CA Final Question Papers Group I Financial Reporting May 2011

 

                 CA Final Question Papers – Group I

                      Financial Reporting – May 2011

This Paper has 17 answerable questions with 0 answered.
Roll No………
Total No. of Questions — 7] [Total No. of Printed Pages — 8
Time Allowed : 3 Hours Maximum Marks : 100
Question.No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
Working notes should form part of the answer.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Marks
1. (a) The fair value of plan assets of Anupam Ltd. was Rs. 2,00,000 in respect of employee benefit pension plan as on 1st April, 2009. On 30th September, 2009 the plan paid out benefits of Rs. 25,000 and received inward contributions of Rs. 55,000. On 31st March, 2010 the fair value of plan assets was Rs. 3,00,000. On 1st April, 2009 the company made the following estimates, based on its market studies and prevailing prices.
%
Interest and dividend income (after tax) payable by fund
Realized gains on plan assets (after tax)
Fund administrative costs
Expected rate of return 10.25
3.00
(3.00)
10.25
Calculate the expected and actual returns on plan assets as on 31st March, 2010, as per AS 15. 4×5=20 (0)
(b) Certain callable convertible debentures are issued at Rs. 60. The value of similar debentures without call or equity conversion option is Rs. 57. The value of call as determined using Black and Scholes model for option pricing is Rs. 2. Determine values of liability and equity component. (0)
(c) HSL Ltd., is manufacturing goods for local sale and exports. As on 31st March, 2010, it has the following finished stock in the factory warehouse:
(i) Goods meant for local sales Rs. 100 lakhs (cost Rs. 75 lakhs)
(ii) Goods meant for exports Rs. 50 lakhs (cost Rs. 20 lakhs)
Excise duty is payable at the rate of 12%. The company’s Managing Director says that excise duty is payable only on clearance of goods and hence not a cost. Please advise HSL using guidance note, if any issued on this, including valuation of stock. (0)
(d) Rama Ltd, has provided the following information:
Depreciation as per accounting records
Depreciation as per income tax records
Unamortized preliminary expenses as per tax record = Rs. 2,00,000
= Rs. 5,00,000
= Rs. 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/liability should be recognized as transition adjustment ? Tax rate 50%. (0)
2. The Balance Sheets of three companies Sun Ltd., Moon Ltd. and Light Ltd. as at 31st March, 2010 are given below:
Liabilities Sun Ltd.
Rs. Moon Ltd.
Rs. Light Ltd.
Rs. Assets Sun Ltd.
Rs. Moon Ltd.
Rs. Light Ltd.
Rs.
Share Capital
(Shares of Rs. 10 each)
Reserves
Profit and Loss A/c
Sundry Creditors
Sun Ltd.
1,50,000
50,000
60,000
30,000

1,00,000
40,000
50,000
35,000
10,000
60,000
30,000
40,000
25,000
8,000 Fixed Assets
Investments (at cost)
Shares in:
Moon Ltd.
Light Ltd.
Light Ltd.
Stock–in–trade
Debtors
Due from––
Moon Ltd.
Light Ltd.
Cash in hand 70,000

90,000
40,000

40,000
20,000

12,000
8,000
10,000 1,20,000

50,000
30,000
25,000

10,000 1,03,000

20,000
30,000

10,000
2,90,000 2,35,000 1,63,000 2,90,000 2,35,000 1,63,000
(a) Sun Ltd. held 8,000 shares of Moon Ltd. and 1,800 shares of Light Ltd.
(b) Moon Ltd. held 3,600 shares of Light Ltd.
(c) All investments were made on 1st July, 2009.
(d) The following balances were there on 1st July, 2009:
Moon Ltd.
Rs. Light Ltd.
Rs.
Reserves
Profits and Loss A/c 25,000
20,000 15,000
25,000
(e) Moon Ltd. invoiced goods to Sun Ltd. for Rs. 4,000 at a cost plus 25% in December, 2009. The closing stock of Sun Ltd. includes such goods valued at Rs. 5,000.
(f) Light Ltd. sold to Moon Ltd. an equipment costing Rs. 24,000 at a profit of 25% on selling price on 1st January, 2010. Depreciation at 10% per annum was provided by Moon Ltd. on the equipment.
(g) Sun Ltd. proposes dividend at 10%.
Prepare the Consolidated Balance Sheet of the group as at 31st March, 2010. Working should form part of the answer. 16 (0)
3. A Ltd. and B Ltd. were amalgamated on and from 1st April, 2010. A new company C Ltd. was formed to take over the business of the existing companies. The Balance Sheets of A Ltd., and B Ltd., as on 31st March, 2010 are given below:
(Rs. in lakhs)
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share capital:
Equity shares of Rs. 100 each
12% Preference shares of Rs. 100 each
Reserves and surplus:
Revaluation Reserve
General Reserve
Investment Allowance Reserve
Profit & Loss account
Secured Loans:
10% Debentures (Rs. 100 each)
Current Liabilities and Provisions:’
Sundry Creditors
Bills Payable
800
300

