Model Paper 1 – Financial Reporting
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Roll No…………….
Total No. of Questions – 7 www.pace2race.com
Time Allowed – 3 Hours Maximum Marks – 100
Q-PEE-FR-1
Answers to questions are to be given only in English except in the case of candidates who have
opted for Hindi Medium. If a candidate has not opted for Hindi medium, his/her answers in
Hindi will not be valued.
Question No.1 is compulsory
Candidates are also required to answer any five questions from the remaining six questions.
Marks
1 (a) From the following details of an asset
i. Find out impairment loss
ii. Treatment of impairment loss
iii. Current year depreciation
Particulars of asset:
Cost of asset ` 56 lakh
Useful life period 10 years
Salvage value Nil
Current carrying value ` 27.30 lakhs
Useful life remaining 3 years
Recoverable amount `12 lakhs
Upward revaluation done in last year `14 lakhs
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(b) M/s Prima Co. Ltd. sold goods worth ` 50,000 to M/s Y and Company. M/s Y and Co.
asked for discount of ` 8,000 which was agreed by M/s Prima Co. Ltd. the sale was
affected and goods were dispatched. After receiving goods worth ` 7,000 was found
defective which they returned immediately. They made the payment of ` 35,000 to
M/s Prima Co. Ltd. Accountant booked the sales for ` 35,000. Please discuss.
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(c) Rainbow Limited borrowed an amount of ` 150 crores on 1.4.2010 for construction
of boiler plant @ 11% p.a. The plant is expected to be completed in 4 years. Since the
weighted average cost of capital is 13% p.a., the accountant of Rainbow Ltd.
capitalized ` 19.50 crores for the accounting period ending on 31.3.2011. Due to
surplus fund out of ` 150 crores an income of ` 3.50 crores was earned and
credited to profit and loss account. Comment on the above treatment of accountant
with reference to relevant accounting standard.
5
(d) Primus Hospitals Ltd. had acquired 40 units of Doppler Scan machines from Holiver
USA at a cost of US$ 165,100 per unit in the beginning of financial year 2008-09. The
5

Model Paper 1 – Financial Reporting
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prevailing rate of exchange was Rupee foradian 50 to 1 US $. The acquisition was
partly funded out of a government grant of` ` 5 crores. The grant relating to such
machines was given with a rider that in the event of a change in management, the
entity is bound to return the grant. In April 2011, 51% control in the company was
taken over by an overseas investor. The expected productive period of such an asset
is normally reckoned as 5 years. The depreciation rate adopted was 20% p.a. on
S.L.M. basis. The company had incurred expenditure of US $ 4000 towards bank
charges and ` 7500 per unit as sea freight. You are also informed that neither
capital reserve nor deferred income account has been maintained by the company.
You are required to suggest the accounting treatment as a result of the return of the
grant, in the light of the relevant AS.
2 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 31.03.12 are
(` in lakhs)
Assets P
Ltd.
S J A
Investment in S 800 -- -- --
Investment in J 600 -- -- --
Investment in A 600 -- -- --
Fixed assets 1000 800 1400 1000
Current assets 2200 3300 3250 3650
Total 5200 4100 4650 4650
Liabilities
Share capital ` 1
Equity share 1000 400 800 800
Retained earnings 4000 3400 3600 3600
Creditors 200 300 250 250
Total 5200 4100 4650 4650
P Ltd. acquired shares in ‘S’ many years ago when ‘S’ retained earnings were ` 520
lakhs.P Ltd. acquired its shares in ‘J’ at the beginning of the year when ‘J’ retained
earnings were ` 400 lakhs. P Ltd. acquired its shares in ‘A’ on 01.04.11 when ‘A’
retained earnings were ` 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 31.03.12 as per AS 21, 23,
and 27.
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3 The summarized Balance Sheet of R Ltd. for the year ended on 31st March, 2010,
2011 and 2012 are as follows:
(` in thousands)
Liabilities 31.3.2010 31.3.2011 31.3.2012
3,20,000 equity shares of ` 10 each, fully 3200 3200 3200
16

