TEST 6: CA Final Financial Reporting (Old) CA P.S.

Beniwal (9990301165)
Total Number of Questions: 7 Total No. of Printed Pages: 7
Time Allowed: 3 Hours Maximum Marks: 100

TEST 6: COMPLETE SYLLABUS

Question No.1 is compulsory. Candidates are required to answer any five questions from the
remaining six questions.
Wherever necessary, suitable assumptions may be made and disclosed by way of a note.
Working notes should form part of the answers.

1.
(a) ABC Company limited had an investment in Venture Capital amounting Rs. 10 crore. Venture capital in turn
had invested in the below portfolio companies (New Start- ups) on behalf of ABC Limited:
Portfolio Companies Amount of investment (in crore)
Oscar Limited 2
Zee Limited 3
Star Limited 4
Sony Limited 1
Total 10

During the financial year 2019-2020, Venture Capital had sold their investment in Star Limited and realised
an amount of Rs. 8 crore on sale of shares of star Limited and entire proceeds of Rs. 8 crore have been
transferred by Venture Capital to ABC Limited.

Accounts manager have received the following additional information from venture capital on 31.03.2020:

(1) 8 crore have been deducted from their cost of investment and carrying amount of investment as at year
end is 2 crore.
(2) Company had to offer capital gain tax @ 20% on the net sale consideration of Rs. 4 crore.
(3) Due to COVID 19, the remaining start-ups (i.e. Oscar Limited, Zee Limited, and Sony Limited) are not
performing well and sooner they will wind up their operations. Venture capital is monitoring the
situation and if required they will provide impairment in June 2020 Quarter.

You need to suggest accounts manager the correct accounting treatment as per AS 22 “Accounting for Taxes
on Income”. (5 Marks)

(b) Expenditure on a new production process in 20X1-20X2:

INR
1st April to 31st December 2,700
1st January to 31st March 900
3,600
The production process met the intangible asset recognition criteria for development on 1st January
20X2. The amount estimated to be recoverable from the process is ₹ 1,000.
What is the carrying amount of the intangible asset at 31st March 20X2 and the charge to profit or
loss for 20X1-20X2?
Expenditure incurred in FY 20X2-20X3 is ₹ 6,000.
At 31st March 20X3, the amount estimated to be recoverable from the process (including future
cash outflows to complete the process before it is available for use) is ₹ 5,000.
What is the carrying amount of the intangible asset at 31st March 20X3 and the charge to profit or
loss for 20X2-X3?
(5 Marks)

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 TEST 6: CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
(c) Mars Fashions is a new luxury retail company located in Lajpat Nagar, New Delhi. Kindly advise
the accountant of the company on the necessary accounting treatment for the following items:
(a) One of Company’s product lines is beauty products, particularly cosmetics such as lipsticks,
moisturizers and compact make-up kits. The company sells hundreds of different brands of
these products. Each product is quite similar, is purchased at similar prices and has a short
lifecycle before a new similar product is introduced. The point of sale and inventory system is
not yet fully functioning in this department. The sales manager of the cosmetic department is
unsure of the cost of each product but is confident of the selling price and has reliably informed
you that the Company, on average, make a gross margin of 65% on each line.

(b) Mars Fashions also sells handbags. The Company manufactures their own handbags as they
wish to be assured of the quality and craftsmanship which goes into each handbag. The
handbags are manufactured in India in the head office factory which has made handbags for the
last fifty years. Normally, Mars manufactures 100,000 handbags a year in their handbag
division which uses 15% of the space and overheads of the head office factory. The division
employs ten people and is seen as being an efficient division within the overall company.
In accordance with Ind AS 2, explain how the items referred to in a) and b) should be measured.
(5 Marks)

(d) A publisher owns 150 magazine titles of which 70 were purchased and 80 were self - created. The
price paid for a purchased magazine title is recognised as an intangible asset. The costs of creating
magazine titles and maintaining the existing titles are recognised as an expense when incurred. Cash
inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed
by customer segments. The level of advertising income for a magazine title depends on the range of
titles in the customer segment to which the magazine title relates. Management has a policy to
abandon old titles before the end of their economic lives and replace them immediately with new
titles for the same customer segment.
What is the cash-generating unit as per AS 28? (5 Marks)