150
170
50
50

60

270
150
750
200

100
150
50
30

30

120
70 Fixed Assets:
Land and Building
Plant and Machinery
Investments:
Current Assets,
Loans and Advances:
Stock
Sundry Debtors
Bills Receivable
Cash and Bank
550
350
150

350
250
50
300
400
250
50

250
300
50
200
2,000 1,500 2,000 1,500
Additional Information:

(1) 10% Debentureholders of A Ltd., and B Ltd., are discharged by C Ltd., issuing such number of its 15% Debentures of Rs. 100 each, so as to maintain the same amount of interest
(2) Preference shareholders of the two companies are issued equivalent number of 15% Preference shares of C Ltd., at a price of Rs. 150 per share (face value of Rs. 100).
(3) C Ltd., will issue 5 equity shares for each equity share of A Ltd. and 4 equity shares for each share of B Ltd. The shares are to be issued @ Rs. 30 each, having a face value of Rs. 10 per share
(4) Investment allowance reserve to be maintained for 4 more years.
Prepare the Balance Sheet of C Ltd., as on 1st April, 2010 after the amalgamation has been carried out on the basis of amalgamation in the nature of purchase. 16 (0)
4. (a) A Ltd., agreed to absorb B Ltd., on 31st March 2010, whose Balance Sheet stood as follows:
Liabilities Rs. Assets Rs.
Share Capital:
80,000 Equity shares of
Rs. 10 each fully paid up
Reserves & Surplus:
General Reserve
Current Liabilities and
Provisions :
Sundry Creditors
8,00,000

1,00,000

1,00,000 Fixed Assets:
Investments
Current Assets,
Loans and Advances:
Stock-in-trade
Sundry Debtors 7,00,000

1,00,000
2,00,000
10,00,000 10,00,000
The consideration was agreed to be paid as follows:

(a) A payment in cash of Rs. 5 per share in B Ltd., and
(b) The issue of shares of Rs. 10 each in A Ltd. on the basis of 2 equity shares (valued at Rs. 15) and one 10% Cumulative Preference shares (valued at Rs. 10) for every five shares held in B Ltd.
The whole of the share capital consists of shareholdings in exact multiple of five except the followings holdings:
A
B
C
D
Other individual 116
76
72
28
8 (each member holding one share each)
300
It was agreed that A Ltd. will pay in cash for fractional shares equivalent at agreed value of shares in B Ltd., i.e. Rs. 65 for five shares of Rs. 50 paid.
Prepare a statement showing the purchase consideration receivable in shares and cash. 8 (0)
(b) The following are the summarized Balance Sheets of two companies, A Ltd., and B Ltd. as on 31–03–2010:
Liabilities A Ltd.
Rs. B Ltd.
Rs. Assets A Ltd.
Rs. B Ltd.
Rs.
Equity shares of Rs. 10 each
Reserves
10% Debentures
Creditors 15,00,000
3,00,000
6,00,000
3,00,000 10,00,000
2,00,000
4,00,000
5,00,000 Goodwill
Net tangible block
Current Assets 2,00,000
17,00,000
8,00,000 1,00,000
14,00,000
6,00,000
27,00,000 21,00,000 27,00,000 21,00,000
Additional information:

(i) Assets are to be revalued as follows:
A Ltd.
Rs. B Ltd.
Rs.
Revaluation of Tangible Block
Revaluation of Current Assets 21,00,000
10,00,000 12,00,000
4,00,000
(ii)
Average annual profit for three years before
charging debenture interest 4,50,000 3,10,000
(iii) Goodwill is to be valued at four year’s purchase of average super profits for three years. Average is to be calculated after adjustment of depreciation at 10% on the amount of increase/decrease on revaluation of fixed assets. In the case of B Ltd. a claim of Rs. 10,000, which was omitted, is to be adjusted against its average profit. Income tax is to be ignored.
(iv) Normal profit on capital employed is to be taken at 15%, capital employed being considered on the basis of revalued amount of tangible assets.
Ascertain the value of goodwill of A Ltd. and B Ltd. 8 (0)
5. The Balance Sheet of PNR Limited as on 31–12–2010 is as follows:
(Rs. in lakhs)
Liabilities Assets
1,00,000 Equity shares of
Rs. 10 each fully paid up
1,00,000 Equity shares of Rs. 6
each fully paid–up
Reserves & Surplus
Liabilities 10

6

4
10 Goodwill
Fixed Assets
Others Tangible Assets
Intangible Assets
(Market Value)
Miscellaneous expenditure to the
extent not written off 5
15
5

3

2
30 30
Fixed assets are worth Rs. 24 lakhs. Other tangible assets are valued 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
(Rs. in lakhs) Dividend
%
2007
2008
2009
2010 3.00
3.50
4.00
4.10 11
12
13
14
Normal expectation in the industry to which the company belongs to is 10%.

