Accounting for Public Companies

8/14/2019 Accounting for Public Companies

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5 DECEMBER 09 www.afterschool.tk 1

ACCOUNTING FOR PUBLICCOMPANIES

by :

DR. T.K. JAIN

AFTERSCHOOL

centre for social entrepreneurship

sivakamu veterinary hospital road

bikaner 334001 rajasthan, indiaFOR PGPSE PARTICIPANTS

mobile : 91+9414430763


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Borad and Samsukha Finserv Ltd. issued 50,000equity shares. The whole of the issue was

underwritten as follows:Red 40%; White 30%; Blue 30%

Applications for 40,000 shares were received in all,out of which applications for 10,000 shares had the

stamp of Red; those for 5,000 shares that of Whiteand those for 10,000 shares that of Blue. Theremaining applications for 10,000 shares did not

bear any stamp.


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Solution

This is a question on underwriting. We have toidentify liability of underwriter. Liability of

Red = 20000, Blue and white : 15000 each.The liability left out is : Red (20-10) = 10000,Blue : (15-10) = 5000, white : (15-5) = 10000

unmarked applications are : 10000. divide it in

their ratio : 4000,3000,3000

final liaibility : Red : 6000,white : 7000 blue2000 answer


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Borad IT Ltd., issued 50,000 equity shares ofwhich only 60% was underwritten by Green.Applications for 45,000 shares were received

in all out of which application for 26,000 weremarked.

Liability of Green : 30000-26000 = 4000


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Samsukha Restate Ltd., issued 30,000 6%Debentures of 100 each. 60% of the issue was

underwritten by Vivek Borar. Applicationsfor 28,000 debentures were received by thecompany.

Liability = 18000, no information aboutmarked. So (30-28) 2000 is the total shares

outstanding, out of which 60% is the liability

(=1200) of underwriter Vivek Borar.


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Goti Bikaneri Sweets Ltd., issued 12% 10,000Preference Shares of rs. 10 each. The issue was

underwritten as follows:

A :30%, B : 30%, C : 20%.Application for 8,000 shares were received by the

company in all. Determine the liability of therespective underwriters.

Outstanding liability : 2000, 80% of which is1600, so divide it in ratio : 3:3:2 in A, B,C.

Answer.


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Borad Bikaneri Namkeen Ltd. issued 40,000 shareswhich were underwritten as:

P: 24,000 shares Q: 10,000 shares and R: 6,000shares. The underwriters made applications for firm

underwriting as under:P: 3,200 shares; Q: 1,200 shares; and R: 4,000 shares.The total subscriptions excluding firm underwriting(including marked applications) were 20,000 shares.

The marked applications were - P: 4,000 shares; Q:8,000 shares; and R: 2,000 shares.


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Solution

Outstanding : 20000, received 20000out ofwhich 6000 were unmarked

(add firm undewriting to marked underwrtingonce and then add it in final liability)

liabilities are p : 24000 4000-3200-5200 =11600 + 3200 = 14800

Q 10000-8000-1200-800 = zero+1200=1200

r = 6000-2000-4000 = zero +4000= 4000


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Solve the following question

Infosis invited applications from public for 1,00,000 equityshares of Rs. 10 each at a premium of Rs. 5 per share. The

entire issue was underwritten by the underwriters A, B, C and

D to the extent of 30%, 30%, 20% and 20% respectively withthe provision of firm underwriting of 3,000, 2,000, 1,000 and

1,000 shares respectively. The company received applicationsfor 70,000 shares from public out of which applications for

19,000, 10,000, 21,000 and 8,000 shares were marked in

favour of A, B, C and D respectively.Calculate the liability of each one of the underwriters. Also

ascertain the underwriting commission @2.5% payable to thedifferent underwriters.


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Solution ...

Total liability = 30000 including firm underwriting ,individual Liabilities :

A 30000- 19000-3600=7400-3000-1650 = 2750

B 30000-10000-3600=16400-2000-1650 =12750

c : 20000-21000-2400=-3400-1000=-4400+4400=0

d 20000-8000 -2400=9600-1000-1100=7500

final liabilities : A 5750, B 14750, C 1000, D 8500total =30000

commission : 2.5% *15 * 30000= : A : 11250, B :11250, C : 7500 D : 7500 answer


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From the following figures calculate the value of ashare of Rs. 10 on (i) dividend basis, and (ii)return on capital employed basis, the market

expectation being 12%.

