New York Office A/c - 1,620
3,360 3,360
Additional Information:
(a) Computers were acquired from a remittance of US $ 6,000 received from New York
head office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth ` 4,20,000 on 31st March, 2015.
(c) The rates of exchange may be taken as follows:
- On 01.04.2014 @ ` 55 per US $
- On 31.03.2015 @ ` 60 per US $
- Average exchange rate for the year @ ` 58 per US $
- Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended
31st March, 2015 and the balance sheet as on that date of Bangalore branch as would
appear in the books of New York head office of ABC & Co. You are informed that
Bangalore branch account showed a debit balance of US $ 29845.35 on 31.3.2015 in
New York books and there were no items pending reconciliation. (8 + 8= 16 Marks)
Answer
(a) Calculation of Correct Profit
Department X Department Y Department Z
` ` `
Profit after charging managers‘ 1,80,000 1,35,000 90,000
commission
Add back : Managers‘ commission (1/9) 20,000 15,000 10,000
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000)
Profit before Manager‘s commission 1,75,500 1,27,500 90,000
Less : Commission for Department
Manager @ 10% (17,550) (12,750) (9,000)
Departmental Profits after manager‘s
commission 1,57,950 1,14,750 81,000

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 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Working Note:
Stock lying with
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized
Profit of:
Department X 1/5×75,000=15,000 20/120×57,000=9,500 24,500
Department Y 0.15×70,000=10,500 0.20×60,000=12,000 22,500
Department Z 20/120×30,000=5,000 25/125×25,000=5,000 10,000

(b) M/s ABC & Co.

Bangalore Branch Trial Balance in (US $)
as on 31st March, 2015
Conversion Dr. Cr.
rate per US $ US $ US $
(`)
Stock on 1.4.14 55 5,454.55 –
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 –
Rent, rates and taxes 58 6,206.90 –
Sundry charges 58 2,758.62 –
Computers – 6,000.00 –
Bank balance 60 7,000.00 –
New York office A/c – – 29,845.35
59,535.01 59,535.01
Trading and Profit & Loss Account
for the year ended 31st March, 2015
US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing stock 7,000.00
To Wages and salaries 9,655.17 (` 4,20,000/60)

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 PAPER – 5 : ADVANCED ACCOUNTING 27

By Gross Loss c/d 1,213.16

28,902.82 28,902.82
To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry charges 2,758.62
To Depreciation on computers 3,600.00
(US $ 6,000 × 0.6)
13,778.68 13,778.68
Balance Sheet of Bangalore Branch
as on 31st March, 2015
Liabilities US $ Assets US $ US $
New York Office A/c 29,845.35 Computers 6,000.00
Less: Net Loss (13,778.68) 16,066.67 Less: Depreciation (3,600.00) 2,400.00
Sundry creditors 5,000.00 Closing stock 7,000.00
Bills payable 4,000.00 Sundry debtors 6,666.67
Bills receivable 2,000.00
Bank balance 7,000.00

25,066.67 25,066.67
Question 7
Answer any four of the following:
(a) What is the distinction between an Ordinary Partnership Firm and a Limited Liability
Partnership (LLP)?
(b) 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
(c) Write short note on classification of advances in case of Banking Company.
(d) Give the basis of allocation of the following common expenditure among different
departments:

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 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

(i) Insurance of Building

(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses
(vi) Labour welfare expenses
(vii) PF/ESI contributions
(viii) Carriage inward
(e) Write short note on 'Suspension of Capitalisation' in context of Accounting Standard 16.
(4 x 4= 16 Marks)

Answer
(a) Distinction between an ordinary partnership firm and a Limited Liability
Partnership (LLP)
Key Elements Partnerships LLPs
1 Applicable Law Indian Partnership Act, Limited Liability Partnerships
1932 Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Created by Law
Agreement
4 Body Corporate Not a body corporate Yes, after registration with ROC,
it becomes a body corporate
5 Separate Legal It has no separate legal Yes, all body corporate are said
Identity identity to have a separate legal identity.
6 Perpetual Partnerships do not have It has perpetual succession and
Succession perpetual succession individual partners may come
and go
7 Number of Partners Minimum 2 and Minimum 2 but no maximum limit
Maximum 20 (subject to
10 for banks)
8 Ownership of Firm cannot own any The LLP as an independent
Assets assets. The partners entity can own assets
own the assets of the
firm
9 Liability of Liability of the partners is Liability of the partners is limited
unlimited. Partners are to the extent of their contribution

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 PAPER – 5 : ADVANCED ACCOUNTING 29

Partners/Members severally and jointly towards LLP except in case of

liable for actions of other intentional fraud or wrongful act
partners and the firm of omission or commission by a
and their liability extends partner.
to personal assets
10 Principal Agent Partners are the agents Partners are agents of the firm
Relationship of the firm and of each only and not of other partners
other
(b) (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.
(c) Banks are required to classify their advances into four broad groups:
(i) Standard Assets — Standard assets are those which do not disclose any problems
and which do not carry more than normal risk attached to the business. Such an
asset is not a NPA (Non-performing asset).
(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 jeopardize the liquidation of the debt and are
characterized 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 of at least 12 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were 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. In other words such assets are considered uncollectable
or if collected of such low value that their being shown as bankable assets is not
warranted even though there may be some salvage or recoverable value.

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 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

The classification of advances should be done taking into account (i) Degree of well
defined credit weakness and (ii) Extent of dependence on collateral security for the
recovery of dues.
This classification is meant for the purpose of computing the amount of provision to
be made in respect of advances.
(d)
S.No. Expenses Basis
(i) Insurance of building Floor area occupied by each department (if
given) otherwise on time basis
(ii) Discount and bad debts Sales of each department
(iii) Discount received Purchases of each department
(iv) Repairs and maintenance of Value of assets of each department
capital assets otherwise on time basis
(v) Advertisement expenses Sales of each department otherwise on time
basis or equally among departments
(vi) Labour welfare expenses Number of employees in each department
(vii). PF/ESI contributions Wages and salaries of each department
(viii) Carriage inward Purchases of each department
(e) Capitalization of borrowing costs should be suspended during extended periods in which
active development is interrupted.
Borrowing costs may be incurred during an extended period in which the activities
necessary to prepare an asset for its intended use or sale are interrupted. Such costs
are costs of holding partially completed assets and do not qualify for capitalization.
However, capitalization of borrowing costs is not normally suspended during a period
when substantial technical and administrative work is being carried out. Capitalization of
borrowing costs is also not suspended when a temporary delay is a necessary part of the
process of getting an asset ready for its intended use or sale.
For example, capitalization continues during the extended period needed for inventories
to mature or the extended period during which high water levels delay construction of a
bridge, if such high water levels are common during the construction period in the
geographic region involved.

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