Corporate Accounting Solved Paper May 2019, Dibrgarh University B.Com 2nd/4th Sem

Corporate Accounting Solved Question Papers Dibrugarh University

Corporate Accounting Solved Paper May 2019

COMMERCE (General/Speciality)

Course: 203 (Corporate Accounting )

The figures in the margin indicate full marks for the questions

Full Marks: 80

Pass Marks: 24

Time: 3 hours

1. (a) Fill in the blanks: 1x4=4

a) Bonus shares can be issued to the existing members only.

b) Dividends cannot be declared except out of profits.

c) Reduction of share capital is unlawful except when sanctioned by the court.

d) Section 2(87) of the Companies Act, 2013 defines a subsidiary company.

(b) State whether the following statements are ‘True’ or ‘False’:                               1x4=4

a) Profit on re-issue of forfeited shares is transferred to General Reserve.              False, Capital reserve

b) Preliminary expenses are of capital nature.      False, Deferred revenue expenditure

c) Internal reconstruction and reduction in share capital means the same.

d) Profit & Loss A/c balance including reserves after acquisition is considered as capital profit.

2. Write short notes on (any four): 4x4=16

a) Reserve Capital.

Ans: Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital. (Sec. 65 of the Companies Act, 2013)

Features of Reserve Capital:

1.    It is not mandatory to create Reserve Capital.

2.    It is created out of uncalled capital.

3.    It is not to be disclosed in the Balance Sheet of the company.

4.    Reserve Capital cannot be used to write off capital losses.

b) Sinking Fund.

Ans: Sinking Fund method: Sinking fund is a fund into which a company sets aside money over time, in order to retire its preferred stock, bonds or debentures. Such fund is created mainly for some specific purposes which are:

1.       To redeem or repay long term liabilities.  For example: debentures, long term loans etc.

2.       To replace wasting assets. For example: mines etc.

3.       To replace an asset of depreciable nature. For example, fixed assets.

Creation of Sinking fund for redemption of debentures: For redemption of debentures or other long term liabilities, a fixed amount is kept aside yearly as sinking fund for the specific purpose and the same amount is invested in securities etc.  for a specific period so that the sufficient amount is available at the time of redemption of long term liabilities. The amount to be set aside can be determined with the help of Sinking fund table. The amount kept aside should not be debited to Profit and loss account but to Profit and loss appropriation account because the same is an allocation of profit not expenditure.

c) Purchase Consideration.

Ans: Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.

Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:

a. Lump sum method

b. Net Assets method

c. Net Payment Method

d) Interim Dividend.

Ans: Interim Dividend: This dividend is declared between two annual general meetings. Section 123 of the Companies Act, 2013 provides that the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year which interim dividend is sought to be declared. It further provides that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. The Board may from time to time pay to the shareholders such interim dividends as appear to it to be justified keeping in view the profits of the company.

e) Cost of Capital.

Ans: Cost of capital is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. Cost of capital is the required rate of return on its investments which belongs to equity, debt and retained earnings. If a firm fail to earn return at the expected rate, the market value of the shares will fall and it will result in the reduction of overall wealth of the shareholders.

According to the definition of John J. Hampton “Cost of capital is the rate of return the firm required from investment in order to increase the value of the firm in the market place”.

According to the definition of Solomon Ezra, “Cost of capital is the minimum required rate of earnings or the cut-off rate of capital expenditure”.

3. (a) Blue Bird Co. Ltd. issued 50,000 equity shares of Rs. 100 each at a premium of 10% payable as under:

Bikram holding 1,500 shares failed to pay call money. The company forfeited his shares and later on 1,000 of these shares reissued to Prakash as fully paid up at Rs. 85 per share. Give Journal Entries to record the above transactions and show the Balance Sheet of the company.

Journal Entries

In the books of Blue Bird Co. Ltd

Particulars	L/F	Amount (Dr.)	Amount (Cr.)
Bank A/c (50,000 x 30)                                              Dr. To Share Application A/c (Being the application money received on 50,000 shares @ Rs. 30 each)		15,00,000	15,00,000
Share Application A/c                                                Dr. To Share Capital A/c (Being the application money of 50,000 shares of Rs. 30 each transferred to share capital account)		15,00,000	15,00,000
Share Allotment a/c                                                   Dr. To Share Capital A/c (50,000 x 50) To Securities Premium Reserve A/c (50,000 x 10) (Being the allotment money due on 50,000 shares @ Rs.60 each including premium of Rs. 10 per share)		30,00,000	25,00,000 5,00,000
Bank A/c                                                                       Dr. To Share Allotment a/c (Being the allotment money received on 50,000 shares @ Rs. 60 each)		30,00,000	30,00,000
Share 1st & Final Call A/c                                           Dr. To Share Capital A/c (50,000 x 20) (Being the first and final call money due on 50,000 shares @ Rs.20 each)		10,00,000	10,00,000
Bank A/c                                                                       Dr. Calls in arrear A/c (1,500 x 20)                                  Dr. To share 1st & Final Call A/c (Being the first and final call money received on 48,500 shares)		9,70,000 30,000	10,00,000
Share Capital A/c                                                         Dr. To forfeited Share A/c (1,500x 80) To Calls in arrear A/c (1,500 x 20) (Being the 1,500 shares forfeited due to nonpayment of first and final call)		1,50,000	1,20,000 30,000
Bank A/c                                                                        Dr. Forfeited shares A/c                                                    Dr. To Share Capital A/c (Being the 1,000 forfeited shares reissued @ Rs. 85 each)		85,000 15,000	1,00,000
Forfeited Share A/c                                                     Dr. To Capital Reserve A/c (Being the profit on reissue of forfeited shares transferred to capital reserve)		65,000	65,000