Yr Capital Empl Profit Dividend (%)

2005 5,00,000 80,000 12

2006 8,00,000 1,60,000 15

2007 10,00,000 2,20,000 18

2008 15,00,000 3,75,000 20


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Solution ....

If you want to calculate value on dividend, letus give weight to nearest year more than

previous year. Let us give weight of 4 (out of10) to 2008 and 3 to 2007. accordingly :

(12*1 + 15*2+18*3 + 20*4) = 176

now divide it by 12, we get: 14.6

so value of share must be 14.6 rupees per share


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solution...

If you want to calculate value on return oncapital employed, let us give weight to nearest

year more than previous year. Let us giveweight of 4 (out of 10) to 2008 and 3 to 2007.

accordingly :

(16*1 + 20*2+22*3 + 25*4) = 222now divide it by 12, we get: 18.5

so value of share must be 18.5 rupees per share


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Vivek Global Ltd. Has assets of Rs. 10 lakh,liability of 6 lakhs and has earned ROI of 20% thisyear. What is its value of share (face value100) ?

It has 1000 shares? Market expectation is 10%return.

There are three methods :

1. intrinsic value method : (10-6) = 4lakh/1000 = 400

2. yield method : ROI / MARKET RATE *

face value = 20/10 * 100 = 2003. Fair price method : simple average of above

two methods : so = 300.


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What will be value of share when networth andprofit were :

:2006 18,50,000 1,80,000

2007 21,20,000 2,00,0002008 21,30,000 2,30,000

The company has Rs. 10,00,000 on equity shares of Rs. 100 each andRs. 3,00,000 in 9% preference shares of Rs. 100 each. The company

has investments worth Rs. 2,50,000 (at market value) on the

valuation date the yield in respect of which has been excluded inarriving at the adjusted tax profit figures. It is usual for similar typeof companies to set aside 25% of the taxed profit for rehabilitation

and replacement purposes. On the valuation day the net worth(excluding investment) amounts to Rs. 22,00,000. The normal rate of

return expected is 9%. The company paid dividends consistentlywithin a range of 8 to 10% on equity shares over the previous sevenyears and the company expects to maintain the same. Compute the

value of each equity share on the basis of productivity.


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Solution ....

Find weighted return for last 3 years AVERAGEOF : 18/185 * 1 + 20/212*2 + 23/213 * 3 = 10.18%

now your networth is 22 lakhs, so 10.18% of this is

224000less 25% for rehabilitation : 168000

less preference dividend : 9% on 3 lakhs: 27000 =

141000capitalise it at 9% : 1551000

add investments (not taken above) : 2.5 lakh

total value : 18 lakh approx.


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What to do on acquisition of a

company ?When a company buys another company, there

are two possibilities :

1. capital reserve

2. goodwill

when you are paying more than the value ofthe firm you are paying goodwill

when you are paying less than the value of thefirm you have capital reserve


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What to do with preacquisition

profit

Preacquisition profit is taken into account inthe value of the firm. It is adjusted while

calculating capital reserve / goodwill.


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Consolidate the accounts of

holding and subsidiary companyLiabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Rs. Rs. Rs. Rs.

Share Capital: Sundry Assets 6,55,000 2,88,000

Equity shares of Investments:

Rs. 100 each 6,00,000 2,00,000 1600 shares of

General Reserve 60,000 25,000 Rs. 100 each 1,60,000 -

Profit and Loss

Account 80,000 15,000

Creditors 75,000 48,0008,15,000 2,88,000 8,15,000 2,88,000

H Ltd. acquired shares in S Ltd. on 31st March, 2009. Prepare the Consolidated balancesheet of H Ltd. and S Ltd. as on that date.


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Solution

Show the capital of H = 6 lakh

out of capital of S, find minority share andshow it

Show general reserve of H

show general reserve of S and profit of S ascapital reserve (H's share) and minority

holding (remaining share).

Share of H in S is 160000/200000=4/5


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SolutionLiabilities :

capital : 6 lakhs

Minority share : 40,000 + (25000+15000)*1/5 = 8000

General Reserve : 60000

Profit : 80000

Capital Reserve : (25000 + 15000)*4/5 = 32000

Creditors : H : 75000, S = 48000 = 123000

total : 943000

Assets :H : 6,55,000 S : 2,88,000 =

total : 943000


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Consolidate the accounts :

Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Rs. Rs. Rs. Rs.