Kamalesh holds 20,000 equity shares of Rs. 10 each fully paid up 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?
Note: Make necessary assumptions, wherever required. 16 (0)
6. (a) Prosperous Bank has a criterion that it will give loans to companies that have an “Economic Value Added” greater than zero for the past three years on an average. The bank is considering lending money to a small company that has the economic value characteristics shown below. The data relating to the company is as follows:
(i) Average operating income after tax equals Rs. 25,00,000 per year for the last three years.
(ii) Average total assets over the last three years equals Rs. 75,00,000.
(iii) Weighted average cost of capital appropriate for the company is 10% which is applicable for all three years.
(iv) The company’s average current liabilities over the last three years are Rs. 15,00,000.
Does the company meet the bank’s criterion for a positive economic value added?

5 (0)
(b) Calculate the NAV of a mutual fund from the following information:
On 1–4–2009
Outstanding units 1 crore of Rs. 10 each = Rs. 10 crores (Market Value Rs. 16 crores)
Outstanding liabilities Rs. 5 crores.
Other information:
(i) 20 lakhs units were sold during the year at Rs. 24 per unit.
(ii) No additional investments were made during the year and as at the year end 50% of the investments held at the beginning of the year were quoted at 80% of book value.
(iii) 10% of the investments have declined permanently 10% below cost.
(iv) At the year end 31–3–10 outstanding liabilities were Rs. 1 crore.
(v) Remaining investments were quoted at Rs. 13 crores.
6 (0)
(c) A Company has a capital base of Rs. 3 crores and has earned profits of Rs. 33 lakhs. Return on investment of the particular industry to which the company belongs is 12.5%. If the services of a particular executive are acquired by the company, it is expected that the profits will increase by Rs. 7.5 lakhs over and above the target profit. Determine the amount of maximum bid price for that particular executive and the maximum salary that could be offered to him.
Rs.
Capital base
Actual profit
Target profit 3,00,00,000
33,00,000
37,50,000
5 (0)
7. Answer any four of the following: 4×4=16
(a) Anil Pharma Ltd. ordered 16,000 kg of certain material at Rs.160 per unit. The purchase price includes excise duty Rs.10 per kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to Rs.1,40,160. Normal transit loss is 2%. The company actually received 15,500 kg and consumed 13,600 kg of material. Compute cost of inventory under AS 2 and amount of abnormal loss. (0)
(b) Jain Construction Co. Ltd. undertook a contract on 1st January, 2010 to construct a building for Rs. 80 lakhs. The company found on 31st March, 2010 that it had already spent Rs. 58,50,000 on the construction. Prudent estimate of additional cost for completion was Rs. 31,50,000.
What amount should be charged to revenue and what amount of contract value to be recognized as turnover in the final accounts for the year ended 31st March 2010 as per provisions of AS 7 (revised)?

(0)
(c) Kumar Ltd., is in engineering industry. The company received an actuarial valuation for the first time for its pension scheme which revealed a surplus of Rs. 6 lakhs. It wants to spread the same over the next 2 years by reducing the annual contribution to Rs. 2 lakhs instead of Rs. 5 lakhs. The average remaining life of the employee is estimated to be 6 years.
You are required to advise the company. (0)
(d) An enterprise reports quarterly, estimates an annual income of Rs. 10 lakhs. Assume tax rates on 1st Rs. 5,00,000 at 30% and on the balance income at 40%. The estimated quarterly income are Rs. 75,000, Rs. 2,50,000, Rs. 3,75,000 and Rs. 3,00,000.
Calculate the tax expense to be recognized in each quarter. (0)
(e) From the following information determine the possible value of brand under the potential earning model:
(Rs. in lakhs)
(a) Profit before tax
(b) Income tax
(c) Tangible Fixed Asset
(d) Identifiable Intangible other than brand model
(e) Expected return on tangible fixed assets 13.00
3.00
20.00
10.00
6.00
Appropriate capitalization factor for intangibles is 25%.

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