Balance Sheet of Blue Bird Co. Ltd

Or

(b) (1) Discuss the provisions of law with regard to redemption of redeemable preference shares as laid down in Section 55 of the Companies Act, 2013.

(2) Gayetree Tea Ltd. issues 5,000, 8% convertible debentures of Rs. 100 each. Give the Journal Entries relating to issue in each of the following cases:

a) The debentures are issued at par and redeemable at par.

b) The debentures are issued at 5% premium and redeemable at 10% premium.

c) The debentures are issued at 5% discount and redeemable at 5% premium. 

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4. (a) Explain the treatment of the under mentioned items in the preparation of Final Accounts of a company: 3.5*4=14

a. Advance Payment of Tax.

Ans: Under Income Tax Act 1961, companies are required to pay advance tax on their expected profits. When advance payment of tax is made, the entry is:

Advance Income Tax Account ………………………………………………………………….. Dr.     To Bank Account (Being payment of tax in advance)

L/f

Amount

Amount

Since the actual amount payable as income tax will be known long after the preparation of the Profit and Loss Account (i.e. when the assessment is made by the Income Tax Department), the liability for taxes has to be estimated while preparing the Profit and Loss Account so that dividend to shareholders may be made from revenue profits and not from capital profits. So, liability for taxes is estimated and provided for in the books. The entry is:

Profit and Loss Account……………………………………………………………..…………... Dr.     To Provision for Income Tax Account (Being provision for income tax for the year)

L/f

Amount

Amount

When the actual assessment of tax is made, balances appearing in Provision for Income Tax Account, Advance Income Tax Account and tax deducted at source on income earned by the company are transferred to Income Tax Account. If the actual assessment of tax comes to be more than the provision made, the balance is deducted from the Surplus in the Balance Sheet. The amount is not debited to the Profit and Loss Account because tax assessed related to the profits of the last year. Similarly, if the actual assessment of tax is less than the amount provided for, the difference is added to the Surplus Account shown in the Balance Sheet.

b. Interim Dividend.

Ans: Interim Dividend: This dividend is declared between two annual general meetings. Section 123 of the Companies Act, 2013 provides that the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year which interim dividend is sought to be declared. It further provides that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. The Board may from time to time pay to the shareholders such interim dividends as appear to it to be justified keeping in view the profits of the company. Total Interim dividend paid during the year is deducted with surplus while preparing Balance sheet.

c. Managerial Remuneration.

Ans: Section 197 of CA 2013 deals with the overall maximum managerial remuneration and managerial Remuneration in case of absence or inadequacy of profits. According to this section, the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits. However, a company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V.

However, the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five percent of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together. Total remuneration paid to manager is shown as other expenses in Income Statement.

d. Provisions and Reserves.

Ans: There are two types of provisions in case of company – long term provisions and short term provisions. Long term provisions include provident fund, gratuity and other employees benefit expenses. Short term provisions include provision for tax, proposed dividend etc. Long term provisions are shown under the head non-current liabilities and short term provisions are shown under the head current liabilities.

Reserves

No dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of Schedule II, except after the transfer to the reserves of the company a certain percentage of its profits for that year as specified:

                                 i.      Where the dividend proposed exceeds 10 percent but not 12.5 percent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 2.5 percent of the current profits;

                               ii.      Where the dividend proposed exceeds 12.5 percent but does not exceeds 15 percent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 5 percent of the current profits;

                             iii.      Where the dividend proposed exceeds 15 percent, but does not exceed 20 percent of the paid-up capital, the amount to be transferred to the reserves shall not be less than 7.5 percent of the current profits; and

                             iv.      Where the dividend exceeds 20 percent of the paid-up capital, the amount to the transferred to reserves shall not be less than 10 percent of the current profits.

Such reserves are shown under the head reserves and surplus in company’s balance sheet.

