CWA ICWA Exam Papers Final Group IV
Advanced Financial Accounting and Reporting December 2011
This Paper has 22 answerable questions with 0 answered.
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
PART A questions are compulsory. Attempt all of them.
PART B has seven questions. Attempt any five of them.
Please: (1) Write answers to all Parts of a question together.
(2) Open a new page for answer to a new question.
(3) Attempt the required number of questions only.
(4) Indicate in the front page of the answer book the required question attempted.
PART A (25 Marks)
1. (a) In each of the cases given below, one out of four alternatives is correct. Indicate the correct answer ( = 1 mark) and give your workings/reasons briefly (= 1 mark): 2×10=20
(i) RAJASTHALI 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 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. The cost of inventory as per AS 2 will be
A. Rs. 3,20,644
B. Rs. 3,01,644
C. Rs. 3,07,800
D. None of these
(ii) BANSAL & JINDAL CONSTRUCTION Co. Ltd. undertook a contract on 1st January, 2011 to construct a building for Rs. 80 lakhs. The company found on 31st March, 2011 that it had already spent Rs. 58,50,000 on the construction. Prudent estimate of additional cost for completion was Rs. 31,50,000. Contract Value to be recognized as turnover in the final accounts for the year ended 31 st March, 2011 as per AS 7 (revised) will be
A. Rs.80 1akhs
B. Rs.10 1akhs
C. Rs.52 1akhs
D. None of these
(iii) Moon Ltd. entered into agreement with Sun Ltd. for sale of goods of Rs. 8 lakhs at a profit of 20% on cost. The sale transaction took place on 1st February, 2011. On the same day Sun Ltd. entered into another agreement with Moon Ltd. to resell the same goods at Rs. 10.80 lakhs on 1st August, 2011. The pre–determined reselling price covers the holding cost of Sun Ltd. Treatment as per AS 9 in the books of Moon Ltd.
A. Sales A/c will be credited with Rs. 9,60,000
B. Advance from Sun Ltd. Ale will be credited with Rs. 9,60,000
C. Financing Charges Account will be debited with Rs. 1,20,000
D. None of these
(iv) PRARTHANA 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 contributes Rs. 5 lakhs annually for its pension schemes. The average remaining life of the employee is estimated to be 6 years. As per AS 15 (Revised) .
A. Surplus of Rs. 6 lakhs in the pension scheme on its actuarial valuation is required to be credited to the Profit and Loss Statement for the current year
B. Surplus of Rs. 6 lakhs can be spread over the next 2 years by reducing the annual contribution to Rs. 2 lakhs instead of Rs. 5 lakhs
C. Surplus of Rs. 6 lakhs is to be spread over the average remaining life of the employees of 6 years by crediting to the Profit and Loss Statement of each year
D. None of these
(v) Mis. XYZ Ltd. has three segments namely X, Y, Z. The total assets of the Company are: Segment X Rs. 1.00 crore, Segment Y Rs. 3.00 crores and Segment Z Rs. 6.00 crores. Deferred tax assets included in the assets of each Segments are: X Rs. 0.50 crore, Y Rs. O4O crore and Z Rs. 0.30 crore. As per AS 17
A. X, Y and Z are reportable segments
B. Only X and Y are reportable segments
C. Only X and Z are reportable segments
D. Only Z and Y are reportable segments
(vi) NIKITA Limited wishes to obtain a machine costing Rs. 30 lakhs by way of lease. The effective life of the machine is 15 years, but the company requires it only for the first 5 years. It enters into an agreement with Ashok Ltd., for a lease rental for Rs. 3 lakhs p.a. payable in arrears and the implicit rate of interest’ is 15%. Treatment as per AS 19 in the books of Lessee
A. Lease payments should be recognized as an expense in the Statement of Profit and Loss on a straight line basis over the lease term
B. Finance Charges included in Lease payments should be recognized as an expense in the Statement of Profit and Loss .
C. Depreciation of Rs. 2,00,000 p.a. should be recognized as an expense in the Statement of Profit and Loss
D. None of the above.
(vii) RAKESH BEHARI Ltd. has provided the following information:
Depreciation as per accounting records Rs. 2,00,000, Depreciation as per income taxrecords Rs. 5,00,000, Unamortized preliminary expenses as per income tax records Rs. 30,000, Tax rate 50%.
