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Solutions to CA Final paper November 2017
ONLY AS RELATED SOLUTION
Total AS related problems: 56 marks

Q1 (a) Investments in Associates - AS-23.......... Marks 5

Rohtas Ltd has a Subsidiary Company Bee Ltd, and it is preparing Consolidated Financial Statements as on 31st March 2017. On 10th May 2016, Rohtas Ltd acquired 40% Shares of Amit Ltd for Rs 45,00,000. By such an acquisition, Rohtas Ltd can exercise significant influence over Amit Ltd. During the Financial Year ending on 31st March 2016, Amit Ltd earned profits of Rs 11,54,000 and declared a Dividend of Rs 2,48,000 on 16th September 2016. Amit Ltd reported Earnings of Rs 26,26,000 for the Financial Year ending on 31st March 2017 and declared Dividends of Rs 9,85,000 on 17th August 2017.

You are required to calculate the Carrying Amount of Investments in Separate Financial Statements of Rohtas Ltd as on 31st March 2017 and also in Consolidated Financial Statements of Rohtas Ltd as on 31st March 2017. What will be the Carrying Amount of Investments in Consolidated Financial Statements of Rohtas Ltd, if prepared on 31st August 2017?

Solution:

Books of Rohtas Ltd.

Carrying amount of investments as on 31/3/2017. (AS-13)    Rs


Cost paid
Less: Dividend recd (pre) 248000*0.4

45,00,000
(99,200)
44,00,800

Carrying amount in CFS as on 31/3/2017 (AS-23)  Rs


Cost paid - Dividend as per SFS
Add: Share of post profits
(2626000*325/365)0.4

44,00,800
9,35,288

Carrying amount

53,36,088


Carrying amount in CFS as on 31/8/2017 (AS-23)  Rs


Cost paid - Dividend as per SFS
Less: Pre dividend (985000*40/365)0.4

Add: Share of post profits
[(2626000-985000)*325/365]0.4
44,00,800
43,178
43,57,622
5,84,466

Carrying amount

49,42,088


Q 2 (b) AS - 19: Leases.................... Marks 5

Neelesh Ltd has initiated a lease for 3 years in respect of a Machinery costing Rs  6,00,000 with expected useful life of 5 years. The Machinery would revert to Neelesh Ltd under the Lease Agreement. The Unguaranteed Residual Value of the Machinery after the expiry of the lease term is estimated at Rs  80,000. The Implicit Rate of Interest is 8%. 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 Machinery. Annual Lease Payments are made at the end of each accounting year. You are asked to ascertain the Annual Lease Payment, the Unearned Finance Income and the segregation of Finance Income in the hands of Neelesh Ltd.

Solution :

FMV = Rs  6,00,000, n = 5 yrs, UGRV = Rs  80,000, IRR = 8%. PVF 8% = 0.9259, 0.8573, 0.7938. Cumulative PVF = 2.577

Also Given that:

FMV (net investments) = PV of (MLP+GRV+UGRV)
6,00,000 = 2.577 x M + 0.7938 x 80,000
Solving M = 2,08,186. Annual lease payment = Rs 2,08,186.
Unearned finance income = Gross investments - Net investments
But Gross invs = Total MLP's + UGRV = Rs 7,04,558
UFI = 7,04,558 - 6,00,000 = Rs 1,04,558

Calculation of annual finance income:


Yr

Opening balance

Effective interest

Cash flows

Closing balance

1

6,00,000

48,000

(2,08,186)

4,39,814

2

4,39,814

35,185

(2,08,186)

2,66,813

3

2,66,813

21,373*
Ugrv --->

(2,08,186)
(80,000)

-


*Effective interest is taken as balancing figure because of fixed cash flows.

Q4 (c)AS - 10 Property, Plant and Equipment.......... Marks 5

(i) Keeping in view the provisions of AS 10, analyze the following - Trozen Ltd operates a major chain of Supermarkets all over India. It acquires a New Store in Pune which requires significant Renovation Expenditure. It is expected that the renovations will be done in 2 Months during which the Store will be closed. The Budget for this period, including Expenditure related to Construction and Remodelling Costs (Rs18 Lakhs), Salaries of Staff (Rs  2 Lakhs) who will be preparing the store before its opening and related Utilities Costs (Rs  1.5 Lakhs) is prepared. What will the treatment of such expenditures in the books of accounts?

(ii) Property, Plant & Equipment 2.5 Marks Keeping in view the provisions of AS 10, analyze the following: Trozen Ltd carried Plant and Machinery in its books at Rs  5,50,000. These were destroyed in a fire. The Assets were insured 'New for Old' and were replaced by the Insurance Company with New Machines that cost Rs  25 Lakhs. The Machines were acquired by the Insurance Company and the Company did not receive Rs  25 Lakhs as Cash Compensation. State, how Trozen Ltd should account for the same.