Or

(b) X Ltd. was registered with a nominal capital of Rs. 5,00,000 dividends into shares of Rs. 100 each. The following Trial balance is extracted from the books on 31^st March, 2019:

Dr. Balances	Rs.	Cr. Balances	Rs.
Building Machinery Closing Stock Purchases (adjusted) Salaries Director’s Fees Rent Depreciation Bad debts Interest accrued on Investment Investment in Shares Debenture Interest Looses Tools Advance Tax Sundry Expenses Debtors Cash at Bank	2,90,000 1,00,000 90,000 2,10,000 60,000 10,000 26,000 20,000 6,000 2,000 1,20,000 28,000 23,000 60,000 18,000 1,25,000 30,000	Sales Outstanding Salaries Provision for Doubtful Debts Share Capital General Reserve Profit and Loss A/c Creditors Provision for Depreciation on: Building                            50,000 Machinery                       55,000 14% Debentures Interest on Debentures Outstanding Interest on Investments Unclaimed Dividend	5,20,000 2,000 3,000 2,00,000 40,000 25,000 92,000     1,05,000 2,00,000 14,000 12,000 5,000
	12,18,000		12,18,000

You are required to prepare the Profit & Loss A/c for the year ended 31^st March, 2019 and the Balance Sheet as on that date after taking into account the following information:   8+6=14

a) Closing Stock is more than Opening Stock by Rs. 30,000.

b) Provide for Bad and Doubtful Debts @ 4% on Debtors.

c) Make a provision for income tax @ 50%.

d) Depreciation includes depreciation of Rs. 8,000 on Building and that of Rs. 12,000 on Machinery.

e) The directors recommended a dividend of 25%.

f) Ignore Corporate Dividend Tax.

 

5. (a) A Ltd. acquired the undertaking of B Ltd. on 31^st March, 2019 for a purchase consideration of Rs. 2,50,00,000 to be paid by fully paid equity shares of Rs. 10 each. Equity & Liabilities and Assets of the two companies on the date of acquisition were as follows:

Particulars	A Ltd.  (Rs.)	B Ltd.  (Rs.)
I. Equity and Liabilities: 1.  Shareholders’ Fund: Share Capital: Equity Shares of Rs. 10 each fully paid up Reserves & Surplus: General Reserve Surplus Development Rebate Reserve Workers’ Compensation Fund Current Liabilities	2,50,00,000   1,20,00,000 10,00,000 10,00,000 15,00,000 45,00,000	1,50,00,000   18,00,000 53,00,000 37,00,000 24,00,000 95,00,000
	4,50,00,000	3,77,00,000
Assets: Fixed Assets: Land and Buildings Plant and Machinery Furniture and Fixtures Current Assets: Stock Debtors Bank Balance	1,20,00,000 2,00,00,000 10,00,000   55,00,000 45,00,000 20,00,000	80,00,000 1,80,00,000 20,00,000   40,00,000 40,00,000 17,00,000
	4,50,00,000	3,77,00,000

Pass the necessary Journal Entries in the books of A Ltd. when amalgamation is in the nature of merger. Also prepare the Balance Sheet of A Ltd. after amalgamation, assuming that Development Rebate Reserve and Workers’ Compensation Fund of B Ltd. are required to be continued in the books of A Ltd.              8+6=14

Or

(b) Explain the various provisions of alteration of share capital as given in the Companies Act, 2013 with examples. 14

Ans: Alteration of Share Capital: Memorandum of Association contains capital clause of a company. Under Section 61 of the Companies Act 2013, a company, limited by shares, can alter this capital clause, if is permitted by (i) the Articles of Association of the company; and (ii) if a resolution to this effect is passed by the company in the general meeting. A company can alter share capital in any of the following ways:

(a) The company may increase its capital by issuing new shares.

(b) It may consolidate the whole or any part of its share capital into shares of larger amount.

(c) It may convert shares into stock or vice versa.

(d) It may sub-divide the whole or any part of its share capital into shares of smaller amount.

(e) It may cancel those shares which have not been taken up and reduce its capital accordingly.

To alter capital by any of the above modes require a resolution at a general meeting, but does not require confirmation by the National Company Law Tribunal. The company is required to give a notice to the Registrar within thirty days of alteration.

The accounting treatment of the above five types of capital alteration is discussed below.

(a) If the company has issued all of its authorised capital, then, for the purpose of raising fund by the issue of fresh shares, it will have to increase its authorised capital first. For increasing the authorised capital, the Capital clause of Memorandum of Association of the company is required to be altered and permission of S.E.B.I. is also required to be obtained.  No accounting entry is necessary for increasing authorised share capital. The company will have to observe the formalities prescribed under the Companies Act, 2013.

(b) The company may decide to change the shares of smaller denomination into larger denomination. This process is called consolidation of shares. On account of consolidation, the total amount of capital of the company will not change but the number of shares will decrease.