Share Capital: Sundry Assets 5,91,000 3,18,000

Shares of Investments:

Rs. 100 each 6,00,000 2,00,000 1,600 shares of

General Reserve 60,000 40,000 Rs. 100 each 2,24,000

P& L Acct 80,000 30,000

Creditors 75,000 48,000

total 8,15,000 3,18,000 total 8,15,000 3,18,000

H Ltd. acquired the shares in S Ltd. on 30th June, 2009. The plant worth bookvalue of Rs. 60,000 included in sundry assets of S Ltd. was re-valued at Rs. 50,000

on this date.


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Solution

Here you can see that for share worth Rs. 160000, holdingcompany has paid Rs. 224000. thus there is some goodwillamount which has been paid. We have to calculate thatamount. Further, we also have to calculate minority interest as the holding company has 1600 out of 2000 shares of S Ltd.

For calculating minority interest take equity+share in generalreserve + share in profit - share in loss in revaluation


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Calculation of goodwill :

Amount paid : 224000

total stake :

equity 160000+ reserve + profit (40000+30000)*16/20 =

56000

loss on revaluation = -10000*16/20=-8000total : 208000

Goodwill=224000-208000 = 16000


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Solution... consolidated balance

sheet :Liabilities :Share : 6 lakhs

Minority interest : (200000+ 40000+30000-10000)* 4/20) = 52000

Reserve : 60000Profit : 80000

creditors = H=75000+S=48000=123000

total =915000

Assets : H : 591000, S:308000 total :899000 ,goodwill : 16000

total : 915000


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Consolidate balance sheets :Reserves and Profit and Loss Account (Cr.) of

S Ltd. stood at Rs. 25,000 and Rs. 15,000respectively on the date acquisition of its 80%

shares by H Ltd Machinery (book-value Rs.1,00,000) and Furniture (Book-value Rs.20,000) of S Ltd. were revalued at Rs. 1,50,000and Rs. 15,000 respectively for the purpose of

fixing the price of its shares; book values ofother assets remaining unchanged. These

values are to be considered for consolidation

purposes. See next slide for balance sheets


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Balance Sheet of H Ltd. as on 31st March, 2008

Liabilities H Ltd.S Ltd Assets H Ltd. S Ltd.

Share Capital: Machinery 3,00,000 90,000

Shares of Furniture 50,000 17,000

Rs. 100 each 5,00,000 1,00,000 Other assets 4,40,000 1,43,000

Reserve 2,00,000 75,000 Shares in S Ltd.

800 shares at 1,60,000 -P & Laccount 1,00,000 25,000

Creditors 1,50,000 50,000

9,50,000 2,50,000 9,50,000 2,50,000


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Solution ...

Liabilities

share : 5 lakhs

minority interest :

reserve 2 lakh

p & l ac 1 lakh

creditors (1.5+.5) 2 lakh

Assets :

machine : 4.5 lakhfurniture : 65000

other assets : 5,83000


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ACCOUNTING STANDARDS

Framed by ICAI

AS 1 to AS 31 (AS 8 is withdrawn)


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Standards

AS 1- accounting policies

AS 2 : - inventory

AS 3 : Cash flow statement

AS 4 : events after balance sheet dates

AS 5 : profit

AS 6 : depreciation

AS 7 : construction contracts


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standards...

AS 9 : revenue recognition

AS 10 : fixed assets

AS 11 : foriegn exchange

AS 12 : Govt. Grants

AS 13 : Investments

AS 14 : amalgamation


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standards...

AS 15: employee benefits

AS 16 : borrowing costs

AS 17 : segment reporting

AS 18 : related party disclosure

AS 19 : lease

AS 20 : EPS

AS 21 : consolidated financial statement


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Standards

AS 22: taxation

AS 23 : investment in association

AS 24 discounting of issueAS 25 : interim financial reporting

AS 26: intangible assets

AS 27 : joint ventureAS 28 : impairment of assets

AS 29 : contingent liability


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standards....

AS 30 : financial instruments recognition andmeasurement

AS 31 : financial instruments presentation


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International accounting standards

Formed by IASB

IAS 1 : financial statements

IAS 2 : InventoryIAS 7 : cash flow statement

IAS 8 : accounting policies

IAS 10 : events after balance sheet dateIAS 11 : construction contracts

IAS 12 : Income tax


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IAS....

