All About Shares & How To Issue And Buy Back Them

ACCOUNTING FOR PUBLIC COMPANIES by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763

Borad and Samsukha Finserv Ltd. issued 50,000 equity 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 White and those for 10,000 shares that of Blue. The remaining applications for 10,000 shares did not bear any stamp.

Solution This is a question on underwriting. We have to identify 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 blue 2000 answer

Borad IT Ltd., issued 50,000 equity shares of which only 60% was underwritten by Green. Applications for 45,000 shares were received in all out of which application for 26,000 were marked. Liability of Green : 30000-26000 = 4000

Samsukha Restate Ltd., issued 30,000 6% Debentures of 100 each. 60% of the issue was underwritten by Vivek Borar. Applications for 28,000 debentures were received by the company. Liability = 18000, no information about marked. So (30-28) 2000 is the total shares outstanding, out of which 60% is the liability (=1200) of underwriter Vivek Borar.

Goti Bikaneri Sweets Ltd., issued 12% 10,000 Preference 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 the respective underwriters. Outstanding liability : 2000, 80% of which is 1600, so divide it in ratio : 3:3:2 in A, B,C. Answer.

Borad Bikaneri Namkeen Ltd. issued 40,000 shares which were underwritten as: P: 24,000 shares Q: 10,000 shares and R: 6,000 shares. 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.

Solution Outstanding : 20000, received 20000out of which 6000 were unmarked (add firm undewriting to marked underwrting once 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

Solve the following question Infosis invited applications from public for 1,00,000 equity shares 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 with the provision of firm underwriting of 3,000, 2,000, 1,000 and 1,000 shares respectively. The company received applications for 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 the different underwriters.

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 8500 total =30000 commission : 2.5% *15 * 30000= : A : 11250, B :11250, C : 7500 D : 7500 answer

From the following figures calculate the value of a share 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

Solution .... If you want to calculate value on dividend, let us give weight to nearest year more than previous year. Let us give weight of 4 (out of 10) 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

solution... If you want to calculate value on return on capital employed , let us give weight to nearest year more than previous year. Let us give weight of 4 (out of 10) to 2008 and 3 to 2007. accordingly : (16*1 + 20*2+22*3 + 25*4) = 222 now divide it by 12, we get: 18.5 so value of share must be 18.5 rupees per share

Vivek Global Ltd. Has assets of Rs. 10 lakh, liability of 6 lakhs and has earned ROI of 20% this year. 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) = 4 lakh/1000 = 400 2. yield method : ROI / MARKET RATE * face value = 20/10 * 100 = 200 3. Fair price method : simple average of above two methods : so = 300.

What will be value of share when networth and profit were : :2006 18,50,000 1,80,000 2007 21,20,000 2,00,000 2008 21,30,000 2,30,000 The company has Rs. 10,00,000 on equity shares of Rs. 100 each and Rs. 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 in arriving at the adjusted tax profit figures. It is usual for similar type of 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 consistently within a range of 8 to 10% on equity shares over the previous seven years and the company expects to maintain the same. Compute the value of each equity share on the basis of productivity.

Solution .... Find weighted return for last 3 years AVERAGE OF : 18/185 * 1 + 20/212*2 + 23/213 * 3 = 10.18% now your networth is 22 lakhs, so 10.18% of this is 224000 less 25% for rehabilitation : 168000 less preference dividend : 9% on 3 lakhs: 27000 = 141000 capitalise it at 9% : 1551000 add investments (not taken above) : 2.5 lakh total value : 18 lakh approx.

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 of the firm – you are paying goodwill when you are paying less than the value of the firm – you have capital reserve

What to do with preacquisition profit Preacquisition profit is taken into account in the value of the firm. It is adjusted while calculating capital reserve / goodwill.

Consolidate the accounts of holding and subsidiary company Liabilities 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 48,000 8,15,000 2,88,000 8,15,000 2,88,000 H Ltd. acquired shares in S Ltd. on 31st March, 2009. Prepare the Consolidated balance sheet of H Ltd. and S Ltd. as on that date.

Solution Show the capital of H = 6 lakh out of capital of S, find minority share and show it Show general reserve of H show general reserve of S and profit of S as capital reserve (H's share) and minority holding (remaining share). Share of H in S is 160000/200000=4/5

Solution Liabilities : 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

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 book value of Rs. 60,000 included in sundry assets of S Ltd. was re-valued at Rs. 50,000 on this date.