2. Air Ltd. a Listed company entered into an expansion programme on 1.10.09. On that that date the
company purchased from bag Ltd. its investment in two private ltd. companies. The purchased was
of
(a) The entire share capital of Cold Ltd. and
(b) 50% of the share capital of Dry Ltd.
Both the investments were previously owned by Bag Ltd. after acquisition by Air Ltd., Dry Ltd.
was to be run by Air Ltd. and Bag Ltd. as a jointly controlled entity.
Air Ltd. makes its financial statement upto 30th September each year. The terms of acquisition were:

Cold Ltd.
The total consideration was based on price earning ratio (P/E) of 12 applied to the reported profit of
Rs. 20lakhs of Cold Ltd. for the year 30-09-09. The consideration was settelled by Air Ltd. issuing
8% debenture for Rs. 140 lakhs (at par) and the balance by a new issue of Rs. 1 equity shares, based
on its market value of Rs. 2.50each

Dry Ltd.
The Market value of Dry Ltd. on 1.10.09 was mutually agreed as Rs. 375Lakhs. Air Ltd. satisfied
its share of 50% of this amount by issuing 75 lakhs Rs. 1 equity shares (Market Value Rs. 2.50
each) to Bag Ltd.
Air Ltd. has not recorded in its books the acquisition of the above investments or the discharge of
the consideration.

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 TEST 6: CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
The summarized statements of financial position of the three entities at 30th Sept, 2010 are:
Rs. in thousands
Air Ltd. Cold Ltd. Dry Ltd.
Assets
Tangible Assets 34,260 27,000 21,060
Inventories 9,640 7,200 18,640
Debtors 11,200 5,060 4,620
Cash - 3,410 40
55,100 42,670 44,360
Liabilities
Equity capital:
Rs. 1 Each 10,000 20,000 25,000
Retained earnings 20,800 15,000 4,500
Trade and other payables 17,120 5,270 14,100
Overdraft 1,540 - -
Provision for taxes 5,640 2,400 760
55,100 42,670 44,360
The following information is relevant.
(a) The book values of the net assets of Cold Ltd. and Dry Ltd. on the date of acquisition were
considered to be a reasonable approximation to their fair values.
(b) The current profits of Cold Ltd. and Dry Ltd. for the year ended 30-09-10 were Rs. 80 lakhs
and Rs. 20 lakhs respectively. No dividends were paid by any of the Companies during the
year.
(c) Dry Ltd., the jointly controlled entity, is to be accounted for using proportional
consolidation, in accordance with AS-27 “Interest in Joint Venture”
(d) Goodwill in respect of the acquisition of Dry Ltd. has been impaired by Rs. 10 lakhs at 30-
09-10. Gain on Acquisition, if any, will be separately accountant.
Prepare Consolidated Balance Sheet of Air Ltd. and its subsidiaries as at 30-09-10.
(16 marks)

3. The Balance Sheet of RNR Limited as on 31.12.1999 is as follows :

Liabilities (Rupees in Lakhs) Assets (Rupees in Lakhs)
1,00,000 equity shares of Goodwill 5
Rs. 10 each fully paid 10 Fixed assets 15
1,00,000 equity shares of Other tangible assets 5
Rs. 6 each, fully paid up 6 Intangible assets (market value) 3
Reserves and Surplus 4 Miscellaneous expenditure to
Liabilities 10 the extent not written off 2
30 30

Fixed assets are worth Rs. 24 lakhs. Other Tangible assets are revalued at Rs. 3 lakhs. The company
is expected to settle the disputed bonus claim of Rs. 1 lakh not provided for in the accounts.
Goodwill appearing in the Balance Sheet is purchased goodwill. It is considered reasonable to
increase the value of goodwill by an amount equal to average of the book value and a valuation
made at 3 years’ purchase of average super-profit for the last 4 years.
After tax, profits and dividend rates were as follows :
Year PAT Dividend %
(Rs. in Lakhs)
1996 3.0 11%
1997 3.5 12%
1998 4.0 13%
1999 4.1 14%

Normal expectation in the industry to which the company belongs is 10%.