Model Paper 1 – Financial Reporting
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paid
General reserve 2400 2800 3200
Profit and Loss account 280 320 480
Creditors 1200 1600 2000
7080 7920 8880
Assets
Goodwill 2000 1600 1200
Building and Machinery less, depreciation 2800 3200 3200
Stock 2000 2400 2800
Debtors 40 320 880
Bank Balance 240 400 800
7080 7920 8880
Additional information:
(a) Actual valuations were as under
Building and machinery less, depreciation 3600 4000 4400
Stock 2400 2800 3200
Net profit (including opening balance after writing off
depreciation, goodwill, tax provision and transferred to
general reserve)
840 1240 1640
(b) Capital employed in the business at market value at the beginning of 2009-10
was ` 73,20,000 which included the cost of goodwill. The normal annual
return on average capital employed in the line of business engaged by R Ltd.
is 12½%.
(c) The balance in the general reserve on 1st April, 2009 was ` 20 lakhs.
(d) The goodwill shown on 31.3.2010 was purchased on 1.4.2009 for ` 20 lakhs
on which date the balance in the Profit and Loss account was ` 2,40,000. Find
out the average capital employed in each year.
(e) Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average
method).
Find out the total value of the business as on 31.3.2012.
4 Dawn Ltd. was incorporated to take over Arun Ltd., Brown Ltd. and Crown Ltd.
Summarised Balance Sheets of all the three companies as on 31.03.2012 are as
follows:
(` ‘000)
Particulars Arun
Ltd.
Brown
Ltd.
Crown
Ltd.
Liabilities :
Equity Share Capital (Share of ` 10 each) 1800 2100 900
Reserves 300 150 300
10% Debentures 600 ---- 300
16

Model Paper 1 – Financial Reporting
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Other Liabilities 600 450 300
Total 3300 2700 1800
Assets :
Net Tangible Block 2400 1800 1500
Goodwill --- 150 ---
Other Assets 900 750 300
3300 2700 1800
From the following information you are to:
(a) Work out the number of Equity shares and Debentures to be issued to the
shareholders of each company.
(b) Prepare the Balance Sheet of Dawn Ltd. as on 31.03.2012.
Information:
(i) Assets are to be revalued and the revalued amount of Tangible Block
and other Assets are as follows:
Tangible Block Other Assets
Arun Ltd. ` 30,00,000 ` 10,50,000
Brown Ltd ` 15,00,000 ` 4,20,000
Crown Ltd. ` 18,00,000 ` 2,40,000
(ii) Normal profit on capital employed is to be taken at 10%
(iii) Average amount of profit for three years before charging interest on
Debentures are:
Arun Ltd. ` 5,40,000
Brown Ltd ` 4,32,000
Crown Ltd. ` 3,12,000
(iv) Goodwill is to be calculated at three years’ purchase of average super
profits for three years, such average is to be calculated after
adjustment of 10% depreciation on Increase / Decrease on
revaluation of Fixed Assets (Tangible Block).
(v) Capital employed being considered on the basis of revaluation of
Tangible Assets.
(vi) Equity Shares of ` 10 each fully paid up in Dawn Ltd. are to be
distributed in the ratio of average profit after adjustment of
depreciation on revaluation of Tangible Block.
(vii) 10% Debentures of ` 100 each fully paid up are to be issued by Dawn
Ltd. for the balance due.
(viii) The ratio of issue of Equity shares and debentures of Dawn Ltd. are to
be maintained at 3:1, towards the take over companies.
(ix) The amount required for preliminary expenses of ` 1,50,000 and for
payment to existing Debenture holders, were provided by issuing
Equity shares of ` 10 each in Dawn Ltd.
5 (a) Comforts Ltd. granted ` 10,00,000 loan to its employees on January 1, 2011 at a 8