Solution Here you can see that for share worth Rs. 160000, holding company has paid Rs. 224000. thus there is some goodwill amount which has been paid. We have to calculate that amount. 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 general reserve + share in profit - share in loss in revaluation

Calculation of goodwill : Amount paid : 224000 total stake : equity 160000 + reserve + profit (40000+30000)*16/20 = 56000 loss on revaluation = -10000*16/20=-8000 total : 208000 Goodwill=224000-208000 = 16000

Solution... consolidated balance sheet : Liabilities : Share : 6 lakhs Minority interest : (200000+ 40000+30000-10000)* 4/20) = 52000 Reserve : 60000 Profit : 80000 creditors = H=75000+S=48000=123000 total =915000 Assets : H : 591000, S:308000 total :899000 , goodwill : 16000 total : 915000

Consolidate balance sheets : Reserves and Profit and Loss Account (Cr.) of S Ltd. stood at Rs. 25,000 and Rs. 15,000 respectively 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. 1,50,000 and Rs. 15,000 respectively for the purpose of fixing the price of its shares; book values of other assets remaining unchanged. These values are to be considered for consolidation purposes. See next slide for balance sheets

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

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 lakh furniture : 65000 other assets : 5,83000

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 - Profit & Loss Account 80,000 30,000 Creditors 75,000 48,000 8,15,000 3,18,000 8,15,000 3,18,000 H Ltd. acquired the shares in S Ltd. on 30th June, 2008. The plant worth book value of Rs. 60,000 included in sundry assets of S Ltd. was re-valued at Rs. 50,000 on this date.

ACCOUNTING STANDARDS Framed by ICAI AS 1 to AS 31 (AS 8 is withdrawn)

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

standards... AS 9 : revenue recognition AS 10 : fixed assets AS 11 : foriegn exchange AS 12 : Govt. Grants AS 13 : Investments AS 14 : amalgamation

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

Standards AS 22: taxation AS 23 : investment in association AS 24 discounting of issue AS 25 : interim financial reporting AS 26: intangible assets AS 27 : joint venture AS 28 : impairment of assets AS 29 : contingent liability

standards.... AS 30 : financial instruments – recognition and measurement AS 31 : financial instruments – presentation

International accounting standards Formed by IASB IAS 1 : financial statements IAS 2 : Inventory IAS 7 : cash flow statement IAS 8 : accounting policies IAS 10 : events after balance sheet date IAS 11 : construction contracts IAS 12 : Income tax

IAS.... IAS 14 : segment reporting IAS 16: property plant and equipment IAS 17 : lease IAS 18 : revenue IAS 19 : employee benefit IAS 20 : govt. Grants IAS 21 : foreign exchange IAS 23: Borrowing cost

IAS IAS 24 : related party disclosure IAS 26: retirement benefit plans IAS 27 : consolidated financial statement IAS 28 : investment in association IAS 29 : hiper-inflationary economy IAS 31: Joint venture IAS 33 : EPS IAS 34: interim financial reporting

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

IFRS : INTERNATIONAL FINANCIAL REPORTING STANDARDS IFRS 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 resources IFRS 7 : financial instruments IFRS 8 : operating segments

A company issued 10,000 shares of Rs. 10 each. Total applications were for 12,000 shares; allotment was made pro-rata. Application money was Rs. 2 per share and allotment money Rs. 3 per share. Goti failed to pay the allotment money on his 300 shares. How much is due from Goti for allotment? Goti must have applied for 12/10*300= 360 shares. He must have paid : 360*2 = 720, out of which (300*2) = 600 have been adjusted in application money and remaining 120 adjusted in allotment. The total money due on allotment is 3*300 = 900, so (900-120) = 780 is due from Goti. Answer.

A company offers two shares for every five held to its shareholders. 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 – new issue 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

Z Ltd. forfeited 150 shares of Rs. 10, issued at a premium 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 are reissued at premium again, so all the amount related to these 100 shares will be transferred to capital reserve. So 100 * 7 = 700 will be transferred to capital reserve.

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 the application money (including the premium) is received in full. The allotment money is received by June 30, 2008, except as regards 500 shares. It is expected that the allotment money on these 500 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 shares which 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

continued... 3. Share allotment dr. 1.5 lakh To share capital cr. 1.5 lakh 4. bank dr. 1,48,500 To share allotment 1,48,500 5. first call dr. 100000 to share capital 100000 6. bank dr. 99000 to first call credit 99000

continued... Second call dr. 100000 To share capital credit 100000 bank dr. 98600 to second call cr. 98600

Balance sheet Liability side Autorised capital : 10 lakhs issued capital : 5 lakhs paid up capital : 4,96,100 (due amount 3900) Assets side bank account : 4,96,100 both sides total 496100

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 what amount was transferred to capital reserve? We had received : 8*100 = 800 (transferred to share forfeiture account). we gave discount of 1*100 = 100 so 700 will be transferred to capital reserve.