IAS 14 : segment reporting

IAS 16: property plant and equipment

IAS 17 : leaseIAS 18 : revenue

IAS 19 : employee benefit

IAS 20 : govt. GrantsIAS 21 : foreign exchange

IAS 23: Borrowing cost


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IAS

IAS 24 : related party disclosure

IAS 26: retirement benefit plans

IAS 27 : consolidated financial statementIAS 28 : investment in association

IAS 29 : hiper-inflationary economy

IAS 31: Joint ventureIAS 33 : EPS

IAS 34: interim financial reporting


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IAS

IAS : 36 : impairment of assets

IAS 37 : contingent liaiblities

IAS 38 : Intangible assets

IAS 39 : financial instruments

IAS 40 : investment inproperties

IAS 41 : agriculture


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IFRS : INTERNATIONALFINANCIAL REPORTING

STANDARDSIFRS 1 : first time adoption

IFRS 2 : share based payments

IFRS 3: business combination

IFRS 4 : Insurance contracts

IFRS 5: non -current assets

IFRS 6: mineral resourcesIFRS 7 : financial instruments

IFRS 8 : operating segments

A company issued 10 000 shares of Rs 10 each Total


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A company issued 10,000 shares of Rs. 10 each. Totalapplications were for 12,000 shares; allotment was made

pro-rata. Application money was Rs. 2 per share andallotment money Rs. 3 per share. Goti failed to pay the

allotment money on his 300 shares. How much is duefrom Goti for allotment?

Goti must have applied for 12/10*300= 360

shares. He must have paid : 360*2 = 720, outof which (300*2) = 600 have been adjusted inapplication money and remaining 120 adjusted

in allotment. The total money due on allotmentis 3*300 = 900, so (900-120) = 780 is due fromGoti. Answer.


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A company offers two shares for every five held to itsshareholders. The issue price is Rs. 14 and the rights

price in the market is Rs. 19. What is the market value

of a right?

Formula : new shares/total shares *( cum rights price newissue price)

=2/7 * (19-14)

=10/7 = 1.43

or

market value average value

average value (19* 5 + 14*2) = 123 /7 = 17.57

(19 17.57) = 1.43 answer


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Z Ltd. forfeited 150 shares of Rs. 10, issued at apremium of Rs. 2, for non-payment of the final call of

Rs. 3. Of these 100 shares were re-issued @ Rs. 11

per share. How much is transferred to capital reserve?

We had received (10-3) = 7 per share, thus 150* 7 = 1050. now 100 of these shares arereissued at premium again, so all the amountrelated to these 100 shares will be transferred

to capital reserve. So 100 * 7 = 700 will betransferred to capital reserve.


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The authorised capital of a company is 1,00,000 shares of Rs. 10 each. On April 10, 2008,50,000 shares are issued for subscription at a premium of Rs. 2 per share. The share money is

payable as follows : Rs. 5 (including the premium of Rs. 2) with application, Rs. 3 on allotment;Rs. 2 on first call and Rs. 2 on second call. The subscription list closes on May 11, 2008 and

directors proceed to allotment on May 18, 2008. The shares are fully subscribed and theapplication money (including the premium) is received in full. The allotment money is receivedby June 30, 2008, except as regards 500 shares. It is expected that the allotment money on these500 shares will not be received. The first call and second call money is received by September

30, 2008 and December 31, 2009 respectively, barring the second call money on 200 shareswhich is not received and which is not likely to be received.

1. Bank ac dr. 2.5 lakh

To share application 1.5 lakh

to share premium 1 lakh

2. share application dr. 1.5 lakhs

To share capital 1.5 lakhs


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continued...

3. Share allotment dr. 1.5 lakh

To share capital cr. 1.5 lakh

4. bank dr. 1,48,500To share allotment 1,48,500

5. first call dr. 100000

to share capital 1000006. bank dr. 99000

to first call credit 99000


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continued...

Second call dr. 100000

To share capital credit 100000

bank dr. 98600

to second call cr. 98600


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Balance sheet

Liability side

Autorised capital : 10 lakhs

issued capital : 5 lakhspaid up capital : 4,96,100

(due amount 3900)

Assets sidebank account : 4,96,100

both sides total 496100

X Ltd forfeited 100 shares of Rs 10 each for non


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X Ltd. forfeited 100 shares of Rs. 10 each for non-payment of the final call of Rs. 2; the shares were

re-issued @ Rs. 9 per share. How much was

credited to shares forfeited account and whatamount was transferred to capital reserve?