There is adequate evidence of future profit sufficiency. As per AS 22 Deferred Tax Asset/Liability to be recognized will be
A. Rs. 1,50,000 (DTA)
B. Rs. 15,000 (DTL)
C. Rs. 1,35,000 (Net DTL)
D. None of these
(viii) Mr. Rajiv Gupta, CEO of Indraprastha Co–operative Bank reports quarterly and estimates an annual income of Rs. 100 crores. Assume tax rates on first Rs. 50 crores at 30% and on the balance income at 40%. The estimated quarterly incomes are Rs. 7.5 crores, Rs. 25 crores, Rs. 37.5 crores and Rs. 30 crores. The tax expense to be recognized in last quarter as per AS 25 is
A. Rs. 9 crores
B. Rs. 10.5 crores
C. Rs. 12 crores
D. None of these
(ix) S.S.CORPORATE SECURITIES Ltd. is showing an intangible asset at Rs. 72 lakhs as on 01.04.2011 and that item was acquired for Rs. 96 lakhs on 01.04.2008 and that item was available for use from that date. It has been following the policy of amortisation of the intangible asset over a period of 12 years on straight line basis. As per AS 26
A. Rs. 4.8 lakhs should be adjusted against the current year’s profits
B. Rs. 4.8 lakhs should be adjusted against the opening balance of revenue reservs
C. Rs. 9.6 lakhs should be adjusted against the opening balance of revenue reserves
D. None of these
(x) An asset of PELF FINSTOCK Ltd. does not meet the requirements of environment laws which have been recently enacted. The asset has to be destroyed as per the law. The asset is carried in the Balance Sheet at the year end at Rs. 6,00,000. The estimated cost of destroying the asset is Rs. 70,000. Impairment Loss to be recognized as an expense immediately in the Statement of Profit and Loss as per AS 28 is
A. Rs. 6,00,000
B. Rs. 6,70,000
D. None of these
(b) ANNA Ltd. purchased an oil well for $ 200 million. It estimates that the well contains 500 million barrels of oil. The oil well has no salvage value. If the company extracts and sells 20,000 barrels of oil during the first year, how much depletion expense should be recognized as per IFRS 6? 5 (0)
PART B (75 Marks)
2. READ & LEARN Ltd. is engaged in the business of manufacture of electric passenger cars. Its Balance Sheet as at 31.03.2011 is as under:
Liabilities Rs.(lakh) Assets Rs.(lakh)
Equity Shares of Rs. 10 each
12% Term Loan from Bank
Provision for Tax
Proposed Dividend 1,500
140 Gross fixed Assets
Less: Depreciation till date
Overseas Debtors (I $ = INR 42)
Stock in Trade
Cash and Bank Balances 1,500
(a) The closing exchange rate for the U.S. dollar was INR 48. There was a loss for the year ended 31.03.2011 owing to write down of cost of acquisition of non–trade investments by 4%. There was no other transaction under non–trade investments during the year.
(b) Current year depreciation charged on historical cost was Rs. 100 lakhs. Current cost of Fixed assets is determined at Rs. 2,000 lakhs.
(c) While current cost of closing stock is Rs. 367, that of the opening stock was Rs. 200 lakhs against its historical cost of Rs. 148 lakhs. The market value of non–trade investments at the year end was Rs. 300 lakhs. The overseas debtors made settlements in U.S. $ only.
(d) The industry average rate of return on current cost of capital employed is 12% on long–term debt, and 15% on equity. The opening balance in general reserve was Rs.l50 lakhs. While prevailing tax rate is 30% such rate is expected to decline by 5%.
Required: Using the above information you are required to arrive at value of the goodwill of the company under equity and long–term fund approaches and also show the leverage effect on Goodwill. 15 (0)
3. (a) From the following data compute the Economic Value Added of EASY Ltd.:
Reserve and Surplus
Profit before Interest and Tax
Market Rate of Return
Risk Free Rate Rs. 1,600 crores
Rs. 320 crores
Rs. 32 crores
Rs. 3,200 crores
Rs. 1,432 crores
(b) DIFFICULT Ltd. has given a 12.50% fixed rate loan to its subsidiary EASY Ltd. DIFFICULT Ltd. measures this loan at an amortised cost of Rs. 2,50,000. DIFFICULT Ltd. has plans to hive off the receivable at a later stage and as a measure to safeguard against fall in value of its dues enters into a pay–fixed, receive floating interest rate swap to convert the fixed interest receipts into floating interest receipts. DIFFICULT Ltd. designates the swap as a Hedging instrument in a fair value hedge of the Loan Asset.
Over the following months, market interest rates increase and DIFFICULT Ltd. earns interest income of Rs. 25,000 on the loan and Rs. 1,000 as net interest payments on the swap. The fair value of the Loan Asset decreases by Rs. 5,000 while that of the interest rate swap increases by Rs. 5,000. You are informed that all conditions required for the Hedge Accounting are satisfied.
Required: Pass Journal Entries, with suitable narrations in the books of DIFFICULT Ltd. to record the above transactions.
4. The Balance Sheets of H Ltd. and S Ltd. as on the dates of last closing of accounts are as under:
Liabilities H Ltd.
Rs. S Ltd.
Rs. Assets H Ltd.