Solution:

(i) As per AS-10 rev any subsequent expenditure incurred which enhances the standard of performance of the asset as previously assessed requires capitalization. 

In the present problem cost of reconstruction and remodelling of the super markets is to be capitalized. It improves the structure / design and value of the assets. Salary paid to staff and other utilities is an operating expenditure which is to be charged to profit / loss account.

Plant property equipment  Dr 18,00,000
Profit and loss  Dr 3,50,000
To Cash  21,50,000

(ii) As the machines were destroyed by fire we should apply AS-28 'Impairment of Assets'. Accordingly, an amount is to be written off to P/L as impairment.

Instead of getting cash compensation the insurance company has provided an asset which is a non - cash compensation. Following entries will be passed by the company:

Books of Trozen Ltd.:

Impairment loss Dr 5,50,000
To PPE 5,50,000
(Machines destroyed with Nil recoverable value)

PPE  Dr 25,00,000
To Impairment loss 5,50,000
To Profit / Loss     19,50,000
(Compensation received for loss of asset)

(d) AS - 28: Impairment of Assets.......... Marks 5

Himalaya Ltd is in a business of manufacturing and export of its product. Sometimes, back in 2014, the Government put restriction on export of goods exported by Himalaya Ltd, and due to that restriction, Himalaya Ltd impaired its assets. Himalaya Ltd acquired Identifiable Assets worth of Rs  4,000 Lakhs for Rs  6,000 Lakhs at the end of the year 2010. The difference is treated as Goodwill. The useful life of Identifiable Assets is 15 Years and depreciated on straight-line basis. When Government put the restriction at the end of 2014, the Company recognized the Impairment Loss by determining the Recoverable Amount of Assets for Rs  2,720 Lakhs. In 2016 Government lifted the restriction imposed on the export and due to this favourable change, Himalaya Ltd re-estimated the Recoverable Amount, which was estimated at Rs  3,420 Lakhs. 

 Required: (i) Calculation and Allocation of Impairment Loss in 2014. (ii) Reversal of Impairment Loss and its allocation as per AS-28 in 2016.

Solution:

Step1: Calculation of carrying amount of assets as on 2014.(Rs lakhs)

Identifiable assets

Goodwill

CGU

Assets acquired in 2010
Less: Depreciation
4000 x 4/15

4,000

(1,067)

2,000

(1,600)

6,000

(2,667)

Carrying amount (2014)

2,933

400

3,333

Recoverable value

2,720

Impairment loss

(213)

(400)

613

As per AS-28, the impairment loss is to be first written off from the goodwill available and balance it is to be written off from other assets. Also G/W is written off over 5 years as per AS-14.

Step2: Calculation of carrying amount as on 2016.(Rs  lakhs)


Identifiable assets

Carrying amount (2014)
Less: Depreciation
2720*2/11

2,720
(495)

Carrying amount (2016)

2,225

Recoverable value

3,420

Impairment loss available

1,195


Even if impairment reversal available is 1195 we should calculate reversal which can be actually availed.

Carrying amount of assets if no impairment would have been carried out = (4000 -4000*6/15) = Rs 2,400.
Maximum loss reversal can be availed = 2400 - 2225 = Rs 175.
The revised carrying amount after reversal = 2225 + 175 = Rs 2,400.

Goodwill cannot be reversed unless until impairment arises out of an  exceptional circumstance.

Q 4 (a) AS -20 EPS.............................. Marks 8

Kishan Ltd grants 250 Stock Options to each of its 800 employees on 1st April 2015, conditional upon the employee remaining in the Company for 2 years. The Fair Value of the Option is Rs  22 on the grant date and the exercise price is Rs  70 per Share. The number of employees expected to satisfy the service condition are 720 in the first year and 670 in the second year. 30 employees left the Company in the first year of service and 700 employees have actually completed second year vesting period. The Profit of the Enterprise before amortization of the Compensation Cost on account of ESOP is Rs  58,65,000 for 20152016 and Rs  76,45,000 for 2016-2017. The Fair Value of Shares for these years were Rs  90 and Rs  100 respectively. The Company has 5 Lakhs Shares of Rs10 each, outstanding at the end of both years. Compute Basic & Diluted EPS for both years. Ignore Tax.

Solution:

Analysis of the data:

Grant date: 1/4/2015
Vesting period: 2 years
Fair value of option on grant date: Rs 22
No. of options = 250 per employee
Fair value of shares: Year 1: 90 and Year 2: 100

Calculation of annual cost of options& Basic EPS.