Model Paper 1 – Financial Reporting
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concessional interest rate of 4% per annum. Loan is to be repaid in five equal annual
instalments along with interest. Market rate of interest for such loan is 10% per
annum. Following the principles of recognition and measurement as laid down in AS
30 ‘Financial Instruments : Recognition and Measurement’, record the entries for the
year ended 31st December, 2011 for the loan transaction, and also calculate the
value of loan initially to be recognised and amortised cost for all the subsequent
years. The present value of ` 1 receivable at the end of each year based on discount
factor of 10% can be taken as:
Year end
1 0.9090
2 0.8263
3 0.7512
4 0.6829
5 0.6208
(b) From the following information of Vinod Ltd., compute the economic value added:
Share capital ` 2,000 lakhs
Reserve and surplus ` 4,000 lakhs
Long-term debt ` 400 lakhs
Tax rate 30%
Risk free rate 9%
Market rate of return 16%
Interest ` 40 lakhs
Beta factor 1.05
Profit before interest and tax ` 2,000 lakhs
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6 (a) From the following details, compute according to Lev and Schwartz (1971) model,
the total value of human resources of the employee groups skilled and unskilled.
Skilled Unskilled
Annual average earning of an employee till the retirement
age
`50,000 ` 30,000
Age of retirement 65years 62 years
Discount rate 15% 15%
No. of employees in the group 20 25
Average age 62years 60 years
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6 (b) Following is the Balance Sheet of Rampal Limited as on 31st March, 2012:
Liabilities ` Assets `
1,00,000 equity shares of `
10
Each
10,00,000 Goodwill 7,20,000
10,000, 12% preference Buildings 15,00,000
8

Model Paper 1 – Financial Reporting
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shares
of ` 100 each
10,00,000
General reserve 6,00,000 Plant 10,00,000
Profit and Loss account 4,00,000 Investment in 10% stock 4,80,000
15% debentures 10,00,000 Stock-in-trade 6,00,000
Creditors 8,00,000 Debtors 4,00,000
Cash 1,00,000
48,00,000 48,00,000
Additional information are given below:
a) Nominal value of investment is ` 5,00,000 and its market value is ` 5,20,000.
b) Following assets are revalued:
Building ` 32,00,000
Plant ` 18,00,000
Stock-in-trade ` 4,50,000
Debtors ` 3,60,000
c) Average profit before tax of the company is ` 12,00,000 and 12.50% of the
profit is transferred to general reserve, rate of taxation being 50%.
d) Normal dividend expected on equity shares is 8% while fair return on closing
capital employed is 10%.
e) Goodwill may be valued at three year’s purchase of super profits.
Ascertain the value of each equity share under fair value method
7 Answer any four question.
(a) Mohur Ltd. has equity capital of ` 40,00,000 consisting of fully paid equity shares of
` 10 each. The net profit for the year 2011-12 was ` 60,00,000. It has also issued
36,000, 10% convertible debentures of ` 50 each. Each debenture is convertible
into five equity
shares. The tax rate applicable is 30%. Compute the diluted earnings.
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(b) While preparing its final accounts for the year ended 31st March, 2012, a company
made a provision for bad debts @ 5% of its total debtors. In the last week of
February 2012, a debtor for ` 2 lakhs had suffered heavy loss due to earthquake. The
loss was not covered by any insurance policy. In April, 2012, the debtor became
bankrupt. Can the company provide for full loss arising out of insolvency of debtor in
the final accounts for year ended 31st March, 2012?
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(c) S. Square Private Limited has taken machinery on lease from S.K. Ltd. The
information is as under:
4

Model Paper 1 – Financial Reporting
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Lease term = 4 years
Fair value at inception of lease = ` 20,00,000
Lease rent = ` 6,25,000 p.a. at the end of year
Guaranteed residual value = ` 1,25,000
Expected residual value = ` 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561,
0.6575 and 0.5718 respectively.
Calculate the value of the lease liability as per AS-19.
(d) Anil Pharma Ltd. ordered 16,000 kg of certain material at ` 160 per unit. The
purchase price includes excise duty ` 10 per kg in respect of which full CENVAT
credit is admissible. Freight incurred amounted to ` 1,40,160. Normal transit loss is
2%. The company actually received 15,500 kg and consumed 13,600 kg of material.
Compute cost of inventory under AS 2 and amount of abnormal loss.
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(e) Omega Limited is working on different projects which are likely to be completed
within 3 years period. It recognizes revenue from these contracts on percentage of
completion method for financial statements during 2010, 2011 and 2012 for `
11,00,000, ` 16,00,000 and ` 21,00,000 respectively. However, for Income-tax
purpose, it has adopted the completed contract method under which it has
recognized revenue of ` 7,00,000, ` 18,00,000 and ` 23,00,000 for the years 2010,
2011 and 2012 respectively. Income-tax rate is 35%.
Compute the amount of deferred tax asset/liability for the years 2010, 2011 and
2012.
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