Rs. S Ltd.
Share Capital (Equity shares
of Rs. 10 each)
Accumulated Profits & Reserves
15% Rs. 100 Non–convertible
Tax Provision 11,00,000
2,50,000 Fixed Assets at Cost
40,000 Shares in S Ltd.
1,000 Debentures in S Ltd.
Cash & Bank 8,45,000
Total: 22,80,000 15,75,000 Total: 22,80,000 15,75,000
The following information is also available:
(a) On 8th February, 2011 there was a fire at the factory of S Ltd., resulting in inventory worth Rs. 20,000 being destroyed. S Ltd. received 75 per cent of the loss as insurance.
(b) The same fire resulted in destruction of a machine having a written down value of Rs. 1,00,000. The Insurance company admitted the Company’s claim to the extent of 80 per cent. The machine was insured at its fair value of Rs. 1,50,000.
(c) On 13th March, 2011, H Ltd. sold goods costing Rs. 1,50,000 to S Ltd. at a mark–up of 20 per cent. Half of these goods were resold to H Ltd. who in turn was able to liquidate the entire stock of such goods before closure of accounts on 31 st March, 2011. As on 31st March, 2011 S Ltd.’s accounts payable show Rs. 60,000 due to H Ltd. on the two transactions.
(d) H Ltd. acquired the holdings in S Ltd. on 1st January, 2009 when the reserves and accumulated profits of S Ltd. stood at Rs. 75,000.
(e) Both companies have not provided for tax on current year profits. The current year taxable profits are Rs. 33,000 and Rs. 66,000 for H Ltd. and S Ltd. respectively. The tax rate is 33%.
(f) The incremental profits earned by S Ltd. for the period January, 2011 to March, 2011 over that earned in the corresponding period in 2010 was Rs. 56,000. Except for the profits that resulted from the transactions with H Ltd. in the aforesaid period, the entire profits have been realised in cash before 31st March, 2011.
Required: Prepare a Consolidated Balance Sheet of H Ltd. and its subsidiary as at 31 st March, 2011. 15 15 (0)
5. Small Ltd. and Little Ltd. two companies in the field of speciality chemicals, decided to go in for a follow on Public Offer after completion of an amalgamation of their businesses. As per agreed terms initially a new company Big Ltd. will be incorporated on 1st January, 2012 with an authorized capital of Rs. 2 crore comprised of 20 lakh equity shares of Rs. 10 each. The holding company would acquire the entire shareholding of Small Ltd. and Little Ltd. and in turn would issue its shares to the outside holders of these shares. It is also agreed that the consideration would be a multiple of the average P/E ratio for the period 1st January, 2011 to 31st March, 2011 times the rectified profits of each company, subject to necessary adjustments for complying with the terms of the share issue.
The following information is supplied to you:
Small Ltd. Little Ltd.
Ordinary Shares of Rs. 10 each (Nos.)
10% Preference Shares of Rs. 100 each (Nos.)
10% Preference Shares of Rs. 10 each (Nos.)
5% Debentures of Rs. 10 each (Nos.)
(a) 4 lakh Ordinary Shares in Small Ltd.
(b) 2 lakh Ordinary Shares in Little Ltd.
Profit before Interest & Tax (PBIT) after considering impact of
Inter–company Transactions and Holdings
Average P/E ratio January, 2011 to March, 2011 40 lakhs
Rs. 20 lakhs
Rs. 50 lakhs
10 20 lakhs
Rs. 40 lakhs
Rs. 25 lakhs
The following additional information is also furnished to you in respect of adjustments required to the profit figure as give above:
(a) The profits of the respective companies would be adjusted for half the value of contingent liabilities as on 31st March, 2011.
(b) Debtors of Small Ltd. include an irrecoverable amount of Rs. 2 lakh against which Rs. 1 lakh was recovered but kept in Advance account.
(c) Little Ltd. had omitted to provide for increased FOREX liability of US $ 10,000 on loan availed in financial year 2007–08 for purchase of Machinery. The machinery was acquired on 1st January, 2008 and put to use in Financial year 2008–09. The additional liability arose due to change in exchange rates and is arrived at in conformity with prevailing provisions of AS 11. The exchange rate is US $ 1 = INR 50.
(d) Small Ltd. has omitted to invoice a sale that took place on 31st March, 2011 of goods costing Rs. 2,50,000 at a mark–up of 15 per cent instead the goods were considered as part of closing inventory.
(e) Closing Inventory of Rs. 45 lakhs of Little Ltd. as on 31 st March, 2011 stands undervalued by 10 per cent.
(f) Contingent liabilities of Small Ltd. and Little Ltd. as on 31 st March, 2011 stands at Rs. 5 lakhs and Rs. 10 lakhs respectively.