A company having free reserves of Rs. 30,000 wants to redeem 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 shares can be used only for premium on redemption, so the face value of shares to be issued must be 70000. answer

Redemption of 10,000 preference shares of Rs. 10 each was carried out by utilisation of reserves and by issue of 4,000 equity shares of Rs. 10 each at Rs. 12.5. How much should be credited to capital redemption reserve account? Total money to be paid : 10*10000 = 1,00,000 money from share issue : 4000 * 10 = 40,000 remaining money 60000 has to come reserves, so we will redit CRR ac by 60000. We will not use premium received for this purpose.

DB corp Ltd. had allotted 10,000 shares to applicants for 14,000 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 on final call. Rahul Borar failed to pay the first call and final call 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, 200 shares were reissued, so discount of 1*200 was deducted out 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 discount 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. 9 per share. Indicate the balance in the Share Forfeited Account 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. 20,00,000 debentures at Rs. 96 but redeemable at Rs. 103. Redemption will be carried out by annual drawings of Rs. 4 lacs (face value) commencing at the end of 2008. What do you recommend as the amount to be charged to the profit 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 & L a/c – fixed instalment 2. fluctuating method. Here our balances are reducing in annual drawings so we will use fluctuating method. 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 balance sheet of a company on 31st March, 2007. The company had not paid the six months interest after 30th June, 2007. State the amount of interest on debentures accrued and due as well as interest accrued but not due on 31st March, 2008. Interest acrued and due 10%*40 lakhs* ½ = 2lakhs on 30 June 2007 now interest will be due on Jan. 2008 and June 2008. so Interest acrued but not due on 31 March = 10%*40 lakhs * 3/12 = 1 lakhs

Calculate the amount of discount to be written off each year on the debentures of Rs. 60,00,000 issued on 1.1.2008 at a discount of 5% repayable in annual drawings of Rs. 10,00,000 each year. Accounting period ends on 31st December. Total discount to be transferred to P & L a/c 3 lakhs and we have 6 years. Here we have to use fluctuating method. So here balance at the beginning of the year would be : 60,50,40,30,20,10, so discounts allowed will be : 6/21 *3 lakhs = 85500 and so on.

Rajasthan Punjab Roadlines Ltd. shows in its balance sheet 9% Rs.30,00,000 Debentures; interest on these is payable 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 in balance sheet? The company will show in the liabilities side : Rs. 30 Lakhs and in the assets side 89/100 * 50000 = 44500.

P. Ltd. issued Rs. 10,00,000 13.5% Debentures at a discount of 5%; the debentureholders have an option of converting the amount into Rs. 10 equity shares at a premium of 10%. A debentureholder holding Rs. 40,000 debentures wishes to exercise the option. How many shares will he get? 40000*100/110*1/10 = 3636 shares

A subsidiary sold goods to the holding company on the basis of cost plus 25%. At the end of the year the stock in trade of the holding company included such goods amounting to Rs. 80,000. 25% of the shares of the subsidiary are held by outsiders. What is the amount of stock reserve required?

Solution First find out the cost of these goods : 80000*100/125 = 64000 thus difference is 16000, for which stock reserve has to be created. However, 25% profit goes to outsiders (minority holders), we have only 75% stake, so 16000*75/100 = 12000 is the amount of stock reserve to be created.

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 of the prospectus. c. Cost of acquisition of a running business. d. Stamp duty on the authorised capital. e. Cost of the project report. Preliminary expenses do not include cost of project report and cost of acquisition of a running business out of these.

Borar & Samsukha Ltd. starts developing a new production process. During the year, expenditure incurred was Rs.20 lakhs, 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 1st March, 2007 the production process met the criteria for recognition as an intangible asset. The recoverable amount of the know-how embodied in the process (including future cash outflows to complete the process before it was available for use) was estimated to be 10 lakhs. What is the value of the intangible asset as on 31 st March, 2007?

Samsukha & Borar Ltd. purchases an exclusive right to generate hydro-electric power for fifty years. The costs of generating hydro-electric power are much lower than the costs of obtaining power from alternative sources. It is expected that the geographical area surrounding the power station will demand a significant amount of power from the power station for at least fifty years. What is the period over which the company should amortize the right to generate power? As per AS – 26 – amortise it in 50 years.