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 TEST 6: CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
Akbar holds 20,000 equity shares of Rs. 10 each fully paid and 10,000 equity shares of Rs. 6 each,
fully paid up. He wants to sell away his holdings.
(i) Determine the break-up value and market value of both kinds of shares.
(ii) What should be the fair value of shares, if controlling interest is being sold?
(16 Marks)

4. Rich Ltd. and Poor Ltd. decided to amalgamate their business with a view to a public share issue. A
holding company, Mix Ltd., is to be incorporated on 1st May 2009 with all authorised capital of Rs.
60,000,000 in Rs. 10 ordinary shares. The company will acquire the entire ordinary share capital of
Rich Ltd. and of Poor Ltd. in exchange for an issue of its own shares. The consideration for the
acquisition is to be ascertained by multiplying the estimated profits available to the ordinary
shareholders by agreed price earnings ratio.

The following relevant figures are given:

Rich Ltd.(Rs.) Poor Ltd.(Rs.)

Issued share capital
Ordinary shares of Rs. 10 each 30,00,000 12,00,000
6% Cumulative Preference shares of Rs. 100 each — 10,00,000
5% Debentures, redeemable in 2013 8,00,000
Estimated annual maintainable profits, before deduction of
debenture interest & taxation 6,00,000 2,40,000
Price/earning ratio 15 10

The shares in the holding company are to be issued to members of the subsidiaries on 1st June
2009, at a premium of Rs. 2.50 a share and thereafter these shares will be marketable on the Stock
Exchange.

It is anticipated that the merger will achieve significant economics but will necessitate additional
working capital. Accordingly, it is planned that on 31st December 2009, Mix Ltd. will make a
further issue of 60,000 ordinary shares the public for cash at the premium of Rs. 3.75 a share. These
shares will not rank for dividends until 31st December 2009.

In the period ending 31st December 2009, bank overdraft facilities will provide funds for the
payment by Mix Ltd. of preliminary expenses estimated at Rs. 50,000 and management etc.
expenses estimated at Rs. 6,000.

It is further assumed that interim dividends on ordinary shares, relating to the period from 1st June
to 31st December 2009 will be paid on 31st December 2009 by Mix Ltd. at 3½ % by Rich Ltd. at
5% and by Poor Ltd. at 2%.

You are required to project, as on 31st December 2009 for Mix Ltd., (a) the Balance Sheet as it
would appear immediately after fully subscribed share issue, and (b) the Profit and Loss Account
for the Period ending 31st December 2009.

Assume the rate of corporation tax to be 40% you can make any other assumption you consider
relevant.
(16 Marks)

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 TEST 6: CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
5.
(a) From the following information in respect of E Ltd., calculate the total value of human capital by
following Lev and Schwartz model:

Distribution of employees of E Ltd.

Age Unskilled Semi-skilled Skilled

No. Av. Annual No Av. Annual No. Av. annual
earnings . earnings earnings
(Rs. ’000) (Rs. ’000) (Rs. ’000)
30-39 70 3 50 3.5 30 5
40-49 20 4 15 5 15 6
50-54 10 5 10 6 5 7
Apply 15% discount factor.
(8 Marks)

(b) Sea Ltd. has lent a sum of Rs.10 lacks @ 18% per annum for 10 years. The loan had a Fair Value of
Rs.12, 23,960 at the effective interest rate of 13%. To mitigate prepayment risks but at the same
time retaining control over the loan, Sea Ltd. transferred its right to receive the Principal amount of
the loan on its maturity with interest, after retaining rights over 10% of principal and 4% interest
that carries Fair Value of Rs.29,000 and Rs.1,84,620 respectively. The consideration for the
transaction was Rs.9,90,000. The interest component retained included a 2% fee towards collection
of principal and interest that has a Fair Value of Rs. 65,160. Defaults, if any, are deductible to a
maximum extent of the company’s claim on Principal portion. You are required to show the Journal
Entries to record derecognition of the Loan.
(8 Marks)