The terms of the share issue are as under:
(1) Shares in Big Ltd. will be issued at a premium of Rs. 13 per share for all external shareholders of Small Ltd. The Premium will be Rs. 15 per share for shares in Big Ltd. issued to all external shareholders of Little Ltd.
(2) No shares in Big Ltd. will be issued in lieu of the investments (intercompany holdings) of both companies. Instead the shares so held shall be transferred to Big Ltd. at the close of the financial year ended 31 st March,2012 at Par Value consideration payable on date of transfer.
(3) Big Ltd. would in addition to the issue of shares to outside shareholders of Small Ltd. and Little Ltd. make a preferential allotment on 31 st March, 2012 of 2 lakhs ordinary shares at a premium of Rs. 28 per share to Virgin Capital Ltd. (VCL). These shares will not be eligible for any dividends declared or paid till that date.
(4) Big Ltd. will go in for a 18 per cent unsecured Bank overdraft facility to meet incorporation costs of Rs. 16 lakhs and towards management expenses till 31st March, 2012 estimated at Rs. 14 lakhs. The overdraft is expected to be availed on 1st February, 2012 and closed on 31st March, 2012 out of the proceeds of the preferential allotment.
(5) It is agreed that interim dividends will be paid on 31.03.2012 for the period January, 2012 to March, 2012 by Big Ltd. at 2 per cent, Small Ltd. at 3 per cent and Little Ltd. at 2.5 per cent. Ignore Dividend Distribution Tax.
(6) The prevailing Income Tax Rate is 25 per cent.
Required: Compute the number of shares to be issued to the shareholders of each of the companies and prepare the projected Profit and Loss Account for the period from 1st January, 2012 to 31.03.2012 of Big Ltd. and its Balance Sheet as on 31 st March, 2012. 15 (0)
6. PRARTHAN A Ltd. is in the business of making sports equipment. The company operates fr0m Thailand. To globalise its operations PRARTHANA Ltd. has identified PIYUSH Ltd. an Indian company, as a potential take over candidate. After due diligence of PIYUSH Ltd. the following information is available:
(a) Cash Flow Forecasts (Rs. in crore):
Year 10 9 8 7 6 5 4 3 2 1
PRARTHANA Ltd. 24
(b) The net worth of PIYUSH Ltd. (Rs. in lakh) after considering certain adjustments suggested by the due diligence team reads as under:
Bank Loans 250
Represented by Equity Shares of Rs. 1,000 each 750
Talks for takeover have crystalized on the following:
(1) PRARTHANA Ltd. will not be able to use Machinery worth Rs. 75 lakhs which will be disposed of by them subsequent to takeover. The expected realization will be Rs. 50 lakhs.
(2) The inventories and receivables are agreed for takeover at values of Rs. 100 and Rs. 50 lakhs respectively which is the price they will realize on disposal.
(3) The liabilities of PIYUSH Ltd. will be discharged in full on take over along with an employee settlement of Rs. 90 lakhs for the employees who are not interested in continuing under the new management.
(4) PRARTHANA Ltd. will invest a sum of Rs. 150 lakhs for upgrading the Plant of PIYUSH Ltd. on takeover. A further sum of Rs. 50 lakhs will also be incurred in the second year to revamp the machine shop floor of PIYUSH Ltd, .
(5) The Anticipated Cash Flows (Rs. in crore) post takeover are as follows:
Year 1 2 3 4 5 6 7 8 9 10
Year 18 24 36 44 60 80 96 100 140 200
Required: Advise the management the maximum price which they can pay per share of PIYUSH Ltd. if a discount factor of 20 per cent is considered appropriate. 15 (0)
7. P Ltd. owns 80% of S and 40% of J and 40% of A. J is jointly controlled entity and A is an associate. Summarised Balance Sheets of four companies as on 31.03.11 are:
(Rs. in lakhs)
P Ltd. S J A
Investment in S
Investment in J
Investment in A
Share Capital Re. I Equity Share
P Ltd. acquired shares in ‘S’ many years ago when ‘S’ retained earnings were Rs. 520 lakhs. P Ltd. acquired its shares in ‘J’ at the beginning of the year when ‘J’ retained earnings were Rs. 400 lakhs. P. Ltd. acquired its shares in ‘A’ on 01.04.10 when ‘A’ retained earnings were Rs. 400 lakhs.
The balance of goodwill relating to‘S’ had been written off three years ago. The value of goodwill in ‘J’ remains unchanged.
Prepare the Consolidated Balance Sheet of P Ltd. as on 31.03.11 as per AS 21, 23 and 27.
8. Answer any three of the following: 3×5=15
(a) State the objectives of financial reporting. (0)
(b) Forward Contract. (0)
(c) State the criteria of Reportable Segment as per AS 17. (0)
(d) Briefly describe the role of Public Accounts Committee. (0)