We had received : 8*100 = 800 (transferred toshare forfeiture account).

we gave discount of 1*100 = 100

so 700 will be transferred to capital reserve.

A h i f f R 30 000 t t


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A company having free reserves of Rs. 30,000 wants toredeem rupees one lakh preference shares. Calculate the

face value of fresh issue of shares of

Rs. 10 each to be made at a premium of 10%.

Total money to be paid : 1 lakh

reserves available : 30000

so issue shares for 70000. Premium on sharescan be used only for premium on redemption,

so the face value of shares to be issued must be70000. answer

Redemption of 10 000 preference shares of


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Redemption of 10,000 preference shares ofRs. 10 each was carried out by utilisation ofreserves and by issue of 4,000 equity shares

of Rs. 10 each at Rs. 12.5. How much shouldbe credited to capital redemption reserve

account?

Total money to be paid : 10*10000 = 1,00,000money from share issue : 4000 * 10 = 40,000

remaining money 60000 has to come reserves,

so we will redit CRR ac by 60000. We will notuse premium received for this purpose.

DB corp Ltd had allotted 10 000 shares to applicants for


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DB corp Ltd. had allotted 10,000 shares to applicants for14,000 shares on a pro rata basis. The amount payable was

Rs. 2 on application, Rs. 5 on allotment (including

premium of Rs. 2 each), Rs. 3 on first call and Rs. 2 onfinal call. Rahul Borar failed to pay the first call and finalcall on his 300 shares. All the shares were forfeited and

out of these 200 shares were re-issued @ Rs. 9 per share.What is the amount credited to capital reserve?

Amount transferred to forfeiture a/c 5*300 = 1500, 200shares were reissued, so discount of 1*200 was deductedout of this, now remaining amount relating to 200 shares

can be transferred to capital reserve : 4*200=800

TRF Ltd had issued equity shares of Rs 10 each at a


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TRF Ltd. had issued equity shares of Rs. 10 each at adiscount of 6%. 200 of these shares had been forfeited

for non-payment of the first and final call of Rs. 2

each; 150 of these shares were later re-issued @ Rs. 9per share. Indicate the balance in the Share ForfeitedAccount and the Capital Reserve Account, resulting

from the above.

Amount tranferred to share forfeiture a/c : 200*5.4 = 1080

discount on share issued : 150*.4 =60

amt. Transferred to capital reserve : 5 * 150 = 750

balance in forfeiture a/c : 1080-(60+750) = 270

A company issues early in 2004 13% Rs. 20,00,000A company issues early in 2004 13% Rs. 20,00,000


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A company issues early in 2004 13% Rs. 20,00,000A company issues early in 2004 13% Rs. 20,00,000

debentures at Rs. 96 but redeemable at Rs. 103.debentures at Rs. 96 but redeemable at Rs. 103.

Redemption will be carried out by annual drawings of Rs. 4Redemption will be carried out by annual drawings of Rs. 4

lacs (face value) commencing at the end of 2008. What dolacs (face value) commencing at the end of 2008. What do

you recommend as the amount to be charged to the profityou recommend as the amount to be charged to the profitand loss account, apart from that of interest?and loss account, apart from that of interest?

We have got 1920,000 but we will pay 2060,000, the difference is

140,000, out of this 80,000 is discount and 60,000 is premium.There are two methods to transfer loss of debentures to P & La/c fixed instalment 2. fluctuating method. Here our balances

are reducing in annual drawings so we will use fluctuatingmethod. The balance of debenture outstanding each year is :

20,20,20,20,20,16,12,8,4, so first year's amount is : 20/140*140 =20000 and last year's amount is : 4/140*140000 = 4000.

Rs. 40 lakhs 10% debentures are outstanding in the


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gbalance sheet of a company on 31st March, 2007. Thecompany had not paid the six months interest after 30thJune, 2007. State the amount of interest on debentures

accrued and due as well as interest accrued but not due on31st March, 2008.

