CA Final Exam Papers Group I
Advanced Accounting May 2006
This Paper has 12 answerable questions with 0 answered.
Total No. of Questions— 6]
Time Allowed : 3 Hours
Maximum Marks : 100
Answers to questions are to be given only in English except in the cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers in Hindi, his answers in Hindi will not be valued.
Answer all Questions
Working notes should form part of the answer.
Wherever applicable, suitable assumptions should be made by the candidate.
1. The following are the Balance Sheets of Arun Ltd., Brown Ltd. and Crown Ltd. as at 31.12.2005:
Rs. Crown Ltd.
Share Capital (Shares of Rs.100 each)
Profit and Loss Account
Rs. Crown Ltd.
Brown Ltd. (3,000 Shares)
Crown Ltd. (400 Shares)
Crown Ltd. (1,400 Shares)
Due from: Brown Ltd.
(i) All shares were acquired on 1.7.2005.
(ii) On 1.1.2005 the balances to the various accounts were as under:
Rs. Crown Ltd.
Profit and Loss account 40,000
(Dr.) 20,000 20,000
(iii) During 2005, Profits accrued evenly.
(iv) In August, 2005, each company paid interim dividend of 10%. Arun Ltd. and Brown Ltd. have credited their profit and loss account with the dividends received.
(v) During 2005, Crown Ltd. sold an equipment costing Rs.40,000 to Brown Ltd. for Rs.48,000 and Brown Ltd. in turn sold the same to Arun Ltd. for Rs.52,000.
Prepare the consolidated Balance Sheet as at 31.12.2005 of Arun Ltd. and its subsidiaries
2. The following are the Balance Sheets of Big Ltd. and Small Ltd. as at 31.3.06:
Profit & Loss A/c
Sundry Creditors 40
27.5 Sundry Assets
(including cost of shares)
Profit and Loss A/c 56
(i) The two companies agree to amalgamate and form a new company, Medium Ltd.
(ii) Big Ltd. holds 10,000 shares in Small Ltd. acquired at a cost of Rs.2,50,000 and Small Ltd. holds 5,000 shares in Big Ltd. acquired at a cost of Rs.7,00,000.
(iii) The shares of Big Ltd. are of Rs.100 and are fully paid and the shares of Small Ltd. are of Rs.50 each on which Rs.30 has been paid-up.
(iv) It is agreed that the goodwill of Big Ltd. would be valued at Rs.1,50,000 and that of Small Ltd. at Rs.2,50,000.
(v) The shares which each company holds in the other are to be valued at book value having regard to the goodwill valuation decided as given in (iv).
(vi) The new shares are to be of a nominal value of Rs.50 each credited as Rs.25 paid.
You are required to:
(i) Prepare the Balance Sheet of Medium Ltd., as at 31st March, 2006 after giving effect to the above transactions; and
(ii) Prepare a statement showing the shareholdings in the new company attributable to the shareholders of the merged companies.
3. The directors of a public limited company are considering the acquisition of the entire share capital of an existing company X Ltd engaged in a line of business suited to them. The directors feel that acquisition of X will not create any further risk to their business interest.
The following is the Balance Sheet of X Ltd., as at 31st December, 2005:
Liabilities Rs. Assets Rs.
4,000 equity shares of Rs.100 each
12,40,000 Fixed assets
Cash and bank balances 6,00,000
X‘s financial records for the past five years were as under:
Extra ordinary item(s)
(i) There were no changes in the issued capital of X during this period.
(ii) The estimated values of X Ltd.’s assets on 31.12.2005 are:
Rs. Realisable Value
(iii) It is anticipated that 1% of the debtors may prove to be difficult to be realized.
(iv) The cost of capital to the acquiring company is 10%.
(v) The current return of an investment of the acquiring company is 10%. Quoted companies with similar businesses and activities as X have a P/E ratio approximating to 8, although these companies tend to be larger than X.
Estimate the value of the total equity capital of X Ltd., on 31.12.2005 using each of the following bases:
(a) Balance sheet value
(b) Replacement cost
(c) Realisable value
(d) Gordon’s dividend growth model
(e) P/E ratio model.
4. (a) Global Ltd. has initiated a lease for three years in respect of an equipment costing Rs.1,50,000 with expected useful life of 4 years. The asset would revert to Global Limited under the lease agreement. The other information available in respect of lease agreementis:
(i) The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at Rs.20,000.
(ii) The implicit rate of interest is 10%.
(iii) The annual payments have been determined in such a way that the present value of the lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of Global Ltd.
(i) The annual lease payment.
(ii) The unearned finance income.
(iii) The segregation of finance income, and also,
(iv) Show how necessary items will appear in its profit and loss account and balance sheetfor the various years.
(b) Briefly describe the method of valuation of human resources as suggested by Jaggi and Lau. Also point out the special merit and demerit of this method. 8 (0)
5. (a) Swift Ltd. acquired a patent at a cost of Rs.80,00,000 for a period of 5 years and the product life–cycle is also 5 years. The company capitalized the cost and started amortizing the asset at Rs.10,00,000 per annum. After two years it was found that the product life–cycle may continue for another 5 years from then. The net cash flows from the product during these 5 years were expected to be Rs.36,00,000,Rs.46,00,000, Rs.44,00,0