(c) A company, in order to alter its share capital, may convert all or any of its fully paid up shares into Stock or Stock into fully paid up shares. In case, shares are converted into Stock, the members get a part of Stock Capital in place of shares. By converting Shares into Stock, any amount of Stock Capital can be transferred to any other person.

(d) When the shares of a company are sub-divided in shares of small value, it is known as sub-division of shares. In sub-division of shares, the face value of a share is converted into smaller denomination from larger denomination. The total capital of the company remains unaffected by sub-division but the total number of shares increase.

(e) Cancellation of capital may take the following form:

(i) Cancellation of unissued capital; and

(ii) Cancellation of uncalled capital.

(i) Cancellation of unissued capital: Cancellation of unissued capital means cancellation of unissued shares by a company. It means that the part of the authorised capital which has not yet been issued to the public may be cancelled by the company.

(ii) Cancellation of uncalled capital: Cancellation of uncalled capital means cancellation of that part of the face value of the share which has not yet been called by the company.

6. (a) (1) Give a legal definition of a holding company and a subsidiary company.                             2+2=4

Ans: Holding Company: As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to this section, one company can become the holding company of another in any of the following three ways:

1. By holding more than ½ of voting power in the subsidiary company.

2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.

3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.

Meaning of “subsidiary Company” 

As per Section 2(87) of the Companies Act, 2013, a company is a “subsidiary company” of another company, i.e. “holding company”, if that other company:

a)      holds more than ½ of the voting rights in it, or

b)      is a member of it and has the right to appoint or remove a majority of its board of directors, or

c)       is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.

(2) What is ‘Minority Interest’? How is it calculated?                                      2+2=4

Ans: When some of the shares in the subsidiary are held by outside shareholders they will be entitled to a proportionate share in the assets and liabilities of that company. The share of the outsider in the subsidiary is called minority interest.

Amount of minority interest is calculated by adding subsidiary company’s share in pre-acquisition profit, post-acquisition profit and in share capital of the company. Preference share capital to the extent of not purchased by holding company is also added with minority interest. In the consolidated balance sheet all the assets and liabilities of the subsidiary   are consolidated with assets and liabilities of the holding company and the minority interest representing the interest of the outsider in the subsidiary is shown as a liability.

(3) Mention any three advantages and three disadvantages of a holding company.          3+3=6

Ans: Advantages of Holding Company:  Following are the important advantages of holding company:

a)      Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company may purchase the majority shares from stock exchange and can become holding company.

b)      Large Business:  A holding company can collect the capital and expand the business on large scale.

c)       Foreign Capital: The holding company may also attract the foreign capital for the expansion of a business.

d)      A Stable Combination: The holding company is a very stable form of business organization. Its life is not affected by the disagreement of subsidiary company.

Disadvantages or Defects of Holding Company: Following are the main defects of the holding company:

a)      Problem of Monopoly: A holding company tries to create monopoly over the market. Monopoly is always against the public interest. It fixes higher prices and consumer suffers a loss.

b)      Unequal Distribution of Wealth: Due to holding companies’ wealth goes in few hands and society is divided into two classes, rich and poor. Rich class enjoys all the amenities of life while poor class faces poverty and hunger.

c)       Costly Management: A holding company spends a lot of money on the officers and offices. All the units are managed by the central authority. So it is costly to maintain the proper control on large number subsidiary companies.

d)      Minority Interest Ignored: The interest of the minority shareholders is ignored and the members of the holding company dispose of every resolution for their own interest.

Or

(b) On 31^st March, 2019, the Equity & Liabilities and Assets of H Ltd. and its subsidiary company S Ltd. stood as follows:

Particulars	A Ltd.  (Rs.)	B Ltd.  (Rs.)
Equity and Liabilities: Share Capital: Equity Shares of Rs. 10 each fully paid up Reserves & Surplus: General Reserve Profit & Loss A/c  Current Liabilities Sundry Creditors	8,00,000   1,50,000 90,000   1,20,000	2,00,000   70,000 55,000   80,000
	11,60,000	4,05,000
Assets: Fixed Assets: Investment:  75% Equity Shares in S Ltd. (at cost) Current Assets: Stock Other Current Assets	5,50,000 2,80,000   1,05,000 2,25,000	1,00,000 -   1,77,000 1,28,000
	11,60,000	4,05,000

Draw the Consolidated Balance Sheet as on 31^st March, 2019 after taking into consideration the following information also:                      14

a) H Ltd. acquired the shares on 31^st July, 2018.

b) S Ltd. earned a profit of Rs. 45,000 for the year ended 31^st March, 2019.

c) In January 2019, S Ltd. sold to H Ltd. goods costing Rs. 15,000 for Rs. 20,000. On 31^st March, 2019 half of these goods were lying unsold in the godown of H Ltd.

Ans: Similar to Question Asked in 2015