Interest acrued and due 10%*40 lakhs* =2lakhs on 30 June 2007 now interest will bedue on Jan. 2008 and June 2008. so Interestacrued but not due on 31 March = 10%*40

lakhs * 3/12 = 1 lakhs

Calculate the amount of discount to be written off


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Calculate the amount of discount to be written offeach year on the debentures of Rs. 60,00,000 issuedon 1.1.2008 at a discount of 5% repayable in annual

drawings of Rs. 10,00,000 each year. Accountingperiod ends on 31st December.

Total discount to be transferred to P & L a/c 3lakhs and we have 6 years.

Here we have to use fluctuating method. Sohere balance at the beginning of the year would

be : 60,50,40,30,20,10, so discounts allowedwill be : 6/21 *3 lakhs = 85500 and so on.

Rajasthan Punjab Roadlines Ltd. shows in its balance


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sheet 9% Rs.30,00,000 Debentures; interest on these ispayable on 31st March and 30th September. On 1st June,2007 the company purchased as investment Rs. 50,000 of

the debentures @ 89. What will the company show inbalance sheet?

The company will show in the liabilities side :Rs. 30 Lakhs and in the assets side 89/100 *

50000 = 44500.

d i d 10 00 000 13 % b di f


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P. Ltd. issued Rs. 10,00,000 13.5% Debentures at a discount of5%; the debentureholders have an option of converting the amountinto Rs. 10 equity shares at a premium of 10%. A debentureholderholding Rs. 40,000 debentures wishes to exercise the option. How

many shares will he get?

40000*100/110*1/10 = 3636 shares

A b idi ld d h h ldi


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A subsidiary sold goods to the holdingcompany on the basis of cost plus 25%.

At the end of the year the stock in trade ofthe holding company included such goods

amounting to Rs. 80,000. 25% of the

shares of the subsidiary are held byoutsiders. What is the amount of stockreserve required?


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Solution

First find out the cost of these goods :

80000*100/125 = 64000thus difference is 16000, for which stock

reserve has to be created. However, 25% profit

goes to outsiders (minority holders), we haveonly 75% stake, so 16000*75/100 = 12000 isthe amount of stock reserve to be created.

Which of the following will not be included in


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Which of the following will not be included in preliminary expenses:- a. Cost of preparation of

Memorandum of Association and Articles of

Association. b. Cost of preparation and issue ofthe prospectus. c. Cost of acquisition of arunning business. d. Stamp duty on the

authorised capital. e. Cost of the project report.

Preliminary expenses do not include cost ofproject report and cost of acquisition of a

running business out of these.

Borar & Samsukha Ltd starts developing a new production


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Borar & Samsukha Ltd. starts developing a new productionprocess. During the year, expenditure incurred was Rs.20lakhs, of which Rs.18 lakhs was incurred before 1st March,2007 and 2 lakhs was incurred between 1st March, 2007 and

31st March, 2007. The company demonstrated that on 1stMarch, 2007 the production process met the criteria for

recognition as an intangible asset. The recoverable amountof the know-how embodied in the process (including future

cash outflows to complete the process before it was availablefor use) was estimated to be 10 lakhs. What is the value of

the intangible asset as on 31st March, 2007?

Samsukha & Borar Ltd. purchases an exclusive rightt t h d l t i f fift Th


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to generate hydro-electric power for fifty years. Thecosts of generating hydro-electric power are much

lower than the costs of obtaining power from

alternative sources. It is expected that thegeographical area surrounding the power station will

demand a significant amount of power from the powerstation for at least fifty years. What is the period over

which the company should amortize the right togenerate power?

As per AS 26 amortise it in 50 years.

Goti & Borar Ltd. purchases an exclusive right to


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Goti & Borar Ltd. purchases an exclusive right tooperate a toll motorway for twenty five years. There is

no plan to construct alternative routes in the area served

by the motorway. It is expected that this motorway willbe in use for at least twenty five years. What is theperiod over which the company should amortize the

right to operate the motorway?

25 years

Samsukha & Gautam Ltd Acquire an


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Samsukha & Gautam Ltd. Acquire anexclusive right to operate a toll motorwayfor next 3 years. They spend Rs. 30 Lakhs

for this. However, based on revisedestimate it is estimated that they will getRs. 27 lakhs from this project. What is

impairment losses?

30-27 = 3 lakhs


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differentiate the following terms

and the treatment given in CostAccounts: WasteScrap Spoilage

Defectives.


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Solution ...