Year1

Year2

Options announced
No. of employees
FV of option
250
720
22
250
700
22
Total Cost of options
Cumulative cost
(-) Recognized in past

3960000
1980000
-

3850000
3850000
(1980000)

Cost for the year

1980000

1870000

Net profit before amortization
(-) Amortization

5865000
(1980000)

7645000
(1870000)

Net profit after amortization

3885000

5775000

WANES  =

500000

500000

Basic EPS =  Rs   

7.77

11.55


Calculation of Diluted EPS.


Year1

Year2

Net profit for diluted EPS
÷
WANES + Shares for no consideration

3885000
÷
519251
5775000
÷
552500

Diluted EPS  =   Rs   

7.48

10.45

Shares for no consideration

Gross options
No. of employees*
No of options
FV

770
250
22



700
250
22

Total Cost as on 31/3
(-) Service cost expired

4235000
50%

3850000
100%

Unconsumed service value Rs
÷
Fair value of shares
2117500
÷
90
0
÷
100

No of shares for service consideration

23527

0

Shares for cash consideration
(770*250*70)/90
(700*250*70)/100

149722

122500

Total shares for consideration ...... a

173249

122500

Total options...........b

192500

175000

Shares for no consideration (b-a)

19251

52500


Q 5 (b)Difference between AS - 12 with Ind AS - 20 ..... Marks 4

Explain major changes in IND AS 20 vis-a-vis Notified Accounting Standard (AS-12) on the following grounds: (i) Accounting for Grant in respect of Non-Depreciable Asset. (ii) Accounting for Grant related to Asset including Non-Monetary Grant. (iii) Valuation of Non-Monetary Grant given free or at a concessional rate.

Solution:  


Particulars

AS-12

Ind AS-20

Non - depreciable assets

If conditions are complied:  Credit grants to Capital Reserves

If conditions are not complied: defer the grants in the ratio of costs to be incurred

Defer the grant in the ratio of costs to be incurred

Grants related to Assets

Deducted from Asset known as capital approach or deferred in the ratio of depreciation

Deferred in the ratio of depreciation

Non - monetary grant received free or at a concessional price

Asset Received Free of cost: Nominal value

Concessional price paid: record actual price.

Asset Received Free or

Concessional price: Both record at FAIR VALUE.


Q.6 (a) Financial Instruments - Ind AS - 32 or 109 ...... Marks 8

On 1st April 2014, Shelter Ltd issued 5,000 8% Convertible Debentures with a Face Value of Rs  100 maturing on 31st March, 2019. The Debentures are convertible into Equity Shares of Shelter Ltd at a Conversion Price of Rs  105 per Share. Interest is payable annually in Cash. At the date of issue, Shelter Ltd could have issued Non-Convertible Debt with a 5 year term bearing a Coupon Interest Rate of 12%. On 1st April 2017, the Convertible Debentures have a Fair Value of Rs  5,25,000. Shelter Ltd makes a tender offer to Debenture Holders to re-purchase the Debentures for Rs  5,25,000, which the Holders accepted. At the date of re- purchase, Shelter Ltd, could have issued Non-Convertible Debt with a 2 year term bearing a Coupon Interest Rate of 9%.

Show the accounting entries in the books of Shelter Ltd for recording of Equity and Liability Component:

(a) At the time of initial recognition, and  (b) At the time of repurchase of the Convertible Debentures.

Solution:

Step 1: PV of Cash flows = 40000 x PVAF (12%,5) + 500000 x PVF (12%,5) = 40000*3.605 + 500000*0.567 = Rs  4,27,700.

Step 2: Calculation of equity portion = 500000 - 427700 = Rs  72,300

Step 3: Calculation of interest and amortization:


Yr

Opening balance

Effective interest

Cash flows

Closing balance

1

4,27,700

51,324

(40,000)

4,39,024

2

4,39,024

52,683

(40,000)

4,51,707

3

4,51,707

54,205

(40,000)

4,65,912

4

4,65,912

55,909

(40,000)

4,81,821

5

4,81,821

58,179

(5,40,000)

0


Journals:

Initial recognition:

Cash Dr 5,00,000
To Debentures (Conv) 4,27,700
To Equity 72,300

Repurchase date:
As far as repurchase (buy back) is concerned it is repurchase of debt and equity both.