6.
(a) An enterprise grants to an employee the right to choose either a cash payment equal to the value of
1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three years’ service.
If the employee chooses the equity alternative, the shares must be held for three years after vesting
date. The face value of shares is Rs. 10 per share.
At grant date, the fair value of the shares of the enterprise (without considering post-vesting
restrictions) is Rs. 50 per share. At the end of years 1, 2 and 3, the said fair value is Rs. 52, Rs. 55
and Rs. 60 per share respectively. The enterprise does not expect to pay dividends in the next three
years. After taking into account the effects of the post-vesting transfer restrictions, the enterprise
estimates that the grant date fair value of the equity alternative is Rs. 48 per share.
At the end of year 3, the employee chooses:
Scenario 1: The cash alternative
Scenario 2: The equity alternative
Calculate the amount of expenses for each year and pass necessary journal entries for each year &
for settlement under above two scenarios.

(8 Marks)

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 TEST 6: CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
(b) The capital structure of W Ltd. whose shares are quoted on the NSE is as under:
Equity Shares of Rs. 100 each fully paid Rs. 505 lakh
9% Convertible Pref. Shares of Rs. 10 each Rs. 150 lakh
12% Secured Debentures of Rs. 10 each 5,00,000
Reserves Rs. 101 lakh
Statutory Fund Rs. 50,50,000

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 Rs. 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)

(c) Shailendra has invested in three mutual funds. From the details given below, find out effective yield
on per annum basis in respect of each of the schemes to Shailendra upto 31.03.2017.

Mutual Fund X Y Z

Date of Investment 1-12-2016 1-1-2017 1-3-2017

Amount of investment (Rs.) 2,00,000 4,00,000 2,00,000

NAV at the date of investment (Rs.) 10.50 10.00 10.00

Dividend received upto 31-3-2017 (Rs.) 3,800 6,000 Nil

NAV as on 31-3-2017 (Rs.) 10.40 10.10 9.80

(4 Marks)

7. Answer any FOUR of the following: (4 X 4 = 16 Marks)

(a) Garden Ltd. acquired fixed assets viz. plant and machinery for Rs.20 lakhs. During the same year it
sold its furniture and fixtures for Rs.5 lakhs. Can the company disclose, net cash outflow towards
purchase of fixed assets in the cash flow statement as per AS-3?

(b) Astha Ltd. has FCCBs worth Rs. 100 crore which are due to mature on 31st December 2013.
While preparing the financial statements for the year ending 31st March 2013, it is expected that
the FCCB holders will not exercise the option of converting the same to equity shares. How should
the company classify the FCCBs on 31st March 2013? Will your answer be different if the
company expects that FCCB holders will convert their holdings into equity shares of Astha Ltd.?

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 TEST 6: CA Final Financial Reporting (Old) CA P.S. Beniwal (9990301165)
(c) Qu Ltd. in the business of manufacture of Passenger cars and commercial vehicles. The company is
working on a strategic plan to shift from the passenger car segment over the coming 5 years
However no specific plans have been drawn up for sale of neither the division nor its assets. As part
of its plan it will reduce the production of passenger cars by 20% annually. It also plans to
commence another new factory for the manufacture of commercial vehicles and transfer plus
employees in a phased manner.
(i) You are required to comment if mere gradual phasing out in itself can be considered as a
‘Discounting Operation’ within the meaning of AS 24.
(ii) If the company passes a resolution to sell some of the assets in the passenger car division and
also to transfer few other of the passenger car division to the new factory. Does this trigger
the application or AS 24?
(iii)Would your answer to the above be different if the company resolves to sell the assets of the
Passenger Car Division in phased but time manner?

(d) Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6 months. The
company entered into a forward contract for 6 months @ ₹ 62.15 per dollar. On 30th November,
2013; the exchange rate was ₹ 60.75 per dollar.
How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year
ended 31st March, 2014 ?

(e) Explain the Carve-out between IND AS 1 and IAS 1.

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