Waste cannot be sold it is visible or inivisible part ofloss of resources, includes smoke, etc.

Scrap can be sold it is produced with main production

spoilage is dective item which can be sold as seconds

defectives can be improved with greater material and

labour. Normal costs are included in cost, but abnormalcosts are transferred to costing Profit and loss account.

Calculate reorder level ? :Re order quantity 6 000 units


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Re-order quantity 6,000 unitsMinimum stock (for emergencies) 5 weeks

Average delivery time 4 weeks

Maximum stock level 20 weeksAverage consumption per week 400 units

Minimum consumption in 4 weeks 1,200 units


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Solution

To calculate this we take help of maximum

level :Maximum level = (reorder level+ reorderquantity) (mini. Use * min. Quantity)

20*400=(X + 6000) - (5*300)

8000=X +4500

X =3500

A company whose profit runs into


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p y plakhs of rupees and has large

inventories finds at the end ofMarch 2008 that the stock sheets,for 31.3.2007 were over-cast by

Rs. 10,000 what to do ?It is a old matter - further it is related to stock which are continuously physically verified

do nothing.


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The Provision of tax at the end of 31.3.2007 stood atRs. 1,50,000; during 2007-08 the tax liabilities upto

31.3.2007 were settled for Rs. 1,37,000. Provisionrequired in respect of 2007-08 is Rs. 41,000. what to

do?

Make a provision pass the entries :Provision for tax. 13000

to P & L appropriation a/c credit 13000

P & L A/c Debitto Provision for tax. 41000

Government has allowed a refund


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of excise duty with effect from 1st

January, 2007; it works out @ Rs.5,000 p.m. What to do ?

Calculate total amount -

entry :

1. Bank a/c Debit

Refund from Excise Credit

2. Refund from Excise Debit

to P & L A/c credit

The company entered into a


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p yspeculative deal in raw materials

and earned a profit of Rs.1,00,000.

1. Bank a/c debit

to Income from Speculation 1 lakh

2. Income from Speculation Debit

to P & L a/c credit 1 lakhs

Government imposed a penalty of


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Government imposed a penalty ofRs. 30,000 for non-payment of

P.F. dues in time.

Penalty of P F dues debit

to Bank

P & L a/c debit

to Penalty of P F dues. 30000

A company acquires plant and machinery on 1stOctober 2007; it paid Rs 30 00 000 to the supplier


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October, 2007; it paid Rs. 30,00,000 to the supplierand incurred transport charges of Rs. 1,00,000

installation charges of Rs. 1,00,000 in addition to

repairs of Rs. 1,40,000 because of accidental damageduring transit. Depreciation according to Schedule

XIV is 15% and its life is estimated at 15 years. Theaccounts are closed on 31st March each year. What is

the figure at which the asset will be capitalised andwhat is the depreciation charge for the first year?

Repairs will not be capitalised but rest will be capitalised sovalue of machine : 32 Lakhs. Depreciation : 15% = 480000*6/12 =

240,000 as per w.d.v. Or 32,00,000*6/12*1/15 = 101333 (Straightline)

A company has Rs. 10,00,000, 20% debentures atissue; interest is payable on 30th September and 31st


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issue; interest is payable on 30th September and 31stMarch, interests warrants being issued on the 6thOctober and 6th April respectively. The company

closes its books of accounts on 31st March. Show therelevant items in the balance sheet.

In liability side :Outstanding interest : Intereston debenture : 1 lakh outstanding

Secured liability : Debentures : 10 Lakhs

A company pays interest on 30th June and 31st


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December on its 50,000 20% debentures of Rs. 100each; the books are closed on 31st March. How will

the relevant items appear in the companys balancesheet?

Secured debentures : 50 lakhs

current liability : outstanding interest : 2.5

lakhs (for 3 months from Jan. To March).

Y Ltd earned a profit after tax of Rs 5 00 000 in


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Y Ltd. earned a profit after tax of Rs. 5,00,000 in2005-06 and it wanted to pay a dividend of 20 % on

its capital of Rs. 15,00,000. What will be the

balance left in the Profit and Loss Account?

5 lakhs 3 lakhs

it will also have to transfer some amount toreserve account (minimum 7.5% has to betranserred to reserve as per sec. 205(2a))

transfer to reserve : 37500.= 163500 is left out after dividend

Y Ltd earned a profit after tax of Rs 5 00 000 in


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Y Ltd. earned a profit after tax of Rs. 5,00,000 in2005-06 and it wanted to pay a dividend of 30 % on

its capital of Rs. 15,00,000. What will be the

balance left in the Profit and Loss Account?