Goti & Borar Ltd. purchases an exclusive right to operate 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 will be in use for at least twenty five years. What is the period over which the company should amortize the right to operate the motorway? 25 years

Samsukha & Gautam Ltd. Acquire an exclusive right to operate a toll motorway for next 3 years. They spend Rs. 30 Lakhs for this. However, based on revised estimate it is estimated that they will get Rs. 27 lakhs from this project. What is impairment losses? 30-27 = 3 lakhs

10. differentiate the following terms and the treatment given in Cost Accounts: Waste Scrap Spoilage Defectives.

Solution ... Waste – cannot be sold – it is visible or inivisible part of loss 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 abnormal costs are transferred to costing Profit and loss account.

Calculate reorder level ? : Re-order quantity 6,000 units Minimum stock (for emergencies) 5 weeks Average delivery time 4 weeks Maximum stock level 20 weeks Average consumption per week 400 units Minimum consumption in 4 weeks 1,200 units

Solution To calculate this we take help of maximum level : Maximum level = (reorder level+ reorder quantity) – (mini. Use * min. Quantity) 20*400=(X + 6000) - (5*300) 8000=X +4500 X =3500

A company whose profit runs into lakhs of rupees and has large inventories finds at the end of March 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.

The Provision of tax at the end of 31.3.2007 stood at Rs. 1,50,000; during 2007-08 the tax liabilities upto 31.3.2007 were settled for Rs. 1,37,000. Provision required 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 Debit to Provision for tax. 41000

Government has allowed a refund 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 speculative 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 Rs. 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 1st October, 2007; it paid Rs. 30,00,000 to the supplier and 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 damage during transit. Depreciation according to Schedule XIV is 15% and its life is estimated at 15 years. The accounts are closed on 31st March each year. What is the figure at which the asset will be capitalised and what is the depreciation charge for the first year? Repairs will not be capitalised – but rest will be capitalised – so value 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 (Straight line)

A company has Rs. 10,00,000, 20% debentures at issue; interest is payable on 30th September and 31st March, interests warrants being issued on the 6th October and 6th April respectively. The company closes its books of accounts on 31st March. Show the relevant items in the balance sheet. In liability side :Outstanding interest : Interest on debenture : 1 lakh outstanding Secured liability : Debentures : 10 Lakhs

A company pays interest on 30th June and 31st December on its 50,000 20% debentures of Rs. 100 each; the books are closed on 31st March. How will the relevant items appear in the company’s balance sheet? 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 2005-06 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 to reserve account (minimum 7.5% has to be transerred 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 2005-06 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 to reserve account (minimum 10% has to be transerred to reserve as per sec. 205(2a)) transfer to reserve : 50,000 Nothing is left out after dividend

Z Ltd. has been paying dividend @ 20% on capital of Rs. 20 lakh for many years in the past; its average after tax profits were Rs. 6,00,000. In 2007-08 it earned 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, following conditions 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 capital of Rs. 30 lakhs; its free reserves totalled at the end of 2006-2007 to Rs. 20,00,000. In 2007-08 it suffered a loss of Rs. 2,30,000 but it still wants a dividend, if necessary by drawing from reserves. What is the maximum 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 the average 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 it should 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 of cash. There is, therefore, a proposal that the company should distribute among the shareholders the shares held by it in F Ltd. by way of dividend. Advise the company. Dividend can be declared only in cash. So this proposal is not acceptable.

Land and Buildings (Cost Rs. 5,00,000 depreciation provided Rs. 80,000) sold for Rs. 7,50,000. Here we are having profit of 3,30,000 out of this 250,000 must be transferred to capital reserve but 80,000 can be transferred to P & L account as normal revenue (because it is against depreciation). .

It was discovered in September 2007 that the purchase invoice of Rs. 50,000 dated 11.2.2006 was not entered in the book at all; accounts for 2005-06 were passed at the AGM in August, 2007. It is an error of omission. Rectify it by following entry : P & L appropriation a/c debit 50000

While preparing the accounts for 2006-2007 closing stock 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 manufacturing excise duty totaling Rs. 6,00,000 was paid in respect of 2005-06 and 2006-2007. Debit P & L appropriation account. By Rs. 6 lakhs for excise

The market value of the quoted investments is Rs. 2,25,000 as against the cost of Rs. 2,50,000. Show the investments at market value in the balance sheet.

Railway claim for goods lost in transit in 2005-06 costing 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 not recognised it earlier.

Sales tax, collected from 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 from Government for installation of generating set. We can reduce the amount of Generatin set by Rs. 1 lakhs or we can show it as capital reserve

Balance held in the Bank of Iraq, Baghdad, Rs. 25,000. As per company law requirements, we have to disclose the name of the bank and also the maximum amount deposited with that bank (in case of foreign banks).

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