First lets calculate the loss or gain on debt repurchase:

Debentures (Conv) 4,65,912 (carrying amount in 3rd yr)
Less: * Fair value of debt (now)4,91,360
Loss on repurchase 25,448
*40000*PVAF(9%,2)+500000*PVF(9%,2)
40000*1.759+500000*0.842 = Rs 4,91,360

Allocation of cash consideration towards on equity cancellation

Cash consideration 5,25,000
Less: Fair value of debt (now) 4,91,360
Received towards equity 33,640

Journal entry for repurchase:

Debentures (Conv) Dr 4,65,912 (carrying amount in 3rd yr)
Loss on repurchase (P/L) Dr 25,448
To Cash 4,91,360 (5,25,000 - 33,640)

Equity Dr 72,300
To Cash 33,640
To Reserves (bal fig) 38,660

Understand it:
4,65,9124,91,360 5,25,000
Carrying amt Fair value of debt Cash consideration      

Q7 (b) Government grants AS-12................... Marks 4

C Ltd received a specific Grant of Rs  360 Lakh for acquiring the Plant of Rs  1,800 Lakh during 2015-2016 having Useful Life of 12 Years. The Grant received was credited to Deferred Income in the Balance Sheet during 2015-2016 and due to non-compliance of conditions laid down for the Grant of Rs  360 Lakh, the Company had to refund the grant to the Government. Balance in the Deferred Income on that date was Rs  330 Lakh and Written Down Value of Plant was Rs  1,650 Lakh.

(i) What should be the treatment of the refund of the Grant and the effect on Cost of the PPE and Depreciation (SLM basis) to be charged during the year 2016-2017 in Profit and Loss Account?

(ii) What should be the treatment of the Refund, if Grant was deducted from the Cost of the Plant during 2015-2016?

Solution:

(i) As the accounting policy of the grant is to defer the grant, carrying amount of plant will be as usual i.e. (Cost - PFD).

During 2016-17: Carrying amount of asset = (1650-150) = Rs 1,500 lakhs.
Depreciation = Rs 150 lakhs (SLM)
Entry for refund:Rs lakhs
Undeferred grant Dr 330
Profit / loss Dr 30
To Cash 360

(ii) If the grant was initially deducted from asset.

Cost as on 2013-14 = (1800-360) = Rs 1,440 (Rs lakhs)
Depreciation for year1 = 1440 / 12 = Rs  120
Opening carrying amount in 2016-17 = 1440 -120 = Rs 1,320 lakhs.

Depreciation and carrying amount for 2016-17:
Depreciation = (1320 + 360 ) / 11 = Rs 152.73 lakhs
Carrying amount = (1320 + 360 ) - 152.73 = Rs 1527.27 lakhs.

7 (c) Distinguish between: AS and Ind AS with reference to Extraordinary items and Contingencies .... Marks 4

Extraordinary items: In AS -5 extraordinary items are disclosed separately disclosed. Even in Schedule III it is a separate line item. But as per Ind AS - 8 or Ind AS - 1. Extraordinary item is strictly prohibited.

Contingent assets are not to be disclosed as per AS - 29. But in Ind AS - 37 it is to be disclosed only if the claim of contingent asset is highly probable.

7 (d) Revenue recognition: AS - 9.......... Marks 4

Principles of revenue recognition: (Indicate revenue recognition policy)

(i) Insurance agency commission: If the contract is new ----> On activation of contract. If the contract is renewed -----> On its renewal.

(ii) Trade discount and volume rebate: Trade discounts and volume rebates received is against purchases they are not Revenue. It is to be deducted from Purchases.

(iii) Goods sold to intermediaries: One has to look into the substance of the contract. If the purchaser has retained the risks and rewards of the goods then it is a normal sale. If the purchaser will return back the goods to the seller then the intermediary is just acting as a consignee.

(iv) Repurchase agreement: If the vendor sells the goods with a promise to repurchase the goods back on the later date it is not a sale. In fact it is a finance transaction. The proceeds will be treated as an advance. The difference between the final payment and advance will be treated as an interest.

(e) Difference between Ind AS 1 and IFRs 1: Carve outs / ins. First time adoption of Ind AS / IFRS .......... Marks 4


Particulars

Ind AS - 101

IFRS-1

Carrying amount of Assets (first time adoption)

Transition from previous GAAP to Ind AS can be a hardship. Opening carrying amount of PPE, Investment property, Intangible assets shall be taken as per old GAAPs.

Opening carrying amount of PPE, Investment property, Intangible assets shall be retrospectively computed as per IFRS or at Fair Value.

Exchange difference option and Toll roads

Ind AS company can continue to enjoy following benefits:

i) Option of exchange difference (capitalized or amortized)

ii) Amortizing Service Concession Asset in the ratio of revenue.

No such relief provided by IFRs- 1.


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