5 lakhs 4.5 lakhs

it will also have to transfer some amount toreserve account (minimum 10% has to betranserred to reserve as per sec. 205(2a))

transfer to reserve : 50,000Nothing is left out after dividend

Z Ltd. has been paying dividend @ 20% on capitalof Rs. 20 lakh for many years in the past; its average


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of Rs. 20 lakh for many years in the past; its averageafter tax profits were Rs. 6,00,000. In 2007-08 itearned a profit of Rs. 5,00,000 and needing funds

for working capital it proposed to transfer Rs.2,00,000 to Reserves. Can it do so? If not, what is

the amount that may be transferred?

If a company wants to transfer more than 10% to reserve, followingconditions must be fulfilled :

a. if it pays dividend pay it at average rate of last 3 years.

b. if it doesnt pay dividend transfer it at rate lower than the average

rate of dividend for last 3 years. So max. It can transfer is 19%

S Ltd. has been paying dividend @ 12% on its capitalf 30 l kh i f ll d h d f


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of Rs. 30 lakhs; its free reserves totalled at the end of2006-2007 to Rs. 20,00,000. In 2007-08 it suffered a

loss of Rs. 2,30,000 but it still wants a dividend, ifnecessary by drawing from reserves. What is themaximum rate of dividend that will be permissible?

Sec. 205 A : conditions are :

1. rate of dividend shall not be more than 10% and more than theaverage for last 5 years.

2. Reserve after dividend will be min. 15% of capital

3. Max. Amount that can be drawn is 10% of captial + reserve and itshould be used to set off loss first.

So Max. Draw : 5 lakhs, less loss : 230000= 270000 it can pay max.10% dividend, but here it will pay max. 270000 only.

D Ltd. wants to pay a dividend but finds itself short ofh Th i h f l h h


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cash. There is, therefore, a proposal that the companyshould distribute among the shareholders the shares

held by it in F Ltd. by way of dividend. Advise thecompany.

Dividend can be declared only in cash. So thisproposal is not acceptable.


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It was discovered in September 2007 that the purchase


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It was discovered in September 2007 that the purchaseinvoice of Rs. 50,000 dated 11.2.2006 was not enteredin the book at all; accounts for 2005-06 were passed at

the AGM in August, 2007.

It is an error of omission. Rectify it byfollowing entry :

P & L appropriation a/c debit 50000

Whil i th t f 2006 2007 l i


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While preparing the accounts for 2006-2007 closingstock was valued at market price Rs. 6,20,000

instead of cost which was Rs. 6,50,000.

Stock is valued is lower of market price or cost so there is no problem here

In June, 2007 post manufacturingi d li R 6 00 000


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excise duty totaling Rs. 6,00,000

was paid in respect of 2005-06and 2006-2007.

Debit P & L appropriation account. By Rs. 6lakhs for excise

The market value of the quoted


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The market value of the quotedinvestments is Rs. 2,25,000 as

against the cost of Rs. 2,50,000.

Show the investments at market value in thebalance sheet.

R il l i f d l t i t it i 2005 06


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Railway claim for goods lost in transit in 2005-06costing Rs. 40,000 settled in 2006-2007 for Rs.

30,000. No entry was passed in 2005-06.

Here we have got Rs. 30000, which is income(we had not recognised it earlier), so show this

income in accounts.

No entry for loss of Rs. 10000 as we had notrecognised it earlier.

Sales tax, collected fromt R 1 50 000 i t


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customers, Rs. 1,50,000 against

which amount paid is Rs.1,20,000.

We have to pay remaining amount of Rs.30000 also so show this amount as current

liability.

Subsidy, Rs. 1,00,000 received


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Subsidy, Rs. 1,00,000 receivedfrom Government for installation

of generating set.

We can reduce the amount of Generatin set byRs. 1 lakhs

or

we can show it as capital reserve

B l h ld i th B k f I


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Balance held in the Bank of Iraq,

Baghdad, Rs. 25,000.

As per company law requirements, we have todisclose the name of the bank and also the

maximum amount deposited with that bank (in

case of foreign banks).


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Documents

Accounting for Public Companies